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Executives

Tim Bonang - VP, IR

David Hegarty - President & COO

Rick Doyle - Treasurer & CFO

Analysts

Daniel Bernstein - Stifel Nicolaus

Todd Stender - Wells Fargo Securities

Tayo Okusanya - Jefferies

James Milam - Sandler O'Neill

Jarrell Golotti - Morgan Stanley

Derek Bower - UBS

Philip Martin - Morningstar

Senior Housing Properties Trust (SNH) Q4 2011 Earnings Call February 16, 2012 1:00 PM ET

Operator

Good day and welcome to the Senior Housing Properties Trust fourth quarter and yearend 2011 financial results conference call. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to the Vice President of Investor Relations, Tim Bonang. Please go ahead sir.

Tim 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, I would like to state that today’s conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based on Senior Housing’s present beliefs and expectations as of today, February 16, 2012. The company undertakes no obligation to revise or publically release the results of any revision to the forward-looking statements made in today’s conference call other than through filings with the Securities & Exchange Commission or SEC regarding this reporting period.

In addition, this call may contain non-GAAP numbers including normalized funds from operations or normalize 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 any forward-looking statements.

Additional information concerning factors that could cause those differences is contained in our annual Form 10-K to be filed with the SEC. Investors are cautioned not to place undue reliance on any forward-looking statements.

And with that I will turn it over to Dave Hegarty.

David Hegarty

Great. Thank you Tim and thank you all for joining us on today's call. The fourth quarter culminated an active year for our company. We had quality assets to our balance sheet and maintained our record of increasing the dividend at least once a year for over 10 years. The full benefit of the work we’ve accomplished this year may not be recognized right away. We are planting the seeds for future growth which is appealing to our income oriented long-term investors.

For the fourth quarter 2011, we reported normalized funds from operations or normalized FFO of $0.42 per share and this compares with normalized FFO of $0.44 per share that we reported for the same period a year ago.

For the 2011 full year, we reported normalized FFO of a $1.73 per share versus normalized FFO of a $1.71 per share a year ago. As noted in our investor presentation from February 2011, we outlined our business plan for 2011 which contained a dual acquisition focused to acquire properties in the medical office building space at cap rates between 7% and 9% as a means to diversify our portfolio and to continue to see seek out senior living acquisitions in the private pay space because we strongly believe in the fundamentals of this industry.

2011 was a very successful year as we announced over $1 billion of acquisitions in the private pay senior living and medical office building spaces, growing the size of our total portfolio to almost $5 billion. Our business plan for 2011 also included maintaining a historically strong financial profile.

We maintained our investment grade ratings of BAA from Moody’s and BBB minus from Standard & Poor’s. We also continued our historical practice of balancing debt and equity. During the year we raised $432 million in two equity offerings and $550 million in two debt offerings, keeping leverage at a conservative 43% of total book capital or alternatively 39% of total un-depreciated book capital.

In 2011, we saw a tremendous opportunity to acquire once-in-a-generation senior living assets with high growth potential. The occupancies in both of the senior living portfolios we acquired were below historical averages and we believe there is significant growth potential to grow our returns as the economy recovers.

If you look at relevant senior housing industry data produced by the National Investment Center for the Seniors Housing & Care Industry or NIC, only independent living showed improvement in occupancy and rent growth, particularly in the Southeast during the fourth quarter of 2011 and with the seventh consecutive quarter that the overall industry saw our occupancies increase.

Given that a majority of the senior living units we acquired in 2011 were independent living, many of which are located in Southeast, we believe these figures bode well for us as the industry moves from stabilization to the recovery phase. And we can achieve upside potential in all facets of senior living rebound.

Looking also at the medical office acquisitions we made in 2011, these helped to further diversify our revenues and positioned us to take advantage of the growing demand for healthcare services. We’ve seen occupancy holding steady at well over 95% and we’ve experienced strong rent growth from renewals made during the year.

Our growth in 2011 positions the company to greatly benefit from future demand in the healthcare industry and to grow our initial returns. Historically, we’ve expected to make around $200 million of non-portfolio core type acquisitions on an annual basis and given that we’re now a larger company in terms of total assets, I would expect our runrate to be between $300 million and $400 million of core acquisitions, excluding any large portfolio or transactions we make.

Accounting for acquisitions under agreement, 94% of our portfolio is NOI and is derived from properties that are primarily private pay and not government dependent. We continue to have the lowest exposure to skilled nursing facilities out of a large public healthcare REIT, although many of the operators and other healthcare companies felt the impact of the recent Medicare cuts to skilled nursing providers. This was essentially a non-event for our portfolio.

And lastly but most important is our dividend. Our Board raised the dividend in October of 2011 by 2.7% and we are currently operating at an annualized dividend rate of $1.52 per share which represents a dividend yield just under 7% and maintains a comfortable payout ratio of normalized FFR.

Let me now provide you with an update on the acquisition activity that transpired during the fourth quarter. Since October 1st 2011 we have acquired or under agreement to acquire 21 properties for an aggregate purchase price of $723 million and cap rates between a low 7% to about 9%.

