Diversified Healthcare Trust (DHC) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Good day and welcome to the Senior Housing Properties Trust third quarter 2011 financial results conference call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations, Mr. Tim Bonang. Please go ahead, sir.

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, October 27, 2011.

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 for operations, or FFO. A reconciliation of FFO to net income and the components to calculate AFFO, CAD or FAD are available in our 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 Form 10-Q to be filed with the SEC. Investors are cautioned not to place undue reliance upon any forward-looking statements.

And now I would like to turn the call over to Dave Hegarty.

Great. Thank you, Tim, and good afternoon, everyone. I'm happy to report another active quarter for Senior Housing Properties Trust, one in which we increased the dividend and positioned ourselves for continued long-term dividend growth.

For the third quarter of 2011, we reported normalized funds from operations, or normalized FFO, of $0.43 per share, and this compares with $0.42 per share we reported for the same period a year ago. And for the nine months ended September 30, 2011, we reported a normalized FFO of $1.30 per share versus $1.27 per share a year ago.

Now let me review some of the highlights for the quarter. In October, our Board of Trustees raised the quarterly dividend payment by $0.01 per share to $0.38 per share. On an annualized basis, we're paying $1.52 per share. This represents an 88% payout ratio of our third quarter's normalized FFO. The dividend was increased based upon the growth opportunities in the pipeline and our Board's confidence in the Company's cash flows.

As Tim just stated, in our supplemental we provide the components to calculate funds available for distribution, or FAD. We believe if you were to calculate our payout ratio on an FAD basis, it would be in the low 90% range. The dividend is our highest priority, and we've always maintained sufficient cash flows to sustain the dividend and prudently grow it over time. Currently our dividend is an attractive yield for investors, at about 6.8% per annum.

We continue to be active on the acquisition front. We have announced over $1 billion of acquisitions this year. And since the beginning of the third quarter, we have acquired, or are under agreement to acquire, 33 properties in the private-pay senior living and medical office spaces for an aggregate purchase price of over $800 million. During the quarter, we acquired 18 of the 33 properties for $234 million.

And let me review the status of our acquisitions announced to date. Back in March of this year, we announced we were acquiring a portfolio of 20 senior living communities located in the Southeast from Bell Senior Living for $304 million. We split up this portfolio by leasing five communities to Five Star Quality Care and by leasing the other 15 communities to our taxable REIT subsidiary, or TRS, and hiring a manager to operate those properties.

At the end of the second quarter, 14 properties had been acquired, four of which were properties leased to Five Star, and the other 10 leased to our TRS. Moving into the third quarter in late July, we acquired three senior living communities, and in early August, we acquired an additional senior living community, all located in Florida, with a total of 473 units for $62 million, including assumption of $25 million of mortgage debt.

Now, three of those four communities are being leased to our TRS, and the fourth is being leased to Five Star. We expect to acquire the remaining two managed communities for approximately $45 million by the end of the first half of 2012. The closings of these properties have been held up by various closing conditions and third-party approvals, including HUD. We are excited to have these 20 communities become part of our portfolio and look forward to their full contribution beginning in 2012.

Next, in late July we acquired a medical office building located near Gainesville, Florida, with over 32,000 square feet for $5.2 million, and assumed $3.7 million of mortgage debt. This medical office building, which was announced on last quarter's call, is the last of a four-building biotech campus affiliated with the University of Florida. And along with this acquisition, we acquired 47 acres of land for $4 million adjacent to the campus, which could be used for potential development for biotech companies.

At the end of September, we acquired 13 medical office buildings located in eight states with 1.3 million square feet from CommonWealth REIT for $167 million. These properties are 95% leased to over 100 different tenants, with a weighted average remaining lease term of five years. Some of the major tenants are Cardinal Health, Boston Scientific, Abbott Laboratories, Winthrop University Hospital, and Stryker Corporation. And this acquisition terminates the right of first refusal that existed between SNH and CommonWealth, as substantially all the properties subject to this right have been purchased by SNH.

