Diversified Healthcare Trust (DHC) 2014 Q1 法說會逐字稿

Good day, and welcome to the Senior Housing Properties Trust first quarter financial results conference call. This call is being recorded. I would like to turn the call over to the Director of Investor Relations, Kimberly Brown for opening remarks and introductions. Please go ahead, ma'am.

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 transcription, recording and transmission of today's conference call are strictly prohibited without the 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 upon Senior Housing's press release and expectations as of today, May 2nd, 2014. The Company undertakes no obligation to revise or publicly release the results of any revisions to the forward-looking statements, made in today's conference call, other than through filings with the Securities and Exchange Commission, or SEC.

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 the 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.

Now I would like to turn the call over to Dave.

Thank you Kim. And good afternoon everyone. Thank you for joining us on today's earnings call. Earlier this morning, we were pleased to report normalized funds from operations, or normalized FFO of $0.43 per share for the first quarter, which was in line with our expectations and consensus. We have made great strides year-to-date in executing our strategic plan, on strengthening and diversifying our portfolio, making accretive acquisitions and increasing the percentage of private pay assets, which is currently an industry-leading 96% of NOI. Our acquisition and disposition activities as well as our investments in the right assets are the cornerstone of driving normalized FFO and dividend growth, and improving shareholder value.

Our primary focus this past quarter has been closing on $1.1 billion acquisition of the Vertex Biotech Medical Office Buildings located in the Seaport District of Boston. Upon closing, this transaction will represent our largest investment in Company history, and will be transformative to our portfolio. From an asset diversification perspective, MOBs will increase from one-third of our portfolio to over 40% of our NOI. And from a tenant diversification perspective, our largest tenant decreases to approximately mid-30% of our NOI. And finally, from a quality perspective, it takes our already high grade quality portfolio to the next level, as these are brand new buildings that are truly state-of-the-art irreplaceable assets, set in a premier location.

The Vertex acquisition also meets our economic standards for trophy assets such as this, and as we previously disclosed, this acquisition is expected to be immediately accretive to SNH shareholders. As evidenced by our successful and disciplined capital rating activities over the past couple of weeks, and consistent with our previous guidance, we are executing on our plan to finance Vertex with approximately 75% debt, and 25% equity. In April, we issued 15.5 million shares of common stock, and raised net proceeds of $323 million. And issued $650 million of five-year and 10-year unsecured senior notes.

As a result of these activities, and consistent with our previous expectations, we remain confident in our accretion guidance of $0.06 to $0.08 per share on a normalized FFO basis. and $0.05 to $0.07 per share on an AFFO or CID basis, after leveling the effect of straight line rent. We currently expect the Vertex transaction to close next week.

In the meantime we continue to focus on other acquisition opportunities that are more typical in size for SNH. In April we purchased the Texas Center for Athletes, a 125,000 square foot Class A multi-tenant medical office building located in San Antonio's South Texas Medical Center, the purchase price was approximately $33 million, with a GAAP cap rate of 8.9%, and a cash cap rate of approximately 8%. The building is 97% occupied, and is ideally located adjacent to the San Antonio Spurs training facility. We are continuing to review several acquisition opportunities, and will remain selective and disciplined in our strategy.

Since the beginning of the year, we have made progress on our disposition activities as well. We sold one facility in Texas for $2.4 million, and one medical office building in New Hampshire for $5 million. Currently we have nine remaining senior living communities which are primarily skilled nursing facilities, and six medical office buildings held for sale, which we expect to sell over the next couple of quarters.

I will now spend some time discussing the trends that we are seeing in our portfolio. Our triple net leased senior living properties whose results are reported on a rolling-12 month basis as of December 31, 2013 continue to perform well. Overall, occupancies were approximately 86%, rental income of our triple net leased senior living properties decreased, however the decrease was a result of the sale of two inpatient rehab hospitals at year end, and two senior living facilities which were sold over the past 12 months.

On a same store basis rental income increased 1.9% year-over-year. For SNH cash NOI and accrual NOI are essentially the same, as we generally do not have fixed bumps in our triple net leased senior living portfolio. Occupancy for the trailing five quarters ended December 31, 2013 was flat, are modestly lower across independent living , assisted living, and skilled nursing, and in line with the NIC Map trends. As expected the skilled nursing portfolio continues to be effected by the weak operating environment, and that's why we continue to recycle these properties into private pay alternatives.

