Healthcare Realty Trust Incorporated
Q1 2015 Earnings Call Transcript

Published: 7 May 2015

[Operator:]

Good morning, and welcome to the Healthcare Realty Trust's First Quarter Analyst Call. All participants will be in a listen only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to David Emery, Chairman and CEO. Please go ahead.

[David Emery:]

Thank you. Good morning everyone. Joining us on the call today are Scott Holmes, Doug Whitman, Todd Meredith, Carla Baca and Bethany Mancini. Now Ms. Baca will now read the disclaimer.

[Carla Baca:]

Except for the historical information contained within, the matters discussed in this call may contain forward-looking statements that involve estimates, assumptions, risks and uncertainties. These risks are more specifically discussed in the Form 10-K filed with the SEC for the year-ended December 31, 2014. These forward-looking statements represent the company's judgment as of the date of this call. The company disclaims any obligation to update this forward-looking material. The matters discussed in this call may also contain certain non-GAAP financial measures, such as funds from operations, FFO or FFO per share. A reconciliation of these measures to the most comparable GAAP financial measures may be found in the company's earnings press release for the quarter ended March 31, 2015. The company's earnings press release, supplemental information, Forms 10-Q and 10-K are available on the company's website.

[David Emery:]

Thank you. The company’s first quarter results reflected continued progress on multiple fronts. Higher revenue for the quarter correlated with positive operating metrics and solid internal growth. Highlighting the quality of the portfolio, stable tenants, superior rent coverage and low fungibility characteristics created a sustainable business model that is resilient and compounds NAV over time. In the long run, the compounding power of rent growth far outweighs the benefits of just heap leach spreads investing. With that said, it’s management’s imperative to invest in properties that not only provide accretion but more importantly advance, not dilute the sustainable growth for the existing portfolio. The size of the MOB inventory in the United States is estimated to be $280 billion, plenty to allow us to be selected with about a 7 billion net usage rates each year. Likewise with development, the more than 5 billion in out-patient properties being built each year by health systems gives the company the opportunity to develop properties but also enhance the compounding effect of the portfolio. We avoid offerings of aggregated disparate properties. Our ability to invest selectively, understanding a property’s inherent growth potential and clinical integration within a well-established health system insures our low business risk profile. We believe the latter will become more increasingly critical as health insurers reform and the Affordable Care Act gradually reshape the economics of the healthcare industry. Health systems are looking to strategically realign their assets and position themselves for the future of outcome-based lower cost care. With reimbursement policy now propelling outpatient expansion, combined with increasing capital demand, discussions with health systems for new outpatient facilities are more active than we've seen in some time. We expect development projects to proceed at a measured pace for us mostly on-campus facilities with significant leasing from hospital-driven services. The company’s strategy has served us well through several extensive changes in healthcare delivery and reimbursement, multiply recessions and the most recent financial crisis. Given the growth trajectory of the healthcare sector and the expansion of medical office real estate, we believe the prospects for our business model remain on target and the company’s future remains bright. Now as we do each quarter, Ms. Mancini will give us an overview and her views on current events and trends related to the healthcare industry. Bethany?

[Bethany Mancini:]

