Equity Commonwealth (EQC) 2008 Q4 法說會逐字稿

Good day, everyone. And welcome to the HRPT Properties Trust Fourth Quarter 2008 Financial Results Conference Call. Just as a reminder, today's call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the Conference over to the Director of Investor Relations, Mr. Tim Bonang. Please go ahead, sir.

Thank you, operator.

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 HRP's present beliefs and expectations as of today, February 26, 2009. The Company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's Conference Call, other than through filings with the Securities and Exchange Commission regarding this reporting period.

In addition, this call may contain non-GAAP numbers, including funds from operations or FFO. A reconciliation of FFO to net income is available in our supplemental package, found in the Investor Relations section in the Company's website. Actual results may differ materially from those projected in these forward-looking statements. Additional information concerning factors that could cause those differences is contained in our filings with the SEC and in our Q4 supplemental operating and financial data found on our website, at www.hrpreit.com. Investors are cautioned to not place undue reliance upon any forward-looking statements.

And with that, I would like to turn the call over to Adam Portnoy.

Thank you, Tim. And good morning, and thank you for joining us on today's call.

Before reviewing our fourth quarter and year-end results, I would like to discuss two events that happened after year end.

First, in January, we announced a 43% dividend reduction, to $0.12 per share per quarter, or $0.48 per share annually. At the same time, we announced up to a $100 million common stock buyback program. We decided to lower our dividend, in part because we believe that shareholders may be advantaged if some of our cash flow, historically paid in dividends, is used to repurchase shares, which are currently trading at historically very low prices.

The dividend reduction also increases our cash flow in future years, which may be used to fund high leasing costs during a potentially long-term economic recession; or the excess cash flow can be used to help repay debt maturities in the future if the capital markets stay dislocated for a prolonged period. Through February 25th, we have repurchased 3.3 million common shares, at an average price of $3.57 per share and a total cost of $11.8 million.

The second event that occurred subsequent to year end happened earlier this week, when we announced our subsidiary, Government Properties Income Trust, filed a preliminary registration statement with the Securities and Exchange Commission for an initial public offering of 10 million common shares. HRP intends to transfer 29 properties to this subsidiary in the near term, including 25 properties which are currently 100% leased to the US federal government and four properties which are currently 100% leased to state governments. These 29 properties contain 3.3 million square feet and are located in 14 states and Washington, D.C.

We are also currently negotiating a $250 million credit facility with a group of banks to be secured by these 29 properties. If we are successful in obtaining the credit facility, we expect that the initial proceeds would be used to repay amounts outstanding under HRP's unsecured revolving credit facility.

If the IPO of this new company is successful, the proceeds from the offering will be used to repay the amount outstanding under the new secured credit facility. And we expect that HRP will continue to own 49.9% of this company after the offering. If the IPO is successful, Government Properties Income Trust is expected to trade on the New York Stock Exchange under the ticker GOV.

There are two primary reasons HRP is interested in pursuing this transaction. First, this transaction will provide HRP with added liquidity. Regardless of whether or not the IPO is completed, HRP may receive $250 million in proceeds from the line of credit secured by the 29 properties. And HRP may be able to use it to repay amounts outstanding under its revolver and effectively extend its debt maturities.

Furthermore, if the IPO does happen, then HRP is expected to own close to 10 million common shares of Government Properties stock. HRP will get the benefit of the equity method of accounting treatment for this ownership interest. And it plans to recognize its pro rata portion of funds from operations from Government Properties in the future.

In addition, although our current intention is to retain ownership of these shares, the ownership of these shares provides HRP with the potential to recognize additional gains on investments through the sale of Government Properties stock in the future, which may be used to repay debt if necessary.

The second reason we are interested in this transaction is that we believe a successful IPO of Government Properties may demonstrate the unrecognized value in the HRP portfolio. Although we have not agreed to a valuation range for the shares of Government Properties with the underwriters, we expect that the valuation may be higher than the current trading multiples of HRP stock.

If the IPO is successful, we'll be taking some good assets out of HRP. But we will be also retaining direct ownership of 18 additional properties and 2.2 million square feet, which are primarily leased to government tenants. Although it is not our current intention to sell these retained properties, Government Properties will have a right of first refusal to buy any property that HRP wishes to sell as majority leased to government tenants in the future.

If the IPO is successful, HRP's reported rents from government tenants will decline from about 14% to 6%. However, after taking into account the pass-through effect of Government Properties' FFO of HRP's ownership stake, the rents received from government tenants only declines to about 10%.

I encourage all investors to read the preliminary registration statement that was filed with the SEC and which is available at the SEC's website, located at www.sec.gov.

I would now like to move on to our financial results for the fourth quarter and year end 2008.

For the fourth quarter of 2008, we are reporting fully diluted FFO of $0.27 per share, which is the same FFO per share we reported in the fourth quarter of 2007. For the year ended 2008, we are reporting fully diluted FFO of $1.08 per share, compared to $1.12 per share last year.

During the fourth quarter, we signed leases for 859,000 square feet, and 74% were renewals, and 26% were new leases. For the year ended 2008, we signed leases for 4.3 million square feet, and 71% were renewals, and 29% were new leases.

Leasing activity during the fourth quarter resulted in a 6% roll-up in rents and about $11 per square foot in capital commitments. The average lease term was 5.7 years, and the average capital commitment per lease year was $1.87. Also, I think it is important to note that we have reported roll-ups in rents during the last 13 consecutive quarters.

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 current vacant space, has slowed significantly since the beginning of 2008. Within all of the markets where we operate, net efficient rents are trending downward.

This is the result of a slowing economy, which is leading to 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 during the last few quarters. At the same time, development activity continues in some markets, despite market conditions, with many new projects scheduled for completion during 2009. As a result of these market dynamics, overall company occupancy at December 31st was 90.4%, which represents a 20-basis point decrease from last quarter and a 250-basis point decrease from year end 2007.

Although our total same-store NOI declined by 2.3% in the fourth quarter, this decline is primarily the result of occupancies declining, especially in our Boston market. Southern California continues to experience weakening fundamentals, with negative net absorption, and about two million square feet of new construction completed in the fourth quarter. Fourth quarter same-store NOI increased by 8.6%, reflecting rent growth and a decline in operating expenses, offset by a 4% decline in same-store occupancy.

Washington, D.C. is still a market experiencing weakening fundamentals, with up to one million square feet coming online per quarter. But despite the increase in supply, our same-store NOI in this market increased by 1.6%, primarily reflecting occupancy gains.

Our Philadelphia portfolio experienced a 7.6% decrease in same-store NOI, partially reflecting a decline in occupancy. The Philadelphia leasing market has shown some signs of weakness, with slight decreases in rental rates and waning interest from some large financial firms which previously expressed interest in relocating to the city. The downtown office market, where we own a large percentage of assets, remains relatively strong, and we continue to believe that we are well positioned in this market.

In Oahu, the market for industrial property is still the strongest in the country, with gross industrial rents approaching $40 per square foot annually in certain areas. Although the economic downturn is starting to affect rental rates in Oahu, land values for all industrial properties on the island, not just our own, have increased significantly since we bought these lands in 2003 and 2005.

