Senior Housing Properties' (SNH) on Q4 2015 Results - Earnings Call Transcript

| About: Senior Housing (SNH)

Senior Housing Properties Trust (NYSE:SNH)

Q4 2015 Earnings Conference Call

February 23, 2016, 13:00 ET

Executives

Tim Bonang - SVP

David Hegarty - President & COO

Rick Siedel - Treasurer & CFO

Analysts

Tayo Okusanya - Jefferies

Michael Carroll - RBC Capital Markets

Dan Altscher - FBR Capital Markets

Vikram Malhotra - Morgan Stanley

Juan Sanabria - Bank of America Merrill Lynch

Jonathan Hughes - Raymond James

Operator

Welcome to the Senior Housing Properties Trust Fourth Quarter Final Results Conference Call. [Operator Instructions]. I would now like to turn the conference over to Mr. Tim Bonang, Senior Vice President. Please go ahead.

Tim Bonang

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

Before we begin, I would like to state that today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based upon Senior Housing's present beliefs and expectations as of today, February 23, 2016. The Company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call, other than through filings with the Securities and Exchange Commission or SEC.

In addition, this call may contain non-GAAP numbers, including normalized funds from operations or normalized FFO and cash-based net operating income or cash NOI. A reconciliation of these non-GAAP figures 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 filings with the SEC. Investors are cautioned not to place undue reliance upon any forward-looking statements.

Now, I'd like to turn the call over to Dave.

David Hegarty

Thank you, Tim and good afternoon, everyone. And thank you for joining us on today's fourth quarter earnings call. Earlier this morning, we reported normalized funds from operations or normalized FFO, of $0.48 per share for the fourth quarter, up 6.7% year over year. For the full-year, normalized FFO was $1.84 and an increase of 5.1% over 2014. This was achieved through strong operating results, benefits of earlier acquisitions and attractive financing activities during the quarter and the year.

For the fourth quarter and early 2016, we continued to focus on adding value through internal growth, more efficient operations and improving our financial flexibility. Some of the major highlights of this quarter were that we grew normalized FFO per share year over year by 6.7%, further reduced our normalized FFO payout ratio to 81%, continued to lead the industry with a 97% private pay portfolio. Only 3% of our portfolio is skilled nursing facilities that are dependent upon government programs.

We grew consolidated same property cash NOI by 90 basis points, increased our managed Senior Living same-store NOI an industry-leading 11.7% and subsequent to quarter end, termed out $250 million of revolver debt to thirty-year fixed-rate debt. And in February 2016, we acquired a 128,000 square foot medical office building investment anchored by a high investment-grade healthcare system.

Now approximately 45% of our total Company's fourth quarter NOI was attributable to our triple net leased Senior Living properties. We had 231 leased Senior Living communities generating quarterly NOI of $75 million.

These communities continued to perform very well from a coverage level and occupancy, while same-store rental income increased 1% year over year. This increase is primarily due to revenue producing capital improvements made in our properties over the past year.

Within the triple net Senior Living portfolio, five stars 177 leased communities had combined occupancy of 84.6% and rent coverage of a solid 1.23 times for the 12 months ended September 30, 2015. The four properties we leased to Sunrise Senior Living had occupancy of 91.4% and rental coverage of 2 times. The 18 properties we leased to Brookdale Senior Living had occupancy and 90.9% and rental coverage of 2.8 times.

Our triple net leased Senior Living properties leased to 13 private regional operators had average occupancy of 86.3% and rental coverage of 1.4 times. Our leases are well covered and we continue to be pleased with the performance of our operators.

Turning to our next larger segment, medical office buildings, we had over 11.3 million square feet, generating quarterly NOI of $63.7 million, representing approximately 38% of total Company NOI. At year end, our MOB segment was comprised of 121 properties with 145 buildings and overall occupancy was an industry-leading 96%. At our 98 same-store medical office building properties, our NOI for the fourth quarter was $55.2 million, $2.3 million less than the same period last year. On a cash basis, the NOI was $1.5 million less than the fourth quarter 2014.

