Diversified Healthcare Trust (DHC) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Senior Housing Properties Trust third quarter conference call. At this time, all participants are in a listen only mode. Later we will conduct a question and answer session; instructions will be given at that time.

(Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Tim Bonang. Please go ahead.

Thank you, and good afternoon, everyone. Joining me on today's call are David Hegarty, President and Chief Operating Officer, and Rick Doyle, Chief Financial Officer. Today's call includes a presentation by Management, followed by a question and answer session. I would also note that the recording and re-transmission of today's conference call is strictly prohibited without prior written consent of SNH.

Before we begin today's call, I'd 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, November 1, 2010. 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, or SEC, regarding this reporting period.

In addition, this call may contain non-GAAP numbers, including funds from operations, or FFO. A reconciliation of FFO to net income, as well as components to calculate AFFO, CAD, or FAD are available on pages 11 and 14 in our Q3 Supplemental Operating and Financial Data Package found on our website at www.snhreit.com. Actual results may differ materially from those projected in any forward-looking statements.

Additional information concerning factors that could cause those differences is contained in our Q3 2010 Form 10-Q, to be filed with the SEC later today. Investors are cautioned not to place undue reliance upon any forward-looking statements.

And with that, I would like to turn the call over to Dave Hegarty.

Thank you Tim, and good afternoon everyone. Thank you for joining us. We're very pleased with the results for the third quarter. We continue to have a strong performance portfolio, coupled with ample liquidity and a solid balance sheet.

Before we get into the details, I'd like to review some of the highlights of the quarter. In August, our senior unsecured debt rating was upgraded to BAA3 by Moody's, as well in September, our corporate rating was upgraded to BBB minus by Standard & Poor's. Additionally, subsequent to quarter end, we raised our quarterly dividend by $0.01 per share by 2.8% to $0.37 per share. Over the past decade, we have raised the dividend by an average of 2% per year, and with our stock price appreciation, our total return has been over 450%.

For the third quarter of 2010, we generated funds from operations of $0.42 per share, as compared to $0.41 per share for the same quarter a year ago. We made modest investments during the quarter, which helped to further diversify our revenues and asset types. Our $550 million revolving credit facility remains almost completely undrawn and we have no near-term debt maturities.

During the quarter we closed on two Class A medical office buildings which were mentioned on the last call, totalling $28.2 million. And subsequent to quarter end we closed on another Class A medical office building for $15 million. Additionally we funded $8 million of capital improvements and expansions at our Senior Living properties. We remain optimistic that there will continue to be numerous investment opportunities to consider for the remainder of 2010 and into 2011.

Before I get into the details of our portfolio, the acquisition environment, and our outlook, Rick will review our results for the quarter.

Thank you, Dave, and good afternoon, everyone. Rental income for the third quarter increased by $9 million or 12%, to $81 million, as compared to the third quarter of 2009. General and administrative expense increased $357,000 or 7%, to $5.5 million.

Our G & A cost as, a percentage of revenue, remains one of the lowest in the Healthcare REIT industry at 6.8%. Depreciation expense increased by $2.8 million or 14%, to $22.5 million. The year-over-year quarterly increase in rental income, G & A, and depreciation expense reflects 32 properties acquired since July 2009, partially offset by the sale of six skilled nursing facilities and one medical office building.

Property operating expense increased by $483,000 to $4.6 million, compared to the same period in 2009. This increase was primarily due to the acquisition of 21 medical office buildings acquired since July 2009, and in most cases, these operating expenses are recovered from the tenant.

Interest expense for the third quarter 2010 was $4.3 million higher versus the 2009 period. This increase is primarily due to the interest in amortization of deferred financing fees relating to our agency debt with Fannie Mae, which closed in August 2009, as well as the $200 million of senior unsecured notes issued in April 2010. Offset by the lesser amounts outstanding under our revolving credit facility and the redemption of $97.5 million of senior unsecured notes due 2015.

In August, we sold four under-performing skilled nursing facilities leased through Five Star for approximately $1.5 million and recorded a gain on sale of $109,000. This transaction reduced the annual rent paid by Flagstaff by 10% of the net proceeds of the sale. This mechanism in our leases allows Five Star to exit from money losing operations and receive a rent reduction on their master lease based on the net proceeds received.

The quality of our earnings from Five Star's master lease has also improved. We recognized acquisition costs during the quarter of $286,000, which was a decrease of $231,000 from the same quarter a year ago. That was solely a function of transaction volume.

