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Executives

Tim Bonang - Director of IR

Adam Portnoy - Managing Trustee

John Popeo - CFO

Analysts

Philip Martin - Cantor Fitzgerald

John Guinee - Stifel Nicolaus

Marisha Clinton - Oppenheimer

Dave Rodgers - RBC Capital Markets

Jamie Feldman - UBS

HRPT Properties Trust (HRP) Q3 2008 Earnings Call November 5, 2008 10:00 AM ET

Operator

Good day, everyone, and welcome to the HRPT Properties Trust third quarter 2008 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, Mr. Tim Bonang. Please go ahead, sir.

Tim Bonang

Thank you, Cynthia. Joining me on today's call are Adam Portnoy, Managing Trustee and John Popeo, Chief Financial Officer.

The agenda for today's call includes a presentation by management, followed by a question-and-answer session. Before we begin today's call, I would like to read our Safe Harbor statement.

Today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Federal securities laws. These forward-looking statements are based on HRPT's present beliefs and expectations as of today, November 5, 2008. 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, regarding this reporting period.

In addition, this call may contain non-GAAP numbers, including funds from operations or FFO. A reconciliation of FFO to net income is available in our supplemental package found in the Investor Relations section of the company's website. Actual results may differ materially from those projected in forward-looking statements.

Additional information concerning factors that could cause those differences is contained in our Form 10-K filed with the SEC and in our Q3 supplemental operating and financial data found on our website at www.hrpreit.com. Investors are cautioned to not to place undue reliance upon any forward-looking statements.

And with that, I would like to turn the call over to Adam Portnoy.

Adam Portnoy

Thank you, Tim. Good morning and thank you for joining us on today's call. For the third quarter of 2008, we are reporting fully diluted FFO of $0.27 per share, compared to $0.29 per share in the third quarter of 2007. Although FFO per diluted share declined from last year, we have made great improvements in reducing our capital expenditures. As a result, for the nine months September 30th, we have generated approximately the same amount of cash from operations as paid in dividends.

During the third quarter, we signed leases for about 1 million square feet, 59% were renewals and 41% were new leases. Leasing activity during the third quarter resulted in a 16% roll up in rents and about $10 per square foot in capital commitments. The average lease term was 5.6 years and the average capital commitment per lease year was $1.75. Also I think it is important to know that we have reported roll ups in rents during the last 12 consecutive quarters.

Although we are pleased with our ability to sign renewals with many of our tenants at attractive terms, the pace of new leasing activity or the leasing of currently vacant space has slowed significantly since the end of 2007. Within most of the markets where we operate, net effective rents are trending downward. This is the result of a slowing economy, which is leading to a reluctance by companies to commit to expansion space or lease new space. This trend is evidenced by the reported decline in office net absorption and occupancy rates across the country during the last few quarters.

At the same time, development activity has not yet slowed, with many new projects scheduled for completion during the remainder of 2008. As a result of these market dynamics, overall company occupancy at September 30th was 90.6%, which represents a 30 basis point decrease from the last quarter.

Although our total same-store NOI declined by 2.9% in the third quarter, this decline is primarily the result of a decline in occupancy in our Boston market and a one-time reduction of rental income in our Washington DC market. Excluding the decline in same-store NOI in these two markets, our total same-store NOI would have been flat this quarter. Philadelphia portfolio experienced a 2.8% increase in same-store NOI, reflecting an increase in rental and escalation income offset by the decline in occupancy.

The Philadelphia leasing market has shown steady improvement during the past year, especially in the downtown market we own a large percentage of assets. We continue to believe that we are well positioned in this market, with less than 1% of our total square feet rolling through the end of 2009 and in place rents equal to or below market rents.

Southern California is also market experiencing weakening fundamentals with negative net absorption and above 1.7 million square feet of new construction completed in the third quarter. Third quarter same-store NOI increased by 1.9%, reflecting rent growth offset by 3.3% decline in occupancy.

