HCP, Inc. Q2 2008 Earnings Call Transcript

Aug. 6.08 | About: HCP, Inc. (HCP)

HCP, Inc. (NYSE:HCP)

Q2 FY08 Earnings Call

August 5, 2008, 12:00 PM ET

Executives

Edward J. Henning - EVP, Chief Administrative Officer, General Counsel and Corporate Secretary Officer

James F. ("Jay") Flaherty III - Chairman and CEO

Mark A. Wallace - EVP, CFO and Treasurer

Paul F. Gallagher - EVP and Chief Investment Officer

Analysts

Richard Anderson - BMO Capital Markets

Jonathan Habermann - Goldman Sachs

Jerry Doctrow - Stifel Nicolaus & Co.

David Toti - Citigroup

Chris Haley - Wachovia Securities

Peter Costa - FTN Midwest Securities

Michael Mueller - JPMorgan

Adam Feinstein - Lehman Brothers

Herb Tinger - Morgan Keegan

Jim Sullivan - Green Street Advisors

Operator

Good day, ladies and gentlemen and welcome to the First Quarter 2008 HCP Earnings Conference Call. My name is Erika [ph] and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. [Operator Instructions]

Now I would like to turn the presentation over to your host for today's conference call Mr. Ed Henning, HCP's Executive Vice President and General Counsel. You may go ahead sir.

Edward J. Henning - Executive Vice President, Chief Administrative Officer, General Counsel and Corporate Secretary Officer

Thank you. 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 belief 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 in earnings release, each of which has been furnished to the SEC today and is available on our website at www.hcpi.com.

I will now turn the call over to our Chairman and CEO, Jay Flaherty.

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

Thanks, Ed. Welcome to HCP's Second Quarter 2008 Earnings Call. I am joined by Executive Vice President, Chief Financial Officer, Mark Wallace; and Executive Vice President, Chief Investment Officer, Paul Gallagher.

It's been a productive quarter for HCP, with asset sales and financings raking over $1.3 billion of proceeds during the quarter. The restructuring of our seven Tenet health care hospitals and solid performance from our repositioned investment portfolio, notwithstanding the current economic head wins. It is nice to be in the healthcare business these days.

In fact, just two weeks ago CNBC reported that for the first time ever the market capitalization of healthcare companies exceeded that of financial institutions. I will have more to say about Tenet, Sunrise and the evolution of the multiple growth drivers that now underpin HCP's business model. But first Mark and Paul will take to the details of the most recently completed quarter. Mark?

Mark A. Wallace - Executive Vice President, Chief Financial Officer and Treasurer

Thanks, Jay and good morning. Despite the current dislocations in the credit markets we continue to execute on our commitment to maintain a conservative balance sheet and ample sources of capital. So far this year we raised $560 million of equity capital, $526 million from asset dispositions and $254 million from the issuance of agency secured debt. These transactions have generated net proceeds of over $1.3 billion all of which were applied to fully pay down our revolving credit faculty and reduce the outstanding balance on our bridge loan.

In May we placed $259 million of secured $20 million debt on 21 of our senior housing assets. The assets are cross collateralized and the debt has a seven year term with a fixed interest rate of 5.83%. We received net proceeds of $254 million which we used to repay outstanding us any debt under our bank facilities.

At quarter end our bridge loan had a balance of $1.15 billion accrues interest at 3.16% and has an extended final maturity of July 31, 2009. We exercised the first of two six-month extension options during the quarter and just last week repaid an additional $150 million on the bridge.

Debt maturity for the remainder of 2008 are limited to $300 million of floating rate senior and secured notes in September and about $74 million of mortgage debt amortization. For 2009 our debt maturities other than the bridge are limited to $276 million of mortgage debt. Our credit metrics continue to be in great shape. Pro forma for the recent bridge pay down, our overall leverage ratio stands at 51%, our secured debt ratio at 14%, our unsecured leverage ratio at 59% and our floating rate debt represents 22% of total debt or 7% adjusting for the natural hedge provided by our Manor Care investment.

During the quarter, we also issued 111,000 shares under our dividend reinvestment plan for total proceeds of about $4 million. We also converted $1.2 million non-managing member down rate units into common equity. Investment activity for the quarter was principally focused on life science and echo office segments. We funded $43 million in construction and capital projects bringing our year-to-date fundings to $92 million. East Grand building A comprising 82,000 square feet was placed into service and occupied by Genentech in June. We anticipate the remaining two East Grand buildings comprising 147,000 square feet to be fully occupied by Genentech in the third quarter.

These three developments should contribute over $5 million to FFO in the last half of 2008.

In the fourth quarter, we anticipate the Corn Shell of Oyster Point 2 buildings A and B comprising 237,000 square feet to be complete. Rent should commence in the fourth quarter of 2008 on building A and the first quarter of 2009 on building B. Keep in mind that rent will recognize for GAAP until related tenant improvements are complete.

The Corn Shell and Oyster Point 2 building C comprising 78,000 square feet should be complete in the fourth quarter of 2008 and we are actively pursuing tenants.

Now let me review our second quarter earnings. For the second quarter 2008 we reported FFO per diluted share of $0.51 compared to $0.58 for the same period in 2007. Merger related charges were $1.1 million for the second quarter in 2008 and $1.7 million in the second quarter of 2007. This quarter's result include the effect of three items that were not anticipated in our previous guidance, so we are going to take a minute and walk through each one.

First, we recorded $9.7 million of impairment charges comprised of $5 million related to defaulting the current operator of a hospital in Louisiana for non-payment of rent and $4.7 million related to four underperforming senior housing properties that we are currently marketing for sale, as part of our disposition program. The sale of these properties will eliminate about $1 million of annual losses affecting our same property performance.

Second, we recorded at write down of $3.5 million attributed to an investment in our marketable equity securities portfolio as recent trading prices have been below our cost bases. This write-down is included in FFO and reflected in interest and other income.

The last of the three items relates to FAS 133 hedge accounting. You may recall during the fourth quarter of 2007, we executed $900 million four starting slots to hedge future anticipating debt issuances given the relatively high level of short-term debt we had at the time.

During the month of June, we settled these hedges at a net cost of $9.7 million. The unaffected portion of this cost totaling $2.4 million was a charge to FFO. The balance of $7.3 million resides on our balance sheet in accumulated other comprehensive income. This amount may be taken to FFO over term or future debt financings or sooner depending on the attributes and timing of future debt issuances.

The three items I just highlighted adversely impacted reported FFO by $15.6 million or $0.06 per share. Excluding these items reported FFO per diluted share would have been $0.57 for the second quarter.

Same property cash NOI growth for the second quarter was 1.9% led by life science at 11%, skilled nursing at 3.1% and senior housing at 2.2%.

In the life science sector, we are beginning to the see the impact of leasing all of the space at our less [ph] campus in San Diego. Our overall life science portfolio economic occupancy was 88% at quarter end.

Senior housing and skilled nursing sectors continued to benefit from contractual escalators and rent resets. Senior housing cash NOI growth also reflects year-to-date additional rents of $2.8 million from property level expense credits related to our Sunrise properties. These property level expenses credits, however, were offset by a reduction of $1.3 million in year-to-date Sunrise rents which fluctuate with LIBOR interest rates and $2.7 million of additional rents received and recognized in the first half of 2007 that relate to 2006 property performance.

