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Senior Housing Properties Trust (NYSE:SNH)

Q1 2014 Earnings Conference Call

May 2, 2014 13:00 ET

Executives

Kimberly Brown - Director, Investor Relations

David Hegarty - President and Chief Operating Officer

Rick Doyle - Treasurer and Chief Financial Officer

Analysts

Vikram Malhotra - Morgan Stanley

Juan Sanabria - Bank of America

Michael Carroll - RBC Capital Markets

Daniel Bernstein - Stifel

Todd Stender - Wells Fargo

Tayo Okusanya - Jefferies

Operator

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.

Kimberly Brown - Director, Investor Relations

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 present beliefs and expectations as of today, May 2, 2014. 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. 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.

David Hegarty - President and Chief Operating Officer

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 to 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 of strengthening and diversifying our portfolio making accretive acquisitions and increasing the percentage of private pay assets, which was currently an industry leading 96% of NOI. Our acquisition and disposition activities as well as our investments in the RIDEA 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 the $1.1 billion acquisition of the Vertex biotech medical office buildings located in 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 the 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 and quality portfolio to next level and be the brand new buildings that is truly state-of-the-art irreplaceable assets set in the 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 disciplined capital raising activities for 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 to 5-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 CAD 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 and 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 the cash cap rate of approximately 8%. The building was 97% occupied and is ideally located adjacent to the San Antonio surgical 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 in our disposition activities as well. We sold one assisted living 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 reported on a rolling 12 months basis as of December 31, 2013 continued 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 the same store basis rental income increased 1.9% year-over-year. For SNH cash NOI and accrued 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 and 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 affected by the weak operating environment and it’s why we continued to recycle these properties into private pay alternatives.

Looking at the performance of our individual operators Five Star’s 187 leased communities had combined occupancy of 84.2%. We are now reporting rent coverage ratio for Five Star as they 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 their prior year’s restated financial statements and the net effect was an increase above net income and shareholders 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 senior living operating leases are master leases cross collateralized and backed by parent guarantees. The four properties we leased 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 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 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 with over 7000 units. During the quarter the portfolio has generated $18.7 million of NOI, which represents approximately 16% of the total company NOI. Occupancy at the 39 same store communities was 88.6%, which is an increase of 150 basis points over last year. And our rates decreased modestly or about $22 per month. 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 is still significant room to continue to grow occupancy, to push rates and margins at these properties.

Moving on to medical office building component 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 our 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 are 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 and we do not believe the roll downs are representative of our portfolio. We continued to maintain a very solid 95% occupancy. In summary, we are very pleased with our results and accomplishments in the first quarter and believe SNH is well positioned to drive shareholder value and benefit from improving demographic trends, with its diverse mix of best in class private pay senior living communities and MOBs.

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

Rick Doyle - Treasurer and Chief Financial Officer

Thank you, Dave and good afternoon everyone. For the first quarter of 2014, we have 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 two inpatient 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, resident 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 and NOI margins were 23.5%. Of 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 continued to decline. However, this was offset by the winter related expenses in the first quarter. In addition, we believer there is still room to increase occupancy and push rate 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 the 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 in the second quarter as a result of three factors. First, in April we issues $400,000 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 from 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 in 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 for held for sale which we expect to sell in 2014.

Moving to the balance sheet. Since January 1 we closed on a $33 million acquisition and invested $8.6 million into revenue producing capital improvements at our leased senior living communities. During the quarter we also spend $2.5 million of tenant improvement and leasing cost. Our recurring capital expenditures included $1.2 million at 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 to capital expenditures primarily at our managed senior living communities, which was consistent with our previously stated expectations.

At March 31 we had $33 million on cash on hand, $1.1 billion of unsecured senior notes and $696 million of secured debt and capital leases. Subsequent to quarter end we sold 15.5 million common shares 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 and MOB in April for net cash of approximately $17 million.

