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Executives

Timothy A. Bonang – Vice President Investor Relations

David J. Hegarty – President & Chief Operating Officer

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

Analysts

Jana Galen – Bank of America Merrill Lynch

Todd Stender – Wells Fargo Securities

Jerry Doctrow – Stifel Nicolaus

[Jarrell Golotti] – Morgan Stanley

Frank Morgan – RBC Capital Markets

Senior Housing Properties Trust (SNH) Q3 2011 Earnings Call October 27, 2011 1:00 PM ET

Operator

Welcome to the Senior Housing Properties Trust third quarter 2011 financial results 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.

Timothy A. Bonang

Joining 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 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, October 27, 2011. The company undertakes no obligation to revise or publically release the results of any revisions to the forward-looking statements made in today’s conference call other through filings with the Securities & Exchange Commission or SEC regarding this reporting period.

In addition, this call may contain non-GAAP numbers including funds from operations or FFO. A reconciliation of 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 any forward-looking statements.

Additional information concerning factors that could cause those differences is contained in our Form 10Q to be filed with the SEC. Investors are cautioned not to place undue reliance on any forward-looking statements. Now, I’d like to turn the call over to Dave Hegarty.

David J. Hegarty

I’m happy to report another active quarter for Senior Housing Properties Trust. One in which we increased the dividend and positioned ourselves for continued long term dividend growth. For the third quarter 2011 we reported normalized funds from operations, or normalized FFO of $0.43 per share, and this compares with $0.42 per share that we reported for the same period a year ago. And for the nine months ended September 30, 2011 we reported normalized FFO of $1.30 per share versus a $1.27 per share a year ago.

Now, let me review some of the highlights for the quarter. In October, our board of trustees raised the quarterly dividend payment by $0.01 per share to $0.38 per share. On an annualized basis we’re paying $1.52 per share. This represents an 88% payout ratio of our third quarter’s normalized FFO. The dividend was increased based on the growth opportunities in the pipeline and our board’s confidence in the company’s cash flows.

As Tim just stated, in our supplemental we provide the components to calculate funds available for distribution or FAD and we believe if you were to calculate our payout ratio on a FAD basis, it would be in the low 90% range. The dividend is our highest priority and we’ve always maintained sufficient cash flows to sustain the dividend and prudently grow it over time. Currently our dividend is an attractive yield for investors at about 6.8% per annum.

We continue to be active on the acquisition front. We have announced over $1 billion of acquisitions this year and since the beginning of third quarter we have acquired or are under agreement to acquire 33 properties in the private pay senior living and medical office spaces for an aggregate purchase price of over $800 million. During the quarter we acquired 18 of the 33 properties for $234 million.

Let me review the status of our acquisitions announced to date. Back in March of this year we announce we were acquiring a portfolio of 20 senior living communities located in the south east from Bell Senior Living for $304 million. We split up this portfolio by leasing five communities to Five Star Quality Care and by leasing the other 15 communities to our taxable REIT subsidiary or TRS, and hiring a manager to operate those properties. At the end of the second quarter 14 properties had been acquired, four of which were properties leased to Five Star and the other 10 leased to our TRS.

Moving into the third quarter in late July, we acquired three senior living communities and in early August we acquired an additional senior living community, all located in Florida with a total of 473 units for $62 million including the assumption of $25 million of mortgage debt. Now three of those four communities are being leased to our TRS and the fourth is being leased to Five Star. We expect to acquire the remaining two managed communities for approximately $45 million by the end of the first half of 2012. The closings of these properties have been held up by various closing conditions and third-party approvals including HUD. We’re excited to have these 20 communities become part of our portfolio and look forward to their full contribution beginning in 2012.

Next, in late July we acquired a medical office building located near Gainesville Florida with over 32,000 square feet for $5.2 million and assumed $3.7 million of mortgage debt. This medical office building, which was announced on last quarter’s call is the last of a four building biotech campus affiliated with the University of Florida. And along with this acquisition we acquired 47 acres of land for $4 million adjacent to the campus which could be used for potential development for biotech companies.

