Healthpeak Properties Inc (DOC) 2015 Q3 法說會逐字稿

Greetings and welcome to the Physicians Realty Trust third-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brad Page, Senior Vice President, General Counsel for Physicians Realty Trust. Thank you. Mr. Page, you may begin.

Thank you. Good morning and welcome to the Physicians Realty Trust third-quarter 2015 earnings release conference call and webcast. With me today are John Thomas, President and Chief Executive Officer; Jeff Theiler, Chief Financial Officer; John Sweet, Chief Investment Officer; Deeni Taylor, Executive Vice President of Investments; 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 and overview of recent transactions and our strategic focus. Then Jeff Theiler will review financial results for the third quarter and our thoughts for the remainder of 2015. Following that we will open 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. Our actual 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, and thank you for joining us today for Physicians Realty Trust's third-quarter 2015 earnings conference call.

During the quarter we celebrated the two-year anniversary of the Company and I'm pleased to discuss today our best quarter yet for growth and operating results. From the beginning of the Company's life just over 27 months ago, we have always stressed the importance of building a great long-term organization, striving to achieve reliable rising dividends and a total shareholder return. Our portfolio now totals more than $1.5 billion in high-quality medical office buildings and we believe we are well on our way to continue delivering on our goals into the future.

Our growth and focus on the quality of our income has delivered normalized FFO of $0.26 per share during the third quarter, more than 14% above our quarterly dividend; and an increase of 53% year over year. During the quarter we invested over $297 million in 11 medical office facilities totaling 876,000 square feet, a 19% increase in gross leasable square footage. This is not only the largest volume of quarterly acquisitions in the history of our Company, but we added some of the highest-quality facilities and providers in the country to our organization, including major health system on campus and affiliated facilities in three top MSAs: Columbus, Ohio; Phoenix, Arizona; and Houston, Texas.

Our third-quarter and year-to-date results reflect the hard work and dedication of our fantastic team, starting with our founder and Chief Investment Officer, John Sweet, who has led our efforts to double the size of our asset base this year, and now working with Deeni Taylor, who will continue to help drive our high but disciplined rate of growth. Jeff Tyler, John Lucey, and their team also deserve special recognition as they have pace with our growth rate, scaling our reporting and accounting infrastructure cost effectively, allowing us to communicate with investors and clients competently and frequently, especially when we see the opportunity to raise capital at the right time at the best price.

In a minute I will ask Jeff to speak to our operating results, noting he will be reporting the third quarter of 2015 produced the best operating results in the history of the Company. We believe this platform will continue to do even better -- consistently better -- for quarters and years to come. But first I would like to speak to the quality of our portfolio. We want to own the highest-quality medical office outpatient care facilities in the United States. The vast majority of investments in 2015 reflect that strategic plan and focus.

These investments are highlighted by our facilities in Houston, Phoenix, Minneapolis, and Columbus, Ohio -- the 5th, 12th, 16th and 32nd largest MSAs in the United States, respectively. In these four markets alone we have invested $406 million and 1.3 million square feet. 51% is on-campus; 80% is on-campus or affiliated with a major health system; and more importantly, 96% occupied. The average age of these buildings is nine years, with many of them less than five years old. The first year unlevered yield of these investments is 6.8% and the average lease term is 8.3 years. Our four largest markets are now Phoenix, Atlanta, Columbus, Ohio, and Minneapolis, but we are also well-diversified geographically with facilities now located in 25 states.

While it is easy to define quality simply by location on campus or a famous street in a top-five MSA, we believe the definition of quality in health care real estate is much broader, especially from a clinical standpoint. MedPAC, the organization established by Congress to provide analysis and recommendation to Congress for improving the Medicare system, reported in its latest report to Congress that Medicare inpatient volume in 2013 was 10.1 million admissions, a decline by 1% over 2012. In contrast, outpatient volume in 2013 was 196 million admissions, an increase of 6 million admissions or 5.5% over 2012.