Because of these factors, HRP is largely benefitting from this market improvement, because we are the largest owner of industrial properties in the state of Hawaii and have many leases scheduled to reset which have below-market rents.

During the quarter, Oahu same-store NOI declined by 7.9%, reflecting a non-recurring charge for environmental remediation costs. Leasing activity was light during the quarter, but we anticipate significant roll-ups in rents in the future. Boston same-store NOI decreased 23.3% during the quarter, reflecting almost 300,000 square feet of space vacated in two of our south suburban office buildings in early 2008. As of today, this is our only major market where we may continue to experience significant lease roll-downs to the end of 2009.

In our other markets located throughout the country, our same-store NOI during the quarter increased by 1.4%, despite declines in same-store occupancy of 2.2%. We have 4.5 million square feet scheduled to expire during 2009, which represents approximately 8% of our total square feet and 9% of our annualized rents.

The majority of leases scheduled to expire through the end of 2009 have in-place rents that are currently below market rents. However, it is unclear whether we will realize any of these possible rent roll-ups in the near term, because leasing fundamentals continue to weaken across the country.

Even in this difficult market environment, I think we are achieving some great accomplishments. During the last seven quarters, we've seen a consistent improvement in leasing metrics, with rental rates rolling up and low CapEx commitments. However, these improvements are coming at the expense of lower occupancy rates and declining same-store NOI. In light of the current market environment, and our need to maintain occupancy and cash flows in the future, we expect capital expenditures may increase in 2009 in order to be competitive with leasing.

During the fourth quarter, we purchased four office complexes with 830,000 square feet, for about $134 million. We purchased these high-quality assets at going-in cap rates of 9.2%, and these properties were 99% occupied, with an average lease term of over five years.

As of today, we have an executed purchase agreement for one office complex with approximately 190,000 square feet, for a total purchase price of $57.5 million. Of course, this agreement is subject to closing conditions, and the purchase of this property may or may not happen in the future.

Before turning the call over to John Popeo, I would like to recap HRP's current balance sheet and liquidity position. We currently have about $2.9 billion of debts outstandings, which represents a conservative 48% of total assets. We have no significant debt maturities until 2011. Our unsecured debt obligations have been investment grade-rated for 15 years. And we continue to be comfortably in compliance with all debt covenants.

As of December 31st, we had $201 million outstanding on our $750 million unsecured revolving credit facility. This facility is provided by a diverse group of close to 30 participating banks and matures in August 2010, and we currently pay an interest rate of LIBOR plus 55 basis points. At our option, we have the right to extend this revolver for one additional year, to August 2011.

As we discussed in the past, we agreed to sell 48 of our medical office, clinic and biotech laboratory buildings, with 2.2 million square feet, for $562 million. As of December 31st, we have closed on the sale of 37 of these buildings, for approximately $347 million and recognized gains of about $137 million. We sold one additional property for $20 million in January, and the remaining $195 million is scheduled to close in phases during the first half of 2010.

We also have one additional property currently under contract to sell for a price of around $15 million, which may or may not close in 2009 based on closing conditions.

Even though HRP has always maintained an excellent balance sheet with ample liquidity, in the last year we have taken additional steps to further increase our liquidity and build long-term value for all stakeholders in our company. In 2008, we successfully recycled capital from the sale of properties into higher-yielding assets. During the year, we sold 37 properties for $347 million, at an average cap rate of 7.3%; and purchased 54 properties for $473 million, at an average cap rate of 9.9%.

Since the beginning of 2009, we have lowered our dividend by 43%, and we have engaged in a $100 million common stock buyback program. We are also pursuing creative ways to increase liquidity through the possible IPO of Government Properties Income Trust.

In summary -- unlike many of our competitors, we are approaching these difficult market conditions with many positive actions which may benefit all stakeholders in our company.

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 9.7%, and total expenses increased by 13.7% during the fourth quarter of 2008. The year-over-year quarterly increase in rental income, operating expenses and G&A expense reflects properties acquired between October 2007 and December 2008, partially offset by the decline in occupancy in same-store NOI. Depreciation and amortization increased by 10.9%, reflecting properties acquired and, to a larger extent, depreciation and amortization related to building and tenant improvements.

Our consolidated NOI margins were 57% for the fourth quarter of 2008 and 59% for the fourth quarter of 2007. The decrease reflects the decline in occupancy and increases in operating expenses. Current-quarter EBITDA was flat compared to the same period last year, primarily reflecting property acquisitions since September 2007, offset by property sales and a decline in occupancy, and same-store NOI.

Interest expense increased by 1.9%, reflecting property acquisitions. Net income available for common shareholders for the fourth quarter of 2008 was $50.8 million, compared to $8.9 million for the fourth quarter of 2007. The increase reflects $39.5 million of gains on the sale of nine properties during the fourth quarter of 2008.

Diluted FFO available for common shareholders was $0.27 per share for the fourth quarter of 2008, third quarter of 2008 and fourth quarter of 2007. Year-over-year results primarily reflect earnings from properties acquired since September 2007 and the reduction in preferred distributions, partially offset by earnings from properties sold during 2008 and the decline in portfolio occupancy in same-store NOI. In January 2008, we declared a dividend of $0.12 per share, which represents 44% of our fourth quarter FFO.

During the quarter, we spent $22 million on tenant improvements and leasing costs, and $1 Million, or $0.01 per square feet, for recurring building improvements, including lobby and faade renovations, elevator upgrades and other capital projects throughout the portfolio. We paid $10 million on development and redevelopment activities during the fourth quarter.

Turning to the balance sheet -- on December 31st, we held $16 million of unrestricted cash. The $146 million of assets held for sale includes the net book value of assets under contract, totaling $129 million, plus the re-classification of rents receivable and other assets related to these properties, totaling $17 million.

Rents receivable includes approximately $152 million of accumulated straight-line rent accruals as of December 31st. Other assets includes approximately $86 million of capitalized leasing and financing costs.

On December 31st, we had $401 million of floating-rate debt, $456 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% at the end of the quarter, and the weighted-average maturity was 5.7 years. We have no debt maturing in 2008 or 2009, and only $50 million of senior notes maturing in 2010.

Our senior unsecured notes are rated BAA2 by Moody's and BBB by Standard & Poor's. The book value of our unencumbered property pool totaled about $5.7 billion at the end of the quarter. Our secured debt represents 7% of total assets, and floating-rate debt represents 14% of total debt.

At the end of the fourth quarter, our ratio of debt to book capitalization was 50%. Our EBITDA and fixed-charge coverage ratios were 2.6 times and 2.1 times respectively. As of the end of the fourth quarter, we were comfortably within the requirements of our public debt and revolver covenants.

As of the end of the fourth quarter, we had $201 million outstanding on our revolving credit facility, with $549 million of additional borrowing capacity at a current interest rate of around 1%.

In summary -- this quarter produced results we expected in light of a difficult market environment. Our recent dividend cut should significantly improve our dividend payout ratio and financial flexibility, and our $100 million stock buyback program, at current trading prices, should enhance HRP's shareholder value.

