Healthpeak Properties Inc (DOC) 2015 Q4 法說會逐字稿

Greetings and welcome to the Physicians Realty Trust year-end and fourth-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Bradley Page. Thank you. You may begin.

Thank you, Matt. Good morning and welcome to the Physicians Realty Trust fourth-quarter and full-year 2015 earnings release conference call and webcast. With me today are John Thomas, Chief Executive Officer; Jeff Theiler, Chief Financial Officer; John Sweet, Chief Investment Officer; Deeni Taylor, Executive Vice President of Investments; John Lucy, Principal Accounting and Reporting Officer; Mark Theine, Senior Vice President of Asset 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 the financial results for the fourth quarter and full year of 2015 and our thoughts for 2016. 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 the 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 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, and good morning.

2015 was a landmark year for Physicians Realty Trust and we finished the year with an excellent fourth quarter. Just in case you did not notice, we delivered an almost 8% total shareholder return in 2015, including dividends, comparing favorably to the S&P of 500 which had a total return of 1.4%, the Dow Jones industrial with a loss of 2.3% and the healthcare sector within the SNL US REIT index, which lost 7.3%.

It was a volatile year in the capital markets, but we are pleased with the relative performance of our stock and dividends as we continued to execute on our business plan and build an excellent long-term Company for you. And the other investors have recognized that excellence. Thank you.

During 2015, we added $841 million of investments in excellent medical office facilities, more than doubling our total portfolio during the year with the first year unlevered cash yield on these investments expected to be approximately 6.92%. These investments included 66 acquisitions and $22 million of mezzanine loans, all of which we believe to be strategically valuable medical office, outpatient medical office facilities. Since we went public, we have averaged just over one acquisition per week and we believe we'll have the opportunity to continue that pace for the foreseeable future.

Our ability to underwrite diligence and close an acquisition per week is due to our highly refined process and team where every facility, tenant and market get the same consistent evaluation, while effectively building our relationship with our tenants and clients during the process. This is the DOC way and leaves a great tenant satisfaction and referrals to other hospitals and physicians, who would rather work with us due to our professionalism, healthcare knowledge and attention to customer service.

All of this hard work led us to ending 2015 with approximately $1.7 billion in total real estate assets and our annual revenues grew year-over-year by 143%. During the fourth quarter, we completed $152.8 million of investment activity, including 11 property acquisitions in 11 states, totaling $142 million and 494,000 square feet and loan investments of $10.2 million. The average first year unlevered cash yield on these investments is expected to be approximately 6.7%.

Since our January 19, 2016 offering and disclosures, we have completed seven acquisitions of seven healthcare properties, containing an aggregate of 323,000 net leasable square feet. These investments total approximately $104.4 million at an average first year unlevered cash yield of 7.35%. During our offering in January, we announced purchase agreements totaling $99.6 million and $167.4 of acquisitions under letter of intent. With have completed $90.5 million of those acquisitions and we continue to believe most, if not all, of those pending investments will close once we complete due diligence and the sellers satisfy their contingencies.

Medical office and outpatient care facilities are the defensive recession-resilient real estate and investors continue to understand that more and more. DOC's team is the most qualified team for sourcing, underwriting, acquiring and managing this most desirable real estate in any economic cycle, but especially now.

Investors particularly appreciate our industry-leading occupancy of almost 96%, with an average lease of almost 9 years, and our clients refer other opportunities to us routinely. We continue to enhance the overall quality of our portfolio and are very excited about the opportunities we see in front of us in 2016. We ended the year with 74% of our space either on the camps of a hospital or anchored by a health system and we are targeting that number to increase to at least 90% in the next two years.

Like the IMS facilities we acquired in Phoenix during 2015, we continue to seek a larger, newer medical office facilities anchored by high-quality health systems and physician groups both on and off campus. Our average property size has grown to 38,400 square feet and we expect that average to still grow but not forsaking our high-quality providers who practice in smaller, more efficient clinical settings where appropriate.

In 2015, Congress and the White House in bipartisan legislation passed the bipartisan budget act of 2015. Section 603 of that law lowers Medicare reimbursement for future hospital outpatient departments located more than 250 yards from the hospital. While this legislation certainly benefits our on-campus facilities with vacancy for location of future HOPDs, Congress didn't pass this law to incentivize hospitals to place services on their campus, but rather intended to further Congressional policy to pay for care in the lowest cost setting clinically appropriate to that care.

