Diversified Healthcare Trust
Q4 2013 Earnings Call Transcript

Published: 26 Feb 2014

[Operator:]

Good day. And welcome to the Senior Housing Properties Trust Fourth Quarter 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, Ms. Kim Brown. Please go ahead.

[Kim Brown:]

Thank you, and good afternoon, everyone. Joining me on today’s call are David Hegarty, President and Chief Operating Officer; 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 transcription, recording and retransmission of today’s conference call are strictly prohibited without the prior written consent of Senior Housing. Before we begin, I would like to state that today’s conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based upon Senior Housing’s present beliefs and expectations as of today, February 26, 2014. The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today’s conference call other than through filings with the Securities and Exchange Commission or SEC. In addition, this call may contain non-GAAP numbers including normalized funds from operations or normalized FFO. A reconciliation of normalized FFO to net income and the components to calculate AFFO, CAD or FAD are available in our supplemental operating and financial data package found on our website at www.snhreit.com. Actual results may differ materially from those projected in these 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. Our fourth quarter supplemental includes a couple of additional enhancements compared with our prior reports. First, we reclassified what we report as medical office buildings, or MOBs. Previously, our property count reflected the number of individual MOB’s in SNH’s portfolio. While we continue to disclose our total number of MOB buildings in the supplemental, we are now consolidating those buildings that are in the same proximity and will be counted as a single property. In addition, we are including cash net operating income or cash NOI in our financial table. Now, I would like to turn the call over to Dave.

[David Hegarty:]

