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Executives

Tim Bonang - Manager of IR

David Hegarty - President and COO

Rick Doyle - CFO

Analysts

Jerry Doctrow – Stifel Nicolaus

Omotayo Okusanya – UBS

Kevin Ellich – RBC Capital Markets

Todd Stender

Philip Martin – Cantor Fitzgerald

Chris Pike – Merrill Lynch

William Wright

Senior Housing Properties Trust (SNH) Q1 2008 Earnings Call May 7, 2008 1:00 PM ET

Operator

Good day, everyone, and welcome to the Senior Housing Properties Trust First Quarter 2008 Financial Results Conference Call. This call is being recorded. At this time, for opening remarks and introductions I’d like to turn the call over to the Manager of Investor Relations,

Mr. Tim Bonang. Please go ahead, sir.

Timothy Bonang

Thank you and good afternoon, 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, May 7, 2008. The company undertakes no obligation to revise or publically 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 or SEC regarding this reporting period.

In addition, this call may contain non-GAAP numbers, including funds from operations or FFO. A reconciliation of FFO to net income is available in our supplemental package found in the Investor Relations section of the company’s website.

Actual results may differ materially from those projected in forward-looking statements. Additional information concerning factors that could cause those differences is contained in our 2007 Form 10K and First Quarter Form 10Q, which will be filed with the SEC within the next 24 hours, as well as our Q1 supplemental operating and financial data found on the 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 afternoon, everyone. This morning we reported $0.42 per share funds from operations for the first quarter and ended the quarter in an excellent position to take advantage of investment opportunities in 2008.

The most important news for SNH is yesterday’s announcement that we’ve entered into a series of agreements to acquire up to 48 Class A and B medical office clinic and biotech laboratory buildings with 370 unaffiliated tenants for approximately $565 million. The seller is HRPT Properties Trust.

As part of the series of transactions, SNH has acquired the right to invest in these property types, and HRPT has entered a non-compete agreement going forward. Furthermore, SNH has acquired a right of first refusal to purchase 45 additional buildings that HRPT currently leases to tenants in medical-related businesses.

This opens up a whole new avenue for growth and diversification for SNH. After these transactions are closed and as of March 31, 2008, our concentration with biotech quality care declines from about 71% to 56% of total revenues, and investments in this new property type will represent about 20% of our total investment.

I’d first like to have Rick report on the results and activities of the First Quarter 2008, and then I will report on the current performance of our leases and activities during the quarter and subsequent to quarter end, including the medical office building transactions.

Richard Doyle

Thank you, Dave. Funds from operations in the first quarter were at $38.3 million versus $31 million in the 2007 quarter. On a per share basis, FFO was $0.42 per share versus $0.38 per share. The 2007 quarter FFO includes a cash loss of $1.8 million or $0.02 per share related to a loss on early extinguishment of debt.

During the quarter, SNH closed on the acquisition of 19 senior living properties with 1,692 units for a total purchase price of approximately $270 million plus funded $16.6 million of capital improvement financing.

The initial rent for these acquisitions totals $21.8 million and $1.6 million of improvement financing. These acquisitions were funded using cash on hand proceeds from our equity issuances and borrowing on the revolving credit facility.

In February we issued 6.2 million shares of common equity and raised net proceeds of approximately $130 million. Approximately $6 million of the proceeds were used to repay outstanding borrowings on the revolving credit facility, and the balance remained in cash until the acquisitions closed on March 1st and March 31st.

As a result, we experienced a small amount of negative arbitrage pending those acquisitions. However, we continue to maintain an exceptionally strong balance sheet. To date, our revolver has $110 million outstanding, and we have $440 million available to borrow plus an additional $550 million accordion feature. The revolver matures in December 2010 and can be extended to 2011 with a fee.

On April 1st we paid in full a $12.5 million mortgage with an interest rate of 7.2%, and the next significant debt maturity is the revolver balance due in 2010. On a book basis, debt was only 28% of our total capital and 19% on a market basis. Only 5% of our debt is secured debt, and all of our debt is fixed rate except for the revolver.

The operating results for the quarter were very straightforward. Rental income increased as a result of acquisitions since the first quarter of 2007, including those that occurred during the first quarter of 2008. Essentially all of our leases have inflation protection in the form of a percentage of revenue growth, consumer price index increases or fixed increases.

Percentage rent is used for FFO purposes based on estimates, and it is all recognized in the financial statement in the fourth quarter. The estimated percentage rent increased quarter over quarter by 22% or $350,000 from $1.6 million in 2007 to $1.95 million in 2008.

Interest expense decreased as a result of using the proceeds of the equity issuance to repay debt and lower interest rates on the revolver. Our GNA remained essentially unchanged. Based on our results for the quarter, our Board declared at $0.35 per share dividend, which is only an 83% payout ratio of funds from operations. I’ll turn it back to Dave to discuss the acquisitions during the quarter, tenant performance and the medical office building initiative.

David Hegarty

Thank you, Rick. Let’s review the acquisitions for the quarter before going into the medical office building transactions. The senior living properties that we acquired during the quarter are very high-quality assets, and these acquisitions were made possible because SNH had the available capital and an established relationship with an operator.

Certainty of closure was critical to the sellers. These properties were mostly private pays, assisted living and independent living facilities. One is a rental continuing-care retirement community with 138 units of independent living, assisted living and a skilled nursing component located adjacent to a regional acute care hospital.

Another transaction involved five assisted and independent living properties located in Wisconsin, one of which has a skilled nursing unit. The remaining properties acquired during the quarter are assisted living and dementia care facilities. I discussed one of the properties on our last call known as the Wellstead of Rogers Minnesota, which is a Class A community with 228 beds, most of which are dedicated to all levels of dementia care.

