Diversified Healthcare Trust (DHC) 2011 Q4 法說會逐字稿

Good day, and welcome to the Senior Housing Properties Trust fourth-quarter and year-end 2011 financial results conference call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to the Vice President of Investor Relations, Tim Bonang. Please go ahead, sir.

Thank you, and good afternoon, everyone. Joining 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, 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, February 16, 2012.

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 normalized funds from operations, or normalized FFO. A reconciliation of normalized 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 annual report on Form 10-K, to be filed with the SEC. Investors are cautioned not to place undue reliance upon any forward-looking statements. And with that, I will turn it over to Dave Hegarty.

Great. Thank you, Tim. And thank you all for joining us on today's call. The fourth quarter culminated an active year for our Company. We added quality assets to our balance sheet and maintained our record of increasing the dividend at least once a year for over 10 years. The full benefit of the work we have accomplished this year may not be recognized right away, although we are planting the seeds for future growth, which is appealing to our income (inaudible) and long-term investors. For the fourth quarter of 2011, we reported normalized funds from operations, or normalized FFO, of $0.42 per share; and this compares with normalized FFO of $0.44 per share that we reported for the same period a year ago. In 2011 full year, we reported normalized FFO of $1.73 per share, versus normalized FFO of $1.71 per share a year ago.

As noted in our investor presentation from February 2011, we outlined our business plan for 2011, which contained a dual-acquisition focus to acquire properties in the medical office building space at cap rates between 7% and 9%, as a means to diversify our portfolio; and to continue to seek out senior living acquisitions in the private pay space, because we strongly believe in the fundamentals of this industry. 2011 was a very successful year, as we announced over $1 billion of acquisitions in the private pay senior living and medical office building spaces, growing the size of our total portfolio to almost $5 billion. Our business plan for 2011 also included maintaining our historically strong financial profile. We maintained our investment-grade ratings of [BAA] from Moody's and [BBB-] from Standard & Poor's. We also continued our historical practice of balancing debt and equity.

During the year, we raised $432 million in two equity offerings and $550 million in two debt offerings, keeping leverage at a conservative 43% of total book capital -- or alternatively, 39% of total undepreciated book capital. In 2011, we saw a tremendous opportunity to acquire once in a generation senior living assets with high growth potential. The occupancies in both of the senior living portfolios we acquired were below historical averages, and we believe there is significant growth potential to grow our returns as the economy recovers. If you look at the relevant senior housing industry data produced by the National Investment Center for the senior housing and care industry, or NIC, only independent living showed improvement in occupancy and rent growth, particularly in the Southeast during the fourth quarter of 2011; and was the seventh consecutive quarter that the overall industry saw occupancies increase. Given that a majority of the senior living units we acquired in 2011 were independent living, many of which are located in the Southeast, we believe these figures bode well for us as the industry moves from stabilization to the recovery phase; and we can achieve upside potential in all facets of senior living rebound.

Looking also at the medical office acquisitions we made in 2011, these help to further diversify our revenues and position us to take advantage of the growing demand for healthcare services. We have seen occupancy holding steady at well over 95%, and we have experienced strong rent growth from renewals made during the year. Our growth in 2011 positioned the Company to greatly benefit from future demand in the healthcare industry and to grow our initial returns. Historically, we have expected to make around $200 million of non-portfolio, core-type acquisitions on an annual basis. And given that we are now a larger Company in terms of total assets, I would expect our run rate to be between $300 million and $400 million of core acquisitions, excluding any large portfolio transactions we make.

Accounting for acquisitions under agreement -- 94% of our portfolio is NOI and is derived from properties that are primarily private pay and not government-dependent. We continue to have the lowest exposure to the skilled nursing facilities out of the large healthcare REITs. Although many of the operators and other healthcare companies felt the impact of the recent Medicare cuts to skilled nursing providers, this was essentially a non-event for our portfolio. And lastly, but most important, is our dividend. Our Board raised the dividend in October of 2011 by 2.7%, and we are currently operating at an annualized dividend rate of $1.52 per share, which represents a dividend yield just under 7% and maintains a comfortable payout ratio of normalized FFO. Let me now provide you with an update on the acquisition activity that transpired during the fourth quarter. Since October 1, 2011, we have acquired or are under agreement to acquire 21 properties, for an aggregate purchase price of $723 million, at cap rates between the low 7% to about 9%. During the quarter, we acquired 12 of the 21 properties for $423 million.

