Healthpeak Properties Inc (DOC) 2015 Q2 法說會逐字稿

Greetings and welcome to Physicians Realty Trust second-quarter 2015 earnings conference call. At this time, all participants are in a listen-only mode. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Brad Page. Thank you. You may begin.

Thank you. Good morning and welcome to Physicians Realty Trust's second-quarter 2015 earnings release conference call and webcast. With me today are John Thomas, Chief Executive Officer; Jeff Theiler, Chief Financial Officer; John Lucey, Principal Accounting and Reporting Officer; and Mark Theine, Senior Vice President of Asset and Investment Management.

During this call, John Thomas will provide a Company update, an overview of recent transactions and our strategic focus. Then Jeff Theiler will review the financial results for the second quarter and our thoughts for the remainder of 2015. Following that, we will open up the call for questions.

Today's call will contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. They are based on the current beliefs of management and information currently available to us. Our actual results will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe our assumptions are reasonable, our forward-looking statements are not guarantees of future performance. Results could differ materially from our current expectations and those anticipated or implied in such forward-looking statements.

For a more detailed description of some potential risks, please refer to our filings with the Securities and Exchange Commission. With that, I would now like to turn the call over to our Company's CEO, John Thomas.

Thank you, Brad. Good morning, everyone. Thank you for joining us. Just two short years ago on July 19, 2013, we started Physicians Realty Trust with 19 medical office facilities worth $124 million, generating $9.5 million of annual revenue. Since that time, we have increased both the quality and size of that portfolio and today, it exceeds $1.3 billion and generates annualized cash revenue of more than $98 million. And just as importantly, we continue to see high-quality opportunities to continue this growth.

We shared in our IPO roadshow a long-term plan to grow the organization quickly, but in a disciplined way with low leverage all for the long-term benefit of our shareholders. This morning, we have announced a number of exciting events all consistent with our original message and plan, which further enhance and establish our shareholders' company as a growth stock investment. We have a strong liquid balance sheet, high-quality healthcare facilities, industry-leading occupancy and lease stability with over 95% occupancy and an average lease term of 9.25 years, including the medical office investment announced today, but closed after June 30.

These announcements include total year-to-date investments of $480 million and an average first year cash yield of 7%, growth of 57.8% in gross real estate assets year to date. Upon closing of the IMS Phoenix investment, we will have completed $621 million of investments this year. We now own $1.3 billion of medical office facilities, growth of 942.5% in our 24-month life. Additionally, we feel confident enough with our visible pipeline to increase our acquisition guidance by $200 million this year. We are now projecting total acquisitions of $700 million to $900 million of high-quality healthcare facilities in 2015.

Revenue has grown 45.7% this year to date and our annualized cash revenue now stands at $98 million compared to our $9.5 million of revenue when we completed our IPO. The average size of our 19 facilities at our IPO was 27,000 feet. Today, we own 124 facilities with an average size of almost 38,000 feet. Our original 19 facilities were 85% occupied, which compared to 95% as of this morning. With the anticipated August closing of the $141 million IMS Phoenix investment, our total investment balance will grow to $1.43 billion and our average building size will grow to approximately 40,000 feet.

With IMS, we will add yet another healthcare community to the 14 markets where we have geographic concentration, enhancing our economies of scale for efficient property and asset management and multiple provider relationships. IMS is a very high-quality physician-owned and led, multispecialty group affiliated with Dignity Health, one of the largest healthcare systems in the West. IMS already has 140 providers and has added 31 physicians already this year. The physician-owned outpatient care office buildings, three of which are on hospital campuses, contain over 400,000 feet of Class A real estate. We believe this investment will be just the beginning of the opportunity to grow with this leading physician organization.

We also announced Moody's Investor Services has recognized Physicians realty Trust organization, assets, balance sheet and operating philosophy with the highly coveted Baa3 investment-grade rating. Since the IPO, we have approached our growth with the mindset of an investment-grade company and we intend to continue to manage the organization this way. Our Board and management believe low leverage and disciplined balance sheet management will optimize total shareholder returns over the long term.

Finally, in March, we announced our founder, John Sweet, had agreed to extend his contract to serve as our Chief Investment Officer through the end of 2016 and that we had a plan to identify and retain a successor Chief Investment Officer before the end of 2015. This morning, we announced the appointment of Deeni Taylor as our Executive Vice President for us starting October 1, 2015 and we plan for Deeni to assume the additional title and responsibility of Chief Investment Officer upon John Sweet's retirement.