Our Austin, Texas portfolio continues to post strong leasing results and new construction in this market is beginning to impact growth. 800,000 square feet of new construction completed during the third quarter, 1.7 million square feet under construction and 1.3 million square feet of projected deliveries by the middle of 2009. Same-store NOI decreased by 2.3% during the quarter, primarily reflecting increases in utilities and other operating expenses.

Washington DC is still a market experiencing weakening fundamentals, up to 1 million square feet coming online for quarter. Our same-store NOI in this market decreased by $1.9 million or 17.1%, reflecting a one-time reduction in rental income booked during the third quarter.

In Oahu, the market for industrial properties is still the strongest in the country, with gross industrial rents approaching $40 per square foot in certain areas. Land values for all industrial properties on Oahu, not just our properties, continue to go up. As a result of these factors, HRP is largely benefiting from this market improvement because we are the largest owner of industrial properties in the state of Hawaii.

During the third quarter, we saw rents roll up by over 90% in this market and we anticipate significant roll ups in rents to continue into the future. During the quarter, same-store NOI declined by 4.3% in this market, as a result of $600,000 of non-recurring lease termination revenue that was recognized in the prior year.

Boston same-store NOI decreased 12.2% during the quarter, reflecting almost 300,000 square feet of space vacated in two of our south suburban office buildings in early 2008. As of today, this is our only major market where we may continue to experience significant lease roll downs through the end of the year.

In our other markets located throughout the country, our same-store NOI during the quarter was flat. We have 1.6 million square feet scheduled to expiry during the last quarter of 2008, which represents approximately 3% of our total square feet and annualized rents. The majority of the leases scheduled to expiry through the end of 2008 and into 2009 have in place rents that are below current market rents. However, it is unclear whether we will realize all of this possible rent roll up in the near-term because leasing fundamentals are currently weakening across the country.

Even in this difficult market, I think we are achieving some great accomplishments. During the last six quarters, we have seen a consistent improvement in leasing metrics with rental rates rolling up and low CapEx commitments. This is having the desired effect of improving our dividend payout ratio during the first nine months of 2008. However, these improvements are coming at the expense of lower occupancy rates and NOI. In light of the current market environment, and our need to maintain occupancy and cash flow in the future, we expect capital expenditures may increase during the fourth quarter and into next year in order to be competitive with leasing.

During the third quarter, we purchased an industrial complex with 42 buildings located in Lenexa, Kansas with 1.8 million square feet for about $112 million. We purchased this high quality asset at a going in cap rate of almost 12% and the complex was 88% occupied with an average lease term of over four years.

We acquired two other industrial properties during the quarter with about 800,000 square feet for $48 million. These two properties 100% leased with a weighted average main lease term of four and 20 years respectively and initial cap rate between 9% and 11%.

As of today, we have also executed purchase agreements with two additional properties, which have approximately 630,000 square feet in aggregate for a total purchase price of $117 million. These agreements were entered into over 60 days ago and the $117 million purchase price will be reduced by about $70 million of mortgage debts to be assumed.

Of course, these agreements are subject to closing conditions and approaches to these properties may or may not happen in the future.

Before turning the call over to John Popeo, I would like to recap HRP's current balance sheet and liquidity position. We currently have about $2.9 billion of debts outstanding, which represents a conservative 48% of total assets. We have no significant maturities until 2011. We continue being compliance with all debt covenants, and we currently have ample room under these same covenants.

As of September 30th, we had $303 million outstanding on our $750 unsecured revolving credit facility. This facility is provided by diverse group close to 30 participating banks and matures in August 2010. We currently paid interest at LIBOR plus 55 basis points. At our sole option, we have the right to extend this revolver to one additional year through 2011.

As we discussed in May, we agree to sell 48 of our medical office clinic in biotech laboratory buildings with 2.2 million square feet for $565 million. As of September 30th, we have closed on the sale of 28 of these buildings for $233 million and recognized gains of about $98 million. We sold one additional building for $30 million in October, and the remaining $302 million is scheduled to close in phases through April 2009. Of this $302 million of anticipated future sales, $186 million is scheduled to close in 2009 and these sales are subject to a financing contingency from the buyer.

