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Executives

Timothy Bonang – VP, IR

David Hegarty – President and COO

Richard Doyle – CFO and Treasurer

Analysts

Todd Stender – Wells Fargo Securities

Jerry Doctrow – Stifel Nicolaus

Omotayo Okusanya – Jefferies & Co

Frank Morgan – RBC Capital Market

David AuBuchon – Dave AuBuchon of Baird

Daniel Cooney – KBW

Senior Housing Properties Trust (SNH) Q2 2011 Earnings Call July 28, 2011 1:00 PM ET

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Senior Housing Properties Trust Second Quarter Conference. At this time, all participants are in a listen-only mode. (Operator instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Tim Bonang. Please go ahead.

Timothy Bonang

Thank you and good afternoon everyone. Joining me on today’s call are David Hegarty, President and Chief Operating Officer; and Rick Doyle, Chief Financial Officer. Today’s call includes a presentation by management followed by a question-and-answer session. I would also note that the recording and retransmission of today’s conference call is strictly prohibited without prior written consent of Senior Housing.

Before we begin today’s call, 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, July 28th, 2011. The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today’s conference call, other than through filings with the Securities and Exchange Commission regarding this reporting period.

Commencing this quarter, the Company will report normalized Funds From Operations or normalized FFO in order to be comparable with its peers. Normalized FFO represents FFO as defined by NARI and as adjusted to include percentage rent and exclude loss on early extinguishment of debt, impairment of assets and acquisition related costs.

In addition to normalized FFO, this call may contain other non-GAAP numbers. A reconciliation of normalized FFO to net income and the components to calculate AFFO, CAD or FAD can be found in our Q2 Supplemental Operating and Financial Data Package found on our website at www.snhreit.com.

Actual results may differ materially from those projected in any forward-looking statements. Additional information concerning factors that could cause those differences is contained in our 2011 Form 10-Q to be filed 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 Hegarty.

David Hegarty

Thank you, Tim, and good afternoon everyone and thank you for joining us today. As Tim stated, we are now referring to Funds From Operations or FFO as normalized FFO. We are not changing the way we have calculated FFO historically, rather we are just differentiating our definition from the NARI’s definition and using a term more comparable to industry peers.

For the second quarter of 2011, we reported normalized FFO of $0.44 per share and this compares with $0.42 per share that we reported for the same period a year ago. For the six months ended June 30, 2011, we reported

we reported normalized FFO of $0.88 per share versus $0.85 per share a year ago. Before Rick reviews the details of our financial results, let me briefly discuss some of the highlights of the quarter. As of today, we have acquired or are under agreement to acquire a total of 29 properties for approximately $361 million since April 1, 2011. To remind you, in March we acquired – we announced an agreement to acquire a 20 community senior living portfolio for $304 million. To date, we have acquired 17 of these communities for $241 million.

During the second quarter, we also acquired another senior living community in five medical office buildings for a total of $35 million. We also currently have under agreements to acquire one additional senior living community and two medical office buildings for a total purchase price of approximately $23 million.

And I will go into more detail in these acquisitions later on this call. We also had some dispositions during the quarter. We sold seven properties including four skilled nursing facilities, two medical office buildings and one assisted living community for a combined sales price of approximately $40 million. The sale of skilled nursing facilities fits with our strategy of reducing our exposure to the Medicare and Medicaid programs.

We are very pleased to report that in June we successfully entered into a new $750 million unsecured revolving credit facility. This new facility replaces our previous $550 million, which was set to mature at the end of 2011. The tremendous success in this deal is highlighted by the fact we increase the size by $200 million, achieved very favorable terms and increased lender participation. Our new facility has a four year term with the borrower’s option to extend an additional year.

The facility has an interest rate of LIBOR plus 160 basis points, which is a competitive rate against our peer group, and with 26 lenders, we have an industry leading numbers of participants in this facility. Subsequent to the quarter end in July, we completed a successful well received public offering of 11.5 million common shares and raised approximately $248 million of net proceeds. We used the proceed from this offering to repay borrowings outstanding on our credit facility and two in part fund the acquisitions I mentioned previously. The 11.5 million shares were issued that a price 10% higher than our last offering at the end of 2010 and our share price has increased favorably since the offering date.

Now I’ll turn the call over to Rich who is going to review our results for the quarter.