We believe that the successful completion of the Government Properties Income Trust IPO will provide HRP with additional financial flexibility in these uncertain times and display the unrecognized value in the HRP portfolio.

We continue to believe HRP's strong tenant base, limited near-term lease expirations, strong balance sheet, and a current annual dividend yield of 13% make HRP a logical choice for long-term, income-oriented investors.

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

(OPERATOR INSTRUCTIONS) John Guinee, Stifel.

John Guinee. How are you?

Hi, John.

Good.

First up, you have, I guess, about $195 million to sell to SNL. What do you have --

(inaudible)

-- in terms of earnest money deposit? And what sort of financing contingencies or other outs does SNH -- SNL have?

SNH. They have no earnest money deposits, and they have -- it's a pretty general financing contingency that they have. I will point out that SNH has publicly announced that they are in the market trying to raise $500 million of secured debt financing, and that they themselves are trying to do that. So they technically have a financing output. It's not something that I think they could easily exercise, unless they really didn't have any capacity. I think that's the best way I can answer it.

Any thought on having them put up an earnest money deposit, or doing what you'd normally do in this case, which is not allow a financing contingency for a year or so, which effectively gives SNL a free look?

They -- it's SNH, not SNL, Senior Housing Properties Trust. They -- the two companies that come to an agreement to extend the closings of those remaining 10 buildings -- and there was -- it was a mutually beneficial transaction at both parties. From HRP's perspective, it was anxious to extend out the closings for possible -- to line up possible like-kind exchange properties, because there's large gains associated with these sales. And we want -- we didn't want to have to rush into buy properties before September 31 exchange transaction, in a market where we wanted to be very careful and picky about what we buy.

So it was mutually beneficial to us as well as SNH. And I don't have any reason for me to believe, today, that SNH will not honor its contract and close on schedule. And if not on schedule, then they will then maybe even -- if both parties could agree to it -- we have the right to close earlier.

Wouldn't it give you a little more comfort if you had an earnest money deposit, or this was a non-contingent contract?

John, maybe -- we're talking about water under the bridge. The deal's been struck. I mean, maybe we can -- obviously, you're free to criticize the way it was structured. But I think it was a deal that was fair to both parties, and it was fair to HRP. But you're free to criticize. But I don't think we're in a position that we can change it.

All right.

Right now, your bonds are trading at about a 13% to 14% yield to maturity. Your preferreds outstanding are trading at about 50%, 55% of par. Clearly, this is not a situation which you can sustain capitalizing the business, at these kind of costs of capital. And essentially, peeling off $250 million with the federal government leases doesn't really get you there. You're talking more like $1 billion of dilutive equity offerings, or $1 billion of asset sales, to get yourself to a leverage number that will bring in these costs of capital to a realistic amount.

So it seems to us as if the actions are kind of light to what you really need to do.

Okay. I actually think we're being incredibly proactive. I'm shocked you think it's light. I've actually heard more criticism from people saying we're doing -- why are we doing so much? You don't have anything maturing for two years. But I appreciate your concern that two years can come pretty quick.

I think we're being incredibly proactive, in terms of -- between lowering the dividend, retaining additional cash flow, thinking of creative ways to realize value and repay debt through a possible spinout IPO of some of our assets. I -- we are in the -- we've sold, or have agreements to sell, $0.5 billion worth of property.

We don't have any debt maturities till 2011. And yes, the debt markets are very dislocated today. But I don't hope that they stay that way forever. And even if those debt maturities were on our next month, I think one market that still is very much open to us at HRP, at reasonable cost of capital, is the secured market. We have a very large, unsecured asset pool that is available to put secured debt on as a fallback position.

So I'm -- I think we're being incredibly proactive, in terms of addressing liquidity needs and possible debt maturities that are coming up in 2011 and 2012. In fact, I think, compared to some of our peers, we're doing a lot more than just sitting around hoping that debt markets get better. We're actually trying to do things two years in advance, anticipating that maybe debt markets don't get better. Or if they do get better, it's not going to be by very much.

And so, I don't think what we're doing is light at all. I really -- I actually believe quite the opposite.

Okay.

Last question -- as a common shareholder, one really has to look at preferred equity as debt, because it's senior to the common. And the other thing you really have to look at, this day and age, is gross book value is largely irrelevant, and just says what you spent on the assets, not what they're worth today. Do you have any sense for what your leverage ratios are if you look at debt plus preferred to total enterprise value, or to actual current value of the assets relative to gross book, instead of gross book value?

Well, I think the number, as enterprise value is calculated versus as percent of market value -- I think that's easily calculable. John, what is it -- it's probably 60%?

On book.

Yes, on book. And on market, it's probably even higher. Because the stock price has deteriorated quite a bit, which is part of the reason we've engaged a common stock buyback program.

But I don't have any answer to you as to what -- we don't have -- I think there -- we don't have any estimates, in terms of what the assets are worth today. I think they're worth close to what we bought to them and in some cases more, even, than what we bought to them. And in some cases, I'll concede there are some assets that have probably declined in value. But all in all, I think book value is actually a pretty good metric for HRP.

I mean, some of our competitors that -- in the heyday, when things were going gangbusters two three years ago -- they were buying assets at sometimes 3%, 4% cap rates. And I can understand how somebody would argue to them that they need to readjust their evaluations for those properties. But HRP, as you're quite aware, has never bought properties at 3% or 4% cap rates. We've bought properties, I think, pretty consistently -- 8%, 9%, 10% cap rates; today, definitely in the 10s is what we're looking at, or even higher.

And so I don't think we have the same, maybe, deterioration in value as some of our competitors that bought assets at very low cap rates. So I'll concede, if you want to look at the debt plus preferred to book value or gross assets, that's a perfectly legitimate way to look at it. I don't believe looking at it at market value is very relevant today, because I think the stock has underperformed, which is why we've engaged in the stock buyback.

All right, thanks a lot.

Dave Rodgers, RBC Capital Markets.

Hey, morning, thanks, guys.

Hi, Dave.

Adam, I think you mentioned talking to secured lenders, or at least having the ability to access secured debt, given the unencumbered nature of the portfolio. I don't know if you or John have done the calculation. And if you could, could you share it with us? Do you have a sense today if you could replace the unsecured debt coming due near term on a one-for-one basis, with secured borrowing, without violating any of the covenants?

Yes. We could do it. 2011 -- I just know, off the top of my head, I'm sure we could do 2011, 2012 maturities with secured debt, and not violate the covenants. I haven't run it out.

Yes. I mean, currently, secured debt as a percent of total assets is only 7%. I mean, we have room up to 35% in certain covenants. We have a lot of room for --

We have a lot of room for secured debt. I haven't -- at some point, our whole -- we can't replace all of our debt with secured debt, and maintain our covenants. But certainly, what we might consider near-term maturities -- '11, '12.

And given your comments to John's last question -- do you think, if you were to go to the secured route, to match-fund, I guess, those unsecured maturities -- would you estimate having to put equity into those, to help get those to that point?

