HRPT Properties Trust Q4 2008 Earnings Call Transcript

HRPT Properties Trust (HRP)

Q4 2008 Earnings Call

February 26, 2009 10:00 AM ET

Executives

Timothy A. Bonang - Director of Investor Relations

Adam D. Portnoy - Managing Trustee

John C. Popeo - Treasurer and Chief Financial Officer

Analysts

John Guinee - Stifel Nicolaus & Company, Inc.

Dave Rodgers - RBC Capital Markets

Mark Biffert - Oppenheimer

David Shapiro - B.G.B Securities

Michael Bilerman - Citigroup

Presentation

Operator

Good day everyone and welcome to the HRPT Properties Trust's Fourth Quarter 2008 Financial Results Conference Call. Just as a reminder, today's 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.

Timothy A. Bonang

Thank you, operator. Joining me on today's call are Adam Portnoy, Managing Trustee and John Popeo, our 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, February 26, 2009. 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 these forward-looking statements.

Additional information concerning factors that could cause those differences is contained in our filings with the SEC and in our Q4 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 D. Portnoy

Thank you, Tim. And good morning and thank you for joining us on today's call. Before reviewing our fourth quarter and year-end results, I would like to discuss two events that happened after year end.

First, in January we announced a 43% dividend reduction or $0.12 per share per quarter and $0.48 per share annually. At the same time, we announced up to a $100 million common stock buyback program. We decided to lower our dividend in part because we believe that shareholders may be advantaged if some of our cash flow historically paid dividend, is used to repurchase shares which are currently trading at historically very low prices.

The dividend reduction also increases our cash flow in future years which may be used upon high leasing cost during a potentially long-term economic recession or the excess cash flow can used to help repay debt maturities in the future if the capital market stay dislocated for a prolonged period. Till February 25th, we have repurchased 3.3million common shares at an average of $3.57 per share and a total cost of $11.8 million.

The second event that occurred subsequent to year-end happened earlier this week when we announced our subsidiary, Government Properties Income Trust filed a preliminary registration statement with the Securities and Exchange Commission for an initial public offering of 10 million common shares.

HRP intends to transfer 29 properties to this subsidiary in the near-term; including 25 properties which are currently 100% leased to the U.S. Federal Government and four properties which are currently 100% leased to State Government. These 29 properties contain 3.3 million square feet and are located in 14 states in Washington D.C.

We are also currently negotiating a $250 million credit facility with a group of banks to be secured by these 29 properties. If we are successful in obtaining the credit facility, we expect that the initial proceeds would be used to repay amount outstanding under HRP's unsecured revolving credit facility.

If the IPO of this new company is successful, the proceeds from the offering will be used to repay the amounts outstanding under the new secured credit facility. And we expect that HRP will continue to own 49.9% of this company after the offering. If the IPO is successful, Government Properties Income Trust is expected to trade on the New York Stock Exchange under the ticker GOV. There are two primary reasons HRP is interested in pursuing this transaction.

First, this transaction will provide HRP with added liquidity, regardless of whether or not the IPO is completed, HRP may receive $250 million in proceeds from the line of credit secured by the 29 properties. And HRP may be able to use it to repay amounts outstanding under its revolver and effectively extend its debt maturities.

Furthermore, if the IPO does happens then HRP is expected is own close to 10 million common shares of Government Property stock. HRP will get the benefit of the equity method of accounting treatment for this ownership interest and it plans to recognize it's pro rata portion of funds from operations from government properties in the future.

In addition, although our current intention is to retain ownership of these shares, the ownership of these shares provides HRP with a potential to recognize additional gains on investments with the sale of Government Property stock in the future which may be used to repay debt if necessary.

The second reason we are interested in this transaction is that we believe a successful IPO of government properties may demonstrate the unrecognized value in the HRP portfolio. Although we have not agreed to a valuation range for the shares of government properties with the underwriters, we expect that the valuation may be higher in the current trading multiples of HRP stock.

If the IPO is successful, we'll be taking some good assets out of HRP. But, we will be also retaining direct ownership of 18 additional properties of 2.2 million square feet which are primarily leased to government tenants. Although it's not our current intention to sell these retained properties, government properties will have a right of first refusal to buy any property that HRP wishes to sell and its majority leased to government tenants in the future.

If the IPO is successful, HRP's reported rents from government tenants will decline from about 14% to 6% However, after taking into account the pass through effect of government properties' FFO on HRP's ownership stake, the rents received from government tenants only declines to about 10%. I encourage all investors to read the preliminary registration statement that was filed with the SEC and which is available at the SEC's website located at www.sec.gov.

I'll now like to move on to our financial results for the fourth quarter and year end 2008. For the fourth quarter of 2008, we are reporting fully diluted FFO of $0.27 per share which is the same FFO per share we reported in the fourth quarter of 2007. For the year ended 2008, we are reporting fully diluted FFO of $1.08 per share compared to $1.12 per share last year.

During the fourth quarter, we signed leases for 859,000 square feet and 74% were renewals and 26% were new leases. For the year ended 2008, we signed leases for 4.3 million square feet and 71% were renewals and 29% were new leases. Leasing activity during the fourth quarter resulted in a 6% roll up in rents and about $11 per square foot in capital commitments.

The average lease term was 5.7 years and the average capital commitment per lease year was $1.87. Also, I think it is important to note that we have reported roll ups in rents during the last 13 consecutive quarters. Although we are pleased with our ability to sign renewals with many of our tenants with attractive terms, the pace of new leasing activity or the leasing of currently vacant space has slowed significantly since the beginning of 2008.

Within all of the markets where we operate net effective rents are trending downward. This is the result of a slowing economy which is leading to reluctance of 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 continues in some markets despite market conditions with many new projects scheduled for completion during 2009.

As a result of these market dynamics, overall company occupancy at December 31st was 90.4% which represents a 20 basis point decrease from last quarter and a 250 basis point decrease from year-end 2007.

Although our total same store NOI declined by 2.3% in the fourth quarter this decline is primarily the result of occupancies declining, especially in our Boston market. Southern California continues to experience weakening fundamentals with negative net absorption and about 2 million square feet of new construction completed in the fourth quarter.

Fourth quarter same store NOI increased by 8.6% reflecting rent growth and a decline in operating expenses offset by a 4% decline in same-store occupancy. Washington DC is still a market experiencing weakening fundamentals with up to 1 million square feet coming online per quarter. But despite the increase in supply our same-store NOI in this market increased by 1.6% primarily reflecting occupancy gains.

Our Philadelphia portfolio experienced a 7.6% decrease in same store NOI, partially reflecting a decline in occupancy. The Philadelphia leasing market has shown some signs of weakness with slight decreases in rental rates and waning interest from some large financial firms which previously expressed interest in relocating to the city. The Downtown office market where we own a large percentage of assets remains relatively strong and we continue to believe that we are well positioned in this market.

In Oahu, the market for industrial property is still the strongest in the country, with gross industrial rents approaching $40 per square foot annually in certain areas. Although the economic downturn is going to affect rental rates in Oahu, land values for all industrial properties on the island, not just our own have increased significantly since we bought these lands in 2003 and 2005. Because 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 and have many leases scheduled to reset which have low below market rents.

