Diversified Healthcare Trust (DHC) 2014 Q4 法說會逐字稿

Good day and welcome to the Senior Housing Properties Trust Fourth Quarter Financial Results Conference Call. This conference 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 retransmission of today's conference call are strictly prohibited without the 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 Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based on Senior Housing's present beliefs and expectations as of today, February 26th, 2015. 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.

In addition, this call may contain non-GAAP numbers including normalized funds from operations or normalized FFO, and cash-based net operating income or cash NOI. A reconciliation of these non-GAAP figures to net income and the components to calculate AFFO, CAD or FAD are available in our supplemental operating and financial data package found in our website at www.snhreit.com. Actual results may differ materially from those projected in these 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.

Great. Thank you, Kim and good afternoon everyone from a cold and snowy Newton, Massachusetts. Thank you for joining us on today's fourth quarter earnings call.

Earlier this morning, we were pleased to report normalized funds from operations, or normalized FFO of $0.45 per share for the fourth quarter, up 4.7% from $0.43 per share for the same period last year and in line with consensus. For the full year, normalized FFO increased 3.6% to $1.75 per share compared to last year. Our portfolio continued to perform well during the fourth quarter as same-store NOI grew across all of our property segments. I'll discuss each segment in more detail in a moment, but first I'd like to review our 2014 accomplishments.

During the year, we completed and announced private pay acquisitions that further strengthen and diversify our portfolio and tenant base. In 2014, we closed on $1.2 billion of acquisitions, the vast majority of which were the trophy assets in the Boston Seaport Innovation District leased to Vertex Pharmaceuticals for approximately $1.1 billion. The Vertex acquisition was a transformative investment for SNH, which not only met all of our investment criteria but also accelerated our strategic objective to increase our MOB exposure, which for SNH includes biotech, an industry poised for continued growth. In 2014, we also closed on three one-off acquisitions for a combined purchase price of approximately $80 million, one MOB and two private pay senior living communities.

In addition, we announced two portfolio acquisition agreements in 2014. In September, we announced the agreement to acquire the Cole Corporate Income Trust or CCIT medical office portfolio for $539 million, which consists of 23 100% occupied Class A properties. The 23 MOBs are of the highest quality from both an asset and tenant perspective as the average age of the building is just under 10 years and 72% of the tenants are investment grade rated, including 44% that are A-rated and the remaining are one notch below investment grade or they don't have debt. We closed on the CCIT deal in late January and are excited to bring such excellent assets and tenants into our portfolio.

Turning to the second portfolio announcement, in late December, we agreed to acquire 38 private pay senior living communities from CNL Lifestyle Properties for approximately $790 million. The 38 communities have approximately 3,500 living units, one-third of which are independent living and two-thirds are assisted living and memory care. The combined occupancy for the fourth quarter of 2014 was approximately 93%. 18 of the 38 communities are leased to six private operators. Upon closing, we expect to assume these leases which have a combined coverage ratio in excess of 1.2 times and a weighted average remaining lease term of approximately 10 years. The remaining 20 communities are currently managed by six operators.

We are in active discussions with the managers about their respective agreements and we're not in a position to provide details of these negotiations on today's call. But suffice it to say, we're doing everything we can to maximize our return, whether through a lease arrangement or a managed relationship with the focus on the bottom line.

We still expect the CNL transaction to close in the second quarter and to achieve our previously stated return in excess of 7%. Upon closing the CNL acquisition, approximately 56% of our NOI will come from senior living properties and 41% will come from medical office. In addition, post CNL, our largest tenant, Five Star will account for approximately 30% of our NOI, down from 43% a year ago. We've made very meaningful progress increasing the diversity of our rental stream and further strengthening the quality of our assets.

Turning to our portfolio performance for the fourth quarter, I'd like to begin by discussing our medical office segment, which at December 31 was comprised of 98 properties with 122 buildings. We had over 9.1 million square feet, generating quarterly NOI of approximately $57 million. Overall, occupancy with an industry-leading 95.9%, up an impressive 100 basis points compared to a year ago.

