Diversified Healthcare Trust (DHC) 2009 Q1 法說會逐字稿

Good day, and welcome to the Senior Housing Properties Trust first quarter 2009 financial results conference call. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the Director of Investment Relations, Mr. Tim Bonang. Please go ahead, sir.

Thank you, Jonathan. 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 the federal securities laws. These forward-looking statements are based on Senior Housing's present beliefs and expectations as of today, May 6, 2009. The Company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call other than through filings with the Securities and Exchange Commission regarding this reporting period. In addition, this call may contain non-GAAP numbers including funds from operations or FFO. A reconciliation of FFO to net income, as well as components to calculate AFFO, CAD, or FAD are available on Page 14 in our supplemental operating and financial data package found in the Investor Relations section of our website at www.snhreit.com.

Actual results may differ materially from those projected in any forward-looking statements. Additional information concerning factors that could cause those differences is contained in our 2008 Form 10-K and first quarter Form 10-Q which will be filed with the Securities and Exchange Commission in the next 24 hours, as well as in our Q1 supplemental operating and financial data. Investors are cautioned not to place undue reliance upon any forward-looking statements. And now I would like to turn the call over to Dave Hegarty.

Thank you, Tim. Good afternoon, everyone. Thank you for joining us on the call today. For the first quarter of 2009, we generated $0.44 per share funds from operations, and ended the quarter with a strong balance sheet. SNH continues to be lowly levered with no near-term debt maturities. Since our last conference call which was just two months ago, things have been quiet on the transaction front, which is not a bad thing in this economic environment. We closed on the acquisition of one medical office building from HRPT for $19.3 million, funded capital improvements and expansions of $12.7 million at our senior living properties, and firmed up our balance sheet by raising a net of $97 million of common equity back in early February. Before I get into the details of the portfolio and the outlook, Rick will review the results for the quarter.

Thank you, Dave, and good afternoon, everyone. As Dave mentioned, we reported FFO of $0.44 per share for the first quarter which compares to $0.42 per share for the first quarter of 2008. And $0.43 per share for the fourth quarter 2008. The results in the first quarter of 2009 were positively impacted from the full quarter earnings of approximately $170 million of acquisitions and improvement funding made in the fourth quarter of 2008, and the partial impact of the $19.3 million acquisition of the medical office building in January, offset by the dilutive impact of using equity proceeds to repay our low-cost borrowings on our credit facility.

Revenues for the first quarter 2009 increased by 38% to $68.6 million versus $49.6 million for the first quarter of 2008. The growth in revenues is due to the acquisitions of 39 medical office buildings acquired for $385 million, four wellness centers for $100 million, 21 senior living properties for $240 million, and improvement funding of $82 million since March 31, 2008. Percentage rent increased modestly to $2.1 million from $1.95 million a year ago. This quarter, we incurred property operating expenses of almost $3 million which directly relate to the medical office buildings. There have been no surprises with these expenses and our comparable to our expectations when we initially agreed to acquire them.

Interest expense increased 13% to $10.8 million, compared to the same period in 2008 due to greater amounts outstanding on the revolving credit facility, offset by lower interest rates. The increase also was due to $61 million of secured debt assumed in connection with the acquisition of two medical office buildings and eight senior living assets acquired during the third quarter of 2008. General and administrative expenses increased year-over-year by $1.1 million. The increase in G&A is a result of the growth in acquired properties since last year, as well as increased legal and accounting fees.

As a result of a new accounting pronouncement known as Statement of Financial Accounting Standards number 141R, which became effective in January 2009, we now expense acquisition costs, such as legal costs, brokerage fees, title insurance, third-party inspection costs, and other transaction costs. For the quarter ended March 31, 2009, we incurred $112,000 of acquisition costs related to the $19.3 million medical office building acquired in the quarter. Historically, these costs would have been capitalized and depreciated over the life of the asset. Since depreciation expense is added back to calculate FFO, we have taken the position that these one-time acquisition costs should also be added back to calculate FFO and you will see that broken out in our FFO reconciliation.

