Earnings Call Transcript - WELL Q3 2020

Operator, 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. Please be advised that today's conference is being recorded. 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 may be deemed forward-looking statements within 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, Chief Executive Officer

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 accomplishments 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 the 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 least, his contribution to 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 in 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 to arrive at the station first using the least amount of wealth. We will continue to be vigilant as ever that institutional imperatives 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’ll lay out a simple capital allocation framework for you. A company effectively has four choices of raising capital: capturing 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 selling, but the right description of that would be sourcing or raising capital. You can loosely call the second set of choices 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 shareholders 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 the 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 significantly in excess of $400,000 per 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 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 matters of any acquisitions, as is with 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 per unit at a material discount to replacement cost. Seventeen deals in the pipeline represent a wide range of transactions from a $10 million redevelopment asset to a $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 in the low 4s but we believe it will stabilize in the high single-digit to low double-digit yields. As a very short-term but incorrect way to look at this will be that 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 is 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 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 operating environment after him. Tim?

Tim McHugh, Chief Financial Officer

Thank you, Shankh. 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 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 dispositions, we had $2 billion of cash and cash equivalents, inclusive of 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 occupancy stats are reported a quarter in arrears. So these statistics reflect the trailing 12 months ending 6/30/2020 and therefore, only reflect a partial impact of 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 headwinds as other operators over the past seven months, and we expect reported lease coverage stats to continue to reflect these challenges as more of the pandemic periods are reflected in 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 the 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-net 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 declined 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, included 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 a penny of FFO per share relative to second quarter 2020. This also resulted in a 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 a 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, the majority of which related to lease enforcement moratoriums in several California jurisdictions, where 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 that activities returned to pre-COVID levels, evidenced by the number of tenant work order requests received, our tenants' own volume data and parking income in our properties. In the quarter, parking 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 August. At that time, our expectations for the third quarter were that occupancy would be down between 125 and 175 basis points from July 1st through September 30th and that REVPAR and total expenses would be flat sequentially. We ended the quarter with occupancy down 150 basis points start to finish. REVPAR 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, two factors drove this outsized decline in occupancy. First, the portfolio began the third quarter at a 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. REVPAR for the quarter was down 1% year-over-year, but I want to provide a bit more color here. The metric 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 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 a 20 basis point decrease in REVPAR year-over-year, while the higher-acuity bucket had a positive 1.4% year-over-year change. While we are seeing 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-store COVID expenses decreased 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 REVPAR and total expenses to be flat on a sequential basis. This outlook does 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 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 at 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 de-risk 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 prepaid 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 at 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 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 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, Chief Executive Officer

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 on the last quarter call. Let's take an example of five very large operators, which constitute national operators and large regional operators in the 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, then it 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 assisted living-focused partners that in many cases this lag is now getting shorter than pre-COVID days as families can no longer delay the care needs of their loved ones. No question, we're very encouraged by that. However, we are unwilling to project this moving trend as we are in the middle of a third wave of COVID across the country. It would be a complete folly for us to predict how things will play out in the next few weeks and months before the COVID curve flattens out again. But the experience of this accelerated 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 COVID but we're optimistic that when that happens, our need-based product will likely 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 torrents of information, it is sometimes hard to differentiate signals from noise. It is important that we periodically take a step back and remind ourselves that stock is a fractional ownership in a business and not a ticker. As managers of the business we can assure you that our team has never been more energized and excited about creating long-term value for our shareholders. With that, we’ll open the call up for questions.

Operator, Operator

Our first question comes from the line of Stephen Sakwa from Evercore ISI.

Stephen Sakwa, Analyst

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 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, Chief Executive Officer

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 and sequentially improving. On a year-over-year basis, it may still be 10% to 50% lower depending on the market, but we're definitely approaching the amount of leads and, more importantly, the quality of leads in the system. The issue has been that you obviously had a very good follow-through of how many people are viewing the units, either virtually or physically, and then getting to the deposit. That's what I talked about—the pressure on 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 assisted-living-focused comment. We're still seeing hesitation in the independent living-focused communities where if you don't have a need, you're taking time to make a decision. With all the noise and the hopeful news on vaccines, people are just taking time. I can't tell you exactly why that is the case but on the independent living side, people are taking time. On the assisted living side, we 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 described earlier. Since we said that, we have seen a clear and significant improvement in that area. That's what we're seeing in that rapid pace of acceleration in move-ins and that continued even through last week.

