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Senior Housing Properties Trust (NYSE:SNH)

Q2 2008 Earnings Call Transcript

August 7, 2008 1:00 pm ET

Executives

Tim Bonang – Director of IR

Dave Hegarty – President and COO

Rick Doyle – Treasurer and CFO

Analysts

Tayo Okusanya – UBS

Jerry Doctrow – Stifel Nicolaus

Philip Martin – Cantor Fitzgerald

Kevin Ellich – RBC Capital Markets

Presentation

Operator

Good day, everyone, and welcome to the Senior Housing Properties Trust Second Quarter 2008 Financial Results Conference Call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the Director of Investor Relations, Mr. Tim Bonang. Please go ahead, sir.

Tim Bonang

Thank you, Cynthia, and good afternoon, everyone.

Joining me on today’s call are Dave 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.

Before we begin today’s call, I would like to state that today’s conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the Federal Securities Laws. These forward-looking statements are based on Senior Housing’s present beliefs and expectations as of today, August 7, 2008. The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today’s conference call other than through filings with the Securities and Exchange Commission regarding this reporting period.

In addition, this call may contain non-GAAP numbers, including funds from operations or FFO. A reconciliation of FFO to net income is available in our supplemental package found in the Investor Relations section of our website. Additional results may differ materially from those projected in forward-looking statements. Additional information concerning factors that could cause those differences is contained in our 2007 Form 10-K and Second Quarter Form 10-Q to be filed with the SEC within the next day, as well as in our Q2 supplemental operating and financial data found on our website at www.snhreit.com. Investors are cautioned not to place undue reliance upon any forward-looking statements.

And with that, I would like to turn the call over to Dave Hegarty.

Dave Hegarty

Thank you, Tim, and good afternoon, everyone, and thank you for joining us during this very busy reporting season that’s going on. We are pleased with the results for the quarter during what is a transformational period as we take steps to diversify our tenant base and product type. Our previously announced $565 million of acquisitions, a medical office, clinic and biotech laboratory buildings allows us to enter the MOB space in a meaningful way. When these transactions are complete, we will have expanded our tenant base from ten to nearly 400 tenants, and over 20% of our rents will come from medical office clinic and biotech laboratory buildings. We believe these steps will bring more securities where it is already a very secure portfolio.

I’d like to point out a couple of events during the quarter that enhanced our financial position for the future. First, in early June, we completed a significant equity offering and raised net proceeds of approximately 394 million, which we used to reduce our outstanding balances on our revolving credit facility to zero, and provided cash for future acquisitions. This was followed by an upgrade of our public debt to investment grade status by Standard & Poor’s.

Looking to our second quarter results, I would point out that the timing of our equity offering and the phased closings of our MOB transaction had a transitional influence on our results as we deployed the proceeds of the offering. As such, this morning, we recorded FFO of $0.41 per share for the second quarter and ended the quarter in an excellent position. As the equity proceeds are invested, we expect our FFO to steadily increase, and we believe that we will be able to take advantage of a range of investment opportunities in the near future. For example, as of June 30, our cash balance was 186 million. This amount had not yet been invested into income producing properties.

Now, Rick will review our quarterly financial results and properties acquired, and then I will discuss the ministry events, the activities with our tenants, lease performance and acquisitions opportunities before we take any questions. Let me turn it over to Rick now.

Rick Doyle

Thank you, Dave.

For the second quarter 2008, our FFO was $41.2 million compared to $34 million for the second quarter 2007 or a 21% increase. On a per share basis, FFO was $0.41 for the second quarter in both 2007 and 2008. FFO for the second quarter 2008 was a bit lower, primarily because the net proceeds of our June equity offering had not been fully redeployed. We have provided a number of number of reconciling items on page 14 of the supplemental package to allow you to calculate FAD, AFFO, CAB or a comparable other number.