Thank you, Kim, and good afternoon, everyone. And thank you for joining us on today’s earnings call. Before we begin, I would like to introduce Kim Brown who recently joined Senior Housing as Director of Investor Relations. Kim brings nearly 15 years of direct Investor Relations experience to our organization and will be a great resource for all of you. Early this morning, we were pleased to report normalized funds from operations or normalized FFO of $0.43 per share for the fourth quarter and a $1.69 per share for the full year. Rick will discuss these results in further detail in a few minutes. As discussed in our prior earnings calls, we view 2013 as a transformative year. During the past year, we’ve made significant progress on our previously stated strategy of owning and acquiring private pay assets and minimizing our exposure to government-funded programs such as Medicare and Medicaid. Throughout the year, we completed approximately $203 million of private pay acquisitions, with the weighted average cap rate of 8.2%. The acquisitions included 16 living communities, as well as seven medical office buildings. We were also successful on the disposition front. On December 31st, we closed the sale of our two Greater Boston inpatient rehabilitation hospitals ahead of schedule to a third-party joint venture for $90 million. Additionally, we sold one skilled nursing facility during 2013 and one assisted living community in January of 2014. We have nine senior living communities and seven medical office buildings currently held for sale, which we expect to sell by mid 2014. In addition, we invested heavily in the redevelopment of our RIDEA assets, so that we could reap the benefits in future periods. As noted in the supplemental, our outstanding same-store TRS NOI growth of nearly 11%, which includes the majority of the transition Sunrise properties, provide proof that we’ve already begun to reach the benefits of our investments. As a result of these actions and accomplishments, we are well-positioned to continue to strengthen and diversify our portfolio. To that end, I’d like to take a minute to talk about our recent acquisition announcement. As most of you are aware by now, SNH has agreed to acquire two Class A biotech medical office buildings that are located in Boston’s Seaport District, currently one of the hottest sub-markets and investment opportunities in the country. This property is state-of-the-art in every way, its LEED gold construction in a premier location with a marquee tenant Vertex Pharmaceuticals. The yield to SNH is expected to exceed 7% per annum, which is impressive for this irreplaceable asset. Ultimately the strength of our balance sheet and sufficient liquidity are enabling this Class A transaction to be immediately accretive to SNH shareholders on a normalized FFO per share basis by approximately $0.06 to $0.08 per year. We expect this acquisition to also be initially accretive by $0.05 to $0.07 on an AFFO or CAD basis per share, after leveling the effects of straight line rent. Now, there seems to be some confusion in the market, so it’s critical to understand that this is a managed net investment and not triple net in a traditional sense. SNH will pay certain expenses and will be subsequently reimbursed by the tenants. SNH is responsible for the management of the common areas and retail space, as well as working with the municipal authorities to further comply with ongoing stringent zoning requirements in this high profile actively developing area of Boston. We are also responsible for expense proration, the annual true-up budgets and asset management of the investments. Our CapEx requirements, including funding future capital for the roof, structure and certain other along with assets, a portion of the property management fee is also reimbursed to SNH by the tenants and the normalized FFO and CAD accretion is after all fees are paid to our manager. To summarize the benefits of this transaction, the yield is expected to exceed 7% and initial cash yield is expected to be in the low to mid 6s. The use of low cost long-term debt financing for the majority of the purchase price, allows us to achieve 4% accretion, while maintaining a strong conservative balance sheet and leverage ratios well in line with our industry peers. We expect this transaction to close in the next few months. Our medical office building exposure on an NOI basis, following the Vertex acquisition, we’ll increase to 41%, and our largest tenant, Five Star Quality Care will decrease to 37%. Finally, an impressive 97% of our NOI and 98% of our revenues will be private pay based, which we believe is the highest amongst our peers. The acquisition of this trophy property fits squarely in our previously stated strategy to increase our concentration of MOBs and private pay properties and helps us achieve a more desirable portfolio mix. SNH is well-positioned to benefit from improving demographic trends with its diverse mix of best-in-class private pay senior living communities and MOBs. Not only was 2013 a transformative year for SNH’s portfolio, but also as it relates to the changes our board of trustees made to further align the financial interest of our manager, REIT Management and Research or RMR with those of our shareholders. Although SNH’s G&A costs as a percentage of revenue are amongst the lowest of our peers at 4.3% of revenues for 2013, our business management agreement with RMR was renegotiated in December and it became effective on January 1st of this year. The changes include, first, now -- we are now paying the base management fee on the lower of our historical property costs or SNH’s total market capitalization, previously, the base management fee was tied only to historical property costs. Second, we are now paying 10% of the base management fee to RMR and SNH’s common shares instead of cash. And third, RMR’s incentive management fee is now based upon the relatively outperformance of SNH’s total return as compared to the total return of the SNL REIT Healthcare Index rather than on growth of SNH’s FFO per share. The incentive management fee will be measured on a rolling three-year period and no fee will be paid if SNH’s total return per share is negative. If