Operator, 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, Analyst

So just want to get into the fourth quarter sequential occupancy numbers that you went through. 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?

Tim McHugh, Chief Financial Officer

I'll start with that, Rich. It's higher than we usually see. You typically see kind of a 50 basis point decrease over the stretch from 4Q to 1Q, so this is higher than that. Speaking about seasonality adds some uncertainty to the number, which is factored into our outlook. At this point, in some ways, it's a best-guess hypothesis and we won't see as much of a seasonal change in demand just due to the disruption we've seen in demand during the year. Seasonality has two drivers: change in seasonal demand and the impact of the flu. I think the data is very supportive that flu at this point won't play a large role in the typical seasonality we see. On the demand side, we don't necessarily think that typical demand changes will play a role. The 100 basis points is really due to the COVID environment and what we've seen so far in the quarter. When I say COVID environment, it's really the national picture and the acceleration in cases that is adding uncertainty to the outlook for the next two to three months.

Operator, Operator

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

Vikram Malhotra, Analyst

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 on Page 16 a little bit, you've seen the acceleration, like you pointed out in the lead conversion that the timelines are narrowing. I'm just wondering if you could describe whether this is uniform across markets—are you seeing real dispersion in markets—or is it more product-driven, meaning second- or third-wave markets versus others?

Shankh Mitra, Chief Executive Officer

We're actually not seeing a lot of dispersion in markets per se; there's a huge dispersion from a product-type perspective. Whether you're in the West Coast, East Coast or Texas, if you have a need-driven product, the customer's willingness to make a decision is significantly higher. Frankly, we are hearing from some of our partners that that is even accelerated relative to pre-COVID levels. But in cases 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, but people are taking more time. So it's not market-driven; it is definitely a product-driven phenomenon.

Operator, Operator

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

Michael Bilerman, Analyst

So Shankh, congrats again on the CEO role. How do you see your leadership style and approach both similar to but also different from Tom? And secondarily, Tom obviously was highly visible within the industry and as well as globally going to events. How do you see yourself doing that? Will that be part of your approach as CEO of Welltower?

Shankh Mitra, Chief Executive Officer

Tom has trained me for the job over many years and I have been influenced by how he saw the world. The first and foremost lesson he taught us—and which is ingrained in my leadership style as well as many on the leadership team—is to think about what we can do more from this platform, not just disparate aggregation of assets but thinking through the platform and being on the bleeding edge of healthcare and wellness trends. That's going to continue. I'm very much focused on execution and per-share value creation, and that's what the team is focused on—capital allocation. Everybody's leadership style is different and that difference is less important than the collective leadership focus. Our biggest focus today is to increase value per share and execute. There's tremendous potential for us to get back to our pre-COVID earnings and to recover and exceed those levels through execution and capital allocation, and that's what we are focused on today.

Operator, Operator

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

Daniel Bernstein, Analyst

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, assisted living to SNFs, have you seen higher acuity, families taking residents 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, Chief Executive Officer

Dan, you asked a very interesting question. Move-outs had come down across the board over the last seven to eight months through COVID. In the last couple of weeks, I would say we have seen some increased move-outs. It's too short of a time frame to call it a trend. It is also the most difficult part of our business to predict. It is all of the reasons you mentioned: pent-up move-outs, transitions to SNFs for higher acuity, families making decisions, and seasonal factors. We don't see financial reasons for move-outs across the industry broadly, but we've seen some elevated move-outs in the last couple of weeks and some reduced move-outs before that. This is a very hard business to predict on a weekly or monthly basis. You could look at the last two weeks and get an optimistic read, or you could look at the prior two weeks and get a pessimistic read. We can be wrong in either direction. Given the overall national COVID uncertainty, it's prudent for us not to over-interpret short-term fluctuations.

Operator, Operator

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

Juan Sanabria, Analyst

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 communities compressing back to pre-COVID levels. Does that mean potentially that once COVID passes you won't have a deferred demand surge—particularly on the assisted living side—that would be coming in the door post-COVID, whenever that may be, since leads and deposits are converting today?