No. I think -- I don't think [that's what] equity in. I mean, we might have -- the markets are in tough shape. We might have to -- where two years ago, maybe one building we could have put secured debt on, and replaced maybe of maturity -- a debt maturity one-for-one -- maybe we'll have to put debt on two buildings, instead of one, to match that debt maturity.

But the way -- when you think of equity, I won't have to put equity into it. I can match-fund it. I may just have to use more properties.

That's fair.

Adam, when you talked about either -- or buying back stock, as well as maybe capital needed to maintain occupancy of the portfolio through leasing -- is there a tradeoff there that you're looking at? Or are you running parallel courses at this point, with enough capital that you're not really concerned, one versus the other, during the first half of the year?

I'm sorry, can you just repeat the question, Dave? Leasing? Is that --

I guess, the parallel course between using capital to buy stock back or using capital to sign new leases. Are those parallel courses, or is there a tradeoff in there that you're evaluating? And at what point do you feel more constrained on the ability to use capital to do that?

No, I think we have enough room, after the dividend reduction, that we can do both. As we've talked about in the prepared remarks, I do think we're going to have to -- it's a lot of running very fast to stand still, is what we've been doing a lot with the core portfolio. And even doing all that work, I still think you're going to have to spend a little -- you're going to have to spend more money to keep the tenants. And I actually do think you're going to see a slight deterioration in occupancy over the next year, even with all that work.

But I don't think there's a tradeoff. I think we have ample room with our current cash cushion.

As you sit here today, given that last comment you just made, with occupancy changes in the coming year, given your discussions with tenants -- what's the sensitivity to a decline in occupancy this year? Or what are you anticipating would be a decent baseline number for non-renewals or new lease signings?

We obviously have our own internal forecasts, and they vary depending on what we think is going to happen to the economy in the second half. I think -- I'm not going to be so surprised to see occupancy drop below 90%. Whether it drops below 89% is open to debate. But I think a safe estimate is somewhere between 89% and 90%, is probably where occupancy might stand at the end of the year.

And again, these are very hard numbers to pin down, but that's -- you're asking my personal gut, where I think things might end up, I think we'll probably lose about 100 basis points of occupancy, and maybe more. But if the economy gets better, maybe less. It all really depends.

All right, great. Thanks.

Yes.

(OPERATOR INSTRUCTIONS) Mark Biffert , Oppenheimer

Good morning, guys.

First question -- on the acquisitions that you -- or on the sales that you made during the quarter, I was wondering what the exit cap rates on those were.

Just about 7.3%. Between 7.1% and 7.3%.

Okay. And then, can you give a little bit more color on the type of sellers of those assets? I mean, were these sale leasebacks that you had with the companies like Wachovia?

Oh, you're talking about acquisitions? You talking about --

Oh, I'm sorry, on the acquisition side, yes.

Was your previous question about acquisitions as well?

No, no, you gave that, of 9.2% in the release. But on the acquisitions that you made, what were the sellers -- I mean, were these sale leasebacks from the sellers, or --

No, no, these were third-party owners of the property. These were not owner-occupied properties.

Okay. So translating that -- I mean, looking at the asset sale that you had in D.C., and you look at the Government Properties that you're up for selling -- you look at the implied cap rate -- and maybe I'm wrong in my calculation, but I have it at around 7%. I'm wondering what your expectations are, in being able to achieve that in the current environment, and what you're hearing, in terms of brokers in the D.C. market and other areas, and where cap rates are currently, and where they could move to.

When you said you're referencing the building that we sold in the fourth -- you're talking about both the building we sold --

Right.

-- and then you're asking me more generally about what I think cap rates are trading for in the D.C. market generally?

Right, and how that translates over to how you're pricing the assets, the 29 assets that you're going to be selling a portion of into this separate entity.

Yes, I think cap rates have drifted up since we struck the deal with the buyer of those properties. So when we struck the deal to sell these assets, it was at a 7.1% cap rate. I think cap rates in the district have definitely moved at least 100 basis points up from that.

So in talking -- first of all, there's not a lot of transactions that are actually occurring. So, I mean, the volume has dropped tremendously in the last three months, really since about November. And especially in January, there was a large -- has really been a steep drop-off in the number of transactions that are occurring out there in the marketplace. But anecdotally, I mean, I can tell you what -- we do still put bids on, put bids out, on even properties we don't win. And I can tell you that bids -- I think cap rates are minimum 100 basis points higher, probably 200 basis points higher.

Right now, the only sellers of property that we're seeing are typically distressed sellers that are trying to sell some of their higher-quality assets to raise capital, to then repay debt, maybe other parts of their business. In fact -- keep it completely nameless, but we've actually seen quite a few of our brethren as sellers of properties in different markets that they themselves are trying to raise capital. And we've been on some of those portfolios. And the bids -- it's very rare we're putting out a bid these days at less than double digits cap rates.

So, I mean, how does that fit into your uses for cash next year? You've mentioned that you're going to focus on share repurchases and debt reduction with the proceeds you're getting on this. I mean, if the right opportunity came up for you, would you put more money into acquisitions next year?

Yes. Yes, we would. And we are looking. And -- but again, I think it's going to be -- we're being very picky. And it's got to be great deals. In some ways, this is clearly a buyer's market. And we haven't seen a lot of sellers yet. I presume, if the economy stays in the state it is through the second half of this year, you'll see an uptick in the amount of volume of properties that will come to market. And I think you'll start to see more and more -- we might execute on more of those opportunities.

Really, what's -- as I think most people understand, it's -- because debt is so hard to raise, it's just very difficult for people to find financing to buy properties. And we have -- there are a few players like us that are all-cash buyers. We have a large amount of our revolver which is unused at the moment. And so we have no problem putting very aggressive -- what I call aggressive bids, meaning high cap rates. Because we're going into bids saying well, there's no financing contingency. You know if we sign the contract, we're good for the money, because it's an all-cash bid.

So in the few times that we have been winning, or coming close on properties recently, I know we're not the highest bidder. I mean, it's clear we're not the highest bidder. It's just that a lot of people that are in the market today selling -- they're not only focused on getting the best price, but they're also, as I say, distressed sellers. And they're very focused on just execution, clarity that we can close; certainly of closure.

So --

So what is your hurdle rate, then? I mean, you're that all-cash, what does your hurdle rate have to be for it to make sense, if you're using all cash to do this?

Well, it's cash from our revolver, meaning the way we position the bids. How we ultimately finance it is ultimately a combination of corporate finance debt and equity. But we're looking -- we want properties that -- as I said, cap rates, usually double digits. And these are typically what I would characterize newly built buildings, within the last five years, 100% occupied buildings, good tenants.

I'll tell you, most of the time we spend today focused on underwriting for acquisitions is credit analysis. I mean, we spend -- it's not -- we clearly are -- we pretty quickly understand that we're buying at below replacement cost. And we got, let's say, a long-term lease with what might be a good-credit tenant. But we spend a lot of time trying to understand the credit of that tenant.

Today, the world is so upside-down. What everyone used to consider great tenants may not necessarily be good tenants. And so we spend a lot of time doing exactly what you're doing -- listening to, if it's a public company, conference calls, and digging into their financials, and talking to senior management, and understanding the business plans, and focused on if they themselves have any debt maturities, and what are they using the site for. Is this a part of their core operations? If it's their headquarters, that's obviously a good thing.