Starting off with our senior living acquisitions -- in mid-December, we completed the majority of the acquisition of the nine-community portfolio being sold by [Vee], or formerly Hyatt. We acquired eight communities, including the assumption of $131 million of mortgage debt, for a total of $379 million. While they had no material impact on our fourth-quarter results, we anticipate that they will contribute nicely to our 2012 performance. We expect to acquire the ninth community, which is located in New York, for $99 million, including $32 million of mortgage debt, in the second half of 2012. As anticipated, this acquisition has been time-consuming due to the regulatory and licensing approvals in the state. Next, also in December, we acquired a senior living at community outside of San Francisco, in a community called Walnut Creek, California, with 57 assisted living units, for $11.3 million. The occupancy of the property was 90%, and the community is 100% private pay. And lastly, in February of 2012, we acquired a senior living community in Alabama with 92 assisted living units for $11.3 million. Occupancy there was 87%, and the community is private pay also. All of these acquisitions will be managed by Five Star Quality Care, under long-term management arrangements for our taxable REIT subsidiary, or TRS.

Moving on to our medical office acquisitions -- in November, we acquired two Class A medical office properties built in 2005, containing over 45,000 square feet, in Richmond, Virginia $11.4 million, including the assumption of $9.6 million of mortgage debt. At the time of the acquisition, these properties were 100% leased to three tenants for 6.5 years, and the major tenant is HCA, the nation's leading provider of healthcare services. Also in December, we acquired another Class A medical office building, with 94,000 square feet, in the Indianapolis market for $21 million. This property was built in 2007 and is 95% leased to eight tenants for an average lease term of almost 10 years. We currently have eight properties under agreement to acquire, for approximately $289 million. Three are senior living communities that we expect to acquire sometime in 2012. They were part of previously announced portfolio acquisitions in 2011 totaling $144 million, including $37 million of mortgage debt. We also have under agreement one additional senior living community containing 87 independent living units, and four medical office buildings totaling approximately 500,000 square feet, all located in four states for approximately $145 million, including the assumption of $52 million of mortgage debt.

Now I would like to discuss the performance of our triple-net senior living properties. As a reminder, our tenant statistics and those of our peers are reported a quarter in arrears. Five Star, our largest tenant, earlier today reported net income from continuing operations of $1.11 per basic and $1.05 per diluted share for the quarter ended December 31, 2011. Now, their financial results had some one-time items included; and even taking those into account, they met consensus and were still able to maintain profitability for the twelfth quarter in a row. In the 12 months ended September 30, 2011, occupancy increased in two of the leases and declined in the other two. The decline is mainly attributable to their skilled nursing portfolio. Rental coverage on an [EBITDARM] basis for each lease was between 1.13 times for the smallest lease and 1.48 times. We have reviewed their fourth-quarter results after considering the Medicare reductions, and found the impact to their coverage ratios is only about five basis points.

For the fourth quarter of 2011, Five Star reported a sequential increase in occupancy; and if you look at the industry data, Five Star's results are very much in line with the overall industry trends. Our other tenants also performed well during the same period. The 14 properties we lease to Sunrise increased their rental coverage to 1.6 times. Occupancies held steady at 89%. At year-end, Sunrise notified us that they will be terminating their lease agreements upon renewal for 10 of the 14 properties they currently lease from us, which mature on December 31, 2013. The leases for all 14 properties could only be renewed with an extension of Marriott International's guarantee, and Sunrise had to let us know their intentions by December 31, 2011. Marriott and Sunrise agreed that starting on January 1, 2014, Marriott will only continue to guarantee four of the 14 properties. Sunrise will continue to lease all 14 communities through year-end 2013, with a Marriott guarantee, and we will continue to evaluate our options for the other 10 properties over the next two years. The cash flows from the 10 properties covers the total current rent by 1.3 times.

Meanwhile, our properties leased to Brookdale were 92% occupied and covered their rents by over two times. The occupancy across our five private operators increased 20 basis points to 84%, and rental coverage increased to 2.8 times. Our two wellness center tenants continued their rental obligations at over 2 times. I want to take a minute to discuss our new [idea] structural line of business, which currently represents approximately 12% of our invested assets. Occupancy at year-end for this portfolio was 84%. At December 31, we have 22 private pay communities with just over 3,000 units of independent and assisted living in our TRS. We began adding properties to our TRS during the summer of 2011, and several more assets were added in mid-December of last year. We plan to provide more property-operating statistics in the future, as we grow this business and the results become more meaningful.

Now looking at the medical office building component of our portfolio -- we own almost 8 million square feet of medical office space. As of December 31, 2011, occupancy at our medical office buildings was 96%. During the quarter, 77,000 square feet was renewed, and we had new leases for 6,000 square feet. Rental rates on renewals increased 4.3%, compared to previous rates. Tenant improvement and leasing commissions for the quarter were $1.1 million; and for the full year, they were $6.9 million. We have been successful in renewing leases with our medical tenants, and our historical retention rate has been over 90%. Having said this, we are aware of some headwinds going into 2012. One tenant who leases 124,000 square feet of biotech lab space from us has given us notice of their intent not to renew their lease when it comes due on March 1. This nonrenewal may impact us by approximately $1.5 million annually until the space is released.

