Equity Commonwealth (EQC) 2008 Q1 法說會逐字稿

Good day and welcome to the HRPT Properties Trust first quarter 2008 financial results conference call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the Manager of Investor Relations, Mr. Tim Bonang. Please go ahead, sir.

Thank you and good morning. Joining me on today's call are Adam Portnoy, Managing Trustee and John Popeo, 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 read our Safe Harbor statement.

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 HRPT's present beliefs and expectations as of today, May 8th, 2008. The Company undertakes no obligation to revise or publicly release the results of any revisions to the forward-looking statements made in today's conference call, other than through filings with the Securities and Exchange Commission, or SEC, regarding this reporting period.

In addition, this call may contain non-GAAP numbers, including funds from operations or FFO. A reconciliation of FFO to net income is available in our supplemental package found in the Investor Relations section of our website. Actual results may differ materially from those projected in forward-looking statements.

Additional information concerning factors that could cause those differences is contained in our Form 10K filed with the Securities and Exchange Commission and in our Q1 supplemental operating and financial data found on our website at www.hrptreit.com. Investors are cautioned to not to place undue reliance upon any forward-looking statements.

And now I would like to turn the call over to Adam Portnoy.

Thank you, Tim. Good morning and welcome to everyone that is joining us on today's call. For the first quarter of 2008 we are reporting fully diluted FFO of $0.27 per share, compared to $0.28 per share in the same quarter of 2007. Although FFO per diluted share is flat with fourth quarter 2007 results, we have made great improvements in reducing our capital expenditures. As a result, this quarter is the first quarter in the last 16 quarters where we have generated more cash from operations than paid in dividends.

In addition, earlier this week we announced the sale of 48 medical office clinic and biotech lab buildings for $565 million to Senior Housing Properties Trust. And we expect to realize gains of about $215 million from the sale. The sales prices equaled a 7.1% cap rate based on these buildings in place cash NOI. Over the short term we expect to use the proceeds from this sale to repay debt and over the long term we expect to recycle this capital and take advantage of current favorable market conditions to purchase properties at higher cap rates than the properties being sold. As a result, we may be able to increase our FFO per share in the future by reinvesting the proceeds into higher yielding investments. The combination of an improved payout ratio and our efforts to recycle capital into accretive acquisitions are two important steps for our company which may better position HRP in the marketplace going forward.

Turning back to our results for the first quarter, we signed leases for about 826,000 square feet during the quarter and 67% were renewals and 33% were new leases. Leasing activity during the first quarter resulted in a 2% roll up in rents and about $11 per square foot in capital commitments. The average lease term was 5.6 years and the average capital commitment per lease year was $2.04, which is an improvement from the prior year.

Although we are pleased with our ability to sign renewals with many of our tenants at attractive terms, the pace of new leasing activity or the leasing of currently vacant space has slowed significantly since the end of 2007. Within most of the markets where we operate, net effective rents are trending downwards. This is the result of a slowing economy, which is leading to a reluctance of companies to commit to expansion space or lease new space. This trend is evidenced by the reported decline in office net absorption and occupancy rates across the country in the first quarter.

At the same time, development activity has not yet slowed, with many new projects scheduled for completion during the remainder of 2008. As a result of these market dynamics, overall Company occupancy at March 31st was 91.6%, which represents a 120 basis point decrease from the prior year.

Despite the difficult market environment, we are doing a good job of outperforming in most of our market areas. Although our total same-store NOI declined by 2% in the first quarter, this decline is primarily the result of a decline in occupancy in our Boston market, which we anticipated and have discussed with investors in the past. Excluding this decline in same-store NOI in our Boston market, our total same-store NOI would have been flat this quarter.

In Oahu, the market for industrial property is the strongest in the country with gross industrial rents approaching $40 per square foot in certain areas. As a result, the Oahu industrial real estate market continues to experience one of the most dramatic increases in rates among all real estate segments in the United States. HRP is largely benefiting from this market improvement because we are the largest owner of industrial properties in the state of Hawaii. During the first quarter we saw rents roll up by almost 40% in this market and we anticipate significant roll ups in rents to continue in the future. During the quarter same-store NOI increased by 7.5% in Oahu, reflecting rent growth on recent renewals.

Our Austin, Texas portfolio continues to post strong leasing results and a 9% increase in same store NOI during the quarter. These results came from rent growth on leases signed during the past few quarters, partially offset by the decline in occupancy from the expiration of over 200,000 square feet of space in one of our industrial parks during 2007.

Our Philadelphia portfolio experienced a 7.4% increase in same-store NOI, reflecting $300,000 of non-recurring lease termination revenue and an increase in operating expense recovery income. The Philadelphia leasing market has shown steady improvement during the last year, especially in the downtown market where we own a large percentage of assets. As announced previously, we have pre-leased over 50% of the space Comcast vacated in April and we hope to report additional progress with this releasing effort in the future. We continue to believe that we are well positioned in this market, with less than 1% of our total square feet rolling through the end of 2008 and in place rents equal to or below market rents.

Washington, D.C. is a market experiencing weakening fundamentals with between 1 and 2 million square feet coming on line per quarter. Our same-store NOI in this market decreased by 1% during the quarter, driven by an increase in utility expenses and real estate taxes.

Southern California is also a market experiencing weakening fundamentals. In the first quarter we saw a decrease in same-store NOI of around 2% and a decrease in same-store occupancy of 2.5% in this market.

