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Senior Housing Properties Trust (NYSE:SNH)

Q3 2012 Earnings Conference Call

October 29, 2012, 1:00 pm ET

Executives

Tim Bonang – VP, IR

Rick Doyle – Treasurer, CFO

David Hegarty – President, COO

Analysts

Michael Carroll – RBC Capital Markets

Robert Mains – Stifel Nicolaus

Tayo Okusanya – Jefferies

James Milam – Sandler O'Neill

Jana Galen – Bank of America Merrill Lynch

Operator

Good day and welcome to the Senior Housing Properties Trust third quarter 2012 financial results conference call. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations, Mr. Tim Bonang. 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 Office, and Rick Doyle, 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 recording and retransmission of today's conference call is strictly prohibited without prior written consent of Senior Housing.

Before we being, I would like to state that today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other Securities laws.

These forward-looking statements are based on Senior Housing's present beliefs and expectations as of today, October 29, 2012. The company undertakes no obligation to revise or publicly release the results with 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 normalized funds from operations or normalized FFO. A reconciliation of normalized FFO to net income and the components to calculate AFFO, CAD or FAD are available on 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 on any forward-looking statements.

Now, I would like to turn the call over to Dave.

David Hegarty

Thank you, Tim, and good afternoon, everyone, and thank you all for joining us today on our third quarter earnings call.

First and foremost, we at SNH hope that each of you and your families are safe and as far from any harm from the hurricane.

I am pleased to report that another active and positive quarter for the company, one of which we increased the dividend and positioned ourselves for continued long-term cash flow and dividend growth.

Over the last decade, we have been consistent in executing our strategy of growing our exposure to private pay real estate by exclusively investing in private pay senior living communities and medical office buildings.

Today, 94% of our portfolio's NOI is derived from real estate where the predominant revenue source is private pay. With uncertainties surrounding the fiscal cliff and the long-term viability of Medicare, we feel that we are in the best position in the healthcare REIT space within any additional Medicare cuts.

Our Senior Housing portfolio and medical office buildings are clearly among the best in their respective industries. We do not discuss this often, but Senior Housing Properties Trust is an ENERGY STAR partner with the US Department of Environmental Protection Agency and is focused on being a partner to reduce global warming.

For the third quarter, we reported normalized funds from operations or FFO $0.43 per share. Subsequent to quarter end, our Board of Trustees increased their quarterly distribution by $0.01 per share to $0.39 per share which represents a 7.2% yield based on Friday's closing stock prices.

Year-to-date, 2012 we have acquired or entered into agreements to acquire $450 million of senior living and medical office properties, $304 million of that being acquisition opportunities that came about during 2012.

We stated at the beginning of this year that we expect we'll acquire $300 million to $400 million of properties. At the end of the quarter, we had achieved that goal. Since July 1st, we have closed on $225 million of acquisitions comprised of seven senior living communities with over 1100 units and three medical office buildings containing approximately 150,000 square feet. All of the activity we closed on during the quarter was previously announced.

We recently entered into agreements to acquire three senior living communities located in three states: Mississippi, Tennessee and Washington with 437 units for $59 million. Two of the senior living communities was leased to our TRS and the other will be triple-net leased to a privately owned senior living operator.

We also recently entered into an agreement to acquire a Class A multi-tenant medical office building located in Tennessee for $9.2 million containing 34,000 square feet.

Including the pending acquisition of the medical office building in Minnesota we announced last quarter for $15 million, we have a total of $34 million of pending acquisitions, which we expect will close by the end of the year.

As we have said in the past, we continue to evaluate individual assets and small portfolios in the senior living and medical office space and are seeing new opportunities from sellers looking to close on transactions before year end.

We are uniquely positioned when compared to the (inaudible) healthcare REITs that we can pursue and win smaller accretive acquisition opportunities that help to grow our portfolio and cash flows.

Moving on to our financing activity, in July we raised $300 million of common stock and $350 million of 30-year senior unsecured notes of 5.625%. In addition to paying off the balance in our revolving credit facilities with these proceeds, on August 31st, we prepaid approximately $199 million of Fannie Mae secured debt that had an interest rate of 6.4%.

