Diversified Healthcare Trust (DHC) 2007 Q3 法說會逐字稿

Good day, everyone, and welcome to the Senior Housing Property Trust third quarter 2007 financial results 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.

Thank you, Cynthia, and good afternoon, everyone. Joining me on today's call are David Hegarty, President and Chief Operating Officer, and Rick Doyle, Chief Financial Officer. The agenda for today's call includes a presentation by management followed by a question and answer session. Before we begin today's call I would like to 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, November 1, 2007. The Company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call other than through filings with the Securities and Exchange Commission, 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 into net income is available in our supplemental package found in the investor relations section of the Company's website. Actual results may differ materially from those projected in these forward-looking statements. Additional information concerning factors that could cause those differences is contained on our Form 10-Q, which will be filed by day's end, and 2006 Form 10-K filed with the SEC, as well as in our Q3 supplemental operating and financial data found on our web site at www.snhreit.com Investors are cautioned to not place undue reliance upon any forward-looking statements. And with that, I would like to turn the call over to Dave Hegarty.

Thank you, Tim, and good afternoon, everyone. Looking over the results for the third quarter of 2007, I would say it was another solid but uneventful quarter. However, the quarter provides a predictable base for which to grow our future FFO. Along the surface it may seem like there was not a lot of activity. This was not the case. We evaluated numerous investment opportunities and our efforts began to bear fruit late in the quarter. In September and October we signed agreements for $155.3 million of new investments. These new investments, plus the $14.1 million transaction under agreement from earlier in the year and $33 million of quarterly improvement financings to date, will already put us over $200 million of investments by the end of the year. Similar to last year, the majority of the investments are in the last quarter of the year.

Before I get into the new acquisitions and the investing landscape, I would like to first review the fundamentals of the third quarter results. As I mentioned, we consider the third quarter results to be a very solid base. Quarterly revenues year-over-year were up about 7%. FFO was up 5% on a per share basis at $0.41 per share, which compares to the $0.39 per share for the same quarter last year. Subsequent to the quarter end, our board increased the quarterly dividend by 3% to $0.35 per share. This is 6% higher than the level one year ago. This is the third dividend increase in the last 12 months. Based on the quarterly results, the new dividend level represents an 85% payout ratio of FFO.

The underlying portfolio has performed well. Since the statistics are a quarter in arrears, they do not indicate third quarter performance. However, in the second quarter, occupancies have been fairly stable, with each lease experiencing a percentage increase or a percentage decrease in occupancy and the same was true with private pay revenue percentage for each lease. Rent coverage by tenant and lease have remained at comfortable levels year-over-year and second quarter versus the first quarter of 2007. The cash flow coverage of rent due under the master lease with Five Star Quality Care decreased slightly from the second quarter of 2006, but has been improving since the first quarter of 2007. At 1.34 times coverage, the rent is very well covered while the rent on the second master lease with Five Star had rent coverage of 1.61 times. We are pleased to report that the 1.61 times coverage of the largest lease in our portfolio is the best it has ever been.

The only lease where the cash flows from the properties did not cover the rent for the second quarter of 2007 was the Five Star lease for the two rehabilitation hospitals. This was expected, as Five Star is implementing a repositioning plan for the two hospitals and this is not expected to be a long-term issue. All of the remaining leases comfortably cover the rent due to us. We continue to realize growth and additional rent from our tenants. The current run rate is about $6.8 million, which compares to a run rate of $5 million a year ago. During the third quarter, we funded $16 million of improvement financings to Five Star. Included in the improvement financing is $1.7 million related to the rehabilitation hospitals and the balance related to expansions at the private pay communities and refurbishments. Unit 8 total improvement financings were $33 million.

Moving on to investing activities. During third quarter we agreed to acquire six wellness centers for $76.8 million. Four of these properties were acquired on October 30th and the other two are expected to be acquired in November. The four properties had a purchase price of $42.1 million. The remaining two properties have a purchase price of $34.7 million. The latter two have a mortgage of $14.9 million due in 2013 with an interest rate of 6.9%. These are high-end fitness centers with basketball courts, multiple tennis courts, Olympic sized pools, often indoors and outdoors, spas as well as many other amenities. They are leased to Starmark Holdings and operated by Wellbridge Management. These properties are located in high-end communities, such as -- Harbor Island in Tampa, Florida; Bel Air, Maryland; Atlanta, Georgia; and Albuquerque New Mexico.