Revenues for the second quarter 2008 were $53.4 million compared to $45 million for the second quarter2007. This was the result of acquiring 25 properties since April 1, 2007. Interest expenses was modestly higher as a result of increased borrowings on the revolving credit facility in the 2008 period. General and administrative expenses increased by $1.2 million. This increase primarily relates to the 25 properties we acquired and was somewhat higher than the normal due to increased professional fees and noncash stock compensation.

Percentage rent earned from our tenants was $2.3 million for the quarter, which is a $639,000 increase from the same quarter last year or a 39% increase. These revenues dropped to the bottom line as we acquired properties, there was a future growth built into the leases.

During the quarter, we recorded an impairment of assets charge of $2.9 million after determining that the fair market value of a closed assisted living facility held for sale needed to be reduced. This is one of two properties we own that Five Star has classified as discontinued operations. Subsequent to quarter end, our Board declared a dividend of $0.35 per share, which is a payout ratio of 85% for the quarter’s FFO.

In June, we acquired the first group of the medical office buildings, which totaled $83.8 million. We closed on acquisitions of 1 multi-tenanted medical office building, one clinic, and three biotech laboratory properties. The multi-tenanted property is a 76,000 square foot building in Pittsburgh, Pennsylvania, with 70 medical tenants and is 97% occupied. Most of the tenants in this building are affiliated with the University of Pittsburgh Medical Center.

The clinic is a 70,000 square foot building in Austin, Texas, which has seven tenants and half of the property is leased to HCA. This property has a surgery center and other related clinical groups and is 98% occupied. We also acquired three biotech laboratory office that include a 117,000 square foot building in Irvine, Texas, leased to Quest Diagnostics for eight years, a 124,000 square foot building in Fort Washington, Pennsylvania, leased to Omnicare for 3.5 years, and a 62,000 square foot biotech wet lab building in Lincoln, Rhode Island, leased for five years to stem cells, Inc. who sub leases the space to two tenants.

Subsequent to quarter end, we closed on three more medical office properties for $39.1 million. We funded these properties with cash on hand and assumed three mortgage loans on two of the properties totaling $10.8 million. One of the properties has two buildings with a total of 65,000 square feet located in East Syracuse, New York, and both buildings are leased to Hematology-Oncology Associates of Central New York until 2023. The property is a comprehensive cancer center.

The second property is a multi-tenanted building located outside Atlanta, Georgia, with a primary tenant of the Atlanta Center for Medicine and primary care providers affiliated with the Emory Clinic. The third property is located in Anaheim, California, with a total of 34,000 square feet and is leased to a multi specialty physician’s practice through 2010. Tomorrow we expect to close on 20 more medical office buildings and clinics for approximately $110 million. 18 of the properties are satellite clinics on one lease with Fallon Community Health Plan, a Massachusetts health plan that is also an insurer. The lease expires in 2019.

One building is a 72,000 square foot clinic leased to Health Insurance Plan of New York and is leased till 2034. And the other building is 29,000 square foot clinic located in King of Prussia, Pennsylvania, and leased to The Children’s Hospital of Philadelphia until 2013. Following the completion of these transactions, we will have closed approximately $233 million of the previously announced $565 million MOB transaction.

As discussed on our last conference call, we closed on the acquisitions of 10 private pay senior living properties effective March 31, 2008, for $135 million. During the quarter, we did not close on any new acquisitions of senior living properties.

After the end of the quarter, on August 1, we also closed on an acquisition of two assisted living facilities in Birmingham, Alabama, for $14.1 million, and leased them to Five Star Quality Care. During the second quarter, we also funded $10.7 million of capital improvements to Five Star for improvement and expansions at properties leased by them. At June 30, we had $186 million of unrestricted cash and complete availability of our $550 million revolving credit facility. Including the 20 MOB acquisitions we expect to close on tomorrow, we will have closed on $163 million of investment subsequent to quarter end. And as of tomorrow, we expect to have approximately $50 million of cash on hand and the revolver will remain undrawn.

