Diversified Healthcare Trust (DHC) 2005 Q2 法說會逐字稿

Thank you for standing by and welcome to the Senior Housing Properties Trust second quarter 2005 earnings results conference call. This call is being recorded.

Now at this time, I would like to turn the conference over the Manager of Investor Relations, Tim Bonang. Mr. Bonang, please go ahead.

Good morning, everyone and welcome to Senior Housing Properties Trust second quarter 2005 investor conference call. My name is Tim Bonang and I'm the Manager of Investor Relations for Senior Housing. Joining me on today's call are David Hegarty, President and Chief Operating Officer and John Hoadley, Chief Financial Officer.

The agenda for today's call includes a presentation by management followed by a question and answer session.

Before we begin today's call, I would like to state that today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and federal securities laws. These forward-looking statements are based on Senior Housing's present beliefs and expectations as of today, August 2, 2005. The Company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call other than through filings with the Securities and Exchange Commission regarding this reporting period. Actual results may differ materially from those projected in these forward-looking statements.

Additional information concerning factors that could cause those differences is contained in our Forms 10-K and 10-Q filed with the Securities and Exchange Commission and in our Q2 supplemental operating and financial data found on our website at www.snhreit.com. Investors are cautioned not to place undue reliance upon any forward-looking statements.

Now, I would like to turn the call over to Dave Hegarty.

Thank you, Tim, and good morning, everyone. Welcome to our second quarter 2005 investor conference call. Before I begin reviewing the quarter, I would like to point out some additional activities we've undertaken to help investors better understand SNH. In early July, we launched the new website for the company. In addition to a more user-friendly design, the Senior Housing's new website provides investors with an increased level of information about the company's management, business strategies and financial and operating performance.

A prominent feature of the new website is a properties section with interactive maps that allow users to drill down and view individual pages for each of the properties that Senior Housing owns. In response to comments we received from the analysts since our last call, we've also refined some parts of our quarterly supplemental reporting package. It's our hope that all these actions will continue to help investors better understand SNH.

Now I would like to focus on some of the specifics regarding our second quarter results. Funds from operations or FFO during the second quarter of 2005 were $0.38 per share versus FFO of $0.37 per share last year. And I think it's important to note that this 3% increase in FFO per share occurred despite the added dilution of the issuance of 5 million shares in December 2004. And the current quarter had approximately $500,000 of legal costs associated with our litigation with HealthSouth, concerning two rehabilitation hospitals located in greater Boston area. If you want to learn more about this litigation, you should read our disclosures and our earnings release supplemental package, and most recent Forms 10-Q and 10-K filed with the SEC.

Let's start with our new investing activities for the quarter. We entered into one sale-leaseback transaction during the second quarter. In early June, we purchased four assisted-living communities with 299 living units for $24 million from Five Star Quality Care. And this equates to a little over $80,000 per unit. We then leased these facilities back to Five Star and the initial rent on these communities is $2.2 million per year, which equates to 9% of the purchase price. It will increase by a percentage of growth in revenues at these communities beginning in 2007.

The four properties we purchased are assisted living facilities in Omaha, Nebraska, Tucker, Georgia, Nashville, Tennessee and Greenwood, South Carolina. Each of these properties was built in the 1990s. These properties were approximately 92% occupied at the time of the acquisition and 100% of the revenues at these facilities were paid for by residents from their private resources.

These communities were added to an existing master lease that Senior Housing has with Five Star for 97 other communities, which has a current term ending in 2020, plus several renewal options thereafter. I would note that the rent coverage on the master lease during the second quarter, excluding the additional four communities, was a strong 1.68 times. And the new properties, added to the lease are at 1.2 times coverage, which pro forma brings the average rent coverage modestly down for the entire lease to about 1.6 times.

In addition to the sale leaseback, Senior Housing also provided first mortgage line of credit to assist Five Star with financing its $58 million purchase of six assisted living communities in western Pennsylvania in June 2005. This line of credit may be drawn up to $43.5 million or 75% of Five Star's purchase price for these six communities. At closing, $24 million of this line of credit was drawn, and the balance may be drawn by Five Star to fund future acquisitions or other business purposes. This mortgage line of credit requires interest at 9% per annum, until it matures on June 30, 2007. It's expected that Five Star will repay this loan prior to maturity or all or a portion of it may be converted to a sale lease back at some point.