Another transaction that occurred since our last call involves a portfolio of equally high-quality assisted living and dementia facilities located in California and the Mid-Atlantic area known as the Sunford Properties [ph]. That transaction closed on March 31st.

In total we invested approximately $270 million during the quarter. As Rick mentioned, we also funded $16.6 million of capital improvement financing on existing properties.

We continue to see a number of private pay senior living properties for sale, but the number of portfolio transactions has decreased. We will continue to pursue investments in the private pay senior living sector in the future.

Let me take a few minutes to discuss the performance of the portfolio before I move onto the medical office building discussion. Occupancies remain strong for the quarter ended December 31, 2007. The senior living properties were at 90% to 91% occupied. Occupancies at the rehabilitation hospitals were at 62% for that quarter, and occupancies at the New Seasons properties declined to 81%, primarily as a result of two underperforming properties.

Rent coverage remained strong for all of our leases at 1.4 to 1.9 times coverage except for the rehabilitation hospitals in New Seasons. One of the considerations that was impacting the rehabilitation hospitals was late in the fourth quarter 2007. Congress passed the Medicare/Medicaid SCHIP Extension Act of 2007, reducing the 75% requirement to a 60% level.

Prior to this legislation, Five Star had been modifying its admission policies to comply with the more stringent 75% rule as well as extensively renting properties. Now at New Seasons the coverage has not been adequate, but we are relying on the Parents Guaranty, which is a strong, investment-grade insurer.

Now let’s talk about the future. Yesterday’s announcement is a transformational event and opens up tremendous growth and diversification avenues for SNH. As announced yesterday, we have agreed to acquire up to 48 medical office buildings, clinics and biotech laboratory buildings over the next year for approximately $565 million.

The properties are located in 11 states and Washington, D.C., and leased to 370 unaffiliated tenants. The current average occupancy is greater than 98%, and many are triple net leased for 100% of the space. The average remaining lease term is almost seven years, and the near-term lease rollover on the medical office buildings is 7% in 2008 and 16% in 2009, giving us an opportunity to increase rents in the near term.

Nine properties are multi-tenant medical office buildings, seven of which are located in Washington, D.C., and surrounding Mid-Atlantic states. Thirty-two of the properties are clinics, triple net leased to major healthcare providers, including Fallon Community Health Plan, Health Insurance Plan of Greater New York, Philadelphia Children’s Hospital, Oklahoma City Clinics, HCA and others.

In addition seven of the properties are comprised of biotech laboratory space leased to excellent credit such as Scripps Research Institute in La Jolla, California, and Quest Diagnostics in Irving, Texas.

Revenues for this portfolio break out as follows: 34% from medical office buildings; 37% from clinics; 29% from biotech laboratories. On a net operating income basis 26% is attributable to medical office buildings, 43% to clinics, and 31% to biotech laboratories.

The average rent per square foot is about $30 for medical office building space, $21 for the clinics and about $32 for the biotech laboratories. The total portfolio is 2.2 million square feet: 45% of the square footage is comprised of clinical space; 29% is multi-tenant medical office building space; and the remaining 26% is biotech space. The average medical office building is 71,000 square feet. The average clinic building is 32,000 square feet, and the average biotech building is 75,000 square feet.

Looking at it another way is one master lease of 19 clinics leased to Fallon Community Health Plan, a large closed-plan HMO insurance company based here in Massachusetts. These properties are smaller in nature, and if you exclude them from the square footage calculations on the whole portfolio, the average property size is approximately 60,000 square feet.

With the exception of one clinic where there’s a ground lease, we will own 100% fee interest in these properties. This transaction does not involve any joint venture arrangements, and many of these medical office buildings are located in close proximity to major hospitals.

As a reminder, SNH was spun off from HRPT back in 1999. As part of that transaction, SNH had agreed not to compete with HRPT for these property types. In connection with this transaction, SNH is able to pursue investments in these areas, and HRPT has agreed not to compete with SNH for these types of assets going forward.

Furthermore, SNH has obtained a right of first refusal on 45 additional buildings, totaling approximately 4.6 million square feet that are leased to HRPT to tenants in medical-related businesses.

The purchase price for these properties to be acquired was established by a reference to an appraisal report by a nationally-recognized real estate appraisal firm. The terms of the sale were negotiated by special committees of each company’s boards comprised solely of independent trustees representing each company.

The purchase price of $565 million equates to $258 per square foot for primarily Class A and B properties located in California, New York and the Mid-Atlantic states. This price compares favorably to medical office and biotech real estate transactions announced over the last two years. We believe these are excellent properties in outstanding location with high credit tenants.

Now, SNH will enter into a property management agreement with REIT Management Research, who currently manages these properties. The property management fee is 3% of revenues, which will remain unchanged, and these fees are already included in the NOI figures presented.

Also, advisory fees of 50 basis points payable to RMR with respect to these 48 properties will be based on HRPT’s historical costs of $397 million rather than SNH’s purchase price of $565 million and, therefore, will be the same as currently being paid by HRPT. Based on fees that other healthcare REITs are paying to outside property management firms, we believe these fees are very competitive.

Some investors have expressed concern that we’re purchasing these properties from an affiliated party. We believe that the seller is irrelevant, and investors should be asking whether it’s a good transaction for SNH.

We ask that you consider the numbers and the quality of assets and tenants whether we would do this transaction with a third-party seller. The cap rate is attractive compared to other recent transactions such as those completed by our peers and that have taken place in the market.

Current GAAP net operating income is 7.9% of our purchase price and 7.1% on a cash basis with the removal of straight line rent. SNH expects to initially fund these purchases with cash on hand, drawings on its revolving bank credit facility and assuming three mortgages totaling $11 million, which encumber two properties.

SNH expects to eventually fund the purchases with a mix of long-term capital based upon market conditions. Depending on the ultimate form and cost of our long-term match funding for these transactions, we expect these acquisitions on a standalone basis to be neutral to modestly accretive long term.

