Diversified Healthcare Trust (DHC) 2012 Q1 法說會逐字稿

Good morning, and welcome to the Senior Housing Properties Trust first-quarter 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. The floor is yours.

Thank you, and good afternoon, everyone. Joining me on today's call are David Hegarty, President and Chief Operating Officer; and Rick Doyle, Treasurer and 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, April 30, 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 funds from operations, normalized funds for 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 filings with the SEC. Investors are cautioned not to place undue reliance upon any forward-looking statements.

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

Thank you, Tim. And thank you all for joining us on today's call, and good afternoon to you. For the first quarter of 2012, we reported normalized funds from operations, or normalized FFO, of $0.45 per share. And this compares with normalized FFO of $0.44 per share that we reported for the same period a year ago. Our first-quarter results were in line with our expectations, as we continue to absorb the new properties that we acquired at the end of last year. During the quarter, we saw above-average rental rate increases on new leases executed at our medical office buildings, and also experienced modest occupancy and rate growth in our private-pay Senior Living communities. We still maintain the highest percentage of private-pay assets in the industry, with 94% of our NOI derived from properties where the majority of revenues are from the residents' or tenants' private resources.

Our dividend yield continues to be very attractive at about 7%. And our balance sheet remains conservative and well managed. Recent data published by the National Investment Center for the seniors housing and care industry, or NIC, showed modest occupancy growth year over year, and sequentially for both independent and assisted-living properties during the first quarter. According to the recent quarterly NIC report, the seniors housing average occupancy rate has risen consistently during the past eight quarters, and is 1.3 percentage points above its cyclical low in the first quarter 2010. They also note that construction of new senior housing inventory remains muted. And construction of a share of existing inventory declined quarter over quarter. All of these statistics continue to support our thesis of investing in private-pay senior living communities, with its potential for occupancy growth and continued muted supply.

Our acquisition activity was modest during the quarter. We closed on the acquisition of a 92-unit senior living community in Alabama, for $11 million in February. We continue to work through several acquisitions under agreement, which we've discussed on previous earnings calls. To recap, we currently have $258 million of previously announced acquisitions under agreement, which includes the assumption of $89 million of mortgage debt, made up of four senior living communities in South Carolina, New York, and Missouri, and three medical office buildings in Georgia and Hawaii. We expect to acquire the majority of these acquisitions under agreement within the next three months. But these would have minimal impact on the second quarter's results. One senior living community in New York, which was part of the V transaction for $99 million, for $32 million of assumed debt, is still expected to close sometime during the second half of this year.

One medical office building acquisition for $70 million is under agreement in Hawaii. And it's a property that we believe is a solid investment with long-term growth opportunities. It's a 203,000-square-foot building with a 500-car parking garage attached. And it's located adjacent to the Straub clinic and hospital, which is part of an A-rated healthcare system in Hawaii. It's 100% occupied with a waiting list of physicians and other healthcare providers. Earlier this month, we terminated an agreement, which we announced last quarter, to acquire one medical office building in Connecticut, with 171,000 square feet, at $31.5 million.

We have $71 million of new acquisitions under agreement, including assumption of $25 million of mortgage debt. During March and April, we entered into agreements to acquire four senior living communities and two medical office buildings. The four private-pay senior living communities will be triple-net leased to a new private operator. These communities contain 511 units and are located in Colorado, Idaho, and Washington.

The two medical office buildings contain 127,000 square feet. One is located in Massachusetts and is leased to an investment grade-A healthcare system. The other is located in the greater Washington, DC, area and is multi-tenanted. Our expected weighted average GAAP yield on these acquisitions is 8.2%. And the expected weighted average cash yield is 7.7%. We continue to monitor the acquisition landscape and have seen individual assets and small portfolios across the senior living and medical office building spaces to consider. On the last call, we discussed that we expect to make between $300 million and $400 million of core acquisitions on an annual basis. And we feel confident in our ability to grow and diversify the portfolio, although it may be more back-end loaded for 2012.