Although occupancy declined 40 basis points to 95.5%, rental income increased almost $400,000. The increase in rental income relates primarily to the increase in rental rates, escalation income and parking income, partially offset by the write-off of lease intangibles for $500,000. Unfortunately, expenses exceeded revenue growth. We had $2.7 million of increases in expenses, primarily due to a $2 million increase in real estate taxes, most of which is escalatable. Plus other non-escalatable expenses such as insurance claims, legal costs and a number of smaller items.

Now turning to our managed communities, at December 31, we had a total 65 managed Senior Living communities, with a little less than 8,600 units generating approximately $22.7 million of NOI during the fourth quarter which represented approximately 14% of the total Company's NOI.

At our 44 same-store communities, NOI grew 11.7% year over year and same-store margins increased 240 basis points to 24.9% from 22.5% last year. These communities generated a $930,000 increase in revenue which was primarily driven by an average monthly rate increase of 2.1%, offset by 120 basis point decline in occupancy. Margin and same store occupancy were essentially flat sequentially.

In addition to excellent revenue growth, we also experienced a decrease in property operating expenses of 1.9% on approximately $1.2 million. Primarily due to decreases in real estate taxes, as well as an overall decrease in direct operating costs at these facilities.

We realized that these are extraordinary results and the increase in revenue alone represents a 5.2% growth in same-store NOI. We did have an exceptionally high real estate tax accrual in the fourth quarter of 2014. And as many of you know, real estate taxes can fluctuate each quarter as we appeal real estate tax assessments on any and all property taxes that we believe are inflated.

If you were to exclude real estate taxes entirely in both periods, the same-store NOI increase would have been 6.3%. These outstanding results may be difficult to match again in 2016, but we're optimistic that we can come close. I would expect more the norm of 3% to 5% growth which is consistent over the long term basis.

Moving on to our acquisition and investment activities. During the quarter, we made no new investments beyond capital improvement and expansion fundings and remain very conservative in our underwriting.

In February 2016, we did acquire one 128,000 square foot MOB in the Minneapolis area for $22.7 million. This multi-tenanted property is anchored by a high investment-grade healthcare system in the Minneapolis market. We also have a 38 unit private pay senior living facility opened in 2015 under agreement in Georgia for $8.4 million.

These acquisitions are at cap rates in excess of 8% per annum. We're marketing several properties for sale currently that Rick will discuss later.

In summary, we're very pleased with the performance and quality of our portfolio. We remain very selective and disciplined for the remainder of the year, given that cap rates continue to be compressed across the healthcare spectrum. Our focus is on furthering our relationships with existing operators, continuing to seek internal growth opportunities, including expansions and renovations at our communities and other opportunities to enhance investment returns while maintaining a strong balance sheet.

Now, I'd like to introduce Rick Siedel, our new CFO. I'd also like to thank Rick Doyle, our former CFO, for his support and contribution to SNH over the past eight years. Rick Siedel is a CPA originally with Ernst & Young, was a Controller for Sensada Technologies and RMR and most recently, was the Chief Accounting Officer for Five Star Quality Care.

With that, I'll turn it over to Rick to provide a more detailed discussion of our financial results.

Rick Siedel

Thank you, Dave and good afternoon, everyone. I plan to touch on some of the key lines in our income statement and then talk a little bit about our cash flows and balance sheet. So starting at the top of our P&L, rental income for the quarter increased $21.3 million from Q4 of 2014 to $170.7 million. This increase was primarily due to growth from our acquisitions of 23 medical office buildings and 20 leased senior living communities since October 1, 2014. But partially offset by a reduction in rental income from the sale of 2 MOBs and 7 leased Senior Living facilities during the same period.

On a same-store basis, rental income was up $1 million or 1% compared to Q4 2014. This increase is primarily attributable to investments we had made in certain of our triple net leased Senior Living communities, along with increased escalation in parking income. Partially offset by write-offs of a couple of above market leases for MOB tenants who moved out unexpectedly during the quarter.