We also have one additional property currently under contract to sell for a sale price of around $50 million, which may or may not close in 2009 based on closing conditions. Assuming all the sales occurred as scheduled and we used the proceeds from the sales to repay our revolver. We have the full $750 million available under our revolver in 2009. Unlike some of our competitors, the HRP is in excellent liquidity position and we are well prepared to take advantage of unique opportunities to build long-term value for all stakeholders in our company.

I will now turn the call over to John Popeo, our CFO.

John Popeo

Thank you, Adam. Looking first at the income statement; rental income increased by 7.5%, and total expenses increased by 11.1% during the third quarter of 2008. The year-over-year quarterly increase in rental income, operating expenses and G&A expense reflects properties acquired between July 2007 and September 2008, partially offset by the decline in occupancy in same-store NOI. Depreciation and amortization increased by 8.6%, reflecting properties acquired, and to a larger extent, depreciation and amortization related to building and tenant improvements.

Our consolidated NOI margins were 58% for the third quarter of 2008 and 60% for the third quarter of 2007. The decrease reflects the decline in occupancy and increases in operating expenses. Current quarter EBITDA increased by around 1% from the same period last year, primarily reflecting property acquisitions since June 2007, offset by property sales and a decline in occupancy and same-store NOI. Interest expense increased by 2.8%; reflecting property acquisitions.

Net income available for common shareholders for the third quarter of 2008 was $73.1 million, compared to $16.8 million for the third quarter of 2007. The increase reflects $58 million of gains on the sale of 23 properties during the third quarter of 2008.

Diluted FFO available for common shareholders was $0.27 per share for the third quarter, compared to $0.28 per share last quarter and $0.29 per share for the prior year. The year-over-year decrease primarily reflects the decline in occupancy and same store NOI and gains recognized in 2007 from the sale of land, partially offset by the reduction in preferred distributions and earnings from properties acquired since June 2007.

In October 2008, we declared a dividend of $0.21 per share, which represents 77% of our third quarter FFO. During the quarter, we spent $20 million on tenant improvements and leasing costs and $2 million or $0.03 per square foot for recurring building improvements, including lobby and facade renovations, elevator upgrade and other capital projects throughout the portfolio. We paid $4 million on development and redevelopment activities during the third quarter.

Turning to the balance sheet, on September 30th we held $25 million of unrestricted cash. The increase in restricted cash reflects over $65 million of proceeds from assets sales that were deposited with an escrow agent during the second quarter. The $220 million of assets held for sale includes the net book value of assets under contract, totaling $199 million, plus the reclassification of rents receivable and other assets related to these properties, totaling $21 million. Rents receivable includes approximately $145 million of accumulated straight line rent accruals as of September 30. Other assets include approximately $86 million of capitalized leasing and financing costs.

On September 30th we had $503 million of floating rate debt, $387 million of mortgage debt and $2.1 billion of fixed rate senior unsecured notes outstanding. The weighted average contractual interest rate on all of our debt was 5.9% at the end of the quarter and the weighted average maturity was 5.7 years.

We have no debt maturing in 2008 or 2009 and only $50 million of senior notes maturing in 2010. Our senior unsecured notes are rated Baa2, by Moody's and BBB by Standard & Poor's. The book value of our unencumbered property pool totaled about $5.8 billion at the end of the quarter. The secured debt represents 6% of total assets and floating rate debt represents 17% of total debt. At the end of the third quarter, our ratio of debt-to-book capitalization was 50%.

Our EBITDA and fixed charge coverage ratios were 2.7 times and 2.1 times respectively. As of the end of the third quarter, we were comfortably within the requirements of our pubic debt and revolver covenants. As of the end of the third quarter we had $303 million outstanding on our revolving credit facility, with $447 million of additional borrowing capacity at current interest rate of around 3.3%.