For the third quarter 2010, we generated FFO of $53.5 million, or $0.42 per share, compared to $49.4 million, or $0.41 per share, for the same period in 2009. Percentage rent revenue from our Senior Living tenants for the quarter increased $300,000 or 12.5%, to $2.7 million versus 2009. FFO for the third quarter of 2010 was negatively impacted by $0.01 per share as a result of the large cash balances we maintained during the quarter. Based on these results, in October we declared a dividend or $0.37 per share, which represents a pay out ratio of 88% of our third quarter FFO.

On September 16, we acquired a medical office building in Buffalo Grove, Illinois, a suburb of Chicago, with approximately 65,000 square feet, for $18.4 million. On September 30, we acquired another 38,000 square foot medical office building located in Conyers, Georgia, a suburb of Atlanta, for $9.8 million. Subsequent to the quarter end, we acquired a 58,600 square foot medical clinic in Conrow, Texas, a suburb of Houston, for $15 million. Additionally, we invested $8 million into revenue-producing capital improvements at our Senior Living properties. As previously discussed we sold four skilled nursing facilities in Nebraska for $1.5 million on August 1st.

At the end of the quarter, we had only $12 million outstanding on our $550 million revolving credit facility, unrestricted cash of $8.5 million, $423 million of senior unsecured notes, and $656 million of mortgage loans and capital leases. Today, we have almost the entire credit facility available to fund future investments. We intend to exercise our option to extend the maturity date of the facility through December 31, 2011. As a reminder, the borrowing rate on the facility is LIBOR plus 80 basis points. Our investment grade ratings from both Moody's and S&P should assist in our efforts to obtain a new revolving credit facility.

We currently have $225 million of senior notes due in 2012, bearing an interest rate of 8% to .625% (sic - see Press Release). [On risk] scaled maintenance penalties on these notes have discouraged us from prepayment, but we will continue to look for opportunities to prepay these notes. Other than the 2012 senior notes, we have little debt due until 2019 or later. At September 30, our total debt was approximately $1.1 billion, and our equity was $1.9 billion, for a ratio of debt to total book capital of 37%. On a market basis our debt to total market capitalization was 27%.

Now, I will turn the call back to Dave for a discussion about the performance of our portfolio in the investment environment.

Thank you, Rick. Let's first discuss the Senior Living portion of our business. We have one of the strongest portfolios of Senior Living assets in the industry. A substantial amount of these assets are operated by three of the premier Senior Living operators in the country.

Our largest tenant, Five Star Quality Care, reported income from continuing operations of $0.15 per diluted share for the quarter, and generated cash flows from operations of approximately $49 million. Five Star ended the quarter with $36.7 million in unrestricted cash, and had their $35 million revolving credit facility completely available. As Five Star noted in their call last week, of the four largest public trade operators, they are the only operator to have been profitable in each of the past seven quarters.

With regards to the properties we own and lease to Five Star, for the 12 months ended June 30, 2010, cash flows covered their rental obligations by 1.35 times. That's computed on an EBITDA basis, or a cushion of approximately $65 million. The occupancy for all four of the leases with Five Star remained flat for the 12 months ended June 30, 2010, compared to 12 months ended March 31, 2010.

The 14 high end retirement communities we leased to Sunrise also covered their rental obligations by 1.35 times for the 12 months ended June 30, 2010. Occupancies at these properties averaged about 89%, and we continue to monitor Sunrise as a Company, but are comfortable with the leases as they are guaranteed by Marriott International, and these properties are performing well.

The Brookdale properties continue to be stable, at 92% occupancy and over two times the rent coverage. Our smaller, private operators continue to perform over two times coverage as a group and have steadily improved over the past year. Additionally, our two Wellness tenants cover their rental obligations over two times, and have held up well in this difficult economy. I'm very pleased with the performance of our Senior Living properties and the Wellness Centers.

Moving on to the Medical Office Building portion of our portfolio, occupancy increased from 97% at June 30, 2010, to 98% at September 30, 2010. We currently own 61 medical office buildings, and a majority are long term leased with strong credit tenants. There's been little turnover in the Medical Office Suites, but the renewals in our new leases have approximated the existing rents.

Moving on to the acquisition environment, we are evaluating several individual assets and portfolios in both the Senior Living and the Medical Office space. I expect that we will acquire properties in the 7% to 9% cap rate range over the next few quarters, and we will continue to exercise discipline and focus on acquiring quality assets with immediate accretion.

