Senior Housing Properties' Management Presents at Acquisition of Two Biotech Medical Office Buildings in Boston's Seaport District (Transcript)

Feb.11.14 | About: Senior Housing (SNH)

Senior Housing Properties Trust (NYSE:SNH)

Acquisition of Two Biotech Medical Office Buildings in Boston’s Seaport District Conference Call

February 11, 2014 10:00 AM ET

Executives

Timothy A. BonangVice President-Investor Relations

David J. Hegarty – President and Chief Operating Officer

Richard A. Doyle, Jr. – Treasurer and Chief Financial Officer

Analysts

Todd J. Stender – Wells Fargo Securities, LLC

Michael Carroll – RBC Capital Markets LLC

Daniel M. Bernstein – Stifel, Nicolaus & Co., Inc.

Haendel E. St. Juste – Morgan Stanley & Co. LLC

Omotayo Okusanya – Jefferies & Company

Juan C. Sanabria – Merrill Lynch, Pierce, Fenner & Smith, Inc.

Nick Yulico – UBS Securities LLC

Ross Nussbaum – UBS Securities LLC

Operator

Good day and welcome to the Senior Housing Properties Trust 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.

Timothy A. Bonang

Good morning, everyone. And thank you for joining us on such short notice to discuss the acquisition we announced yesterday and also for your patience as we got everyone on the call. Joining 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 is 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 on Senior Housing's present beliefs and expectations as of today, February 11, 2014. The company undertakes no obligation to revise or publicly release the results of any revision for the forward-looking statements made in today's conference call other than through filings with the Securities and Exchange Commission or SEC regarding this reporting period.

Now, I would like to turn the call over to Dave, who will begin the slide three.

David J. Hegarty

Thank you Tim, and good morning everyone and thank you for joining us on today’s call. Yesterday afternoon we announced that SNH has agreed to acquire two Class A biotech buildings in Boston’s fastest growing submarket, the Seaport District, also referred to as the Innovation District or Fan Pier. The acquisition is expected to be a new accretive to SNH shareholders and 96% of the rentable square footage is a 15-year triple net leased to a strong credit tenant, Vertex Pharmaceuticals.

Vertex has been a public company since 1991 as stated on the NASDAQ. This was a transformative acquisition to SNH’s portfolio as it significantly increases our MOB exposure. The purchase price is $1.125 billion and the yield to SNH is expected to exceed 7% per annum. We anticipate closing this transaction in the first half of 2014.

Now please turn to Slide 4, which highlights the property details. The property consists of two 15-storey newly constructed buildings with a total of 1.65 million gross square feet. There is over 1.13 million rentable square feet. And as I just mentioned 96% is triple net leased biotech lab and office space to Vertex. The lab’s research space is steady and features intensive HVAC, plumbing and redundant electricity to meet the needs of the biotech industry. The properties also include approximately 50,000 square feet on street level retail space, which will have amenities such as dining, banking and day care.

Finally, there is approximately 390,000 square feet and subterranean parking for 740 vehicles on three levels. The buildings were constructed in accordance with LEED Gold standards and they feature a high-end building systems and finishes.

Please turn to Slide 5, I hear that most of you have a building at 11 Fan Pier Boulevard, although we can see it on the slide, it’s important to note that the two buildings are connected by a glass sky bridge on the fifth and sixth levels. This is not only an attractive feature but also has obvious practical benefits in connecting the workforce.

Please turn to Slide 6, here is a closer view of the other building which is 50 Northern Avenue. For those of you who are familiar with the Boston area, you will notice that to the left of this building sits the John Joseph Moakley United. States Courthouse.

Turning to Slide 7, which details the location. Over the past several years, the Seaport District which includes the Innovation District in Fan Pier has become Boston’s fastest growing submarket and one of the nation’s top real estate investment opportunities. Billions of dollars of public investment in infrastructure for more than a decade have made the area photograph of growth and development. With the completion of the Back Bay several years ago and investment in public transportation, the area enjoys seamless and easy access from the Financial District and surrounding areas of Boston. The Seaport District is now thriving as one of the most attractive places to live, work and dine.