Looking at the performance of our individual operators, Five Star's 187 leased communities at a combined occupancy of 84.2%. We are not reporting rent coverage ratio for Five Star as they have publicly disclosed that they are in the process of preparing to file their Annual Report on Form 10-K for the year ended December 31, 2013. In April Five Star filed a prior year's restated financial statement, and the net effect was an increase to both net income and shareholder equity. We are very comfortable with Five Star's operating performance and rents, and rents are being paid on a timely and consistent fashion.

As a reminder, all of our Senior Living operating leases are Master Leases, cross-collateralized, and backed by parent guarantees. The four properties released to Sunrise Senior Living had occupancy of 92.3%, and rental coverage of 1.9 times. The 18 properties we leased to Brookdale Senior Living had occupancy of 95.1%, and rental coverage of 2.5 times. Our other triple net leasing and living properties leased to private regional operators had occupancy of 85.1%, and strong rental coverage of 1.9 times.

Moving on to our managed senior living portfolio, about two-thirds of our managed senior living portfolio is based on investment value and NOI is located in the top 31 metro markets, and approximately 80% is located within the top 100 metro markets. Today we have 44 very high quality communities, and over 7,000 units. During the quarter the portfolio generated $18.7 million of NOI, which represents approximately 16% of the total company NOI.

Occupancy at the 39 same-store communities with 88.6%, which is an increase of 150 basis points over last year. Our rates decreased modestly, or about $22 per month. Now these communities contain a certain portion of Medicare beds, that were subject to the sequestration. And impacted the average monthly rates in the first quarter of this year. Same store NOI grew 4.8% quarter-over-quarter, and same-store margins increased 80 basis points to 23.7%.

We are very pleased with the 4.8% same store growth, given that margins were meaningfully impacted by the harsh winter conditions during the first quarter. We experienced a significant increase in costs related to utilities, snow removal, and weather-related damage. We believe there's still significant room to continue to grow occupancy, push rates and margins at these properties.

Moving on to the Medical Office Building part of our portfolio, as you will see in the supplemental we have 96 MOB properties, which comprise 119 buildings. Excluding the MOB buildings we are marketing for sale, we have over 7.8 million square feet, generating quarterly net operating income, of approximately $36 million. First quarter NOI increased 2.4%, and occupancy was up 50 basis points to 95%compared to the same period last year. In addition, our cash NOI grew by 2%.

Looking at the 112 same store medical office buildings, occupancy was up 50 basis points to 94.8%, and revenue increased over $400,000. GAAP NOI decreased $500,000, or 1.4%, to$33.4 million and the cash NOI decreased 1.5%, but did improve sequentially. We were pleased with our overall results, given that expenses increased by more than $700,000, directly related to the harsh winter conditions.

During the quarter we renewed 54,000 square feet of leases, and signed 37,000 square feet of new leases for a weighted average roll down in rent of 5% on a GAAP basis, and a weighted average lease term of 5.7 years. The volume represents only 1% of our leasable square footage. We do not believe the roll downs are representative of our portfolio, we continue to maintain a very is solid 95% occupancy. In summary, we are very pleased with our results and accomplishments in the first quarter, and believe that SNH is well-positioned to drive shareholder value and benefit from improving demographic trends, with this diverse mix in Best-of-Class private pacing living communities and MOBs.

With that, I will turn it over to Rick to provide a more detailed discussion of the financial results.

Thank you Dave. And good afternoon everyone. For the first quarter of 2014, we generated normalized FFO of $80.1 million,up from $79 million in the first quarter of last year. On a per share basis normalized FFO for the quarter was the same at $0.43 per share quarter-over-quarter, and in line with consensus. Rental income for the quarter increased $200,000 to $112 million, the modest increase is due to external growth from investments, offset by a reduction in rental income of $2.4 million, due to the sale of the two impatient rehab hospitals and two senior living communities. $55 million of rental income was derived from our senior living leased communities, while $53 million was derived from our medical office buildings.

Looking at our managed senior living portfolio, residents fees and services increased nearly 6% to $79.4 million during the first quarter. The increase primarily relates to acquiring five senior living communities over the past 12 months. NOI for the first quarter increased 8.8% to $18.7 million, andthe NOI margins for 23.5%. For the 39 communities that are in the same store comparison, year-over-year NOI growth was 4.8%, and margins increased 80 basis points to 23.7%.

