Diversified Healthcare Trust (DHC) 2009 Q3 法說會逐字稿

Good day and welcome to the Senior Housing Properties Trust Third 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 Vice President of Investor Relations, Mr. Tim Bonang. Please go ahead, sir.

Thank you, Belise, and good morning, everyone. Joining me on today's call are David Hegarty, President and Chief Operating Officer and Rick Doyle, Chief Financial Officer. Today's call includes a presentation by management followed by a question-and-answer session.

Before we begin today's call, I would like to state that today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Federal Securities laws. These forward-looking statements are based on Senior Housing's present beliefs and expectations as of today, November 3rd, 2009. The Company undertakes no obligation to revise or publicly release the result of any revision to the forward-looking statement made in today's conference call other than due 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 pages 11 and 14 and our supplemental operating and financial data package filed in the Investor Relations section of the Company's 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 Third Quarter Form 10-Q to be filed with the SEC in the next day or two, as well as in our Q3 supplemental operating and financial data. 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.

Thank you, Tim, and good morning and welcome to everyone. Well, the third quarter was a very positive one for Senior Housing Properties Trust and a very busy one. For the quarter, we generated $0.41 per share funds from operation, which is equal to the $0.41 to funds from operations in the same quarter as 2008. I think it is important to note that we kept FFO per share at the same level on a year-over-year basis even while increasing our weighted average share count by 6% over the comparable period.

In addition, we achieved our strong third quarter 2009 results while greatly diversifying our revenue and without placing stress on our balance sheet. Our balance sheet ranks as one of the best of all the healthcare REITs and among the best balance sheets of all REITs. At September 30th, our debt to total market capitalization was only 29% and we had $72 million of cash on hand with 100% availability on our $550 million line of credit.

Our nearest significant debt maturities in 2012 when our senior notes in the amount of $225 million are due. These quarterly results are all the more impressive in light of the significant negative arbitrage we incurred during the quarter due to the un-invested proceeds we had on hand as a result of capital raises during the quarter.

As discussed on our last earnings call, at the beginning of August we closed on the attractively priced 10-year Fannie Mae financing at a rate of 6.6% per annum. We also raised approximately $127 million of equity in September. With the proceeds of these capital raises, we paid off our revolver balance, closed on the remaining medical office buildings from HRPT Properties Trust or HRP in August and acquired 10 medical office buildings leased to Aurora Healthcare and finally acquired one rental CCRC.

As of today, we have agreed to acquire another 10 private pay senior living facilities for $97 million in two transactions, which are scheduled to close in the next 30 days. I'll go into more details in these events shortly, but I'd like to have Rick first report on third quarter operating results in our balance sheet.

Thank you, Dave, and good morning, everyone. This morning, we reported FFO of $0.41 per share for the third quarter of 2009, which compares to $0.41 per share for the same quarter of 2008. Year-to-date FFO was $1.29 per share versus $1.24 per share for the same period 2008, an increase of 4% which includes an 18% higher weighted average share count.

Revenues for the third quarter were $72 million which represents 21% growth over the same quarter last year. The main reason our revenues increased from the 2008 comparable period was due to the acquisitions made since July 1st, 2008 of which many were medical office buildings with gross leases.

For the third quarter, percentage rank was $2.4 million versus $2.3 million for the same period last year. These percentage revenues are not included in our GAAP revenues until the fourth quarter, but are calculated to determine FFO on a quarterly basis. Operating expenses increased by $3.1 million for the third quarter 2009 versus the 2008 quarter as a result of approximately $750 million of medical office buildings acquired since June of 2008. Today, these expenses are in line with expectations and fourth quarter may be more indicative of a run rate for these expenses.

Interest expense increased from $9.6 million to $15.9 million as a result of greater amount outstanding on our credit facility and $51 million of mortgage and loans assumed in September 2008 and $513 million of Fannie Mae financing that closed on August 4th, 2009. General and administrative expenses increased by $980,000 year-over-year primarily due to the acquisitions since July 1st, 2008. Our G&A remains one of the lowest in the industry at 7.3% of revenues and 18 basis points on total assets as of September 30th, 2009 and is expected to be approximately 70 basis points for the year.