Because there is excess hospital capacity in these trends, occupancy rates in hospitals averaged just 60% in 2013 despite a national reduction in over 1,000 beds. Since 1975, over 2,000 hospitals in the United States have closed. Medicare inpatient discharge volume from 2006 to 2013 declined by a total of 17% over the past 17 years. In contrast, Medicare outpatient service volume from 2006 to 2013 increased by 33%. MedPAC and the healthcare industry not only expects this continued shift from inpatient to outpatient services and settings, the Affordable Care Act and payers are encouraging and incentivizing this shift in care to more efficient integrative service providers in the lowest-cost settings capable of meeting the clinical needs of the patients. We believe the data is undeniable that the future of healthcare services and the vast majority of care will be provided in outpatient settings.

Our healthcare expertise, combined with our experience in real estate and finance, enables us to source substantially more investments in far more markets. That's providing to you, our investors, far more opportunities for more outsized growth and higher risk-adjusted returns. We don't stop at the address when we underwrite. We believe quality in healthcare real estate begins with the quality of care provided in the facility, a critical mass of patients seeking convenient access to that care, the quality of the patient's ability to pay or otherwise compensate the provider for that care, and the care providers' ability to deliver that care efficiently, effectively, and safely.

A beautiful but empty building regardless of location is not high-quality healthcare real estate. The strength of our team is the ability to match quality criteria with physical real estate and locations that optimize the success of our clinical provider tenants, and thus produces reliable long-term and growing net operating income for our organization. As an example, earlier this year we invested $41 million in Rochester, New York, to acquire a strategically located outpatient medical office park consisting of five class-A facilities.

While Rochester is the 51st largest MSA in the country, the office park is leased primarily to the University of Rochester Medical Center, one of the largest healthcare providers in New York, and a strong investment-grade credit with an S&P AA-minus rating. The convenient outpatient location provides a central healthcare destination for high-margin and needed access to oncology, orthopedics, and family medicine primary care services. Our investment produces a 7.2% first-year unlevered return with long-term triple net leases and the opportunity to expand the relationship with the University of Rochester in new investments in the future.

God knows where the physicians and the patients want to go, and that's where the rent is located. We believe that is high-quality healthcare real estate. While the primary focus is the quality of the anchor tenant, we do believe the vast majority of the best anchor tenants are healthcare systems and large physician groups. And the percentage of our facilities that are on campus or affiliated with a health system is now 77%, with a goal to increase that percentage to 90% or more over time.

Finally, we would like to thank our investors for the strong support in the up-sized $226 million follow-on offering completed in October. This capital further strengthened an already very strong balance sheet and positioned us for continued and sustainable growth. We have excellent liquidity moving forward to take advantage of accretive investment opportunities and a growing pipeline of off-market transactions.

I will now turn the call over to Jeff to discuss our financial results for the quarter. After that we will be happy to take your questions. Jeff?

Thank you, John.

We're happy to report another strong quarter of operations and acquisition activity. Our third-quarter 2015 funds from operations, or FFO, were $16 million or $0.21 per diluted share. Our normalized FFO, which added back $3.3 million of acquisition expenses and some other small normalizing adjustments, were $19.3 million. Normalized funds from operations per share was $0.26 per share, which represents a year-over-year increase of 53% from the third quarter of 2014 normalized FFO per share of $0.17. Normalized funds available for distribution, or FAD, for the third quarter were approximately $16.9 million or $0.23 per diluted share. Importantly, this quarter marks a milestone for our Company in which we, for the first time, achieved our stated goal of covering our quarterly dividend, a testament to the success of our disciplined investment program and the strength of our operating portfolio.

We achieved record investment results this quarter, adding 11 medical office building properties and one mezzanine loan investment. The investments this quarter totaled $297 million, expanding our asset base by about 25%, and were achieved at an average first-year unlevered cash yield of 6.7%. Had we acquired all these assets at the beginning of the quarter, they would have contributed an additional $2.7 million of cash NOI to our portfolio. In this past quarter, as we have throughout the life of our Company, we sourced many of these deals through relationships, which we believe enables us to achieve higher risk-adjusted returns for our shareholders.

