Welltower Inc (WELL) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2020 Welltower Inc. Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

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 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 the SEC.

And with that, I'll hand the call over to Shankh for his opening remarks. Shankh?

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 for 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 -- he took a successful entrepreneurial 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 REIT space has joined our board. Well, 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, with 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 the series of promotions and new roles that will consolidate the leadership of this company. Not a change per say, just the 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 wellness 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 for 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 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 per share basis. To parastate one of my favorite CEOs of all time, Tom Martin, the goal is not to have the longest train but to arrive at the station first using the least amount of fuel. We will continue to be vigilant as ever that institutional imperative do not creep into our culture, and we remain focused on 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 4 choices of raising capital. Tapping internal cash flow, issuing debt, issuing equity and disposition of its existing assets. It also has 5 essential choices of deploying that capital, investing in existing assets, acquisitions, paying down debt, paying dividends and buying back stock. 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 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 thoughtful description, optimizing these choices from this menu of sources and uses in a tax-efficient manner creates value for continuing shareholder on a per share basis. The goal is to maximize cash flow and value per share, not to become the biggest or the most revolutionary. We, at Welltower, 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 outsized 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 team of 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 2 large senior housing transactions at a valuation significant in excess of $400,000 unit in the mid-3% cap rate on current NOI and around 5% cap rate on pre-COVID NOI. These transactions with our Invesco joint 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 Welltower, do not see balance sheet as a matter of vanity like vintage cars. But the most important countercyclical tool is to create value at the cycle lows and avoid the need of raising dilutive capital at exactly the wrong time in the cycle. That gets us to our menu of capital deployment to particular interest investing in hard assets and doubling down on the assets that we already own through buying back our own stock.

In a matter of any acquisitions, assets of stocks, patience is a virtue with occasional boldness and we think that moment of occasional boldness is finally here. We have in excess of $1 billion of acquisition in our pipeline comprised of 6,500-plus units at an average price of $165,000 unit at a material discount to replacement cost. 17 deals in the pipeline represents 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 capital partners of our existing operators. The pipeline's initial yield is at low force, but we believe it will stabilize in the high single-digit to low double-digit yields. At a very 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 this will be that we are sourcing that capital in the mid-single-digit 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 $165,000 per unit level. Despite our weak cost of public capital, this freight has never been wider. And hence, the opportunity to create generational value for our owners on a per share basis. And that completes the loupe for you and explains why our team is so excited and so busy. We believe we are making real impact and anticipate this 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're pouncing 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, Shankh. My comments today will focus on the third quarter 2020 results, 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 $0.84 per diluted share, a $0.02 decline from the second quarter, driven by $0.03 of dilution from dispositions completed in Q2 and Q3, a $0.01 negative impact from changes in revenue recognition in our post-acute senior housing triple-net portfolios and a slight decline in sequential senior housing operating performance. Those items were offset by tighter cost controls at corporate and reduction in COVID-related expenses in our senior housing operating portfolio. As a reminder, on the dilution type of dispositions, we had $2 billion of cash and cash equivalents, inclusive 10/31 deposits as of 9/30.

Now turning to our Individual Property segment. 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 ending June 30, 2020 and therefore, only reflect a partial impact from 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-store NOI declined 10 basis points year-over-year. And higher bad debt accrual and a tough comp drove growth slightly negative. Combined FFO impact of revenue recognition changes on one restructured lease in the quarter was $0.005 relative to 2Q and expected to grow to a full penny in 4Q. i.e., another $0.005 impact sequentially from 3Q to 4Q. Occupancy was down 390 basis points sequentially and EBITDAR coverage decreased 0.02x on a sequential basis to 1.02.

Consistent with my comments in the past, our senior housing triple-net operators have experienced the same headwind server day operators over the past 7 months. You may expect reported lease coverage starts -- stat that continue to reflect these challenges and more of the pandemic periods reflected in EBITDA going forward. In the quarter, we also transitioned 5 of a planned 9 properties from Capital Senior to StoryPoint Senior Living. We expect the other 4 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 an 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 and execute transition plans with StoryPoint transitions as well as the remaining 15 properties CSU currently operates, which will be transitioned to 3 of our existing RIDEA operators in the fourth quarter. As a result of the COVID backdrop, the initial expected dilution from conversion is expected to be approximately $12 million or $0.03 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 7 of our supplement and make up roughly 3/4 of the triple-net senior housing rent that is less than 0.85x covered by EBITDA.

