Welltower Inc

NYSE:WELL

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2020 Welltower Inc. Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session [Operator Instructions]. Please be advised that today's conference is being recorded [Operator instructions].

I’d now like to hand the conference over to your first speaker today to Mr. Matt McQueen, General Counsel. Thank you. Please go ahead, sir.

[Matt McQueen, General Counsel]

Thank you and good morning. As a reminder, certain statements made during this call maybe 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 remarks. Shankh?

[Shankh Mitra, CEO]

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 entrepreneur -- 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 in 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. We're looking forward to Phil's guidance and mentorship for many years to come. And finally, I'm thrilled to be working with a 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 a series of promotions and new roles that will consolidate the leadership of this company, not a change per se, just a recognition of the exceptional work that the team is doing. Our team has never been busier and more excited to create 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. You're not going to get any grand strategic pronouncement from me. We’ll continue to focus on creating value for our partners and our employees, if they create significant value for our owners. And the partners and employees will be able to create long term sustainable value, only if their end customers are happy. It is that simple. We do not need to complicate a simple idea.

We need to continue to execute and deliver superior cash flow growth on a per share basis. To paraphrase one of my favorite CEOs of all time, Tom Murphy, the goal is not to have the longest wait but we arrive at the station first using the least amount of wealth. We will continue to be vigilant as ever that institutional imperative do not fit 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 lay out a simple capital allocation framework for you. A company effectively has four choices of raising capital; capping internal cash flow, issuing debt, issuing equity and disposition of its existing assets. It also has five essential choices of deploying that capital; investing in existing assets, acquisitions, paying down debt, paying dividends and buying 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, pptimizing these choices from this menu of sources and uses in a tax efficient manner creates value for continuing shareholder on 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 focused 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 theme 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 two large senior housing transactions at a valuation significant in excess of $400,000 units in the mid 3% cap rate on current NOI and around 5% cap rate on pre COVID NOI. These transactions with our 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 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 matter of any acquisitions as is with stocks patients 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 $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 partner of our existing operators. The pipeline's initial yield is at low 4s but we believe it will stabilize in the high single-digit to low double-digit yields. As is 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 rate has never been wider and hence the opportunity to create generational value for our owners on a per share basis. And that completes the look for you and explains why our team is so excited and so busy.

We believe we are making real impact and anticipate creating exceptional value. We not only see this environment as an opportunity for smart capital allocation in the financial realm, but also in the human capital area. We are seeing availability of superior talent in the marketplace today and we're bouncing on this opportunity as we are on the investment side.

With that, I will hand the mic over to Tim, who will walk you through the operational and financial results for the quarter. I will come back to make some additional comments on the operating environment after him. Tim?

[Tim McHugh, CFO]

Thank you, John. My comments today will focus on the third quarter 2020 results and 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 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 dispositions, we had $2 billion of cash and cash equivalents, inclusive 10/31 deposits as of 9/30.

Now turning to our individual property segments. First, our triple-net lease portfolios. As a reminder, our triple net lease portfolio covered an occupancy stats reported a quarter in arrears. So these statistics reflect the trailing 12 months ending 6/30/2020 and therefore, only reflect a partial impact on 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 NOIs declined 10 basis points year-over-year and higher bad debt accrual and a tough comp drove growth slightly negative. The combined FFO impact of revenue recognition changes on one restructured lease in the quarter was $0.05 relative to 2Q and expected to grow to a full penny in 4Q., i.e., another half penny impact sequentially from 3Q to 4Q. Occupancy was down 390 basis points sequentially and 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 experienced the same headwind server day operators over the past seven months, and we expect reported lease coverage starts stats to continue to reflect these challenges and more of the pandemic periods reflected EBITDAR going forward. In the quarter, we also transitioned five of a planned nine properties from Capital Senior to StoryPoint Senior Living and expect the other four properties to transition by the end of the year. This is the first phase of the transition agreement we entered into with Capital Senior at beginning of the year, which allowed for an early termination of CSUs 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 three of our existing RIDEA operators in the fourth quarter. As a result of the COVID backdrop, the initial expected dilution from the 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 three fourths of the triple-net senior housing rent that is less than 0.85x covered by EBITDA. Although the last seven months have been very challenging for the senior housing triple operators, the sequential stabilization we observed between the second and third quarter, along with relief funds from HHS we 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 decline by 0.1x sequentially. As noted in our business update earlier this month and in last night's release, Genesis Healthcare, which makes up approximately half of our long term post acute segment exposure, includes language in the second quarter financials filed on August 10th regarding its ability to continue as a going concern. As a result of this, Welltower began recording Genesis lease revenue on a cash basis in the third quarter, retroactive to July 1st.

