Welltower Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Q3 2020 WellTower Inc. earnings conference call. At this time, all participants are on the listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your first speaker today to Mr. Matt McQueen, General Counsel. Thank you. Please go ahead, sir.

Thank you and good morning. As a reminder, certain statements made during this call may be deemed forward-looking statements in the meaning of the Private Securities Litigation Reform Act. Although WellTower believes any forward-looking statements are based on reasonable assumptions, the company can give no assurance that its projected results will be attained. Factors that could cause actual results to differ materially from those in the forward-looking statements are detailed in the company's filings with And with that, I hand the call over to Sean for his opening remarks. Sean.

Thank you, Matt, and good morning, everyone. First and foremost, I hope that all of you and your families are safe and healthy during these difficult times. Before I get into the accomplishment of the quarter and discuss our capital allocation strategy, let me make some comments on leadership changes and strategy going forward for WellTower. Let me start with our outgoing CEO, my close friend and mentor, Tom DeRosa. Tom's impact on our industry, our company, and me can never be overstated. He was a visionary who saw the need of integrating senior housing into healthcare continuum years before COVID, and now we all know the importance of that today and going forward. He was a successful entrepreneur company and made it a process-driven institutional company that attracted an incredible caliber of talent. And last but not the least, his contribution on me personally and my career can never be overemphasized. He has been a terrific boss, a great mentor, and a close friend. He continues to help me even today and guide me as necessary. We wish Tom the very best in his retirement. I'm also pleased to announce that Phil Hawkins, one of the most well-respected ex-CEOs of the reach space, has joined our board. We're looking forward to Phil's guidance and mentorship for many years to come. And finally, I'm thrilled to be working with our new independent chairman of the board, Ken Bacon, who has a strong track record of leadership and experience both in real estate and finance. Ken will lead our board and partner with me and our leadership team as we execute our company strategy. As far as our team is concerned, the company has never been in a better place. There are about 20 women and men who are leading this company forward every day. I cannot be more proud of this team. In the coming weeks and months, you will see a series of promotions and new roles that will consolidate the leadership of this company. Not a change per se, just a recognition of the exceptional work that the team is doing. Our team has never been busier and more excited to create -a-lifetime value for our owners. Many of you have asked me if our strategy will change going forward. The answer to that question is an emphatic no. WellTar will continue to strive to be the previous wellness infrastructure company that allocates capital in the path of growth of health care and wellness trends. You are not going to get any grand strategic pronouncement from me. We'll continue to focus on creating value for our partners and our employees if they create significant value for our owners. And the partners and employees will be able to create long-term sustainable value only if their end customers are happy. It is that simple. We do not need to complicate a simple idea. We need to continue to execute and deliver superior cash flow growth on a partial basis. To paraphrase one of my favorite CEOs of all time, Tom Murphy, the goal is not to have the longest frame but to arrive at the station first using the least amount of fuel. We will continue to be vigilant as ever that institutional imperatives do not allow for the efficiency of the platform, data driven decision making and employee satisfaction. Given it is my first call as CEO, I'll lay out a simple capital allocation framework for you. A company effectively has four choices of raising capital. Capping internal cash flow, issuing debt, issuing equity and disposition of its existing assets. It also has five essential choices of deploying that capital. Investing in existing assets, acquisitions, paying down debt, paying dividends and buying that stuff. You can loosely call the first set of choices as selling but right description of that would be sourcing or raising capital. You can loosely call the second set of choices as buying but the current description would be deployment of capital. Following the same line of thinking, loosely speaking, consistent buying low and selling high creates value for our shareholders. In a more wholesome and thoughtful description, optimizing these choices from this menu of sources and uses in a tax efficient manner creates value for continuing shareholders on partial basis. The goal is to maximize cash flow and value per share, not to become the biggest or the most revolutionary. We at World Tower do not spend a second strategizing on how to win the popularity contest on Wall Street. In fact, as stated in the past, we focus on buying assets when they're out of favor, that is unpopular at the right price in the right structure. Ultimately, this capital deployment strategy allows for outside return with a large margin of safety. Price, not exposure, is the ultimate mitigant of risk. We are constantly striving to create value and trust you as our shareholders will reward the companies that create true intrinsic value over long term. If you allow me to continue this theme of sourcing and deployment of capital, let's look at what we have achieved in the last two years, the first two years, the second two, three and post quarter close. We are delighted to inform you that we have executed on two large senior housing transactions at a valuation significant in excess of $400,000 units in the mid 3% cap rate on current NOI and around 5% cap rate on pre-COVID NOI. These transactions with our -Co-Join venture on MOBs puts us in an enviable position of balance sheet strength. We currently have $5.2 billion of liquidity and $2.2 billion of cash, which is expected to rise further as the quarter progresses. We at World Tower do not see balance sheet as a matter of vanity like vintage cars, but the most important contact-cyclical tool to create value at the cycle level and avoid the need of raising diluted capital at the wrong time in the cycle. That gets us to our menu of capital requirement to particular interest investing in hard assets and doubling down on the assets that we already own to buy back our own stock. In matter of any acquisition, assets have stopped. Patience is a virtue with occasional boldness and we think that moment of occasional boldness is finally here. We have in excess of a billion dollars of acquisition in our pipeline comprised of 6,500 plus units at an average price of $165,000 units at a material discount to replacement cost. 17 deals in the pipeline represent a wide range of transactions from a $10 million redevelopment asset to $188 million core portfolio of brand new assets. We have identified many of these assets working with our existing partners through our data analytics platform or who are buying out other canceled partners of our existing operators. The pipeline's initial yield is a low force, but we believe it will stabilize in the high single digits to low double digit yields. As a very short-term but incorrect way to look at this will be we are deploying capital in the low 4% range and sourcing that capital in the mid 3% range. We believe the correct way to look at this will be that we are sourcing that capital in the mid single digits unlevered IRR and deploying at a low double digit unlevered IRR as evidenced by sourcing the capital in the $400,000 plus per unit level and deploying that capital at a $165,000 per unit level. Despite our weak cost of public capital, this rate has never been wider and hence the opportunity to create generational value for our owners on a partial basis and that completes the loop for you and explains why our team is so excited and so busy. We believe we are making real impact and anticipate creating exceptional value. We not only see this environment as an opportunity for smart capital allocation in the financial realm but also in the human capital area. We are seeing availability of superior talent in the marketplace today and we are bouncing on this opportunity as we are on the investment side. With that, I will hand the mic over to Tim who will walk you through the operational and financial results for the quarter. I will come back to make some additional comments on the operation operating environment after him. Tim?