There has been positive net absorptions and leasing velocity, and rents have increased more than 30% in the past year. The ultimate validation of these flats has been the relocation to the Seaport District by some of Boston’s highest quality tenants that have moved from the Financial District and Back Bay. These include Fidelity, State Street Bank and PricewaterhouseCoopers coming in the field. In addition, the Seaport is now home to several technology companies and relocated from Cambridge and other parts of Greater Boston area.

As you’ll see on the bottom of the slide featuring last month’s Boston Globe trumpet [ph] of the significance of the Innovation District. Just last week the [indiscernible] economic development is already saying that the Vertex project was a catalyst and an anchor for the Innovation District, now among the hardest growth rate markets in the world.

Now please advance to Slide 8, here is an area of the older property which provides clear perspective on the core structure related to the Financial District. The buildings were developed on Fan Pier which is prime real estate and the gateway to the remainder of the Seaport which scrolls beyond this area.

Beyond these buildings they are numerous restaurants, hotels and residential development, other landmarks include the Boston Convention Centre, the World Trade Center and the Institute of Contemporary Art. The Seaport District has truly become a cultural, social and hospitability nexus to Boston in New England.

Now turning to slide nine, our strong credit tenant is Vertex Pharmaceuticals, a leading biotech company which was founded nearly 25 years ago, that has a diverse and innovative pipeline for multiple medicines including its breakthrough therapies of Cystic Fibrosis. Vertex is well positioned for long-term growth and has a very strong balance sheet.

According to Vertex’s most recent filings with the SEC, the company had cash and marketable securities of approximately $1.5 billion. The company has moved to this space they vastly improved working conditions and promote collaboration as they consolidated 10 satellite facilities in Cambridge to this new global headquarters, which will eventually house more than 1,300 employees for additional headcounts growth.

Please turn to slide 10, which provides a summary of the main lease. Vertex is committed to a triple net 15-year lease, which just recently commenced through December of 2013. The leases for the entire research lab and office space which represents 96% of the rentable square footage. The rent starts at $62.50 per square foot with $5 per square foot increases in both years 6 and 11.

In addition, approximately 50,000 square feet of street level retail space is currently being negotiated by the seller and are seeing strong demand. A portion of the retail space has been pre-leased and the seller is economically protecting SNH on the vacant retail space for up to 15 years.

Currently the subterranean parking on three levels is expected to experience strong demand and generate additional revenues given that is immediately adjacent to the U.S. District Court and the First Circuit Court of Appeals as well as numerous restaurants and other amenities.

Now please turn to Slide 11. Here is some rent benchmarking and other triple net leased lab in office space in Boston area. As you can see the Vertex rent compares very favorably at just over $10 per square foot below market to other destination medical office, lab space in the Boston area.

And with that I’ll now turn it over to Rick to provide financial details and the positive impact for SNH’s portfolio.

Richard A. Doyle, Jr.

Thank you, Dave, and good morning everyone. Please turn to Slide 12, which aligns the transaction details. The purchase price is $1.125 billion which is approximately $682 per gross square foot. As Dave mentioned these buildings include 390,000 square feet of underground parking for 740 vehicles on 3 levels, which is expected to generate additional parking revenues for SNH.

If you only include the $1.1 million rentable square feet and exclude the square feet associated with the parking garage, the purchase price is $994 per rentable square foot. The yield to SNH is expected to average 7% per annum which includes reasonable estimates for parking revenues. Ultimately the strength of SNH’s balance sheet and sufficient liquidity are enabling this class A transaction to be immediately accretive SNH’s shareholders on a normalized FFO per share basis by approximately $0.06 to $0.08 per share per year.

It is also important to note that SNH is only obligated to fund capital for the roof, structure and certain other long lived assets and given that the property is brand new construction we expect the acquisition to also be accretive on an AFFO or CAD per share basis.