This had a negative $2.2 million impact or approximately half of penny FFO per share relative to second quarter 2020. This also resulted in writedown 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 2.75% increase during August and trailing 12 month EBITDAR 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 jurisdictions, which we have a sizable footprint. As these moratoriums expire, we spent rent collection to further improve. We continue to see signs across our outpatient portfolio that activities returned to pre COVID levels, evidenced by the number of tenant work order requests received, our tenant's own volume data and park income in our properties. In the quarter, park income 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 enforcement moratoriums. We also continue to have very strong rent collection and 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 pay back entirely by year-end.

Now turning to our senior housing operating portfolio. Before reviewing this quarter's senior housing operating portfolio results, I want to briefly summarize the outlook we provided back in us. At that time, our expectations for the third quarter was that occupancy would be down between 125 and 175 basis points from July 1st through September 30th. And that 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 680 basis point year-over-year drop in average occupancy. As we indicated last quarter, two factors drove this outsized 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 tougher sequential comp.

REVPOR for the quarter was down 1% year-over-year, but I want to provide a bit more color here. The next shift is distorting the use of this metric as a proxy for rate growth. Over the last two 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 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 per occupied unit.

If you break the portfolio into two buckets, active adult independent living in one and assisted living and memory care in the other, you will see the lower acuity bucket had 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 as in some 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, SHO operating expenses. Same store operating expenses declined 1.1% year-over-year and declined 3.3% sequentially. I'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 two main items; lower compensation growth as operators adjusted their staffing to lower occupancy levels and lower COVID expenses as same- tore COVID expenses decreased from $33 million to $50 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 23rd. And we expect to finish the fourth quarter approximately 75 basis points to 125 basis points lower than where we ended the third quarter. We also expect both ROVPAR and total expenses to be flat on a sequential basis. This outlook does not include any impact from HHS funds 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 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 increased our unsecured bond borrowings weighted 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 the previously announced sale of a senior housing operating portfolio for $200 million or $395,000 per unit. The sales price represents a cap rate of 2.6% based on third quarter annualized NOI and a 4.9% cap rate on pre-COVID or 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 [ROPAR] asset sales tied to 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.

Underlying cash flow continues to be impacted by a challenging backdrop. We ended the quarter at 6.02 times net debt to adjusted EBITDA, a 34 basis point increase from last quarter as a result of liquidity generated 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 end 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 Shankh.

[Shankh Mitra, CEO]

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 of 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's take an example of five 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 covet days as families can no longer delay the care needs of their loved ones. No question, we're very encouraged by that. However, we are unwilling to project this moving trend as we are in 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 car flattens out again. But the experience of this accelerated move-ins 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 they finally come, 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 Torrens of information, it is sometimes hard to differentiate signals from noise. It is important that we periodically take a step back and remind ourselves that stock is a fractional ownership in a business and not a ticker. As managers of the business we can assure you that our team has never been more energized and excited about creating long term value for our shareholders.

With that, we’ll open the call up for questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Stephen Sakwa from Evercore ISI.

[Stephen Sakwa, Evercore ISI]

I guess, Shank, 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?

[Shankh Mitra, CEO]

So Steve, leads has 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%, 50% 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. This is a purely an AL focused comment. We're still seeing hesitation in the IL focused communities where if you don't have a need, you're taking time to make a decision. I mean, with all the noise and then obviously, hopeful good news 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 clearly significant improvement in that area. So that's what we're seeing in that rapid pace of acceleration in that move-in and that continued even through last week.

[Operator]

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

[Rich Anderson, SMBC]

So just want to get in a little bit to the fourth quarter sequential occupancy numbers that you went through. So down 100 basis points versus the third quarter, which is reasonable in a 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?

[Tim McHugh, CFO]

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 higher than that. And I think speaking about the seasonality is improvement, because it adds some uncertainty to the number, which is factored in now we're looking at the fourth quarter. We've talked about this a bit, at this point, in some ways, it's a best guy’s 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 two things that drive seasonality. There's change in seasonal demand and there's also the impact of the flu. I think data is very supportive of 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 COVID environment, what we've seen so far in the quarter. And certainly, when I say COVID environment, it's really the national picture, the acceleration in cases and it’s that adding a bit of certainty to what the outlook is for the next two, three months.

