Q3 2020 Welltower Inc Earnings Call
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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 assurances of 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 companys filings with the SEC and with that I'll 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 as safe and healthy during these difficult times before.
Before I get into the accomplishment for the quarter and discuss our capital allocation strategy. Let me make some comments on the leadership changes and strategy going forward for Welltower, let.
Let me start with our outgoing CEO my close friend and mentor, Tom Durels, Tom the 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 health care continuum years before that and now we all know the importance of that today and going forward. He was a successful entrepreneur. He took a successful entrepreneurial company and made a process driven institutional company that's true.
Did an incredible caliber of talent.
And last but not the least is contribution on me personally and make clear can never be overemphasized, yes.
He has been a topic 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.
Im also pleased to announce that Phil Hawkins one of the most well respected XC yields of the REIT space has joined our board. We're looking forward to sales guidance and Mentorship for many years to come and finally im thrilled to be working with our new independent chairman of the board Ken Bacon with a strong track record of lead.
A ship and expand both in real estate and Ken 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 Dara bought 20 women and men were leading this company forward every day I cannot be more proud of this team in the coming weeks and months you will see the seasonal promotions and new rules that will constantly days the leadership of this company.
Not to change by say just a recognition of the exceptional work that the team is doing our team has never been busier and more excited to create once in 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.
Welltower will continue to strive to be the premier wireless infrastructure company that allocates capital in the path of growth of healthcare and wellness trends.
We're not you're not going to get any grand strategic pronouncement from me, we'll focus 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 the end customers are happy it is that simple we do not need to complicated is simple idea we.
We need to continue to execute and deliver superior cash flow growth on a bus share basis.
To paraphrase one of my favorites the yields of all time, Tom Macphee. The goal is not to have the longest straight back to arrive at the station first using the least amount of well we will continue to be vigilant as ever that institutional imperative do not creep into our culture and we remain focused on it.
She has hit the platform data driven decision, making and employee satisfaction.
Given that it is my first call as CEO I lay out is simple capital allocation framework for you.
A company effectively has four choices of raising capital.
Tapping internal cash flow issuing debt issuing equity.
And his position us with existing assets. It also has five essential choices of deploying that capital investing in existing assets acquisitions paying down debt paying dividend and buying back stock.
Okay loosely call the first set of choices selling but.
Spot right description of that would be sourcing or raising capital you can loosely call. The second set of choices as buying but the client 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 partial description optimizing the strong sales from this menu of sources and uses in a tax efficient manner creates value for continuing shareholder on par share basis.
The goal is to maximize cash flow and value for our share not to become the biggest or the most revolutionary.
We at Welltower to not spend the second strategy strategizing on Hopper when the popularity contest on World Wall Street in fact as stated in the past we focused on buying assets when the alpha favor that is unpopular at the right price are there in the REIT structure ultimately this capital there.
Alignment strategy allows for outsized returns with a large margin of safety price not exposure is the ultimate mitigants of risk.
We're 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 team our sourcing and deployment of capital, let's look at what we have achieved in Q3 and post quarter close.
We are delighted to inform you that we have executed on two large senior housing transaction at evaluation significant in excess of $400000 unit in the mid 3% cap rate on content online and around 5% cap rate on Preopening NOI.
These transactions with our Invesco joint venture on a movies puts us in an enviable position of balance sheet strength. We currently have $5.2 billion to liquidity and $2.2 billion of cash which is expected to rise further as the quarter progresses.
We at Welltower do not the balance sheet as a matter of Vanity like vintage cars, but the most important competition nickel tool to create value at the cycle lows and avoid the need of raising dilutive capital as the exactly the wrong time in the cycle that gets us to our menu off.
Capital deployment to particular of interest investing in hard assets and doubling down on the assets that we already own through buying back our own stock.
In matter of any acquisition assets us stop patience is a virtue with our cash on board with us.
And we think that momentum official ordinance is finally here.
We have in excess of a billion dollars of acquisition in our pipeline comprised of six and a half dozen plus units at an average price of $165000 unit at a material discount to replacement cost 17 deals in the pipeline represents a wide range of transaction.
From $10 million redevelopment assets $288 million or portfolio of brand new assets. We have identified many of these assets working with our existing partners through our data analytics platform or we're buying out other capital partner of our existing operators the pipelines initial.