Subsequent to quarter-end, the Board of Trustees declared a cash dividend of $0.35 per share based on the quarter's results. This represents a payout ratio of just under 80% of our FFO. The balance sheet is also well positioned, especially in today's economic environment. Today, we have $165 million outstanding on our $550 million unsecured revolving credit facility. The credit facility matures in December, 2010. At our option and upon payment of a fee, we can extend the maturity date one year to 2011.

We have two issuances of senior unsecured debt, one for $225 million of which is due in 2012, and one for $97.5 million which is due in 2015. Debt represents only 26.4% of our total booked capital. Only 6% of our assets are encumbered by debt. All of our debt, except the credit facility, is fixed-rate debt. In February, we raised approximately $97 million of common equity to provide capital for future growth. As a result of the lack of liquidity in the capital markets, in the investing opportunities we anticipate, we can utilize a portion of our unencumbered portfolio to pursue secured financing.

Today, we are currently negotiating terms of mortgage financing with Fannie Mae in the amount of approximately $500 million. This is a cumbersome process, but we expect to close on this within the next few months. I will turn the call back to Dave to discuss the portfolio performance, acquisition environment, and outlook.

Thank you, Rick. As you can see by Rick's comments, our operating performance is solid. The dividend is well covered, and the balance sheet is well positioned for several years. We all know that the sustainability of our operating results though is dependent on the quality of the performance of our tenants and their management of the properties we lease to them.

Five Star Quality Care, our largest tenant, reported their first quarter results yesterday, and they reported pro forma earnings of $0.09 per share, generated EBITDA of approximately $7.5 million, which excludes their gains from early extinguishment of debt, and have their $40 million revolving credit facility completely available and little capital needs for several years. The properties they lease from us cover the rent for three of the four master leases by 1.2 to 1.4 times, and one lease of seven former [NewSeasons] properties at 0.8 times. The first three leases had occupancy levels of 85% to 89% in Q4 '08, while the lease number four was at 83%. The occupancy levels have been impacted due to the economy, which should come as no surprise as everyone in the industry is reporting declines recently in occupancy.

If you were to drill down further, you would find the occupancies were impacted mostly at the rural skilled nursing facilities, the rehab hospitals, and some of the independent living properties. Since all of healthcare is local, it's difficult to generalize. So the best you can do is to be diversified, which we've done with each master lease. In the case of lease number four, these seven properties were taken over from NewSeasons by Five Star on July 1, 2008, and there's been a significant amount of repositioning of those assets, including capital improvements, replacing personnel, and increasing marketing efforts. In addition, the Philadelphia and New Jersey market is a very competitive market, so it's taking longer to reposition those assets than we'd like.

We have 14 properties that are leased to Sunrise that are guaranteed by Marriott International. On a quarterly basis, the coverage appears to have dropped from 1.9 times in Q3, 2008 to 1.3 times in Q4, 2008. But for the calendar year 2008, coverage actually increased to 1.47 times from 1.42 times in 2007. Internally, we regularly debate whether we should provide information on a quarterly basis because they are unaudited, often contain true-ups, and are subject to seasonality. Our peers do not provide stand-alone quarterly data, and we will consider in the future whether we will continue to do.

The Brookdale Properties we have continue to hum along at about two times coverage and 95% occupancy. The smaller, private companies continue to perform at about two times as a group. The wellness center leases also continue to perform at about two times coverage. They experience the same economic pressures as the senior living industry as far as occupancy and rates and respond similarly by reducing or waiving upfront fees, throwing in a free month of service, or selling the higher end packages for lower rates. Lifetime Fitness announced its quarterly results back on April 23rd and posted a profit of $15 million for the quarter.