Deeni has over 25 years of hospital executive management, 25 years of experience with hospital executive management, with the largest healthcare system in the United States. Since 2006, he has helped lead the medical office building division at Duke Realty and through his tenure that ended in June 2015 his team built one of the best portfolios of medical office buildings in the United States. Deeni will hit the ground running, not only working with John Sweet and our team to evaluate and manage our investment opportunities, but Deeni has a depth of relationships coast to coast that will even further enhance our ability to identify, underwrite and grow our investments in high-quality medical office facilities with the highest quality providers. We look forward to introducing Deeni to you in the future as part of the DOC team.

On our last earnings call, we announced our goal to pursue an investment-grade rating in 2015 and if successful begin the transformation to a long-term capital structure. As noted, Moody's has recognized our team, assets and balance sheet with this investment-grade rating. The Board, management and team have all worked hard to achieve this recognition, but we want to recognize our CFO, Jeff Theiler, and his leadership and hard work in achieving this recognition.

Before I turn the call over to Jeff, I would like to conclude with a note of appreciation to you on the call. We are a growth healthcare real estate company. We've pursued this growth from the beginning with a commitment to be disciplined and transparent to our stakeholders and clients. We are proud that this commitment to transparency and the content of our communications was recognized by NAREIT with the Gold CARE and that is the Communications and Reporting Excellence award for small cap REITs. Winners of this award are selected by a panel of securities analysts and portfolio managers.

Thank you to those on the call who are on the panel and selected us for this award the privilege to communicate with you. Your feedback makes us better. We encourage you to provide us all the constructive feedback you can and we look forward to your questions later today. With our ability to grow and your support, we look forward to earning this award from you again in the future. Perhaps in the future, it will be for the large cap REIT category.

I will now turn the call over to Jeff to discuss our financial results for the quarter, the short and long-term benefits of our investment-grade rating and after that, we will be happy to take your questions. Jeff?

Thank you, John. We are pleased to share our results for another successful quarter of operations. Our second-quarter 2015 funds from operations or FFO were $13.2 million or $0.18 per diluted share. Our normalized FFO, which added back $2.6 million of acquisition expenses and some other small normalizing adjustments, were $15.7 million or $0.21 per diluted share. The year-over-year increase is 23.5% from the second quarter of 2014. Normalized funds available for distribution or FAD were approximately $15 million or $0.20 per diluted share, a year-over-year increase of 25% from the second quarter of 2014.

We are excited that we have been able to continue this high level of growth for our shareholders and we see the opportunity in front of us expanding. With the pending appointment of Deeni Taylor as Executive Vice President of Investments, the signing of the $141 million IMS portfolio and the state of our current pipeline, we now feel comfortable increasing our acquisition guidance by $200 million for the remainder of the year. This equates to total acquisitions of $700 million to $900 million for 2015.

In the second quarter of this year, we invested $157 million in 13 high-quality healthcare facilities with an average first-year cash yield of 7.4% and one mezzanine loan investment that paid interest at a rate of 8.4%. Had we acquired all of these assets at the beginning of the quarter, they would have generated an additional $1.8 million in cash net operating income. In addition, subsequent to the end of the second quarter, inclusive of the Phoenix IMS portfolio, we have acquired or entered into agreements to acquire an additional $229 million of assets with an average unlevered first year cash yield of 6.6%.

We funded our acquisitions primarily with our revolving line of credit, which we upsized to $750 million in July and now have the ability to expand to a total size of $1.1 billion. At the end of the quarter, our revolving line of credit had a balance of $191 million, leaving us with plenty of capacity to fund our growth plans. We continue to maintain a strong balance sheet. Our total secured debt is $95.7 million or 8% of our asset value. Our overall debt to assets is just under 24% and net debt to adjusted EBITDA is 3.4 times. Both of these metrics are solidly in the investment-grade range.

Moody's Investors Service specifically recognized that fact yesterday as they initiated coverage of our senior unsecured debt (technical difficulty) with a Baa3 investment-grade rating. This rating was earned by our disciplined growth and commitment to building a long-term company. This excellent outcome will enable us to access the debt markets at favorable rates and will lower our cost of capital significantly on both the revolving credit facility, as well as on any long-term debt we issue in the future.