We intend to use the remainder of the proceeds to fund a $1.1 billion Biotech MOB acquisition and we repaid mortgage debt of approximately $38 million due June 1. Following these transactions SNH’s balance sheet and liquidity remains strong and in line with our peers with debt to total book capitalization of approximately 47% and adjusted EBITDA to interest expense 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 we’ll continue to look for additional opportunities, that’s creating our portfolio mix, increased FFO, and build shareholder value.

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

Question-and-Answer Session

Operator

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

Vikram Malhotra - Morgan Stanley

Hi guys. Good afternoon.

David Hegarty

Hi.

Vikram Malhotra - Morgan Stanley

Could you maybe just talk about both in the RIDEA portfolio and the medical office, just kind of your broad expectation for same-store NOI and I know there were some sequential improvement in medical office, but then there was a dropdown in RIDEA. If you kind of X out the – could you just talk generally about the trends there you see going forward and just if you X out the excess snow removal kind of what the same-store growth would have been?

David Hegarty

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

Rick Doyle

Yes. 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 that it’s probably greater than 700,000 on the expense. So, we have improved it and 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 take care of those extra expenses. So, we do expect moving forward in the second quarter and beyond that those would be positive trends going upwards.

Vikram Malhotra - Morgan Stanley

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 as you grow the – as you kind of 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?

Rick Doyle

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

Vikram Malhotra - Morgan Stanley

Okay. Thanks guys.

Rick Doyle

Thank you.

Operator

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

Juan Sanabria - Bank of America

Hi. Good afternoon.

David Hegarty

Good afternoon.

Juan Sanabria - Bank of America

Just a couple of questions, what is the expectations for leasing for the MOB portfolio over the next couple of years, where are you guys relative to market on that?

David Hegarty

Well, I would say that the expectation is probably to be – probably flat to modestly up. I think the – I’d say that market depends on obviously which market you are in. Certain markets that are weaker obviously and others are stronger, but I think net-net will determine that. Over the next year or so we probably see flat to modestly positive on the rental side. And then we are continuing to work on the expense side of things to become more efficient and try to fit, save on that side.

Juan Sanabria - Bank of America

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

David Hegarty

Sure. I mean, the real estate tax appeal process, we continue to always appeal the taxes. Energy contracts, we continue to work those and monitor them better and just to look for better opportunities to get more efficiencies. We have also been able to lower our insurance costs in the MOB portfolio. So there are a number of initiatives think that have been ongoing, but we are just not continuing to improve on those.

Juan Sanabria - Bank of America

And on the snow, dealing with the winter weather, etcetera, 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?

David Hegarty

Well, we maybe able to recoup some of that. It is the lag, as you would expect many of these situations we can ultimately recoup it over the end, through the end of the year as you go into the year with estimated escalations and build proportionately and then have the true up later on the year. So we are hopeful to recover a good piece of that.

Juan Sanabria - Bank of America

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

David Hegarty

Well, nothing would impact Five Star, but that was the CWH is still managing the properties. And I think at some point, we will realize things, but we are going to be assured that the SNH assets will be well-monitored, well taken care of. And I am really expecting no disruption in the service of the SNH properties.

Juan Sanabria - Bank of America

Great, thanks.

David Hegarty

You’re welcome.

Operator

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

Michael Carroll - RBC Capital Markets

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

David Hegarty

That’s right. As I think if you were to look at our same-store performance for the last several quarters, the expense has continued to come down. And 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 have we not incurred those extra expenses. So, just so it’s really good, back to the management of the properties by Five Star. And as they are able to improve the performance by one is insurance that’s come down significantly at the properties. Another thing is that they have actually the purchasing power at Five Star and whenever they take over operations, it’s 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. So, I think as time goes on, we just keep seeing the benefits of the efficiencies start to show up. And as we have discussed, the rates have not been pushed aggressively at most of these properties yet, I think occupancy continues to move up and margins moving up, but I think that’s to come soon is to be pushing the rates more aggressively.

