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Senior Housing Properties Trust (NYSE:SNH)

Q4 2007 Earnings Call

February 29, 2008 10:00 am ET

Executives

Tim Bonang - Manager of IR

David Hegarty - President and COO

Rick Doyle - CFO

Analysts

Kevin Ellich - RBC Capital Markets

Jerry Doctrow - Stifel Nicolaus

Philip Martin - Cantor Fitzgerald

Steve Swett - KBW

Chris Pike - Merrill Lynch

George Walsh - Gilford Securities

Operator

Good day and welcome to the Senior Housing Properties Trust Fourth Quarter and Year-End 2007 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 Manager of Investor Relations, Mr. Tim Bonang. Please go ahead, sir.

Tim Bonang

Thank you, Leo, 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 the federal securities laws. These forward-looking statements are based on Senior Housing’s present beliefs and expectations as of today, February 29, 2008. 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, or FFO. A reconciliation of FFO and the net income is available in our supplemental package found in the Investor Relations section of the Company’s website. Actual results may differ materially from those projected in forward-looking statements. Additional information concerning factors that could cause those differences is contained in our Form 10-K, which will be filed later today, in Form 10-Qs previously filed with the SEC, as well as in our Q4 supplemental operating and financial data found on our website at www.snhreit.com. Investors are cautioned not to place 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. We believe that the financial discipline we displayed in 2007 has really set us up to what appears to be a very active and successful 2008. For the quarter ended December 31, 2007 we reported FFO of $0.42 per share, which was in line with Street expectations. This appears to be a decrease from FFO of $0.47 per share for the fourth quarter in 2006.

However, FFO for the fourth quarter of 2006 included a $5.7 million litigation settlement and reduced by fourth quarter litigation cost of $260,000, with the net effect of $5.4 million, or $0.07 per share of FFO. Excluding this one-time settlement and related legal charges, FFO for per share would have been $0.40 per share and FFO would have been increased by 5% on a per share basis quarter-over-quarter.

For the full year 2007, FFO per share was $1.62 versus $1.57 for 2006. The 2006 results include that $5.7 million settlement I just mentioned, reduced by the full year litigation cost of $1.7 million. FFO per share would have been $1.52 and FFO growth would have been 6.6% year-over-year. This growth was accomplished with no acquisitions for the first nine months of the year and two equity issuances during the year. So through primarily internal growth, FFO increased 6.6% year-over-year and 5% quarter-over-quarter.

At this time I would like to turn the call over to Rick to discuss further financial results for the quarter and for 2007. And then I’ll discuss the performance of our current leases, the acquisition environment and the capital markets activity.

Rick Doyle

Thank you, Dave. As Dave mentioned, we are very pleased with our growth in FFO quarter-over-quarter and for the full year 2007. Revenues for the fourth quarter 2007 grew by $3.7 million, or 7.6%, compared to last year’s quarter if you exclude the one-time settlement. This was primarily due to approximately $179 million of acquisitions in improvement financings since October 1, 2006 and increased rent from percentage rent in other CPI increases in rent.

For FFO purposes, we have recognized $1.7 million of percentage rent in the fourth quarter versus $1.3 million a year ago. Interest expense decreased from $12.3 million in the fourth quarter of 2006 to $9.5 million in the fourth quarter of 2007, primarily due to reduced leverage levels and lower rates. During the fourth quarter of 2007, our average borrowings were $452 million compared to $602 million in the fourth quarter of 2006. Interest rates were slightly lower on our revolving credit facility in 2007 and the decrease in interest expense was also due to a decrease in interest on our senior notes as a result of retiring $20 million of our senior notes in January 2007.

General and administrative expenses were low in the fourth quarter of 2007 versus the same period in 2006 by $353,000. The majority of that decrease is attributable to the elimination of the HealthSouth litigation costs incurred in 2006. During the fourth quarter of 2007, we recorded an impairment reserve of $1.4 million, which relates to one assisted living facility in Pennsylvania.

One of our tenants, Five Star Quality Care, has determined the facility is no longer viable as an assisted living facility and with our consent they have closed the doors in this – and is selling it in the first quarter of 2008. In 2006, we sold three skilled nursing facilities resulting in a $21,000 net loss. For the year, revenues in 2007 increased by 8% to $188 million, excluding the one-time rent settlement of $5.7 million from HealthSouth in 2006.

Interest expense for the full year of 2007 was $9.3 million less than the full year of 2006 because of lower rates and lesser amounts outstanding under our revolving credit facility. Our weighted average balance outstanding under our revolving credit facility was $20 million compared to $135 million for the full year 2006. The decrease in interest expense is also due to a decrease in interest, as a result of our purchase and retirement of $20 million of our senior notes in January 2007, in all $28 million of our junior subordinated debentures in June 2006.

In the first quarter 2006 and 2007, portions of our unsecured debt were retired which resulted in a loss on early extinguishment of debt of $2 million in 2007 and $6.5 million in 2006. However, only the cash portion of the loss is deducted to compute funds from operations. For 2007, the cash portion of the loss was $1.8 million and for 2006 it was $4.1 million.