This acquisition helps us to continue to diversify our portfolio by tenant, product type, and geography. MOBs now represent 32% of our invested assets and 31% of our NOI. We also have agreements to acquire one senior living community and three medical office buildings for an aggregate purchase price of $44 million, including the assumption of $9.7 million of mortgage debt. The senior living community and two of the medical office buildings were announced last quarter, representing approximately $23 million of that price. We expect to close on these acquisitions by the end of 2011.

And finally, the highlight of the quarter was in early September, when we announced an agreement to acquire nine upscale senior living rental communities operated as Classic Residence by Vi, formerly known as Hyatt, for $478 million, including the assumption of approximately $164 million of mortgage debt. The portfolio contains over 2,200 independent living and assisted living units, with a portion dedicated to Alzheimer's care. We expect to close on the acquisition of the majority of these communities by the end of 2011.

The acquisition of one of these communities for approximately $100 million is not expected to close until the second half of 2012 due to certain required approvals and licensing in New York State. We expect all these communities to be leased to our TRS and managed under similar contracts that exist today. Currently the contracts call for the manager to be paid a management fee of 3% of revenues and an incentive fee of 35% of the net cash flows after the properties have achieved a priority return to us.

The nine communities were 87% occupied at the time of our underwriting. About four years ago, these properties ran at 94% occupancy, and we believe we can ultimately meet or exceed this historical performance over time. Pictures of these properties, displaying their location and high quality, are available on the presentation found on the front page of our website. We look forward to the performance of these properties contributing to our operating results, again beginning in 2012.

In mid-October, we issued 9.2 million common shares of stock in a public offering, raising net proceeds of approximately $185 million. We used the net proceeds to repay borrowings outstanding on the revolving credit facility, which we had used to fund our acquisitions.

Now I would like to discuss the performance of our senior living tenants. As a reminder, our statistics and those of our peers are reported a quarter in arrears.

Our largest tenant, Five Star, today reported net income from continuing operations of $0.08 per basic and diluted share. And for the past 12 months, they've earned net income from continuing operations of $0.57 per diluted share. For the 12 months ended June 30, 2011, the occupancies in two of the Five Star leases declined slightly, while the other two remained unchanged. The drop in occupancy was principally due to clients in skilled nursing occupancy. Rental coverage on an EBITDA basis was between 1.1 times and 1.5 times for each of these leases. And for the third quarter, Five Star reported a sequential increase in occupancy, which is in line with the NIC MAP industry data.

Our other tenants also performed well during the same period. The 14 properties we lease to Sunrise covered their rental obligations by 1.56 times. Occupancies held steady at just under 90%. Our properties leased to Brookdale were 92% occupied and covered their rents by over 2 times. Occupancy across the five private operators decreased 30 basis points to 83.8%, but rental coverage was consistent at 2.5 times.

Our two wellness center tenants covered their rental obligations, again, over 2 times, and that's held steady over the past year.

Moving on to the medical office building component of our portfolio, today we own almost 7.5 million square feet of medical office space. And within our definition, medical office building are properties primarily used for clinics, outpatient centers and doctors' offices, biotech laboratory and research, medical equipment manufacturing, and other medical-related services.

Our three largest tenants in this portfolio, representing over 20% of our MOB revenues, are Aurora Healthcare, Scripps Research Institute, and Cedars-Sinai Medical Center. As of September 30, 2011, occupancy at our MOBs was 96%, and during the quarter, 197,000 square feet was renewed, and we had new leases for 11,000 square feet. And the rental rates on the renewals increased, on average, about 3.25%, and the new lease rates increased 19.4% compared to the prior tenant's rental rate in place.

The tenant improvement and leasing commissions for the quarter were $1.6 million, and for the nine months ended this quarter, were $5.8 million.

We have an extremely high-quality portfolio that's been put together through a disciplined approach that has yielded rational book values based on units, square feet, and beds, and we maintain this high-quality portfolio by consistently reinvesting in our properties.

