TORONTO, April 29, 2013 /CNW/ - HealthLease Properties Real Estate Investment Trust (HLP.UN) ("HealthLease" or "the REIT") provides below answers to questions received since our last Q&A Update on March 7, 2013.
Question 1: How does Mainstreet recover the incremental costs of the new strategic hires from the REIT?
Answer: Under the current management agreement, there is no scheduled recovery of incremental costs by management for additional hires. The management agreement, as drafted, did not contemplate the volume of acquisition activity seen thus far. As discussed in the prior Q&A, management has now reviewed more than $1 billion of potential acquisitions on behalf of HLP. Management is constrained from a human resource perspective to execute on the growth opportunities available to the REIT as there is no established mechanism to recover investments in additional resources, human or otherwise. However, on behalf of unitholders, management continues to utilize the resources it does have available to execute the growth strategy of the REIT.
Question 2: Would the cost of new hires change the REIT's G&A or any other items on its financial statement?
Answer: As seen in the answer to question #1, under the current management agreement, there is currently no scheduled effect of new hires on the REIT's G&A or other items on its financial statements.
Question 3: Which Canadian markets is the REIT targeting for growth - Ontario, Quebec, Alberta, B.C.?
Answer: With its triple-net leasing structure, HLP is able to execute on any good opportunities it sees across the U.S. and Canada. Management is looking at opportunities in all provinces, including some not mentioned in the question. With a focus on need-driven properties, opportunity is not driven by geographic location, but rather by local market demand and good operations. This is true for both development and acquisitions. Sometimes, the best senior housing and care opportunities are found in the secondary and tertiary markets.
Question 4: Can you provide any colour on your 2013 acquisition objectives (high level) for the U.S. and Canada?
Answer: As seen in the answer to question #1, management has already reviewed, or is reviewing, a tremendous volume of potential acquisitions. Just in the previously announced external developments, there is opportunity to acquire more than $100 million worth of "Class A" property in the near future (once complete). In addition, HLP has several hundred million more in its active acquisition pipeline. While there is no assurance that any of these opportunities will ultimately prove successful, management continues to diligently study and analyze acquisitions that could benefit unitholders.
Question 5: What is the cap rate for the SP Senior Care Portfolio?
Answer: Management will not generally reveal the capitalization rates for successful transactions on a go-forward basis. Those figures can typically be calculated by unitholders based on figures released in public filings. However, this being the first material acquisition, management will state that the estimated cap rate for the Smith/Packett (SP) acquisition was approximately 7.8%. (For reference, this rate is in line with the capitalization rates for the various properties acquired at the time of IPO.)
Question 6: How much liquidity does the REIT have after the acquisition of the SP Senior Care Portfolio?
Answer: Actual liquidity figures can typically be calculated by unitholders based on the public information made readily available on SEDAR. Between cash, operating lines and additional debt capacity, HLP does have ample room on its balance sheet for additional investment. However, management will not utilize this liquidity flippantly just to "do deals." Instead, management will continue to be diligent in its use of resources to acquire or develop properties that are beneficial to unitholders' long-term value. It can take a long time to recover from a bad transaction. Instead, management will be patient and will execute swiftly when the right opportunity presents itself.
Question 7: What were the acquisitions fees paid to Mainstreet related to? Will these costs be present in every acquisition? Does the asset management contract have any acquisition fee provisions?
Answer: As seen in the answer to question #1, the business model of the REIT has shifted since the IPO. It was believed that the business model would be more heavily weighted to new developments, wherein compensation was and still is accounted for in the development agreement. While development activity has been consistent with expectations as to volume and pace, acquisitions volume has been substantially higher than was originally envisioned. As such, management has on behalf of HLP expanded its HR resource in Canada and the U.S. in response to this shift in business strategy. For additional clarity, since the IPO, Mainstreet has hired three VPs of acquisitions - one in the U.S. and two in Canada -, a financial analyst, a real estate attorney, a paralegal, and additional accounting and administrative staff.
On the heels of a material acquisition that increased the REIT's asset base by more than 50%, the Board of Trustees decided to allow management to recoup some of these hiring costs by virtue of a one-time fee. Under section 8 of the Asset Management Agreement, "The Client [HLP] and the Asset Manager may from time to time agree in writing on additional services that are to be provided to the Client by the Asset Manager for which the Asset Manager shall be compensated on terms to be agreed upon between the Asset Manager and the Client prior to the provision of such services."