In May 2005, we sold a nursing home property located in Farmington, Michigan to Five Star for $4.6 million. We used the majority of the proceeds from the sale to prepay one of our mortgage obligations for $4.2 million. The agreement to sell this property was announced a while ago. And it's a win-win situation for both Senior Housing and Five Star. For SNH, by disposing of government-dependant skilled nursing facilities, it fits with our strategy of focusing on independent living and assisted living communities where the majority of the revenues are derived from residents' private resources. It benefits Five Star because they are able to obtain HUD mortgage financing at lower rates, as well as an enhanced Medicaid rate from the state of Michigan.

Following these acquisition disposition activities in Q2, the total size of our portfolio now stands at 184 properties in 32 states. And the annual rent from these properties is currently $161 million per year. These properties are managed by 11 different operators and the average lease term remains approximately 12 years. The largest lease is still the master lease to Five Star for the 31 upscale retirement communities that we acquired from Crestline in 2002. Including our second quarter investments, approximately 61% of Senior Housing's rental revenues come from properties leased to Five Star. We continue to evaluate investment opportunities with Five Star, as well as with several other operators.

In July this year, Five Star celebrated its fifth anniversary in business and the financial strength of Five Star has been steadily improving over the last couple of years. Five Star reported strong earnings for the last five quarters and in May 2005, Five Star closed on a new $25 million revolving credit facility with Wachovia Bank. Currently Five Star is one of the largest nursing home providers and about the sixth largest assisted living provider in the country. Having a publicly traded tenant such as Five Star provides our investors with another level of transparency when compared to healthcare REIT to rely on private operators for a majority of their revenues.

Lastly and perhaps most important, we believe that diversification of operators is not as critical as owning high-quality assets that are efficiently managed by credit-worthy tenants. While we're able to complete some acquisitions during the second quarter, the acquisition market continues to remain quite hot. For much of the quarter, the 10-year treasury remained in the 4% range and capital has been readily available for buyers of Senior Housing Properties. And there continues to be increasing competition from other healthcare REITs, plus institutional investors and even foreign investors.

Recent deals on the market have had cap rates in the 8 to 10% range with some high-quality assets falling below 8%. Historically, SNH has been a disciplined investor and we've tried to maintain a minimum going in cap rate of around 9%. And we will continue to practice this disciplined approach to investing in an attempt to evaluate every deal that comes to the market.

The competitive acquisition environment has yet to lead to any significant new development of properties. And it's our belief that occupancy rates throughout the industry will need to increase more before significant building is needed. For many, the pain of over-development in the late 1990s is too fresh in the minds of investors, developers and Senior Housing operators. However, there are some signs that operators are looking to increase their leverage by adding units to existing buildings and we're interested in financing existing tenants looking to complete that kind of add-on development.

On Friday, July 29, 2005 we announced that we amended our existing $250 million unsecured revolving credit facility to increase the maximum borrowing amount to $550 million, to reduce the interest rate by 45 basis points and to extend the maturity date to November 2009. The maximum borrowing amount on this line may be expanded up to 1.1 billion in certain circumstances. And we increased the number of participating lenders in the revolver from 8 to 19 lenders. We believe this new facility expands our financial flexibility and gives us an added advantage, as we look at acquisitions in this competitive environment.

Soon after the end of the second quarter, we declared a dividend of $0.32 per share, which represents 84% of our FFO for the quarter. Our board considers the dividend level on a quarterly basis and they're comfortable with this current payout ratio. I also want to add that we have seen some global improvements at our tenants operating statistics. Rent coverage ratios increased in most cases in the second quarter from the same period in 2004, and sequentially from last quarter. Occupancy rates have generally increased across the board in the second quarter from the same period in 2004, and first quarter 2005.