Over the past decade, all of our acquisitions have focused on real estate with private-pay revenue sources. And in turn, we have been gradually selling off government-dependent real estate. So approximately 94% of our total revenues come from properties where the revenues are derived from private sources, which is the highest percentage out of all the healthcare REITs that have senior living assets.

We continue to believe there are numerous opportunities to continue to invest in both the senior living and medical office industries.

And with that, I'll turn it over to our Treasurer and CFO, Rick Doyle, to discuss the third quarter financial results.

Thank you, Dave, and good afternoon, everyone. For the third quarter, we generated a normalized FFO of $65.4 million, up 22% from $53.5 million for the same period a year ago. On a per-share basis, normalized FFO was $0.43, up 2.4% compared to $0.42 a year ago. Earlier this month, our Board declared a quarterly dividend of $0.38 per share, an increase of $0.01 per share from last quarter's dividend payment, which represents a payout ratio of 88% of our third quarter's normalized FFO. Percentage rent revenue from our senior living tenants for the third quarter increased 7%, to $2.9 million versus the same period last year.

Looking first to the income statement, total revenues increased $32.3 million in the third quarter, or 40%, to $113.3 million compared to $81 million during the same period last year. During the quarter we recognized $10.7 million of residents' fees and services at our managed communities. Residents' fees and services are the revenues earned at the 13 senior living communities we have acquired since June 2011 that are leased to our TRS.

Depreciation expense increased quarter over quarter by $6.3 million, or 28%, to $28.8 million. Property operating expenses increased $15.2 million to $19.8 million, which is in line with our expectations. Property operating expenses are primarily related to our medical office buildings, but now include expenses incurred at our managed senior living communities. We recorded $11.2 million of property operating expenses for our medical office portfolio and $8.6 million of senior living operating expenses for the third quarter.

General and administrative expense increased $1.1 million to $6.6 million. Our G&A was 5.8% of revenues and 20 basis points of average total assets, consistent with prior reporting periods.

The quarterly increase in revenues, depreciation expense, property operating expenses, and G&A primarily relates to the 68 properties we acquired since July 1, 2010, and the purchase of approximately $42 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 July 2010.

Interest expense for the third quarter was $4.5 million higher versus last year. The increase relates primarily to the amortization of deferred financing fees, commitment fees related to our new $750 million revolving credit facility, and the January 2011 sale of $250 million of five-year unsecured senior notes with an interest rate of 4.3%. The new revolving credit facility closed on June 24, 2011, and the amortization of the new deferred financing fees and the fee on the increased capacity of the revolver resulted in an additional $600,000 per quarter of interest expense.

During the quarter we recorded a $1 million impairment charge related to an assisted living property which is classified as held for sale. We recognized acquisition costs during the quarter of $2.6 million, which was solely a function of transaction volume.

Now let's turn to the balance sheet. During the third quarter, we acquired four senior living communities and 14 medical office buildings for a total of approximately $234 million and invested $10.6 million into revenue-producing capital improvements. We funded these acquisitions with the proceeds from our July equity issuance by assuming $28.9 million of mortgage debt, by using cash on hand, and borrowings on our revolving credit facility. As we have mentioned, we will be assuming mortgage debt along with some of the acquisitions we have announced so far this year. For your modeling purposes, the average interest rate on these mortgages is approximately 6%.

In May, we entered into a secure bridge loan agreement with Five Star for up to $80 million to help finance their acquisitions of six private-pay senior living communities in Indiana. During the quarter, Five Star borrowed $39 million and completed the acquisition of the remaining four of the six communities. At September 30, $48 million was outstanding, and no additional borrowings were available. The bridge loan matures on July 1, 2012.

At September 30, 2011, our total debt was approximately $1.6 billion, and our equity was $2.3 billion, for a ratio of debt to total booked capital of 41%. On a market basis, our debt to total market capitalization was 33%. At the end of the quarter, we had $210 million outstanding on our revolving credit facility, three series of unsecured senior notes totaling $675 million, and mortgage loans and capital leases totaling $724 million.