The operating environment for healthcare providers has been favorable so far this year and the regulatory landscape while in question at times has remained stable. The rebound in the economy and increasing exchange enrollment continue to support patient volume and Medicare reimbursement rates generally appear within expectations and benign. The legislative process and balance of power currently in Congress seem to be keeping health policy matters in line, avoiding draconian changes that might result in abrupt defects on the electorate healthcare spending and Medicare reimbursement. Ongoing political battles over the Affordable Care Act or ACA remain centered on unpopular effects of health insurance reform. They could possibly garner enough support to withstand the threat of a presidential veto. Legal battles over the ACA, specifically the King v. Burwell case that will be decided by the Supreme Court this summer, could endanger federal subsidies to exchange enrolees. However if the court sides with the plaintiff, allowing subsidies, either the president could allow states to work around the issue, or Republicans in Congress could rally around an alternate plan and offer a slow transition period to keep health insurance market stable and elevate consumers’ choice. Last month, Congress finally resolved the perennial Doc 6 debate spanning two decades of gridlock and 17 consecutive short-term fixes to the sustainable growth rate or SGR formula that determine the annual update to Medicare physician payment. The bill has been viewed positively by physicians and hospitals with manageable pay for measures and much-needed rate visibility for the near future. In addition to eliminating an annual vehicle for attached amendments with more regulations. There is clearly widespread support in Congress to uphold Medicare payments to physicians as they lead reform-based initiatives and provide care to the rising insured population. Accordingly, the Doc 6 legislation calls for a two-track payment system that incentivizes risk-based payment models to reimburse physicians for quality over volume. They will have five years of 0.5% positive increases in Medicare rate which should protect payment as they begin to transition to alternative payment model. In addition, the metric setting process outlined by the SGR bill requires the government to solicit quality indicators from doctor group, permitting them to influence their own standards and ensure adequate reimbursement. While uncertainty continues to fester from the implementation of health insurance reform and its various objectives, health systems are expanding the outpatient services as a definitive means to lower their cost of care. They are actively acquiring physician practices to create clinically integrated network that allow them to participate in risk based coordinated care models as well as increase their referral base. Outpatient care now comprises approximately 65% of hospital revenues and will continue to meet rising health policy demand for quality, patient satisfaction, technological advancement and efficiency. In this environment, Healthcare Realty remains well positioned to take advantage of growth opportunities in the ambulatory sector. The company maintains a low business risk profile, having a diverse base of physician tenants across more than 30 specialties with relatively lower concentration of Medicare and Medicaid patient and high rent overage. Approximately 83% of the company’s outpatient facilities are located on hospital campuses which results in high tenant retention and the ability to grow rental income steadily. Moreover 83% of the company’s facilities are affiliated with credit rated health systems that can navigate the evolving healthcare environment and ongoing vagaries of health policies. As they move quickly to make the structural and operational moves necessary to meet [indiscernible] physician to invest in their outpatient real estate. David?

[David Emery:]

Thank you, Bethany. Now on to Mr. Whitman to update us regarding balance sheet matters and capital markets. Doug?

[Doug Whitman:]

Throughout the first four months of the year, Healthcare Realty has been active in the capital markets. During the first quarter, we raised $31.2 million of equity through our aftermarket program to accretively fund a nearly $40 million on-campus acquisition. In the first part of April, we raised an additional $8.3 million. We expect to be similarly efficient in our equity issuance for the remainder of 2015 raising capital for upcoming acquisitions. In April, we took advantage of a low interest-rate environment and strong demand from fixed income investors to issue $250 million of 10 year senior notes at a coupon rate of 3.875%. In conjunction with this offering, the company called its January 2017 senior notes which were $300 million and had a coupon rate of 6.5%. We expect that redemption to occur in mid-May. This transaction will significantly lower our interest expense and extends the weighted maturity of our long-term debt by more than two years with our average maturity being slightly more than seven years. Given the current level of asset pricing for healthcare properties, we see the opportunity for selective dispositions that would increase our disposal volume above our historical norm. We expect to fund the $26 million make-whole payment and the $50 million principal difference between 2017 and 2025 bonds using proceeds from upcoming dispositions. The average cap rate on these dispositions is expected to be at or below the interest rate on the to-be-redeemed 2017 notes. The net annual pro forma accretion from the new bond issuance, the redemption of the 2017 bonds and the portion of upcoming asset sales is approximately $0.04 per share. The 2015 impact will be a little more than $0.02 per share with minimal impact in the second quarter due to the double interest in the period. In addition to these bond transactions, we’ve also repaid three mortgages totaling about $41.4 million at effective rates that averaged 5.7%. Over the next 12 to 18 months, we expect to repay another $47.7 million of secured debt at effective rates that average 4.9%. All of these mortgages were assumed with previous acquisitions. These various debt transactions coupled with the growth from our existing portfolio and development conversion properties, continue to improve our debt metrics. The rating agencies have noticed this progress and in March, Fitch upgraded the company to BBB flat and in April, S&P changed its outlook on HR to positive. As we look ahead into the rest of 2015, we will continue to be cautious in raising additional debt or equity, balancing the need to fund new investments accretively while maintaining a strong and flexible balance sheet and allowing our shareholders to benefit from the solid FFO growth expected in 2015.

[David Emery:]

Okay, good. Thank you, Doug. Now on to Mr. Holmes to give overview of results of operations and other financial matters. So Scott?