At our 93 same-store medical office buildings, cash NOI for the fourth quarter was $35.7 million, a strong increase of 4.7% compared to the same period last year. Same-store occupancy of 95.3% represents an increase of 30 basis points year-over-year. Our strong same-store growth was due to a combination of factors, including an increase in escalations, improved occupancy and rent bumps while maintaining good expense controls.

We executed 254,000 square feet of new leases and renewals during the quarter for an average annual rent of approximately $28 per square foot, with the weighted average lease term of over seven years. We are very pleased with the recent leasing activity and the overall performance of our medical office building portfolio.

Now on to our senior living portfolio. Our triple net leased senior living properties, which represented 45% of our fourth quarter NOI continued to perform extremely well as same-store rental income increased 3.5% year-over-year. The increase is due to investments made in our properties, increased rent at some of our smaller tenants and increases in percentage rent.

As expected, overall rental income of our triple net lease senior living properties decreased 1.6% year-over-year. The decrease was due to a recycling of capital from the sale of two skilled nursing facilities and two rehab hospitals, which are dependent on government-funded programs and four under-performing assisted living facilities since October 1, 2013.

Within the triple net senior living portfolio, our individual operators continued their steady strong performance. Five Star's 181 leased communities had combined occupancy of 84.4% and rent coverage of 1.2 times for the 12 months ended September 30, 2014. The four properties we leased to Sunrise Senior Living had occupancy of 92.2% and rental coverage of 2.0 times. The 18 properties we leased at Brookdale Senior Living had occupancy of 94.5% and rental coverage of 2.6 times. Our other triple net lease senior living properties leased to private regional operators had occupancy of 85.3% and rental coverage of 1.9 times.

Moving on to our managed senior living portfolio, today we have 46 managed communities with over 7,200 units. During the quarter, this portfolio generated $18.1 million of NOI, which represents approximately 12% of total Company NOI. We were pleased to report increases in occupancy, rate and revenue at the 42 same-store properties. Occupancy increased 50 basis points to 88.3%, average monthly rates increased 1.8% to approximately $4,200 a month with room for more to grow. And revenues in the aggregate increased 2.4% on a same-store basis.

Our same-store NOI at the 42 communities increased 1.6% quarter-over-quarter, which actually was below our expectations and primarily due to an increase in expenses related to real estate tax true-ups. Absent these true-ups, our same-store growth would have been in line with our expectations of mid-single digit growth. For the full-year, same-store NOI increased 3.4%, which we believe we can achieve or exceed in 2015 given that revenue, occupancy and rate are growing and the day-to-day operating expenses remain in check.

In summary, we are very happy with the overall performance of our portfolio as well as our acquisition activities, which we believe makes SNH a stronger company and in a position for continued growth in 2015 and beyond.

And with that, I'll turn it over to Rick to provide a more detailed discussion of our financial results.

Thank you, Dave, and good afternoon everyone. For the fourth quarter of 2014, we generated normalized FFO of $91.3 million, up from $80.5 million in the fourth quarter of last year. On a per share basis, normalized FFO for the quarter increased 4.7% to $0.45 per share, up from $0.43 per share for the same period last year.

For the year ended December 31, 2014 we generated normalized FFO of $348 million, an increase of $30 million over 2013 and an increase of 3.6% on a per share basis. Rental income for the quarter increased $26 million to $149 million. The increase is primarily due to external growth from investments in five medical office buildings for approximately $1.2 billion offset by a reduction in rental income due to the sale of two rehab hospitals, six senior living communities and three MOBs since October 1, 2013. $65 million of rental income was derived from our senior living leased communities, while $79 million was derived from our medical office buildings.

Looking at our managed senior living portfolio, residents fee and service revenues from our 46 managed properties increased nearly 4% to $80 million during the fourth quarter. The increase primarily relates to acquiring six managed senior living communities for approximately $88 million since October 1, 2013.

Property operating expenses increased 9.5% in the fourth quarter to $84 million due to external growth from acquisitions of $1.3 billion as we added six managed senior living communities and five MOBs to our portfolio since October 1, 2013 offset by our dispositions during the same period. Approximately $22 million of property operating expenses were derived from our medical office buildings and approximately $62 million were derived from our managed senior living communities.