During the quarter we acquired 12 of the 21 properties for $423 million. Starting off with our senior living acquisitions, in mid December we completed the majority of the acquisition of the nine community portfolio being sold by Vi or formerly Hyatt. We acquired eight communities including the assumption of a $131 million of mortgage debt from a total of $379 million.

While they had no material impact to our fourth quarter results, we anticipate that they will contribute nicely to our 2012 performance. We expect to acquire the ninth community which is located in New York for $99 million including $32 million of mortgage debt in the second half of 2012. As anticipated this acquisition has been time consuming due to the regulatory and licensing approvals in the state.

Next also in December we acquired a senior living community outside of San Francisco and a community called Walnut Creek California with 57 assisted living units for $11.3 million. The occupancy at the property was 90% and the community is a 100% private pay. And lastly in February of 2012, we acquired a senior living community in Alabama with 92 assisted living units for $11.3 million. Occupancy there was 87% and the community was 100% private pay also. All of these acquisitions will be managed by Five Star Quality Care, under long-term management arrangements for our taxable REIT subsidiary, or TRS.

Moving on to our medical office acquisition, in November we acquired two Class A medical office properties built in 2005, containing over 45,000 square feet in Richmond, Virginia for $11.4 million, including the assumption of $9.6 million of mortgage debt. At the time of the acquisition these properties were 100% leased to three tenants for 6.5 years and the major tenant is HCA, the nation’s leading provider of healthcare services.

Also in December we acquired another Class A medical office building with 94,000 square feet in the Indianapolis market for $21 million. This property was built in 2007 is 97% leased to eight tenants for an average lease term of almost 10 years. We currently have eight properties under agreement to acquire for approximately $289 million, three as senior living communities that we expect to acquire sometime in 2012 that would part of previously announced portfolio acquisitions in 2011, totaling $144 million including $37 million of mortgage debt.

We also have under agreement one additional senior living community containing 87 independent living units and four medical office buildings totaling approximately 500,000 square feet, all located in four states for approximately $145 million including assumption of $52 million of mortgage debt.

Now I would like to discuss performance of our triple net senior living properties. As a reminder our tenant statistics and those of our peers are recorded over quarters and over years. Five Star, a licensed tenant earlier today reported a net income from continuing operations for $1.11 per basic and $1.05 per diluted share for the quarter ended December 31, 2011. And their financial results have some one-time items included and even taken those into account, they met consensus and were still able to maintain profitability for the 12th quarter in row.

In the 12 months ended September 30, 2011 occupancies increased in two of the leases and declined in the other two. The decline is mainly attributable to their skilled nursing portfolio. Rental coverage on a EBITDAR basis for each lease was between 1.3 times for the smallest lease and 1.48 times. And we’ve reviewed their fourth quarter result after considering their Medicare reductions and found that the impact to the coverage ratio is only about five basis points. For the fourth quarter of 2011 Five Star reported sequential increase in occupancy and if you look at the mix industry data Five Star results are very much in line with the overall industry trends.

Our other tenants also performed well during the same period. The 14 properties we leased to Sunrise increased their rental coverage to 1.6 times. Occupancies held steady at 89%. At year end Sunrise notified us they will be terminating their lease agreement upon renewal for 10 of the 14 properties they currently leased from it which mature on December 31, 2013.

The leases for all 14 properties could only be renewed with an extension of Marriott International’s guarantee and Sunrise had to let us know their intentions by December 31, 2011. If Marriott and Sunrise agree that starting on January 1, 2014 Marriott will only continue to guarantee for the 14 properties. Sunrise will continue to lease all 14 communities through year end 2013 with the Marriott guarantee and we will continue to evaluate our options for the other 10 properties over the next two years.

The cash flows from the 10 properties covered a total current rent by 1.3 times. Meanwhile our properties leased to Brookdale were 92% occupied and covered their rents by over two times. The occupancy across our five private operators increased 20 basis points to 84% and rental coverage increased 2.8 times. Our two wellness center tenants continued their rental obligations at over two times.

I want to take a minute to discuss our RIDEA structure line of business, which currently represents approximately 12% of our investment assets. Occupancy at year end for this portfolio was 84%. At December 31st, we had 22 private pay communities with just over 3000 units of independent and assisted living in our TRS. We began adding properties to our TRS during the summer of 2011 and several more assets were added in mid-December of last year. We plan to provide more property operating statistics in the future as we grow this business and the results become more meaningful.

Now looking at the medical office building component of our portfolio. We owned almost eight million square feet of medical office space. As of December 31, 2011 occupancy at medical office buildings was 96%. During the quarter 77,000 square feet was renewed and we had new leases for 6000 square feet. Rental rates on renewals increased 4.3% compared to previous rates.

Tenant improvement and leasing commissions for the quarter were $1.1 million and for the full year they were $6.9 million. We have been successful in renewing leases with our medical tenants and our historical retention rate has been over 90%. Having said this we are aware of some headwinds going into 2012. One tenant lease is a 124,000 square feet of bio-tech lab space from us has given us notice of their intent to not to renew their lease when it comes due on March 1. This non-renewal may impact us by approximately $1.5 million annually until the space is re-leased.