Membership levels at these locations have increased annually over the last five years. The average monthly membership is approximately $107 per month. The properties' operating income covers the $6.5 million of annual rent almost two times. The leases expire in 2023 and the rent is a cap rate of 8.5% and the lease contained CPI increases that are reset every 45 months. This is our first investment in wellness centers and it may be our only investment in this area. On previous calls I have indicated that SNH will consider investments that are triple net, private pay and and a part of the healthcare landscape. These investments fit this criteria. What attracted us to these particular properties was that all six are well located, have a history of strong membership trends and a very good lease coverage and provide diversification from Five Star.

We realize this asset class can have difficulty in sustaining membership, but this group has been able to maintain as well as increase the membership at premium prices. These properties are in great locations, our leases provide a high level of capital improvement expenditures be maintained and there's certainly adequate cash flow at these properties to support these capital expenditures. Having said that, our core business is and will remain investing in private pay senior living assets. Subsequent to quarter end, we entered into a purch and sale agreements to acquire 6 senior living properties for $78.5 million. Both transactions are in the diligence period, so I cannot provide any specifics about the properties operations at this time. However, the properties contain 565 units of independent and assisted living, as well as 142 skilled nursing home beds. The majority of the revenues are from private pay residents. These properties are expected to be acquired by year-end and at that time, I can provide more specifics.

They would be added to the 114 property master lease we have with Five Star and the initial rent will be 8% of the purchase price. There's still a transaction under agreement involving two assisted living properties for $14.1 million. This continues to be held up pending the HUD approval process. All the acquisitions and improvement financings we have discussed will total over $200 million of investments this year and the year isn't over yet. There are still numerous investment opportunities for us to evaluate. I am optimistic we will be successful in our bidding. We have not altered our underwriting standards and are seeing the market coming back to our level. Having ready capital allows us to more affectively compete in the current environment.

At September 30th we had nothing outstanding on our $550 million revolving credit facility. Our debt as a percentage of our market capitalization was only 18%. As you can see we are well positioned to take advantage of the tight capital markets to make new investments. We continue to evaluate more investment opportunities. Now I'll turn it over to Rick to discuss our financial performance.

Thank you, Dave. As Dave mentioned, we have strong growth in our revenues in FFO year-over-year. Revenues grew by $2.9 million or 7% from the third quarter 2006 to the third quarter 2007. This was primarily due to approximately $148 million of acquisitions in improvement financings and increased rent at the two rehabilitation hospitals and other properties subject to CPI increases in rent. For FFO purposes, we are recognized $1.7 million of percentage rent in the third quarter versus $1.3 million a year ago. Interest expense decreased from $11.8 million to $9.2 million year-over-year, primarily due to reduced leverage levels. During the third quarter we did not borrow on our resolving credit facility and actually have been using operating cash to fund the improvement financings and therefore we had zero outstanding on our $550 million revolving credit facility at September 30th. In addition our credit facility has an accordion feature that allows us to increase our capacity by an additional $550 million to $1.1 billion.

Due to the acquisition of the four wellness centers earlier this week, we currently have $30 million drawn on our credit facility. General and administrative expenses were roughly comparable to the second quarter of 2007 at $3.6 million. After the quarter end, the board of trustees increased the quarterly dividend to $0.35 per share, which is an increase of 3% over the previous level and a 6% increase over the same quarter a year ago. This represents a payout ratio of approximately 85% of the FFO per share. On an annualized basis, there is a $20 million cushion between FFO and the dividend level. There are a number of factors that we feel make SNH an attractive investment. First, we have long-term leases with strong credit quality tenants. 97% of our portfolio is leased to public companies or investment grade rated tenants. Second, 85% of our revenues come from properties that are more than 80% private pay.

This payor makes us among the best of all healthcare REITs and somewhat insulates SNH from Government-funded programs. Third, we have a conservative financial structure with debt to total book capital of 26%. In addition we currently have $520 million available on our $550 million line of credit. As a result, we are well positioned to pursue accretive acquisition even in this tight credit market. Fourth, we have a low dividend pay out ratio of 85%. This is more than enough to -- enough cushion to cover the dividend. And finally, these factors combined with the current dividend yield of 6.5% make SNH a compelling investment for value and income investors. That concludes our prepared remarks. Operator, we are now ready to take questions.

