Diversified Healthcare Trust
Q3 2016 Earnings Call Transcript

Published: 4 Nov 2016

[Operator:]

Good morning. And welcome to the Senior Housing Properties Trust Third Quarter Financial Results Conference Call. All participants will be listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Brad Shepherd, Director of Investor Relations. Please go ahead.

[Brad Shepherd:]

Thank you. Welcome to the Senior Housing Properties Trust call covering the third quarter 2016 results. Joining me on today's call are David Hegarty, President and Chief Operating Officer; and Rick Siedel, Chief Financial Officer and Treasurer. Today's call includes a presentation by management, followed by a question-and-answer session. I would like to note that transcription, recording and retransmission of today's conference call is strictly prohibited without the prior written consent of Senior Housing. 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, Friday, November 4th, 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 operation 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 in 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. I'd like the call -- turn the call over to Dave.

[David Hegarty:]

Thank you, Brad, and good morning everyone and thank you for joining us today on our third quarter earnings call. Earlier in this morning, we reported normalized funds from operations or normalized FFO of $0.45 per share for the third quarter, a decrease of $0.01 per share year-over-year. This quarter was transitional for SNH as well as the industry as asset dispositions and industry trends negatively impacted the results. However, we expect that these dispositions and recent transitions will improve our portfolio's future results. In the third quarter, we continued to focus on adding value through internal growth, more efficient operations, and attractive long-term financing. We believe investors appreciate and support our strategy as confirmed through the performance of our common stock, which has produced a total return of over 55% through the first three quarters of this year whether we grew consolidated same-property cash NOI by 2.1% year-over-year. In July closed on $620 million attractive 10-year fixed rate financing allowing us to term out the majority of our outstanding borrowings under our $1 billion revolving credit facilities. We sold results four medical office building and one skilled nursing facility for total of $20.4, bringing our year-to-date total disposition to approximately $30.2 million. We prepaid $92 million of mortgages with a weighted average interest rate of approximately 6% per annum and subsequent to the quarter end prepaid $42.5 million mortgages at 6.5% per annum. Also subsequent to quarter end, we acquired one MOB for $18.5 million bringing our year-to-date total acquisitions $207 million. In addition, we agreed to acquire two private pay senior living communities for $18.6 million, which we believe -- which we expect will close by year end. We did have some offsetting challenges which we will discuss during the course of this call. Our portfolio is comprised of well-diversified private pay focused healthcare real estate which is designed to benefit from overall healthcare trends. In the third quarter, approximately 41% of our NOI was attributable to triple net lease senior living communities, 15% to managed senior living communities, 41% to medical office buildings, and the remaining 3% triple net lease to wellness center operators. In the third quarter, we increased our total portfolio net operating income over the prior year by $2.3 million or 1.4%. This total NOI increased just related mainly to investment activities in each of our portfolio of segments. The external growth in the triple net senior living portfolio is primarily a result of the sale leaseback transaction for seven senior living communities in June was partially reduced but unfortunately thought resulted in transition of two triple net lease senior living communities to our managed senior living portfolio during the year. The impact of converting these triple net leased assets to managed assets was a decrease in our quarterly NOI of approximately $400,000 year-over-year. However, since the transition the properties are turning around and are well on their way to becoming stabilized and more profitable. In our MOB portfolio, our acquisition and disposition activities result in a net increase of $1.2 million in NOI