Sales in the low fourth but we believe it will stabilize in the high single digit to low double digit yields.
Additive evade short term, but incorrect way to look at this will be we're deploying capital in the low 4% trends and sourcing that capital in the mid 3% range. We believe the correct way to look at these will be that we're sourcing that capital in the mid single digit Unlevered IR and deployed.
Looking at a low double digit unlevered, Iraq as evidenced by sourcing the capital in the 400000, plus our unit level and deploying that capital at a $165000 per unit level.
Despite our wheat pasta public capital this spread has never been wider and hence the opportunity to create generational value for our owners on departure basis and that completes the Lou for you and explains why our team is so excited and so busy we've.
Believe were making real impact and anticipate creating exceptional value we not only see this environment as an opportunity for smart capital allocation in the financial around but also in the human capital area. We are seeing I believe you have to be a talent in the marketplace today and were counting on this operates.
Unity as we are.
On the investment side.
With that I will hand, the Mike 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 third quarter 2020 results performance of all property segments in the quarter, our capital activity and finally on balance sheet liquidity update.
And the third quarter Walthour reported normalized FFO of 84 cents per diluted share.
A two cents decline from the second quarter, driven by three cents dilution from dispositions completed in Q2 in Q3, a one penny negative impact from changes in revenue recognition, our post acute senior housing triple net portfolios and a slight decline in sequential senior housing operating performance.
As items were offset by tighter cost controls at corporate and reduction in corporate related expenses and our senior housing operating portfolio.
As a reminder, in the dilution type dispositions, we had $2 billion of cash and cash equivalents inclusive 10, 31 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 covered in occupancy stats reported a quarter in arrears. So these statistics reflect the trailing 12 months any sixthirty 2020, and therefore only reflect a partial impact and coke 19.
Across all Triple net lease segment, Welltower collected 98% contractual rent to third quarter.
Now starting with our senior housing Triple net portfolio sales.
Same store NOI declined 10 basis points year over year, and higher bad debt accrual in a tough comp growth growth slightly negative.
Combine that will impact revenue recognition changes and one restructured lease in the quarter as half a penny relative to twoq and expected to grow to a full penny in Fourq you.
Another half penny impact sequentially from Threeq to Fourq.
Occupancy was down 390 basis points sequentially and even our coverage decreased points. There a few times on a sequential basis to 1.02.
Consistent with my comments in the past our senior housing Triple net operators, we experienced the same headwinds during the day operators over the past seven months, we expect reported lease coverage starts staff to continue reflect these challenges as more of the pandemic periods reflected in EBITDA going forward.
In the quarter. We also transitioned five of a planned nine properties with capital senior to story points senior living we expect the other four properties transition by the end of the year. This.
This is the first phase the transition agreement, we entered into with capital senior beginning of the year, which allowed for an early termination of CS used 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 and execute transition plans for the story point transitions as well as the remaining 15 properties CS you currently operates.
Which will be transitioned to three of our existing day operators in the fourth quarter.
As a result of the cobot backdrop. The initial expected dilution from medium conversion 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 transition.
Our 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 there is less than pointed five times covered by EBITDA.
Although last seven months and very challenging for the senior housing triple and operators. The sequential stabilization, we observed between the second and third quarter, along with refunds from HHS to be received in the fourth quarter should help our operators find their footing heading in 2021.
Turning to long term post acute portfolio, we generated positive 2% year over year same store growth and EBITDA coverage declined 5.0 onetime sequentially.
As noted in our business update earlier this month in last nights release, Genesis healthcare, which makes up approximately half of our long term Postacute 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 Welltower began recording Genesis lease revenue on a cash basis in third quarter retroactive to July onest.
This had a negative $2.2 million impact or approximately half a penny FFO per share relative to second quarter 2020.
It's also resulted in the write down of $97 million or straight line rent receivables Jan.
Genesis continues to remain current on all financial obligations to Welltower through October.
And lastly, within our Triple net lease segment health systems, which is comprised of our Promedica senior care joint venture with Promedica health system.
Growth was positive 2.3% year over year, driven by a 2.75% increase in August and trailing 12 month EBITDARM coverage was 2.61 times.
Turning to medical office.
Our outpatient medical portfolio delivered positive 1% same store growth.
This below trend growth was driven mainly by increased bad debt reserve majority of which related to lease enforcement moratoriums in several California jurisdiction, which we have a sizable footprint as.