Turning to Slide 13, where I’ll walk through the financing details. We plan to long-term finance this acquisition with approximately 75% with that including possible bank term loan, mortgage debt in unsecured notes. Approximately 25% of long-term financing is expected to be equity. Simultaneous to signing the purchase of sale agreement SNH received a term loan commitment for $800 million from Jefferies and Wells Fargo Bank.

The term loan will have an interest rate of LIBOR plus 140 basis points and can be repaid in part or whole at anytime without penalty and will mature five years from closing. Prior to closing, the term loan is expected to be syndicated to a group of banks, and it is expected to close simultaneous with the acquisition of the Vertex buildings. The actual size of the term loan can also be reduced depending on SNH’s funding needs at the time of closing and without any additional costs to SNH.

SNH also maintains a $750 million unsecured revolving credit facility, which is currently substantially available to partially fund this acquisition at closing if necessary. Because of our availability under our credit facility in up to $800 million of term loan commitment, we have great flexibility as to when to access the capital markets for this acquisitions long-term financing.

Turning to Slide 14, where you will find charts that illustrate the improved diversity of SNH’s NOI by property type and tenant mix before and after this acquisition. The pro forma charts also account for the sale of the two rehabilitation hospitals on December 31, 2013. Our MOB exposure following this acquisition will increase to 41% up from 30% at September 30, 2013, a 97% of our NOI will be private pay.

In addition, our largest tenant Five Star Quality Care will decrease to 37% of our NOI down from 44%. This acquisition fits squarely in our previously stated strategy to increase our focus on MOBs and private pay properties and helps us to achieve a more desirable portfolio mix.

Slide 15 compares our actual coverage in leverage ratios at September 30 to pro forma ratios into the SNL U.S. REIT Healthcare Index. The pro forma ratios include this acquisition as well as the sale of our only two rehab hospitals announced in December. As you can see, the leverage and coverage ratios remain conservative, post acquisition is well in line with our peers. Our balance sheet continues to be strong and we have excellent liquidity.

Please turn to Slide 16, which takes a closer look at the break-down of our MOB portfolio. Biotech increased to 42% of the MOB portfolio, up from 40% at September 30. On/near Campus MOBs decreased to 43% down from 69% and Off Campus MOB decreased slightly to 15% down from 17%. The quality of our MOB tenants across all segments remains very strong.

Turning to Slide 17, which takes a look at SNH’s top MOB tenants. Vertex will clearly be our largest MOB tenant with an annualized rental income of $75 million and approximately 1.1 million square feet. The highlight of this slide have a chart at the bottom which illustrates that pro forma average lease term remaining, but MOB rental income is now 8.2 years, up from 5.6 years at September 30, and the pro forma average remaining lease term for SNH’s total portfolio rental income is 10.3 years, up from 9.8 years at September 30, 2013.

Please turn to Slide 18. In summary, this is clearly a very exciting acquisition for a Class A laboratory and office property in Boston’s most desirable submarket with a marquee tenant. SNH’s portfolio and tenant mix will be straightened by it either it’s expected to be immediately accretive on a normalized FFO basis to SNH shareholders.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Thank you. Our first question comes from the line of Todd Stender with Wells Fargo.

Todd J. Stender – Wells Fargo Securities LLC

Hi, good morning guys.

David J. Hegarty

Good morning, Todd.

Richard A. Doyle, Jr.

Good morning Todd.

Todd J. Stender – Wells Fargo Securities, LLC

With the term loan just being in the five-year range, is this more of a bridge loan, is it more of a posturing or optics for the seller just for a surety of closing, or you think you really tap it?

David J. Hegarty

No we expect to utilize the term loan because obviously we have, low leverage balance sheet and we can stratify our maturities diagram appropriately. So this fits well into our transaction and where do we use the whole 800 million I think we still have to decide, but we have that available.

Todd J. Stender – Wells Fargo Securities, LLC

And as far as there are ground lease on this property at all?

David J. Hegarty

There is not.