During the quarter, Oahu same store NOI declined by 7.9% reflecting a non-recurring charge for environmental remediation cost. Leasing activity was light during the quarter but we anticipate significant roll-ups in rents in the future.

Boston same store NOI decreased 23.3% 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 till the end of 2009.

In our other markets located throughout the country, our same store NOI during the quarter increased by 1.4% despite declines in same store occupancy of 2.2%. We have 4.5 million square feet scheduled to expire during 2009, which represents approximately 8% of our total square feet and 9% of our annualized rents. The majority of leases scheduled to expire to the end of 2009, have in placed rents that are currently below market rates.

However, it is unclear whether we will realize any of these possible rents roll-ups in the near-term because we've seen fundamentals continue to weaken across the country. Even in this difficult market environment, I think we are achieving some great accomplishments. During the last seven quarters, we've seen a consistent improvement in leasing metrics with rental rates rolling up and low CapEx commitments.

However, these improvements are coming at the expense of lower occupancy rates and declining same store NOI. In light of the current market condition... environment and our need to maintain occupancy and cash flows in the future, we expect capital expenditures may increase in 2009 in order to be competitive with leasing.

During the fourth quarter we purchased four office complexes with 830,000 square feet for about a $134 million. We purchased these high quality assets with going in cap rate of 9.2% and these properties were 99% occupied with an average lease term of over five years. As of today, we have an executed purchase agreement for one office complex with approximately 190 square feet for total purchase price of $57.5 million. Of course this agreement is subjected to closing conditions and the purchase of this property 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 debt maturities until 2011. Our unsecured debt obligations have been investment grade rated for 15 years and we continue to be comfortably in compliance with all debt covenants.

As of December 31st, we had $201 million outstanding on our $750 million unsecured revolving credit facility. This facility is provided by a diverse group of close to 30 participating banks and matures in August 2010 and we currently are paying interest rate of LIBOR plus 55 basis points. At all of our option we have the right to extend this revolver for one additional year to August 2011.

As we discussed in the past, we agree to sell 48 of our medical, office, clinic and biotech laboratory buildings, the 2.2 million square feet for $562 million. As of December 31st, we closed on the sale of 37 of these buildings for approximately $347 million and recognized gains of about $137 million. We sold one additional property for $20 million in January and the remaining $195 million is scheduled to close in phases during the first half of 2010. We also have one additional property currently under contract to sell for a price of around $15 million, which may or may not close in 2009 based on closing conditions.

Even though HRP has always maintained an excellent balance sheet with ample liquidity; in the last year we have taken additional steps to further increase our liquidity and build long-term value for all stakeholders in our company. In 2008, we successfully recycled capital from the sale of properties into higher yielding assets. During the year we sold 37 properties for $347 million, at an average cap rate of 7.3% and purchased 54 properties for $473 million at an average cap rate of 9.9%.

Since the beginning of 2009, we have lowered our dividend by 43% and we have engaged in a $100 common stock buyback program. We are also pursuing creative ways to increase liquidity through the possible IPO of Government Properties Income Trust. In summary, unlike many of our competitors we're approaching these difficult market conditions with many positive actions which may benefit all stakeholders in our company.

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

John C. Popeo

Thank you, Adam. Looking first to the income statement; rental income increased by 9.7%, and total expenses increased by 13.7% during the fourth quarter of 2008. The year-over-year quarterly increase in rental income, operating expenses and G&A expense reflects properties acquired between October 2007 and December 2008, partially offset by the decline in occupancy in same store NOI.

Depreciation and amortization increased by 10.9% reflecting properties acquired and to a larger extent depreciation and amortization related to building and tenant improvements.

Our consolidated NOI margin was 57% for the fourth quarter of 2008 and 59% for the fourth quarter of 2007. The decrease reflects the decline in occupancy and increases in operating expenses.

Current quarter EBITDA was flat compared to the same period last year, primarily reflecting property acquisitions since September 2007, offset by property sales and a decline in occupancy and same store NOI. Interest expense increased by 1.9% reflecting property acquisitions.

Net income available for common shareholders for the fourth quarter of 2008 was $50.8 million compared to $8.9 million for the fourth quarter of 2007. The increase reflects $39.5 million of gains on the sale of nine properties during the fourth quarter of 2008.

Diluted FFO available for common shareholders was $0.27 per share for the fourth quarter of 2008... third quarter of 2008 and fourth quarter of 2007. Year-over-year results primarily reflect earnings from properties acquired since September 2007 and a reduction in preferred distributions partially offset by earnings from properties sold during 2008 and a decline in portfolio occupancy and same store NOI.

In January 2008, we declared a dividend of $0.12 per share which represents 44% of our fourth quarter FFO. During the quarter, we spent $22 million on tenant improvements and leasing costs and $1 million or $0.01 per square foot for recurring building improvements including lobby and façade renovation, elevator upgrade and other capital projects throughout the portfolio. We paid $10 million on development and redevelopment activities during the fourth quarter.

Turning to the balance sheet, on December 31st, we held $16 million of unrestricted cash. The $146 million of assets held for sale includes the net put value of assets under contract, totaling $129 million but the reclassification of rents receivable and other assets related to these properties totaling $17 million. Rents receivable includes approximately $152 million of accumulated straight line rent accruals as of December 31st.

Other assets include approximately $86 million of capitalized leasing and financing costs. On December 31st we had $401 million of floating rate debt, $456 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 6% 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 $5.7 billion at the end of the quarter. Our secured debt represents 7% of total assets and floating rate debt at represents 14% of total debt. At the end of the fourth quarter our ratio of debt-to-book capitalization was 50%.

Our EBITDA on fixed charge coverage ratios were 2.6 times and 2.1 times respectively. As of the end the fourth quarter, we were comfortably within the requirements of our public debt and revolver covenants. As of the end of fourth quarter, we had $201 million outstanding on our revolving credit facility with $549 million of additional borrowing capacity at current interest rate of around 1%.

In summary, this quarter produced results we expected in light of a difficult market environment. Our recent dividend cut should significantly improve our dividend payout ratio and financial flexibility and our $100 million stock buyback program at current trading prices should enhance HRP's shareholder value.

We believe that the successful completion of the Government Properties Income Trust IPO will provide HRP with additional financial flexibility in these uncertain times and display the unrecognized value in the HRP portfolio. We continue to believe HRP's strong tenant base, limited near-term lease expirations, strong balance sheet and a current annual dividend yield of 13% 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

Thank you. The question and answer session will be conducted electronically. (Operator Instructions). Our first question will come from John Guinee with Stifel.

John Guinee - Stifel Nicolaus & Company, Inc.

John Guinee. How are you?

Adam Portnoy

Hi John.

John Guinee - Stifel Nicolaus & Company, Inc.

Good. First you have a...I guess about a $195 million to sell to SNL. What do have in terms of earnest money deposit and what sort of financing contingency to other ousters does SNH... SNL have?

John Guinee - Stifel Nicolaus & Company, Inc.

SNH. They have a very earnest money deposits and they have... it's a pretty general financing contingency that they have. I will point out that SNH has publicly announced that they are in the market trying to raise $500 million of secured debt financing and they themselves are trying to do that. So they technically have the financing out but it's not something that I think they could easily exercise and was they really didn't have any capacity, I think that's the best way I can answer it.