year-over-year. Now, I'd like to discuss our results within each segment. Our triple net lease senior living portfolio continues to perform very well with same-store cash NOI increasing 1.9% year-over-year. The triple net senior living portfolio had a combined occupancy of 85.3% and rent coverage of 1.33 times for the 12 months ended June 30, 2016. The coverage ratios of our leases remained strong and very consistent with prior quarters. We've seen occupancy impacted by new competition in certain markets within our lease portfolio, but our tenants responded by controlling cost and increasing rates in markets where they can and investing necessary capital at the communities to remain competitive. We continue to be comfortable with our tenant's ability to cover the rent due to us. Managed senior living portfolio same-store cash NOI decreased 2.9% year-over-year. Occupancy declined 60 basis points in the same-store portfolio over the prior year, but we saw a slight increase in total revenues. Declines in occupancy were more pronounced in the skilled nursing units within our CCRCs. The skilled nursing revenue was down just over a $1 million this quarter over the prior year quarter. This is due to trends in Medicare reimbursement and growth of managed care programs and several skilled nursing units were on service during the quarter due to refurbishment. In fact one community the skilled nursing wins been completely converted to assisted living and Medicare units. We will please to see increases in independent assisted living revenues at buildings, which more than offset the decrease in skilled nursing revenue. This increase demonstrates that our operators continue to push IL and AL rates will attempt to combat nursing and other operating challenges. Expenses were up on the same store basis 1.3% year-over-year primarily an employee benefit costs, welfare taxes and management fees. We continue to invest capital in and find opportunities to grow our managed senior living communities. Our operation committed to increasing profitability during this time of increased competition through revenue-generating initiatives, controlling cost, investments in capital and further in the program that make some provided the choices in our markets. We're encouraged that we're seeing a meaningful increase in census as we progress into the fourth quarter. Medical office buildings our MOB portfolio remained well-occupied this quarter with overall occupancy at the end of the third quarter 95.9%. Items in the same store MOB portfolio increased 30 basis points to 96.3%. Same store cash NOI increased 20 basis points year-over-year as a result of net leasing activity in the quarter offset by slightly higher year-over-year non-recoverable expense. Turning to our acquisition and disposition activities. Subsequent to quarter end in October we acquired one MOB in Ohio occupied by a publicly traded medical device manufacturer at an 8.5% cap rate for $18.5 million. And this acquisition brings the total acquisition volume to approximately $207 million year-to-date. We also agreed to acquire two private pay senior living communities in Illinois with the 126 units for $18.6 million. There will be triple net leased an initial rental rate of 7.5%. This acquisition is subject to customary closing conditions that is expected to close before year-end. In third quarter we sold four MOBs located in Oklahoma and one skilled nursing facility in Wisconsin for a total of $20.4 million. A year-to-date disposition total is now $30.2 million at an average cap rate of approximately 12%. At September 30, we had one MOB located in Pennsylvania and one former memory care building at a senior living community located in Florida classified as held for sale. Intention of our dispositions program is to enhance the overall asset quality of our portfolio and our internal growth potential going forward. While these dispositions were diluted from the short-term, they achieved these two goals by prudent portfolio of non-core assets. We continue to monitor the investment opportunities in senior living medical office markets and being disciplined to maximize our risk adjusted return. Acquisition activity for the foreseeable future will continue to be modest with individual properties and small portfolios and funding expansion improvement within our portfolio. I'd like to now turn it back over to Rick to provide more detailed discussion of our financial results for the quarter.