At the end of September we acquired 13 medical office buildings located in eight states with 1.3 million square feet from Commonwealth REIT for $167 million. These properties are 95% leased to over 100 different tenants with the weighted average remaining lease term of five years. Some of the major tenants are Cardinal Health, Boston Scientific, Abbott Laboratories, Winthrop University Hospital, and Striker Corporation. This acquisition terminates the right of first refusal that existed between SNH and Commonwealth as substantially all the properties subject to this right have been purchased by SNH.

This acquisition helps us to continue to diversify our portfolio by tenant, product type, and geography. MOB now represent 32% of our invested assets and 31% of our NOI. We also have agreements to acquire one senior living community and three medical office buildings for an aggregate purchase price of $44 million including the assumption of $9.7 million of mortgage debt. The senior living community and two of the medical office buildings were announced last quarter representing approximately $23 million of that price. We expect to close on these acquisitions by the end of 2011.

Finally, the highlight of the quarter was in early September, when we announced an agreement to acquire nine upscale senior living rental communities operated as Classic Residence by Vi formerly known as Hyatt for $478 million including the assumption of approximately $164 million of mortgage debt. The portfolio contains over 2,200 independent living and assisted living units with a portion dedicated to Alzheimer’s care. We expect to close on the acquisition of the majority of these communities by the end of 2011.

The acquisition for one of these communities for approximately $100 million, is not expected to close until the second half of 2012 due to certain required approvals and licensing in New York State. We expect all these communities to be leased to our TRS and managed under similar contracts that exist today. Currently, the contracts call for the manager to be paid a management fee of 3% of revenues and an incentive fee of 35% of the net cash flows after the properties have achieved a priority return to us.

The nine communities were 87% occupied at the time of our underwriting. About four years ago these properties ran at about 94% occupancy and we believe we can ultimately meet or exceed this historical performance over time. Pictures of these properties displaying their location in high quality are available on the presentation found on the front page of our website. We look forward to the performance of these properties contributing to our operating results again, beginning in 2012.

In mid October we issued 9.2 million common shares of stock in a public offering raising net proceeds of approximately $185 million. We used the net proceeds to repay borrowings outstanding on the revolving credit facility which we had used to fund our acquisitions.

Now, I’d like to discuss the performance of our senior living tenants. As a reminder, our statistics and those of our peers are reported a quarter in arrears. Our largest tenant, Five Star, today reported net income from continuing operations of $0.08 per basic and diluted share and for the past 12 months they’ve earned net income from continuing operations of $0.57 per diluted share. For the 12 months ended June 30, 2011 the occupancies in two of the Five Star leases declined slightly while the other two remained unchanged. The drop in occupancy was principally due to decline in skilled nursing occupancy.

Rental coverage on an EBITDA basis was between 1.1 times and 1.5 times for each of these leases. And for the third quarter Five Star reported a sequential increase in occupancy which is in line with the NIC map industry data. Our other tenants also performed well in the same period. The 14 properties we lease to Sunrise covered their rental obligations by 1.56 times. Occupancies held steady at just under 90%. Our properties leased to Brookdale were 92% occupied and covered their rents by over two times.

Occupancy across the five private operated decreased 30 basis points to 83.8% but rental coverage was consistent at 2.5 times. Our two wellness center tenants covered their rental obligations again over two times and have held steady over the past year. Moving on to the medical office building component of our portfolio, today we own almost 7.5 million square feet of medical office space. And within our definition of medical office buildings, our properties are primarily used for clinics, outpatient centers and doctor’s office, biotech laboratory and research, medical equipment manufacturing, and other medical related services.

Our three largest tenants in this portfolio, representing over 20% of our MOB revenues are Aurora Healthcare, Scripps Research Institute, and Cedars-Sinai Medical Center. As of September 30, 2011 occupancy at our MOBs was 96%. During the quarter 197,000 square feet was renewed and we had new leases for 11,000 square feet. Now the rental rates on the renewals increased on average about 3.25% and the new lease rates increased 19.4% compared to the prior tenants’ rental rate in place.

The tenant improvement and leasing commissions for the quarter were $1.6 million and for the nine months ended this quarter were $5.8 million. We have an extremely high quality portfolio that’s been put together through a discipline approach that has yielded rational book values based on units, square feet, and beds and we maintain this high quality portfolio by consistently reinvesting in our properties. Over the past decade, all of our acquisitions have focused on real estate with private pay revenue sources and in turn we have been gradually selling off government dependent real estate.