Congress intends to save $9 billion by this legislation over the next 10 years, which means they expect the care to be provided in convenient locations for the physicians and patients away from hospital campuses. The American Hospital Association and their members recognize this, as well as they are fighting hard to repeal this legislation so that they can place services in locations convenient to their patients and physicians and recognize that is not always on the campus of a hospital.

We recently discussed this legislation with the chief medical officer of one of our most important clients, specifically section 603's impact on strategic outpatient physician strategy this sophisticated hospital organization has developed. The answer was very revealing. This hospital system, like many, is actively acquiring physician practices and very focused on its off-campus outpatient strategy as the current and future of healthcare service delivery.

This physician executive said, and I quote, we have found that trying to move physicians for Medicare part B physician office rates to part A hospital outpatient departments results in the loss of more than 50% of their patients. In HOPD clinics, the patients have substantially higher co-pays and deductibles, and they seek other options as the service is the same, but they have substantially higher out-of-pocket costs.

The implication of these comments is that enlightened hospitals recognize what they may gain in rate, they may lose substantially more in volume. Hospitals are focused on placing physicians and hospital outpatient services in the best possible locations for access and volume.

Similarly, H.R.2895, a bipartisan bill sponsored called the Medicare Patient Access to Cancer Treatment Act of 2015, seeks to enhance Medicare reimbursement for physician practices providing cancer care in lower cost settings and will pay for the incentive by further lowering the reimbursement to HOPDs. The HA is also fighting this legislation. We support all of our clinical providers in advancing their efforts for fair and adequate reimbursement for their services.

Our belief is that patients and physicians, that is consumers and consumers, will ultimately drive the optimal location for their healthcare services and today, that mean services that can be provided in the most convenient location will be the ultimate real estate location for investment. The answer is clear. Government commercial payers, patients and even physicians want all care they can't be provided in outpatient settings to be provided in the lowest cost environment that is possible.

Physicians Realty Trust's strategy and focus is to invest where everyone wants their care to be provided, including those who pay for that care, that is, outpatient medical office. As US healthcare economy grows from $3 trillion to $5 trillion over the next eight years, the wave in transition of care out of the hospital and into lower-cost outpatient medical office facilities is not only inevitable, it is imperative. In the meantime, we have a significant amount of 603 assets benefiting from a grandfathered reimbursement status and we have more in the pipeline.

These assets have the dual benefit of being in a location that maximizes patient flow and convenience, that is customer satisfaction, as well as physician efficiency, while also benefiting from higher Medicare reimbursement. We have a strong belief that the hospital located these services in these locations primarily for patient volumes and convenience and will continue to make that a priority and we will be reluctant to move out of these locations and jeopardize both patient/physician convenience and the higher Medicare HOPD reimbursement Congress protected for them.

Before ask Jeff to review our financial results, I would like to commend our Senior Vice President and Principal Accounting Officer, John Lucy, Laurie Becker, and their entire team and our entire team that worked so hard in 2015 to build our internal controls and stocks compliance structures. The 10-K we filed for 2015 is the first year we are subject to stocks 404B requirements and that is a monumental task.

Excellent and transparent reporting is our commitment to you and we couldn't do without DOC eligible team that John has built and leads. Thank you, John.

We believe we are well on our way to continue delivering our strong 2015 performance into 2016 and beyond. We're building a great Company piece by piece.

Jeff?

Thank you, John.

We finished the year with a strong quarter of operations. Our fourth-quarter 2015 funds from operations, or FFO, were $19.6 million, or $0.22 per diluted share. Our normalized FFO, which added back $3.1 million of acquisition expenses and some other small normalizing adjustments, were $22.7 million.

Normalized funds from operations per share was $0.26, which represents a year-over-year increase of 18% from the fourth quarter 2014. For the full year 2015, normalized FFO per share was $0.92, representing growth of 31% over the full year 2014. Normalized funds available for distribution, or FAD, for the fourth quarter were approximately $21.2 million, or $0.24 per diluted share, an increase of 20% over the fourth quarter 2014.

Our funds available for distribution are helped by the fact that our average lease term is nine years, which limits the amount of tenant improvements in leasing commissions required to generate that figure. We achieved record investment results in 2015, adding $841 million of healthcare investments, which was at higher end of our guidance of $700 million to $900 million of overall investments for the year.