Medical office cash NOI growth of 1.5% reflects rent increases of nearly 3% partially offset by the expiration of five natural leases that decrease the effective rents at those properties. Overall MOB occupancy was 90% at quarter end.

Our hospital sector same property cash NOI growth continues to be affected by the Louisiana hospital I discussed earlier and additional rent at our Tenet hospitals that are relatively stable with prior year levels.

We are raising our reported FFO guidance to range between $2.27 and $2.35 per diluted share for the full year 2008. That guidance includes charges of $0.06 from the three second quarter items described earlier as well as the following key assumptions.

Consistent with the previous quarter our guidance contemplates no additional acquisitions of real estate or net investments and no contribution of assets into joint ventures. We expect to fund about $191 million in construction and capital projects this year principally in our life science sector. We expect to recognize an FFO between $23 million and $28 million of income related to our Tenet healthcare restructuring and settlement agreement.

On July 30th, we received and recognized lease termination fees of $18 million from a tenant in connection with three early lease terminations representing 149,000 square feet at five of our life science properties in the bay area. We also recognize an impairment of $4 million related to intangible assets associated with these leases. The net 2008 FFO impact from this transaction is approximately $12 million including a $2 million reduction in NOI from the tenant vacating space. This vacancy will reduce our overall life science economic occupancy by 2.4%.

Asset dispositions for the full year are expected to be about $750 million with gains for GAAP earnings on these sales of about $285 million. Our investment and management platform should generate fee income of about $6 million, same property cash NOI growth is expected to be about 2%, the decline from our previous guidance is primarily attributable to lower additional rents anticipated at our Sunrise facilities and slightly lower occupancies at our MOBs.

G&A should be about $75 million or roughly 6.5% of total revenues. Income tax expense is expected to be $5 million for the full year. Merger related cost for 2008 should be about $4.5 million or $0.02 per diluted share again representing the amortization and remaining bridge loan fees.

And I will now turn the call over to Paul.

Paul F. Gallagher - Executive Vice President and Chief Investment Officer

Thank you Mark, I would like to point out the changes in methodology by which occupancy metrics are reported this quarter and will be reported on an ongoing basis moving from physical occupancy to economic occupancy. This better represents the cash rents collected and will primarily affect life science portfolio as tenant improvement work is completed. It will also be seen in our MOV portfolio but to a lesser extent. With this in mind let me walk you through our 5 segments.

Senior housing. As Mark mentioned our senior housing year-over-year same store performance increased by 2.2%. Breaking it down senior housing excluding Sunrise increased by 5.8% driven by contractual rent escalators and a restructuring of our HRA portfolio. Sunrise experienced a 2.5% decline due to the one time items Mark described. Occupancy for a same property portfolio is 90% representing a 20 basis point decline quarter-over-quarter and a 60 basis point decline year-over-year. Same property cash flow coverage year-over-year has increased from 1.05 times to 1.19 times due to resident rate increases and a higher level of extended care fees, as well as the reduction in LIBOR based Sunrise rents.

Hospitals. In the second quarter HCP sold a portfolio of 18 hospitals and wellness centers representing gross proceeds of approximately $325.8 million. A final $30.3 million traunch of this portfolio sale subsequently closed in July. In the aggregate this portfolio sale resulted in $356.1 million of gross proceeds and an exit Cap rate of 9.1% and a gain of $133.7 million.

We reached agreement with Tenet healthcare to restructure the overall portfolio of seven assets we own. Three hospitals Hickory, North Carolina, Palm Beach, Florida and Roswell, Georgia will exercise an early contractual renewal of their lease through 2014.

Our Tarzana hospital lease will be sold to Tenet who in turn will sell the hospital to Provident Health and Services. In addition we will buyout Tenet's position in a joint venture that dates back to HCP's original IPO.

Tenant will not renew leases on our Irvine and Los Gatos facilities which expire in February and May of '09 respectively. We have signed a lease with the Premier Orange County not for profit Hoge [ph] Memorial Presbyterian for our Irvine facility.

Hoge [ph] will make significant capital improvements and will lease the facility for 15 years. Additionally, we have several interested parties and are Los Gatos asset.

Skilled nursing. In the second quarter HCP sold nine skilled nursing facilities representing gross proceeds of $70.4 million. Two of these were sold at an 8.6% cap rate and 7 were sold to the existing operator at a 7.8% cap rate. Combined with first quarter dispositions HCP has realized $97.2 million in gross proceeds from skilled nursing sales year-to-date and recognized an aggregate gain of $50.8 million.

For the remaining portfolio year-over-year adjusted NOI is up driven by contractual rent increases, occupancy is stable and same property cash flow covers declined slightly as a result of fair market rent increases in one of our stabilized portfolios.

We've added first quarter 2008 debt service coverage ratio for Manor Care to our most recent supplemental. The ratio of 1.52 times was calculated assuming the 5.25% interest rate cap Manor Care purchased for the entire CMBS and mezzanine positions. The actual coverage for the quarter was 1.18 times. Going forward we will be reporting converge on a GAAP basis calculated at the cap.

In addition as the case with our owned skilled nursing portfolio, coverage will be reported on one quarter lag. Based on recent discussions with Manor Care's management we believe second quarter performance will remain strong despite a slight seasonal decline in occupancy. Year-over-year Medicare and managed care rates were up and quality mix remained at historic highs.

Medical office. During the second quarter, we sold a 689,000 square foot off campus medical office portfolio, for gross sales price of $90.1 million. This sales price equals a 6.9% cap rate and we recognized a gain on sale of $26.5 million.

Same property NOI for the quarter was up 1.5% on the year-over-year basis. This was driven by higher base rents but was offset by the exploration of five master leases. Overall occupancy for MOBs ended the quarter down 10 basis points at 90.3%.

For the end of second quarter, we have experience strong leasing of 61% of the 2.6 million square feet of space initially set to expired in 2008 having already been renewed or released. We executed 150 leases total in 515 square feet of second quarter exploration. Of the executed leases approximately 123,000 square feet related to previously vacant space and the remaining 392,000 square feet related to the renewal of previously occupied space.

One large lease was renewed on short term basis at a premium rate to market. Add some facilities renewals occurred at 4.8% higher rents. A recent activity during the quarter resulted in a retention rate of 81%. Of the remaining 1.3 million square feet of space scheduled to expired in 2008, approximately 263,000 square feet has already been leased and we have a pipeline of nearly 755,000 square feet of active negotiations.

We have expanded our pre-development pipeline which now include seven properties aggregating 610,000 square feet with a projected cost of $168 million. We anticipate construction to commence in the fourth for at least one of these projects.

Life science. Occupancy for the life science portfolio was 88.1% at the end of the quarter up slightly from 87.7% on a sequential basis. The portfolio remained approximately 92% leased during the quarter as HCP completed approximately 47,0000 square feet of leasing activity.

In addition, an existing tenant expanded into approximately 20,000 square feet relating to joining space that resulted in a mark-to-market increase of rents of 85%. The majority leasing volume related to activity at our Mountain View campus which is now fully weak.