Michael Carroll - RBC Capital Markets

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

David Hegarty

Not much really. I think it’s the fact that’s just there is, I now think occupancy has held up well. We have several of the RIDEA assets are in Northern states, New York, Chicago, Washington D.C. even, they are all significant, Teaneck, New Jersey. So – but I don’t think the census really was not impacted. So, it’s really the rates have not been pushed and (indiscernible).

Michael Carroll - RBC Capital Markets

So when do you plan on start pushing those rates?

David Hegarty

Well, part of it is, I mean, really Five Star has the best handle on when people’s anniversary dates are, when you can push the rates, you can stop this. And many of the contracts were inherited from the prior offerings too. So in my opinion, burn off if we can push rates, but I would say going up to 2014 and into early ’15, it’s when we will significantly do pushing the rates.

Michael Carroll - RBC Capital Markets

Okay. And then how should we think about your investment activity going forward? And are you looking at any other deals that are similar to the Seaport acquisition that’s currently pending?

David Hegarty

Well, I consider that a once-in-a-lifetime transaction. So, I don’t envision any more $1 billion transactions, especially about high-quality. So, I think you can look more towards the medical office building we acquired this quarter. And we will still be buying individual assets in that portfolio looking for that $10 million to $50 million size transactions and trying to achieve cap rates at least north of 7%, hopefully more in the 7.5% to 8%. That again, it depends in the particularly hit this MOB. We actually have been working on for a good while. And that was 50% levered with debt at 6.3%. So, I think that not got a lot of potential buyers, because it was – you could not put a second mortgage on it and say the same 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 are going to continuing to look for those transactions. And I would probably say we are looking at around say $200 million of transactions for the rest of this year. That may include some of the capital funding if there is tenants we have that, we can charge a return on.

Michael Carroll - RBC Capital Markets

Okay, great. Thank you.

David Hegarty

Okay.

Operator

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

Daniel Bernstein - Stifel

Good afternoon.

David Hegarty

Hi, Dan.

Rick Doyle

Hi, Dan.

Daniel Bernstein - Stifel

Hi. So, I want to go back to the rate question on the Senior Housing operating portfolio, it looked to me like your rates were up about 3% sequentially. So, is it and like you said you took a lot of legacy leases, was it this 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?

David Hegarty

Yes, I mean, I wish it was black and white like that, but unfortunately, every property certainly applied from different operators have the different anniversary date and policy on to when they can raise rates. So, some rates could be raised January 1, others on just people’s anniversary dates when they moved into a facility, but now like I think we have 35 properties in Q4 and 39 in Q1. And what has been added on are more of the Sunrise properties that we said typically 40% to – 50% to 60% skilled nursing beds. And of course, a sequestration kicked in at the first 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.

Daniel Bernstein - Stifel

Right, that looks like it was sequentially higher, I mean, it wasn’t just something year-over-year, but definitely….

Rick Doyle

Numbers of properties like Dave said, it’s 35 properties, in the fourth quarter the 39 properties from the first quarter.

Daniel Bernstein - Stifel

Okay.

Rick Doyle

And maybe the rates will continue.

Daniel Bernstein - Stifel

Okay. And then also, just looking to trying to figure out the growth thesis going forward? I mean, you alluded to it a little bit that the prior caller, but if I take a $250 million or $300 million of acquisitions at 7.5%, 50% or so levered, I only get a $0.01 or $0.02 accretion or something like that, so what kind of investment volume should we be thinking about for you guys going forward and just trying to understand the growth thesis?

David Hegarty

Yes. I will go broad picture, because we don’t exactly give guidance, but 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 margins should move up from what – from where they are today. And then you have got the same-store the triple net leased portfolio went up 1.9% on a same-store basis. So that again, that hopefully drops to the bottom line. And then on the MOBs, we also incurred good amount of extra cost this quarter which again hopefully won’t repeat. And I think the trending should do a little bit better in the MOB portfolio. And the Vertex acquisition is closing next week and as we have constantly said, we do expect $0.06 to $0.08 of FFO accretion that would kick in early on May 7. All of our capital has been raised and lines of credit are paid off. So we are starting off from square one of the, I think a pretty improved base to start from after the Vertex closes.