90% of our 2015 investments were in medical office buildings, 7% in specialty hospitals and 3% were mezzanine loan investments, which are designed to provide future acquisition opportunities. We have focused and will continue to focus on the medical office building segment of the healthcare asset spectrum, which we believe will generate superior risk adjusted returns. 86% of the cash NOI generated by our portfolio was from medical office buildings, and we would expect that percentage to continue to grow in 2016.

The investments this quarter totaled $153 million at an average first-year cash yield of 6.7%. If we had acquired all of our fourth-quarter acquisitions at the beginning of the quarter, they would have contributed an additional $1.2 million of cash NOI to our portfolio. As a reminder, the Nashville medical office building, which we acquired in the fourth quarter for $45 million is 100% leased, but tenants don't take occupancy until June of 2016.

Once occupied, our Nashville MOB will generate cash NOI of $700,000 per quarter. As John mentioned, we have completed $106 million of investments year-to-date in 2016 and are making good progress toward closing the rest of the new transactions we announced in January.

It is an unusual time for medical office building investments. Non-traded healthcare REITs continue to be negatively impacted by the RP fallout and increased regulatory scrutiny by the SEC. Medical office building focus private equity funds have a relatively limited pool of capital and have exhausted much of that in the past year with portfolio purchases.

Finally, many of the larger diversified REITs are reluctant to pursue large-scale investment activity, with the recent declines in their share price related to negative perception around the senior housing and skilled nursing sectors. Our stock price on the other hand has performed relatively well in 2015 and is one of the few healthcare REITs that generated positive total returns for its shareholders.

Based on these factors and the pipeline of potential acquisition opportunities we see in front of us, we believe the overall investment environment for 2016 is even better than last year and we remain comfortable with our investment guidance of $750 million to $1 billion for the year. We elected to strengthen our balance sheet with a follow-on equity offering of $321 million in January at favorable pricing in order to reduce our debt outstanding and put us in the best possible position to execute on our investment pipeline.

We hit another important financial milestone in January of 2016 as we were able to issue $150 million of long-term debt at investment grade rates in the private market, split into four different tranches: a 7-year tranche, a 10-year tranche, a 12-year tranche and a 15-year tranche. The blended maturity of the debt was just under 12 years with a weighted average interest rate of 4.5%.

Both the debt and equity markets were extremely challenging at the beginning of 2016 and we were pleased with the favorable results of both offerings and appreciate the support from our investors. To summarize the impact of all the capital changes following the quarter end, pro forma for the $321 million equity offering in January, the terming out of $150 million of debt in the private placement market and the acquisitions announced year-to-date, our current debt to gross assets is approximately 15%.

We believe we are starting 2016 in a strong capital position with low debt and $73.5 million remaining on our existing ATM program. Our portfolio continues to perform to our expectations. At the end of the year, it was 96% leased and the 62 property same store pool, which encompasses 100% of the properties we have owned for over one year generated year-over-year NOI growth of 2.2%, driven primarily by contractual rent increases.

Finally, our general administrative costs for the fourth quarter were $3.5 million, which brought full-year G&A expense to $14.9 million, within the range we had estimated at the beginning of the year. This met our target of reducing overall G&A to less than 1% of asset value. As we look into 2016, we estimate our overall G&A expense will stay in that less than 1% of asset value target range for the year as we scale up the platform for another year of growth.

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

Thank you, Jeff. We look forward to responding to your questions.

Thank you. We will now be conducting a question-and-answer session.

(Operator Instructions)

Juan Sanabria, Bank of America.

I just was hoping you could give us a little bit more color on the pricing you were expecting on acquisitions for the year in terms of the deal pipeline. You are mentioning less competition from the non-traded regions, some of the bigger guys, but seems that you're wanting to get bigger assets and move up the quality spectrum. So just how you are thinking about pricing for the year.

Yes. It's a great question. I think the deals we announced at the first part of the year was about 7.35% one, and as you recall, we always report in a first year cash yield that we expect. I think overall, most of the year, for us, it's going to continue to tighten a little bit for the factors that you mentioned, kind of moving up the quality scale and bigger markets, bigger buildings, so probably 6.5% to 7%. We've historically said 6.5% to 7.5%, but we still see some higher yielding opportunities but I think that overall average is going to move down to the blended number, 6.5% to 7%.

Are you seeing cap rates stabilize? Any signs that may head up with some of the big REITs out of the market or what are you seeing overall?

