Healthpeak Properties Inc (PEAK) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2009 HCP earnings conference call. I'll be your call coordinator today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward then of this conference. (Operator Instructions). As a reminder this conference is being recorded for replay purposes. Now I would now like to turn the presentation over to your host for today's conference, Mr. Ed Henning, HCP's Executive Vice President and general counsel. You may go ahead, sir.

Thank you, Chanel. Good afternoon and good morning. Some of the statements made during this conference call contain forward-looking statements. These statements are made as of today's date, reflect the Company's good faith beliefs and best judgment based upon currently available information, and are subject to risks, uncertainties, and assumptions that are described from time to time in the Company's press releases and SEC filings. Forward-looking statements are not guarantees of future performance. Some of these statements may include projections of financial measures that may not be updated until the next earnings announcement or at all. Events prior to the Company's next earnings announcement could render the forward-looking statements untrue and the Company expressly disclaims any obligation to update earlier statements as a result of new information.

Additionally, certain non-GAAP financial measures will be discussed during the course of this call. We have provided reconciliations of these measures to the most comparable GAAP measures, as well as certain related disclosures, in our supplemental information package and earnings release, each of which has been furnished to the SEC today and is available on our website at www.hcpi.com.

I'll now turn the call over to our Chairman and CEO, Jay

Thanks, Ed, and welcome, everyone. HCP had a strong quarter, with each of our five property sectors contributing to an overall same-property performance of plus 4.7%. Our leverage metrics are in terrific shape, and are now superior to the levels prior to the start of our strategic repositioning activity in 2005. Last night we announced an accretive add-on investment in the Propco debt of HCR ManorCare. As a result of these successes we are raising our 2009 FFO guidance. Joining me today are Executive Vice President and Chief Financial Officer, Tom Herzog, and Executive Vice President and Chief Investment Officer, Paul Gallagher. Let me start things off by turning the call over for the first time ever to Tom Herzog, who will take you through our second-quarter results. Tom?

Thank you, Jay. There are several key items I will cover today. First, as Jay mentioned, yesterday we closed an accretive $590 million investment in the most senior traunch of HCR ManorCare's mortgage debt. Second, for the second quarter we reported FFO of $0.55 per share and $0.57 per share before impairment charges. Third, we continue to strengthen our balance sheet and closed out the quarter with our financial leverage ratio at a new four-year low of 44%, and our adjusted debt service coverage improved to 2.6 times for the second quarter. Fourth, our FFO guidance for the full-year 2009 was increased $0.06 per share as a result of our accretive investment in ManorCare. And lastly, we streamlined and enhanced our supplemental package.

First, our new ManorCare investment. Yesterday we purchased a $720 million participation in the first mortgage debt of HCR ManorCare at an 18% discount to par. The investment represents 45% of the $1.6 billion most senior traunch of HCR ManorCare's mortgage debt ,which bears interest at LIBOR plus 125 basis points. The mortgage debt investment matures in January, 2013, inclusive of a one-year extension available at the borrower's option, and is secured by a first lien on 331 skilled nursing facilities located in 30 states.

In connection with this investment we obtained $425 million of favorable financing. The purchase resulted in a net cash payment by HCP of $165 million, which in the near term will be funded on our revolver. We have estimated an effective unlevered internal rate of return of approximately 13%, inclusive of the benefit of the favorable financing. Despite the 72% favorable financing included in this transaction, in the near term we expect to manage the capitalization of our balance sheet to roughly maintain our quarter-end financial leverage ratio of approximately 44%.

Second-quarter results. In Q2 we delivered FFO of $0.55 per share and $0.57 per share before impairment charges compared to $0.50 per share and $0.55 per share before impairment and merger-related charges for the second quarter of 2008. Three unusual items not included in our previous guidance, which together approximately offset, are as follows.

First, in connection with the previously-announced transition of 15 senior housing communities operated by Sunrise, we recognized an impairment charge of approximately $6 million, or $0.02 per share related to the intangible lease assets. Second, we recorded a favorable adjustment of approximately $6 million, or $0.02 per share related to the correct of purchase price allocation of certain assets acquired in 2006. Finally, we recognized rental income of approximately $1.5 million, or $0.005 per share from a single tenant life science facility. Our same-store property continued to perform well, producing a positive 4.7% year-over-year cash NOI growth during the second quarter versus the second quarter of 2008. Paul will review our performance by segment in a few minutes.

With respect to our investment and disposition activities. during the second quarter we funded $30 million of development and other tenant and capital improvements, primarily in our life science segment. Also during the quarter, we completed the sale of two hospitals, including the Los Gatos hospital, formerly operated by Tenant, generating an aggregate cash proceeds of $46 million and gains on sale of $31 million. Lastly, our aggregate mark-to-market on our marketable securities increased in value approximately $58 million during the quarter, principally driven by our HCA debt investment. This increase does not impact net GAAP income or FFO but rather is reported as an element of other comprehensive income in the consolidated statement of equity.

Now turning to our balance sheet. In May we completed a $440 million equity offering by issuing 20.7 million shares of common stock at $21.25 per share. The net proceeds from this offering totaled $422 million, of which $320 million was used to repay the remaining outstanding balance of our bridge loan with the remainder for general corporate purposes. We ended the quarter with an overall financial leverage ratio of 44% versus 48% at year-end 2008. Our unsecured leverage ratio improved to 46% from 51% at year end, and our 2Q '09 adjusted fixed charge coverage increased to 2.6 times from 2.3 times during the same period in the prior year. We are comfortably within all covenants of our credit agreements.

We continue to carefully assess the Company's floating rate exposure on both sides of the balance sheet. After retiring the floating rate bridge loan during the quarter, we entered into a fixed-to-float interest rate swap on $250 million of our debt in order to more closely balance our floating rate exposures. Floating rate debt represented approximately 13% of our total debt at quarter end, and continues to be reasonably match funded with our HCR ManorCare mezzanine investment. For the remainder of 2009 our debt maturities include only $70 million of mortgage obligations.

Our 2010 debt maturities of $505 million consist of $206 million of senior unsecured notes and $299 million of mortgage debt. We have numerous sources of capital to comfortably repay or refinance these debt maturities. At the end of the second quarter we had $50 million drawn on our $1.5 billion revolver, net of unrestricted cash. Our revolver matures in August, 2011.