As you all know, our main goal is to increase cash flows in order to increase the dividend paid to our shareholders over time. To that end, our Board declared a cash dividend of $0.37 per share, which was an increase of $0.01 per share over the prior quarter. Our Board evaluates the dividend on a quarterly basis, and they look for opportunities to prudently raise the dividend and have done so over the past 10 years.

The impact of the recent medical office building acquisitions occurring late in the quarter and subsequent to quarter end was not fully reflected in our quarterly results. Based on our current FFO pay out ratio of 88%, we're generating $30 million to $35 million of excess cash flow per year, which provides a cushion for the dividend should any operator experience difficulties or any other unforeseen needs. The surplus cash flow is currently used to fund improvement financing, make new investments, or prepay debt.

In conclusion, we believe our current dividend yield of over 6% is attractive and secure. We will continue, as always, to closely monitor the portfolio, seek excellent investment opportunities, while prudently managing our liquidity and focusing on growing cash flows to ultimately be able to increase the dividend. With that, I'll turn it over for questions.

Thank you.

(Operator Instructions)

One moment for our first question. That question will come from the line of Todd Stender from Wells Fargo Securities. Please go ahead.

Hi. Thanks guys, good afternoon.

Hi Todd.

If you could just share with us how you source those medical office buildings that you recently acquired, were they direct relationships or did you source them through brokers?

They were both. Let's see, I'd say in each case there were - - two of the transactions were brought actually through relationships we had with brokers but they were not widely marketed, as opposed to - - and one of them was through a national firm that produced many books, and there were many bidders bidding for it, and we were successful. So we do utilize a number of brokers for off market deals. We do have a number of relationships with existing healthcare systems, and then finally, we're on all the major brokerage lists.

Were these primarily sourced with cash, or are you assuming any debt on the properties?

Each of these cases it's a cash transaction.

Okay. And, if you could just, along those lines, where do you stand right now on your balance? Where do you stand right now on allocating the cash proceeds from your second quarter debt offering?

We've used up all that cash, Todd. We've actually started borrowing off our line of credit, and today we have about $15 million outstanding on the line, leaving us with about $435 million available.

Okay thanks, and I think you mentioned it was $8 million invested on Senior Housing improvements. What kind of rate of return are you looking for on those?

Those are typically at an 8% initial return on those investments.

Okay, and your 2012 senior notes, it doesn't make sense now to prepay them due to the penalties. At what point does the restrictions open up? Is there a period before 2012 where you might start looking at that?

No, they will go down as it gets closer to the due date, which is early 2012, so we'll be looking at it during the whole year next year, but more closely probably towards the end of the year next year, where the payment is less and we'll figure out how we're going to fund that. And one way or the other it will be accretive to us since these notes are at 8.625%.

Okay, thanks guys.

Thanks, Todd.

Thank you. Our next question is from the line of Tayo Okusanya from Jefferies & Company. Please go ahead.

Yes, good afternoon. Quick question. Could you talk a little bit more about the potential acquisition pipeline? I noticed you did mention that you expect to make acquisitions over the next few quarters.

Yes, I would say at the moment we don't have any committed transactions under a purchase sale agreement, but we have a number of letters of intent out for individual situations there. We're hopeful that we will succeed on a couple of those transactions. I would say that there are a few Senior Living assets that we're pursuing pretty aggressively, and then there are several individual medical office building transactions we're chasing.

Okay, and with everything you're looking at, do you foresee yourselves kind of staying more towards the triple net model for these things, except some of the multi-tenant MOBs or would you consider using a TRS similar to what some of your payors are doing?

For what we're currently considering everything would be on a triple net situation, and like you said, with a caveat that some of these are multi-tenanted medical office buildings. We have periodically looked at using TRS structure for certain situations where we believe that there is added value to be obtained, and for interested parties we would be interested in putting up the money and doing a TRS structure, but those have only occurred in a couple situations we've looked at over the course of this year.

And then one other question, Dave. In regards to when you just kind of look at the acquisition landscape out there, do you kind of see any fairly large sized, let's say, $100 million and above portfolios out there that you think are kind of in the market with a potential seller? Or are those kind of larger deals still somewhat difficult to come by?

There are not many transactions out there like that. I don't know if your question is focused on Senior Housing or Medical Office or either one.

Either one actually.

Alright, on the Senior Housing side, I really -- it's really more one-offs or very small portfolios of a couple properties, but there really are not that many that I can think of that are north of $100 million. On the Medical Office front, each quarter there is typically a couple transactions that are $100 million or more in the marketplace, and those we bid aggressively .