During the third quarter, we acquired 17 medical office buildings. Seven of the medical office buildings were acquired from HRP to complete the portfolio acquisition announced a year-and-a-half ago and were discussed in our last earnings call. Three of the seven are biotechnology research buildings located in La Jolla, California that are master leased to Scripts Research Institute on a long-term basis and the other four are master leased to Oklahoma City clinics on a long-term basis.

At quarter-end, we closed on the acquisition of 10 medical office buildings and leased them back to Aurora Healthcare, a high investment grade health system in Wisconsin. These buildings are off-campus in our class A and B satellite clinics and surgery centers. Subsequent to the quarter on October 1st, we acquired one senior living property for total consideration of $21 million, which we leased to Five Star Quality Care at an initial rental rate of 8.75%. This was a rental continual care community with 259 units of assisted living, Alzheimer's care and skilled nursing beds surrounded by 76 independent living townhouses owned by residents.

As a result of new accounting regulations, we became effective in January 2009. We now expense acquisition costs such as legal costs, brokerage fees, title insurance, transfer taxes, third-party inspection costs and other transaction costs. For the quarter ended September 30th 2009, we incurred $517,000 of acquisition costs related to the medical office buildings 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'll see that broken out in our FFO calculation.

We funded $6.1 million of improvement financing in the third quarter for properties operated by Five Star. For the nine-months ended September 30th, 2009, we funded $30.4 million on our improvement funding. Also during the third quarter, we recorded an impairment charge of $11.2 million related to six skilled nursing facilities, one assisted living facility, and one medical office building. The skilled nursing facilities and assisted living facility was underperforming and are either being sold or evaluated for potential sale.

In July, EPIX Pharmaceuticals, a medical office tenant located in Lexington, Massachusetts filed bankruptcy and as a result, we have taken impairment charge on that building. Based on the level of interest, we are optimistic we will release the property in the near term at comparable round.

On October 1st, we sold one skilled nursing facility for $500,000 and we sold another skilled nursing facility on November 1st for $1.4 million. At September 30th, we had a very strong balance sheet. Our debt consisted of the new 10-year Fannie Mae mortgage of $513 million, two senior unsecured notes totaling $322 million, other mortgage debt in capital leases totaling $150 million.

We raised net $127 million of common equity in early September as we envision a significant amount of investment opportunities in the near future. At September 30th, we had $72 million of cash and cash-equivalents and zero outstanding on our $550 million revolver. Until the excess proceeds of the equity offering are reinvested, we continue to incur negative arbitrage.

We currently have 10 private pay assisted living and Alzheimer's communities under agreement for $97 million. These acquisitions are expected to close in the next 30 days but are subject to customary closing conditions and may or may not ultimately close. If these acquisitions close, we will still have almost the entire $550 million of credit facility available to us for additional acquisitions. At September 30th, our debt to gross book value of our real estate assets is only 31%. Our secured debt to total assets is only 22% and our EBITDA coverage to debt service is a strong 4.1 times.

Dave will now discuss further our activities for the quarter as well as the performance of our portfolio.

Thanks, Rick. As we all know, the Company's cash flow is only as good as the ability of the underlying assets and the tenant's ability to continually pay the rent. We believe we have a solid cash flow stream from our portfolio and investors have very good visibility into these cash flows as approximately 82% of our rents come from publicly traded tenants or not-for-profit entities that are required to publish publicly their financial statements.

As of May 2008, while we embarked on our diversification strategy, Five Star accounted for 73% of SNH's revenues. A little over a year later, as of September 30, 2009 and as a result of our investments in high quality medical office buildings, Five Star accounts for only 55% of SNH's revenues. The fundamentals of our senior living portfolio continue to hold up well in this challenging environment.

Our expenses for the June quarter were generally down slightly across the portfolio versus the March quarter with the nursing homes and independent living being impacted the most while the need-driven assisted living and Alzheimer care segments are generally up a bit. This is also consistent with what the public operators have been reported. Occupancy is only part of the story and operators are adjusting their way of doing business in this environment by raising or lowering rates and implementing cost controls.

As a result, we feel rent coverage ratios should be the focus and the coverage ratios remain strong for the quarter ended June 30 at 1.37 times to over 2 times, except for lease number 4 with Five Star, which was at 1.06 times. Keep in mind, we don't look at the Five Star leases on an individual basis given that all four leases are guaranteed by Five Star and the other three leases had generous coverage. On a combined basis, it was 1.4 times for the June quarter.

