Diversified Healthcare Trust (DHC) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Senior Housing Properties Trust second-quarter conference. At this time all participants are in a listen only mode. Later there will be an opportunity for questions. 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 your 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 retransmission of today's conference call is strictly prohibited without prior written consent of Senior Housing.

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 other securities laws. These forward-looking statements are based on Senior Housing's present beliefs and expectations as of today July 28, 2011.

The Company undertakes no obligation to revise or publicly release the results of any revisions 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.

Commencing this quarter the Company will report normalized funds from operations, or normalized FFO, in order to be comparable with its peers. Normalized FFO represents FFO as defined by NAREIT and is adjusted to include percentage rent and exclude loss on early extinction of debt, impairment of assets and acquisition-related costs.

In addition to normalized FFO, this call may contain other non-GAAP numbers. A reconciliation of normalized FFO to net income and the components to calculate AFFO, CAD or FAD can be found in our Q2 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 2011 Form 10-Q to be filed with the SEC. Investors are cautioned to not place undue reliance upon any forward-looking statement.

Now I would like to turn the call over to David Hegarty.

Thank you, Tim, and good afternoon everyone, and thank you for joining us today. As Tim stated, we are now referring to funds from operations, or FFO, as normalized FFO. We are not changing the way we have calculated FFO historically, rather we are just differentiating our definition from the NAREIT definition and using a term more comparable to industry peers.

In the second quarter of 2011 we recorded normalized FFO of $0.44 per share. This compares with $0.42 per share that we reported for the same period a year ago. For the six months ended June 30, 2011, we reported normalized FFO of the $0.88 per share versus $0.85 per share a year ago.

Before Rick begins the details of our financial results, let me briefly discuss some of the highlights of the quarter. As of today we have acquired, or under agreement to acquire, a total of 29 properties for approximately $361 million since April 1, 2011. To remind you, in March we acquired -- we announced an agreement to acquire a 20 community senior living portfolio for $304 million. To date we have acquired 17 of these communities for $241 million.

During the second quarter we also acquired another senior living community and five medical office buildings for a total of $35 million. We also currently have under agreements to acquire one additional senior living community and two medical office buildings for a total purchase price of approximately $23 million. And I will go into more detail on these acquisitions later on in this call.

We also had some dispositions during the quarter. We sold seven properties, including four skilled nursing facilities, two medical office buildings, and one assisted-living community for a combined sale price of approximately $40 million. The sale of the skilled nursing facilities fit with our strategy of reducing our exposure to the Medicare and Medicaid programs.

We are very pleased to report that in June we successfully entered into a new $750 million unsecured revolving credit facility. This new facility replaces our previous $550 million facility, which was set to mature at the end of 2011.

The tremendous success of this deal is highlighted by the fact we increased the size by $200 million, achieved very favorable terms, and increased lender participation. Our new facility has a four-year term with a borrower's option to extend an additional year. The facility has an interest rate of LIBOR plus 160 basis points, which is a competitive rate against our peer group. And with 26 lenders we have an industry-leading number of participants in this facility.

Subsequent to the quarter end in July we completed a successful, well-received public offering of 11.5 million common shares, and raised approximately $248 million of net proceeds. We used the proceeds from this offering to repay borrowings outstanding on a credit facility and to, in part, some of the acquisitions I mentioned previously.

11.5 million shares were issued at a price 10% higher than our last offering at the end of 2010, and our share price has increased favorably since the offering date.

Now I will turn the call over to Rick, who is going to review our results for the quarter.

Thank you, Dave, and good afternoon everyone. For the second quarter we generated normalized FFO of $62.6 million, up 17% from $53.3 million for the same period a year ago. On a per-share basis normalized FFO was $0.44, up 5% compared to $0.42 a year ago. Earlier this month our Board declared a dividend of $0.37 per share, which represents a payout ratio of 84% on the second-quarter's normalized FFO.

Percentage rent revenue from our senior living tenants for the second quarter increased 8% to $2.7 million versus last year. Looking to the income statement, rental income increased $19.1 million in the second quarter, or 24%, to $99.9 million compared to the same period last year. During the quarter we recognized $844,000 of residents fees and services at our managed communities.