There are a number of capital sources that are chasing this type of medical office property type pretty aggressively, so whether it's people looking to accumulate assets to do an IPO of a medical office building REIT, or just even pension plans and private funds, they are just earning such a low return on their existing cash balances and investments that, say, a 7% cap rate on a medical office building is still attractive to them. So we're finding a lot of varied competition in the marketplace depending on the asset type and

That's helpful. Thanks, Dave.

You're welcome.

Thank you.

(Operator Instructions)

We'll go to the line of Jerry Doctrow from Stifel Nicolaus. Please go ahead.

Thanks. A lot have been covered. I wanted to go back, just because it has such a big potential impact on numbers, and talk a little bit about the refinancing of the debt. So, is there kind of a crossover point in terms of where rates are, I mean now that you've gotten your debt upgraded or time. I think Rick was saying that you'll look at it continuously through next year, but it probably doesn't make sense until later in the year, I just maybe want a little bit more color on what the dynamics are in that decision.

Sure. That particular debt issuance, the rate is so high compared to where treasuries are today, and especially short-term treasuries, so the yield maintenance would still be pretty expensive and it does decline, obviously, as we get closer to the maturity. That particular debt does not have like a window, per se, where there's no penalty, so we're going to have to pay something at some point.

I think that we know that that's out there; in the open market it's trading at a premium. It's just not in our short-term plans, but clearly as we get into probably the first and second quarter of next year, it will be very much on our radar screen, but we also plan on next year redoing our line of credit, and I guess there's no urgent need to refinance that at the moment.

Okay, and then I wanted to come back a little bit and talk about sort of the Five Star relationship, and you obviously had the negotiations or discussions about potentially restructuring that relationship as a TRS, you've continued now to do some asset sales including the ones in the fourth quarter.

Anything else we should be thinking about there? I'm sure they still had some additional assets maybe that are underperforming they'd like to play out, but just other dynamics there or things that might be changing as we go forward?

No, just to talk about generally the relationship with Five Star, I mean, they obviously have been performing well and they continue to execute on their plan to weed out some underperforming assets, and we want to work with them on that. And I think, in general, we made the conclusion that doing an entire TRS transaction with all of Five Star was probably not feasible for a lot of reasons, one of them -- because it's so large for us, it would have had a significant impact on our perception of our Company, the fact that we would be more of an operating Company and less of a REIT, per se, and more volatile cash flows. And also, I think one thing, it's not - - because of the size of that, people would look more at our CAD or AFFO, and with capital expenditures and so on, that would significantly reduce our cash flow available to bump up our dividend on a regular basis, so those are some of the considerations we made.

We do -- are looking to make some investments with them on the Senior Housing side. They have some resources themselves that they - - it probably might be better for both of us that they should acquire assets on their own, as opposed to through us. But I think it's a case-by-case basis whether we buy a portfolio and do a TRS type situation, but otherwise, I think we will certainly work with them to alleviate underperforming assets and help their performance and our performance.

And I guess, maybe two questions kind of along those lines. Did you guys look at Atria together?

Over the course of time, we have. They've been available at various points in time and we've explored it, and I would say we had another opportunity at this point. I'm not sure I followed the last part, Dave. We had an opportunity to consider them at this - -

You were in this round of bidding or whatever it was?

We chose to bail out early because of the price considerations. We did not think we could do an accretive transaction given where the price is.

Okay, and then just last question for me. So you were saying earlier that - - I don't know if it was a right for them to buy, but where they get sort of a 10% reduction on rent, based on the actual price at which you sell stuff. So if they wanted to do something bigger in the way of the sale, say hypothetical like the rehab hospital or something like that. Is that something that they can just do sort of automatically under that formula or you kind of have to approve each and every sale?

Well, they do have their right under all of our leases. If it's an underperforming asset, they have the right to approach us about selling those assets, and there's a mechanism to reduce the rent, and it's not all at 10% depending on which lease it is. Some of the old nursing homes from the 2000, 2001 time period are at 10%; some others are at 8% and 9%. I think the rehab hospitals are at 9%, so that is something that they can do, and we'd probably have to work with them on that.

Okay, but it can be at their initiative, basically, if they want to sell, as long as it's under-performing, they have some rights to basically initiate a sale?

That's correct.

Okay, great. I think that's all for me, thanks.

Okay, you're welcome.

Thank you. Our next question is from Jana Gallon from Banc of America.