Todd J. Stender – Wells Fargo Securities, LLC

I think so, but any existing mortgages?

David J. Hegarty

None that we would be affirming.

Todd J. Stender – Wells Fargo Securities, LLC

Okay, because it seems like now you’ve got both coasts, you have got this property here no ground lease and much like the same with your dual assets in Los Angles, the Cedars-Sinai property which is also unencumbered. So it seems like you’re building out a pretty good portfolio of real estate.

David J. Hegarty

And yes we also have biotech in [indiscernible] California with The Scripps Research Institute too. So this fits well with our biotech portion of our business.

Todd J. Stender – Wells Fargo Securities, LLC

Okay, thank you.

David J. Hegarty

You’re welcome.

Operator

Thank you. (Operator Instructions). Our next question comes from Michael Carroll with RBC Capital Markets.

Michael Carroll – RBC Capital Markets LLC

Thanks. With this acquisition are you guys becoming more focused on life science assets or is this just more of a unique opportunity?

David J. Hegarty

Well, we have always maintained that life science is one of our options to invest in. We’re still like keeping the balance. We think that this acquisition particularly fixed squarely in our previously stated strategy to increase our focus on medical office buildings in private pay properties. So I think it helps just balance our portfolio, significantly.

Michael Carroll – RBC Capital Markets LLC

And what percentage of these assets are labor’s office?

David J. Hegarty

Of this particular transaction?

Michael Carroll – RBC Capital Markets LLC

Yes.

David J. Hegarty

It is more in the 50s as a percent as a lab and biotech research.

Michael Carroll – RBC Capital Markets LLC

Okay and then can you give us some more color on I guess your assumption that will be $0.06 to $0.08 accretive? Rick did you say assuming 70% equity, 30% debt. And how should we think about the timing of these potential offerings.

Richard A. Doyle, Jr.

Yes, as I mentioned on that, we have compared various pro forma financials using different tranches of about 75% debt and 25% equity. And that gave us a low range between $0.06 and $0.08 accretion on that.

Michael Carroll – RBC Capital Markets LLC

So this $0.06 to $0.08 accretion assume 75% debt?

Richard A. Doyle, Jr.

Yes, and 25% equity.

Michael Carroll – RBC Capital Markets LLC

Okay, all right, great. Thanks.

Richard A. Doyle, Jr.

Thanks.

Operator

Thank you. Our next question comes from the Daniel Bernstein with Stifel.

Daniel M. Bernstein – Stifel, Nicolaus & Co., Inc.

Hey, good morning.

David J. Hegarty

Hi, Dan.

Daniel M. Bernstein – Stifel, Nicolaus & Co., Inc.

That’s a quite an asset that you bought there. Just taken that last question a little bit further, if it the $0.08 of FFO accretion, I assume essentially entire throughout the $800 million term loan?

Richard A. Doyle, Jr.

Like I just said Dan we used, we prepared different pro forma choose and different tranches of our debt. So the, we came to ranges of $0.06 to $0.08 and that’s just on different variations.

Daniel M. Bernstein – Stifel, Nicolaus & Co., Inc.

Okay. And then I’ve looked at the Vertex 10-K last night and if I took their, what they listed their lease obligation for 2014 would be 67.2 million at 61 square foot. So I am just trying to understand is there any delayed rents that get moved into 2014 or you quoting GAAP versus cash, just trying to reconcile what I see in the Vertex 10-K versus that 62.50 just seems…

Richard A. Doyle

62.50 is going in, the cash rents per square foot to Vertex and then there is $5 increases in year six and another $5 increase in year 11 I believe, so.

Daniel M. Bernstein – Stifel, Nicolaus & Co., Inc.

Okay, is there any construction funding that you have to fund at this point?

David J. Hegarty

Lot other construction has been completed at this point and any TIs and so on related to the retail to sell its obligation.

Daniel M. Bernstein – Stifel, Nicolaus & Co., Inc.

Okay, okay that’s all I have thanks.