earned, the incentive fee will be paid entirely in common shares that vest overtime. Finally, our independent board of trustees also eliminated SNH’s historical right of first offer for property dispositions among the RMR managed REITs. Again, the purpose of these many changes is to further align RMR’s interests with SNH’s shareholders. Using the Vertex acquisition as an example, the increase in G&A is unknown at this time and it is dependent on SNH’s future stock price and RMR’s fees will be paid based on the lower historical property costs or our market capitalization. Based on the current share price, the fees will be calculated in using historical property costs because our historical property cost is lower than our total market capitalization. I’ll now spend some time discussing the trends we’re seeing in our portfolio. Our triple net leasing and living properties, whose results reported on a rolling 12-month basis as of September 30, 2013 continued to perform well. Overall occupancies were approximately 85% and coverage ratios remained strong at 1.4x. In aggregate, our rental income decreased. However, this was due to the transition of the former leased Sunrise Communities to our TRS and the sale of one skilled nursing facility in August of 2013. On a same-store basis, the rental income increased 1.8% quarter-over-quarter and 1.3% year-over-year. For SNH, cash NOI and accrual NOI are essentially the same as we generally do not have fixed bumps in our triple-net leased senior living portfolio. Occupancy for the trailing five quarters ended September 30, 2013, was consistent for our independent living assets and modestly lower for assisted living communities while skilled nursing continued to decline. The independent living assets decrease 10 basis points to 87.5%, while assisted living declined slightly to 86.4%. As expected, skilled nursing declined from 80.7% to 78.7% year-over-year. As a reminder, these statistics lag by a quarter and occupancies have modestly improved since then. The skilled nursing portfolio continues to be affected by the weak operating environment. The decline in skilled nursing census is due to lower hospital discharges and changes affecting Medicare coverage of skilled services. This decline along with the Medicare sequestration has put some pressure on coverage ratios. And this is precisely why we continue to recycle these properties into private pay alternatives. Looking at the performance of our individual operators, Five Star’s 187 leased communities had combined occupancy of 84.3%. If you exclude the nine senior living communities held for sale, Five Star’s aggregate occupancy would have increased to 50 basis points to 84.8%, and rental coverage would have increased modestly to 1.3x, and in line with historical coverage ratios. The four properties we leased to Sunrise Senior Living had occupancy of 92.7%, and rental coverage of 1.9x. The 18 properties we leased to Brookdale Senior Living had occupancy of 95.3%, and rental coverage of 2.5x. As reminder, Brookdale does not have any purchase options on this lease. Our other triple net leased senior living properties leased to private regional operator, had occupancy of 84.8% and strong rental coverage of 2x. Moving on to our managed senior living portfolio, about two thirds of our managed senior living portfolio, based on investment value and NOI, is located in the top 31 metro markets and approximately 80% is located within the top 100 metro markets. Today, we have 44 very high quality communities with over 7,000 units. During the quarter, the portfolio generated $17.6 million of NOI, which represents 15% of the total company’s NOI. Occupancy at the 35 same-store communities which now includes eight of the 10 from the Sunrise properties, was 87.8%. These communities contain a certain portion of Medicare beds that were subject to the sequestration, and impacted the average monthly rates in the fourth quarter. The improvement in expense controls resulted in an industry leading increase in same-store NOI, 10.8%, quarter-over-quarter and same-store margins increased 240 basis points to 22.9%. For the 22 properties that are in the same-store comparison year-over-year, NOI growth was 10.2% and margins increased 170 basis points to 28.6%, due primarily to the increase in occupancy of 330 basis points and a slight increase in rates. We believe that there is still significant room to continue to grow occupancy and push rates and margins at these properties. Moving on to the medical office building component of our portfolio, I would like to highlight that we classified our property count during the quarter in an attempt to make it easier for analysts and investors to follow. As Kim mentioned in the beginning, we have combined multiple individual buildings located adjacent to, or near each other, into one property location. As you will see in the supplemental, we have 96 MOB properties, which comprise of 119 buildings. However throughout the presentation, we are referring to buildings. Excluding the seven MOB buildings we’re marketing for sale, we have over 7.8 million square feet generating NOI of approximately $35 million. Fourth quarter NOI increased nearly 8% and occupancy was up 220 basis points to 94.9%, compared to the same period last year. And cash NOI growth was 9.7%. Now looking at the 106 same-store medical office building, occupancy was 94.8%, up 70 basis points from last year and NOI was $31.7 million, down 2% from last year. Cash basis NOI was down 10 basis points, or only $24,000, essentially flat. During the quarter, we renewed 110,000 square feet of leases and signed 39,000 square feet of new leases for a weighted average roll-down in rent of 9.7% on a cash basis, and a weighted average lease term of 4.5 years. The volume is not significant and we do not believe the roll-down are representative of our portfolio. To summarize, we’re very pleased with our many accomplishments in 2013. We invested in our RIDEA assets and beginning to reap the benefits, strengthened our portfolio and increased our private pay percentage to an industry leading 98% of revenues. With that, I will turn it over to Rick to provide more detailed discussion of our financial results.