Full-year 2009 guidance. We're increasing our 2009 reported FFO guidance to a range between $2.13 and $2.19 per share as a result of an increase of $0.06 per share due to our accretive add-on investment in ManorCare. Our 2009 preimpairment FFO equivalent is projected to range between $2.15 and $2.21 per share.

In addition to the $0.06 adjustment for ManorCare there were a number of moving parts considered in updating our full-year guidance so I'll take a moment to walk you through the revised assumptions. We continue to expect same-property growth to range between 2.5% and 3%. We incurred a -$0.02 per share related to lease intangible impairments offset by the favorable purchasing accounting adjustment of $0.02 per share described earlier. We expect a -$0.02 per share due to the projection of lower rents in our Sunrise portfolio offset by additional income of $0.02 per share in connection with the revenue recognition related to one life science facility. A -$0.02 per share related to G&A due to increased litigation costs, resulted in full-year G&A that is now expected to approximate $78 million to $80 million. The increase in G&A is offset by numerous other items representing a net positive impact of $0.02 per share. No additional acquisitions of real estate or debt investments and no contributions of assets into joint ventures and future impairments or similar charges, if any, are excluded.

A few words on our supplemental package. As you may have noticed, this quarter we streamlined and enhanced our supplemental package. Our objective was to improve the flow and content and include certain additional disclosures to help you better understand our Company. Numerous enhancements were made to the document including the following; weighted average interest rates by year for future debt maturities; financial covenants as defined under our line of credit agreement; shares outstanding of common stock and equivalents; quarterly year-over-year cash analyzed by segment; the location and date of our closed dispositions; development spend for each project under active construction; and we disaggregated the maturities of our debt investments from our operating leases. We also eliminated capitalized interest and interest accretion on debt investments from our supplemental cash flow investment on page 3.

We made this revision as we do not consider these items to be FAD adjustments on a normalized basis. However, the cap interest and interest accretion components remain available in the supplemental package in the investment and dispositions and owned portfolio summery schedules respectively. We believe you will find our retooled supplemental package helpful and informative.

I'll now turn the call over to Paul. Paul?

Thanks, Tom. Before I get into the details of each sector, I would like to address the rollover exposure in our total portfolio for the next few years. For the remainder of 2009 annualized revenues for expiring leases totaled only 3% of annualized revenue. 89% of this exposure rests in our MOB platform, which typically experiences 80% retention. For 2010 and 2011, the rollover exposure is 6.1% and 5.6% respectively, again with the majority of the exposure occurring in our MOB space. Now, let me address our specific sectors.

Senior housing. Occupancy for the second quarter for our same-store senior housing platform is 86.6%, representing a 110 basis points sequential decline over first quarter and a 280 basis point decline over the prior year. With the exception of our Sunrise portfolio we are seeing the rate of decline slow. Our Sunrise portfolio, while previously stable, experienced its single largest quarterly drop, declining 140 basis points to 88.1%. The decrease in occupancy is largely driven by the non-mansions where occupancy is 86%, while the mansion occupancy remains at 92.1%. As we have mentioned, most of our operators have and continue to demonstrate good operating flexibility as sequential same-property cash flow coverage is holding steady at 1.13 times. The decline over prior-year cash flow coverage of 1.2 is due to one-time Sunrise credits received last year and the current deterioration in the performance of Sunrise's non-mansions.

For our current quarter same-property performance results we will again need to separate out our Sunrise portfolio to provide a more accurate explanation of ACP's senior housing platform. Our non-Sunrise portfolio same-property performance increased 1.3%. For Sunrise, recall the first-quarter performance decreased 21.6%. Half of that drop was the result of LIBOR-based rents and insurance credits that were received in 2008. The remainder of the decline was due to certain Sunrise portfolios where cash payments were not received in the first quarter. Those payments, however, were received in the second quarter, resulting in a higher Sunrise same-property performance for the second quarter of 9.8%. Normalizing this result by netting out those first-quarter payments received in the second quarter, current quarter's same-property performance for Sunrise was down 3.3% and year-to-date same-property performance for Sunrise is down 6.3%.

On the Sunrise expense side, recall that we experienced positive signs that expense growth had slowed in the first quarter. Preliminary second-quarter data shows expense growth remains under control. However, we have seen a marked decrease in revenue growth, with the mansion revenue growth flat and non-mansion revenue growth increasing at a rate of only 1.5%. In June we announced the termination of Sunrise management contracts on our 15 EdenCare communities effective October 1st. The replacement operators for these communities have been identified, and the leases are close to being finalized. When completed, our Sunrise concentration decreases to 12%. The EdenCare termination follows the transition of the operations on our Orius portfolio from Sunrise to Emeritus in December of last year. Since the transition we have already experienced increases in revenue per occupied room of 4.9% and an increase in NOI margin of 280 basis points.

Hospitals. Same-property cash flow coverage was 4.4 times. Year-over-year same-property cash NOI for the second quarter declined 12.4%, primarily driven by short-term rent relief at our Irvine hospital as [Hogue] invests up to $40 million of their own funds to reposition the campus. Net of this, as well as another completed restructure of two rehab hospitals, our hospital NOI growth is flat. We have received notice from Tenant that they will not renew their lease at our Slidell Hospital when it expires in 2010. We are currently engaged in active negotiations with several potential replacement operators. As Tom mentioned, we completed the sale of our Los Gatos Hospital in the second quarter, realizing a substantial gain.

Skilled nursing. Our skilled nursing portfolio continues to perform well. Year-over-year NOI for the second quarter in our same-store portfolio increased by 4.1%, driven by contractual rent increases, with cash flow coverage increasing slightly to 1.6 times. With regard to our existing HCR ManorCare mezzanine investment the Company reported strong first quarter results lifting trailing trailing 12-month debt service coverage to 2.53 times, an increase of 41 basis points over the prior quarter. Approximately three-quarters of this increase was driven by a decline in debt service due to LIBOR, with the remainder driven by NOI increases as a result of higher acuity and positive rate growth.

Medical office buildings. For the current quarter same-property adjusted NOI was up 4% over the first quarter 2008. This growth was driven by increased base rents, continued success in our expense control initiatives, and future nonrate impact of operating support revenues. Our expense reduction initiatives resulted in a decrease in controllable operating expenses of $600,000 when compared to prior-year quarter. Our previously-discussed utility rate reduction at a portfolio of our Texas MOB's was effective for the second quarter, and combined with energy controls throughout the portfolio, resulted in a reduction of $230,000 in utility costs compared to the second quarter of 2008. We also received a lease termination fee of $714,000 at a Texas -- at a facility in Texas, which we have excluded from same-store results.