Subsequent to quarter end the company received a termination fee $18 million from a tenant in connection with a termination of three leases representing 149,000 square feet in the Bay area. This amount represents 85% of all future lease obligations under the lease and had a remaining... that had a remaining lease term of 4.5 years. The termination will drop occupancy from 88% to 86%, but has the potential to produce superior financial results as space is released.

General economic conditions have moderated throughout the year and venture capital funding, a leading indicator of life science demand have slowed. Despite the current environment HCP has renewed or released 52% of the 263,000 square feet scheduled to expire over the balance of the year leaving remaining expirations totaling just 126,000 square feet of... or 2% of the portfolio.

HCP continues to pursue a pipeline of prospects in excess of 200,000 square feet for existing space. The future development, re-development pipeline remains unchanged at 3.3 million square feet of expansion opportunity. During the second quarter we successfully concluded a 3-year entitlement process for 540,000 square feet at our CRF point location which represents a campus of five waterfront life science buildings in the South San Francisco submarket.

Our San Diego county markets while improving continued to experience slower tenant demand and no immediate starts are expected. In comparison HCP continues to have active dialogue with tenants in the bay area. It is difficult to predict when these discussions will lead to new transactions, but we are encouraged by the level of interest in our development holdings. With that review of HCP's portfolio I'd like to turn it back to Jay.

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

Thanks Paul. Let me now speak to a handful of separate topics. The tenant restructuring. In many respects this was the most complicated deal we have ever executed. While that may surprise some of you, it is actually six separate transactions rolled into one. Let me provide one bit of context before I elaborate. If I were to take you back to page 19, of our March 31, 2008 supplemental and point you to the leases expiring in 2009, you would note $38 million of expiring annual revenues related to six hospitals. These six hospitals were all leased to Tenet, and scheduled to expire next year. Excluding the normal annual roll of leases in our MOB sector included on that schedule, the Tenet hospitals represented 79% of our anticipated 2009 expirations. Our agreement with Tenet eliminates that exposure, generates substantial proceeds from the sale of our Tarzana Hospital, and allows us to insert Western market operators at our urbane [indiscernible] locations.

We've already executed a 15 year lease with Hoge [ph] Memorial Presbyterian Hospital, the premier Orange County non-profit for our Irvine urbane hospital, and have indications of interest for our Los Gatos property. As part of our agreement, we will also buyout Tenet's 23% minority stake in Healthcare Property Partners, a joint venture created at the time HCP went public in 1985. The HCP Tenet win-win outcome, allows Tenet to exit its three California hospitals and monetize in a liquid minority investment.

Sunrise. Our Sunrise portfolio came to us as part of our CNL acquisition. As in the side we have invested limited funds in the senior housing space, since closing that transaction in the fourth quarter of 2006 but have recycled $1.5 billion of senior housing real estate at attractive valuations during those 21 months.

We priced the Sunrise deal off of in-place cash flows from actual 2005 financials and 2006 projections. We are fortunate to have the wind at our back for the past two and half years and it has been advantageous to have been an owner and recycler of senior housing real estate during this period of time.

Now, let me quantify how strong that wind at our back has been blowing since we made the decision to acquire the Sunrise portfolio as part of CNL in the first quarter of 2006. At December 31, 2005, our Sunrise portfolio had an occupancy of 86.0%. This occupancy hit a 2007 high of 91.2% in October of 2007. The flash report for the weekend of July 30, 2008 was 91.8%.

For the year ended December 31, 2005, the cash flow from summarize portfolio was $110 million. Budgeted cash flow for 2008 is $149 million in 11% compounded annual growth rate.

HCP shareholders have done well on the Sunrise investment but we can and will do better. I have stated several times that HCP Sunrise portfolio is both strategic and unique for the following four reasons. One, it is the only Sunrise portfolio of scale in total that represents approximately 25% of all the real estate managed by Sunrise that is 100% owned by one party unlike the traditional 80%, 20% capital partner Sunrise joint venture structure where Sunrise serves as the managing partner for those ventures. Two; HCP Sunrise properties have modest amount of secured debt on them. Three; HCP's portfolio cuts across several of the property brands that Sunrise operates including Mansions, Brighton Gardens, Eden Care and Maple Ridge.

For the later three brands, HCP owns 100% of all the properties operated by Sunrise in those brand categories. And four; HCP owns valuable, exclusive, non complete development rings for 41 of its 101 locations.

Sunrise does a good job with its mansion product. Of the remaining brands it is our view that Sunrise can become a more efficient operator of some of our portfolios while alternative operators may be more efficient for other portfolios.

This is the essence of the discussion we have had with Sunrise for the past two years. One of the expense line items that we are particularly focused on was insurance. Toward that end in October 2006, we formally provided Sunrise notice of our concern on this expense category. We were pleased to see the company provide us with meaningful insurance credits earlier this year relating to the period we have owned the portfolio.

Of our 13 separate pools of Sunrise properties two have performance termination clauses currently running in our favor. We anticipate moving one of these pools to an existing HCP operator at economics to HCP that are in excess of the excitingly lease. We aspire be more than one of the multiple capital partner that Sunrise has; rather a good strategic partner for the company.

Fortunately, the tax legislation for healthcare real estate signed in the law by the President last week; nicely expands the flexibility we have to work with Sunrise going forward.

In recent months, we have been engaged in frequent conversation of new management team at Sunrise. We were pleased to here of the company's renewed focus on reducing its cost structure and on its core brand during their conference call last Friday. We looked forward to creating multiple win-win outcomes for the two organizations.

In this regard, we recently completed restructuring of our tenant portfolio may prove to be a good template.

Our Portfolio. I would be remiss if I did not acknowledge the fine performance of our leading operator tenant partners across each of our sectors.

One, Life Sciences. The recent binge of M&A deals and drug development news for biotechnology companies in general and for our two largest tents Amgen and Genentech in particular underscore the value we underwrote as part of our slow acquisition as well as life science acyclical nature.

Well leasing velocity has softened in the first half of this year, sub market vacancies remain low and are remaining available inventory is a modest 496,000 square feet at June 30, 2008. The dialog level around our inventory and new development and redevelopment opportunities is robust. And the completion of the entitlement process for our sierra point site is exciting.

Two, hospitals. HCA continues to model along our mezzanine debt investment continues to trade at a premium, and the company announced an improvement in its bad debt expense and credit metrics for the quarter ended June 30, 2008. This morning Tenet reported its strongest volume growth in four years.

Three, skilled nursing, Manor Care is simply Manor Care. The company continues to maintain historically high operating metrics, generated a 1.81 times actual debt service coverage ratio, has substantial cash balances, is exceeding it's business plan and is positioned to benefit disproportionately from last week's 3.4% Medicare rate increase in light of it's high quality mix.

Four, MOBs. We reduced our aggregate, owned and managed square footage to 16.6 million square feet following the closing of last month's disposition of our Indianapolis off campus portfolio. We are now at an 80%, 20% mix of on campus to off campus medical office buildings. We have initiated an RFP process that will reduce the number of third party property managers we contract with and expect to achieve modest cost savings as a result.