Residents fees and services are the revenues earned at the 10 senior living communities we acquired in late June that are managed by Five Star and leased to our TRS.

Depreciation expense increased quarter-over-quarter by $4.6 million or 21% to $26.9 million. Property operating expenses increased $6.7 million to $10.8 million, which was in-line with our expectations.

Property operating expenses are primarily related to our medical office buildings, but now they include expenses incurred at our managed senior living communities.

We recorded $609,000 of senior living operating expenses for the second quarter. General and administrative expense increased approximately $1.5 million to $6.9 million. Our G&A continues to be among the lowest of our peer group.

The quarterly increase in revenues, depreciation expense, property operating expenses and G&A primarily relates to the 52 properties we acquired since April 1, 2010, and the purchase of approximately $41 million of revenue-producing capital improvements made to our senior living properties, offset by a reduction in rental income resulting from the sale of 11 properties sold since April 2010.

Interest expense for the second quarter was $2.8 million higher versus last year. The increase relates primarily to the January 2011 sale of $250 million of five-year unsecured senior notes with an interest rate of 4.3%, and greater amounts outstanding under our revolving credit facility.

During the quarter we recorded a $427,000 loss on early extinguishment of debt from the write-off of unamortized deferred financing fees relating to the refinancing of our previous $550 million revolving credit facility.

As Dave mentioned earlier, during the quarter we sold four skilled nursing facilities, two medical office buildings, and one assisted-living community for approximately $40 million, and recognized a gain on these sales of $21 million. We recognized acquisition costs during the quarter of $2.8 million, which was solely a function of transaction volume.

Now let's turn to the balance sheet. During the second quarter we acquired 15 senior living communities and four medical office buildings for a total of approximately $226 million and invested $4.5 million into revenue-producing capital improvements. We funded these acquisitions with the proceeds from our January debt issuance by assuming $48 million of mortgage debt, by using cash on hand, and borrowings under our revolving credit facility.

In May we entered into a secured bridge loan agreement with our largest tenant, Five Star Quality Care, for up to $80 million to help finance the acquisitions of six private pay senior living communities. In June they borrowed $41 million under the bridge loan and subsequently repaid $32 million.

As of June 30, 2011, there was $9 million outstanding on the bridge loan and $39 million available to borrow. Following quarter end in July, Five Star borrowed an additional $15 million. Today there is $24 million outstanding and $24 million available to borrow. The bridge loan matures on July 1, 2012, and bears interest at a rate applicable to our revolving credit facility plus 1%.

In June in conjunction with Five Star's common share offering of 11.5 million shares we acquired 1 million shares of Five Star's common stock for a purchase price of $5 million.

At June 30, 2011, our total debt was approximately $1.5 billion, and our equity was $2.1 billion, for a ratio of debt to total book capital of 42.5%. On a market basis our total debt to total market capitalization was 31.8%.

At the end of the quarter we had $184 million outstanding on our revolving credit facility, three series of unsecured senior notes totaling $670 million, and mortgage loans and capital leases totaling $698 million.

Looking at our upcoming debt maturities, we have $225 million of unsecured senior notes due in January of 2012, with a high interest rate of 8 5/8. In addition, we have $36 million of mortgage notes due in 2012 with a weighted average interest rate of 6.9%. We are looking for opportunities to accretively refinance these notes. Other than the 2012 maturities, 96% of our debt is not due until 2015 or later.

On July 1 we completed an issuance of 11.5 million common shares in a public offering, where the net proceeds are approximately $248 million. We used a portion of the net proceeds to pay down the $184 million outstanding on our credit facility, and today we have the entire $750 million available.

We also used a portion of the proceeds to close on three senior living communities and one MOB acquired subsequent to quarter end, along with assuming $60 million of mortgage debt. After paying down the balance on our credit facility, and assuming the mortgage loans, our debt to total book capital goes from 42.5% to approximately 37%. However, we still have a portion of the proceeds from the offering and we don't expect to reinvest the excess cash until later in the quarter.