MOB occupancy for the first quarter was 90.7%, up from 90.5% at the end of the first quarter. During the second quarter, tenants representing 810,000 square feet took occupancy, of which 542,000 square feet related to previously-occupied space resulting in a retention rate of 79%. These renewals occurred at a 15.6% higher base rent. The significant increase was driven by the conversion of over 160,000 square feet from a net rate to a base-year structure. Absent this our mark-to-market increase was 3.6%. As of the end of the second quarter we have one million square feet of scheduled expirations remaining for the balance of 2009, including 340,000 square feet of month-to-month leases. Our pipeline remains strong, with 434,000 square feet of executed leases that have yet to commence and 465,000 square feet in active negotiations. During the quarter we moved one 38,000 square-foot MOB into redevelopment and sold two small condominium units in Virginia for $605,000, resulting in a nominal gain.

Life science. The life science second-quarter same-store cash NOI was up 16.2%, principally driven by increased occupancy and previously-executed mark-to-market rent increases. Occupancy for the entire life science portfolio was 91.1% at the end of the second quarter, down slightly from 91.4% at the end of the first quarter. As mentioned in our first-quarter call, we would anticipate that going forward renewal leases would most likely experience decrease in mark-to-market rent. Our approach has been simple, retain tenants. This has allowed us to maintain cash flow with no down time and little or no TI expenditure.

For the quarter we completed 349,000 square feet of leasing of which 310,000 square feet related to previously occupied space that was renewed at an average decline of 13.6%. This leasing activity represented a quarterly retention rate of nearly 98%, as we renewed 310,000 of the 317,000 square feet of near-term lease expirations, and in the process we retained quality tenants, such as Abbott Laboratories, Becton Dickinson and Infomatica. Our life science portfolio has limited lease expiration profile over the next two years. Lease expirations for the remainder of 2009 total 184,000 square feet and represent only 0.3% of HCP's annualized revenue. Looking at 2010 we have 274,000 square feet of expirations, which represent only 0.8% of HCP annualized revenue. Despite the general slowdown in tenant demand, HCP continues to pursue a pipeline of product of approximately 500,000 square feet for existing space. We have begun to see increased activity in the second quarter, as large institutional clients seek space to accommodate expansion needs or relocate functions.

Switching to our redevelopment and development activities. The pipeline remains unchanged, with our current development efforts aggregated approximately 515,000 square feet in the bay area and five buildings that are 49% pre-leased. These projects represent new construction on three buildings at our Oyster Point campus where Amgen has pre-leased two buildings and the redevelopment of two smaller projects where we are converting office buildings to life science use. We recently executed an LOI for one of these projects that, if converted to a lease, would bring the pre-lease percentage on the pipeline to nearly 53%. As we have discussed in the past calls, we continue to monitor the underlying credit and liquidity profile of our tenant base.

The composition of our tenant base is strong with approximately 87% of our rents coming from public companies or well-established private entities. From a liquidity standpoint life science tenants with less than 12 months of cash continue to represent 2% of HCP's base rent. The Biotech industry remains in its fifth funding drought since the 1980's and the IPO market has been shut for four quarters. Despite the current climate, our early stage companies have recently experienced an uptick in funding. These early stage companies have raised over $315 million in the second quarter from multiple sources, including public equity, venture capital, and strategic alliances, up significantly from the $125 million in the first quarter.

With that review of HCP's portfolio I'd like to turn it back to Jay.

Thanks, Paul. HCP's diversified portfolio experienced broad-based momentum. In hospitals, our two largest operators, HCA and Tenant, both preannounced upside earning surprises last week and have raised substantial funds in the high-yield markets. Cash flow coverage for HCP's hospital portfolio now stands at a frothy 4.4 times, reflecting the success of the restructuring activities we completed last year. Confirming the market's strong acceptance for the hospital sector is the price movement in our HCA toggle notes, which have increased from the December 31st price of $78 to a price of $104 this morning. This represents an aggregate increase of $70 million in value for HCP's shareholders. Last Friday's positive reimbursement news from CMS should further improve operating results going forward for the hospital sector.

The skilled nursing sector continues to perform exceptionally well, and our cash flow coverages now provide for more than adequate cushion for any potential reimbursement pressure resulting from pending healthcare reform. In life sciences, we have had a successful run of good news, resulting in exceptional real estate performance for HCP and positive operating results from our tenants. Roche, Genentech, Amgen, and NuVasive continue to produce superior earnings results, while Tenant's Cytokinetics, Exelixis and [SanGuard] all achieved significant fund-raising milestones during the quarter. In fact, July, 2009, was the best month of announced partnering and financing activity for the biotech industry in several years. MOB's, our most defensive sector, produced a solid 4% same-property performance gain and experienced a 20-basis point increase in occupancy.

Our senior housing portfolio, the sector most exposed to the nation's currents economic headwinds, managed a positive same-profit performance and held cash flow coverages constant after exclusion of the Sunrise communities. Last night, Brookdale reported strong operating results for their second quarter. Clearly HCP's strategic moves of the past three-plus years have successfully created a uniquely diversified healthcare real estate portfolio and, despite being eight quarters into the great recession, have generated outperformance.

Pimko's 2009 investment outlook articulated their view of a winning investment strategy for the period ahead. And I'll quote, "Stable and secure income are the order of the day. Shaking hands with the new government is still the prescribed strategy, although it should be done at a senior level of the balance sheet." Two weeks ago on Conan (inaudible) July 23rd earnings conference call they stated that "The opportunity for well-capitalized REITs to acquire high-quality bank loans at attractive prices has never been better." Combining these two investment insights we present exhibit A. HCP's acquisition of a $720 million first mortgage interest in HCR ManorCares propco. Being positioned in the zero to 30% loan-to-cost slice of HCR ManorCare's capital stack is good. Having security in the first mortgage interests of the premiere skilled nursing portfolio in the country is even better. Realizing a 13% unlevered IRR on such an investment is the best. This investment had a trailing 12 months debt service coverage ratio of ten times. For the first quarter of 2009, this investment had a debt service coverage ratio of 21 times. Companywide, HCR ManorCare's quarter -over-quarter NOI increased 20% for the period ended June 30. Opco is currently sitting on $400 million of cash with $485 million of its original $700 million term loan outstanding and has just $85 million of net debt. For the two years actual and projected through the remainder this year, their property level performance has increased 18%. Not bad for 19 months' work.