[Scott Holmes:]

The company reported first-quarter normalized and NAREIT defined FFO per diluted share of $0.38. The normalized items include an add-back for acquisition costs of $38,000 and severance costs of $141,000. For the first quarter, the Board of Directors declared a dividend of $0.30 per share and the dividend payout percentage is 78.95%. In the same store pool, the trailing 12-month NOI growth rate over the same period a year ago was 7.8% for the multitenant properties, including the development conversion properties and 3.4% for the single tenant net leased properties for a blended NOI growth rate of 6.6%. As we have said before, there will most likely be noise in the same-store NOI pool quarter by quarter. For example, the frictional turnover in a given period often distorts the underlying intrinsic growth stats. As illustrated on Page 23 of our investor presentation, the more predictive same-store metrics for the first quarter were contractual rent increases of 3.0%, cash leasing spreads for renewals of 3.6%, tenant retention of 83.1% and the average yield on renewal leases increased by 60 basis points. These metrics are reflected in the average rental rate per occupied square foot in same store pool which increased by 2.4% year-over-year in both the multitenant portfolio and single tenant net leased properties. Again, frictional turnover almost always models comparative short-term same-store NOI results. However the portfolio’s inherent lease turnover affords the ability to continually adapt to operational and economic conditions. Compared to year-end 2014, occupancy increased or held steady across the board throughout our portfolio. The total occupancy increased from 86.4% to 86.6%, inclusive of recent acquisitions with occupancy of 93.1%. We continue to be pleased with the direction of our leasing initiatives combined with operational expense management. The company’s strong tenant retention reflects the low fungible nature of the assets, enabling us to maintain positive cash leasing spreads, improve re-leasing yields and consistent annual rent bumps. These positive indicators reflect strong momentum for the key drivers to the company's future revenue growth. David?

[David Emery:]

Thanks, Scott. Now on to Mr. Meredith for information regarding the recent investment and development activities. Todd?

[Todd Meredith:]

In-place contractual rent pumps are the single most important component of Healthcare Realty’s growth each year. 84% of the company’s multitenant leases have annual rent bumps that average 3% per year. Cash leasing spreads are also critical with 10% to 20% of our leases expiring each year and tenant retention averaging over 80%. We've been demonstrating our ability recently to push rates well over 3% in the past few quarters. Achieving this level of embedded rent growth comes from years of honing the company’s portfolio and remains an ongoing process. As we evaluate properties to acquire or build, we focus heavily on the propensity for rent growth. We only want to buy or build properties that are additive, not dilutive to our annual rent bumps or our ability to push cash leasing spreads. As many of you may have noticed in our recent presentations, we’ve illustrated the impact of rent growth to our same-store revenue model and how it influences and leverages the bottom line. The vast majority of the MOB market and the steady increase of liquidity in recent years provides us ample opportunity to remain disciplined as we acquire and develop MOBs. In 2014 we looked at nearly 400 properties totaling 25 million square feet and representing over $5 billion in market value, which excludes nearly 2 billion of M&A transaction. As some of you heard us say, our investment appetite could range from $0 to $500 million in any given year. The goal is to identify properties that add to the intrinsic growth of our existing portfolio of properties. Rent growth requires pricing power which is a function of high demand and minimal substitution. In our experience, the property located on the campus of a leading health system is the epitome of low fungibility and steady rent growth. Last year we rolled out nearly all off-campus properties simply because they offered low pricing power. We continue to project measured acquisition levels in 2015 of between $75 million and $150 million with the possibility of exceeding this range if we see the right properties. While cap rates are historically low, in the low 6% range for suitable properties, our cost of capital enables us to acquire properties accretively when we want them. Taking advantage of these low cap rates, we further increased our disposition guidance to $100 million to $150 million. Visibility on this front continues to progress as a sizable asset sale is expected to close late in the second or early in the third quarter, with pricing expected to average in the mid 6% range for the year. We continue to make steady progress on several development and redevelopment properties. At our Nashville redevelopment involving a pair of on-campus buildings, we’ve completed the key phase of building upgrades and in April began site work for 70,000 square foot building expansion with vertical construction to begin in June. In the first quarter, we also acquired adjacent land for a 640 space parking garage to begin construction this summer. We currently have signed leases in hand for 83% of the combined buildings with over 90% expected before construction is complete in early 2017. In Birmingham where we recently signed a 138,000 square foot lease renewal and expansion, we obtained a building permit in April to construct an on-site 400 space parking deck that is scheduled to be completed by year-end. In 2015 we plan to spend $30 million to $40 million on these redevelopment projects and generate stabilized returns in excess of 8% on over $60 million of budgeted capital deployed over the next two years. Development of an on-campus 80,000 square foot MOB in Denver continues to move forward as the health system finalizes its programming needs. While the hospital is committed to lease a minimum of one third of the MOB, recent discussions indicate more than 50% is likely, including multiple specialty clinics and an outpatient surgery center. With a well-refined and differentiated strategy in an ever-expanding outpatient sector, our investment outlook remains positive, not solely chasing volume, instead balance between acquisitions, development and redevelopment and shaped by a persistent focus on long-term sustainable rent growth. A strategy that has proven resilient through many market cycles.

