Diversified Healthcare Trust (DHC) 2012 Q3 法說會逐字稿

Good day, and welcome to the Senior Housing Properties Trust Third Quarter 2012 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 on today's call is 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'd also note the recording and re-transmission of today's conference call is strictly prohibited without prior written consent of Senior Housing.

Before we begin, I'd like to state that today's conference call contains forward-looking statements within the meaning of the Private Securities of 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 29, 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 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 on 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 to not place undue reliance upon any forward-looking statements. Now, I would like to turn the call over to Dave.

Thank you Tim, and good afternoon everyone. Thank you all for joining us today on our third-quarter earnings call. First and foremost, we at SNH hope that each of you and your families are safe and are spared from any harm from the hurricane. I'm pleased to report that another active and positive quarter for the Company, one in which we increased the dividend and positioned ourselves for continued long term cash flow and dividend growth.

Over the last decade, we have been consistent in executing on our strategy of growing our exposure to private pay real estate by exclusively investing in private-pay senior living communities and medical office buildings. Today, 94% of our portfolio's NOI is derived from real estate where the predominant revenue source is private pay. With uncertainty surrounding the fiscal cliff and the long-term viability of Medicare, we feel that we're in the best position in the health care REIT space to withstand any additional Medicare cuts. Our Senior Housing portfolio and medical office buildings are clearly among the best in their respective industries. We do not discuss this often, but Senior Housing Properties Trust is an EnergyStar partner with the US Department of Environmental Protection Agency, and is focused on being a partner to reduce global warming.

For the third quarter, we reported normalized funds from operations, or FFO, of $0.43 per share. Subsequent to quarter end, our Board of Trustees increased our quarterly distribution by $0.01 per share to $0.39 per share, which represents a 7.2% yield based on Friday's closing stock prices. Year-to-date 2012, we have acquired or entered agreements to acquire $450 million of senior living in medical office properties, $304 million of that being acquisition opportunities that came about during 2012. We stated at the beginning of this year that we expect to acquire $300 million to $400 million of properties. At the end of the quarter we had achieved that goal. Since July 1 we have closed on $225 million of acquisitions, comprised of seven senior living communities with over 1,100 units, and three medical office units containing approximately 150,000 square feet. All of the activity we closed on during the quarter was previously announced.

We recently entered into agreements to acquire three senior living communities located in three states -- Mississippi, Tennessee and Washington -- with 437 units for $59 million. Two of the senior living communities were released to our TRS and the other will be triple-net leased to a privately owned senior living operator. We also recently entered into an agreement to acquire a Class A multi-tenant medical office building located in Tennessee for $9.2 million, containing 34,000 square feet. Including the pending acquisition of the medical office building in Minnesota we announced last quarter for $15 million, we have a total of $84 million of pending acquisitions which we expect will close by the end of the year. As we've said in the past, we continue to evaluate individual assets and small portfolios in the senior living and medical office space, and are seeing new opportunities from sellers looking to close on transactions before year end. We are uniquely positioned when compared to the larger health care REITs in that we can pursue and win smaller accretive acquisition opportunities that help to grow our portfolio and cash flow.

Moving on to our financing activity, in July we raised $300 million of common stock and $350 million of 30-year senior unsecured notes at 5.625%. In addition to paying off the balance on our revolving credit facility with these proceeds, on August 31 we pre-paid approximately $199 million of Fannie Mae secured debt that had an interest rate of 6.4%. As a result of this, 11 of the 28 properties securing this loan were released from the mortgage. Currently 327 of our 384 properties, or 85%, of our properties are unencumbered.

Turning to the performance of our portfolio. First I'll review our senior living triple-net lease properties, whose results reported on a rolling 12-month basis as of June 30, 2012. Overall, we saw a nice increase in independent and assisted living occupancies from last quarter. Independent living occupancy had gained the most ground, as it's up 40 basis points from last quarter and 70 basis points from last year, at 87.8%. Assisted living occupancy increased 10 basis points from last quarter and is flat with last year, at 86.7%. Skilled nursing occupancy is down 190 basis points from last year, but essentially flat from last quarter.