As it relates to our existing mezzanine loan investment, the trailing 12-months and first-quarter debt service coverage ratios were 2.5 times and 4.2 times respectively. Said another way, if you were to envision our mezzanine investment as a doughnut, it would certainly be a juicy, jelly doughnut and a golden one at that. We have now bookended Propco with 100% ownership of the 66% to 85% loan-to-cost mezzanine debt slice and a 45% ownership and control block of the zero to 30% loan-to-cost first mortgage debt. Taken together we own the 37% of the debt of Propco. HCP's tactical add-on investment will enhance our options of this strategic holding in the period of healthcare reform ahead.

With that, Paul, Tom and I would be delighted to take any questions you might have. Chanel?

(Operator Instructions). Your first question comes from the line of Sheryl Skolnick with CRT Capital Group.

Good morning and thank you very much and congratulations on all of the strategic initiatives you've pursued, et cetera. I guess with where I'm coming out on this is, in view of the deterioration in the Sunrise portfolio and the opposite results from Brookdale, I'm wondering if you would comment on your comments, Jay, from the last quarter, which were that you saw tremendous opportunity to invest in the properties in the assisted living area given the fact that no new capacity is coming on line, given the fact that senior -- we are all aging and the seniors are aging even more so, so that perhaps coming out of this great recession the Company might be better positioned. In view of the second-quarter results from these companies you've seen to date, are you still of like mind?

Yes. Probably -- first off let me welcome to our quarterly kumbaya, it's nice to have you participate, Sheryl.

Thank you very much, pleasure to be here.

Yes, if anything we're probably more emboldened. Again, just to review our earlier comments from this year. If you compare where we are right now in 2009 to where we were arguably at the depth of the last senior housing downdraft, which would have been the fourth quarter of 2002, and compare just a couple of quick metrics, back then industry-wide occupancies were in the low 70% area. This morning, as you've heard in our portfolio and Brookdale's last night and other portfolios, they're generally in the mid to high 80's today. Back in 2002 you had a significant amount of supply that had been developed and was just coming on line. Ultimately, with the benefit of hindsight, we now know it took four years to absorb all of that supply. You have nothing like that today, as we sit here today. And finally, there was a fair amount of additional construction financing that was being put to work back in '02 to fund even additional developments in senior housing. Obviously with the credit markets being what they are, that doesn't exist, as well.

Despite that, you've got one constant; the baby-boomer is aging and that demand year over year is going up anywhere between 1.5% and 2%. So if anything, I would probably say we've shortened up our target investment period here as being between now and the next 2.5 to 3 years. We think this is going to be a very, very good time to deploy capital into the senior housing space. We think looking back two, 2.5, 3 years from now if we're able to buy good, good quality real estate at attractive prices our shareholders will do quite well. I would view the Sunrise results that Paul is taking us through as more of an aberration and not at all indicative of what's going on with certainly the remainder of our senior housing portfolio, as well as the economic fundamentals for senior housing as a whole.

Great, thanks very much.

Your next question comes from the line of Jay Habermann of Goldman Sachs.

Hey, Jay, good morning you to.

Morning, Jay.

Question, obviously two strategic decisions this quarter, the HCR ManorCare investment then the Sunrise announcement. Can you speak first on the investment, looking at the 13% IRR at this point. Clearly attractive and it's collateralized.. We to expect that you're probably not going to much better opportunities, I'm just wondering what your seeing at this point in terms of investment opportunities at this point in the cycle?

Yes, let me take you through the investment and then let's not forget to come back to your second question. I think you need think about this on three dimensions. One is the performance of ManorCare, two are the merits of this incremental investment by HCP. And three, probably most importantly, where we're heading from here with this overall investment, Jay, so let's talk about ManorCare performance.

I think I summarized that but in a nutshell, spectacular EBITDA performance. They're now sitting with practically zero net debt over at Opco. Debt service coverage ratios that are just incredibly strong. And as they sit here today they actually have a variety of financing opportunities available to them. They would include HUD financing, which I think a lot of you have gotten familiar with the HC programs and senior housing offered by Fannie and Freddie. The HUD program for skilled nursing is just as attractive. There's certainly REIT financing available out there. The high-yield markets are once again wide open and have a voracious appetite for higher-quality, best-in-class healthcare providers, and I'd point you in the direction of the several billion dollars that HCA had brought to market this year, including another $1.5 billion last week of first lien paper, which looks an awful lot the investment we made yesterday. And then ultimately you've got an IPO -- and I'll come back to that as part of our exit strategy. So that's kind of the first dimension.

The second dimension is just the story behind this investment. We are fortunate that we had this investment made available to us. In fact,, we're quite fortunate. This was a deal that was circled in the late winter at a time when, obviously, the credit conditions were far worse than they are today. The prospective buyer fell out when they were unable to obtain a necessary consent and that occurred just last month. We had a motivated seller and we were able to negotiate the same set of terms that had been negotiated by the previous prospective buyer back in the late winter timeframe and moved quickly to close the transaction. Again, to answer one of your questions, what else is out there, we're looking at this at a 13% effective unlevered as equity or equity-like returns for nowhere near that sort of risk exposure, given where we are in the capital stack on this investment.

Now let me go to really where we're headed from here. Three years ago we made the strategic decision to significantly reduce our skilled nursing exposure. When we looked at our portfolio, which was 30% of the overall Company portfolio three years ago, we had three concerns. One was the age of our portfolio, a lot of those properties were in excess of 30-years old. Two was the high Medicaid census in our portfolio. And three was the preponderance of one-off properties where we had one operator operating one property. Between 2006 and 2007 we reduced the owned real estate exposure in the skilled nursing sector of ACPs portfolio from 30% to 2%. However, we always maintained that given the proper catalyst we might re-enter the space. We believe pending healthcare reform represents such a catalyst. The best way to talk about our overall Propco debt investment would be in the context of an exchangeable bond, convertible with a conversion option in the ManorCare's real estate.