On the operations front, our portfolio was just under 95% leased at the end of the second quarter. Additionally, this is the second quarter in which we have reported our same-store portfolio statistics. As a reminder, our same-store portfolio is a relatively small part of our overall portfolio at 37% and relatively small adjustments can significantly impact the results. Our same-store cash NOI for the second quarter of 2015 grew 2.3% year-over-year, which was driven primarily by contractual rent increases of roughly 2.8% and offset by operating expense growth of 4.9%.

Finally, our general and administrative costs for the quarter were $3.9 million or $3.1 million on a cash basis. The increase was primarily driven by salary expense accrual, which was in line with our expectations. We continue to maintain effective control on our costs and make progress towards our target of reducing overall G&A to less than 1% of assets. With that, I will turn it back over to John.

Thanks, Jeff. We will now turn it over for questions and answers.

(Operator Instructions). Jordan Sadler, KeyBanc Capital Markets.

Thank you, good morning. So congrats on the investment-grade nod from Moody's. I guess I am curious about the follow-up we might see or expected timing on a second rating, if you think that is imminent and sort of maybe if you can sort of provide a little bit of color, a little bit of an update on when your inaugural bond deal you may look to get off?

Jordan, it is Jeff. So we spent the last two years with Moody's walking them through our assets, talking to them about the Company's strategy, laying out a game plan, executing on that game plan. And so the benefit of that was, by the end of the process, they felt very comfortable with the Company's strategy, the management team, the portfolio and gave us that investment-grade rating, so it was a pretty long engagement. We are continuing to do that with the other rating agencies and if and when we receive an investment-grade rating from them, we will certainly report that to you.

But I think the key here is that -- the first one here, this Moody's one, is really the important one because it does a couple of things immediately. It reduces the costs on our revolving line of credit. We go from a leverage-based grid where we currently are at the lowest leverage level. We pay 150 basis points over LIBOR to an investment-grade pricing matrix, which will charge us LIBOR plus 120 at our current Baa3 rating, so you get an immediate benefit there.

It also gives us access to the private debt markets at investment-grade rates and if you look at the private debt markets versus the public debt markets right now for fairly new investment-grade issuers, you get much better execution in the private debt markets on a pricing basis. So we feel that we have got really a great ability to go out there and access capital right now in the private debt markets, as well as our bank markets actually. But all that being said, we are continuing to engage with S&P and Fitch and we will report those ratings if and when we get them.

I think were you suggesting that you could do the private deal or bank deal in advance of a second rating, a second investment-grade rating?

Yes, we are. We are looking at all the options and we continue to weigh all the options, but we certainly have the ability to go do a private deal right now with our current rating.

Okay. I guess as it relates to this cost of capital shift somewhat, which I know you guys were anticipating, how does this impact, John, underwriting or -- so on assets and/or the target assets that you might be looking at?

I think we have said from the beginning that as our cost of capital improves, we can be -- kind of move up the quality scale, but we are still seeing lots of great opportunities in secondary markets where we get favorable pricing. I think our relationship model continues to get us favorable pricing even in the bigger markets and with the bigger, higher quality assets, i.e., the IMS portfolio we talked about. I think you will still see just the range across the board where we pay up for quality. Now we have a cost of capital -- we continue to have a cost of capital that allows us to do that and we are still seeing lots of great opportunities that are not as expensive, higher yielding and are helping us fuel our growth.

Okay. And then last one, Jeff, just a follow-up on sort of the quarter. I feel like relative to model, and we can follow up on this off-line a little bit, but relative to model, and I know there are a lot of moving pieces, a lot of acquisitions in the quarter and last quarter, I feel like the FFO came in a little bit lighter than expected relative to our model, but probably relative to the rest of the street as well. Was there anything driving that in particular that you can flag for us in the quarter that was more of a one-time item or do you think it was all purely acquisition timing?

Yes, it is hard to answer without directly looking at your model. I'm happy to do that with you off-line and see if I can flag what might be a difference in this quarter. I think a lot of it is acquisition timing. If you look at our acquisitions for the quarter, the bulk of them were June and a lot of them were actually the last day in June. While the overall number seems to be in line with probably how most people are modeling it, I would imagine most people are modeling those acquisitions to occur earlier in the quarter, at least midway through the quarter. So I think from my perspective the vast majority of that is probably going to be acquisition timing.