The closings of these properties subject to normal real estate contingencies and are schedule to close in phases over the next 12 months. The first group that’s scheduled to close involves 21 clinics leased to Fallon Community Health Plan and Health Insurance Plan of Greater New York and Philadelphia Children’s Hospital for approximately $113 million in August.

Although the acquisitions are scheduled to close in phases over 12 months, they can be accelerated based on mutual agreement with HRPT. Furthermore, we have a financing contingency involving $245 million of the acquisitions that are currently scheduled to close in 2009.

We are optimistic that this transaction may assist in achieving an investment-grade rating for our debt. I believe the principal benefit to SNH is a diversification of tenants, revenues and property type, which has been a concern of both equity and debt investors, and the degree of accretion will be determined by the ultimate long-term funding.

HRPT has owned these properties for an average of nine years, and may of you may recall that I was President of HRPT during the time that these properties were acquired, so I was integrally involved in the underwriting of these acquisitions and have personally visited most of these properties. I know these properties are an excellent addition to SNH’s portfolio.

Over the past few years, we’ve heard the concerns of equity and debt investors regarding concentration in our portfolio of one tenant and one property type. We’ve listened and hopefully this move to diversify our portfolio will address this concern and may eventually help us to achieve investment-grade status, which may lead to a lower cost of capital in the future.

Although the transaction on a standalone basis is neutral to slightly positive, these new property types open up new avenues for growth and FFO accretion in the future. That concludes our prepared remarks, and Rick and I would be happy to answer any questions that you may have.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Jerry Doctrow. Please go ahead, sir.

Jerry Doctrow – Stifel, Nicolaus & Company, Inc.

Hi, good afternoon. And, David, I must say you made a nice, compelling case for the acquisition, so that’s good. Is it possible that we could get these up on your website or are they up on the, you know, HRPT website so that you would get a little bit—you know, photos and stuff—so we can get a little bit better feel for the properties or are they there already?

David Hegarty

No, we can put together a package to put up on the website. Currently we don’t have it neatly packaged yet, so we can put that together for you. As far as the properties, you know, I’d have to see what kinds of photos we have. You know, about 20% of these properties actually have been on the cover of HRPT’s Annual Report in the past. That’s the La Jolla property leased to the Scripps Institute out in California.

Jerry Doctrow – Stifel, Nicolaus & Company, Inc.

Okay.

David Hegarty

But we will try to pull together some photos to give you a good feel for the portfolio.

Jerry Doctrow – Stifel, Nicolaus & Company, Inc.

Okay, that would be great. I guess the key area questions that I have and I think Rick touched on this, but I don’t know that I got all the numbers. I wanted to kind of just go through, you know, what’s on the line again, again with the accordion feature and then, you know, think a little bit more with you about, you know, whether you would be issuing equity or what time you might need to issue equity or, you know, debt for that matter to sort of fund this. So can you just go over the numbers on the line first of all and sort of where we stand?

Richard Doyle

Yes. Hi, Jerry. This is Rick. Yes, I did mention today we have $110 million outstanding on our line, and we have $440 million available. And we also have a $550 million accordion feature on the line also, so right now, you know, to answer that question, that’s what we have available.

And in response to going to the equity markets, you know, that’s something that we would have to look at in the near future to see how we acquired these properties over the phases of the properties and see what’s the best for SNH.

Jerry Doctrow – Stifel, Nicolaus & Company, Inc.

Okay.

Richard Doyle

We do have the availability on the line of $440.

Jerry Doctrow – Stifel, Nicolaus & Company, Inc.

$440 plus $550 so it’s almost a billion dollars available just on line if your exercise the accordion.

Richard Doyle

Right and if you notice there’s specifically $245 million that’s currently scheduled to close in 2009 that’s subject to a financing contingency on our part, so we have plenty of time to acquire these assets and bring them into the portfolio.

Jerry Doctrow – Stifel, Nicolaus & Company, Inc.

Okay and do you have any more on sort of the rest of the schedule to acquire those? I think you said $113 million in August. And should we assume that they’ll all about the same yield basically, but what’s sort of the rest of that schedule if—I don’t think I saw it in the press release the other day.

Richard Doyle

No, it’s in multiple phases, and there is a, you know, good possibility some of it could be accelerated, and as you could envision, a lot of it is being worked around some consents from lenders as well as some tax planning for HRPT. So I would envision, let’s see, all except for $245 million is contemplated to be closed before year end.

Jerry Doctrow – Stifel, Nicolaus & Company, Inc.

Okay.

Richard Doyle

And even apt to be accelerated under certain conditions.

Jerry Doctrow – Stifel, Nicolaus & Company, Inc.

Okay, basically so we start in August with the $113. We got the rest except for the $245 in ’08 and maybe even more of it in ’08 so that’s, we’ll make some assumptions within those parameters. Is that …

Richard Doyle

That’s correct and assume the same yield because, you know, these were all valued as a group. Now the only allocation that was meaningful was to basically do a pro rata NOI allocation.

Jerry Doctrow – Stifel, Nicolaus & Company, Inc.

Okay, that’s fine. And then the last thing I guess is I was wondering how this affects your thinking about other investments. I mean clearly I guess you still have capital availability, but in terms of, you know, can you talk a little bit about others, the acquisition pipeline in general, I mean how you feel about senior housing.

Would you continue to fund stuff? Would you continue to fund stuff with Five Star? You know, this obviously opens up other possibilities, so what should we be thinking about, you know, investments over the rest of the year separate from this transaction? I mean are you fully satisfied with this or are you going to expect to be doing other stuff?

Richard Doyle

Right. No, we’re still going to be active in the marketplace. You know, what I envision is that we would still continue to pick up onesies and twosies and small portfolios either for lease to Five Star or, you know, we would like to do sale leaseback with another operator or two anyways. But and then this opens up avenues for us to do more medical office buildings, clinics and so on during the course of the year, so it just broadens our options for us to acquire assets.