John Guinee - Stifel Nicolaus & Company, Inc.

Any thought on having an put up in earnest money deposit or doing what you'd normally do in this case which is not allow a financing contingency for a year or so which affectively gives us an error-free look?

Adam Portnoy

They... Its SNH and not SNL, Senior Housing Properties Trust. They... two companies have come to an agreement that to extend the closings of those remaining 10 buildings and there was... it was a mutually beneficial transaction that both parties from HRP's perspective. It was anxious to extend out the closings for a possible... to line up possible light kind exchange properties, because there's large gains associated with these sales. And we didn't want to have to rush into buy properties before its 1031 exchange transaction in the market where we want to be very careful and picky about what we buy.

So there is mutually beneficial to us as well as SNH. And I don't have any reason for me to believe today that SNH will not honor its contract and close on schedule and if not on schedule then they will and may be even the if both parties could agree to it, we have the right to close earlier.

John Guinee - Stifel Nicolaus & Company, Inc.

When they give you a little more comfort if you had an earnest money deposit or this was a non-contingent contract?

Adam Portnoy

John, may be, you know we're talking about water under the bridge, the deals construct I mean we can obviously you are free to criticize the way we are structured, but I think it was a deal that was fair to both parties and it was fair to HRP. But you are free criticize if it.... but I don't think we're in a position that we can change it.

John Guinee - Stifel Nicolaus & Company, Inc.

All right. As ... right now your bonds are trading at about a 13% to 14% yield to maturity, your preferred outstanding are trading about 50%, 55% of par clearly this is not a situation which you can sustain capitalizing the business at these kind of cost-to-capital. And essentially, peeling off $250 million with the Federal Government leases doesn't really get you there.

You are talking more like $1 billion of diluted equity offerings or $1 billion dollars of asset sales to get yourself to a leveraged number that will bring in this cost-to-capital to a realistic amount. So it seems to us as if the actions are kind of like to what you really need to do.

Adam Portnoy

Okay. I actually think we are being incredibly proactive. I am shocked you think it's a lie. I've actually heard more criticism from people saying we are doing... why are we doing so much, you don't have anything maturing for two years. But I appreciate your concern that two years can pretty quick.

I think we are being incredibly proactive in terms of... between lowering the dividend, retaining additional cash flow, thinking of creative ways to realize value and repay debt through a possible spin-out IPO of some of our assets. We are and probably sold and have agreements to sell, $0.5 billion property. We don't have any debt maturities till 2011 and yes, the debt markets are very dislocated today but I don't hope that they stay that way forever. And even if those debt maturities were on our... next month, I think one market is still is very much open to us at HRP at reasonable cost-to-capital is the secured market.

We have a very large unsecured asset pool that is available to put secure debt on as a fall back position. So I think we're being incredibly proactive in terms of addressing liquidity needs and possible debt maturities that are coming up in 2011 and 2012.

In fact I think compared to some of our peers, we're doing a lot more than just sitting around hoping that debt markets get better. We're actually trying to do things two years in advance. Anticipating that may be debt markets don't get better or if they do get better, it's not going to be by very much and so, I don't think what we're doing is light at all. I really... I actually will look at quite the opposite.

John Guinee - Stifel Nicolaus & Company, Inc.

Okay, last question as a common shareholder; one really has to look at preferred equity as debt because it's seen here to the comment. Any other thing you really look at this day and age is, gross book values is largely irrelevant and just says what you spent on the assets not what they're worth today. Do you have any sense for what your leverage ratios are if you look at debt plus preferred to a total enterprise value or to actual current value of the assets relative to gross book and instead of gross book value?

Adam Portnoy

Well, I think the number as a enterprise value as calculate versus percent of market value, that's can easily calculatable. John what is it... it's probably 60%.

John Popeo

On book.

Adam Portnoy

Yeah on book and on market, it's probably even higher. But the stock price is deteriorated quite a bit which is part of the reason we have engaged the common stock buyback program. But I don't have any answer to you as to what... we don't have.... I think there... we don't have any estimates that in terms of what the assets are worth today.

I think they were close to what we bought to them and in some cases even and what we bought to them. And in some cases I'll can see there some assets they're probably declining in value. But all-in-all, I think book value is actually a pretty good metric for HRP. I mean, some of our competitors that in hay day, when things were going gangbusters two-three years ago. They are buying assets, at sometimes, 3%-4% cap rate and I can understand how somebody would argue to them that they need to readjust their evaluations for those properties.

But HRP as you are quite aware has never got properties at 3% or 4% cap rates. We bought properties I think pretty consistently, 8%, 9%, 10% cap rates today definitely in the 10s as what we're looking at, or even higher. And so I don't think we have the same maybe deterioration in value as some of our competitors that back assented at very low cap rate.

So, I mean I'll concede if you want to look at the debt plus preferred-to-book value our gross assets that's a perfectly legitimate way to look at it. I don't believe looking at it at market value is very relevant today, because I think the stock is under performed which is why we've engaged in the stock buyback.

John Guinee - Stifel Nicolaus & Company, Inc.

All right, thanks a lot.

Adam Portnoy

Yes.

Operator

And our next question will come from Dave Rodgers with RBC Capital Markets.

Dave Rodgers - RBC Capital Markets

Hey, good morning, thanks guys.

Adam Portnoy

Hi, Dave.

Dave Rodgers - RBC Capital Markets

Adam I think you mentioned talking to secured lenders or at least having the ability to access secured debt given the unencumbered nature of the portfolio. I don't know if you and John have done the calculation and if you could share with us. Do you have a sense today if you could replace the unsecured debt coming due near-term on a one-for-one basis with secured borrowings without violating any of the covenants?

Adam Portnoy

Yes we could do it, 2011, I just know, a thought in my head, I am sure we could do 2011, 2012 maturities with secured debt and not violate the covenants. I haven't run it out.

John Popeo

Yeah, I mean currently secured debt as a percent of total asset is only 7%. We have room up to 35% in certain covenants, we have a lot of room.

Adam Portnoy

We have a lot of room for secured debt and haven at some point our whole, we can't replace all of our secured debt and maintain our covenants but certainly what we might consider near-term maturities '11, '12.

Dave Rodgers - RBC Capital Markets

And given your comments to John's last question, do you think if you go to the secured route to match fund I guess those secured maturities would you estimate having to put equity in to those to help to get those to that point?

Adam Portnoy

No, I think... I don't think it would equity in to it. We might have... the markets are in tough shape. We might have to... whereas two years ago may be one building we could have put secured debt on and in place may be of maturity our debt maturity one for one may be we'll have to put debt on two buildings instead of one and match that debt maturity. But the way... when you think of equity I won't have to put equity in to it. I can match funds, I may just have to use more properties.

Dave Rodgers - RBC Capital Markets

Yeah, that's fair. Adam and you talked about either or buying back stock as well as may be capital needed to maintain occupancy in the portfolio through leasing. Is there a trade off there that you're looking at or are you running parallel; of course at this point with enough capital that you're not really concerned one versus the other during the first half of the year?

Adam Portnoy

I am sorry. Can you just repeat the question Dave with that leasing?