[Rick Siedel:]

Thank you, David. Good morning, everyone. We are pleased with what we are able to accomplish in the quarter to improve the quality of our portfolio and improve our financial position through the utilization of attractively priced long-term financing. These actions along with deployment in each of our segments resulted in normalized FFO of $105.7 million or $0.45 per share, a decrease of 2.2% compared to last year. We also declared a $0.39 per share dividend in October that will be distributed to shareholders on November 17, 2016. Rental income for the quarter increased $6.6 million or 4.2% from the third quarter last year to $165.5 million. This increase is primarily due to the acquisitions of medical office buildings and eight triple net leased senior living communities since July 1st, 2015, partially offset by the sale of five skilled nursing facilities and our MOBs during the same period. On a same store basis rental income increased $3.4 million or 2.2%. This increase was largely attributable to increase disposition income in our MOB portfolio as well as increases in rental income related to funding capital improvements at certain of our community within our leased senior living portfolio. As a reminder consistent with recent non-GAAP reporting guidance we will recognize all the percentage rent related to our triple net leased senior living community in the fourth quarter for both our GAAP and non-GAAP performance measures. Residents fees and services revenue from our 68 managed senior living communities increased 2.1% compared to the third quarter of 2015 to $98.5 million. This increase is primarily attributable to our acquisition of one managed senior living community and the two transitioned triple net leased properties into this portfolio along with an increase of 1.1% in our average monthly rent to $4208. These increases were partially offset by decrease in occupancy from last year. The decline in occupancy was most pronounced in skilled nursing units within our CCRCs, resulting in a decrease of over $1 million of revenue year-over-year. This decrease was partially attributable to debt been out of service as we continue to transform units into higher-margin we have the home units and partially attributable to change is caused by Medicare ACO or Managed care programs. Property operating expenses from our MOBs and managed senior living communities increased 6.6% in third quarter to $103.3 million compared to the same period last year, primarily due to the acquisition and the transition communities that I just mentioned. On a consolidated same store basis, property operating expenses increased $3.9 million. This increase was primarily attributable to increase employee health benefit costs and real estate taxes in our managed senior living community and increases in operating expenses at our MOBs particularly real estate taxes which were largely recoverable from tenants. General and administrative expenses increased $1.8 million or 17.4% to $12.1 million this quarter compared to third quarter of last year, primarily as a result of increases in business management fees and stock based compensation incurred in Q3 of 2016. Much of these increases are related to changes in the market price of our shares which was up 53% year-to-date as of September 30, 2016. With G&A up 4.6% of revenues for the quarter, SNH continues to benefit from the efficiencies of management structure and remains one of the more efficient company’s in the healthcare REIT sector, particularly when considering the size of our portfolio. We recorded non-cash impairment charges totaling $4.6 million in the third quarter 2016 related two buildings. First with skilled nursing facility that primarily leased to Five Star that sold during the quarter and second, related to our planned this position of our former memory care building at managed senior living community that was classified as held for sale at September 30th. We expect proceeds totaling $5 million from the sale these two properties classified as held for sale at the end of the quarter. Interest expense increase to 11.4% to $43.4 million this quarter compared to the third quarter 2015. The increase was a result of us closing the $620 million 10 year interest only secured financing in July, along with $200 million term loan closed in September of 2015 and $250 million 30 year senior notes issued in February of 2016. These increases were partially offset by the repayments of $250 million for our senior notes in November of 2015 and $168 million of mortgages that had encumbered in six of our properties at an average interest rate of 5.72%, since July 1st of 2015. The July financing secured by two Class A life science buildings located in Boston sea port district allowed us to term-up the majority of the outstanding borrowings under our revolving credit facility. At the end of October 2016, we prepared another $42.5 million of mortgages that had encumbered eight more of our properties at an average interest rate of 6.54%. We recognized $659,000 of dividend income from our equity investment in the RMR Group during the quarter. We expect dividend income to run at this amount per quarter going forward for the foreseeable future. In the third quarter, we invested $5.3 million into revenue producing capital improvements at our triple net lease senior living communities, for which we earned 8% return on the amount funded. Our recurring capital expenditures for the third quarter totaled $12.2 million and included $3.8 million at our MOBs for building improvements, $3.9 million on MOB tenant improvement in leasing cost and $4.5 million at our managed senior living community. We also spent $7.4 million on development and redevelopment capital projects, with a vast majority of it being spent at our managed senior living communities. These projects include major renovations intended to reposition a property of market or give our communities competitive advantage against new supply we see entering the market. At September 30, 2016, we had $40.8 million of cash in hand and $785 million available on our $1 billion revolver. Our total debt-to-gross asset at the end of third quarter was 42.9% and debt to adjusted EBITA was 6.0 times on trailing 12 months basis. We are comfortable with our leverage ratios where they are, given the quality of our portfolio and significant amount liquidity we have available today. I will now turn the call back over to our operator to open it up for questions.

[Operator:]

Thank you, sir. [Operator Instructions] Our first question comes from Juan Sanabria with Bank of America. Please go ahead.

[Juan Sanabria:]

Hi, good morning, guys.

[David Hegarty:]

Good morning, Juan.

[Juan Sanabria:]

Just looking at your triple net coverage ratios that you gave on page 32 of our slide. Just quickly, are those EBITDA or EBITDA on coverage levels and if you could provide the four different Five Star ones that you used to disclose?