The industry-leading provider of research and data on senior housing, the National Investment Center for Seniors Housing and Care Industry, or NIC, showed third-quarter continued growth in independent assisted living occupancy. They note that the Senior Housing average occupancy rate has risen consistently during the past 10 quarters, and is almost 200 basis points above its cyclical low during the first quarter of 2010. Independent living has had the greatest rebound over the last several quarters, although assisted living saw a slightly larger increase in occupancy this quarter. Given the fact that a significant percentage of the units we have acquired over the last year of independent living, we feel this is a positive for our portfolio. Absorption rates are favorable, while new development is still very modest. I see also notes that nursing care occupancy has been marginally declining for several years. We believe our results are mostly in line with this industry data, and are encouraged by the continued growth in occupancy, which will ultimately benefit us as owners of private-pay senior housing real estate.

Now looking at our largest tenant, Five Star, their lease properties had combined occupancy of 84.5%. Rental coverage on an EBITDA basis ranged from 1.2 to 1.7 times across our four leases, and with 1.3 times in the aggregate. Their third-quarter results reflected their fifteenth consecutive quarter of profitability and improving independent assisted living results. In fact, they mentioned on their call this morning that senior living occupancy as of Thursday was up to 86.2%.

Our next-largest senior living tenant is Sunrise Senior Living. As we discussed last quarter, we're currently transitioning 10 properties leased to Sunrise into our own TRS. On September 1, we transitioned three communities. On October 1, we transferred another five communities, and we expect to move the remaining two by year end. Because of this, our third-quarter supplementary reporting for Sunrise only includes the four properties they will continue to lease from us through 2018. These properties are a slight increase in occupancy, which was 93.1%, and rental coverage was a strong 1.9 times.

Brookdale's leased properties saw a nice increase in occupancy, which was 93.6%, with rental coverage increasing to 2.3 times. Our other triple-net lease properties continued to perform well, with flat occupancy in rental coverage at 2 to 3 times. Looking at our TRS Manor senior living portfolio, occupancy for the third quarter was 87%. NOI grew to over $11 million during quarter, and margins were 26%, up significantly from last year due to the growth in acquisitions. As I mentioned earlier, because we're in the process of transferring 10 Sunrise properties to our TRS, we included their occupancies in unit count in our TRS statistics for all the periods presented in our supplemental. The financial results of the three properties which were transferred on September 1 are included in the third-quarter period. We believe that we've created a good foundation by taking on two large, strong-growth profile portfolios during 2011 and 2012, and over time we expect to continue to grow at TRS by acquiring individual assets and small portfolios.

Moving on to the medical office building component of our portfolio, which makes up 31% of our NOI. We've discussed in the past the types of properties we included in our medical office building portfolio, and as a refresher -- on an NOI basis 68% are classified as clinics, outpatient centers and doctors offices; 21% are properties leased to medical equipment manufacturing tenants and other medical-related tenants; and 11% are biotech laboratory and research space. Excluding the biotech space, two-thirds of our MOVs are what we consider on campus. Within our definition of on campus, we include properties located directly on a hospital campus, properties near to and affiliated with a hospital, and properties leased directly to a health care system -- for example, our properties leased to Aurora Healthcare in Wisconsin, an A-rated health care system.

For the third quarter, occupancy in our medical office building portfolio was 93.9%, and NOI was $35 million. We have 114 medical office properties with over 8 million square feet and are one of the largest health care REIT owners of medical office space. This growth has primarily come from new acquisitions. On a same-store basis, occupancy was 93.1%, NOI was $28 million, and NOI margins were flat at 72%. As we discussed last quarter, we have one vacant building which primarily contributes to the decline in occupancy and NOI from a year ago. During the quarter we had 32,000 square feet of new leases and we renewed 285,000 square feet. The weighted average rate on renewals and new leases increased by 2.8%.