We continue to be lowly leveraged with debt representing only 19% of our debt book capitalization and 16% of our market capitalization. We have no debt coming due until 2012. As Dave noted earlier, subsequent to the end of the quarter, our senior debt was updated to an investment grade rating of BBB- by Standard & Poor’s.

Now I will turn it back to Dave to discuss other activates in the quarter.

Dave Hegarty

Thanks, Rick.

I would like to touch briefly on two industry developments. First, during the past week, President Bush signed the REIT Improvement and Empowerment Act or RIDEA, which included a provision permitting healthcare REITs to own and operate health care properties as long as an independent manger is used to manage the property. We continue to assess the opportunities that this creates. We currently have no intention of changing our investment or operating approach. This is just another option for us to consider in the future.

Second, CMS recently announced final skilled nursing facility reimbursement rules. They were much better than any of us in the industry expected. There was a 3.4% rate hike to the market basket commencing on October 1. Five Star said on their second quarter conference call yesterday that they would expect – they will provide them with an additional $4.5 million per annum or $0.11 per fully diluted share annually. On the tender front, there were two significant developments that we announced just after the end of the quarter. One development involved the ten properties that we had previously leased to NewSeasons Assisted Living, a subsidiary of Independence Blue Cross to Philadelphia or IBC. This lease had a guarantee from IBC, which we greatly valued. HHowever, last year, NewSeasons and IBC had determined to exit the senior living business as part of a move to merge with another large insurer in Pennsylvania. NewSeasons had discussions with a number of different operators in an attempt to reach agreement to get out of the lease and we had certain approval rights on any replacement.

While we obviously are following with Five Star as an operator, they would not have been our first choice because of our desire to reduce our exposure to our largest tenant. I think we took a great step in that direction when we announced the medical office building transaction. Over the past few years, the occupancy and coverage ratios for the NewSeasons’ portfolio were inadequate to cover the rent and they were deteriorating, which meant the value of the assets was deteriorating over the lease term. Our desire to maintain the value of these properties by having an engaged and proven operator like Five Star outweighed any concerns we had about tenant diversity and our reluctance to let a strong credit like IBC off the hook.

As NewSeasons or IBC and Five Star came close to an agreement, Five Star initiated negotiations with SNH to assume the lease and guarantor obligations. As a result of these negotiations, Five Star assumed the NewSeasons and IBC lease obligations to us. Simultaneously with the assumption of the NewSeasons lease. Five Star agreed to purchase three other properties or 259 living units for approximately $21.4 million. That value was subject to an appraisal process which has now been completed and no adjustment was required. The rent payable by Five Star for the seven facilities which SNH will continue to own will be approximately $7.6 million per annum. This is a few hundred thousand dollars more than the straight line rent NewSeasons would have paid us on the seven assets and significantly higher than the cash rent. There is no increase to the amount during the remaining lease term which runs through 2017. The unpaid rent of $4.9 million which had been accrued under historically increasing straight-line rental arrangement between SNH and NewSeasons were paid in part by delivery of title to certain personal property to SNH which was previously owned by NewSeasons and partly in cash.

The other development had to do with our historical leases with Five Star. One of the leases was becoming increasingly large proportion of Five Star’s operations, and these actually could trigger an accounting requirement that the lease be capitalized. In addition, Five Star has been seeking a lower cost of capital improvement funding for some time. SNH accommodated their request in exchange for rebalancing the three leases and adding some term to the end of the leases.

The rent payable by Five Star to us is unchanged as a result of this lease realignment and the increased rent payable, if and as repurchase improvements to the lease properties was greater of 8% or the ten-year treasuries plus 300 basis points. The statistics presented in the supplemental package reflect these newer lease arrangements. The first lease now includes 100 properties including nine properties acquired in the first of 2008. This lease includes independent living and assisted living communities and half of the standalone skilled nursing facilities. The term was extended by two years to 2022. The number of properties in this lease is not likely to increase and is actually more likely to decrease as we periodically sell some underperforming assets.