[Rick Doyle:]

Thank you, Dave and good afternoon, everyone. I will now review our fourth quarter and year end financial results. For the fourth quarter of 2013, we generated normalized FFO of $80.5 million, up 6.6%, from the fourth quarter of last year. On a per share basis, normalized FFO for the quarter was $0.43 per share, compared to $0.43 per share for the same period last year, and in line with consensus. For the year ended December 31, 2013, we generated normalized FFO of $317.4 million, an increase of 7.3% over 2012. Normalized FFO was $1.69 per share in 2013, compared to $1.75 per share in 2012. As Dave mentioned, normalized FFO per share was primarily impacted by the significant re-development investments we made in the 10 former Sunrise leased properties and the transition of these properties to our triple net lease portfolio to our TRS. In addition, normalized FFO was impacted by the timing difference between when we raised equity back in January, to when we were able to fully invest the proceeds in August. Rental income for the quarter increased by 1.1%, to $123 million, mainly due to our external growth from investments in one senior living lease community and seven medical office buildings. $66 million of rental income was derived from our senior living lease communities while $52 million was derived from our medical office buildings. The increase we reported in rental income from new investments was offset by the reduction of $3.2 million due to the transition of two communities formally leased to Sunrise into our TRS on November 1, 2012 and the sale of one senior living lease community in 2013. Percentage rent from our senior living operators was $9.2 million, down from $10.5 million last year, again primarily due to the transition of the 10 former Sunrise communities from our triple net lease portfolio to our TRS and the sale of one senior living lease community. Resident fees and services from our 44 managed senior living communities grew to $77 million during the fourth quarter, a strong increase of 10.8%. NOI for the fourth quarter was $18 million and the NOI margins were 23%. For the 22 communities that are in the same store comparison, year-over-year NOI growth was 10.2%. And margins increased 170 basis points to 28.6%. Property operating expenses for the quarter increased to $77 million due to external growth from acquisitions. Approximately $17 million of property operating expenses were derived from our medical office building and in line with our expectations and approximately $60 million was derived from our managed senior living communities. We added five managed senior living communities and 7 MOB’s to our portfolio during the year. General and administrative expenses for the quarter were $8 million, compared with $7.4 million for the same period last year. For the full year, G&A was approximately $32.7 million, compared to $31.5 million in 2012. Although we acquired approximately $203 million of properties from the full year 2013, G&A declined 70 basis points to 4.3% as a percent of revenues compared to 5% last year. SNH continues to maintain a G&A expense below the average of its healthcare peers. Interest expense declined to 1.8% to $29.3 million this quarter compared to fourth quarter of last year. For the full year 2013, interest expense increased $600,000 to $117.8 million. Interest expense increased due to the issuance of $350 million of unsecured senior notes issued in July of 2012. This was partially offset by lower amounts outstanding under our revolving credit facility. On December 31, 2013, we sold two rehabilitation hospitals for $90 million and recognized a gain of one sale of $36.3 million. This transaction reduces Five Star’s rental payments by $9.5 million, or approximately a 10.5% cap rate on the sale. These assets were our only inpatient rehabilitation hospitals that we no longer have exposure to government reimbursements for these types of assets. As a reminder, during the fourth quarter, we recorded an impairment of asset charge of $2.3 million related to our skilled nursing facilities held for sale. Income from discontinued operations was $1.3 million for the quarter, which included operating results of the seven medical office buildings for sale. We also recorded impairment charge of $9.7 million during the fourth quarter related to two of these MOBs held for sale. In January 2014, we sold one assisted living community located in Texas for $2.4 million. Currently, we have nine senior living communities, principally skilled nursing facilities, and seven medical office buildings classified as held for sales, which we expect to sell by mid 2014. Moving to the balance sheet, since October 1 we closed up $56 million of acquisitions. We also invested $4.7 million into revenue producing capital improvements at our leased senior living communities. For the full year, we acquired $203 million of assets with the weighted average cap rate of 8.2%, invested $27 million into revenue producing improvements at our triple net leased senior living communities for an initial return of 8%. During the quarter, we spent $1.8 million on tenant improvements and leasing costs. Our recurring capital expenditures included $1.8 million at our medical office buildings and $2.5 million at our managed senior living communities. We also incurred approximately $3.7 million of development and redevelopment capital expenditures, primarily at managed senior living communities, which is consistent with our previously stated expectations. At December 31, we had $39 million of cash on hand, $1.1billion of unsecured senior notes, $699 million of secured debt and capital leases, and $100 million outstanding on our line of credit. At quarter end, our debt to market capitalization ratio was a conservative 31% and our debt to capitalization ratio was 41%. Today, we have $170 million outstanding on our line of credit. Our credit statistics remain among the strongest of all healthcare REITs, with adjusted EBITDA over interest expense of 3.8 times and debt over annualized adjusted EBITDA of 4.3 times. In 2014, we will continue to look for opportunities that strengthen our portfolio mix, increase FFO, and build shareholder value. With that, Dave and I are happy to take your questions.