The medical office buildings, clinics and laboratories buildings we have acquired have all performed as expected or better. During the first quarter, we acquired one property from HRPT for $19.3 million, which is a clinic master leased until 2015 by Health Insurance Plan of New York, and its located in White Plains, New York. One of the remaining buildings to be acquired with an allocated value of $3 million is no longer subject to our purchase agreement. And the remaining nine properties of this portfolio to be acquired have an aggregate purchase price of $195 million. These properties are to be acquired by May 2010. However, we and HRPT may mutually agree to accelerate the closings of some or all of the acquisitions.

We continue to see a few portfolios and individual assets for possible investment, both on the senior living and medical office segments of our business. There continues to be a disconnect with sellers' and buyers' expectations. And in some cases, the value that we attribute to it is not worth the amount of the debt on the property. We'll continue to review investment opportunities on a case-by-case basis.

As we discussed on our last earnings call, we are pursuing a 10-year $500 million secured financing with Fannie Mae. Because of the size and complexity of the financing, it's a cumbersome process. However, we are moving forward with it and expect to close on the financing in the next few months. If this financing is consummated, we'll likely have to realign our leases with Five Star to accommodate the requirements of Fannie Mae. Since we don't have a firm commitment yet, I can provide no guarantees that the financing or the lease realignment will occur.

In closing, in the face of the uncertain economic backdrop, SNH continued to perform very well in the first quarter. Our prudent decision-making during the acquisition frenzy that gripped our industry a few years ago, places us in an enviable position of having a strong balance sheet, low leverage, and no near-term debt maturities. This combination strongly positions us to ride out the economic storm and to operate from a position of strength moving forward. That concludes our prepared remarks. Rick and I would be happy to answer any questions you may have.

(Operator Instructions) Our first question will come from Jerry Doctrow with Stifel Nicolaus.

Hi, good afternoon. David, I just had a couple of things. There were a couple of items that came up on the Five Star call yesterday where they indicated that because some of their rent is tied to revenue, or the rent payments due are tied to revenue. That they might actually be seeing some rent roll down, and I was trying to get a sense of what quantity we might be talking about. Obviously, it depends on where occupancy goes and that sort of stuff. But can you give me a little more color? That and maybe order of magnitude what we're talking about?

Sure. Our leases -- all of our leases with Five Star, excluding the [NewSeasons] lease number four and the two rehab hospitals have a formula where SNH receives 4% of the growth in revenues at the properties as compared to a base year, which is usually the first year that Five Star has operated for a full year. So year-over-year, it's possible if revenues go down, that our participating rent would go down also. I guess in our situation -- first quarter we recorded about $150,000 of percentage rent, which is not -- I'm sorry, $150,000 growth in percentage rent versus a year ago.

Okay.

So it's not a big number. Five Star -- obviously, they have fewer shares outstanding in the smaller market cap. So a couple hundred thousand dollars is more meaningful to them than it is to us. But also, we do receive percentage rent from Sunrise Senior Living. They're 4.5% of the growth in revenues. We also receive it from Brookdale on the Brookdale properties. I would say it's probably more likely to be flat to a very modest positive overall, for all of SNH versus maybe -- versus, it may be, possibly a slight decline for Five Star. Maybe.

Okay, but from Five Star, you think order of magnitude what we're talking about is hundreds of thousands, not millions?

Correct.

And then there was another item that had come up, on their call, and you -- it also ties into something you just raised where they were suggesting on the rehab hospitals, which obviously have not performed as well as either side has hoped. That they had discussed in the past, maybe continue to pursue renegotiation of those rents. So if you've got to go back to them for agreements to get the Fannie Mae financing done, does that create an opportunity for them to renegotiate whether the rehab hospitals or something else where they've got issues?

It's premature because we haven't had those discussions. First of all, we're not even sure. We are still working -- we don't have a commitment from Fannie Mae. So I'm reluctant to commit that that's a sure thing. But as far as it does create an opportunity to talk about it with the CEO, CFO, and a few other people at Five Star come to us all the time and remind us and ask us if we would consider a rent reduction. Clearly, we look at Five Star as a whole, and they clearly have the ability to continue to pay the rent for those hospitals, even if they are not able to cover the rent today. We still want them to use every effort possible to try to turn those around, which might mean adding more services, or like they have talked about -- opening up more satellites and taking some of the licensed beds and pushing them out into the suburbs. I think we'd want them to use every avenue possible before we even consider reducing their rent. Now, also, too, in any of our leases, there's always a properly or two that is underwater from covering the rents, and we don't -- just as a matter of practice -- we do not give people rent concessions on individual assets.