Thank you, John. My comments today will focus on the third quarter 2020 results. The performance of all property segments in the quarter, our capital activity and finally a balance sheet liquidity update. In the third quarter, WellTower reported normalized FFO of 84 cents per diluted share. A 2-cent decline in the second quarter, driven by 3 cents dilution from dispositions completed in Q2 and Q3, a one pending negative impact from changes in revenue recognition in our post-acute senior housing triplet portfolios and a slight decline in sequential senior housing operating performance. Those items are offset by tighter cost control of the corporate and reduction in COVID related expenses in our senior housing operating portfolio. As a reminder, in the dilution type dispositions, we need $22 billion of cash and cash equivalent inclusive 1031 deposits as of 930. Now turning to our individual property segments. First, our triple net lease portfolios. As a reminder, our triple net lease portfolio coverage and occupancy stats are reported a quarter in arrears. So these statistics reflect the trailing 12 months ending 6-30 2020 and therefore only reflect a partial impact in COVID-19. Across all triple net lease segments, WellTower collected 98% of contractual rent due in the third quarter. Now starting with our senior housing triple net portfolio. Same score NOIs declined 10 basis points year over year. An entire bad data cruel and a tough count drove growth slightly negative. Combined FFO impact of revenue recognition changes on one restructuring lease in the quarter of half a penny relative to 2Q and expected to grow to a full penny in 4Q, i.e. another half penny impact sequentially from 3Q to 4Q. Occupancy was down 390 basis points sequentially and EBITDA coverage decreased 0.02 times on a sequential basis to 1.02. Consistent with my comments in the past, our senior housing triple net operators experienced the same headwinds as our day operators over the past seven months. We can expect reported lease coverage stats to continue to reflect these challenges as more of the pandemic periods reflected in EBITDA going forward. In the quarter, we also transitioned five of a plan nine properties from Capital Senior to StoryPoint Senior Living. Expect the other four properties to transition by the end of the year. This is the first phase of the transition agreement we entered into with Capital Senior at the beginning of the year, which allowed for early termination of CSU's leases on 24 WellTower owned assets in exchange for full year 2020 rent being paid in cooperation with transitioning the operations. Despite the challenging environment, our team and our operators have been able to organize next year's transition plans for the StoryPoint transitions, as well as the remaining 15 properties CSU currently operates, which will be transitioned to three of our existing day operators in the fourth quarter. As a result of the COVID backdrop, the initial expected dilution from these conversions is expected to be approximately $12 million or three cents per share in 2021 relative to rent recognized in 2020. As a reminder, since our Capital Senior rent continues to be paid, the leases on these assets that have yet to be transitioned are reflected on our payment coverage stratification presentation on page seven of our supplement and make up roughly three quarters of the triple net senior housing rent that is less than 0.85 times covered by EBITDA. Although the last seven months have been very challenging for the senior housing triple net operators, the sequential stabilization we observed in between the second and third quarter, along with relief funds from HHS to be received in the fourth quarter, should help our operators find their footing heading into 2021. Turning to long term post-it to portfolio, we generated positive 2% year over year savings for growth and EBITDA coverage declined by 0.01 times sequentially. As noted in our business update earlier this month, in last night's release, Genesis Healthcare, which makes up approximately half of our long term post-acute segment exposure, includes language in the second quarter financials filed on August 10th regarding its ability to continue as a going concern. As a result of this, Wellpower began recording Genesis Lease revenue on a cash basis in the third quarter, retroactive July 1st. This had a negative $2.2 million impact, or approximately half a penny, that's a faux-faire share, relative to second quarter 2020. This also resulted in the right amount of $97 million of straight rent receivables. Genesis continues to remain current on all financial obligations to Wellpower through October. And last, we've seen our triple net lease segment health systems, which is comprised of our ProMedica Senior Care Joint Venture with ProMedica Health System. I know IGrowth was positive .3% year over year, driven by a .75% increase here in August, and trailing 12-month EBITDA coverage was 2.61 times. Turning to the Medical Office. Our Outpatient Medical Portfolio built a positive 1% savings for growth. This below-trend growth was driven mainly by increased bad debt reserve, the majority of which related to lease enforcement moratoriums in several California jurisdictions in which we have a sizable footprint. As these moratoriums expire, we've spent rent collections to further improve. We continue to see signs across our outpatient portfolio that activities return to pre-COVID levels, evidenced by the number of tenant work order requests received, our tenants' own volume data, and parking income and our properties. In the quarter, parking income was still as playtime-wise year over year, but its negative contribution to NOI-Growth decreased to 10 basis points this quarter versus 70 basis points in the second quarter. During the quarter, we collected approximately 97% of contractual rents and had an additional 2% of rents deferred, the majority of which are located in the aforementioned jurisdictions with lease enforcement moratoriums. We also continue to have very strong rent collections and deferral plans we put in place in April, May, and June. Since we started collecting on these plans in June, we've experienced .5% collection rates through September. As a reminder, the large majority of our second quarter deferral plans were structured to pay back entirely by year-end. Now turning to our senior housing operating portfolio. Before reviewing this quarter's senior housing operating portfolio results, I want to briefly summarize the outlook we provided back in August. At that time, our expectations for the third quarter were that occupancy would be down between 125 and 175 basis points from July 1st through September 3rd, and that rents for and total expenses would be flat sequentially. We ended the quarter with occupancy down 150 basis points to start to finish, Rep. 4 was down 40 basis points, and expenses were down 3.4%. Turning to results in the quarter, same-store NOI decreased .3% as compared to the third quarter of 2019, driven largely by a 680 basis point -over-year drop in average occupancy. As we indicated last quarter, two factors drove this outside decline in occupancy. First, the portfolio began the third quarter at a significantly lower level of occupancy following a steep drop experience in the second quarter, and continued to decline during the quarter, albeit at a significantly decelerated pace from 2Q. And secondly, we experienced a seasonal increase in occupancy in the third quarter of 2019, creating a tougher sequential count. Rep. 4 for the quarter was down 1% -over-year, but I want to provide a bit more color here, as mixed shift is distorted in the use of this metric as a proxy for rate growth. Over the last two quarters, our lower acuity properties, active adult and independent living, have held up considerably better on the occupancy front than our higher acuity buildings. This has driven up the percentage of our total portfolio occupied units that are lower acuity, and therefore lower rent-paying units. This has had the mathematical effect of averaging down our total portfolio rent for occupied units. If you break the portfolio in two buckets, active adult and independent living in one, and assisted living in memory care in the other, you will see the lower acuity bucket at a 20 basis point decrease in Rep. 4 -over-year, while the higher acuity bucket had a positive .4% -over-year change. While we are seeing evidence of selective counting on room rates in some of our markets, in general, rates continue to be fairly resilient in the face of occupancy declines. And lastly, show operating expenses. Same-store operating expenses decline .1% -over-year and decline .3% sequentially. I will focus on sequential growth since the changes are more relevant to trends in the current operating environment. We experienced better than expected sequential expense trends driven by two main items. Lower compensation growth, as operators adjusted their staffing to lower occupancy levels, and lower COVID expenses. As same-store COVID expenses decreased from 33 million to 15 million sequentially, driven by lower emergency staffing costs and significant reductions in price per unit cost of PPE. We expect COVID-related costs to continue to decrease in the fourth quarter, but at a much lower pace than in 3Q. Looking forward to the fourth quarter, and starting this October day that we've already observed, we've experienced a 30 basis point decline in occupancy to the week of October 23rd. And we expect to finish the fourth quarter approximately 75 to 125 basis points lower than where we ended the third quarter. We also expect both rev core and co-expenses to be flat on sequential basis. The salad does not include any impact from HHS funds that may be received in the fourth quarter. Now into capital markets activity. In July, we completed a successful tender of 426 million of our .75% and .95% senior notes due in 2023. Proceeds for the tender were generated from the June issuance of the $600 million in senior and secured notes bearing an interest rate of .75% with maturity date of January 21st. We used the remaining proceeds to pay down 140 million of our term loan due in 2022. These transactions both deripped near-term maturities due to 2023 and increased our unsecured bond borrowing with leveraged maturity to 9.2 years. Additionally, in the quarter, we repaid $289 million of secured debt of which $112 million was defaced and subsequently extinguished in October. Moving to investment activity, which was mainly focused on our development pipeline with 96 million invested this quarter. On the disposition front, we completed $1.4 billion of pro-res disposition in a 5-3 cap rate. Post quarter end, we closed in the previously announced sale of a senior housing operating portfolio for $200 million or $395,000 per unit. The sale price represents a cap rate of .6% based on third quarter annualized NOI and a .9% cap rate on pre-COVID or March trailing 12 months NOI. Inclusive of this disposition, we completed $3.3 billion of this disposition here today at a 5-4 cap rate. We expect to close in another $186 million transaction in the fourth quarter, comprised of secondary tranches or rover asset sales tied to previously executed outpatient medical transactions. The near-term FFO impact on the completion of these intra- and post-quarter dispositions will be approximately $0.03 per share sequentially in the fourth quarter. It will bring cash and cash equivalents to $2.4 billion and total liquidity to $5.4 billion. We believe that the continued ability to execute dispositions at strong pricing supports our view that our private cost of equity capital is substantially better than our public cost at this time. The underlying cash flow continues to be impacted by a challenging backdrop. We ended the quarter at 6.02 times the -sat-2 test of EBITDA. A 34 basis point decrease from last quarter is a result of liquidity generated successful dispositions in the quarter, which have continued to bolster the balance sheet. A jump in for EBITDA loss to sales in the quarter and the post-quarter run sales, just mentioned, run rate -sat-2 EBITDA is approximately 6.1 times, with $2.4 billion cash and cash equivalents. And with that, I will hand the call back over to Sean.