Okay. Thanks, guys.

Juan Sanabria, Bank of America Merrill Lynch.

Good morning, guys and congrats on the investment-grade rating. John, I was just hoping maybe you could speak to the pipeline and kind of what we should be expecting for the balance of the year, more skewed towards the cap rates we were seeing earlier in the year, sort of closer to 7%, 10% plus or more sort of mid-6%s. Maybe as the quality improves, some of the more recent deals, what the ballpark of the range should be.

Yes, the IMS portfolio, which has not closed but we described today in our release and we've talked about today is a very nice -- bulky and that helped drive and fuel the increase in guidance from the $700 million to $900 million for the rest of the year. It is easy to say that we feel pretty good about that range, particularly at midpoint of the range and a high degree of confidence there. We are seeing some high-quality assets out there. There is some high-quality small portfolios that are floating around and will attract and will demand a higher price. We are still in that 6.5% to 7% plus range. I think we are right at 7% for this quarter on a blended basis across the pipeline. And so I think high 6%s to 7% is still a good number for the remainder of the year.

Are you seeing any movement in cap rates or a sense that things may begin to turn with what has happened in the capital markets or still too early to tell if there is any change in the level of competition for deals?

Yes, I think the easy answer is it is too early to tell, but I do think there is more talk of investors like us that pricing needs to start adjusting and I think that is translating into the market discipline of -- again, there are two or three portfolios out there that we are really not involved in, but they are going to command a pretty high price from a size volume discount or volume premium, if you will. So I think overall Class A on-campus buildings that are going to attract the most potential bidders are going to command in the low 6%s or 6% and portfolios that have any quality in them may demand 6% or less. But I do think, it is too early to tell, but I do think that the market generally -- the buzz if you will is asset prices need to start reflecting where the 10-year debt is moving in your Treasury (inaudible).

And for Jeff, just a couple of quick ones. Expectations for G&A, how should we think about that with Deeni's addition and just any thoughts on timing of dividend coverage?

So for G&A, at the end of last year, or I guess fourth-quarter earnings call, we talked about G&A of $14 million to $15 million for 2015. I think we are still on track for that. I mean I think with Deeni it probably pushes to the high end of that range frankly, but we still feel good about that number. And then in terms of dividend coverage, look, we continue to make very good progress toward covering our dividend. We have talked about by the end of the year we would still stick to that. I don't see any reason why we wouldn't be covering by the end of the year.

Great. Thank you.

Michael Gorman, Cowen Group.

Thanks, good morning. If I could just follow up on Juan's question, maybe ask it a different way. As you are looking at the investment pipeline and as you are out in the marketplace, have you started to see any deals maybe that you had missed out on or that you hadn't won come back to you? Are you starting to see any assets being retraded in the marketplace?

That is an interesting question, Mike. We actually have been seeing some of that. I think some for different reasons, but some for private buyers who for one reason or another couldn't get to the finish line with their capital stack. But we have seen that, two or three instances of that and frankly, if it is something that we had looked at and either put in of rent or passed on it, our price has typically been lower than where the deal had been struck and then not closed. So we have seen a couple -- we have seen a couple try to just flip their contracts to us and for the most part, we have not participated in that.

Sure, sure. Okay. As we think about the back half of the year and kind of getting to maybe the midpoint of that acquisition guidance, I mean should we think about it more in terms of the smaller deals that we saw through the first six months or is it going to be a little bit chunkier like the Washington acquisition and now the Phoenix acquisition? Is that going to be more prevalent in the back half of the year?

I think we have got some sizable opportunities, but we have got lots of our bread and butter $15 million opportunities as well. So I would say things kind of shut down in December, so I think most of the closings will be by then, but otherwise I think it will be kind of a blend of what you have seen throughout the year, but we will work until December 31.

Okay, and then maybe just one last one on the investment front. Can you just talk about, as you are out there working with the physicians groups, what you are hearing on kind of seller motivation right now, what is driving it. Is it investment in their practices? Is it trying to expand or what is the motivation to cash out the real estate or to find a partner for the real estate?