(OPERATOR INSTRUCTIONS) We will take our first question Omotayo Okusanya with UBS. Please go ahead.

Good afternoon, everyone. Dave, quick question, with the wellness centers, could you walk us through a little bit how you came up with the decision that it was a asset class or property type you wanted to move into, moving away from what you historically invested in?

Sure. Well, as you know, we've sort of indicated on previous calls that we have considered investing in sort of tangental type investments.

Right.

That are triple net that we could be comfortable with that the cash flows were very strong. And we could get a comparable return on. And these -- this particular transaction was a descent sized transaction. Obviously it is not a significantly changing to the character of our Company, but it is a transaction that fits the bill as far as cash flows and triple net and so on. And we have looked at trying to find other ways to invest outside of the senior living space and we are not pursuing a medical office building platform. So, we have to sort of continue to look at opportunities that are on the fringe, let's say. These ones we thought were appropriate given that it is really about wellness, fitness, the demographics should be a positive momentum for these types of properties given the baby boom generation is very much focused on good health and longevity and so on. That is -- should increase demand for this type of product also.

But do you find that membership at most of these wellness centers tends to be fairly stable or is it kind of one month is very high membership and next month everyone drops off or -- I don't think that I am just wondering are the cash flows as stable as some of the other property types that is you invest in.

Right. A couple of things to take into consideration is the fact that these are on the high-end of the spectrum of healthcare facilities, so they really have somewhat of a country club type approach to the business. Just all of these have large, large number of outdoor tennis courts, they often have professional tournaments at these clubs and the monthly dues, we said the average is about $107 a month. If you look at most of the fitness clubs per se, they're going to be in the more of the $30 to $60 a month range. These are kind of on the high-end and very unique assets. And the key to meet -- first of all, as I mentioned, the membership for the last five years has progressively improved. So in these particular six facilities, there's roughly just under 19,000 members. What we find is that the main focus of this operator is to maintain membership, so they're constantly evolving to offer programs that cater to them.

Like the locations. The one in Tampa is on Harbor Island and it is right at the entrance to a gated community where there's a lot of high-end residential apartments and condos and houses. And then you have the Bel Air property in Maryland. A little more than 50% of the membership is family membership packages and it has been voted the number one family health club, wellness center in the State of Maryland. So, we feel it is a pretty stable base and 99% of the time the people, the members end up signing out of their bank accounts and have it automatically withdrawn or charged to their credit card every month. I don't know. The most experience I have seen with others is the fact that they tend to let it ride for several months even if they stop going. But that's still not healthy because you want an active membership.

That's helpful. Just second question before I drop off. The acquisitions in relation to the Five Star deal. Did you mention that it is the rent on that are going be 8% of the purchase price.

That is correct.

Okay. What exactly, what are you seeing out there at this point in regards to cap rates on transactions.

Well, we have seen that cap rates are starting to come back at a level that we can compete more effectively with. And I would say right now early indications are probably about a quarter to 50 basis point increases in cap rates. Again, it is still early in the game and from everything I keep hearing about, it is going to get, depending on how you look at it, worse before it gets better with the credit crunch and even I saw GMAC took a major hit today. They have been a major lender in almost everybody seems to be taking significant -- .

Taking their lumps.

Yes. So, I think that we are viewing that this is more opportunistic for us over the foreseeable future than -- .

It sounds like, in regards to your -- the core areas that you investment in you are likely to just kind of keep looking at opportunities but not jumping quite well and try to preserve liquidity for the right asset at the right price at the right time.

Right.

That's helpful. Thank you.

You're welcome.

We will take our next question from Phillip Martin with Cantor Fitzgerald. Please go ahead.

Good afternoon.

Hi, Phillip.

Well, it is nice to hear some optimism in your voice on the acquisition front.

It has been a bit of a dry spell.

Yes, I know. It is good to see things might be loosening up here for you. First of all, with the Starmark assets, did you mention the lease coverage? What is the lease coverage?

-- about two times covered.

Two times and that $107 a month rate, what is -- I would love to have a rate like $107 a month, quite honestly, but is that $107, do you have any idea what kind of annual growth in that number there is? Does it go up by inflation or 4% a year? Is that something you would know?