Subsequent to the end of the third quarter we closed on $53.5 million of additional investments. For the year we have closed on $741.6 million of investments, putting us at the bottom end of the upsized $700 million to $900 million of full-year 2015 investment guidance that we announced on our second-quarter earnings call. We are evaluating an increasing pipeline of potential opportunities and expect to continue to execute our growth strategy in the highly fragmented medical office building sector. We utilized our line of credit to fund our acquisition activity in the third quarter, ending on September 30 with a balance of $473 million. Our debt to gross assets at the end of the third quarter was 38.4% and our net debt to adjusted EBITDA ratio was 5.9 times.

In keeping with our strategy of maintaining a conservative capital structure to position our Company for long-term sustainable growth, we executed a follow-on offering in October at $15 per share. The upsized offering generated net proceeds of $226.3 million. $225 million of that offering was used to pay down our line of credit, with $1.3 million contributed towards acquisitions made subsequent to the end of the third quarter. Pro forma for the paydown of the line of credit and the $53.5 million of acquisitions announced subsequent to the end of the quarter, our debt to gross assets would be 26%. We continue to work on finalizing our first long-term debt issuance and expect to announce an agreement before the end of the year. On a 10-year basis, pricing is now anticipated to be slightly better than the range we announced last quarter of Treasuries plus 225 to 250 basis points.

Our portfolio continues to perform exceptionally well and was 95.5% leased at the end of the third quarter. Our same-store portfolio, which encompasses about 37% of our total NOI, grew cash NOI at 2.3% year over year, which was primarily driven by contractual rent increases and a 30 basis-point improvement in occupancy. This was partially offset by a 4.6% increase in operating expenses driven by additional insurance expense incurred in the third quarter of about $70,000.

Finally, our general and administrative costs for the third quarter were $4.0 million, which was primarily driven by salary expense and about $275,000 of one-time rating agency fees. We expect to incur similar G&A expenses in the fourth quarter, which would put us at the high end of the $14 million to $15 million range we estimated at the beginning of the year. We continue to work diligently toward reducing our G&A below 1% of assets.

All in all, our portfolio is continuing to perform well. Our pipeline of potential opportunities remains as big as ever. And we are exceptionally well positioned to continue to execute on our disciplined growth strategy in the fourth quarter of this year and into 2016.

With that, I will turn it back over to John.

Thank you, Jeff. Operator, we will be happy to start taking questions.

(Operator Instructions)

Juan Sanabria, Bank of America Merrill Lynch.

Good morning, Juan.

Good morning, guys. Given the very successful acquisition quarter record numbers, what do you guys feel is a sustainable quarterly or annual run rate, however you want to frame it, of what you guys think you could do with the current team? And any views on cap rates as well would be helpful. Thanks.

Juan, we've been consistently growing every quarter and adding -- Deeni's going to bring in additional level of resources and relationships to the organization. We've consistently been in the $200 million per quarter, I think. Next year we look at it at similar to this year.

We will put out formal guidance in the next earning call around acquisition expectations next year. But as long as the capital markets stay open, we think the volume of opportunities will continue to be there in the consistent pace we've been growing.

Cap rates, I think we very excited this quarter with the cap rates we achieved. A little pricier than previous quarters but again, we have consistently said where we can match quality with our cost of capital -- when I say quality it's the bigger markets, the more on-campus or more health system-affiliated assets. If we can find those we'll pay up for those.

But we're still for the year right at 7% on the deployment of capital, and that's a first-year unlevered cap rate. We haven't seen a big change in pricing this quarter, but I think that's what we'd expect going into the first quarter.

Okay. As you think about the quality of assets that you highlighted in the quarter and the whole shift towards outpatient and lower-cost settings, how do you underwrite and what are the key metrics you look at to underwrite hospitals as a key tenant and the relationship with the medical office buildings? Any sort of key benchmarks, market share, et cetera, that you look at demographic growth? What are you focused on?

We look at all of the above. The one easy thing with hospitals is most of them have credit ratings and more public data about their historic and current financials. But also more importantly, we look at their growth rate and their access to new markets, where they're growing and aligning with physicians most importantly.

Because a hospital doesn't do anything without a physician order. They've got to have good relationships with physicians and then growing and aligning with those physicians in outpatient care settings. Those settings can be on-campus or off-campus, it's just a reflection of underwriting what services are in the building and how that hospital is going to grow.