So those are the things in the way we're analyzing things today.

Okay.

And then lastly, just related to the lease, and just as a follow-up -- I mean, specifically, if you can note, what percentage of the lease expirations have you addressed in '09 and '10 to date, in handling those? And how much of that is built into your expectation for occupancy that you mentioned, between 89% and 90%?

Yes. The way we would do reporting is -- basically very little of what we show you as expiring has actually been addressed already, meaning if it's already been addressed -- I mean, I can tell you, in '08, we did deal with a lot of renewals that had expirations in '09, and then had expirations '10. But they've just been -- because we dealt with them, they've been pushed out.

So I'd say maybe less -- probably 10'%, 15% of what's on that expiration schedule is in some form of negotiation now. And I think probably -- actually, I'm probably underestimating. That's probably higher, it's probably -- a third to even half of that is probably in negotiations or conversations now. But none of it's -- if it's on that schedule as scheduled to expire, then we're -- we haven't addressed it yet.

And those spreads are trending where? Are those negative, flat? What are you seeing?

When you say spreads, you mean the net-effective rents? Or --

Right, versus in-place rents -- where are the new rents trending? Are they declining?

Well --

I mean, are you --

We're -- luckily, we're seeing that they've actually trended upwards for the last 13 consecutive quarters. And our cap -- our net effect is we've been very, very good and competitive in the marketplace. I think -- and if you look at our in-place rents today, across our portfolio, they aren't below -- I mean, sorry -- they are below where the market is.

So you can argue that there should be a roll-up of 1%, 2%, maybe 3% across the Company, especially in what's rolling in 2009. But in our prepared remarks, I'm not banking 100% on those roll-ups. And yes, we're going to obviously try for them, and we're obviously going to negotiate for them, and we're going to do our best to obtain them.

But this is a tenant's market. Just like it's a buyer's market if you want to buy properties, it's a tenant's market if you want to lease space. And I'm not sure we're going to be able to realize all those roll-ups.

I think the name of the game in 2009 from the core operations is renewals, and keeping cash flow steady. It's just -- we're very focused on renewals, we're very focused on keeping our cash flow stable, and not -- and making sure it doesn't drop in a market that's clearly declining.

I mean, that's -- I heard on another conference call, down -- flat is the new up. And if we can keep things flat, I'm going to feel pretty good about that in 2009.

Okay. Thanks.

Yes.

David Shapiro, B.G.B Securities.

Hi, guys.

Hi.

Hey, quick question -- this is interesting discussion that John brought up, and that everybody else is bringing up here. You're in the market here selling your GOV subsidiary at what, it looks like to me, is about -- a 9.8% cap rate is sort of the intended target here, based on sort of those documents you're putting out.

I'm trying to understand the logic here. And you're going into the market, bidding for assets, maybe at 10% caps, maybe a little north of there. You were buying assets in the fourth quarter in the mid-9s. And now you're turning around and selling what is arguably some of your more stable assets -- maybe it's on older properties, but it's certainly the most stable, credit-worthy tenants you probably have -- at 9.8% cap rates.

So I'm just trying to understand, what is management figuring here in selling these properties at cap rates close to what you intend to buy at, at the current time?

Yes. First of all, it's important for me to note that the numbers that were put in that preliminary registration statement are just estimates. And we have not come to any sort of agreement with underwriters regarding valuation. And so, I can't really -- I can't speak definitively as to what that cap rate might be. But I can speak more definitively about the rationale as to why we're doing it.

Obviously, we thought -- as I said in the prepared remarks, one is liquidity, trying to find innovative, creative ways of trading liquidity for the Company. And the second thing is to also -- the demonstration effect. I mean, it's no secret that obviously we think that our stock is undervalued. And that's why we engage in a stock buyback program. We're hopeful that if we -- whatever the valuation might be ultimately for Government Properties Income Trust, we think it's going to be in a higher multiple than the multiple that HRP's currently trading at.

And we hope that that will serve as a demonstration effect to say hey, look, these are some good assets at HRP, but certainly not all of the good assets, and certainly not -- in some cases, maybe not even the best assets at HRP. But these are some of the assets, and it's a small portion of our -- it's only 29 buildings of the entire portfolio. And we're hopeful that if the IPO is successful that it will demonstrate to shareholders of HRP that -- and investors, that hey, maybe look at this small part of the Company that's trading -- that's able to trade at this much higher multiple, hopefully. Maybe that means HRP's undervalued.

Now, I also want to point out that the -- why are we doing it this way? Why are we doing an IPO? We've been asked, Well, why didn't you just do a joint venture? Or why didn't you just go sell all the assets? Why are you doing an IPO? And I think it's important to address that. We obviously thought hard and long about that.

And the truth is, there's just not many, if any, buyers in the marketplace at an aggressive price for this size portfolio in today's market. And we actually feel more confident today that we might have a better shot of getting this IPO done at a decent valuation than we might get from trying to actually sell the assets in a market that is incredibly difficult, with very, very few buyers.

And I also want to point out that yes, we are looking at buying things and, as I said, 10% up. But the pace of acquisitions at the Company has clearly slowed. It's -- I assume we will buy some things in 2009. But it's not going to be nearly at the pace at which we bought things in previous years.

If the goal is to provide liquidity -- you have the valuation goal, that's one thing. It's sort of an expensive goal, given the I-banking fees that are going to come out of this. But just speaking -- if the goal is to increase liquidity, why not -- for the vast majority of your proceeds from this GOV sale, or from the secured financing that you may or may not get from the GOV spinout -- why not just use the vast majority to buy in your public market debt, and maybe pay down some of your revolver? I mean, the public market debt, like John was saying, is at 13%-plus yields. You can't find properties in the market that you'd probably want to own at those cap rates, without taking on significant tenant risk. That's sort of a risk-free return for you guys to buying that in 13%.

And given that the IRS has now given you a sort of clearing to sort of issue these 1031 gains as stock dividends, or do some sort of distribution as a stock dividend, you really don't have the pressure that you necessarily have to do a 1031 property exchange. You could satisfy these gains, if I'm not mistaken, with a stock dividend. Is that something that the Company's considering, given the high yields on the debt and the IRS ruling that you guys now have the ability to do?

The short answer is yes. We are considering, well, one, the use of proceeds from the debt that we will hopefully raise -- that will be secured by the 29 properties. We are going to immediately use it to repay our revolver. But I'll also say, in a more blanket statement, that you're absolutely right -- the yields that we can get on buying back some of our debt is clearly something that we are going to take a look at. And so, I agree with you.

Okay.

And then, back to Hawaii, I guess, with the NOI rolling down there. I'm trying to understand, is this -- so you had sort of a bid expense hiccup there in the quarter, with some sort of remediation. Is this an ongoing thing? Because I'm just wondering why we're not going to be seeing, I guess, very large NOI roll-ups, given the fact, with your discussion -- and it's well noted in the press that the rent rolls on some of your expiring leases are significantly higher. I'm just trying to understand when NOI starts moving up in a sizeable manner in Hawaii. And are these remediation costs continuing to run through? What's the dynamic there that we should be looking at?