I know it has been going up a little bit better than inflation and it is different depending on which marketplace it is. Harbor Island has been going up more than inflation. I think Bel Air has gone up slightly, Atlanta is maybe been about flat for the last two years, maybe a little bit, like 1% or 2%. So it does vary by locale. The one in Atlanta, I know literally across the street is -- there's construction going on at a new Gables residential apartment complex that's going to add at least 400 new apartment units that will open up within the next six months. That should allow for more membership increases and pricing pressure.

Are there expansion opportunities with these properties if they want to make them bigger or add something to it on the wellness front?

That's probably one of the bigger challenges. I think they could increase their membership and increase the services offered if they could expand more the size of the locations. Harbor island and Atlanta are land locked. But the other ones, I believe, do have some capacity to increase the area and that is frankly one of the things that we will explore with them about maybe we can provide some sort of expansion funding.

Okay. For that, okay. I mean how big is the Starmark portfolio beyond these assets? How many other assets are they managing?

They manage in total 20 locations.

Okay.

And Starmark, they're about, I guess, about the eighth largest chain of wellness centers. Obviously you have got 24 Hour and Bally and LA Fitness is the largest ones out there. But then it drops off to typically about 60 to 30 or 20 locations for the next largest chains.

Of the -- other than these, do they own the other chains. Do they own those or are they just managing.

No, those are currently leased. All of it is in joint ventures.

Okay.

And Starmark is, has a little bit complicated ownership structure but a minority investor through their parent is a company called Central Sports that's on the Tokyo Stock Exchange. They have about another 160 properties that they operate. So, we -- again we just closed on the assets so our intent is to go explore for other opportunities within Starmark, maybe Central Sporting and others for further opportunities. Maybe it is a long-term process, who knows.

Okay. Okay. What, if anything -- well, I can actually deal with that off line with you. But are these master leased?

No. They're actually in three leases.

Okay.

And we have some - couple months' security deposits for them. We have a guarantee by -- up to Starmark Holdings parent company.

Okay. And you have got, is it fair to say, three months security deposit.

Yes.

Okay. Guaranteed by -- okay. Is there any reason a master lease wasn't done?

No, it was not available to us because this, we are buying existing landlord interests.

okay. Okay. On the, on the rehab hospitals, can you give us a road map there in terms of, what's the best way to say it, in terms of when they stabilize, when they get to the point where they're stabilized. Just the road map, the timing and where you think coverage is, will be on a stabilized basis there?

Sure. Well, I guess a couple of things, one is I think Five Star will be hosting a call within the next about a week or so from now. They're probably the best ones to give you details on the performance of the hospitals. But, I can just tell you that we understood that once Five Star got in there, that they had to make sure that they handled the admissions and so on such that they could comply with the implementation of the 75% rule. So that affected some of the make up of the population in the facilities. And of course, they had to take a little bit of a different occupancy and have come back from that.

Also, capital improvements are a significant ingredient in their turnaround, repositioning of the properties. The exterior work they have done quite a bit amount of work. They're almost done with a large part of the exterior work. And we funded $1.7 million in the September 30 funding for improvements. The interior work is a much longer process and it has to go through a -- still going to need approval process which is a six months to a year process. And they're probably just about a month into that process. So, it is foreseeable when they will be turning around and doing pretty well, but -- and they're well along the way. I couldn't tell you if it is going to be six months or a year exactly.

Okay. Okay.

But it is, it is all pretty much going according to plan. This isn't a surprise to us really.

Okay. So everything is on plan and on budget and et cetera. So it is as expected.

Yes.

Okay. Now, on the acquisition front, the sellers -- are the sellers being -- are the sellers, I am sure the negotiating process with some of these, I am -- is it fair to say that it started out at a certain price and have sellers come back to reality a bit on their sale prices or are you still finding sellers willing to wait it out potentially hoping for better pricing or did the credit crisis here over the last couple of months push sellers to the point where okay, if we need to sell, this is when we need to sale.

Well, I guess it is sort of the answer is sort of all of the above.

Okay.

Every seller has a unique set of circumstances. We have come across a couple of situations where they put it on the market, they did not get the price they wanted and they have taken it off the market for a while. We have gotten into other situations where people have called us up after we were the losing bidder and asked us if we are still interested and so on at our price and we are talking to those people. So, what I see happening is that the sellers are saying let's see what the bids come in at and then looking at the best bids, then determining how realistic they are at closing. If they have the financial capable to close. And then deciding if they're willing to go forward on that basis.

Were you seeing a lot of competition from the other REITs on these investments that you have announced as part of this third quarter press release.