Resident fees and service revenues from our 65 managed Senior Living communities increased over 20% to $96.8 million compared to the fourth quarter of 2014. This increase is primarily attributable to our acquisitions of 22 managed Senior Living communities since October 1, 2014.

On a same-store basis, managed Senior Living revenue was up $934,000 or 1% due to a 2.1% increase in average monthly rates. Partially offset by reduced occupancy compared to Q4 2014. Our managers have been shifting away from expensive third-party referral services towards less expensive, more organic referral sources which often result in a longer length of stay and increased resident satisfaction. But the transition contributes to flat or slightly decreased occupancy.

Property operating expenses from our MOBs and managed Senior Living communities increased 20% in the fourth quarter to $101.3 million compared to the same period last year, due to the acquisitions I just mentioned. On a same-store basis, we saw increases in operating expenses at our MOBs and decreases at our managed Senior Living facilities compared to Q4 of 2014.

Our MOBs had increases in property taxes, most of which were passed through to tenants and some additional expenses related to increasing our tenant relationship focus and other property expenses. While our managed Senior Living communities saw reductions in property taxes and reduced contract labor costs, as open positions were filled along with reductions in other property expenses.

General and administrative expenses decreased $430,000 or 4% to $10.3 million this quarter compared to the same period last year. As you may know, our business management fees are based on the lower of historical asset costs or market capitalization.

With our stock price as depressed as it is, our business management fees for the month of December 2015 were about $400,000 lower than they would have been based on the historical cost of our portfolio. We would obviously like to see the stock price increase, but we're currently benefiting from G&A savings. Lastly, at only 3.8% of quarterly revenues, SNH continues to run lower G&A expenses as a percentage of revenues than many of its peers.

Interest expense increased 6% to $38 million this quarter compared to Q4 of 2014. Primarily as a result of increased borrowings outstanding on the revolver and a new $200 million term loan in September 2015. Partially offset by the repayment of $250 million of our senior notes, $135 million of mortgages that had encumbered 11 of our properties.

In January 2016, we paid off another mortgage for $6 million. And as Dave mentioned, in February 2016, we issued $250 million of 30-year senior notes at 6.25%.

We also included two new lines in our income statement this quarter related to our investment in RMR. The larger of the two was related to the distribution of 2.6 million shares of RMR to our shareholders in December.

While we recorded a non-cash loss on the distribution for GAAP purposes of $38.4 million or $0.16 per share, we still view the transaction as very positive for our shareholders. As we all benefit from the further alignment of interests and the additional transparency that we hope should clear up any lingering misperceptions about our structure.

The other line's dividend income from the investment in RMR which was $2.8 million for the quarter and year ended December 31, 2015. After distributing half of the RMR shares that we held from June to December, we expect dividend income to run at approximately $2.6 million annually beginning in the second quarter or just under $2 million for 2016.

Moving to cash flows and the balance sheet, as Dave mentioned, during the quarter, we did not acquire any properties but we did continue to invest in our portfolio. We invested $5 million into revenue producing capital improvements at our leased Senior Living communities and we spent $6.4 million on MOB tenant improvements and leasing costs.

Our recurring capital expenditures for the quarter included $4.4 million at our MOBs and $3.2 million at our managed Senior Living communities. We also incurred about $6.2 million of development and redevelopment capital expenditures, primarily at our managed Senior Living communities.

On the disposition front, we continue to sell off skilled nursing facilities. During the fourth quarter, we sold one leased skilled nursing facility and continue to market others, as well as select MOBs for sale. Currently, we have 140-bed leased skilled nursing facility and a parcel of land that meet the accounting requirements to be classified as held for sale. We expect proceeds of $10 million to $11 million for these two properties which would be approximately a 9% cap rate. Our asset management team is constantly analyzing the portfolio to look for opportunities to cull the portfolio.

At year end, we had $37.7 million of cash on hand, $775 million outstanding on our revolver, $1.5 billion of senior unsecured notes, $683 million of secured debt and capital leases and $550 million of unsecured term loan debt. Subsequent to year end, we issued $250 million of 30-year senior notes and used the proceeds to reduce the amount outstanding on our revolver.