Boston same-store NOI decreased 23.6% during the quarter, reflecting almost 300,000 square feet of space vacated in two of our south suburban office buildings. Unfortunately we currently have no commitments to release this space at this time. Boston is our only major market where we continue to expect lease roll downs.

In our other markets located throughout the country, our portfolio experienced a 1.2% decline in occupancy which contributed to a 4% decline in same-store NOI during the quarter. We have 3.8 million of total square feet scheduled to expire during the remainder of 2008, which represents approximately 6% of our total square feet and 8% of our annualized rent. Excluding Boston, the majority of the leases scheduled to expire through the end of 2008 have in place rents that are below current market rents, which may lead to some rent roll ups in the future. But these roll up are expected to be offset by some occupancy declines in other markets. For example, we are expecting occupancy to decline by around 4% during the second quarter of 2008 in our Philadelphia market because of Comcast vacating their space in April.

As I discussed earlier, this past Tuesday we announced the sale of 48 medical office, clinic and biotech lab buildings with 2.2 million square feet for $565 million. The sale is scheduled to close in phases throughout the next year with the first closing scheduled in August for $113 million, another $207 million scheduled to close prior to year end, and the remaining $245 million scheduled to close in the first four months of 2009. Also, the timing of the sales may be accelerated by mutual agreement of both HRP and Senior Housing. These properties are located throughout the country and we have owned them for an average of 9 years. This sale represents about 6% of our existing portfolio and the sale will not result in any meaningful changes in any of our operating metrics on a Company-wide basis.

As a result of this sale we will be exiting the medical office, clinic and biotech lab market. However, we will continue to own 45 properties with 4.6 million square feet which are principally leased to tenants in medical related businesses but are generally not used for medical office, clinical or biotech lab purposes. As I said previously, we anticipate using the proceeds from the sale over the long term to take advantage of current favorable market conditions to purchase properties at higher cap rates than the properties being sold.

A good example of this is our first quarter purchase of one of the best Class A office towers located in Cleveland, Ohio with 878,000 square feet of space for about $124 million. This property is over 90 percent occupied, with almost half of the building leased to a national law firm for over 10 more years. We purchased this high-quality asset at a cap rate of over 9% and as a result of recycling capital from the announced sale of properties, this purchase is expected to be accretive to FFO per share in the future.

Also, as of today we have one other property under contract to purchase for a price of $53 million. Obviously the closing of this acquisition is subject to completion of diligence and may or may not occur for a variety of reasons.

Looking forward, we continue to believe that our FFO per share is likely to decline by at least $0.01 per share in the second quarter of 2008. This temporary decline relates to the loss of rent in Philadelphia resulting from Comcast vacating in April and getting the space ready for new occupancy later in the year. We also expect that in order to maintain our FFO per share in this weakening market environment that capital expenditures may increase in the remaining quarters of this year. Nevertheless, we anticipate overall continued improvement with our payout ratio in the future.

Even though it appears that the economy is slowing and office fundamentals are weakening in 2008, HRP is still well positioned in the marketplace. We currently enjoy a high occupancy rate, long remaining lease terms and among the highest credit quality tenants in the entire office REIT sector. As a result, our cash flow and our dividend payments are very secure and our stock represents a great defensive, income-oriented investment in today's environment.

I'll now turn the call over to John Popeo, our CFO.

Thank you, Adam. Looking first to the income statement, rental income increased by 5% and total expenses increased by 8% during the first quarter of 2008. The year-over-year quarterly increase in rental income, operating expenses and G&A expense reflects properties acquired between January, 2007 and March, 2008, partially offset by the decline in occupancy in same-store NOI.

Depreciation and amortization increased by 11%, reflecting properties acquired and to a larger extent, depreciation and amortization related to building and tenant improvements.

Our consolidated NOI margins were 60.5% for the first quarter of 2008 and 61% for the first quarter of 2007. Current quarter EBITDA increased by 3.6% from the same period last year, primarily reflecting property acquisitions since December, 2006.

Interest expense increased by 12.3%, reflecting property acquisitions.

Net income available for common shareholders for the first quarter of 2008 was $14.7 million, compared to $17.7 million for the first quarter of 2007. The decrease reflects depreciation and amortization related to building improvements and leasing costs incurred since December 2006 and the decline in occupancy, partially offset by the reduction in the preferred distributions on $125 million of Series B preferred shares redeemed in November, 2007 and earnings from properties acquired since December, 2006.

Diluted FFO available for common shareholders was $0.27 per share for the first quarter, compared to $0.27 per share last quarter and $0.28 per share for the prior year. The year-over-year decreased primarily reflects the decline in occupancy and same store NOI, partially offset by the reduction in preferred distributions and earnings from properties acquired since December, 2006.

As mentioned before, FFO per share in the second quarter of 2008 may temporarily decline by at least $0.01 per share as we transition the space leased to Comcast in Philadelphia. Of course the 2008 estimates are not guaranteed to occur and may be lower than expected.

In April, 2008 we declared a dividend of $0.21 per share, which represents 75% of our first quarter FFO. Our Board considers the dividend level on a quarterly basis and they are comfortable with this current payout ratio.

During the quarter we spent $9 million on tenant improvements and leasing costs and $2 million or $0.03 per square foot for recurring building improvements including lobby and facade renovations, elevator upgrades and other capital projects throughout the portfolio. Combined Cap Ex declined by more than 40% from the same quarter last year. We paid $3 million on development and redevelopment activities during the first quarter.