Yes, IMS is the most recent example and their motivation is a couple fold. One is they are hearing from people that it is kind of top of the market of the seller, so they are capturing that. They have added 31 providers this year and just growing like crazy and they need additional facilities and so they have kind of self-funded, self-developed these beautiful Class A, three of which are on-campus 100,000 square feet facilities. And they need to develop more of those and they want to develop more of those. They kind of like this development model. It's a very large, very sophisticated physician group that has got this alignment now with Dignity Health and is really providing capital for them to grow, but they need both real estate capital and capital for their baseline growth. Same things we have been hearing them talk about for a couple years -- IT investments and investments in new physicians.

Okay, great. And then one last one I think for Jeff. Can you just talk about, I know it is still a minority of the portfolio, but in the quarter, what kind of was driving the operating expense line? And I know it is not that big a number, but I am just curious the 5% growth in same-store expenses and kind of what that is going to look like over the long term?

Mark, do you want to address that? Mark Theine is sitting here.

The same-store percentages isn't that large at 37% of the portfolio and Jeff mentioned in his comments that some small adjustments can make large numbers and percentages. Actually there are two that are one-time events, one is an insurance invoice that we had a one-time payment for a triple net lease, so that was an increase in expense there. The second was an increase in expenses at our building with Summit Healthplex where we reduced some of the lease payments and we did that because of -- and had some expenses involved with that because we signed a new 20-year lease that will be commencing this fall at that particular property. So a couple of one-time items that happened in the quarter.

Great. Thanks, guys.

(Operator Instructions). Jonathan Hughes, Raymond James.

Thanks for taking my questions. I was wondering if you could give us an update on maybe any development deals you may be looking at or projects under development that you have agreed to acquire upon completion and then maybe what yields those potentially would be bought at?

This is John. Kind of the biggest commitment we have made in that space, we closed in July. We did expect that to close in June and the project was completed in June, but for a couple of reasons it didn't get closed until July. That was the Kennewick, Washington medical office building, a very large investment, $64 million and our yields on that, a first-year yield of 6.6%. It's a 20-year lease with 100% leased to the hospital and a 2.25%, a 2.3% increase. It's a really attractive investment. The developer is a Wisconsin-based company and a long relationship with Governor Thompson that is really the source and how we secured that deal.

We have some optionality on a couple of projects, one that may close by the end of the year. Again, assuming the (inaudible) deliver and the tenant commences and we have every expectation they will. We have a very attractive price on that in the high 8s on that investment. If we proceed with it and frankly, we expect we will, but we have the ability to walk away as well.

We have got a couple of others, small MOBs again where we are not taking any development risk and we have some optionality to acquire it on the backend in exchange for a small mezzanine debt or a small, no capital commitment upfront.

Okay. All right. Thanks for that. Lastly, just kind of touching on Jordan's question earlier about the FFO discrepancy versus what most of us had modeled, you showed a breakdown of lease type by gross and net on 16, which is helpful. Do you have kind of like an NOI margin split between -- specifically for the gross leases? Just think that would maybe be helpful to try and clear some of it up going forward.

Jonathan, we lost you just for a second. What was your -- what was the point to the question?

I was just trying to see if you could maybe give kind of an NOI margin breakdown for the gross leases and kind of help us -- because we were a little high on the NOI margin that we had modeled for the quarter.

We will follow up with you on that, Jonathan.

Okay, fair enough. That is it for me. Thanks, guys.

John Kim, BMO Capital Markets.

Good morning. I was wondering with Deeni's appointment to the executive team how, if any, are acquisitions going to change at all. For instance, are there going to be more acquisitions with the hospital beds or potentially any acquisitions from Duke?

Great question. We expect Deeni to bring a lot of his relationships. It's kind of funny. John Sweet, Deeni and myself have been competing with each other for so many years chasing the same relationships, same quality and high profile healthcare providers. So again, we are excited. While the three of us are together for the next 18 months or as long as John Sweet wants to work, we just see additional opportunities and additional reach of the team and the breadth of the relationships and the quality and frankly less competition from Deeni at Duke. So all of those are good things.

I don't think it changes so much the nature of it other than Deeni's focus has been very health system-driven, but he has also had some physician group (inaudible) as well, exactly the same kind of things that we have been pursuing for investment. Broader reach, broader opportunity, broader ability to get to more opportunities.

Just to clarify your answer to a previous question, are you going to be looking to do more development type of acquisitions or something that is some kind of development angle potentially?