Now I will turn it back to Dave for a discussion about the performance of the portfolio and the investment environment.

Thank you, Rick. The acquisition environment remains open to us in both the senior living and medical office spaces. We have completed well over [$400] million of acquisitions during the first half of 2011 and have $86 million more under agreement.

Of the 20 community senior living portfolio we announced back in March, we have acquired 17 communities. We acquired 14 of these communities in June -- late June, and the other three communities in July. Of the 17 communities we have acquired thus far, 12 communities are managed through a RIDEA structure, and the remaining five are leased communities.

We also assumed approximately $61 million of mortgage debt along with these acquisitions. These properties are performing as expected, and were written at a mid-7 initial cap rate. The closing of the remaining three managed communities are contingent upon customary closing conditions and third-party approvals, including HUD, and two are scheduled to close in late 2011 or early 2012.

In addition to this large transaction, in May we acquired a 50,000 square foot medical office building in the St. Paul Minnesota area for $7.2 million. This property is 100% leased to four tenants, with the primary tenant being a satellite clinic of [Helena Medical Clininc], a health care system servicing Minnesota and Wisconsin.

During June and July, we acquired four biotech lab space buildings located near Gainesville, Florida. The four properties have a total of approximately 157,000 square feet, are 89% leased to 14 different tenants for approximately 2.8 years. The total purchase price was $19.8 million, and we assume $3.7 million of mortgage debt along with this acquisition.

The properties here are part of a research park built on land previously owned by the University of Florida Foundation for their biotech program. The park is home to 30 biotech companies and the University of Florida's Sid Martin Biotechnology Incubator program.

Lastly on the acquisition front we are currently under agreement to acquire one senior living community and two medical office buildings for an aggregate purchase price of $23 million. The senior living community is located in California and has approximately 60 units. The two medical office buildings are located in Virginia and have approximately 46,000 square feet in total.

The closing of these acquisitions are contingent upon completion of our diligence and other customary closing conditions, and accordingly we can provide no assurance that we will purchase these properties.

We also had some disposition activity, some of which was discussed on our last earnings call. We sold seven properties, including four skilled nursing facilities, two underperforming medical office buildings, and one former assisted living community that is being converted to another use For a total sales price of approximately $40 million.

The skilled nursing facility disposition reflects our focus of owning private pay senior living communities and reducing the number of properties we own with Medicare and Medicaid exposure. In fact, we have sold eight skilled nursing facilities over the last year. Currently skilled nursing represents only 5% of our NOI, and we expect this percentage to continue to decrease over time.

At this point I would like to review the performance of our major senior living tenants. Our largest tenant, Five Star, reported their earnings earlier this morning. They reported income from continuing operations of $0.17 per basic and diluted share. For the 12 months ended March 31, 2011, occupancies across all of our Five Star leases declined slightly in the aggregate, principally due to skilled nursing. The rental coverage has remained consistently strong on an EBITDA basis at a range of 1.12 times to 1.52 times.

Five Star continues to have strong earnings. Their coverage is increasing, and they are still able to push rates at levels higher than their peers. This speaks both to the Five Star operations and the high quality of our properties.

Our other tenants also performed well during the same period. The 14 properties we leased to Sunrise covered their rental obligations by 1.46 times. Occupancies averaged almost 90%. Our properties leased to Brookdale where 92.6% occupied and covered their rents by over 2 times.

The occupancy across our five private operators increased 10 basis points to 84.1%, and covered their rents by 2.5 times. Our two wellness center tenants continue to cover their rental obligations over 2 times as well.

Moving into the medical office building component of our portfolio, today SNH owns over 6 million square feet of medical office space, and represents approximately 31% of our NOI. Most of these properties are long-term leased to strong credit tenants. Occupancy was 97% at June 30, 2011. This quarter 115,000 square feet was renewed and we had new leases for 6,000 square feet.