Dave Rodgers - RBC Capital Markets

I guess the parallel course between buying stock... using capital to buy stock back or using capital to sign new leases. Those parallel courses or is there trade off in there that you're evaluating, and at what point you feel more constrained on the ability to use capital to do that?

Adam Portnoy

I think we have enough room after the dividend reduction that we can do both. As we've talked about in the prepared remarks, I do think we're going to have to... it's a lot of running very fast to stand still. It's what we've been doing a lot with the core portfolio and even doing all that work, I'd still think you're going to have to spend more money to keep the tenants and I actually do think you're going to see a slight deterioration in occupancy over the next year even with all that work. So, but I don't think there is a trade off. I think we have ample room with our current... with our current cash position.

Dave Rodgers - RBC Capital Markets

And as you sit here today, given that last comment you just made with occupancy changes in the coming year, given your discussions with tenants, what percent of activity you do decline in occupancy this year or what are you anticipating would be a decent base line number for non-renewals or new lease sign?

Adam Portnoy

It depend... we obviously have our own internal forecast and they vary depending on what we think is going to happen to the economy in the second half. I think I am not going to be so surprised to see occupancy drop below 90% whether it drops below 89% is open to debate.

But I think a safe estimate is somewhere between 89 and 90% it's probably where occupancy might stand at the end of the year. And again these are very hard numbers to pin down but that's my personal gut where I think things might end up. I think we'll probably lose about 100 basis points of occupancy and maybe more; but if the economy gets better, maybe less. It all really depends.

Dave Rodgers - RBC Capital Markets

All right, great, thanks.

Adam Portnoy

Yeah.

Operator

(Operator Instructions). And our next question will come from Mark Biffert with Oppenheimer Company.

Mark Biffert - Oppenheimer

Good morning guys. First question on the acquisitions that you... around the sales that you made during the quarter; I was wondering what the exact cap rates on those were?

Adam Portnoy

Just about 7.3%; between 7.1 and 7.3.

Mark Biffert - Oppenheimer

Okay. And then can you give a little bit more color on the type of sellers of those assets; I mean were these sale lease backs that you had with the companies like Wachovia?

Adam Portnoy

You're talking about acquisitions?

Mark Biffert - Oppenheimer

I am sorry, on the acquisition side, yes.

Adam Portnoy

With your previous question about acquisitions as well?

Mark Biffert - Oppenheimer

No, no. You gave that of 9.2 in the release but on the acquisitions that you made what were the sellers? I mean were these sell lease backs from the sellers or?

Adam Portnoy

No these were individual third party owners of the property, not owner occupied properties.

Mark Biffert - Oppenheimer

Okay. And so translating that I mean looking at asset sale that you had in DC and you look at the government properties that you are up for selling. You look at the implied cap rate and may be I am wrong in my calculation but I have it at around 7% I am what your expectations are in being able to achieve that in the current environment and what you are hearing in terms of... the brokers in the DC market another is where cap rates are currently and where they can move to?

Adam Portnoy

When you said you're referencing the building that we sold in the fourth quarter, you're talking about both the building we sold and then you're asking me more generally about what I think cap rates are trading for in the DC markets generally?

Mark Biffert - Oppenheimer

Right and how that translates over to how you are pricing the assets, the 29 assets that you're going to be selling a portion of into this separate entity?

Adam Portnoy

Yeah, I think cap rates have drifted up since we struck the deal with the buyer of those properties. So, when we struck the deal to sell these assets, it was a 7.1% cap rate. I think cap rates in the district have definitely moved at least 100 basis points up from that. So, in talking, first of all there is not a lot of transactions that are actually occurring. So I mean the volume has dropped tremendously in the last three months, really since about November and especially in January there was a large. It's really been a steep drop off in the number of transactions that are occurring out there in the marketplace.

But anecdotally I mean I can tell you what we do still put bids on... put bids out on even our properties we don't win and I can tell you that bids... I think cap rates are minimum a 100 basis points high or probably 200 basis points higher.

Right now the only sellers of property that we are seeing are typically distressed sellers that are trying to sell some of their higher quality assets to raise capital and then repay debt may be other parts of their business. In fact and I will keep it completely nameless but we've actually seen quite a few of our brethren and sellers of properties in different markets that they themselves are trying to raise capital and we bid on some of those portfolios and the bids.... its very rare we are putting out the bid these days at less than double-digits cap rates.

Mark Biffert - Oppenheimer

So, how does that fit into your uses for cash, just to make sure you have mentioned that you are going to focus on share repurchases and debt reduction with the proceeds are getting on this. I mean if the right opportunity came up for you would you put more money into acquisitions next year?

Adam Portnoy

Yes, we would and we are looking and but again I think its going to be we've been very picky and it's got to be great deals. In some ways this is clearly a buyers market and we haven't seen a lot of sellers yet. I presume if the economy stays in the state it is, in the second half of this year you'll see an up tick in the amount of volume of properties that will come to market and I think you'll start to see more and more... we might execute on more of those opportunities.

Really, as I think most people will understand it, because debt is so hard to raise, it's just very difficult for people to find finance and to buy properties and there are few players like us are all cash buyers. We have a large amount of our revolver which is unused at the moment. And so we have no problem putting very aggressive what I call aggressive bid meaning high cap rates because we are going into bid saying Well there is no financing contingency.

You know if we sign the contract, we're good for the money because it's an all cash bid. So, in the few times that we have been winning or coming close on properties recently I know we're not the highest bidder. I mean it's clear we're not the highest bidder, it's just that a lot of people that are in the market today selling they are not only focused on getting the best price but they're also I'll just say distress sellers and they are very focused on just execution clarity that we can close, certainly a closure.

Mark Biffert - Oppenheimer

So, what is your hurdle rate, Adam, I mean if your that all cash I mean what is your hurdle rate have to be for to make sense if you're using all cash to do this?

Adam Portnoy

Well, it's cash from our revolver. Meaning the way we position the bid, how we ultimately finance it is ultimately a combination of corporate finance, debt equity. But we're looking... we want properties as I said cap rates usually double-digits and these are typically what I would characterize newly built buildings within the last five years, a 100% occupied buildings, good tenants.

I'll tell you, most the time we spend today, we focused on underwriting for acquisitions is credit analysis. We spend... we pretty quickly understand that we're buying at the low replacement cost and we got, I must say, a long-term lease what might be a good credit tenant but we spend a lot of time to understand the credit of that tenant.

Today, the world is so upside down, when everyone used to consider great tenants may not necessarily be good tenants. And so we spent a lot of time doing exactly what you are doing listening to if it's a public company conference calls and digging into their financials and talking to senior management and understanding the business plans and focused on if they themselves have any debt maturities and what are they using the site for, is this a part of their cooperation; if its headquarters that's obviously a good thing. So those are things in the way we are analyzing things today.

Mark Biffert - Oppenheimer

Okay. And then lastly just related to the lease and just as a follow-up, I mean specifically if you can know what percentage of the lease expirations have you addressed in '09 and '10 to-date in handling those. And how much of that is built in to your expectation for the occupancy that you mentioned between 89% and 90%?

Adam Portnoy

Yeah, the way we would do reporting is basically very little of what we show you as expiring is actually been addressed already mean if it's already been addressed I can tell you in '08 we did deal with a lot of renewals that had expirations in '09 and then had expirations '10 but they have just in because we dealt with them they've been pushed out.