We have always said that we would like to be kind of the partners to developers and exit path for developers, but not building a development engine or team. Deeni did a lot of development within Duke. Duke is much more of a development REIT than we are, far more than we are and more than most healthcare REITs. As we grow, the percentage of creative development takeout relationships we will have. We will grow because the denominator is growing, but we will still keep a very modest 5% to 10% kind of of our pipeline committed to those kind of structures and with a lot of optionality. So I wouldn't really see any change there in the way and how we are approaching development.

And as you are growing your portfolio, how do you feel about your staffing levels particularly on the asset management side?

Yes, asset management has really rounded out well recently. We have had a couple of really great new additions in that space. R Davis, our partner in Minneapolis, we bought his portfolio back in the spring, frankly has been a great addition to the organization. Just did that partnership because he is the kind of frontend property manager and asset manager for that portfolio and others in his market that we have been sourcing. We feel very good about that. The scalability of the team is -- for what we have got on our plate for the foreseeable future is, we think, is very strong, very high scalability.

The same thing on the accounting and kind of other back office. We have had three recent additions there that -- again these are all (inaudible) positions, but we continue to focus on finding DOC-eligible people and so we have had three great additions in that group as well. So feel very good about that. With Deeni's addition, it will always be helpful to find some underwriting and analytical support and we have got a good team doing it now.

Maybe a little bit early to ask about this, but what are your plans with the mortgage debt, when they become due in the next couple of years?

I think as we can pay off mortgage, we will be paying off mortgage debt. We like running an unencumbered portfolio, we think it just gives us a lot of flexibility as we consider our options on the financing side. So I can't imagine that we would really be adding mortgages to new properties or even keeping mortgages on existing properties.

Okay, great. Final question, you did a $9 million mezz loan this quarter. It is not very big, but can you just maybe elaborate on the strategy of this, how big do you want your mezzanine investments to get and maybe the rationale of this particular investment?

This is John Thomas again. That is a means to an end. We've got a few of those mezzanine loan structures out there, they happen to be all with GE. It's a senior debt, they have all been in connection, most of them have been in connection with developer recapitalizations looking to a four to five-year hold post construction. The developer of that facility owns hundreds of millions of dollars of buildings and we have had a great relationship for several years and [team] was looking to recap and sell that building. It is a very large medical office building, built in Jacksonville, Florida. Every healthcare development firm and REIT that I know that does development chased that opportunity several years ago and Landmark one it and delivered a facility lease primarily to the University of Florida Health System.

So very strong credit. GE put out a press release about this as well. It is about a $100 million building. So we get a nice premium yield on our mezzanine loan, we have got a lot of equity behind us and we have some rights on the back end, not a true call option, but some preferential rights on the back end to buy that building in the long term. So we see it as a means to an end, a nice little tool in the toolbox for investment and building the pipeline over time, a lot of optionality. There is no put in that deal, so we will get paid at a premium yield on a very premium building that the University of Florida is going to build a hospital next to it in the next couple of years. So before we had the -- we expect to own it, we will be able to see what they have done on that campus as well. Again, as a percentage of our pipeline, mezzanine loans as a tool, development, takeout as a tool, I said 5% to 10% a minute ago. It is really 5% or less of our kind of asset mix and pipeline commitment and expectations.

So the mezz loans going forward, are you going to be investing in them with the idea to purchase the assets?

That is exactly right. That is a good summary and like I said, it is just a tool. We are not out shopping for mezzanine paper. We are out shopping for great healthcare facility investments, buildings to invest in and some of the owners are just not ready to sell, but we have got some good access points in the future.

Okay, great. Thank you.

Craig Kucera, Wunderlich Securities.

Good morning, guys. A couple of questions here. I apologize, I may have missed this, but with the increase in acquisition guidance, how do you think about the size of the potential bond offering and where do you think pricing is going to settle into that?

It is Jeff. So we are flexible on the bond offering. I think right now we are probably looking $250 million to $300 million range, but again we always are tweaking that depending on the pipeline that we see going forward and all that. So that is a pretty good faith estimate and what we are seeing now in the private markets is probably all-in pricing on a 10-year average duration. If we were to tranche it out, you could do an 8, 10, 12 for something, but probably 2.25 to 2.5 over the treasury. So that is about the pricing that we are seeing right now in the private markets and it is about -- if you were to go to the public market -- you are probably an additional 25 basis points to 50 basis points wide of that pricing.