Moving on to the performance of the triple-net lease senior living tenants in our portfolio, as a reminder, our tenant statistics are reported a quarter in arrears and are based on the 12 months ended December 31, 2011, to eliminate seasonality. For our properties leased to Five Star -- our largest tenant, and one of the top five independent assisted-living providers in the United States -- occupancy increased in two of their leases and declined in the other two. Occupancy trends have been flat to modestly increasing for independent and assisted living, while skilled nursing has been on a steady decline. These results are in line with what the industry's been experiencing. Rental coverage on an EBITDA basis across all four leases ranged between 1.14 and 1.44 times. Coverage was down only a few basis points from the prior quarter on three of the leases. And we attribute this relatively minor decline in rental coverage to the skilled nursing Medicare cuts that went into effect in October of last year.

The properties we lease to Sunrise Senior Living reported particularly strong rental coverage of 1.6 times and steady occupancy of 90%. The four properties that Sunrise has exercised its renewal option on, and was able to secure a Marriott International guarantee for, had coverage of 2 times with occupancy of 93%. The 10 properties they will not be operating after the lease matures had 1.3 times coverage, and occupancy of 87%. Our properties leased to Brookdale Senior Living were 92% occupied and covered their rents by over 2 times. Occupancy across our five private operators was 84%, and rental coverage was 2.8 times. Our 10 wellness centers continue to perform amazingly well, maintaining coverage ratios in excess of over 2 times.

Now, looking at our managed senior living operating assets, we have 23 properties with over 3,000 units, which represent a 9.5% of first-quarter NOI. Occupancy averaged 87.2% for the quarter. Since taking on these 23 properties, starting in second quarter of last year, we've seen performance improve, which was in line with our expectations. For the first quarter, the NOI margin for these properties was 28%, which was an increase over what we underwrote, but we believe there is significant room for improvement over time. We believe that having and growing these operating assets to a reasonable size as part of our portfolio mix provides us higher growth opportunities, supported by favorable supply-and-demand demographics. The managed portfolio adds significant diversification to our revenue stream. Like multi-family assets, our credit risk is the 3,000-plus seniors renting apartments from us, and not the manager we hire. Although we like the growth prospects to manage senior living assets, our large and stable triple-net lease portfolio continues to provide stability to our cash flows.

I recently visited several of our TRS operating assets from the Florida market, including communities in Boca Raton, Pompano Beach, Plantation, and Hollywood. And occupancies were in the 90% range and the properties were in great physical condition. One of the most dramatic positive changes in our TRS portfolio was a community we own in Teaneck, New Jersey. When we underwrote the deal, occupancies averaged high 70%, and this quarter the average occupancy was 88%. These successes came in spite of the fact that six of our TRS assets were briefly closed for admissions during the quarter due to spells of the norovirus. I want to mention we've included additional metrics in our senior living operating properties in our first-quarter supplemental package, which we believe will be helpful for investors to evaluate the performance of these properties. In the future, we will provide more meaningful same-store comparable data and other data as it becomes more relevant.

Moving on to the medical office building component of our portfolio, we own 108 medical office buildings, leased to over 500 tenants, with 7.6 million square feet, which comprise 31% of our NOI. Same-store NOI growth during the quarter was approximately 4%. And occupancy at quarter end was 94.2%. The sequential decline in our occupancy is mostly attributable to one building that became vacant during the first quarter, which I discussed on our last earnings call.

We plan to reposition this property and sell or re-lease it, which will take several quarters. During the quarter, 22,000 square feet was renewed and we had new leases for 24,000 square feet. Overall, we saw rental rates on newly executed leases and on renewals increase by a strong 17%. The benefits of these increases will be derived in future periods, though. Tenant improvement and leasing commissions for the quarter were $1.5 million.

With that, I'll turn it over to our Chief Financial Officer, Rick Doyle.

Thank you, Dave, and good afternoon, everyone. I will now discuss our year-over-year quarterly financial results for the first quarter of 2012. For the first quarter, we generated normalized FFO of $72.5 million, or $0.45 per share, up 17% in the aggregate, and 2.3% on a per share basis. Earlier this month, our Board declared a quarterly dividend of $0.38 per share, which represents a normalized FFO payout ratio of 84% of the first quarter's normalized FFO.