Jerry Doctrow – Stifel, Nicolaus & Company, Inc.

And, again, just sort of for planning purposes we should assume—again, I don’t have right in front of me what our assumption was about acquisitions—but we should assume the acquisition pace that you were doing before is sort of unaffected by, you know, this transaction so …

Richard Doyle

That’s correct although I would, you know, assume like the first quarter we did $270 million of acquisitions, so I would not count on that to be the norm—

Jerry Doctrow – Stifel, Nicolaus & Company, Inc.

Right, right.

Richard Doyle

--in further quarters, but we will be doing some other acquisitions during the course of the year.

Jerry Doctrow – Stifel, Nicolaus & Company, Inc.

Right. I mean I think we were modeling something like $500 million over the course of the year separate from the MOB thing and so another $75 a quarter or something like that. Does something like that sound right? I’m not trying to nail you down. It’s just to get a sense of order of magnitude.

Richard Doyle

No, it’s very difficult to predict, but it’s—I mean I don’t know. You say at the moment I don’t have that much in the pipeline.

Jerry Doctrow – Stifel, Nicolaus & Company, Inc.

Okay.

Richard Doyle

So I’d say it’s maybe a tad high, but you never know.

Jerry Doctrow – Stifel, Nicolaus & Company, Inc.

Okay, okay. I think that’s all for me. Thanks.

Operator

Thank you and our next question comes from Tayo Okusanya. Please go ahead.

Richard Doyle

Hi, Tayo? Hello?

Omotayo Okusanya – UBS

Hi. How are you? Good morning.

Richard Doyle

Hi. How are you?

Omotayo Okusanya – UBS

Actually, good afternoon. Just following up on Jerry’s question, I mean I guess what I’m trying to figure out at this point is that between the HRPT deal and as well as the HCP deal there’s kind of a lot of balls in the are in regards to acquisitions at this point.

How do you kind of think about or what does it take, you know, basically to get all these deals done, you know, to integrate all these facilities into, you know, into your company and how are you going about managing that entire process?

Richard Doyle

Well, fortunately, we are more or less the provider of capital so, you know, within the organization we have in this medical office building and clinic area, they’re currently being managed by RMR so, you know, there should be no disruptions in the operations of these properties. Just the reporting format’s going to be different internally and more information will be coming towards us rather than towards the HRPT management team on these properties.

So I don’t think that’s a tremendous amount of additional work for us, and then on the $270 million of acquisitions that closed in the first quarter, I mean that’s already into our fold, and Five Start is operating those. So new acquisitions, you know, I don’t think they’re particularly burdensome to us to take on. We really won’t see much disruption in our operations.

Omotayo Okusanya – UBS

But what about like the whole due diligence process to see all these assets, whether it’s quarterly or biannually asset management that would you like to do to feel comfortable that these operators are running these assets properly.

Richard Doyle

Sure, right.

Omotayo Okusanya – UBS

To make sure there are no CapEx issues and …

Richard Doyle

Exactly. Well, we have a whole separate department within RMR that is specifically assigned to do ongoing, day-to-day diligence inspections and, you know, they process things, determine where any deficiencies are, and they communicate it back to the operator. And I am kept copied on those correspondence and so on so, you know, that essentially is what the 50 basis points advisory fee is for, a good piece of it that is paid to RMR for that type of service.

So you know, granted RMR has to continue to hire some more people. The MOBs are being done anyway currently so, you know, it’s really fee-delivering properties and other non-medical office building properties that we rely on this management group to continually get out there and inspect the properties, make recommendations.

You know, we have people back here who review the numbers and question the operators on the numbers, but that’s more from understanding their business because we really don’t have a say in how they run the business as long they’re covering rent. So again, I don’t think—it’s an expansion of the RMR operation, but as far as SNH is concerned, I don’t envision that to be any issue.

Omotayo Okusanya – UBS

Got it. Second question just looking at the rent coverage table you put in the supplemental and just the coverage ratio’s generally going down at the Five Star assets in fourth quarter of ’07 and as well as the Brookdale assets. Could you just talk a little bit about that? I mean if occupancy kind of hung in there, but the coverage ratios are coming down.

David Hegarty

Right. Well and lease number one is where we keep adding more properties to. So it’s not exactly saying store for all of it. And also let’s see, I’m trying to think if there’s anything particular that affected these properties at that time. On the Alterra I know it’s just that they’ve experienced a couple hundred thousand dollars of increased operating costs at these properties specifically. And –

Omotayo Okusanya – UBS

Why is that?

David Hegarty

Well a good chunk of it is insurance. And they’ve also increased their benefit packages and pay during that period. So it seems to be pretty much across the board but it’s these assets. As you said the revenue side of things and occupancy levels have not really changed that much at the Brookdale situation.

Omotayo Okusanya – UBS

And on Five Star you said lease number one was because that’s where you added the acquisitions to but from anything else specific talking about the declining coverage ratios?

David Hegarty

Not particularly. I think in fact the September quarter was probably higher than normal. If you were to look at the historical trend it’s usually been around one three, one four.

Omotayo Okusanya – UBS

Right.

David Hegarty

And certainly this after at 5:00, Five Star is having their first quarter earnings results.

Omotayo Okusanya – UBS

Right. Okay. Great. Thanks a lot.

David Hegarty

Okay, you’re welcome.

Operator

Thank you and our next question comes from Kevin Ellich. Please go ahead.

Kevin Ellich – RBC Capital Markets

Good afternoon guys. Thanks for taking the question.

David Hegarty

Okay Kevin. Good afternoon.

Kevin Ellich – RBC Capital Markets

I was wondering if we could get some more color on the 45 properties you have the first right of refusal. I think you said that they’re in the medical specialties business but I mean are these more lab business? Or what type of properties are we looking at?