So I'd say maybe less, probably 10%, 15% of what's on that expiration schedule is in some form of negotiation now. And I think probably naturally I probably underestimating that; it's probably higher, it's probably a third to even half of that is probably in negotiations or conversations now. But none of it's... if it's on that schedule as scheduled to expire then we haven't addressed it yet.

Mark Biffert - Oppenheimer

And those spreads are trending where? Are those negative, flat. What are you seeing?

Adam Portnoy

When you say spreads, you mean the net effective rents or?

Mark Biffert - Oppenheimer

Right, versus in place rents where the new rents trending are they declining?

Adam Portnoy

We're... likely we're seeing that they've actually trended upwards through last 13 consecutive quarters and our net effect is we've been very, very good and competitive in the marketplace. I think and if you look at our in place rents today, across our portfolio they are below I mean they are below where the market is. So, you can argue that they should be a lower of 1%, 2% maybe 3% across the company and especially in what's rolling in 2009.

In our prepared remarks I am not banking a 100% on those roll-ups, yes, we're going to obviously try for them, and obviously we're going to negotiate for them and we're going to do our best to obtain them but, this is a tenant market just like it's a buyers market if you want to buy properties, it's a tenants market if you want to lease space and I am not sure we're going to be able to realize all those roll-ups.

I think the name of the game in 2009 from the core operations is renewals and keeping cash flow steady. Its just we're very focused on renewals, we're very focused on keeping our cash flow stable and making sure it doesn't drop in a market that's clearly declining. I heard on another conference call, down... flat is the new up and if we can keep things flat, I am going to feel pretty good about that in 2009.

Mark Biffert - Oppenheimer

Okay, thanks.

Adam Portnoy

Yeah.

Operator

And our next question will come from David Shapiro with B.G.B Securities.

David Shapiro - B.G.B Securities

Hi guys.

Adam Portnoy

Hi.

David Shapiro - B.G.B Securities

A quick question. This is interesting discussion that John brought up and that everybody else is bringing up here. You're in the market here selling your GOV subsidiary and what it looks like to me is about 9.8% cap rate is sort of the intended target here based on sort of those documents you are putting out.

I am trying to understand the logic here and you are going into the market bidding for assets may be a 10% caps, may be a little north of there. You are buying assets in the fourth quarter in the mid-nines and now you are turning around and selling what is arguably some of you think more stable assets, may it's on older properties but certainly the most stable credit worthy tenants you probably have at 9.8% cap rate. So, I am just trying to understand what is management figuring here in selling these properties at cap rates close to what you intend to buy at the current time?

Adam Portnoy

Yeah first of all it's important for me to note that the numbers that we put in that preliminary registration statement are just estimates and we have not come to any sort of agreement with underwriters regarding valuation. And so, I can't really, I can't speak definitely to what that cap rate might be. But I can speak more definitely about the rationale as to why we are doing it.

Obviously, we thought... as I said in the prepared remarks, one is liquidity, trying to find innovative, creative ways of creating liquidity for the company. And the second thing is to also a demonstration of fact, I mean it's no secret that obviously we think that our stock is undervalued and that's why we engaged in a stock buyback program. We're hopeful that if we... whatever the valuation might be ultimately for Government Properties Income Trust, we think its going to be in a higher multiple than HRP is currently trading at.

And we hope that that will show up the demonstration effect and say Hey, look, these are some good assets at HRP but certainly not all of the good assets and certainly not... in some cases maybe not even the best assets at HRP. But these are some of the assets and it's a small portion of our; its only 29 buildings of the entire portfolio and we're hopeful that if the IPO is successful, then it'll demonstrate to shareholders of HRP that an investors that Hey, maybe look at the small part of the company that's trading that's able to trade at this much higher multiple hopefully.

Maybe that means HRP is undervalued. Now I also wanted to point out that the... why we doing it this way, why are we doing an IPO. We have been asked, Why don't you just do a joint venture, or why don't you just go sell all the assets, why are you doing an IPO, and it's I think its important to address that. We obviously thought hard and long about that. And the truth is there is just not many if any buyers in the marketplace and aggressive price for this size of portfolio in today's market.

And we actually feel more confident today than we might have a better shot of getting this IPO done in a decent valuation. Then we might get from trying to actually sell the assets in a market that is incredibly difficult with very, very few buyers. And I also want to point out that yes; we are looking at buying things. And as I said 10% up but the pace of acquisitions, the company has clearly slowed its and I assume we will buy some things in 2009. But it's not going to be nearly at the pace in which we bought things in previous years.

David Shapiro - B.G.B Securities

Okay. If the goal is to provide liquidity, you have the valuation goal that's one thing it is sort of an expensive goal given the I-banking fees are going to come out of this. But just speaking if the goal is to increase liquidity, why not for the vast majority of your proceeds from this GOV sale or from the secured financing that you may or may not get from the GOV spin-out, why not just to use the vast majority to buy in your public market debt and may be pay down some of your revolver.

I mean the public market debt like John was saying is had plus 13% yields, you can't find properties in the market that you probably want to own at those cap rates without taking on significant tenant risk, that sort of risk for you return for you guys to be buying that in 13%. And given that the IRS has now given you a sort of clearing to sort of issue these 1031 gains of stock dividends or do some sort of distribution as a stock dividend.

You really don't have the pressure that you necessarily have to do at 1031 property exchange could satisfy these gains if I am not mistaken with the stock dividend. Is that something that the company is considering given the high yields on the debt and the IRS ruling that you guys now have the ability to do?

Adam Portnoy

The short answer is yes, we are considering. But one, the use of proceeds from the debt that we will hopeful raise that will be shared by the 29 properties; we are going to immediately use to repay our revolver. But I also say in more blanket statement, you're absolutely right, the yields that we can get on buying back some of our debt is clearly something that we are going to take a look at. And so I agree with you.

David Shapiro - B.G.B Securities

Okay. And then back to Hawaii I guess with the NOI rolling down there, I am trying to understand is this, so you have sort of a big expense take up there in the quarter with some sort of remediation. Is this an ongoing thing, because I am just wondering why we're not going to be seen I guess very large NOI roll-ups, given the fact with your discussion and it's well noted in the press that you know the rent rolls on some of your expiring leases are significantly higher. I am just trying to understand when and why it starts moving up in a sizeable manner? And Hawaii and is this are the remediation costs continuing to run through it. And what's the dynamic there that we should be looking at?

Adam Portnoy

Yeah, it's a good question. Well first of all I can show you that to remediate this is a one time environmental remediation cost that flowed through the P&L that it's not a recurring event. It was a site that we brought in 2005, that we... it was a scheduled clean up and we finally have push through the expenses.

The question about when is NOI going to start being increases in NOI. We have an interesting situation in Oahu. We bought properties at a value of may be about 45 bucks a square foot and they have clearly gone up in value may be over $100 a square foot if not more in value that they have increased; probably more and more in some instances. And Hawaii is an interesting place, we've actually had... we have built in I think 50% or 70% roll-ups in the rents, just where they are currently paying us versus what the market is.