We are pleased with the same-store growth, in light of the unusually high expenses from the winter months. Operations are becoming more efficient, and routine expenses continue to decline, however, this was offset by the winter related expenses in the first quarter. In addition we believe that there is still room to increase occupancy and push rates at these properties. Property operating expenses for the quarter increased to $78 million, due to external growth from acquisitions as we added five managed senior living communities and four MOBs to our portfolio since the first quarter of 2013. Approximately $17 million of property operating expenses were derived from our medical office buildings, and $61 million were derived from our managed senior living communities.

General and Administrative expenses for the quarter were $8.3 million, down from $8.6 million for the same period last year. The year-over-year decrease is primarily due to lower professional fees. At 4.3% of quarterly revenues, SNH continues to maintain a G&A expense as a percentage of revenue at or below its healthcare peers.

Interest expense declined 2.2% to $28.9 million this quarter compared to the first quarter of last year. Interest expense is expected to increase inthe second quarter as a result of three factors. First in April we issued $400 million of 3.25% five-year unsecured senior notes, and $250 million of 4.75% 10-year unsecured senior notes. Second, we assumed $15.6 million of mortgage debt at 6.3% in April, as a result of the Texas Center for Athletes acquisition, and third, we intend to utilize $350 million of the original $800 million term loan commitment, at LIBOR plus 140 basis points, which we expect to close in May.

Income from discontinued operations was $1.3 million for the quarter which included operating results of the seven medical office buildings held for sale. In January, we sold one assisted living community located in Texas for $2.4 million, and recognized a gain of $156,000. In April we sold one MOB located in New Hampshire for $5 million. Currently we have nine senior living communities and six medical office buildings, with an aggregate net book value of approximately $21 million classified as held-for-sale, which we expect to sell in 2014.

Moving to the balance sheet. Since January 1st, we closed on a $33 million acquisition, and invested $8.6 million intorevenue producing capital improvements at our leased senior living communities. During the quarter, we also spent $2.5 million of tenant improvements and leasing costs. Our recurring capital expenditures including $1.2 millionat our medical office buildings and $2.4 million at our managed senior living communities. We also incurred approximately $2.4 million of development and redevelopment capital expenditures, primarily at our managed senior living communities, which is consistent with our previously standard expectations.

At March 31st, we had $33 million of cash on hand, $1.1 billion of unsecured senior notes, and $696 million of secured debt and capital leases. Subsequent to quarter end, we have sold 15.5 million commonshares raising net proceeds of approximately $323 million. And $650 million of unsecured senior notes, and we intend to borrow $350 million of the term loan commitment. With a portion of these proceeds, we have paid down our revolver, which was $145 million as of quarter end, and acquired the Texas MOB in April, for net cash of approximately $17 million. We intend to use the remainder of the proceeds to fund the $1.1 billion biotech MOB acquisition, and repay mortgage debt of approximately $38 million due June 1st.

Following these transactions, SNH's balance sheet and liquidity remains strong and in line with our peers, with debt to total booked capitalization of approximately 47%, and adjusted EBITDA to interest experience of 3.5 times. Our $750 million credit facility will be fully available to fund future acquisitions, and we do not expect to go to the capital markets for the foreseeable future. In the coming weeks we look forward to closing the Vertex acquisition, and will continue to look for additional opportunities that strengthen our portfolio mix, increase FFO, and build shareholder value.

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

(Operator Instructions). We will begin with the line of Vikram Malhotra with Morgan Stanley. Please go ahead.

Good afternoon. Can you maybe talk about both in the RIDEA portfolio and the medical office, just kind of your broad expectations for same store NOI, I know there's some sequential improvement in medical office, but then there was a drop down in the RIDEA, as you kind of X-out, can we talk generally about the trends there going forward, and as you X-out the excess snow removal, kind of what the same store growth would have been?

Sure. Well, certainly on the RIDEA side of things the trends are very positive, the properties continue to perform better each quarter. And I think as you mentioned we had particularly a harsh winter this year. I think we probably will be in the high-single digits, if we had not incurred those extra expenses this winter. And I think that there's still significant amount of growth potential there in the assets. Really the rates have not been pushed at properties, I know as of today, every property we have down in Florida that is in the RIDEA is 90% or higher occupancies. Including some of the former Sunrise properties. So there are a lot of positives that are underway, and will continue to improve, from what I can tell. I will turn to Rick on the comment on the MOB side.