Looking at our upcoming debt maturities, we have $225 million of unsecured senior notes due in January 2012 with a high interest rate of 8 5/8%. In addition, we have $48 million of mortgage notes due in 2012 with a weighted average interest rate of 6.7%. We are looking for accretive opportunities to refinance these notes. Other than the 2012 maturities, 96% of our debt is not due until 2015 or later.

In October, we completed the issuance of 9.2 million common shares in a public offering, raising net proceeds of approximately $185 million. We used these proceeds to pay down most of the balance outstanding on our credit facility, and today we have almost the entire $750 million available. After paying down the credit facility, our debt to total book capital rose from 41% to approximately 34%, not including pending acquisitions.

To conclude, for the remainder of 2011, we will remain focused on refinancing our upcoming 2012 debt maturities, executing on our acquisitions under agreement, and continuing to seek out new accretive acquisitions in both the senior living and medical office building spaces.

And with that, we'll turn it over for questions.

(Operator Instructions.) Jana Galan, Bank of America.

Given that you have about $550 million of acquisitions under contract, can you walk us through how you're thinking about your intended capital structure for these transactions?

As you obviously know, we raised the equity recently, so that paid down our line of credit almost to zero. And so we have the capital available to close on everything we've committed to close on. We would expect to access the debt markets when the market is open and fluid. I think, again, our transactions probably aren't closing for, say, another 30 to 45 days or so, so we've got time to keep an eye on the window for possible debt. And that will probably be our major source of financing for the next several months.

And I think we'll try to keep the balance of debt and equity still -- right now, it's around plus or minus 40%. And that's on a net book basis, not a gross assets basis. So just taking it off the financial statements. So I think it's still running at a pretty conservative level.

Thank you. And then I was hoping if you can let us know, for the Five Star lease number for those 25 properties, are they primarily assisted living, or are they more rehab or skilled nursing?

It's a combination of all three. They do include some skilled nursing in there, maybe one-third, and then the rest is IL and AL properties, communities.

Yes, and there's no rehab in that particular lease.

Thank you.

Todd Stender, Wells Fargo Securities.

Just looking at the bridge loan to Five Star, if Five Star pays down the balance -- do I have this right? The loan itself goes down. It's not like it's an existing or outstanding line of credit?

No, they can't borrow or re-borrow. They actually borrowed the maximum that they can, Todd. As of September 30, $48 million is outstanding, and there's no availability for Five Star to borrow any more.

Okay, so if that goes to $28 million, they can't bring it back up.

Yes, they can't bring it back up. It just keeps on going down until it's fully paid.

Okay, thanks. And just looking at your pending acquisitions, most of which, I guess, or several of which have the assumption of debt, is this normal, would you say? Or are we in the middle of something where we're just seeing more distress or more motivated sellers because of debt maturities?

Not necessarily at this point. I do think that that's something that's going to continue to play for the next year or two, where CMBS debt or other debt is coming due and people have to do something. But in our case, ewe valuate each thing, and our preference is to pay off debt if it's economically feasible. And so what we have determined to assume is debt that the prepayment penalty is not too onerous or they're in a lockout or something of that nature. So it's not voluntary that we're assuming this debt; it's more that if we want to buy these assets, it's something we have to do.

And I would say that there probably are some cases where things are being triggered by debt maturities. And I know in some cases, debt has already matured and extended for one or two times -- one or two years, let's say -- and I think the lenders finally got tired of extending. But the bulk of these transactions are just either investors have reached their maturity date for the investment and want to exit. There are a couple of individual situations where maybe other of the investor is strained from other debts that they have that's forcing them to sell. But that's not the case, certainly, with Vi. That's another different situation.

Okay, thank you. And if you can just comment on current pricing on initial lease yields, just looking at the difference between assisted living and independent living, and any improvement in pricing with independent living, because maybe it's more economically sensitive right now.

I really don't think cap rates have changed that much. I do think that it's been a little quieter for competition in the marketplace. So maybe to some degree, I think maybe cap rates have moved up a little bit, if we had a number of transactions to point to. We are seeing, on occasion, deals that have come to market and they did not get the pricing that they wanted or expected that have been pulled from the market. So maybe we are running up against some resistance where cap rates will move up a bit. But I really haven't seen a great shift in any valuations at the moment.