Five Star as a company also has excellent liquidity. Now, Sunrise Properties had strong coverage comparable to the March quarter at 1.44 times coverage. Brookdale continues to be strong at over 2 times coverage and the private operators have a combined 2 times coverage. Finally, the 10 wellness centers cover their rental obligations at 2.36 times coverage, which continues to be very strong.

Lifetime Fitness, one of these tenants, reported an excellent third quarter with growth in membership. As Rick mentioned in August, we acquired the three biotech laboratory buildings in La Jolla, California for $116 million that will lease to Scripts Research Institute until 2019. On September 1, we acquired the four remaining medical office buildings to conclude the package from HRP. These were four off-campus clinics totaling $29 million leased to Oklahoma City clinics until 2016. These acquisitions complete the previously disclosed portfolio transaction with HRP announced in 2008 for approximately $558 million.

On September 30th, we acquired 10 medical office buildings and leased them back to Aurora Healthcare in Wisconsin, an A-rated tenant. The portfolio consists of 10 off-campus locations with 643,000 square feet. Aurora Healthcare operates 13 acute care hospitals in eastern Wisconsin with the hub-and-spokes strategy and the 10 buildings we acquired have ambulatory surgery centers or medical clinics that support the health system.

The purchase price was $169 million or $263 per square foot and initial rent is $15 million per year, which averages about $23 per square foot. The 10 properties are triple-net under one master lease for a 15-year initial term with bumps in the rent every three years. Our cap rate on this investment is 9.7%.

Occupancies for the medical office portfolio have remained strong at 98% with little rollover during the quarter. One tenant, EPIX Pharmaceuticals which leased 57,000 square feet and represented $3 million of annual revenues has filed Chapter 7 bankruptcy and the receiver continues to occupy the property and pay rent. We are actively marketing the property and as Rick said, the initial levels of interest are very positive.

Medical office buildings now represent approximately 2.9 million square feet and approximately 25% of our revenues. The acquisition environment is currently modest on the senior housing side and on the medical office side. However, in addition to the one senior living community we acquired on October 1st that Rick discussed, we currently have two senior living transactions under agreement to purchase the 10 private pay assisted living and Alzheimer care communities with 611 units in four states for $97 million. We expect to lease these to Five Star at 8.75% of the acquisition price.

We continue to encounter senior housing owners who are reluctant to sell unless they have some pressure from a lender or an investor who needs liquidity. We see several one-off properties for sale and occasionally a portfolio. We also see healthcare systems, developers and physicians who continue to look to monetize their real estate and we are continually evaluating potential MOB investments. Keep in mind, we have acquired or have under agreement $290 million of investments in the second half of 2009 exclusive of the properties we acquired from HRP, which is more than the rest of the other healthcare REITs combined for this period.

In summary, we are very well positioned to be an acquirer, but we do not need to chase irrational investments. As we've seen in the past, our prudent decision-making during the acquisition frenzy a few years ago and our balance sheet management places us in the enviable position of having a stronger balance sheet with low leverage and no near-term debt maturities. This combination strongly positions us to ride out the economic storm and take advantage of opportunities as they arise.

The bottom line is that we have solid cash flows to support our cash dividends and the focus is on opportunities to grow cash flows, to grow the dividends to our shareholders. In October, our Board declared a quarterly cash dividend of $0.36 per share to reflect the solid performance and the positive outlook for the Company.

And that concludes our prepared remarks and Rick and I would be happy to address any questions that you may have. Operator?

Thank you. (Operator Instructions).

We'll go ahead and take our first question from the line of Jerry Doctrow with Stifel Nicolaus.

Thanks. Hi, David, and, everybody.

Hi, Jerry.

Let's see, I just had a couple things. I guess, Dave, first of all just acquisition levels, as you said you've been very busy this quarter and mentioned the $290 million just in the second half. I think we're miling from like $300 million for you for next year. I'm just trying to get -- at one point, you said the acquisition levels are modest. You clearly have a lot of firepower, any sense of what's a reasonable level for sort of next year?

