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Senior Housing Properties Trust Inc. (NYSE:SNH)

Q4 2008 Earnings Call Transcript

February 27, 2009, 10:00 pm ET

Executives

Timothy A. Bonang – Director of Investor Relations

David J. Hegarty – President & Chief Operating Officer

Richard A. Doyle – Chief Financial Officer

Analysts

Jerry Doctrow – Stifel Nicolaus

Omotayo Okusanya – UBS

Mark Biffert – Oppenheimer

Chris Haley – Wachovia Capital Markets, LLC

Bill Knickerbaucher – ING

Operator

Good day and welcome to the Senior Housing Properties Trust fourth 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.

Timothy Bonang

Thank you and good morning everyone. Joining me on today’s call are David Hegarty President and Chief Operating Officer, and Rick Doyle Chief Financial Officer. 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 state that 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 Senior Housing's present beliefs and expectations as of today February 27, 2009. The company undertakes no obligation to revise or publicly release the results of any revisions 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.

A reconciliation of FFO to net income as well as components to calculate AFFO, CAD or FAD are available on page 14 in Q4 supplemental operating and financial data package found on our website at www.snhreit.com.

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 2008 Form 10-K to be filed with the SEC on Monday. Investors are cautioned to cause undue reliance upon any forward-looking statements. And with that I would like to turn the call over to Dave Hegarty.

David Hegarty

Thank you, Tim and good morning everyone. Thank you for joining us during this very busy reporting season.

I will try to be brief but informative. Last evening we announced our results for the fourth quarter and full year 2008. for the fourth quarter we reported funds from operations of $0.43 per share. And these results further reflect the investment of surplus equity proceeds from the June offering but do not fully reflect the impact of the new investments made during the quarter.

In spite of difficult capital markets and weak economy, 2008 was a very successful year for SNH. Revenues and FFO grew significantly and now come from a more diversified tenant base than at the start of the year. FFO per share grew by 3% to $1.67 per share, which is significant given a negative arbitrage on earnings created by the timing delay and investing all the proceeds from the equity raised in the second quarter.

We are very pleased with the results for the quarter and for the year and as well as our strong financial position we are in today. In terms of liquidity and balance sheet strength, SNH compares very favorably with not only the rest of the healthcare REIT but the whole REIT universe.

I would like to highlight a few points about the position that we are in today. Our debt ratios are at industry leading lows. At December 31, our debt represented less than 30% of our total book capital. In February 2009, we raise another net $97 million of common equity, which further reduced our debt ratios.

Only 6% of our portfolio is secured by debt. We have no near term debt maturities. Our $550 million credit facility matures in December 2011, which includes our option to extend the maturity date one year. There was $190 million outstanding after the February equity offering. We have only $259 million of debt coming due before the end of 2012 and it’s related senior unsecured notes and 16 mortgage loans.

We have availability on our revolving credit facility. We currently have $360 million available on our revolving credit facility. We are in the process of exploring Fannie Mae financing. We're currently negotiating secured financing for at least $500 million with Fannie Mae. If this is consummated, it is expected to close in the second quarter and the user proceeds will be to repay balances outstanding on the revolver and at that point we will encourage HRPT to sell us the remaining $195 million medical office building as soon as possible. And use the balance of the proceeds to find investments opportunities and possibly even prepay some debt.

Earnings maybe impacted on an interim basis depending on the timing of the receipt and deployment of that cash. In these economic times, this could be described as the good problem to have. We've enjoyed continued access to the capital markets. We were able to successfully raise equity capital on two occasions during 2008 for a total of $525 million, which has and will continue to assist us in weathering the difficult credit markets.

In fact we feel it positions us very well for being opportunistic in the acquisition environment looking forward. As perviously mentioned, subsequent to the end of the quarter, we raised a net $97 million in the common equity offering and these equity raises in the diversified investments have aided in getting our unsecured debt to investment grade with one rating agency and a positive outlook to investment grade from another agency. When the debt markets return, SNH will be well positioned to access the public debt markets.

Now I would like to have Rick review the annual quarterly results with you and the properties we acquired. Then I'll discuss the operating trends, the acquisition environment and the outlook for SNH.

Richard Doyle Jr.