[David Hegarty:]

Those are on an EBITDA basis and part of the reasoning for that is that the fact that management fees sometimes using 5% is the rule of thumb that our people often use, but in many times -- the real cost of managing might be 2%, 3%, 4%. But--

[Rick Siedel:]

Yes, I can speak to the change in the disclosure and not breaking it out. I think it's important to remember that Five Star leases all have cost to fall provisions as corporate guarantees in place. They are all backstopped by real estate that Five Star owns and operates on some of the account. So, we really think about it as consolidated coverage, which is the same way we think about Sunrise, which also has four leases with us. So, this quarter, we would have added -- we would have to [add a fifth client] for that new master lease for the sale leaseback transaction we just did. And it would have only had two days of activity in it. It just didn't make a lot of sense. So, we sat back and said okay, we should to just simplify this presentation and report it as a consolidated number. It's more meaningful to us that way and we don't really think breaking up the detail added much to users of our financial statements either. I don't have the detail in front of me, but I can say, I mean the number just ticked up a little bit on a consolidated basis. I don't think any of the leases moved significantly, I think had we presented in detail the fifth lease would have looked a little funny because it was two days of pro-rated activity. But overall we're still comfortable just with Five Star's coverage where it is at 1.23.

[Juan Sanabria:]

And sorry just to clarify that's after-management EBITDA not trending with them, correct?

[David Hegarty:]

That's before management fee.

[Rick Siedel:]

Before management fee.

[Juan Sanabria:]

Okay. I mean how -- those coverage levels before management fees and before CapEx seem pretty low. I mean you said you feel that the rent is safe, but -- I mean what are assuming for CapEx as it deduct like a pro forma coverage post-CapEx for those assets?

[David Hegarty:]

Well, in all of our leases, the -- we have a mechanism where we can fund the CapEx as they wish us to and [Indiscernible] refund most of their long-term capital items. So, within our typical underwriting like we're spending $1,500 -- between $1,200 and $1,500 a unit on our private pay senior living. Most underwriting would assume anywhere from $750 to $1,500, but again push it on the tenant and we use our own estimates depending on the property.

[Juan Sanabria:]

So, you pay their CapEx, but then you get I'm assuming an 8 -- what did you say an 8% return?

[David Hegarty:]

That's correct.

[Rick Siedel:]

We do. We get -- we generally an 8% return on CapEx improvements that we fund. But it is important to remember that they do handle all of their maintenance CapEx, all the regular things to operate the facility. Generally where they come to us is for the more improvement type projects that will enhance the community in perhaps longer term.

[Juan Sanabria:]

Sorry that confused me a little bit. So, you are funding the maintenance CapEx or they are?

[Rick Siedel:]

They are. The tenants fund all the maintenance CapEx. If they have a more substantial project, that's really more of a building improvement that's where they generally would come back to us and ask us to fund it. And we're happy to invest further in our communities, make sure the work gets done and generate a return on that investment.

[Juan Sanabria:]

Okay. And then any update on what you guys were thinking about on the vertex asset, I mean we've seen a bunch of transactions large scale for post-acute, which is arguably a lot more risky and some pretty meaningful sheer housing transactions, you'd think a building of thinking a building of this quality in major metropolitan city would be fairly easy to JV or so. Any update?

[David Hegarty:]

Only that it's still on the table and so having number of discussions -- there are number of interested parties. But we're not in a position at the moment to get any specific on it.

[Juan Sanabria:]

Okay. And then just lastly any comments on what you guys are seeing in terms of new supply both under triple net senior housing and business, sounded the alarm, I think, pretty loud on the secondary supply -- supply on the secondary market, any thoughts heading into 2017?

[Rick Siedel:]

I think we've definitely seen the impact of new supply. We've already seen new openings within five miles at about 18% of our communities this past year. The NIC data covers the majority, but not all of our markets and when we scrub the NIC data, we do see some new construction in the pipeline, but we do believe it will be manageable. The NIC data tell us that about 33% of our communities have new supply both new construction together with openings in the past 12 months. So, we are hopeful that we've already seen a majority of new competition, but believe it will be manageable on a go-forward basis.