[Operator:]

(Operator Instructions) And we will begin with the line of Michael Carroll with RBC Capital Markets. Please go ahead.

[Michael Carroll:]

Yeah, thanks. Rick, can you give us your new leverage targets since you’re planning on financing the Boston acquisition with, what, 75% debt?

[Rick Doyle:]

Yes. As we previously stated, we would -- our plan is to fund that acquisition with 75%, 25% equity. As I stated, we do have a very conservative balance sheet today, and that gives us that advantage right there to use. So our leverage, we are comfortable as we roll over $5 billion and $6 billion on total assets to be up in the mid 45%. And in fact, that’s exactly where our peers are, so we’ll be in line where our peers are, if not better. So that’s our comfortable leverage.

[Michael Carroll:]

Okay. Is that based on book?

[Rick Doyle:]

Yes.

[Michael Carroll:]

And then how should we think about how you’re going to finance that with permanent debt, with the term loan that you have commitments for? Are you going to use the term loan or are you going to try to use permanent debt? Obviously, if you use a term loan, it is going to be much more accretive than what you’ve indicated.

[Rick Doyle:]

Yeah, we do have that commitment of $800 million of the term loan, but we’re also looking at longer-term permanent debt and are looking at mortgages, putting a mortgage on there for about half of the 75%.

[Michael Carroll:]

And what rate would that be at?

[Rick Doyle:]

We figure that the all-in cost rate for all of the funding will be less than 5%.

[Michael Carroll:]

Okay, great. And then, can you talk a little bit about the TRS performance? I mean, it was a solid performance on an NOI basis, but it looks like a lot of that was driven by expense savings. Was there something in those numbers that were non-recurring and should we expect better topline growth going into 2014?

[Rick Doyle:]

Yes, I mean, we had great results on the expense side. There was a lot of control. We expect that to continue. And remember that 8 of the 10 Sunrise communities in the fourth quarter were included in the fourth quarter too. And some of those -- those facilities have the skilled nursing beds in them, which -- and we’re doing a capital expenditures on those buildings, too. So we feel that although the expense controls are there, but we have opportunities to grow rates and occupancies in all those same store results.

[Michael Carroll:]

So the expense savings is entirely driven by just better controls at those properties?

[Rick Doyle:]

Better controls.

[Michael Carroll:]

Go ahead, David.

[David Hegarty:]

You have to recall too that a lot of these properties went through a transition period from the prior management company to Five Star. So now, as they’ve been put into Five Star’s systems and get the benefit of scale with the Five Star company, they’re able to achieve better pricing and drive down the cost to get better economics there.

[Michael Carroll:]

You said you expect those savings to continue as in they are going to stay there or are you are going to get more?

[David Hegarty:]

I would expect they will at least stay there and continue to look for opportunities to further push them down.

[Michael Carroll:]

Great. Thank you.

[David Hegarty:]

You’re welcome.

[Operator:]

(Operator instructions) Our next question comes from the line of Daniel Bernstein with Stifel. Please go ahead with your question.

[Daniel Bernstein:]

Good afternoon.

[David Hegarty:]

Hi, Dan.

[Daniel Bernstein:]

I just missed, can you go back over the -- how the management fees are working on the Vertex property purchase?