Richard Doyle

Thank you, Dave, and good afternoon everyone. For the second quarter, we generated normalized FFO of $62.6 million, up 17% from $53.3 million for the same period a year ago. On a per share basis, normalized FFO was $0.44, up 5% compared to $0.42 a year ago. Earlier this month, our board declared a dividend of $0.37 per share, which represents a payout ratio of 84% of the second quarter’s normalized FFO. Percentage rent revenue from our senior living tenants for the second quarter increased 8% to $2.7 million versus last year.

Looking to the income statement, rental income increased $19.1 million in the second quarter or 24% to $99.9 million compared to the same period last year. During the quarter, we recognized $844,000 of resident’s fees and services at our managed communities. Resident’s fees and services are the revenues earned at the 10 senior living communities, we acquired in late June that are managed by to prior stock and leased to our TRS.

Depreciation expense increased quarter-over-quarter by $4.6 million or 21% to $26.9 million. Property operating expenses increased $6.7 million to $10.8million, which was in line with our expectations. Property operating expenses are primarily related to our medical office buildings, but now they include expenses incurred at our managed senior living communities. We recorded $609,000 of senior living operating expenses for the second-quarter.

General and administrative expense increased approximately $1.5 million to $6.9 million. Our G&A continues to be among the lowest of our peer groups.

The quarterly increase in revenues depreciation expense, property operating expenses and G&A primarily relates to the 52 properties we acquired since April 1, 2010, and the purchase of approximately $41 million of revenue producing capital improvements made to our senior living properties, offset by a reduction in rental income resulting from the sale of a 11 properties sold since April 2010.

Interest expense for the second quarter was $2.8 million higher versus last year. The increase relates primarily to the January 2011 sale of $250 million of five-year unsecured senior note with an interest rate of 4.3% and greater amounts outstanding under our revolving credit facility.

During the quarter, recorded a $427,000 loss on early extinguishment of debt from the write off of unamortized deferred financing fees, relating to the refinancing of our previous $550 million revolving credit facility. As Dave mentioned earlier, during the quarter, we sold four skilled nursing facilities, two medical office buildings and one assisted living community for approximately $40 million and recognized a gain on these sales of $21 million. We’ve recognized acquisition costs during the quarter of $2.8 million, which was solely a function of transaction volume.

Now, let’s turn to the balance sheet. During the second quarter, we acquired 15 senior living communities and four medical office buildings for a total of approximately $226 million and invested $4.5 million into revenue producing capital improvements. We funded these acquisitions with the proceeds from our January debt issuance by assuming $48 million of mortgage debt by using cash on hand and borrowings under our revolving credit facility.

In May, we entered into a secured bridge loan agreement with our largest tenant Five Start Quality Care for up to $80 million to help finance their acquisitions of six private pay senior living communities. In June, they borrowed $41 million under the bridge loan and subsequently, we paid $32 million. As of June 30, 2011, it was $9 million outstanding on the bridge loan and $39 million available to borrow. Following quarter end in July, Five Star borrowed an additional $15 million. Today, there is $24 million outstanding and $24 million available to borrow. The bridge loan matures on July 1, 2012, and bears interest at a rate applicable to our revolving credit facility plus 1%.

In June, in conjunction with Five Star’s common share offering of 11.5 million shares we acquired 1 million shares of Five Star’s common stock for a purchase price of $5 million. At June 30, 2011, our total debt was approximately $1.5 billion and our equity was $2.1 billion, credit ratio of debt to total booked capital 42.5%. On a market basis, our total debt to total market capitalization was 31.8%. At the end of the quarter, we had $184 million outstanding on our revolving credit facility. Three series of unsecured senior notes to only $670 million and mortgage loans and capital leases to only $698 million.

Looking at our upcoming debt maturities, we have $225 million of unsecured senior notes due in January 2012 with the high interest rate of (inaudible). In addition, we have $36 million of mortgage notes due in 2012 with the weighted average interest rate of 6.9%. We are looking for opportunities to accretively refinance these notes. Other than the 2012 maturities, 96% of our debt is not due until 2015 or later.

On July 1st, we completed issuance of 11.5 million common shares in a public offering with net proceeds were approximately $248 million. We used a portion of the net proceeds to pay down the $184 million outstanding on our credit facility and today we have the entire $750 million available. We also used the portion of the proceeds to close on three senior living communities and one MOB acquired subsequent to quarter end along with the assuming $50 million of mortgage debt. After paying down the balance on our credit facility and assuming the mortgage loan loans, our debt to total book capital grows from 42.5% to approximately 37%, however, reserved a portion of process from the offering and we don’t expect to reinvest the excess cash until later in the quarter.