Looking forward, we will continue to look to acquire medical office properties that meet our investment criteria and to increase the size of our medical office portfolio overtime.

In January of 2012, we hosted property tour for several of our sell-side analysts and institutional investors at one of our premier medical office buildings in Los Angeles, California, The Cedars-Sinai Medical Office Towers. The two medical office towers are connected by a walkway to the medical center and the complex contains over 330,000 square feet of 1,700 parking spots in two adjacent garages and the annual NOI generated is just under $90 million.

These buildings are leased to the Cedars-Sinai Medical Centers, the largest non-profit hospital in the Western United States and a large number of private practice physicians. They consistently maintain near a 100% occupancy with rental rates at approximately $70 per foot and 4.5, 4% to 5% of our annual growth rate.

The strong tenant and financial performance of this property mix is a large contributor of our overall MOB portfolio performance.

With that, I’ll turn it over to Rick Doyle, our Treasurer and Chief Financial Officer, who’s got our financial results.

Rick Doyle

Thank you Dave and good afternoon everyone. For the fourth quarter of 2011, we generated normalized FFO of $67.9 million, up 19% from $57.2 million compared to the same period a year ago.

On a per share basis, normalized FFO for the quarter was $0.42 per share. Our results for the quarter were negatively impacted by several factors. The timing of acquisitions the deployment of capital proceeds, the lease valuation amortization of recent acquisitions and a significant cash balances we maintained on deposit for acquisitions. Also, the fourth quarter results do not reflect a full quarter’s earnings from acquisitions we made during the quarter.

In early January, our board declared a quarterly dividend of $0.38 per share, which represents a 90.5% pay out ratio for the fourth quarter’s normalized FFO. Percentage rent revenue from our senior living tenants for the full year of 2011 increased 9.7% to $11.3 million for the same period last year. $3 million of percentage rank using quarterly in our fourth quarter calculation of normalized FFO versus $2.6 million for the fourth quarter of 2010. In addition through occupancy and rent growth our percentage rank increased due to the addition of the 11 senior living communities we acquired in 2009 based on 2010 base share revenues.

During the quarter total revenue increased 40% to $136.6 million compared to last year. We now have over 550 tenants generating these revenues. The majority of these growth was approximately $1 billion of investments we made in 2011. We invested $336 million in medical office buildings, $656 million in senior living communities of which $556 million of these investments were in senior living communities leased to our TRS.

We also invested $33 million in revenue producing capital improvements at our senior living communities. The increase in revenues was offset by a reduction in rental income resulting from the sale of seven properties for approximately $40 million during 2011. We recognized $15.3 million of residence fees and services at our managed communities. Residence fees and services are the revenues earned from the approximately 2,900 residents at the 22 managed senior living communities we have acquired since June 2011 that are leased to our TRS.

Property operating expenses for the quarter increased from $6.4 million to $27.1 million compared to last year which is in line with our expectations for growth and expenses. We reported $14.7 million of property operating expenses for our medical office portfolio and $12.4 million for our managed senior living operating communities leased to our TRS.

Depreciation expense increased quarter-over-quarter by 34% to $31 million. General and administrative expense increased 22% to $6.5 million. Our G&A represents 4.8% of revenues and 15 basis points of average total assets, which is lower compared to the same period last year.

The quarterly increase in revenues, property operating expenses, depreciation expense and G&A primarily relates to 78 properties we acquired in the purchase of approximately $41.4 million of revenue producing capital improvements made to our senior living properties offset by the reduction in rental income resulting from the seven properties all of which happened since October 1, 2010.

Interest expense for the quarter was $27.4 million, 31.5% increase from last year. This increase relates primarily to $270 million of assumed mortgage debt on certain acquisitions. Two issuances of unsecured senior notes in 2011 offset by the amortization of mortgage debt and the reduction in variable rate of interest applicable to one mortgage loan.

On a quarterly basis, we evaluate our portfolio for impairment and performance and during the fourth quarter of 2011, we recognized an impairment of assets charge of $796,000 related to one under performing property. During the full year 2011, we recognized impairment charges of $2 million which reduced the carrying value of four properties to the estimated fair value.

At December 31, 2011 two of our properties were classified as held for sale. The gain on sale of properties of $21.3 million in 2011 was a result of the sale of four skilled nursing facilities, one assisted living community and two medical office buildings during the second quarter of 2011.

Now let’s turn to the balance sheet. During the quarter, we acquired nine senior living communities and three medical office buildings for a total of approximately $422 million and invested $7.4 million in two revenue producing capital improvements at our leased senior living communities. We funded these acquisitions with the proceeds from our December debt offering by assuming $140 million of mortgage debt, by using cash on hand and borrowings under revolving credit facility. The average interest rate of the mortgage that we assumed is 5.9%.

Also during the quarter Five Star repaid $10 million of borrowings under their bridge loan with us. At December 31, 2011, $38 million was outstanding and no additional borrowings were available. The bridge loan matures on July 1, 2012 and we expect Five Star to repay us or we have the option to coverts certain private pay properties to a sale leaseback.

In fact, on the earnings call earlier this morning, Five Star discussed that they are working with lenders to negotiate out a new $150 million revolving credit facility with some of their own private pay communities as collateral. We think this is a positive sign of the health of Five Star’s balance sheet and financial capacity.