Looking forward, we will continue to look to acquire medical office properties that meet our investment criteria, and to increase the size of our medical office portfolio over time. In January of 2012, we hosted a property tour for several of our sell-side analysts, and institutional investors at one of our premier medical office buildings in Los Angeles, California -- the Cedars-Sinai medical office towers. The two medical office towers are connected by a walkway to the medical center and the complex contains over 330,000 square feet plus 1,700 parking spots in two adjacent garages, and the annual NOI generated is just under $19 million. These buildings are leased to the Cedars-Sinai Medical Center, the largest nonprofit hospital in the Western United States, and a large number of private-practice physicians. It consistently maintains near 100% occupancy, with rental rates at approximately $70 a foot and 4.5% -- [4.05%], rather, annual growth rate. The strong tenant and financial performance of this property makes it a large contributor to our overall MOB portfolio performance. And with that, I will turn it over to Rick Doyle, our Treasurer and Chief Financial Officer, to discuss our financial results.

Thank you, Dave, and good afternoon, everyone. For the fourth quarter of 2011, we generated normalized FFO of $67.9 million, up 19% from $57.2 million compared to the same period a year ago. On a per-share basis, normalized FFO for the quarter was $0.42 per share. Our results for the quarter were negatively impacted by several factors -- the timing of acquisitions, the deployment of capital proceeds, the impact of lease valuation amortization of recent acquisitions, and the significant cash balances we maintained on deposit for our acquisitions. Also, the fourth-quarter results do not reflect a full quarter's earnings from acquisitions we made during the quarter. In early January, our Board declared a quarterly dividend of $0.38 per share, which represents a 90.5% payout ratio for the fourth quarter's normalized FFO. Percentage rent revenue from our senior living tenants for the full year of 2011 increased 9.7% to $11.3 million, versus same period last year. $3 million of percentage rent is included in our fourth-quarter calculation of normalized FFO, whereas $2.6 million for the fourth quarter of 2010. In addition to occupancy and rate growth, our percentage rent increased due to the addition of 11 senior living communities we acquired in 2009, based on 2010 [base share] revenues.

During the quarter, total revenue increased 40% to $136.6 million compared to last year. We now have over 550 tenants generating these revenues. The majority of this growth was due to approximately $1 billion of investments we made in 2011. We invested $336 million in medical office buildings, $656 million in senior living communities -- of which $556 million of these investments were in senior living communities leased to our TRS. We also invested $33 million in revenue-producing capital improvements at our senior living communities. The increase in revenues was offset by a reduction in rental income, resulting from the sale of seven properties for approximately $40 million during 2011. We recognized $15.3 million of residents fees and services at our managed communities. Residents fees and services are the revenues earned from the approximately 2,900 residents at the 22 managed senior living communities we have acquired since June 2011 that are leased to our TRS.

Property operating expenses for the quarter increased from $6.4 million to $27.1 million compared to last year, which is in line with our expectations for growth in expenses. We reported $14.7 million of property operating expenses for our medical office portfolio, and $12.4 million for our managed senior living operating communities leased to our TRS. Depreciation expense increased quarter over quarter by 34%, to $31 million. General and administrative expense increased 22%, to $6.5 million. Our G&A represents 4.8% of revenues and 15 basis points of average total assets, which is lower compared to the same period last year. The quarterly increase in revenues, property operating expenses, depreciation expense, and G&A primarily relate to the 78 properties we acquired in the purchase of approximately $41.4 million of revenue-producing capital improvements made to our senior living properties, offset by the reduction in rental income resulting from the seven properties -- all of which happened since October 1, 2010.

Interest expense for the quarter was $27.4 million -- 31.5% increase from last year. This increase relates primarily to $217 million of assumed mortgage debt on certain acquisitions, two issuances of unsecured senior notes in 2011, offset by the amortization of mortgage debt and the reduction in variable rate of interest applicable to one mortgage loan. On a quarterly basis, we evaluate our portfolio for impairment and performance; and during the fourth quarter of 2011, we recognized an impairment of assets charge of $796,000 related to one underperforming property. During the full year 2011, we recognized impairment charges of $2 million, which reduced the carrying value of four properties to the estimated fair value. At December 31, 2011, two of our properties were classified as held for sale. The gain on the sale of properties of $21.3 million in 2011 was a result of the sale of four skilled nursing facilities, one assisted living community, and two medical office buildings during the second quarter of 2011.

Now, let's turn to the balance sheet. During the quarter, we acquired nine senior living communities and three medical office buildings, for a total of approximately $423 million, and invested $7.4 million into revenue-producing capital improvements at our leased senior living communities. We funded these acquisitions with the proceeds from our December debt offering by assuming $140 million of mortgage debt, by using cash on hand and borrowings under a revolving credit facility. The average interest rate of the mortgage that we assumed is 5.9%. Also during the quarter, Five Star paid -- repaid $10 million of borrowings under their bridge loan with us. At December 31, 2011, $38 million was outstanding and no additional borrowings were available. The bridge loan matures on July 1, 2012, and we expect Five Star to repay us while we have the option to convert certain private pay properties to a sale-leaseback. In fact, on the earnings call earlier this morning, Five Star discussed that they are working with lenders to negotiate a new $150 million revolving credit facility, with some of their own private pay communities as collateral. We think is a positive sign of the health of Five Star's balance sheet and financial capacity.