Yes. It's a good question.

Well, first of all, I can assure you that -- this was a one-time environmental remediation cost that flowed through the P&L -- that it's not a recurring event. It was for a site that we bought in 2005 that we -- it was a scheduled cleanup, and we finally have pushed through the expenses.

The question about when is NOI going to start being -- increases in NOI? We have an interesting situation in Oahu. We bought properties at a value of maybe about $45 a square foot. And they have clearly gone up in value, maybe over $100 a square foot, if not more, in value that they've increased -- probably more in some instances.

And Hawaii's an interesting place. We've actually had -- we have built in, I think, 50% or 70% roll-ups in the rents, meaning just where they're currently paying us, versus what the market is.

If investors have ever been worried that HRP is not aggressive in trying to maximize cash flow, I suggest you just read some of the press reports that come out of Hawaii. Because there's a group of tenants that have banded together and are now trying to lobby the state legislature to do some pretty remarkable and amazing things that I think, frankly, might be unconstitutional, which are that they're trying to prohibit our ability to raise the rents for those tenants.

And that is something -- while that sort of -- those sort of conversations are going on at the state government level among a group of tenants that we lease space to, and land to, it's basically putting all re-leasing activity on hold on that space -- in that line -- in Hawaii. Because everyone wants to see what's going to happen -- what is the state legislature going to do. Are they actually going to pass some sort of crazy bill that says that you can't raise rents [on] commercial -- that you go in and actually alter an agreed contract between two parties, by state law, by state act? And that's why I think it might be an -- I believe it is unconstitutional.

So that's -- what I'm trying to tell you is that we're working very hard. But we have people that are working very hard on the other side, trying to prevent us from raising the rents. And as a result of all this, I think it might be -- it might take till the end of the year till we start seeing increases in cash flow come out of that portfolio. I think the next three to six months, we're in for a little bit of a fight, is what's going on.

Okay.

And then back on the GOV transaction -- is sort of -- if the transaction doesn't go through at an acceptable price -- and I'm not sure what sort of your minimum cap rate is that you're expecting -- but maybe some guidance on that? And then, assuming that it does not meet your minimum cap rate, is that revolver with the banking syndicate still a possibility regardless of whether the transaction goes through? And then sort of what was the -- I guess, the interest rate and sort of the maturity, and then some of the basic terms that were being considered on that revolver?

Sure. The final deal -- one -- the answer to your question -- the revolver, or that bank credit facility, would stay in place regardless of the IPO. So it would go in place prior to the potential IPO and would stay in place regardless of whether or not the IPO is consummated. So that's there.

The final terms -- we've come to agreement with a group -- with some lenders. And we're still in the process of -- they're finishing their diligence, and we have to document it. So the final terms haven't been set. I can tell you it's LIBOR. LIBOR's got a floor associated with it, and it's got a spread on top of that LIBOR. But I can't commit to you what all those numbers are. And I can tell you that right now what's being contemplated is a three-year facility with a one-year extension option on it.

Okay.

So those are the basic terms.

And this revolver is secured, as opposed to sort of the common industry practice these days of doing unsecured revolvers. I found that interesting. Is that a trend that you think we could be seeing here going forward, where --

I think it's a trend for new revolvers, yes.

Oh.

I think capital is -- I mean, you hear it all the time, you read about it, and I can tell you from firsthand experience -- getting capital out of banks is very, very difficult today, unless you have an existing relationship or you're just rolling an existing piece of debt. New debt, or new deals -- it's very, very difficult. It's like trying to get blood from a stone in some banks. I mean, there are certain banks that are open and are willing to do lending. It's very expensive, but they're willing to do it. And there are many banks that are just not lending, period.

Okay. Thank you.

Thanks.

Michael Bilerman, Citi.

Morning. Irwin --

Hi, Michael.

Hey. Irwin Guzman's on the phone with me as well.

Hey, can you talk a little bit about how you think the impact of the IPO has an impact to -- obviously, you'll maintain about a 50% ownership -- but how does that have an impact to HRP, from perspective of your earnings stream, but also your distribution capability and your dividend?

Sure. John, you want to --

I can answer it quickly.

Basically, through the equity method of accounting, we get pass-through treatment of the FFO. So at the end of the day, if everything goes to plan and we own 49.9% of it, we'll get -- 49.9% of the FFO will be carried through on our -- to our income statement. And on the cash side, on the -- as you might say, CAD or AFFO, or FAD -- I'm not sure how you characterize it -- but the -- we basically will get the dividends from the ownership of the stock. That will be what will be reported up to HRP.

And the FFO probably gets marked up, I guess, for [re] straight-line and mark-to-market or rent? So your FFO could actually go up. But --

No. Actually, there's going to be no mark-to-market for rent in this transaction, just the way it's structured. It'll drop down. And basis will carry over to the new entity.

As far as -- same holds true for straight-line rents. In fact, there really isn't a whole lot of straight-line rent type leases in this portfolio. Most of the bumps with the government tenants are CPI adjustments, which you don't include in straight-line rent adjustments under GAAP.

And then, how does the dividend income compare to sort of the -- what effectively would be the net cash flow [layering] in the loan? How does that compare?

Well, the way the payout ratio is laid out currently in the S11, it's not a 100% payout. So I guess in theory, the cash that flows up to SNH through dividends is going to be slightly less than the cash that would have otherwise flowed into HRP, if we didn't do the IPO.

Right.

Right.

And then, can you talk a little bit about, from the RMR perspective, and the change of fee stream, either on the -- I think the base management fee -- it sounds like that's going to be done at historical cost. But any change at all to the fee stream, or any other incentive that may be in there?

No. No, the contract that the new entity would enter into would be identical to the contracts that HRP already has with its existing REITs and with HRP. And as you've already noted, the historical fee stream will just carry over to the new entity. There will be no markup or -- there will be no changes.

The base -- but won't the -- I guess, your G&A will -- your allocated G&A will go down? I mean, I guess there's some public company costs, right? So there's some leakage somewhere, right?

Yes, there's some leakage, that's right. Accounting costs, some legal costs.

But who's picking that up? The --

The entity, the public company will pick that up.

So where will be some higher fees to RMR?

No. No, no. RMR only gets -- just to review -- RMR only gets fees based on gross real estate assets. And --

Oh, and then the entity will have all the public fees on top of that?

That's right. So --

And what sort of --

The fees to RMR won't change at all. [We know that.]

And what sort of public fees are in there, terms of -- for running this public company relative to HRPT? Magnitude-wise? Because I'm just trying to understand what the leakage --

Okay.

-- is like.

Let's see. G&A, of course, around 89% to 90%, typically is represented by the advisory fee. The balance includes legal, accounting, New York Stock Exchange fees, SEC fees, and things like that.

And then, just Adam, on the -- there's an incentive fee that's baked into the management agreement, which, I guess -- equal to 15% of any increase in FFO?

Yes.

Is that the same that's in HRP right now?

Yes, it's identical.