In October 2011, we issued 9.2 million common shares in a public offering raising net proceeds of approximately $185 million. We used the proceeds to repay borrowings outstanding under our revolving credit facility. In December, we sold $300 million or 6.75% senior unsecured notes due 2021 raising net proceeds of approximately $292 million. We used the proceeds of this debt issuance to repay borrowings outstanding under revolving credit facility and two fund part of the Vi acquisition of mid-December.

At December 31, 2011 our total debt was approximately $1.8 billion and our equity was $2.5 billion for a ratio of debt to total book capital of 43%. On a market basis our debt to total market capitalization was 33%. At the end of the quarter, we had nothing outstanding on our revolving credit facility; fourth series of unsecured senior notes totaling $975 million and mortgage loans and capital leases to only $852 million.

On January 17, 2012, we repaid the $225 million of 8 5/8 senior unsecured notes that were at maturity using borrowings under our revolving credit facility. We also expect to repay the $48 million of mortgage loans that are due in 2012 as they mature. As of year-end and excluding our 2012 maturities 94% of our debt is not due until to 2015 or later. Today, there is $276 million outstanding on our $750 million credit facility and $474 million available to borrow.

And with that, we’ll turn it over for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Daniel Bernstein from Stifel Nicolaus. Please go ahead.

Daniel Bernstein - Stifel Nicolaus

I have question on the actual operating TRS portfolio. How much of that is currently on lease up and not stabilized?

David Hegarty

I would say it’s really on one property in Lake Spivey, Georgia that is probably about 70% occupied and that was about that level at the time we made the acquisition. Everything else is pretty much stabilized assets that you know have range from say, 80% occupancy to low 90% occupancy.

Daniel Bernstein - Stifel Nicolaus

So you’re just expecting the upside basically from improving senior housing fundamentals?

David Hegarty

Correct, yeah.

Daniel Bernstein - Stifel Nicolaus

One of the TRS or were all the TRS acquisitions in the quarter related to previously announced acquisitions or did you buy anything new in the quarter that you just decided to put in the TRS and then in that sense, are you looking for more acquisitions to grow your TRS portfolio?

David Hegarty

Well, the only one that was added during the quarter was the property on Walnut Creek, California. It was a one-off deal. And then subsequent to quarter end, we’ve added the Alabama property. I would say for the foreseeable future, anyways that most properties will be just added to the TRS to make it stronger and also I believe that this is probably and at least for the foreseeable future greater upside potential.

Daniel Bernstein - Stifel Nicolaus

You’re looking to further dispose off any assets particularly like in senior housing or MOB that is not as high quality; I mean you’ve already disposed off a lot of your SNF portfolio or call it your SNF portfolio are there a lot more asserts on the senior housing side or MOB that you think could be called this year?

David Hegarty

I do not expect many; we are always looking at the portfolio and I would expect over the course of the year we will probably call a couple of properties on the MOB side. We still have a portfolio of roughly 40 skilled nursing facilities that we would consider selling and components over the course of next several years and may be if the right situation, the majority of the portfolio we might sell it once But it is significant something that ultimately we intend to exit.

Daniel Bernstein - Stifel Nicolaus

And the last question I have is, are you looking at any development opportunities; I know you fund some of Five Star’s CapEx and perhaps expansions. But do you see any development opportunities in the senior housing space or do you see that become more attractive relative to acquisitions?

David Hegarty

Well, we are not going to get into the development business in the foreseeable future. As you said, we do have situations where I expect our funding will ramp up more on adding additional wings or units to buildings; we do know that there have been blueprints here and there of like an assisted living facility that would be built on the grounds of the campuses that we currently own. So I think that I do see some opportunity there, but we are not going to it significantly in the near term.

Operator

Our next question comes from the line of Todd Stender from Wells Fargo Securities. Please go ahead.

Todd Stender - Wells Fargo Securities

Just to clarify the December acquisition at the Walnut Creek asset, that will go into the TRS?

David Hegarty

That is correct.

Todd Stender - Wells Fargo Securities

Okay and then same with the February acquisition of the one in Alabama.

Rick Doyle

Yes.

David Hegarty

Right and a couple of thoughts on that. One is that when you are buying individual assets and so on, you actually do get an initial return more comparable to what we used to get in a traditional sale leaseback and then we believe that there should be more upside in the near term just because of the fundamentals of the industry. So net-net we think from our perspective that we will probably get a better return at the current time on doing a sale leaseback.

Todd Stender - Wells Fargo Securities

Sure and I don't know if I missed this, did you give the initial yields on both of those properties.

David Hegarty

I did not. I would say that in both cases that they were in the upper 8% cap rates.

Todd Stender - Wells Fargo Securities

Okay. And just going back with the life science asset with the March lease expiration, what market is that in, and if you could just kind of go through what the in place rents are and then maybe what the market rate of rent is?