Although the last 7 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-acute portfolio. We generated positive 2% year-over-year same-store growth and EBITDAR coverage declined by 0.1x sequentially. As noted in our business update earlier this month in the last night's release, Genesis HealthCare, which makes up approximately half of our long-term post-acute segment exposure include language in the second quarter financials filed on August 10 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 the third quarter, retroactive to July 1. This had a negative $2.2 million impact or approximately $0.005 FFO per share relative to second quarter 2020. This also resulted in the write-down of $97 million of straight-line rent receivables. Genesis continues to remain current on all financial obligations to Welltower through October. And lastly, within our Triple-Net lease segments, health systems, which is comprised of our ProMedica Senior Care joint venture with ProMedica Health System. NOI growth was positive 2.3% year-over-year, driven by a 2.75% increase during August and trailing 12-month EBITDAR coverage was 2.6x. 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 jurisdictions in which we have a sizable footprint. As these moratoriums expire, we expect rent collection to further improve. We continue to see signs across our outpatient portfolio and activities returned to pre-COVID levels. Evidenced by the number of tenant work order requests received, our tenant's own volume data and Park and Lexington properties. In the quarter, Park and Lexington was still a slight headwind 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 before the moratoriums. We also continue to have very strong rent collection in deferral plans we put in place in April, May and June. Since we started clocking 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 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 provided back in August. At that time, our expectations for the third quarter was that occupancy would be down between 125 and 175 basis points from July 1 through September 30. And the REVPOR and total expenses would be flat sequentially. We ended the quarter with occupancy down 150 basis points start to finish, REVPOR was down 40 basis points, and 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 a 680 basis point year-over-year drop in average occupancy. As we indicated last quarter, 2 factors drove this outside decline in occupancy. First, the portfolio began the third quarter at significantly lower level of occupancy, following the steep drop experienced 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 comp.

REVPOR for the quarter was down 1% year-over-year, but I want to provide a bit more color here as mix shift is distorted in the use of this metric as a proxy for rate growth. Over the last 2 quarters, our lower acuity properties, active adult 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 of rent for occupied unit. If you break the portfolio into 2 buckets, active adult independent living in one and assisted living and memory care in the other, you will see the lower acuity bucket had a 20 basis point decrease in REVPOR year-over-year, while the higher acuity bucket had a positive 1.4% year-over-year change. While we are seeing evidence of select discounting 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 declined 1.1% year-over-year and declined 3.3% sequentially. We'll focus on sequential growth since the changes are more relevant to trends in the current operating environment. We experienced fairly expected sequential expense trends driven by 2 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 with October data we've already observed, we've experienced a 30 basis point decline in occupancy to the week of October 23. And we expect to finish the fourth quarter approximately 75 to 125 basis points lower than where we ended in the third quarter. We also expect both REVPOR and total expenses to be flat on sequential basis. Welltower did not include any impact from HHS funds that may be received in the fourth quarter.

Now on to capital markets activity. In July, we completed a successful tender of $426 million of our 3.75% and 3.95% Senior Notes due in 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 used the remaining proceeds to pay down $140 million of our term loan due in 2022. These transactions both derisk near-term maturities through 2023 and increase our unsecured bond borrowings weighted in average maturity to 9.2 years. Additionally, in the quarter, we repaid $289 million of secured debt, of which $112 million was the fee 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 rata dispositions at a 5.3% cap rate. Post quarter end, we closed on a previously announced sale of a senior housing operating portfolio for $200 million or $395,000 per unit. The sale prices -- the sale price represents a cap rate of 2.6% based on third quarter annualized NOI and a 4.9% cap rate on pre-COVID from March trailing 12-month NOI. Inclusive of this disposition, we completed $3.3 billion dispositions year-to-date at a 5.4% cap rate. We expect to close another $186 million of transactions in the fourth quarter comprised of secondary tranches or (inaudible) asset sales had previously executed outpatient medical transactions. The near-term FFO impact from the completion of these intra and post-quarter dispositions will be approximately $0.03 per share sequentially in the fourth quarter and 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 of strong pricing supports our view that our private cost of equity capital is substantially better than our public costs at this time. While underlying cash flow continues to be impacted by a challenging backdrop, we ended the quarter at 6.2x net debt to adjusted EBITDA, a 34 basis point decrease from last quarter as a result of liquidity generated from successful dispositions in the quarter which have continued to bolster the balance sheet. Adjusting for EBITDA loss to sales in the quarter and the post quarter on sales just mentioned, run rate net debt-to-EBITDA is approximately 6.1x with $2.4 billion of cash and cash equivalents.