General and administrative expenses for the full year 2007 were $14.2 million versus $14.6 million in 2006. However, the 2006 period includes $1.7 million of costs related to the HealthSouth litigation. Without the litigation costs, G&A would have increased by $1.2 million. Over half of this increase is due to legal and accounting fees, and $330,000 is attributable to investments acquired in late 2006. We also had an increase in state taxes of $250,000. Also during 2007 and 2006, we recognized an impairment of asset charge of $1.4 million in both periods related to one property that we intend to sell in 2008 and three properties that were sold during 2006. The dividend paid with respect to the fourth quarter results was $0.35 per share. This represents a payout ratio of 83% on $0.42 per share of FFO. For the year, the dividends paid were $1.38 per share, which is 85% of the $1.62 per share of 2007 FFO.

During 2007 the quarterly dividend was increased by a penny per share in January, and again in October. These increases represent a 6% increase in dividends for the year. At year end, the balance sheet remains strong and well positioned for growth. In fact, in December Moody’s Rating Service upgraded our senior unsecured debt to Ba1, one notch below investment grade. We’d real estate investments of $1.9 billion, all of which are 100% owned in fee simple investments.

In December we raised net proceeds of approximately $110 million of common equity and used the proceeds to repay the outstanding borrowings on the revolver and to fund an acquisition that closed in January of 2008. As a result, at December 31, 2007 we had $43.5 million of cash and cash equivalents on hand and nothing outstanding on our $550 million revolving credit facility.

Subsequent to year end, we closed on three acquisitions of eight senior living properties for approximately $86 million and have commitments to acquire 16 more senior properties for $198 million. Also on January 31, we funded $15 million of capital improvement under the Five Star master leases. As a result of these commitments and potential opportunities for future investments, we again accessed the equity market in February with net proceeds of approximately $130 million and used these proceeds to repay the $61 million outstanding on our revolver to fund a $48.5 million acquisition that we are closing today and for future acquisitions.

At this point, I’ll turn the call back to Dave to discuss the performance of our leases, the acquisition environment and our capital resources.

David Hegarty

Thanks, Rick. And portfolio of investments continues to perform very well. For the quarter ended September 30, 2007 rent coverage improved or stayed essentially the same for all the leases, expect the New Seasons lease and one of the private company leases. The two senior living property leases with Five Star had very strong coverage of 1.6 to 1.7 times the rent.

And the rehabilitation hospital lease improved to 1.08 times from 0.767 times for the quarter ended June 30. We expect coverage to improve over time at the rehab hospitals because the 75% rule for in-patient rehabilitation hospitals was modified to 60% level and some of the capital improvements at the hospitals are starting to be completed.

Occupancies modestly improved at the private pay senior living properties to approximately 90 to 92% range for the properties and the run change for the rehabilitation hospitals. The New Seasons properties had a decrease in occupancy to 82% and rent converge slipped to 0.79 times. Two of the ten properties leased in New Seasons are struggling and they are negatively impacting the occupancy coverage. However, we have a strong guarantee from the parent, Independence Blue Cross.

Occupancies at the skilled nursing facilities in the portfolio have been consistent year-over-year and down 1% from the June quarter. But it is consistent from the same quarter a year ago. I am very comfortable with the metrics and coverage rates of the portfolio we own today.

During the last few months, we’ve raised equity in anticipation of future growth potential we see. For all of 2007, we did not acquire a single senior living property, but we did capitalize on a unique transaction in the fourth quarter to acquire six wellness centers that are leased on a long-term basis to Starmark Holdings. At that point in time, we believe the Senior Housing assets will become overpriced and not worth the risk at those prices. The wellness center transaction was an opportunity to purchase excellent assets at low replacement cost and a more attractive yield. It was also an investment not dependent on government funding and a non-Five Star transaction.

Now in the fall of 2007 the credit crunch became worse and certain transactions in the senior living marketplace were not being consummated due to inadequate funding to the purchaser or the increased cost of fund, resulting in significant pricing adjustment to the sellers. And as a result, we are being asked to reconsider a number of opportunities where we had previously been unsuccessful. Certainty of closure now became very important – has become very important and we’re being told that if our pricing was at all competitive, we will be selected.

Since January 1, 2008 we’ve closed on three acquisitions involving eight senior living properties. One transaction involves five assisted living properties in Wisconsin, one of which has a skilled nursing component. Another transaction was a rental CCRC in Nebraska, that’s all private pay except for the skilled nursing component.

The other transaction we closed on was for two all private pay assist living facilities in the San Antonio area where Five Star has a presence. All of these transactions are being leased to Five Star at an initial rate of 8% per annum and added to the master lease with the term that expires in 2020. We currently have purchased commitments for 16 private pay assisted living and dementia care communities and three separate transactions totaling $198 million. We expect these properties will also be leased to Five Star.