SNH's balance sheet and liquidity remains strong and in line with our peers, with total debt to undepreciated book value of real estate assets of approximately 47% and adjusted EBITDA to interest expense at 4.0 times. We're comfortable with our leverage ratios where they are and believe we still have some flexibility to take on additional debt if necessary. For 2016 and 2017, we only have $200 million of debt maturing, so we're well positioned for the next two years.

We generated normalized FFO of $112.9 million in the fourth quarter of 2015, up 24% from $91.3 million in Q4 of 2014. On a per-share basis, normalized FFO for the quarter was $0.48 per share, up 6.7% compared to the same period last year. In January 2016, we declared a cash dividend of $0.39 per share and our normalized FFO payout ratio for the fourth quarter decreased to 81% which means our dividend is well covered.

As you heard today, the portfolio is performing very well and the balance sheet is in excellent condition with no meaningful debt maturities for the next few years. For the foreseeable future, we will continue to focus our efforts on internal growth by funding expansions and improvements and managing the portfolio to generate strong operating results from our Senior Living and MOB properties.

So with that, Dave and I are happy to take your questions. Operator, we're ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from Tayo Okusanya of Jefferies. Please go ahead.

Tayo Okusanya

I just had two questions, the first one, the debt that was issued in January, the 30-year paper, any reason why you decided to such long maturity? Most of your peers are moving towards two-year term loans and three-year term loans and you went in a totally different direction by issuing third-year paper?

David Hegarty

Yes, Tayo. We did choose to go the 30-year route for a couple of different reasons. One was the fact that the five-, seven- and ten-year markets were very volatile and the spreads continued to widen over the course of January and February. So there was very little incremental costs to go out for 30 years for one thing and it puts it very far out there. We do have other term debt and so on that is on the shorter end. So that just gives us a lot more flexibility. And there wasn't that much more incremental costs.

Tayo Okusanya

And then post the issuance, you still have a decent balance on your line of credit. I think there's still a concern out there of you guys having to issue equity to ultimately take the line down or issue equity based on your acquisition outlook. Could you talk a little bit about how you're thinking about equity issuance given the current stock price?

Rick Siedel

Certainly, I think it's fairly straightforward, given the current environment and where the stock price is. We have no interest in going to the equity markets. I think it's really that simple with the prices where they are today, I just don't see that happening.

We're going to continue to monitor the debt markets. And based on our acquisition pipeline, we don't expect to be out in the market doing big acquisitions, we're probably more or less look the same at the end of the year. There might be some plus one minus one type stuff, but for the most part, we're happy with the portfolio and we're going to manage the balance sheet appropriately.

Tayo Okusanya

Okay. So you could issue more long term debt just to term out the line of credit and to deal with any one-off acquisitions, but you'd likely not issue an equity at current prices?

Rick Siedel

Absolutely. We're going to continue to monitor the debt markets, we want to make sure our debt maturities are appropriately laddered. The revolver is scheduled for 2018 with an option to extend it for another year. So terming out a little bit more of that certainly might make sense and we're going to keep watching the markets to be ready when the time comes.

Operator

Our next question comes from Michael Carroll of RBC Capital Markets. Please go ahead.

Michael Carroll

Can you guys touch on a little bit on your investment outlook going forward? I know you indicated that you are interested in one-off type deals. Do these types of deals need to be compelling? Do they need to be with existing relationships or how do you think about completing those types of transactions?

David Hegarty

Well as we said, the fourth quarter we had no acquisitions and this quarter we only had one acquisition in February. And frankly, I don't think anything of consequence would occur before the end of this quarter. And so we're just looking for individual ones that we feel are very good quality that fit in a location we're in or complements our existing portfolio. But I expect most of our dollars really to go to capital improvements that would be revenue improving for existing tenants, so it will be very modest this year.

Michael Carroll

Okay. And then can you give us a quick overview on potential supply pressures we're seeing in your managed portfolio? And how will this new competition impact I guess the results in 2016 and maybe going forward?