In October 2011, we issued 9.2 million common shares in a public offering, raising net proceeds of approximately $185 million. We used the proceeds to repay borrowings outstanding under our revolving credit facility. In December, we sold $300 million of 6.75% senior unsecured notes due in 2021, raising net proceeds of approximately $292 million. We used the proceeds of this debt issuance to repay borrowings outstanding under a revolving credit facility and to fund part of the [Vee] acquisition of mid-December. At December 31, 2011, our total debt was approximately $1.8 billion and our equity was $2.5 billion, for a ratio of debt to total book capital of 43%. On a market basis, our debt to total market capitalization was 33%.

At the end of the quarter, we had nothing outstanding on our revolving credit facility, four series of unsecured senior notes totaling $975 million, and mortgage loans and capital leases totaling $862 million. On January 17, 2012, we repaid the $225 million of [8.625%] senior unsecured notes that were at maturity, using borrowings under our revolving credit facility. We also expect to repay the $48 million of mortgage loans that are due in 2012, as they mature. As of year-end, and excluding our 2012 maturities, 94% of our debt is not due until 2015 or later. Today, there is $276 million outstanding on our $750 million credit facility and $474 million available to borrow. And with that, we will turn it over for questions.

(Operator Instructions) Daniel Bernstein, Stifel Nicholas.

I had a question on the actual operating TRS portfolio. How much of that is currently in lease-up and not stabilized?

Let's see, I would say there is really only one property in Lake Spivey, Georgia, that is probably about 70% occupied. And that -- it was about that level at the time we made the acquisition. Everything else is pretty much stabilized assets, that range from, say, 80% occupancy to low 90% occupancy.

So, you are expecting the upside basically from improving senior housing fundamentals?

Correct.

Were all the TRS acquisitions in the quarter related to previously announced acquisitions? Or did you buy anything new in the quarter that you just decided to put in the TRS? And in that sense, are you looking for more acquisitions to grow your TRS portfolio?

The only one that was added during the quarter was the property out in Walnut Creek, California -- it was a one-off deal. And then, subsequent to quarter-end we have added the Alabama property. I would say for the foreseeable future, anyway, that most properties will be just added to the TRS, to make it stronger -- and also, I believe that there is, at least for the foreseeable future, greater upside potential.

Are there any other -- are you looking to further dispose of any assets, particularly like in senior housing or MOB, that is just not as high-quality? You have already disposed of a lot of your [SNIF] portfolio or culled your SNIF portfolio. Are there a lot more assets on the senior housing side or MOB that you think could be culled this year?

I do not expect many. We are always looking at the portfolio, and I would expect over the course of the year we will probably cull a couple of properties on the MOB side. We still have a portfolio of roughly 40 skilled nursing facilities that we would consider selling in components over the course of the next several years. Maybe if the right situation -- the majority of the portfolio we might sell at once. But it is something that optimally we intend to exit.

And the last question I have is -- are you looking at any development opportunities? I know you fund some of Five Star's CapEx and perhaps expansions, but do you see any development opportunities in the senior housing space? Or do you see that becoming more attractive relative to the acquisitions?

Well, we are not going to get into the development business in the foreseeable future. As you said, we do have situations where I expect our funding will ramp up more, on adding additional wings or units to buildings. We do know that there have been blueprints here and there of -- like an assisted living facility to be built on the grounds of the campuses that we currently own. So, I think that -- I do see some opportunity there, but we are not going to go into it significantly in the near term.

All right. Thank you.

Todd Stender, Wells Fargo Securities.

Just to clarify, the December acquisition of the Walnut Creek asset -- that will go into a TRS?

That is correct.

Okay. And then, same with the February acquisition of the one in Alabama?

Yes.

Right, but a couple thoughts on that -- one is, that when you are buying individual assets and [selling], you actually do get an initial return more comparable to what we used to get in a traditional sale-leaseback. And then, we believe that there should be more upside in the nearer term, just because of the fundamentals of the industry. So, net-net, we think from our perspective that we will probably get a better return at the current time, in doing a sale-leaseback.

Sure. And I don't know if I missed this -- did you give the initial yields on both of those properties?

I did not. I would say, in both cases, that they are in the upper 8% cap rates.

Okay. And going back with the life science asset, with the March lease expiration -- what market is that in? And if you could kind of go through what the in-place rents are, and then maybe what the market rate of rent is?

