Healthcare Realty Trust Incorporated
Q1 2009 Earnings Call Transcript

Published: 12 May 2009

[Operator:]

Welcome to the Healthcare Realty Trust’s first quarter financial results conference call. (Operator Instructions). Now, I would like to turn the conference over to Mr. David R. Emery, Chairman and CEO.

[David R. Emery:]

Good morning everyone. Joining us on the call today are Scott Holmes, Chief Financial Officer, Doug Whitman Chief Operating Officer and Bethany Mancini and Gabrielle Andres in communications. Now, I’d ask Ms. Andres to read the disclaimer.

[Gabrielle Andres:]

Except for the historical information contained within, the matters discussed in this call may contain forward-looking statements that involve estimates, assumptions, risks and uncertainties. These risks are more specifically discussed in our Form 10-K filed with the SEC for the year ended December 31, 2008, and the Form 10-Q filed with the SEC for the quarter ended March 31, 2009. These forward-looking statements represent the company's judgment as of the date of this call. The company disclaims any obligation to update this forward-looking material. The matters discussed in this call may also contain certain non-GAAP financial measures such as funds from operations, FFO or FFO per share, funds available for distribution, FAD or FAD per share. A reconciliation of these measures to the most comparable GAAP financial measures may be found in the company's earnings press release for the first quarter ended March 31, 2009. The company's earnings press release, supplemental information, Form 10-Q and 10-K are available on the company's website.

[David R. Emery:]

We’re pleased to have completed another sound quarter. Occupancy rates, rental rates, and NOI have remained solid consistent with the company’s portfolio performance over the last year. Despite the sluggish economy, healthcare employment trends are still increasing and our core portfolio results continue to pose a deterioration seen in other sectors of the industry. Rental rate on renewals averaged 9.9% for the first quarter and occupancy remains steady at 91%. We certainly have not seen any washing away of our company’s pricing power. Regarding investments, our recent acquisitions are performing as we thought they would, and leasing at our new developments has shown excellent progress. Notably, the Kaiser lease in Colorado Springs is certainly a dull weather tenant that would attract complement reposition practices. Kaiser is Colorado’s oldest and largest group practice providing healthcare in a network of 219 primary care physicians and 534 specialists in Colorado Springs. In fact, we are already in discussions about expanding their space. There is no predictable pattern to leasing, and sometimes our assumptions for facility stabilization can change; for instance, our development on Baylor’s downtown campus is now estimated to stabilize about a year ahead of the original schedule. Currently, the completed development that are being stabilized but are less than 50% leased comprised only 3% of the company’s portfolio. With most of our developments now slated for completion over the next year and given that we expect more opportunities for acquisition on the horizon, it is important to continue our focus on sources of funding which could impact future growth. To enhance liquidity, management has initiated offerings on secured financing from about $150 million to $250 million on existing assets. We expect to close on these financings by the third quarter. In recent weeks, credit markets have begun to improve with unsecured bond credit have been tightened dramatically, hopefully a catalyst for improvement in the equity markets in the months to come. Lastly, since December, we have had ongoing dialogue with participants and others concerning the renewal of our bank credit facility. We are pleased with their indications and anticipate a well executed renewal of the facility later this year. Our conservative stance and simple capital structure have served us well over time, and we are reassured by our core fundamentals and the strength that the company has shown in renewing leases, securing acquisitions, and completing development. It seems at this time that in the months ahead there could well be a return to normalcy in the capital markets and a more favorable backdrop for executing the company’s long-term strategy and maintaining its low business risk profile. Now, I’d like to ask Ms. Mancini to give us an update on the trends in healthcare as most of you know there’s been a lot into press regarding healthcare in recent months.

[Bethany Mancini:]