Richard A. Doyle

Thanks.

David J. Hegarty

You’re welcome.

Operator

Thank you. We have a question from Haendel St. Juste with Morgan Stanley.

Haendel E. St. Juste – Morgan Stanley & Co. LLC

Hey, good morning.

David J. Hegarty

Good morning.

Richard A. Doyle

Good morning.

Haendel E. St. Juste – Morgan Stanley & Co. LLC

So just going back just wondered I think pursue the external growth story a bit more, now that you are at that 40% threshold for MOBs, how do we think about external growth being going forward? Have you reached what you want to be and is it just dependent on pricing opportunities between say Senior Housing and MOBs at this point.

David J. Hegarty

Yes, I mean lot of its pricing, lot of its opportunity was still very bullish on the Senior Housing industry and the demographics and even in the next couple of years we believe that supply and demand will be in balance for multi-tenant and medical office buildings and traditional office buildings, again the demand is there and will increase with the demographics, so we are very bullish on that sector. And biotech I think also – it’s a unique industry and it varies in that time. We like that we would be very disciplined and selective in making our investments ahead and it’s another options for us to grow. With regards to which of those three buckets to each transaction are going to stand unsound and depending on pricing and the attractive features of that asset would make better decision at that time.

Haendel E. St. Juste – Morgan Stanley & Co. LLC

Can you give us a flavor for what you are seeing in the marketplace? Are you seeing a lot of opportunities with your return bucket threshold and can you talk about that across the different spectrum that you are considering investing in?

David J. Hegarty

Well, to further really expand that question until our earnings call, it should be in a couple of weeks, but generally we are still seeing quite a bit of opportunity in MOB space and in housing.

Haendel E. St. Juste – Morgan Stanley & Co. LLC

And then one last one if I may, I think you provided the detail on the cost per square foot both with or without the parking, can you do the same for the yield on this. Do you have a field figure without the parking included?

Richard A. Doyle

I do not have that one right now.

Haendel E. St. Juste – Morgan Stanley & Co. LLC

Okay, well I guess we could follow up on that. Thank you.

Operator

Thank you. We’ll go to the line of Omotayo Okusanya with Jeffries.

Omotayo Okusanya – Jefferies & Company, Inc.

Yes good morning, first of all congratulations on the deal. Couple of questions, the 7% yield, is that a GAAP or cash number?

Richard A. Doyle

That’s the GAAP number Omotayo.

Omotayo Okusanya – Jefferies & Company, Inc.

Okay, that's the GAAP number, I mean when we’re trying to do our own back of the envelope MAP, again assuming there is 75% or 25% split, and the 75% really is the term loan, we kind of come up with much higher accretion on that of course there is meaningful increment G&A associated with the acquisition. Could you talk a little bit about that?

Richard A. Doyle

Well, like I mentioned, we had different non-performer scenarios that we put together and but facts out there are with the Vertex lease of 96% of the stakes and we did reasonable estimates on our parking, we came up with the thinking of around 7%.

David J. Hegarty

Yeah, we just add to that time, the term loan will be hedged, so that will cause something to our cost of capital.

Richard A. Doyle, Jr.

Okay, I understand that probably we are missing link here with the math that we are doing so there will be some hedging that’s…

Omotayo Okusanya – Jefferies & Company, Inc.

So in general what kind of fixed rate or what kind of a rate are you assuming that your cost of debt will be altered on the transaction?

Richard A. Doyle, Jr.

Well, like I said we use different tranches of our debt, we have availability like the term loan, we will probably are going to take a portion of the $800 million and then we may have mortgage debt that we are considering in other tranches of debt and then it depends on that– the rates on those.

Omotayo Okusanya – Jefferies & Company, Inc.

Got it, okay that’s thanks for asking this has been the missing piece. Okay so that’s fine, that’s helpful, and then could you just talk a little bit about just the whole process of actually, successfully acquiring this asset. I’ve heard of a healthcare REIT lab tech we’ve kind of talked about this building, what a high quality building it is? I would have assumed they would all have been interested, how did you do guys happen to kind of to beat all those doubts so to speak?