Thank you, Dave. When comparing 2008 to 2007, we were able to grow and diversify our revenue streams from $188 million with the 11 tenants, with $236 million with 155 tenants. This growth in revenues is due to investing approximately $910 million including capital improvements in 2008. We invested approximately $375 million in Senior Housing Properties, $356 million in medical office buildings, $100 million in wellness centers and $59 million in capital improvements during 2008.

Also included in the revenues are percentage rank revenues from our senior living tenants, which totaled $8.4 million in 2008 versus $6.6 million in 2007. The annual interest expense for 2008 was $2.4 million higher, or 6% higher versus 2007 due to the assumption of secured debt in greater amounts outstanding under our revolving credit facility.

We assumed three mortgage loans in July on two medical office building properties for $11 million with a weighted average interest rate of 7.1% per annum in a weighted average maturity in 2018. In September, we also assumed 15-mortgage loans maturing in 2017 on eight senior living properties for $50 million with a weighted average interest rate of 6.5% per annum.

In addition, interest expense increased due to the full year impact of interest on $50 million of secured debt, we assumed in November 2007 on two wellness centers at an interest rate of 6.9% per annum.

General and administrative expenses were $3 million higher year-over-year due to the new investment as well as the overall increase in professional fees. We recognized impairment charges of $8.4 million for the year on four assets that are underperforming and maybe sold in the near future. Two of these assets are classified as held for sale in our financial statements. Upon sales, there will no meaningful impact on our results.

On a quarterly basis, we evaluate our portfolio for impairments and performance and in July, we sold three underperforming assisted living facilities with 259 living units for $21.4 million and recognized the gain of $266,000.

For the fourth quarter of 2008, our FFO was $48.9 million, or $0.43 per share compared to $35.2 million, or $0.42 per share for the 2007 quarter. The dividend paid with respect to both quarters was $0.35 per share, which is in 81% payout ratio of the quarterly 2008 FFO.

During the fourth quarter, we invested $171 million, which is comprised of one senior living community for $29 million, nine medical office buildings for $115 million and funded $27.5 million of capital improvements on December 31.

Results for the 2008 quarter do not reflect the full impact of these acquisitions. Subsequent to the quarter end, we acquired another medical office building for $19.3 million. Interest expense increased in the fourth quarter 2008 versus the same period in 2007 due to assumed mortgages on the acquisitions as discussed previously in increased use of the credit facility.

General and administrative expenses were higher quarter-over-quarter due to the increase in real estate investments and professional fees. There were $1.7 million of property operating expenses in the fourth quarter of 2008 compared to none in the same period in 2007 as we didn't have multi-tenanted medical office buildings until June 2008.

As previously discussed our investments for 2008 totaled approximately $910 million. It was funded with the proceeds of $525 million of equity raised in 2008, $21 million of asset sales, $51 million of assumed debt, borrowings on the revolving credit facility in operating cash.

At year-end we had $257 million outstanding on our revolving credit facility. Two series of unsecured senior notes of $322 million in mortgage loans and capital leases totaling $151 million. Our total debt was $730 million and our equity was $1.7 billion, for a ratio of the debt to total book capital of just under 30%.

At December 31, we had commitments to acquire $215 million of medical office buildings by early 2010. In January 2009, we acquired one medical office building for $19.3 million. As previously discussed we issued common equity on February 3, resulting in net proceeds of $97 million, which was used to repay a portion of the outstanding borrowings on our credit facility. Today we have $360 million available on our credit facility to acquire the remaining $195 million of the medical office buildings.

We have also been negotiating terms of a mortgage financing with Fannie Mae in the amount of approximately $500 million of long-term secured financing. We cannot assure you that this financing will be consummated or that the amount will be significantly higher or lower, but the timing would be during the second quarter.

Now I will turn it back to Dave for discussions about the performance of the portfolio in the investment environment.

David Hegarty

Thank you, Rick. As Rick described we had a solid fourth quarter in 2008 and ended the year in excellent liquid position. In fact we are positioning ourselves to take advantage of investment opportunities in later 2009 and 2010.

The quality of ones earnings and security of the dividend is only as good as the performance of the underlying portfolio and the tenant’s to pay the rent. At SNH, the dividend is our highest priority and we believe it is well protected on many levels. Our largest tenant, Five Star reported it earnings on Wednesday night. As a company it generated operating income and meaningful cash flow. They were in a decent liquid position at year-end and had zero outstanding on their $40 million revolving line of credit.