Hospital companies continue to report favorable operating fundamental. First quarter results have been in line with expectations or better as higher revenues and cost control efforts resulted in expanding profit margins. With relatively flat inpatient volumes, companies remain focused on retaining and recruiting physicians to improve admissions and enhance revenue growth from outpatient services. Despite positive first quarter results, hospital company management teams remain cautious in the face of the difficult economy, the potential for lagging effects from higher unemployment on patient volumes and bad debt expense, and uncertainties surrounding healthcare reform initiatives in Congress. Headlines have reported series of declining volumes from patients foregoing elective procedures. While elective care may decline in the near term, physicians serve most importantly as the front door to the hospital. The first stops were the 117 people per thousand were admitted to the hospital every year, a number which has remained relatively constant regardless of economic cycle. We believe Healthcare Realty’s medical office facility will continue to serve a strategic role on hospital campuses, particularly as health systems enhance their physician recruitment and outpatient initiatives while looking to preserve capital through investment partnerships. We also view historical and current trends in healthcare employment as further evidence of the stable fundamentals of healthcare real estate and physician office investments in particular during economic recession. The economy as a whole locked 539,000 non-farm jobs in April, increasing the national unemployment rate to 8.9%. While other real estate sectors are seeing occupancies decline as unemployment rises, overall healthcare employment increased in April by 16,800 jobs and medical office occupancy remains stable. The majority of this growth came from ambulatory healthcare services including physician offices which added 2200 workers. We would expect that even with some impact on providers operations as the result of the recession, healthcare should remain a profitable, largely need driven business and essential and growing part of our economy. Uncertainty remains, however, from the changes to our healthcare system that have been considered on Capitol Hill during the first quarter and the $633 billion special reserve fund for healthcare reform included in the proposals for the 2010 federal budget which offer little specifics as to neither the benefits to healthcare providers nor the means to finance the cost. Congress is expected to consider a health reform bill later this summer that should include items such as the creation of an insurance exchange market, a cap on the tax deductibility of health benefits, physician payments focused on primary care, mandate for health insurance, and possibly a federally funded insurance option to compete with private insurers. The questions remain how the cost of these initiatives will be financed if Congress will change the 2010 Medicare payment update to providers and that some providers will benefit at the cost of other providers. So far, Congress has not seemed willing to cut spending and will most likely be involved now in their expansion of government healthcare spending with the voluntary proposal announced yesterday by healthcare industry groups to lower international spending growth by 1.5% per year, even though the proposal was not a guarantee that can be budgeted. Strategically, the proposal places these healthcare groups inside the reform process with the hope of keeping Congress from restricting their profitability as they consider ways to pass universal healthcare. The CMS recently proposed through its usual regulatory process the 2010 update to Medicare rate for inpatient rehab facilities as expected out of positive 2.6% and for acute care hospitals which came in more negative that line is 0.5%. Congress may change these rates and reform legislation and it is widely expected that they will also address the 21% formulated cut to physician payments that CMS will propose later this year most likely with another 1 to 2-year fix the Congress has stated would not need to be offset by cuts in payments to other providers. In the end, it is considered fairly probable that healthcare reforms should be a net positive to providers over the long-term because of the addition of funds to the healthcare system estimated to be approximately $122 billion to cover the $48 million uninsured. Reforms should continue to support the private health insurance market and allow providers to benefit from less uncompensated care and increase their services to an aging population in the future. We expect medical office and outpatient real estate to continue to be attractive to investors for its private pay characteristics and positive healthcare fundamentals, and if healthcare services improve with technology and heightened patient demand and both public and private payers emphasize lower cost settings, we anticipate Healthcare Realty’s outpatient facilities and new development will remain vital to hospital systems growth strategy.

[David R. Emery:]

Now, I’d like to ask Mr. Holmes to give an overview of the numbers and comment on other financial activities.

[Scott W. Holmes:]