As these moratoriums expire we spent recollection to further improve.
We continue to see signs across our outpatient portfolio that activity has returned to pre cobot levels.
Tenants by the number of pendant work order requests received our tenants owned volume data and parking income and our properties.
In the quarter Park income was still a slight headwind year over year, but has negative contribution annualized growth decreased 10 basis points this quarter versus 70 basis points in the second quarter.
During the quarter, reflecting approximately 97% of contractual rent and had an additional 2% of rents to per month.
The majority of which are located in the aforementioned jurisdictions with lease enforcement moratoriums.
We also continue to have very strong recollection. The deferral plans, we put in place in April May and June.
Since we started collecting on these plans in June we've experienced 99.5% collection rates through September.
As a reminder, the large majority of our second quarter deferral plans were structured to payback entirely by year end.
Now turning to our senior housing operating portfolio.
Before reviewing this quarter senior housing operating portfolio results I want to briefly summarize outlook, we provided back in August and.
At that time, our expectations for the third quarter with an occupancy would be down between 125 175 basis points from July Onest through September Thirtyth, and therefore in total expenses would be flat sequentially.
We ended the quarter with occupancy down 150 basis point start to finish Revpar was down 40 basis points the expenses were down 3.4%.
Turning to results in the quarter same store NOI decreased 27.3% as compared to the third quarter of 2019, driven largely by 680 basis point year 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 as significantly lower level occupancy following the steep drop experienced in the second quarter and continued to decline during the quarter, albeit at a significantly decelerated pace from Twoq you.
And secondly, we experienced the seasonal increase in occupancy in the third quarter 29, creating a tougher sequential comp.
Revpar for the quarter was down 1% year over year, but I want to provide a bit more color here as mix shift is distorting the use of this metric as a proxy for rate growth.
Over the last two quarters are lower acuity properties active adult independent living have held up considerably better on the occupancy front than or higher acuity buildings. This.
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 per occupied unit.
If you break the portfolio in two buckets active adult independent living one in assisted living and memory care in the other you will see lower acuity bucket.
Had a 20 basis point decrease in rep for year over year, while the higher acuity buckets had a positive 1.4% year over year change well.
Well, we are seeing evidence of select discounting on room rates in some of our markets in general rates continued to be fairly resilient in the face of occupancy declines.
And lastly show operating expenses.
Same store operating expenses declined 1.1% year over year, and three point and declined 3.3% sequentially.
Our 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 corporate expenses as same store corporate expenses decreased from 33 million to $15 million sequentially, driven by lower emergency staffing costs and significant reductions in price per unit cost of PV.
We expect cobot related cost to continue to decrease in the fourth quarter, but at a much slower pace than in Threeq you.
Looking forward to the fourth quarter and starting with October data, we've already observed we've experienced a 30 basis point decline not occupancy to the week of October 20 Threerd.
In respect of finished the fourth quarter, approximately 75 to 125 basis points lower than where we ended the third quarter.
We also expect sales rep for until expenses to be flat sequential basis.
This is Alan did not include any impact from HHS fund that maybe received in the fourth quarter.
Now on to capital markets activity.
In July we completed the successful tender of 426 million of our 3.75% and 3.95% senior notes due 2023.
Proceeds for the tender were generated from the June issuance of $600 million in senior unsecured notes bearing interest rate of 2.75% with maturity date of January 2031.
We use the remaining proceeds to pay down $140 million of our term loan due in 2022.
These transactions both de risked near term maturities through 2023, an increase our unsecured bond borrowings weighted average maturity.
To 9.2 years.
Additionally, in the quarter, we repaid $289 million of secured debt of which 120 $112 million with the feast and subsequently extinguished in October.
Moving to investment activity, which was mainly focused on our investment pipeline was 96 million invested this quarter.
On the disposition front, we completed 1.4 billion a pro rata dispositions in a five three cap rate post.
Post quarter end, we closed the previously announced sale of a senior housing operating portfolio for 200 million or $395000 per unit sales.
The sales prices the sale price represents a cap rate of 2.6% based on third quarter annualized anyway, and line and a 4.9% cap rate on pre cobot or March trailing 12 month in line.
Inclusive of this disposition, we have completed 3.3 billion dispositions year to date at a five four cap rate.