Okay. But Fannie Mae -- you need some stuff from them for Fannie Mae that they do not have to necessarily agree to. Is that -- just so I understand the facts?

That is correct.

The only other issue I wanted to clarify is just on the MOB stuff. We had been thinking about of a cap rate on that of 7%. This may have come up in the last call, but I wanted to clarify. 7%, but you're now buying some of them for later, so I think you were talking about a cap rate of 7.7%. Can you clarify what the cap rate is that we're talking about today? And how that 7.7% fits in, and how we got there?

Hi, Jerry, this is Rick. Yes, when we first agreed to these back in last spring, it was a cash cap rate of about 7.1%, and a GAAP cap rate of about 7.9%. As we are closing on these, we do look at that. It's about same to modestly a little better, maybe an 8% or an 8.1% at best cap rate that we have right now.

Okay. So it's really whether we're talking about GAAP or cash is the bigger swing.

On a GAAP, we went from a 7.9% to maybe an 8% to an 8.1%.

And the the cash correspondingly moved up 100 to 150 basis points.

That's helpful. Last thing, and then I'll jump off. Have you thought, David, about buying back some of the debt which some of the other REITs have been doing since it is trading at a decent discount?

We have, and we've periodically put some feelers out to see if there's interest. Frankly, our bonds don't trade that much, and the few opportunities we've had for investors to sell them to us have been at such modest discounts that it's not attractive to us. But we definitely have an interest, and I'd say, should the Fannie Mae transaction close, we'll have significant, obviously more capacity to do more.

Okay. Would you think about a tender or whatever, or you -- ?

Clearly not before the Fannie Mae deal is closed. At that point, we'd have to think about it -- think it through.

The published numbers show them trading at a big discount, but I understand they may just not be that liquid. That's all for me. Thanks.

You are welcome.

We will now hear from Mark Biffert with Oppenheimer.

Question on the $500 million Fannie term. When you look at that, you said you may have to renegotiate some of the things with Five Star -- get some things for Five Star. How much of the properties will be covered by this $500 million? Or will be secured by this $500 million that you're looking at?

Well, it's still somewhat in flux, but just a couple thoughts. One is the -- our portfolio, number of properties had to be appraised, and they are coming in at significantly above our cost basis in the property. So we're not talking about a large universe of properties in our portfolio. And they would be some of the larger rental properties that we have. And what Fannie Mae is customarily used to having an owner-operator and financing individual assets. So they usually have rights to the real estate and many assets of the business, and since we in the REIT structure don't have -- we don't own those assets of the business, we have to work something out where we can give some of those -- some rights in those assets should Senior Housing not be able to meet the debt obligations. So that's why we have to work with Five Star to ask them to relinquish some stuff to meet the Fannie Mae formulas or guidelines.

Have they quoted you any rates at all?

Clearly, they have given us indications back in the beginning. Until we have an official commitment, you can't lock in rates. But if you see other deals that other REITs have announced, that they've been the low 6%. When we started this process, I think we had been saying that clearly we would be below 7%. Right now, I think we're still in that low to mid-6% range.

Okay. When you look at the lease for -- or some of the things with Five Star. If things don't improve and the coverage ratios don't improve, what's the likelihood that you would look to switch operators? Find an operator that could improve the fundamentals of those assets. Or would you look to sell those assets?