The little turnover we have experienced in our portfolio is in our multi-tenanted buildings. Tenant improvement and leasing commissions for the quarter were $1.9 million, and the six months ended this quarter were $4.2 million, with a budget for all of 2011 was $6.5 million.

On a same-store basis the NOI decreased very slightly as utility expenses and real estate taxes increased more than the rental revenues increased.

The dividend remains are highest priority. Earlier this month the Board declared a dividend of $0.37 per share or $1.48 per share annually for a yield of over 6% today. Our Board evaluates this dividend every quarter.

Based on our current normalized FFO payout ratio of 84% we are generating approximately $40 million of excess cash flow per year. And the surplus cash flow is currently used to fund improvements financings, make new investments or prepay debt.

We have an extremely high-quality portfolio that has been put together through a disciplined approach, and has yielded rational book values based on units, square feet and beds. We maintain this high-quality portfolio by consistently reinvesting in our properties. Over the next two years only 4.7% of our annualized rental income comes up for renewal.

Our pipeline remained strong as the number of opportunities we are currently evaluating remains around $1 billion. We believe that due to market conditions the majority of any senior living acquisitions we will make will need to utilize the RIDEA structure.

No senior living and medical office opportunities we are evaluating will warrant a mid-7% to a mid-8% cap rate range. Overall, we feel confident in our ability to make accretive acquisitions in 2011 and continue to grow the Company using a disciplined investment approach.

Although the future is bright, we may experience some short-term dilution until our excess cash is reinvested into acquisitions. For the remainder of 2011 we will remain focused on refinancing our 2012 debt maturities, executing on our third-quarter acquisitions, and continuing to seek out new accretive acquisitions in both senior living and medical office building spaces.

Now I'll open it up for questions at this point.

(Operator Instructions). Todd Stender, Wells Fargo Securities.

Just with the pending CMS proposal out there, did you encounter any difficulty in selling your SNFs in the second quarter?

We did not really. I think three of those properties we had negotiated I think around the first quarter for timing. And so they were pretty much locked in. And the other situation is an owner-operator where the operator is buying it, and they have the capital to do so. So we really did not have any issue.

I think some of our smaller private operators we do -- a lot of them don't have the capital to acquire them. Right now might be a challenge for them to do so. In the meantime, they are covering their rents 2 to 3 times, so we feel pretty secure from that perspective.

Okay, thanks. Just looking at the medical office buildings you purchased in Gainesville, can you tell us a little bit about Sage Software Healthcare? And how much do they represent as a percentage of the square footage?

Sure. Well, the way -- there is 14 tenants in those buildings. And it is all built around biotechnology and startup companies. And the way our charts are listed it just lists the largest tenant within the property based on space.

So Sage is a company that has developed software for operating systems for health care companies, and they have come up with a number of new technologies and products to market to the health care companies. So it is a venture capital-type start-up company based in that area, and formed by a professor from the University.

Then with the purchase of the Five Star stock is there any formal commitment in place maybe within any of the leases that you guys own a certain percentage of their shares?

Now, there is no commitment or requirement. There is just to keep our level at 9% ownership.

Okay, is that what it is now? It is just you are not diluted, it remains at the 9?

Correct.

Okay, all right. Thanks, guys.

(Operator Instructions). Jerry Doctrow, Stifel Nicolaus.

So, David, you've covered a lot of things, so just a couple of areas. A little more color on maybe acquisitions. I think you talked about $1 billion sort of pipeline, maybe not closing more stuff until later this quarter. But a little more color on what you are seeing, maybe MOBs versus senior housing.

I guess I would like to understand maybe a little bit more color on your remarks that he would want to use -- or need to use a RIDEA structure, so just a little more sense of what you are seeing out there would be helpful.

Sure. Well, I guess it is because there is capital available in the marketplace and maybe it has been a while since operators have -- investors have put properties into the marketplace to sell that we seem to be seeing several good-sized portfolios of properties in the marketplace to consider. Some of them are off-market deals. But there are a few in the market that are being marketed through the traditional (inaudible) of brokers and investment bankers.