Looking first at our income statement, total revenues increased 47% to $145 million. This increase was due to several factors. First, we had significant external growth from acquisitions since January 2011 -- we invested $336 million in 28 medical office buildings, and $668 million in 29 senior living communities, and, in addition, we spent $40 million on revenue-producing capital improvements at certain of our senior living communities. Second, we recognized $36 million of residents' fees and services at our managed senior living communities leased to our TRS; as we now have 23 senior living communities leased to our TRS, we expect that, excluding the four properties we have left to acquire in our TRS, and with all other things being equal, $36 million of residents' fees and services is a good run rate. And, third, percentage rent from our senior living operators increased 7% to approximately $3 million, driven from occupancy and rate increases at our triple-net senior living communities; these increases in revenues were offset by the sale of seven properties in 2011 for approximately $40 million, which reduced annual revenues by $3.5 million.

Property operating expenses for the quarter were at $39 million, which was in line with our expectations as we have added a significant number of senior living communities and medical office buildings to our portfolio. Of the $39 million, $14 million was attributable to our medical office buildings, and $25 million to our managed senior living communities. Excluding the 13 properties we have left to acquire, and with all other things being equal, we believe this is a good run rate. Depreciation expense increased by 27% to $33 million. General and administrative expense increased 25% to $7.7 million. G&A is currently 5.3% of total revenues, which is a 90-basis-point improvement over last year.

Interest expense was $29 million, a 27% increase from last year. The increase relates primarily to several factors, including the assumption of $218 million of mortgage that we took on in connection with certain 2011 acquisitions at a weighted average rate of 5.9%, and the sale of $300 million of 10-year unsecured senior notes in December 2011, with an interest rate of 6.75%. The increase was partially offset by the redemption of our $225 million of senior notes in January 2012 and the repayment of one mortgage loan for $12 million in February, with an interest rate of 6%. Today, we've repaid in full 17 mortgage loans for $33 million, which encumbered 17 properties with a weighted average interest rate of approximately 6.95%. The repayment of this debt was funded with borrowings on a revolving-credit facility.

With the exception of the mortgage loans we paid off today, and the addition of $114 million of mortgage debt we expect to assume with pending acquisitions, we expect this level of interest expense to be a good run rate. We evaluate our portfolio for impairments on a quarterly basis. In this quarter we recognized an impairment of assets charge of $3 million related to the recently vacated medical office building in Pennsylvania.

Now, let's move to the balance sheet. In February, we acquired one senior living community leased to our TRS for $11.3 million using cash on hand. And during the quarter, we invested $6.3 million into revenue-producing capital improvements at our senior living communities. Five Star repaid us the remaining $38 million outstanding on their bridge loan with us and the funds were applied to the outstanding balance on our revolving-credit facility. This final payment terminated the bridge loan, as there are no more borrowings available.

At March 31, we had $265 million outstanding on our revolving-credit facility, three series of unsecured senior notes totalling $750 million, and mortgage loans and capital leases totalling $846 million. Our total debt was $1.9 billion and our equity was $2.4 billion, for a ratio of debt to total book capital of 43%. On a market basis, our debt to total market capitalization was 34%. Our credit statistics remain healthy, with debt to annualized EBITDA at 4.6 times and EBITDA over interest expense of 3.5 times. After paying off $33 million of mortgage loans today, 94% of our debt is not due until 2015 or later. Today, there is $235 million outstanding on our credit facility, and $515 million available to borrow.

In summary, we are pleased with the continued performance of our portfolio, amidst the growth of last year. We expect to see a continued growth profile once our acquisitions under agreement are completed. We will continue to be prudent in our acquisition strategy and in keeping our balance sheet well managed and flexible. And we'll keep looking for opportunities to diversify our portfolio mix with both private-pay senior living communities and medical office buildings.

With that, Dave and I are now happy to take questions.

(Operator Instructions) Jana Galan, Bank of America.

Thank you. I wanted to follow up on your TRS operating asset margins and where do you think those margins can get to? Is it driven primarily through occupancy, or are there still expenses that could be taken out?