David Hegarty

While a couple things about our portfolio of managed properties. A good amount of the portfolio is independent living which has seen -- it's holding up quite well in this environment and we've seen very limited new construction that should impact that. We're seeing memory care impacting our occupancies and performance at some of our managed portfolio and assisted living is pretty much consistent with the [indiscernible] or everything else that it's more or less flat. So I think net-net, we're probably be about holding our own.

I would say that out of the 65 properties, I think it would be unreasonable to expect that all 65 would be unaffected by new construction. Just within a 5-mile radius, we've identified about 20% of our properties have a new facility opening up in the next year but pretty much in every case it's one facility, so I think we'll be fine. But we could be impacted a little bit, but I don't expect anything significant.

Rick Siedel

Right. A lot of the markets where we do see that competition that's going to be opening up, we have pretty good occupancies and we've got really strong executive directors at those buildings. So this being a local business, we're hopeful that reputation and our track record will carry us through.

David Hegarty

And we're putting a lot of capital into all of our properties, so we should be very competitive from a physical plant perspective.

Michael Carroll

Okay. And then can you finally give us some color on the potential asset sales? Rick I believe you touched on this during your comments if I heard you correctly. How much of the portfolio are we talking about here?

Rick Siedel

I think it's individual assets. I think we've expressed some interest in selling the skilled nursing facilities or that piece of the portfolio which is a fairly small percentage of our total pie. But there's also some select MOBs and some other things that might make sense to consider, but again, generally if we were going to do any acquisitions we'll probably fund them from asset sales or debt issuances.

Operator

Our next question comes from Dan Altscher of FBR. Please go ahead.

Dan Altscher

I wanted to follow up a little bit with Mike's last question just in terms of supply pressures. Is there anything I guess within this 5-mile radiance for instance that you're seeing some new supply pressures there? Any concentration that you're seeing in a particular geography or is there a particular tenant that there is concentrated that there's new supply coming on? Just trying to distinguish between which geographic if might be operator based?

David Hegarty

Right. Well I think you saw a little bit of slippage in occupancy if you were to look at our -- in the supplemental, we have the stats for occupancy by tenant. And I think Brookdale has seen some pressure and we've also seen Sunrise experience some pressure. Within Five Star, what we're seeing is that the pressure is certainly in Texas and then I would say a little bit in the mid-Atlantic and Northeast such as New Jersey and New York.

So the central part of the country seems to be doing fine, although the secondary markets are actually doing just fine. So but we're, like I say, San Antonio, Houston, mostly and the mid-Atlantic.

Dan Altscher

And, Rick, I wanted to follow up from one of your comments earlier regarding additional debt capacity. I guess when you did the note offering and you probably had a discussion with the rating agencies, what are they indicating as maybe the potential of what and how incremental debt capacity could take on or maybe just your own internal guesstimates of incremental debt capacity from here?

Rick Siedel

I think at this point, anything we would do would just be around margins where we're not going to move it drastically. We did have conversations with the rating agencies in connection with the last offering. Ratings were unchanged, I don't think there's any real concern there. So, yes, we're not going to do anything too crazy, we're probably just going to stay around where we're.

Dan Altscher

And then maybe just one more for me, I guess in terms of the managed the shop portfolio, are you seeing anything from a wage inflation standpoint? I know it's a common question, it probably comes up a lot. But just given I guess what's going on, is it starting to impact yet?

David Hegarty

Not in a meaningful way. Wages are up a bit, but and most of that's being offset by lower health benefits and other costs being lower. Certainly food is lower and some of the insurance and things like that are lower, so net-net, it's not impacting our results.

This is the second quarter sequentially that pretty much expenses have stayed flat. Obviously, it's spread out over 65 properties, so clearly there's some properties that experience it more than others but we're really not seeing it yet.

Rick Siedel

Largely market-driven.

Dan Altscher

Okay. So maybe just one quickie and then I'll jump off. So in the fourth quarter when we look at the operating expenses for that portion, I guess it a pretty sequential large sequential tick up. Was that the real estate tax item that you were maybe mentioning or is that something different?