Five Star owned several properties and leases properties from other landlords. SNH focusses on the underlying performance of our own properties leased to Five Star in addition to overall monitoring of Five Star as a company. We report performance a quarter in a way like other healthcare REITs and not all tenants do report information accurately and timely to us to relying on the report.

We know that most others report trailing 12 months each quarter when they report the statistics while we report it on a quarter standalone basis. The quarter ended September 30, the properties cover the rent obligation at three of the four Five Star leases by a comfortable 1.3 to 1.4 times. There is one lease for seven properties at 1.04 coverage now represent the properties formal leased to NewSeason. A couple of these properties had operating issues when Five Star took them over on July 1 and it takes some time to reposition them.

For the quarter ended September 30, 2008 occupancies remain strong at 91% lease number one, which are mostly assisted living properties with some skilled nursing facilities Lease number two, which are 30 large retirement communities and two rehabilitation hospitals. The occupancies remained flat at about 88% from the second quarter to third quarter. And lease number three, which is the newest acquisition plus the proportion of legacy portfolio of skilled nursing facilities was 84% down from 86% in the June quarter.

The 14 properties leased to Sunrise continue to perform well at the Group. The rent coverage was 1.52 times and occupancies averaged 91%. These leases are guaranteed by Marion International. As you know, Sunrise having its own issues as a company but the facilities being operated while in the occupancy and rent coverage are holding up well.

The Brookdale properties that we owned continue to be stable with 93% occupancy and two times coverage. The private operator have experienced occupancy drops at two skilled nursing locations but still cover the rent very comfortably. The two wellness tenants cover their rental obligations well over two times, and have been surviving the downturn in the economy relatively well.

Everyone knows we are at a very difficult economic times and all the operators in the senior living industry and wellness industry are under pressure but we are comfortable that businesses are holding up well enough to pay their rental obligations due to us. In addition, our portfolio is very geographically diversified, which provides further safety to our cash flow. On the medical office building portfolio our occupancy is 99% for the 38 properties we own.

Most of these properties are long-term lease with strong credits but even the multi-tenanted buildings are performing out at or better than expected levels. There is a little turnover in medical office suites but renewals or leases have been added above existing rents.

In late December we announced the delay in the book date by which we have to acquire the remaining medical buildings from HRPT. Currently we have nine remaining properties to acquire by May 2010, totalling $195 million. This deferral was by mutual agreement, which permitted SNH to access more capital to be in a position to take advantage of high yielding investment opportunities this year.

We raised equity proceeds earlier this month and we're having discussions with Fannie Mae to continue to be lower leveraged and have significant capacity for opportunities. There are tremendous number of opportunities out there to considered in the senior housing industry and in the medical office area.

Today the biggest obstacle in the price is the pricing as we are going to pay as usually in the neighborhood of 9% to 11% cap rate, but if the property was acquired at 7% to 8% cap rate or less and with finance 80% or so with debt and it is very difficult for us to pay an amount that's more than debt amount and that the pressure is increasing on lenders and operators out there and we believe that the market will come around to our pricing.

And during the floppy acquisition period in 2007 we basically sat on the sidelines. We're conservative investors who do not want to overpay for properties. We’re right now balancing risk-adjusted returns versus safety.

As stated in the past, our current business plan is to closely monitor the portfolio in these tough economic times. Look for opportunities that have risk-adjusted returns in today's market, prudently manage our liquidity and look for opportunities to grow cash flow in order to utimatly increase the dividend.

Subsequent to quarter end our Board declared a cash dividend of $0.35 per share, which has a payout ratio of 81% of the quarter’s FFO. Our Board evaluate dividend on a quarterly basis and currently the Board considers this dividend level to be appropriate. Based on our current payout ratio, we are generating $35 million to $40 million of excess of cash flow per year to provide a cushion for the dividend should any operator who experienced difficulties or for any other unforeseen needs.

The surplus cash flow is currently used to just fund, improve financings, make new investments and to prepay debt. Our liquidity position is very strong with no meaningful debt maturing until December 2011 and as you can see on page 16 of our supplemental package we’re well within all of our debt covenants.

I said before we’re among the top of all REITs for liquidity and strength of our balance sheet. And with that I’ll turn it over for questions or the Q&A.

Question-and-Answer Session

Operator

(Operator Instructions). We will take our first question from Jerry Doctrow with Stifel Nicolaus.