The company’s Form 10-Q which contains financial statements and related foot notes and management’s discussion and analysis of the results of operations, liquidity capital resources and other matters was filed yesterday afternoon, and at the same time, information was furnished on the Form 8-K to supplement the Form 10-Q disclosures, specifically regarding real estate investments, construction in progress and developments, lease maturities, joint venture investments, same facility growth, and other corporate information. I would also like to point out that yesterday afternoon, concurrent with the earnings release and filing of the Form 10-Q, the company issued a press release regarding the dividend for the first quarter of 2009 and included a GAAP statement of cash flows to disclose dividend coverage and thereby eliminate the ambiguity of commonly used but diversely defined metrics such as the AFFO measures. FFO per diluted share for the first quarter of 2009 competed according to the NAREIT definition was $0.43. Before one unusual item, FFO per diluted share was $0.38. The unusual item relates to a $2.7 million non-recurring, non-cash re-measurement gain on the company’s investment upon acquiring the remaining interest in a joint venture. This gain results from the application of SFAS restatement 141R that requires the re-measurement to fair value of any prior interest in an acquired business. FAD per diluted share for the first quarter of 2009 was $0.41. Before one unusual item, FAD per diluted share was $0.45. The long-time cash payment of a partial settlement of the pension liability in the amount of $2.3 million caused FAD to be lower. A reconciliation of all items included in the calculation of FAD for the quarter as well as a reconciliation of FFO can be found on the last page of the earnings press release furnished yesterday afternoon. One additional item to note regarding first quarter operations is that G&A was a bit higher than normal. I commented last quarter that in the first quarter of each year G&A tends to be higher than average because of expenses related to year-end reporting and the required annual non-cash charge under FASB statement 123R or the employee stock purchase plan. For the remainder of 2009, average quarterly G&A is anticipated to be in the range of about $6 million and will fluctuate from quarter to quarter. A more complete discussion of operating results can be found in management’s discussion and analysis of the results of operations included in the Form 10-Q filed yesterday afternoon. For the first quarter, portfolio operating results continued to show no cause for concern with respect to the potential impacts of this difficult economy. The three leading indicators of trouble in our business would be lower occupancy, increasing delinquencies, or erosion in renewal rental rates. The company has not experienced an increase in vacancy nor any increases in its rents receivable from tenants and rental rates on renewing leases increased again in the first quarter. We credit these results to the unique nature of medical office space and tenant diversity with the average tenant lease being just over 4000 square feet. However, the company’s interest expense will increase measurably over the coming months as the unsecured credit facility is renewed or turned down at higher interest rates. Even with operating fundamentals soundly in place, this increase in the cost of borrowed funds combined with an increase in shares outstanding should equity be raised will impact earnings. We will have more clarity in the coming months regarding the outcome of these matters. Regarding the balance sheet, capital structure, and access to capital markets, at March 31, 2009, the company’s leverage ratio was 44.5%. The company maintains a simple but strong capital structure and remains in compliance with all debt covenants. In the capital markets environment today in contrast to a quarter ago, the company believes there are now several available options for dealing with the outstanding balance on the unsecured credit facility and future maturities. The equity and debt markets are open to REITS. There have been a number of successful equity offerings in recent months, and we believe that the stronger REITS will enter the unsecured debt market given the dramatic improvement in investor demand within the past few weeks. Both high-grade and high-yield issuers have been active in the debt markets with order books typically accumulating to many multiples of the proposed offering side and with tighter spreads. We have observed that secondary market trades in recent debt issues have tightened further since the issuances occurred and continue to tighten. The unsecured debt market is now clearly a viable option, and to term out the company’s unsecured credit facility, will provide funding for the accretive investments. In addition to the open equity and public debt markets, the private secured debt market continues to be a vibrant alternative capital source. The company began a secured debt initiative during the first quarter of this year and worked continuously on that effort. As a reminder, the company has very little secured debt to day and has nearly $2 billion of unencumbered real estate properties in its portfolio. Feedback from potential secured lenders has been enthusiastic and positive and commitments are due within the next several weeks. We see the potential for borrowing on a secured basis in the range of $150 million to $250 million depending on the company’s capital needs and pricing. Regarding the renewal of the unsecured bank credit facility that matures January 2010, at March 31st, the balance outstanding was $325 million. The company held a meeting last December with its bank group and fixed potential new bank participants to discuss company progress and plans and the future renewal of the facility. Feedback from the banks has continued to be positive and management has had regular and consistent dialogue with the banks. Year-to-date management has had more than 60 meetings or telephone calls with the banks to keep a finger on the pulse of the market. These continual discussions have reinforced our view that pricing and conditions have been gradually improving. We will keep evaluating the right size for our secured credit facility and expect to renew it in the coming months. The company has no other near-term debt maturities with its senior notes maturing in 2011 and 2014. Our conservative stance and simple capital structure continued to service well. That concludes my prepared comments.

[David R. Emery:]

Now, I’d like to turn it over to Mr. Whitman to give more specific information on recent investments and development activities.

[B. Douglas Whitman:]