General and administrative expenses for the quarter were $10.7 million compared to $8 million for the same period last year. The increase primarily relates to the property acquisitions and an increase in professional fees, offset by dispositions since October 1, 2013. At 4.7% of quarterly revenues, SNH continues to maintain a G&A expense as a percentage of revenues at or below its healthcare peers.

Interest expense increased 23% to $36 million this quarter compared to the same period of last year as a result of the issuance of $650 million unsecured senior notes in April, the assumption of $15.6 million of mortgage debt related to the Texas MOB acquisition in April and a term loan of $350 million, which we closed in May, offset by the pre-payments of $74 million of secured debt during the second half of 2014. We will continue to look for opportunities to pre-pay secured debt and refinance debt at lower rates whenever possible.

In the fourth quarter, we reported a loss from discontinued operations of $123,000 compared to income from discontinued operations of $1.4 million in 2013, a differential of approximately $1.5 million year-over-year which we include in our calculation of normalized FFO. Our discontinued operations for the fourth quarter included operating results of one MOB held to sale which is 93% vacant. In the first quarter, we are forecasting another loss from discontinued operations, similar to the amount we incurred in the fourth quarter. However, we remain confident that we will sell this property in the first half of 2015.

In 2014, we made good progress on our dispositions program and sold three MOBs, three assisted living communities and three skilled nursing facilities and recorded a gain of $5.5 million from these sales. Subsequent to year-end, in February, we sold one assisted living facility that was classified as held for sale at year-end. Currently we have three senior living communities in the medical office building I just mentioned, with an aggregate net book value of approximately $3 million classified as held for sale, the majority of which we expect to sell over the next couple of quarters.

Moving to the balance sheet. In 2014, we closed on $1.2 billion of acquisitions and invested $28 million into revenue producing capital improvements at our leased senior living communities. During the quarter, we also spent $4.4 million of MOB tenant improvement and leasing costs. Our recurring capital expenditures included $830,000 at our medical office buildings, and $1.9 million at our managed senior living communities or approximately $1,300 per unit on an annualized basis in 2014. We also incurred approximately $4.3 million of development and redevelopment capital expenditures, primarily at our managed senior living communities, which was in line with our expectations.

At December 31, we had [$28] million of cash on hand, $80 million outstanding on our revolving credit facility, $1.7 billion of unsecured senior notes, $627 million of secured debt and capital leases and a $350 million unsecured term loan. SNH's balance sheet and liquidity remains strong and in line with our peers with total debt to gross book value of real estate assets of approximately 45% and adjusted EBITDA to interest expense of 3.6 times.

Subsequent to year-end, in January, we closed on the CCIT acquisition for approximately $539 million, which included the assumption of $30 million of secured debt at 4.7%. In February, we issued 31 million common shares, raising net proceeds of approximately $660 million. With these proceeds, we paid down our revolving revolver, which is now 100% available to us.

As a result of our successful equity offering in February and in line with our expectations of utilizing an appropriate mix of equity and debt to long-term fund at CCIT and CNL portfolios, we intend to fund the 38 private pay senior living communities that we expect to close in the second quarter with cash on hand, assuming approximately $150 million of secured debt at 4.8% in debt financing. As Dave mentioned, we're very pleased with our 2014 results and accomplishments. With that, Dave and I are happy to take your questions.

(Operator Instructions) Mike Carroll, RBC Capital Markets.

David, can you give us an update on the Company's investment strategy? Historically, SNH has really focused on small transactions, but the Company has recently completed three large transactions. Do you still consider doing these small deals or are you still out there looking for the larger portfolios?

Well, we are still looking at both opportunities; the individual assets as well as the portfolios. As you said, historically, we've been focused on the smaller one-offs. What we're finding is that the competition is just as competitive at the individual level as well as on the portfolios. And I think we do feel that we wanted to refresh some of the portfolio and bring on some -- take advantage of the fact that a number of high-quality assets and portfolios are trading in, in the last couple of years and I think it's important for our long-term vision to acquire some of those portfolios.

And I think we're getting, the Vertex acquisition obviously was an outstanding asset in the Boston area, the portfolio of medical office buildings, again nice, outstanding buildings with excellent credit tenants on a long-term basis and then you have the latest transaction which is CNL Properties and again they're newer assisted living, independent living type properties that we believe still have a good amount of internal growth to go on them.