Okay, thanks. And just looking, and your disclosures of the medical office portfolio are much improved, so thank you. I wondered if we could see, in the future, how you're thinking about breaking out the RIDEA portfolio, of maybe of just looking at rental rates, maybe some CapEx expectations. Any color about that?

Yes. Obviously, we've just so far dipped our toes into a RIDEA structure, so I don't think the material would be particularly meaningful yet. But we are really going to be an operator in the space going forward, so I do believe as, when we close these transactions, that we're going to enhance our disclosure and provide more operating-type statistics and data that will help you evaluate the results of those operations.

Great. Thanks, guys.

Jerry Doctrow, Stifel Nicolaus.

A couple of things. You did provide bits and pieces of data on the existing TRS or RIDEA stuff, and I just wanted to clarify that. There's an occupancy number on page 7 which is a Company profile, and it was a little unclear to me on the footnote whether that was like quarter end or that was the average since you owned them. And I'm just trying to sort out what the number is, if you could. It's like 82.8%.

That's the averages since we've owned them, Jerry.

Okay. And again, I understand that you don't have that much of that stuff yet. You will get disclosures going forward. But I think, Rick, you said -- and this is as I calculate it as well -- when you take the expenses, all the property operating expenses, and you subtract out the MOBs, for which you give us details like $8.6 million on the senior housing side, which is like only a 19.8% operating margin. So I was wondering if -- it sounded a little light -- whether there were startup costs or other things in there and where that margin you think might be headed as we settle down.

Yes, you're absolutely right. There are some startup costs there that we have to hit right away, and we do feel that that margin will increase up to about the 30% to 35% mark.

And I also think, too, that one of the difficulties of providing meaningful data to everybody that they can follow this through is that these transactions are closing in phases. So, for instance, the Bell properties, some of the properties closed in June, some in July, one in August, and there's still a couple more out there that may not close for another several more months. And I would say those assets that are yet to close also have the highest profit margins and highest occupancy levels of the group.

So our return on the assets at the moment is probably lower than what the original whole package was underwritten and described as. So once those properties come into the fold, then we'll have the full economic benefit of all that, and we should, I would say, meet or exceed the original published cap rates and so on.

Okay. That's fine. That's helpful. And how about, David, while we're on that, just in terms of CapEx spending? So with Bell, particularly, since that's on the books now, and on Vi as well, but particularly on Bell, are there CapEx needs that we should be thinking about that are meaningful once you get those properties on the books?

No. When we bought those assets, we knew what we were getting, and across all portfolio, there are really very little significant projects.

Yes, there's no immediate needs. These properties are just five years old, on average, and stuff, and I think it's just going to be the normal $750 to $1,000 per unit maintenance CapEx.

Okay, okay. That's fine. And then just, I don't know if you can give us any more color on Vi. Again, particularly that one is so big that a month, one way or the other, actually is going to make a difference in the numbers. So are we talking at right at year end? Are we talking a month, December 1 or something -- any sense at this point?

I would say probably unlikely December 1. I would say, probably for your analysis, I would assume probably the end of the month. If we can get it closed during December or earlier, we will do so, and we'd love to do so.

You'll be working Christmas Eve there?

Maybe.

Okay. And then, the other thing that I think Rick touched on, and maybe there's one question on, so the refinancing -- obviously, you've got the $225 million that you're going to refinance earlier in the year, plus some of those mortgages have to get refinanced. And you indicated, I think, you might want to term out some of the debt you'll put on the line as these acquisitions close. And I think Rick alluded to that you're looking at options there.

So I have two questions. One, any more color on financing? Are there prepayment penalties, whatever, on that, that make it unlikely you'll do it too early? And then second, just maybe remind me where you are with rating agencies and that sort of stuff and any expectation you have for unsecured debt costs.