You call it the big guys, the big three and others, have been kind of out of the market but there is still plenty of private equity and plenty of data out there, so while the players have changed a little bit over the last 18 months, there is still plenty of competition for the building. I would say they have stabilized, there's less competition, or less buyers, but there is also plenty of buyers and plenty of liquidity and just the defensive nature and people recognizing that it's really attracted a lot more capital from many sources.

Great. And then maybe for Jeff on the same store NOI outlook as we think about 2016, what kind of range can you give us at all if you can or any pressure on expenses and if you could remind us what percentage of your portfolio is internally managed?

Sure. I will actually turn it over to Mark Theine for these questions. Mark?

Sure, Juan. Happy to answer the question. On the same store for 2016, we project to be in that 2.5% range. As you know our contractual rent increases, our regularly 2% to 3% on average, so we think we will be right in the middle of that range there for 2016. As it relates to property management, we are about 96% internally managed on everything that we oversee.

Great. Thanks, guys.

Thanks, Juan.

Chad Vanacore, Stifel.

John, you mentioned that you expect to get to into the 90% of on-campus MOBs in your portfolio. So what should we expect in terms of off-campus versus on-campus in the pipeline right now?

I think, again, to be clear, it is 90% on-campus or anchored by a health system. We're just very focused on the larger physician groups and the larger health systems and a big part of my comments just was not clear during my presentation was hospitals are looking for the most strategic opportunity and physician groups are looking for the most strategic location of their facilities and that is not always on campus and reimbursement and payers are recognizing that as well and frankly trying to incent care to be provided in lower cost settings, whether they be on or off campus.

I think you will just continue to see a nice blend of both. The IMS portfolio which I highlighted and we closed on third quarter last year, three of those were big on-campus buildings and one was off-campus in a very strategic location but anchored by the IMS group and a large surgery center that is tied to the Abrazo health system out there.

Okay. Just thinking about the other side of your portfolio, other than MOBs, what is your appetite for specialty hospitals and surgical centers?

Pretty limited. We could close on the Great Falls Surgical Center in the first quarter, earlier this year. As I look out over the year, that maybe the only one we do this year. So you may see one or two but we are very focused on just the pure play medical office buildings.

All right. And then just can you remind me what the overall pipeline size is? And then I think you had mentioned at some point you had some more small portfolios. What size are those in the pipeline?

With our offering and we announced about roughly $250 million of acquisitions under contract or letters of intent, and we tend to maintain that kind of bucket so I think for we're looking to second and third quarter opportunities right now and we expect to close on just about everything we announced earlier this year. Pipeline continues to be robust and lots of opportunities to pick and choose from.

Okay. And still looking at some $20 million, $30 million small portfolios in there?

I think $20 million to $30 million buildings, but not a lot of, we tend to grow one building, two buildings at a time, and that is what sellers tend to own so that's where we focus.

All right. Thanks for taking my questions.

Michael Carroll, RBC Capital Markets.

John, can you give us some color on the competitive landscape in the investment market today and how has it changed over the past few quarters? I know you indicated that the larger guys in the non-traded guys have dropped off a little bit, but those guys weren't your main competition previously, right?

Yes and I know that's not what you want to hear, but 100% of everything we have done this year was off market, so we tend to not have a lot of competition for most of the buildings we are acquiring. But the landscape has changed. Two years ago, we saw, when we did see somebody it was the non-listed REITs more often than not.

Last year and, I'd say, this year, it has been more private equity driven investors than anything else. We tend to bump in our other, our pure play peers and try to distinguish ourself on service and hopefully get a better price than they do, but they win their fair share as well. We're not seeing the big three really at all and frankly rarely have bumped into them in our life of this Company.

I know this is off of what Juan asked earlier, but with the volatility in the capital markets, with your off market transactions, have you been pushing cap rates a little bit higher just due to the increased volatility or has that not really changed at all?

I think so. I think first quarter and the deals we've announced so far reflects that and again with, in the off-market nature of that, but I think the things in our near-term pipeline, I think the cap rate's better than it was a year ago, but our blended average is coming down from our historic norms just because of the ability to access more newer, bigger banker health system buildings.

Okay. Thanks for your comments on the changes potentially that could occur with the section 603 assets. With the passage or the enactment of that legislation, has that changed your underwriting at all? Are you looking at anything different right now?