Daniel Bernstein - Stifel

Then what kind of investment volumes and clearly after the same period you are a much bigger company I mean looking that you are trying to doing $500 million a year and that’s not as guidance, it’s hard guidance but you are now looking to do $500 million of your acquisitions or?

David Hegarty

Well, I think I mean the challenge is there is competition out there. I mean I clearly love to do more and maybe we will. I mean it’s very difficult to predict what the success rate will be on our bidding and so on. We will still show – certainly see a good amount of acquisition opportunities on both MOB and senior housing fronts. But again I personally feel that the private REITs and some of the private equity funds are bidding very aggressively on assets and 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. But 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’s truly Class A asset with decent growth potential we might have bid a bit more aggressively and otherwise some bread and butter Class B assets and 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.

Daniel Bernstein - Stifel

Okay. And then one quick last question on the fixed point – on the debt you are assuming with MOB the 6.3% debt, is that pre-payable in the near-term or…?

David Hegarty

No, it would – we want to prepay if it was.

Rick Doyle

It’s a couple of more years to maturity and it’s pre-payable like six months prior to the maturity.

Daniel Bernstein - Stifel

Okay. That’s all for me. Thank you very much.

David Hegarty

You’re welcome.

Operator

And we will now go to the line of Todd Stender with Wells Fargo. Please go ahead.

Todd Stender - Wells Fargo

Hi. Thanks guys.

David Hegarty

Hi Todd.

Rick Doyle

Hi Todd.

Todd Stender - Wells Fargo

How are you guys?

David Hegarty

Good.

Todd Stender - Wells Fargo

Just looking at the impairments on five MOB assets, just 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 kind of getting a sense of how they look as pricing for MOBs is still pretty attractive?

Rick Doyle

Yes, we still have six as we have said six assets out for sale and we took about $721,000 impairment on few of those MOBs. And you have to look at it on each quarter the market value of these, the accounting rules and if there are any market values that there is decline in the market and you have to take the MOBs, you have to take the impairments 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 are there out there is because they are tougher markets that it’s 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, so.

David Hegarty

Yes and I will give you a little inside color to like four of the buildings around the campus in Albuquerque and frankly their tenant was a healthcare system that has decide to build their own campus and these properties will become vacant later this year. So it needs, so it’s a single user for that term. And frankly we don’t want to invest the capital into what we think it would take to relet this or have it multi-tenanted or whatever. So we offered it for sale with a limited term less than existing lease. And we had similarly a biotech property in the line we get – we have done tenant and merge and consolidated operations to California and the lease expired and we cannot relet it to another biotech company so that’s going to go from an alternative use. And we decided that’s not bt growth, so initially we thought a little bit of slow but it’s an underperforming to begin this we don’t want to put in the capital that we think is necessary to release it to another party which may or may not be healthcare.

Todd Stender - Wells Fargo

Okay, that’s helpful. Thanks for the details. And any color you can add for the Senior Housing properties, are these net leased assets? Are there any within the RIDEA platform?

David Hegarty

These are all leads us with Five Star, leads us mainly leads us number one and number two and there is 9 in total, about 6 of them are the skilled nursing facilities. These are older buildings, 20, 30 years older plus and rolled our markets that we felt us with right time to put off for sale.

Todd Stender - Wells Fargo

Okay, thank you. And just looking how is Five Star’s delay in filing their financial statements? Is that one having any impact on new sourcing capital? I wonder it’s just the banks show 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 is any trickle down effect?

David Hegarty

It has had no trickle down effect. We obviously access the equity markets and the debt markets just on the last couple of weeks. So it has had no issue with us raising capital. And we do see lot of financial information about Five Star and they continued to perform well. The restatements just take a lot of time, because of the process, but they did do those statements right through third quarter of 2013 and the net result was to increase net income and increase shareholders’ equity. So it’s – so I think as if I would like to get have them produced them sooner rather than later, but the practical effect has not been negative on us in anyway.