The largest lease, our largest lease for 31 upscale retirement communities with Five Star had a modest improvement in rent coverage and occupancy during the second quarter. These improvements build on the positive trends we've been seeing for several quarters with this lease. The coverage ratio for this lease after 7% management fee, paid to Sunrise was 1.17 times. This equates to an annualized cash flow before rent of approximately $75 million, and the rent of $64.3 million today. So the surplus cash flow is available for capital expenditures at the properties and that equates to almost $1,500 per unit, which is a very high amount by industry standards. And is indicative of the high-end quality of the properties.

Before I turn over the call to John, I want to note that the second quarter was a busy in terms of meeting with investors. In addition to our usual complement to one-on-one meetings, we presented at the Credit Swiss Real Estate Conference in April, the Bear Stearns Global Credit Conference in May and the NAREIT Institutional Investor Forum in June. And we look forward to continuing to be active with meeting investors in the future.

Now I'll turn the presentation over to John Hoadley, our Chief Financial Officer to provide some more details regarding our second quarter results.

Thank you, Dave. The revenues for the quarter ended June 30, 2005 were $39.6 million, which is a $4.1 million increase over 2004 revenues for the comparable period. This was attributable to $195 million of acquisitions made since April 1, 2004 and increases in percentage rent. Rental revenues include $107,000 of straightline rent in the 2005 quarter and $89,000 in the 2004 quarter.

Net income was $15 million, or $0.22 per share for the second quarter, compared to $14 million, or $0.22 per share for the same quarter last year. The 7% year-over-year increase in net income was offset on the bottom-line by the effect of the 5 million share public offering we completed in December 2004. The weighted average number of common shares outstanding totaled 68.5 million in the second quarter as compared with 63.5 million for the second quarter 2004.

Funds from operations for the second quarter were $25.9 million, or $0.38 per share. This compares to FFO for the second quarter in 2004 of $23.3 million, or $0.37 per share. As Dave mentioned earlier, we declared a dividend of $0.32 per share, which represents 84% of our FFO for the quarter. Interest expense in 2005 increased over 2004, by $1.2 million, which is primarily due to our assumption of $48.8 million of debt, in connection with the Five Star and LTA transaction in Q4 2004, and higher interest costs associated with our revolving bank credit facility.

Our weighted average balance outstanding and interest rate under our revolving bank credit facility was $52.3 million and 4.6% respectively for the three months ended June 30, 2005 versus $29.9 million and 2.7% respectively for the three months ended June 30, 2004. General and administrative expenses increased in 2005, by $345,000 over 2004. However, general and administrative expenses include $500,000 of HealthSouth litigation costs in 2005. Exclusive of these litigation costs, G&A actually would have decreased in 2005 versus 2004 by $155,000 or 5.7%. This was due to a reduction in estimated incentive fees accrued in 2005, offset by increases in G&A related to acquisition since April 1, 2004, and accounting and other costs associated with new SEC rules such as Sarbanes-Oxley 404 compliance.

On the asset of the balance sheet, essentially all of our investments are fee interest in senior living properties. Real estate investments increased by a net $27.3 million, which represents the $24 million sale lease-back transaction plus $7.7 million of capital improvements funded to our tenants, less the sales of the Michigan skilled nursing facility. The average lease term remaining of the portfolio is 12 years. Only 1% of revenue come up for renewal in the next five years.

On the liability side, the real estate is primarily funded with long-term, fixed rate unsecured debt. SNH has $577 million of debt. As Dave mentioned earlier, we amended and extended our bank credit facility on July 29, 2005. The renewal of our unsecured revolving bank credit facility improves our financial flexibility. The amended maturity date is now November 2009. The current interest rate was lowered from LIBOR plus 145 to LIBOR plus 100 basis points. If we achieve investment-grade status by either Moody's or Standard & Poor's, our interest rate margin will also improve.