As we have mentioned on the phone, and as Dave just mentioned too, the harsh winter has really hit us on the MOB side too. And probably greater than $700,000 on the expense. So we have improved if you looked over sequentially from the fourth quarter to the first quarter we have improved those margins, and it would have been a positive track if we didn't accrue those extra expenses. We do expect moving forward in the second quarter and beyond, that those will be positive trends going upwards.

And then just lastly from me, as you look out in the acquisition pipeline, you kind of mentioned not really needing to access the markets, but where are you, what levels are you comfortable in the sense that as you close on acquisitions, where are you comfortable with taking leverage. And at what point do you say we need to maybe change the way we approach the acquisitions?

Yes, like I said, on the call, we don't see going to the market in the near future, and that's because of the $750 million credit facility will be available to us. And it will take some time to acquire some properties, and to build up enough amount on the credit facility to go to the markets. With that, we will continue to work on our balance sheet, right now we are after we finish the transaction with Vertex, we will be in line, our balance sheets and debt will be in line with our peers, so we are comfortable in the range that we will be at. And we will look at the capital markets the next time we will need to go visit that.

Thank you.

Thank you.

We will now go to the line of Juan Sanabria with Bank of America.

Hi, good afternoon.

Good afternoon.

Just a couple of questions. What are the expectations for leasing for the MOB portfolio over the next couple of years? Where are you guys relative to market on that?

Well, I would say that the expectation is probably flat to modestly up. I think I would say we are at market, it depends on obviously which market you are in. Certain markets that are weaker obviously and others are stronger, but I think net/net we determined that over the next year or so, we would probably be flat to modest positive on the rental side. We are continuing to work on the expense side of things to become more efficient, and try to save on that side.

What are you focusing on to draw that efficiency? Can you give us some examples?

Sure. The real estate tax appeal process, we continue to always appeal with taxes, energy contracts, we continue to work those and monitor them better, and just bullet proof better opportunities to get more efficiencies. We have also been able to lower our insurance costs in the MOB portfolio. There are a number of initiatives, things that have been ongoing and we are just continuing to improve on those.

And on the snow, dealing with the winter weather, et cetera, how did you guys ability to recoup any of that work, is there a lag, or is it just some cost or lost costs that you guys have to eat?

We may be able to recoup some of that. It is a lag, as you would expect. Many of these situations we can ultimately recoup it over the end, through the end of the year. You go into the year with estimated escalations and build proportionately, and then have a true-up later on in the year. To hopeful to recover a good piece of that.

Okay. And then could you give us a sense from an RMR perspective with the loss of I guess the Commonwealth AUM and associated fees. Has there been any changes to staffing levels at RMR that could potentially impact SNH as well as maybe Five Star?

Well, nothing would effect Five Star, but the CWH, they are still managing the properties, and I think at some point, we will realign things, but we are going to be assured that the SNH assets will be well monitored, well taken care of. And I'm really expecting no disruption in service at the SNH properties.

Great. Thank you.

You are welcome.

We will now go to the line of Michael Carroll with RBC Capital Markets, please go ahead.

Thanks. Looking at the managed senior housing portfolio, I know that you guys said that you were impacted by snow there, but the expense growth on the same-store basis year-over-year was flat, what have you been putting into place that would cause it to go down? Were you expecting expenses to drop in the first quarter?

That's right. I think if you were to look at our same-store performance for the last several quarters, the expenses continue to come down. During our prepared remarks we did mention that we would have had even a better performance, we would have been in the upper single digits,had we not incurred those extra expenses. So just it is really goes back to the management of the properties by Five Star. And as they are able to improve the performance by, one is insurance has come down significantly at the properties. Another thing is that they have excellent purchasing power at Five Star, and whenever they take over operations there is always an initial period where actually expenses most likely go up. And then there will be a couple of quarters before they settle out, get them into the fold, and run them more efficiently. I think as time goes on, we just keep seeing the benefit of the efficiencies start to show up, and as we have discussed the rates have not been pushed aggressively at most of the properties yet. The occupancy continues to move up, and margins are moving up, but I think that's to come soon. To be pushing the rates a little more aggressively.