And five; senior housing. At Sunrise our senior housing same store cash NOI was up 5.8% for the first half of 2008. We understand from our operators that second quarter occupancies have softened approximately 50 to 100 basis points of year-over-year metrics. We also understand that July occupancies have firmed. Balance sheet. I would like to review the fortunate liquidity position we find ourselves in today. A year ago we entered into $1.5 billion four year line of credit bearing interest all an in cost of LIBOR plus 70 basis points. This revolver currently has no outstanding on it.

A year ago, as part of the Slough [ph] acquisition we entered into a $3 billion bridge facility with a one-year initial maturity barring interest at an all-in cost of LIBOR plus 70 basis points. This facility can be extended for two additional six month periods, at our option and currently has $1 billion remaining on it.

As Mark mentioned, we recently exercised our first six-month extension for a one-time fee of 12.5 basis points. We currently have $94 million of cash balances and anticipate receiving $200 million in proceeds from our remaining two asset sales over the next 30 to 45 days. We expect our bridge facility to be drawn at $900 million, which is equal to our LIBOR based investment in the mezzanine debt of Manor Care. Our leverage ratio at June 30 net of $250 million in cash at quarter end, stood at 51% below the 52% target we established at the closing of our Slough investment.

I would remind everyone that the commitment to return our leverage ratio to our pre-Slough level of 52% within one year was made prior to our December 2007 $900 million Manor Care investment. Not withstanding this incremental borrowing, we still exceeded our reduced leverage ratio commitment one month ahead of schedule.

HCP's business model. On our last call I highlighted the successful execution of our multi year portfolio repositioning strategy. A more subtle benefit is the ability to create shareholder value, evolving from solely buying right, selling right and financing right to a model of creating shareholder value as an active asset manager without putting incremental shareholder capital at risk.

As examples I give you, one HCP's $250 million secured mezzanine investment in American Retirement Court that was subsequently converted into 15 year sale lease backs on their Crown Jewel properties, now master leased under a Brookdale credit with current coverage's of approximately 1.3 times.

Two; HCP's Lusk campus in San Diego acquired for $38 million at $168 per square foot, is now completely repositioned, realizing rent increases of 76% and with ongoing discussions regarding development for the third build-to-suit property for this campus.

Three, HCP's Horizon Bay investment where we exchange the requirement to replenish a $15 million security deposits for a master lease on three separate primarily independent living portfolios that are currently 93.5% occupied with 41% operating margins.

Following this restructuring, we subsequently placed $687 million of attractive Fannie Mae secured debt on the assets and sold off 65% of the equity to an institutional investor.

And four, HCPs Irvine campus where community leader Hoge [ph] hospital will invest a significant some of capital improvements in our building.

We anticipate meaningful incremental value creation from this 15-year lease. In 2008, HCP's $750 million of asset disposers will generate approximately $285 million of gains none of which will run through FFO and approximately $14 million of impairments all of which will run through FFO for a net gain of $271 million. At a present time we have an unusually large pipeline of initiatives that will be actively asset managed to the benefit of HCP's shareholders. These include the Los Gatos campus, our Sunrise portfolio and entitled land and redevelopment opportunities in our life science sector, warrant positions in public and private companies and lease termination possibilities.

So, what is the bottom line? At the mid point of our increased guidance which assumes no acquisition volumes, but incorporates the dilutive effect of $750 million of asset dispositions and over $1 billion of repayment, we're turning out of attractive short-term debt; HCP expects to produce year-over-year increases in FFO of 8% for 2008.

To close, we own a fine portfolio of healthcare real estate and the finest portfolio of best in class operator tenant partners. We're getting increasingly liquid, with each passing league. Our 5x5 business model has been further enhanced by recently enacted ideal tax legislation.

We now sit in the pole position in what is unquestionable... unquestionably, the most interesting deal environment for the past 5 years. With that, we thank you for your attention today, and we'd be delighted to take your questions at this time. Operator?

Question And Answer

Operator

[Operator Instructions]. And our first question comes from the line of Rich Anderson with BMO Capital Market. Please proceed, sir.

Richard Anderson - BMO Capital Markets

Hey, good morning over there.

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

Good morning.

Richard Anderson - BMO Capital Markets

Can you... it sounds like you're going to provide who the tenant was in the life science lease termination, or can you provide that? Was it Amgen?

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

It was not Amgen.

Richard Anderson - BMO Capital Markets

It was not Amgen.

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

No, it certainly was not.

Richard Anderson - BMO Capital Markets

Okay. Could you comment on who it was?

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

Under confidentially reasons we cannot, but it was not Amgen. Okay.

Richard Anderson - BMO Capital Markets

Okay, you mentioned, that you are going to --

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

Someone's got a Blackberry near the phone... you know who it is?

Richard Anderson - BMO Capital Markets

Me. Sorry about that. You mentioned that you plan to replace sunrise I think that's right you plan to replace Sunrise with an operator that you currently do business with in a pool of assets, is that correct?

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

For one of our 13... we are a 101 sunrise properties are owned in 13 separate street polls. We are moving one of those polls. We anticipate moving one of those polls to another operator that's already an existing HCP operator.

Richard Anderson - BMO Capital Markets

And you call it at a good thing I imagine you may be improve the quality of the tenant or the operator but can you just sort of run through why you need to that?

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

Looks like a question of quality operator. Sunrise is very high quality operator; it's all about economics. As I mentioned we have done very, very well on a Sunrise investment and they do a terrific job in there mansion product some of the other brands from a margin standpoint, those margins are a little out of line with what we see with some of other operators. So this particular portfolio that we anticipate moving is a portfolio of 12 purpose built facilities, all done all developed and lasted 9 years, 90% occupied at the year end '07 with a 19.5% operating margin and... our view and other metrics of comparable portfolio's in those areas would suggest that, that operating margin should be quite a bit higher.

Richard Anderson - BMO Capital Markets

Okay. In terms of the guidance, we go through the numbers, it looks like, excluding the lease termination fee and the impact from Tenet restructuring that you actually tweaked down guidance by 5 pennies, I assume I have that right and if you could just give some color on what were the factors behind that, was it interest related to the terming out of debt or was it disposition dilution being higher than you expected, can you just go through that math?

Mark A. Wallace - Executive Vice President, Chief Financial Officer and Treasurer

Yeah this is Mark. I think you said it correctly, is that the core guidance is down about $0.02. But sort of let me take you through sort of how you reconcile the numbers. So if you look at our mid point of our guidance on the last call it was $2.25, the items that you sort of need to factor... factor out of that or to reconcile our current mid-point of $2.21 would be take out impairment charges of $0.06, that would include $0.04 in the second quarter of impairment charges and $0.02 for third quarter from the lease termination. Then we had the write-down on the marketable security of $0.01, we had hedge ineffectiveness of $0.01 now and then going the other way for additional income, we have the lease termination that we talked about, pre-impairment of $0.06 and then the Tenet gains of $0.10. So if you do all that you get to $2.33 reconciliation which leaves you a difference of $0.02 and that's primarily related to what I talked about in my guidance, the $0.02 decrease is primarily attributable to the lower additional rents at the Sunrise facilities and then slightly lower occupancy that we forecast in the medical office building sector.

Mark A. Wallace - Executive Vice President, Chief Financial Officer and Treasurer

But to be clear, Rich, it's $0.02 not $0.05.

