HealthLease Properties Real Estate Investment Trust Provides Q&A Update for December 2012

TORONTO, Dec. 28, 2012 /CNW/ - HealthLease Properties Real Estate Investment Trust (TSX: HLP.UN) ("HealthLease" or "the REIT") provides below answers to questions received since our last Q&A Update published on November 9, 2012.

Question: What portion of Zeke Turner's personal wealth is tied up in HLP.UN?

Answer: While we do not publicly disclose our principals' financials, we can tell you the majority of Zeke Turner's personal wealth is related to his ownership of HLP.UN.

Question: What is your correct NOI - before or after management fees?

Answer: NOI is after management fees.

Question: Why do you divide corporate expenses into management fees and trust expenses?

Answer: Management fees are the fees paid to Mainstreet for overseeing the properties.  We deem this an operating expense.

Question: How is your U.S. debt held? According to your IPO prospectus, you had $51 million of US$ mortgages. I am trying to understand how the two notes (US$12 million and US14.5 million) are placed.

Answer: We have the following debt at the U.S. level:
Construction Loans for the Mishawaka, IN and Springfield, IL properties of $15.2 million (once fully drawn these two loans will total $20.8 million); MS Wabash and ML Marion- Bonds of $27.4 million.

Question: How does the REIT make sure that it does not run afoul of the thin capitalization rules?

Answer: We work with our attorneys (Goodmans) and tax professionals (KPMG) on a regular basis to ensure we are in compliance.

Question: Can you provide more color on development bonds?

Answer: Development bonds are debt that has the respective project city's credit backing it.  These bonds allow the REIT to achieve lower interest rates.  This debt is just like a mortgage on a property.

Question: The three properties under development are currently contributing $595K per quarter (not in revenue, but added directly to AFFO). In 2013, the contribution increases to $4 million, why? Will the $4 million amount be included in revenue?

Answer: The three properties will generate approximately $4 million in revenue.  The AFFO on these three properties should be materially close to what they are achieving now via the development lease.

Question: What are the management fees related to the acquisition?

Answer: For the third quarter, management fees related to the Western Canadian Properties were $93,870 (3% of cash rent for the quarter).  Management fees are always 3% of revenues.

Question: How are the operating margins of the 52-bed facility in the U.S. different than the 200-bed facility? Also, what are the monthly revenue per bed and breakeven occupancy? Please talk about U.S. and Canadian properties in terms of occupancy rates, monthly revenue per suite, operating margins and staff per patient.

Answer: First, the REIT's operating margins do not materially change based on property size.  The REITs margins are based on the spread between the rent collected and the total weighted average cost of capital for that particular property or the REIT overall.  This being said, smaller properties operationally do not have the same operating efficiencies experienced in larger properties, but the law of diminishing returns also applies.  Management believes the ideal size of a new development property is approximately 100 to 200 units, depending on local market demand.  We do not disclose individual property information at this time.

Question: What are some main differences between the support provided by the Canadian and U.S. government to LTC/SNF facilities?

Answer: Generally, the U.S. properties tend to run higher operating margins, whereas the Canadian properties tend to be more stable and exhibit higher overall occupancy rates.  The U.S. properties are also able to provide a significant amount of short-term rehabilitation and therapy services, which is a high-margin business for operators.  This service is not common in the Canadian marketplace, at least not in the sub-acute market.  Both markets face supply constraints and stagnant reimbursement environments.  This is offset by exponentially increasing demand drivers and the emergence of new, efficient niche services, such as rehab and therapy, memory care, etc.

Question: Highland Manor lease - the REIT is looking for a new operator to replace Mainstreet Senior I - what is the progress on that front?

Answer: We are still in discussions with several operators.

Question: Are the U.S. leases materially different than the Canadian leases?

Answer: No.

Question: Can you send us an example of a typical lease between a Seniors Living operator and a landlord?

Answer: Our typical leases are 9-10% of cost and will be for an initial term of 10 or 15 years.  The tenant will then have a couple five-year extensions.  The typical lease will include 2-3% annual escalators.  In addition, the tenant will have a mandatory capital expenditure per bed and financial reporting requirements.

Question: Avalon Springs - I am not clear on the rent escalators of this lease. - "3 times CPI Increase, annually on May 1."

Answer: If CPI is .9%, then the annual increase would be 3 x .9%, or 2.7%.  The increase cannot exceed 3%, so if the CPI was 1.2% then it would cap out at 3%.

Question: What was the cap rate on their IPO appraisals?

Answer: The implied cap rate on the portfolio was 8.5%.  The blended appraisal cap rate on all of the assets was approximately 8%.

Question: Note 9 to financial statements - Future minimum rentals - are those rents including straight line rents? Also are there tax recovery amounts in those figures?

Answer: These do not include straight line rent amounts.  This note includes only future cash rent amounts.

Question:  Fin P26 - Rental revenue forecast for Q4/12 - Why is the revenue number going down to $4.2 million in Q4/12, even though you had revenues of $4.5 million (i.e., tax recoveries) in Q3/12?

Answer: This financial statement note is only the future cash rent payments (i.e., does not include straight line amounts).  In addition, it does not include the property tax recovery that we book each quarter.

Question: Will there be any seasonality in your revenues? I know that there should not be any but want to make sure.

Answer: All rents are contractual and do not fluctuate.