Turning to the balance sheet, on March 31st we held $32 million of unrestricted cash. The $4 million increase in rents receivable reflects straight line rent accruals and seasonal expense recovery accruals during the quarter. Rents receivable includes approximately $162 million of accumulated straight line rent accruals as of March 31st. Other assets include approximately $93 million of capitalized leasing and financing costs. On March 31st we had $508 million of floating rate debt, $364 million of mortgage debt, and $2.1 billion of fixed rate, senior unsecured notes outstanding. The weighted average contractual interest rate on all of our debt was 6.1% at the end of the quarter and the weighted average maturity was 6.2 years. We prepaid $29 million of 8.5% mortgage debt in January, 2008 and have no other debt maturing in 2008 or 2009 and only $15 million of senior notes maturing in 2010.

Our senior unsecured notes are rated B AA2 by Moody's and BBB by Standard and Poors. The book value of our unencumbered property pool totaled $5.7 billion at the end of the quarter. Our secured debt represents 6% of total assets and floating rate debt represents 17% of total debt. At the end of the first quarter our ratio of debt to book capitalization was 50%. Our EBITDA and fixed charge coverage ratios were 2.7 times and 2.1 times respectively. As of the end of the first quarter we were comfortably within the requirements of our public debt and revolver covenants.

As of the end of the quarter we had $308 million outstanding on our revolving credit facility, with $442 million of additional borrowing capacity at a current interest rate of less than 3.5%.

In summary, we think this quarter produced good results in light of a difficult market environment. We also think that the combination of an improved payout ratio and our efforts to recycle capital into accretive acquisitions are two important steps for our company, which may better position HRP in the marketplace going forward. We continue to believe HRPT's strong tenant base, limited near-term lease expirations, strong balance sheet and current annual dividend yield of almost 12% make HRPT a logical choice for long term, income-oriented investors.

That concludes our prepared remarks. Operator, we are now ready to take questions.

Thank you very much. (OPERATOR INSTRUCTIONS) The first question is from Michael Bilerman from Citigroup. Please proceed with your question, sir.

Hi. Good morning. Irwin Guzman's on the phone with me, as well. Adam, maybe you can just walk through the decision of selling the assets and then using the proceeds to go out and buy new assets. How did you evaluate your payout ratio on a cash basis? It's about 145% currently. How did you think about perhaps paying out a special dividend, reducing the common to get your payout ratio in line with peers, which is more towards 90%, versus going out and just redeploying into acquisitions?

Sure, Mike. There's a lot there. Well first of all we have been thinking about dispositions for some time at the Company, over the last year and a half. And we've been thinking about what was the best portfolio to think about selling. And at the same time the credit markets deteriorated and asset prices also deteriorated. So we thought about what to sell. It seemed that the portfolio that was likely to garner the highest prices in the marketplace seemed to be our medical office buildings. And they seemed to be a part of our portfolio that we didn't think we were getting much credit for in the marketplace. And at the same time, by selling them we didn't think it was going to have material changes to the overall metrics of our company. And once we decided on selling it, it became pretty obvious that the logical buyer that was likely to pay the most for it because they had something else to be gained besides just buying assets was Senior Housing Properties Trust.

So that's primarily how the transaction came about. Why we decided to use it to recycle capital? I think initially what we're planning on doing is using most of the proceeds to repay debt and de-lever the Company. And over time we will redeploy it then into higher accretive acquisitions. And I think the reason the Company and management is focused on that is I think the Board and management are confident that we are going to be able to get the payout ratio under control, just by making some operational changes. I know you've been following the Company for some time and others on the call have been too. I think it's important to recognize that one quarter does not make a trend. But this is the first quarter that, in the 16 quarters, where we are generating cash flow in excess of our dividends. And you're right. If you look at just the last four quarters combined or at the fourth quarter only, you're right; it's well in excess of 100%. But I think just through normal operating changes and some adjustments we're making in the field and throughout our regions, we're going to be able to get the payout ratio under control without the need to make any sort of dividend cut. And I'm very confident about that aspect. I'm very confident we'll be able to do that actually.

And so that's primarily what the Board has been considering and the way we thought about the acquisition. We think we got the payout ratio -- we're going to get it under control. And we looked at this sale as very opportunistic and as a way to initially de-lever the Company but also take advantage of this market environment. Because we've been honestly been able to look at some very interesting acquisitions that have been priced at very attractive prices. This acquisition in Cleveland, I know it's Cleveland and people say well, that's not a great market to be in. But if you're gong to be in Cleveland you want to own the best building in the market. And we really did buy what I would call one of the two best buildings in the entire market. It's one of the newest buildings. It's one of the nicest by far Class A1 in Cleveland. It's got some of the best tenants in the marketplace as tenants in the building. So -- and we were able to buy that building at over 9% cap rate. And so I think that's the way the Board looked at it and I think it's going to create great value for shareholders and stakeholders in our Company over the long term.

And Adam when you talked about the genesis of the transaction you talked about it from HRP's perspective of thinking about doing dispositions and determining what the best portfolio of assets within the Company should be sold. And it sounds like you had come to the decision that the medical office portfolio was the one to be sold. And then you approached the sister company in that case?