As Rick mentioned, today we are closing on the acquisition of a trophy asset in Rogers, Minnesota for $48.5 million, which is known as the Wellstead of Rogers. The property has 162 dementia care units and 66 assisted living units. And we welcome you to look at their website at www.wellsteadofrogers.com, and that’s Wellstead spelled wellsteadofrogers.com. In this property, and most of the other properties that are under agreement today, really specialize in dementia care, and this is an attractive niche to us because we believe it’s underserved, it’s a need driven service that’s not subject to macroeconomic changes and it’s all private pay. And we’re seeing a number of opportunities with and without Five Star, and expect to be an acquirer for the rest of 2008. The unsecured debt markets are very expensive at the moment, particularly for our non-investment grade issuer. A $550 million revolver does not mature until December 31, 2010 and is completely available to us and we look forward to being able to acquire accretive assets at this time when others are constrained.

That concludes the prepared remarks and, operator, we’d like to open it up to questions at this time.

Question-and-Answer Session

Operator

Very good. (Operator Instructions). We’ll take our first question from the side of Kevin Ellich of RBC Capital Markets.

Kevin Ellich - RBC Capital Markets

Good morning, guys. Thanks for taking my questions.

Rick Doyle

Good morning.

David Hegarty

Good morning, Kevin.

Kevin Ellich - RBC Capital Markets

Dave, could you provide us with an update regarding your acquisition pipeline? And since you recently raised capital, could you provide some coloring on the size of expected future transactions?

David Hegarty

Sure. The – well, all of the significant commitments or significant acquisitions have already been disclosed. So we currently have $197 million – or $198 million of transactions, counting the one that’s going to close today out there. And I would expect almost all of that will close by April 1.

Kevin Ellich - RBC Capital Markets

Okay.

David Hegarty

Other transactions are just smaller ones or ones that we are looking at, but we don’t have any commitments or agreements to acquire them. So I would say after we fund these commitments we’ve mentioned, we would probably have about $120 million or so outstanding on the revolver and the rest available for acquisitions. But getting on numerous transactions, $550 million revolver seems like a large sum of money. But in some ways one or two transactions could consume that, or just three or four transactions could easily consume a meaningful chunk of it. So...

Kevin Ellich - RBC Capital Markets

Sure.

David Hegarty

And I just don’t want to speculate today on what our odds are of consummating some of those transactions.

Kevin Ellich - RBC Capital Markets

Right. But could you say it’s safe for us to assume or I think that you guys might be bidding on some larger transactions that could consume that 550 million?

David Hegarty

It’s possible, yeah.

Kevin Ellich - RBC Capital Markets

Okay.

David Hegarty

When we – this first quarter we will have closed on almost $300 million. So...

Kevin Ellich - RBC Capital Markets

Okay.

David Hegarty

One quarter is 300 million. So it won’t take us long to run out of money if we kept up at this pace, but who knows.

Kevin Ellich - RBC Capital Markets

Excellent. And then since you guys have a significant exposure to Five Star, and I am sure you guys announced that they have some cash paid up in auction rate securities. Is that considering you at all or do you think that’s more of an opportunity to do more leasing transactions with them?

David Hegarty

I don’t see that having a meaningful impact on the way we are going to view transactions or structure them. We have been looking at transactions where maybe we would do some of the stabilized assets and maybe they would do some assets that had some upside potential to increase occupancy or assets that were not long-term holds, so maybe smaller.

It may have a modest impact on the way we do some transactions. But I don’t envision a big one. For others, Kevin is referring to some of the investments that Five Star has in auction rate securities that are a bit illiquid at the moment. But our understanding is that those are excess funds that were raised previously and have it invested for a temporary period. But it’s not their day-to-day operating cash...

Kevin Ellich - RBC Capital Markets

Right, right.

David Hegarty

Performance from the leases we lease to them. So it maybe modestly could impact the potential.

Kevin Ellich - RBC Capital Markets

Okay, okay, excellent. And then as I think about the wellness centers, I know it’s still kind of relatively new. But any idea or could we get an update on how they’re performing? And then also if they are noticing any impact from the economic slowdown with regards to membership and pricing?

David Hegarty

Well, the – I mean, it’s still pretty early and obviously we disclose our coverage ratios and such a quarter in arrears. But in general we went into the transaction envisioning about 1.8 to 2 times coverage of the rent, and everything indicates that that’s still holding. And so far we have not seen any meaningful impact on membership. Obviously the first of the year, New Year’s resolution and everything else is a big push. So in fact we may modestly see memberships increase during this period.

Kevin Ellich - RBC Capital Markets

Okay. And then just one last question. Thinking about the dementia care move in Rogers, Minnesota, what’s the census at that facility, and have you guys scouted out several other dementia care opportunities?

David Hegarty

Right. We are very much attracted to that segment, particularly because it’s a segment that is not being actively developed for a new product type. So I don’t anticipate an oversupply of product. It is a niche that it is a need driven decision. So the demand for the properties versus the supply should be pretty strong, and it’s all private pay. So we’re attracted to that area.