David Hegarty

Well about the 45, the bulk of them are situations where the tenant is in the medical business but patient care is not being conducted at that site. So for instance there are two buildings right here in Boston that are major components of Harvard medical teaching hospitals. But they’re where the computer the systems are stored and where a lot of their other support services are. So they’re not included in this group for us. But we do have the right of first refusal on those properties.

Also the top of the list are the two Cedars-Sinai Medical Towers. And those are mostly doctor’s offices and support services for Cedars-Sinai Medical Center in LA. And those are encumbered with CMBS debt with some other traditional office buildings and can not be broken out at this time. So we are encumbering those properties with the right of first refusal so that if they should trade hands in the future we have a say in it. That’s the type of assets that these properties comprise.

Kevin Ellich – RBC Capital Markets

I mean if you had to classify that, would you put it in the medical office building bucket?

David Hegarty

I would. I mean I think if you were to even look at other medical office portfolios that other healthcarites [ph] have picked up I’ve got to believe within those buildings there are some that are dedicated patient care and others that are daily support services for hospitals. So we would lump them in with medical office buildings ourselves.

Again I do not know really what the likelihood is of any of those properties coming to us in the foreseeable future but it was a requirement that our independent board requested an HRPT in the negotiation.

Kevin Ellich – RBC Capital Markets

Okay. And then just wondering what made – was there anything special about the timing as to why you guys pulled the trigger on this transaction now?

David Hegarty

Well, a combination of things. The message to us from equity investors, debt investors, erady [ph] agencies have been consistently growing concern about the concentration with Five Star as our tenant. And also we were feeling a little constrained about being only able to buy in the private pay senior living business. So the combination of factors sort of gave rise to this transaction. And we’re trying to address those issues.

Kevin Ellich – RBC Capital Markets

Okay. That makes sense. And then I think you mentioned in your prepared remarks that occupancy into senior living properties was 90 to 91%. Was that for – is that right?

David Hegarty

That’s right. It’s a pretty general statement. When we were working on this presentation I was afraid I would not get anybody’s attention to talk about the historical results for the quarter. And so we tried to deal with them upfront and I did not want to belabor specifics. But yes, generally it’s been in that range. I guess it’s been a little – I would consider a relatively minor softening of occupancies across the board in the industry over the last two quarters.

Kevin Ellich – RBC Capital Markets

Okay.

David Hegarty

And this Q – this period that’s in our supplemental is a little dated. It’s December 2007 quarterly results.

Kevin Ellich – RBC Capital Markets

Right. Well that 90 to 91%, was that – that was for Q1, was it not?

David Hegarty

No. That was commenting on the Q4.

Richard Doyle

We record in the RAS. One quarter in the RAS.

Kevin Ellich – RBC Capital Markets

Right, right. Okay. I forgot that. Thanks guys. And then Rick, I think you also mentioned capital improvement funding was 16.6 million. Was that also Q4 or was the Q1?

Richard Doyle

No that is Q1.

Kevin Ellich – RBC Capital Markets

Okay. And then does that all go to Five Star or how is that spread out?

Richard Doyle

Those were existing properties at Five Star.

Kevin Ellich – RBC Capital Markets

Okay. So that does go to Five Star. Okay.

David Hegarty

Yes. And it was funded on like March 31.

Richard Doyle

Yes, we fund it on the last day of the quarter.

Kevin Ellich – RBC Capital Markets

Okay.

Richard Doyle

There’s no economics recognized in the quarter that would contribute to the [inaudible].

Kevin Ellich – RBC Capital Markets

Sure. And then I was also wondering how are the recently properties performing like the wellness facilities? Facing any impact from the economy?

David Hegarty

Not really. As we reported in our supplemental it was 1.95 times coverage which is about what we expected anyways. And this first quarter is an interesting situation because with New Year’s resolution and everything else it’s usually the biggest quarter of the year. So you had increased membership but it – kind of difficult to sort out how many dropped out or were affected by the economy. So I’m expecting that they’re doing well.

And I believe a couple other companies recently reported – Lifetime Fitness and a few others – beat the street per se with better than expected results. And they’ve said that membership has been strong. So I think the first quarter – who knows. It may not be telling but for the industry it has been a pretty strong quarter.

Kevin Ellich – RBC Capital Markets

Okay. And then just one last question on the pipeline. Are you looking at other dementia facilities and can you tell us a little bit about the dynamics of that business? I understand the revenue is a little bit higher but so is the labor component of that business.

David Hegarty

Yes but the margins are significantly better than traditional stand-alone assisted living. So the demand continues to grow for that type of care. The new supply of properties that offer that care has been very limited. And the rates continue to go up above average at those properties. And I believe that the contribution to bottom line has – grows faster than traditional assisted living. So at least for the foreseeable future that is a sweet spot to be in.

Kevin Ellich – RBC Capital Markets

Okay. And then how’s the facility up in Minnesota doing? Is it highly occupied would you say?

David Hegarty

Yes. It has not missed a beat from the old management to the new management. In fact the executive director there has stayed on and is operating the facility. But the dementia care component has been historically near full and continues to be near full. It’s the assisted living that is roughly about 65 to 70% occupied.

And that creeps along and the thinking there is that assisted living is something that people can go five miles in any direction and find another assisted living facility. So it’s more driven by the local demographics. Whereas dementia care – especially this one which covers the most acute care dementia services – there is a short supply of high level dementia care providers. And so this is a place that people will travel from out of state or to further regions of the state to have a resident stay there.

Kevin Ellich – RBC Capital Markets

Okay.

David Hegarty

That’s why the occupancy is so high.

Kevin Ellich – RBC Capital Markets

Right. Actually I just have one last question. You mentioned that you acquired a CCRC with 138 units. What’s the upfront fee to move into that property and do you think that could be an issue with the weakening economy?