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

Thank you, Dave, and good afternoon everyone. I will now review our year over year quarterly financial results. We reported normalized FFO for the third quarter of $74.8 million, or $0.43 per share. If you recall, last quarter we told you that our FFO per share would be reduced by $0.03 to $0.04 in the third quarter when compared to the second quarter's FFO because of the timing of both our capital markets activities in the repayment of certain debt. We expect our third-quarter results will be a good run rate in the short-term, as we work to transition a number of recent acquisitions, including the transition of the Sunrise communities, evaluate capital spending needs, and work to grow margin in our TRS.

Looking first at the income statement, rental income increased to $116 million, mainly due to external growth from investments in medical office buildings in leased senior living communities we made over the past year. Residence fees and services from our managed senior living portfolio grew to $42.4 million from 30 communities, with over 4,300 units we owned as of September 30, 2012, compared to $10.7 million from 13 communities with over 1,200 units from the same period last year. Due to the transition of the 10 Sunrise communities to our TRS, rental income from our leased senior living communities will be reduced by approximately $3 million for the fourth quarter. We expect a net operating income from these same communities in our TRS for the fourth quarter to be approximately $2 million. The negative arbitrage primarily relates to the decline in operations at these communities over the past year, and we expect the results to improve and exceed previous financial results over the next several quarters as we invest in capital expenditures enhance the operations.

Percentage rent from our senior living operators was $2.4 million for the quarter. The decline was attributable to moving three senior living communities formerly operated by Sunrise into our TRS on September 1. These three communities reported approximately $350,000 of percentage rent revenue for the eight months ended August 31, 2012. We expect percentage rent to decline in the fourth quarter as we transition the remaining sunrise properties to our TRS. Property operating expenses for the quarter increased to $47.8 million, compared to $20.2 million last year, which was in line with our expectations as we added a significant number of both managed senior living communities in medical office buildings to our portfolio. Of the $47.8 million of property operating expenses, $16.6 million were derived from our medical office buildings and $31.2 million were derived from our managed senior living communities.

General and administrative expenses increased to $8.4 million, compared to $6.6 million last year. As a percentage of revenues, G&A decreased 50 basis points to 5.3%, compared to 5.8% last year. Interest expense was up 23% to $30.4 million. Interest on our debt has increased since last year due to several factors. Since July 1, 2011, we have assumed $281 million of mortgage debt in connection with acquisitions at a weighted average interest rate of 5.9%. We also issue a total of $650 million of unsecured senior notes from two separate issuances at a weighted average interest rate of 6.1%.

Offsetting this activity was the repayment of $48 million of mortgage loans encumbering 19 properties at a weighted average interest rate of 6.7% in 2012. The repayment of $225 million of unsecured senior notes at 8.625% in January, and the pre-payment of $199 million of Fannie Mae debt at 6.4% on August 31. As a result of this pre-payment we recorded a loss on early extinguishment of debt of approximately $6.3 million. During the quarter, we recorded a loss on lease terminations of approximately $104,000 related to the termination of the 10 Sunrise leases. During July, we sold one medical office building located in Massachusetts for $1.1 million, and recognized a loss of approximately $101,000.

Moving to the balance sheet. We closed on $225 million of investments during the quarter, comprised of seven senior living communities and three medical office buildings, and assumed $55.4 million of mortgage debt. The weighted average capitalization rate for these acquisitions since July 1 was 7.7% based on estimated annual NOI. We still have $84 million of pending activity, comprised of three senior living communities and two medical office buildings, and will assume $22 million of mortgage debt with a weighted average rate of 6.5%, the majority of which we expect to close during the fourth quarter. These are all individual properties and one of the senior living communities will be triple-net leased to our new private operator in the northwest.