Neither the Board nor unitholders should desire to limit the opportunities for the REIT to grow through good acquisitions, and may decide at some point to review the Asset Management Agreement to address the disparity between the original agreement and the actual reality of the REIT's work volume.
In the meantime, management continues to be focused on bringing value to the REIT through new developments, acquisitions, or other means of growth and also performs its duties under the agreement to manage the REIT's day-to-day operations.
Question 8: I think one of the acquired facilities is licensed for both Medicare and Medicaid? Are the other facilities not?
Answer: All of the skilled nursing facilities (4 of the 13) are licensed for both Medicaid and Medicare. The assisted living facilities (ALF) do not receive reimbursements from Medicare; however, the state of North Carolina will reimburse ALF under the Medicaid program. Thus, they are licensed accordingly.
Question 9: As per the prospectus, the portfolio was appraised at US$139.8MM. The REIT is paying $141.7MM. Is the difference related to a portfolio premium?
Question 10: Agency financing - will this loan be placed under the Fannie Mae or Freddie Mac programs?
Answer: In line with the REIT's debt strategy, management looks to eventually place all debt into longer-term, fixed rate products like agency financing or other appropriate vehicles. How and when this is accomplished will be based on debt availability, suitability, market factors and overall needs at the REIT level. It can be expected that management will be actively reviewing opportunities to position properties to long-term financing such as CMHC, HUD, Fannie Mae, Freddie Mac, insurance products, etc.
Question 11: What accretion are you getting in terms of AFFO/unit from the acquisition?
Answer: Management is estimating accretion of approximately $0.11 per unit (13%).
Question 12: What is your current payout ratio?
Answer: HLP's ratios are discussed in depth in our quarterly and annual public filings on SEDAR. However, this recent transaction will have a positive effect on the REIT's payout ratio, decreasing it to well below 100%. This lower ratio creates flexibility to consider a number of initiatives, including building up additional liquidity and resources on the balance sheet, increasing unitholder distributions, etc.
Question 13: What is the planned use for the new funds being raised?
Answer: These funds, along with cash, were used in part to fund the recently announced acquisition of 13 assets in the US. The balance is being held on the balance sheet to fund future acquisitions or developments, as appropriate.
Question 14: Do any of your tenants have a master lease agreement with you?
Answer: Yes, HLP does in certain instances utilize master leases, as well as cross-defaults or other measures within its leases.
Questions 15: Does your new operating line have a demand option in favor of the lender?
Question 16: How much rent is the REIT getting from the vendor on these properties [the Smith/Packett acquisition]? In consideration of the $26.7MM vendor take-back and given that the REIT pays 7.0% interest on the loan.
Answer: The REIT will be receiving rent equal to 7.8% on the $26.7MM purchase price. To be clear, this is only the case until the properties are completed and full rent commences (estimated to be June 1, 2013).
Question 17: Why did you prefer short-term variable rate debt over fixed rate mortgages?
Answer: Management does not prefer short-term, variable-rate debt. The operating line is being utilized as acquisition financing and a portion of this line is swapped to fixed rate debt. As per the answer to question #10, management's desire is to focus on longer-term, fixed-rate debt as appropriate and available.
Question 18: What is the incremental G&A of $167K related to?
Answer: Tax and audit related to the new assets.
Question 19: Will there be any capitalized interest given by the vendors for the properties under development?
Answer: The vendors are responsible for completing the assets at their cost - HLP will not be capitalizing interest or booking interest cost.
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, Management's Discussion and Analysis (MD&A), and final short form prospectus dated April 4, 2013. The REIT's Fiscal Fourth Quarter and Year-end Financial Statements, MD&A, and final short form prospectus have been filed on SEDAR. The Year-end Financial Statements and MD&A 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 premier portfolio of seniors housing and care facilities located in the United States and Canada. The properties are leased to experienced tenant operators who have significant operational experience. 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.
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 Annual Information Form dated March 6, 2013 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:
Chief Financial Officer
HealthLease Properties REIT
(317) 420-0205 ext. 106
(416) 815-0700 ext. 242