Now I will turn it back to Dave for discussion about the performance of the portfolio in the investment environment.

David Hegarty

Thank you, Rick. The acquisition environment remains open to us in both the senior living medical office spaces. We have completed well over $300 million of acquisitions during the first half of 2011 and have $86 million more under agreement. Of the 20 community senior living portfolio we announced back in March, we have acquired 17 communities. We acquired 14 of these communities in June, late June and the other three communities in July.

Of the 17 communities we have acquired thus far, 12 communities are managed to our ideal structure and the remaining five are leased communities. We also assumed approximately $61 million of mortgage debt along these acquisitions. These properties are performing as expected and were written at a mix seven initial cap rate.

The closing of the remaining three managed communities are contingent upon customer closing conditions and third-party approvals including HUD and two are scheduled to close in late 2011 or early 2012. In addition to this large transaction, in May we acquired a 50,000 square-foot medical office building in a same Minnesota area for $7.2 million.

This property is a 100% leased to four tenants with the primary tenant being a satellite clinic of Elena Medical Clinic, the healthcare system servicing Minnesota and Wisconsin. During June and July, we acquired four biotech lab space buildings located near Gainesville, Florida. The four properties have a total of approximately 57,000 square feet or 89% leased to 14 different tenants for approximately 2.8 years.

The total purchase price was $19.8 million and we assumed $3.7 million of mortgage debt along with this acquisition. The properties here are part of our research park built on land previously owned by the University of Florida Foundation for their bio-tech program, the park is home to 30 bio-tech companies in the University of Florida’s Sigma and bio-technology incubator program.

Lastly on the acquisition front, we’ve currently entered agreements to acquire one senior living community and two medical office buildings for a (inaudible) purchase price of $23 million. The senior living comminutes located in California and has approximately 60 units, the two medical office buildings are located in Virginia and have approximately 46,000 square feet in total.

To closing these acquisitions, that continue to fund completion of our diligence and other customer at closing conditions and accordingly we can provide no assurance that we will purchase these properties. We also have had some disposition activities some of which was discussed on our last earnings call. We sold seven properties including four skilled nursing facilities, two underperforming medical office buildings and one former sister living community that’s been converted to another year.

Our total sales price of approximately $40 million. The skilled nursing facility dispositions reflect our focus of owning private – senior living communities and reducing the number of properties we owned with Medicare and Medicaid Exposure, in fact we have sold eight skilled nursing facilities over the last year. Finally skilled nursing represents only 5% of our NOI and we expect this percentage to continue to decrease overtime.

At this point I would like to review our performance of our major senior living tenants our largest tenant Five Start reported their earnings earlier this morning, they reported income from continuing operations of $0.17 per basic and diluted share. For the 12 months ended March 31, 2011 occupancies across all of our Five Star leases declined slightly in the aggregate principally due to skilled nursing.

The rental coverage has remained consistently strong on an EBITDA basis at a range of 1.12 times to 1.52 times. Five Star continues to have strong earnings, their coverage is increasing and is still able to push rates at levels higher than their peers, which speaks both to the Five Star operations and the high quality of our properties.

Our other tenants also performed well during the same period. The 14 properties we lease Sunrise cover their rental obligations by 1.46 times. Our expenses average almost 90%. Our properties leased to Brookdale were 92.6% occupied, and covered their rents by over 2 times. The occupancy across our five private operators increased 10 basis points to 84.1% and covered their rents by 2.5 times. Our two wellness center tenants continued to cover their rental obligations over two times as well.

Moving into the medical office building component of our portfolio, today SNH owns over 6 million square feet of medical office space and represents approximately 31% of our NOI. Most of these properties are long-term leased to strong credit tenants. Occupancy was 97% at June 30, 2011. This quarter 150,000 square feet was renewed and we have new leases of 6000 square feet. The long-term overview we’ve experienced in our portfolio is in our multitenant building.

Tenant improvement and leasing commissions for the quarter were $1.9 million for the six months ended this quarter were $4.2 million with a budget for all of 2011 is $6.5 million. On a same store basis, the NOI decreased very slightly, as utility expenses and real estate tax increased more than the rental revenues increased. The dividend remains our highest priority, earlier this month, the board declared a dividend of $0.37 per share or $1.48 per share annually, for yield of over 6% today. Board evaluates this dividend every quarter.

Based on our current normalized FFO payout ratio of 84%, we’re generating approximately $40 million of excess cash flow per year, and the surplus cash flow is currently used to fund improving financings, make new investment or prepaid debt. We have an extremely high quality portfolio, that’s been put together through a disciplined approach that has yielded rationale book values based on units, square feet, and beds.