Now, let me describe two very different scenarios as framing two very different but both very attractive exit strategies. Scenario one. We have benign healthcare reform, we have improving capital markets and we have an expansion of the skilled nursing [piggy] multiples. In this scenario the private equity sponsor, Carlisle, is likely to take ManorCare public and it will look an awful lot like what it did before it went private in the middle of '07, which is to say a best-in-class, low-cost provider to the skilled nursing industry with an investment grade balance sheet that owns all of its real estate in fee simple. In that scenario we are likely to be on the receiving end of $1.72 billion of cash, which monetizes our investment, plus the $0.25 billion of discounts that factor into the purchases -- the two purchases we've made.

Let me go to scenario two and I'll try to give you two end points here. Alternatively, you might have a more challenging reimbursement environment coming out of healthcare reform for skilled nursing providers. You may see a deterioration in the credit markets. In this scenario HCP would exchange its debt investment into direct ownership interests in the real estate of ManorCare. Again, realizing the $0.25 billion of discount in the form of attractive, low to mid-teen cap rate basis in the real estate. Now there's obviously a variety of gradations in between those two end points, which would include, but not be limited to Propco itself going public as a REIT with Opco remaining private. We have set ourselves up as a "heads we win, tails we win" outcome. In the interim we are receiving an attractive current income. With respect to timing, I think anything prior to the finalization of healthcare reform would be unlikely, but you should not accept -- expect a lot of grass to grow once healthcare reform becomes finalized. Most likely scenario would be sometime next year, you could very much envision some resolution with these investments.

I guess --

That's a little bit about how we got to where we are right now. We're obviously thrilled with the opportunity to make this investment, and looking forward to what (inaudible) in combination of the exit strategies we actually affect.

Right. I wasn't diminishing the acquisition or the investment at all, I just was curious about what else -- what sort of alternative usage you could be investing your capital in at this point and the returns you're seeing?

Well, if I had to rank our sectors right now in terms of most attractive to least attractive, is that what you'd like to get input on?

Sure.

I would say probably the two least attractive sectors to us right now would probably be hospitals and medical office buildings for different reasons. Our existing hospital portfolios is doing obviously quite well and with the CMS news last week and with the likely development coming out of the healthcare reform that bill at the margin be further advantaged, we think that a lot of valuations will begin to reflect those sorts of good underlying fundamentals. So we like what we've got in hospitals, but we're not anticipating adding to that. In fact, increasingly that's a much more complicated operating business as opposed to a real estate business.

Now medical office, we think the values there have only adjusted about 150 basis points or so from peak valuations back in the third and fourth quarter of 2007. You're looking at mid to high seven cap rates today for high-quality, on-campus MOB's, and that we feel -- we feel that we've got superior investment opportunities in our remaining three sectors. In no particular order, skilled nursing -- healthcare reform is likely to be an enormous catalyst for deals. There are substantial concerns privately held that include, in addition to ManorCare, Genesis, Sava, Golden -- which is the previously Beverly Enterprises -- and others that are awaiting for some certainty to come out of this healthcare reform. It is likely that healthcare reform is likely to come to fruition later this year and I would expect 2010 to be an extremely active timeframe for the skilled nursing space.

In senior housing, as I mentioned in response to Sheryl's question, we think the valuations now justify re-entry by HCP, especially in light of these strong, intermediate-term fundamentals. And life science is more situation specific, but there's a handful of opportunities that we see there right now. And then away from that, just as a general comment, whenever we can see equity or equity-like returns on debt investments that are also with high-quality operators, like we've been able to realize with both HCA and HCR ManorCare, we would move on those.

And in terms of debt investments relative to, as you said before, the equity investments, at this point do you think you've maximized your position roughly call it 14 or so percent of assets of the Company?

Oh, in the --

About $1.5 billion of investment on roughly $12 billion --

I think -- today I think we're probably in reasonably good shape, yes. I do think, however, that 14% could largely look like an owned real estate portfolio 12 to 15 months from now so we have to be cognizant of not just what we have now but where we're going 12, 15 months from now.

And lastly, what of the litigation charge? Could you just detail the amount there?

As far as the litigation charge, you mean as far as any contingent liabilities or the amount that hit G&A?

I think you mentioned in G&A, just how much was that?

Yes, we bumped up our G&A by $6 million in the projection for the full year. We didn't detail out the amount of litigation charges in that, but it is a component of it.

Okay. Thank you.

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

Good morning. I guess, Jay, related to ManorCare, you talked a little bit about the healthcare reform and the potential [RUGS] that came out last week it looked like skilled nursing facilities were going to see a bit of a negative out of that announcement that came out last week and I'm just wondering if ManorCare has assessed what that impact would be to their coverage ratios and if you know that or could share that?

Well, I think the expectation had been a net negative of 1.2. What came out last Friday night was a net negative of 1.1, so this was all expected. In fact, it was at the margin, very marginal, better than expected. And we have certainly run all those numbers, not just for our ManorCare investment but also for our overall skilled nursing portfolio, and on average you're probably looking at about five basis points of decline. Since you mentioned the RUGS, I think again, going back to ManorCare and healthcare reform, I've said this for the last couple of calls, the winners going forward here are going to have three criteria, okay? They're going to be efficient operators. You should read that to mean good margins. They're going to have critical mass. You should read that to be market share. You don't have to be national. You can have a national platform and not have critical mass. And then you've got to have quality outcomes.

HCR ManorCares, as is the case with HCA and Brookdale and a number of folks in our portfolio, their core strength is being a low-cost provider in a post-acute setting. If you go back ten years ago to 1999 when RUGS were first adapted, I think it's very telling to note that there were six publicly-traded nursing home companies back then. Four ended up going chapter 11. Only one was an investment-grade credit before that period began and it ended up after that period was over as an investment-grade credit, as well, and that company, of course, was HCR. So we've got every confidence in this management team they'll continue to execute superbly and are very excited about the next steps in terms of where this investment goes.

Could you also comment -- you paid an 18% discount on this, how does that pricing reflect over to the mezz piece where you paid a 10% discount and given that that's more junior to this debt, and then do you think it matters because you plan on eventually converting that into equity?

Well, again, the terms on this piece of paper that we bought yesterday they were negotiated back in the late winter, kind of the February-March timeframe as opposed to today, so I don't think it's reflective of what's going on today, point one. Point two, since we made our mezz investment the property performance of this portfolio is up 18%. The cash -- the debt service coverage ratio, which we underwrote at a 1.35 times in the fourth quarter of '07 and actually ended up being about 1.41 for the quarter -- for the first quarter alone was north of four times. Tom Herzog wishes ACP had coverage ratios like that.