Well, we typically try to lease to a couple hundred million dollars of acquisitions a year depending on pricing and type of asset and so on. So, it's very difficult to predict what -- how successful we will be or not. But at least we want to have the capacity to take advantage of the situations that we do see periodically.

Okay and then just on sort of the capital side. Some of the stuff you've been buying now in senior housing, I think based on the last year call they were talking it about being 90% occupied, it's clearly the sort of stuff you could put more Freddie or Fannie financing on. Is that something you'd likely do more of or are we more likely to see if you went through $200 million, $300 million see you coming back to equity markets? Or unsecured, I guess that would be.

Sure. Well, I guess that the answer is it depends; there's always -- our focus now is closing on the existing $97 million under agreement and we're still not going to have much at all outstanding on our line of credit, so we're not even looking at the capital market in this environment unless we had a significant transaction lined up to use up some of those proceeds.

So, I would say we would have to see how the capital markets look probably in 2010 and then as usual we evaluate the debt markets, the equity markets and the -- any government agency markets to see where our best options are at the time. We're open to doing some more government agency financing, but I think if the unsecured spreads were comparable to the secured government spreads at the time we're looking at it, then our bias would be towards going to the unsecured market.

Okay, that's helpful. And just one or two more if I could quickly. There's a group of SRZ Properties that I think the initial lease term runs out in the next, I don't know, maybe within a year or so now. I know that there's always been some potential for you to take those properties back or will they get released. There's the issue of whether the Marriot guarantee gets extended or not. Can you just kind of give me an update on what the timing is and maybe status of those things, what your thinking is?

Sure, sure. There's actually 14 properties that we lease to Sunrise and the maturity isn't up for another four years.

Okay.

So, we still have some time. Sunrise is doing a great job of working through their issues and positioning themselves in a much better position. So, we're clearly monitoring that and it would be nice if they did pull through all this and stayed on and then we'd evaluate as we get closer to the end of the term whether we renew with them or do other options with them. But that's a decision for a later date.

Okay, but -- yes, I thought it was -- that's fine, I appreciate it and I didn't mean to cut it off. Yes, I didn't realize it was another four years, I thought it was shorter than that. And then, last question, I'll jump off. Is there more opportunities buy stuff for HRP and where does that just fit in your thinking?

Well, we've certainly purchased everything from them that we had agreed to purchase. Now, we don't have anything particular. There may be other properties in their portfolio that could be available but I think some of them had debt, CMBS type debt that encumbered the properties that made them not available for sale.

Okay.

And we do have the right of first refusal on a group of properties, 45 properties that should they decide to sell that we would consider whether to buy them or not. But right now, we're focused mainly on these unrelated party medical office buildings and senior housing assets and primarily those two areas.

Okay, all right, great. Thanks.

You're welcome.

(Operator Instructions).

Your next question comes from the line of Todd Stender with Wells Fargo Securities.

Hi, good morning, guys. Thanks for taking my call.

Morning, Todd.

Good morning, Todd.

Back to the Aurora transaction, earlier in the year they had sold some medical office buildings in two separate transactions. Did you guys look at those properties at that time?

That's correct. Let's see, only one of them we had looked at and they did I think because they were smaller transactions -- what's interesting is sometimes the smaller ones are more difficult to compete against because there's more capital available for it and more buyers for it. So, we were not able to win those. I think if you look on a per square foot basis, our purchase price for our Aurora properties is a little lower than their per square foot acquisition prices, but they're a great healthcare system and we'd certainly love to do more business with them.

And that kind of goes into my second question; the one that you did close on, the 10 MOBs had a little more scale behind it. Does that -- should I infer from that that maybe it was less competitive, maybe just for the sheer size of this on a 10 medical office buildings?

I would say yes, there were fewer bidders on that situation because of the size and I think that one of the reasons I think we did get it was because we had the immediate capital available to have a no-finance contingency. It was clearly obvious looking at our public documents that we could close quickly. So, the capacity and competitive pricing were the attributes of why we won, we believe.

Okay, thank you. And switching gears with the dispositions to sell the two skilled nursing facilities; what were the cap rates on those transactions?

I don't think a cap rate is applicable because they were losing money. Well, surely with the rent on there, they were underperforming. One of them I think had a very modest earnings and the other one was losing money. So, they're really properties that hurt Five Star's performance and also affected our coverage ratios and not long-term holds for us.