And we maintain this high quality portfolio by consistently reinvesting in our properties. In the next few years, only 4.7% of our annualized rental income comes up for renewal. Our pipeline remains strong as the number of opportunities we are currently evaluating remains around $1 billion. We believe that due to market conditions, the majority of any senior living acquisition we will make will need to utilize their idea structure.

Most senior living and medial office opportunities we are evaluating will warrant to mid-7% through mid-8% cap rate range. Overall, we feel confident and our ability to make accretive acquisitions in 2011 and continue to grow the company using a disciplined investment approach. Now, well in the future’s bright, we may experience some short-term dilution until our excess cash is reinvested into acquisitions. For the remainder of 2011, we will remain focused on refinancing our 2012 debt maturities, executing on our third quarter acquisitions and continuing to seek out new accretive acquisitions in both senior living and medical office building spaces. Now, I’ll open it up for questions at this point.

Question-and-Answer Session

Operator

(Operators Instruction). The first question from the line of Todd Stender, Wells Fargo Securities. Please go ahead.

Todd Stender – Wells Fargo Securities

Hi guys, thanks. Just with the pending CMS proposal out there, did you encounter any difficulty in selling your SNFs in the second quarter?

Timothy Bonang

We did not really. I think three of those properties we had negotiated, I think around first quarter for time reason and so they’re pretty much locked in and the other situation is an owner operator where the operator is buying it and they have the capital to do so. So, we really did not have any issue. I think some of our smaller private operators we do, a lot of them don’t have the capital to acquire them and right now it might be a challenge for them to do so. In the meantime, they are covering the rents two to three times, so we feel pretty secure from that perspective.

Todd Stender – Wells Fargo Securities

Great, thanks. And just looking at the medical office buildings you purchased in Gainesville, can you tell us a little bit about Sage Software & Healthcare and how much of they represent as I guess – as a percentage of the square footage?

Timothy Bonang

Sure. It’s 14 tenants in those buildings and it is all built around biotechnology and startup companies and the way chapter listed at the list the largest tenant within the properties based on space. (Inaudible) is the company that has developed software for operating systems to healthcare companies and they’ve come up with a number of new technologies and products to market through the healthcare companies. So, it’s venture capital type startup company, that’s based in that area and formed by a professor from the university.

Todd Stender – Wells Fargo Securities

Okay. And then with the purchase the Five Star stock, is there any formal commitment in place maybe within any of the leases that you guys own on certain percentage of their shares?

Timothy Bonang

No, there is no commitment to our requirement – just to keep our level at 9% ownership.

Todd Stender – Wells Fargo Securities

Okay. Is that what it is now, it’s just you’re not diluted, it remains at the 9?

Timothy Bonang

Correct.

Todd Stender – Wells Fargo Securities

Okay. All right. Thanks guys.

Timothy Bonang

You’re welcome.

Operator

Thank you. (Operator Instructions). You have a question from the line of Jerry Doctrow of Stifel Nicolaus. Please go ahead.

Jerry Doctrow – Stifel Nicolaus

Hello.

David Hegarty

Hi, Jerry.

Jerry Doctrow – Stifel Nicolaus

So, David, you’ve covered a lot of things. So, just a couple of areas – little more color on maybe acquisitions. I think you’ve talked about a $1 billion sort of pipeline, maybe not closing more stuff to later in this quarter. But a little more color on what you’re seeing maybe MOBs versus senior housing, I guess I would like to understand may be a little bit more color on your remarks that you want to use or need to use your RIDEA structure, so just a little more sense of what you are seeing out there would be helpful?

Timothy Bonang

Sure, Bob I guess it’s because there is capital available in the marketplace and maybe it’s been in a row since operators have – investors have put properties in the marketplace to sell that we seem to be seeing several good sized portfolios or properties in the marketplace to consider. Some of them are off market deals.

But there are few in the market that are being marketed through the traditional routes of brokers and investment bankers. So, I think it’s a great opportunity to be buying right now. And I would say probably what we are looking out right now of that $1 billion let’s say may be two thirds of it is probably senior living versus the other third being some portfolios and individual assets in the medical office side. And what we are considering is strictly pretty much private paying senior living product.

Jerry Doctrow – Stifel Nicolaus

Okay, and again you said rates suddenly have beaten half, I am assuming if you are going to do RIDEA would be exclusively with Five Star or is there chances you do with somebody else?