During the quarter, we invested $4.2 million into revenue-producing capital improvements at our leased senior living communities. We also incurred approximately $5 million of capital improvements at our managed communities in medical office buildings, of which $2.4 million relate to medical office leasing costs and building improvements, and the remaining $2.6 million for capital improvements at our managed communities. We expect capital improvement spending at our managed senior living communities to increase over the next year. As you know, it is our policy to invest capital when taking over a property so it is well-positioned in the future. Assessments of the Sunrise communities are being conducted to determine capital needs.

At quarter end, we had $21 million of cash on hand, $55 million outstanding on our revolver, $1.1 billion of unsecured senior notes, and $717 million of secured debt and capital leasing, making our debt-to-total-book capitalization ratio of 41%. Our targeted leverage using debt-to-total-book capital is in the range of 40% to 45%. Our credit statistics remain extremely strong, with EBITDA over interest expense of 3.5 times, and debt over annualized EBITDA of 4.4 times. In July we sold 13.8 million common shares, raising gross proceeds of $300 million, and issued $350 million of 5.625% unsecured senior notes due 2042. In addition to repaying the entire outstanding balance on our revolver, on August 31, we pre-paid approximately $199 million of Fannie Mae secured debt. Today, we have $50 million drawn on our revolver.

We are well-positioned to make acquisitions using our line of credit. As we have mentioned in prior calls, our sweet spot for acquisitions in the individual property or small portfolio in the $10 million to $50 million range where we can effectively complete. In the rare occurrence that we would pursue larger transactions, as we did last year, we would do so if we believe there is a significant upside potential. The majority of the transactions we have completed this year fit our acquisition criteria.

In closing, we feel very confident in our ability to maximize value as an owner of private-pay senior living and medical office properties. Our Board recently raised the quarterly dividend by $0.01 per share. The new annual dividend rate of $1.56 per share represents a yield of 7.2%, and is a 3% increase over the previous rate, an attractive option in today's market environment. We have consistently raised the dividend over the last decade, and this recent increase is a reflection on how our Board views the future of our Company. We will continue to be prudent in our approach to acquisitions, and will focus on maintaining a conservative financial profile so we remain an attractive investment option for yield-seeking investors, health care investors and REIT investors alike. With that, Dave and I are now happy to take your questions.

(Operator Instructions)

Jana Galan, Bank of America.

Thanks. Dave, can you discuss what you're reviewing in your potential acquisition pipeline going to year-end in terms of property type, what you're seeing with cap rates? Also, what is your preference in terms of growing exposure to MOBs, Senior Housing triple-net and Senior Housing TRS?

Yes. Okay, what we're predominantly looking at is the smaller one-off transactions and small portfolios. I expect to do probably about maybe two-thirds or so senior housing versus MOBs, although I think that's partly a reflection of the environment of opportunities out there right now. The MOBs, we're being a little more aggressive to try to bring up that percentage of our portfolio. We would like to bring it up to more in the range of like 40% of our portfolio or better. But in order to win something of size there, you have to significantly reduce your cap rate, but we're finding a number of opportunities in the high 7%s to low 8%s for both medical office and senior housing.

Thanks, and then maybe if you could just clarify for the realignment of leases with Five Star you did in August. Did that change any of the bundles, or did those 10 Sunrise assets just get placed into those leases? How did that work?

That really related to when we paid off the Fannie Mae debt, the $199 million, and we were able to release 11 of the 28 properties from lease number 3. What we did, we just spread those 11 properties into lease number 1, 2, and 4. At that time it just helped realign the rent coverages and we accrued all prior periods for that occupancy, rent coverage, and location of those 11 properties, and we just disbursed them between those three other leases.

Right, and the Sunrise properties are totally separate topic, and those are going into our taxable REIT subsidiary as licenses get approved and as they're allowed to be rolled off of the leases to Sunrise and into our TRS portfolio.