[Operator]

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

[Vikram Malhotra, 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 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, is this more kind of uniform? Are you seeing real dispersion in markets?

[Shankh Mitra, CEO]

We're actually not seeing a lot of dispersion in markets per se, there's a huge dispersion from a product-type perspective. So you were seeing whether in the West Coast, 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 visitation. So it's not a market driven, it is definitely a product driven phenomena.

[Operator]

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

[Michael Bilerman, Citi]

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 and 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?

[Shankh Mitra, CEO]

So I will tell you, look, as you guys know that Tom has trained me for the job over many years and definitely been very influenced by how he saw the world. 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 platform, not just think about disparate aggregation of assets but thinking through platform. 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 made and capital allocation.

So everybody's leadership style is different and 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 as collectively as 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 recover level. As you imagine, we have talked about even pre COVID, our portfolio was under leased and get back to that and create that value through execution and capital allocation, and that's what we are focused on today.

[Operator]

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

[Daniel Bernstein, 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 residence out before the winter, any change in length of stay? Just trying to understand that other side of the equation for move-ins.

[Shankh Mitra, CEO]

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 last seven, eight months through 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. 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. 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 the trend and what's not. You could take us for weeks and say the first two weeks is that you wanted to have an optimistic bench, and you could have said that I will take that move-out trends and move-in trends and project, or you could have taken the last two weeks of elevated move out trends and project forward, and there's no right and wrong answer. We have just done the latter part or 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 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.

[Operator]

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

[Juan Sanabria, BMO Capital Markets]

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 into the cities in 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?

[Shankh Mitra, CEO]

No, Juan. It simply means that the customers need our product. So what has been going on is with all the national headlines and all the COVID and the overall situations, people are 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, that's a very important point. If we did then we would not give you the guidance for fourth quarter that we did. But very much with thinking that very simply the customer has moved in when they could. Now if COVID spiked up again and they can because you have visitation bans 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.

[Operator]

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

[Connor Siversky, Berenberg]

Just a quick one on testing capacity, among your peers of the last round of earnings, it still seemed 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 six or 12 month view?

[Shankh Mitra, CEO]

Connor, we have made a very significant improvement even in 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 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.

[Operator]

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

[Derek Johnston, Deutsche Bank]

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

[Shankh Mitra, CEO]

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

[Operator]

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

[Lukas Hartwich, Green Street]

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

[Shankh Mitra, CEO]

Lukas, can you repeat please one more time?

[Lukas Hartwich, Green Street]

So 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? I thought the color around the mix shift was helpful. I'm just curious what's going on with face rents and concessions?

[Tim McHugh, CFO]

So I think from the numbers and we're seeing in the market is we're not seeing a lot of evidence of concession. I think as Shank spoke to probably seeing more on the lower acuity side as far as just what we're seeing in the market as far as it’s because of some of the difference in kind of needs-based aspect of it that there is a little bit more of a consumer discretionary goods 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 bit. 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 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. And in assisted living importantly you’re not seeing discounting in care and more of the residents we're seeing coming in, they're coming in because of the care. And so there isn't a lot of price competition there. Reputation is a huge factor.

You saw some competition in general in the market to the 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.

[Operator]

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

[Michael Carroll, 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, prior 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 is there a difference between on the assets that you sold versus the deals that are in your pipeline, if you're being able to source at much below replacement costs?

[Shankh Mitra, CEO]

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've got to check three boxes, pretty assets, pretty market, most importantly, a very well-known well-reputed operator. If you can’t check all those three boxes, it will be very hard, if not impossible for you to line up financing. And that gets you to the everything else outside that. We talked about this on the last call. We are bringing our operators into asset. So these assets will become financeable but today, it's not. Many of these assets were built in the last two, three years, so they don't have a stabilized 2019 NOI that a lender can underwrite. So a lot of things we're 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 doing.

Interestingly, if you see that in real estate over a period of time for apples-to-apples, newer asset trades for higher prices than lower, but just really difference of CapEx that's relative to vintage. Given what happened today in the marketplace, you are seeing exactly opposite of that. Newer assets are trading at a discount purely because they can 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 bringing in our operators that these assets are obviously owned by other capital partners of our existing operators and we're buying this asset. So there is a difference. So if you think about what we sold that checks all the boxes, pretty assets, pretty market and very experienced and well-known well-reputed operator. You missed one of those checks, it comes back to pretty much very, very few buyers in the marketplace as well as dominant one.