The occupancy at the Rogers property, the assisted dementia units are pretty much in the high 90% occupancy level. And the assisted living was the last component just built, and that I would say is roughly about 70% occupancy. And what’s interesting is that different dynamics, dementia care for a high quality facility, plus this also takes all levels of dementia care even the higher levels, which many don’t take. People will travel for miles and miles to come to that facility versus assisted living, which is much more local driven. And Rogers, I understand is a very fast growing suburb of Minneapolis, but it’s still somewhat rural. And so I say the assisted living has taken longer to fill up.

Kevin Ellich - RBC Capital Markets

Okay. I appreciate that that’s helpful. Thanks.

David Hegarty

Okay.

Operator

We’ll take our next question from the site of Jerry Doctrow of Stifel Nicolaus.

Jerry Doctrow - Stifel Nicolaus

Good morning.

David Hegarty

Good morning, Jerry.

Jerry Doctrow - Stifel Nicolaus

Let’s see, a couple of things, some picky, some broader. Just straight line rents, you are going to make a series of acquisitions. Any sense about how it impacts straight line as we kind of go through the next – I guess the next 198 million or so?

David Hegarty

It would have no impact on straight line.

Jerry Doctrow - Stifel Nicolaus

Okay. That was easy enough. Wellstead of Rogers, again, I think I just missed some of those numbers. You’re buying just sort of an AL dementia piece, you are buying is part of a bigger campus. Can you just kind of run through that again?

David Hegarty

Well, we are buying it all, but it’s a campus of strictly 166 or 162 dementia units, and I believe it’s 66 assisted living units.

Jerry Doctrow - Stifel Nicolaus

Okay.

David Hegarty

And it was property build on three phases, extremely high-quality construction, copper routes, and...

Jerry Doctrow - Stifel Nicolaus

Yeah, I looked at the pictures already.

David Hegarty

Okay.

Jerry Doctrow - Stifel Nicolaus

And it does look nice. And is that a Five Star facility you are releasing back to the operator?

David Hegarty

That’s the Five – it’s going to be a Five Star facility.

Jerry Doctrow - Stifel Nicolaus

Okay. So that’s part of the 198, that’s just the first phase or whatever?

David Hegarty

Correct.

Jerry Doctrow - Stifel Nicolaus

Okay, okay, thanks. And then just one or two other things. You obviously did a lot sort of reducing debt cost and stuff this year. Is there anything else sort of on the balance sheet we should be thinking about in terms of bringing down debt cost any other sort of buyouts of debt or that sort of thing that’s on the agenda?

Rick Doyle

In the short term, we’re looking to payoff a mortgage, it’s around $12 million, in April 1st.

Jerry Doctrow - Stifel Nicolaus

Okay.

Rick Doyle

Other than that, I don’t see anything in the near future that would reduce.

Jerry Doctrow - Stifel Nicolaus

Okay. And what’s – remind me what the rate is on the line of the spread?

David Hegarty

It’s LIBOR plus 80.

Jerry Doctrow - Stifel Nicolaus

Okay.

David Hegarty

We have some other debt that’s prepayable come April 1st if we choose to, but at a higher interest rate. But there is a prepayment penalty and it’s not something we’re likely to prepay in this environment.

Jerry Doctrow - Stifel Nicolaus

Okay. And just – I wanted to just get a little bit more color sort of on maybe strategy and sort of mix here. I mean, obviously, it sounds like you’re very comfortable with kind of the current acquisition environment could put up bigger numbers. And I guess I wanted to kind of explore two issues. One is, I think you mentioned you would do Five Star and some stuff away from Five Star. Any color we could get on diversification, I think it would be helpful. And then maybe any color on sort of where you see kind of yields and stuff, is 8% kind of the number or should we think about something different?

David Hegarty

First off on the diversification strategy, we are keeping our eyes open for opportunities to diversify from Five Star. And if we can consummate a meaningful transaction that would shift some of the concentration away from Five Star, we would pursue that pretty aggressively. Again, I can’t comment specifically on any transaction at the moment, but it is a priority of ours.

Jerry Doctrow - Stifel Nicolaus

Okay.

David Hegarty

And secondly is, the rates that we charge today I would expect that we will be able to begin to move up rates a bit. But frankly the competition of all the Healthcare REITs are still holding pretty much in the 7.75 to 8.25 range. So it’s tough for us to go beyond probably 8.25 at least for the near term anyways.

Jerry Doctrow - Stifel Nicolaus

Got it. And the focus would still be on sort of the private pay stuff that’s – you are not...

David Hegarty

That’s correct. We are not looking skilled nursing. I won’t rule out looking at possibly some hospital type transactions. But skilled nursing was -- we’re still not pursuing.

Jerry Doctrow - Stifel Nicolaus

Okay.

David Hegarty

On a standalone basis anyways.

Jerry Doctrow - Stifel Nicolaus

Okay. And then medical office, you’re not thinking about getting back in that business. I mean you have been at one point to pass, but?