So I think to maintain our competitive position, we have to participate in some of these high quality portfolios. But we are still continuing to focus on that $10 million to $50 million transaction, but I have to admit that there is a significant amount of competition out there for those types of assets too.

So, is it safe to assume that the smaller transaction volumes is going to be a little bit lighter than normal and then every once in a while you'll hit one of these larger portfolios?

I think that would be an honest assessment of it. We'll still pursue it. And frankly, right now, we're mostly focused on the CNL transaction, to close that and to work out all of our relationships with the individual managers and tenants. So, I'd say even in the short term, you won't see a lot of volume on individual assets or portfolios.

Okay. And then, Rick, can you give us an update on your leverage targets? How high are you willing to push those numbers?

Yes. Well, at year-end we're about -- on a total book cap, [about] 48% as I mentioned on the gross real estate, total debt to gross real estate, [about] 45%. And we just finished the equity offering in February to have fund the two portfolios. We do expect to go out and finance the CNL portfolio with debt and expect that our leverages won't change meaningfully. It'll still be in about the same range that it's in today.

So is your goal still in the mid 40% and are you willing to push it above 50% in the near term?

If we had to put it above 50%, we would. I think we would still stay below 50% and as you saw, we paid about $74 million of secured debt in 2014 and we still look for opportunities to continue to pay down debt whenever possible and bring that leverage down.

Juan Sanabria, Bank of America.

Hi, thanks for the time. I was just hoping you could speak a little bit to on, continuing on the balance sheet, any pre-payment opportunities to repay some higher costing debt. I think you referenced that in your prepared statements?

Yes, like I just said to, we're continuously looking at our secured debt to see if we can prepay them before the maturity dates. I think, we've done a great job in 2014 to do that and we'll continue that in 2015. We do have one of our secured or unsecured senior notes due in January of 2016. We'll be looking to refinancing that later in 2014 or in January of 2016. So, we do look for opportunities to pay down our debt.

Nothing specific though you can point to other than that 2016 maturity?

There's really nothing -- I mean, we only have about $50 million, $60 million left in 2015. The mortgage debt, a lot of them just have high cost prepayment costs that really, it's not worth paying off at this time. So, we just look for the opportunities where we can pay them off, that's worthwhile for us.

Excellent. And then on the CNL, with the operating partners there that you're looking at, your options and you're in negotiations, could you just give us a sense of any costs or performance fees or any other expenses that might be incurred by you to change operating partners or bring in Five Star or what you're planning to do there and kind of the financial impact of potential changes in the operating structures?

Well, our primary objective is to try to work something out with the existing operators. So, I think right now, the only cost that we should incur would be potentially some termination fees for contracts, but in the grand scheme of things, I think they're less than $1 million and there would be a one-time charge.

So, no performance fees that are earned that you'd have pay out on top of those termination fees?

Not that we would have to pay. I think obviously CNL will have to pay through the end of -- till closing, anything that's been earned. But for us, our costs would be just a one-time termination fee. And again, I expect it to be less than $1 million.

And could you remind us of the cash and GAAP yields you expect on that transaction?

Well, as we said in our prepared remarks too, we still expect to earn in excess of 7% on a GAAP basis and it would probably be about 40 to 50 basis points less on a current cash basis.

And then, I may have missed this in your introductory remarks but anything that drove the above average same-store growth for MOBs and the triple nets, I guess in particular, any fees or anything that -- with the 3.5% particularly on the triple nets that was a bit high.

On the triple nets, there is nothing there. It's just a percentage rent from our leases with Sunrise and Five Star. We did have some of the private tenants that we've renewed their leases and increased the rent. So they went(inaudible) to fair market value.

Revenue producing capital improvements at some of the properties.

Yes, that would be the third ingredient.

Where we invest capital improvements at them, the rents go up.

So, the average bumps on the triple net portfolio is 3.5%?

No, on the private operators the bumps are normally about 2.0% to 2.5% per annum, but that's just on the private operators. We have percentage rent formulas with Five Star, Sunrise and actually Brookdale where we get a 4% to, in one case, 10% of the growth of revenues at the properties and it's a quarterly estimate and we true-up in the fourth quarter, but there's nothing unusual. I think it was just a very strong quarter.