Timothy Bonang

More likely than now with Five Star.

Jerry Doctrow – Stifel Nicolaus

Okay. And then one thing I wanted to just come back to you have talked about this none another I got the numbers just on the operating expenses I think you have given out some figures about how much was senior housing, how much was sort of MOBs, and the MOBs we have got a relatively good hand on, because that’s been growing, say, part of your business. On the Senior Housing, maybe you can give me the number again that was in the quarter and do you expect, sort of, seasonal fluctuations or any more color we should think about that, I mean, it’s not a huge number relative to your earnings, but just wanted to think about fluctuations there?

Richard Doyle

Hi, Jerry, this is Rick. Yes, I’ll comment on that. As you know, we close on those in the last 7 to 10 days of the quarter, so that is not a big number in the property operating expenses for these managed senior living communities, but we did record $609,000 for the quarter. So, of course, when we go to the next quarter and have those and maybe close on a couple of other managed communities, we do expect that to increase. Just have to annualize that, just remember $609,000 over a 10-day period for the quarter.

Jerry Doctrow – Stifel Nicolaus

Okay. And it’s not going to move around enough for us to worry about do you think or...?

Timothy Bonang

No, I don’t think so. I mean there are a lot of moving parts right now just with the fact that the 12 properties are just closing and the transitional stuff going on, but the – I think we knew going into this transaction that the margin were probably lower, let’s say about 25% or so margins, which for private pay senior living communities is below average. And also the occupancies were a little bit lower on the managed facilities. So, we expect improvement in both the margins, occupancy and overall performance.

Jerry Doctrow – Stifel Nicolaus

So, that maybe more of a 2012 phenomenon rather than something that would come very quickly you think?

Timothy Bonang

It could and I think we have trend lines improving out of gate here. So, we’re optimistic that should improve from where it’s been at historically, but it’s quite long, full until 2012 or so.

Jerry Doctrow – Stifel Nicolaus

And I just wanted to last things I have, so the loans of Five Star, do you have a sense of when you would get repaid? I mean I’m assuming you’d rather be out of it sooner than later?

Timothy Bonang

That’s right. No, we don’t have any specific timeline and obviously, they have till next July 1st to refinance out.

Jerry Doctrow – Stifel Nicolaus

Okay. And then last thing I have just a little bit broader, the NIC numbers were out yesterday, Five Star numbers came out, weren’t particularly stellar, certainly in terms of occupancy obviously it’s weaker on the skill side, but we would normally expect the first quarter or second quarter kind of improvement and you’re just seasonally and private pay senior housing occupancy which would you really see in their numbers. So how are you feeling about given economy, given all of that about senior housing, private pay senior housing and real quickly where occupancies maybe trending?

Timothy Bonang

I think it does trade somewhat in line with how the economy is doing, but it is studding at the moment. I also see that happening with the occupancy level. If you were to look at the other statistics in the portfolio granted there end with March 31st. They’re basically at the same couple of basis points lower from yearend results.

So, and I think we’re kind of bouncing along here where it’s going to fluctuate a little bit one way or the other. But I don’t see any drop off, but then again I don’t see any ramp up either in the – it’s in the last couple of months or upcoming future months, I think when you are seeing those probably less discounting going on and people are trying to push rates if they can, so that’s usually trade off with occupancy suffers a bit when you push the rates too much, in Beijing occupancy particularly will stay static for a while.

Jerry Doctrow – Stifel Nicolaus

Okay, okay. Okay that’s helpful. Thanks.

Timothy Bonang

You are welcome.

Operator

Thank you. Next question from the line of Omotayo Okusanya of Jefferies & Co. Please go ahead.

Omotayo Okusanya – Jefferies & Co

Yeah, good afternoon. Just along Jerry’s line of questioning just kind of given this near-term for senior housing and the commentary around future acquisitions in the pipeline being more TRS focused. I am just kind of curious you balanced both things where as fundamentals are not going to be getting better anytime soon, why that makes sense to exposures out to those fundamentals, why are acquisitions using the TRS?

Timothy Bonang

Sure, a couple of thoughts. One is first of all when opportunities present themselves, you really need to take advantage of them, portfolios down come to the market, often they usually come once and you have an up to bid on and if its quality product and you believe in the industry and you really have to step up and try to buy those assets. So that’s one reason why we should be aggressive in try to acquire some of these.

Omotayo Okusanya – Jefferies & Co

But why TRS specifically, why not (inaudible)?