Jerry Doctrow – Stifel Nicolaus

Thanks, good morning.

David Hegarty

Good morning Jay.

Jerry Doctrow – Stifel Nicolaus

A mix of kind of trivia and bigger things. Just sort of starting with trivia. Just give a sense what CapEx and TI was in the quarter and maybe a sense of where it might be for 2009?

David Hegarty

For the fourth quarter, TI and CapEx on the medical office buildings was about $285,000. We expected to probably continue around that on a quarterly basis for the year so about $1 million to $1.5 million for 2009.

Jerry Doctrow – Stifel Nicolaus

And, assuming that you placed the Fannie Mae stuff in the second quarter. David, I think you touched on the fact that you're trying to accelerate purchase of the MOBs from HRPT. So, should we - obviously some of this is subject to getting the financing and stuff,so we should think that that might move up to maybe third quarter or something than rather than wait until first quarter of 2010, which I think where it is now?

David Hegarty

Yes, so it's clearly difficult to speculate exactly the timing on that and it’s really the decision is going to be driven by when HRPT is in a position to either find alternative properties to do like exchanges or somehow defer some of the gain that’s built into those properties.

Jerry Doctrow – Stifel Nicolaus

Okay.

David Hegarty

As soon as we have the money of course we are going to want them to close as quick as they can.

Jerry Doctrow – Stifel Nicolaus

Okay. And the current agreement, just remind me was starting in 2010 or they don’t have an obligation to sell it to you to later. Just remind me that?

David Hegarty

That’s right. It has to be by mutual agreement. We can’t force them into something and alternatively can’t be forced to close either.

Jerry Doctrow – Stifel Nicolaus

Okay, and just couple others things. The Marriott guarantee burn off at some point. I remember that right or not?

David Hegarty

Well, it’s tied to the lease. So as long as the lease is in place that the guarantee has to be in place. In 2013 December, the leases the initial term expires and at that time I do not know what rights Sunrise has to mandate Marriott sale and the guarantee. So, if they renew the leases, we are not sure that they have that ability to renew the leases without the guarantee.

Jerry Doctrow – Stifel Nicolaus

Okay, so in just from your perspective and Sunrise perspective to stay on that for a minute, after 2013 Marriott may not be guaranteed, but you don’t actually have to renew unless you have the Marriott guarantee. Is that's kind of your thoughts at this point?

David Hegarty

Right. that’s our view of it.

Jerry Doctrow – Stifel Nicolaus

Okay, interesting. Just the rehab facility in Boston. I mean that was obviously one of things is just kind of struggling on the Five Star side. I mean any sort of thinking about those assets, obviously the rent continues get paid, but just where you see it headed or any better resolution?

David Hegarty

Well I think when we first took back those properties and lease from the Five Star that was always – our plan that changes had to be made for the physical plant and the whole business plan had to reevaluated at those properties. And we all knew it's going to be a multiyear process. So they are still in the process of doing that. I think as you would expect we are constantly in touch with them about the properties and how they are progressing. They did complete a whole new wing that they plan to do over it in the Hoover location. Then they are pretty close to well on the way in the Braintree. So we would expect them to continue with that and then there are other changes that they can make in the business plan and we will evaluate it on a regular basis but at the moment there is no expected change in the arrangement.

Jerry Doctrow – Stifel Nicolaus

And do you ever think about moving it other either just a manager or another tenants in just clearly kind of a sideline business for Five Star as well?

David Hegarty

That is a possibility. We do think about that often on and I think that an option right now.

Jerry Doctrow – Stifel Nicolaus

Okay and then just one last thing and I’ll jump of. So it sounds like you are thinking about opportunistic investments. You said and we’ve heard similar things from the other REITs that we’ve reported so far That the sense that the deals will be out there but really aren't out there now there is not enough sort of blood and water yet maybe. Is there a particular kinds of assets that you would be looking for Senior Housing versus others. Would they likely be Five Star deals or something else, more fitness. We have the sense of what's you yield is but what type of assets would you, again Senior Housing or something else, just give any color.