I don't really know to what extent the other REITs were in there competing. I have got to believe they have pretty much access to most of what we see. Although given our size I do believe that transactions under $20 million, let's say, are probably not as appealing to them as it is to us.

Okay. So fundamentally, there weren't fundamental reasons why some of the larger bidders out there would have passed on these to your knowledge.

No. The ones that I think are -- have dropped out of the bidding process are just the ones who just did not have equity to put into bids.

Okay.

I think people, people, from what I can tell, are only able to get floating rate mortgages and very few can get mezzanine or any other type of financing. So they are going to have to come up with the 25$ or 30% of equity.

Okay. And my very last question. Going back to Starmark, the typical member profile here, can you break that down, percentage that are family-type memberships versus the senior component? I know it probably varies by location.

It does. The family membership is typically at these facilities around 35% to 50%, or a little more than 50% in the case of the Bel Air, Maryland location. The rest are individuals. There are some couple memberships that are different than family memberships. Almost each one of these clubs, in fact, each one of these clubs has a kids club and all kinds of programs to make it easier for families to get their workouts in or keep the kids occupied during the summer. So, there are some other memberships that are add ons for, if they're want specifically the tennis membership and each of these locations pretty much has between 10 and say 16 tennis courts and often at least once you have a professional tennis tournament at that location. And I guess I can't really quantify right now how much percentage of the revenues come from those add on memberships for the tennis. But it -- I would say it is a little less than half on average is a family membership and then it's individuals and then there's maybe another 10% or 15% are these special programs for tennis or the kids club or something.

We will take our next question from Jerry Doctrow with Stifel Nicolaus. Please go ahead.

Hi. This is actually Dan Bernstein filling in for Jerry. Made a different type of acquisition there with the wellness. I was wondering have you looked at any other types of facilities, other than wellness, that might be on the fringe? I know you indicated that you don't want to do a MOB platform. I was just wondering what other types of facilities you would consider.

Well, we have talked to some of the drugstore chains about portfolios of pharmacies. Just other out at day care clinics for seniors and different other triple net lease chains. There are a few other ideas that I don't want to mention now. We've explored different ones but they're not, to date, not real.

Okay. Your bread and butter will be the senior housing?

Correct.

On the Starmark leases, what is the length of those leases and is there a purchase option at the end?

They run -- the initial term runs to 2023 and then they have some five-year renewal options. There are no purchase options on them. The leases have a 45, every 45 months they get reset to a cumulative CPI adjustment and the first reset is actually about 30 months from now.

Is there any percent rent affiliated with those leases?

No, the CPI bumps the only increases.

Okay. And switching to the Five Star acquisition, was that something that Five Star brought to you or was that something that you found and decided you wanted to lease to Five Star?

That was something that came in to us and they were in Five Star marketplaces so we asked them if they had any interest.

Okay.

So it came through us.

Okay. That may do it for me since everybody else asked very good questions. All right. I think that's it for me. Thank you.

(OPERATOR INSTRUCTIONS) We will take our next question from Kevin Ellich with RBC Capital Markets. Please go ahead.

Good afternoon. Thanks for taking my questions. David, I missed the number of beds for the Five Star properties. Could you break that out again, please?

Yes. It was --

707 in total.

707 total but it is units/beds.

And we have 42 skilled nursing beds and 565 assisted living independent beds, units.

And do you have anymore data on those properties you can give us between private pay and occupancy?

Not specifically right now. We are in the diligence period, so I prefer to comment on it after we have closed on transaction but they are stable properties that are roughly around 90% occupied. And what was the other question?

No. It was just a question about the occupancy and payer mix.

Yes, the payer mix is, the majority is private pay. All the ILAL is private pay and a good component of the skilled is private.

Okay. And then going back to the wellness center acquisition, I was wondering what led you to Starmark, you gave a lot of details, that's something that has been discussed quite a bit. But why Starmark, why not looking at any of the other operators, Bally, Lifetime Fitness et cetera?

Well, I am going to guess. This was a transaction that came on the market. So we reacted to an opportunity we saw out there and one of the advantages of the RMR organization is that a number of transactions come in through the broker networks and so on to RMR to consider for acquisition and we felt that this was a transaction that sort of fit the profile that we have been looking for for Senior Housing Properties Trust. Again, it is a descent size transaction but not huge and it is not going to change significantly the overall profile of SNH. We very possibly will consider investment opportunities with the other fitness center, wellness chains. We would have to get comfortable with the structure and so on. But, it is on our radar screen to at least evaluate potential opportunities.