As a result of this, 11 of the 28 properties securing this loan were released from the mortgage. Currently, 327 of our 384 properties or 85% of our properties are unencumbered.

Turning to the performance of our portfolio, first, I'll review our senior living triple=net lease properties whose results reported on a rolling 12 month basis as of June 30, 2012.

Overall, we saw a nice increase in independent and assisted living occupancy from last quarter. Independent living occupancy had gained the most ground as it's up 40 basis points from last quarter to 70 basis points from last year at 87.8%.

Assisted living occupancy increased 10 basis points from last quarter and it's flat with last year at 86.7%. Skilled nursing occupancy is down 190 basis points from last year but essentially flat form last quarter.

The industry leading provider of research and data on Senior Housing, the National Investment Center for Senior Housing Care industry for NIC, showed third quarter continued growth in independent assisted living occupancies.

They note that Senior Housing average occupancy rate has risen consistently during the past 10 quarters and is almost 200 basis points above the cyclical low during the first quarter 2010.

Independent living has had the greatest rebound over the last several quarters of our assisted living slightly larger increased in occupancy this quarter. Given the fact that a significant percentage of the units we've acquired over the last year of independent living, we feel this is positive for our portfolio.

Absorption rates are favorable. New developments are still very modest. NIC also notes that nursing care occupancy has been moderately declining for several years. We believe our results are mostly aligned with the industry data and are encouraged by the continued growth in our occupancy, which will ultimately benefit us as owners of private pay senior housing real estate.

Now looking at our largest tenant, Five Star, their leased properties had combined occupancy of 84.5%. Rental coverage on an EBITDA basis ranged from 1.2 times to 1.7 times across our four leases and was 1.3 times in the aggregate.

The third quarter results reflected their 15th consecutive quarter of profitability and improving independent assisted living results. In fact, they mentioned on their call this morning that senior living occupancy as of Thursday was up to 86.2%.

Our next slide on senior living tenant is Sunrise Senior Living. As we discussed last quarter, we're currently transitioning 10 properties leased to Sunrise into our own TRS. On September 1st, we transitioned three communities.

On October 1st, we transferred another five communities and we expect to move the remaining two by year-end. Because of this, our third quarter supplementary reporting for Sunrise only includes the four properties they will continue to lease from us through 2018.

These properties saw a slight increase in occupancy, which was 93.1%. The rental coverage was a strong 1.9 times.

Brookdale's leased properties saw a nice increase in occupancy, which was 93.6% and the rental coverage increasing to 2.3 times. Our other triple-net leased properties continued to perform well, with (flat) occupancy and rental coverage at two to three times.

Looking at our TRS managed senior living portfolio, occupancy for the third quarter was 87%. NOI grew to over $11 million during the quarter and margins were 26%, up significantly from last year due to the growth from acquisitions.

As I mentioned earlier, because we're in the process of transferring 10 Sunrise properties to our TRS, we included their occupancies and unit count in our TRS statistics for all the periods presented in our supplemental.

The financial results for the three properties, which were transferred on September 1st, are included in the third quarter period. We believe that we've crated a good foundation by taking on two large, strong growth profile portfolios during 2011 and 2012 and over time we expect to continue to grow our TRS by acquiring individual assets and small portfolios.

Moving on to the medical office building component of our portfolio, which makes up 31% of our NOI, we've discussed in the past the types of properties we included in our medical office building portfolio and as a refresher, on an NOI basis, 68% are classified as clinics, outpatient centers and doctor's officers.

21% are properties leased to medical equipment manufacturing tenants and other medical related tenants and 11% are biotech laboratory and research space. Excluding the biotech space, two-thirds of our MOBs are what we consider on-campus.

Within our definition of on-campus, we include properties located directly on hospital campus, properties near to and affiliated with a hospital and properties leased directly to a healthcare system, for example, our properties leased to Aurora Health Care in Wisconsin, an A-rated healthcare system.