David Hegarty

That property is in the Mid-Atlantic, I think probably on next call I will give a little more detail on it, but it is a biotech space that they are consolidating on and therefore vacating it. The current rent we are getting into triple net of $12 a foot. So it really will be, the whole new economics will be probably significantly different because I envision we probably have to redesign a fair amount of the space and a lot of build out for the next tenant. And I think it’s too early to speculate. At the moment we don’t have a particular candidate for that space. So I can’t quantify yet the extent of the capital improvements that we would have to do to it. So probably $12 triple net for biotech space is not all that pricey, but again we could do a significant amount of capital improvements and end up with a much higher rate.

Todd Stender - Wells Fargo Securities

Sure. Would this be a candidate for disposition or really do you like where the asset is positioned?

David Hegarty

It is a potential situation for disposition.

Todd Stender - Wells Fargo Securities

Okay. And then just moving towards, just terming out your line balance. Does preferred come into the equation for you guys this year? We’ve seen some of the other REITs start to look at the preferred market as pricing has been attractive. How do you guys think about that and maybe where would a preferred price for SNH?

David Hegarty

We always considering the preferred, Todd and that is definitely one of our options. The pricing might be around the 7 to 7.25 mark.

Todd Stender - Wells Fargo Securities

Okay and thanks. And last question, the growth in 2011 was tremendous for you guys and then kind of it looks like you are on the right pace for 2012, how do you think about building out your top management ranks to accommodate this growth? Have you thought about that or kind of how may be senior management might expand just because of this year’s size of your portfolio?

David Hegarty

Sure. Well I guess what you don’t see and most of the people probably on this call don’t see is that we are a part of a larger organization with REIT management research and we do have multiple divisions within the company and as new properties are added to the portfolio, people are being added to the ranks to take on the responsibility or realign responsibilities. I would say the REIT management is currently up to about 780 employees at this time. So although, for the most part you will see Rick and I and Tim and Beth that most of the presentations and tours and stuff. In fact at the Cedars-Sinai tour, people did have an opportunity to meet the property manager for the Cedars-Sinai properties who has been there, well over a dozen years and then you have the regional Vice President based in Sacramento area for REIT management research. So there is a deeper bench because you don’t have to really see them at investor conferences or on these calls.

Todd Stender - Wells Fargo Securities

Okay. And does that get layered into your G&A, how do you kind of account for that?

David Hegarty

Well, it’s not incremental. As we make investments, there is a standard 50 basis points on invested assets for the new investment and that encompasses all incremental costs and stuff that we would incur for that.

Operator

(Operator Instructions) Our next question comes from the line of Tayo Okusanya from Jefferies. Please go ahead.

Tayo Okusanya - Jefferies

I may have missed this, but the $144.8 million of deals that you guys have under purchase agreements right now, could you give us a sense of what cap rates you intend to buy those assets?

Rick Doyle

Well, the 144 is just a partial of the acquisitions we have under, the 144 represents the previous announced acquisitions, the property in Yonkers, New York. It’s part of the B property. And then the two, to another property of the (inaudible). So the 144 really represents those that those are the old. We do have new pending acquisitions of above $145 million.

Tayo Okusanya - Jefferies

That’s what I meant. The 144.8 million, the 145.

Rick Doyle

So, you want about the 145 million?

Tayo Okusanya - Jefferies

Yeah.

David Hegarty

So, the 145 is about is senior housing and medical office. I would say the average is a little over 8.5 for going in cap rate.

Tayo Okusanya - Jefferies

That’s helpful. And then the November deal, the two properties located in Virginia? I mean, it’s a relatively small deal of $11.4 million, but it has $9.6 million of debt against it and I was just kind of curious what your appetite was kind of on the deals that have meaningful amount of leverage behind the buildings already?

David Hegarty

Well obviously it does enhance our return on the cash that we put into it. We do look for opportunities to pay off that debt. Most of the debt that we are assuming tends to have four to five years left on a term. So we would have a quite a bit of refinancing to do in 2015 and 2016, all those types of mortgages and you know I think we try to focus on $10 million and up for acquisitions and given that it is very nice buildings with great tenancy such as HCA and we are happy to do those. We have to do more of them obviously to add up to a few $100 million.

Tayo Okusanya - Jefferies

But the debt to asset ratio being like almost 90% is not a real concern?

David Hegarty

No I mean obviously for our case we prefer a debt rate with (inaudible). We actually do better when something is 50% levered because it limits the competitors vying for those assets and this one is a roughly minor amount of equity, but I think we have all the resources and capability to add these to our portfolio which is not really a lot of extra effort to do it.

Tayo Okusanya - Jefferies

Okay, just last question. One of your peers announced this morning a fairly large JV deal in Canada. I don’t think you guys are interested in Canada, but I am just kind of curious what you guys are seeing on the US front in regards to acquisition opportunities for fairly sizeable senior housing or MOB portfolios.

David Hegarty

There's a couple of out there of decent size. We do see these. We did look at that Canadian transaction and I think we have plenty of opportunity for healthcare REITS for the upcoming year.

Tayo Okusanya - Jefferies

Across all property types or specific property types?

David Hegarty

What I am more seeing is in the senior living and skilled nursing area which is obviously skilled or not, something we are pursuing but there are some opportunities out there of decent size and then medical office, there's a couple of portfolios of a couple of hundred million dollars inside and then a fair amount of one to three property sized portfolios in the medical office side.