[David Emery:]

Thank you, Todd. Now operator, we are ready to begin the question and answer period.

[Operator:]

[Operator Instructions] The first question is from Jordan Sadler of KeyBanc.

[Jordan Sadler:]

First question is regarding the Doc 6, was helpful to have sort of some thoughts around the change in legislation. I'm curious though if there's been any change in your thoughts around underwriting and if that in any way had any impact on your decisions to -- up the disposition guidance or the potential to hit the acquisition guidance for the year?

[Todd Meredith:]

Jordan, this is Todd. I would say it hasn’t and I think at the margin it certainly reduces uncertainty although I think most everyone expected something like this eventually. I think the outcome is positive. I would not say it’s influenced disposition at all, that’s more opportunistic just given the environment and an ongoing process as I mentioned with the portfolio. But I think at the margin it probably helps a little bit having certainty and probably increases our confidence in terms of continued leasing progress in the portfolio as well as the development environment and acquisition.

[Jordan Sadler:]

Has the 0.5% bump over five years versus sort of what you guys have been focused on and looking for in terms of rent bumps of north of 3%, has that come into the conversation yet and will it make those discussions more difficult?

[David Emery:]

No, I think – this is David, you have to remember the context of the payment of rent in the whole position revenue model. It’s not material and so therefore any of the small changes really don’t reflect that behavior particularly from the standpoint of topography of where they have to be or where their practice is. It’s just not an item. There is a recent MGMA report indicated that rent and occupancy cost for the typical physician group in their study was about 3% to, 4.5%, 5%, so that should you some sort of context as to where occupancy costs fit in the overall cost structure.

[Operator:]

The next question is from Rich Anderson of Mizuho Securities.

[Richard Anderson:]

The disposition guidance increases, how much of that big one that you are expecting at the end of the second quarter is reflective of the total number of 125 million at the midpoint?

[Todd Meredith:]

It is certainly significant, it’s over half, so I think we will obviously have an update next quarter and give more color what’s beyond that.

[Richard Anderson:]

So over – let’s call it 75 million type number.

[Todd Meredith:]

Sure.

[Richard Anderson:]

Can you talk about your direct peers – talks a lot of cost cutting to get to the same store numbers. I am curious how you look at that as an element to your same-store outlook, how much is there in the way of savings that you can generate to support your same-store outlook?

[David Emery:]

Rich, I think we all have different views on but just at the very high level of expense management and as you know I have been at this 40 something years -- so much of it probably I would say – probably in the term of just looking at it in general, you’re probably in the high 60s, maybe sometimes much of 70% of your expenses, there's not a lot you can do with it and that has to do with taxes, insurance and some of those kind of those things. You can’t affect -- one of the biggest being utilities by management procedures and simply turning things on and off, et cetera. You go next – the cost of cleaning the building, that is such a competitive industry, most likely what we found over the years -- what we’re paying currently if we go to market, we say a dime and nickel, or $0.02 or something like that. There is not a lot of real big opportunity. We’ve even considered over the years sometimes of getting into the building, claiming business ourselves but we’ve tried that once or twice and we quickly got out of that. So it’s a frustrating kind of thing, it’s what you can actually do and expensive, Doug, I don’t know if you – Todd, anything –

[Doug Whitman:]

I think year over year we look at trying to keep expenses in general growing, it’s more about that and just keeping them contained and doing all the things that David talked about, to keep that expense growth in the 2% range over the long run which is well below that average of 3% in the revenue line on a per foot basis. So if you can translate that to leverage to the NOI level and grow little faster on the NOI line, then that’s for us the goal whereas on-boarding an asset yet, there is a little at the margin and frankly we think it's pretty quick and maybe there is a little personal benefit when we buy something in existing market but in general, we think it’s more about just containing expenses long term.

[Richard Anderson:]

On your normalized guidance, how much are you assuming the way of acquisition costs?