Coverage ratio of this portfolio for the first quarter was 1.27 times and includes several of the newest acquisitions which pulled down the historical coverage number. The second lease is comprised of 35 (inaudible) that were formerly managed by Sunrise Senior Living plus the two in-patient rehabilitation hospitals. And they had historical coverage ratio of 1. 6 times rent for the first quarter of 2008. This lease expires in 2026 which is a nine-year extension to the 30 senior living communities.

Third lease is where most of the future acquisitions will be included. This lease consists of 23 standalone nursing homes, which is really the other half of five nursing homes that we previously reported in lease number one, and the ten private pay properties we acquired in March 31, 2008. This lease expires in 2024. The tenant performance statistics for the quarter-ended March 31, 2008, included 23 nursing homes for the full quarter and the 10 private pay properties for one day. The lease had 2.67 times coverage for the March quarter. And the ten communities that we acquired in March known as the Somerford properties were added to this lease on the last day of the quarter, and as a result the coverage ratio will be a much lower number in the future which should comfortably cover the rent due to us.

The fourth lease represents the seven former NewSeasons properties and the rent coverage from the first quarter of 2008 would have been 1.28 times and 88% occupancy. Now looking at our other leases, the Brookdale assets maintained strong occupancy of 91% and rent coverage increased to 2.23 times. Similarly the private pay operators – the private operators rather, had an average occupancy of 87% and rent coverage of 2.25 times, and the wellness centers maintained coverage of 1.9 times the rent due to us. Overall, the portfolio continues to perform very well in meeting its rent obligations to us.

On the acquisition front, we continue to see numerous investment opportunities. We are being very prudent with the opportunities that we are bidding on to be sure that the reward is appropriate for the risk. We currently have about $63 million of investments under contract but it will be premature to discuss in detail and we cannot assure that we will purchase any or all of these properties. If we are successful, we anticipate these will close before quarter end.

We continue to see a number of quasi [ph] living assets and medical office buildings to consider as investments. We are exercising some restraint so that the resources to acquire assets have a little extra reward in our view of the credit crisis is that it will continue for quite a while putting pressure on operators who need to sell or refinance.

We’ll quickly review our acquisition activity. We have $84 million of acquisitions that we closed during the second quarter, $163 million of acquisitions that closed post quarter end, including the 20 MOBs we expect to close on tomorrow. And there are $322 million of medical office buildings, clinics, biotech buildings to close in the next three quarters from that $565 million portfolio.

In closing, market factors are working to our advantage. In the 2005 to 2007 timeframe when capital was abundant, we were very selective as competition for transactions drove pricing to levels that we couldn’t justify. And the tightening of the credit market over the past year has reduced the competition for acquisitions. We are seeing additional opportunities arise as highly levered owners are forced to sell or refinance. And as opportunity funds reach the end of their whole period, we are seeing multiple opportunities in private pay senior living, MOB and other triple net health care related real estate like wellness centers. And our primary advantages in this environment are that we have a clean balance sheet with debt to capitalization of only 19% and an undrawn credit facility of $550 million that gives us certainty of closure that many of our competitors don’t have. And our conservative capital structure solidly positions SNH to aggressively pursue accretive acquisitions during this challenging credit environment.

Now that concludes our prepared remarks, and Rick and I would be happy to answer any questions that you have.

Question-and-Answer Session

Operator

Today’s question and answer session will be conducted electronically. (Operator instructions). We will take our first question from Tayo Okusanya with UBS. Please go ahead.

Tayo Okusanya – UBS

Hi, yes. Good afternoon, gentlemen. Congratulations on another good quarter.

Dave Hegarty

Thanks, Tayo.

Tayo Okusanya – UBS

The question I have I believe has to do more with the whole relationships with RMR. I think people judge you have a lot of liquidity, people judge you are in a good position to continue to make accretive acquisitions, but the stock has been literally – has under performed its peers ever since you guys did HRT deal. I was just wondering going forward with all the fire power you have, what opportunities do you have to diversify away from doing business with other RMR affiliated companies such that investors feel a little more comfortable in regards to investing in the stock? It really kind of seems like it’s what’s holding thing back at this point.