Approximately 94% of our total revenues come from properties where the revenues are derived from private sources which is the highest percentage out of all the healthcare REITs that have senior living assets. We continue to believe there are numerous opportunities to continue to invest in both the senior living and medical office industries. With that, I’ll turn it over to our Treasurer and CFO, Rick Doyle to discuss the third quarter financial results.

David J. Hegarty

For the third quarter we generated normalized FFO of $65.4 million, up 22% from $53.5 million for the same period a year ago. On a per share basis normalized FFO was $0.43, up 2.4% compared to $0.42 a year ago. Earlier this month our board declared a quarterly dividend of $0.38 per share from last quarter’s dividend payment which represents a payout ratio of 88% of our third quarter’s normalized FFO. Percentage rent revenue from our senior living tenants for the third quarter increased 7% to $2.9 million versus the same period last year.

Looking firs to the income statement, total revenues increased $32.3 million in the third quarter or 40% to $113.3 million compared to $81 million during the same period last year. During the quarter we recognized $10.7 million of residence fees and services at our managed communities. Residence fees and services are the revenues earned at the 13 senior living communities we have acquired since June 2011 that are leased to our TRS.

Depreciation expense increased quarter-over-quarter by $6.3 million or 28% to $28.8 million. Property operating expenses increased $15.2 million to $19.8 million which is in line with our expectations. Property operating expenses are primarily related to our medical office buildings but now include expenses incurred at our managed senior living communities. We recorded $11.2 million of property operating expenses for our medical office portfolio and $8.6 million of senior living operating expenses for the third quarter.

General and administrative expense increased $1.1 million to $6.6 million. Our G&A was 5.8% of revenues and 20 basis points of average total assets consistent with prior reporting periods. The quarterly increase in revenues, depreciation expense, property operating expenses and G&A primarily relates to the 68 properties we acquired since July 1, 2010 and the purchase of approximately $42 million of revenue producing capital improvements made to our senior living properties offset by a reduction of rental income resulting from the sale of 11 properties sold since July 2010.

Interest expense for the third quarter was $4.5 million higher versus last year. The increase relates primarily to the amortization of deferred financing fees, commitment fees related to our new $750 million revolving credit facility, and the January 2011 sale of $250 million of five year unsecured senior notes with an interest rate of 4.3%. The new revolving credit facility closed on June 24, 2011 and the amortization of the new deferred financing fee and the fee on the increased capacity on the revolver resulted in an additional $600,000 per quarter of interest expense.

During the quarter we reported a $1 million impairment charge related to an assisted living property which is classified as held for sale. We recognized acquisition cost during the quarter of $2.6 million which was solely a function of transaction volume.

Now let’s turn to the balance sheet. During the third quarter we acquired four senior living communities and 14 medical office buildings for a total of approximately $234 million and invested $10.6 million into revenue producing capital improvements. We funded these acquisitions with the proceeds from a July equity issuance by assuming $28.9 million of mortgage debt by using cash on hand and borrowings on the revolving credit facility.

As we have mentioned, we will be assuming mortgage debt along with some of the acquisitions we have announced so far this year. For your modeling purposes, the average interest rate on these mortgages is approximately 6%. In May, we entered into a secured bridge loan agreement with Five Star for up to $80 million to help finance their acquisitions of six private pay senior living communities in Indiana. During the quarter Five Star borrowed $39 million and completed the acquisition of the remaining four of the six communities.

At September 30th $48 million was outstanding and no additional borrowings were available. The bridge loan matures on July 1, 2012. At September 30, 2011 our total debt was approximately $1.6 billion and our equity was $2.3 billion for a ratio debit to total book capital of 41%. On a market basis, our debt to total market capitalization was 33%. At the end of the quarter we had $210 million outstanding on our revolving credit facility, three series of unsecured senior notes totaling $675 million, a mortgage loan and capital leases totaling $724 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 8 5/8ths. In addition, we have $48 million of mortgage notes due in 2012 with the weighted average interest rate of 6.7%. We are looking for accretive opportunities to refinance these notes. Other than the 2012 maturities 96% of our debt is not due until 2015 or later.