Well, we're always looking at -- we evaluate the portfolio all the time, at least every quarter, and determine which assets are temporarily impaired versus longer term impaired. What the likelihood of a turnaround is. We've been -- we have agreed to sell some individual assisted living and skilled nursing facilities with Five Star. We would definitely be interested in selling some individual assets. And it's amazing -- a handful of assets that were pulled out of the leases, the coverage ratios would materially improve. The problem is that, as you know, the buyers have difficulty obtaining financing. And so it's been fairly illiquid in some ways.

Now is the reason because the coverage ratios have to be at a certain level for Fannie to come in and underwrite those assets? And that why they're having trouble getting that financing? Or is it just these are small private operators that don't have access to Fannie that may have to use regional financing -- or regional bank financing?

Part of the problem is -- we're predominantly interested in selling the properties that are underperforming. They're not likely to qualify for Fannie financing. They would probably qualify for HUD financing, but that is a cumbersome process. And there are a few properties that we are working with people to try to do that. But, it's not a material part of the portfolio, it's more a one-off situation.

Okay, and then from a strategic perspective, you have significant liquidity on your balance sheet. As you look ahead and look at expanding the portfolio, you have some of the remaining HRP assets to buy out. But when you look at new acquisitions, what have you said in terms of looking at quality of assets, markets? In terms of improving the overall tenant quality of the portfolio as we look into the next year or two?

Well, let's see. Couple things. One is, we are seeing some nice quality assets in the marketplace, but we are still -- still find this disconnect with the sellers' expectations. In a few cases, we have been, clearly, the highest and best qualified bidder, but the seller's have been thinking long and hard whether they would even sell at that price. It's a question of whether they -- if there is enough pressure on the seller to feel that they need to sell, or if they want to wait. As far as, I guess, on the quality of the tenants, I'm not sure what you mean on that. Because if you look at our medical office building portfolio, we have excellent tenants that are in there. We continue to look for more medical office buildings with excellent tenants, and I believe there are a few situations out there that fit that bill. On the senior living side, it's a bit challenging right now. Ideally, it would be best if we bought a portfolio leased to different tenants. But right now, I'd say most of the major players have some question marks right now.

And what is the hurdle rate that you are looking at? In terms of acquisitions? Where does pricing need to be on the senior housing and the medical office side for you to go out and make acquisitions in this environment?

We're clearly seeking high 8%, low 9% for our initial yield.

In the medical office, or is that the senior housing?

Pretty much both. Because our cost of capital is the same for both cases. It's -- but the real thing is whether or not even -- what our chances of success with that hurdle rate. And we find in the medical office space, there is still a number of situations where the private REITs are still bidding in the around 8% range. And so, therefore, for all intents and purposes, we really can't compete at an 8% level.

Okay, thanks.

You're welcome.

Our next question will come from Kevin Ellich with RBC Capital Markets.

Good afternoon. Thanks for taking my questions.

How are you doing, Kevin? Thanks for calling.

Good. Going back to the Fannie financing, just wondering, if, is this still the best option for you at this point? Or, most attractive?

For raising capital?

Yes.

It definitely is. Obviously, the unsecured market is still -- it's starting to show some life. But we believe it would still cost us well into the 9%, if not 10% at this point. Although -- I think we would trade around Ventas' recent deal. If we could get secured financing at, say, 6.5%, that's clearly more attractive to us. We have the revolver, but that's -- since LIBOR is so low, that's artificially low. And as you know, our equity is quite expensive. So it really is the best option in today's environment.

Dave, did you say the cost of that debt would be 6.5%? I missed that.

Yes. I mean, I believe it's going to be north of 6% and lower than 7%, so I'm just -- ballpark, 6.5%.

We can triangulate from that, I guess. I don't know if there's any color -- more information you want to provide, or you can provide on the one facility that's no longer part of the HRP transaction. Any big deal going on there?

The one property for $3 million that got dropped out?

Yes.

Yes, it just is a little bit of a legal dispute over some of the rights in that property. It's not going to be settled any time soon, so HRP just pulled it out of the portfolio, and we agree with that.