David J. Hegarty

And I called you after that the detail of that question to them make sure who is actually competing against, and how close we were and so on and what are the exciting factors. But we do know that it was marketed HFF come back to the process. We are locally based, and we feel very strong about this tide of optimum in the growth prospects for the Innovation District.

This particular building, as you mentioned has all the state-of-the-art build-out and construction, Gold LEED certified and so on. So we decided to pursue this as aggressively as we thought we could, and potentially with that we’re able to win that. And I think the fact that, the balance sheet is has historically been very low deleveraged, so we thought this was an opportunity to use all of that borrowing capacity to pursue this aggressively.

Omotayo Okusanya – Jefferies & Company, Inc.

Got it, okay and then just the rent bumps in your 2006 and 2011 those are the only two rent bumps, there is no annual CPI based rent bumps associated with this?

Richard A. Doyle, Jr.

Those are the rent bumps in the lease.

Omotayo Okusanya – Jefferies & Company, Inc.

Okay so that’s about it, okay great thank you. Congrats again.

Richard A. Doyle, Jr.

Thank you.

Operator

Thank you, we’ll go to the line of Juan Sanabria with Bank of America.

Juan C. Sanabria – Merrill Lynch, Pierce, Fenner & Smith, Inc.

Hi, guys good morning just a couple of questions can you just provide the golden cash cap rate?

Richard A. Doyle, Jr.

Yes, the golden cap rate is low-to-mid 6s.

Juan C. Sanabria – Merrill Lynch, Pierce, Fenner & Smith, Inc.

Okay and how did you allocate in the purchase price for the parking structure?

David J. Hegarty

Well, we didn’t.

Richard A. Doyle, Jr.

Well, we didn’t allocate that we just got out the, square footage of the parking.

David J. Hegarty

The entrance.

Juan C. Sanabria – Merrill Lynch, Pierce, Fenner & Smith, Inc.

Okay. And with regards to your 25% launch on allocation equity, why not raise the equity in conjunction with this announcement, it just seems like it puts a bit of an overhang on the shares, what was the thought process there?

Richard A. Doyle, Jr.

Well we feel that we have a very strong balance sheet and we do have the capacity to close on this with the commitment of the $800 million in availability of what we have remaining available on our $750 million credit facility that it gives us the flexibility to go to that market for the best time for us, needs to put us on long-term financing.

David J. Hegarty

First it rotates, is a couple of variables that cause a dilution to decide a fact though it could take after a couple of months to close sitting on that any extra cash would be diluted from the interim, so, we will catch it when the time comes.

Juan C. Sanabria – Merrill Lynch, Pierce, Fenner & Smith, Inc.

Okay, and can you just give a little bit more color on sort of the range on the cost of debt you are assuming in your guidance, you mentioned that you fix some of the debt that kind of what you are thinking ballpark for that?

David J. Hegarty

Like I’d mentioned, we did various pro forma’s of using different tranches of debt, I don’t think I’m going to get into the specifics so just remains but it could be between the 4%, 5% on a combined for the different tranches of debt that are available to us.

Juan C. Sanabria – Merrill Lynch, Pierce, Fenner & Smith, Inc.

You said 4% to 5% sir.

David J. Hegarty

Probably between 4% to 5%.

Juan C. Sanabria – Merrill Lynch, Pierce, Fenner & Smith, Inc.

Okay thank you. That's it. Thanks from me.

David J. Hegarty

Thank you.

Operator

Thank you. We’ll go to the line of Nick Yulico for UBS.

Nick Yulico – UBS Securities LLC

Thanks. Couple of questions. If I look at this, what is the additional management fee that’s due to RMR from this on the base management fee and the property management fee?

David J. Hegarty

It’s the same contractual amount on any transaction. So, 50 basis points on invested assets?

Nick Yulico – UBS Securities LLC

Plus this is in the MOB segment, are they getting 3% property management fee?