That property is in the mid-Atlantic. I think probably on the next call we can give a little more detail on it. But it is a biotech space that they are consolidating on, and therefore vacating it. Our current rent we are getting there was, triple-net, about $12 a foot. So, it really will be -- the whole new economics will be probably significantly different, because I envision we would probably have to redesign a fair amount of the space and do a lot of buildout for the next tenant. I think it's too early to speculate. At the moment, we don't have a particular candidate for that space, so I can't quantify yet the extent of the capital improvements that we would have to do to it. $12 triple-net for biotech space is not all that pricey; but again, we could do a significant amount of capital improvements and end up with a much higher rate.

Sure. Would this be a candidate for disposition, or really do you like where the asset is positioned?

It's a potential situation for disposition.

Okay. And then, moving towards -- terming out your line balance, does preferred come into the equation for you guys this year? We have seen some of the other REITs start to look at the preferred market, as pricing has been pretty attractive. How do you think about that? And where would a preferred price for SNH?

We are always considering a preferreds, Todd, and that is definitely one of our options. The pricing might be around the 7%, 7.25% mark.

Okay, and thanks. And last question -- the growth in 2011 was tremendous for you, and it looks like you are on the right pace for 2012. How do you think about building out your top Management ranks to accommodate this growth? Have you thought about that, or how Senior Management might expand, just because of the sheer size of your portfolio?

Sure. Well, I guess what you don't see, and most of the people probably on this call don't see, is that we are part of a larger organization with REIT Management and Research. And we do have multiple divisions within the Company. And as new properties are added to the portfolio, people are being added to the ranks to take on more responsibility or realign responsibilities. I would say REIT Management is currently up to about 780 employees at this time. So, it's -- so although, for the most part, you see Rick and I and Tim and Beth, that -- most of the presentations and tours and stuff -- in fact, at the Cedars-Sinai tour, people did have or get -- did have an opportunity to meet the Property Manager for the Cedars-Sinai property, who has been there well over a dozen years. And then, you have the Regional Vice President based in Sacramento area for REIT Management and Research. So, there is a deeper bench, just -- you just don't necessarily see them at investor conferences or on these calls.

Okay. And does that get layered into your G&A? How do you account for that?

Well, it's not incremental. As we make investments, there is a standard 50 basis points on investment assets for the new investments; and that encompasses all incremental costs and stuff that we would incur for that.

Okay. Thanks, guys.

(Operator Instructions) Tayo Okusanya, Jefferies.

I may have missed this, but the $144.8 million of deals that you guys have under purchase agreements right now -- could you give us a sense of what cap rates you intend to buy those asset at?

Well, the $144 million is just a partial of the acquisitions we have under -- the $144 million represents the previous amount of acquisitions. The property in Yonkers, New York -- it's part of the Vee property, and then the two -- another property of the [Belt]. So, the $144 million really represents those -- those are the old. We do have new pending acquisitions that are about $145 million.

I'm sorry, that is what I meant -- the $144.8 million, or $145 million.

So, you want the $145 million?

Yes.

Those -- the $145 million is senior housing and medical office. I would say the average is a little over 8.5% for a going cap rate.

That is helpful. And then, the November deal -- the two properties located in Virginia.

Yes?

It's a relatively small deal of $11.4 million, but it has $9.6 million of debt against it. And I was curious what your appetite was to do deals that have meaningful amount of leverage behind the building already?

Obviously, it does enhance our return on the cash we put into it. We do look for opportunities to pay off that debt. Most of the debt that we are assuming tends to have four to five years left on the term. So, we would have quite a bit of refinancing to do in 2015 and '16, on those types of mortgages. I think we try to focus on $10 million and up for acquisitions. And given that it's very nice buildings with great tenancy, such as HCA, we are very happy to do those. We have to do more of them, obviously, to add up to a few hundred million dollars.

But the debt-to-asset ratio being almost 90% is not a real concern?

No. Obviously, for our case, we prefer debt-free. We would love -- we actually do better when the -- something is 50% levered, because it limits the competitors vying for those assets. This one, there is a roughly minor amount of equity; but I think we have all the resources and capabilities to add these to our portfolio, [with] $5 million. Not really a lot of extra effort to do it.

Okay. Last question -- one of your peers announced this morning a fairly large JV deal in Canada. I don't think you are interested in Canada, but I'm curious what you have seen on the US front, in regards to acquisition opportunities with fairly sizable senior housing or MOB portfolios?

There is a couple out there of decent size. We do see these -- we did look at that Canadian transaction. And I think there will be plenty of opportunities for the healthcare REITs in this upcoming year.

Across all property types, or specific property types?

What I am more seeing is in the senior housing and skilled nursing area, which is -- obviously, skilled is not something we are pursuing, but there are some opportunities out there of decent size. And then, medical office, there is a couple portfolios of a couple hundred million dollars in size, and then a fair amount of one- to three-property size portfolios in the medical office side.