Timothy Bonang

The other part is at least with – first of all the rest of the universities is bidding with a TRS format. So in order for you to effectively compete, you have to use that model because with the sale lease back situation, that we have to make a profit margin and then to operate we have to have some profit on the table, so that’s even want to do that transaction. So when you layer in a couple of layers of profit and then you have the coverage ratio and so on, you become non-competitor and we would have to earn 7.5% to 8% cap rate to buy quality assets, while our peers might be bedding 7 to 7.5. So using our RIDEA structure, so if we are going to compete, we kind of have to use the RIDEA structure.

And then our fundamental belief is that if there is a pause right now, is that a pause for short-term, the dynamics in the industry are very compelling, for say the next five years, I do believe that we will come out of this soft patch and the recovery and then the demographics will kick in, people – the confidence factor will kick in that was a huge – is a huge factor, hopefully unemployment comes down and the housing market should pick up so all of those factors should bore well I would say or say the next five years.

Omotayo Okusanya – Jefferies & Co

But...

David Hegarty

Yeah.

Omotayo Okusanya – Jefferies & Co

Well, Dave, but I guess if you are going to compete against the rest of your peers, I mean the larger peers kind of doing these RIDEA deals they are all underwriting anywhere from mid to high single digit seems to NOI growth for these portfolio, are you basically going to be underwriting that as well and you fundamentally believe that or your concern that given the economic backdrop those numbers maybe a little bit too aggressive for Five Star doing their transaction, but they were launching it and we decided to support the closing of their acquisition because they had to have to have no financing contingency.

And to think it will – I guess that it. It’s just – it’s a staged closing and so we if once they have drawn a facility and paid it back, it cannot be redrawn. So, it’s a one-time borrow.

Omotayo Okusanya – Jefferies & Co

But, it’s already drew it down and then drew it back up again in July?

Timothy Bonang

No, its $80 million total capacity, but they borrowed $41 million in June and they did repay $32 million, that’s why at the end of June there was $9 million outstanding.

Omotayo Okusanya – Jefferies & Co

And then they borrowed down it again?

Timothy Bonang

They borrowed another $15 million in July, so they were up to $24 million outstanding, but they are only allowed now only $24 million to borrow, that’s all that’s available to them. It’s not the 80 minus to 24 that’s outstanding. They cannot borrow any of that $32 million that they paid back, and....

Timothy Bonang

Yeah, it’s not meant to be a revolver, it’s one-time borrow.

Timothy Bonang

So, today it’s $24 million outstanding and $24 million left to borrow if they like.

Omotayo Okusanya – Jefferies & Co

Okay. Got it, okay. That’s helpful. And then last question again just the asset sales, I understand the teeth of this, so I was asked to why sell the SNF, could you talk a little bit about the MOBs and what’s the mind that was there?

Timothy Bonang

Those particular MOBs, it was a portfolio transaction we had the healthcare system and those two properties they decided to exit that from those locations. We have a mechanism and at least that allows them to – they get a small rent reduction and what they are paying as some rents, so yield that up to remaining assets in that portfolio actually go up. But again they are pretty small I think was 12,500 square feet in total by the two or five operations

Omotayo Okusanya – Jefferies & Co

All right. Thank you.

Timothy Bonang

You are welcome.

Timothy Bonang

Thank you.

Operator

Thank you. The next question comes from the line Frank Morgan with RBC Capital Market. Please go ahead.

Frank Morgan – RBC Capital Market

Good afternoon. You mentioned the use of the RIDEA structure how that’s necessary to be comparative from a lot of deals. So when you – I am assuming that must be for larger deals where you are being, I guess, these big larger REITs, but that being said is that right and then secondly how do you characterize the opportunity the characteristics of this two-thirds $1 billion backlog in senior living, how do you characterize that in terms of bigger portfolios versus smaller groups of assets? Thanks.

Timothy Bonang

Okay. You are correct that the RIDEA structure is really geared towards the larger portfolios and left stuff for individual assets. There is a dichotomy of is the premium paid for portfolio versus a single asset or small group of assets. And I think the larger REITs are fulfilling the portfolio of transactions and so that’s who we’re competing against in those – most of those cases. And of the normal transactions we are considering, I would say the bulk of that two-thirds represents portfolios of situations, several portfolios that make that up. Hopefully that was helpful?

Frank Morgan – RBC Capital Market

Okay. Thanks.

Timothy Bonang

You’re welcome.

Operator

Thank you. The next question comes from the line of Dave AuBuchon of Baird. Please go ahead.