On the $225 million that's due in January, there is a make-hold provision up to the last day. But we will be looking to now until then that we might even refinance that prior to maturity. We do have about $550 million of pending acquisitions that have assumed debt to those, and we do have the capacity today on our revolver to close on all those with the assumption of debt. Some of those acquisitions, like the Vi property located in New York, that's $100 million. That's going to be pushed out to probably the second half of 2012, so there's some time that we need financing for that. But initially, that's what we normally do, is to acquire these properties, throw them on the line of credit, and figure out how we're going to finance them on a long-term basis.

Okay. And where do you stand with rating agencies and that sort of thing? Any sense? Do you have any sense of where, if you financed, did $500 million worth of 10-year paper today, any sense where those costs would be?

We recently have had conversations with them, and they're very comfortable with our position at the moment. And they know that if we did take on some more debt, they're not concerned about it. I don't think we --

And the pricing on that's tough to tell now because there's not a lot of activity in the market to really price it out, so we don't know where the pricing would be. Not too long ago, we would say, and maybe still say, that a 10-year note would probably be sub, below 6%.

If it was easy, Rick, I wouldn't ask the questions.

Yes, well, it's never easy.

Okay. And then just last thing I had, just acquisition levels. I think, David, you indicated that CommonWealth is kind of done. You also indicated that you thought there was a pretty rich environment, maybe, for acquisitions. So any sense about acquisition volume, maybe, for next year, or typical acquisition volume? And then mix and cap rates? My assumption is there won't be more MOBs at 9.2 to 9.5, kind of where you were from CommonWealth. So just your thinking about costs and mix and volume, maybe.

Sure. I'd say we still see plenty of activity. I'd say the larger deals we're seeing at the moment are on the senior living side of things. As you know, I couldn't have told you that this year we'd do $1 billion. I would never have predicted that at the beginning of the year, so you just never know how successful you'll be. But I always feel that we're going to customarily do $150 million to $200 million of bread-and-butter one-offs and small portfolio transactions. So again, I'd think that we'd probably do at least a couple of hundred million dollars of that type of product, of the one-offs and small portfolios, and hope that we do better than that.

As far as cap rates or rates that we would expect to earn on those types of investments, I think we're going to probably average around the 8% level on a current basis, maybe even higher on a GAAP basis. And that's because, certainly if you're dealing with the one-offs and so on, you're not going to get the premiums that would attract real competition from all the other healthcare REITs and some of the other private REITs and the others.

So, and certainly, in senior living that's true, too. One-offs are going to get a higher cap rate, for sure.

Okay. Okay, that's helpful. I think that's all for me. Thanks.

Jorel Guilloty, Morgan Stanley.

I just wanted to pick up on the transaction pipeline question that Jerry was asking about. So specifically, you had mentioned on the 2Q call that you had a $1 billion pipeline. Is that still the size that you're seeing, going forward? Or has that diminished, considering you've already announced two-thirds of that since your 2Q call?

We're always looking at, I'd say, several hundreds of millions of dollars of opportunities at any given time. I think all the big deals at this point have been announced. But I would expect, again, we should be able to do a number of individual transactions and then, hopefully, land one or two of the larger ones -- say, a couple of hundred million dollars.

So as far as -- I think I'm a little uncomfortable with the term "pipeline" in the sense that deals that are likely to happen, I wouldn't say is $1 billion. Deals we're looking at and so on, we're looking at, certainly, I'd say $0.5 billion right now. How many of those are actually going to turn, to come out to fruition, I couldn't tell you right now, because I'm not sure how lucky we'll be.

Okay. And considering all the macro headwinds, has this affected your view on using a TRS or RIDEA structure on future acquisitions? And also, has it affected your view on performance for this structure in the interim?

No. I think fundamentally the story still makes sense. I believe that maybe things have deferred a bit from when people expected things to really take off. But I do think that fundamentally, over the next several years, the RIDEA format is going to be positive, have greater growth than otherwise we could attain. But so the fact that we're running into some more headwinds economically, I don't think undermines the thesis. So I don't expect any real change in our strategy.

And also in the near term, you don't expect your expectations for performance to be affected as much? Or do you think it hasn't changed?