Okay. And anything in the MOB?

On the MOBs, first off, just pointing out that we're at 95.3% occupancy and -- now, I think people forget that we -- how much of the portfolio is multi-tenanted with vacancies to fill and I think our property management team and asset management team have done an outstanding job with being able to increase the occupancy in these buildings when they're already at 95% occupancy and achieving increasing rents and high tenant retention levels. The tenant retention levels are over 80%. So, what contributed to this quarter was, fourth quarter was escalation income was a piece of it. I know we had some tenants that had some free rent that on a cash basis are now kicking in.

Occupancy growth, [seeing] occupancy growth and other rent bumps.

Okay. And anything on the dividend lastly? Sorry, I know -- you've grown the portfolio, it seems about 25% since the fourth quarter of 2012, but the dividends remained flat.

Well, if you were to look at it like the last several quarters, say four or five quarters, our payout ratio a year ago was about -- in excess of 90% on an FFO basis. And I think about 102%, 103% on a CAD basis. And over these last several quarters, we've managed to bring that down to about 86% right now.

And I think on a historical basis, we've typically looked to raise the dividend when we were in the mid 80%. So I think we're getting close and we're considering -- the Board will consider it every quarter. I can't speak on their decision, but I think that we're getting within the range that it's -- we seriously will look at it.

Tayo Okusanya, Jefferies.

Hi, good afternoon everyone. Just a follow-up question on the CNL properties, I do know some of the concerns investors had initially was that the EBITDAR and NOI growth had not been as strong as people would typically see out of a senior housing assets for most of 2014. Just curious if you could give us a sense of whether there was a change in that trend with their fourth quarter results?

No, I mean, like talking about our existing portfolio, we've historically had greater growth rate and in these last two quarters, I'd say we were not pleased with the results of the two quarters, but I do believe that we will return back to the mid-single digits.

And I think that there is still a good amount of growth to go to run on those, because as you recall, we've been putting a lot of capital into these properties. So, they're still not functioning on all cylinders and rates have not been pushed. Our growth, our rate increase has been about -- it was 1.8% this quarter. We expect to see increases between 3% to 6% in this portfolio for 2015. That would push rates and I think expenses are still pretty manageable and I don't expect any significant growth in expenses. So I am expecting a better 2015 from this portfolio.

Okay. Dave, I appreciate the comments about that specific portfolio, but I think my question was around the CNL assets that you're trying to acquire?

Right. Well, that -- I mean, it's a more mature, more occupied portfolio, I should say, in the 90s. But, they also I believe have opportunities to expand the physical plant as well as to push rates. Again, I would probably be a little bit more modest in expectations for same-store growth from that portfolio just because they are in -- average is 93%. So, until we get in there and see --

But, them knowing that you are trying -- when you buy this portfolio, one of things you're looking for is an improvement in the fundamentals. I mean, did we see any improvement at all in fourth quarter? I'm assuming you were privy to their fourth quarter results as part of our ongoing due diligence. The first three quarters were pretty tough for them. And I'm just kind of curious whether things have started changing in fourth quarter because you do have investors asking you, why are you buying this portfolio that has had below industry average performance for most of 2014?

I think -- I don't think it would be right for us to comment on the fourth quarter, Tayo until they publish their numbers and do what they need to do on their side. Like Dave said I think we really need to, when we close on there, get in there and see what we can do on the expense side and revenue side where we have room to improve on both sides which like you're saying they may not have accomplished in 2014, or at least the first three quarters. So until we get in there, I think we'll have an opportunity to improve on any metric we can.

Okay, that's fair. The second question again, when I just kind of think about balance sheet and financing needs going forward, you did raise the equity earlier on, you've basically paid down the line, the excess cash from the equity deal basically is more than enough to cover the acquisition costs associated with the CCIT portfolio, leaving you with a little bit of excess cash. But again, when we think about the CNL portfolio of almost $800 million coming on board in 2Q, how do we think about financing as it pertains to that portfolio?