Rick Siedel

Sorry, on which piece? On the managed portfolio?

Dan Altscher

Yes.

David Hegarty

I didn't think the expenses -- well those real estate taxes are always the variable and that we did see a tick up from Q3 to Q4 of approximately about $400,000. But nothing else of consequence that I can think of.

Rick Siedel

There was some of the routine or unexpected repairs and maintenance and some little things that needed to be tended to, but no big underlying trends changing.

Operator

Our next question comes from Vikram Malhotra of Morgan Stanley. Please go ahead.

Vikram Malhotra

You highlighted I think in an earlier comment about some MOBs tenants unexpectedly leaving. Can you maybe just give us a bit more color and what's happening to that space?

David Hegarty

Sure. Well we have quite a few multi-tenanted buildings in our portfolio and some of them we've bought in the last few years. And there's two specific cases that accounted for pretty much the write-off in this quarter. And it was situations where we acquired properties and when you do the analysis of above market and below-market rents compared to what their cash payment is, you set up a big receivable for the rents that are above market.

Those tenants, they internally, they were doctor groups in both cases. And they had internal disagreements and split up and vacated the premises before the lease expired. So we're clearly chasing people under the guarantees and so on. But that rent asset just gets written off at that time.

Rick Siedel

Right. The lease related intangible from the above market lease gets written off and we view that as a reduction of rental income. But I think there's the highlight of that is that we've been successful in releasing the space.

David Hegarty

Correct. Right.

Vikram Malhotra

And then just turning to benefits you're seeing from the CapEx you've put into various parts of the portfolio. Can you maybe give us some color or some numbers to just highlight whether it's increase in occupancy in assets that you've already put CapEx in?

What are some of the benefits you're seeing? And then maybe give us an update on CapEx plans for this year and just break that out into buckets of ongoing versus one-time and just how that splits between the different groups, different divisions?

David Hegarty

Sure. Well obviously, we're spending quite a bit of capital on the managed senior living portfolio, particularly down in Florida and Southern California. I think between three projects, we're putting in about approximately $45 million spread out over a couple years. And that's for complete facade improvements, as well as a couple buildings had new elevators, things of that nature.

And so they're more to be competitive. In addition, we will have funded like expansions of memory care or assisted living units or conversions of these rehab-to-home programs. Where a wing of a facility is converted to a skilled nursing unit with individual bedroom suites and try to capture some of that private pay Medicare business. So that's definitely revenue producing.

On the MOB side, we don't have as much capital projects as some of the senior housing managed side. But one of the biggest expenditures right now is Cedars-Sinai, that's one of our trophy assets. But it's an older building, dated and so we've completely renovated all the common area space and are replacing all the elevators and so on.

So again, normally, the rates there have considerably increased over the course of time. So now the average rents are in the $75 to $78 a foot and at least tenants there are complaining about the rent going up. Buyers saying, we can see all the stuff you are doing, it's fantastic and it's very much appreciated by the hospital as well as the tenants.

So I would say all that capital expenditures, redevelopment and so on, it's all that type of capital. And the fourth quarter had a higher than normal capital expenditure just for a couple reasons. One is, with all budgeting, it seems that most of the capital gets done in the fourth quarter just to use what was budgeted and then we expect this next quarter to be half of this quarter's expenditures. And on the senior housing, I think it's a couple year projects we're doing, so that will probably be maintained at the current levels for there. Hopefully that gives you some color anyways.

Vikram Malhotra

And just the budget, can you just remind us for this year what the total budget is?

David Hegarty

I don't believe we've put that out there, but I would say it's approximately -- it's going to be in the $12 million to $15 million range for the MOBs and another $12 million to $15 million for senior housing.

Operator

Our next question comes from Juan Sanabria of Bank of America. Please go ahead.

Juan Sanabria

Hoping to follow up on Vikram's question the CapEx, is that $12 million to $15 million for MOBs and senior housing, is that maintenance or does that include any of the redevelopment work that you alluded to?