Got it. That is helpful to understand from a modeling perspective. And then, John, a question for you. Can you give us some additional color on the concept of the dream team?

What did you say, Craig?

Can you tell us a bit about the dream team?

Are you talking about Deeni, adding Deeni to the team? If that is what you are referencing.

Yes.

I think when we started this -- when John and Mark and I started this Company with Governor Thompson three years ago, I think we laid out who over time would be the best additions to the organization. Frankly, Jeff Theiler was high on that list as well. So we couldn't be more excited about Deeni coming on board. And those of you investors on the phone who know Deeni, I hope you feel the same, but others haven't met him, you will. Deeni's relationships just are so deep and frankly most of the deals that I lost that were relationship-driven deals were to Deeni. So we just think we are just building out a great team here for the long term and Deeni couldn't be more excited to join the team as well.

Appreciate it.

Michael Carroll, RBC Capital Markets.

John, how did you force the IMS Phoenix portfolio? Was that an existing relationship that you had?

They had an advisor, so there was some competition, but it was not widely marketed; it is not one that popped up on the Internet for everybody to sign up for. The advisor is somebody who we have a great relationship with and understands kind of what we are looking for and understands in this particular case trying to match her client, it's a team, him and her, but -- so lightly marketed, but I am sure it went to 5 to 10 organizations that the advisor was trying to match make and we got out in front of the physicians quickly and visited the buildings quickly and building a great relationship with that group. Like I said, we haven't closed yet, but a couple of conditions left to satisfy, but we do expect those to satisfy and close quickly.

How do you plan to grow with them, (inaudible) physician group? How many assets or how quickly are they actually growing and is this entirely through development? Do they have existing properties that you could also purchase?

So they own these four. They have some smaller ones, but these are the four that we were focused on. They weren't really marketing the others or seeking buyers for the others. I think it will be a combination of both ground-up development that they will fund through their sources and look to exit to those to us upon completion or thereafter. I think we have worked with a couple of groups over the last two years who went out and bought a building, rehabbed it for their purposes and then sold it to us upon completion of that process.

I think it will be a combination of both. No specific color on sizing or how large that can be, but this, as I said a minute ago, the group has added 30 physicians this year already and has part of a big accountable care organization in the Phoenix market and a growing relationship with Dignity Health and a tenant, which operates as Abrazo in that market, is also part of an ACO and looking to kind of expand that ACO provider network, which is primarily through the IMS physician network.

Okay, and then when do you usually start talking to I guess the tenants with expirations in 2016 and 2017? Have those discussions already started?

Yes, those have already started. You typically look out 12 months to two years to initiate those discussions. Mark mentioned a minute ago kind of a one-time adjustment or operating expense this year where we deferred some lease payments in connection with an extension of a lease that is actually extending out beyond 2028. So most of the 2016 discussions have already occurred and we have good insight into where those renewables will be and where the renewables will occur.

So do you feel comfortable about those expirations over the next 18 months?

We feel comfortable about them, yes. Still working through terms and how long and the rent bumps and adjustments, but we feel good about them and high renewal rate should be at or increasing rents.

Great, thank you.

Paul Morgan, Canaccord Genuity.

Good morning. Just in terms of -- as we think about modeling the acquisitions for the rest of the year, you said some of those were maybe a little early in the second quarter. How should we think of timing for the third quarter? Obviously you had a healthy amount in July, but for what is in your pipeline, is there any way for us to get a feel for kind of when those deals might close, especially since you listed the full-year guidance?

Paul, it is John. I mentioned a minute ago, if you think about the midpoint of our increased guidance, we feel very good about that and I would say kind of spreading that out through third quarter, fourth quarter. December tends to shut down, but we will be working, we will be closing deals in December, but I think most of it occurs between now and the first of December. And if we are fortunate enough to move to the top of our guidance again, we still fall in that same general timeframe.

Okay. So if we take from where we are now to the midpoint of your guidance for the full year and kind of smooth it out over the rest of the year, that is a decent guess?

That is a decent guess, yes, Paul. With the IMS being sooner because IMS we expect to close fairly soon and that being a big chunk of that additional amount.

And then for the smaller deals that you have announced over the past -- or that you closed over the past couple of months, could you just characterize how you sourced those deals and how it makes those referrals from your other physicians network that you talked about before versus lightly marketed or fully marketed deals?