Shankh Mitra, Chief Executive Officer

No, Juan. It simply means that customers need our product. What has been happening is with all the national headlines around COVID, people were hesitating. Now, when there is a clear need, customers are saying they can move in. We're not projecting that acceleration into the future—that's an important point—otherwise we wouldn't give the guidance for the fourth quarter that we did. If COVID spikes again and facilities have visitation bans or temporary shutdowns, you'll see that affect move-ins. But most importantly, people moved in when they could. I was answering the question about the need-driven nature of our product and the secular demand. COVID will eventually be behind us and the demand for our product hasn't changed during this period.

Operator, Operator

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

Connor Siversky, Analyst

Just a quick one on testing capacity. Among your peers in the last round of earnings, it still seemed like point-of-care tests were in short supply. 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 six- or 12-month view?

Shankh Mitra, Chief Executive Officer

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've seen very meaningful improvement over the last 45 days in testing capacity. But it's too premature to say how that will impact consumer behavior and the ability to move in residents. We think it will improve outcomes and confidence, but given the overall uncertain environment it is too early to be definitive.

Operator, Operator

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

Derek Johnston, Analyst

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, Chief Executive Officer

I don't have the exact percentage for you on hand, but I can tell you that both of the portfolios that were sold were not in RIDEA 3.0 contracts. So your fundamental assumption would be correct for those particular dispositions.

Operator, Operator

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

Lukas Hartwich, Analyst

Just a bit of color on the earlier point—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? Specifically, on the REVPOR front, can you dive a little deeper on what you're seeing with face rents versus concessions? What's kind of driving the headline REVPOR number?

Tim McHugh, Chief Financial Officer

From the numbers and what we're seeing in the market, we are not seeing a lot of evidence of broad concessions. As Shankh spoke to, you're probably seeing more pressure on the lower-acuity side given the discretionary nature of those moves. Community fees, which typically align with move-ins and cover costs to move in—testing, transfers and the like—are coming through REVPOR, and as you have fewer move-ins year-over-year you're seeing community fees in total come down. So you have community fees coming down and some selective discounting. On the assisted living side, importantly, you're not seeing widespread discounting in care; residents are moving in because of care needs. Reputation is a huge factor—some well-known operators are seeing stronger demand—and so assisted living pricing is holding up fairly well given the steepness of occupancy declines.

Operator, Operator

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

Michael Carroll, Analyst

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

Shankh Mitra, Chief Executive Officer

There is a difference. In today's marketplace, to get financing you generally need to check three boxes: pretty asset, pretty market, and most importantly, a very experienced and well-reputed operator. If you can't check all three boxes, it's very hard, if not impossible, to line up financing. That gets you to everything else outside that. Many of the assets we're looking at were built in the last two to three years and don't have a stabilized 2019 NOI that a lender can underwrite. So a lot of what we're buying are brand-new assets that have been built in the last two to three years and do not fit that financing criteria. Those assets are trading at a discount today precisely because they're not easily financeable. That's where we come in—we buy assets for cash. We're bringing in our operators to make those assets financeable later, but today many potential buyers who rely on financing can't underwrite these deals. So we see differentiated opportunities: we can buy newer assets at a discount to replacement cost, bring our partners in, and create outsized risk-adjusted returns.

Operator, Operator

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

Steven Valiquette, Analyst

Shank, let me offer my congrats on your promotion as well. Regarding the lower expenses in the SHO portfolio, particularly the lower PPE cost per unit where you said the price per unit costs have come down, how much do you think that trend is industry-wide versus Welltower driving a better-than-average trend either due to initiatives like the Dallas procurement center and other company-specific efforts?

Shankh Mitra, Chief Executive Officer

I'd say we've wound down a lot of the activity we had in the Dallas procurement center. That was very important to operators' operations early in March and April when the only way to access PPE reliably was through scale. As distribution channels have normalized, operators are sourcing PPE directly from suppliers. We're seeing normalization and price improvements versus the extreme second-quarter prices. Retail surge prices like $8 per unit back toward $0.80–$1.10 in normal times aren't back fully, but prices are down from the peak. The pricing improvements are therefore more of an industry normalization than a unique Welltower-driven phenomenon at this point. In instances where we stepped in to help, we've done so, but broadly the market is normalizing.