No. It was mutual. I mean, honestly for a couple years Senior Housing has wanted to get those assets because many of the investors in that company -- that company has been hampered by its inability to expand into the medical office space when many of its peers have been able to do it. And so it had a desire to expand into that space. And so it was mutual. I mean, I don't know who approached. I mean, the idea had been kicked around for some time. And then I can tell you from HRP's standpoint, we stepped back and before we decided that this was the right thing to do we obviously stepped back and said is this the right portfolio, generally. And it was our view it was. And it was our view that approaching --working with SNH made the most sense because SNH had the incentive to pay the most for the properties because they were getting something besides just these properties. They were getting the ability of a release of a covenant. And for everyone's benefit and you may not know what I'm talking about, Senior Housing Properties Trust was spun out of HRPT in late '99. And when we spun it out, we subjected that company to a covenant that said that they were prohibited from investing in medical office buildings, that those types of assets would stay at HRPT and HRPT would invest in those assets. And so we were releasing Senior Housing from that covenant, so it made sense that they had the most to gain and would be willing to pay the most for those assets because they were getting something in addition to it.

Right. So you felt going out and sort of doing a broadly marketed offering versus the appraisal in terms of setting the price. So that was, from an HRPT perspective, the best that HRP shareholders can do?

Yes. We also felt the time was also important. And we also wanted to have some certainty of closure in this environment. And it was our view that --

Isn't there a financing contingency on the second half?

There is contingency on about just under a half of it. We also -- that's correct. There is a financing contingency on the second half, a little less than half of it.

Right. So I'm just trying to piece together how you come to the decision to sell it internally versus if HRPT had made the decision to liquidate and sell assets to fund your growth and get accretion up, why not go out and try to broadly market? Just to make sure that you test the market to make sure that for HRPT shareholders you're getting the highest price possible? I'm just trying to understand all the dynamics.

No. No. I understand. Look it comes back to again, speed, getting the deal done as fast as possible. Because we all -- there is an advantage to the fact that both companies were being advised and managed by RMR. And that is that on a day to day basis the property's management doesn't change. And so we have a very high degree of confidence that SNH would be able to move quickly in terms of reaching agreements once we reached the negotiations, and the entire negotiation which I was not part of and nobody at RMR participated in. It was all done between the independent directors of HRPT and SNH. And I can tell you that they were long and tedious negotiations that took place and I feel very good that 7.1 in this marketplace is a very good price. I mean, when we did the appraisal we also looked at what other properties were selling at in this environment. And not looking at what properties were selling at in 2007 or 2006. We were looking at what properties were selling at today. And it was our view that this is a very --we think this is a very aggressive price. We think it's a very good price.

Mike, it's also not unheard of in a capital constrained market to do what I -- to go -- to do separately negotiated transactions. There are not a lot of groups. I mean, there are some but there are not a lot of groups that we could approach that we felt confident could close on this transaction quickly and that we have confidence they would close.

Right. No. And it's just helpful just trying to understand what happened behind the scenes. It sounds like there was one appraisal so it wasn't like both Boards got an appraisal and you sort of took the mid-point of both appraisals?

No. Actually there was one appraisal but it was done jointly by independent directors of both Boards. There was a special committee formed of just the independent directors from each company. They hired independently an appraisal. There was a range provided for the appraisal of values. And I can tell you that the purchase price that was decided on was the high end of that range that the appraisal gave us. And the reason it was the high end is HRPT and the independent directors of HRPT really felt that the most important thing that they should be seeking was price. And we also felt that and I think the SNH Board I think were willing to pay at the high end of the appraisal because they were getting something besides just the building.

Right.

They were getting an intangible value, intangible asset in the sense that they could now go out and buy medical office buildings.

Right. And just from the independent Board members, there is a common independent Board member so did he recuse himself?

He reclused himself. There was only --

Two on each side?

Yes, there was only two. From HRPT side it was Pat Donelan and Bill Lamkin. And on the SNH side it was John Harrington and Frank Bailey.

Great. Thanks for all the color. I appreciate it and being able to ask questions on the call.

Thank you very much. The next question is from John Guinee with Stifel. Please proceed with your question.

Hi, gentlemen. A few quick questions. On this building you bought in Cleveland, it looks to me like you've got it at about 870,000 or 880,000 square feet on your acquisitions page. CoStar has it at about 820,000 square feet. And then you've got it at 797,000 square feet on page 32 under your square foot leased. How big is the building on a net rentable area?

878,000 in square feet leased is just that, square feet leased. So I mean that building is not 100% occupied.

Got you. Okay. When you're out there buying in Cleveland, or I guess you're about to do a deal in Milwaukee, who else is bidding out there? I mean, who is your competition? I can't imagine there is a long list of people.

You know I think you'd be surprised. I think there's still a long list. There's local players. There's still private equity money, smaller funds. There are still some REITs playing. I mean I think you'd be surprised; the list is pretty long. We're not the only group looking at these assets.

And then the last question. You're at somewhere between 91% and 92% occupied now. When you give your sort of implicit guidance, what's your expectation on occupancy between now and the end of 2009?

The end of 2009. I'm more comfortable talking about where we might be at the end of 2008.

Okay.

But 2008 I think we're going to either end up right about where we are or a little bit less. I don't think we're -- 91% maybe at the end of the year, around there. And 2009 depends too much on what's going to be going on in the economy and different markets. But I feel much more comfortable talking about where we're going to be at the end of 2008. I mean, I think somewhere between 91% and 92%. Probably on the lower end of that range, is where I think we'll be at the end of the year.

Okay. Thanks a lot.