If investors have ever been worried that HRP is not aggressive in trying to maximize cash flow, I suggest you just read some of the press reports that come out of Hawaii because there is a group of tenants that have banded together and are now trying to lobby the state legislature to do some pretty remarkable and amazing things that I think frankly might be unconstitutional.

But which are... that they are trying to prohibit our ability to raise the rents for those tenants. And that is something why that sort of conversations are going on at the state government level among a group of tenants that we space to and lend to is basically putting all the leasing activity on hold in that space in that land... in Hawaii, because everyone wants to see what's going to happen? What's the state legislature going to do? Are they actually going to pass some sort of crazy bill, that says that you can't raise rents commercial... you go in and actually alter agreed contract between two parties by state law, by state act and that's why I think it might be... I believe it is unconstitutional.

So with that what I'm trying to tell you is that we're working very hard but we have people that are working very hard on the other side trying to prevent us from raising the rents. And as a result of all this I think it might be, it might take till the end of the year that we start to increases in cash flow come out of that portfolio. I think the next three to six months we're into a little bit of fight. It's what's going on.

David Shapiro - B.G.B Securities

Okay. And then back on the GOV transaction. If the transaction doesn't go through at an acceptable price and I am not sure what sort of your minimum cap rate is that you're expecting but maybe some guidance on that? And I assume that it does not need your minimum cap rate, is that revolver with the banking under kit? Still a possibility regardless where of the transaction goes through? And then sort of what was the... I guess the interest rate and sort of the maturity and then some of the basic terms that were being considered on that revolver?

Adam Portnoy

Sure. If the final deal, one, the answer to your question, the revolver over that bank credit facility would stay in place regardless of the IPO. So it would go in place prior to the potential IPO and would stay in place regardless of whether or not the IPO was contemplated. So that's there.

The final terms we've come to agreement with a group with some lenders and we're still in the process of definition due diligence and we have to document it so the final terms haven't been set. I can tell you it's LIBOR; LIBOR is going to floor associate with it and it's going to spread on top of that LIBOR. But I can't commit to you what all those numbers are. And I can tell you that right now it's been contemplated is a three year facility with a one year extension option on it. So, that's... those are the basic terms.

David Shapiro - B.G.B Securities

And this revolver is secured as oppose to sort of the common industry practice these days doing unsecured revolvers. I found that interesting; is that a trend that you think we could be seeing here going forward where?

Adam Portnoy

I think it's a trend for new revolvers, yes. I think capital is, I mean, you hear it all the time, you read about it and I can tell from first hand experience, getting capital out of bags is very, very difficult today. Unless you have an existing relationship or you are just rolling an existing piece of debt, new debt or new deals are very, very difficult. It's like trying to get blood from a stone and from some banks. I mean there are certain banks that are open and allowing to do lending. It's very expensive but they are willing to do it and the remaining banks they are just not lending, period.

David Shapiro - B.G.B Securities

Okay. Thank you.

Adam Portnoy

Thanks.

Operator

Our next question will come from Michael Bilerman with Citi.

Michael Bilerman - Citigroup

Good morning.

Adam Portnoy

Hi Michael.

Michael Bilerman - Citigroup

Hey. Only got some... with me as well (ph). Can you talk a little bit about how you think the impact of the IPO has an impact to obviously you're maintaining about 50% ownership but how is that going to be impact to HRP from perspective of your earnings stream but also your distribution capability and your dividend?

Adam Portnoy

Sure. John, you want to? Basic... I mean I can answer it quickly; basically through the equity method of accounting we get pass through treatment of the FFO. So at the end of the day if everything goes to plan and we own 49.9% of it, we'll get 49.9% of the FFO will be carried through on our... to our income statement. And on the cash side as you might say CAD or AFFO or FAD I am not sure how you characterize it but... we basically will get the dividends from the ownership of the stock. That will be what would be reported up to HRP.

Michael Bilerman - Citigroup

And the FFO probably gets marked up I guess for re-straight line and mark-to-market of rent. The FFO could actually go up.

John Popeo

No. Actually there's going to be no mark-to-market for rent in this transaction just a way its structure little drop down. And basis will carry over to the new entity. As far as same holds true for straight line rents. In fact there really isn't a whole out of straight line rent type leases in this portfolio. Most of the bonds with the government tenants are CPI adjustments which you don't include in straight line and adjustments under GAAP.

Michael Bilerman - Citigroup

And then how does the dividend income compared to, sort of... and what effectively would be the next cash flow bearing in the loan? How does that compare?

John Popeo

Well, the way the pay out ratio was laid out currently in the S11 it's not a 100% pay out. So I guess in theory the cash that flows up to SNH through dividend is going to be slightly less than the cash that would have otherwise flowed into HRP if we didn't do the IPO.

Michael Bilerman - Citigroup

Right. And then can you talk a little bit about... from the RMR perspective and the change of the stream either on I think the base management if it sounds like that's going to be done at historical cost but any change at all to the key stream or any other incentive that may be in there?

Adam Portnoy

No, no the contract that the new entity would enter into would be identical to the contracts that HRP already has with its existing lease with HRP and as you've already noted the historical suite stream will just carry over to the new entity there will be no more particularly... there'll be no changes.

Michael Bilerman - Citigroup

The base I mean that won't be... I guess your G&A will... your allocated G&A will go down. I mean I guess there's some public company cost, there's some leakage, somewhere. Right?

Adam Portnoy

Yeah, there's some leakage. That's right. Accounting costs, some legal costs.

Michael Bilerman - Citigroup

But who's picking that up?

Adam Portnoy

The entity, public company will pick that up.

Michael Bilerman - Citigroup

But there will some higher fees to RMR.

Adam Portnoy

No, no. RMR only gets just review, RMR only gets fees based bonds gross real estate assets that's and...

Michael Bilerman - Citigroup

And then the entity will have all the public fees on top of that.

Adam Portnoy

That's right. Fees RMR won't change at all.

Michael Bilerman - Citigroup

And what sort of public ease are in there in terms of the running this public company relative to HRPT.... I am sorry, I want to understand what the leakage is like.

John Popeo

With the G&A of course around 89% to 90% typically is represented by the advisory fee. The balance includes legal, accounting New York Stock Exchange fees, SEC fees and things like that.

Michael Bilerman - Citigroup

And then just Adam on the... there is an incentive fee that's baked into the management agreement, which would I guess for equal to 15% of any increase in FFO?

Adam Portnoy

Yes.

Michael Bilerman - Citigroup

Is that same that's in HRP right now?

Adam Portnoy

Yes, its identical.

Michael Bilerman - Citigroup

It's identical. Okay. All right, thank you.

Adam Portnoy

You're welcome.

Operator

And our next question will come from Sun Capital Advisers. We'll hear from Michael Arian (ph).

Unidentified Analyst

Hi guys. And a couple of question in what sort of been addressed regarding on your spin off but again, Adam could you just again clarify some of the reasoning because in my mind to me given that your stock is trading between three and four bucks a share and I am on the bond side I would just thing that, you don't have any near term liquidity issues to 2011, I mean why not lead to do something like this. I mean in a way I am somewhat concerned that I might be interpreted as an act of desperations sometime.

And so I am just confused about a little bit and also wondering when you say that your reported rents from the U.S. government will go from 14% to 6% does that represent the 49% interest or that does not. And then the only other question is just relating the Boston with a 23% decline in NOI can you explain what happened there, I know you can't talk about it, but are we going to continue to see weakness in that market? Thanks.