And with that, I will hand the call back over to Shankh.

Thank you, 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 of movements. 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's take an example of 5 very large operators, which constitute of national operators, large regional operators in Northeast, West Coast and Sunbelt, 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 AL focus 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 portion were very encouraged by that. However, we are unwilling to project this moving trend as we are in the middle of a third wave of COVID across the country. It will be a complete full 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 pace of move-ins tells you that our customers need our product. 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 traction in demand. What bridges 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 tolerance 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.

(Operator Instructions) Our first question comes from the line of Steve Sakwa from Evercore ISI.

I guess, Shankh, going back to Page 16, 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 time from a lead to a move-in. But just what are you seeing specifically on that timetable 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 year-over-year basis, but sequentially it has. And it is even on a year-over-year basis, it's approaching pre-COVID level, maybe 10%, 15% 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 seeing the units whether virtually or physically and then getting to the deposit. That's 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 after that, right? This is a purely an AL focus comment. We're still seeing hesitation in the IL focus community where 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 are on vaccines, people are just taking time. I can't tell you why that is the case. But on the IL side, people are taking the time.

On the AL side, 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 continued even through last week.

I show our next question comes from the line of Nick Joseph from Citi.

Okay. I show our next question comes from the line of Rich Anderson from SMBC.

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 the third quarter, which is reasonable in perhaps a seasonal environment, and 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 a 50 basis point decrease over -- that 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 factored in now looking at the fourth quarter. We've talked about this a bit in it's -- at this point, in some ways, it's the best 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 demand during the year. And so seasonality, there's 2 things that drives seasonality, right? There's a change in seasonal demand and there's also the impact of the flu. I think data is very supportive to flu. And 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 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 this is adding a bit of uncertainty to what the outlook is for the next 2 or 3 months.

Our next question comes from the line of Vikram Malhotra from Morgan Stanley.

Shankh, congrats on taking the leadership and congrats to the whole team. I know you guys put a lot of hard work. Just maybe building or digging into 16 a little bit, you've seen the acceleration, like you pointed out in the lead conversion that -- the time lines narrowing. I'm just wondering if you described sort of second or third wave or -- is hard 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?

We are -- that's a really good question, Vikram. We're actually not seeing a lot of dispersion in markets per se. There's a huge dispersion from a product-type perspective, right? So you were seeing whether in the West Coast or East Coast or Texas or you pick your market, if you have a need-driven product, the customer's 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 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-hesitation. So it's not market-driven. It is definitely a product-driven phenomena.

Our next question comes from the line of Nick Joseph from Citi.

It's Michael Bilerman. Can you hear me now?

Yes.

Awesome. So Shankh, 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, Tom, obviously, was highly visible within the industry as well as globally 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, look, as you guys know, that Tom has trained me for the job over many years and definitely I've been very influenced by how he saw the world. The first and foremost, he had 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 this 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 per share value creation. And that's what the team is and capital allocation. So it's -- everybody's leadership style is different and advanced. I would -- obviously, it is less important on the difference between Tom's leadership style and my leadership style, I will tell you, that it is collectively at the leadership team, we see our biggest focus today is to increase the value per share, execute. And obviously, there's a tremendous amount of potential for us to get back to our lost earnings, not just to the pre-COVID level. As you imagine, we have talked about even pre-COVID, our portfolio was underleased and get back to that and create that value through execution and capital allocation, and that's what we are focused on today.

Our next question comes from the line of Daniel Bernstein from Capital One.

I just wanted to ask a little bit more about the other side of the equation on move-outs and just understand maybe why residents are moving out if you have that information at this point? Is it pent-up move-outs, AL to SNFs that you've seen higher acuity, families taking residency out before the winter, any change in length of stay? Just trying to understand that other side of the equation for move-ins.

Dan, you asked a very interesting question. If you think about move-outs, move-outs have come down pretty much across the board for over the last 7, 8 months to COVID. Last couple of weeks, I would say that we have seen some increased move-outs. It's hard to say why that is the case because it's too short of a time frame 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 reason for move out. 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 move-outs 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 take last 4 weeks and say the first 2 weeks is that you wanted to have an optimistic bend, and you could have said that I will take that move-out trends and move-in trends on project or you could have taken the last 2 weeks of elevated move-out trends and project forward, and there's no right and wrong answer. We have just done 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 overall with the national COVID environment, I think it's prudent for us to, at this point, not to try to get to too excited about what might or might not happen.