David Hegarty

No. We described it as a rental CCRC. So there are no upfront fees. And given that it’s located in a medical area in town it has the acute care hospital next door and the skilled nursing as well at the ILAL. And it’s holding up very well and I expect that to continue.

Kevin Ellich – RBC Capital Markets

Okay. Excellent. Thanks guys.

David Hegarty

You’re welcome. Are there any other questions?

Operator

Our next question comes from Todd Stender [ph]. Please go ahead.

David Hegarty

Hello. Todd?

Todd Stender

Okay.

David Hegarty

Hi Todd?

Operator

Mr. Stender?

Todd Stender

Yes. Can you hear me?

Operator

Please go ahead with your question.

Todd Stender

Okay. Can you hear me now?

David Hegarty

Yes.

Todd Stender

Okay, thanks. Most of my questions have been answered. Now that you’re able to acquire medical office buildings, what’s your ultimate goal for concentration of the space and also for lab space?

David Hegarty

Well I will tell you that we have not preset a limit on how much we will invest in the space. Like most anything else it’s going to depend on market conditions and how much we can compete. We have not done joint ventures or real development so it would happen by buying existing product type.

And I guess I do not envision too many large portfolios but more onsies and twosies around the country. And I think there’s a huge supply of that type of property.

Todd Stender

Okay. Thank you.

David Hegarty

Welcome.

Operator

(Operator Instructions) Our next question comes from Philip Martin. Please go ahead sir.

Philip Martin – Cantor Fitzgerald

Okay. I thought I was going to be forgotten about there. Thank you for taking my question and good afternoon. I wanted to focus a little bit on the investments made in the quarter. And first of all, can you give us an idea of coverages here on these properties?

David Hegarty

Right. Well I guess I can give you and idea of what we underwrote them at and then how they progress going forward is [inaudible] the way Five Star operates the facilities. But each one of them had coverage typically between – at a minimum of 1.15 coverage before management fees up to about 1.3 times coverage before management fees. And I say before management fees because several of these are within markets that Five Star has a presence and they do not charge themselves internal management fee or 5% management fee. So essentially what’s left after they pay rent is for their overhead and profit.

Now the CCRC and we bought a couple of assisted living facilities in Texas that those are more like the 1.15, 1.2 times coverage. And then these dementia care facilities are more in the range of about 1.3 times coverage. And the average investment across all the investments for the quarter was $160,000 per unit. The dementia care facilities which I think even Steve Monroe in his Lubin report of senior care report yesterday commented that the sum of the properties are at a minimum A- quality properties. Those we paid about 215,000 a unit I believe and 205,000 for the ones in – for the Minnesota properties. So we paid up for those but those also had like I say about 1.3 times coverage going into it.

Philip Martin – Cantor Fitzgerald

You have the better coverage and again the reasons to pay up. I mean are all these – what’s the average age of these assets?

David Hegarty

Well the one in Minnesota is less than – it was built in phases. But the oldest phase is like seven years old. And the ones in the Sunford transaction are all less than 10 years old. About five of them are in California and those are about six years old. And the ones on the East coast are closer to the 10, 9, 10 year old.

Philip Martin – Cantor Fitzgerald

Okay. I mean at the property level here, can you give us an indication of what the NOI margins are and the rent growth on an annual basis is?

David Hegarty

Well I mean I think probably a lot of the questions should really be answered by Five Star as the operator. But typically in most assisted living facilities on a pre-management fee basis you’re between 30 and 40% margins. And the dementia facilities, it’s closer to 40 and maybe you could push it up to 45.

Philip Martin – Cantor Fitzgerald

And these from your underwriting and due diligence, these properties are performing at that level?

David Hegarty

Yes. And they have some vacancies so there’s some room to grow.

Philip Martin – Cantor Fitzgerald

Okay, that was my next question. When we look at the vacancy or the occupancy here can – and the rent growth, is it fair to assume rent growth again 4 to 6% based on part of the underwriting and due diligence that you’ve done?

David Hegarty

That’s right. They could still – these properties still can support that type of growth and at least at least on the Alzheimer’s side of the business. So I would expect that to continue.

Philip Martin – Cantor Fitzgerald

Okay. And from an occupancy standpoint where again to go back to your comment about potential upside.

David Hegarty

Right. The both properties are in the high 80% occupancy level. So –

Philip Martin – Cantor Fitzgerald

Okay. And the remainder of the properties that – like the CCRC and then you’ve got the – what would be kind of two CCRCs here. I know you’ve got the one at 138 units then you’ve got the 568 as well.

David Hegarty

Right. The 138 unit group is CCRC was running about 88% occupancy. The ones in Wisconsin – there’s individual facilities but they were all between 88 and 90% occupancy. There are two properties in Texas that are standalone assisted living facilities and those are running about 94, 95% occupancy.

Philip Martin – Cantor Fitzgerald

Okay. So the entire package here is kind of high 80’s to 90 on average.

David Hegarty

That’s correct.

Philip Martin – Cantor Fitzgerald

Total. And the 138 unit CCRC at 67,000 per unit, value play here. What type of risks can we infer in that or what can we infer with that $67,000 per unit price?

David Hegarty

What you can infer is that, I’ll tell you it’s a property in North Platte, Nebraska and is next to the, as I said the acute care hospital. And my guess is that we were one of the few institutional investment grade bidders for this. So we could provide that certainty of closure and we could operate the skilled as well as the IL component. So that was all attractive to the seller and so they went with us.

Philip Martin – Cantor Fitzgerald

Okay. Now a couple of things with the HRPT portfolio. Can you give us some sense of the tenants? I know you talked about Scripps and – well just in terms of the top five or 10 as a percentage of revenues and can you go down kind of your top five or 10 tenants just so we have an idea?