Now, this -- one of the thing too is the fitness area is one area that is a little bit controversial. There are -- Bally's has been through a number of restructurings and so on. We have to pick the situations that we are willing to invest in. And what we liked about this particular transaction was that it was very soundly structured and we could be comfortable that these are long-term, viable entities and they have a -- they're less focused on the fitness center aspect of it and more focused on the amenities, the pools the tennis and sort of a country club type atmosphere.

Okay. Excellent and then just for a little background, wondering why you were hesitant about looking at MOBs or is there any hesitancy there?

There isn't much hesitancy, I think, to so some degree. There's a couple of reasons. One is they're not much -- they're at least as pricey as senior living assets are, so it would be challenging to buy. But the real thing is that we were actually one of the first to get into medical office buildings back in the mid-90s, when we were part of HRPT Properties Trust and we saw a tremendous opportunity to invest in that sector back then. As time has gone on, others have decided that is an area too that they would want to invest in. But when we were split up from HRPT Properties Trust, we had agreed that HRPT would still be the -- they were actually a 49% owner of us at the spinoff and they mandated that we not compete with them on the medical office building front. So, we can't do traditional MOB investing, especially multi-tenanted ones. We could maybe consider some sort of restricted like standalone clinics, if we had a clean portfolio from all our dialysis centers or something of that nature.

Excellent. Okay. That's good. Thank you.

Okay. You are welcome.

We will take our next question from Bryan Legg with Millenium Partners. Please go ahead.

Thanks, David. I mean, when you are looking at maybe going, talking to some of the other fitness, will you be more proactive? It sounds like this portfolio came on to the market, that's why you took a shot at acquiring it. Would you consider going directly to some of the operators and say here is a way to recognize some of your real estate value?

We will. Because that is the ideal situation, because we could go in and say let's structure something that works for you and works for us. The challenge is a lot of these operators lease their facilities anyway. So we have got to sort through how much are owned real estate that they have the potential to do something. There are situations, too, where we could go to a landlord and possibly do a transaction with them because we would be willing to come in at a fresh approach, be willing to provide some additional capital to maybe improve some of the facilities to offer a different service or add a service. That might be attractive to everybody all around. So it is something we intend to look at further.

Can you just talk about the attractiveness of the sector, because I generally think of this sector as -- well, it does have much lower barriers to entry than certainly the SNIF and independent and assisted living industries. Can you just sort of go through your thoughts on why this is an attractive asset class that you feel okay about the stability of the cash flows? And the potential that there could be supply coming into the market that could certainly impact those cash flows more so than your traditional senior housing assets?

Correct. Well, first of all, we are not fully endorsing the whole space because we do realize that there's a whole spectrum of retail fitness centers to very large complexes. I know in the Boston area we have a number of Boston Sports Club, New York Sports Club and others in Washington and so on that are very high-end and multiple services. So, I think we have to choose wisely in making our investments. I think that the main thing is that I do believe that there is going to be increasing demand with the movement of the baby boomers up and the makeup of the members may be a bit older, maybe have more money to be able to spend on this type of membership and so on and appreciate the tennis aspects or the swimming or other aspects.

I do believe that the larger properties that have a lot of these amenities, stay in business for the long-term. Everyone I can think of that has been in business that is large like this has been -- stayed in business for a long-time, the name on the front door may have changed or there has been some consolidation and so on. And so, we have to be comfortable with the asset, the location, and the fact that it could change its ownership membership or the name on the door. So, I think we believe in selective investments in the large type of properties.

And just when you threw out some other potential property types. You talked about pharmacies. I mean you are starting to move into territory like realty income and some other guys that might have a lower cost to capital than you do. And clearly the larger national chains or even the larger regional chains maybe have a lower cost to capital, like the Long Drugs that own some of their real estate out in California. I don't know if they would want to do a deal at the type of return, un-leveraged return you would like to do. Would you be looking to do more mom and pop type of rollups or how would you approach that business or is it just -- is it similar to this, something would happen, a portfolio would have to come on the market and you would bid on it?