Thanks, Tim. Let me provide you with some color on underlying trends of what's happening in the senior housing business. Needless to say that we're very encouraged by the sequential stabilization of NOI in the quarter. I would like to draw your attention to slide 16 of our deck, which describes the significant sequential improvement of move-ins. Last quarter, I talked about the hesitation of customers to move in after they put a deposit on. As communities resume visitation, we have seen a significant improvement in this area. Frankly, which was my biggest concern, as described last quarter call. Let's take an example of five very large operators, which constitute of national operators, large regional operators in Northeast, West Coast, and Sunwell, a pretty diverse group. The average delay between deposit to move in during October of last year was 19 days. In March of this year, it was 17 days. That increased to a whopping 41 days in June. We have seen a meaningful decrease every month in Q3, and finally it is down to about 18 days in October. We are hearing from our ALFocus partners that in many cases, this lag is now getting shorter than pre-COVID days, as families can no longer delay the care needs of their loved ones. No question we're very encouraged by that. However, we're unwilling to project this move-in trend as we are in middle of a third wave of COVID across the country. It will be a complete fool-hurry for us to predict how things will play out in next few weeks and months before the COVID curve flattens out again. But the experience of this accelerated move-in in the face of move-ins tells you that our customers need our products. They moved in as soon as they could. We have no ability to predict when we'll be on the other side of the COVID. But we're optimistic when that day finally comes, our need-based product will likely to see meaningful fraction in demand. What bridges us between now and then is our fortress value sheet, and what creates value between now and then is our ability to allocate capital to make outsize returns for our owners. In this age of torrents of information, it is sometimes hard to differentiate signals from noise. It is important that we periodically take a step back and remind ourselves that stock is a fractional ownership in a business and not a ticker. As managers of the business, we can assure you that our team has never been more energized and excited about creating long-term value for our shareholders. With that, we'll open the call for questions.