I think it is a great opportunity to be buying right now. And I would say probably what we're looking at right now of that $1 billion I would say maybe two-thirds of it is probably senior living versus the other one-third being some portfolios and individual assets in the medical office side. And what we are even considering is strictly pretty much private pay senior living product.

Okay. And, again, you said rates 7.5% to 8.5%. I'm assuming if you were going to do RIDEA it would be exclusively with Five Star or is there chances you would do it with somebody else?

More likely than not with Five Star.

Okay. Then one thing I wanted to just come back to -- you had talked about this and I don't know that I got the numbers -- just on the operating expenses, I think you had give out some figures about how much was senior housing, how much it was sort of MOBs. And the MOBs we've got a relatively good handle on, because that has been a growing steady part of your business. On the senior housing, maybe give me the number again that was in the quarter.

And do you expect seasonal fluctuations or any more color we should be thinking about that? It is not a huge number relative to your earnings, but I just wanted to think about fluctuations there.

This is Rick. Yes, I'll comment on that. As you know, we closed on those in the last 7 to 10 days of the quarter, so there is not a big number in the property operating expenses for these managed senior living communities. But we did record $609,000 for the quarter, so of course, when we go to the next quarter and have those and maybe close on a couple of other managed communities we do expect that to increase.

You just have to annualize that. Just remember, $609,000 over a 10-day period for the quarter.

Okay. And it is not going to move around enough seasonally for us to worry about it do you think or --?

No, I don't think so. There are a lot of moving parts right now just with the fact that the [rental] properties are just closing and the transitional stuff going on. But I think we knew going into this transaction that the margins were probably lower. Let's say about 25% or so. Margins, which for private pay senior living communities is below average.

And the occupancies were a little bit lower on the managed facilities. So we expect improvement in both the margins, occupancy and overall performance.

But that may be more of a 2012 phenomenon rather than something that would come very quickly, do you think?

It could. I think we are -- the trendline is improving out of the gate here. So we are optimistic that should improve from where it has been at historically, but it probably won't hit full stride until 2012 or so.

Just one or two other last things I have. So the loan to Five Star, do you have a sense of when you would get repaid? I am assuming you would rather be out of it sooner than later.

That's right. No, we don't have any specific timing on that. Obviously, they have until next July 1 to refinance out.

Then last thing I have, just a little bit broader, the NIC numbers were out yesterday. Five Star numbers came out, weren't particularly stellar, certainly in terms of occupancy. Obviously, it is weaker on the skilled side, but we would normally expect a first-quarter, second-quarter kind of improvement in just seasonally in private pay senior housing occupancy, which we really didn't really see in their numbers.

So how are you feeling about, given the economy, given all of that about senior housing -- private pay senior housing and particularly where occupancies may be trending?

My feeling is I think it does trade somewhat in-line with how the economy is doing, where it is sputtering at the moment. I also see that happening with the occupancy levels. If you were to look at the other -- the statistics in the portfolio, granted their end was March 31, they are basically at the same or a couple of basis points lower from year-end results.

And I think we're bouncing along here where it is going to fluctuate a little bit one way or the other. But I don't see any big drop off, but then again, I don't see a big ramp up either in the last couple of months or in the upcoming future months.

I think when you were seeing those probably less discounting going on, and people are trying to push rates if they can. So that is usually a trade-off with occupancy suffers a bit when you push the rates too much. So I envision the occupancy particularly will stay static for a while.

Okay. Okay, that's helpful. Thanks.

Omotayo Okusanya, Jefferies & Co.

Just along Jerry's line of questioning, just given this near-term outlook you have given for senior housing, and the commentary around future acquisitions in the pipeline being a more serious focus, I am just kind of curious how you balance both things where your fundamentals are not going to be getting better any time soon, why it makes sense to expose yourself to those fundamentals via acquisitions using the TRS?

Sure, and a couple of thoughts. One is, first of all, when opportunities present themselves you really need to take advantage of them. Portfolios don't come to the market often. They usually come once, and you will have an opportunity to bid on it. And if it is quality product and you believe in the industry, then you really have to step up and try to buy those assets. So that is one reason why we feel we should be aggressive in trying to acquire some of these.