David Hegarty

It's [indiscernible] development. It's different than trying to attribute it to revenue producing. The stuff that was being done with the Cedars-Sinai, it's defensive but it also allows us to continue to raise rates and go forward. So I'm not sure how you would exactly define that.

Juan Sanabria

It's more maintenance. Okay.

David Hegarty

Yes.

Juan Sanabria

And then you mentioned $45 million of spend left on some of the senior housing or in total $45 million. How much is left to spend of that $45 million and over what time period?

David Hegarty

I would say about $30 million over the next two years.

Juan Sanabria

And switching gears, on dispositions, have you guys thought about selling or joint venturing any of the larger assets?

Rick Siedel

We have thought about a lot of different things. That's obviously an option potentially, but just your regular core disposition of other properties that might be in a market we don't want to be in or just might not fit as well as some of the others are probably more likely to happen.

Juan Sanabria

So you wouldn't necessarily look to joint venture the Vertex building?

David Hegarty

We would consider it and I think all options are on the table. And we have on and off discussions with different parties on different assets in the portfolio, so it's something that has been considered and is still being considered.

Juan Sanabria

Could you help us think about what are the pros and cons of going down that route? How you were thinking about it?

David Hegarty

There are definitely a lot of pros and validation of values and so on and also just fresh capital into the Company. So there is definitely a lot of advantages, but we're seeing that done in the senior housing area too. As well as HCN just did one with medical office buildings, so there's multiple assets that we can potentially do something with that. So we don't give guidance. And so that's why we if we do something be it sell a large portfolio or sell through a JV or do something like that, we're going to tell you after it has occurred, so we continue to explore multiple options.

Juan Sanabria

Okay. And then just on the dividend, it seems like you guys are happy with the coverage. At what point do you think we get to a place where we could see the dividend grow?

David Hegarty

We certainly have the capacity. I think, again, we've talked to a number of investors. And I'd say most of them believe that we're better off where our stock price is where it is and the yield we're offering is that the money being invested back into the portfolio are hopefully revenue producing enhancements for the portfolio at this time.

Operator

Our next question comes from Jonathan Hughes of Raymond James. Please go ahead.

Jonathan Hughes

Could you talk about the new leasing spreads versus prior rates on similar space in the MOB portfolio? And then maybe the renewal spreads on the 99,000 square feet that were renewed in the quarter as well?

David Hegarty

The releasing spreads have been a modest about normally in the range of about 2% or so. And we've done a number of transactions where we have given some free rent in the early period in exchange for a long term lease. Typically that's done for a significant part of a building with a -- we've done a couple deals with high investment grade academic institutions. So the benefit of those transactions are yet to show up in our numbers. But we believe that they are expected to show up during 2016 and should significantly enhance the performance of our MOB portfolio.

Jonathan Hughes

And then the spread on maybe new leases versus comparable space?

David Hegarty

It's still pretty much in that 1% to 2% range. We have such a varied portfolio. Some of it is triple net, some of it is the multi-tenanted like we're constantly about 25% of the leases roll over every year, 20% or 25%, in the Cedars-Sinai towers. And there, we're always getting 2% to 3% increases, while some of the other properties we have we may take a short term reduction which has a long term gap say a 5% or 10% improvement over the life of the lease.

Rick Siedel

Or the write-offs we talked about lease intangibles. We had a tenant who was paying above market rent, they moved out. So the space was vacant and we've retenanted it at closer to market rates. We think that's a plus, but the metrics would say that's that a roll down even though it's kind of crazy. But it's varied across the portfolio. But for the most part, we believe it's rolling up.

Jonathan Hughes

Okay. Shifting gears, looking at the discount NAV and the performance over the past couple years. Have there been any more discussions to initiate a stock repurchase program?

David Hegarty

No. There is discussion, but the conclusion is that it's for one thing for us to do a material one, there would be a significant amount of capital need and we would have to lever up to sell a significant amount of the portfolio. But also just, it's a very controversial area. Not everybody agrees that it's a long term positive for the Company. So I think at the present time, I don't see us doing a buyback plan.