Dave Hegarty

Sure, thanks. Tayo, I guess first I think that the stock has been on a drag a bit recently because of the fact we did raise the equity proceeds and those funds have not been invested. So, this quarter was a bit down from a expected performance just because we had so much cash on hand. And so hopefully I would get – expect to put that to use in the near term, and that should significantly improve the results for the quarter and that would allow us to raise the dividend and so on.

Now I think as far as the opportunities out there, we are seeing a number of opportunities that are away from Five Star. On the HRT front I don’t – we don’t have any current other transactions, or follow-on transactions in mind with them. So, maybe down the road, there could be something, but we are seeing mostly today a number of opportunities in the medical office building area. We are very optimistic that some of those will come to fruition in the near term. So, I don’t want to give you any specifics but we do have several on the line and we expect that we’d be able to finish documenting and closing them in the near term.

Tayo Okusanya – UBS

What about in your core assisted living portfolio, any opportunities for you to do something with other assisted living operators out there?

Dave Hegarty

We’re optimistic that there will be. We’ve had a few situations that we’ve bid on and have come close on. We’re to trying to be as aggressive as we can in our bidding. I think there is –

Tayo Okusanya – UBS

But even apart from bidding and owning the assets, are there opportunities to lease the assets to other operators apart from Five Star, is that something that will become a reality over the next three to six months?

Dave Hegarty

That’s actually what I was referring to is sale-leaseback type transaction with other operators. The sentiment that we are seeing out there is that the larger players really don’t want to do sale leaseback transactions for the foreseeable future, because you obviously have a Ameritas buying them back, and you have Brookdale would buy back as many as they could today. And so it’s going to be more the mom and pop and regional operators, and we’ve made proposals with the regional operators. But to be honest NHP and Ventas and some of the others have just been more aggressive and willing to live with much smaller secure deposits or much less capitalized companies than we would require. And I guess we are not willing to go so much on the risk curve that we’re just a step away from taking on the operator’s risk of those properties. And so that tends to be why we are not winning a number of transactions with other third parties.

Tayo Okusanya – UBS

Okay. Fair enough, thank you.

Dave Hegarty

Welcome.

Operator

We will take our next question form Jerry Doctrow with Stifel Nicolaus. Please go ahead.

Jerry Doctrow – Stifel Nicolaus

Thanks. Yes, actually a little bit on the same lines. David, I was wondering on the MOBs that you are seeing out there in the environment, is that also been very competitive, you know whether they are sort of general theme of things that sort of work for you, whether you are on campus or off campus, I mean more of your stuff I think you acquired from HRP is kind of off campus stuff. And just if you can give me a little more color there maybe what cap rates might be and that sort of thing, or yields might be?

Dave Hegarty

Sure. Well, there are a few differentiating factors between us and some of our peers in that we are not willing to do any transactions that have say a land lease or a fee restriction to us with a certain hospital system or hospital group. And as a result, a lot of the on campus properties are ones that we are not willing to do or just it’s not the right situation, and besides a lot of on campus is going for the lowest cap rate. So, what we are finding is that the most opportunity for us are near campus but off campus, and in some of the ones we are buying form HRPT and some of the ones that we are seeing out there that are most – that work for us are actually well established standalone medical office buildings and that may be – are affiliated with nearby hospital systems but they are one off large medical office buildings. And so from a cap rate perspective, we are able to see the rates – cap rates in the high sevens, low eight range and actually I expect us to be able to do a number of transactions. What’s also interesting too is that in our existing portfolio, the very first property we did buy from HRPT when we acquired it, it was 89% occupied and it has gone up. We’ve signed up a couple new tenants and currently it is at 97% occupancy. So, I think the standalone medical office buildings are working for us.