Before I provide an update on our acquisition and development activity, I would like to comment on property level operations. Our portfolio of outpatient medical facilities has again this quarter shown both resiliency and growth. While this may sound atypical for a real estate company during the current recession, we believe it is further evidence of the non-fundable nature about patient medical facilities; the statistic for our first quarter operations demonstrate this. For the quarter, the occupancy rate of our stabilized properties remained steady at 91%. Compared to the first quarter of 2008, our same-store NOI for master leased properties increased by 3% and by 2.6% for our owned and managed facilities. Our focus on increasing revenues at our properties continues to yield results. As I noted on the previous call, the weighted average of rental rate increase upon renewal in our multi-tenanted properties for the previous 10 quarters was 6.4%. With a very strong leasing effort in the first quarter, that number jumps to an average of 6.9% per quarter over the past 11 quarters. Over the past 4 quarters alone, we have signed lease renewals but have a weighted average increase of 9% per quarter. Because of this ability to push rental rate even during a recession, we view the remaining leases coming up for renewal as an opportunity and not a liability. This potential to renew leases at higher rates is also why we see the expiration of master leases and property operating agreements has only temporary revenue setback. One-third of the expiring master lease square footage either has or will renew this year at favorable rates, an 60% of expiring master leases are actually multi-tenanted properties where the company will simply assume the existing sub-leases. As these multi-tenanted master lease properties were empty multi-tenanted master lease properties, the underlying occupancy is over 85%, so the properties will not go dark and we will have a chance to recover any discrepancy between the master lease rate and sub-lease rate upon renewal of the sub-leases. Having nearly 70% of our properties on or adjacent to a hospital, having 88% of our investments in outpatient facilities and having an average tenant size of only 4100 square feet provides us with stable asset where we have the ability to increase revenues. This quarter is a great example of that. Now, some comments on our acquisition activity

[David R. Emery:]

Operator, I think we’re ready to open the call for questions.

[Operator:]

(Operator Instructions). Our first question will come from Jerry Doctrow - Stifel Nicolaus & Co.

[Jerry Doctrow:]

Doug I was wondering on the acquisitions and maybe some of the dispositions which I don’t think you touched on, if we can get a feel for the tap rates that the deals are being done on?

[B. Douglas Whitman:]

On the acquisition side these are generally being done in the 8% range, some of them a little bit higher, 8% to 8.5%. On the dispositions, I’ll have to check on that and get back with you. I think they’re generally going to be around market, but I’d like to double check that for you.

[Jerry Doctrow:]

Market would be that 8% to 8.5% is what you’re thinking if this market fee stays?

[B. Douglas Whitman:]

Yes.

[Jerry Doctrow:]

I think this has popped up before, but just wanted to get a little more color on the payout on the pension; I think that’s gone on for a couple of quarter, and maybe if you can just clarify the accounting treatment; I think like a million dollars was in G&A if I remember and then there is an additional charge in the cash flow which you have taken out of FAD, but if you can just clarify that and the background on it.

[Scott W. Holmes:]

During the fourth quarter we reached an agreement for curtailment partial settlement of the pension plan which caps out the maximum amount of benefits to be paid out and the payment was scheduled for the first quarter and not in the fourth quarter and this goes back to IRS rules. So, the payment was actually made in the first quarter which does two things; one it affects pension expense for the quarter and for future quarter and then the other is that it gets recorded as a curtailment and partial settlement in the first quarter. So, what you will expect to see going forward is the pension expense will be reduced to a lower level, we’ll still have pension expense of course because pension plan is still in place and it still will provide benefits, but just a capped amount. The pension expense will be lower going forward and the payment occurred in January of this quarter.

[Jerry Doctrow:]

That’s the $2.3 million. So, in G&A, is there like a million for pension expenses or something and that will gradually go down over time?

[David R. Emery:]

No, in G&A, there was around a million dollar expense offset by a decrease in pension expense. There was a million dollars related to the curtailment settlement offset by about $600,000 of old pension expense. The lower pension expense will go forward, but the rest of it will not.

[Jerry Doctrow:]

So, that’ll be one of those things that moves G&A just down a little bit as you suggest in Q4?

[David R. Emery:]

That’s correct.

[Jerry Doctrow:]

You talk obviously about capital markets improvements improving and we’re certainly seeing dramatic moves, certainly in the bond markets even more than the stock markets; it sounded like you’re going to proceed with the secure debt financing and then seemed to suggest that you were looking harder, maybe at those unsecured and perhaps comment; I was just wondering if you could maybe give us anymore color on how you were thinking about the markets and what the priority might be or what some of the triggering of that might be that would move you one way or the other?