David J. Hegarty

Yes they do.

Nick Yulico – UBS Securities LLC

Okay, so altogether the fees, there is $7.5 million to $8 million, it seems like?

David J. Hegarty

That would be the math…

Nick Yulico – UBS Securities LLC

Okay.

David J. Hegarty

That we got a portfolio of fee moving assets the same with cost.

Nick Yulico – UBS Securities LLC

Okay, if I look at this year, the G&A excluding the property fee management is going up $5.5 million which is 17% versus the G&A last year, what is the sense of, why do this transaction in this fashion why not sell some assets to offset it, to offset some of the G&A increase.

David J. Hegarty

We didn’t sell, until we have hospitals back in December for $90 million, we continue for what we are selling particularly like skilled nursing assets and we are selling a few MOBs right now. So we are selling assets at the same time but clearly you don’t have something applies to pay for this whole acquisition.

Richard A. Doyle, Jr.

Okay, I think Ross had a question as well.

David J. Hegarty

Okay

Ross Nussbaum – UBS Securities LLC

Yes, hi, I guess my question is a little bigger picture which is, if we back out the straight-line rents from this deal, it looks like the accretion to AFFO would only be maybe a $0.01 or $0.02, is that about the right now?

David J. Hegarty

We perform various analysis, it's accretive more than on the CAD base.

Ross Nussbaum – UBS Securities LLC

How do we, I’m missing how we get there, when if it’s a low six cash yield, straight-line rent number, are we talking about $8.5 billion a straight-line rents here?

David J. Hegarty

We can probably talk offline, I don’t think we would like to go through specifics line by line and how we get those right now.

Ross Nussbaum – UBS Securities LLC

Well I think I mean guys I think this is important what we are all trying to figure out is if this is just accounting [Indiscernible] getting guys doing accretive deal, if this is sort of only a $0.01 or $0.02 accretive on a cash basis to the bottom line and it’s expanding the company by 15%, it seems like pretty minimal accretion for an enormously big deal relative to the company and I guess, I’m just trying to get my arms around to fit that minimal accretion what else was so compelling about this deal if it’s not translating into bottom line immediate earnings growth?

David J. Hegarty

There is a couple of things, actually using the analysis that Rick has done another the CAD, AFFO accretion, it’s below the normalized FFO accretion, but it’s still more than what we are suggesting. And then, a lot of other things depending on the ultimate financing pricing and stuff, but we think that this particular asset surely from an NAV perspective is going to be significantly adding value to the company, and again the rents are below market, we think will go for long-term, it will be getting to the mid to highest 7 to the second half of our lease and then even if market rents for this year, are going to significantly increase from here. Plus we get to the next year, bigger-ish from the parkings under these buildings, these have been some part of the much larger complex of parking and we’ll get a proportionate share of the overall parking. So there are additives from the two different components, but if you can expect from the SNH shares for the longer term

Ross Nussbaum – UBS Securities LLC

Okay, can you talk a little bit about the underwriting of Vertex? Can you walk through how you guys approached underwriting their drug pipeline over the next couple of years and how you took the risk of that tenancy into the equation?

David J. Hegarty

Sure, Vertex has been around for about 25 years. We have certainly done a lot of research [Indiscernible] their chemicals, medicines and their process. We have obtained numerous different research reports and cannot find sell-side analysts evaluations of Vertex’s pipeline and what they think the successful teams there believe that – look at the substantial majority is almost all of sell-side analyst will obviously have a buy recommendation on Vertex right now.

We’ve looked at what their cash flows have been for the last several years in their financials, and we’ve met with them senior management at Vertex, and I’ve had discussions with them.

So I do not prefer to know the chemicals and a lot of what goes into [indiscernible] analysis and so on. But they have a number of fast track medicines with the FDA right now and the prospects look very positive and $11.5 billion of cash on hand certainly less than seven years, and then kind of come back to overall the property itself whether it be Vertex to someone else are very comfortable but this is a state-of-the-art asset in a Class A location in a rapidly growing hot submarket in Boston.