But why a TRS specifically, why not [sale leaseback]?

Well, the other part is at least with TRS -- first of all, the rest of the universe is bidding with a TRS format, so in order for you to effectively compete you have to use that model. Because with a sale leaseback situation, the REIT has to make a profit margin and then the operator has to have some profit on the table for them to even want to do that transaction.

So when you layer in a couple of layers of profit, and then you have to -- the coverage ratio and so on -- you become noncompetitive. And we would have to earn 7.5% to 8% cap rate to buy quality assets, while our peers might be bidding 7% to 7.5%, so using a RIDEA structure. So if we are going to compete we kind of have to use the RIDEA structure.

Then our fundamental belief is that if there is a pause right now, is that a pause for short-term? The dynamics in the industry are very compelling for say next five years. I do believe that we will come out of this soft patch in the recovery. And then the demographics will kick in. People -- the confidence factor will kick in. That was a huge -- is a huge factor.

Hopefully, unemployment comes down, and the housing market should pick up. So all of those factors should bode well, I would say, for say the next five years.

If you want to compete against the rest of your peers, I mean, the larger peers doing these RIDEA deals are all underwriting anywhere from mid to high single-digit same-store NOI growth for these portfolios. Are you basically going to be underwriting that as well and you fundamentally believe that, or are you concerned that given the economic backdrop those members numbers may be a little bit too aggressive? I guess that is what I'm trying to get at.

I do believe that those numbers are good for growth rates. It may take a quarter or two or so before that actually kicks in. And I'm not sure I that would say that the year 2011 is going to be as beneficial as those growth rates. But I do believe that 2010 should be -- 2012, rather, and 2013 should be in that ballpark.

Then just back to Five Star. They recently raised equity. I was just somewhat surprised they were still tapping the term loan that you guys gave them.

Correct, yes. Well, the transaction that they have entered into to acquire was $123 million, I believe, and they needed roughly $100 million cash to consummate that transaction. We have provided up to $80 million secured bridge facility. Our fallback is always that the properties may end up being a sale leaseback transaction. There are different options for that to be ultimately repaid, so we feel protected.

It is still unlike, I think, a couple of the REITs' bridge Brookdale last year to access the equity markets. And so this is a relatively similar type situation. Obviously, we would have liked -- the dynamics and the economics could be better for Five Star doing their transaction, but they were launching it and we decided to support the closing of their acquisition, because they have no have financing contingency. (inaudible).

I guess that is it. It is a staged closing. And so once they have drawn the facilities and paid it back, it cannot be redrawn. So it is a one-time borrow.

But it is not like they drew it down and then drew it back up again in July.

No, it was $80 million total capacity, but they borrowed --.

They borrowed $41 million in the second -- in June, and they did repay back $32 million. That is why at the end of June there was $9 million outstanding.

And they borrowed on it again.

They borrowed another $15 million in July. So they're up to $24 million outstanding. But they are only allowed now only $24 million to borrow. That is all that is available to them. It is not the $80 million minus the $24 million that is outstanding. They cannot borrow any of that $32 million that they paid back.

It is not meant to be a revolver (multiple speakers).

So today $24 million outstanding and $24 million left to borrow, if they would like.

Okay, got it. Okay. That's helpful. And then next question, again, just the asset sales. I understand the piece of this, it was also why sell the SNF. Could you talk a little bit about the MOBs and what the mindset was there?

Those particular MOBs, it was a portfolio transaction we had with the health care system, and those two properties they decided to exit those locations. We have a mechanism in our lease that allows them to work with us. They get a [smaller] rent reduction than what they're are paying us in rent, so our yield on the remaining assets in that portfolio actually go up. But, again, they are pretty small, I think, with 12,500 square feet in total. But the two (inaudible).

That is cool. All right, thank you.

Frank Morgan, RBC Capital Markets.

You have mentioned the use of the RIDEA structure, how that is necessary to be competitive for a lot of deals. So when you -- I am assuming that must be for larger deals where you are competing against these big, larger REITs.