Great. Thank you.

James [Molam], Sandler O'Neill.

I wanted to ask a quick follow-up on the coverage ratio, given the CMS cuts -- you said five basis points out of the fourth quarter. Was that an annualized impact, or just what you have seen so far for the trailing 12 [months]?

That was actually just Q4 annualized. So, it's not -- it doesn't have the historical up through September 30 results impacting that; it's just looking at Q4 times four.

Got it. Okay, thanks. And then, I was wondering if you could give us a little more color -- the acquisition leases that are amortizing in has a negative impact. Can you tell us what deals those relate to, and maybe what the amortization time period is for that? And if we should look at that as kind of the run rate, going forward, or not?

Yes, that impacted us for a full quarter here. Those are leases that we assumed, and you have to do the above- and below-market rents on those. It affected us, and you can see that in our supplemental, where it affects us about $481,000 for the fourth quarter. These leases, on average, are about four or five years out; so you will see that on the quarters. And that number changes as we acquire other properties with in-place increases and they net against each other. But for the fourth quarter, it affected us about $481,000.

Okay. So, obviously, there are more deals to close, but we can think about that as being what is in the existing portfolio, on a go-forward basis?

Yes.

Okay, great. Thanks. And then, I wanted to ask a follow-up on the balance sheet -- what are you seeing in terms of the unsecured market? And you had talked about a term loan in the fourth quarter as being a potential opportunity for you. What are you thinking in terms of those options, just looking out into 2012?

Yes, that is another option that we have to raise some capital, as Todd asked earlier. The preferreds in these term loans are attractive rates out there, so we are in favor of looking at those and considering those in the future.

Have you gotten quotes on either an unsecured, a 10-year, or maybe it's a shorter term loan, recently? Do you have any idea where the price --

Well, on those term loans, they are usually 5-year, and you probably saw a couple of 7-years out there. You don't see them, really, in the 10-year, and you never really know what the return until you are negotiating. But there are some rates out there that are sub-5% or right around 5%.

Okay, and then -- I'm sorry, on a 10-year unsecured, do you have any idea where that might price right now?

I would think in -- once again, you don't know until you are negotiating, but I would think around a 6% 10-year.

Okay, great. Thanks. And then, my last question -- what are you looking at when you look at 2012 from a same-store cash NOI basis for MOBs and operating senior housing -- what do you think reasonable expectations are going out this year?

You raise an interesting question, because our financials and our discussions of results are on a GAAP basis, down to the FFO level. And as a result, we have about a 1% same-store growth rate on a GAAP basis, so anytime the straightline rent is essentially smoothed out to show no growth. But on a cash basis, you have to go further down to look at the FAD or AFFO and so on. And we have not really published numbers from our perspective from that. But typically, the cash side for us would be more closer to the 3%, 3% to 4%. Like I mentioned, the leases that we have renewed in the quarter have typically been in the 4.3% rate increases we have been able to achieve. But I think I would say on a cash basis, we are in the 3% to 4% range.

Okay, great. Thanks, guys. Appreciate it.

Jorel Guilloty, Morgan Stanley.

I was looking in your MOB leasing summary -- specifically, I was looking at the weighted average lease terms by square feet for the renewals. And I noticed that for the first three quarters that you have on the supplemental, the years are about -- the lease terms are about 7, 7.5 years; and afterwards, it goes to around 5. I was wondering if you can provide some color on the reduction in the lease terms.

Let's see, I'm not sure that I know exactly where you are focused on, but we have -- this is on the whole portfolio, and not just the -- okay, we have medical office and senior housing. Typically, we have some long-term leases for, say, a biotech space, and certainly our senior housing properties are all long-term. And this includes senior housing.

On page 25 of the supp?

Page 25? I'm on page 27.

Yes, page 25.

Sorry.

No worries. So, if you look at the weighted average lease term by square feet years, you have renewals; and then you have, from 12/31/2010 through 6/30/2011, the lease terms are about 7 to 7.5 years. And then, they go --

I see -- you are saying as time has gone on, the terms get shorter.

Yes.

Yes. And that is a very interesting insight you have picked up on, is that the more we are into that multi-tenant and medical office buildings, the more people are only doing leases for three to five years. So, you have that factored in. And then, properties that were in, say, the 12/31/2010 base that had longer lease terms will just -- another year or so has burned off those lease terms. So, between the combination of the two, I would say today the average lease term is this 5.5-year term for the MOBs. So, it's a function of the longer-term lease assets having some lease term burn-off, and in addition, most of the newer multi-tenanted properties coming online are in that around five years, plus or minus, for average lease terms.

Okay. You had renewals at 4% spread, and that is GAAP, right? On a cash basis, how much would that be?

Let's see, we are still achieving pretty much in the 2.5% to 3%, on a cash basis.