Operator

Our next question comes from the line of James Milam from Sandler O'Neill. Please go ahead.

James Milam - Sandler O'Neill

I just want to ask a quick follow-up on the coverage ratio given the CMS, because you said five basis points as of the fourth quarter was that an annualized impact or just what you've seen so far for the trailing 12.

David Hegarty

That was actually just Q4 annualized. It doesn't have the historical up through September 30, results impacting that, if you are looking at Q4 times four.

James Milam - Sandler O'Neill

And then I was wondering if you could give us just a little bit more color, the acquisition leases that are amortizing in, as a negative impact, can you just tell us what deals those relate to maybe what the amortization time period is for that if we should you know look at that is kind of the run rate going forward or not?

Rick Doyle

Yes, that impacted us for a full quarter here, those are leases that we assumed and you have to do the above and below market rents on those. It affected us and you could see that in the supplemental where it affects us for $481,000 for the fourth quarter. And these leases on average about four or five years out or so you will see that on the quarters. And that number changes as we acquire other properties with in-place leases and they net against each other. But for the fourth quarter it affected us about $481,000.

James Milam - Sandler O'Neill

Okay. so obviously there are more deals to close but we can kind think about that has being what’s in the existing portfolio on a go-forward basis?

Rick Doyle

Yes.

James Milam - Sandler O'Neill

Okay, great. Thanks. And then I just wanted ask a follow up on the balance sheet what you guys are seeing in terms of the unsecured market and you had talk about a term loan in the fourth quarter as begin potential opportunity for you. What you guys are thinking in terms of those options just looking out into 2012.

Rick Doyle

Yes, that’s another option that we have to raise some capital as Todd asked earlier. The preferred in these term loans are attractive rate out there. So we are in favor of looking at those and considering those in the future.

James Milam - Sandler O'Neill

Have gone quotes on either on unsecured, a 10 year or maybe at the shorter term loan recently. Do you have any idea what the price looks like?

David Hegarty

On those term loan that you referred, some of that you price at sort of couple of seven year out there you don’t see them really in the 10-year and never really know what the return to negotiating but there is some retail there that’s up 5% or right around 5%.

James Milam - Sandler O'Neill

Okay. And then on a just a tenure on security, do you have any idea where that might place right now?

Rick Doyle

I would think and once again you don’t know until you are negotiating. But I would think around 6% tenure.

James Milam - Sandler O'Neill

Okay, great. Thanks. And then just my last question what you guys are looking at when you sort of look at 2012 from a same-store cash NOI basis for NOB then operating senior housing, what you guys kind of think as reasonable expectations are going out this year?

David Hegarty

This is an interesting question because our financials and our discussions of results are on a GAAP basis, down for the FFO level and as a result we have about 1% same-store growth rate on a GAAP basis. So any time the straight line rent essentially smooth up to show no growth, but on a cash basis, you have to go further down to look at the FAD or AFFO and so on and we have not published numbers from our perspective from that. But typically the cash side for us would be more closer to the 3% to 4%. Like I mentioned the leases that have renewed in the quarter have typically been in 4.3% rate increase we have been able to achieve. But I think I would say, on a cash basis were in the 3% to 4% range.

Operator

Our next question comes from the line of Jarrell Golotti from Morgan Stanley. Please go ahead.

Jarrell Golotti - Morgan Stanley

So, I was looking at your MOB leasing summary, specifically I was looking at the weighted average lease terms by square feet for the renewals. And I noticed that for the first three quarters that you have on the supplement. So, the lease terms are about seven, 7.5 years, and afterwards, it goes around five. I was just wondering if you can provide some color on the reduction in the lease terms?

David Hegarty

I am not sure that I know exactly where you’re focused on but we have, this is on the whole portfolio, not just medical offices and senior housing. But typically we got some long-term leases in for, say, biotech space and certainly our senior housing properties are on the long-term and this includes senior housing.

Jarrell Golotti - Morgan Stanley

On page 25 on the sub?

David Hegarty

Page 25 and on page 27.

Jarrell Golotti - Morgan Stanley

Page 25. So you look at the weighted average lease term by square feet years, you have renewals and then you have from 12, 30, 2010 to 6, 30, 2011, lease terms are about seven and seven and half years and then.

David Hegarty

I feel its like I guess as times going on, the terms get shorter. And that is very interesting insight picked up on is that the more were in the multi-tenant medical office buildings, the more people are only doing leases for three to five years,. So you have that factored in and then properties that we are rented by 12-31-2010 base that have longer lease terms, with another year or so it burned off those lease terms. So between the combination of two I would think today the average lease term is 5 and a half year term for the MOBs. So, it’s a function of a longer termed leased assets having some lease term burned off and in addition most of the newer multi tenanted probably is coming online are in that around five years plus or minus per average lease terms.

Jarrell Golotti - Morgan Stanley

You had renewals at 4% spread and that is on a cash basis how much would that be?

David Hegarty

We are still achieving pretty much in the 2.5% to 3% on cash basis.

Jarrell Golotti - Morgan Stanley

Got it. Is this something you would expect to see go on during 2012?