But that being said, is that right? Then, secondly, how do you characterize the opportunity, the characteristics of this two-thirds $1 billion backlog in senior living, how do you characterize that in terms of bigger portfolios versus smaller groups of assets? Thanks.

You are correct that the RIDEA structure is really geared towards the larger portfolio and less so for individual assets. There is a dichotomy of -- is the premium paid for a portfolio versus a single asset or a small group of assets. And I think the larger REITs are pursuing the portfolio of transactions. And so that is who we are competing against in most of those cases.

Of the number of transactions we are considering, I would say the bulk of that two-thirds represents portfolio situations -- several portfolios that make that up. Hopefully, that was helpful.

Okay, thanks.

Dave Aubuchon, Baird.

Just on the Five Star stuff, real quick, just did you give the rationale why you made the purchase of the Five Star stock? And is there any lockup on that -- on those shares?

There is no lockup on the shares. It was $5 million at $5 a share of 1 million shares. And it was mainly to just keep our 9% interest not diluted, in that we believe that $5 a share is still a very attractive investment for us.

All right, and then on the bridge loan, how did you scale your commitment to them, the $80 million, relative to what they needed? How did you think about the scale of what you are going to remit to them? And then just I'm curious on the pricing too, just 100 basis points over your cost.

Well, we looked at the transaction that they had -- like I said, $123 million acquisition that was under agreement. We looked at what resources they had available. They assumed some debt, as well as provided some of their own capital. And then basically agreed to look at how much is necessary to complete that transaction. And so $80 million was established as the amount necessary. And we have put liens on several properties to more than cover our security. Then a one-time draw was meant to be specifically for funding that transaction and nothing else. So that is how it came about.

We currently have cash on hand. We are starting to spread (inaudible) between their two independent committees explored all the market rate and agreed that I think there were other transactions going at the same time.

It was somewhat of a tie-in to the Bell transaction in a sense that the management team, where we see them there is a 3% management fee we are being charged. So that has been a favorable management fee arrangement on our perspective, and the trade up was a little bit favorable on the spreads we were charging.

Do you feel like this will be a tool that you'll use going forward in any transactions?

No, I don't expect this to be customary.

The last question is, relative to your investment pace and what you're buying, do you feel like you need to get more aggressive on these deals? Because many of your peers, and even your much larger peers, are outgrowing you right now on an annual basis. And they're set up to outperform or outgrow you in the future if their assumptions in the RIDEA structures are even remotely close to being accurate.

Do you feel like you need to be more aggressive to keep up with your peer group?

Well, we know we have to compete. I think we do have to be a bit more aggressive. As you know, we always wrestle with the -- it is a size issue as far as one of our advantage historically has been that we have not been as big as the other guys in the top three now, and as a result we can pursue smaller transactions.

But there are all these portfolios of say $100 million to a couple of hundred million dollars that come on the market, and those would be great for us. We hate to not compete on those. And like with Bell we were successful at a mid-7 cap rate.

We think there is tremendous amount of upside potential in that portfolio. And if that can be reproduced in other portfolios then we feel we should be a bit more aggressive in pursuing those other portfolios. And before you know it, we will be of a size where we have to keep up that big a portfolio too.

But to kind of get back your question, yes, I think we do have to be a bit sharper around bidding for some of these portfolios.

Thanks, Dave.

Dan Cooney, KBW.

You mentioned that any future RIDEA deal would likely be with Five Star. Is it fair to assume that you would utilize a similar management agreement structure that you guys used on the Bell portfolio?

Yes, I think that was set as a template for possible future transactions.

Okay, great. Then I guess just one more follow-up on the Five Star equity investment. I guess just from like a strategic point of view, do you view your investment in their equity as an indirect way of retaining some upside exposure to senior housing fundamentals or was that not really a consideration?

No, that is absolutely a consideration. We clearly do have a relationship there that we want to participate in any upside potential that could be there. And it is also further with the RIDEA structure and stuff it also allows us to be a little more creative in the structuring of it.