For the quarter, the operating margin was about 28%. And typically for independent and assisted living properties, they are significantly higher than that. I would say, they probably have another about 10% that they could grow to the mid-30%s for independent living. And if it's running on all cylinders, could certainly even be north of 40%. But I would say this portfolio should, when we get there with increasing occupancy and rates, there's probably still some expense efficiencies that we can obtain. But I would say something mid-30%s would be more appropriate.

Thank you. That's very helpful. And then just quickly on the MOBs, it seemed that renewals were down on GAAP rent. Maybe if you can just touch upon that.

On the new renewals that we entered into this period, we actually have a significant increase in renewals. The rates in the Northeast, particularly the Boston area, as well as the Southwest, the Cedar Sinai and a few properties in Virginia. Where we had a softness was in Long Island area and also some of the other Maryland locations. But overall, I think it was about a 17% increase in new leases and renewals entered into during this quarter.

Thank you very much.

Tayo Okusanya, Jefferies.

Just following on Jana's question. I think she was focused on just the negative change in GAAP rents purely on the renewals, the 22 renewals that you did in the MOB portfolio this quarter. Were there one or two renewals that just skewed the whole number?

It was. I would say there are a couple locations where they did have a decline. Considering there's not a lot of activity that occurs during the quarter, so it doesn't take much to skew it. But on the renewals, yes, pretty much New York was, I would say, the one that had mostly declines on the renewals.

Of about how much, Dave?

Let's see. Those were -- in the Long Island area, was about 11% decline in rates.

Got it, okay. That's helpful. And then just back to the TRS portfolio on the senior housing side. I believe you guys have five acquisitions or so to close. And if I heard correctly, Rick said the run rate going forward would still be about $36 million, which is currently about where it's at right now. Did I hear that correctly, or did I mishear something?

No, that right, Tayo. We expect that to be a good run rate. And as we close on acquisitions, it would increase accordingly.

Okay. So instead of $36 million, the $35.5 million right now is just for the 23 you own. And then as you add more acquisitions then that number will grow?

Yes.

Okay, got it. And the five that you have outstanding right now, if I recall correctly, those are better assets that will automatically expand the NOI margin?

Yes. And since we announced these acquisitions, the properties have been improving. And remember, one of these will not close until the second half of 2012.

Yes, okay. That makes sense. Then the assets that you guys declined to buy after you did the due diligence, could you talk a little bit about that and what caused that?

I can't get into too many specifics, but that was actually a biotech property that, in the diligence, we discovered that they weren't a long-term player for that property and the re-leasing would be very expensive and so on. So we decided to pull the plug on it and terminate the transaction.

Okay. So that was a buyer type deal. Okay, that's great. I'll jump off now. Thank you.

Daniel Bernstein of Stifel Nicolaus.

I also just want to go back over the same-store results for the senior housing TRS. You added one property in the quarter and I just wanted to understand the impact on your results there. It looked like results were pretty good for the quarter, but I just want to understand the impact to that one property.

That was probably the property in Alabama that we added, and that came on, I believe, February 1.

Yes.

And that property actually negatively impacted the operations for the first quarter. What we find is that most of the time it does take a couple quarters of transitional period that, before you exceed what you initially underwrote it at. I would say the Bell properties and the V properties clearly are significantly above what we originally underwrote them at. But the one-off that we've added actually negatively impacts the results this quarter. And what we do find is that there is a transition period where all the linens, the names on the buildings, everything has to be changed over and there's a fair amount of inefficiencies for a quarter or two that we expect.

Was that just the impact then on the margin, or are these properties similar occupancy, similar rate to the ones you have now?

They are similarly occupied, in the mid 80%s -- mid to high 80%s. And the impact has been on the operating expense side of things. So negatively impacted margin at this time.

Thank you for answering that question. Can you go back over the impact of the Norwalk Virus on your properties, if any, on the TRS? I know Five Star on their call earlier today went into a little bit of detail.