Richard Anderson - BMO Capital Markets

Okay. Last question, Jay on Wridea [ph]. What are some of the elements of that that really stand out to you as the biggest opportunity for HCP?

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

Well, I mean first of all everybody got to understand that we are not looking to become an operator of senior housing, that's the last thing any of us want to do. I think this is a very situation specific opportunity for us in the healthcare regions. Potentially it could be a bigger opportunity for some C Corps, some of the operators that are structured to C Corps quite frankly. But with respect to us I mean, two things that kind of jump out at us. One, if we got portfolios of say senior housing assets where by repositioning them either by putting some refresh dollars in the portfolio or maybe changing out an operator, if there's an opportunity to have a significantly large bump in the economics accruing to the benefit of us as a landlord, we would probably be more interested in going at that directly as opposed to using a lease where you might normally be limited to annual escalators along the lines of greater of say CPI or 3%. So if there's an opportunity to kind of have an order of magnitude increase in the possibly a portfolio, this tax legislation will give us an opportunity to directly and more meaningfully participate in that value creation along with the operator that's helping to create the value. So that's one option that jumps out at us.

The other opportunity is in the past I can't tell you how many conversations we've had took up with our pals on the private equity side many of which are represented in our portfolio and we get all excited, we look at something we're going to partner up and we kind of get down the magic moment, everything sounds great and because we're a healthcare Reid we've got to have our economics cut the lease at the top line and the prospective joint venture partner like every other kind a rational investors looking at bottom-line... sorry cash flow generation. We will now actually deal to have real alignment in those situations going forward.

So again to repeat I think its very situation specific. I don't think this is going to be some panacea that totally changes our business model but at the margin I believe it will be another arrow in our quiver to increase economics to HCP shareholders as we either cut or recut some deals. So that's kind of our take on it.

Richard Anderson - BMO Capital Markets

And the international stuff didn't jump out at you as an opportunity?

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

Specifically led to the idea of tax legislation?

Richard Anderson - BMO Capital Markets

Yes.

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

No.

Richard Anderson - BMO Capital Markets

Okay. All right, thank you.

Operator

And next question come from the line of J. Habermann with Goldman Sachs. Please proceed.

Jonathan Habermann - Goldman Sachs

Hey good morning. Jay just some question there on... in terms of pricing that you were seeing in the market. I know you have been out selling assets. But I am just curios if you are starting to see lease valuations or pricing become a little bit more attractive or do you still think that that's more of a back half of the year 2009 type timeframe?

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

I keep; I think I shared with you as your conference J. I keep quoting my pal Spencer Hayber who's one of our fixed income partners at H2 Capital. He went back and looked at the history of one real estate markets correct. And in so doing concluded that real estate markets correct from most liquid to least liquid in that sequence and so if you boil it down to other part of the world, if you take a look after the credit crunch started kind of say August sort of timeframe, if you look at where the first dislocations were, it was in CMBS for healthcare real estate that would be most liquid part of all the healthcare real estate.

And that obviously kind of really got locked there in the fourth quarter. Fortunately it presented an opportunity for us the week before Christmas when we surfaced with the $1 billion face states value investment in Manor Care. If you look at the next liquid, health care real estate market it probably would have been some of the bank syndication loans. And if you go back and look kind of in the February-March timeframe that's when a lot of the banks were starting to try to get ahead of the liquidity issues and began marking down those. Those don't trade nearly as frequently I say the CMBS but you saw some reduction in values there. And in fact we look at some of that stuff, but we concluded that notwithstanding the economics that was a little bit over the stretch from the standpoint of underlying real estate opportunity.

Obviously the least liquid part about the real estate of the properties themselves and we really haven't seen any correction. In fact if you take a look at the asset dispositions that we either closed down or have now kind of being signed up... by the way we do everything to get it signed up to get to that 750 number; forgot to mention that. We've really seen no change in the valuation matrix what's so ever.

So that's kind of our state of the world and we got our crystal balls any better than anybody else's. We've been rather fixated on what we think is the value creation opportunity for our shareholders and in last 13 months, the only opportunity that we've seen that kind of cleared the bar for our shareholders benefit was the Manor Care investment. I would think at some point that will start to turnaround. But as we sit here today on August 5, 2008 we've not seen that J.

Jonathan Habermann - Goldman Sachs

In terms of opportunities that may arise, obviously perhaps debt maturity driven, are you seeing perhaps at least some initial science of where there might be sellers were again they can get the financing or refinancing ?

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

Yes, we are absolutely I mean nothing is eminent take a look at what we are reviewing. There are a handful of those situations but I think I said on the... on our November call of last year which was for the... related to the third quarter of '07, I predicted with certainty that our fourth quarter volumes would be down versus the third quarter. On our fourth quarter call in February I predicted with certainty that our first quarter volumes would be down sequentially to fourth quarter.

On our April call relating to the first quarter I predicted our second quarter volumes would be down. And I am hear to tell you today I think our third quarter volumes will be flat to down probably down from second quarter. I do think based on the dialog that we are having that there's anything that obviously going to turn at some point and I am... it would appear though the fourth quarter might be the timeframe where you start to see that swing around the other way.

Jonathan Habermann - Goldman Sachs

Okay, and just switching gears back to the lease term that you recognized in July, was that consolidation driven? And can you just discuss a bit more in terms of the impact of consolidation on South San Francisco and San Diego?

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

Yes, good question. The answer is no, it was not consolidation driven. That was a company that had had a discreet drug program built around the prospect of an FDA approval, had built out a significant infrastructure which included the lease on our properties. They did not get the thumbs up from FDA that they had anticipated and made the decision to close everything down and they were particularly motivated to kind of close everything down and wrap it all up in the form of one charge that could occur in this quarter. So that's what drove that.

Now, the impact of consolidation is very interesting and there's been just a flood of M&A news and where we could come out and you've heard me talk about this before I think if you want to look at life sciences, you're probably limited to a handful of markets across the country. Obviously South San Francisco which is the birth place of biotechnologies, where Genentech was created in 1978, where it went public in 1982, that's ground zero; next biggest is the Boston Cambridge market and the third biggest is San Diego. So typically within those markets when you see consolidation, you have one of two phenomenons, both of which have occurred in spades with respect to our portfolio which of course is the legacy Slough portfolio. You see companies coming in that are... and they are acquiring other companies and you typically see those to be bigger higher credit companies and you get a... the economics all stay in place but you get a pop from a credit standpoint.

If you take a look at the Genentech news of last month, Genentech has credit ratings that are currently AA1, AA and if this transaction goes through where Roche acquires them, Roche is actually a step-up from a credit standpoint. They're AA, AA. So not that we are particularly concerned by the way of the credit stash or Genentech but in that case we'll have a pop from a credit standpoint, with respect to that.

The other phenomenon that occurs is that frequently sometimes there might be some consolidation and often times on that... that's why its so important to be in one of those core markets because a lot of times what that does is kind of free up inventory to enter into new leases with other folks that you are in different phases of the drug development pipeline. So we are absolutely thrilled with this investment, it's obviously gone... far exceeded our expectations. But we are... bunch of us were just up there two weeks ago with our leasing team, what's in the making here over the next year or two, particular with the CR Point entitlement news behind us now and a few other things as... that could really provide some meaningful growth for an extended period of time going forward for HCP shareholders.