David Hegarty

Well, we are thinking about whether or not there is some opportunity to do something that would be somewhat along those lines. But right now we do have a probation against particularly multi-tenanted office buildings, medical office buildings from competing against HRPT. But there may be some opportunities along those lines.

Jerry Doctrow - Stifel Nicolaus

Okay. Okay. Let’s see, I think that’s basically from me. I’ll jump back in the queue if I think of something else. Thanks.

David Hegarty

Okay. Thank you.

Operator

(Operator Instructions). We’ll take our next question from Philip Martin of Cantor Fitzgerald.

Philip Martin - Cantor Fitzgerald

Good morning.

David Hegarty

Good morning, Philip.

Rick Doyle

Good morning.

Philip Martin - Cantor Fitzgerald

On percentage rents, can you just give us an update as to the trend line with percentage rents? Certainly it’s increased a bit over the last year, and what’s kind of your forecast there? And with investment volumes increasing here in 2008, are you looking to possibly structure more leases with percentage rents, especially given that most of these are going with Five Star?

David Hegarty

Well, we’re still structuring our transactions with percentage rent, and often even with our new operators that’s the pitch that we market. Because when things are good, we share in that potential, and things are not so good, we don’t further add salt to the wound and burden them with, say, CPI increases or some sort of fixed increases. So what – for the fourth quarter, we had $1.7 million of percentage rent, same period a year ago was 1.3 million year-over-year. The overall increase was about 1.2, $1.3 million.

Rick Doyle

Yeah, we’re 5.3 million to about 6.6 million.

Philip Martin - Cantor Fitzgerald

Okay.

David Hegarty

Yeah. And then beginning January 1, we have 11...

Rick Doyle

11 new properties that will be added to the base rent starting in January 1, 2008.

David Hegarty

They will start kicking in percentage rent.

Philip Martin - Cantor Fitzgerald

Okay. What will be the annualized rate there approximately, the incremental?

David Hegarty

It’s tough to tell. But if you – like the 1.7 for last quarter, obviously that’s 6.8 million a year. Obviously we expect to see a couple of hundred thousand I would think of increase as a result of adding these properties plus continuing on with the existing properties under those master leases. So, again, the run rate was 1.8 or 1.9, you could annualize that at least for a base case.

Philip Martin - Cantor Fitzgerald

Okay, okay. That provides a bit of help. Okay. So it sounds like you’re pursuing percentage rent structures and there is – we can expect to probably see some of those as you announce the acquisitions here. Now again going back to Five Star as and trying to diversify away, it wouldn’t be a quarter if we didn’t ask that question, right?

David Hegarty

That’s right.

Philip Martin - Cantor Fitzgerald

Your life just wouldn’t seem right.

David Hegarty

Yeah.

Philip Martin - Cantor Fitzgerald

I mean, I know the last couple of years the acquisition environment has been more difficult and spotty. But do you think there is a good – I mean, is this – I don’t know really how to ask this question. But is there a higher likelihood that we get some diversification this year or is it just a better negotiation or better opportunity when you can go in and potentially find to trouble operator that needs to be replaced with somebody like Five Star?

David Hegarty

Well, I mean, the opportunities we see out there that are most likely to succeed with us as a bidder on a situations where an operator wants to get out of the business entirely. They don’t want to stay on as the operator. And once in a while you come across a situation where you have wealthy individuals or some institutional investors who have put the capital behind a management team, and the management team wants to stay. But the investors feel they’ve hit their three or five-year horizon, the properties are stabilized, and they want to cash out.

We’ve been on several of those situations. But the catch is, we’ve always said to them, we are not going to cash everybody out, and then leave the management company in as a tenant, and just continue on with that situation for the next 15-year lease. We’ve said the management team you have to turnaround and maybe the amount you’re going to cash out in, you’ve got to post a security deposit or some sort of enhancement that we could feel comfortable with that, A, if there is a default, we’ve got a little bit of time to deal with it before it start – hurts our bottom line, and second that we can hold their feet to the fire.

And in those cases typically competition has said that they’re going to be a little holding to a lower credit standard or whatever, and view it more as management. It is not irrelevant, but management is not the key component, because should they fail, you bring in somebody else. And the properties have to stand on their own. But I mean in some ways we should in the best position to do that, because we have Five Star that we could call upon to manage the property should it get into trouble. But that’s not a desirable solution really for us.

Philip Martin - Cantor Fitzgerald

If you didn’t have Five Star, could you have done this transaction?

David Hegarty

Very possibly not. I mean, a lot of this is relationship business, and every REIT has its own strategy. Obviously like healthcare REIT puts somebody in business and then requires them to come back to them with all the deals. And Ventas and NHP are trying to do the same thing. I think Capital Senior Living went around and asked for bids, back when they were looking for their first deals to be financed, and they were able to get a 7.75% rate. But they are now going to bring most of the deals that they find to back to Ventas or whomever. So you are probably right. We may not be as successful today if we did not have Five Star with us on bidding on a lot of transactions.