In summary, this quarter produced results we expected in light of a difficult market environment. We also think that an improved payout ratio is an important step for our company. We continue to believe HRP's strong tenant base, limited near-term lease expirations, strong balance sheet, current high annual dividend yield make HRP a logical choice for long-term, income-oriented investors.

That concludes our prepared remarks. Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) We will take our first question from Philip Martin with Cantor Fitzgerald. Please go ahead.

Philip Martin - Cantor Fitzgerald

Good morning.

Adam Portnoy

Good morning, Phil.

Philip Martin - Cantor Fitzgerald

Adam, I just wanted to get a better feel for your rent roll in 2009 in terms of the types or type of tenant that is rolling. Are more of these back office tenants, I know a significant portion of your portfolio is medical, government-related, etcetera. I guess my question really goes to the retention rate that you expect, and are these tenants more susceptible to an economic downturn or are they the type of a tenant that could weather a downturn reasonably well?

Adam Portnoy

It's a good question, Phil. Given the number of tenants that we have, I think it's safe, and I feel comfortable saying generally, we feel very good about the renewal prospects for the vast majority of the tenants that are expiring in 2009. What I think is happening in the marketplace is, it is definitely getting more competitive for landlords to keep tenants because other landlords and brokers are entering the market and trying to entice people to renew early, two year, over two years at some point, at some instances early in terms of renewal activity.

So generally speaking, I feel good about our portfolio in terms of the credit quality of our tenants. Yes, there is some back office. Yes, there is some medical back office. There is a lot of GSA as you point out. We also have a lot of professional service firms that I think are going to do fine. The stuff that was going to shake out that we were worried about and we didn't have a lot of it, was earlier in the year, industries that were related to the mortgage financing business, title companies, mortgage brokers.

We never had a lot of that in our portfolio and the little bit that we did we've largely dealt with those businesses I’d say in the first half of 2008, so I think we are entering a more competitive market, but I think the credit quality of our tenants is good and I think the renewal prospects for the vast majority are very good.

Philip Martin - Cantor Fitzgerald

Do you have a sense one or another, whether is it a 50-50 mix between a back office type tenant verses a professional services? Do you have a sense of what percentage of that role is approximately professional services?

Adam Portnoy

I can't give you any exact number but it's safe to say it depends why you considered back office, why the GSA properties might be considered functions that you'd typically considered back office, but being done by the GSA, which I don't see them downsizing in our buildings anytime soon.

Philip Martin - Cantor Fitzgerald

No.

Adam Portnoy

So I guess commercial non-GSA back office, this is a ballpark 25% maybe.

Philip Martin - Cantor Fitzgerald

My next question in terms of the opportunity giving your platform and the skill sets and just your strategy, what types of opportunities are you seeing in this chaotic environment. Are you getting any calls for examples from banks knowing that you are in a pretty good financial position with no significant debt maturity or debt refinancing risk and some available cash to utilize strategically? Are any of your bank relationships or lending relationships coming to you with potential opportunities where you might be able to help them out?

Adam Portnoy

That's been happening for the last three to six months, but I would not say that's not happening in large amounts. If that's the question, yes, there's been a fewer instances where banks that we have relationships who have approached us and said this is an opportunity, this is an asset that we hold on our books, especially some of the investment banks.

This is an asset we hold on our book, would you be of interested in and looking at it? We've taken a look at a few things, but typically we haven't been able to get comfortable either with the asset quality, the credit of the tenants or the pricing expectation, to be perfectly frank, but obviously there haven't been a lot of those types of inbound calls that we've got from our banks.

Philip Martin - Cantor Fitzgerald

What's your feeling on potential opportunities in '09 and '10? Are you pretty excited about, I mean certainly a weaker economic environment doesn't excite anybody, but some of the opportunities that can come in that kind of environment is, are you excited about those opportunities, and what's your feel there?