Thank you, sir. Thank you, sir. As a reminder to ask a question, you would need to press star one on your telephone. To withdraw your question, press the pound key. Due to the absence of time, we ask that you please limit yourselves to one question and one follow-up. Please stand by while we compile the Q&A roster. I show our first question comes from the line of Steve Sackler from Evercore ISI. Please go ahead.

Thanks. Good morning. I guess, Sean, going back to page 16, you know, it's encouraging to see the move-ins. Could you talk maybe a little bit more about leads and kind of where leads are? And I know you spoke a little bit about the times, you know, from a lead to a move-in. But just, you know, what are you seeing specifically on that timetable, you know, as it relates to move-ins?

So, Steve, leads have not been a problem. Even when we were here 90 days ago, leads have come back not completely to pre-COVID level, but definitely on a -over-year basis, but sequentially it has. And it is even on a -over-year basis is approaching, you know, pre-COVID level, maybe 10, 15 percent still lower. But we're definitely approaching the amount of leads and the quality leads more importantly in the system. The issue has been that you obviously had a very good follow-through of how many people are doing either, you know, seeing the units, whether virtually or physically, and then getting to the deposit. That's what I talked about, the pressure on the, you know, sort of the front door, if you will. That has not been the issue. The issue has been that the customer was hesitating after that, right? This is a purely an ALFocus comment. We're still seeing hesitation in the ILFocus communities where, you know, if you don't have a need, you're not, you're taking time to make a decision, right? I mean, with all the noise and then obviously hopeful good news and vaccines, people are just taking time. I can't tell you why that is the case, but on the IL side, people are taking their time. On the AL side, you know, we have faced that pressure on the front door, but that was not translating into the move-in, that sale was not translating into the move-in, which we kind of described that. And since we said that, we have seen some very significant improvement in that area. So that's what you're seeing in that rapid pace of acceleration in that move-in. And that continues, you know, even through last week.

Thank you. I show our next question comes from the line of Nick Joseph from Citi. Please go ahead. Mr. Joseph, your line is open. Okay. I show our next question comes from the line of Rich Anderson from SMBC. Please go ahead.

Hey, thanks. Good morning, everybody.

Good morning, Nick. So

I just want to get in a little bit to the fourth quarter sequential occupancy numbers that you went through. Okay, so down 100 basis points versus the third quarter, which is, you know, reasonable in a, you know, perhaps a seasonal environment. You can comment on seasonality that would typically impact you. But I'm curious, how would 100 basis points compare to your pre-COVID history? Is this a fairly typical change in occupancy or is it still being impacted in your view by the unique environment we're in?