Okay, and then are those 11 unencumbered assets, did anything change in terms of their rents or lease term?

No. We look at all four leases as one, too, so the bottom line nothing changes.

The economics of the rent and stuff was unchanged.

Yes.

Great. Thank you.

Okay, you're welcome.

James Milam, Sandler O'Neill.

Can you just go over the yield on the acquisitions that you closed in the quarter, and also what you expect the yields to be on the deal that you've announced pending for the fourth quarter?

Sure. There is a schedule in the supplemental, but broad picture, there are two properties that we closed on that had cap rates in the 7%s, median -- I'd say around 7.3% or so. One was the Yonkers, New York, property that was the last remaining V property, and one in Boynton Beach, Florida, is a medical office building that's 80% leased, and it's physically adjacent to one of the senior living properties in our TRS, and we expect to move that occupancy up considerably, so our yield at the end of the day should be a lot better. Everything else has been pretty much in the low 8%s for cap rates, about 8.28% in the quarter, and what's in the pipeline today pretty much again in that low to mid 8% cap rate range.

Okay, thanks. On the debt that you guys are assuming, is any of that, I guess what's the maturity on that debt, and is any of that available to be pre-paid at any point, or will you be carrying it at what currently is a little bit higher of a yield for a while?

We focus on the pending acquisitions, if we can pre-pay it we will pre-pay it, that's our first priority. This debt's about four or five years out, and pre-payable a year or two from maturity date. We're always evaluating any pre-payment opportunities we can get, but these are about four or five years out, so we have to wait for a year or two prior.

Okay, and then my last one. The MOB, same-store stats were down a little bit. I think you mentioned in the prepared remarks that's really just based on the Philadelphia asset. Is that correct? Maybe could you talk about trends in the MOBs kind of the same-store portfolio, if you exclude that asset what they would look like?

Yes. That's probably if you'd point to one thing that affected the numbers the most from a comparison year-over-year, that would be the main asset. Everything else we've had modest improvement offsetting that from the other assets, so net-net, we were just down a little bit. Some of the things you're seeing in the portfolio -- we are seeing some situations where some of the doctors' groups are splitting up, and some properties that have been leased to one tenant are now multi-tenanted. Rents are holding up very well. I'd say we have some properties in the Southwest where it's a little more challenging to re-lease some space, but generally it's not significant. It's a very stable portfolio, but I'd say like that one particular asset skews the numbers, I should say.

Okay, great. Thank you, guys.

Thank you.

Michael Carroll, RBC Capital Markets.

Can you explain the difference, if any, between the location and age of the Senior Housing assets that are in the RIDEA structure versus the ones leased on a triple-net basis?

Let's see. Well, I would say probably first of all, the triple-net lease assets have been accumulated over the course of time, and most recent transactions have been almost all TRS-type transactions. As far as age-wise, I don't think there's a significant amount of difference between the physical age of the properties. The newer, latest transactions have clearly been East-Coast-focused, between New York, New Jersey, Washington, major MSAs, and then down in Florida. I'd say maybe those assets. One thing about all of the TRS assets that we bought have been pretty much two-thirds to three-quarters independent living units. They're all private pay, and so we believe that there should be above-average return on the TRS assets than our triple-net leased assets.

Thank you. Can you give us a sense of how much capital you plan on spending on the TRS assets, and how much would you consider that being re-occurring versus revenue generating?

Yes, the normal rule of thumb for re-occurring would probably be about a $1,000 to $1,500 per unit, and over the next -- we're going to be evaluating, especially the Sunrise assets coming and evaluating the CapEx needs -- and we expect that could go up to maybe on a short-term basis over the next 12 to 18 months maybe $2,500 per unit. We do -- we're anticipating a growth in our capital expenditures over the next 12 to 18 months for about $5 million to $10 million over and beyond the normal CapEx.

I think you spent about $600 a unit on your TRS portfolio this quarter, so you would say a pretty good chunk of that was for revenue-generating activities?