[Scott W. Holmes:]

Jerry, it’s like a prophecy, and otherwise it’s hard to really know exactly what is going on. I think you have heard me say that I have felt that time is an issue or size here that I think as we tend to work ourselves through more of not necessarily recession as much as financial panic, I think things tend to return to normal. I don’t think anybody suspected that we would have the dramatic improvement in the bond rate just in the last three weeks, I guess. I think you’re beginning to see the lead names like Simon printed a 5-year deal yesterday that was upsized to yield 7%, and of course, that’s a leading name and is indicative of the marketplace. From a recession or credit standpoint, it’s also a large shopping center organization, but a stellar organization. So, to some degree I think it’s going to take some time for those things to settle themselves out as far as timing, and otherwise, I can’t really predict if it continues to improve, the levels tend to get close to what banks might be asking for revolving credit facilities. So, I don’t really have an answer; it’s just a day-to-day, week-to-week, and if it presents itself to get good long-term opportunity to term out the bank credit facility or to provide dry powder for lower acquisitions, as you’ve heard me say, those folks have got full inboxes as far as investment opportunities themselves. Right now it’s just a hotchpotch of opportunities and capital costs and those things.

[Jerry Doctrow:]

Overall, your debt level is showing a little higher than it was historically; so at some point, you would think about maybe cutting back to the equity market.

[Scott W. Holmes:]

I think over time we’ve always done that and that’s again a balancing effect; I am no sage on the markets, but usually the debt markets doing what they’ve done is usually a precursor to equities to follow, but there’s still a lot of noise around the world; events, headline risks, and all those kind of things, but certainly there’s been a dramatic move and I don’t think that’s again linear and it’s going to continue to go up and that rig stocks are going up another 50% by July 4th, but at least it’s headed in the positive direction, and I think to some degree, one of those benefits I think from investments that we have is that there really has not been any overbuilding in the MOB space, basically in any space; so I think the dynamics on the other side here of excess to capital markets is going to be; those of who have access are going to have investment opportunity because I think the individual developer or builder thing is probably still several years or at least a couple of years out as far as access is concerned. So, if the markets would cooperate, I think we should see opportunity for accretive investments and then you have to layer all that on tope of maturity and opportunity.

[Operator:]

Our next question comes from the line of Rosemary Pugh - Green Street Advisors.

[Rosemary Pugh:]

In the 10-Q that you released yesterday you reported that you reached a settlement with HealthSouth regarding a lawsuit, and as part of this settlement you agreed to purchase a new inpatient rehabilitation facility for HealthSouth to lease and to modify the terms of several existing leases, and I wonder if you could elaborate a little bit on those modified terms and the impact on NOI? Also, if you could talk a little bit more about that inpatient rehabilitation facility that you’re going to purchase.

[David R. Emery:]

The inpatient rehabilitation facility is located in Arizona is a to-be developed one. HealthSouth is having it developed and it should be completed later this year and we will acquire it upon its completion. So, I think that’s a third or fourth quarter acquisition and we’ll match or lease it back to HealthSouth.

[Rosemary Pugh:]

What will be the yield on that lease?

[David R. Emery:]

I want to say it’s north of 9%, it’s about 9% to 10%.

[Rosemary Pugh:]

Can you elaborate on those lease terms that were modified?

[David R. Emery:]

Several leases were amended. For NOI purposes there was really no reduction in rent. It’s more non-financial stuff that was modified.

[Rosemary Pugh:]

For example; the term or…

[David R. Emery:]

Yes, the term and renewals and stuff like that.

[Rosemary Pugh:]

And I noticed that you have an inpatient rehabilitation facility that was sold in the second quarter in Michigan; was that to HealthSouth that you sold that property?

[David R. Emery:]

No, that was an inpatient psychiatric hospital and the operator purchased that facility in an effort to expand it.

[Rosemary Pugh:]

On a different topic, you mentioned last quarter that you had a certain amount of construction loans, and I wonder if you could disclose the total amount of constructions loans that you have outstanding?

[David R. Emery:]

That may be in the Q somewhere. I’m looking at Scott if he can track that down. The loans would have been converted to equity, the cancer center in Des Moines Island that I mentioned earlier, some of those loans would’ve been converted into equity.

[Rosemary Pugh:]

I noticed that you had part of it converted to a mortgage loan payable and I was wondering what the rate was on that?

[David R. Emery:]

8.5%.

[Rosemary Pugh:]

How much more in acquisitions will the joint venture be making out of this pipeline over the next two years?

[David R. Emery:]

There are some smaller acquisitions in the Des Moines area, and what you see from an acquisitions point of view there; as we’ve talked about before, there’s an outpatient campus that’s being developed adjacent to Mercy Health’s new hospital there. Collectively, there will be five or six buildings developed over the next couple of years. A couple more will be completed and come online in 2009. We’ve provided construction funding for those and upon completion of those facilities, and they’re already 80% to 90% pre-leased, we will then take ownership of those through the joint venture. In aggregate that full outpatient campus is about $70 million.