[David Hegarty:]

Let me add -- I was just going to say big picture, looking at this quarterly results, one thing that jumped out at us and try to make the point in our presentation was the fact that we have a number of properties that have full services, full CCRC services with ILAL, a skilled nursing unit typically. And this quarter we had a drop in revenue of over $1 million Medicare A in-patient revenue, primarily from those types of communities. And some of it is due to new program refurbishments going on at a number of the communities, but also a significant piece, particularly in Florida is lost revenue due to managed care programs. So really the private pay senior living side I have -- that actually done very well during this quarter. And as we mentioned in Q4 today we're seeing a noticeable improvement in census. So, a number of programs that have been implemented over the last couple of quarters we believe are bearing fruit. And I'd say our properties are doing on the senior living side pretty well.

[Juan Sanabria:]

And just to clarify did you say -- you threw out kind of two numbers there, the 18% of the assets were facing new supply or 33%?

[David Hegarty:]

18% has already seen new supplies when we look at the data and look at the new -- new openings within the past 12 months. 18% of our communities already have you know that based -- that's baked into current numbers. We do see some more coming and when we combine new supply with the recent openings and get that to just under 33% of our community.

[Juan Sanabria:]

Thank you.

[Operator:]

The next question comes from Vikram Malhotra with Morgan Stanley. Please go ahead.

[Vikram Malhotra:]

Thank you. So just wanted to understand the managed properties a bit more, just on expenses. It seems like a bunch of expenses be now taken out you've been able to control over the last few q quarters. I am just wondering from here on how much more is there to -- how much more rationalization can there be? And just what are your expectations for the growth trajectory over the next few quarters?

[David Hegarty:]

I think we are -- we definitely did see increased operating expenses this quarter. We mentioned in our prepared remarks that real estate taxes impacted both senior living and our MOB portfolio. Real estate taxes in total were up about $2 million year-over-year and a lot of that on the MOB side is recoverable. But on the managed side one other things we notice is that the timing of our real estate tax appeal tends to move the needle on talking about a portfolio of 65 assets. We also in the managed senior living business saw increased health benefit costs this quarter. Largely a function of a small number of extraordinarily high individual claim that wind up increasing overall cost beyond what we normally see. These costs were up about $800,000 this quarter compared to last year. So to your point, I mean the operators did a great job offsetting a lot of it through labor efficiencies and trying to manage over time to the vacation season but definitely had an impact on our results. On a go forward basis I don't think we see a ton of structural changes. I mean and I think the more you focus on managing labor and focusing on supply chain efforts more momentum that that I forget and I think it will continue to become cultural and we're hopeful to continue to see savings and growth in NOI there. But I think we generally talk about targets of 3% to 5% growth in the managed business and think that's probably still appropriate. But again there certainly has been some headwinds with both competition and again a couple of the unique operating expenditures.

[Vikram Malhotra:]

Okay and then on your markets as you look at impact of supply both on the net leased side and the managed side, just based on what you're seeing in terms of new construction, any sense of when you could see all that it is as actual inventory and a source of competition?

[David Hegarty:]

I mean I am encouraged that we were already seen openings already at 18% of our buildings. So our current numbers already reflect some of those -- that new supply where the units are open and the operators actively trying to fill them up. So there is certainly more coming. We're aware that but believe it will be manageable.

[Vikram Malhotra:]

Okay. Great. And then just last one on the portfolio, you've seen some of your peers, we've seen some large transmitted transaction and we've also seen a lot of different buyers come to the table. Any sense of what -- you're looking at the portfolio now today given where pricing is and the buyers we've seen any sense any-- any- any coloring that you could do to improve the overall metric?

[David Hegarty:]

Well, I think the -- we are selling off some of collective assets over the course of time. I don't -- in the near term I don't see like a major shifts like some of the peers have done some major repositioning of their whole portfolio. I don't just doing that in a major way but I think individual assets. Again, can we know periodically sell down our positions and few underperforming properties. On the MOB side, a number of the transactions being done in the marketplace are being done at cap rates in the five and six, now six is and we realize that that's not a price range that we can compete in at the moment. And so I think we're looking at other selected situations that make a lot of sense for us and that's why I think our acquisition path will be modest and again that's we don't need tremendous amount of capital at the moment. And we've frankly done our best one. We kind of stayed out of the hot markets and gone in when there is a hiccup in the economy or the market and we have capital available to go in and take advantage of that. So we’re trying to exercise discipline in more or less there on sidelines, but be somewhat involved in.