Our next question comes from the line of Juan Sanabria from BMO Capital Markets.

Shankh, I just wanted to follow up with 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 and that kind of compresses back to kind of pre-COVID levels. Does that mean potentially that once COVID passes that you don't have kind of deferred demand, 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 converting today?

No, Juan. It simply means that the customers need our product, right? So what has been going on is with all the national headlines and all the COVID in the overall situations, people were hesitating. Now we obviously have a need that's sort of adding up. And now the customers are saying, well, 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 (inaudible) thinking that very simply the customer has moved in when they could. Now if COVID spikes up again and they can because you have visitation bands or you have shutdown of facilities and all of those things, that you will see that. But most importantly, 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 hasn't changed through this period of time.

Our next question comes from the line of Connor Siversky from Berenberg.

Just a quick one on testing capacity. Among your peers at the last round of earnings, it still seems like point-of-care test 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, what are the goals in terms of testing if we're taking a 6- or 12-month view?

We have -- Connor, we have made a very significant improvement even in the last 90 days on point-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, a point of -- in the testing side. But it's very -- it's too premature to say how that will impact the consumer behavior and the 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.

Our next question comes from the line of Derek Johnston from Deutsche Bank.

Congrats Shankh. 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 our 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, Derek. I don't have the number percentage for you, but I can tell you that both of what was -- the 2 portfolios were sold. They were not in RIDEA 3.0 contracts. So your fundamental assumption will be correct.

Our next question comes from the line of Lukas Hartwich from Green Street.

Thanks for the color on that earlier. It was really helpful. I was hoping if you could dive a bit below the surface and describe what you're seeing with base rents versus concessions, things like that?

Lukas, can you repeat the question please one more time?

Sure. So I was curious on the REVPOR front, if you could dive a little bit deeper on what you're seeing with face rents versus concessions? What's kind of driving the headline REVPOR number? The color around the mix shift was helpful. I'm just curious what's going on with face rents and concessions?

So I think from the numbers we're seeing and what we're seeing in the market is we're not seeing a lot of evidence of concessions. I think as Shankh spoke to you probably seeing more on the lower acuity side as far as -- just of what we're seeing in the market, as far as -- because of the lack -- 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'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 typically align with when you move in and are both kind of cover costs to move in as well as having -- testing, et cetera, to get your acuity level of care. So you're seeing some discounting of those. And so we've said the combination of community fees coming through REVPOR is that you have less people moving in on a year-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 will start 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, there is a supply cycle over the last couple of years impact pricing. I'd say 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 as said in the opening remarks given the steepness of the occupancy declines.

Our next question comes from the line of Michael Carroll from RBC Capital Markets.

Shankh, 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 appear to have held up well, especially given Welltower's recent sales, I guess, this past several months. I mean, what is or or is there a difference between the assets that you sold versus the deals that are in your pipeline that you're being able to source at much below replacement costs?

There is. So if you think about in today's marketplace, pay, if you take a very simple view of what gets you financing is you got to check 3 boxes, pretty assets, pretty market, most importantly, a very well-known, well-reputed operators, right? If you can check all those 3 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 talked about this on the last call. We are bringing our operators into assets. So these assets will become financeable. But today, it's not. Many of these assets were built in the last 2, 3 years, so they don't have a stabilized 2019 NOI that a lender can underwrite, right? So a lot of things we're buying, brand-new assets that have been built last 2 to 3 years, does not fit that criteria. So those are the ones that we are going. Interestingly, if you see that in real estate over a period of time for apples-to-apples, newer asset trades 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 that. New assets are trading at a discount purely because they can't get financing because they don't have a stabilized NOI 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 what is bringing in our operators, all these assets are obviously owned by other capital partners of our existing operators and we're buying this asset. So there is no difference. So if you think about what we sold, that checks all the 3 boxes, pretty assets, pretty market and very experienced and well-known, well-reputed operator.

You miss one of those checks, it comes back to pretty much very, very few buyers in the marketplace and all tariffs and most dominant one.

Our next question comes from the line of Steven Valiquette from Barclays.

Great. Shankh, let me offer my congrats on your promotion as well. And your -- actually, the comments you had on the call regarding the portfolio buying and selling was definitely helpful. 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 5 years or so. So that's been now lost upon us. The question I really have, though, is just related to your comments on the lower expenses in the SHOP portfolio, particularly in the lower PPE, where you said the price per unit costs are now weighed down. Just curious how much you think that trend is more of an industry phenomenon versus how much Welltower maybe driving a better-than-average trend on that either due to some of the initiatives like the Dallas Procurement Center and other stuff that's more company specific?