Yes, there's a lot going on right now with the portfolios. For instance, almost every asset we bring on requires new signage, and just additional things to put to re-brand a lot of the assets, so that is a significant cost up front. Also, we've taken an approach that since there is a transition going on already, you're disrupting the normal course for patients, residents, and staff, so you may as well show that you're putting in capital, fixing things that they might have been complaining about for a while, and so on, so all the more we're putting in capital up front rather than on an on-going basis. I think the $600 a unit is light compared to what we expect it will be, just because we're still ramping up and what needs to be done at some of these properties.

Okay, and how's the leasing activity going at the Philadelphia MOB asset that you mentioned earlier on the call?

That's very slow because it's very specific property real estate. In fact, we're debating about whether or not to just redevelop it and release it as another type of property, or sell it. We're undergoing a lot of those considerations that will require a fair amount of capital to just remove the infrastructure that's there for a new tenant.

All right, thank you.

Thank you.

Tayo Okusanya, Jefferies.

The TRS-managed communities, now that you have most of those assets pretty much in place, and we can track them a little bit better, you've talked a little bit about the CapEx piece of this puzzle to kind of get things moving, but how should we be thinking about your goals over the next 12 to 18 months in regards to where occupancy can get with this portfolio, and where ultimately you expect NOI margins to end up after you've done the stabilization of the portfolio?

Yes, well I think the next 12 months is probably -- 12 to 18 months is where most of the repositioning will occur to do the capital improvements and re-brand and so on. I would expect our results will be meaningfully in excess of what they historically have delivered. The margins, 26% is a low margin for this quality asset, and so we believe that we can get the margins at a minimum 30%. Hopefully it's the lower 30%s at a minimum, and particularly the V properties, being predominantly independent living, there's no reason we shouldn't be able to get the margins ultimately up to closer to 40%, with the capital being put into it.

So do you expect the margin expansion to come from occupancy gains? Is it price increases, or is it reduction in operating expenses?

First I would say coming from occupancy increases. Once they have achieved into the 90% area, north of 90%, then we can start pushing rates. Operating expenses -- again they're a little bit volatile right now, because it is in transition, but I think in a couple quarters we should have a pretty steady run rate on that, and I would expect them to be lower than where they are today.

Okay, and the target for this, again just to confirm, is 12 to 18 months?

Correct.

Okay, great. That's helpful. If I could just move to the MOB portfolio real quick. When I take a look at the change in [cap rents] for your renewals, you kind of -- the trend over the past one year -- a year ago your renewals were up 3.2%, down 4.3% now, and the trend has been steadily lower over the past five quarters. Just wondering if you could talk a little bit about that?

Yes, a combination of factors. I think one of the factors is that right now in this time period we're in, I know the focus on the leasing effort has been to approach renewals early, a year or two earlier than they would currently expire, and encourage those tenants to stay in. As a result, they've been dropping the front end rent and increasing the rent over the course of the lease term to lock in maybe a five- or seven-year period, instead of having a one- or two-year time horizon. I do think that properties on the East Coast and West Coast are experiencing increases, decent increases in rental rates. I'd say it's a lot softer in Albuquerque area and the Phoenix markets.

Got it. Would you say on the renewal side, although you're down 4.3% this quarter, there's a bigger drop in the off-campus stuff versus the on-campus stuff?

Yes, that is true.

Could you give us a sense of what those numbers are?

Well, let's see. I'd say most of this is attributed probably to a handful of buildings, and as we mentioned in our script, about two-thirds of our MOBs are what we consider on campus, and it's more the non-core, MOB-type properties that are experiencing more of the re-leasing challenges.

But is their mark-to-market like 10%? The on-campus is flat, or is there any way to get a sense of what the numbers are?

Let's see, off the top of my head, I --

We don't have that detail right here.

Okay. I'll get off line and try to get those details from you later.