Jonathan Habermann - Goldman Sachs

And just last question, the success of your sales program year-to-date, do you think that gets expanded beyond the targeted 750?

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

I think that would be Jay... that would be... on an opportunistic basis, I mean right now, we are kind of heading the other way here with liquidity. We've got significant liquidity, cash balances, we've got... we're going to have more in light of the asset sales coming in. So... and with some of the asset management, the actively asset managed opportunities that are creating nice economics for HCP shareholders they don't really require any additional capital. So, right now we have nothing on the front burner with respect to any other dispositions except for closing the two sales, the biggest of which of course is the Tarzana sale which we anticipate goes all closing down in the next 40... 30 to 45 business days.

Edward J. Henning - Executive Vice President, Chief Administrative Officer, General Counsel and Corporate Secretary Officer

Okay, thanks.

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

Yes.

Operator

Our next question comes from the line of Jerry Doctrow, Stifel Nicolaus Please proceed.

Jerry Doctrow - Stifel Nicolaus & Co.

Thanks you have already covered a lot of ground; I just want to go on a couple of details. The marketable securities that were sold, I assume that's not Manor Care, what were they?

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

We would not... those are marketable securities that we would not identify the particular security, it was not Manor Care by the way.

Jerry Doctrow - Stifel Nicolaus & Co.

But was it... it was just stock that you invested in... it's not a major... it's not Manor Care... it's not something else we would have known, it's just... I am just trying to understand the nature of what stock that you bought or was... any color you can give me on what it was?

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

We sold it for a gain. That's the --

Jerry Doctrow - Stifel Nicolaus & Co.

Okay. And I just want to go back to the basics. We talked a lot about Sunrise already, the basic of the CNL leases Jay. I mean my recollection on this it's been a while since CNL closed. Was it was kind of lease structure where there may have been sort of tenants sort of between you and Sunrise and you were then getting sort of a share of revenue gain. Can you just give me a little bit of background on sort of what the basics of that stuff is obviously about to maybe change as we go forward?

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

I think got exactly right. You have got... for tax reason there is... you got a third party tenant between many not all of those 13 polls and that certainly something I didn't get... the Sunrise, and the Veneer team [ph] at Sunrise are very impressive group of people we very much enjoy working with them and to be fair.. I mean they have been there a couple of months, so they got of kind sort out which direction they want to go. We have no particular black box of any particular way we have to go. And so were kind of standing down waiting for them to kind of figure our strategically what they would like to do. And our objective here is to be a good partner for them and it may well be the possibility that quite frankly some of those portfolios we may decide to kind of collapse that third party entity between ourselves and them given the flexibility we now have as part of the tax law change. So it just... there's all sorts of things we can do and it's nice now to have a flexibility to do it and have the individuals that are involved in that dialogue now focused on creating win-win opportunities for both Sunrise and HCP.

Jerry Doctrow - Stifel Nicolaus & Co.

And the third party tenant in the middle is not sort of an impediment or doesn't require big buyout here whatever.

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

We got... absolutely not here.

Jerry Doctrow - Stifel Nicolaus & Co.

Okay. And the gist of sort of what you're trying to accomplish there. I mean you sort of identified it is for both of you to sit down, identify sort of what pieces work out well and those might be rolled into sort of again a more simplified structure where Sunrise is the true manager and the stuff that they don't do well were it might make sense for both of you to move it to somebody else just gets sold or released to another party and that's kind of a broad generalization what might happen?

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

I mean those are examples... I wouldn't tell you don't do it well, I just said it ain't some of those --

Jerry Doctrow - Stifel Nicolaus & Co.

Right, I'm going [multiple speakers].

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

I didn't say they don't do it well I think for the some of the lower brands, lower margin brands, I think their forte is the development of that build-to-suit mansion product. They do a great job there. Some of the other things that quite frankly they kind of inherited or whatever got as part of other deals, that's probably not their highest, they choose quite frankly. It's probably a little bit of distraction to the main mission. So I think there's a lot of alignment that we see with the new management team. So we are really excited about... we just could go in, might be involved plus investing some additional money. So the range of outcomes here is very broad and again to be fair I think the new team at sunrise have earned and deserved the right to kind of sort that out and we're having chats with them and I don't think there's anything imminent there but we'd very much be interested in becoming a good partner for them going forward.

Jerry Doctrow - Stifel Nicolaus & Co.

Okay. All right thanks.

Operator

Our next question comes from the line of David Toti with Citigroup. Please proceed

David Toti - Citigroup

Hi, everybody. Just a couple of quick questions. Forgive I hooked on the call a little bit late, did you say that you have planned on extending the term loan second time?

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

Yes, David, no, no we certainly didn't say that. We said that we have a... it's the bridge loan; I think you're referring to not the term loan. Yes. And that was entered into just a year ago, had a one year initial term and has two six month extension features that are run at our option, and what we said was to $3 billion is now paid down to $1 billion, which by the way we anticipate that being down of about $900 million in a couple months time which Dennis kind of creates a natural hedge with our LIBOR based Manor Care investment. And then in that regard, what we said is that we had initiated and extended the first of those two, six months extensions features and that was a cost of 12.5 basis points.

David Toti - Citigroup

Right. And then just some sort of big picture views. What of Medicaid in states such as Florida and Texas and the direction that that's going in?

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

Well we have been pretty outspoken for several years and don't watch want we say watch what we do, we have been concerned about Medicaid, real estate that has a disproportionate amount of Medicaid exposure with it and again if you go back and look Medicare is the federal program, Medicaid is a state program. If we take a look at the source of state based revenue you got two big buckets, one our income tax revenues and the other our capital gain revenues, and because property taxes are typically down at the County municipality level.

So things were going great there for several years, and inevitably there was going to be a slow down in the economy; when the economy slows down you typically have job loss not job gain, which tends to make your revenues from income taxes start to go down. And in light of what's going on with the stock market and real estate market, the prospects of capital gain transactions have deteriorated probably even further. So I think there was a journal, a front page Wall Street journal picture of about two weeks ago... and have got it if anybody needs it, where it looked at every single state in United States and it coated red, those states with deficits.

If you go back look at when, in previous recessions that is, when you can anticipate the possibility of pressure on the state-based Medicaid because they've got to... they have got to somehow figure out a way to balance budget. So we have been concerned about that for some period of time, we continue to be concerned about it. We're at the point now where we've got next to nothing in terms of exposure of that revenue stream in our portfolio and that's our take on it.

David Toti - Citigroup

Great, thank you very much.

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

Yes.

Operator

Next question comes from the line of Chris Haley with Wachovia. Please proceed.

Chris Haley - Wachovia Securities

Thank you, good morning.

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

Good morning.

Chris Haley - Wachovia Securities

Jay, I appreciate your views on some of the portfolios in the medical office building segment that have been rumored to be on the market and may be your throwing out of the market and none of them seem to have closed, just a couple of ones that were... we are trying to keep an eye on and I don't know whether they're still out there or not, but may be I appreciate your views on portfolio pricing versus single asset pricing, hurdle rates that you guys might have an update on the MOB activity?