It's always very difficult to exactly quantify the impact. But like I said, we had four of the V properties and two of our Bell properties experience the [norovirus] in this first quarter. I think it's about 70 -- 73 days, I believe, it was closed for new admissions. So you have a little bit of period where existing tenants pass away or transfer, but you can't admit till you get a clearance. And so it's very difficult to quantify the impact on occupancy, but it definitely impacted us for a period of time during this quarter.

And you would call it an unusual occurrence?

Yes, I would. It's definitely seasonal. It happens in the first quarter more than any other time of year, but I think that is unusual.

And then on the acquisition pipeline, it's starting off slow. You're still hoping it picks up into the back half of the year. Can you talk about maybe a little bit of the tilt to that portfolio? The acquisition pipeline, is it more MOBs than senior housing, or vice versa? And then maybe a related question would be, you said you would grow the TRS to a reasonable size. Maybe you could talk about what a reasonable size would be and whether you're looking at any additional TRS assets.

Sure. Currently I would say what is in our pipeline is predominantly medical office buildings. So, I would expect the majority of the acquisitions that I can see at this present time would be on the medical office side. I would envision maybe we will probably pick up some individual assets on a TRS basis. And I really don't envision the TRS to grow tremendously. I would think that we'll probably hold it at about 20% of our NOI, in that range. Obviously it's not an exact science. It depends on the size transaction. I don't think we'd want to significantly go beyond 20% in any way.

All right. Thank you for taking my call.

Todd Stender of Wells Fargo Securities.

I think you said this in your opening remarks, that the net lease assets that you acquired in the senior housing space are going to be leased to a private operator. Did I get that right?

Yes, that's correct. It will be on a triple net basis.

Okay. If so, what does the decision revolve around? How come it's not Five Star?

It's a combination of things. First of all, the states that they are in, Idaho and Washington and so on, are states that Five Star does not have a presence in. Also we're comfortable with this operator. I think down the road, we'll provide a little more detail on it. We still have to go through some loan assumptions and license approval and so on. So it's most likely to close about the end of this quarter. And we can probably give more detail on next call. But it's predominantly that cash flow there and Five Star doesn't have a presence there.

Okay, thank you. And just based on your comments before on the Connecticut MOB that didn't make it through the due diligence period, I would think that this would contribute to dispelling some of the notion that SNH grows just for growth sake, based on how RMR gets paid. Do you have any rough percentages of properties that you actually close on to just spell out that quite a few do not get closed on? Maybe it's a lower percentage than investors think.

We see tremendous opportunities come through here all the time and evaluate a number of senor living properties as well as medical office and other types of properties. I would say maybe 25% of those properties actually we enter the negotiation stage. And if we come to an acceptable pricing we'll try to acquire that property. But as you said, things do come up in diligence, some very early. If we hadn't preannounced it, we probably would have killed this deal without mentioning it. And if you look at the fact that we're the fourth largest healthcare REIT and not in the top three, I would say we've been certainly one of the lesser acquisitive companies in our space. If we were acquiring to grow assets, then we should be in the thick of it with the others. But we're much more cautious and we grow slower.

Okay, that's helpful. Thank you, Dave. And this is probably a question for you, Rick. Just with the medical office building becoming so meaningful now. Can you just share what you're budgeting for, for CapEx specifically for the MOB portfolio, maybe a cost per square foot?

We have a budget for the full year of around $12 million for the full year. And that's over 7.6 million square feet.

Okay. And just further with that, could you break out, just for the senior housing assets, the triple net leased versus what you expect for the RIDEA.

Yes. On the TRS for the CapEx, we are figuring between $1,000 per unit a year, which right now would be about $4.5 million to $5 million for 2012.

Okay, thank you.

James Milam of Sandler O'Neill.

Just wanted to follow up on the new triple net senior housing portfolio. Did you guys have the option to use Five Star as the operator? It sounds like you decided to go with the existing. But could you have replaced them if you wanted to? Or was that part of the deal that they would only sell if they could maintain the management?

We could have replaced them. That was an option to us. But again, we chose not to. I think we were happy with the management that was going to operate these properties. Again, Five Star, too, it would have been a new market for them that they don't have an existing presence in. So it didn't make a lot of sense for them either.