We expect to close another $186 million transaction in the fourth quarter comprised of secondary trenches or Roper asset sales tied to previously executed outpatient medical transactions.
The near term FFO impact from the completion of these interesting post core dispositions will be approximately three cents per share sequentially in the fourth quarter, we 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 and strong pricing supports our view that our private cost of equity capital is substantially better than our public costs at this time.
Well underlying cash flow continues to be impacted by challenging backdrop. We ended the quarter at 6.02 times net debt to adjusted EBITDA of 34 basis point decrease from last quarter. As a result of liquidity generated from several dispositions in the quarter, which have continued to bolster the balance sheet.
Adjusting for EBITDA loss of sales in the quarter and the post quarter on sales just mentioned run rate net debt to EBITDA is approximately 6.1 times with 2.4 billion of cash and cash equivalents.
And with that I will hand, the call back over to John.
Thanks, Tim.
Let me provide you 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 a significant sequential improvement on move ins.
Last quarter I talked about the hesitation of customers to move in after they put a deposit on.
As communities resumed visitation, we have seen a significant improvement in this area frankly, which was my biggest concern as described last quarter call let.
Let's take an example of 580 large operators, which constituted of national operators.
Large regional operator, dosing northeast West coast, and Sunbeds pretty diverse group.
The average delay between deposit to moving during October of last year was 19 days in March of this year. It was 17 days that increase 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 and focus partner that in many cases. The slab is now getting shorter than prequalified, Dave as families can no longer delay that care needs of their loved ones no.
Portion were very encouraged by that however, we are unwilling to project. This moving trend as we are in middle up a tired wave of colgates across the country. It will be a complete foolhardy for us to predict how things will play out in next few weeks and months before the Colgate car flattens out again, but.
The experience of these accelerated moving in in the pace of move ins tells you that our customers need our product they moved in as soon as the court we have no ability to predict when we'll be on the other side of the core of it but we're optimistic one that they finally come our need based products.
We'll likely to see meaningful traction in demand what brigus us between now and then is our fortress balance sheet and what creates value between now and then is our ability to allocate capital to make outsized returns for our owners.
In this age of Torrance 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 the 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 will.
Open the call up for questions.
Thank you Sir.
As a reminder to ask a question you would need to press star one on your telephone sales.
Which are your question press the pound key.
Due to the excess of time, we ask that you. Please limit yourselves to one question and one follow up please.
Please stand by while we compiled acuity roster.
I show. Our first question comes from the line of Steve Sakwa from Evercore ISI. Please go ahead.
Thanks, Good morning, I guess, John going back to page 16, it's encouraging to see the move ins.
Could you talk maybe a little bit more about lead and kind of where leads are and I know you spoke a little bit about the time.
From a lead to a move in but just what are you seeing specifically on that on that timetable.
As it relates to to move ins.
So Steve leads has not been a problem even when we were 90 days ago leads have comeback not completely to prequaled level, but definitely on a year over year basis, but sequentially. It has and even on a year over year basis is approaching.
Please go read level, maybe 10, 15% still lower.
We're definitely approaching the amount of leads and the quality needs 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 seeing the units where they're virtually are physically.
And then getting to the deposit Thats, what I talked about the pressure on the sort of the front door. If you will that has not been the issue. The issue has been that the customer was hesitating offset that Craig. This is a purely an added focus common we're still seeing hesitation in the aisles focused communities, where if you don't have a need.
You are not you are taking time to make a decision right I mean.
With all the noise and then obviously hopefully good news on vaccines people are just taking time either I can tell me why that is the case, but on the wholesale side people are taking their time on the Aero side. You know we have faced that pressure on the front door, but that was not translating into the move in that sales was not trying.
Diving into the move in which we kind of describe that and since we said that we have seen some face significant improvement in that area. So thats. What you are seeing in the rapid pace of acceleration in that move in and Thats continued even through last week.
Thank you.
I sure next question comes.
From the line of Nick Joseph from Citi. Please go ahead.
Mr. Joseph your line is open.
Okay, all right so our mix.
Question comes from the line of Rich Anderson from SMBC. Please go ahead.
Thanks, Good morning, everybody.
Good morning.
So 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 third quarter, which is.
Reasonable.
Ill.
Seasonal environment, you could comment on seasonality that typically impact you, but I'm curious how would 100 basis points compared to here.