Yes, good question, Steve. I'd say on the -- we actually have worn down a lot of the activity that we had in the Dallas Procurement 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 you've seen them normalize, our operators have been able to access PPE themselves and instances really happened, we've stepped in to help. But for the most part, that's going direct from operators to providers of PPE. And so I think in saying that the pricing is more, I'm just seeing a bit of a normalization from -- if you look at mass prices where some have uppers of $8 and things are retailing $0.80 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 come down significantly from what we're paying on average in the second quarter.

I would 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 assets. That's not our goal. We are -- obviously, when we see how to finance the transaction, we're very -- 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, some point that could be the equity that's trapped into the asset 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 asset disposition and acquisition over the last 5 years, is roughly complete. However, we have seen that the propensity of companies to continue to grow and that is not inside Welltower, right? We're always trying to think how we maximize value per share for the continuing shareholder, right? You can say the one good thing will be when your stock in the right place, just continue to sell your stock instead of selling your assets and that would be the correct approach if you just look at capital allocation from the lens of spot NAV. 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 what you're buying and look at a comprehensive way of what your tools, the sort of sources and uses of capitals are. So we'll continue to do that.

But the overall transformation of the portfolio that we wanted to do, that Tom 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.

Our next question comes from the line of Omotayo Okusanya from Mizuho.

First question, just around government-aided senior housing. Again, we've kind of had this first round and you guys are getting close to even 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?

Yes. 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, I have seen step in with the first tranche that they provided through HHS and there's a second tranche that's currently being contemplated and I think open for application. It's more performance-based, the first one, which is more based on 2019 revenue. And -- but 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 that we're not relying on the duration of the pandemic or the government taking a view on funds to the industry.

Our next question comes from the line of Nick Yulico from Scotiabank.

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 indexed to February. And 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 why 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 we're trying to understand the business trends, how that has changed through COVID. So putting out 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 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're making, which is the year-over-year decline is an important one, and that's why we put it in board face on our slide deck.

I show our last question comes from the line of Mike Mueller from JPMorgan.

Just 2 quick ones here. Number one, should 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 progress at the 56th Street project that opened recently?

So let me answer both of those 2 questions. Our near-term acquisition pipeline is primarily focused on senior housing. We have a couple of smaller MOB 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. MOBs 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 56 Street, we're still waiting for our license as state seems to be opening up again for licensure. So when we get the licensure, then we'll open the buildings for residents.

We have a follow-up from Jordan Sadler from KeyBanc.

And congratulations, Shank. So I wanted to ask you, and I might have missed this because I dropped for a second off the call. The -- 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 buying low, selling high, essentially very focused on capital allocation. What do you -- 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 sell our stuff? How would you sort of characterize that?

That's a great question, Jordan. And it's a tale of 2 cities. If you have, as I described previously, pretty assets, pretty markets, and most importantly, experienced operator and a stabilized 2019 NOI base that a 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 for next 3-year, 5-year, 10-year, 15-year and the opportunity to make 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 misses one of those -- one or more of those checks that I talked about, then 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 life companies or agencies unstabilized assets. And banks are obviously not lending in the space today anywhere close to where they were. I don't want -- I almost would venture, I guess, to say they're not lending at all other than like couple of select circumstances. So you have a tale of city -- 2 cities on those kind of assets, which are not financeable because of the -- you didn't check all the 3 boxes that I talked about. There's almost no bid for that because we have to buy those assets for cash. And there, we are a very significant buyer. As 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 order assets purely because of all the margin building activity that has happened in our industry from, call it, '16, '17 to '18, '19, and those assets are, in many cases, are not financeable, and we're finding tremendous risk adjusted return bringing our operators and our data capabilities and filling those assets out, that you will see in the next few years.

I show our last question and follow-up comes from Omotayo Okusanya from Mizuho.

Just another quick one. Is there any pressure to kind of ramp up acquisition activity in a world where you have Biden win and he kind of 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 fight assets exactly at the bottom regardless of outcome of election. It is possible that you will see asset prices are lower in 3 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, if the asset prices go down, we'll buy more. So there is no pressure other than price. And we can tell you at Welltower, we're salivating on the prices that we see today in the marketplace.

I do show we have a question -- I show no further 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.