So the cash flow creation here, the value creation, quite frankly I think for both of these pieces of paper there's an extremely good precedent out there and for the piece of paper we bought yesterday, it's the first lien note in HCA and they raised $1.5 billion last week and the yields that came to market were in the low eights, so you should compare that to the effective unlevered 13% on our investment yesterday. And as I mentioned for our toggle notes, they've moved from a $78 price to $104. Those are a bunch of second and third position -- kind of silent second, third position piece of paper and those are yielding in the high eights this morning, so I think those are bookending [procto] as we have. Those are two very, very good precedents out there and I would tell you that HCR ManorCare's credit metrics compare favorable to HCA's.

Okay. And then regarding the financing that you took out on the investment, as well as the LIBOR plus 120 that you're earning, are there any caps or collars and what was the rate that you had on the financing for that investment?

Yes. There were no caps and collars. As to the financing, it's at 72% LTV, but we're subject to a confidentiality agreement with the seller on this so I'm not going to be able to disclose the details of the financing.

The debt, however, Mark, is coterminous with the loan receivable that we acquired.

Okay. Let's see --

Why don't I just take a minute because I had this questions four or five times yesterday, and just clarify an item. As it pertains to the 13% unlevered IRR in the investment, if you do the math based on purchasing this at an 18% discount to par and LIBOR plus 125, what you would find when you do the calc is you'd find the IRR to be over the 3.5-year term, including the one-year extension. You'd find it to be at about 10%. How we have come to the 13% unlevered return with the benefit of the favorable financing is by taking into account the favorable rate included in that financing, present valuing that back, and showing that essentially as a discount on the front end of the investment. So what we're showing by way of doing that is not a levered IRR, which would be much higher, it is an unlevered IRR inclusive of the benefit of the favorable financing included in the transaction, so that's where the 13% comes from.

Okay. And then lastly, regarding leasing and the life science portfolio, you showed it a little bit differently this quarter versus last quarter in terms of the development versus the redevelopment, what of the percentage leased in the development and the redevelopment separately?

I don't have that broken down right now but I can get you that offline.

Okay, great. Thanks.

Your next question comes from the line of [Bryan Sekino] with Barclays Capital.

Hey, good morning.

Morning.

Just wanted to get you an update regarding the 15 EdenCare facilities and I know had disclosed it, the termination occurs in October, and what you're thinking about when those facilities' management contracts are terminated?

Oh, no, the termination's already occurred. What I think Paul said in his remarks were that we're very far along and close to having all those leases finalized and we'd expect to be in a position to announce the details on that no later than October 1st, potentially earlier.

Okay. And so -- but they're currently right now being managed by Sunrise until then?

Yes.

Yes.

Okay, okay. Okay. And then on the Slidell facility with Tenant, can you give us an update on the performance of that facility and as -- you mentioned earlier hospitals being a tougher segment, can you provide us with some perspective on your thought for that facility going forward.

No, I said tough -- when I said tougher that was in the context of a response to a question of where we are most attracted to in terms of deploying incremental capital. The operating metrics for the hospital space are fantastic. And as I mentioned, look at the price action in our HCA toggle notes, look at the price action in the publicly-traded hospital operators. They got additional good news Friday night from CMS so the operating metrics are in great shape. I was just saying that the valuations are beginning to reflect that so we're always looking to try to create incremental value as we deploy capital and that sector is -- we're very glad we did what we did back when we did it, most notably our Medical City Dallas acquisition. But at this point difficult was in response to a question of the relative attractiveness of that.

Yes. I would go on to say that with the transition of our Tenant hospitals being Tarzana, Irvine, and Los Gatos what we've seen in the past is that the underlying performance by Tenant -- people see different opportunities and have come in and looked at maybe alternative uses and things of that nature. So we have the same sort of situation here in Slidell where we've got a variety of different people that are looking at a variety of different alternatives and we feel comfortable where the outcome will come out once we get this property released.

Okay. Thanks a lot.

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

Hi, thanks. Just a couple of things, a lot have already covered. On guidance -- and I'm trying to figure out what I'm missing, but you were saying it was up $0.06 and what I'm reading from your first-quarter guidance is $2.15 to $2.21 and this guidance with -- before impairments is $2.15 to $2.21 so I'm just trying to understand where the $0.06 is or what I'm missing?

Are you missing the equity issuance in May?

Ah, okay, so that's basically would have brought it back down -- which I'm not looking at -- and this brought it back up. Okay, all right. That's it.

And then just a couple of other things. When you calculate your discount because we were another one of those ones struggling with the 13 to the ten, are you looking at a comparison to your --something like the rate you've gotten on recent term loan financing and this is below that and that's what allows you to do the discount?

Yes, we're looking at the rate inherent in the favorable financing versus what we believe we would finance a similar instrument at in the current market.

Okay, so a 3.5-year floating rate piece of paper? 3.5-year floating rate piece of paper presumably?

Yes, yes, and then reflecting that as effectively an additional discount in the purchase price.

Okay, okay. And then just two other things quick, if I could. On the life science stuff -- I think Paul talked about this -- just I think some of the stuff that Amgen is taking down and that sort of stuff I think there was some possibility of it being sublet, so is there any sublet issues in any of your markets that would be material?

Well, they have been trying to sublease that

And, too, Amgen still remains on the sublease in the marketplace today.

Right. In the last six months they had a -- one of the properties they took out, they decided to use it, so the sub -- now we're talking about south San Francisco --

Yes.

-- and the micro -- the sub market up there. The submarket supply has actually come down because of that Amgen --

Okay. And then Rose you had suggested might be moving additional space in, have we gotten any further clarification on that now that they've closed?

We have nothing new to report on that at the present time.

Okay. And last thing, there was this one little deal with [Cirrus] where there was a $1.1 million benefit that you were going get and then I think there was some reference in here that Cirrus then you've put into default, so I was just trying to clarify if, A, there's a one-time item in there for that and maybe clarifying what's going on with them?