Free covert 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.
Yeah, I'll start with average is.
It's higher than we usually see you typically see kind of a 50 basis point decrease over.
That stretches from Fourq to you to one Q, but over a typical typical seasonality and occupancy will see 50 basis points lost over kind of the.
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 in a number which is factored in now are looking at the fourth quarter, we talked about this a bit in its.
At this point a.
Summarizes the basket hypothesis and that we won't see as much of a seasonal change in demand just due to the disruption we've seen in this manner to demand during the year is our seasonality. There's two things addressing now there is a change in seasonal demand and then also the impact of the flu data.
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 100 basis points is really just due to the cold environment, what we've seen so far in the quarter and certainly when I say cover environment, It's really the national picture acceleration.
Cases, and this that landing of adding a bit of uncertainty too.
And what the outlook is for the next two or three months.
Thank you.
Next question comes from the line of Vikram Malhotra from Morgan Stanley. Please go ahead.
Thanks, Good morning.
And John Congrats congrats on the on taking the leadership and congrats to the whole team I know you guys put a lot of hard work.
Dedicated to building on our dealers are digging into 16 little bit you've seen the acceleration like you pointed out in the lead conversion that yet the timeline narrowing im.
Im just wondering as you describe sort of second or third wave or hard to categorize now, but can you sort of comment on this this decline and timing and the lead.
In markets, where you've really seen a true second in the Truchard wave versus markets, where we're just seeing sort of a new wins in other words is this more kind of uniform are you seeing real dispersion in markets.
That's a really good question Mr. were actually not seeing a lot of dispersion in markets parsing. The Hughes dispersion from a product type perspective, right. So you are seeing whether in Wesco ASO Easco store, Texas are you pick your market, if you ever need driven product the customer as 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 prequalified levels, but 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 some visitation. So it's not a market driven it is a definitely a product driven phenomena.
Thank you. Our next question comes from the line of Nick Joseph from Citi. Please go ahead.
Hey, it's Michael Bilerman can you hear me now.
Often have some.
So Sean Congrats again on the CEO role, how do you see your leadership style and approach.
Similar but also different then Tom and maybe secondarily.
Tom obviously was highly visible within the industry and as well as globally going data flows 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 really good question. So I will tell you look.
No that Tom has trained meaning for the job over many years and definitely been very influenced by how we saw the war.
First and foremost Todd.
Taught us and that sort of ingrained in my leadership style as well as a lot of other people in our leadership team is to take that what we can do more from the smartphone not just think about disparate aggregation of assets, but thinking through platform right and the importance of.
Being on 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 our share value creation.
And that's where the team is on capital allocation. So it's it everybody leadership style is different and nuanced I would obviously it is less important on the difference between Tom's leadership solid my leadership style I will tell you that it is collectively as a leadership team we see our biggest focus.
Yes today is to increase the value of our share execute and obviously, there's a tremendous amount of potential for us to get back to a loss time not just for the peak over the level as you imagine we have talked about even pre recorded our portfolio was under leased and get back to that and create that value through.
Execution on capital allocation and that's what we're focused on today.
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 equation on move outs and just understand maybe why residents are moving out if you have that information at.
At this point is it pent up move outs.
I want to see if they are using higher acuity.
Families seeking residents out before the winter any change in length of stay just trying to understand the other side of the equation for move ins.
Then you asked a very interesting question, if you think about robust mobile assets come down crude.
Pretty much across the board for last seven eight months to call. The last couple of weeks I would say that we have seen some increased move out is hard to say why that is the case, because it's too short of a timeframe to make this as a trend.
Now, but it is also the most difficult part of our business to predict right. It is all of the above what you mentioned as reason for mobile we don't see financial reasons for move out in our industry.
But we have seen some elevated move outs for last couple of weeks. We also saw some reduced will last few weeks before that right. This is a very very hard business to predict on a covino weekly basis monthly basis. So I think it is hard for us to sort of get into that and see what the trend and what's not UK.
Good uptake in last four weeks and say the first two weeks is that you added 100 optimistic band and you could have said that I'll take that move our trends on moving trains and protect our you put up take in the last two weeks of elevated Milad trends and project forward additional right and wrong answer we have just under that.
Latter part not the first part, but 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 corporate environment.
I think it's prudent for us to at this point not to try to get to two.