It's identical. Okay.

Yes.

All right. Thank you.

You're welcome.

[Michael Erien], Sun Capital Advisors.

Hi, guys. Couple questions, and one of them has already sort of been addressed, regarding your spinoff.

But again, Adam, could you just again clarify some of the reasoning? Because in my mind, to me, given that your stock is trading between $3 and $4 a share -- and I'm on the bond side -- I would just think that you don't have any near-term liquidity issues in 2011. I mean, why not wait to do something like this? I mean, in a way, I'm somewhat concerned that it might be interpreted as an act of desperation in some sense. And so I'm just confused about that a little bit.

And I'm also wondering, when you say that your reported rents from the US government would go from 14% to 6%, does that represent the 49% interest, or does that not?

And then, the only other question is just relating to Boston, with a 23% decline in NOI. Can you explain what happened there? I know you kind of talked about it. But are we going to continue to see weakness in that market? Thanks.

Sure. The reasoning -- it's interesting. We had a question earlier in the call, somebody saying why aren't we doing more? (inaudible)

Yes, I know. I don't understand.

[laughter]

I totally don't agree. I mean, I'm sort of on -- I'm in the other camp, I guess.

Yes.

Because I would just think that you don't need to do this right now.

Yes. It's -- I think -- look -- be candid -- it's an abundance of caution, in some ways. And you're right -- we don't have to do it. But we don't know how long the markets are going to be dislocated. And we might look back a year from now and say, Wow, jeez, we didn't really need to do this. Markets have all come back, and we're going to be able to refinance all this debt in 2011, 2012, no problem.

But it's been dislocated now for quite some time; I think over a year. And it's been very choppy. And it might be like this for another year, maybe two. And so, I think the best way to characterize it is as abundance of caution.

Okay. And then, in regard to the ratings agencies, did you talk with them about this at all? Because I understand it's a good thing if you're reducing debt, obviously, from their perspective. But would they then look and say, Well, you're also sort of getting rid of some of your really good assets, and stable assets, and that could sort of ding you? I mean, did you talk with them at all about this?

Yes, we spoke with both firms that rate us -- S&P and Moody's. And I think S&P has already put out a press release on the transaction, maintaining a stable BBB rating on it --

Okay.

-- on the company. Moody's has yet to put out an announcement. I mean, I think you characterized the tradeoff pretty well, which is that you're getting a lot of extra liquidity at the sacrifice of some ownership in some pretty good assets.

And the analysis we've explained to them is that we think, in this type of market, abundance in caution is a good thing, and it's worth the trade. [Their] giving up a little bit of the ownership in those assets is worth the extra liquidity in today's world. I mean, I think most people -- [our people] say that the most important thing today is liquidity. And I think that's why -- I can't speak for the rating agencies. And again, Moody's hasn't put out their announcement on it, but S&P has. And they reaffirmed a BBB.

Okay, I missed that. All right.

And then, the rent from 14% to 6% -- is that -- that does not represent the 49% interest, does it?

That's correct.

Okay.

It does not. If you include the 49% interest pro forma, it's 10%.

Right, okay, that's what I figured.

And then in Boston -- so what's happened -- is that that one facility that -- I think there was an issue in suburban Boston, right -- there was one facility that had lost a major tenant. Is that the issue there?

Yes. We've lost a couple of tenants in the Boston south suburban market. And it's -- the suburban market -- well, the downtown market also -- the market is in rough shape. The only good news about Boston is that it didn't have a lot of development activity, the way some other markets did. And so once the economy turns a little bit, we'll be able to -- we've have less of a trough to work ourselves out of, and if there had been a lot of development activity.

But you are correct -- Boston will be a market that I think, for the next year, that we're going to -- it's -- of all our major markets, it's the one that I think -- it's got the most weakness.

Okay. Thanks.

Yes.

Su Ping Li, Tenor Capital Management.

Hi. Thanks for taking my question.

Just related to your comments regarding buying back the common, and also where your preferred is trading, which is $0.40 [and] $1, have you guys thought about buying preferred, or especially the convertible preferred?

Yes, we've looked at it. It's a good question. But we think we get a better return on the -- on buying back the common. It's just a basic bang for your buck. You get more for buying back the common.

But if you buy back the convertible preferred, that would reduce our dilution as well.

Yes, that's correct. But we get more -- we get a better return, we feel, in our analysis, on buying back the common.

I see, okay.

And second question is, a lot of your peers have been paying stock, paying their dividend in stock, as a way to increase liquidity. Have you guys thought about that?

In this market, I think it's important that you put all options on the table. And so, it's obviously been discussed. But I can tell you that it is our current intention to maintain the dividend in cash.

For the foreseeable future?

As I sit here today, for the foreseeable future, we intend to maintain it in cash. As we say in our forward-looking statements, that's as I sit here today. I can't tell you six months from now, if the markets are horrible and they continue to get weak, that we might have a different view. But today, that is our current intension.

I see, okay.

If you IPO the Government Properties, that subsidiary, your FFO will be lower. Do you expect to maintain your current dividend rate after the IPO happens?

It's our -- we obviously review on a quarterly basis the dividend. But we feel comfortable that we'll be able to maintain the current dividend, even after the IPO of GOV. But of course, this is something that's subject to review every quarter. I can just tell you where -- as we sit here today, that's what we intend.

And what will be your pro forma payout ratio after the IPO?

Of FFO?

Yes.

Around --

Less than 50%.

Yes, it's less than 50%, yes.

Okay. Okay, that's good to hear.

And can you help me with what's your kind of CapEx, in new projects or tenant improvement you need to do in '09? If possible, 2010 as well?

Yes. Well, we don't really -- let me answer the question this way. We've been running on tenant improvements and leasing commissions. For the last year, year and a half, it's been running somewhere around $10 a square foot in concessions that we've been paying, or signing up for.

I suspect and believe that that will creep up, in 2009, closer to $15.

Okay.

In terms of redevelopment and new development projects, I can tell you that as of right now, all development projects, ground-up projects, are on hold.

Are on hold?

Yes.

Okay. So that $15 commitment for tenant improvement, how many square footage should I think about? (inaudible)

Well, we have -- I think it's 4.5 million square feet expiring in 2009, and probably -- we're going to try and renew all of it. So that's a good number, I think.

So the maximum could be $15 times 4.5 million square feet?

Could be. But -- it could be. If it's all just renewals, it won't be. Not everything we're going to do is going to be renewals. We're going to be very focused on renewals. We will do some new leasing activity. And it's the mix. I mean, the renewals are less than $10 a square foot. It's the new leasing activity that's $25, $30 a foot. And --

Yes.

-- I think on a blended basis, it's going to work out to about $15. Because I think on both counts, we're going to have to be a little bit more aggressive in a much more competitive market for tenants --

[Yes.]

-- both on the renewals and on the new stuff. So on a blended basis, I think it's going to -- I could be wrong; it could be less, it could be more. But I think it's going to creep up closer to $15.

I see, okay. Okay, that's good to hear.

And in terms of [just] transaction, the transaction you could close with SNH in 2010, and also 2009 -- how much net cash proceeds do we expect to receive, if those transactions close?