Okay. Thank you very much. (OPERATOR INSTRUCTIONS) The next question is from David Cohen with Morgan Stanley. Please proceed with your question.

Hey. Good morning. I just wanted to follow up on the transaction again. Can you just reconcile? You have on the SNH press release you had GAAP cap rate of 7.9%. How does that compare to the 7.1%? Is that a forward-looking? Was your press release cash-based? What's the difference?

Sure. Thanks for the question. They're both current, in-place numbers meaning the NOI is being generated today. The difference is on the HRPT press release that's cash. And on the SNH press release that is the GAAP rate that SNH will realize from the transaction, including straight line rents that get included in GAAP for an income statement purposes.

When you look on a forward fourth quarter basis, what would those cap rates look like?

For 2008?

Yes.

From HRPT what we expected those properties to generate? About 7.2%.

Okay. And I just want to be clear. Are you guys now restricted from buying medical office? Did you switch it? Or was that --

Yes. Yes. We're now restricted. That's correct.

And why did you guys decide? So one I guess that's just to avoid the conflicts with SNH then?

That's right. That's right.

And then on the additional 45 buildings that SNH has a right to buy first. I mean why was there a decision to include that in this type of transaction?

Sure. Again, it's not to buy first. They have a right of first refusal. If we decide to sell them and we get offers then they have the right to match. The reason that was included ,and again this was a negotiation between the independents, and my understanding of what happened was in exchange for going to the higher end of the range that was presented by the appraisal, SNH wanted something else besides release of the covenant. And the independent directors decided the other thing to give them was the right of first refusal on those buildings. Again, remember it's only if we decide to sell them then they get the right to buy them if we go and solicit offers. That's all.

And what is your desire to eventually sell those buildings?

Short term I don't think there's a desire to sell them, short term. I can't speak long term. What happens in 2009 or 2010 I can't speak to. It depends on the performance of HRPT and how successful we are at recycling this capital and reducing leverage as a result of it. And creating improvement for our company at HRPT will dictate whether or not we think about this type of transaction going forward again. So we want to see how this sort of plays out for the next few months. And then whether or not that group of properties would be the group of properties that HRPT would eventually decide to sell, I don't know.

And, given their first right of refusal, does that prohibit you from actually going out and kind of doing an auction to find the highest bidder and allowing SNH to match that? Or would it mean that you specifically have to offer it to them first?

No. No. It's you go out and get the highest bid and then they get to match.

Okay. And then I just wanted to talk -- you had higher lease term fees. Can you just talk about what you're seeing in terms of bankruptcies? Where did that lease term fee come from? And what are you expecting going forward there?

Go ahead, John.

Yes. Lease term fees amounted to around $1 million during the quarter in total. A little less than half of that came from Philadelphia. It was not a significant -- it wasn't a large space. It's not really a trend we're seeing. I mean, we don't really have a run rate for termination revenue. But it runs right around $300,000 or $400,000 per quarter; is not unusual. The balance of the lease termination revenue was in the other markets.

Okay. And when you report your same-store results it was like minus 2%. Does that include or exclude lease term fees?

It includes it.

It includes it so you would have been more like minus 2.5% without it?

Well if you consider the fact that there was termination revenue in the prior year, the net impact is probably around $500,000.

Okay. And then just you talked about Oahu being extremely strong. What was the decline in occupancy related to?

That was a tenant lease that terminated late in the quarter so you're really not going to see an impact. And it was just a natural termination and we have a lot of significant interest in that space and we're pretty confident we'll have that re-let and have something to announce next quarter.

Great. Thank you.

Thank you very much. The next question is from Philip Martin with Cantor Fitzgerald. Please proceed.

Good morning, gentlemen. A lot of my questions have been answered. But first of all, what is the thought within HRPT to redeem your preferred, the 8.75% preferred with some of the net proceeds from the sales to SNH?

It's a great question. You know a few months ago I would have said absolutely we'll take out those preferreds; they're very high cost. I'd say it's a little bit up in the air right now what we're going to do and whether or not we're going to redeem them with the proceeds. The reason I say that is because the preferred market has suffered tremendously as a result of what's going on in the credit markets. And even though it's at 8-and-7/8ths and $175 million of it, I don't believe --

[To replace it] is difficult. Yes.

To refinance it today, believe it or not, I think would be over 9% in today's market. And so we could take it out and just replace it with debt. And that's one option and maybe as a result of all this we will do that. But we've typically looked at preferreds usually refinancing it out with another slug of preferred and hopefully at a lower cost. But right now that option is not really open to us. So the answer is, it's a very good question and the jury is out. And I can't tell you exactly which way we're going to go on it.

And I guess from your commentary too it sounds like your acquisition pipeline is producing some pretty good opportunities, at or above 9%. So I'm just looking at ways for this to be accretive. And I know it's staged over the next kind of year, year-and-a -- call it a year, so it gives you some flexibility. But my question is with respect to this transaction being accretive and how potential accretive it could be?

Secondly, in terms of your portfolio and this was answered a bit earlier I believe. But in terms of tenant retention going forward, it appears we're in a period of economic slow down. Certainly it's weaker out there. But as you talk to your tenants and you look at your portfolio, is it fair to say that the portfolio is still better able to weather these economic downturns better than most because of the tenant base? Significant government, healthcare, et cetera, which the healthcare portion is diminishing. But with you selling these healthcare assets, how does that impact your portfolio and its ability to weather these downturns better than some of your peers?