Adam Portnoy

Sure, the reasoning... it's interesting. We had a question earlier in the call, somebody saying why aren't we doing more?

Unidentified Analyst

Yeah, I know I don't understand, I totally don't agree. I am in the other camp, I guess because I would just think that you don't need to this right now.

Adam Portnoy

Yeah it s a.... I think look to be candid it's abundance of caution, its in some ways and you're right. We don't have to do it but we don't know how long the market is going to be dislocated and we might look back a year from now and say Wow, Jeez, we didn't really need to do this. Markets have all come back and we're going to be able to refinance obviously in 2011, 2012 no problem.

But it's been dislocated now for quite sometime. I think over a year and it's been very choppy and it might be like this for another year; may be two and so, I think the best way to characterize it is abundance of caution.

Unidentified Analyst

Okay. And then, in regards of the ratings agencies, did you talk with them about this at all because... I understand it's a good thing if you're reducing debt obviously from that perspective and but then they look and say Well you are also sort of getting rid of some of your really good assets and stable assets and that could sort of within you. I mean did you talk to them about all this?

Adam Portnoy

Yes, we spoke with both firms that rate us S&P and Moody's and I think S&P has already put out a press release on the transaction maintaining a stable BBB rating on it... on the company. Moody's is yet to put out an announcement. I mean I think you've characterized the trade off pretty well which is that you're getting a lot of extra liquidity at the sacrifice of some ownership and some pretty good assets.

And the analysis we've explained to them is that we think in this type of market, abundance and caution is a good thing and it's worth the trade. Giving up a little bit of the ownership on those assets is worth the extra liquidity in today's world that mean I think most people, our people saying the most important thing today is liquidity and I think that's why I can't speak with the rating agencies and again Moody's hasn't put up their announcement out, but S&P has, they reaffirmed the BBB.

Unidentified Analyst

Okay. I missed that all right. And then the rent from 14 to 6 that does not represents the 49% interest. Does it?

Adam Portnoy

That's correct.

Unidentified Analyst

Okay.

Adam Portnoy

If you include the 49% interest, pro forma is 10%.

Unidentified Analyst

Right. Okay, that's what figured. And then in Boston, so what's happen... is that there one facility that, I think there was an issue in suburban Boston, I think there is one facility that have lost the major tenant. Is that the issue there?

Adam Portnoy

Yes, it's we have lost a couple of tenants in the Boston market and south suburban market and its suburban market...the Downtown market also, the market is in rough shape. The only good news about Boston is that it didn't have a lot of development activities, the way some other markets did. And so once economy or the economy turns a little bit will be older, we'll have less of a attractive to work ourselves out of and as there had been a lot of development activity. So.... but you are correct Boston will be a market and I think for the next year that we're going to... it's of all our major markets its the one that I think has got the most weakness.

Unidentified Analyst

Okay. Thanks.

Operator

And our next question will come from Su Ping Li (ph) from Tenor Capital Management.

Unidentified Analyst

Hi, thanks for taking my question. Just to relate to your comments on regarding buying back the common and also where your preferred trading which is around $0.40 and $1. Have you guys thought about buying prefer or especially the convertible preferred?

Adam Portnoy

Yes, we've looked at it. It's a good question. But, we think we get a better return on the... on buying back the common. Its just a basic, bank re-about to you get more for buying back the common.

Unidentified Analyst

But you see buyback the convertible preferred that will reduce your dilution as well.

Adam Portnoy

Yes, that's correct. But we get more... we get a better return we feel in our analysis on buying back the common.

Unidentified Analyst

Okay. And second question is a lot of your peers have been paying stock, paying their dividend in stock as way to increase liquidity. Have you guys thought about that?

Adam Portnoy

In this market I think it's important that you really put all options on the table. And so it's obviously been discussed but I can tell you that it is our current intention to maintain the dividend in cash.

Unidentified Analyst

For the foreseeable future?

Adam Portnoy

As I sit here today for foreseeable future, we intend to maintain it in cash. As we say in our forward-looking statements that's as I sit here today. I can't tell you six months from now if the markets are horrible and they continue to get weak then we might have a different view. But today that is our current intention.

Unidentified Analyst

I see, okay. If you IPO the government property that subsidiary and your FFO will be lower. Do you expect to maintain your current dividend rate, if that after the IPO happens?

Adam Portnoy

We obviously review this on quarterly basis the dividend, but we feel comfortable that we will be able to maintain the current dividend even after the IPO of GOV but, of course, this is something that's subject to review every quarter. I can just tell you where, as we sit here today, that's what we intend.

Unidentified Analyst

And what will be your pro forma pay out ratio after the IPO?

Adam Portnoy

Of FFO?

Unidentified Analyst

Yeah.

John Popeo

Less than 50%.

Adam Portnoy

Yeah, it's less than 50%, yeah.

Unidentified Analyst

Okay, that's good to hear. And can you help me with what's your CapEx in term... new projects or tenant improvement you need to do in '09 if possible 2010 as well.

Adam Portnoy

Yes well, we don't really... let me answer the question this way. We have been lending on tenant improvements and leasing commissions for the last year and a half, its been running somewhere around 10 bucks a square foot in concessions that we have been paying for signing up for. I suspect and believe that will creep up in 2009 closer to $15.

Unidentified Analyst

Okay.

Adam Portnoy

In terms of redevelopment and new development projects I can tell you that as of right now all development projects... ground up projects are on hold.

Unidentified Analyst

Are on hold?

Adam Portnoy

Yes.

Unidentified Analyst

Okay. So that $15 commitment for tenant improvement, how many square footage should I think about?

Adam Portnoy

We have 4, I think it's 4.5 million square feet expiring in 2009 and probably we're going to try to renew all of it so. That's a good number I think.

Unidentified Analyst

So the maximum could be $16 on 4.5 million square feet?

Adam Portnoy

Could be. But... it could be if it's all just renewal it will be not everything we are going to do is going to be renew. We will be very focused on renewals. We will do some leasing activity and it's the mix. I mean that we never observed less than $10 of square foot the new leasing activity that's 25, 30 bucks a foot and I think on a blended basis its going to work out about $15 because I think on both counts we are going to have to be a little bit more aggressive in a much more competitive market for tenants, both on renewals and on the new stuff. So on a blended basis I think its going to.... I could be wrong it could be less; it could be more but I think its going to creep up course of $15.

Unidentified Analyst

I see, okay. Okay that's good to hear. And in terms of the transaction.... the transaction you could close with SNH in 2010 and also 2009, how much net cash proceeds do we expect to see if those transactions close?

Adam Portnoy

$195 million.

Unidentified Analyst

But do you have debt on those properties?

Adam Portnoy

On those properties? No that's they are encumbered.

Unidentified Analyst

So, net you can receive a $195 million cash in 2010?

Adam Portnoy

Yes.

Unidentified Analyst

How about 2009?

Adam Portnoy

Only there is one property under contract for $15 million.

Unidentified Analyst

I see. Okay, so...

Adam Portnoy

And we also in January did sell one property for $20 million.

Unidentified Analyst

I see. All those are encumbered assets.