David Hegarty

I would. Obviously as the economy picks up more steam and we can push for more increases that we currently have right now. Obviously it is a balancing act depending on market you ran and how much you feel you can push rates. In some cases we are making a little bit of concession in exchange for getting some more term from other markets, so that I can see a sign or waiting list, we just can’t figure out how much we are comfortable pushing rates there.

Jarrell Golotti - Morgan Stanley

Thank you and in terms of still sticking to the MOBs, your margins of about 77% on a same store basis, do you say that's your target margin or could you see that trend up?

David Hegarty

I think that's pretty much target we will be at.

Jarrell Golotti - Morgan Stanley

And also touching on the, I guess the financing strategy for 2012, you mentioned that all options are open, I just want to get an idea of what your optimal leverage ratio would be?

David Hegarty

I think its pretty much keeping it around the level we are at today, plus or minus in the 42% or so, where we are comfortable at.

Rick Doyle

Historically, we've been lower than that but as we’re growing, we are a bigger company we’re hitting the $5 billion mark so 40% to 45% is a spot that we’re comfortable at.

Jarrell Golotti - Morgan Stanley

And that's debt to un-depreciated book?

Rick Doyle

That's the high 30s right now and we could see that being there. I was talking about total book capital.

Jarrell Golotti - Morgan Stanley

I am sorry what was that?

Rick Doyle

I was talking about total book capital of 40% to 45% and maybe high 30s un-depreciated.

Jarrell Golotti - Morgan Stanley

And how does that play into your ratings, how do the ratings agencies, I mean in the sense of, you were previously 10% lower or that was your target, now you are more comfortable at 42%. How is that perceived by them?

David Hegarty

My impression is that they are still very comfortable with the leverage ratios. They thought the other leverage ratio was conservative and given the size of the company and also given the fact that skilled nursing was a bigger component of our percentage basis, of our portfolio, they thought it was wise to maintain a low leverage ratio. I think as we’ve grown, they have seen a lot of the investments go into medical office buildings and for the diversifying the revenue stream. So I believe they are very comfortable with this new level for us. And if you were look at like the other healthcare REITs, I think we are in the ballpark of pretty much most of the other healthcare REITs.

Jarrell Golotti - Morgan Stanley

In terms of the properties you have agreements to acquire in 2012; focusing on the senior housing asset, do you plan to structure that acquisition as RIDEA investment?

David Hegarty

Yes, I would say for the foreseeable future, I anticipate most of our senior living assets will be put into RIDEA structure.

Jarrell Golotti - Morgan Stanley

Is that a symptom or is that a result of where we are in the cycle of -- generally speaking in the economic cycle?

David Hegarty

Yes. It’s a combination of current market conditions for acquisitions, but in addition, we do believe that the wind is at our back for the next several years. So it’s an opportunity to capture above average returns.

Jarrell Golotti - Morgan Stanley

And in terms of the Sunrise assets, so as soon as those come off from Sunrise as the operator, is there any thought into putting those into RIDEA as well?

David Hegarty

It’s an option; especially they cover total rent count, base rent plus percentage rent they cover 1.3 times. That allows you to put into management fee arrangement and still have a bump in performance for us; plus I think that there is more upside potential at those properties. So yeah, it would lend itself to RIDEA format, but the drove is still out as to what we want to do or if we – you know that something I would finalize alternatively, that’s also on the table.

Jarrell Golotti - Morgan Stanley

What is your optimum RIDEA exposure?

David Hegarty

It’s not exact science obviously, but I would say it’s around 20% to 25%.

Jarrell Golotti - Morgan Stanley

And in terms of yields you are seeing right now for independent versus assisted living, can you comment on those -- I know you earlier said you have been seeing yours is between 7% and 9% range; I was just wanting to get a little more granular as to between those two senior housing property types?

David Hegarty

Well, I think there is a swing right now in the view point of independent living versus assisted living. I think independent living has been sort of batted down the most in this recessionary period and assigned to rebound right now. Having said that, I think individual independent living properties still can be bought at pretty decent cap rates and liaises in many cases.

A lot of it depends if you are standalone independent living facility based in Washington D.C. the cap rates going to be a lot lower than something in the Midwest or other parts of the country. You know, similarly with assisted living, I think assisted living is probably trading at a bit lower cap rate than independent living. And there is always a portfolio of premium.

Jarrell Golotti - Morgan Stanley

And when do you think, I mean when said from now on forth that you probably looking more at putting senior housing assets in your RIDEA structure rather than triple net structure. What sort of premium would you allocate when you make that decision like so what would be the premium going from like RIDEA to triple net or vice versa?

David Hegarty

Well, I mean, I think, part of the two is competitive landscape. If you do want to acquire an asset or portfolio of assets then you’re going to have to pay up for that and as a result, you may settle for something percent of cap rate. And the whole reason you want to acquire those assets is you believe that there is a decent amount of upside potential. It’s very difficult to compare that to a theoretical sale leaseback that you may not be able to achieve in this marketplace. There are very few sale leasebacks being done out there and if you’re going to bid on either higher cap rate for a sale leaseback, I don’t know if you’re going to get it; I don’t know if that deal will happen.