Adam Portnoy

Yes. I think you're absolutely right, in 2009 we expect there to be some great opportunities in the market by some very high quality assets at very good prices. I think in my prepared remarks I made a point saying that we really haven't entered into any agreements to buy anything in over 60 days and we are currently in a position where I think the management, the board, and the entire company is stepping back for a moment and deciding exactly how we want to use this liquidity.

We are in a very good position. We want to be very careful in what we spend money on and how, and so specifically regarding acquisitions, we've seen a few interesting situations to-date in the last couple months but there haven't been a large flow of what I described as distressed sales yet. We anticipate that will pick up in 2009, but we haven't seen it yet.

Philip Martin - Cantor Fitzgerald

Okay. Thank you for the answers.

Adam Portnoy

Yes.

Operator

We'll take our next question from John Guinee with Stifel Nicolaus. Please go ahead.

John Guinee - Stifel Nicolaus

Hello, gentleman, how are you?

Adam Portnoy

Good. How are you?

John Guinee - Stifel Nicolaus

Good. Couple of things, it really surprised me when you said you would need to increase your CapEx on leasing to be competitive. Can you elaborate on that?

Adam Portnoy

Sure. What's happening, I believe what's happening and actually it is happening, is that you have very, the limited number of landlords and are having to give more concessions to be competitive in the marketplace. If you want to lease vacant space or space that is going to roll and the tenant might be leaving. If you are going after a new tenant, it is becoming more competitive in terms of the dollars you have to spend, in terms of upfront concessions either in pre-rent or in TI dollars.

John Guinee - Stifel Nicolaus

Adam, let me interject, the facts are, none of our competitors, in B&C markets with your competitors are all private guys. None of these competitors have any money.

Adam Portnoy

No.

John Guinee - Stifel Nicolaus

If they can't go out and just borrow off their lines like they use to in the old days because the banks have shut them off. If you talked to 20 of your peers, everyone of them will say the same thing, nobody has any money for CapEx and leasing commissions.

Adam Portnoy

No, that's what was happening, I saw that last quarter. I'll tell you in the third quarter there has been a change and maybe some of our competitors who don't have as diverse portfolio as we do, don't have the opportunity to look across the country maybe the way we do, but I can tell you in most of our markets we are seeing there's a lot of private equity guys, I know you like to say that we are in B&C markets and you think that nobody else is there, John.

There are a lot of investors in those markets. There are a lot of private investors and not everybody has capital constraint. The people, for example, there to give you a good example Washington DC almost two years, they've got to the point where they're willing to do almost anything in terms of concessions to lease up the space. We are seeing that not just in DC, but in other markets across the country, so I don't agree with your characterization in B&C markets that there's nobody to compete with. There is a lot of competition out there and it's definitely becoming a tenants market.

John Guinee - Stifel Nicolaus

Okay. Second question, I guess this is for John. It looks like your straight lines have gone from 2 million to 3.2 million to 6.8 million, why such a big change over quarter-by-quarter?

John Popeo

It partly reflects property acquisitions John, but in addition if you look back we have some seasonality in the trends in our straight line rents, and that's due to couple of large tenants that pay rents semiannually.

John Guinee - Stifel Nicolaus

Okay, and then it looks like you are raising equity about $6.58 a share.

John Popeo

That's correct, that was part of an acquisition we made in July.

John Guinee - Stifel Nicolaus

Okay. So you are not raising it in the open market at that number?

Adam Portnoy

No, that's the only equity we have raised I think quite some time, it was part of that acquisition of Lenexa in Kansas City.

John Guinee - Stifel Nicolaus

Okay, and then finally, what's going on with the RMR Funds effecting HRP?

Adam Portnoy

I don't think there is any relation to what's going on with the RMR funds. They don't invest in the RMR funds which is affiliated group of mutual funds are prohibited from investing in any related company, so I don't think there is any effect on HRPT zero.