[Vikram Malhotra:]

Okay, great. Thank you very much.

[David Hegarty:]

Okay.

[Operator:]

Our next question comes from Nick Yulico with UBS. Please go ahead.

[David Hegarty:]

Good morning, Nick.

[Nick Yulico:]

Thanks. Good morning. Just going back to the leases with Five Star. I guess the first question is how come you don’t report the coverage as of September 30th since there is financial data on Five Star out?

[David Hegarty:]

I mean it came out yesterday, I mean there are – it’s important to remember they are separate public company and we don't have their data on real-time basis. And on the path on occasion we’ve reported before for them and we also have other operators who we don't have their data by the time we report so. I think you have seen that trend in the whole industry where everybody's one quarter behind just because of the practical side it.

[Nick Yulico:]

Okay. So I mean looking at Five Star's actual financials they had negative operating cash flow for nine months this year. How should we think about their ability to still pay your rent and how this ultimately ends up I mean is there a rent cut that use to happen here to help out Five Star? Because it seems like the only other option for Five Star has would be to sell real estate that they own to help their cash flow and yet that’s being prevented it looks like tied to this activist campaign against five-star right now?

[David Hegarty:]

Five Star is going through transition period and one of the things that as I mentioned for us, the Medicare A impact of $1million to us times four is $4 million a year, if you extrapolate that to Five Star, they have to change in the business strategy to minimize the Medicare business and focused more on private pay to expand that. So they are transitioning they had a rough quarter this quarter, but I think there are a lot of positive things that overtime will get them back to cash flow positive on a regular basis. But as you said, they currently sit on about 50 million of cash and have clearly available revolving credit facility of another $100 million and they own about 26 properties I believe on their balance sheet. I don't want – if they want to sell some assets here and there that is their choice, but I think the whole, it’s their choice anyway. So we are comfortable that they need some time to work through this stuff, but they should be okay.

[Nick Yulico:]

Okay. And then just I mean where is – is there an actual default threshold on the lease?

[David Hegarty:]

Not as at the certain level of performance. Also when you delve into the detail and I think, if you took out say the bottom 3% or 5% of their portfolio and close them, sold them whatever their coverage ratios would materially improve, so it's up to them to determine when to sell those properties or do something with them and they need our consent obviously, but we are likely to consent if something like that. So I think they could improve their results by eliminating some of their problem properties.

[Nick Yulico:]

Okay. I guess just last question. They are mortgages attached to some of these specific individual leases, remind us where you what is amount of these mortgages for the kind of debt summary in the supplemental and then also whether there is any -- if there's any you mentioned a cross default provisions on the leases, is there any cross default that applies to the mortgage as well?

[David Hegarty:]

You are still talking about specifically five-star leases just in general?

[Nick Yulico:]

Yes. The five-star leases. I know five-star discloses that they have the they are separate leases because there are actually specific mortgages tied to separate leases you mentioned cross default provisions in the leases is they are also cross default that attaches to the mortgage?

[David Hegarty:]

No, that is other pool of properties that wasn’t what we describe is lease number three and overall, predominantly CCRCs and private pay communities that are secured by Fannie Mae financing. They are nonrecourse loans -- so there would not be cross default on that. It is not tied to that specific operation to the property.

[Nick Yulico:]

Okay. Just where is on the debt summary page where -- which mortgages under the secured debt summary or the ones of the Five Star mortgages?

[David Hegarty:]

It’s the one secured by the pool of 17 assets. Its --

[Nick Yulico:]

So, that's the only that the only mortgage and that's all -- that's across various leases or you said that's only lease three?

[David Hegarty:]

They are pooled in the lease three.

[Nick Yulico:]

Okay. All right. Thanks for the help.

[David Hegarty:]

You're welcome.