Okay, thank you. And any particular -- just last question here -- the pending acquisition of the 10 senior living facilities, any geographic concentration? I think you mentioned that they were spread across 11 states. Anything --

No, I'm sorry. Those are properties across four states.

Four states, sorry.

And I'd say three states in the Southeast and one out in Texas.

Okay. Okay, thank you very much.

You're welcome.

Thank you.

Your next question comes from Michelle Ko with Bank of America-Merrill Lynch.

Hi, this is Andrew Ryu, I'm here with Michelle Ko. Just going back to the transaction market. Can you give us a little more color on the increased level of activity in property transactions and what you think cap rates are for the different healthcare property types? And also, where are you seeing the most opportunities?

Okay, well, I think as far as if somebody were investing today I'd say the most opportunities are in the skilled nursing section given that there's such a shortage of capital there. But it's not an area that we are pursuing. As a result of that, we don't even track the cap rates, rumor would say that they're about in the 13% area for skilled nursing, but for us the assisted living and Alzheimer care properties are probably the most attractive to us today and I would say that they're in the mid-9 cap rates.

For independent living, that's actually a bit higher cap rate, but still kind of in that 9, 9.5 to maybe even 10. And the properties that have a combination of assisted living, skilled nursing and maybe assisted living -- independent living rather, probably if they're a rental model, probably attract the best cap rates I should say. Those would probably be high 8's, low 9.

Then, you have medical office buildings which there's significant variation in that. I'd say some of the most common transactions you're seeing out there trading in the low 8 cap rates. We were very fortunate in our situation because it was actually a larger transaction that we were able to get a higher cap rate, but I would -- it is still in the low to mid-8's for the medical office building transactions.

Thanks, that's very helpful. And just one last question is some of the peers are seeing that senior housing occupancy is actually -- it's improving somewhat. Can you comment on how you think things are trending so far in October and when do you expect to see improvement?

Well, I think we are, from every indication I've seen, we are seeing very modest improvements continuing on from our second quarter statistics and the companies that have recently reported have indicated that they've seen modest improvement. I don't think we're going to see a tremendous swing up in occupancies. I think it's going to be a gradual, but predominantly in one direction over the next several quarters, maybe even years. It's very much dependent on the housing market and the unemployment markets which are taking very long to turn, but I do believe the bottom has occurred and we're moving up from here.

Thank you.

The fundamentals are just great as far as no new construction of any consequence out there so that's got to start showing up in the numbers fairly soon that the demand is there and the supply is very much limited.

Great. Thank you.

You're welcome.

Your next question comes from the line of Mark Biffert with Oppenheimer and Company.

Good morning, guys.

Hi, Mark.

Morning, Mark.

Question for you; I noticed on the senior housing deal that you guys signed that there was -- that you're planning to shift a percentage rents I think was after 2011. I'm just wondering if that's a new type of structure that you're implementing with Five Star to try to take part in the upside of the properties?

No, actually. On the senior housing properties that we've done with Five Star, the formula for participation has been the same forever basically. It's always the first full year of operations after they take over becomes the base year and then each year thereafter we get 4% of the growth in revenues of that base year. So, in all of our leases with Five Star we participate in some of the growth after they've had a chance to get it under their management operation.

So in terms of the operating margins, I mean at some of the properties that you're acquiring, are you seeing them that are undermanaged and where there's opportunities to earn a greater return out of those? Are you targeting those types of situations?

Well, the only time we can participate in the profitability, like the margins that you're talking about is really with the TRS format and we don't have that. Ours is really focused on the revenue growth at the properties where we can participate and when occupancies do move up, and actually some of the acquisitions of the last couple of years, if the base year is 2009 or 2008, then as 2010 and '11 come along, we should be able to get more upside because hopefully occupancies will move up and revenues will move up.

And so, hopefully the future will be more beneficial to us. But as far as we're not trying to take advantage of low performing assets today that we expect to have meaningfully pick up going forward.

Okay. And then and just related to the acquisition market where you're seeing -- I'm just wondering if you can may break out a little bit the competitors that you're seeing for the types of assets that you're going after, whether it be some credit rated health system or a non-profit. Are you seeing a variance in the type of people bidding on the projects and who competed with you on the Aurora project or acquisition?