Jerry Doctrow – Stifel Nicolaus

Okay. And then I think kind of following up on the diversification issue, I found it interesting that you would talk about Five Star not being your first choice on NewSeasons and focus on diversifying which I certainly agree would be I think beneficial for the stock. The – I guess my issue is whether there is other things. We cover Five Star as well, and I think Five Star has been encouraging (inaudible) to simplify its business structure so whether you take the existing portfolio and sort of move, whether it’s the skilled nursing assets or the rehab hospitals, whatever, to a new operator, I mean Five Star gives you obviously some – a public company a strong balance sheet, but it does create sort of the concentration risk. So is that sort of a discussion that have had or you think about because I think would benefit both companies?

Dave Hegarty

Right. Well, periodically we do discuss some of those options and a lot of negotiations really can’t come from the SNH side. They really have to be – Five Star has to make some strategic decisions if they want to exit some of those assets, and depending on the situation, they most likely would probably have to be compensated by somebody. In the NewSeasons situation, you probably have the reverse where NewSeasons paid Five Star to take over those leaseholds and Five Star would probably want to be compensated by somebody to take over their leaseholds, and then we would have to approve such a transition. And depending on who it is, we’d probably want to encourage that, but that’s where the decision has to be driven from. We can’t tell them you should – we’d really like you to switch operators for these properties, it’s just not something we can force upon a tenant.

Jerry Doctrow – Stifel Nicolaus

Right. I mean I think the point which probably is obvious to you guys already is, I think there are some of those transactions even if you were to take a leasehold tenant that was much less well capitalized, I think the diversification and their refocus on their core business would be beneficial for both sides. So, that’s just my editorial comment, I will let somebody ask.

Dave Hegarty

Okay. We do bid on other scenarios like even skilled nursing facilities which is not our preferred investment property type if it was with say seven or ten different operating companies. We would find that attractive because of the diversification and we would be more aggressive chasing the situation like that than doing any transaction with one new tenant.

Jerry Doctrow – Stifel Nicolaus

Okay. Thanks.

Dave Hegarty

All right.

Operator

We will take our next question from Philip Martin with Cantor Fitzgerald. Please go ahead.

Philip Martin – Cantor Fitzgerald

Good afternoon.

Dave Hegarty

Hi, Phil. Good afternoon.

Philip Martin – Cantor Fitzgerald

Dave, just a question on, as you are out there looking at investment opportunities in the senior living area, private pay senior living, are you finding – are you finding there are properties that you might like to have but are just being – that are under performing because of the operator and does the REIT legislation that was recently signed allow you to maybe think differently now about going after those opportunities to try to affect some change operationally and benefit from any change you might be able to help provide given your experience in the sector?

Dave Hegarty

Yes. There are those situations out there and that would be a good appropriate use for the new legislation. And the REIT – we could hire almost any operator, including Five Star to operate while we take on the risk, Philip, of those properties. We don’t necessarily want to go into the senior living business ourselves and keep the bottom line. Once it’s stabilized, we’d probably look to probably more do a sale leaseback type transaction, but that is the way that we could get some initial improvement in the return on the assets, with us bearing the risk during that fill up stage and stabilization.

Philip Martin – Cantor Fitzgerald

Do you find that there is a higher percentage of under – of what you would consider under – or properties not performing up to their expectations on the senior living side out there – or no?

Dave Hegarty

No. Actually I would say that there are more than I would have expected out there that are under performing today, and I am not sure it’s fully captured in all the statistics like the NIC statistics will have occupancy levels in the high 80s, low 90s, but there are quite a few properties out there that are 60% and 70% occupancy that are pretty decent properties. And so – and I think they are fairly highly levered, so there may be opportunities out there to step in, save somebody from debt, becoming foreclosed on and to improve the performance of those properties.

Philip Martin – Cantor Fitzgerald

Okay, thank you.

Dave Hegarty

You are welcome.

Operator

(Operator instructions) And we will take our next question from Kevin Ellich with RBC Capital Markets. Please go ahead.