David Hegarty

Sure, well the deepest markets are possible opportunities that’s clearly the Senior Housing and medical office building areas. The wellness center is now particularly a key market, so we are not that heavily but it is possible down the road it could be something there but I think ideally we would love to be more medical office building. Again the cap rates are not there yet for making attractive enough to us. But I also think with guys that maybe full flexibility in the cap rate and as I see at this year right now without the Fannie Mae financing now we have obviously some capacity on the revolving credit facility but we are clearly going to be very conservative and only do transactions that we feel are real winners for us, but we're going to be pretty conservative with everything. And should the Fannie Mae transaction occur clearly it gives us more fire power but we're also going to be very conservative in putting it to work and I think the best things, well opportunities will be better later in the year than they are right now. People are still trying to come to the realization that properties are probably not worth the debt values on their property.

Jerry Doctrow – Stifel Nicolaus

Have a just quick followup. The pricing on this stuff from HRPT is still set, I just wanted you to confirm that and are you looking to really do more multi-tenant or single-tenant and then I'll jump off?

David Hegarty

Sure. Pricing is still the same on the HRPT properties with the little bit of time, the time is gone on some fixed increases in the leases have kicked in, and so on to it, maybe a little modestly higher but not materially higher.

Jerry Doctrow – Stifel Nicolaus

It's okay.

David Hegarty

We did a multi-tenant MOB-transaction at the end of the third quarter. That is something more like what we want to do more of; properties with about a dozen tenants it and there was an 8.5 cash cap rate and product mid-nine or low-nine GAAP cash rate.

Jerry Doctrow – Stifel Nicolaus

Okay.

David Hegarty

But so I think we're fixed in both multi-tenant and single-tenant arrangements.

Jerry Doctrow – Stifel Nicolaus

Okay thanks a lot.

David Hegarty

You're welcome.

Operator

We will take our next question from Omotayo Okusanya with UBS.

Omotayo Okusanya – UBS

Hi yes good morning. The rent coverage ratios that you guys have report as those EBTIDA arrangement coverage ratio.

David Hegarty

They are.

Omotayo Okusanya

Okay if we were to look closer towards more cash rent coverage's. Take out the management, the kind of maybe some adjustments for any CapEx spent some other tenants may need to make. At that point, just based on the numbers you've as of 9/30/08 doesn't that paint a kind of much more dire picture, for the Five Star leases, in regards to the coverage being much closer to one?

David Hegarty

Well, there are many things about that coverage calculation. I’ll point out several things. One is that the statistics we provide in our supplemental are not same store basis, so as properties get added those dual properties are going in at lower coverage ratio than existing ones and they sort of pull down. That's the case particularly with the lease number three and so we've properties that pulls down the coverage ratio and in the case of Five Star they don't charge a management fee to themselves, so you have to compute some sort of fee, a 5% fees what the industry uses a rule of thumb usually that has some profit baked in there for a third party managers, so real costs would be something lower than that. So may be you take these down another 10 or 15 basis points to factor in additional costs may be little CapEx, but typically all of our tenants have the options to come to us for financing for CapEx, but the other things I had mentioned, I believe just above all the other healthcare REITs reported trailing 12 in each quarter and as we report in individual quarter so they tend to be much more volatile than the other healthcare REITs from a quarter-to-quarter to basis but so there is the seasonality and other things affecting these. But I think certainly like a 13, 14 coverage is more than adequate to cover a rental obligation and have some profit left over for the tenant. It is like historically and reasonable number one, its been at their level for several quarters and then like lease number two the obligation there as about $80 million of rental obligation. So a 0.2 coverage on $80 million is quite materials $30 million of excess, $3 million rather in excess coverage, so this is not 30, so there is very good cushion still to pay the rental obligation due to us.

Omotayo Okusanya – UBS

Could you give us the sense of what these thing coverage ratio is not look like as of fourth quarter now that Five Star has reported?

Richard Doyle

Well, we have not produced them or verified them.

Omotayo Okusanya – UBS

Can you talk about directionally which its going.

Richard Doyle

I think they've pretty help steady to comparable to these. What's interesting is the rehab hospitals are in lease number two and as Jerry mentioned they had $1 million dollar loss this quarter. So if you took out the rehab hospitals you find the senior living assets are actually covering very strongly and about1.6 times or so and they continue to hold pretty strong.

Omotayo Okusanya – UBS

And then one last question with the Five Star, the acquisitions you made and you lease the Five Star in 2008 and that in 2010 you start to get percentage rent on those facilities, any concerns about that at this point just kind of given everything that’s going on with pressure on the assisted living independent living market?