I'll start with that, Rich. It's higher than we usually see. You typically see kind of 50 basis points decrease over, let's say, stretches from 4Q to 1Q, but over a typical seasonality of occupancy, you'll see 50 basis points lost over kind of the fourth quarter and first quarter. So this is higher than that. And I think speaking about the seasonality is important because it adds some uncertainty to the number, which is, you know, factored in now we're looking at the fourth quarter. We talk about the, at this point, in some ways, the best guy for hypothesis and that we won't see as much of a seasonal change in demand. Just due to the disruption we've seen in demand during the year. And so seasonality, there's two things that drive seasonality, right? There's a change in seasonal demand and there's also the impact of the flu. I think data is very supportive that the flu at this point won't play a large role in the typical seasonality we see. And on the demand side, we don't necessarily think that the typical demand changes we see will play a role. But the other basis points is really just due to the COVID environment, what we've seen so far in the quarter. And certainly when I say COVID environment, it's really the national picture, the acceleration in cases, and it's that adding a bit of uncertainty to what the outlook is for the next two or three months.

Thank you. Our next question comes from the line of Vikram Malhotra from Morgan Stanley. Please go ahead.

Thanks. Good morning and Sean, congrats on taking the leadership and congrats to the whole team. I know you guys put in a lot of hard work. Just maybe building on or digging into 16 a little bit, you've seen the acceleration like you pointed out and the lead conversion, the timelines narrowing. I'm just wondering if you describe sort of second or third wave or how to categorize now. But can you sort of comment on this decline in timing and the leads in markets where you've really seen a true second and a true third wave versus markets where we're just seeing sort of a new wave? In other words, like, is this more kind of uniform? Are you seeing real dispersion in markets?

That's a really good question, Vikram. We're actually not seeing a lot of dispersion in markets, far say. There's a huge dispersion from a product-side perspective, right? So you are seeing whether in West Coast or East Coast or Texas or, you know, you pick your market, if you have a need-driven product, the customer's, you know, willingness to make a decision is significantly higher. And frankly, we are hearing from some of our partners that that is even accelerated relative to even pre-COVID levels. But, you know, in case of where you have a lifestyle-driven product where somebody wants to be in that environment but doesn't have to be, you are still seeing self-visitation. So it's not a market-driven. It is definitely a product-driven phenomenon.

Thank you. Our next question comes from the line of Nick Joseph from Citi. Please go ahead.

Hey, it's Michael Billinman. Can you hear me now?

Yep. Awesome.

So, Sean, congrats again on the CEO role. How do you see your leadership style and approach both similar but also different than Tom and maybe secondarily, you know, Tom obviously was highly visible within the industry as well as globally, you know, going to Davos and other events? I guess how do you see yourself doing that and is that going to be part of your approach as well as CEO of Welltower?

That's a very good question. So I will tell you, as you guys know, that Tom has trained me for the job over many years and definitely been very influenced by how he saw the world. So the first and foremost he has taught us and that's ingrained in my leadership style as well as a lot of other people in our leadership team is to think that what we can do more from the platform, not just think about disparate aggregation of assets but, you know, thinking through platform, right? And the importance of, you know, being at the bleeding edge of healthcare and wellness trends and that will continue to happen. I'm very much focused on execution, very much focused on partial value creation and that's what the team is and capital allocation. So it's a everybody leadership style is different and nuanced. I would, you know, obviously it is less important on the difference between Tom's leadership style and my leadership style. So I will tell you that it is collectively as a leadership team we see our biggest focus today is to increase the value per share, execute and, you know, obviously there's a tremendous amount of potential for us to get back to our lost earnings, not just to the pre-COVID

level. Thank you. Our next question comes from the line of Daniel Bernstein from Capital One. Please go ahead.

Good morning everyone. I just wanted to ask a little bit more about the other side of the equation of move outs and just understanding why residents are moving out if you have that information. At this point, as it pent up move outs, you know, AL to SNFs, they use some higher acuity. Families taking residency out before the winter and changing length of stay, just trying to understand that other side of the equation for movement.

Dan, you asked a very interesting question. If you think about move outs, move outs that come down pretty much across the board for the last seven, eight months to COVID. Last couple of weeks I would say that, you know, we have seen some increased move outs. It's hard to say why that is the case because it's too short of a timeframe to make this as a trend. But it is also the most difficult part of our business to predict, right? It is all of the above of what you mentioned as reasons for move out. You know, we don't see financial reasons for move out in our industry. But, you know, we have seen some elevated move outs for the last couple of weeks. We also saw some, you know, reduced move outs a few weeks before that, right? This is a very, very hard business to predict on a weekly basis, monthly basis. So I think it is hard for us to sort of get into that and see what's the trend and what's not. You could have taken the last four weeks and say the first two weeks is that you wanted to have an optimistic sense. And you could have said that I will take that move out trend and move in trends and project. Or you could have taken the last two weeks of elevated move out trends and project forward. And there's no right and wrong answer. We are just on the, you know, the latter part, not the first part. We could be wrong and things can turn out to be better than we thought. But as we sit here today with the uncertainty that we see the overall, the national COVID environment, I think it's prudent for us to at this point not to try to get too excited about what might or might not happen.