Well, what's going on with them is, as I said in the past, is that is an attractive real estate portfolio. We have a piece of debt that the real estate portfolio is collateral for. We've in the last six months had that appraised. There's nice coverage there in terms of the value of the real estate relative to the outstanding balance we have. They have made their July payment and in addition, we have a significant percent of the outstanding balance guaranteed by -- personal guarantees by some high net-worth individual. So I think that's an opportunity at some point where we might look to move some portion of that debt investment into outright ownership of the underlying real estate. That's -- as we look at it today that is one distinct possibility.

Okay. And there was --

To add on to your question, though the $1.1 million payment was not taken in income in the current period, it's amortized over the loan term.

Okay. All right, I think that's all for me. Thanks.

Your next question comes from the line of Rich Anderson of BMO Capital Markets.

Thanks. Good morning to you guys over there.

How are you?

I just want to make sure and clarify for myself that the $0.06 is all a function of the favorable rate and cash you were -- rate you were earning on your cash versus the investment in the paper at 18% discount and that there's no gain -- one-time gain in that $0.06, it's all recurring. That right?

Yes, that's right, Rich. What it is is the $0.06 is simply taking the -- let me get just a little bit more complicated. We bought the thing at a discount, and with that you calculate an effective rate on the investment.

Right.

Take that effective rate times the outstanding investment balance at any point in time it produces a certain amount of income. That amount of income is what's producing the $0.06 per share for the balance of 2009, so there's no one-timers in it or any accounting magic. It's just $0.06 of income under the effective interest method for that investment.

Okay, thanks, I just wanted to clarify that. A question for you, Jay, sort of more big picture conceptual, if I may. You mentioned you're thrilled with the ManorCare investment and I can understand that. However, the market, at least today, isn't showing that they're thrilled with it and I think that may be a function of just some of the complexity inherent in these transactions, the one announced last night. And so I guess I would ask you how would you counter that argument that so-called complex transactions are in part what caused some of the problems for the REITs to begin with. How would you say -- how would you rebut to that view?

Yes, I'm not sure why this is complex. It's a very attractive debt that --

It's unconventional investment from a REIT perspective, though, I guess I would say. I'm just the messenger.

Our eyes are always on the ultimate prize of having direct ownership in the real estate. We never -- when we decided to exit the skilled nursing space three years ago to the extent we did, I cited the three concerns; high Medicaid expense -- census, age of the real estate, and the one-off operators. We would never have envisioned an opportunity to come back in with the exact opposite on each of those three dimensions, so the best quality mix in the country, best real estate portfolio, and it all being in one overall master lease. So the opportunity to come back in with what would be the golden portfolio in this space at a discounted price, by virtue of the discounts we've been able achieve the debt purchase and as we hang out and wait for the ultimate resolution, which could certainly be a 2010 event and get paid a handsome current return, we think that's a fantastic result for our shareholders.

I'm not necessarily disagreeing, but the Market for whatever reason is today. In terms of --

That's what makes a Market.

What's that?

That's what makes a Market.

Yes. Thank God for the Market. You mentioned the Sunrise termination second round, the second pool of assets, I think, Mark, you said numerous operators as replacement potential, is that right, or would this more likely go to a single operator like the first go round?

We're envisioning it's going to three specific operators.

Okay. And then last question for me is, Tom, you mentioned your 2010 debt maturities at over $500 million, and you said there are numerous sources to address those needs. Can you prioritize those sources?

Why don't I describe three very attractive alternatives that exist right now, in addition to others. The equity markets currently look great. The debt markets on an unsecured basis, we'd be on five-year unsecured debt in the mid-sevens right now. The agency financing also looks attractive, and we have certain pools that we could consider there. Those would be in the low sixes. Those are just three alternatives that would be very achievable today.

What would you say your equity cost of capital would be?

That's difficult to tell. You know what our FFO yield is as well as I. One could add a growth rate to that but I'll probably steer clear at this point of just setting forth an equity cost to capital.

Okay. Thank you.

And we do our internal cost of equity and lack and whatnot for internal purposes, but I'm sure everybody has their own point of view on that.

Got it. Thank you.

Your next question comes from the line of [Ross Nosbaum] of UBS.

Hi, good morning, I'm here with Dustin Pizzo, as well. Guys, can you walk through structurally for everyone the relationship between Opco and Propco over at HCR today?

Sure. There is a 12-year master lease that runs between Opco and Propco. The master lease has 331 properties, which represented at the time of the buyout all the stabilized real estate. There was a couple of properties that were in development that were excluded.

As I mentioned, that's the portfolio that if you take the actual results for all of '08, first half of '09 and assume that the company merely meets their projection for the remaining six months will have been up 18% during that two-year timeframe. The $1.350 billion of aggregate of Carlisle, cash equity that was put into the buyout, about two-thirds of that sits below our mezz investment over at Propco, the remaining one-third is over in Opco. As I've mentioned, they've gone from having a $700 million term loan at the time of the buyout over at Opco to having just $85 million of net debt today, so they radically delevered Opco and are sitting on approximately -- a cash balance of approximately $400 million. Opco is just a subordinate to Propco. And I'm not sure what else you'd like to know but that's a brief summary of the Opco/Propco structure.

That's helpful. What is -- I think you gave a coverage ratio in your press release last night on the $1.6 billion of senior debt, is that coverage ratio relating to the EBITDA of Propco?

Yes. Okay. So if I'm thinking about this, if I look at the interest rate and the coverage ratio it would allow one to potentially back in, even if I used the higher 21 times coverage, of something around $575 million of EBITDA at Propco on an annualized basis?

It's close, yes.

Is that roughly?

Yes, roughly.

Okay. At Opco can you share with us where you think that number is I guess on an EBITDAR basis?

No, that'ld be -- we wouldn't be able to disclose that.

Okay. But $575-ish million of EBITDA at Propco is not a bad guess?

That's right. That's in the right zip code, Ross.

Okay. Thank you.

Your next question comes from the line of Jim Sullivan of Green Street Advisors.

Thanks, good morning.

Morning.

A couple of questions on ManorCare. You said the terms were circled back in the late winter, a couple of things have happened since that timeframe from the seller's standpoint, the banks involved, some of them were at risk in terms of their survival in that timeframe, that doesn't seem to be the case today. Per your comments, ManorCare's operating results and their balance sheet have improved markedly, why wouldn't the seller here have retraded terms that were discussed the late wintertime, given the improvement on both the side of the seller and the borrower here?

Jim, you'd have to take that up with the seller.