Okay, that makes sense. My second question is, the G&A was a pretty big increase over the fourth quarter. Is that just related to the portfolio growth, or was there something else that also caused that large increase?

The G&A is what we expected. It's right in line with our expectations. And the breakout, as I said on the call, was $25 million to the TRSs and the remaining to the MOBs. But it's as expected, and it will grow as we start closing on these pending acquisitions.

Okay, great. Thanks. And then my last one, with about $230 million out on the line of credit and $200 million more of capital you'll need to close these acquisitions over the course of the year, what are your thoughts on permanent capital to finance those acquisitions? Are you looking more equity, unsecured debt, or possibly term loans? And maybe if you could give color on pricing for each of the possible options?

We do have multiple options to look at. And once again, we do have $515 million on our credit facility available. And a few of these acquisitions are going to close over time, especially the property in New York. So we do have some time. But our options would be looking at equity, be looking at the debt market. We'll be looking at a term loan. We don't have a term loan on our books. And we also have an option for preferred. So I think all those options are available to us and we would consider all of them at the time.

Is there any sense of urgency from you guys? It seems like the capital markets are pretty favorable right now. Is it something you would like to prefund with these acquisitions identified? Or are you content, or patient to wait until closer to closing?

It's just all in time. Like you said, we won't close if there's any other activity going. I don't think we're rushing out to any market. We do have time on our side and we do have the availability on the credit facility if something did come up.

Okay, thanks. Let me just ask one more and then I'll be done. It looks like there's a big drop in the lease maturities for 2013. But the total lease maturities over time didn't really decrease by that much. Is that related to the Sunrise portfolio, or is there something else in there, as well?

That does. We moved the four properties that Sunrise extended 'til 2018, so we just moved it down because now it's going to close on 2018 for four of those properties.

Great. Thanks a lot, guys. Appreciate it.

Gerald Galati of Morgan Stanley.

You mentioned that the NOI margin goal for RIDEA asset is 30% to 35%. I was just wondering where you envision that NOI margin being at the end of the year.

I can't tell how fast things will progress. I do expect it will improve from the current 28% today and I do expect occupancy to continue to improve. And certainly, like in the Florida locations, the rates can be pushed. I think expenses will remain in check. So I would hope to be certainly at least at the 30% by year end. One of the other things that's also difficult is that as we add properties in, they may increase or decrease that margin percentage-wise. So I would say certainly the existing portfolio should do better from where it is today. A number of the Bell properties that's still yet to come into the fold have better margins than average, so those would help bring this up. The Yonkers property is the big one that is back to more in the 25% margin. By the time that comes in, hopefully that will be much higher. But those are the variables that would effect that margin.

Thank you. And the other question I had is in relation to your acquisitions run rate. So you had mentioned that the run rate is anywhere between $300 million to $400 million per year. You've already committed to or have closed on $340 million of assets, which is the midpoint of that guidance. I was wondering how much more upside do you see from your committed deals or acquired deals, considering that you're at the midpoint right now of your guidance.

It is very difficult to predict. We seem to manage through, buy $50 million or so each quarter in normal bread-and-butter transactions. And we occasionally hope to win some of these bids on larger portfolios. So I would say you could probably factor in, say, $50 million a quarter, barring something significant.

Got it. Thank you very much.

Derek Bauer of UBS.

I was wondering if you could provide any update on the negotiations, or if there have been any, with Sunrise regarding the 10 remaining assets.

Sure. We're in regular ongoing discussions with them. We don't have anything to report on what's going to happen or where those assets are today. All I can say is we continue to interact with them on possible scenarios.

How active would you say you've been over the last three months, just marketing those assets to other operators other than Sunrise?

Not very, at the moment. I think we still have 18 months left. No, more than that. 20 months left on the lease. So we really can't do anything, if we would have to compensate Sunrise, to walk away from the leases early. So right now, it's pretty much a dialogue with them.