Thank you. Our next question comes from the line of Juan Sanabria from BMO Capital Markets. Please go ahead.

Hi. Good morning. Thanks for the time. Shrock, I just wanted to follow up with one of your points at the end there when you talked about conversions of people putting down money to actually coming in to the communities and that kind of compressing back to kind of pre-COVID levels. Does that mean potentially that once COVID passes that you don't have kind of deferred demands, I guess particularly on the AL side that would be coming in the door kind of post-COVID, whenever that may be first or second quarter that's kind of deferred the decision and now is ready to come in if those leads and deposits are converted today?

No, Juan. It simply means that the customers need our products, right? So what has been going on is with all the national headlines and all the COVID in the overall situations, people are hesitating. Now we obviously have a need that's sort of, you know, adding up. And now the customers are saying where they can move in again. We're not projecting that into the future, right? That's a very important point. If we did, then we would not give you the guidance for fourth quarter that we did. But very much we're thinking that very simply the customers moved in when they could. Now if COVID spikes up again and they can because you have visitation bans or you have shutdown of facilities and all of those things, then you will see that. But most importantly, when they moved in when they can, I was simply answering the question on the need-driven nature of our product and the secular demand of the product. COVID will eventually be behind us. And the demand of the product has been changed through this period of time.

Thank you. Our next question comes from the line of Conor Siversky from Berenberg. Please go ahead.

Hey, good morning, everybody. Thank you for having me. Just a quick one on testing capacity. Among your peers of the last round of earnings, it still seems like -of-care tests were in short supply. So I'm just wondering how this dynamic has improved at all. And then given some news on the vaccination front, you know, what are the goals in terms of testing if we're taking a six- or 12-month view?

We have, Conor, we have made a very significant improvement even in the last 90 days on -of-care testing. We tested over 200,000 employees and residents, and that continues to progress. We got some very significant improvement, I would say, in the last 45 days in that particular area of -of-care testing side. But it's too premature to say how that will impact the consumer behavior and their ability to move in people. We think it will improve, but again, given the overall uncertain environment, it is too early for us to comment.

Thank you. Our next question comes from a line of Derek Johnston from Deutsche Bank. Please go ahead.

Hi, everyone, and congrats, Shank. I was hoping to get a sense of the legacy RIDEA contracts that were embedded in the show dispositions during 3Q. And if the majority were actually legacy structures, I believe heading into 2020, you had 80% of operators converted to what is seemingly a more favorable RIDEA 3.0 contract. And I guess the second part of the question is where would that percentage stand today? Thank you.

Thank you, Derek. I don't have the number percentage for you, but I can tell you that both of what was the two portfolios were sold, they were not in RIDEA 3 or contracts. So your fundamental assumption would be correct.

Thank you. Our next question comes from the line of Lucas Hartwich from Green Street. Please go ahead.

Thanks. Good morning. I was looking at the color of the S4 earlier. I was really up for it. I was hoping you could dive a bit below the surface and describe what you're seeing with face prints versus confessions, things like that.

Lucas, can you repeat that question please one more time?

Sure. So I was curious on the REV4 front if you could dive a little bit deeper on what you're seeing with face prints versus confessions, you know, what's kind of driving the headline REV4 number. I thought the color around the next shift was helpful. I'm just curious what's going on with face prints and confessions.

Yeah. So I think from the numbers we're seeing and what we're seeing in the market, we're not seeing a lot of evidence of a contention. I think Asha spoke to probably seeing more in the lower acuity side as far as just of what we're seeing in the market as far as it's because of the lack, which is the difference in the kind of needs-based aspect of it, that there's a little bit more of a consumer discretionary good and therefore you're seeing a bit more of that, I'd say, in the front end. Whereas on the assisted living side, you're seeing very little of it. We've talked about this a bit, community fees, which is typically aligned with when you move in and are both kind of cover costs to move in as well as, you know, having testing, et cetera, to get your acuity level of care set up. You're seeing some discounting of those. And so we've said the combination of community fees coming through RedPoll is that you have less people moving in on a -over-year basis. So you're seeing kind of community fees in total come down and also you're seeing some discounting. But in assisted living, importantly, you're not seeing discounting in care. And more of the residents we're seeing coming in, they're coming in because of the care. And so there isn't a lot of price competition there. Reputation is a huge factor. You saw some competition in general in the market through the supply cycle over the last couple of years, impact pricing. I'd say, you know, in the COVID environment, you're actually seeing a bit of that dissipate because more of the consumer residents are being attracted towards the better brand names and more well-known names in the market. So assisted living pricing is holding up, I'd say, pretty well, I guess, in the opening of March, given, you know, the steepness of the occupancy declines.

Thank you. Our next question comes from the line of Michael Carroll from RBC Capital Markets. Please go ahead.

Thanks. Sean, I was hoping you could provide some color on the investment pipeline and the types of deals that you've been able to source. I guess, prior market valuations appear to have held up well, especially given Low Towers' recent sales, I guess, this past several months. I mean, what is or is there a difference between the assets that you sold versus the deals that are in your pipeline, which you're being able to source at much below replacement costs?