Was the weather, did that impact the top line too? The top line appeared around what, 1% growth?

Not that much, really. I think it is the fact that there's not, I think that occupancy has held up well. We have several of the RIDEA assets, they are in northern states New York, Chicago, Washington DC even. They all had significant, Teaneck, New Jersey. But I don't think that the census really was not impacted, so it is really the rates have not been pushed on our expenses.

So when do you plan to start pushing those rates?

Part of it is really Five Star has the best handle on when people's anniversary dates are, when you can push the rates, and stuff, and many of their contracts were inherited from the prior operator too. So they may have to burn off before you can push rates. But I would say the rest of 2014 into early 2015 is when we will significantly be pushing the rates.

How should we think about your investment activity going forward? Are you looking at any other deals that are similar to the Seaport acquisition that is currently pending?

I consider that a once in a lifetime transaction. So I don't envision any more $1 billion transactions, especially of that high quality. You can look more towards the medical office building we acquired this quarter, and we will still be buying individual assetsand small portfolios. Looking for the $10 million to $50 million size transactions. And trying to achieve cap rates at least on north of 7%, hopefully more than 7.5 to 8%, but again it depends, like in this particular MOB, we actually have been working on it for a good while, and that was 50% levered with debt at 6.3%. So I think that knocked out a lot of potential buyers because you could not put a second mortgage on it, and there was a significant amount of equity involved, so I think that's how we were able to get such a high-quality Class A MOB at such an attractive rate. So we will continue to look for those transactions, and I would probably say looking at around say $200 million of transactions for the rest of this year, and that may include some of the capital funding at various tenants we have that we can charge a return on.

Okay, great, thank you.

We will now go to the line of Daniel Bernstein with Stifel, please go ahead.

Good afternoon.

Hi, Dan.

Hey. So I want to go back to the rate question on the senior housing operating portfolio. It looked to me like rates were up about 3% sequentially, so is it, and like you said you took a lot of legacy leases, I guess legacy assets there. With resident contracts, so is it correct to say that a lot of the rents were raised on January 1, and then even if you and Five Star put your heads together and wanted to raise rates saw the portfolio occupancy up, and wanted to push rates, you really couldn't push resident rates until the first quarter of 2015, would that be the correct way to think about it?

Yes, I wish it was black and white like that, but unfortunately, every property certainly applied from different operators have a different anniversary date and policy on to when they can raise rates. So some rates could be raised January 1st. Other just on people's anniversary dates when they moved into a facility. But now I think we had 35 properties in Q4, and 39 in Q1. And what has been added-on are more of the summarized properties, that as I said, that are typically 50% to 60% skilled nursing beds. And of course, sequestration kicked in April 1st of last year, so Q1 last year had the full benefit of Medicare rates, and this year had a bit lower rates, so that was the offsetting part of it to rates being raised this quarter.

That looked like it was sequentially higher year-over-year?

They were.

It was different numbers of properties, like Dave said, there are 35 propertiesin the fourth quarter, and the 39 properties in the first quarter. And maybe the raise on rates on January 1.

Okay. And then also, trying to figure out the growth thesis going forward? You alluded to it a little bit with the prior caller, if I take a $250 million or $300 million of acquisitions at 7.5%, 50% or so levered, I only get a penny or two of accretion or something like that, so what kind of investment volume should we be thinking about for you guys going forward, just trying to understand the growth thesis?

Yes. I will draw a broad picture, because we don't exactly give guidance, in the RIDEA portfolio, I would expect that to continue to do very well, and probably even better than it did this quarter. Because of rates, occupancy, and hopefully not the expenses that we incurred for the weather, and margin should move up somewhat from where they are today. And then you've got the same store, the triple net leased portfoliowent up 1.9%, on a same-store basis. So that again, that mostly drops to the bottom line.

And then on the MOBs. We also incurred a good amount of extra costs this quarter, which again ultimately won't repeat, and I think the trending should be a little better on the MOB portfolio. And the Vertex acquisition closing next week, and as we have constantly said, that we do expect $0.06 to $0.08 of FFO accretion. That would kick in immediately on May 7th. All of our capital has been raised, the line of credit is paid off, and so we are starting off from square one, with a pretty improved base to start from after the Vertex closes.