Philip Martin - Cantor Fitzgerald

Now, I mean, switching gears a little bit to the alternative investments. I mean, certainly you announced the Starmark transaction in late ‘07 and you briefly touched on thinking or maybe pursuing some MOB opportunities. Characterize what would be – well, number one, what is your stance on pursuing some of these alternative investments? And on the MOB front, characterize a transaction that would be appropriate for SNH, given its profile and its financial structure, et cetera?

David Hegarty

Well, I mean, we’re obviously part of a larger organization and we see a number of transactions pitched by any Wall Street firms and some dug out by ourselves. And I guess, I won’t rule out – it was another wellness center transaction, a similar type transaction that was sort of tangential lifestyle healthcare, somewhat related that we would not seriously consider that.

And again we don’t have any transactions under agreement, not even a letter of intent on any of those alternative investment situations. But even in the medical office building area, we can do triple net lease clinics and some other surgery centers and things of that nature, and we can also do hospital type transactions. So it’s possible we could have some transactions along those lines right now, particularly multi-tenanted medical office buildings are something we cannot do without consent of working with HRPT somehow.

Philip Martin - Cantor Fitzgerald

Okay, okay. And my last question, is just making sure I’ve got some numbers right here. So closing 198 million here in the first quarter with your recent equity offering, your line is paid down. So by April 1st, you will be a 198 plus. You mentioned 300, 320 million here closed in the first quarter, that’s the fourth quarter acquisitions as well that are closing?

David Hegarty

No, there was a – the 198 plus...

Rick Doyle

86.

David Hegarty

86...

Philip Martin - Cantor Fitzgerald

86.

David Hegarty

That we’ve closed.

Rick Doyle

In January

Philip Martin - Cantor Fitzgerald

Okay, that was 198 plus the 86.

Rick Doyle

Yes.

David Hegarty

Yeah, and then we’ll...

Rick Doyle

We’ll close on the majority of that 198 in the first quarter.

Philip Martin - Cantor Fitzgerald

Okay. The 198, the 86 and then they’re...

David Hegarty

Well, it has some improvement financing...

Philip Martin - Cantor Fitzgerald

Exactly, okay.

David Hegarty

Again, say 15 million.

Philip Martin - Cantor Fitzgerald

Okay. So you’re kind of right at that 300 million. Okay. Just wanted to make sure I had all the components.

David Hegarty

Yeah.

Philip Martin - Cantor Fitzgerald

Okay, thank you.

David Hegarty

You’re welcome.

Rick Doyle

Thank you.

Operator

We’ll move next to Steve Swett of KBW. Go ahead please.

Steve Swett - KBW

Hi, Dave. How are you?

David Hegarty

Good morning, Steve. How are you?

Steve Swett - KBW

I’m fine. Thanks. Just refresh my memory about the improvement investments that you make. You start collecting the rent on that when the investment is made?

David Hegarty

That’s correct as soon as we fund it.

Steve Swett - KBW

Okay. And then, I think you covered this, but just all of the 198 will close in the first quarter, correct?

David Hegarty

The majority of it. It’s conceivable that there might be 14 or 15 million that do not close by April 1.

Steve Swett - KBW

Okay. And clearly with the two equity offerings that’s been your preference, you commented on the unsecured debt market. Would you consider using the secured market at all to issue debt?

David Hegarty

Possibly with the Fannie Mae programs, we’ve had some discussions off and on with people about that or assuming debt if there is debt in place.

Steve Swett - KBW

Yeah.

David Hegarty

Obviously, it would not be a large portion. I mean, I could see us doing 100 million or maybe even $200 million of that type of debt, but probably not more than that.

Steve Swett - KBW

Okay.

David Hegarty

So it’s an option available to us. The – as you said, we’d be north of 8% on any senior unsecured debt issuance in this market.

Steve Swett - KBW

And where would you be on the Fannie secured today, just for a kind of a normal underwriting?

David Hegarty

I believe about 6.75 to 7.

Steve Swett - KBW

Okay. And then my last question, the Starmark transaction was clearly a different type of asset. Do you think – and just kind of just thinking strategically, would you have pursued that investment if you had opportunities at the time in your more kind of normal space, senior living, assisted living, that sort of stuff?

David Hegarty

Yes. It actually – it came about during the same timeframe that some of these other transactions came about.

Steve Swett - KBW

Okay. So you were negotiating that and you were also seeing a return of some of these other transactions as well?

David Hegarty

Yeah, yeah.

Steve Swett - KBW

Okay, thanks.

David Hegarty

Thanks.

Operator

We’ll move next to the site of Chris Pike of Merrill Lynch.

Chris Pike - Merrill Lynch

Hi. Good morning, Dave.

David Hegarty

Good morning, Chris.

Chris Pike - Merrill Lynch

Can you just run through, I guess, the condemnation asset in Q1 ‘08, I missed that, you went through it pretty quick.