Thank you, Mike. There is. So if you think about in today's marketplace, pay, you know, if you take a very simple view of what gets you financing is you've got to check three boxes, pretty assets, pretty market, most importantly, very well-known well-reported operators, right? If you can't check all those three boxes, it will be very hard, if not impossible, for you to line up financing. And that gets you to everything else outside that. We've talked about this on the last call. We are bringing our operators into assets. So these assets will be confidential, but today it's not. Many of these assets were built in the last two, three years, so they don't have a stabilized 2019 in a way that a lender can underwrite, right? So a lot of things we're buying, brand new assets that have been built in the last two to three years, does not fit that criteria. So those are the ones that we are going. It's interesting if you see that in real estate over a period of time, for apples to apples, new assets trade for higher price than lower price, just purely the difference of capex that's relative to vintage, right? Given what is happening today in the marketplace, you are seeing exactly opposite of that. Newer assets are trading at a discount purely because they can't get financing because they don't have a stabilized NOR for a lender to underwrite. And that's where we are coming in to buy things for cash. So we don't obviously put financing in. We buy assets for cash, and that's bringing in our operators or these assets are obviously owned by other capital partners of our existing operators and we're buying these assets. So they are even different. So if you think about what we sold, that checks all the three boxes, pretty assets, pretty markets, and very experienced and well-known, well-represented operators. You miss one of those checks, it comes back to pretty much very, very few buyers in the marketplace and well-known is the most dominant one.

Thank you. Our next question comes from the line of Stephen Valacat from Barclays. Please go ahead.

Great, thanks. Good morning, everyone. Chuck, let me offer my congrats on your promotion as well. And the comments you had on the call regarding the portfolio buying and selling was definitely helpful. And one of the lines in our model that really sticks out is the gain on sale of properties with some $3 billion recognized over the last five years or so. So that's definitely not lost upon us. The question I really have though is just related to your comments on the lower expenses in the shop portfolio, particularly on the lower PPE where you said the price per unit costs are now way down. Just curious how much you think that trend is more of a industry phenomenon versus how much wealth power may be driving a better than average trend on that either due to some of the initiatives like the Dallas Recruitment Center and other stuff that's more company specific. Thanks.

Yes, good question, Steve. I'd say on the, we actually have wound down a lot of the activity we had in the Dallas Recruitment Center. That was very important to operations when, to our operators' operations early on in the March and April period when the only way to access PPE or one of the only ways to kind of guarantee access to it was through scale. And I think as we've seen distribution channels normalize and they're still not back to where they would be pre-COVID, but as we've seen them normalize, our operators have been able to access PPE themselves and instances really haven't. We've stepped in to help. But for the most part, that's going direct from operators to providers of PPE. So I think in saying that the pricing is more of just seeing a bit of a normalization from, if you look at mass prices where some mass upwards of $8 on things are retailing 80 cents to $1.10 in a normal environment and they're still elevated even today. But if they're in the $3 to $4 range, it's coming down significantly from what we're paying on average in the second quarter. I'll

just add some commentary to the first part of your question, which is I want you to understand that we're not trying to buy and sell assets, you know, like trade assets. That's not our goal. We're obviously when we see how to finance the transaction, we're trying to always think about what our sources of capital will be, right? Sometimes that could be stock at some point in the cycle. At some point that could be the equity that's strapped into the assets that you think you have maximized under your sort of umbrella, right? So we have alluded to this before, that the huge amount of portfolio transformation, which I believe sort of amounts to close to $30 billion of assets disposition and acquisition over the last five years, is roughly complete. However, we have seen that a propensity of companies to continue to grow and that, you know, is not inside World Tower, right? We're always trying to think how we maximize value for share for the continuing shareholder, right? You can say the one good thing will be when your stock is in the right place, just continue to sell your stock instead of selling your assets. And that would be a correct approach if you just look at capital allocation from the lens of smart energy. I told you that's not how we see the world, right? We see the world from the perspective of long-term IRR of what you're selling versus what you're buying and look at a comprehensive way of what your tools, the sort of sources and uses of capital are. So we'll continue to do that, but that overall transformation of the portfolio that we wanted to do that's not started, I would say we're roughly close to being done. But that doesn't mean that we'll not sell assets. We'll continue to sell assets if we think that is the best source of capital to fund what we are buying.

Thank you. Our next question comes from the line of Motaya Okungsaya from Mizuho. Please go ahead.

Yes. Good morning, everyone. First question, just around government aid to senior housing. Again, we've kind of had this first round and you guys are getting some proceeds in 4Q, but I think clearly everyone thinks that's not enough. I mean, what's the viewpoint that you have internally of just what the government still has to do or what you would like to see the government do in regards to help for the industry to kind of stabilize things?

Yeah, Kyle, I'll start with that. We don't have an internal view of what we'd like to see the government do. I think it's been very beneficial to our operators to have seen them step in with the first tranche that they provided through HHS. And there's a second tranche that's currently being contemplated and open for application. It's more performance-based. The first one was just more based on 2019 revenue. And as far as kind of further funds from HHS, management doesn't have an internal view. Part of the reason why we've acted the way we have as far as building our balance sheet and continuing to strengthen our capital position is so that we're not relying on the duration of the pandemic or the government taking a view on funds to the industry.