John Guinee - Stifel Nicolaus

Okay, and then last question, when you subject to additional rating agencies' reviews?

Adam Portnoy

We just went through annually; we went through reviews with both Moody's and S&P in a late summer. We went through our reviews with them.

John Guinee - Stifel Nicolaus

Great, okay. Thanks a lot.

Adam Portnoy

Yes.

Operator

We will take our next question from Mark Biffert with Oppenheimer. Please go ahead.

Marisha Clinton - Oppenheimer

Hi, this is Marisha Clinton calling in for Mark. Hi guys.

Adam Portnoy

Hi.

Marisha Clinton - Oppenheimer

Okay. My question is for Adam, you briefly touched upon your recent acquisitions in Lenexa, Kansas. And I am trying to find out if you could provide more color on the actual tenants mix within these 42 assets?

Adam Portnoy

Sure. It's a large diverse group of tenants, I'd say one of the largest groups of tenants, probably the largest tenants, Sprint, which is a very large user of space in the Kansas City market. I think there are largest tenants, but there is also breakdown the portfolio about half of it is what you'd call flex or industrial and the other half is office, and the office tenants range from professional service firms too, there are some law firms, accounting firms, the whole gamut, I mean it's a very diverse group of tenants that are in there but the largest tenant is Sprint that in that portfolio.

Marisha Clinton - Oppenheimer

So Sprint, Spectrum Realty what do they do? Is that like regular Sprint?

Adam Portnoy

Yes.

Marisha Clinton - Oppenheimer

Okay. And of the 1.8 million square feet, how much space do they occupy?

Adam Portnoy

Sprint, I don't have the exact numbers in front of me, so I'll have to get you, I could guess but I don't want to, we can get you that number offline.

Marisha Clinton - Oppenheimer

Okay, and pertaining to this industrial acquisition, are there any concerns of bankruptcies or terminations?

Adam Portnoy

No. I mean, we evaluate this portfolio in this market environment pretty thoroughly and we have a very good handle on, we feel pretty good about the tenant mix and the viability of them to stay in the buildings, so because of the time we bought it, we knew if there's going to be upcoming bankruptcies or terminations we factor that in.

Marisha Clinton - Oppenheimer

Okay, then moving on to the leasing environment, you talked about Boston a little bit, you refer to space being vacated at least roll down through the end of the year, then you also said weakness in the Washington DC market. Can you provide any additional color on NOI declines in these markets? What are your expectations for seeing these declines stabilize? Are there any leasing expectations across savings?

Adam Portnoy

I am hoping that things stabilize sometime in 2009 in both these markets. Washington DC, it will be interesting to see what happens over the next year with the new administration. Is that creates any sort of expansion of government, usage of space in the market. In Boston again buildings that we have, we're seeing very little activity to be honest with you in the south suburban Boston markets.

These are great assets. They are high quality A suburban buildings. It's just in a tough market area and across the country, I mean, I hate it sound so negative, it's just that we're just not seeing a lot of new leasing activity, and entering markets looking to rent large blocks of space. Now there are obviously exceptions to that. I know you didn't ask about it, the Philadelphia is a market where.

Marisha Clinton - Oppenheimer

My next question is Philly.

Adam Portnoy

Philly is a market where there are some very large tenants in the market, they keep telling us that they are still moving forward with their lease proposals and there are fees and we are among with many of these large leases, the finalist, the final two to three spaces that they are looking at, but we are an uncharted territory, and I can't tell you how different the leasing, leasing decisions taking long time for companies to make, everybody, may be after the election people will start, they will be some certainty in the world and people might start making decision again.

I can tell you over the last two months, people have been very reluctant to make any decisions and will commit to do anything. In Philadelphia, we have a lot of people we're talking to and they tell us that they are going to continue to move forward, but I take everything with a little bit of grain salt because a decision could come down from the higher ups, let's say we no longer want to take expansion space and we no longer want to move into the Philadelphia market. We're going to stay where we are. It is a very fluid market.