Tim McHugh, Chief Financial Officer

I'll add that we are not trying to buy and sell assets as a trading business—that's not our goal. When we think about financing a transaction we always consider sources of capital. Over the last five years we've completed roughly $30 billion of asset disposition and acquisition activity to transform the portfolio, and that transformation is roughly complete. That does not mean we'll stop selling assets; we'll continue to sell assets if it's the right source of capital to fund what we're buying. The overall transformation we set out to achieve is largely done, but capital allocation remains an ongoing discipline to maximize per-share value for continuing shareholders.

Operator, Operator

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

Omotayo Okusanya, Analyst

First question around senior housing: clearly you've had a first tranche and you guys are getting some proceeds in 4Q, but many think that's not enough. What is the viewpoint that you have internally of 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 stabilize?

Shankh Mitra, Chief Executive Officer

We don't have a specific internal prescription of what the government should do. The HHS first tranche was beneficial to our operators. There's a second tranche currently being contemplated and open for application; that one appears more performance-based while the first was more based on 2019 revenue. Part of the reason we've acted to strengthen our balance sheet is so we're not reliant on the duration of the pandemic or on government funding timing or amounts. We see the government's actions so far as helpful, but our strategy is to be resilient regardless of additional government assistance.

Operator, Operator

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

Nicholas Yulico, Analyst

Just a question on the move-ins. I know you pointed to Slide 16 showing move-ins coming back versus February being indexed to February. I'm wondering why February is the appropriate month to compare to? Isn't February typically a slower move-in time? Isn't the more relevant metric that your move-ins are down 39% from a year ago?

Shankh Mitra, Chief Executive Officer

We do think the year-over-year decline is a relevant metric and that's why we included it in our slide deck. February marks the last month of pre-COVID operations, so we used it to understand how the business changed through COVID. Year-over-year comparisons include seasonal differences and last year's performance, while the February comparison is intended to highlight changes relative to the immediate pre-COVID baseline. Both metrics provide useful perspectives.

Operator, Operator

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

Mike Mueller, Analyst

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 second, can you update us on the progress at the East 56th Street project that opened recently?

Shankh Mitra, Chief Executive Officer

Our near-term acquisition pipeline is primarily focused on senior housing. We have a couple of smaller medical office building deals in the pipeline, but the pipeline is primarily senior housing because we see significant disruption on pricing there. MOBs are not priced for distress and we see greater opportunity for marginal capital allocation in senior housing. Regarding East 56th Street, we are still waiting for our license; the state seems to be opening up licensure again. Once we receive the license we will open the buildings for residents.

Operator, Operator

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

Jordan Sadler, Analyst

How would you characterize the market for senior housing right now in general? In other words, supply of assets versus demand—are we in equilibrium, or are people better to buy or better to sell? Is it tough to source assets, easy to source assets? How would you characterize it?

Shankh Mitra, Chief Executive Officer

That's a great question, Jordan, and it's a tale of two markets. If you have a pretty asset, in a pretty market, with an experienced, well-reputed operator and a stabilized 2019 NOI base that a lender can underwrite, there's significant buyer demand—it's a feeding frenzy. Private capital is focused on multi-year returns and sees generational opportunity given the long-term demand outlook. On the other side are assets that miss one or more of those three checks. Those assets are generally not financeable today because banks and other lenders are not lending to them at scale. That leaves very few buyers for those assets, and the buyers who can transact often need to have cash or different underwriting approaches. That's where we are finding opportunity: newer assets that are not easily financeable are trading at discounts, and we can buy for cash, bring in our operators and data capabilities, and create value over time. So depending on whether an asset checks the three boxes, it's either highly bid or has very few buyers. It's not a uniform market.

Operator, Operator

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

Omotayo Okusanya, Analyst

Is there any pressure to ramp up acquisition activity in a world where you have changes to 1031 exchanges? How does that change how you think about deals going forward?

Shankh Mitra, Chief Executive Officer

There is only one pressure to buy assets in our shop and that's price. We're not trying to buy everything at the bottom regardless of circumstances. It is possible you will see asset prices lower in three months than today. If they go down, we'll buy more. The focus for Welltower is price discipline. We are excited about the prices we see in the marketplace today and we will be opportunistic, but there is no external pressure other than price.

Operator, Operator

Thank you. I do show we have no further questions in the queue. I'd like to turn the call over to management.

Shankh Mitra, Chief Executive Officer

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

Operator, Operator

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