It is a more of a opportunistic approach that we are taking to it. If it's the right situation. The volume of transactions that come through RMR is just incredible from all different types of real estate. So, we have sort of known in the back of our minds that there are -- we should be considering alternative investments beyond just senior living for the last year or so. And so, nothing is going to happen overnight. We will continue to monitor investments and look for opportunities. So we may for another year may not make another investment outside of senior living. I guess I wouldn't read too much into it beyond this transaction at the moment.

Okay. And can you talk about clearly you have plenty of capacity on your line of credit but you guys are always forward-looking and if you have more of a back-end '07 weighting toward your acquisitions, can you just talk about how long you might want to wait before maybe going to the equity markets?

Well, funny you should just say equity markets and not the capital markets.

Okay.

But we will -- we have plenty of capacity. We have got about 3.5 years left to run on -- 2010 to run on the revolver but we don't have to do anything. Once we do have substantial amount outstanding on the revolver, we don't like to let it sit out there too long and we would look at what the debt markets are doing and what the equity markets are doing and just make our best decision at that time. You are correct that we like to have plenty of powder at almost any given time and we do feel that the capital markets are creating opportunities for us and we want to be counter-cyclical and take advantage of opportunities when others can't.

Great. And just last question, can you just give a sense for in senior housing, maybe bifurcated by assisted living and independent living, what you are seeing as far as occupancies. From what we understand, there's a bit of dip in occupancies in the early part of this year because of maybe a little higher death rates. That carried on into the second quarter, but that anecdotally we are hearing the third quarter is a little better. Can you just give a sense of on what Five Star or what you have been seeing as far as the incremental pickup in occupancies in the third quarter.

Well, I am going to refrain from giving any specifics because I don't want to pre-empt Five Stars call next week. But just in general, Five Star has commented that they have seen improvements in their occupancy levels. The most of the other operators that are in our portfolio as well as others that I know through in the industry are all experiencing modest improvements. So I think fundamentally things are better in the third quarter than the second quarter.

Okay. When you say modest improvements, they're definitely seeing a pickup. Is it a similar, is it a similar seasonal pickup that you've normally seen or is it a little better than the seasonal pickup?

I mean it has been a pretty steady improving all around. So, I mean to be honest I couldn't attribute it to seasonal versus just the fundamentals. You have had a pause to some degree real slowdown in developments and things just seem to be moving a bit slower on the supply side. The demand keeps on chugging. So I think what I have noticed over the history of the senior living industry is that when there's a pull back it can only be temporary because the demand just keeps pushing forward and ultimately, whether it be a couple months or something, that the people are in assisted living have that need driven decision and that keeps on moving forward and the independent living holds off for a while, but ultimately it surges forward.

Okay. Great. Thank you.

We will take a follow up question from Phillip Martin with Cantor Fitzgerald. Please go ahead.

Actually one of the items was previously addressed but one other question I do have. With the Starmark assets, are these assets are they within a community or a subdivision, et cetera, or are they more street corner retail locations?

No. They're not retail locations. Harbor Island is a gated community.

Okay.

And if you -- as you approach the gates, the fitness center is right there next to the gates and at the gate is a -- it is a 24 hour manned guard and a lot of professional athletes reside in that gated community and so on. So it is very purpose-built location and everything. And Atlanta is the same thing, standalone. Across the street is that residential apartment complex going up. And about a block away is an executive office park, which is actually owned by HRPT and managed by RMR. And the same with Albuquerque, one of the properties in the Albuquerque market is adjacent to a commercial office park and so they're not retail boxes. They're more standalone professional properties.

Okay. That's what what I thought. So they serving a -- they are serving kind of a defined community for the most part?

Yes. I mean each location has 2400 up to 4800 members.

Uh-huh.

Location. So they're pretty large properties and they cater to pretty diverse membership profiles.

Okay. And as an alternative use, or I mean if for some reason one of these failed, the land -- the land value or an alternative use pretty high?

Yep. These should be highly desirable locations.

Okay. Okay. Thank you.

You're welcome.

At this time, there are no further questions. Mr. Hegarty, I will turn the conference back over to you for closing comments.

Thank you for joining us this afternoon. I know it has been a busy time with the conference calls. I know LTC is going on as we speak too, but many of you will be coming to the NAREIT conference. We will be there and we hope to have the opportunity to meet with most of you there. Thank you and have a good afternoon.

Ladies and gentlemen, this will conclude the Senior Housing Properties Trust third quarter 2007 financial results call. We thank you for your participation. You may disconnect at this time.