Well, It really hasn't -- I don't think the universe has changed that much as far as who's pursuing product. Potentially is the bit by bit more and more funds are being formed to invest in senior housing and medical office buildings but the catch usually is most funds will not invest unless they have some leverage to work with.

And so, they are -- in the senior housing space they're very dependent on the government agency type financing to assist them in getting their deals to make and be competitive. So, we are seeing some institutional funds bidding. On the -- and that's also where we have a bit of an advantage to be able to say we don't have any financing contingency. So -- and I think that has been one of the factors why we have been successful lately.

On the medical office building, obviously you've got what was formerly Grubb and Ellis Healthcare REIT, they have created new funds to invest in this space and they are becoming -- continuing to be active in this space. And a few other private funds that have been created are pursuing medical office space, not so much on the senior housing side. And clearly, all the healthcare REITs are in the game and at least looking at properties they may not be bidding as aggressively. I will tell you of the ones that we bought, that we have under agreement, those were -- at least one of them was privately negotiated and not widely marketed. So --

So, why do you think your peers are not willing to go out and do deals where -- versus you guys are willing to do it. I mean is it you're willing to accept a lower return, or is it there just -- you have different targets for the type of assets you're looking at? I'm just wondering why you think the other ones are heading up and as competitive?

I think part of it, most people are focused more on the medical office side of things to grow and from what I've been hearing many of them want to get into relationships with developers and so on and we have not pursued that avenue. We'd much rather do a transaction that if we can get stabilized properties at 8.25%, 8.5% cap rate on the MOB side, we'd rather have that then going through a development relationship and upon completion get an 8%, 8.25% and 8.5% return. So, that's where we're a little bit different.

I guess you really have to ask the others about what their target return is on investments. You've got Nationwide Health has some capacity, but not a lot and I think Adventis has capacity. ACP clearly has some capacity. Let's see, Healthcare REIT has capacity, but they're principally doing developments with the expectation that maybe they can get maybe a higher return at the end of the day.

Okay, all right. I appreciate it. Thank you.

Okay.

Your next question comes from the line of Kevin Ellich with RBC Capital Markets.

Hey, guys. A lot of my questions have been answered, but given all the moving parts in the transactions you've done this quarter and subsequent to year-end, can you help us out with the net impact on how we should think about operating expense going forward?

Well, I guess the operating expense is pretty much as we expected. The operating expense for us is just the medical office building. So, I think that's what you're asking about and I'm trying to address. It's very hard where we -- when we first announced the medical office building transaction we were at about a 7.98% cap rate, that's improved a little bit. And that's net after expenses. I'm not sure I can really give you what a fourth quarter expectation would be for the expenses. I think fourth quarter will be more of a run rate.

Yes, that's what we mentioned in our script. I think fourth quarter will be more run rate, especially that we just closed in the third quarter was some -- a lot of it was halfway through the quarter and then Aurora at the end of the quarter. So, I think the fourth quarter will give us a better indicative of what the run rate will be for the operating expenses.

Got it. Okay, no that's helpful. And then thinking about the [sniff] that came on after the quarter ended and the 10 properties that you guys expect to close -- I assume those will be triple-net leases to Five Star. Is that correct?

Yes. I'll correct you on the -- we didn't buy a sniff, we bought that rental CCRC.

CCRC. Thanks for the clarification. But what's that going to do in terms of the purchase improvements that Five Star will sell back to you? I mean, how should we think about that?

Well, the improvement financing that we've done with Five Star I would say they've slowed down their pace of doing expansions and some of the major capital improvement projects. So, we've only seen about $6 million this quarter.

Yes, this quarter we did $6.1 million and for the year it's been about $30.5 million. If you recall though, Kevin, last year we did around $69 million for 2008. So, it has slowed down a little during 2009 and -- but also fourth quarter of last year there was a big uptick from the normal $12 million to $15 million that we normally fund on a quarterly basis. So, we'll see what happens if they complete a couple of the projects this quarter and they ask for some of the reimbursements on those.

Do you think that's just a function of market dynamics or are they just running out of projects and improvements to make at their facilities?