Got it. And is this something you would expect to see go on during 2012?

I would. Obviously, as the economy picks up more steam, than we can push for more increases than we currently have. And right now, it's -- obviously, it's a balancing act depending on what market you are in and how much you feel you can push rates. In some cases, we are making a little bit of a concession in exchange for getting some more term. Other markets -- certainly, like in Cedars-Sinai, waiting list and we just figure out how much we are comfortable pushing rates there.

Thank you. And in terms of -- still sticking to the MOBs, your margins are about 77% on a same-store basis. Would you say that is your target margin, or could you see that trend up?

No, I think that is pretty much the target we will be at.

Got it. I also -- touching on the financing strategy for 2012, you mentioned that all options are open. I wanted to get an idea of what your optimal leverage ratio would be.

I think pretty much keeping it around the level we are at today, plus or minus the 42% or so, is where we are comfortable at.

Historically, we have been lower than that; but as are we growing and we are a bigger Company, and we are hitting the $5 billion mark, the 40% to 45% is a spot that we are comfortable at.

And that is debt to undepreciated book?

That is the high 30%s right now. And we can see that being there -- I was talking about total book capital.

I'm sorry, what was that?

I was talking about total book capital from 40% to 45%, and maybe high 30%s, undepreciated.

And how does that play into your ratings? How do the ratings agencies -- you have a sense of -- you were previously 10% lower, or that was your target; now you are more comfortable at 42%. How is that perceived by them?

My impression is that they are still very comfortable with the leverage ratios. They thought the other leverage ratio was conservative. And given the size of the Company, and also given the fact that skilled nursing was a bigger component of our -- on a percentage basis of our portfolio, they thought it was wise to maintain a low leverage ratio. I think as we have grown, they have seen a lot of the investments going into medical office buildings and further diversifying the revenue stream. So, I believe they are very comfortable with this new level for us. And if you were to look at the other healthcare REITs, I think we are in the ballpark of pretty much most of the other healthcare REITs.

Okay. In terms of the properties you have agreements to acquire in 2012, focusing on the senior housing asset, do you plan to structure that acquisition as an RIDEA investment?

Yes. I would say for the foreseeable future, I anticipate most of our senior living assets will be put into a RIDEA structure.

Got it. Is that a symptom of -- or is that a result of where we are in the cycle, generally speaking, in the economic cycle?

Yes. It's a combination of current market conditions for acquisitions. But in addition, we do believe that the wind is at our back for the next several years. So, it's an opportunity to capture above-average returns.

Okay. And in terms of the Sunrise assets, as soon as those come off from Sunrise as the operator, do you -- is there any thought into putting those into RIDEA as well?

It's an option. Especially if they cover total rent -- base rent plus percentage rent, they cover 1.3 times. That allows you to put in a management fee arrangement and still have a bump in performance for us. Plus, I think that there is more upside potential at those properties. So, yes, it would lend itself to RIDEA format, but the jury is still out as to what we want to do or if we can work something out with Sunrise, alternatively, that is also on the table.

What is your optimum RIDEA exposure?

It's not an exact science, obviously, but I would say it's around 20% to 25%.

And in terms of yields you are seeing right now for independent versus assisted living, could you comment on those? I know earlier you said you have been seeing yields between the 7% and 9% range. I just wanted to get a little more granular as to -- between those two senior housing property types.

Well, I think there is a swaying right now in the viewpoint of independent living versus assisted living. I think independent living has been sort of batted down the most in this recessionary period, and they are starting to rebound right now. Having said that, I think individual independent living properties still can be bought at pretty decent cap rates, in the 8%s, in many cases. A lot of it depends -- if you are a standalone, independent living facility based in Washington, DC, the cap rate is going to be a lot lower than something in the Midwest or other parts of the country. And then, similarly, with assisted living, I think assisted living is probably trading at a bit lower cap rate than independent living. And there is always a portfolio premium.

Yes. And when you think -- you said from now on forth, you would probably be looking more at putting senior housing assets in a RIDEA structure rather than triple-net structure. What sort of a premia would you allocate when you make that decision? So, what would be the premia going from RIDEA to triple-net? Or vice versa?

Well, I think part of it, too, is the competitive landscape. If you do want to acquire an asset or a portfolio of assets, then you are going to have to pay up for that. And as a result, you may settle for something in the 7%s for a cap rate. And the whole reason you want to acquire those assets is you believe that there is a decent amount of upside potential. It's very difficult to compare that to a theoretical sale-leaseback that you may not be able to achieve in this marketplace. There is very few sale-leasebacks being done out there. And if you are going to bid on 8% or higher cap rate for a sale-leaseback, I don't know if you are going to get it; I don't know if that deal will happen.

Got it. One last question -- for the 2012 acquisitions, you said that they basically will happen in 2012. I guess there was no specificity as to when they will actually happen; I was wondering if that is something you can provide?