Okay. The unlevered return of 13%, I'm still having trouble understanding the concept of unlevered given that the 72% leverage is being layered in, albeit through a present value calculation, into that IRR. Can you help me understand the unlevered versus levered concept?

Sure. If you took a straight unlevered return and calced it based on acquiring the interest for $590 million and have it pay off 3.5-years later at $720 million, take LIBOR plus 125 using the forward curve, during that intervening period you'd calc the number somewhere in the neighborhood of about a 10% unlevered IRR. If one then took into account the 72% favorable financing in isolation with no consideration of rebalancing in the future, which I indicated that we would intend to do because we do want to stay more in the 44% leverage ratio or so that we're currently at, but if one just simply did the levered calc you would end up with an IRR that is 20% plus on a levered basis, which I'm not going to spend a lot of time speaking to because, again, we intend to rebalance that.

It's not complete to think of the 10% unlevered IRR without, though, the benefit of the favorable financing because we've achieved 72% favorable financing at a spread lower than what we could achieve in the marketplace. So if we take the favorable spread achieved in that financing, present value that back to today, add that in as an additional discount on the front end of the investment and then recalculate the unlevered return with the benefit of that additional discount so that we don't lose sight of the fact that there's favorable financing, that achieves a 13% unlevered IRR with inclusion of the favorable financing, but that is not a levered IRR, which is a much higher number.

So I guess to add on to this, if I could, I would think about it this way. We're looking at a 30% -- and I'm going to repeat a little bit of what Jay said because I think it's so compelling. It's a 30% LTV investment with huge coverage that ends up achieving equity-like returns. In the event that they take it private and pay us off we're going to end up with an enormous -- sorry, take -- thank you, Jay -- take it public we'll end up with an enormous return on this. But in the event that we end up in an equity position at a future date, it's with the premiere portfolio of real estate that we've had an interest in for a long while that we just then purchased another traunch in this investment, if you will, at $130 million discount to par. So all in it just -- it's like Jay said it's a "heads you win, tails you win-type scenario."

Is it safe to presume that this was dollar financing, the favorable financing you referred to?

Yes, Jim, again, we're under an unusual confidentiality letter and that -- we're not able to answer that question.

Fair enough. But with respect to the market rate calculation, what were the parameters when you tried to estimate what the market rate might have been? Was it a recourse deal, an unrecourse deal, did you look at it 72% loan to cost transaction, how did you figure out what the market rate was?

Yes. Well, I'll tell you this, we based it on the 72% because even when we rebalanced our portfolio, our capitalization, that 72% favorable financing is still going to be in place. As to recourse, nonrecourse, and all the other components that we incorporated, those are things that, again, I'm not going to be able to speak to.

All right. Can we switch gears to senior housing. I'd like to understand better as you transition some of the Sunrise managed assets to what you called are more efficient operators. I'm very interested on the expense side -- on the operating expenses where you see the greatest opportunity. Seems like some of the costs in your cost structure are fixed, some are variable, some are variable and vary with occupancy, some are variable under your discretion as owner of the property. Can you help me understand where the richest opportunities might lie in the operating expenses and what you can achieve there?

Well, are you talking about senior housing opportunities generally, or are you talking specifically about our Sunrise portfolio, Jim?

Specifically in Sunrise.

Well, I think we can't be terribly expansive there given the outstanding legal matter. I think Paul's comments related to its early days so far, but the success we've had on the Orius portfolio that we transitioned to Emeritus, I think that's a very relevant metric. I think some of the metrics that Brookdale put out last night are quite important. I think it's important to distinguish between independent living and assisted living.

If you go into our big independent living joint venture there you see operating margins -- and again, there is eight quarters into this downdraft -- their -- Horizon Bay's operating margins are at 41%. So I think -- that's really only down from maybe 42%, 43%, so they've been able to hold their margin. Like all these efficient operators, they've all, to their credit, moved very aggressively to reduce costs. I think I'm on record as having said that they've been able to hold their coverages constant in the move from, say, a 90-point percent occupancy down to an 86% or 86.5%, where we are now. I don't expect --were that 86.5% to move down to 80%, I don't expect that that continues to be a linear function.

Jim, I think one of the things to bear in mind, our Orius transition was with Brighton Gardens, this portfolio is a different type of product. And as the operators get in and start looking at the specific locations and typing configuration what they're finding is that they're finding a variety of different opportunities. We haven't quantified specific line items. We've targeted typically margin improvement over time and we've left it to the operator to actually dig in and find out where those various different opportunities are. But given the configuration, some of the Brighton Gardens have skilled nursing, some of them do not some of them have more independent living than assisted living. We've got a variety of different areas where we could find cost savings.

Hey, Paul, John Arabia here. How long do you think it would take to ramp up to a normalized cost level?

We've -- in our Orius transaction we assumed that it would take a total of five years to get the full performance from the assets.

Okay. Very quick follow-up question on senior housing. I think you had mentioned that in the second quarter you realized rent in from Sunrise, it had not been paid from the first quarter, correct?

Yes.

It was paid in the second quarter as opposed to the first quarter, John.

How does that affect the 4% NOI growth? Is that included in that?

What I've done is I separated out our non-Sunrise portfolio and that was the 1.3% growth.

Okay --

The Sunrise portions was the 9.8%.

Okay, maybe we can follow up off line, but I'm wondering what happened to that 4%, if you pulled the Sunrise portfolio out? Maybe we can follow up offline.

I can give you that. John, you're talking on a year over year --

Year over year for three months, so --

For three month. Yes. So we were at 4% total for senior housing. If we excluded Sunrise -- it bumped Sunrise up a bunch, as you can imagine, having that cash amount come in that had been deferred in Q1. So excluding Sunrise we'd have been at 1.53%.

But is it probably more representative to look at the first six months, which normalizes the --

Yes, let's look at the first six month. If you looked at the first six months, excluding Sunrise, you're going to notice in the supplemental, John, the total senior housing at a -0.9% year over year for the six months.

Okay.

You see that? If you exclude Sunrise, which would have been a large negative for the six-month period we would be at a positive 1.8% for the six months year over year.

For senior housing, non-Sunrise? Flower housing, non-Sunrise, thank you.

Thank you.

That concludes the Q&A session. I would like it turn the call over to Mr. Jay Flaherty, Chairman and CEO.

Thanks, everybody, for your attention and interest in HCP. Have a good rest of the summer and we'll talk to you in the fall.

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.