In October we completed the issuance of 9.2 million common shares on a public offering raising net proceeds of approximately $185 million. We used these proceeds to pay down most of the balance outstanding on our credit facility and today we have almost the entire $750 million available. After paying down the credit facility, our debt to total book capital goes from 41% to approximately 34% not including pending acquisitions.

To conclude, for the remainder of 2011 we will remain focused on refinancing our upcoming 2012 debt maturities, executing on our acquisitions under agreement, and continuing to seek out new accretive acquisitions in both the senior living and medical office building spaces. With that, we’ll turn it over to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jana Galen – Bank of America Merrill Lynch.

Jana Galen – Bank of America Merrill Lynch

Given that you have about $550 million of acquisitions under contract, can you kind of walk us through how you’re thinking about your intended capital structure for these transactions?

David J. Hegarty

As you obviously know, we raised the equity recently so that paid down our line of credit almost to zero and so we have the capital available to close on everything we’ve committed to close on. We would expect to access the debt markets when the market is open and fluid. I think again, our transactions probably aren’t closing for say another 30 to 45 days or so, so we’ve got time. We’ll keep an eye on the window for possible debt. That will probably be a major source of financing for the next several months. I think we’ll try to keep the balance of debt and equity still – right now it’s around plus or minus 40% and that’s on a net book basis not a gross assets basis, so just taking it off the financial statements so I think it’s still running at a pretty conservative level.

Jana Galen – Bank of America Merrill Lynch

Then I was hoping if you could let us know for the Five Star lease number for those 25 properties, are they primarily assisted living or are they more rehab, or skilled nursing?

Richard A. Doyle, Jr.

It’s a combination of all three. They do include some skilled nursing in there, maybe one third and the rest is [ILMAL] properties/communities.

David J. Hegarty

And there’s no rehab in that particular lease.

Operator

Your next question comes from Todd Stender – Wells Fargo Securities.

Todd Stender – Wells Fargo Securities

Just looking at the bridge loan to Five Star, if Five Star pays down the balance, do I have this right, the loan itself goes down it’s not like it’s an existing or outstanding line of credit?

Richard A. Doyle, Jr.

No, they can’t borrow and re-borrow. They actually borrowed the maximum they can Todd. As of September 30th $48 million is outstanding and there’s no availability for Five Star to borrow anymore.

Todd Stender – Wells Fargo Securities

So if that goes to $28 million, they can’t bring that back up.

Richard A. Doyle, Jr.

They can’t bring it back up, it just keeps going on down until it’s fully paid.

Todd Stender – Wells Fargo Securities

Just looking at your pending acquisitions, most of which or several of which have the assumption of debt, is this normal would you say or are we in the middle of something where we’re just seeing more distressed or more motivated sellers because of debt maturities?

David J. Hegarty

Not necessarily at this point. I mean, I do think that’s something that’s going to continue to play for the next year or two where CMBS debt or other debt is coming due and people have to do something. But in our case, we evaluate each thing and our preference is to pay off debt if it is economically feasible. So what we’ve determined to assume is debt where the prepayment penalties are too onerous or they’re in a lock out, or something of that nature. It’s not voluntary that we’re assuming this debt, it’s more that if we want to buy these assets it’s something we have to do.

I would say that there probably are some cases where things are being triggered by debt maturities and I know in some cases debt has already matured and extended for one or two times, for one or two years let’s say, and I think the lenders are starting to get tired of extending. But the bulk of these transactions are just either investors have reached their maturity date for the investment and want to exit. There are a couple of individual situations where maybe the investor is strained from other debts that they have that is forcing them to sell but that’s not the case certainly with Vi. That’s another different situation.

Todd Stender – Wells Fargo Securities

If you can just comment on the current pricing on the initial lease yields just looking at the difference between assisted living and independent living, and any improvement in pricing with independent living because maybe it’s more economically sensitive right now?

David J. Hegarty

I really don’t think cap rates have changed that much. I do think it’s been a little quieter for competition in the marketplace. So maybe to some degree maybe cap rates have moved up a little bit if we had a number of transactions to point to. We are seeing on occasion deals that have come to market and they did not get the pricing that they wanted or expected that have been pulled from the market. So maybe we are running up against some resistance where cap rates will move up a bit, but I really haven’t seen a great shift in any valuations at the moment.

