Q: On the next generation assets, your prospectus indicated that Medicare and private pay mix tend to be much higher than older assets. Does it not make sense that if the Medicare patient needs LT care and their resources are eventually depleted that they will effectively become Medicaid, i.e., I can see why a brand new building will attract a higher mix of Medicare and private pay, but over time as the newer assets ‘season’, we should see an increasing proportion of Medicaid, consistent with th
A: Our Next GenerationTM designs are founded on two different principles. One principle is what you reference, that a consumer will be more attracted to our new, better designs than the other product offerings in the market. Yes, these will eventually “season” and will have to adapt over time, especially if new entrants enter the market. However, this is offset by a number of factors. First, in the local markets, even in non-certificate of need states, there are still significant barriers to entry for new competitors. New properties can be expensive to build and a local market can only manage a certain number of active properties. As new entrants enter the market, it will be the older buildings (even more obsolete by that time) that will be forced to close. Second, our entire approach at this time is based on current market demand. Senior demographics continue to grow exponentially, creating even more demand into the future. We view this as upside and it is what will be serviced by any new entrants to the local markets. It will not be them stealing census from our buildings. Finally, our buildings, via private rooms and other design features, are able to flex over time to adapt to different uses. For instance, a property may start out as a mix of 70 skilled nursing rooms and 30 assisted living rooms, but may flex over time to more of a 50/50 model or even something entirely different. This adaptability has never before been seen in the senior care industry.
However, it is the second principle of our designs that is even a more compelling answer to your questions. This represents a programmatic shift in the facility’s operations, targeting short-term rehabilitation and therapy instead of long-term care. I cannot overstate how important this shift is to the long-range viability of our model. The old model of care was long-term, custodial care paid for by the state government’s welfare system (Medicaid). The new model is that of consumer-focused, short-term stays paid for by insurance programs (Medicare and private insurance). This means that our properties are not even competing with the current “legacy” properties in a market. Instead, they are filling a vastly underserved niche of patients coming directly out of a hospital stay. In fact, the majority of our properties have little to no active Medicaid certifications, meaning they cannot even admit a resident on a Medicaid stay. (If a resident were to run out of money, they would have to transition to another property.) As demand in the markets continues to grow, our properties will continue to hold a key position in servicing the rehabilitation and therapy needs of the local population.
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Q: Despite the reduction (from 5% to 3%) of management fees, I am quite leery of the external management of REITs, as fees are quite high and the reward is for volume/acquisitions rather than profits. Most REITs are moving to internal management fee structures, and management is more aligned with shareholders than is the case here. Can you explain to me why you have an external management fee structure, why 5% is allowed for development of properties, and why fees are based upon volume of ren
A: The 3% management fee currently equates to only approximately $630,000 per year. We believe this is very reasonable, especially when compared to the cost of having similar management functions performed internally. Under the agreement, management is required to be internalized once market capitalization reaches $500 million – at no additional cost to the REIT. The goal is to move to internal management once the REIT can absorb the overhead without influencing yield to investors. Remember, the manager is also a significant unitholder of the REIT, owning 2.4 million shares, or approximately 17% of shares outstanding. This, more than anything, drives alignment of interest.
The development fee is based on market terms and represents a fair compensation when compared to the actual cost to execute development projects.
The base management fee is based on revenue because it is straightforward and easy to understand. However, the prospectus does contemplate an incentive compensation plan that will likely be based on other measures such as profitability, growth, etc. This is what will ultimately be implemented to further align management and unitholder interest.
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Q: Please give me information as to your existing payout ratio as well as the payout ratio you expect for 2013.
A: Our payout ratio for Q3 2012 was 102%. Our target is 93%. The ratio was higher in Q3 due to the over-allotment that was exercised by the underwriters not being fully deployed.
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Q: Could you please advise if HealthLease Properties Real Estate Investment Trust (the "REIT") (TSX: HLP.UN) is a mutual fund?
A: HealthLease is an “open-ended” real estate investment trust.
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Q: I have a U.S. client who owns shares of HREIU. Do they receive the same monthly distribution as people who own HLP.UN?
A: HREIU is the ticker symbol for HealthLease Properties REIT on the United States OTC market. The ticker symbol is assigned by the OTC. However, to answer your question, the unitholders of HREIU receive the same benefits as the unitholders of HLP.UN.
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Q: Can you please confirm how distributions are categorized for income purposes?
A: The distributions are estimated to be approximately:
U.S. source interest – 11%
Canadian property income – 25%
Return of capital – 64%
These amounts will be “trued-up” at year-end.
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Q: Are the Development Lease properties still expected to be completed within the forecasted timeline and budget?
A: The Development Lease properties are still materially on time and on budget.
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Q: How is the acquisition pipeline progressing? Do you still expect to deploy the proceeds of the over-allotment option by the end of the year?
A: We are seeing robust demand for our products, both in developments and acquisitions. We previously announced via press release several developments that are coming online next year. We also believe we will have ample third-party acquisition opportunities.
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Q: What was the portfolio EBITDAR / Rent Coverage? Are there any facilities in particular that are operating above or below expectations?
A: We do not disclose individual property performance. However, our portfolio EBITDAR to rent coverage is currently 2.11 to 1.00. To be clear, we have varying reporting periods among our operators, so this number reflects a snapshot of all of our operators but may contain annualized calculations of different time periods.
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Q: How is the internal development pipeline shaping up? Are tenant operators expressing interest in developing new facilities?
A: We have already started putting a list together for potential internal developments. Based on market demand and industry fundamentals, management believes these opportunities will be significant in terms of volume going forward.
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Q: What are the impacts of the recent election on funding sources for skilled nursing facilities in the U.S.?
A: It is impossible to predict what future changes might be made to the funding sources. With that said, we do not see anything coming down the line that causes us to be concerned about our business or its future growth potential.
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Q: Can you elaborate on the roof repair at the AgeCare asset? Is there any recourse against Northern Property REIT for the repair?
A: The REIT is currently investigating all of its options.
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