Well, like you said, we do have ample liquidity to close on the CNL deal. We were able, with the successful equity offering we had, we were able to pay down our credit facility to zero. And that gives us, an opportunistic about the timing of when we do go to debt markets. We don't know what the debt markets will be to raise the appropriate funds to close on that. We will be assuming about $150 million on that deal at 4.7%. So, I think until we know what the market is in a couple of months, it's hard to say.

But I mean if I think about the portfolio at $790 million, again, you're assuming $150 million of debt, when I kind of take a look at where your balance sheet should be in January based on the equity raise and closing of the CCIT deal, I kind of come up with excess cash of about $125 million or so. So you're still talking about a need to fund slightly over $500 million, which I think would be a fairly large debt deal. Do you expect that to fully be debt based on where your leverage targets are, or do you think you might do another slug of equity?

Yes. We do expect that to be debt. We have always said that we have an appropriate mix of debt and equity for both portfolios and we wanted to go out to the equity market and just go out there, wanted to try to get what we needed in February and I think we've successfully did that. So whatever we do need to close on this, it would be the debt component and it could be, like you said, it could be around $500 million. And it be different tranches.

And we do have the line of credit of $700 million, $750 million that's available to us totally. So, if we did -- our expectation is we will try to accomplish all the debt financing at one time probably in a couple of different tranches, but if we end up with a residual couple of hundred million on line of credit, that's not a problem either.

Nick Yulico, UBS.

Thanks. On the CNL transaction, I want to make sure I understood this. You're saying you're talking to the managers and operators of the individual buildings and is your intent to keep them in place or to put Five Star in as the operator?

I can only give you broad parameters because we're still in discussions with them. So I couldn't give you any final conclusion. But ultimately, I think we would have a preference for leasing the properties, but we also, if we can't do that we'd want to accomplish something that would be under a management arrangement that would at least give us some, the right incentives for them to perform the way we prefer going forward. So we're in different discussions with different operators and I think it's premature at this point to determine how it's going to shake out.

Okay. So it sounds like you're saying the opportunity might be to redo arrangements with the existing operators. That's the opportunity moreso than bring Five Star in as an operator to run these better?

I'd say they're all on the table. The current contracts most of them only have a year or two left to run on them. So something has to be done. So we'll look at all the options, including Five Star as a manager. We do know the economics should they manage for us at the end of the day on some of them but there is still a lot in motion at the moment.

And how do we balance Five Star? What's going on with their -- the coverage in the triple net portfolio you have with them continues to go down each quarter. The occupancy was down year-over-year and yet you are using them as your main operator on the managed portfolio. What's the big difference between those two as far as the triple net continuing to go down and the managed occupancy being up a bit, but not much year-over-year?

Yes, there are a couple of different characteristics of the two different portfolios. On the triple-net, they still have a considerable amount of skilled nursing in there, and what you're seeing in the coverage ratio is now the full effect of the sequestration cutting out a portion of revenues, which has a direct effect on the bottom line. The occupancy has been pretty much flat, about 84.5% across for the last year.

And another thing is that, every time we fund capital improvements, the rate goes up on the rent by 8% on the amount funded. So that's an additional cost that they have to cover and that's factored into the coverage ratio. So it is a more challenging thing for them to make that coverage ratio move up in a meaningful way, but it's still a very strong coverage at the 1.2 level.

With the managed properties, I would say that their -- the makeup of them is a significant amount of independent living and assisted living and a relatively small amount of skilled nursing. So I think that's one reason why their performance has been better, the occupancy has moved up considerably by 90 basis points at that portfolio. And I think a good part of that is because independent living has bounced back from the recession at a faster clip.

If you look at the NIC data, the rates being charged are increasing faster in independent living than they are in the assisted living and definitely in the skilled nursing. They are not barely going anywhere in skilled nursing. So, I think those are differentiating between the two portfolios I think.

And I guess just one other question, going back to the CNL transaction is you did mention it's a higher occupancy portfolio. I think you said it was 93%. How're you viewing that as a potential risk given that you're talking about management agreements expiring with existing operators over the next couple of years, possibly bringing in Five Star, having a new operator coming in and maybe residents not liking that changeover situation? I mean, it's kind of an unusual -- it's a much more unusual situation you're dealing with here than the rest of your portfolio which is just lower occupancy. Here you have some high occupancy that maybe has some potential occupancy downside risk?