That's a good thing, then. I was trying to reconcile between -- forgive me if this is too obvious. But in the press release, it says that to date you have acquired 38 of the MOBs. But then when I go to the supplement, I believe in the footnote it says that you've got 39 MOBs. Was there one that you had before? Or one that came from a different acquisition?

One, and I believe it was September 30th, we went outside of the HRP portfolio. Yes.

Okay. And who was that from?

That was a multi-tenanted medical office building with about twelve different tenants based in upstate New York.

I see. And then -- Dave, Rick -- could you give us an update or outlook on the acquisition front? Is the market still pretty active, and what are you looking at these days?

The acquisition environment -- it's very quiet. It's strange. As I mentioned, we see some opportunities that have floated out there, that are good quality assets. But when they're not receiving the bids that they think they would, or almost all of the bids are subject to financing contingencies. The sellers have decided to not sell in this environment. We're clearly seeing several one-offs in a few portfolios. And quite a bit of the portfolios have debt coming along with them that would have to be assumed. So it's pretty quiet out there, I'd say though. And I do expect we will be doing some acquisitions going forward, but nothing major.

Okay. And then thinking about the diversification that you have brought into the portfolio, looking at the wellness and health clubs. And given the transparency and also good coverage that you got from Lifetime and [Star Mart]. Do you see any more opportunities in that area?

It's not a particularly deep mark. And it's not -- there are not many players that we feel -- that we necessarily could get comfortable with from a credit perspective and long-term buyability perspective. Because we are not -- a lot of these are franchises. A lot of them are small, regional operators, and we're not going to do transactions with them necessarily. So I, frankly, don't see a lot of opportunity there.

Okay.

We do like the asset class. We do think that -- for qualified assets, quality assets, sorry -- that there's a bright future for them. And, once this economic recessionary period passes on.

And that would make sense, especially with the early cyclical play. The other one that we have talked about in the past is the retail pharmacies, maybe even some of the short-term clinics, clinic operators -- like Minute Clinic, et cetera. Any movement on that front? Or any deals coming across your table?

Very few. Once in a while we do see a situation to look at. But there's nothing of any size out there that's attracted us. It seems they're still able to get sub-8% cap rates for those. A lot of them are still with [PICC] buyers or other structured financings. We would love to pick up a portfolio of those, but I don't think pricing is there yet. Or size is there yet.

Okay. Got it. Thanks.

Our next question will come from Dave Aubuchon with RW Baird.

Thank you. David, you gave some individual detail on the Five Star leases. I don't think you touched on lease number three? Can you provide some context behind the pretty significant drop there in the rent coverage ratios over the last several quarters? But specifically, versus the fourth quarter of 2007?

Sure, yes. In connection with that lease, what we've done is we've added all the newest acquisitions to that lease. So when leases come on-line, we might underwrite them at a 1.15, 1.2 coverage. And they join that lease. It brings down the average for the lease. In addition, whenever you take over an operation, there's usually a transition period. And in this environment, the transition period is a little more painful. So you end up with the performance taking a dip for a quarter or two or three before it actually starts to take off. And that's because Five Star has to get in there. Rebrand everything. Maybe change out some personnel, and so on.

And there is also -- just to let you know -- there was 23 [SNFs] in there that is performing well. So prior to 2008 where you're seeing the fourth quarter '07, you're going to see a higher rent coverage.

Okay. And can you give the general breakout of the assisted living, independent living, and the SNFs in the first three portfolios? Leases to Five Star?

As far as their coverage?

Coverage and number of assets would be helpful.

In the first lease, there's one hundred properties in that lease. There are about 24 SNFs in that lease. And the remaining would be CCRs and [ILA] of the properties. And lease number two has the two rehab hospitals plus the former Marriott properties -- 30 Marriott properties. And then lease number three is 23 SNFs. And as Dave was just talking about, all of the new properties that we started acquiring, early 2008. Most of those that were acquired in 2008 are fairly significant and heavy in Alzheimer's care and assisted living. So, that's the makeup of that portfolio. It's more heavily weighted toward -- all the new additions have been AL and ALZ.