[Operator:]

Our next question is from Tayo Okusanya with Jefferies. Please go ahead.

[Tayo Okusanya:]

Yes. Good morning. Again, just trying to understand this loss of revenue from the Medicare Part A side, again, your skilled nursing, when we take a look at your portfolio, it's such a small piece of your portfolio. I guess I'm just surprised about the magnitude of that number. So, I'm really trying to understand what's going on there?

[David Hegarty:]

Right. I mean it has happened pretty quickly and what in the standalone skilled nursing facilities, the properties we own a more traditional long-term care nursing homes that typically have fair amount of Medicaid and very little Medicare -- very little private pay. So, I think that there are very stable operations generally. But within the TCSC properties we have, there's often 40 to 50 beds that are skilled nurse and normally those have been shorter term rehab stays or could be a little bit longer term. But what's happened is particularly in state of Florida, a lot of managed care programs are now directing people to go straight to home and skipping the skilled nursing and maybe having some home healthcare to follow-up. But -- so that has really bypassed a lot of rehab units that we have within our CCRCs. So, what's happening is we are making some changes as far as developing relationships and having better electronic medical records, which then could be provided to a lot of systems to try to draw in or referrals and things like that as well as we do have them. I should say we probably have 100 units across the system that are just out of commission because of refurbishments.

[Tayo Okusanya:]

Got it. So, when I take a look at your property mix that you put on page 29 of your supplemental, where are you sticking the skilled nursing stuff that's been, is that being stuck under NIC, is that part of the 3%?

[Rick Siedel:]

No, I mean these are -- no, it's not in -- the 3% there is predominantly skilled nursing or facilities that are primarily -- most of their revenue comes from government facilities.

[Tayo Okusanya:]

So, that was predominately -- if the CCRC that's predominantly for living, you would pick in living bucket?

[Rick Siedel:]

Correct. If we have -- where we're seeing this impact -- our CCRCs, we could have 200 units of IL -- 100 units of IL, 250 units of AL and like Dave mentioned 40 or 50 sniff beds. From our perspective that is a predominantly private pay facility. But there is still some exposure to the Medicare.

[Tayo Okusanya:]

So, some like that example would have put in the AL bucket in this chart?

[Rick Siedel:]

Correct.

[Tayo Okusanya:]

Okay. Now I understand why I'm not seeing it. Okay. That's helpful. So, that's number one. Then number two you talked a little bit G&A that part of it was impacted by your stock price doing so well this year. I'm curious is that because you just have to do more higher expenses paid, does it tie back to the management fees that RMR get paid. I'm just kind of curious like what's that increase that tied to the increase in your share value?

[David Hegarty:]

It’s a little bit of both. So, we -- as you know our business management fees are based on the lower historical cost or market cap. And as a result, we actually paid a lower fee based on market cap from the third quarter of 2015 through Q2 of 2016. So, year-to-date our -- through September 30th, our stock was up 53%. So, we've now switched back to paying fee based on historical cost, which has an increase in our G&A. Also because of our management structure, our share based comp is predominantly issued to non-employees because they are employees of RMR and as a result of issuing shares to non-employees, we actually recognize expense based on the vesting date fair value, not the grant date fair value like most companies would. So, as our stock price increased, so did our comp expense. So, I think it's on page 14 of our supplemental, you'll see a fairly sizable increase in our non-cash stock comp expense.

[Tayo Okusanya:]

Okay. That's helpful. And then again just back Five Star and some of the comments that were made earlier on. Again when you see the company generating $5 million of EBITDA a quarter, but yet they have a CapEx budget each year like $40 million, I'm just kind of curious again, they are trying to make all these efforts to improve fundamentals, but are they kind of forced to certainly differ CapEx which in my mind would put their assets at a competitive disadvantage in several markets where there's increasing supply. Like I'm just trying to wonder what you’re going to talk to them how are they trying to manage this dynamic to find a sense of cash but at the same time to trying to be offensive to be kind of stay off some of the increase competition?