Sure. I don't disagree that there is some downside risk at least in the short term because there is some. When the manager stays on, before and after a transaction, it's pretty smooth. When there is a change in managers whoever it is, there's disruption for -- we find to be a quarter or two of disruption in performance because of those exact reasons, the staff, the residents and so on are on guard as to what to expect from the new people.

But that usually does smooth out and then gets back on a trajectory. We had that with the Vi portfolio down in Florida; those properties are all in over 90% occupancy today and performing very well. So, I think you're correct that there could be a disruption for a quarter or two with those, whenever properties change hands, but I think in the longer term, they are pretty new assets. I know that a couple of expansions are in the works at a couple of the properties. And I think that in the longer term, it's a much -- a very good investment for us, an excellent investment.

I guess, just lastly, I mean, the bigger question I guess I have is why even bother trying to bring Five Star into this portfolio. I mean, why not diversify away from Five Star, I mean you haven't given much details on the operators of some of these facilities, but they seem to be smaller local players and maybe it's an opportunity for you guys to -- I mean this is a business that's pretty much an operator business. It's not that you just own the real estate and put in whatever operator and maybe this is an opportunity to actually expand into other operators versus Five Star, which has underperformed as an operator?

Well, in our RIDEA portfolio, they have performed very well. But as far as -- I think there is a lot of complications. One is trying to structure the right incentives with some of the local operators, but also as a public company, we have to comply with all the Sarbanes-Oxley requirements with internal controls. And I think some of these are not necessarily equipped to comply with the rules and I don't think we can afford a hiccup if we want to access capital markets or report ourselves at the end of the year.

So I think we want to know our risk going into these transactions. And like I say we've had very good experience with Five Star on our RIDEA portfolio and they have tremendous depth and qualifications and liquidity. That's the greatest thing. And I think we're very transparent in all of our relationships and dealings and stuff like that and I'm not sure that, to switch operators and stuff like that, we would spend a lot of our conference calls talking about a manager for 1% of our portfolio. We just don't want to be in that position.

Chad Vanacore, Stifel.

Hey, good morning. I'm pinch hitting for Dan Bernstein today.

Hi, Chad.

So, one of the things we're seeing is actually a pretty heavy flu season, it started in December, and it's going deep into the first quarter. Are you seeing any issues at your properties and what do you expect as far as occupancy in the first half?

We are seeing flu showing up pretty much across the board. So, it's still early -- it didn't really seem to show up until, I'd say the last couple of weeks and we are in the, just at the end of February. So, I'm hoping that's not a prolonged period, but I would say we have had an effect of, probably, maybe up to 40 residents at this point, people not facilities, from an occupancy perspective, and we really hope that's short term. We've also experienced a little bit of cold weather is traveling across the country. We've learned a lot of lessons from a year ago, but I think people are incurring some additional cost just because of preventative measures and that will -- we'll have to see how that plays out.

Okay. And one of the other things we're seeing too is some large retailers boost wages and some boost in state minimum wages. Do you expect any impact on 2015 results for yourself as far as expenses go?

I would say certainly I'm not expecting it certainly for the first half of the year. It's a lot more difficult to forecast for later in the year because it is starting to spread, but through more states, but I feel confident we can increase rates and so on to compensate for it.

All right. And then last question, about your pipeline. Could you give us a look on the size and maybe split between Senior Housing and MOBs and maybe cap rate ranges you're looking at?

Well, we certainly see a lot of transactions and I think we are focused on closing the CNL first and foremost. But I would say, we're seeing a lot of all types of properties, the medical offices what we're winning mostly and I expect to continue to, over the course of this year, do another couple of hundred million dollars of those type of properties, a little bit of senior housing.

All right, and what about the cap rate ranges you're looking at?

They're pretty much around plus or minus 7%, high 6% to low 7%. We're not pursuing -- we're seeing transactions out there that are happening at 5.5, 6 cap rates, but we're just not pursuing them. So it's getting pretty frothy, I'd say out there.

And at this time, it does appear there are no further questions in queue. Please continue.

Well, that's it for us. But thank you all very much for your time and your questions and hope to see you sometime soon in a new conference. Take care. Bye, bye.

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