[Doug Whitman:]

I think this quarter was $38,000 –

[David Emery:]

We bought about a $40 million building this quarter and we normalized about $38,000. So it generally runs – last quarter was 400 and something, so it’s a little more significant but in a year that range is probably zero to $500,000 is probably a reasonable range, to think about in a quarter. It generally runs less than – I think if we kind of look at on a long term it was less than 1.5% of sort of the volume of assets that you are buying.

[Richard Anderson:]

And then last question, could you list of like the top four, five markets that you see the greatest opportunity for HR in the next 12 months for whatever reason, internal, external growth, relationships, whatever?

[Doug Whitman:]

Sure, Rich. Kind of thinking about it in that way internal versus external, I think internally just as you think about, we’re where we can push rents and see occupancy climbing and those types of things, I think we’ve got some opportunity in Hawaii, interestingly Washington DC area and even Indianapolis, so there’s couple of examples there internally and that’s just steady rent growth, we've seen some up-trends. Externally I would say the Northwest has been very good for us. We’ve made some acquisitions you’ve seen in recent years out there and you see some, frankly some development as well out there long-term. So kind of Seattle, Tacoma markets and then Colorado has been good for us, that’s where the Saint Anthony project I talked about, we’ve developed there before and expanded. Texas is always certainly ripe for some opportunities and we have some things going on there and then the redevelopment as I talked about Nashville and Birmingham which are kind of an interesting hybrid with some very nice you rent growth, especially here in Nashville with the redevelopment.

[Operator:]

The next question is from Mike Carroll of RBC Capital.

[Michael Carroll:]

On the discussions with hospital systems continue to rise, should this translate into more development opportunities in the near term or is this just discussions for now?

[David Emery:]

No, I think anytime you have movement or the big institution, bureaucratic institution usually indicates that something is going to happen. So I would say we kind of have to measure it, as many years as we’ve been involved, you kind of get a sense of it. I don’t think it’s more of a sense, Rod Hall [ph] who is doing a lot of that, just continually day-to-day whether we are launched or otherwise, anecdotally mentioning that we are talking to this now and that. So I would think it’s got a lot to do with the ACA thing and the Doc 6 and all these kind of things where hospitals now kind of have pattern of their ambulatory delivery of services and all those things. So I think it's just the confluence a little bit of that and I think you heard Todd say a minutes ago and I know Doug says a lot of times, uncertainty is the biggest issue regarding health systems and what they are doing. So the more you get clarity the more you begin to see activity. So does that answer your question? If not – it’s more of a general sense I guess.

[Michael Carroll:]

I guess this year I know the plan was maybe doing a few development starts, would you expect that, that’d be a little bit hierarchy discussions or is that going to be kind of a 2016 event?

[Todd Meredith:]

I think if you think about 2015 it certainly continues to remain a couple of starts and then the redevelopments as we’ve talked about now. So if you put that in that category and I think it’s longer-term, ’16, ’17 and beyond, where we’re having a lot of these discussions as David mentioned but translating those into starts, it takes a lot.

[Michael Carroll:]

And then Todd, can you kind of give us some additional color? I know you mentioned this in your comments about the Denver project. I know it seems like it’s been kind of close to breaking down for a little while now, do you expect that to occur over the next few quarters or you get more comfortable with that start date?

[David Emery:]

Mike. It’s always close.

[Todd Meredith:]

Well as you hear David say, hospitals are looking at calendars, we are looking at watches and man, it’s taken a while but nothing has changed in terms of the prospects of that. I think it’s just been a long process for the hospitals for retooling but what David said, retooling their ambulatory strategy and quite frankly they’ve delayed this enough, they’re going to take a lot of the building with them and third-parties that will make for a nice pre-leasing start. So it’s getting closer, I think certainly this year we see a start hopefully by summer.

[Michael Carroll:]

And then on those two redevelopment projects, are those 80% pre-leased, is that what the – I cannot read from the press release?

[Todd Meredith:]

Well, that’s – yes, I mean, again these are existing properties with tenant in them. It’s a little bit of a mix of tenants that are already there plus tenants that we signed new leases with. In Nashville, 33%, we’re doing an expansion of 70,000, so we’ve already had that spoken for and leased up, plus new tenants that will be coming into the existing space and other tenants being relocated. So it gets a little complicated but yes is the answer, 83% Nashville, the other facility in Birmingham is a 100%. So the weighted average is 88%.