And then Jeff, I think you mentioned quickly at the end of your prepared remarks, on terming up a line. What size tenure are you thinking would it be unsecured market or private placement market? What are the latest thoughts?

Sure, Juan. Latest thoughts are private placement market. The size is likely to be around $150 million. And we'd expect it becomes private placement market you typically are tranching that out in several different tranches. But average maturity of 10 years or so.

Okay. And you said to 225 to 250 over or maybe a little bit below that?

I think it'll actually be below that end of the range.

Okay, thanks, guys. Great quarter.

Jonathan [Huksa], Raymond James. Please go ahead.

Hi, good morning, guys. Thanks for taking my questions. Congrats on a solid quarter and the growth since the IPO.

Are you guys looking at any large MOB portfolios in your pipeline? Or are they mostly smaller one-off deals? And then one more, have you seen any assets circle back around that were previously on the auction block?

The simple answer is all of the above, Jonathan. There's been several larger portfolios out there floating around and we've seen most of those. I think for us it's a matter of most of those will carry some kind of portfolio or portfolio premium.

One of the things we do is reflect, is the quality of the overall portfolio worth paying a premium for? And how does it match up with our onesie-twosie down the middle of the fairway kind of pipeline and the way we've grown. Nice opportunities out there, nice portfolios out there, but we've yet to see a lot that's enticed us to pay a premium for those assets while we're still growing very effectively, putting capital to work at a better cap rate at the onesie-twosie stretch.

Okay, that's a good segue into my next question. Once you had the Memorial Hermann assets you bought in 3Q, could you talk about the difference in yields there on those assets versus the portfolio of Memorial Hermann assets that were bought earlier this year by a competitor of yours? I think the cap rate differential there was 80 basis points. I would expect a portfolio premium, but it seems like it was even more of a differential than I would have expected.

I think that reflects the approach that John Sweet had with the seller, the physician group that really self-developed those assets working with Memorial Hermann, newer bigger buildings in a great market. The other assets were on-campus but frankly not assets that were that attractive to us. In the end, it's Memorial Hermann credit.

Again, no criticism of that portfolio but we're very excited and think we got a very attractive price and yield on those assets and they will be there for a very long time and they're completely occupied, or 95% occupied. Can't really explain the differential other than John Sweet getting down there, working hard, developing a relationship with the seller and the seller caring who the next owner was.

That's great color. One last one. I know you're definitely focused on external growth right now but given some of the other healthcare REITs out there looking to aggressively move into hospital sector, would you be open to selling some of your hospitals or [LPECs] and recycle that capital into MOBs? Or is that something you haven't looked at?

We always evaluate our portfolio. Just about everything we own we bought in the last two years. We're excited about the investments we've made. We're always looking to maximize the best source of capital and then deploy that into the best new opportunities.

We're a pure-play medical office building REIT. We like the surgical hospital business, we like the specialized post-acute care facilities with the best operators. And we think we have all of that in the portfolio.

We'll look at it from time to time and if there's a good opportunity to recycle capital we will evaluate it. We have no current plans to do so, but we are evaluating it constantly though.

That's it for me, thanks guys.

Jordan Sadler, KeyBanc Capital Markets.

Thank you, good morning. My first one is following back up on the hospital underwriting. I am curious, John, given your history and experience, from a real estate perspective would you be interested in owning an acute-care hospital today?

We focus on outpatient care, Jordan. As I said, I'm sure there's some good opportunities out there to own acute-care hospitals, but the average age of hospitals in this country, most hospitals in the United States were built in the 1950s, 1960s. There's a lot of big infrastructure out there. With the trends to outpatient, the trends to more and more clinical services being performed, frankly, in a physician's office, we have no plans to invest in acute-care hospitals.

Our surgical hospitals are licensed hospitals in their respective states, but they're outpatient care facilities, primarily, that expand the scope of services for the physicians that work there. But they're not in-taking patients and they're not big general acute-care hospital. So long-winded answer to say no, I wouldn't expect us to invest in any hospitals.

Again, back to -- probably didn't tie the square tightly in my opening comments, but a lot of hospitals are closing. A lot of hospitals are rebuilding in new better markets within their sub-markets. We'd rather focus on the outpatient care and aligning with those hospitals in those newer markets where we can.