For the third quarter, our occupancy at our medical office building portfolio was 93.9% and NOI was $35 million. We have 114 medical office properties and over 8 million square feet and one of the largest healthcare REIT owners' medical office space.

This growth has primarily come from new acquisitions. On a same-store basis, occupancy was 93.1%, NOI was $28 million and NOI margins were flat at 72%. As we discussed last quarter, we have one vacant building which primarily contributed to the declined occupancy and NOI from a year ago.

During the quarter, we had 32,000 square feet of new leases and we renewed 285,000 square feet. The weighted average rate on renewals and new leases increased by 2.8%.

With that, I'll turn it over to Rick Doyle, our Chief Financial Officer, to review our financial results.

Rick Doyle

Thank you, Dave, and good afternoon, everyone. I will now review our year-over-year quarterly financial results. We reported normalized FFO for the third quarter of $74.8 million or $0.43 per share.

If you recall, last quarter we told you that our FFO per share would be reduced by $0.03 and $0.04 in the third quarter when compared to the second quarter's FFO because of the timing of both our capital markets activities and the repayment of certain debt.

We expect our third quarter results will be a good run rate in the short term as we work to transition a number of recent acquisitions, including the transition of the Sunrise communities, evaluate capital spending needs and work to grow margins in our TRS.

Looking first at the income statement, rental income increased to $116 million, mainly due to external growth from investments in medical office buildings in leased senior living communities we made over the past year.

Residents fees and services from our managed senior living portfolio grew to $42.4 million from 30 communities with over 4300 units we owned as of September 30, 2012, compared to $10.7 million from 13 communities with over 1200 units from the same period last year.

Due to the transition of the 10 Sunrise communities to our TRS, rental income from our leased senior living communities will be reduced by approximately $3 million for the fourth quarter.

We expect the net operating income form these same communities in our TRS for the fourth quarter to be approximately $2 million. The negative arbitrage primarily relates to the decline in operations at these communities over the past year and we expect the results to improve and exceed previous financial results over the next several quarters as we invest in capital expenditures and enhance the operations.

Percentage rent from our senior living operators was $2.4 million for the quarter. The decline was attributable to moving three senior living communities formally operated by Sunrise into our TRS on September 1st.

These three communities reported approximately $350,000 of percentage rent revenue for the eight month ended August 31, 2012. We expect percentage rent to decline in the fourth quarter as we transition the remaining Sunrise properties to our TRS.

Property operating expenses for the quarter increased to $47.8 million compared to $20.2 million last year, which was in line with our expectations as we added a significant number of both managed senior living communities in medical office buildings to our portfolio.

Of the $47.8 million of property operating expenses, $16.6 million were derived from our medical office buildings and $31.2 million were derived from our managed senior living communities.

General and administrative expenses increased to $8.4 million compared to $6.6 million last year. As a percentage of revenues, G&A decreased 50 basis points to 5.3% compared to 5.8% last year.

Interest expense was up 23% to $30.4 million. Interest on our debt has increased since last year due to several factors. Since July 1, 2011, we have assumed $281 million of mortgage debt in connection with acquisitions at weighted average interest rate of 5.85. We also issued a total of $650 million of unsecured senior notes from two separate issuances at a weighted average interest rate of 6.1%.

Offsetting this activity was the repayment of $48 million of mortgage loans encumbering 19 properties at a weighted average interest rate of 6.7% in 2012, the repayment of $225 million of unsecured senior notes at 8.625% in January and the prepayment of $199 million of Fannie Mae debt at 6.4% on August 31st.

As a result of this prepayment, we recorded a loss on early extinguishment of debt of approximately $6.3 million.

During the quarter, we recorded a loss on lease terminations of approximately $104,000 related to the termination of 10 Sunrise leases. During July, we sold one medical office building located in Massachusetts for $1.1 million and recognized a loss of approximately $101,000.

Moving to the balance sheet, we closed on $225 million of investments during the quarter comprised of seven senior living communities and three medical office buildings and assumed $55.4 million of mortgage debt.