As of June 30, 2005, we had $84 million outstanding in our revolving credit facility. Pro forma for the amended revolver, we would have had $466 million available for borrowing at the end of the second quarter. The rest of our debt is comprised of two senior note issuances due in 2012 and 2015, for $395 million. Junior subordinated debentures totaling $28 million, due in 2041 and mortgages and capital leases due mostly in 2012, 2013, for a total of $71 million. The junior subordinated debentures have a coupon of 10 and 8% and to be prepaid at par, beginning in June 2006. Only 5% of our capital is secured debt. The weighted average interest rate on our fixed-rate debt is 6.4%. The weighted average interest on our unsecured fixed-rate debt was 7.8%, while the overall weighted average interest rate, including our revolver, is 7.2%.

On a book basis today, we're at approximately 40% debt to total capital, which falls within our stated target rate of 35 to 45%. We expect to use cash balances, borrowings under our revolving bank credit facility, and net proceeds of offerings of equity or debt securities to fund future property acquisitions.

In the second quarter of 2005, Our EBITDA to interest rate coverage ratio was 3.3 times, which is consistent with our trends over the last several years. We're also currently comfortable within the requirements of our public debt covenants.

That concludes our prepared remarks. Operator, we are now ready to take questions.

(Operator Instructions)

And we'll take our question from Jerry Doctrow with Legg Mason.

Hi. Good morning.

Good morning, Jerry.

First of all, I want to compliment you on the improved disclosure. I mean, you touched on it, before the website supplement. But really excellent, I think, among the best of anybody we cover here. So thanks for doing that.

You bet.

Let's see. I had just a handful of things. I guess, maybe, first, you really did see some significant improvements in occupancy and coverages. I was wondering if we can get maybe a little bit more color on that? You touched a little bit, I think, on the Five Star-Sunrise, but also it looked like your jumps in numbers are Alterra and Genesis. And just maybe if we could get a sense of what's going on?

Sure. In the industry itself, I believe, there is a global fundamental improvement going on at the facility level. The supply of properties out there has really not increased that much, while the demand continues to tick along and improve.

Also I think, with the higher interest rate environment for the short-term rates, that is meaning that people are receiving a little bit more income or interest income on their investments. And the portfolios of a lot of residents have been increasing in value over the last year or so. So there's an increased level of confidence in the residents, who want to move into these facilities.

Just one thing on the new development front, this year, a survey just came out from the American Seniors Housing Association that indicates that there is less development in 2005 than there was in 2004 in the independent living and assisted living space. And it's up a lit bit in the CCRC area.

For assisted living, nationwide, they estimate that there is only about 87 properties in construction with about 6,000 units. So it's about 1% of the total universe of properties out there. So I think the fundamentals just are continuing to improve and we're seeing operators pushing rates more.

Alterra recently bumped up their rates in the 5% to 6% range. And that's why you saw the improvement in this quarter, because that kicked in in the beginning of June. And I would just think the fundamentals across the board are improving.

Okay. Thanks. The increase in the credit facility was pretty dramatic. And I was-- in fact, I was just starting to think that you must have some expected use for that. I mean, can you just give us some rationale? You said the acquisition environment is tougher, but you've got more dry powder than you've had in a long, long while. What's your sense about how it might get used or what was your rationale for increasing it?

Well, there were several reasons for increasing the size of the facility. One is, our existing facility came up for renewal in November. And we had to give a 30-day notice in October, if we were going to extend it for another year. So, it was time to renew the line anyway.

The interest rates are low, and the demand is very high by lenders. So it's an attractive time to be in the market to renew the line of credit. So we -- a combination of thinking that we could take advantage of this market, right now, and increase the capacity of the facility.

And we are always looking at transactions during the -- this past quarter, we evaluated at least $2 billion of investment opportunities to evaluate. And we bid on many of those situations. And we just believe that, over the next four years, the life of that credit facility -- we would hope and anticipate that we will tap into that increased capacity. So it's, sort of, taking advantage of the current, right now, and our optimism about the future.

Okay. Any sense about whether Five Star draws the rest of its credit with you guys? Is that likely to happen or not likely to happen or just don't know at this point?

At this point, we don't know.