David AuBuchon – Dave AuBuchon of Baird

Yeah, thanks. Just on the Five Star stuff real quick, just – did you give us the rationale why you made the purchase of the Five Star stock and is there any lock up on that – on those shares?

Timothy Bonang

There is no lock up on the shares. It was a $5 million at $5 a share of a million shares and it was mainly to just keep our 9% interest not diluted and we believe at $5 a share, it’s still a very attractive investment for us.

David AuBuchon – Dave AuBuchon of Baird

All right. And then on the bridge loan, how do you scale your commitment to them, $80 million relative to what they needed? How do you think about the scale, which you are going to admit to them and then just I’m going curious in the pricing to just a 100 basis points of your cost?

Timothy Bonang

Well, we look at the transaction that they had, I think it said $123 million acquisition net that is under agreement and we looked that – what resources they had available, they assumed some debt as well as provide from their own capital, and then basically agreed to okay, how much is necessary to complete that transaction and so $80 million was established as the amount necessary, and we have put lease on several properties to more than cover our security.

And then one-time draw is only meant to be specifically for funding that transaction and nothing else. So, that’s how it came about and currently have cash on hand. We are establishing the spread and separate that just between the two independent committees and what would be our market rate and agree that, I think, there are other transaction going at the same time with the – somewhat of a tie into the Bell transaction since that. The management fee we are receiving is a 3% management fee, and we’ll in charge.

Now, that’s a bit of favorable management fee arrangement on that perspective and trade off was a little bit favorable on the spreads

David AuBuchon – Dave AuBuchon of Baird

Do you feel like this will be a sort of a tool that you’ll use going forward on the transactions?

Timothy Bonang

No, I don’t expect this to be customary.

David AuBuchon – Dave AuBuchon of Baird

Okay. Last question is relative to your investment pace and what you’re buying, do you feel like you need to get more aggressive on these deals because many of your peers and even your much larger peers are outgrowing you right now on an annual basis, and they are setup to outperform or outgrow you the future, if their assumptions in the RIDEA structure is even remotely close to being accurate. Do you feel like you need to be more aggressive to keep up with your peer group?

Timothy Bonang

Well, we know we have to compete, so I think we do have to be a bit more aggressive. As you know, it’s large vessel with the – it’s a size issue. One of our advantage historically has been that we’ve not been as big as the other guys in the top three now, and as a result, we can pursue smaller transactions. There are these portfolio of 100 to a couple of millions of dollars that come onto market and those will be great for us, we hate to not compete on those, and like with Bell, we were successful at a mid-7 cap rate.

We think that there is tremendous amount of upside potential in that portfolio, and if that can be reproduced in other portfolios, then we feel we should be a bit more aggressive in pursuing those other portfolios. And before you know, we will be of a size where we have to keep up bigger portfolios too, but kind of get back to question on CFA I think we have to be a bit, did shop around bidding for some of these portfolios.

David AuBuchon – Dave AuBuchon of Baird

Thanks Dave.

Timothy Bonang

You are welcome.

Operator

Okay, thank you. And the next question comes from the line of Dan Cooney with KBW. Please go ahead.

Daniel Cooney – KBW

Hey, good afternoon guys.

Timothy Bonang

Hi Dan.

Daniel Cooney – KBW

You mentioned that any future deal would likely be with Five Star. Is it fair to assume that you would utilize a similar management agreement structure that you guys used on the Bell portfolio?

Timothy Bonang

Yes, I think that was set as template for possible future transaction.

Daniel Cooney – KBW

Hey, great and then, I guess that just one more follow-up on the kind of the Five Star equity investment. I guess just kind of from the strategic point of view do you kind of view your investment in their equity is kind of an indirect way of retaining some upside exposure to senior housing kind of fundamentals or was that not really a consideration?

Timothy Bonang

That is the fully consideration. You know, we clearly do have a relationship there that we want to participate in the upside potential that could be there. You know, it also further – the idea of structure is that it also allows us to be a little more creative in structuring of it.

Daniel Cooney – KBW

Okay, great. Thanks a lot.

Timothy Bonang

Welcome.

Operator

Okay. Thank you. And the next question comes from the line of (inaudible) of Morgan Stanley. Please go ahead.

Daniel Cooney – KBW

Good morning, gentlemen. I have a question going back to the Five Star leases, specifically I mean in cash flow coverage, when coverage is out, but you have occupancy trailing down for two of the leases now, you mentioned that part of that was due to skilled nursing facility occupancy weakness, but one of the leases, lease three doesn’t seem to have any skilled nursing facility exposure. So I was wondering if you can comment on what’s leading to occupancy weakness there.