Todd Stender - Wells Fargo

Okay, thanks 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 you any time? Do you have to make the commitment upfront? Does the pricing stay static, how do you kind of tap that going forward?

David Hegarty

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

Todd Stender - Wells Fargo

Got it. Thanks, Rick.

Operator

Thank you. We will now go to the line of Tayo Okusanya with Jefferies. Please go ahead.

Tayo Okusanya - Jefferies

Yes, good afternoon. Just a quick question on the – 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?

Rick Doyle

No, Tayo, I mean it is unusual looking at – if you look at the supplemental, it’s a little higher this quarter. There is nothing unusual and I don’t think that would the trend going forward. I think it would back to the normal the amount on previous quarters.

Tayo Okusanya - Jefferies

Got it, okay. So, that’s helpful. And then on the (indiscernible) and 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’s kind of going on, whether it’s particularly tenant related, market related and how should we just kind of be thinking about pricing trends to your MOB portfolio going forward?

Rick Doyle

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

Tayo Okusanya - Jefferies

Okay. So, I will say, it’s just an optical thing then with the old one having both numbers and the new one just having the base rent number?

Rick Doyle

The base rent number exactly.

Tayo Okusanya - Jefferies

And I guess why don’t you kind of strip out the two to give us a better sense of what the mark to market really is base rent versus base rent?

Rick Doyle

The industry puts out – the industry database was just put in the new base rent and you just compare it to the old total base and that’s the industry standards.

Tayo Okusanya - Jefferies

Yikes. Well, I think the industry needs to improve upon that, because I think it gives a false sense that fundamentals seem to be deteriorating when they really aren’t?

Rick Doyle

Exactly.

Tayo Okusanya - Jefferies

Alright. That’s all for me. Thank you very much guys.

Operator

Thank you. (Operator Instructions) We’ll go to the line of Juan Sanabria with Bank of America. Please go ahead.

Juan Sanabria - Bank of America

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 the assets sold and those assets that are still up for sale?

David Hegarty

Yes. Well, for the Senior Housing ones, those are ones that are put, they are part of a master lease and the master lease has 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 sales price.

Juan Sanabria - Bank of America

So, a 10% cap rate?

David Hegarty

Yes.

Juan Sanabria - Bank of America

Okay.

David Hegarty

The MOBs really have some of them are not producing at all and I don’t really know that the cap rate is an appropriate mechanism there.

Juan Sanabria - Bank of America

So, what’s the breakout between the Senior Housing and MOBs in terms of book value, do you have the rough split?

Rick Doyle

The book value – the net book value is a little higher on the MOBs. Combined, they were going on $21 million, $22 million.

Juan Sanabria - Bank of America

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 comments at the beginning about the accretion $0.06 to $0.08 FFO, $0.05 to $0.07 AFFO seems 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?

David Hegarty

Yes, it’s not that wide a number differential in the – there is two step ups in the year, one in the year six and one in year 11 at the initial lease term. And it’s about an 8% increase at that time, 8% to 8.5%. So, that probably is 2% a year, but that’s the – what the differential works out to be just works out to state a $0.01 or so differential in the range.

Juan Sanabria - Bank of America

So, what are the GAAP and the cap cash rates then?

Rick Doyle

To go into your cash cap rates low to mid 6, about 6.3%. And you can’t gap the whole building in there, because there is retail space and parking. So, we say that we would get yields over the lease term of up to 7% or better.

Juan Sanabria - Bank of America

And so that 7% number, that’s what you are using to calculate that FFO accretion?

Rick Doyle

Yes, right.

Juan Sanabria - Bank of America

Okay. Great, thanks guys.

Rick Doyle

Thank you.

David Hegarty

Okay.

Operator

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

David Hegarty - President and Chief Operating Officer

Okay. 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 June in 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.

Operator

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.

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