Okay. And on the litigation with HealthSouth, you've made a little -- as I read it, maybe just confirm my reading -- as I read it, you made some incremental progress in that. You've got their effort to block termination of the lease was rejected and your proceeding, if I understand it right, to basically terminate their lease, take possession of the properties, and then potentially release them to somebody else. My sense is that that's going to generate some significant upside for you or material upside for you. And I was curious if a) you read it that way; and if you have any sense about how long the core process might drag out?

We obviously are incurring significant amount of legal costs. And major -- most of the depositions and discovery have been going on in this first six months of this year. So a significant amount of time and money has been invested into this.

The court, as you said, did say that they could not stop us from terminating the lease. But we've actually gone to the court to ask them to affirmatively allow us to enforce our rights under the lease. And we're still in that process now. We don't have an answer yet. So we're not going to take action, until we have the court affirmatively take a position on that.

Okay.

And as you can tell, we're investing a good amount of dollars in this litigation. So we obviously believe that it's worth the fight and that there is potential upside from here.

Okay. And in terms of timeframe, do you think this is resolved yet in 2005 or is it going longer than that, potentially?

I would say potentially it could go on longer. We just don't know at this point. We're certainly in the thick of it, but in litigation it can always be counter-arguments and so on that stall it and prolong it.

Okay. And just one last thing if I could, I think you said a couple of times that dividend policy, 84% payout, and that you're comfortable with that. Is there -- if you can just remind me sort of what -- is this your Board look at it every quarter or you have a regular -- is there a regular time of year that you review it and would consider increases? When might we see the dividend cover reconsidered?

Sure. We do evaluate it every quarter. So it's not a predictable thing that every year it's going to be on the same quarter or same time period. So each -- every quarterly board meeting, around that time of declaring the dividend, there's a fair amount of discussion on the current situation, our tenant stability and so on. And so, the next time we'll evaluate is probably around October 1st. And last year we raised it in October, at that time.

Okay. Great. Thanks.

Our next question will come from Steve Swett with Wachovia Securities.

Hi, David, how are you?

Good morning, Steve. Good.

Just one question on the mortgage to Five Star, is that pre-payable at any time without any cost or penalty?

It is. And it's structured to encourage them to access capital sometime between now and 2007 because we want them to have other sources of capital and to be able to grow more on their own.

All right. Well, in a kind of a related question, you mentioned that you guys are 61%, I think, was the number of your revenues coming from Five Star. What level would you like it to be, and as you pursue investment opportunities, do you consider a different yield of -- potentially for an investment that is with Five Star versus somebody else?

I'll answer it the tail end first; we don't look at transactions really differently with Five Star versus anybody else. I think each transaction is different than -- like anything. You get down to the final bidding and if it takes an extra push to get that transaction, then we would -- if we really liked the assets and we would work out what the rental rate has to be to make that work. So far, we've been able to hold to 9% to make it work on the acquisitions that we want.

As far as our concentration with Five Star, we would love to do significant a couple transactions of size away from Five Star to bring down the relative percentage. And -- but it's not going to preclude us from doing a transaction with them if we like the assets and the situation. So, really, it's possible that that percentage could go up. Also, too, a factor that goes into that is, in this environment, most of the transactions we're seeing are types of situations where somebody wants to sell the company, real estate and operations in all.

And it's easier to go into a bidding situation with Five Star with us to make a proposal, as opposed to an operator who wants to bid on a portfolio and they're going to interview three or four REITs to get the best pricing, and then, it gets obviously very competitive. And I don't know that we could -- we can't do deals at, say, below an 8% cap rate because the economics don't work for us. And so -- it works for our advantage in many cases to have Five Star with us to bid on some of the sales of companies.

Okay. Thanks.

Okay.

(Operator Instructions)

We'll next go to Philip Martin with Stifel Nicolaus.

Yes. Good morning.

Hi, Philip.

A couple of things. Regarding -- you mentioned that some of the development opportunities or expansion opportunities within your existing portfolio. Could you quantify that for us, what potential exists within your portfolio?

Well, let's see...

And timing?

We really don't forecast or provide data on future acquisitions or fundings or financings. I would say probably most of our portfolio operators are exploring what facilities they can add on to instead of going to acquire new facilities or develop a new facility. So I think it's pretty much three-quarters of our portfolio would fall into that who are exploring at this time. I don't have any numbers to be able to quantify that at this time though.