Jonathan Hughes

And I guess the opposite of Juan's question earlier. Have you looked at some other alternatives like maybe even lowering the dividend to free up some cash flow to pay down debt and address the leverage that you just talked about?

David Hegarty

No. We believe this dividend is very sustainable and we're very comfortable with it. And we think that we do see it would be disastrous for us.

Rick Siedel

And with our payout ratio where it is, we believe we will have some free cash flow to help reduce leverage over time.

David Hegarty

We're generating approximately $20 million of free cash flow every quarter to either reinvest in the properties or to just pay down debt. And most of the debt that we have been paying off has been secured debt at rates that have been in the 5% to 6.5% range.

And in the next two years, there is about $180 million of debt coming due and the rates there are around 5.75% I'd say on average for the group. So I think we look for opportunities to pay off debt, particularly secured debt.

Operator

And our last question is a follow-up from Tayo Okusanya from Jefferies. Please go ahead.

Tayo Okusanya

Just a quick question around the RMR shares, could you just talk about how you account for that at SNH? Is it an investment held for trading or how to we think about those investment securities?

Rick Siedel

Yes. So the asset is on our balance sheet as an available-for-sale security. They get mark to market each period and all that good stuff. What else, there is the dividend income that will be recognized when dividends are declared.

So again, a big piece of the loss recognized on the distribution to shareholders. When the shares initially started trading, the price was only $11.89. And I think partially that might have had something to do with a lot of REIT investors who were given these shares that might not have being able to hold shares of a management company.

So obviously, we've seen the share price increase on RMR. I haven't paid attention to it today, but it's probably, yes, it's probably double from where it was and we still think it's at a bit of a discount to where it belongs based on peer groups and stuff. So SNH is going to continue to hold that asset and we think it's a positive all around.

David Hegarty

And on our initial dollars invested, it's an 8.5% dividend yield on our dollars.

Tayo Okusanya

Okay. So that initial $38 million markdown was the stock just selling off indiscriminately when it was initially distributed?

Rick Siedel

Our carrying value also includes a fairly significant -- it's disclosed in our prior 10-Q's and it will be talked a little bit about in our 10-K. It includes a fairly significant liability or deferred gain related to the exchange of the price was negotiated in exchange for a 20-year agreement and as a result, there's a fairly significant basis increase because of that.

Tayo Okusanya

Okay. Helpful. Thank you.

David Hegarty

Okay, you're welcome. Do we have any more questions?

Operator

Yes we have one more question, a follow-up for Mr. Jonathan Hughes of Raymond James. Please go ahead.

Jonathan Hughes

I guess just going back to the last question I was asking about the dividend cut. When you saw another REIT recently that traded at a large discount to NAV and high leverage and they recently announced they're going to look at some strategic alternatives and cut the dividend and the stocks rebounded on that. You don't think that's worth looking at potentially?

David Hegarty

Not really. I think the Company's portfolio is performing quite well and I don't think -- we don't want to establish a record of cutting the dividend. I think we want to get the word out, educate the investors as much possible and realize the security of the dividend and the potential for us to grow it going forward.

Jonathan Hughes

But if your leverage profile was better, you would potentially be able to create more long term shareholder value by growing at a more accretive base?

David Hegarty

I'm not sure, Jonathan, just because our leverage is right in line with the other healthcare REITs. So when we were a smaller company, a couple billion dollars in size and we had a large percentage of skilled nursing in our portfolio, it was just a prudent thing to do is maintain very low leverage, about a third leverage or so.

But as we've grown to be a bigger company and interest rates have been low, we've taken advantage of that to lever up the balance sheet somewhat. But we're very much in line with the rest of the healthcare REIT industry. So I don't know if we dropped down to 40% leverage instead of 50% whether that would necessarily have a stock price impact. At least that's--

Operator

All right. This concludes our question and answer session. I would now like to turn the conference back over to management for any closing remarks.

David Hegarty

Just thank you all for joining us today and we look forward to seeing you at upcoming conferences such as the Wells Fargo conference this week and in April the Jefferies conference in New York. Thank you and have a good day.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

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