The weighted average capitalization rate for these acquisitions since July 1st was 7.7% based on estimated annual NOI.

We still have $84 million of pending activity comprised of three senior living communities and two medical office buildings and will assume $22 million of mortgage debt with a weighted average rate of 6.5%, the majority of which we expect to close during the fourth quarter.

These are all individual properties in one of the senior living communities – will be triple-net leased through our renewed private operator in the northwest.

During the quarter, we invested $4.2 million into revenue-producing capital improvements at our leased senior living communities.

We also incurred approximately $5 million of capital improvements at our managed communities in medical office buildings of which $2.4 million relate to medical office leasing costs and building improvements and the remaining $2.6 million for our capital improvements at our managed communities.

We expect capital improvement spending at our managed senior living communities to increase over the next year.

As you know, it is our policy to invest capital when taking away property, so it is well positioned in the future. Assessments of the Sunrise communities are being conducted to determine capital needs.

At quarter end, we had $21 million of cash on hand, $55 million outstanding on our revolver, $1.1 billion of unsecured senior notes and $717 million of secured debt and capital leasing making our debt to (EBITDA) capitalization ratio of 41%.

Our targeted leverage using debt to total book capital is in the range of 40% to 45%. Our credit statistics remain extremely strong with EBITDA over interest expenses of 3.5 times and debt over annualized EBITDA of 4.4 times.

In July, we sold 13.8 million common share raising gross proceeds of $300 million and issued $350 million of 5.625% unsecured senior notes due 2042. IN addition to repaying the entire outstanding balance on our revolver, on August 31 we prepaid approximately $199 million of Fannie Mae secured debt. Today, we have $50 million drawn on our revolver.

We are well positioned to make acquisitions using our line of credit. As we have mentioned in prior calls, our sweet spot for acquisitions in the individual property or small portfolio in the $10 million to $50 million range where we can effectively compete.

In the rare occurrence that we would pursue larger transactions as we did last year, we would do so if we believe there is a significant upside potential. The majority of the transactions we have completed this year fit our acquisitions criteria.

In closing, we feel very confident in our ability to maximize value as an owner of private pay senior living in medical office properties. Our board recently raised the quarterly dividend by $0.01 per share.

The new annual dividend rate of $1.56 per share represents a yield of 7.2% and is a 3% increase over the previous rate, an attractive option in today's market environment.

We have consistently raised the dividend over the last decade and this recent increased is a reflection on how our board views the future of our company.

We will continue to be prudent in our approach to acquisitions and will focus on maintaining a conservative financial profile so we remain an attractive investment option for yield-seeking investors, healthcare investors and REIT investors alike.

With that, Dave and I are now happy to take your questions.

Question-and-Answer Session

Operator

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

Jana Galen – Bank of America Merrill Lynch

Can you discuss what you're viewing in your potential acquisition pipeline going through year-end in terms of property type, what you've seen with cap rates and also what is your preference in terms of growing exposure to MOBs, senior housing triple-net and senior housing TRS?

David Hegarty

What we're predominantly looking at are the smaller one-off transactions, the small portfolios. I expect to do probably about maybe two-thirds or so of senior housing versus MOBs, although I think that's partly a reflection of the environment that's – opportunities out there right now.

The MOBs were being a little more aggressive to try to bring up that percentage of our portfolio. We would like to bring it up to more in the range of like 40% of our portfolio or better. But in order to win something of size there, you have to significantly reduce your cap rate but we're finding a number of opportunities in the high sevens to low eights for both medical office and senior housing.

Jana Galen – Bank of America Merrill Lynch

And then maybe if you could just clarify for the realignment of leases with Five Star you did in August. Did that change any of the bundles or did those 10 Sunrise assets just get placed into those leases? How did that work?

Rick Doyle

That's really related to when we paid off the Fannie Mae debt, the $199 million, and we were able to release 11 of the 28 properties from lease number three and what we did, we just spread those 11 properties into lease number one, two and four and at that time it just helped realign the rent coverages and we include all prior periods for that occupancy and rent coverage and location of those 11 properties and we just disburse them in between those (three other) leases.