Okay. I think that selling the portfolio will not have much impact on our overall metrics in the sense of how we think about our portfolio when we go out in the market and we talk about our secure portfolio, which is government leased buildings, and investment grade rated companies and other large publicly traded companies, and good credit tenants like law firms and accounting firms and consulting firms. Yes, it's a little weaker because medical office buildings, you're right; they do tend to regularly renew. But it's very, very small change. And I still think that the Company is very, very well positioned to weather a downturn. And I think that's been evidenced by the renewal rates we're seeing. I mean, generally speaking whenever there is a slowdown, tenants typically renew rather than go look for new space because it's cheaper to do that. And that's not going to be different in our portfolio maybe than other portfolios. What's different in maybe our portfolio from others is that we don't have a lot of tenants I think that I'm worried about going bankrupt or disappearing. We have a lot of consistent tenants that I think are very high credit quality, that will likely renew and likely renew at the same square footage that they're currently leasing.

So I still feel very good about the portfolio and I think in the press release we put out last Tuesday we had some attachments to it where we looked at the portfolio and we sort of broke down the different aspects of it. And it really hasn't changed much as a result of selling these medical office buildings. One good metric to look at is occupancy. I think occupancy if you pro forma for the entire sale of all the buildings goes down by 0.2% or 20 basis points on a Company-wide basis. That's not a meaningful change in my view.

Okay. Thank you for your answers.

Thank you very much. The next question is from Ian Weissman with Merrill Lynch. Please proceed.

Good morning. Most of my questions have been answered. But can you guys talk about a little -- sort of separate sort of the demand drivers between your CBD and suburban markets. And I think you actually had pretty bearish comments about the office markets in general, but maybe if you can compare and contrast the two?

Sure. You know I think it's generally, even in our CBDs, it's weak. It's weaker than it has been and it's been trending down. We actually don't see a big difference. I mean, one of the advantages of having a large portfolio like we do in many different markets and different types of markets. I mean, I can point to some suburban markets that are doing really well. And I can point you to some CBDs that are struggling. And so I think overall there's no real -- I have not noticed a trend, let's say, that CBDs are doing better or worse than what's going on in suburban markets. I have not noticed that. Because I can point to three or four -- I can point to some CBDs that aren't doing well. And I can point to some suburban markets that are doing well.

I mean, again we don't own property in some of the larger gateway cities. Like we don't own anything in New York City. That could be a different world than what's going on in the rest of the country. We don't own anything in a market like San Francisco. That could be a different world than what's gong on. But we do own a lot of stuff in Southern California, in Los Angeles, in San Diego. And I can tell you the San Diego market, some of the infill urban areas of the San Diego market, not at the outlying areas, are experiencing a lot of weakness. Surprisingly for some reason and I haven't quite figured out why yet, but our upstate New York, Syracuse portfolio which is extremely suburban is doing very well right now. And that could be what's going on in specific market dynamics in Syracuse.

Another market, Memphis. It's a small market but we own buildings right in the middle of the CBD and they're good buildings. And I can tell you that the CBD is doing much worse there than the suburbs around Memphis. The suburbs are much stronger than the CBD.

So it depends where you are and I'm going to turn this in to a positive for HRPT which is that we benefit because we've diversified. And so luckily we're not concentrating in any one area and as a result of that we don't get penalized for a weakness in that one specific area. So that's what we're seeing.

When you guy an asset like in Wisconsin where you have really no presence or this Cleveland office, just walk me through sort of the underwriting. What type of un-levered IR are you assuming in your model?

Low teens.

Low teens? With no rent growth or -- ?

Little bit of rent growth. But again, the buildings we're buying don't have a lot of roll. So I think it's fair to say we're very conservative in our underwriting. We don't anticipate -- we don't buy buildings that have a lot of roll. And we don't anticipate that even though the Cleveland building is 90% occupied, we didn't underwrite it at 100%. I can guarantee you we underwrote it that it would stay 90% and what's it going to take just to keep it at 90%.

Okay. Thank you very much.

Great. Thank you very much. (OPERATOR INSTRUCTIONS) The next question is from Charles Place with Ferris, Baker Watts. Please proceed.

Good morning. These are little housekeeping items. How much was raised this quarter in your stock program?

None. Zero.

The shares increased a couple million over year end. What accounted for that on the diluted basis?

Well we did pay --

Oh you did something in the fourth quarter.

Yes. We raised equity in the fourth quarter.

Okay. I apologize for that. Secondly, the healthcare assets, are they going to be reclassified as discontinued operations in the second quarter?

I'm looking to John. In the second quarter are we going to classify the MOBs as discontinued operations?

Yes.

Yes.

Okay. So that will fully be reflected there?

Yes.

And you've talked about how the Boston vacancy and the Comcast move out is going to impact the second quarter by about $0.01. Where you sit right now, Adam, and you look at the marketplace; do you think that's a one quarter phenomenon? Or is that something that might drag into the second half of '08, as well?

We believe where we sit right now that that's a one quarter phenomenon.

Okay. That's all I had on my end. Thank you.

Thank you very much. The next question is from David Rogers with RBC Capital Markets. Please proceed.

Hey, Adam. Really quickly, I didn't get all the numbers down; if you could run through the timing of the sales of the medical office real fast? As well as talk about if you provided or would consider providing any seller financing, particularly on the contingency part of the second half of that sale?