Thank you. And just as a reminder on lease number two, the 30 Marriott assets were primarily senior living? Or, I'm sorry -- independent living?

I'm sorry?

On the 30 Marriott assets in lease number two?

On lease number two. Those were mostly the larger rental CCRCs.

Regarding lease number four, and you mentioned that you are again, transitioning some of those assets, obviously. And the Philly and New Jersey market was tough. Have you done a revised pro forma on those assets? And if you have, maybe where do you think coverage could turn positive?

It's really Five Star who would do the pro formas and evaluate how long it would take. It's clearly taken longer than expected, as it is. They've started to make some inroads. I think it's still going to be a few more quarters before they would break even.

So your latest discussions with them circle around -- listen, we're just having -- it's a tougher environment, clearly. And assuming we go into a period where there is better fundamentals, better economic trends. That there is nothing particularly wrong with the asset, just more of a macro issue?

Right. And they -- I believe they've changed out every single executive director in those seven properties. And they've had to -- it turned out that the -- some of the local reputations of the prior operator was not particularly good in that area. So they had to really rebrand and get out there. And tell their Five Star story. That clearly doesn't happen overnight. It's just taken longer than we thought to do that. Also, we are aware of a number of competitors in the area who have done significant discounting, and they are fighting up against that, too.

And then, last question was on the financing. Is there a Plan B? If, for whatever reason, you just can't get the Fannie financing done?

Well, we're not in bad shape as it is. I think what it does is -- it reduces our potential for taking advantage of opportunities in this marketplace going forward. Our existing situation is that we clearly have enough funds to cover all our current obligations and our next couple year's obligations. And we'd have to see in the next few years if we refinance out the line. That's really the only thing coming up in the next, say, three years.

Thanks.

Our next question will come from Todd Stender with KBW.

Hi, thanks. Just to circle back on the agency debt that you're seeking. Assuming you obtain the $500 million, how much additional secured debt can you take on after that? And still stay within your covenants?

We could take on probably another $200 million of secured debt. Then we'd run up against -- pretty much, our revolver covenants. Our public debt covenants are a little bit looser than our revolver. And then we have -- hopefully, at some point too, the unsecured debt markets will open up again. And then we'd have significant capacity to borrow on an unsecured basis.

Okay, thanks. And just to provide an update, are you beginning to see any emergence of distressed sellers? Maybe with assets that fit your investment criteria?

Periodically, we do see some and have some discussions with operators that are facing massive debt maturities. I think our challenge is always to see whether or not the value that we come up with exceeds the debt level. Because as you can imagine, a couple years ago, assets were acquired at say an 8% or a below 8% cap rates. And then, they might have been levered 80%. Today, that cap rate has moved up considerably. And when you do the math, you end up with not quite meeting the value of the debt. So the seller has no interest in selling if they can't at least cover the debt. And it might force the lender to do something. And they can't do anything until a default has occurred. So I think those opportunities are still out there, but it's -- there's a lot of noise, and this disconnect has to come together. We are seeing also lenders granting one-year, two-year extensions, because they know there's no need -- there's no benefit to force the sale in this environment. So that's why I was saying, there's quite a bit of discussion, but not a lot happening.

Got it. Okay, thank you.

Thank you.

Our next question will come from Brendan Maiorana with Wachovia.

Good afternoon. This is Yen Koo here with Brendan. David or Rick, have a question in terms of your stock. Your stock is trading at around say ten -- nine, ten times -- whereas you're looking to buy assets in the 8% to 9% cap rate. Is there a reason why you aren't buying stock? It would seem like it would make more economic sense to buy back stock instead of going out and buying assets?

I'd say right now in this environment, I don't think would it behoove us to buy in the stock. Especially, it's not like we have a ton of liquidity above and beyond. And the stock has been weak the last few days. It's usually another $1.50 higher, to $2 higher not too long ago. So I think maybe in a different timing, that might be a consideration. But, in this environment, I think buying back stock would not be prudent.