Marisha Clinton - Oppenheimer

All right, if there is an extended downturn through 2009 and into 2010, what are your expectations for occupancy in these markets?

Adam Portnoy

I think in the specific three, we talked about DC, Philly and Boston.

Marisha Clinton - Oppenheimer

Yes.

Adam Portnoy

Yes, it's very hard to predict. I think we're about where we're going to be in both Philly and Washington DC. There might be some more vacancy in Boston over the next year or two but again it's conjecture we might be do better at some other releasing than I might be predicting in my head for 2009 in Boston.

I think we're pretty stable in our markets, in those free markets in terms of where we are with occupancy, we don’t have a lot rolling and the stuff we do have rolling I feel pretty good about the renewals except maybe in Boston.

Marisha Clinton - Oppenheimer

Lastly, what drove the decline in NOI your industrial portfolio during the quarter, I was initially thinking that was Hawaii, but you mentioned same-store Oahu. Can you elaborate that?

Adam Portnoy

The decline in NOI or same-store NOI?

Marisha Clinton - Oppenheimer

Yes.

Adam Portnoy

John, can try best answer for that.

John Popeo

It was mainly attributable to decline in occupancy in Boston. In the Boston market, we had around 300,000 square feet call vacant in a Boston suburb in January 2008 and also a decline of around $1.5 million in Washington DC. That decline reflects adjustments booked during the quarter, actually two adjustments, one was to retroactively book, in terms of the lease signed this quarter with those terms went effective retroactively to late 2006.

The second adjustment in the Washington DC market was to adjust revenue build to another of our tenants but not paid pending resolution of a dispute over CPI clauses in their new leases. We still may receive the full amount but given current market conditions we wanted to be conservative.

Marisha Clinton - Oppenheimer

Okay, great. Thank you.

Adam Portnoy

Marisha, the one, I do have the answer on that Sprint question.

Marisha Clinton - Oppenheimer

Okay.

Adam Portnoy

They actually hold a 140,000 square feet about 10% of the portfolio.

Marisha Clinton - Oppenheimer

Okay, perfect. Thank you.

Operator

(Operator Instructions) We will take our next question from Dave Rodgers with RBC Capital Markets. Please go ahead.

Dave Rodgers - RBC Capital Markets

Hi, good morning, guys. A follow-up on the John's questions earlier, these OP units in the transaction during the quarter that was again negotiated a while ago, what's your view on continuing to use units as a source of equity for those acquisitions you mentioned either late '08 or into 2009?

Adam Portnoy

Dave, first of all, just to be clear, it was actually just, it was an issuance of stock, it wasn't OP units. The company actually doesn't actually have OP units.

Dave Rodgers - RBC Capital Markets

Right, okay.

Adam Portnoy

That is just the technicality in terms of getting to the meat of your question which is would we use stock again in acquisitions? It was very unusual transaction, what lead us to use stock. It was very much driven as OP units are typically used for tax reasons and partly is what lead us to able to buy the properties in Lenexa at such a very attractive cap rates. It is not our preferred structure for buying properties and because it's not OP units, it's stock, we typically have to buy the entity, we can't just buy the asset and so we typically would not structure a deal that way.

I'm not saying it could happen again, but it's not our bias nor are we actively looking, we're not, if we put a bid out, I don't anticipate us making a bid, that the percent of the considered and being focused as primarily an income investment for interested investors in the company. The dividend has always been, I think management and the board has taken the position, it's very important, it's important to maintain it.

You bring up a good point that we're in uncharted territories and we're in the process as I've tried to state in the prepared remarks that we are currently evaluating what to do with our liquidity, what is the best course of action going forward, I think included in those discussions it would be prudent to think about the dividend. But I think it's also important to point out that we have been good recovering it historically, and at the same time, it's always being very important to us to maintain it.