And just in general with negotiations on lease renewals, how long of a timeframe do you typically like to lock up a tenant before the lease expires. Just in generalities, maybe just not even talking about this lease in general. But typically, would you like to have a tenant secured by 12 months or 8, 9 months before?

Typically, if you were to look through all of our leases, it's generally one year to two years per notification period. And then once you know their intentions, then you typically work out a transition with them. It also depends on what states they are in. Like I say, one year is usually adequate, but when you're in New York or California or a few other states, the process can be very cumbersome and last a long time. So it is a negotiation once you line up somebody else. One year is most deals. This deal, we were very fortunate to have a two-year notice.

Got it. Okay, great. Thanks. That's it for me.

Tayo Okusanya of Jefferies.

Thanks for taking my follow-on. It's more of a conceptual question. Just given how large the MOB portfolio is getting at this point. And really more, Dave, just trying to get your comments on if the Supreme Court ultimately does end up striking down the Healthcare Reform Act, exactly what impact you would expect that to have on the medical office building business. Whether it's all of a sudden because of all the uncertainty it becomes hard to lease stuff up. Or whatever general commentary, if the world suddenly changes come June.

Sure. I think either way it pans out, I don't think it would necessarily be bad news for us in the medical office space, because healthcare is moving this way anyway. You've got obviously the demographics for the baby boomers. 65 and up tend to be the biggest users of the medical system. I think I heard [some] statistics that, up to now, about 70% of medical procedures have been done inpatient, and the goal is to ultimately get them to 70% to be done on an outpatient basis. All of which would suggest smaller outpatient centers located closer out to where the residents are, or the potential patients are. So I think there's a lot of compelling forces that are going to create demand for this space irregardless of what happens with healthcare reform.

If healthcare reform stays in place, I think you'll see a lot more of healthcare systems becoming much more proactive in managing their real estate, and trying to design their plan. Which would create opportunities for us. And also you would have the increased patient population that will utilize the system. So another positive force for people in the space. If it's rejected I think you'll still have a fair amount of discussion in Washington about if there's a modified plan that could be passed to preserve some of this. And I think there will be a bit of pause. It takes some pressure off the healthcare systems to do something immediately and they may want to wait to see what the new legislation might look like. But again, I think that may slow down the process a little, but I do think that it's still going in that direction of increasing demand for these services.

Got it. All right. That's helpful. Thank you.

Daniel Bernstein of Stifel Nicolaus.

Just going back to the Sunrise leased assets that aren't being renewed, there's a big disparity between lease coverage on the 10 assets that aren't being renewed versus the 4 that are. Is there some mechanism in the leases to reset the rents on the four to a market rate? I just want to understand how the rent mechanism works there.

The rent mechanism is a continuation of the existing rent formula, which is a base rent plus percentage rent as the revenues grow at the properties. And, in fact, one renewal option was exercised for five years. That's why the leases on those four properties go out to December 31, 2018. And then presumably we would have to face that whole discussion again in 2016. And obviously with the Marriott International guarantee, I think Sunrise paid a significant sum and utilized considerable amount of resources to get Marriott to continue on with the guarantee. And as a result, I don't think they either could or would want to commit more resources to take on more than these 4 properties from us. I think it's more economics on their end.

And how many more renewals are there? Was it just one?

There's three more renewals following the one that they just exercised.

And like Dave said, Marriott would have to be on those renewals, so we'll have to take them one at a time.

And same rent terms, just continue with whatever normal bumps?

After a couple more renewals down, yes.

Okay. All right. That's all. Thank you.

There are no further questions in queue at this time. I would like to turn the conference call back over to Mr. Dave Hegarty.

Great. Thank you all for joining us today. We will be participating in several conferences this spring, including the JMP Securities conference in San Francisco; the BofA Merrill Lynch Healthcare Conference in Las Vegas, also in May; and the Jefferies Healthcare Conference, as well as the NAREIT conference, both in New York City in June. We look forward to meeting with our investors and analysts at any one of those events. Thank you again. Have a good day.

Ladies and gentlemen, that does conclude our conference call for today. On behalf of today's panel, I would like to thank you for your participation and thank you for using AT&T. Have a wonderful day. You may now disconnect.