I think it's somewhat market dynamics. They're moving back a little bit on some of the expansions; just because the demand isn't there as much today as they thought it was a year, year-and-a-half ago when they originally were going through the planning process. They're continuing to do the normal capital improvements for the physical plant but I don't think -- I think expansions are slowing down from what they originally anticipated.

Some of it too is timing. They've been working on the rehabilitation hospital, completed one wing, they're working on second wings at both hospitals. But when that's completed, they would flip all the costs incurred for those projects over to us at that time and we would charge them rent. So, I think that it's lumpy and that's part of the timing, but clearly it has slowed down a bit.

Okay, no, that makes sense. And then, I know there's been a lot discussed about the acquisitions you guys have made and I was just wondering how the pipeline looks now? I mean, are there many other transactions that you're looking at sale, lease-back transactions like the Aurora deal?

Well, let's see -- I guess at this point all I can comment is that we're regularly looking at transactions in our office and our staff is working more than eight hours a day evaluating them. So, we're plenty busy with opportunities to consider. Again, I hate to speculate on how many will actually come to fruition because you bid, you think you've put a pretty good offer on the table and you still may lose out. So, it's -- particularly on the small and medical office buildings, it's still very competitive.

Got it. That's helpful. Thanks, guys.

Thank you.

Welcome.

Your next question comes from the line of Jerry Doctrow with Stifel Nicolaus.

Thanks, just one follow-up. I want to just talk a little bit more, David, about basically the -- I guess what I call the coloring of the portfolio. In addition to the ones that you sold in the quarter, you mentioned some additional assets are being evaluated for potential sale. I guess the ones that you took some charges on. I guess just two things, one, I was wondering if I can get a little bit more color. Is that stuff in recent acquisitions, is this old stuff, is this stuff that's leased to Five Star and just a little more color maybe what's going on, expectations for when they might be sold?

Sure --

And do you expect to do some more of that? Again, I think many of the REITs regularly call, it's not something I've seen a lot of from you guys in the past.

Right. I think typically if a property is doing well, we like to keep it because it's so much work to find investments and if they're performing well we'd just as soon have it. But if properties have been given long enough to try to see if they'll turn around or show improvement and they have not, we'll agree to sell them. I'd say there's four to six properties that are actively being marketed to be sold and they are Five Star properties.

They are ones that are underperforming and periodically like some of the other REITs have done, sold properties back to their tenants, we've done that a few times over the years, did a major one a while back with Brookdale five years ago or so. And some of the private operators that we'd definitely consider selling back some of the properties to them. And those, not because they're underperforming but more just because that held them for such a long period of time, we have significant built-in gains with those. And they probably procure financing for the smaller deals rather than big deals.

Okay.

But we do like to color portfolio periodically and especially if something -- like any of these portfolios, if you were to look at them you're going to find it's a couple facilities dragging down say coverage or [some of that] if you just eliminated them then sold them for a buck, you'd have serial improvements in the coverage ratios and in Five Star's performance for that matter.

Okay. So the four to six or whatever that are part of the Five Star portfolio, you're not anticipating selling back to Five Star, you're anticipating just selling off to third parties and both sides basically exit the story and move on. Is that --?

That's correct and timing I would hope in three to six months at the most.

Okay, and -- okay. And just -- there's nothing in terms of geography or property type or anything else, it's just -- that you'll be generalized about the portfolio, they're just particular underperformers for no particular reason or individual property issues?

Yes, yes. I'd say the nursing homes are mostly rural Midwest.

Okay.

It's probably is a common denominator.

Okay, okay. All right, thanks a lot.

You're welcome.

Thank you, Jerry.

All right. I guess it's -- no further questions?

No further questions at this time. This will conclude our question-and-answer session. At this time, I would like to turn the conference back over to Mr. Hegarty for closing remarks.

Okay. Thank you, Belise. Thank you, everyone, for joining us. Rick and I are planning to be at the NARI Conference next week in Phoenix and we'll be hosting a property tour on Tuesday afternoon of some of our properties in the Phoenix area. If you wish to join us, please contact Katie in our Investor Relations Department at 617-796-8207. Thank you, we hope to see many of you at the conference. Have a good day.

That concludes today's conference. Thank you for your participation.