Todd Stender – Wells Fargo Securities

Just looking, in your disclosures o f medical office portfolio are much improved so thank you. I wondered if we could see in the future how you’re thinking about breaking out the RIDEA portfolio of maybe just looking at rental rates, maybe some cap ex expectations, any color about that?

David J. Hegarty

Yes, obviously we’ve just so far dipped our toes into RIDEA structures so I don’t think the material would be particularly meaningful yet. But we are really going to be an operator in the space going forward so I do believe when we close these transactions we’re going to enhance our disclosure and provide more operating type statistics and data that will help you evaluate the results of those operations.

Operator

Your next question comes from Jerry Doctrow – Stifel Nicolaus.

Jerry Doctrow – Stifel Nicolaus

A couple of things, you did provide sort of bits and pieces of data on sort of the existing TRS or RIDEA stuff and I just want to clarify that. There’s an occupancy number on page seven which is a company profile and it was a little unclear to me on the footnote whether that was quarter end or the average since you owned them and I’m just trying to sort of sort of what the number is if you will. It’s like 82.8%.

Richard A. Doyle, Jr.

That’s the averages since we’ve owned them Jerry.

Jerry Doctrow – Stifel Nicolaus

Again, I understand that you don’t have that much of that stuff yet [inaudible] public disclosures going forward but I think Rick you said, and this was I calculated as well, when you take the expenses, all the property operating expenses and you subtracted out the MOBs which you gives us detail, it’s like $8.6 million on the senior housing side which is only like a 19.8% operating margin. I was wondering if, I mean it sounded a little light, whether there are start up costs or other things in there and where that margin you think might be headed as we sort of settle down?

Richard A. Doyle, Jr.

You’re absolutely right, there are some start up costs there that we have to hit right away and we do feel that that margin will increase up to about the 30% to 35% mark.

David J. Hegarty

I also think too that one of the difficulties of providing meaningful data to everybody so that they can follow this through is that these transactions are closing in phases. For instances, the Bell properties, some of the properties closed in June, some in July, one in August and there’s still a couple more out there that may not close for another seven more months. I would say those assets that are yet to close also had the highest profit margins and highest occupancy levels of the group.

Our return on the assets at the moment is probably lower than what the original whole package was underwritten and described as. Once those properties come into the fold then we’ll have the full economic benefit of all of that and we should, I would say meet or exceed published cap rates and so on.

Jerry Doctrow – Stifel Nicolaus

While we’re sort of on that how about just capex spendings? With Bell particularly since that’s on the books now and on Vi as well. But particularly on Bell, are there capex needs that we should be thinking about that are meaningful once you get those properties on the books?

David J. Hegarty

When we bought those assets we knew what we were getting and across the whole portfolio there are really very little significant projects at this time.

Richard A. Doyle, Jr.

Yes, there are no immediate needs, these properties are just five years old on average and stuff and I think it’s just going to be the normal $750 to $1,000 per unit maintenance capex.

Jerry Doctrow – Stifel Nicolaus

I don’t know if you can give us any more color on Vi? I mean again, particularly that one is so big that a month one way or another is actually going to make a difference to the numbers. I mean are we talking right at year end, are we talking a month, December 1st or something, any sense at this point?

David J. Hegarty

I would say probably unlikely December 1st. I would say probably for your analysis I would assume probably the end of the month if we can get it closed during December earlier, we will do so and we’d love to do so.

Jerry Doctrow – Stifel Nicolaus

The other thing that I think Rick touched on, the refinancing, obviously you’ve got the $225 that you’re going to refinance earlier in the year plus some of those mortgages have to get refinanced and you indicated you might want to term out some of the debt you’ll put on the line as these acquisitions close. I think Rick alluded to that you’re looking at options there so kind of two questions. One, any more color on sort of financing? Are there prepayment penalties or whatever on that, that make it unlikely you’ll do it too early? Then second, maybe just remind me kind of where you are with rating agencies and that sort of stuff and any expectation you have for unsecured debt costs?