$195 million.

But do you have debt on those properties?

On those properties, no. They're unencumbered.

So net, you can receive $195 million cash in 2010?

Yes.

How about 2009?

Only -- there's one property under contract for $15 million.

I see, okay. So --

And we also, in January, did sell one property for $20 million.

I see. Oh, those are unencumbered assets.

Yes.

Okay. So if I added them up -- $195 million plus $20 million plus $15 million -- you have $220 million, basically, potential proceeds you can get from the SNH transaction, which should be enough to pay off your revolver, just on that, right?

Yes.

So are you -- is there a way that your IPO -- if you don't get good pricing in the IPO for your GOV subsidiary, you might not proceed with the IPO?

That's a fair statement. It will depend on the valuation and how the market receives it. That's right. There is a price at which we would not entertain doing the deal.

Okay. But [put] $260 million in secured debt in that subsidiary asset, that could happen regardless of the IPO or not. Is that --

That's the current intention, yes.

Okay. And that proceeds will go to HRP as well?

Yes.

So isn't that a better choice, though? You just put more secured debt at the GOV subsidiary. Don't do the IPO, just wait for market improve. And you also got security -- you also got liquidity that way. So what's [matter to] --

Yes --

-- do the IPO?

Well, the IPO proceeds would be used to repay the debt. So you'd be repaying debt with equity, at a higher multiple than what HRP could trade at today.

Okay.

So --

But --

-- you're basically retiring the debt as well.

Oh, so you're saying -- so you did secure the $250 million in debt at the GOV subsidiary -- you actually have to repay that pretty soon, you cannot have that as a long-term secured debt outstanding?

That's right. It would be -- if we did not do the IPO, and the debt just remained in place, it would extend our maturities. Because our revolver -- if we exercise the renewal, expires in 2011. This would have a maturity beyond that. So we'd be extending our debt, if we just took the secured facility and did not complete the IPO. If we are successful in the IPO, then the proceeds from the IPO would be used to repay the secured line that went in place prior to the IPO.

Okay.

Can I just ask, when you say your revolver can be extended for one year, I just -- make sure I understand -- dose that mean you can extend from 2011 to 2012? Or --

No. I'm sorry if there was any confusion. 2010, in August, is when it actually matures.

Oh.

In August 2010, we can extend it for one year to August 2011.

Are there any covenants you need to meet?

We have to be in good -- yes, we have to meet all the existing covenants. But we're already in compliance with those. We don't anticipate having any problem with that.

I see, okay. Okay. That's great. I [actually] think that you guys are doing prudent things to improve your liquidity. Because your maturity after 2010, very -- you have lost -- you have -- every year, you have maturity in 2011, 2012, beyond. So I think it's prudent to have [the] (inaudible) liquidity in current market.

Thank you. We agree with you. Thank you.

Okay. Thanks, yes.

Anything further, Ms. Li?

No. That's it.

David Shapiro, B.G.B Securities.

Hey, guys. A quick follow-up here.

I'm trying to think through this here, and I may have it wrong here, on these 1031 exchanges. As you guys continue to do these property sales, like an IPO, like the SNH sale, I don't see how you ever improve the liquidity if you're forced to continually reinvest those proceeds in properties. And I -- unless, of course, you're investing it and getting the secured debt on the properties. But it seems like there's sort of a treadmill effect going on here. I mean, unless -- am I wrong here, that there's no way to eventually pay down debt with -- avoiding, essentially, these 1031 considerations, unless you end up doing sort of this stock dividend option. Can you guys help --

Sure.

-- walk me through that?

Sure.

You're correct. The 1031 tax issue is something that gets -- it comes into play with regards to selling the assets to SNH. It is not something that comes into play with regards to the sale or possible IPO of Government Properties Income Trust. So --

Even though there's a markup of about $110 million on book value there?

No, it does not become a tax issue.

Huh. That's intriguing. Okay.

And then, on the Hawaiian -- one last question -- on the Hawaiian property sale -- if I'm mistaken, do they -- does Hawaii tax you at about $900 million for that entity in Hawaii? Is that sort of the implied property value they have on it?

Oh, the property tax, what they value it? I just don't know the answer to that, David. We can try and get you the answer. It's probably public. I just don't know the answer.

Okay. Thank you.

Yes.

Michael Bilerman, Citi.

[A] quick one.

Adam, the pricing, at $25, is close to a 10% cap when you -- I guess, when you net down all the IPO fees, the higher G&A, and everything that gets sort of layered in. Your stock, HRP is trading at a 10.4% and 10.5% cap. I'm just trying to think through it. I mean, why not just take the secured facility, and pay -- take the debt in and repay it, and wait for public markets? Or are you effectively saying the public markets would be better than where you could sell government-leased assets in the private market, which I would have thought would have been south of 10% cap? But maybe I'm wrong.

Yes. Mike, it's incredibly important that you keep in mind that those numbers in that preliminary registration statement were just estimates that we had to put in there to get the -- to make the filing complete for the SEC review. We really did not come up with a valuation with our underwriters yet. So it's sort of just -- it's almost moot for me to talk about what the implied cap rate is, at that $25. Because I honestly don't know where it's going to be.

And the other multiple I encourage you to look at, besides just the cap rate, is also the multiple on the stock itself, based on the FFO or CAD, however you want to look at it.

Until we know what the valuation, and what underwriters feel comfortable that they could price something at, or even put on the cover to begin marketing, we just can't comment on whether or not it makes sense or not. And you're right. In a certain price -- and I can't really tell you what that is yet -- we just -- we're not going to -- you're right -- we're not going to do the deal. I don't know what that price is, or what that value is yet, and I can't comment on it. But you're right -- there's a price at which it doesn't make sense.

Right. I'm just thinking about it from the perspective that if you have a lender that's willing to give you a secured facility on the [event -- at the ] decent proceeds, you can take that in and repay other HRPT debt. And when the public markets improve -- and I think you would agree that they're under duress -- you can then IPO the subsidiary and get the benefit down the road. There's no benefit of IPOing this thing at a low valuation.

Mike, I agree with you. We have to see what -- the registration statement's going to likely be reviewed by the SEC. It's going to take -- it's going to take 30 or 40 days. We just have to see what the markets look like and what underwriters feel comfortable marketing the IPO at. But you are correct -- there's a -- it's not a foregone conclusion that that IPO's happening.

Right. And how would you compare the fees on selling the assets outright, versus IPOing, and having the underwriter fees? How do those compare?

Obviously, the fees [in] selling would be less than IPO. It's a question of, again, valuation, and certainly of execution. It's -- those two things factor into it as well.

Right. Okay. Thank you for your time.

Thanks.

And that's all the time we do have for questions at this time. I would like to turn the Conference back over to Mr. Adam Portnoy for any closing remarks.

Thank you for joining us on our Fourth Quarter Conference Call. John Popeo, our CFO, will be presenting at the Citigroup Conference next Wednesday. And I think he hopes to see many of you there. Thank you.

That does conclude our Teleconference for today. We'd like to thank everyone for your participation, and have a wonderful day.