Timothy Bonang

That actually does have some skilled nursing in it, because it’s comprised of CCSCs that have some skilled nursing units, but also that portfolio is comprised mostly off the large CCSCs in our company and I would say the skilled nursing is probably the most impacted but independent living is probably the next one that is a bit soft, and assisted living is actually holding up very well. So I think that a little bit – it’s definitely being impacted by the skilled nursing units within the CCSCs. It is to some degree being impacted by the independent living exposure within that portfolio and being offset by the positive ALV.

Daniel Cooney – KBW

So – but if I look at your occupancy by property type for the whole company, I see that independent living is actually trending, I guess, down – assisted living is trending downwards, independent living is sort of like stabilizing or trending up, so it sort of doesn’t really match up with what’s happening, I guess, with the Five Star lease?

Timothy Bonang

Okay, well on the independent living is from the December quarter to the March quarter down a little bit. Assisted living (inaudible) one thing that chart don’t (inaudible) we saw same store number. So, in the case like when we added a property in Illinois that came on at a 75% accuracy level and most of the Dell properties are coming on at levels in the mid to low 80%. So, this all of the story because the newer properties kind of bring down the percentages, but I guess if we had some same store statistics to show we could also be actually system living as been taking up on a same store basis.

Daniel Cooney – KBW

Okay. Then another thing I wanted to look at, a grasp on is basically what are the yields that you focus on when you’re looking at properties to dispose of, so is there a target yield when you’re thinking about I guess selling off these properties?

Timothy Bonang

Yep. On these two camps there is properties that are underperforming and are falling under case. We don’t believe that they will turn around and so we sell them off it. So, they typically lose money. So, there is no real cap rate. In the case of three of these – actually we have four of these properties in skilled nursing side that we sold we were able to obtain cap rates in the 8 to 8.5 range. And I’d check and we actually are very attractive rates from our perspective to skilled nursing to sell that. And when we consider our decision we’re trying to evaluate what did you supporting in each all of those investment kind of assets because we the best we can do is trying them on and reinvest in assets that 7.5% to 8.5%. So that goes into our cap growth.

Daniel Cooney – KBW

And then I also had a question on yields as they regard your capital expenditures, the one that you are buying back or basically investing on. So what sort of, do you envision or did you have for the CapEx on Senior Housing for this past quarter?

Timothy Bonang

Yeah, at this past quarter we funded about $4.5 million into senior living facility. So we are going to yield about 8% back on that under the mark.

Daniel Cooney – KBW

And is that true I guess for a MOBs well?

Timothy Bonang

MOBs, we don’t get, they not producing any revenues coming back like that. So they just putting capital into the buildings for improvement, but no return on those.

Daniel Cooney – KBW

Okay and this 8% like a fair yield going forward I guess?

Timothy Bonang

On that senior living side, yes.

Daniel Cooney – KBW

Okay, all right that’s good for my line of question.

Operator

Okay, thank you and the final question comes from the line of Jerry Doctrow with Stifel, Nicolaus. Please go ahead.

Jerry Doctrow – Stifel, Nicolaus

Thanks. I guess, David just a quick follow-up. I think you would say on the Bell portfolio the things were trending positive. I was wondering if you could just clarify may be where occupancy, I know I think you may be specify that individual press release where occupancy was when you acquired and I was curious where may be occupancy is today?

Timothy Bonang

I would say the occupancy is up slightly if we put forward there are a couple of assets that are probably the same or may be little bit lower. Must be others are up, so I think on the managed office is about 85% at the time of our announcement. There is still let’s say in the aggregate about 100 basis points higher than that.

Jerry Doctrow – Stifel, Nicolaus

Okay.

Timothy Bonang

And but there is a lot of say efficiencies that Five Star can bring to the table to on the operating expense side of things.

Jerry Doctrow – Stifel, Nicolaus

(inaudible) trending higher. Okay, that’s all from me. Thanks.

Timothy Bonang

Okay.

Operator

Okay, thank you. I’ll hand back to Mr. Dave Hegarty.

David Hegarty

I want to thank you for joining us today. In September, we have the Bank of America/Merrill Lynch Global Real Estate Conference and JMP Securities Healthcare Conference both in New York City, so we hope to see some of you at one of our conferences. Thank you.

Operator

Okay, thank you. And that concludes our conference for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.

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