David Hegarty

There was one assisted living facility, that I wouldn’t call it condemnation. But it was a facility in the Pittsburgh area that is operated by Five Star that due to different regulations changes that occurred in Pennsylvania, as well as it’s kind of a tough asset to start with that, it was determined that the best thing to do would be to consolidate the operations of that facility with another one not too far from it. And then close this one down and sell it as just general real estate as opposed to an assisted living facility. And so that is being sold off this quarter, and we took an impairment of 1.4 million to reflect what we think that it will sell for.

Chris Pike - Merrill Lynch

Okay.

David Hegarty

Now we still get rent on that. And should it be sold for – I don’t know – I think we had in our books maybe 4 million something and...

Rick Doyle

Yeah, 4.3 million.

David Hegarty

Yeah, we expected to sell it for say 3, so the net proceeds of $3 million we would get in and we will reduce Five Star’s rent by 8% on 3 million. And then what we would – because they are reinvesting in other properties they have, when that money gets put into the next capital improvement funding on another property, we will get 9.5% or approximately that on those monies being put back in. So it’s a recycling of cash basically.

Chris Pike - Merrill Lynch

All right. And then I guess in the acquisitions or the prospective acquisitions, I mean, I just did the math. I mean, I have it in front of me, but it seems like some of the acquisitions you are buying for – I don’t know – call it 110 per unit, others you are buying for 197, 200 a unit.

David Hegarty

Yeah.

Chris Pike - Merrill Lynch

You have to lease them both – those both slugs back to different leases to Five Star at 8. Can you walk through the two different slugs and why the initial price per pound are so different and yet the lease yields back to Five Star the same?

David Hegarty

Yeah. A couple of things: One is the first transactions are more generic assisted living facilities with the skilled nursing home component, and those are based in Wisconsin and Nebraska. The ones in Wisconsin have all been built in the last, say, seven or eight years. The one in Nebraska is a little bit older, but that 8% is pretty much thereabouts the going rental rate that would be market conditions. The other properties that are going for close to $200,000 a unit are almost all the dementia care type units.

Chris Pike - Merrill Lynch

Okay. That explains it, okay. Okay, that’s it. Thanks a lot.

David Hegarty

Okay, you’re welcome.

Operator

We will move next to the site of George Walsh of Gilford Securities.

George Walsh - Gilford Securities

I just had a question relating to the auction rate securities with Five Star. If there is a reclassification of some of those assets to – from short-term assets to longer term assets, then could there be any changes in the capital ratios like working capital that might affect the terms or financing that you have with them or certain other terms that they may have?

David Hegarty

No. Obviously, Five Star is having their call on Monday, and I can’t comment on what the impact is on their numbers or their presentation. But from the landlord’s perspective at SNH, there are no covenants in our leases that would affect the cost of rent or financial covenants or viability of the leases. So it would have no monetary impact with regards to their relationship with us.

George Walsh - Gilford Securities

Okay. And as far as the rehab hospitals goes, is there any update on the capital improvements there and the trends that you see going forward in occupancy?

David Hegarty

Well, a couple of things, and again, it’s probably more appropriate for Five Star on some of this. But I can just tell you that the rehab hospitals – the capital improvements that are being done are pretty much exterior type improvements that can be done without certificate of need approval by the state regulators. The interior stuff is pretty limited to paper and paint and things of that nature.

They can’t really change around the room configurations and so on until they get the Massachusetts Regulatory Health Department to give them approvals to spend it. There has also been a new development too, which is probably a positive to some degree is, it’s been reported in the various papers that Mass General was planning on building a new rehab hospital not too far away from their old one, and replacing the old one. And that has been put on hold. They’re reevaluating what they’re going to do. They’re not moving forward with that at the moment. So that’s also good news for our two rehab hospitals.

George Walsh - Gilford Securities

Okay, all right. Thank you.

David Hegarty

You’re welcome.

Operator

We have a follow-up question from the site of Jerry Doctrow of Stifel Nicolaus.

Jerry Doctrow - Stifel Nicolaus

Thanks. I appreciate the time. Just one follow-up, David. I know there was a couple of other assets. I think about some of those stuff in Delaware that you had with Five Star, maybe some of the older skilled stuff that might also be consolidated or sold or whatever. So is there anything else in terms of the sale or workout kind of thing that we should be thinking about at all?

David Hegarty

Not in a big way. There will be ongoing pruning of the portfolio. I would say some of the rural nursing homes are always borderline, whether they will make it just because of the declining populations in those towns. And in some cases it’s just better for a local operator may be able to make a goal of it versus a chain. So I would envision that over the course of the next few years you might see individual properties plus there is two or three sold here and there. But that’s more just culling the portfolio. I think the ones you’re referring to like in Delaware, those are older – I am thinking of the property, you are thinking of the (inaudible).

Jerry Doctrow - Stifel Nicolaus

Yeah.