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, our shock I just wanted to follow up on one of your points at the end there where you talked about.
Conversions of people, putting down money to actually coming in to the communities are more common for crossing back to pre corporate levels.
Mean, potentially once kopec, passing you don't have quantum deferred demand I guess, particularly on the sales side that would be.
Coming in the door kind of post program is whenever that may be first or second quarter that gets kind of deferred a decision and miles rate commitment if those needs and deposits are converting today.
No one is it simply means that the customers need our product right. So what in what has been going on is with all the national headlines.
And all the coal based in the overall situations.
Who are hesitating now, we obviously have a need that sort of.
Adding up and now the customers the same way they can move and again, we're not projecting that into the future and thats very important point. If we did then we will not give you the guidance for fourth quarter that we did.
But very much with that thinking the base simply the customers won't even when the court now April may Spike up again, and they can because you have visitation bad. So you have shutdown of facilities and all of those thing that you will see that but the most importantly, when they moved in when they can I was simply answering that question.
Okay, and if the majority were actually legacy structures I believe heading into 2020, you had 80 per cent of operators converted to what is seemingly a more favorable or day or three dot O contract and I get to the second part of the question is where would that percentage stand today. Thank you.
Thank you to I don't have the number percentage for you, but I can tell you that both of what was two portfolios were sold there were not in right Israel contract. So you're.
Fundamental assumption would be correct.
Thank you.
Next question comes from the line of Lucas Heart, which from Green Street. Please go ahead.
Thanks, Good morning.
Online and go to the color on for earlier I was really helpful. I was hoping to get die, though it below the surface and describe what you're seeing with these transfers concessions things like that.
Lucas can you repeat the question. Please one more time.
Sure. So it was a curious on the Rab forefront if you could dive a little bit deeper on what you're seeing with face rents versus concessions you know what what's kind of driving the the headline rat for number I thought the color around the Knicks shiftless helpful. I'm, just curious what's going on with face ran some concessions.
So I think from the numbers were seeing what we're seeing in the market is we're not seeing a lot of evidence of the concession that he is Sean spoke to probably say more in lower acuity side as far as.
Just of what we're seeing in the market as far as.
Because of the lack of to the difference in the kind of needs based aspect of it that there is a little bit more of a consumer discretionary good and therefore, you are seeing a bit more of that I'd say in the front end.
Whereas on the assisted living sign you are seeing very little bit we've talked about this a bit community fees, which is typically align with when you move in and are both kind of cover cost to move in as well as.
Having testing et cetera, and get your acuity level of care setup, you're seeing some discounting of those and so we've said the combination of community is coming through Revpar is that you have less people moving in on a year over year basis, So you're seeing.
The fees.
In total come down and also you received some discounting.
And assisted living importantly years, not seeing discounting and care and more of the residence, we're seeing coming in.
They're coming in because of the care and so there is there isn't a lot of price competition. Their reputation is a huge factor you saw some competition in general market to the supplies like over the last couple of years impact pricing I'd say.
In the Covid environment, you are actually seeing a bit of that dissipate because more of the consumer residents are being attracted towards a better brand names more well known names in the in the market. So assisted living pricing is holding up I'd say pretty well is that an opening remarks given the.
The steepest of the occupancy declines.
Thank you.
Our next question comes from the line of micro Carol from RBC capital market. Please go ahead.
Yep. Thanks shock I was hoping you can provide some color on the investment pipeline and the types of deals that you've been able to source I guess part of market valuations appeared to has held up well, especially given well towers recent sales I guess the past several months I mean, what is or is there a difference between the answers that you saw.
Old versus the deals that here in your pipeline merger being able to source at much below replacement costs.
Thank you Mike there is so if you could think of us in today's marketplace.
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Take it very simple view of.
What what gets to financing is you've got to take three boxes pretty assets pretty market. Most importantly, a very well known whether it booted alternatives right shoe can check all those three boxes it'll be very hard if not impossible for you to line up.
Financing.
And that gets you to the everything else outside that we've we've talked about this on the last call we are bringing out awkward as into assets.
So this asset will be comprehensible, but today, it's not many of these assets were built in last two three years. So they don't have is stabilized 2019 and alive that Linda can underwrite right. So a lot of things were buying brand new assets that have been built last two to three years does not fit that criteria. So.