Okay.

I know that's the direction of the industry right now and most of our tenants.

About three-quarters of your portfolio does have some interesting existing opportunities for growth, expansion growth, et cetera, as you see it?

Potential.

Potentially. Okay. Secondly, the rating agencies, how have your discussions been going with them? What are they, in terms of investment-grade ratings, how close or how far are you away, would you say, from realistically having an investment-grade rating from the rating agencies?

I'll turn this to John. But...

I know that that is a hard question.

Yes.

The rating agencies are...

Let's say, in terms of timing we don't know at this point. We're scheduled to have annual meetings probably in the late summer or early fall. And to the extent we've had discussions in the past. The issue has always been not with our balance sheet or any of our ratios. It's sort of been the fact that we had a concentration in Five Star. And at the beginning, we had a concentration in Five Star, where Five Star was a new company that was not producing profits. So in our opinion, the fact that Five Star has come a long way since then and is now had five quarters of earnings and was able to get its line of credit up to $25 million, its got $100 million of book equity, we think we've got a stronger case. And will just as Dave mentioned earlier, we'll make the same pitch to them that it's more important to us that the quality mix of our assets is there versus having that tenant concentration be a bigger issue.

Are the -- do the rating agencies respond positively to that? Are they giving you some good feedback in terms of, now that Five Star has had five solid quarters here, are they responding positively to that, the rating agencies and see the quality of your argument?

It's a little premature at this point. We haven't really sat down to make that argument. Because it's really just been the last five quarters that Five Star has made that turnaround.

Okay, okay. And with respect to the pipeline, you've looked at $2 billion year-to-date you've looked at, or in the last quarter?

Just in the last quarter.

Okay. And the quality of that pipeline, again, you mentioned that a lot of that is a lot of these companies and sellers wanting to sell the company outright. What's the -- do you feel pretty good about a potential, what's your potential, what do you think your potential hit rate is on that $2 billion? Has it gotten better? I'm not really looking for guidance. I'm just -- I know it's been a difficult acquisition market. It's been competitive. And do you feel you have a better chance today than you did 6 to 9 months ago?

It's really difficult to tell. I don't know that our success rate will necessarily be better. We see, for instance, the transaction that healthcare property announced, they're saying 7.1% return, yield on that investment. We can't touch that. There -- our other transactions out there that we bid on that are even still around the 8% range, which are difficult for us to achieve.

Although truly Class A stuff, we probably stretch for. But the quality of portfolios that we've seen out in the marketplace during this last quarter, they've been average to above average, to very high-end quality properties. We're not seeing much in the way of troubled assets or inferior assets. That's probably because most of them have been built in the last, say five to 10 years. And so the stock out there is of high quality construction and we've stayed away from the smaller facilities. Less than say 50 units is not necessarily appealing to us. But the larger ones are more appealing. And it's an opportunistic situation.

We typically do two or three transaction a year. And I don't expect this will be any different. I think we'll have a strike or two here and there that will go our favor. But the dollar amounts, the larger the deal is the more attracted we are to it. But a deal could come along at $250 million in the fourth quarter, or something. That would be more exciting to us probably than a $25 million deal.

Fair enough. Okay. And my last question, as you look out there and you look at the landscape here, in your estimation, when do you think meaningful new development starts to occur in your markets?

I would say we're still probably two or three years off before it's meaningful. I think you have a combination of the fact that public companies really can't take on those start-up losses in a meaningful way. So they have to limit the amount of development that they can do. And on the private side, maybe somebody like a Fortress might be able to carry it. But there aren't many private people who are investing in development. At least at this point today. So it would take a while for it to get all ginned up and money being spent until the facilities can open.

Okay, okay. And my very last question, I promise. Operating margins on the assisted living side, obviously, occupancies are up. Overall within the industry, NOI is up year-over-year. What has that done to margins, at the facility level?