[David Hegarty:]

Right. As we mentioned, the Vertex situation, its base management fee, which is capped at 50 basis points on the historical cost of the investment, but it could be lower if the total market capitalization is lower on SNH. And again, 10% of that fee is paid in the form of common shares that are restricted. But then the management fee for property management, this building, although many of the costs are passed back to Vertex and get reimbursed from Vertex, it’s still actively managed to do that. So if we get a snowstorm, it’s up to us to get the landscaping crew in there to clear out the premises and so on. And real estate taxes and insurance and many things like that, we’re still responsible for paying and then getting reimbursed from the various tenants and doing the allocations. So that is percentage of revenues, [3%] of revenues and it’s partially reimbursed by all the tenants, including Vertex.

[Daniel Bernstein:]

I also want to ask about the acquisitions you did, both the assisted living and the other small medical office buildings that you did in Florida. Just want to understand for the AL side, if you could talk a little bit more about the age of the property, the occupancy there, the need for CapEx. I’m just trying to understand, since you put that in the TRS, what are those properties? Are they where you want them to be, and do you have to put some money into them as well?

[David Hegarty:]

Sure. Many of the properties, like each particular store is a bit different, but like coming to Georgia, it’s a very affluent suburb north of Atlanta, and it was built in the last two or three years. At the time we bought it, one of only five facilities in the State of Georgia that complied with the newest assisted-living regulations. So it’s definitely a state-of-the-art property. And we’re even looking to do an expansion on the property. That requires virtually no capital upfront. Some of the other properties that are also in similar counties in Georgia, ones in Tennessee and Wisconsin, again they are pretty much in the high 80 to low 90% occupancies. Some very basic capital improvements. They’re probably within 10-years old, and so it’s going into still minor cosmetic improvements to corridors and common areas and so on. So that’s the -- knowing that, we’re getting a higher cap rate going into it, which we will put in some capital. But again, they are predominantly mom and pop operators. And so I think that’s on the senior living side and just the MOB side. Bethel, Washington was built in last five years, and a tremendous amount of capital was put in by the tenant for new research labs. Hattiesburg, Pennsylvania-- Hattiesburg, Mississippi is also an affiliated MOB with the healthcare system there and it’s about 15 years old. Boston and Orlando, that’s all -- I’d say, in the 10 to 15-year range. Boston had major lab space built out. It’s actually a nuclear medicine being performed there. So, each property has its own intrinsic value to us.

[Daniel Bernstein:]

In terms of the Senior Housing, it looks like you’re doing almost all TRS. Are you seeing any triple net opportunities, or is that by design? You don’t want to do triple net. You want to build the TRS portfolio. So just trying to understand maybe where the opportunities are coming from, from just from the mom and pops, and if it’s really just again by design, TRS, versus triple net?

[David Hegarty:]

Right. It is a pretty close call between a TRS and RIDEA, just because the pricing structure out there, there is still a good amount of capital chasing transaction. So we are doing some triple nets up in the northwest, at least for stellar senior living. Other properties, we’re doing TRS because of the pricing and also we believe that there’s a good amount of upside potential at those properties, that’s the main drivers. The sellers again are mom and pops regional operators, a few equity pioneers who are looking at exit investments that they got into three to five years ago, et cetera.

[Daniel Bernstein:]

And just one more quick question, on Brookdale, do they have extension options on those leases?

[David Hegarty:]

They do. And given the coverage and everything, we would expect they will extend.

[Daniel Bernstein:]

And is the rent reset to bring the coverage back down to the normal level? Those are pretty higher number.

[David Hegarty:]

Let’s see. I think it’s -- we might have one renewal at existing terms and the second one might be fair market value.

[Daniel Bernstein:]

Okay.

[David Hegarty:]

But I think they’re looking at doing a number of expansions at several of the properties given the occupancies and coverage.

[Daniel Bernstein:]

Okay. Sounds good to me. Thanks a lot.

[David Hegarty:]

You’re welcome.

[Operator:]

And the next question comes from the line of Tayo Okusanya with Jefferies. Please go ahead with your question.

[Tayo Okusanya:]

Hello, everyone.

[Rick Doyle:]

Hi, Tayo.

[David Hegarty:]

Hi, Tayo.