Richard A. Doyle, Jr.

On the $225 million that’s due in January there is a make whole provision up to the last day but we will be looking from now to then that we might even refinance that prior to maturity. We do have about $550 million of pending acquisitions that have assumed debt to those and we do have the capacity today on our revolver to close on all those with the assumption of debt. Some of those acquisitions, like the Vi property located in New York, that’s $100 million that’s going to be pushed out probably to the second half of 2012 so there’s some time before we need financing for that. Initially, that’s what we normally do is to acquire these properties, tow them on the line of credit and figure out how we’re going to finance them on a long term basis.

Jerry Doctrow – Stifel Nicolaus

Where do you stand with rating agencies and that sort of thing? Do you have any sense of where if you did $500 million worth of $10 year paper today, any sense where those costs would be?

David J. Hegarty

We recently have had conversations with them and they’re very comfortable with our position at the moment and they know that if we did take on some more debt they’re not concerned about it.

Richard A. Doyle, Jr.

The pricing on that is tough to tell now because there’s not a lot of activity in the market to really price it out so we don’t know where the pricing would be. Not too long ago we would say, or maybe still say, that a 10 year note would probably be sub below 6%.

Jerry Doctrow – Stifel Nicolaus

The just last thing I have, just acquisition levels, I think David you indicated that Commonwealth was kind of done. You also indicated that you thought there was a pretty rich environment maybe for acquisitions so any sense about acquisition volume maybe for next year, or typical acquisition volume? Then sort of mix and kind of cap rates? My assumption is there won’t be more MOBs at 9.2/9.5 kind of where you were with Commonwealth so just your thinking about cost and mix volume maybe?

David J. Hegarty

Well, I’d say we still see plenty of activity. I’d say the larger deals that we’re seeing at the moment are on the senior living side of things. I couldn’t have told you that this year we’d do a billion dollars. I never would have predicted that at the beginning of the year so you just never know how successful you’ll be but I always feel that we’re going to customarily do $150 to $200 of better and butter one offs and small portfolios of transactions. Again, I think that we’d probably do at least a couple hundred million of that type of product, of the one offs and small portfolios and hope that we do better than that.

As far as cap rates or rates that we would expect to earn on any type of investments, I think we’re probably going to average around the 8% level on a current basis, maybe even higher on a GAAP basis and that’s because certainly if you’re dealing with the one offs and so on you’re not going to get the premiums that would attract a real competition from all the other healthcare REITs and some of the other private REITs and others. Certainly in senior living that’s true too, one offs are going to get a higher cap rate for sure.

Operator

Your next question comes from [Jarrell Golotti] – Morgan Stanley.

[Jarrell Golotti] – Morgan Stanley

I just wanted to pick up on the transaction pipeline question that Jerry was asking about. So specifically, you had mentioned on the 2Q call that you had a $1 billion pipeline. Is that still the size that you’re seeing going forward or has that diminished considering you’ve already announced two thirds of that since your 2Q call?

David J. Hegarty

We’re always looking at I’d say several hundreds of millions of dollars of opportunities at any given time. I think the big deals at this point have been announced but I would expect again we should be able to do a number of individual transactions and then hopefully land one or two of the large ones for say a couple hundred million. I think I’m a little uncomfortable with the term pipeline since deals that are likely to happen I wouldn’t say that is a billion, deals we’re looking at and so on we’re looking at certainly I’d say a half of billion right now. How many of those are actually going to come up to fruition I couldn’t tell you right now because I’m not sure how lucky we’ll be.

[Jarrell Golotti] – Morgan Stanley

Considering all the macro headwinds, has this affected your view on using a TRS RIDEA structure on future acquisitions? And also, has it affected your view on performance for this structure in the near term?

David J. Hegarty

No, I think fundamentally the story still makes sense. I believe that maybe things have deferred a bit from when people expected things to really take off but I do think that fundamentally over the next several years the RIDEA format is going to be positive, have greater growth than otherwise we could obtain. So the fact that we’re running in to some more headwinds economically I don’t think undermines the thesis. So I don’t expect any real change in our strategy.

[Jarrell Golotti] – Morgan Stanley

Also, in the near term you don’t expect your expectations performance to be affected as much or do you think it hasn’t changed?