Well margins have been modestly still increasing because they've been able to push the full revenue increases along to the consumer. There's a lot less discounting today than there was a year ago. So, and the costs have been pretty much holding steady. Insurance has not been increasing as much as it used to. And labor is pretty much in check. Workers comp is probably higher than people like, than it has been for a while. But generally, the costs are staying pretty much in control.

All right.

Margins are improving.

Would you say on average they're very stable here in the mid 30's?

In my opinion, yes, I think that's true.

Okay. Thank you.

You're welcome.

Our next question will come from Chris Pike with UBS.

Hi, good morning, everybody.

Hi, Chris

Hi, Chris

I just wanted to turn back to the acquisition question again. You talked about the HCP deal that you guys lost on pricing. Would you say the pipeline at this point, relative to let's say past years, has been more concentrated in the larger deals versus the smaller deals? Just trying to get a better understanding of what type of things you lost and -- who have you been losing them to? Have they been predominantly foreign investors pushing the cap rate down? If you could just add a little more color, it would be great.

Sure. Most of the transactions that we've been seeing in 2005 are large portfolios. And we're losing most of those to other than probably, the health care property investor's transaction. Most of the other deals are going to institutional investors and not REITs. And some of that's foreign money.

It's interesting, there was a transaction announced with Chartwell Senior Living out of Canada and they did a JV with capital from Australia and hired Horizon Bay to manage those properties for them. So, the bidding is taking on some different forms and it's been an interesting development. But there seems to still be quite a bit of money available. And many of the larger transactions are being done by institutional investors for, to own and to hold for a period of time, until they can sell a fund of some source that has a five-year time horizon.

Okay. And I think you talked about the improving fundamentals on the Alf Neal (ph) space. It seems that the sense of occupancy on the SNFs was up around 300 bps sequentially. Can you talk a little bit about more, about what you see happening in that segment, albeit a smaller portion of your portfolio. But can you just talk about what you see happening there, and any notable supply trends or anything in general in that sector?

Sure. Well that sector as you mentioned, is not a sector that we've targeted for investing. And if anything, we'll probably somewhat decrease our investments in that space. But there is virtually, no new construction going on, of that type of property and has not been for several years. So I think that the -- in fact, to some degree, there's probably been more facilities closing than opening in skilled nursing. So, I think the supply of properties is equal or less than it was last year. And that the demand continues to be there because it's really the only alternative for Medicaid person is to go into skilled nursing or home healthcare.

There is a movement in many states, in Massachusetts, it's in the works, is to pay people to take care of a family member at home, as opposed to in a nursing home setting. And that, and currently, there are proposals to pay 18,000 a year, for somebody to stay at home. Which for somebody at home, that's enough of a stipend to not have to take on a job outside the home. They can stay home and take care of an elderly family member. So that could hurt the occupancy somewhat, in certain markets. We just think that the pressure is going to continue over time, on the Medicaid funding. Congress mandated a $10 billion be cut out of Medicaid programs in the next five years.

And they put a commission together to focus on how they will do that. There's just a number of reasons, why we don't invest in that space. And, but that's not to say that there isn't a need for that, for capital for that space. And there's a number of facilities out there that are in regional hands that are looking to grow. And they're going to need capital. So for -- so there are certain REITs that have their niches, and that's fine.

It's just for the occupancy push, is just simply a supply issue?

Yes.

Okay. I think I may have missed it in the release. You sold one SNFs for a small amount?

Right. In the state of Michigan.

What was the cap on that?

Actually, I don't know, it was a agreed-upon price about a year ago. And that price has stayed the same, since than because...

Okay. Fine, so it's not indicative of current pricing for...

No. At the time it was, say a year ago, when the deal was cut. But then it was continued upon, Five Star going through the HUD approval process and getting financing. And that took a year.

Particularly, thanks a lot.

You're welcome.

And with that, there are no further questions. I would like to turn the conference back to David Hegarty for any additional or closing remarks.

And I'd just like to thank you all for joining us this morning and we look forward to the next quarter and seeing many of you at future conferences this fall. Thank you.

Again, this does conclude today's conference call. We would like to thank everyone for their participation.