The other question I have for you which is a little bit along the same lines, but given the recent budget approval, the section [CO3] revisions there, can you speak to that and how you're addressing that in your acquisitions and underwriting strategy? And how you may expect that to impact tenant decisions going forward?

That's a great question. We're calling those 603 assets after the section number. We have a number of grandfathered 603 assets.

For everybody on the phone, Section 603, you can have the same scope of services in a building. And if it's built as an outpatient department of a hospital, you should expect much higher reimbursement, particularly in oncology and cardiology. Those are the two service lines, or two of the service lines where you get significantly higher rates billing as a hospital outpatient department, even though it's in effect a physician office with ancillary services.

Section 603 requires or provides that those facilities to bill on that basis need to be on campus, which is historically defined by regulation as tied to the hospital or within 250 yards of the hospital. It grandfathers all existing HOPD providers so if a hospital is billing a facility on a hospital outpatient department reimbursement rate, those are grandfathered if they're in place.

So we have a number of those, again, we're calling them 603 assets, we have a number of those grandfathered facilities. Historically, we'll have to see how regs are written, but historically if you're grandfathered you can change the address of that location and continue to achieve that higher reimbursement. We would think that our 603 assets and providers are going to want to stay in those locations for a very long time, so that excites us a lot.

On the other hand, going forward, you're certainly making new investment decisions. We will underwrite what their expected reimbursement is going to look like in the location. Obviously if they want HOPD reimbursement and a new provider, at least under the new law it's going to have to be on campus as defined by the regs. And certainly that will make us look at that investment from that perspective.

But there's other reasons to be off campus, getting into new markets, looking to align with new physician groups and accessing new higher patient demographics. So you still may get better or good reimbursement, just not the HOPD reimbursement. So that will cause us to dig a little bit deeper into the expected reimbursement structure of that provider.

Again, long-winded answer to the question. It's good for our existing assets going forward. We've already built that into our underwriting process and structure.

One thing it does is it really levels the playing field between big multi-specialty groups and hospitals. A lot of physician groups are already performing these services and doing it very successfully and at a high margin. That really levels the playing field.

If you're a physician group and you want to continue to stay independent of a hospital, it really levels the playing field from a competitive standpoint. Again, we think we have great relationships with those big multi-specialty groups across the country. Something to factor in, but it doesn't really drive the decision one way or the other, it's just something to factor into the analysis.

So on look-back basis, does this enhance the value of a grandfathered 603 asset as we look at it? As your underwriting new investments, basically everything on the ground today or being built before 2017 would be considered a grandfathered asset, right? So it doesn't change anything now.

Slight edit to what you just said. The way I understand the law, you had to be billing in that location as of the effective date which was November 2. If you trade a new location after September 2 you can bill HOPD until January 1, 2017, if you otherwise qualify and then you'll go to the lower physician office rate.

I think the more important answer to your question is, we certainly view a hospital outpatient department in an existing building as one that's probably going to want to stay in there for a very long time. So when we underwrite 10- to 15-year investments, at least the way that new law is written, those hospital tenants are going to want to stay in there for the longer term then that, we would expect. So we think it has enhanced the value of those assets.

Thanks guys.

Dan Alger, FBR.

Thanks and good morning, everyone. Really nice result, glad to see the dividend coverage. Reading from the language in the press release, it sounded like the idea of a lowering to further loan to pay ratio further was the game plan.

I just want to confirm. I think what you're trying to say is maybe not dividend increases but just naturally get it down as cash flow starts to continue to ramp. Is that right?

I think that's a fair interpretation, Dan. And thank you for the nice comments.

Great. I just wanted to spend a minute on that TI or the leasing commission number in the quarter. It was a little large. Can you give us some color or context as to what that was specifically rated to?

Sure, Dan, this is Jeff. It was a little bit larger than normal and primarily what that related to is we had about $1.5 million of additional CapEx associated with our office build-out, of the new dock headquarters.

Okay. So that was probably more one-time in nature?

Definitely it's a one-time expense.

Okay.

Nothing unusual or unexpected in the rest of the core portfolio.