David Hegarty

And the Sunrise properties are totally separate topic and those are going into our taxable REIT subsidiary as licenses get approved and as they are allowed to be rolled off of the leases to Sunrise and into our TRS portfolio.

Jana Galen – Bank of America Merrill Lynch

Then are those 11 unencumbered assets – did anything change in terms of their rents or lease term?

Rick Doyle

No. We look at all four leases as (one, two), so the bottom line, nothing changes.

David Hegarty

But the (economics) of the rents and stuff was unchanged.

Operator

Your next question comes from the line of James Milam – Sandler O'Neill.

James Milam – Sandler O'Neill

Can you just go over the yields on the acquisitions that you closed in the quarter and also what you expect the yields to be on the deals that you've announced pending for the fourth quarter?

David Hegarty

There is a schedule in that supplemental but broad picture, there were two properties that we closed on that had cap rates in the sevens, say around 7.3%. So one was the Yonkers New York property that was the last remaining (NASDAQ:Z) property and one in Pompano Beach, Florida was the medical office building that's 80% leased and it's physically adjacent to one of the senior living properties in our TRS and we expect to move that occupancy up considerably.

So our yield at the end of the day should be a lot better. Everything else has been pretty much in the low eights for cap rates, about 8.28 in the quarter and what's in the pipeline today pretty much again in that low-to-mid eight cap rate range.

James Milam – Sandler O'Neill

On the debt that you guys are assuming, is any of that – I guess what's the maturity on that debt and is any of that available, do you prepay at any point or would it be (inaudible) what currently is a little bit higher of a yield for a while?

Rick Doyle

We focus on the pending acquisitions, if we can prepay, we will prepay it. That's our first priority. This debt is about four, five years out and pre-payable a year or two from maturity date and we are always evaluating any prepayment opportunities we can get. But these are about four or five years out and so we have to wait for a year or two prior.

James Milam – Sandler O'Neill

My last one, the MO same-store stats were down a little bit. I think you mentioned in the prepared remarks that's really just based on the Philadelphia asset. Is that correct? And maybe could you talk about trends in the MOBs for the same-store portfolios if you exclude that asset what they would look like?

David Hegarty

That's probably if you were to point out one thing that affected the number the most from comparison year-over-year that would be the main asset. Everything else had modest improvement offsetting that from the other assets, so net-net we were just down a little bit.

Some of the things you are seeing in the portfolio, we are seeing some situations where some of the doctors' groups are splitting up in some properties that have been leased to one tenant are now multi-tenanted.

Rents are holding up very well. I'd say we have some properties in the southwest where it's little more challenging to release some space but generally it's not significant. So it is a very stable portfolio but I'd say that one particular asset excuses the number, I should say.

Operator

Your next question comes from the line of Michael Carroll – RBC Capital Markets.

Michael Carroll – RBC Capital Markets

Can you give us a sense of how much capital you plan on spending on the TRS assets and how much would you consider that being reoccurring versus revenue-generating?

Rick Doyle

The normal rule of thumb for reoccurring would probably be about $1000 to $1500 per unit over the next – we're going to be evaluating especially the Sunrise assets coming and evaluating the CapEx needs and we expect that to go up to maybe – on a short-term basis over the next 12 to 18 months, maybe $2500 per unit.

So we do – we're anticipating a growth in our capital expenditures over the next 12 to 18 months for about $5 million to $10 million over and beyond the normal CapEx.

Michael Carroll – RBC Capital Markets

So I think you spend about $600 a unit on your TRS portfolio this quarter, you would say, like a pretty good chunk of that was for revenue-generating activities?

David Hegarty

Yes. There is a lot going on right now at the portfolios. For instance, almost every asset we bring on requires new signage and just additional – things to put to rebrand a lot of the assets.

So that is a significant cost upfront and also we've taken an approach that since there is a transition going on already, you're disrupting the normal course of patients, residents and staff.