[Operator:]

The next question is from Dan Bernstein of Stifel.

[Dan Bernstein:]

On the development, when you say measured pace, what kind of dollar amount should we be thinking on an annual basis? It can maybe go back up to $100 million of development or is that something that might be on the lower?

[Todd Meredith:]

If you think about a development, an individual development on average being in that 25 million to 35 million range for 100,000, 150,000 foot building. I think two or three of those a year would be under 100 million in terms of starts. So I think it’s less than 100 but it could certainly vary 50 to 75 might be a better number to think about in terms of starts. In the next couple of years, it could certainly be north of that if an individual property is larger or if we have an extra start.

[Dan Bernstein:]

Also I think you made a very good move paying down some debt and disposing of the assets. Internally when you had discussions about that, were you weighing paying down debt versus acquisitions or investments or the mutual exclusive? I mean the debt paydowns are fairly accretive, maybe accretive as an acquisition would be. So was that mutual exclusive or were they combined in your internal discussions?

[David Emery:]

They are mutual exclusive.

[Dan Bernstein:]

I don’t want to bust your chops on the retirement plan but I just want to understand what happened in terms of getting rid of the old executive retirement plan and then putting in a new plan that pays David, when I read that, I was worried David was leaving? Something was going on, but maybe totally innocuous but I just want to understand what happened there?

[David Emery:]

I think the plan termination is really – Dan, just look at it as kind of corporate house keeping. Firstly it eliminates a lot of the uncertainty, liabilities and removes earning and compensation volatility, that we’re always having for year-over-year different time of these periodic actuarial re-valuations and this creates volatility of compensation if people don't actually get changes in the plan and valuation of plan. So this is not something that 90 days ago somebody decided, this we’ve talked about for I guess years, Scott – probably for some period of time. I think secondarily there is kind of the close out of the legacy plan that’s not – no one has been added to it since ‘94 and thirdly, I think it’s just an evolution of current best practices related to employment method. So I think it’s just – these things are just not around much anymore and I think it’s one of the things that – as you move forward, we’ve changed some of the board structure and all those kind of things. So I think we’re always trying to do that. So I would think it’s more a corporate housekeeping. There is not any event as far as I am concerned or whatever. The termination of the plan is in no way related to board succession planning and I expect there will be some indication of those plans within the next year or two and we’ve talked about it before and I think there is really not many change and I think from the standpoint of the plan termination calls for the payment of cash but I personally requested, HR stock rose in cash in the plan and I expect to be around here in some capacity for many years to come. I hope that answers your question.

[Dan Bernstein:]

No, it did. I saw it in the 10-Q and didn’t know what to make of it –

[David Emery:]

Yes, nothing unusual, it’s just more of corporate progression, corporate housekeeping.

[Dan Bernstein:]

And then one last question, I didn’t see anything in the 10-Q about tenant purchase options. Can you guys give us some update on that for 2015 and there is anything we should think about for modelling into 2016 on those tenant purchase options?

[David Emery:]

We had one that exercised last year, it’s fairly small, less than I think 20 million or less, that’s in a process that you go through when those are exercised, we frankly don’t – asset held for sale, so we will see how that comes out. But it may sell or may not. So other than that, I don’t think we really have anything sort of it I would put on the horizon for ’16.

[Operator:]

The next question is from Rich Anderson of Mizuho.

[Richard Anderson:]

Sorry, I don’t know if I missed this, but do you – Doug, do you have any costs – what are the costs associated with paying down the debt early?

[Doug Whitman:]

Yes, there is a $26.8 million make-whole payment that we funded, we unwound some interest rate swaps to the tune of about $1.7 million just for general underwriting.

[Richard Anderson:]

Is there a one-time penalty?

[Doug Whitman:]

It’s a make-whole. Make-whole payment.

[Richard Anderson:]

How much is it?

[Doug Whitman:]

26.8 million.

[Richard Anderson:]

And when will that hit?

[Doug Whitman:]

Second quarter. End of Q&A

[Operator:]

This concludes our question and answer session. I would now like to turn the conference back over to David Emery for any closing remarks.

[David Emery:]

Thank you everyone. We appreciate being on the call and I guess next call is August 4, I think it is or 5. So we will be on the line then and otherwise we would be around today if anybody needing to follow-up calls or questions, would be happy to accommodate you. Thank you and everyone have a good day.

[Operator:]

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