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

Let's see. As Paul mentioned we just closed on a portfolio of off campus medical office buildings in Indianapolis, the Cap rate on that was 6.9%. So that... in terms of transactions we've been involved in this year. I think that's the only MOB transaction from year to buy standpoint or sell standpoint. I'm just looking at the [indiscernible].

Chris Haley - Wachovia Securities

Counts [ph] that major portfolio?

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

Yeah, so that's really... so kind of have a limited, the data point Chris and that's it and it just closed so it's reasonably current. Paul you might talk a little bit about kind of return... you might want to speak to kind of, your return expectations and maybe why that has led us to more towards the development side of MOB as opposed to the acquisition side?

Paul F. Gallagher - Executive Vice President and Chief Investment Officer

Yes as I mentioned we've actually expanded our pre-development pipeline we're now up to seven buildings. We're looking at doing development returns in the 8.5 to 9.25 type of range and what we're trying to do is target anywhere from 200 to 250 basis points, kind of where we think stabilized returns are. So we haven't been able to see portfolios trade that have the opportunities on kind of an existing portfolio basis which has kind of led us towards more of the development side of the business.

Chris Haley - Wachovia Securities

Thank you, just a smaller package is a closure, are there portfolios that you are aware of or are there still some that you're looking at in your target markets?

Paul F. Gallagher - Executive Vice President and Chief Investment Officer

Well we look at things all the time Chris, we look at things to buy, sell and develop and we're constantly reviewing anything and everything that's out there and what gets through the funnel in terms of clearing the hurdles of a very small subset of that.

Chris Haley - Wachovia Securities

And then the... thank you. And the 8.5 to 9.25 rate of return, that is second year, third year from start just trying to add parallel the initial rate of return is about 7% on in the... it might go up from there in the second or third year are you looking at 200 to 250 basis points higher on your development?

Paul F. Gallagher - Executive Vice President and Chief Investment Officer

That number is Chris is, is it a pro forma based on market today, of net operating income divided by cost. So if you looked at an un-levered IRR on that type of investment, you are going to be in the high-nines to mid-tens on an un-levered IRR basis. So that kind of gives you the lock.

Chris Haley - Wachovia Securities

On the development side?

Paul F. Gallagher - Executive Vice President and Chief Investment Officer

Yes.

Chris Haley - Wachovia Securities

Okay, thank you. And last question, specifically on the senior housing and assisted living exposures. The... firstly your views on where some fundamental pressures maybe more evident both in terms of terms of concessions or supply risks in the markets that you are in.

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

I actually think, this base is holding up remarkably well, and I have personally talked with the CEO of early major concentration of senior housing real estate in last 30 days and they are all feeling, they are all experiencing some Q2 softness. But in July is gone well and move-ins are actually tracking at all time highs. In the second quarter you had move outs blip up and it wasn't because of there was a lack of move-in. So that's very important fact number one.

Fact number two, there really has been zero in the way of any meaningful increase in supply. So yet you've got industry wide occupancies for our portfolio turnings is very represents what's out there and slightly over 90%.

So if this is a downturn, it looks pretty good. I think we are increasingly hearing from our operators that they are having to get little more creative maybe be a little more sensitive on rate in order to drive occupancy, but that's kind of straightforward kind of business one on one, I would think. So from the standpoint... the thing that gets... that's why kind of sort to said where we will sit today moving obviously at the industry's gotten stronger... the healthcare industry's obviously gotten stronger in last couple of years and we have been through strategic moves benefited enormously from that. The thing that gets pretty excited about where we are right now because last time I checked a lot of other people had gotten stronger as well; two of the main groups of folks that a year ago it would have been bumping up against for opportunities are particularly challenged right now. One obviously is the private equity side of the business where their inability to secure debt is a real challenge for their economic model and then the senior housing properties themselves, perhaps on fairly little bit with all the concern over residential real estate spillover, they've had their stocks... their stocks prices clipped as well which has increased their cost to capital.

So on an absolute sense we are sitting here today without a doubt in the strongest position of our company's history, that's nice. But what's really interesting is on a relative basis we've kind of gapped out in terms of our competitive advantage. So that's why, this is so interesting to us right now. I think there certainly is some evidence that for operators that have exposure to first generation CCRCs where you got the big down payment which is typically sourced from the sale of primary residents. I think that is clearly a sub segment that has been challenged. But that's a reasonably small slice of the overall senior housing industry and it's even smaller slice quite frankly of our portfolio. And again, in our portfolio, we've got a lot of mature communities that came to us, through the American retirement transaction. So, that's kind of my general take as to what's going on out there.

Chris Haley - Wachovia Securities

Just a quick follow up Jay, would you expect your coverage ratios at your assisted living facilities to improve over the next 12 months, taking into account what you commented on in terms of revenue generation... and expense... expectations at the operator level?

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

Yes, forget about the next 12 months. Let's talk about the last three, I think Paul just took you through the meaningful increase in our coverage ratios, I think, what did you say, they went up from?

Paul F. Gallagher - Executive Vice President and Chief Investment Officer

They went from 1.05 to 1.19.

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

105 to 1.19 just in the quarter. So you are absolutely seeing that.

Chris Haley - Wachovia Securities

Thank you.

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

Yes, sir.

Operator

Our next question comes from the line of Peter Costa with FTN Midwest Securities. Please proceed.

Peter Costa - FTN Midwest Securities

Hi Jay. You mentioned sort of a more interesting deal environment and it sounds like you thought there might be some opportunities to use the new legislation to get some windfall sort of things where you could get some increase in occupancy or whatever. Is there anything in particular that you are focused on in terms of a specific sector where you think some kind of a transaction like that would be or is there anything more you want us give us about somewhat types of transactions you are working on?

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

No.

Peter Costa - FTN Midwest Securities

In terms of size?

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

No.

Peter Costa - FTN Midwest Securities

Okay.

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

Nothing else I would like to give any additional perspective on it is the answer to the question.

Peter Costa - FTN Midwest Securities

You don't feel like the opportunity to invest in being coming on more than operator or something you are going to see more over do you think that's in terms of and its first time you will able to do you think that it will be something is that what we were talking about when you said more interesting deal environment or its just a fact that...

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

No I am sorry I... I just in the previous call I said it seems really the... what's changed with the competitive dynamics which makes this very interesting, with particularly the private equity and the lot of the operators, particularly are challenged right now, that's what makes us particularly interesting from our standpoint, but we are active in each our five sectors looking at a host of opportunities and as I said, I expect for the fourth consecutive quarter volumes to be sequentially down from the prior quarter, but I... we are just trying to see some signs that there would be some situations out there that could become quite interesting. I want to reiterate in case people didn't... make sure there's was no miscommunication, we are not interested... not interested in becoming an operator of senior housing. This tax legislation which is great from our stand point we think is situation specific, we think it's at the margin and we think it will allow us to create a better risk reward ratio for our shareholders, but we've got some terrific operators. We have got the best operators, quite frankly in our portfolio and the last thing we want to do is compete with them.

Peter Costa - FTN Midwest Securities

Okay. So it's more just interesting from a deal flow perspective. Thank you very much.