Question: Interest expenses were $1.38 million in Q3. Was there anything one-time in that figure? The number seems a bit low. If I assume that your average debt outstanding during the quarter was $130 million and apply your weighted average interest rate of 5.1%, I get $1.66 million.

Answer: The interest expense associated with the assets under construction is capitalized into the asset and not expensed.  Interest is expensed once a facility is up and operational.  When we capitalize a new project we include an interest reserve fund that pays the interest during construction.

Question: Q3/12 average revenue per bed for Canada - I tried to calculate this number using $3404K of revenue (provided in segmented operations). I got $1133/month, which is much higher than the average of $1012 I got from the forecast revenue for 2013. What am I missing? Tax recoveries?

Answer: Tax recoveries are included in this number.

Question: Q3/12 management fees are not equal to 3% of gross revenue. Why? Also does gross revenue include tax recoveries?

Answer: The fee is 3% of cash rent.  The gross revenue does include tax recoveries.  The total annual tax recoveries are approximately $360,000.

Question: Construction payables on the balance sheet - how is this figure calculated?

Answer: These represent amounts owed to general contractors for the construction of the Wabash, Mishawaka and Springfield properties that are currently under construction.

Question: Tax recoveries - are these accounting entries or actual cash flows? I think they are actual cash flows but just want to confirm.

Answer: No these are not actual cash flows.  It is a journal entry that grosses up revenue and operating expenses.

Question: How should we forecast recovered realty taxes? Are they included in both revenues and operating costs?

Answer: Yes.

Question: What is the average rent per suite of your portfolio?

Answer: We do not view our business in this manner.  With that said, we have 1,931 beds in our current portfolio.

Question: What is a good run rate for G&A expenses?

Answer: Based on our forecast, a 4-5% run rate would be reasonable at this time.

Question: For 2013, how should we model Rent from development projects shown in AFFO calc?

Answer: The development lease was done only for the purpose of the three initial projects under construction.  In 2013, there should not be any development lease payments.  The assets that are currently under construction will be complete and will begin generating rent income and interest expense.

Question: For straight line expenses, is $277K a good run rate?

Answer: After the three assets currently under development are live, the run rate for straight line rent will be approximately $439,000 per quarter.

Question: How much do you spend in maintenance Capex on a per suite basis? For example, Chartwell spends about $700 per suite per year.

Answer: We believe that this is the major difference between our business model and that of an operator, such as the company you mentioned.  The triple net lease structure places all responsibility for capital expenditures on the tenant.  We require reporting of these expenditures and monitor such accordingly.  In addition, our portfolio is very young compared to the market.  As such, even for our tenant operators, the capital expenditures required to maintain the properties are lower than older portfolios.  Our tenants are required to cover all capital expenditures except for the roofs on the Canadian properties.  As a result, we are not required to spend any capital expenditures per suite.  We further mandate under our leases that our tenants spend a certain minimum amount in capital expenditures.

Question: In the attached Excel file I have highlighted some cells in yellow. I couldn't find this info in your prospectus or financial statements. Can you please fill up the empty cells?

Answer: The purchase price of the U.S. assets was based on the final pricing (8.5% cap rate/yield).  You should be able to derive the purchase price by taking the annual rent at IPO and dividing by the IPO yield.
The U.S. assets without occupancy numbers were left blank due to the properties being under construction or just recently opened.  The Valparaiso and Marion properties' lease have commenced and are now open and working toward stabilization.  Both are making great progress in occupancy and are on schedule for stabilization.  Remember, that for the REIT, stabilization occurs at lease commencement and we begin collecting 100% of rent.  The operator assumes the operational risk of stabilization.

We assumed existing leases on the Western Canada Properties.  These leases do not allow us to disclose property performance and occupancy.  With that said, we feel very comfortable with the performance of the properties.

Supplemental Financial Information

This news release is not in any way a substitute for reading HealthLease's financial statements, including notes to the financial statements, and Management's Discussion and Analysis.  The REIT's Fiscal Third Quarter Interim Financial Statements are available on SEDAR and can also be viewed in the Investor Information section of the HealthLease's website at www.hlpreit.com.

About HealthLease Properties Real Estate Investment Trust

HealthLease Properties Real Estate Investment Trust (TSX: HLP.UN) owns a portfolio of seniors housing and care facilities located in the United States and Canada.  The facilities are leased to experienced tenant operators who have significant operational experience in the U.S. and Canada. The leases are structured as long-term and triple-net, features that provide stability and dependability to the REIT's cash flow and distributions.  The REIT's best-in-class portfolio of properties meets the needs of modern seniors by emphasizing features such as hotel-like design, private rooms and baths, and hospitality-inspired amenities.  For more information, visit www.hlpreit.com.

Forward-Looking Information

This news release contains forward-looking statements which reflect the REIT's current expectations regarding future events. The forward-looking statements involve risks and uncertainties, including those set forth in the REIT's final prospectus dated June 8, 2012 under the section "Risk Factors", a copy of which can be obtained at www.sedar.com. Actual results could differ materially from those projected herein. The REIT disclaims any obligation to update these forward-looking statements.

SOURCE: HealthLease Properties Real Estate Investment Trust

For further information:

Adlai Chester
Chief Financial Officer
HealthLease Properties REIT
(317) 420-0205 ext. 106

Salvador Diaz
Investor Relations
TMX Equicom
(416) 815-0700 ext. 242