Those are the ones that we are going into interestingly, if you see that in real estate over a period of time for apples to apples new on acid trades file higher priced than lower price just purely the difference of capex, that's relevant to vintage right given the what is happening today in the marketplace. You are seeing exactly opposite of that new asked us to trading.
At a discount purely because they can get financing because they don't have a stable is NOI for Linda to underwrite and that's why we are coming in to buy things for cash. So we don't obviously prefinancing in we buy assets for cash and that they're bringing in our operators are are these assets are all obviously owned by other cat.
Pardon us up our existing operators and we're buying detached it. So there is a difference. So if you think about what we what we sold that check bold us box.
Boxes pretty assets pretty market, and very experienced and well known well reported operator, you don't you Miss one of those checked it comes back to pretty much.
Very few buyers in the market place in loco simple dominant one.
Thank you.
Next question comes from the line of Stephen Valiquette from Barclays. Please go ahead.
Great. Thanks, good morning, everyone.
Shock, let me offer my congrats on your promotion as well and.
And.
The comments you have the call regarding the portfolio buying and selling was definitely helpful.
The Lions in our model, that's really sticks out as the gain on sale of properties with some.
3 billion recognized over the last five years or so so that's something that lost upon us.
Question I really have though is just related to your comments on the lower expensive in the shop portfolio.
Particularly in the lower PPE or you said the 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 well tower maybe.
Driving a better than average trend on that either due to.
Some of the initiatives like the the Dallas procurement center and other.
Other stuff is more companies specific thanks.
Thanks.
Good question, Steve I'd say on the we actually have wound down.
Any activity that we have in the Dallas procurement center that was very important to operations when.
Our operators operations early on in March and April period, when the only way to access.
One of the only ways to kind of guarantee access to it was through scale.
And I think it is we've seen distribution channels normalized and they're still not back.
Back to where they would be pre covid, but as you've seen them normalize our operators being able to access.
And himself and institutional haven't we've stepped in to help but for the most part that's going direct from operators.
Two.
Two providers of PB.
And saying that the pricing is.
Is more I'm, just seeing a bit of a normalization from like a mass prices were some ask upwards of $8. On these are retailing $82 10 in a normal environment and and there's still elevated.
Even today, but if they're in the three to $4 range did come down significantly from what we were paying on average in the second quarter.
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 like trade asset that's not our goal. We're obviously when we see how to finance the transaction.
We're very we're trying to always think about what are.
Sources of capital will be right, sometimes that could be stock at some point in the cycle. Some point that could be the equity that's trapped into the acid that you think you have maximize under your sort of umbrella right. So we have alluded to this before the huge amount of portfolio of transformation.
Which I believe sort of amongst too close to $30 billion of assets disposition and acquisition over the last five years each roughly complete.
All of them, we have seen that the propensity of companies to continue to grow.
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Is not inside well tolerate we're always trying to think how we maximize value for sure for the continuing Sherwoodite right. You can say the one good thing will be one year to stock into the right. Please discontinue spill yo stock instead of settling your.
Acid and that would be the correct approach. If you just look at capital allocation from the lens sore spot and Navy.
I told you that's not how we see the world right, we see the world from the perspective of long term IRR off what USA selling versus what what you're buying and look at a comprehensive way of what your tools to sort of sources and uses the capital stock.
So we will continue to do that but that overall transformation of the portfolio that we we.
We wanted to do that storm started I would say, we're roughly close to being done but that doesn't mean that will not sell assets will continue to sell assets. If we think that is the best source of capital to fund what we're buying.
Thank you.
Next question comes from the line of Tyre or sorry off from Missoula. Please go ahead.
Hi, good morning, everyone.
First question just around government.
Housing.
Dealt with kind of habits first round and you guys are getting caught proceeds in four Q.
Think clearly everyone thinks that's not enough what's the viewpoint that you have internally just what the government has to do with what you would like to see the government do you agree to help.
The industry kind of stabilized thing.
Yes, hi, I'll start with that.
We don't have an internal view of what we'd like to see the government do.
Has.
I've been very beneficial to our operators and I've seen them step in with the first tranche that they provided HHS and.
There's a second tranche, that's currently being contemplated and I think open for application. That's more performance based the first one was just more based on 2019 revenue.
And but as far as kind of further funds will need to adjust.