David Hegarty

What could be interesting is that the acquisition in 2008, the way the structure is that 2009 is the new base year. So the revenues they earn in 2009 with set the floor for going forward, so if the economy is picking up in 2010 and thereafter there is actually probably a relatively low base in 2009 to start with, so that may work to our benefit down the road. And two, while we are talking about the leases, I do want to mention in connection with the Fannie Mae financing, one thing that we will have to look at is certain properties would have to be pulled out to be financed by the Fannie Mae transaction, so we would end up restructuring these leases between in different leases. Again at that time once that's known so I am just. We will look provide all the statistics and so on so that people can track still how the performance has been, but that's something that will probably change late second or three quarter dependent on timing with everything.

Omotayo Okusanya – UBS

Got it. Thank you.

Richard Doyle

Thank you.

David Hegarty

You're welcome.

Operator

We will take our next question from Mark Biffert, Oppenheimer.

Mark Biffert – Oppenheimer

Good morning guys. I guess and continue on that, Dave relate to the first, can you just share kind of a target range for terms that you are seeing for the Fannie Mae facility, in terms of length in coupon rate?

David Hegarty

Yeah, I mean it's still preliminary, so I am he hesitant to give you many specifics but I would say its long term financing the notes will be set for ten years, but there will be clearly various prepayment options and so we would have. And just the rate is not locked in. So that's why I am not sure what the rates historic I would say today, you’ve clearly be below 7% deals in the market have been at say 6.25% maybe even as low as 6.5% in some cases, but I think today it is clearly less than 7.

Mark Biffert – Oppenheimer

So the assets, so you are going to be pulling out to be tied or secured by this facility. Do they have any existing loans that you would be paying off and what rates would those currently be at, if there is any?

David Hegarty

No, I mean the properties that we are pulling out today are not encumbered today. There would be nothing there. But I mean when we use these proceeds we clearly have amounts outstanding on the revolving credit facility. First application of funds would be to pay down the revolver, obviously our revolver is very expensive right now. So, you would have maybe 5% or some negative arbitrage. And then we would buy hopefully we could line up the HRPT properties, but again I know if that is possible. But that would be our desire. Those who are going to be cash cap rate of 72, 73 by that time, and so I would be a positive and then hopefully we can line up some transaction at 9, 10, or 11 cap rates.

Mark Biffert – Oppenheimer

So, I mean given that you have some flexibility with the HRP transactions, wouldn’t you rather just push those of as far as you could to take down if you could find other transactions in that 9, 10, or 11% range?

David Hegarty

That is possible and it’s going to be depend on where we are at that time.

Mark Biffert – Oppenheimer

Do you have a commitment to actually take those assets down. I mean you made it sound like you have a decision or you can decide whether or not you want to take them come down. If HRP put them to you, you have to taken them?

David Hegarty

It currently right now, we have a drop dead date in 2010. So we have to close on by down.

Mark Biffert – Oppenheimer

And if you don’t then you can walk away.

David Hegarty

No.

Richard Doyle

No we’re committed to close those in 2010, but if we want to accelerate it or HRPT wanted to accelerate it then it would have to be mutually agreed upon both companies to do it otherwise we both committed for the 2010 closing.

Mark Biffert – Oppenheimer

Okay and is significant deterioration in the fundamentals there is no adjustment to the price if that happens is there?

David Hegarty

Well, its subject to a customary diligence and real-estate diligence. In material adverse conditions, if something should happen to any of the properties or major the tenant moves out or whatever, we would have the ability to walk from their contract. But most of our third party diligence has all been done and it would have to be a material event or something like that, or material tenant. So right now we do plan on closing on all these.

Omotayo Okusanya – UBS

Okay and then related to the impairment charge that you had in the quarter what asset type is that related to?

David Hegarty

We took an impairment on three of the Senior Living properties and one on the medical office buildings.

Omotayo Okusanya – UBS

Those were - one of those was from the acquisition you had from HRPT.

David Hegarty

One of the acquisitions we have from HRPT that back in July.

Omotayo Okusanya – UBS

Okay, thank you.

David Hegarty

Welcome.

Operator

(Operator Instructions) We will go next to Chris Haley, Wachovia.

Chris Haley – Wachovia Capital Markets, LLC

Good morning, this is Young Ku here with Chris. Going back to the MOB question, if you did have to walk away from the HRPT assets is there a break up fee of some sort?