[Operator:]

Our next question comes from the line of Robert Mains - Morgan, Keegan & Co.

[Robert Mains:]

When you answered Jerry’s question you said that there’re more of an appetite; Healthcare Realty it sounds like for acquisitions than you’ve had for sometime. When you compare this story to the development project, is this strictly or mostly an assumption of pricing that was, you’ve spoken about this in the past, being unfavorable and recent years becoming more favorable or is there something about the development or the dynamics of development that has changed in your eyes?

[David R. Emery:]

Nothing happened to that standpoint. If you remember most of the development was initiated because of just getting out of the acquisition of buying MOBs at 6% or 6.5% cap rate. I think that specter of all those cap rates has vanished and so you get more of the variable between development and acquisitions has compressed dramatically. So, frankly I think the development that we’re doing we’ll continue to do those because they do provide a better return usually than existing properties, and so we don’t currently have more than one or two under consideration; mainly we see how the development, just what do we use our dry powder on and it looks like that probably the acquisition opportunities are going to be greater than the developing opportunities, but that’s not a change in philosophy Rob as far as where we need to invest money.

[Robert Mains:]

This is more of a dynamic in what’s going on in the acquisition market I guess.

[David R. Emery:]

Yes.

[Robert Mains:]

Scott, a couple of questions; sequentially I am assuming that the increase in master lease and property operating income, those are both mostly a function of the acquisitions?

[Scott W. Holmes:]

No, I think those are going to be more a function of rate increases.

[Robert Mains:]

When I get down to the managed properties operating expense, that was flat versus the third quarter; so you had some good margin expansion. Could you comment a little bit about what’s playing into the cost contained in there?

[Scott W. Holmes:]

The cost side of property operations tends to fluctuate from quarter to quarter to some extent where the revenue side is a lot predictable. There were some property tax catchups in Q1, there were some other catchups that took place in the fourth quarter that by comparison makes it look flat this quarter, so it’s just that kind of stuff. There is nothing systemic going on, Rob, in the property operations.

[Robert Mains:]

So we shouldn’t take the 8% or whatever increase and plug that in necessarily going forward?

[Scott W. Holmes:]

I wouldn’t do that. I would look at the average behavior between income and expense on property operations.

[Robert Mains:]

So, some sort of medium there?

[Scott W. Holmes:]

Yes.

[Operator:]

Our next question comes from the line of Todd Stender - Keefe, Bruyette & Woods.

[Todd Stender:]

In the past you’ve stated that there are certain states that you choose over others to invest just based on them being more doctor-friendly or for various other reasons. Given the current credit pressures right now, has that mix of states changed at all?

[David R. Emery:]

Credit pressures for us or for the hospitals or what?

[Todd Stender:]

Just the current market for borrowing right now?

[David R. Emery:]

For us or for the hospitals?

[Todd Stender:]

For you guys.

[David R. Emery:]

No, not really. I’d say demographics have taken precedence. We tend to build facilities where there are more and more people because where there are people they get ill and see their physicians at fairly constant rate, so instead of following the money, we just follow the people, and the ability to secure financing for our activities I don’t think has been too terribly challenged in the current environment, and so our investment opportunities that we see seems to be in areas that see solid long-term population growth.

[Todd Stender:]

Can you give any specifics in the disposition of those 5 facilities to the tenant that fell through?

[David R. Emery:]

Basically they were not able to execute the transaction as it needed to be. It had to do with the financing on those properties and make whole agreement and so forth, so they elected not to purchase the properties, and they were returned back to the portfolio.

[Todd Stender:]

How much of the portfolio is subject to purchase options?

[Scott W. Holmes:]

There is a disclosure on that in the Q; I don’t know if I can point you to it right now off the top of my head, but I will be happy to do that offline. The amount has come down considerably, and you’ll see that in the disclosure that’s in the Q.

[Operator:]

Our next question comes from the line of Michael Mueller - J.P. Morgan.

[Michael Mueller:]

Going back to Jerry’s question where you were talking about the trigger point for the equity, if you guys decided you like the stock price and you come back for equity, would that change necessarily the amount of secured debt that you guys envision raising? I think the number you threw out was $150 to $250, so would equity be in place of that or on top of that?

[Scott W. Holmes:]

I would say again going back to what the acquisition opportunities are and the size of that, I would say that would be additive.

[Michael Mueller:]

Sticking with acquisitions, can you give us a sense as to what you’re looking for Q2, Q3, Q4, and the balance of the year? What do you think a wide range of expectations could be in terms?