Management doesn't have an internal view part of the reason why we evacuate the way we have as far as building our balance sheet and continuing to strengthen our capital position. So that we're not relying on the duration of the pandemic or the government taking a view on.
Fun to the to the industry.
Thank you.
Our next question comes from the line of MC Julie co from Scotiabank. Please go ahead.
Okay. Good morning, everyone. Just a question on the move ins.
I know you guys pointed to slide 16, which is showing the move ins.
Coming back versus February being index to February I guess, because I'm wondering though why 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 you are moving is are down 39% from a year ago.
We do think that's irrelevant metric that's why we put it out in our slide deck.
However, as far as we understand if you think about the business.
February March last month of free Covid right. So we're trying to understand the business friend, how that has changed through covid, so putting on weight.
Last 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 no 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're making which is the year, where you decline is an important one and that slowed for.
And board based on our flight deck.
Thank you.
Sure. Our last question comes from the line of Mike Mueller from J P. Morgan. Please go ahead.
Yes, Hi, just two quick ones here number one show.
We think of all near term acquisitions is pretty much entirely being focused on senior housing and then second can you update us on the car.
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 why we see them significant disruption on the pricing site and will be on not priced for distress and we see the part the marginal use of the Capitol.
We see significantly higher bigger opportunity on the senior housing site.
And the East 56 Street, we're still waiting for our license.
Six.
Steve 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 sure we have a follow up from Jordan Saddler from Keybanc. Please go ahead.
Thank you good morning.
Congratulations shock.
So.
Asking a multiple since we can we can talk through second call, but I had a question about sort of the market.
In General I mean, I appreciate your commentary and I know this has been your cadence about sort of.
Finding low selling high essentially.
Very focused on capital allocation.
What how would you characterize the market through seniors housing right now in other words supply of assets versus demand I mean are we in equilibrium or people.
Better to buy or better so tough to source for you needed to assess how would you sort of characterize it.
That's a great question, John and it's it's a tale of two cities.
If you have as I described previously.
Pretty assets pretty markets and most importantly experienced operator and is stabilized 2019, NOI base that the lender can underwrite you cannot you. There's a feeding frenzy you cannot have enough assets forest capital to buy because everybody private capital is not focused on what's going to be the occupancy.
From the fourth quarter right, they're focused on what's coming.
Ooh for next three five entertaining a 15 year and the opportunity to meet Jane.
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From an industry perspective, the demand side of the equation. So so that you have one side on the other side of finance it misses one of those one or more of those checks that they talked about that you cannot finance those transactions today.
And because of that usually transactions like that has been financed in the bank.
Side of the house, rather than like companies or agencies uncivilized asset and banks are obviously not lending in the space today anywhere close anywhere close to where they were.
I don't want I almost for adventure guests to say that not lending at all other than play a couple of select circumstances. So you have a tale of city two cities on those skylar assets, which are not financeable because of that you didn't check all the three boxes that I talked about there's almost no bejewelled asset because you have to buy those assets forecast.
And there we are very significant buyers you know, we buy assets, we buy everything forecast shape and so we're finding tremendous opportunity all that that then frankly as I described previously we're finding many of these assets you can buy brand new assets added significantly lower price than the order active.
Purely because of all the marching building activity that has happened in our industry. Some colleagues 16 17 to 18 19 and those assets. Many cases I'm not financeable and we finding tremendous risk adjusted return, bringing our operators and a data capabilities and.
Filling those assets out that you will see in next few years.
Thank you I sure. Our last question and follow up comes from Ohio of course, sorry are from Mizuho. Please go ahead.
Yes, just one other quick one any Russia, so you're kind of.
Bump up acquisition activity in the World where.
You have a bite and when he kind of eliminates the 10 31 exchanges, how does that kind of change how you think about deals going forward.
That is all the water pressure of buying things in our in our shop and Thats price.
We're not trying to fly assets exactly at the bottom.
Regardless of outcome of election. It is possible that you will see asset prices are lower in three months than it is today, but again if.
You think about the scale and scope of our balance sheet of how much value we want to create for our shareholders.
Acid prices go down will buy more so there is no pressure that then price and we can tell you at 12 hour were salivating on the prices that we see today in the marketplace.
Thank you.
Sure we have a question.
Thank you yeah, I should know further questions in the queue I would like to turn the call over to management.
Thank you very much we will 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.
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