Kevin Ellich – RBC Capital Markets

Good afternoon, guys. Thanks for taking my questions.

Dave Hegarty

Hi, Kevin.

Kevin Ellich – RBC Capital Markets

Last night Five Star mentioned there is about a 100 assisted living units that are being converted to Alzheimer’s units in five communities. Was this something you guys had talked about previously or is this something new? I can’t remember.

Dave Hegarty

Well, this has been ongoing as far as – I don’t know that they’ve raised that before in a prior call and we have not. I don’t believe that it’s because of the foray into buying the Wellstead in Minnesota in the Somerford properties which are – all those are predominantly Alzheimer’s. The demand for Alzheimer’s care continues to significantly increase and what they are finding is that it is very meaningful to be able to provide that service in a decent size assisted living property. So, they have just gone through a property-by-property basis and identified areas where there’s the demand for that service. And that is part of their capital improvement budgeting process they’ve gone through.

Kevin Ellich – RBC Capital Markets

Okay. And then if I – if my memory’s correct, I think the Wellstead, on the assisted living side, the census was pretty low. Have you guys been able to – have you been able to increase that at all, do you know?

Dave Hegarty

Not in any meaningful way. It’s still – I believe still is hovering in the mid 60s range for the assisted living component, while the Alzheimer’s still stays in the – above 90% occupancy levels. I know that they have been trying to formulate a good marketing program to encourage people to look at that because that – Wellstead has such as strong reputation as being known for an Alzheimer’s facility that people who are looking for assisted living don’t even really seriously consider it. But I know you have been to the property and several other people have toured it, and the assisted living units are at least the twice the size of a typical assisted living unit, and has a full kitchen, and it’s almost very much like having a fully sledged multi family apartment, one bedroom apartment, and the rates are the same as if it was a the traditional assisted living unit. And I don’t think that’s known out there. I don’t – I think the marketing effort is still being ramped up for that.

Kevin Ellich – RBC Capital Markets

Okay. And then on the 20 properties that you are going to close on tomorrow, Rick, maybe, is that all going to be paid for in cash or have you guys planned on any debt for that?

Rick Doyle

No, that will be all in cash.

Kevin Ellich – RBC Capital Markets

All in cash, okay. And for the two senior living properties that you acquired, did you say they were in Birmingham?

Dave Hegarty

Yes.

Kevin Ellich – RBC Capital Markets

Just wondering if you could give a little more in detail on that, what the sense is, is it all AL or any independent living in that?

Dave Hegarty

It’s all AL with an Alzheimer’s component in one of the building. There are each about 62 units per building, and the occupancy levels are in the mid 90% for each location. And what’s interesting about this is – these two properties have been under agreement for a long time and they required HUD approval and the process was just so painful that ultimately the decision was made to just pay off the HUD loans. And we could have walked at any points along the way if we didn’t like the performance of the property. So for a good two years, these have been running at that that mid to high 90% occupancy levels and maintained and improved the bottom line performance. So – but these are our desirable assets.

Kevin Ellich – RBC Capital Markets

Okay. And then lastly, have you seen any economic impact on the wellness facilities that you had acquired a couple of quarters ago?

Dave Hegarty

Not any of consequence. They are still up around the 1.9 times coverage and membership has held pretty steady.

Kevin Ellich – RBC Capital Markets

Excellent. Thanks, guys.

Dave Hegarty

You are welcome.

Operator

And gentlemen at this time, there are no further questions. Mr. Hegarty, I will turn the conference back over to you for closing comments.

Dave Hegarty

Thank you very much, everyone. And Rick and I will be at the NIC Conference in Chicago in September as well as UBS is having Healthcare REIT and Operator conference in Chicago on September 9, and we will be attending both and we’ll be available to talk with anybody who would like to be with us. Thank you. Have a good day.

Operator

Ladies and gentlemen, this will conclude the Senior Housing Properties Trust second quarter 2008 financial results conference call. We thank you for your participation.

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