So you may as well show that you're putting in capital, fixing things that they might have been complaining about for a while and so on. So (inaudible) we are putting in capital upfront rather than on an ongoing basis.

So I think the $600 a unit is light compared to what we expect it will be just because we are still ramping up in what needs to be done at some of these properties.

Michael Carroll – RBC Capital Markets

And then how is the leasing activity going at the Philadelphia MOB assets that you mentioned earlier on the call?

David Hegarty

That's very slow because it's very, very specific property real estate and, in fact, we are debating about whether or not to just redevelop it and re-lease it as another type of property or sell it.

So we are undergoing a lot of those considerations; require a fair amount of capital to just remove the infrastructure that's there for REIT (inaudible).

Operator

Your next question comes from the line of Tayo Okusanya – Jefferies.

Tayo Okusanya –Jefferies

The TRS managed communities, now that you have most of those assets pretty much in place, so I’m (inaudible) a little bit better. Just trying to – you talked a little bit about the CapEx piece of this, possible to kind of get things moving.

But how should we really be thinking about your goals over the next 12 to 18 months in regards to where occupancy can get with this portfolio and where ultimately you expect NOI margins to end up after you've gotten the stabilization of the portfolio?

David Hegarty

Yes, well, I think the next 12 months is probably – 12 to 18 months is where most of the repositioning will occur to do the capital improvements and rebrand and so on. I would expect our results will be meaningfully in excess of what they've historically have delivered.

The margins 26% is a low margin for this quality asset and so we believe that we can get the margins at a minimum 30% and hopefully into the lower 30s at a minimum and particular the (Z) properties being predominantly independent living, there's no reason we should be able to get the margins ultimately up to closer to 40% with the capital being put into it.

Tayo Okusanya -Jefferies

Do you expect the margin expansion to come from occupancy gains? Is it price increases? Or is it reduction in operating expenses?

David Hegarty

First, I would say coming form occupancy increases – and then once they have achieved into the 90% area, north of 90%, then we can start pushing rates. Our operating expenses again they are a little bit volatile right now because it is in transition.

But I think in a couple quarters we should have a pretty steady run rate on that and I would expect them to be lower than where they are today.

Tayo Okusanya -Jefferies

And the target for this (again to confirm) is 12 to 18 months.

David Hegarty

Correct.

Tayo Okusanya -Jefferies

Then if I could just move to the MOB portfolio real quick, when I take a look at the change in GAAP rents from the renewals, the trend over the past one year, a year ago your renewals were up 3.2%, down 4.3% now, and then the trend has been steadily lower over the past five quarters – just wondering if you could talk a little bit about that?

David Hegarty

Yes, a combination of factors and I think the (inaudible) is that right now in this time period we're in, I know the focus on the leasing effort has been to approach renewals early, a year or two earlier than they would currently expire and encourage those tenants to stay in.

And as a result, they've been dropping the front-end rent and increasing the rental over the course of the lease term to lock in maybe a five or seven-year period instead of having a one or two time horizon.

I'd say the – I do think that properties on the east coast and west coast are experiencing increases, decent increases in the rental rates. I'd say it's a lot softer in Albuquerque area and the Phoenix market.

Tayo Okusanya -Jefferies

And then would you say on the renewal side although you were down 4.3% this quarter, the bigger drop in the off-campus stuff versus the on-campus stuff?

David Hegarty

Yes, that is true.

Tayo Okusanya -Jefferies

Could you give us a sense of what those numbers are?

David Hegarty

Well, let's see. I'd say most of this is attributable probably to a handful of buildings and, as we mentioned in our script, about two-thirds of our MOBs where we consider on-campus and if it's more of the non-core MOB type properties that are experiencing more of the releasing challenges.

Tayo Okusanya -Jefferies

But is there mark-to-market more like 10% and then the on-campus are flat or is there a way where you can get a sense of what the numbers are?

Rick Doyle

We don't have detail right here.

Operator

Your next question comes from the line of Robert Mains – Stifel Nicolaus.