Hi, good afternoon. I just had a quick follow-up on cap rates. The seven to nine range you gave for expected acquisitions is about 100 basis points lower than what you mentioned on the second quarter call, and I wanted to maybe understand is it primarily just due to increased competition, or are you also seeing better quality assets than you'd expected to see?

Both of those are true. We've seen, certainly, for the best medical office buildings, there is a bit of a feeding frenzy and driving cap rates down, and we have bid very aggressively in certain situations, so we would be in that closer to seven cap rate in some of those cases. But on the Senior Housing I think we're still in the eights, and maybe up to nine at the most, and then on the Medical Office, some of our recent transactions on a GAAP basis have been at nine, or high eights I should say rather, but they may start out at a lower cash cap.

Okay, thank you. And then, I guess now that some time has passed since the FASB said they were proposing certain lease accounting changes, I don't know if you've had time to speak with your tenants and get an idea of how they're thinking about that, or is that not so much a concern right now?

I think it is an overriding concern out there. With our existing tenants, we are having no discussions at the moment about restructuring anything or changing the way our business between us will be conducted. I think it's causing some hesitancy in the marketplace with some transactions being delayed coming to market until they know what the rules are going to be.

I know a few transactions where people have significantly offered much shorter lease terms on a sale lease back, and although they have every intent of staying there forever, they aren't willing to sign a lease for that, so we know it is affecting the marketplace to some degree out there, but I'd say not tremendously yet.

Okay, thank you very much. Appreciate the color.

You're welcome.

The next question is from Dustin Pizzo from UBS. Please go ahead.

Hi, thank you. Good afternoon guys.

Hi, Dustin.

Dave just to follow-up on that last question on cap rates. On the recent deals, can you provide some more color on where the cash cap rent is or what the straight line rent associated with those deals is?

Typically, those transactions we've done recently, the annual bumps have been in the range of 2% to 3%, and so the current cash rates have been typically around 7.75% to 8%, in that range. And then with the bumps, depending on how long the lease turns are and so on, we've ended up around 8.5% to low 9% to a GAAP cap rate.

Okay, that's helpful. And then I'm assuming the deals you're looking at now, and these recent deals, I'd imagine given the size, you're still not seeing too many of the other major players chasing them?

That's correct. On these deals we're more likely to run into competition from the private REITs or private investment groups. The larger REITs, it just really doesn't do anything for them, or as we believe it does for us.

Okay, thank you.

You're welcome.

Thank you. Our next question is from the line of Kevin Ellich from RBC Capital Markets. Please go ahead.

Hi guys. Just a couple quick follow-up questions. Rick, I was wondering maybe you could talk a little bit about the property operating expenses? As you guys have added the MOBs, how should that trend? Is the $4.6 million this quarter kind of a good run rate?

Yes. We've reported $4.6 million which is about $480,000 greater than last year, and that is from the acquisitions of 21 medical office buildings. I think last quarter was about $4.1 million, so it increased about $450,000, and I think that's just for the new MOBs coming in in the second quarter of this year; they have a full quarter's effect on a couple of the MOBs we've brought in the third quarter. But I think this quarter it's a good run rate going forward.

Understood, and then you mentioned I think in the prepared remarks about extending the unsecured facility. Is that just going to be a one year extension?

Yes, we had that option of one year to extend it to the end of 2011, and I think our intention now is to extend it one year.

And does the interest rate stay the same? Is it still LIBOR plus 80?

It does, it's LIBOR plus 80 and that will stay the same for the full year.

Okay, and then Dave, going back to your comments on the acquisition outlook on the Senior Living facilities versus MOBs, just wondering what the mix is? It sounds like you've got a lot of, you're having a lot of different conversations, and maybe you could talk a little bit about -- you talked about the cap rates, maybe comparing the big deal that Ventas did, on a price per unit are you seeing roughly the same type of valuations?

No. The pricing is pretty high in the Ventas transaction, and we know clearly many of the assets, and I don't think that's reflective of most of the transactions that are in the marketplace. We are now looking, ourselves, at mostly one-offs, and I don't think -- maybe $200,000 might be the highest priced per unit transaction of the ones we're considering.

Understood. Okay, sounds good. Thank you.

You're welcome. Thank you, Kevin.

Thank you. Our next question is from the line of Buck Horne from Raymond James. Please go ahead.

Hi, good afternoon.

Hi Buck.

I was just wanting to talk a little bit more about the medical office acquisitions, and just if you'd help us characterize what you bought. Is that on campus versus off campus? Is that affiliated with any particular healthcare delivery systems? And what are you seeing in terms of differentials between the cap rate pricing between being on campus versus off campus?