Richard Doyle

No there is currently no break up fee from that.

Young Ku – Wachovia Capital Markets, LLC

Okay. It looks like your notes are trading around 13% yield Chris your acquisitions around 7 to 8 range. Have you guys think about buying that debt vs. buying assets or even buying that stock.

Richard Doyle

That's a possibility. Right now, we have two different worlds here for until we procure any Fannie Mae financing or any other financing. We just have our revolving credit facility with limited available capital. And so we're going to use that very cautiously and I don’t think we would probably do either of those other alternatives with that limited amount of capital available. Now with the Fannie Mae money, that opens up a host of a whole array of opportunities for us including those options you just mentioned.

Young Ku – Wachovia Capital Markets, LLC

And then one last question. Could you tell us how much of your total rent has CPI based escalators?

David Hegarty

That’s a small amount has CPI based income. Some of the medical office building leases and just a couple of the Senior Living assets do. But the alternative what they have is the formula based on the growth and revenues at the properties. Now, in most of our leases, it is either 4% or 4.5% growth on revenues at the properties. And naturally, if occupancies are off a bit or people are discounting rates and so on, the growth and revenues will not be as high in 2009 as they historically have been, but still even most operators are reporting still modest net increases in revenues.

Young Ku – Wachovia Capital Markets, LLC

Okay thank you.

David Hegarty

You are welcome. Thank you.

Operator

We will take our next question from John Holbert with Gramercy.

John Holbert – Gramercy

Thanks guys. Actually my question has already been answered by the previous participants.

Richard Doyle Jr.

Okay thanks very much John

Operator

We'll go next to Bill Knickerbaucher, ING.

Bill Knickerbaucher – ING.

Yes good morning. I have some more of a big picture question on the industry. If you could just sort of go over briefly what you feel the largest concerns and challenges facing Senior Housing would be over the next year or so. And then more specifically to what extent do you feel that the slump in the housing market is affecting anything if people are reliant on selling their homes for entry fees into the communities. How much of impact do you think it has on Senior housing

David Hegarty

Couple of thoughts on one is as far as affecting the industry as a whole, I think there's going to be significant rationalization of the industry in the sense that in the lot of the debt that is out there either for development or for short term debt like three year financings or five year financings are going to start to come to ahead this year and next year which is going to create significant stress on operators, and as I mentioned in my prepared remark, we’ve seen a number of transaction to date this year that we’ve run the numbers and we keep come in out to a value that is less than amount of the debt and therefore we are stuck because the lender may or may not be in default, I mean operator may or may not be in default at the moment and there's no equity for them. So they are not willing to sale. And the lender have make some decision to eventually whether a foreclose or how to handle that. So, I think those I going to create additional pressures on the industry as a whole as far as company’s go. As far as fundamental day-to-day, I think all the operators are feeling some pressure from the economy and moving rates and so on. I do believe that interest will be model is under significantly more pressure than the rental model and the housing market is having significant impacts. And more so in certain markets than other markets and stuff, but it is definitely having a significant pack on not-for-profits or for-profits that are made with that type of model. Hopefully the stimulus package should help start to move things along. I think everybody I think everybody is waiting to see, and prove it--but we are certainly hoping that going to start to have some positive effects on it but there is a building up of pent up demand for these services that at some point is going to have to come through the system and we are seeing more frail residents coming in and many of the services that have to pay and I think that’s going to continue to build up too. Well I think for some whether through this year so then that should be some good times after that. And the other thing too is there's no new supply happening. So that should also further help the demand equation. I guess I can't under estimate the impact of the housing market on the entrance fee models.

Bill Knickerbaucher – ING

Right and what, in terms of your assets, what approximately how much as is that entrance fee versus rental.

Richard Doyle

We are very--we only have two or three in the whole portfolio that are partial entrance fee models and it is offered as an option and so far they are holding up quite well.

Bill Knickerbaucher – ING

Yes, thank you.

Richard Doyle

Welcome.

Operator

And we had no additional questions at this time I would now like to turn the call back over to David Hegarty for any closing remarks.

David Hegarty

No thank you all very much we will give you further update and our first quarter call in May, thank you.

Operator

This concluded today conference we thank everyone for the participations.

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Source: Senior Housing Properties Trust Inc. Q4 2008 Earnings Call Transcript
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