Robert Mains – Stifel Nicolaus

Rick, I couldn't write fast enough. You mentioned that $2 million decrease that you are expecting in the fourth quarter NOI. Could you go over that again, please?

Rick Doyle

For the transitioning of the 10 Sunrise communities, that revenue will come out of triple-net rental income and we will now report residence fees in property operating expenses.

We'll take about $3 million – in the fourth quarter $3 million are the rental income and we will be recording residence fees and property operating expenses at a run rate for the fourth quarter about $2 million, so there is a negative arbitrage there and that's just like what we've been talking about just as a transition.

Over the past year, Sunrise operations have declined since they knew they were not going to renew these leases, so you could see as we've – in our reports in prior periods that rent converges have been declining and occupancy has been declining, so we put our focus to try to transition these properties as quick as we can.

We're trying to get these properties under our belt and then we need to go in there, improve the operations, put in the CapEx and get them back up to market value and we wanted to point that out in the fourth quarter that there will be a negative arbitrage there.

Robert Mains – Stifel Nicolaus

That net negative $1 million is the source of the above average growth that you are expecting over the next 12 to 18 months from improving that?

Rick Doyle

Yes.

Robert Mains – Stifel Nicolaus

And then on the – I think it is Page 14 in the supplemental where you have the TRS communities. Any help you can give us on what the transition would have been from the June 30 quarter to the 9/30 quarter without the new buildings because it sounds like you would not have experienced the occupancy NOI margin trends that were in the supplemental?

Rick Doyle

I am looking at page 24 at TRS managed communities and I am not sure exactly what you are asking.

Robert Mains – Stifel Nicolaus

You got from 24 to 37 communities - what would occupancy and NOI trends have been on a same-store basis?

Rick Doyle

We've started – if you looked at last year, we acquired properties in mid-quarter as well as we acquired properties mid-quarter this year and 37 also includes properties that we haven't even taken over from Sunrise yet.

As we've said in our prepared notes, seven of those properties – we had 30 properties at September 30th with above 4400 units and occupancies would have been higher if you took the Sunrise out – without Sunrise occupancies would have been reported higher if that answers your question.

Robert Mains – Stifel Nicolaus

Let me try it another way. Then I will give it up. The June 30 quarter you were at 87.7%. You've been looking at just the same 24. Would you be at commensurate level in September quarter?

Rick Doyle

Yes, we should, if not better.

Robert Mains – Stifel Nicolaus

I assume the same thing then with NOI?

Rick Doyle

Yes.

Robert Mains – Stifel Nicolaus

Then Dave, you mentioned that you're seeing smaller deals in the acquisition pipeline. Should I surmise that there aren't larger deals out there or that you got maybe – (inaudible) stars in their eyes? Where do you see the bigger portfolios?

David Hegarty

No, there are a handful of large portfolios out there and they do command a significant premium for being large portfolios. It just doesn't benefit us to pursue a portfolio of that size if it's going to be so competitive.

So we figure that it is best to stick with our smaller portfolios. Certainly, even $100 million to $300 million portfolio we still feel that we can compete on.

But it seems our most effective and sweetest spot is we're still able to pick up one-off properties that say $15 million to $25 million, $30 million and still achieve around eight, 8.25 to 8.5 cap rate on those type of transactions. So those we're pursuing more often.

Robert Mains – Stifel Nicolaus

And the last question, have pricing expectations in your judgment changed post the healthcare REIT Sunrise deal?

David Hegarty

Only on the major transactions – like you said, there are a lot of smaller operators or regional operators who think they should get that premium pricing. But I think once they start testing the market and so on, they realize that that's not real.

And so I think we still win a number of transactions but don't really get close to the ask. But the large portfolios, anything, say $500 million and up, is going to be chased after in low cap rates and getting that premium pricing.

Operator

And there is no one else in the queue at this time. Please continue.

David Hegarty

Well, thank you all very much. Hope everybody makes it fine with the hurricane and thank you for joining us. We are going to be presenting at the NAREIT Conference in San Deigo in November. So we hope to see a lot of you at that conference. Thank you and have a good day.

Operator

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

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