[Tayo Okusanya:]

One quick question is just on the Senior Housing operating platform. Again, in 4Q, you guy have 34 assets in same store. As you explained, a meaningful amount of them are the Sunrise assets that are in transition. What I am trying to understand, if I look out 12 months from now on just these 35 assets that have the upside from the Sunrise piece, what should I be expecting this portfolio to do, specifically the Sunrise names, what occupancy today where we trying to get to? Where do we think we can kind of raise rents to, to get a good sense of what same-store NOI growth could look like in 2014?

[David Hegarty:]

Sure. I think 2014 looks pretty good for being in the same ballpark of what we’re currently reporting, because we believe there is still a good amount of upside potential with these properties during this year. Obviously, double-digit returns is probably not as sustainable as it was long term. Hopefully, it will come down to a more average of probably about 5% growth. But if we were to look at say the year numbers, the 22 properties there and that’s mostly Vi and from Bell property, and those are continuing to improve occupancies and rates have only been modestly raised at this point. And the margins are, I think at 28%, 29%. So, if you are looking at 35, clearly what has come online are the Sunrise stuff, which is lower occupancies, lower margins. But have I think plenty of capability to improve significantly. So I mean, it’s very difficult to predict. Obviously, it will be a year from now. But I think we’re doing quite a bit of -- the Sunrise won’t achieve the same margins that the Vi or Bell ones will, just because of the presence of skilled nursing in those buildings. But I think they have quite a bit of room to go in occupancies.

[Tayo Okusanya:]

Yeah. The occupancy, it’s in the mid-80s right now, if I recall correctly?

[David Hegarty:]

For the all 35?

[Tayo Okusanya:]

No, for the Sunrise, that’s for the Sunrise stuff?

[Rick Doyle:]

Yes, that’s right. Its about the mid-80s.

[Tayo Okusanya:]

Okay. Okay. That’s helpful. And then I just wanted to clarify again, the comments about the Fan Pier transaction. Dave, I think you mentioned you expect the deal to be accretive to AFFO in the year after the management fee?

[David Hegarty:]

That is correct. Yes. The numbers we’ve all been stating has been post all fees.

[Tayo Okusanya:]

So post all fees. How come there is not a big difference? I mean, you are expecting about $0.06 to $0.08, I believe you said on the FFO. But yet, you expect about $0.05 on the AFFO, but you still have about $150 per square foot on TI.

[David Hegarty:]

Yeah. I mean, the big difference is the fixed increases in the lease, are relatively modest, but they are kicking near 6 and 11. But also, the GAAP return is just what is contractually there today. We believe that there will be other opportunities to enhance revenues through the parking lot system that’s there. And it’s going to be a number of high end restaurants on the first level and things like that, that there maybe -- we believe that there will be some further non-GAAPable income coming in.

[Tayo Okusanya:]

Okay. Okay. That’s helpful. And just one more before I get off. Just how are you thinking about the dividend going into 2014? You made $0.43 FFO this quarter. When I take out all of the AFFO-related charges you end up about $0.39 of AFFO and the dividend is about $0.39. How should we think about the build-up for 2014, and what could potentially happen with the dividend?

[David Hegarty:]

Well, again, I think we look at it each quarter, and I think we look for the opportunity to raise it. Certainly, one of the things that the Vertex transaction does for us is that, the amount of CapEx that is attributable to that property will be pretty minimal for the first several years of that ownership. So, that gives us a lot more breathing room for CAD purposes. And so I think each quarter we will look, based upon on how our numbers are looking for that quarter, whether or not that is sustainable and whether we can raise it. So, I think we will be looking to try to raise it at the earliest possible time in 2014.

[Tayo Okusanya:]

Sure. Thank you very much.

[David Hegarty:]

You’re welcome. Very good.

[Operator:]

There are no further questions. Please continue, Mr. Hegarty.

[David Hegarty:]

All right. Just thank you all for joining us today. And we will be heading right down now to the Wells Fargo Real Estate Securities Conference in New York for tomorrow. And we look forward to meeting many of you there. Thank you. Have a good day.