Okay.

Rob Mains, Stifel Nicolaus.

Thanks, good afternoon. I couldn't write fast enough. You mentioned the $2 million decrease that you're expecting in fourth-quarter NOI. Could you go over that again please?

Yes, what I said is that for the transitioning of the 10 Sunrise communities, that revenue will come out of our triple-net rental income, and we'll be now reporting residence fees and property operating expenses. We'll take about $3 million in the fourth quarter, $3 million out of the rental income, and we'll be recording residence fees and property operating expenses at a run rate for the fourth quarter of about $2 million, so there's a negative arbitrage there. That's just like what we've been talking about just at the transition.

Over the past year, Sunrise operations have declined since they took their -- since they knew they were not going to renew these leases, so you could see as we've been on our reports and prior periods that rent coverages have been declining and occupancy has been declining, so we put our focus to try to transition these properties as quick as we can. We're trying to get these properties under our belt, and then we need to go in there, improve the operations, put in the CapEx and get them back up to market value. I just wanted to -- we wanted to point that out in the fourth quarter that there will be a negative arbitrage there.

Okay, and that net negative $1 million is kind of the source of the above-average growth that you're expecting over the next 12 to 18 months from improving that?

Yes.

On the -- I think it's Page 14 in the supplemental where you have the TRS communities -- any help you can give us on what the transition would have been from the June 30 quarter to the 9/30 quarter without the new buildings, because it sounds like you would not have experienced occupancy and NOI margin trends that were in the supplemental?

Yes, I'm looking at Page 24 in our TRS managed communities, and I'm not sure exactly what you're asking?

Well, you got from 24 -- you're up from 24 to 37 communities. What would occupancy and NOI trends have been on a same-store basis?

Well, we started -- if you looked at last year, we acquired properties in mid-quarter as well as we acquired properties mid-quarter this year. The 37 also includes properties that we haven't even taken over from Sunrise yet. As we said in our prepared notes, seven of those properties -- really we had 30 properties at September 30, with about 4,400 units, and occupancies would have been higher. If we took the Sunrise out, occupancies would have been reported higher, if that answers your question.

Let me try it another way, and then I'll give it up. The June 30 quarter you were at 87.7%. If you'd been looking at just the same 24, would you have been at a commensurate level in the September quarter?

Yes, we should, if not better.

I assume the same thing with NOI?

Yes.

Dave, you mentioned that you're seeing kind of smaller deals in the acquisition pipeline. Should I surmise that there aren't larger deals out there, or that you got maybe sellers with stars in their eyes? What are you seeing with sort of the bigger portfolios?

Right. No, there are a handful of large portfolios out there, but -- and they do command a significant premium for being large portfolios. It just doesn't benefit us to pursue portfolios of that size if it's going to be so competitive. We figured that it is best to stick with our smaller portfolios, certainly even the $100 million to $300 million portfolios we still feel that we can compete on, but it seems our most effective and sweetest spot is we're still able to pick up one-off properties at say $15 million to $25 million to $30 million, and still achieve around an 8%, 8.25%, to 8.5% cap rate on those type transactions, so those we're pursuing more often.

Last question, have pricing expectations in your judgment changed post the Health Care REIT Sunrise deal?

Only on the major transactions. Like you said, there are a lot of smaller operators, there are regional operators who think they should get that premium pricing, but I think once they start testing the market and so on, they realize that that's not real. I think that we still win a number of transactions, but don't really get close to the ask. The large portfolios, anything in the, say, $500 million and up is going to be chased after, and low cap rates, and getting that premium pricing.

Got it. Thank you very much.

You're welcome.

There is no one else in queue at this time. Please continue.

Okay. Well, thank you all very much. Hopefully everybody makes it fine with the hurricane and thank you for joining us. We are going to be presenting at the NAREIT conference in San Diego in November, so we hope to see a lot of you at that conference. Thank you and have a good day.

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