[David Hegarty:]

They are spending a significant money capital and they are posting ahead I don’t think they are holding back on any capitals. So they have to do to obviously compete against the new product that is coming online. A good amount of it is capital that will be financing through us. So that is coming out of their pocket per se, but it's being financed at 8% rate and then, what’s also interesting is that lot of properties where these significant capital being spent on it. Then you can turn to your residents and demonstrate that you spent the money now we are going to raise your rates 5%, 6%, 7% and it goes down a lot easier and in fact, we often find that census increases during the major construction projects because people become involved in what’s going on in community and there are like seeing it and it actually benefits the community to see the construction going on.

[Tayo Okusanya:]

But you are not worried that it will continue to have a negative cash flow from operations and they are certain point why do you keep putting money into a company which keeps losing money?

[David Hegarty:]

Right now, I mean these major projects where they are -- we expect to bear fruit. I think as I said through a transition period right now and I think it will benefit them in the longer-term.

[Tayo Okusanya:]

All right. Thank you.

[Operator:]

[Operator Instructions] The next question is from Todd Stender with Wells Fargo. Please go ahead.

[Todd Stender:]

Hi, thanks. Good morning.

[David Hegarty:]

Good morning.

[Todd Stender:]

Just I guess my first, couple of questions are around MOB side, you experienced pretty favorable rental rate on renewals $37 any color there, any specific point you point to and there is mix of gross leases and triple net?

[David Hegarty:]

Yes. New leases I mean certainly, we have constant roll over at the Cedars-Sinai powers there and renewals today are in $76 million to $78 a foot and I think in general, we are experiencing very positive rent rollovers. What we do have that is also impacting our numbers is the fact that we do have a couple properties that still in a free rent period. That we would expect to burnout before year-end and that would help us beginning in 2017 in January. But I mean -- I think just the blended average is really push that rental rate up.

[Todd Stender:]

Thanks Dave and then any color on releasing spreads whether it's -- you want to highlight Cedars-Sinai or just the portfolio in general?

[David Hegarty:]

I'd say in general during this particular quarter, I think it's been flat. We have some good -- very progress out there all in one year and few other markets but I know I think we've experienced some issues in rolling over rents in upstate New York or Albuquerque, which offset that. That's why say in the aggregated unfortunately net. We'll see its 3% -- generally 3% to 5%.

[Todd Stender:]

Thanks and Rick you mentioned property tax increases on the MOBs in your billing you recovered some of that is there a general rule of thumb or how much do you actually recover may be on a percentage basis from tenant?

[Rick Siedel:]

I don't have in front of me. It’s a pretty high percentage if we were -- I think we're largely able to recover most of it from what we saw this quarter, but it’s a high percentage. And it does impact -- the structure of this does a little bit. We do occasionally have the rental base year resets or something like that. But I guess you can probably go 80 -- 80 plus percent on drop there a recovery.

[Todd Stender:]

Okay. And then I think you know there was a previous question and Dave you addressed it sort of I guess when it looks -- when you're looking at Vertex and I guess is a possible candidate to sell into a JV. Why is that on the table I guess I would consider one of your premier assets when I look across the portfolio particularly with Five Star exposure we could reduce their may be that would help with lowering concentration, help your valuation to ultimately test the equity market?

[David Hegarty:]

Well, I think with the Vertex property our intent is to diversify our risk. We've already encumbered it with the debt, so we should realize some of the value within that property. And it also at some degree hurt us in the sense that it is the rate there is flat for five years then has a significant bump about 10%. And so it definitely hurts our same-store growth story, but with regards to the senior housing side and frankly, we have seen very little interest on our side from JV potential partners. I'm pleased to see that some of peers have broken through that and paid some parties, so that might be in our future down the road. At this point, we have not found receptive parties to that side.

[Todd Stender:]

Okay. Thank you.

[David Hegarty:]

You're welcome.

[Operator:]

Ladies and gentlemen this concludes our question-and-answer session. I would like to turn the conference back over David Hegarty for any closing remarks.

[David Hegarty:]

Thank you all for participating in today's call and we hope to see many of you at the NAREIT Conference in a couple of weeks out in Phoenix. And then have a good weekend. Thank you.

[Operator:]

And thank you sir. And thank you everyone for attending today's presentation. You may now disconnect.