Sure. It's $113 million scheduled for August. $207 million scheduled between August and the end of the year. $245 million scheduled in the first four months of 2009.

You know I never say never but it's not something we're currently contemplating, in terms of providing, seller financing.

Okay. And the second question related to the accretiveness or dilutiveness of the transaction, with John talking about near term debt at about 3.5% rate. Looking at those transactions for the second half of the year, I guess could you give us some comfort with how big your acquisition pipeline might be today, such that those wouldn't have an impact or an operating impact this year? I understand long term obviously the goal is to get the proceeds reinvested, but trying to kind of gauge the impact to this year.

Yes. That's one of the advantages of staging it over time is that we hope and it's our belief that we won't have a period where -- we'll be able to match fund it as we go along in terms of reinvesting. Hopefully. There might be some periods of short term debt repayment. But we don't believe it's going to result -- today we don't believe it's gong to result in any short term dilution because of the timing. Now I'm hedging because it could, depending on what happens and how the rest of the year looks. But it's our hope that we can turn it pretty quickly, that it will have no negative impact and hopefully only turn it into positive impact gong forward. That's our hope.

It's in your acquisition pipeline or I guess what you're looking at today in terms of deals would be sufficient or you see sufficient volume to be able to do that?

We are seeing significant -- we're looking at a lot of things. I am hopeful that that will happen. I can't guarantee that we'll be able to close. I mean, I'm not going to change our underwriting standards just so I can make sure I can turn this into a -- just so we can recycle the capital quickly. I want to really take advantage of the marketplace and buy good assets at good prices. And so we're maintaining our discipline on the buying side. So it's tough to give an answer, other than to say that I think we'll be able to do it. And I'm hopeful. But you should understand; we do look at a lot of stuff. I mean, any one week we could look at anywhere from two to half a dozen opportunities in one week. And we're keeping our underwriting very disciplined in this market because we think it's the market to be disciplined in. So assuming we start winning some of those bids at our conservative underwriting, then I think it would be easily done. But I don't know if it's going to happen. I mean, I'm trying to give you a real answer.

Fair enough. Thank you.

Thank you very much. The next question is from Jamie Feldman with UBS. Please proceed.

Thank you. Good morning. What kind of fees will RMR get for any kind of transaction between the two companies?

Thanks for asking the question. There is absolutely zero benefit to RMR from this transaction. Zero. The fees that RMR currently collects from HRPT for these properties is an asset management fee based on historical book value of those properties that were owned by HRPT. The fee that SNH will pay on those properties will be based on HRPT's historical costs; not the new acquisition cost. So there will be no increase in the fees that RMR generates. RMR also generate a 3% management -- (inaudible) receives a 3% management fee for managing those properties and you'll see that in the operating expense line. That will also occur at SNH but as a result of this there will be no change in the cash flow generated from these properties to RMR as a result of the transaction. And I should also point out; there is no transaction fee. There is no acquisition fee. There's no disposition fee. Nothing. There is absolutely zero economic benefit to RMR from this transaction.

Okay. And then certainly the sale of assets is a bit of a change in strategy for you guys. Can we expect more of this going forward? I know you mentioned more medical office. But are you going to take a deeper dive into the portfolio here?

We could. I wouldn't anticipate large asset sales in the remainder of this year. As I look out for the rest of 2008 we are not currently planning on any other large asset sales. There could be some other smaller asset sales, but any larger ones for the remainder of this year -- but again, things could change and I don't know what 2009 or 2010 may bring.

Okay. And then finally can you just give us an update on how valuations and cap rates have moved? Maybe your suburban markets versus your CBD markets?

Again, in all of our markets, both CBD and suburban, I feel confident that saying cap rates have moved 100 basis points is a pretty fair statement, at minimum. I've seen things trade that we've won and things trade that we didn't win. But at much higher cap rates than I thought they would have traded at, you know, a year or two ago. So I think at least 100 basis points, across the board where we're operating.

And then what's the most severe change you've seen?

We're not buying in this market but Detroit is a market that I think is well into the -- they probably moved 200, 300, 400 -- 300 basis points. I mean there has been a big move. You've got to convince someone to buy properties in some of those markets.

And Cleveland is different?

Cleveland, what we have noticed, yes. Cleveland is different. It's got different drivers going on in Cleveland than you do in Detroit. Of all the markets we operate in and all the markets we see, I think it's fair to say the toughest economic area that we are operating is Detroit and the Detroit Metropolitan area. I mean I don't know if you've been there recently, but you drive down the street and 1 in 4 homes is vacant and has been foreclosed on. There's a lot of office -- it's sort of frightening.

Okay. Thank you.

Thank you very much. And the last question is from David Shapiro with Aegis Financial. Please proceed.

Hi guys. A quick question. Were there any third party commissions associated with the sale, outside of RMR, or no?

Only the payment of the appraisal fee.

Okay. Just the appraisal?

Just the appraisal.

Okay. And then on the structure of the transaction here, were there anything outside of those three mortgages I think that were mentioned? Any other mortgage that was associated with this transaction? Or was the rest sort of revolver backed?

There is no other mortgages that are moving with the transaction, other than those three.

Okay. And then on the Cleveland property, that 9% cap rate, was that a GAAP cap rate or was that more like the cash cap rate that you associated with this transaction?

No. That's a GAAP cap rate. Based on what we're going to recognize including straight line rents.