Okay, great. Thanks a lot.

Jorel Guilloty, Morgan Stanley.

I have a question going back to the Five Star leases. Specifically meaning cash flow coverage -- rent coverage is up, but you have obviously trailing down for two of the leases. Now you mentioned that part of that was due to skilled nursing facility occupancy weakness. But one of the leases, lease 3, doesn't seem to have any skilled nursing facility exposure. So I was wondering if you can comment on what is leading to occupancy weakness there?

That actually does have some skilled nursing in it because it is comprised of CCICs, that seems some skilled nursing units. But also that portfolio is comprised mostly of the large CCICs in our company. And I would say that skilled nursing is probably the most impacted, but independent living is probably the next one that is a bit soft. And assisted living (inaudible) is actually holding up very well.

So I think that -- a little bit of that is definitely being impacted by the skilled nursing units within the CCICs. It is to some degree being impacted by the independent living exposure within that portfolio. And (inaudible) by the positive ALD.

But if I look at your occupancy by property type for the whole Company, I see that independent living is actually trending, I guess, down -- assisted living is trending down, whereas independent living is sort of like stabilizing, trending up. So it doesn't really match up with what is happening, I guess, with the Five Star lease.

Okay. On the -- the independent living is -- from December quarter to the March quarter is down a little bit. The assisted living (inaudible), for one thing that charts don't reflect same-store numbers. So in the case of like when we added a property in Illinois that came on at a 75% occupancy level. And most of the Bell properties are coming on at levels in the mid-to low 80%. So it is a little bit distorted because the newer properties kind of bring down the percentages. But I guess if we had the same-store statistics to show clearly it could illustrate that actually assisted living has been ticking on a same-store basis.

Okay. Then another thing I wanted to get a grasp on is basically what are the yields that you focus on when you're looking at properties to dispose of? So is there a target yield when you're thinking about, I guess, selling off these properties?

Yes. And there is two camps. There is properties that are underperforming. And we are selling them because we don't believe they will turn around and so we sell them off. So they are typically losing money, so there is no real cap rate.

In the case of three of these -- actually all four of these properties are in the skilled nursing side that we sold -- we were able to obtain cap rates in the 8% to 8.5% range, which I think is actually very attractive rates from our perspective to skilled nursing to sell at.

And when we consider that decision, we are trying to evaluate what the use of proceeds are for those investments -- those assets, because the best we can do is turn them around and reinvest in assets at 7.5%, 8.5%. So that goes into our calculus.

Then I also had a question on yield as they regard your capital expenditures, the ones that you are buying back or basically investing on. So what sort of yields do you envision or did you have for the CapEx on senior housing for this past quarter?

This past quarter we funded about $4.5 million into a senior living facilities, so we get a yield about 8% back on that funded amount.

Is that true for MOBs as well?

MOBs, we don't get -- they are not producing any revenues coming back like that. So they're just putting capital into the buildings for improvements, but no return on those.

Okay, and is 8% like a fair yield going forward, I guess?

On the senior living side, yes.

Okay, all right. That is good for my line of questioning.

Jerry Doctrow, Stifel Nicolaus.

David, just a quick follow-up. I think you had said on the Bell portfolio that things were trending positive. I was wondering if you could just clarify maybe where occupancy -- I think you maybe specified in the original press release where occupancy was when you acquired, and I was curious where maybe occupancy is today?

Like I said, the occupancy is up slightly. It is a portfolio so there are couple of assets that are probably the same or maybe a little bit lower, while most of the others are up. So I think on managed properties there was about 85% at the time of our announcement. They is still, I would say, in the aggregate about 100 basis points higher than that. But there is a lot of efficiencies that Five Star can bring to the table on the operating expense side of things.

It is good to hear that they are trending higher. Okay, that is all for me. Thanks.

Back to Mr. Dave Hegarty.

I want to thank you for joining us today. In September we have the Bank of America Merrill Lynch global real estate conference, and a JMP Securities health care conference, both in New York City, so we hope to see some of you at one of those conferences. Thank you.

That concludes our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.