Okay, great, that's perfect. Just one clarification question. I think, Jeff, you said that pro forma for the pay-down of the revolver you're looking at 26% debt to assets. I just wanted to make sure that was not including any potential future bond issue that you're referring to.

No, that was just pro forma for the pay-down of the revolver and the additional acquisitions that we announced subsequent to the end of the third quarter.

Okay, so to make it really simple for me, can you give me a sense as to where the line currently sits? How much capacity or how much is currently drawn in that number?

We have about give or take $500 million-ish of a capacity on the line. $750 million line.

Okay great, that's simple. Thanks, I appreciate it.

Paul Morgan, Canaccord.

Hi, good morning. Quickly going back to the section 603 assets. If I missed this, I'm sorry. Did you say what share of your assets or NOI that you qualified as being part of your section 603 portfolio?

We're working through that, Paul. We will follow up with you, but not huge percentage. There's a nice batch of grandfathered 603 assets in the portfolio.

So unless you're talking to some of the hospital tenants that we work with to clarify whether it's HOPD or not, for the most part we know which ones are. But some of them are really classic physician offices so you got to dig a little deeper to figure out if it's HOPD billed or not. We're working with the hospitals on that assessment.

Okay, thanks. And then you've talked about with some of your prior acquisitions that there were opportunities for growth with those tenants via either expansions of their network and the acquisition of other facilities or potentially development opportunities. As you look at your current pipeline for investment, is that a meaningful piece of it? Do you see opportunities you think you'd execute on over the next few quarters, either acquisitions or development opportunities, with your operators?

We have one specific asset that we're working with a private party to expand that asset on behalf of the provider. I don't see it being a material part of our growth next year. We have a number of assets where the potential for expansion is there, but I don't seeing that being near-term event.

I think the bigger opportunity is like with the University of Rochester, we know what some of their three- to five-year plans are and we hope to have opportunities there. The IMS group out in Phoenix added 30 providers this year and has a similar aggressive growth plan next year. Those buildings that we bought in partnership with them are substantially full, so we look for some opportunities over the next 18 months there. Short-term is more potential, long-term we see some exciting organic growth opportunities with them.

Thanks. And then you probably have pretty good clarity on the rest of the year as you think about your investments before year-end. Are there many things that could shift in or out of the fourth quarter, first quarter? Do we see an active last two months of the year?

I think that our guidance was $700 million to $900 million. We wouldn't expect to change that. Hopefully more towards the higher end of that guidance.

We slowed down the pipeline a little bit intentionally in July and August and we pushed out some discussions intentionally during that period of time when the market was so rocky. I'd say that's still good guidance but the pipeline for first-quarter 2016, we're really pleased with where we sit today.

Okay, great. And then lastly, it's only about a third of your portfolio that's in the same-store pool, so as I think about -- as all those additional asset get rolled into it over the next few quarters is there any reason to expect any variance and your low 2% some-store NOI number? Is there any upside or downside for all the assets that you've acquired over the past 12 months as they get added to the pool?

We would continue to expect 2.5% to 3% quarter to quarter. You'll have some variability each quarter in that number but pretty confident in that range.

Okay, great, thank you.

(Operator instructions)

Jon Kim, Capital Markets.

Thank you. Your acquisition-related expenses were pretty significant. And three quarters into the year they're higher than your G&A costs. Can you provide some breakdown as to the external versus internal breakdown of these costs as well as what percentage directly related to transactions?

Jon, just so I understand, do you mean internal versus external, meaning external like broker's fees and stuff like that? And internal being allocated to acquisition personnel expense?

Right.

We can do that. We actually don't have that at our fingertips right now. But I think we're around 1% of assets, which is fairly typical and what we have been doing over the past couple of years. I wouldn't expect the number to change drastically from that going forward.

I'm just wondering if you're actually paying broker's fees a higher dollar figure than you are internal management?

No, I don't think so. We can look at it, Jon. Two-thirds of our acquisitions are off-market, probably half those have no broker involved at all. Sometimes a broker working with us helps establish the relationship, but I don't think it's an usual percentage.

Okay. And it looks like your margins were higher this quarter with the increase in occupancy. Where do you see the occupancy next year given you have pretty minimal expirations?

95% to 96%, it should stay there. You think about MOBs and that's substantially full. We already have a good pace on our next-year renewals.