Yes, the smaller ones tend to be -- and when we think about smaller, we think about things below $10 million, they tend to be relationship-driven, part of a bigger relationship or physician referral to the physician next door that we just did a transaction with. So they are not ones we are out spending a lot of time and effort tracking down. They are physicians that call us and strike a conversation and come from referrals from other physicians we are doing business with. And then we appropriately price those to -- they are getting much bigger yields. We continue to move up the minimum size deal we will do, but if it is a relationship-driven -- I mean if we have investment that's bigger with the relationship and they want us to do the small things, we are going to bend over backwards to meet their needs but at the right price.

And in terms of your pipeline, is that kind of similar spread between small portfolios and one-off and referral-based deals?

Yes, it is spread between. I think $15 million average transaction is still about the right average size, but every once in a while, you get lucky and buy a Davis group at $116 million or an IMS at $141 million. You just don't see many $100 million deals a year in the medical office space and so we are really excited -- we sourced two this year and there is just not a lot out there, that kind of bulky transactions of that quality and companies we want to invest in.

And then just lastly, now that we have had a little time to absorb the [doc fix] resolution, are you hearing anything from the physicians that are changing kind of anything in the industry that might have implications from an investment perspective for you?

I don't think we are hearing anything new or different. (inaudible) certainly provide some stability to them, certainly provides more stability for us for the next five years with the physician relationships we have encountered. We made one investment this year; it was a little bit smaller, but with a very large physician-owned accountable care organization in the Midwest. And this goes back to your last question, it was about a $10 million deal, but they are growing rapidly. I think the doc fix -- the experience with the ACO has been so strong for them that they are looking for fairly rapid growth and with that comes access to real estate opportunities that we will have with them.

I think some connectivity between the doc fix and their incentive to grow and with all of the insurance company consolidations, headline news and the Wall Street Journal recently, I think both hospitals and physicians feel the even greater compulsion for consolidation and scale to be able to negotiate against even larger and fewer insurance companies out on the market.

Great, thanks.

Wilkes Graham, Compass Point.

Good morning. John or Jeff, just one question from me. With the sort of weakening public bids for REITs out there, I'm curious as you thinking about looking past your current pipeline and maybe into 2016, the idea of continuing to grow your portfolio via acquisitions and improve sourcing ability with the addition of Deeni and a lower cost of capital with the investment-grade rating, how do you think about your various ways you can use your capital to continue to create value if your stock is not at a level where you want to raise equity?

Yes, I think part of that -- I'm going to let Jeff answer as well or ask Jeff to answer as well, but I think part of that is being disciplined about match funding and slowing down the pace of growth if necessary if the stock price is not attractive for raising equity capital. We are very committed to low leverage and not being trapped in a high leverage box and I think you will see us be very disciplined with our growth. We are a high-growth rate organization, but we can also slow down that growth with the investment-grade rating, almost $1.5 billion in real estate with very low leverage and 95% leased. We can collect that cash and kind of wait it out while the asset prices adjust or our stock price gets to a point that it is attractive.

This is Jeff. I don't know if I have too much to add to that other than we are not growing for growth sake. We are continually monitoring the market and we only grow when we can do so in a way that is going to be accretive to our stakeholders' value. So we are perfectly comfortable sitting and waiting if that is what the market is telling us to do. We evaluate that week to week, quarter to quarter.

I will just conclude with we still see lots of interest in our OPUs, upREIT structure, so just another tool in the capital toolbox.

I am curious if another tool is perhaps selling any non-core assets?

Good question. Eventually, we will. We haven't bought any portfolios where we had to buy B and C assets. So we actually did dispose of one of the Lansing, Michigan properties this year, which was part of the original portfolio, but really not a lot of non-core assets. The 125 buildings we've owned, we went a year ago or last month and intentionally purchased those for 10-year plus investment holds. You won't see anything like that in the near term, but eventually we will move through an annual disposition kind of guidance and process.

Thank you.

There are no further questions. At this time, I would like to turn the call back to John Thomas for closing comments.

Again, we think we had a fantastic quarter and lots of great things coming. But as we said, we are all cognizant of the equity markets, the debt markets and kind of the adjustments. Again, just thank Jeff and his leadership in achieving an investment-grade rating and appreciate Moody's recognition of that and we look forward to seeing you soon and next quarter. Thanks for taking the call today.

This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.