David Hegarty

Sure. Well the largest tenant in the portfolio is Scripps Institute and they represent about 20% of the NOI in the group. I would say the next largest tenant would be considered Fallon Health Care and I’d say it’s an insurance company based here in Massachusetts, an HMO. So it’s highly regulated and as you can imagine, like most insurance companies mostly are assets or cash in short-term investments. And the lease term there is out to 2019.

Then you get into let’s see, I guess the next largest one would be Health Insurance Plan of New York. There’s two clinics leased to them. And again long-term leases with them.

Philip Martin – Cantor Fitzgerald

And on Fallon and health insurance, what percentage of NOI would that be, would each of those be?

David Hegarty

Let’s see, on an NOI basis, let me see. It’s just roughly 10%.

Philip Martin – Cantor Fitzgerald

Okay, for each one? Or 5% each?

David Hegarty

No, Fallon is 10%. Then HRP is about 5%. And then most of it really breaks down let’s see, many of these are multi-tenanted.

Philip Martin – Cantor Fitzgerald

Okay

David Hegarty

So like for instance one of the major assets of the group is a property called 1145 19th Street in Washington D.C. And they have something like 40 tenants and it is in the heart of Washington D.C. And it has let’s see – we’ve owned – saying we go back to HRPT, we’ve owned that property for about 10 years and it has never gone below 90% occupancy. And it’s all 2,000 square foot users, 3,000 and so on. And that is less than a half a mile from George Washington Hospital, University Hospital.

Philip Martin – Cantor Fitzgerald

Okay. So that – and the Scripps lease, that ends when?

David Hegarty

Let’s see. That is in 2019 I believe.

Philip Martin – Cantor Fitzgerald

Okay. So that’s also 2019 with Fallon.

David Hegarty

Yes.

Philip Martin – Cantor Fitzgerald

Okay. In terms of development expansion opportunities within this portfolio, are there any?

David Hegarty

The expansion opportunities are really in the multi-tenanted office buildings. And as I mentioned there’s 6% roll-over expected this year in 2008. And again the potential is going to be determined by when we actually close on these. Next year it’s supposed to be another 17% roll-over – or 16% net roll-over next year and so on. So we do have some decent roll-over in that component of it. So I would expect maybe a couple percent growth in the NOI at those locations.

Philip Martin – Cantor Fitzgerald

And in terms of development, are there development opportunities within the portfolio or not so much?

David Hegarty

Not meaningful.

Philip Martin – Cantor Fitzgerald

Okay.

David Hegarty

Sometimes redeveloped properties and stuff but – and we may fund an expansion of a property but it’s not the norm.

Philip Martin – Cantor Fitzgerald

Right. Okay. And my last question, the maintenance CapEx required on these HRPT assets and your due diligence, what type – what can we expect to kind of maintain these properties? Or fix things that might be broke.

David Hegarty

Sure. Well actually there’s not a lot that is going to be expected to be put into these properties for the near term that we can tell. HRPT has invested a considerable amount of money in these properties, in particularly the Scripps property. And so for the – I did not think the budget for this whole portfolio and it was only about $1.5 million of CapEx type expenditures and maybe another 1.5 million of TI commission, leasing commission and so on.

But to the extent that HRPTs signed up a tenant and we’re going to be buying the building and giving them credit for that tenant while they’re going to have paid for that TI, because we’re paying based upon that new rental figure for the purchase price of the property. So I do not expect us to have a significant amount of – we’re talking maybe $.01, maybe $.02 a year.

Philip Martin – Cantor Fitzgerald

Okay. All right. Thank you very much.

David Hegarty

Okay, you’re welcome.

Operator

Thank you and our next question comes from Dirk Bauer [ph]. Please go ahead.

Chris Pike – Merrill Lynch

It’s actually Chris here. How you guys doing?

David Hegarty

Good. Hi Chris.

Chris Pike – Merrill Lynch

I guess you touched on this earlier. Dave maybe you could just walk us through the Genesis of the HRPT deal. I guess if you read the transcript from last quarter carefully you kind of hint at larger deals, opportunistic deals, deals that are going to diversify away from Five Star. I’m just wondering how it really came to fruition. Was it just you guys sitting around the table for dinner one night, you and John saying hey, how about this? Or did Barry tap you on the shoulder? How did it come about?

David Hegarty

Well we’ve attended many conferences –

Chris Pike – Merrill Lynch

And maybe when. And then you can maybe frame it out in terms of timing. When did you really start to think hard about this?

David Hegarty

I’d say pretty much March, April. Yes, pretty much March time frame because the conferences that we attended and stuff really – we got challenged pretty hard at the conferences about how we’re going to grow, what are we going to do to diversify and so on. So we came back here and had discussions internally with about what are our options and we started rethinking that back in 2000 – back in 1999 in a perfect world maybe these assets should have been with SNH at the time. But we were are a pure play [inaudible] lease at the time.

And then our peers have been going into these areas for diversification and a number of investors and analysts have asked us why are we not going into it? So we determined in March or so that we should be looking to see what it’s going to take for us to get out from this restriction. And we believe we’re paying a fairly high price for this portfolio but it includes that right to go into other areas.

So it’s mainly coming back here, talking with Barry and Adam who are on our board as well as the general board at recent board meetings. And our HRPT board was approached and asked if that would be something that they would be interested in and we started thinking about what it does for them. And so the timing is also helpful because I believe I told you about a stock price and everything else, the market proves what the deal from their perspective. So I think it’s a positive for them and this is a positive for us we believe.

Chris Pike – Merrill Lynch

Okay so I guess in your last quarterly call was this on the table? Was this one of those potential large acquisitions that you were hinting at?

David Hegarty

Yes, it was a potential. It was being kicked around. The idea about how to do and when and pricing and all that stuff were unknowns at the time.