[David R. Emery:]

The best way to describe it is a lot, and you have different sizes of opportunities at different cap rates. To give you some color on that, we’re currently in the final selection process on something that’s $170 million that is related to a stellar health system. One of the issues there is pricing is obviously tighter on that than you would find on a 100,000 square foot MOB in some other city, so to some degree, it kind of boils down to the formula of accretion from the standpoint of cost of capital, etc., so to some degree, Mike, there’s a lot of opportunity, but again it depends upon on where it is, what it is, etc., but I would say there’s at least $200-$300 million of opportunity.

[Michael Mueller:]

If none of those would hit, do you think equity would come off the table at that point then, or you would still look at it from a bigger balance sheet positioning standpoint and consider it?

[David R. Emery:]

I don’t know that everything is that necessarily connected, but to some degree we always need to a balance of debt to gross assets and all of those kind of things, so there are just so many components to that. I don’t know there’s necessarily disconnected to acquisitions. If we thought that there was an opportunity in the equity and we saw an upswing in the opportunity to make accretive investments, then we might do that ahead of even the investment opportunity. I think we always want to try to keep dry powder. I think we’ve been fortunate from the standpoint of operations and co-operations that we haven’t been fighting dilution on several fronts as others may have, and so the fact that our renewal rates here in the first quarter were 9.9% is a clear indication that we have pricing power and that the opportunities to invest are probably in properties with good opportunities, so hopefully we’ll be able to just like the example I gave you on large offering and the final people in that, there’s just as many people stirring on that as there once was, and so to some degree, that gives you a little bit of pricing power among the smaller universe of potential buyers.

[Michael Mueller:]

So it sounds like if something like that would come through, you’re potentially looking at an equity raise that could be in excess of the size from the last deal?

[David R. Emery:]

Yes. We did something then, and that was kind of related. In the offering at that point of time, we had the Carolinas transaction which I think was $163 million, but the use of equity and equity raise is a component of balancing and dry powder as much as it is of anything, and it depends upon whether the capital markets seeming to open, particularly on the unsecured front, and how much dry powder do you want and what component do you want to have it in, and the bank revolver credit facility historically has always been the cheapest, but since banks are trying to earn their way out of the chasm that they are in, it seems like the revolving credit facility cost can get close to what long-term unsecured cost is. We’ll just continue to balance that. There’s really no easy answer to it. We’d like to have a very clear picture, but it’s kind of hard to formulate right now.

[Michael Mueller:]

On the credit line, Scott, do you think that could be re-cast mid year or are you looking at the end of the year? Any sort of timeframe we should think of?

[Scott W. Holmes:]

I would think midyear. I don’t think we would want to wait till the end of the year considering the maturity is in January, but midyear probably makes sense.

[Michael Mueller:]

For the master leases, not the third that are being renewed but the balance of them, is there a sense and I think you mentioned the occupancy of about 85%, is there a sense that the short-term NOI leakage or shortfall is very minor at this point, or can you give us any color as to where those things actually burn off, number one; what’s the time, and is it material?

[David R. Emery:]

They burn off throughout 2009, and given the relatively small amount compared to the overall portfolio size, it’s not a huge number.

[Scott W. Holmes:]

If you were to have asked me Todd Stender’s question about purchase options, I would have answered that the company had a gross investment of about $107 million in real estate properties that were subject to outstanding exercisable contractual options. Many of those have been outstanding for some period of time and have not been exercised, the probability is fairly low, but they will be, but that’s the number and that’s how I would’ve answered your question.

[Operator:]

Our next question comes from the line of Omotayo Okusanya - UBS.

[Omotayo Okusanya:]

The secured financing you’re expecting over the next few quarters, could you give us a sense of what kind of rates you’re expecting?

[Scott W. Holmes:]

7%.

[Omotayo Okusanya:]

With the line of credit, Scott, I believe the last time we met you had talked about a high probability that the size of the line would get reduced but was unsure about by what amount, do you have a better guess or sense in regards to how much the capacity could be reduced going forward?