It really hasn't changed. I think we have bottomed out, anyways. The timing could be deferred, maybe, another six months or something like that, but the fact that our transactions in and of themselves take six months to a year to ultimately be all consummated and closed, that we will be picking up from there. And I do expect that the economy is picking up, albeit slowly, but I think it's picking up from here.

Got it. And also, so the NIC MAP data, which you referenced earlier, came out earlier this week, and it said that independent living is up 40 bits sequentially, assisted living's up 10 bits. True, this is not on a same-store basis, but it seems like it's getting better for IL versus AL on that basis. So do you expect that independent living will pick up meaningfully in the near term, whereas assisted living will stay rather flat?

No, I think both sectors will pick up. I think assisted living really hasn't had as big a dip because it's a need-driven business more than independent living is. But I do think independent living has lagged because it took a bigger dip, but it should come back. Now, I mean, our investment with the Vi properties is about three-quarters independent living and one-quarter assisted living. So, obviously, we are making a significant bet on the IL coming back as it had in the past. And that's typically the greater-margin business, too, once it does come back. So, now in Central, we are, obviously, very optimistic and putting a lot of money on the bet that independent living will come back strongly.

And one last question on transaction velocity. So from your previous commentary, you said that it seems like it's pretty much eased up. So do you expect this to be the normal transaction velocity, say, for the next year or so?

Yes, I would say so. I don't think we're going to change any, change in our strategy for the next year or so.

Okay. And that's true, as an agent, you think it's true like, just for the senior housing market as a whole?

Obviously, I really can't comment to what other companies will do for strategy for the next year or so, but I do think that the fundamentals are going to pick up and that it just has to. Given the lack of new inventory coming online, absorption is picking up, and I think it's more a little bit of patience for it all to be approved, and it's just taken a little longer. But I do think everybody will continue on with their basic strategies.

All right, thank you very much.

(Operator Instructions.) Frank Morgan, RBC Capital Markets.

Two questions here. First, I'm curious. Have you talked with your SNF operators about the cut that is now going into effect, the 11% cut on that, and really, the impact on coverage and, really, the mitigation strategies that they're developing to deal with that? One, that's the first question.

The second question, as you look at -- you were starting to talk a little bit about lack of capacity development. But are you seeing any kind of pickup on either side, maybe either on the assisted living or dementia side versus the independent living side from a development standpoint? And would that be having any impact on overall growth in occupancy or absorption? Thanks.

First off, the question about the cuts in Medicare rate reimbursement. One of the things, obviously, I didn't discuss in our prepared remarks, because we feel that our exposure is about 4% of our NOI from Medicare and Medicaid-based facilities. So in our view, if we sold them tomorrow and wiped them out of our portfolio, we still would be able to comfortably pay our dividend.

But we have talked to our operators, and clearly, they're feeling an impact since October 1 in the rates. Many of then have mitigated some of the damage, probably about one-third or so of the rate reductions. And I think that people are obviously anxious to see what's going to come in December for further cuts, if any. Well, there will be cuts probably, anyways.

But we believe that the effect on the coverage ratios, there will be some effect, but it won't be significant enough to impact the ability to pay the rent to us, which might be a 50-basis-points or 75-basis-points drop in the skilled nursing component of their coverage.

As far as new development, no. I do believe that there are many developers out in the wings that are very anxious to try to get developing. However, I commonly hear the theme that they just cannot raise enough money to go out and do it and have the staying power to fill up and so on. So, again, that's the key to it all; it's going to be when the capital starts flowing, and it's not flowing as of now. And I don't anticipate it to open up, certainly for, say, the next six months, anyways, which means I obviously think it's going to be better for existing operators in this environment.

Okay, thank you.

That concludes the questions, so I'd like to turn this over to Mr. Hegarty.

And I thank you all for joining us today. And we will be in Dallas for the NAREIT Conference in November, and we look forward to meeting with many of you at that conference. Thank you. Have a good day.

Ladies and gentlemen, that does conclude our conference for today. You may now disconnect.