Right, okay. Well I'm glad you asked, because these particular properties we've acquired, all of these properties we've acquired this year, are off campus. They are fee simple, so there's no ground leases or other joint ventures or any other structures that are common in the marketplace. We don't have any minority investors, like often physicians will remain -- or the developer will remain a minority partner. These are all 100% out right.

They are all leased to very high end, quality tenants. The most recent one down in Texas is leased to Sadler Clinic, which is a major provider in Montgomery County in Texas. And it's 15-year long term leases.

The property in Buffalo Grove, Illinois, which is a fairly affluent suburb of Chicago, the majority of the building - - there's about seven tenants in the building and the majority is leased through Affinity Healthcare, which was acquired by Northwest Community Hospital, an A-rated credit, and they are on the lease. And again it's part of a network.

The property we recently bought down in Conyers, Georgia, is across the street from a hospital, I think Life Point is the operator of the hospital, and that has seven tenants, but they primarily deal in dialysis and urology and similar expertise. We have a property in Lubbock, Texas, (inaudible) Health System, which is a major provider there and a subsidiary of St. Joseph's, an A-rated credit. So, we're focusing clearly on properties that are part of a healthcare system that are critical to their operations, but it's a satellite clinic as opposed to on the main campus of their hospital, and as such, they tend to be $10 million to $20 million in value,

And one of the things -- what we have found in our experience is that if something is subject to a ground lease, it often has a number of restrictions with it, and it becomes more of a joint venture relationship, and we tend to discount that a bit, while many of our peers either don't discount it or even pay a premium for that location and that relationship. So that's one of the differentiating factors between our investments and others.

And you think that if you had to characterize the spread between on campus and off campus cap rates these days?

I'd say the whole universe of off campus, so it's tough to be exact, but I would say it could be 25 to 100 basis points, maybe higher return.

Okay. Thanks.

Okay.

Thank you and we do have a follow-up question from Jerry Doctrow. Please go ahead.

Hi, thanks. David I was just wondering whether there's anymore acquisition opportunities at HRP? Whether that's an opportunity for you guys?

Right. Okay, well, first, old habits are tough to break, because we're always saying HRP at times here, but Commonwealth REIT - -

Oh, yes, my apologies, okay.

But yes, we do, on our last transaction we did with them a while back we got a right of first refusal on about 45 medical office buildings that they currently hold. They have expressed off and on an interest in possibly selling some of those properties, and I could say obviously since we're both managed by the same organization, we're part of those discussions, and they have expressed interest at times; we're hopeful that they do something and we would be -- acquire some of those medical office buildings, but it is their decision but hopefully they decide to.

And I mean, in terms of just their motivation, are they just looking for another place to reinvest the capital, or what - - you said they've been interested from time to time. I'm just trying to understand what might trigger it or not trigger it.

Correct. You're right on. Their capital needs, they find that this is an excellent investment environment for them right now, while they're certainly able to buy a number of Class A large office buildings in major markets, and to do that, that consumes quite a bit of capital, so, as I say, they view us as potential for one source of capital to fund from that growth.

Okay. So if basically if they are buying, they may be selling to you?

That's a possibility.

Okay, thanks a lot.

You're welcome.

Thank you. Our next question is from Dave Aubuchon from R.W. Baird. Please go ahead.

Thank you. Dave, I just want to make sure I heard you correctly on your cash cap estimate. Did you say it was 7.75% sort of based on 2% to 3% annual contractual rent increases?

On a current cash basis, yes, and so that would gap out depending on the length of the leases and the various tenants and so on, it would typically gap out to something in the high 8s or mid 8s to nine or so.

Right, okay, perfect. Thank you.

Okay.

We also have a follow-up question from Kevin Ellich. Please go ahead.

Hi guys. Just wondering, subsequent to the quarter, are there any other properties that you guys are looking at maybe divesting, or how should we think about other potential sales?

At the moment we're only considering properties that are underperformers, so we have a couple assets that are held for sale, Assisted Living facilities, and then we've looked at some Nursing Home portfolios off and on to sell -- I mean those are the main areas. I don't think dollar-wise that any of them are significant to our cash flows or so on.

Got you. Okay, thanks.

You're welcome.

At this time there are no further questions in queue. Please go ahead, Mr. Hagerty.

Thank you all for joining us today. We will be at the NAREIT Conference in November and at the Wells Fargo Real Estate Conference in December. Both are in New York City, and we hope to see you at one of those events. Thank you.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.