Adam Portnoy

Yes.

Unidentified Analyst

Okay. So if I added them up, 195 plus 20 plus 15 you have 220 million basically potential proceeds you can get from the SNH transaction which should be enough to pay out your revolver just from that. Right?

Adam Portnoy

Yes.

Unidentified Analyst

So, are you... is there a way that your IPO... if you don't get good pricing in IPO for your GOV subsidiary, you might not proceed with that yield?

Adam Portnoy

That's a fair statement. It'll depend on the valuation and how the market receives it. That's right. There is a pricing which we would not entertain doing the deal.

Unidentified Analyst

Okay. But put on, 250 million secured debt in that subsidiary assets that could heighten regarding to the IPO or not. Is that right?

Adam Portnoy

That's the current intention, yes.

Unidentified Analyst

Okay. And do that proceeds will go to HRP as well?

Adam Portnoy

Yes.

Unidentified Analyst

So isn't that a better doing so? You just put more secured debt at the GOV subsidiary, don't do the IPO just wait for market improves and you also got security. You also got liquidity in that way. So what do you have to do that IPO?

Adam Portnoy

Well, the IPO proceeds would be used to repay the debt. So if we repaying debt with equity at a higher multiples then what HRP could trade at today. So, we 're basically retiring the debt as well.

Unidentified Analyst

So you are saying, so you feel secured the 250 million debt at the GOV subsidiary, you also have to repay that pretty soon you cannot have that as a long-term secured debt outstanding.

Adam Portnoy

That's right, it would be, if we did not do the IPO and debt would just remained in place it would extend our maturity because our revolver if we exercise the renewal is as far as in 2011. This would have a maturity beyond that so we will be extending our debt if we just took the secured facility and did not complete the IPO, if we are successful in the IPO and the proceeds from the IPO would be used to repay the secured line that went in place prior to the IPO.

Unidentified Analyst

Okay. Can I just ask, when you said your revolver can be extended for one year, just to make sure I understand, does that mean you can extend from 2011 to 2012, or?

Adam Portnoy

No I'm sorry if there was any confusion. It's a 2010 in August, its one that actually matures in August 2010 we can extend it for one year to August 2011.

Unidentified Analyst

Are there any covenants you need to meet?

Adam Portnoy

Yes, we have to meet all the existing covenants but we are already in compliance with those. We don't anticipate having any problem with that.

Unidentified Analyst

Okay, that's great. I'll just think that you guys are doing prudent things to improve your liquidity because your maturity after 2010 is very.... you have your maturity in 2011-2012 and beyond. So, I think it's prudent to have a lot of liquidity in current market.

Adam Portnoy

Thank you. We agree with you. Thank you.

Unidentified Analyst

Okay. Thanks.

Operator

Anything further Ms. Lee?

Unidentified Analyst

No, that's it.

Operator

Thank you. Our next question will come from David Shapiro with B.G.B Securities.

David Shapiro - B.G.B Securities

Hey guys a quick follow up here. I'm trying to think through this here and I may have it wrong on this 1031 exchange is. As you guys continue to do these property sales like in IPO, like the SNH sale. I don't see how you ever improved the liquidity if you're force to continually reinvest those proceeds and properties. And once of course you're reinvesting in getting the secured debt on the properties.

But it seems there is like sort of treadmill effect going on here. Unless, am I wrong here that there is no way to eventually pay down debt with avoiding essentially these 1031 considerations, unless you end up doing sort of this stock dividend option. Can you guys help me walk me through that?

Adam Portnoy

Sure. You are correct the 1031 tax issue is something that could... comes into play with regard to selling the assets to SNH it is not something that comes into play with regards to the sale, where a possible IPO of Government Properties Income Trust, so....

David Shapiro - B.G.B Securities

Even though there is markup of about a 110 million on book value there?

Adam Portnoy

No. it does not become a tax issue.

David Shapiro - B.G.B Securities

That's intriguing. Okay and then on the Hawaiian, one last question on the Hawaiian property sale. If I am mistaken, this Hawaii tax suite about $900 million for that entity in Hawaii. Does that sort of implied property value they have on it?

Adam Portnoy

The property cash what they value it and I just don't know the answer to that David and we can probably try to get you the answer it's probably public. I mean I just don't know the answer.

David Shapiro - B.G.B Securities

Okay, thank you.

Adam Portnoy

Yeah.

Operator

Our next question is a follow up question from Michael Bilerman with Citi.

Michael Bilerman - Citigroup

Just a quick one, Adam, the pricing is that 25 bucks close to cap when I guess when you net down IPO fees and higher G&A and everything I guess sort of barred in. Your stock at HRP is trading at a 10 for five cap. I am just trying to think through it, I mean why not just take a secured facility and take the debt in and repay it and wait for public markets. So are you actually saying the public markets would be better than where you could sell government leased assets in the private market which would have far... cap rate maybe I am wrong.

Adam Portnoy

Yes, Mike it's a incredibly important that you keep in mind that those numbers in that prospect... in that preliminary registration statement were just estimates that we had put in there to make the finagling look complete for the SEC review. We really have not come up with evaluation with our underwriters yet.

So it's sort of a shift, it's almost moved to me to talk about what the implied cap rate is at that $25 because I honestly don't know where it's going to be and the other multiple I encourage you to look at beside just the cap rate is also the multiple on the stock itself are based on the FFO or CAD probably where look at it.

Until we know what the valuation and what underwriters you're comfortable that they could price something that or even put on the cover to begin marketing. We just can't comment on whether or not it makes sense or not and you're right and at a certain price and I can really tell you what that is yet.

We just we're not going to do right direct. We're not going to do the deal. I don't know what that price is or what that value is yet, and I can't comment on it. But, you're right. There's a price which it doesn't make sense.

Michael Bilerman - Citigroup

Right. I am just thinking about perspective that if you have the vendor just trying to give you secured facility on these assets at decent currency you can take that in and repay other HRPT debt. And when the public markets improve and I think you would agree that you are under dressed I think you can IPO subsidiary and get the benefit down the road. There is no benefit of IPO in this thing and a more valuation.

Adam Portnoy

Mike I agree with you. We have to see what... the registration statement is going to likely be reviewed by the SEC. It's going to take... it can take 30 or 40 days. We just have to see what the markets look like and what underwriters feel comfortable marketing the IPO but you are correct there is a.... it's not a foregone conclusion that that IPO is happening.

Michael Bilerman - Citigroup

Right. And how would you compare the fees on selling the asset right versus IPO-ing and having the underwriter fees. How does that compare?

Adam Portnoy

Obviously the fees in selling would be didn't less than the underwriting.... than IPO it's a question of again the valuation and certainly of execution its those two things factor in to it as well.

Michael Bilerman - Citigroup

Right. Okay, thank you for your time.

Adam Portnoy

Thanks.

Operator

And that's all the time we do have for questions at this time. I would like to turn the conference back over to Mr. Adam Portnoy for any closing remarks.

Adam Portnoy

Thank you for joining us on our fourth quarter conference call. John Popeo our CFO will be presenting at the Citigroup Conference next Wednesday and I think he hopes to see many of you there. Thank you.

Operator

That does conclude our teleconference for today. We like to thank everyone for your participation and have a wonderful day.

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