Operator

Our next question comes from the line of Michael Mueller with JPMorgan. Please proceed.

Michael Mueller - JPMorgan

Yes, hi, just a couple of quick questions on the tenant restructuring, I apologize if I missed this, but can you comment on the three leases that were extended and the rent levels, did they remain the same during that time... during the new period?

Paul F. Gallagher - Executive Vice President and Chief Investment Officer

It was based on existing contractual rent up... rent for the extensions.

Michael Mueller - JPMorgan

Okay, so directionally does that stay flat or go up?

Paul F. Gallagher - Executive Vice President and Chief Investment Officer

Stay's relatively flat.

Michael Mueller - JPMorgan

Relatively flat. Okay and then the rent on a lease with Hoge [ph] versus what it was paying before is that a comparable number or is there a significant change there?

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

We'll... once that closes we are standing down until the... everything is contingent on the sale of Tarzana which is all buttoned up from a documentation standpoint, we're waiting for Providence to clear Hart-Scott-Rodino and once those transactions are all closed which I guess will be the next cost and relatively soon we can take you through that?

Michael Mueller - JPMorgan

Okay, and actually the last question was on Tarzana. The proceeds from that sale, is that embedded in the $750 million disposition guidance or does that exclude that?

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

No, its part of the 750. As I said, we anticipate $200 million closing next 30 to 45 days of which the Tarzana proceeds are in there.

Michael Mueller - JPMorgan

Okay.

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

So just to be clear with the Tarzana closing; and the other closing, we will be right on that 750 number that we had committed to in the first quarter this year.

Michael Mueller - JPMorgan

Okay great, thanks.

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

Yes.

Operator

: Our next question comes from the line of Adam Feinstein with Lehman Brothers. Please proceed.

Adam Feinstein - Lehman Brothers

Yes, thank you. Hi, good afternoon. Just... it's late in the call here so I'll just ask a couple of quick ones here. But just... as you were talking about looking at different asset classes earlier Jay, I was just curious, as you think about it are you willing to take up your exposure as... senior housing at 40% of your total assets under management, do you have a target level that you would not take that over or are you guys open to doing whatever is going to get the highest return on capital?

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

Well we are prepared to do whatever it takes to get the highest return on capital, the reality is being active in five sectors. It would be hard to imagine a scenario, where senior housing would get mean fully about 50%, we're already at about, I think to 37%, no 37% to 50% the size company [ph] that we have that's a lot of senior housing assets. But you have got... we are active in these other sectors as well. So I don't know I have an even prior better perspective than mostly anybody else on the call, I happen to think the hospital space increasingly is looking attractive. I mean if I you look at the micro perspective from the performance of the two large operators we have in our portfolio, when we know a little bit what's going on with the non-profit operator's given our window on their finances and the profitability from our medical office building portfolio. But my sense is that regardless who becomes our next President, I think you are going to see some form of universal health care coverage and I think as a result of that you are likely to see some sort of wealth transfer from the federal government to the hospital industry for profit, non-profit in the form of more coverage which ought to mean less bad debt expense. So I think, I think that's... that gets the hospital space potentially more interesting and that may in fact have bottomed in the last year or two. So that's one space I think we... we like what we have got. We're excited as all get out to get folks to call Hoge [ph] in our portfolio and we are actively trying to get others of that ilk into our portfolio.

Adam Feinstein - Lehman Brothers

Okay. Great. Thank you very much.

Operator

Our next question comes from the line Herb Tinger with Morgan Keegan. Please proceed.

Herb Tinger - Morgan Keegan

Thanks good afternoon, just two quick questions. First with the CPI network levels we haven't seen in a while, do you have any CPI based rent escalated with our cap?

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

The answers we do have CPI based escalators. It's... we have quite a candy store of different lease structures summer effects then some are CPI and some of the greater CPI and some as you have heard are LIBOR based. I don't Paul if you could elaborate on that or not?

Paul F. Gallagher - Executive Vice President and Chief Investment Officer

Yes I think if you look across the senior housing portfolio a lot of those do have either 6 months or may have caps on CPI of say 4% or things of that nature. Their MOB portfolio, we try and rate leases were it's the greater of CPI or 3% and we typically in our life science portfolio typically have six firms in and around 4% especially in our San Francisco market but it's a mix bag across the portfolio.

Adam Feinstein - Lehman Brothers

Okay. And finally Mark based on some more your comments earlier in the call, do you think that interesting... interest and other income line will go back to the $34 million to $35 million level in the third quarter?

Mark A. Wallace - Executive Vice President, Chief Financial Officer and Treasurer

Well the, I think the interest and other income line will go back to that level, probably in the fourth quarter I think you demanded I believe that the gain on tenant loss will run through the interest and other income line in the third quarter.

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

So it actually may go up.

Mark A. Wallace - Executive Vice President, Chief Financial Officer and Treasurer

Yes it actually may go up, Okay, but I think so your question is I think once we get, without any, sort of noise in the number like we had this quarter or will have tenant perhaps in the third quarter when they... on the effective day, I think $34 million to $45 million is kind of a normal, it's kind of normal rate.

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

And for Herb [ph] benefit, the two biggest drivers of that line are what the Manor Care and the ECA.

Paul F. Gallagher - Executive Vice President and Chief Investment Officer

Right yes.

Adam Feinstein - Lehman Brothers

Okay, thank you very much.

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

Yes.

Operator

Our last question comes from the line Jim Sullivan with the Green Street Advisors. Please proceed.

Jim Sullivan - Green Street Advisors

Thanks. Just a couple of quick follow-ups on the MOV development, Paul. When you underwrite your development deals, what sort of time frame are you underwriting with respect to stabilization that is how long between completion of the building and the time you achieve your stabilised yield?

Paul F. Gallagher - Executive Vice President and Chief Investment Officer

It's really a function of the pre release that we have Jim. Lot of times, we like to be 50% pre-leased. So what we'll typically do is, depending on the market and the size of the project, we'll go anywhere from 18 to 24 months after completion to get the building stabilised.

Jim Sullivan - Green Street Advisors

And you're pre-leasing philosophy does that dipper [ph] depending on whether it's on campus or off campus?

Paul F. Gallagher - Executive Vice President and Chief Investment Officer

I think it's really function... size of the building also factors into it but the more we can get to know the better the transaction we think we have. But in certain situations, especially if we have a track record, we might go below that 50% number and have done so in the past.

Jim Sullivan - Green Street Advisors

Would it ever under normal underwriting normal leasing conditions would it ever take three years to stabilise an MOV development?

Paul F. Gallagher - Executive Vice President and Chief Investment Officer

It's been very rare for us to take that long.

Jim Sullivan - Green Street Advisors

Okay. Great, thank you.

Operator

There are no further questions; I would now like to turn the call over to Jay Flaherty, Chairman and CEO, for a closing remarks.

James F. ("Jay") Flaherty III - Chairman and Chief Executive Officer

Thanks operator. Thanks to everybody. Enjoy the rest of your summer and for those of you who will be in Chicago at Nick [ph] in five weeks we look forward to catching up with you then. Take care.

Operator

Thank you for your participation in this second quarter 2008 HCP earnings conference call. This conclude the presentation, you may now disconnect. Everyone have a great day.

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