David J. Hegarty

It really hasn’t changed. I think we had bottomed out anyways. The timing could be deferred maybe another six months or something like that but the fact that our transactions in and of themselves take six months to a year to ultimately be all consummated and closed, that we will be picking up from there. I do expect that the economy is picking up, albeit slowly but I do think it’s picking up from here.

[Jarrell Golotti] – Morgan Stanley

The NIC map data which you referenced earlier came out earlier this week and it said that independent living is up 40 sequentially, assisted living is up 10 bips. True, this is not on a same store basis but it seems like it’s getting better for IL versus AL on that basis. So do you expect that independent living will pick up meaningful in a near term whereas assisted living will stay rather flat?

David J. Hegarty

No, I think both sectors will pick up. I think assisted living really hasn’t had as big of a dip because it’s a need driven business more than independent living is. But I do think independent living has lagged because it took a bigger dip but it should come back. Now, I mean our investment with the Vi properties is about three quarters independent living and one quarter assisted living so obviously we are making a significant bet on the IL coming back as it has in the past and that’s typically the greater margin business too once it does come back. We are obviously, very optimistic and putting a lot of money on the bet that independent living will come back strongly.

[Jarrell Golotti] – Morgan Stanley

One last question on transaction velocity, from your previous commentary you said that it seems like it’s pretty much eased up so you expect this to be the normal transaction velocity say for the next year or so?

David J. Hegarty

Yes, I would say so. I don’t think we’re going to change our strategy for the next year or so.

[Jarrell Golotti] – Morgan Stanley

That’s true for SNH and you think it’s true just for the senior housing market as a whole?

David J. Hegarty

Obviously, I really can’t comment on what other companies will do for strategy for the next year or so but I do think that the fundamentals are going to pick up and that it just has to give the lack of new inventory coming online. Absorption is picking up and I think it’s more a little bit of patience for it all to be of fruit and it’s just taking a little bit longer but I do think everybody will continue on with their basic strategies.

Operator

(Operator Instructions) Your next question comes from Frank Morgan – RBC Capital Markets.

Frank Morgan – RBC Capital Markets

Two questions here, first I’m curious have you talked with your SNF operators about the cut that is now going into effect, the 11% cut on that and really the impact on coverage, and really the mitigation strategies that they’re developing to deal with that? That’s the first question. The second question, you were starting to talk a little bit about the lack of capacity development but are you seeing any kind of pick up on either side maybe either on the assisted living or dementia side versus the independent living side from a development standpoint and would that be having any impact on the overall growth in occupancy here or absorption?

David J. Hegarty

First off the question about the cuts in Medicare rate reimbursement, one of the things and obviously I didn’t discuss it in our prepared remarks because we feel our exposure is about 4% of our NOI from Medicare/Medicaid based facilities. So in our view if we sold them tomorrow and wiped them out of our portfolio we’d still be able to comfortably pay our dividend. But we have talked to our operators and clearly they’re feeling an impact since October 1st in the rate. Many of them have mitigated some of the damage, probably about a third or so of the rate reductions and I think people are obviously anxious to see what’s going to come in December or further cuts if any. There will be cuts probably anyways.

We believe that the affect on the coverage ratios, there will be some affect but it won’t be significant enough to impact the ability to pay the rent to us. It might be 50 basis points or 75 basis points drop in the skilled nursing component of their coverage. As far as new development, no I do believe there are many developers out in the wings that are very anxious to try and get development. However, I commonly hear the theme that they just cannot raise enough money to go out and do it and have the staying power to fill up and so on. So again, that’s the key to it all is when the capital starts flowing and it’s not flowing as of now and I don’t anticipate it to open up certainly for the next six months anyways. We obviously think it’s going to be better for existing operators in this environment.

Operator

That concludes the questions. I’d like to turn this over to Mr. Hegarty.

David J. Hegarty

Thank you all for joining us today and we will be in Dallas for the NAREIT Conference in November and we look forward to meeting many of you at that conference. Thank you, have a good day.

Operator

Ladies and gentlemen that does conclude our conference for today. Thank you for using the AT&T Executive Teleconference Service. You may now disconnect.

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