Thank you. Our next question comes from the line of Nick Yuliko from Skoshevac. Please go ahead.

Thanks. Good morning, everyone. Just a question on the move-ins. You know, I know you guys pointed to slide 16, which is showing the move-ins, you know, coming back versus February being indexed to February. I guess I'm wondering, though, why is February the appropriate month to be comparing to? I mean, isn't February, the dead of winter, kind of a slower move-in time? Isn't the more relevant metric that your move-ins are down 39% from a year ago?

We do think that's a relevant metric. That's what we put out in our slide deck. However, as far as we understand, if you think about the business, the February marks the last month of pre-COVID, right? So trying to understand the business trend, how that has changed through COVID. So putting out what last, you know, year over year is not a function of just what's happening today. It's also a function of what happened last year. All of us on this call know what happened last year at this point is fairly irrelevant given how COVID has changed our business, right? But we do think that the point that you are making, which is the year over year decline, is an important one. And that's why you put it in boldface on our slide deck.

Thank you. I'm sure our last question comes from the line of Mike Mueller from JPMorgan. Please go ahead.

Yeah, hi. Just two quick ones here. Number one, should we think of all near-term acquisitions as pretty much entirely being focused on senior housing? And then second, can you update us on the progress with the 56th Street project that opened recently?

So let me answer both of those two questions. Our near-term acquisition pipeline is primarily focused on senior housing. We have a couple of smaller MLB deals in the pipeline. However, it's primarily focused on senior housing because that's where we see the significant disruption on the pricing side. MLBs are not priced for distress, and we see for the marginal use of the capital, we see significantly higher, bigger opportunity on the senior housing side. And the East 56th Street, we're still waiting for our license. New York State seems to be opening up again for licensure. So when we get the licensure, then we'll open the buildings for residents.

Thank you. I show we have a follow-up from Jordan Sadler from KeyBank. Please go ahead.

Thank you. Good morning and congratulations, Shank. Thank you, Jordan. So I want to ask you, and I might have missed this because I dropped for a second off the call, but I had a question about sort of the market in general, right? I mean, I appreciate your commentary, and I know this has been your cadence about sort of, you know, buying low, selling high, essentially, very focused on capital allocation. How would you characterize the market for seniors housing right now? In other words, supply of assets versus demand? I mean, are we in equilibrium? Are people better to buy or better to sell? Is it tough to source stuff, easy to source stuff? How would you sort of characterize it?

That's a great question, Jordan, and it's a telepathy. If you have, as I described, you know, previously, pretty assets, pretty markets, and most importantly, experienced operator, and a stabilized 2019, and why is that the lender can underwrite? You cannot, it is a feeding frenzy. You cannot have enough assets for capital to buy because everybody, private capital is not focused on what's going to be the occupancy from fourth quarter, right? They're focused on what's coming, you know, for next three or five or ten or 15 year, and the opportunity to make a generational return given where we are from an industry perspective, the demand side of the equation. So that sort of, you have one side. On the other side, the finance miss is one of those, one or more of those chefs that I talked about, that you cannot finance those transactions today. And because of that, you know, usually transactions like that have been financed in the bank side of the house rather than like companies or, you know, agencies on stabilized assets, and banks are obviously not lending in the space today anywhere close, anywhere close to where they were. I don't want, I almost would venture a guess to say they're not lending at all other than like a couple of select circumstances. So you have a tale of cities, two cities, on those kind of assets which are not, you know, financeable because of that you didn't check all the three boxes that I talked about, there's almost no bid for the assets because you have to buy those assets for cash. And there, we have very significant buyers, you know, we buy assets, we buy everything for cash, right? And so we're finding tremendous opportunity on that and frankly as I described previously, we're finding many of these assets you can buy, brand new assets at a significantly lower price than the older assets purely because of all the margin building activity that has happened in our industry from call it, you know, 16, 17 to 18, 19. And those assets are, many cases are not financeable and we're finding tremendous risk at just a return, bringing our operators and our data capabilities and, you know, filling those assets out as you will see in the next few years.

Thank you. I sure our last question and follow up comes from Amataya Okusoya from Nizohu. Please go ahead.

Yes, that's another quick one. Is there any question to kind of ramp up acquisition activity in a world where you have a Biden when he kind of, you know, eliminates the 1031 exchanges? How does that kind of change how you think about deals going forward?

There is only one pressure of buying things in our shop and that's price. We're not trying to buy assets exactly at the bottom, you know, regardless of outcome of election. It is possible that you will see asset prices are lower in three months than it is today. But, you know, again, if you think about the scale and scope of our balance sheet of how much value we want to create for our shareholders, you know, the asset prices go down, we'll buy more. So, if there is no pressure other than price, and we can tell you at 12th hour, we're calibrating on the prices that we see today in the marketplace.

Thank you. I do show we have a question. Thank you. I should know for the questions in the queue. I'd like to turn the call over to management.

Thank you very much. We'll see you in another 90 days. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.