David Hegarty

Like an older forum property that – it runs at a very high occupancy level and it generates decent money. It’s just older vintage building, and so I don’t know of any plans to sell that or do anything differently with it.

Jerry Doctrow - Stifel Nicolaus

Okay, okay. All right, thanks a lot.

David Hegarty

All right. You are welcome.

Operator

We’ve a follow-up from Philip Martin of Cantor Fitzgerald.

Philip Martin - Cantor Fitzgerald

Thank you again. One question was answered, but the second question I have is, can you talk about the coverage ratios that you underwrote here – that you’re underwriting on this kind of 275 million, $280 million pool of assets?

David Hegarty

Sure. They all cover, and I’d say the range is from about 1.1 to 1.25 times coverage.

Philip Martin - Cantor Fitzgerald

Okay.

David Hegarty

The dementia ones are the ones that have the higher coverage ratios.

Philip Martin - Cantor Fitzgerald

Okay. So closer to the 1.25 there and you are on a 1.1 on the rest. Okay, thank you.

David Hegarty

Okay. You are welcome.

Operator

And our final follow-up comes from Kevin Ellich of RBC Capital.

Kevin Ellich - RBC Capital Markets

Hey, guys. Just a couple of quick questions: Going back to the comment about the rehab hospital with Mass General, just help me understand Mass General still has your old existing rehab hospital?

David Hegarty

Yeah, it’s called the Spaulding Rehab Hospital.

Kevin Ellich - RBC Capital Markets

Yeah.

David Hegarty

And it’s a separate building about – I don’t know – a quarter mile away from the Mass General Hospital. And their plan was to build a brand new state-of-the-art hospital about a mile away that was going to be 75% of their license capacity of their existing one, and just make them all single suites with state-of-the-art electronics and so on.

And apparently, again, from what I’ve seen in the public press is that their costs have escalated something like $60 million since they’ve been planning this. And now they’re feeling that they probably can’t afford to do this and are now looking at whether they should just do some sort of improvement program on their old site. And so – I mean, that was certainly some cause for Five Star to be concerned about the competition and a major driver as to why Five Star felt they had to put in money as quick as possible into improving their patient rooms and so on.

Kevin Ellich - RBC Capital Markets

Right. So really the concern was that recruiting new patients would be tougher if there is a newer competitor, a newer facility for people to go to, right?

David Hegarty

Yeah. I mean...

Kevin Ellich - RBC Capital Markets

Okay

David Hegarty

You’ll always have maybe the Mass General and their network in Boston referring to their own hospital versus the others will refer to, possibly refer to Five Star’s facilities. But this becomes a less black and white issue, because it’s, why wouldn’t anybody want to go to the state-of-the-art facility if Medicare is paying.

Kevin Ellich - RBC Capital Markets

Right.

David Hegarty

And – but...you know.

Kevin Ellich - RBC Capital Markets

Okay. And then Rick, did you say how much CapEx was funded to Five Star during Q4?

Rick Doyle

Roughly $15 million.

Kevin Ellich - RBC Capital Markets

Okay.

Rick Doyle

It’s 14.7, it is roughly $15 million.

Kevin Ellich - RBC Capital Markets

Okay, thanks. And then, thinking about – going back to Wellstead of Rogers, it’s a pretty large campus, I think like 20 acres. Is there any possibility or thoughts about expanding, adding on independent living or skilled nursing to that campus?

David Hegarty

It’s possible, but that’s not – I guess, it hasn’t been factored in today.

Kevin Ellich - RBC Capital Markets

Okay.

David Hegarty

I think there is upside potential and – the only thing is it it’s – they themselves market themselves as wanting to be the Mayo Clinic of dementia care and feel that people will come there if they are known for that specialty. Now from an independent living perspective, I am not for sure that they want to live in a community that’s known for being a specialty in dementia care.

Kevin Ellich - RBC Capital Markets

Right.

David Hegarty

So I’m not sure they necessarily go together. But you’re right. The location has quite a bit of open area around it, and in fact behind it are number of condos and duplexes and multi-family type properties, so – which has all been built in the last five years.

Kevin Ellich - RBC Capital Markets

Okay. Kind of like the field of dreams for a dementia care, if you build it, they will come.

David Hegarty

Sort of, yeah.

Kevin Ellich - RBC Capital Markets

And then lastly, you mentioned two of the facilities that were recently acquired in San Antonio are private pay. What was the census on that occupancy?

David Hegarty

In the high 90% occupancy levels there. They are sort of the only games in town about 60 units per location. And they have a track record of being at that level for the last three or four years, so it will make very good properties.

Kevin Ellich - RBC Capital Markets

And is that all assisted living or is there independent in that also?

David Hegarty

Those are all assisted.

Kevin Ellich - RBC Capital Markets

Okay, excellent. Thanks, guys.

Rick Doyle

Thank you.

David Hegarty

Okay. You’re welcome. I think that’s all the calls. So thank you all for joining us and have a good weekend.

Operator

This concludes our conference call for today. You may now disconnect your lines and thank you for participating.

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