In terms of the $500 million Fannie Mae debt. I think if you buy the assets and pay off your credit facility, it comes to about $100 million plus in terms of remaining capital. Are you expecting to use that capital for additional acquisitions?

I think we'll evaluate all our options at that time -- acquisitions, possibly buying back debt -- are other options. But those would be the primary things we'd be considering.

Okay. And are you seeing any non-HRPT MOB (inaudible) on the market these days?

Absolutely. We are seeing some portfolios and some one-offs, and we evaluate all of those that are out there. And we bid on a few, and I think, as I said, even in some of those cases we have won the bidding, but their institutions are not sure that they're willing to sell at that price level. Okay.

And one last question. I think about a year ago, including yourselves and some of your peers, have been underwriting private pay as being a higher credit quality type metric versus public pay. Has that changed since what's been going on recently?

Fundamentally, I think we're still believers in the free market, and that owning private pay assets is the better route to go. Basically, we have been burnt in the past. Back in that 1999-2000 timeframe, and so we're very much against anything that's fundamentally dependent upon government programs. Historically, they have a way of allowing you to make enough profit to make it interesting enough to go into that business. But as the demographics progress, and capital -- and state budgets get constrained -- that those programs are under pressure to reduce costs. And then they'll end up cutting rates, and they leave no margin for profit. So we just don't want to be in that position. We do think that once the economy comes back, the private pay will prefer the AL product, the IL product. AL is delivering more and more services that could be found in skilled nursing or other settings. But I think that's still going to be the preferred route down the road.

And private pay assets -- or a higher portion private pay assets have been performing better recently?

They have been, and I think they will, more meaningfully, be more profitable going forward.

Okay, thank you.

You're welcome.

We will now take a follow-up from Mark Biffert.

One last accounting question. You had mentioned that you might speed up some of the HRP-remaining acquisitions. I'm just wondering, now that you're expensing the acquisition costs, what kind of impact that might have on earnings for the rest of this year?

Well, probably not a big impact, as you saw in this quarter, that our acquisition cost for that one medical office building was $112,000, which is less than 0.5%. And the remaining acquisition costs are still going to be of that caliber. They're mostly the transfer taxes and legal fees and things of that nature that are left.

And those costs would be added back, as I mentioned, would be added back on the FFO reconciliation. So they would be added back to our FFO.

Okay. Sorry, I didn't hear that. Thanks.

You are welcome.

We will take another follow-up from Kevin Ellich.

I just had a quick question about the possibility of having to renegotiate the Five Star leases. How would that affect the rent that they pay? Would it stay the same? Or would we see any changes on that front?

Well, I guess our expectation is, we had restructured the leases last June -- .

June 30th, July 1st, yes.

And the result was no change in rent, and no rebasing anything. Just purely sorting out the individual assets between the -- .

In total, Kevin, the rent will stay the same.

Okay. So it's really more structural than actual financial, then?

Correct.

Okay. Then the other question I had was, do you have any visibility on the CapEx that you have to pay back to them? Or that they will be charging back to you each year?

This past quarter was only a little over $12 million, but I would pretty much figure on probably $60 million, $80 million?

Last year -- I believe it was $69 million last year. If we do about $15 million a quarter, we should be -- get back there. I believe they did a lot in the fourth quarter last year. So I don't know if we can anticipate such a big one in the fourth quarter, but around $15 million maybe a quarter.

So, yes, about $60 million a year is a good number to think about.

In the last quarter, they might be throwing a lot more in there before year-end. If they finish some of their projects. I see. Okay, that's helpful. Thanks.

You're welcome. Alright. Any more questions?

There are no more questions at this time. I would like to turn the conference back over to David Hegarty for any closing remarks.

Thank you all for joining us this afternoon, and Rick and I will be at the NAREIT Conference in New York in June. And we'd be glad to meet with any of you at that time. Have a good day.

Once again, that does conclude today's conference. We appreciate your participation.