Jarrell Golotti - Morgan Stanley

One last question. For the 2012 acquisitions, you say that they basically will happen in 2012, I guess there was no specificity as to when they will actually happen. I was just wondering if that’s something you can provide?

David Hegarty

Well, the acquisitions, the ones that $144 million that are on agreement from this past year, really its likely more to happen around the end of the second quarter, around the third quarter.

Jarrell Golotti - Morgan Stanley

So that goes – you’re talking specifically about the senior living community and the four MOBs right?

Rick Doyle

No, no the old ones; the senior living in it and the four MOBs are the new pending ones (inaudible) today. Dave was mentioning the other buildings that we previously announced in 2011, we don’t expect to close until the end of second quarter sometime during the second half of 2012 and that primarily relates to regulations. The new ones we do have some models to go through, we don’t feel like they will be close or have any impact in Q1, but we do feel they will close sometime during Q2.

Jarrell Golotti - Morgan Stanley

Okay, so the $145 million, so the four MOBs and senior living community likely will close next quarter?

Rick Doyle

Sometime during next quarter.

Operator

Our next question comes from the line of Derek Bower from UBS. Please go ahead.

Derek Bower - UBS

So going back to the 10 Sunrise leases, can you just remind me what’s the difference between that 1.3 coverage that you just stated and the 1.6 that was in the press release from December?

David Hegarty

The difference is percentage rent.

Derek Bower - UBS

And so what would be your, I guess, can you remind us what you would underwrite a new I guess senior housing triple net at least to on a coverage basis.

David Hegarty

Well, typically it would be around 1.15 to 1.2 in that range.

Derek Bower - UBS

Okay, so it’s still above your range.

David Hegarty

Yeah.

Ross Nussbaum - UBS

And this is Ross Nussbaum. So is the issue basically that you are just trying to extract higher rent out of Sunrise in either exchange for the fact that you view their credit as being weaker without the Marriott guarantee or you view underwriting to be different if you will?

David Hegarty

It’s still very preliminary. We've got two years to work something out and I think we also have more clarity on the status of Sunrise as a company going forward. So I don't think I can comment much more on that but there is cushion that we could, clearly the other four leases that have a Marriott International guarantee could continue on as they were originally underwritten. But now if you take the Marriott international guarantee off that, then that clearly, Sunrise should not get the same pricing as if it had a Marriott guarantee. So that might be a solution as to workout different pricing on the rent. We have a few options on the table.

Operator

And our next question comes from the line of Philip Martin from Morning Star. Please go ahead.

Philip Martin - Morningstar

Just a couple of quick questions. Number one, just on the Marriott and the Sunrise portfolio on the 10 assets that are not guaranteed by Marriott on a go forward basis. Fundamentally and operationally are they performing at a much different level or even from the risk award standpoint, can you just characterize the 10 versus the 4?

David Hegarty

Sure, the other 10 are fine properties, obviously they were originally operated or built by Marriott and Sunrise was more than happy to operate them. So I think the one key difference is the four properties that Sunrise and Marriott are willing to stay on are just located in the Mid-Atlantic and in Florida whereas these other properties are located, scattered around the country. I think part of it is the concentration. You know this is a mirror image of the bulk of property that they are not renewing on and it is a beautiful property built by Marriott. It is just, I mean you to realize too that we don’t know the specifics of the relationship of the deal between Sunrise and Marriott, but it is costing Sunrise a significant sum to keep Marriott on the guarantee. So that had to be a factor into the consideration on how many properties they are willing to pay Marriott to stay on.

Philip Martin - Morningstar

Exactly. Okay. Now shifting gears a little bit, your pipeline going forward et cetera value add deals versus stabilized. Again, it looks like the RIDEA structure is going to be a big focus for you in 2012; are there a fair amount of value-add deals in this market that you are seeing?

David Hegarty

I remember value-add deals, we are not a big pursuer of them. But there are number of situations we just need the right personnel or somebody around capital to continue to turn them fair quite a bit of CCRC entrance fee product type out there that still needs to be straightened out. But none of those are our particular investment parameters.

Philip Martin - Morningstar

And again, I know you are not a big developer and will not be doing that going forward, but from a redevelopment and re-positioning standpoints, repositioning from a management of the property or redevelopments, you are seeing those; I am just looking at the potential growth within the RIDEA structure, so we could try to get some handle on?

David Hegarty

With SNH or in the industry?

Philip Martin - Morningstar

Within SNH?

David Hegarty

Well, our growth is going to be just, again there is a vehicle to use the RIDEA for redevelopment and so on. But that’s not we are going to do. We will do incremental things to improve the operations at properties, we do putting into it, as well as expansion. Many of the properties we have do have a parcel of land adjacent to it that have potential for expansion, so I can envision us doing that type of growth and so on.

Philip Martin - Morningstar

That was my next question. So there is a fair amount of expansion spaces associated with your pipeline. Okay, thank you.

Operator

And that’s all the time we have for our question-and-answers today. I would like to turn the call back over to Dave Hegarty. Please go ahead.

David Hegarty

Great. Thank you all for joining us and in two months we’ll be doing this again. Thank you. Bye, bye.

Operator

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

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