So we’re [indiscernible] Vertex or someone else we think we can, we know we get comparable rents and these are below market rents compared to a lot of those being built in Cambridge, and a lot of was built up in the medical area as well as the hospitals, no new medical area in Boston. So I think we’ve got it covered on both sides, okay.

Operator

Thank you. We have a follow up question from Daniel Bernstein with Stifel.

Daniel M. Bernstein – Stifel, Nicolaus & Co., Inc.

Hi, yes. Thanks for taking the follow up questions, I have two actually, one do you have any rent protections in the transaction documents are for the retail parking space, it’s a minimum if rents and parking revenue aren’t what you expect, is there some obligation to sell or to make you whole?

Richard A. Doyle, Jr.

No we have a 13 percentage of the spaces leased to Vertex and so that is in their numbers. The excess capacity, we got a percentage off but we don’t have any guarantee to mark from the seller.

Daniel M. Bernstein – Stifel, Nicolaus & Co., Inc.

Okay and then just on the balance sheet, you are going to pay essentially about 45% leverage, it’s about a 5, as I clearly remember, you guys in terms of your leverage again not outside the normal averages for our healthcare REITs really but for you it’s a very, it’s outside your normal range that you’ve been comfortable with so, long-term do you expect to maybe very long-term, do you expect to be back in that 35% kind of leverage range, or you are now comfortable being somewhere between 40%, 50% leverage?

Richard A. Doyle, Jr.

Yes, this does bring ourselves before the transaction we have very solid balance sheet, we feel that our balance sheet post transaction is still solid and inline with the other U.S. healthcare EBIT pace and as you said, I think we would move that down. I’m not sure if we’ll move it down to the historical 35% or maybe closer to about 40% it’s going to take.

Daniel M. Bernstein – Stifel, Nicolaus & Co., Inc.

Okay, just wondering your thoughts on that. That’s all I have, thanks.

Operator

Thank you. We’ll go to the line of Juan Sanabria with Bank of America.

Juan C. Sanabria – Merrill Lynch, Pierce, Fenner & Smith, Inc.

Hi, guys just two quick follow ups, does the accretion on an FFO basis is $0.06 to $0.08, does that include the offsetting RMR fees?

Richard A. Doyle, Jr.

That does include, yes.

Juan C. Sanabria – Merrill Lynch, Pierce, Fenner & Smith, Inc.

Okay, great thanks and can you give a range of what you guys are modeling in for the accretion, for the deal for what’s allocated to parking?

Richard A. Doyle, Jr.

The reasonable estimates that we include on here, I’m not sure. I don’t have in front of me the range what we will include in there, but I can get that.

Juan C. Sanabria – Merrill Lynch, Pierce, Fenner & Smith, Inc.

Okay, all right.

David J. Hegarty

Potential majority of it is the Vertex.

Richard A. Doyle, Jr.

Yes, Vertex represents [indiscernible] costs.

Juan C. Sanabria – Merrill Lynch, Pierce, Fenner & Smith, Inc.

Okay, thanks guys.

David J. Hegarty

You are welcome.

Operator

Thank you we have a question from Omotayo Okusanya with Jefferies.

Omotayo Okusanya – Jefferies & Company, Inc.

Yes, just a quick one could you walk us through all the fees, our incremental fees again that will end up going into RMR. I know there is a base fee and then there is also about a 3% property management fee anything else I’m missing?

David J. Hegarty

No, that’s it.

Omotayo Okusanya – Jefferies & Company, Inc.

Okay, it’s just basically on the 2% property management fee. Okay thank you.

David J. Hegarty

Okay.

Operator

Thank you I will now turn the conference over to Tim Bonang for any closing remarks.

Timothy A. Bonang

Thank you very much for joining us today. I want to point out that our presentation with might be issues on the front page of the website is now up there. It is also available on the Investor Events section of the website, thank you all for joining us today, have a good day.

Operator

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

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