[Operator]

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

[Steven Valiquette, Barclays]

Shank, let me offer my congrats on your promotion as well. And actually, the comments you had on the call regarding the portfolio buying and selling was definitely helpful. On the lines in our model that really sticks out is the gain on sale of properties with some $3 billion recognized over the last five years or so. So that's 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 a 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. Thanks.

[Shankh Mitra, CEO]

I'd say we actually have wound 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 operator sale of assets PP&E and sales, and in instances like really haven't 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 of just seeing a bit of a normalization from -- if you look at mass prices where some as upwards of $8 on 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.

[Tim McHugh, CFO]

I'll just add some commentary to the first part of your question, which is I want you to understand that we're not trying to buy and sell assets like trade assets, that's not our goal. Obviously, when we see how to finance a transaction, we're trying to always think about what our sources of capital will be. 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 have maximized under your sort of umbrella. 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 five years, is roughly complete. However, we have seen that the propensity of companies to continue to grow and that is not inside Welltower. We're always trying to think how we maximize value per share for the continuing shareholder.

You can say the one good thing will be when you’re exactly at the right place is just continue to sell your stock instead of selling your assets, and that would be a correct approach if you just look at capital allocation from the lens of spot NAV. I told you that's not how we see the world. We see the world from the perspective of long term IRR of what you're selling versus what you're buying and look at a comprehensive way of what your tools, the sort of sources and uses of capitals are. So we'll continue to do that. But the overall transformation of the portfolio that we wanted to do that some 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.

[Operator]

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

[Omotayo Okusanya, Mizuho]

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

[Shankh Mitra, CEO]

We don't have an internal view of what we'd like to see the government do. I think it's been very beneficial to our operators to have seen them step in with the first tranche that they provided through HHS. And there's a second tranche that's currently being contemplated and has been open for application. It's more performance-based, the first one was just more based on 2019 revenue. 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 reliant on the duration of the pandemic or the government taking a view on funds to the industry.

[Operator]

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

[Nicholas Yulico]

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?

[Shankh Mitra, CEO]

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. 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. 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.

[Operator]

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

[Mike Mueller, JPMorgan]

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

[Shankh Mitra, CEO]

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 MOB deals in the pipeline. However, it's primarily focused on senior housing because that's why 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 bigger opportunity on the senior housing side. And the East 56 Street, we're still waiting for our license, state seems to be opening up again for licensure. So when we get the licensure then we'll open the buildings for residents.

[Operator]

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

[Jordan Sadler, KeyBanc]

So I wanted to ask you and I might have missed this because I get drop for the second half of the 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 buying low, selling high essentially, very focused on capital allocation. How would you characterize the market for seniors housing right now? In other words, supply of assets versus demand? I mean are we in equilibrium, or are people better to buy or better to sell? Is it tough to source stuff, easy to source stuff? How would you sort of characterize it?

[Shankh Mitra, CEO]

That's a great question, Jordan and it's a tale of two 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 -- there's 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. They're focused on what's coming for next three year, five year, 10 years, 15 years 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 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 life companies or agencies on stabilized assets. And banks are obviously not lending in the space today anywhere close to where they were. I I almost would venture, I guess, to say they're not lending at all other than like a couple of select circumstances. So you have a tale of two cities on those kind of assets, which are not financeable because of the -- you didn't check all the three boxes that I talked about, there's almost no bid for the asset, because we have to buy those assets for cash.

And there we have very significant buyers who know we buy assets and we buy everything for cash. And so we're finding tremendous opportunity on that. And frankly, as I described previously, we're finding many of these assets you can buy brand-new assets at a significantly lower price than the older assets purely because of all the margin building activity that 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 next few years.

[Operator]

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

[Omotayo Okusanya, Mizuho]

Just another quick one. Is there any pressure to kind of ramp up acquisition activity in a world where you have at a kind of eliminates the 1031 exchanges. Like how does that kind of change how you think about deals going forward?

[Shankh Mitra, CEO]

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 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, 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.

[Operator]

Thank you. 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.

[Shankh Mitra, CEO]

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

[Operator]

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