Okay. And you talked about adjustments to lift FFO. Besides selling lower cap rate investments and recycling to higher cap rates, what other adjustments were you talking about?

Well I think what you're talking about is just making an effort to reduce our capital expenditures and specifically with regards to leasing. That's what I was talking about. Our efforts at trying to drive cash flow at our properties. For a long time HRPT was very focused on maintaining high occupancy. And that worked for the Company for a long period of time. And I think about a year ago we made a strategic shift and really moved away from occupancy and focused much more on cash flow. And that's what I'm talking about.

Okay. So you're just going to examine the benefit of doing the investment a little bit more carefully at this point?

That's right. And I think if you'll notice the Company's occupancy, we're probably running at some of the lowest occupancy the Company has been at in years. And that's a direct result of giving up some occupancy and some cash flow that would flow to FFO, but we're also not spending -- we're not doing those high CapEex or high tenant improvement deals. We're trying to stay away from them.

Okay. Now the --

Unless we have to.

I'm sorry. On the remaining medical portfolio, the one that's sort of first right of refusal, are you thinking that similar cap rates would be applied on that if there was a sale? I mean obviously the market may change somewhat if and when that occurs. But let's say here and today if that was to happen, are we talking a similar type of range?

It's probably a little higher, I'm guessing. A little higher than what this went for. I mean I still think it's probably less than 9, but it's somewhere between 7.1 and 9. I mean that's a pretty big range. But it's a little more. Medical office is a very coveted investment class in today by many investors. And many of these medical office buildings were located next to or on hospital campuses. And so those are considered to be very valuable to most investors. Now many of these buildings that are on the list of properties that we could sell and SNH would have a right of first refusal, some of them are also great buildings and have their own reason that I think people would pay a lot of money for them. But as an asset class, generally speaking I think the industry and pundits in the industry would argue that generally medical office buildings command a little bit lower cap rate than let's say traditional office buildings.

Okay. And then is there any consideration into doing anything in the CMBS arena? I mean, is there any portfolios out there that would be even more attractive than managing the actual buildings? Certainly it would seem like the cost would be a heck of a lot less.

You're talking as investments?

Yes.

Dave, that's a really good question. We have spent and I can tell you we've spent a lot of time looking at that and what's going on in the dislocation in the market. There's a long answer to this but to give you the short answer is probably not. We're not going to be making, I believe any investments in CMBS debt.

What is an interesting asset class for us and simply because you can get control of the entire asset might be to look at some whole loans. There are a lot of investment banks that are sitting on whole loans that are backed by real estate. The reason for that is because if there is a default and non-payment you can get control of the entire asset. When you're dealing with CMBS and you buy a traunch, even if you have some of the highest grade traunches, let's say AA or even single A, you probably will get your principal back. But you've got to have a strong stomach for withstanding perhaps not receiving some interest payments along the lines. Because even if the lower traunches fail or if there's a (inaudible) amount of defaults in that portfolio, even though your principal is probably secure, you've got to be cognizant of the fact that the servicer has the right to withhold interest payments as it pursues collection of those assets that defaulted in the lower traunches. So just because of the complexity of it and the higher risk I believe that's involved in it, we'll probably shy away from any sort of CMBS investments.

And if we were going to make an investment sort of as a result of what's happened in the dislocation, we have looked at whole loans. That's what we've looked at. And obviously we'd only do something if we felt that we were going to get an outsized return for moving away from what is our core. But we'd also do it because if there was a problem, we felt confident we could actually get control of the asset. That's why.

And a last question on paying down this debt here. Clearly it seems like it's going to go to the revolver, at least in the near term. It seems, given your conservative asset base -- I'm speaking of the government, the medical and then the Hawaiian land which is undoubtedly pretty darn secure in this day and age. What could be more accretive, I guess, than buying back shares of your stock at these type of yields? I mean even if you adjust for the CapEx, the normalized CapEx, it seems like the stock at this point is probably superior to almost any piece of property that you could come up with in the market today. And given that you still have a very conservative investment base, I'm just wondering what could be more accretive than that?

It's a very good question, David. And I'm surprised it took near the end of the call for someone to ask it. Management and the Board has considered very seriously whether or not a stock buy back makes sense. It's our view that, in the current credit markets and the current capital constrained environment, that doing a stock buy back is not what we believe is the best interest of the Company and the long term holders of the stock, again over the long term.

As you said, our initial use of the proceeds is to de-lever the Company. And I think that's important for us. I think that is something we're very focused on. And then recycling the capital eventually into higher yielding assets to take advantage of this market environment and the dislocation in the office market, industrial market, we believe benefits the Company and the stakeholders in the Company over the long term the best.

Now I don't want you to think that we'd never do a stock buy back. We have done them in the past; back in 2001 we did a stock buy back. So it's not that we have a phobia of it. But then we did and our experience was it gave a short term bump to our stock and once the stock buy back program stopped, the stock sort of settled back into where it was. It didn't do very much to increase the stock price for shareholders over the long term. And so that is a factor that we think about when we think about doing another stock buy back program.

Okay. Thank you very much and good luck.

Thank you very much. Gentlemen, the question and answer session has now concluded. I'll turn the call back over to Adam Portnoy.

Okay. Thank you very much for joining us on our call today. And I look forward to seeing some of you at NAREIT in June. Thanks.

Ladies and Gentlemen, thank you for joining the HRPT Properties Trust first quarter 2008 financial results conference call. Today's call has concluded. You may now disconnect.