I think the board would next consider the dividend for the fourth quarter payment sometime in either December or January when it would be considered again. But you bring obviously with where our stock price is and the yield being as high as it is now. And obviously we make note of that and ask ourselves the question, the market obviously is telling us something with a 25% dividend yield in these uncertain times, in these unique times, should we be considering the course of action as you've outlined.

I'll tell that I think it's important for the management and the board to consider all options. I think that would be one of the them, but I think you should understand and as we consider it, it's being considered in the context of our payout ratios being improving and it's always been very important to the company to maintain its dividend. So I think that's the best answer I can give on that.

Dave Rodgers - RBC Capital Markets

That's fair. With respect to acquisitions and the opportunities, would your focus continue to be on cash flow acquisitions or could we see you I guess dwell into the opportunities of those types of building you talked about in DC or other markets that may have been unleased, that may still offer long-term potential as either I guess call it to redevelop and/or repositioning?

Adam Portnoy

I think we would primarily be focused on buildings that are producing good income. I mean in these markets we are somewhat, if we think about acquisitions, we are reverting back to our core investment philosophy which is trying to buy very high quality asset, physical assets, very well leased to good credit tenants. I think that's as we think about potential acquisitions in these markets, that's the type of opportunities that we're more focused on.

I think the certainty of cash flow today and the ability to maybe buy certainty of cash flow at distress prices is we think more appealing than maybe buying some opportunities that as you point out might be unleased or leasing challenges. Again I am trying to maintain flexibility, I can't predict every opportunity we might look at and there could be a compelling reason to do something as you've outlined. But that's not our bias and that's not the way we're thinking about. We're thinking about it, if we make acquisitions going forward, we're focused on high quality assets, well leased to good credit tenants on a long-term basis but are going to be cash flow.

Dave Rodgers - RBC Capital Markets

Thanks Adam.

Adam Portnoy

Yes.

Operator

We will take our next question from Jamie Feldman with UBS. Please go ahead.

Jamie Feldman - UBS

Thanks. Can you talk a little bit about maybe the potential for additional assets sales similar to the healthcare assets you guys [teed up] last quarter?

Adam Portnoy

Sure. As we said in the prepared remarks, we do have one other building for $15 million certainly on the contract. We think it's going to close in the first to second quarter of 2009. There's not much else that I can say that we are actively thinking about selling only because this is a very difficult, this is not a seller's market. And we're just not going to be in a position to be generating anything close to I think the true value of the properties if we try to sell them today.

I am not saying that we may not sell some one-off properties here and there into 2009, that may makes sense, but it just doesn't feel like a seller's market to us and that would be getting not only that, we don't need to be doing selling because we have I think ample liquidity unlike many of our competitors to take advantage of the market if we choose to do so. So I think that's our bias and that's what we're thinking about dispositions.

Jamie Feldman - UBS

Okay. Then can you give a little bit of more color exactly the kind of pricing you are seeing on financing right now. If you were to go after some mortgage level debt kind of what you could get?

Adam Portnoy

On mortgage level debt, it's very much available. As you know, we don't have much mortgage level debt, mostly we financed it through unsecured debt offerings, but mortgage debt you are seeing, I haven't seen a quote recently but call it 250 to 300 over.

Jamie Feldman - UBS

Okay. That's an average.

Adam Portnoy

That's an average for mortgage, 60%, 65% loan, good asset, good office, 65% loan-to-value, a 10 year, 30-year AM, I mean 10-year AM, 30-year amortization on a 10-year loan. Something like that.

Jamie Feldman - UBS

Okay. All right, thank you.

Adam Portnoy

Yes.

Operator

At this point, I will turn the call over to Adam Portnoy for closing remarks.

Adam Portnoy

Thank you for joining us on our Q3 conference call, and John and Tim both look forward to seeing some of you at the NAREIT Conference in San Diego later this month. Thank you.

Operator

Ladies and gentlemen, this will conclude today's teleconference. We thank you for your participation and you may now disconnect at this time.

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Source: HRPT Properties Trust Q3 2008 Earnings Call Transcript

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