What kind of investment volumes, and clearly after Fan Pier, you are a much bigger company, what can they try to do, $500 million a year? Not as guidance. Hard guidance. Are you now looking to do $500 million a year of acquisitions? More or less?

Yes, the challenge is this is a competition out there. I mean clearly I would love to do more, and maybe we will, it is very difficult to predictwhat the success rate will be on our bidding, and so on. We will still certainly see a good amount of acquisition opportunities on both MOB and the senior housing fronts.

I personally feel that the private REITs and some of the private equity funds are bidding very aggressively on assets, and they keep pushing cap rates down, while everybody's cost of capital is going up, so I don't think we should chase deals just to meet acquisition target numbers. I think we have to remain disciplined, and prudent on how we use our capital, and just try to stay within certain parameters. And something that is truly a Class A asset with decent growth potential, we might bid a bit more aggressively. Than an otherwise bread-and-butter Class B asset type of stuff. So I think again, we will exercise prudent and care and discipline, so that's why I have tapered back a bit my acquisition expectations.

And then one quick last question, on the debt you are assuming with the MOB the 6.3% debt. Is that prepayable? In the near term?

No, we wouldn't prepay it if it was.

It is a couple more years until maturity, and it is prepayable at like six months prior to the maturity.

Okay. That's all for me, thank you very much.

You are welcome.

We will now go to the line of Todd Stender with Wells Fargo, please go ahead.

Hi, thank you guys.

Hi, Todd.

How are you guys.

Good.

Just looking at the impairments, on the five MOB assets. Trying to get a sense of their age, quality, were these vacant, and did they require some CapEx over the years that just wasn't put in? Just trying to get a sense of how they look, as pricing for MOBs is still pretty attractive?

Yes, we still have six, we have said six assets held for sale, and we took about a $721,000 impairment on a few of those MOBs. You have so look at it on each quarter, the market value of these, the accounting rules, and if there are any market values that there is a decline in the market, then you have to take the MOBs, you have to take the impairment on them, and that's the driver of these impairments. We still believe we can sell these properties in 2014. And one of the reasons just to remind you why they are out there, is because they are in tougher markets that it is going to be very hard to relet them. They still have some term left on the lease, and we thought maybe we would take advantage of that remaining term on it, and sell them with that term.

I will give you a little inside color too. Four of the buildings are on a campus in Albuquerque, and frankly their tenant was a healthcare system that hasdecided to build their own campus, and these properties will become vacant later this year. So it needs, so it is a single user for that term. And frankly we don't want to invest the capital into what it would take to relet this, or have it multi-tenanted, or whatever. So we offered it for sale is with a limited term left on the existing lease. And we had similarly a biotech property in Rhode Island that we had the tenant merge and consolidate its operations to California, and the lease expired, and we cannot relet it to another biotech company, so it will go for a non-target use, and we decided that is not going to be for us. So each of these has a little bit of a story, but they are under performers to begin with, that we are not willing to put in the capital that we think is necessary to release it to another party, which may or may not be healthcare.

That's helpful, thanks for the details. Any color you can add for the senior housing properties, are these net leased assets? Are there any within the RIDEA platform?

These are all in the leases with Five Star. Mainly leases number one, and number two. These are nine in total, six of them are the skilled nursing facilities, these are older buildings, 20 and 30 years older plus, in rural markets that we felt this was the right time to put up for sale.

Okay, thank you. And just looking how is Five Star's delay in filing their financial statements? One, does that have any impact on you sourcing capital? I wonder if it is just the banks are showing any concern for this, and two, your ability to bid effectively on RIDEA deals, just because they are your strategic partner, and then when you go up against other players in competitive deals, just seeing if there's any trickle down effect?

It has had no trickle down effect. We obviously accessed the equity markets and the debt markets in the last couple of weeks, so it has had no issue with us raising capital. And we do see a lot of financial information about Five Star, and they continue to perform well. There restatements just take a lot of time, because of the process. But they did do the restatements right up through third quarter of 2013. And the net results were to increase net income and increase shareholder equity. So I think, I would like to have them produce them sooner rather than later, but the practical effect has not been negative on us in any way.

Thank you, Dave. And just finally when you look at the $800 million term loan, if you take down $350 million to start, does the remaining $450 million remain available to any time? Do you have to make the commitment up front? Does the pricing stay static, how do you tap that going forward?