We have a very limited remount as a percentage basis expiring through the end of this year, so 95% to 96%. We continue to by buildings that are 90% to 100% occupied, so to the extent that affects it, should still be in that range.

Do you have an estimate to your mark to market on your expirations for the next couple years?

Yes. Mark, why don't you speak to recent renewals and our --

Sure. On the third quarter we had 19,000 square feet that we renewed or had up for renewal in the quarter. We had a 78% retention rate. There was only one lease that we did not renew in the quarter and unfortunately that was a physician who a stroke and we worked out an early termination with his lease with a pre-payment penalty. But we had a 78% retention rate.

And then for the re-leasing spreads, we were actually up substantially, 22% for the quarter. Again, on a small 19,000 square feet of renewal, but increased up nicely.

Please don't model 22% increases in your spreads. We continue to see renewals at or above the expiration. So 2% to 3% growth should be normal.

On the growth figure, can you discuss what you're finding as far as annual lease escalators?

Typically 2% to 3%. We always push for 3% where we can.

Okay. And then finally, I know you're still in active growth mode, but are you going to be providing 2016 FFO guidance next year?

No, Jon, this is Jeff. I don't think so. We've talked about it a lot because we want to be as transparent as we possibly can be to the market.

But because we're still in external growth mode and because the FFO is so dependent on the timing of the acquisitions the leverage that you have throughout the year, it's really, really difficult to come up with an estimate that's meaningful. And it would change quarter to quarter as our acquisition activity changed.

So I think what we will end up doing is providing the same type of guidance that we did this year in an overall acquisition bucket. And then that gives us a little bit more flexibility as to the timing of those acquisitions, because it's highly variable depending on the deal.

Great, thank you.

Michael Carroll, RBC Capital Markets. Please go ahead.

Thanks. John, can you give us some color on your recent investment activity? I'm specifically looking at the Catalyst portfolio. Looks like that's 12 facilities with an aggregate of 94,000 square feet. Those facilities seem to be fairly small.

Yes, Mike, smaller than we like but a great tenant base and it's a really young dynamic development team that's really built a nice client base in, particularly the panhandle of Florida and stretching over to Jacksonville. Again, smaller assets but newer with good tenant base. But the pipeline there, which we essentially control through the acquisition as well, is really moving towards the preferred size of assets and locations that we want.

I wouldn't call it a loss leader, we got a nice cap rate on those assets with a nice tenant base. But going forward we'd expect some bigger, more interesting opportunities with those same hospital systems and that group.

Okay. And then can you talk a little bit about the mezzanine ones that you made? For the Truman facility, did the owner just buy that property and you expect to take him out in the near term?

No, frankly, I'm glad you asked about that. We're very excited about those two investments. Those were built by a developer called Landmark that we've had a long -- they're actually based in Milwaukee but we've had a very long relationship with the Landmark organization.

The Jacksonville, Florida asset's over 200,000 square feet. I would be humble to say probably the best, nicest looking, best occupied medical office building outpatient care facility built this year. Every REIT I know and every developer I know tried to win that opportunity.

Landmark was looking to recap It for a five-year period upon CEO working with them. We put in some mezzanine debt as part of the recap and working GE Healthcare as well. Then we have an opportunity to buy it at the termination of that five-year recap.

Same thing in Kansas City. The Truman Medical Center is the tenant in that building. It's an 82,000 square foot facility that was just completed last month. It's on what's called Hospital Hill in Kansas City, so in a great location, close to a number of hospitals. But the tenant is Truman Medical Center which is the teaching hospital for the University of Missouri, Kansas City.

Again, similar structure. We get a nice premium yield on the mezzanine loan during the term and then the opportunity upon the maturity of the senior loan and our mezz loan to buy that at that time. Great new assets and great opportunity for the future.

What was the rate on those loans?

8.5%? Yes, just over 8%. We indexed those to the 10-year Treasury at the time of closing.

Okay, great, thank you.

Excuse me, Mr. Page, gentlemen, there are no further questions registered at this time.

This is John. Thank you, everyone, for listening in. We look forward to seeing most of you at NAREIT. Please call if you have any further questions.

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