[Scott W. Holmes:]

No, and I wouldn’t necessarily assume that it will be reduced. Just to give you a little update on that, our various meetings and we’ve had many of them with the banks were to understand the market, and the sentiment of our banks and banks that both in our syndicate and not in our syndicate and what’s their sentiment toward our renewal, of the 10 banks that are in our facility, none of those have signaled and intent to pass on our renewal and none has indicated an intent to downsize their commitment. Several have indicated that they might upsize their commitment. In addition to that, there are three banks outside of our current facility that have indicated an intent to commit new money to the facility when we renew. So I think the size will be at our option. The question that we’re asking ourselves is what is the right size for our facility and do we want to keep it at the current $400 million level with the related fees and so forth or would we want to consider dropping that down somewhat, and we haven’t reached a conclusion on that, but either of those would be an option.

[Operator:]

Our next question comes from the line of David Aubuchon - Robert W. Baird & Co.

[David Aubuchon:]

I know you talked about the purchase options, but in general, are asset sales any consideration when you think about your capital raising options?

[Scott W. Holmes:]

We might have one-offs now and then for particular reasons related to a specific property, but not as a source of capital.

[David R. Emery:]

Dave, most of that from the standpoint of those, if you buy these larger portfolios, with these hospitals, sometimes you wind up with cats and dogs. If we’ve got assets that we bought that have good year over year NOI growth and the ability to renew rents, we certainly don’t want to sell those for any reason just to raise capital.

[David Aubuchon:]

Right, but right now, you don’t see anything that would be significant?

[David R. Emery:]

No.

[David Aubuchon:]

The NOI that you report on the assets that are in stabilization went down sequentially. Was that just related I’m assuming to seasonal operating expenses?

[Scott W. Holmes:]

I think that’s probably the best explanation.

[David R. Emery:]

And some of the property tax cuts also that Scott referenced and some other seasonal items.

[David Aubuchon:]

David, you mentioned the Kaiser leasing in Coral Springs. What was the size of that and if you could maybe amplify a little bit your comments regarding their potential desire to expand further?

[David R. Emery:]

To some degree, Kaiser in that market is really kind of upscaling their intent there. To some degree, they have an affiliation with the Memorial Healthcare System which is the largest healthcare system in Colorado Springs. You may remember that Colorado Springs development is across the street from Memorial, so to some degree I think we were obviously as we said many times it’s all about location, location, location, and so to some degree I think they made the commitment to come there. They have other offices and facilities in the market already, and shortly after we finished their initial requirement, we have already been involved in discussions for maybe as much space as double their current lease. I think the lease was a little over 20,000 feet that they signed, so the nice thing about Kaiser is that with the primary care emphasis, there is a real impetus for specialties to want to locate adjacent and contiguous and that kind of stuff just because of patient flow and referrals, so it’s an absolute fabulous opportunity for us in that particular development, and again we didn’t get there except by the fact that we were diligent in where we were going to be in location and market and that kind of stuff, and so a lot of times we found on these MOBs you just need to get the door open and let everybody kind of see where you are and what you are, and to some degree, it happens. You’re familiar with Kaiser. I think they’re the country’s largest not-for-profit health clinical system, so it’s really good for us, and we’re really excited about it.

[David Aubuchon:]

I think Scott it was you that mentioned that you’re not seeing much bad debt, and I realize it’s small, but it did tick up a little bit from last year in this quarter. Do you still feel fairly comfortable about that line?

[Scott W. Holmes:]

The bad debt expense that we had this time is not base rental rate related. It has to do with an OER accrual on our Hawaii properties, and it’s a one-time thing, so it’s not indicative of any trend with the physician tenants or base rents. So yes, I’m still comfortable with that trend.

[David Aubuchon:]

So it was related to the Hawaii development asset?

[Scott W. Holmes:]

No, other properties that we have in Hawaii.

[Operator:]

We have a followup question from Jerry Doctrow - Stifel Nicolaus & Co.

[Jerry Doctrow:]

On the development properties, I was curious as to what renal rates you’re getting and if you have a trend line in there? It may vary some state by state, but just a sense of what you have.

[David R. Emery:]

Jerry, we don’t see anything that’s much off the mark on what our projections are. There’s no really economic influence. You’ve heard me say it. I can’t believe with the recession that we have that it wouldn’t have some effect, but right now, we’re not really seeing that with the activity we’ve had. Again, it gets back to the basics. If you’ve got the right location, you’ve got the pricing power.

[Jerry Doctrow:]

Where about are you on per square foot?

[Scott W. Holmes:]

Other than Hawaii which has its own lease rate structure, the other ones are in the mid 20s per square foot.

[Operator:]

We show no further questions at this time.

[David R. Emery:]

We appreciate everyone being on the call, and we’ll be around over the next 2 to 3 days if somebody has any followup questions, and operator, we appreciate your assistance.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.