No, it is a one-time draw. So we had the original commitment of $800 million, and now we are working with the banks because we don't need the full $800 million. Our intention is just to draw on the $350 million, and it's just a one-time draw.

Got it, thank you, Rick.

Yes.

Thank you, we'll now go to the line of Tayo Okusanya with Jefferies, please go ahead.

Yes, good afternoon. Quick question. For the quarter, the MOB portfolio, tenant improvements on leasing commissions seemed elevated during the quarter, curious if there was something unique to move-ins or leases during the quarter that created that?

No, it is unusual if you look at the supplemental, it is a little higher this quarter, there's nothing unusual, and I don't think that would be the trend going forward. I think it would be back to the normal, the amount of the previous quarters.

Got it, okay. That's helpful, and then on the [Senate] part again just with the MOB portfolio, and I may have missed this earlier, but the large negative mark to market as well? Just give us a sense of what is kind of going on, was it particularly tenant related, market related, and how should we be thinking about pricing trends to the MOB portfolio going forward?

Yes, you will see, once again, in the supplemental that we had rolled down from the rent and stuff like that, and one thing I really want to point out, is that is new rents that are being set, are compared to old rents that also include expense reimbursements, so the new rents do not, so you will see a little roll down on that one, when the new rents go into effect, we will have reimbursements that increases the revenue on that side.

Okay, so it is just an optical thing then, with the old one having both numbers, and the new one just having the base rent number?

The base rent number, exactly.

Correct.

Why don't you strip out the two to give us a better sense of what the mark to market really is, base rent versus base rent?

The industry database is just you put in your new base rent, and just compare it to the old total base, and that's the industry standards.

Yikes. I think the industry needs to improve upon that, because it gives a false sense that fundamentals seem to be deteriorating when they really are not.

That is right.

I don't agree with you.

Alright. That's all for me, thank you very much guys.

Thank you.

(Operator Instructions). At this time, we will go to the line of Juan Sanabria with Bank of America, please go ahead.

Hi guys. Just had a couple of follow-up questions. First, could you either provide the cap rate, or the potential lost NOI on both of the assets sold, and those assets that are still up for sale?

For the senior housing ones, those are ones that are put part of a Master Lease, and the Master lease has a mechanism where the tenant can market the assets for sale, and generally, they get a rent concession equal to 9% to 10% on the amount of the sale, the ultimate sales price.

So a 10% cap rate?

Yes.

Okay.

The MOBs really are, some of them are not producing at all. I don't really know that a cap rate is an appropriate mechanism there.

Yes.

What's the break out between the senior housing and MOBs in terms of book value, do you have the rough split?

The book value, the net book value is a little higher on the MOBs. Combined they are around $21 million to $22 million.

Great. Can you just remind me as a separate question, the difference between the cash and the GAAP rent on the Vertex portfolio? Just your comment at the beginning about the accretion $0.06 to $0.08 FFO, $0.05 to $0.07 AFFOseems a bit tight, those two relative to each other, I thought the cash and GAAP rent spreads were somewhat wider than that would imply, just why such a narrow difference, if in fact the cash and GAAP cap rate is six number and eight number?

It isn't that wide of a number differential, the two step-ups, one in year six, and one in year 11 of the initial lease term, and it is about an 8% increase at that time, 8% to 8.5%. Not quite 2% a year, but that's what the differential works out to be, just it works out to say a penny or so differential in the range.

What are the GAAP and the cap cash rates then?

The going in cash cap rates low to mid 6s, about 6.3%. And you can't GAAP the whole building in there because there is retail space and parking. We say that we would get yield over the leased term of up to 7% or better.

So that 7% number, that is what you are using to calculate that FFO accretion?

Yes. Right.

Okay. Great, thank you, guys.

Thank you.

We have no further questions in queue at this time, I turn it back over to your host for closing remarks.

Alright, well thank you all for joining us today. We will be attending the Bank of America Merrill Lynch Healthcare Conference in Las Vegas in two weeks. And the Jefferies Global Healthcare Conference in New York, and the NAREIT Conference in New York, both in Junein New York City. So we look forward to meeting with many of you at one of those events, and have a great day. Thank you.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation, and for using AT&T Executive Teleconference. You may now disconnect.