Chris Pike – Merrill Lynch

Thanks. Now have you spoken specifically with the rating agencies about this before you consummate or before you announce the deal? And have they given you any privem or any feedback on terms of what their thoughts are?

David Hegarty

No we have not discussed this with the rating agencies at this point. Again it’s our own internal assessment that hopefully they should view this positively as diversification because they’ve expressed over the last several years we run a great balance sheet and that service coverage and all that concentration – two things were being held against us. Size and concentration with buy stock. And we’re addressing both of those in this transaction.

Chris Pike – Merrill Lynch

Do they give you any commentary on the external management and the relationship with RMR? What are their views on that?

David Hegarty

I mean they analyze it and they ask us about the controls and so on. But I do not know. It’s a consideration but I do not believe, especially from a debt holder’s perspective I do not believe they penalize us in whether we’d be investment grade or not. Especially when the other two companies that are managed by RMR are investment grade rated.

Chris Pike – Merrill Lynch

And I guess just to the incremental cost savings in terms of moving to investment grade and your ability to tap that market.

David Hegarty

I think it’s significant.

Chris Pike – Merrill Lynch

Quantify that directionally.

David Hegarty

I mean it’s very difficult to quantify in this environment but I would say that from what I understand spreads have moved down in the last week or so by even 100 basis points. And I do not know if the non-investment grade debt issuance can be done in this market at the moment. I think it’s kind of – this is all going to flush through and we believe that with time, maybe it’s six months. Who knows exactly but ultimately this credit crunch is going to get fixed and we know that things are starting to look more positive for investment grade debt issuances at the moment. A little better than they were even a couple weeks ago.

So we believe that a debt – if we were investment grade, that debt would be available to us later this year maybe. Who knows how quickly or long it’s going to take. But it would be several hundred basis points cheaper between non-investment grade and bottom notch investment grade.

Chris Pike – Merrill Lynch

And I guess if this can come to fruition whereby the rating agencies are a little bit more beneficial which evoke and push into investment grade, is it fair to assume that your capital stack is going to change? Because how it used to run historically, very low leverage, very favorable, should we assume that you start to revisit that capital structure argument and where your debt to unpreciated book should ultimately run at?

David Hegarty

Absolutely. Historically we’re running between 30 and 40%.

Chris Pike – Merrill Lynch

Where do you think you can run if you get investment grade?

David Hegarty

We could run right back up there if not even a little higher. But I guess being non-investment grade I do not think – first of I think it’s just not an option at the moment for non-investment grade debt. So we could either use mortgage financing or have – obviously a line of credit has significant capacity and we have several years for that to mature. So we have the accordion feature. And also these transactions are slated to close over the course of the next year.

And I would hope the capital markets are in much better shape over the fall.

Chris Pike – Merrill Lynch

Okay. Congratulations guys.

David Hegarty

Thank you.

Operator

Thank you. And our next question comes from William Wright [ph]. Please go ahead sir.

William Wright

Hello?

David Hegarty

Hello.

William Wright

You’re charging – your – all your various entities are under one management umbrella so what you pick up on the management fee theoretically would be lost by HRPT. The question is, is there going to be any net increase in the management fees when this transaction is completed?

David Hegarty

There will not be any increase in management fees as a result of this transaction. The agreement is that it will be the exact same fee that was being paid to HRPT – being paid by HRPT would be paid by SNH on the old historical cost to HRPT.

William Wright

Okay, look. You mentioned earlier that the transaction will be neutral to marginally accretive. So if that’s the case there does not seem to be a very strong reason for doing it except for the objection by lenders that you’re concentrated in one sort of tenant. Is that correct?

David Hegarty

No, actually we believe there’s multiple reasons. The concentration has been a concern for equity investors as well as the debt investors and we believe it is one of the major impediments keeping us from attaining investment grade status. And if we achieve investment grade status that should significantly lower out cost to capital for the future.

So it may not – well in fact we have so much availability in our line of credit as we fund transactions it would be hugely accretive if we were to just let it sit on the revolver. But that’s not a prudent long-term strategy. So we will use the revolver to close on transactions and then look at what the capital markets available to us are. And we believe that between equity and debt or mortgage financing or other alternatives that we should be able to do this at least neutral if not somewhat accretive. And we just do not know exactly how much in timing.

Six months from now we expect hopefully some more rent roll-over and the NOI will go up. We believe there’s a positive momentum going into this portfolio and it could be more accretive than – we do not want to set high expectations so we’re conservative.

William Wright

Yes. Look, your current borrowing rate is what, around seven, seven and eight? Something like that?

David Hegarty

It’s very hard to tell. Our revolver is at 3.5 or lower. But borrowing we could do debt financing which would probably be I believe 7%, 7.5%. And if we did public unsecured debt I do not even know if it’s feasible in this environment.

William Wright

Well look, there is some feeling among I think some more sophisticated observers is that interest rates are going to soar and so I think you might take that into your thinking and do whatever you want to do before interest rates go up quite a bit in the next two or three years. Because the inflation is really sort of – conditions are that it can go through the roof and it very likely might, okay?

David Hegarty

Appreciate that.

William Wright

Okay, bye bye.

Operator

Thank you and our next question comes from Ray Garrison [ph]. Please go ahead sir.

David Hegarty

Hello Ray?

Operator

Mr. Garrison please go ahead with your question. And it seems that he is not on the line anymore.

David Hegarty

Okay.

Operator

At this time we have no further questions.

David Hegarty

All right. Well thank you very much operator and thank you all for joining us this afternoon. Rick and I will be at the nary conference in New York in June and we hope to have the opportunity to meet with you there and talk about this further. Thank you.

Operator

Thank you everyone for joining today’s Senior Housing Properties Trust conference call. This call has concluded and you may now disconnect.

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Source: Senior Housing Properties Trust, Q1 2008 Earnings Call Transcript
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