Well, the acquisition -- the ones that -- the $144 million that are under agreement from this past year -- really, it's likely more to happen around the end of the second quarter, early third quarter.

Yes.

So, those -- you are talking specifically about the senior living community and the four MOBs, right?

No, the old ones. The senior living communities and the four MOBs are the new pending ones that [we announced] today.

Yes, yes.

Dave was mentioning the other buildings that we were previously announced in 2011, we don't expect to close until the end of the second quarter or sometime during the second half of 2012. And that primarily relates to regulations.

Yes.

The new ones, we do have some assumed loans to go through, we don't feel they will be closed or have any impact on Q1, but we do feel those will close sometime during Q2.

Okay, so the $145 million -- so, the four MOBs and one senior living community, it likely will close next quarter?

Sometime during next quarter, right.

Okay, great. Thank you very much for answering my questions.

Derek Bower, UBS.

Going back to the 10 Sunrise leases -- can you remind me, what is the difference between that 1.3 coverage that you just stated and the 1.6 that was in the press release from December?

The difference is percentage rent.

Oh, it is? Okay.

Yes, on base rent.

And so, what would be your -- can you remind us what you would underwrite a new senior housing triple-net lease to, on a coverage basis?

Typically, it would be around 1.15 to 1.12, in that range.

Okay, so it's still above your range?

Yes.

This is Ross Nussbaum. So, is the issue basically that you are just trying to extract higher rent out of Sunrise, in either exchange for the fact that you view their credit as being weaker without the Marriott guarantee? Or you view underwriting to be different, if you will?

It's still very preliminary; we have two years to work something out. And I think we also have to have more clarity on the status of Sunrise as a company, going forward. So -- and I don't think I can comment that much more on that. But there is cushion that we could -- clearly, the other four leases that have a Marriott International guarantee could continue on as they were originally underwritten. But now, if you take the Marriott International guarantee off that, then that -- clearly, Sunrise should not get the same pricing as if they had a Marriott guarantee. So, that might be a solution, is to work out different pricing on the rents. We have a few options on the table.

Okay. We appreciate it. We will stop our questions there, as opposed to the guy who just asked 50. Thank you.

Philip Martin, Morningstar.

A couple quick questions -- number one, on the Marriott, on the Sunrise portfolio on the 10 assets that are not guaranteed by Marriott on a go-forward basis -- fundamentally, and operationally, are they performing at a much different level? Or even from a risk-reward standpoint, can you characterize the 10 versus the 4?

Sure. The other 10 are fine properties. They are -- obviously, they were originally operated or built by Marriott, and Sunrise was more than happy to operate them. So, I think the one key difference is the four properties that Sunrise and Marriott are willing to stay on are just located in the mid-Atlantic and in Florida, whereas these other properties are located scattered around the country. I think part of it is the concentration. There is a mirror image of the Boca property that they are not renewing on, and it's a beautiful property built by Marriott. It's just -- you have to realize too that we don't know the specifics of the relationship or the deal between Sunrise and Marriott, but it is costing Sunrise a significant sum to keep Marriott on the guarantee. So, that had to be a factor into their consideration on how many properties they were willing to pay Marriott to stay on.

Exactly. Okay, okay. Now, shifting gears a little bit -- your pipeline, going forward, et cetera. Value-add deals versus stabilized -- again, it looks like the RIDEA structure is going to be a big focus for you in 2012. Are there a fair amount of value-add deals in this market that you are seeing?

There are a number of value-add deals. We are not a big pursuer of them. But there are a number of situations where they are -- you need the right personnel, or somebody ran out of capital to continue to turn them. [Fair] and quite a bit of CCRC entrance fee product type out there that still needs to be straightened out. But none of those are our particular investment parameters.

So, it's -- and, again, I know you are not a big developer and will not be doing that going forward. But from a redevelopment and a repositioning standpoint, repositioning from a management of the property or redevelopment, you are seeing those -- I'm just looking at the potential growth within the RIDEA structure that we could try to get some handle on.

Within SNH, or in the industry?

Within SNH.

Well, our growth is going to be just -- again, there is a vehicle to use RIDEA for redevelopment and so on; but that is not what we are going to do. We will do incremental things to improve the operations at properties we do -- are putting into it, as well as expansion. Many of the properties we have do have parcels of land adjacent to it that have potential for expansion. So, I can envision us doing that type of growth and so on.

Okay, that was my next question -- so, there is a fair amount of expansion space associated with your pipeline?

[Many of them.] Correct.

Okay, okay. Thank you.

That is all the time we have for our question and answers today. I would like to turn the call back over to Dave Hegarty. Please go ahead.

Great. Thank you all for joining us. And in two months, we will be doing this again. Thank you. Good-bye.

That does conclude our conference for today. Thank you for your participation, and for using the AT&T Executive Teleconference service. You may now disconnect.