I think it is a factor to consider. So the on-campus buildings that have vacancy, again, if it has got vacancy, there is some incentive for the hospitals to look at that space versus going off-campus. But that said, we're having this conversation with our client as chief medical officer of the hospital system and he said it is really not driving their ultimate decision-making.

It's ultimately patient access and convenience and they found that they have lost patients by trying to push them into an HOPD reimbursement model in the past. We tend to listen to our clients and then follow where they think what is the best location for their services.

Okay, great. Thank you.

Craig Kucera, Wunderlich.

I appreciate you taking the call. I know you break out rent coverage for hospitals and L tax in the 3.5 to 4 times range. But can you give us an sense of where the overall portfolio would be for rent coverage?

It would be, in the physician groups, we get finances for the larger groups, but a lot of the smaller ones you do to physicians, they are not audited or anything like that. The bigger groups tend to be. It would be 5% to 10% on a blended across the platform, Craig, so it is very strong rent across the board.

I know one group we always talk about a lot has almost 50 times coverage, so these numbers get a little irrational or a little crazy at times, but that is the benefit of this private pay MOB investment model, which tends to be 5% to 6% of the overhead, their rent, and they actually get these large drivers of coverage.

Craig, so unlike skilled nursing or some other types of healthcare asset classes, the rent is a pretty small part of the overall expense structure for a medical office building tenant.

Got it. Can you give us some color on the pipeline as it relates to potential OP unit issuance and does the drop in maybe the non-traded and larger REIT competition, does that necessarily help you there or are they not really as focused on that seller base?

We have that conversation with most of our sellers, particularly if it's a private physician group or a private developer. So you will continue to see the handful. It's been kind of a strategic advantage for us. Most of the big three don't use it as a tool very often and the non-listed REITs, to my knowledge, I've only seen it happen once or twice so it has been fairly limited. You will continue to see some, but right now, we're really trying to guide people toward cash purchase.

Got it. And one more. Just wanted to talk about the mezzanine size of the business. Are you seeing any pickup in opportunity to invest in that segment or is it still just sort of as things have been going in the past?

We see opportunity, but we're pretty stringy about where we do those loans, because we are not out shopping for the paper. It is really a structuring tool, particularly with developers who are either in the process of construction or post construction and they're wanting to continue to hold the asset, but we get some kind of hook into it long-term when they do a recap.

See some opportunities out there, the hospital anchored development is, I'd say, picking up and when they are using private developers for that, most of the national ones we have great relationships with. We have opportunities to get involved on a limited basis but usually through the mezzanine loan structure and some kind of optionality when they finish the building and if we are interested in buying at that time.

Okay, great. I'll hope back in the queue.

Jordan Sadler, KeyBanc Capital Markets.

Thanks and good morning. Question regarding 603. You have had some time to process it, another 90 days or so, and I am just curious, vis-a-vis your comments and discussions with tenants, has there been any change in terms of target assets for you all as it relates to 603, either as it relates to perspective underwriting or the existing portfolio?

It's hard to say it has been a change, but it is just certainly a factor that we consider. I mentioned in my comments, we have a number of 603 assets in our pipeline and a couple of the cases I am referencing, there is also a CON tied to the building, so and off-campus building where the hospital essentially cannot move because of their CON and they cannot move or are reluctant to move out of that building because they are getting the higher HOPD reimbursement that is grandfathered, tends to be pretty attractive to us.

It's a very sticky building, a very sticky tenant and providing outpatient services, which is going to continue to drive the healthcare dollar. I would say it is a factor we consider, but I don't think it has changed ultimately what we're looking for, which is great health system and large physician group anchored building. That said, if it is on-campus building and it's got some vacancy, there's certainly an enhancement to more opportunity to lease that vacant space with the hospital now being forced to consider HOPD and reimbursement only being available to future on-campus facilities.

Helpful, but I would not say it's changed anything. It is just a factor and we're talking to every hospital that we talk to, or physician group, and it's working with hospitals around that and trying to get a good handle on who is taking advantage of HOPD and who is not, the higher reimbursements.

Has there been any clarification on the determination of whether or not it is the classification or grandfathering ties to the tenant versus the site?

There has not been. The AHA is working hard to, at a minimum, expand the grandfathering to projects that were under development. But I think if the AHA had its ruthers, it would repeal the section altogether, but there hasn't been any real clarification around the law.

The law is pretty clear as written, but as you mentioned, it will be up to CMS to define, further define what is eligible to be grandfathered and whether or not you can actually move that status. Historically, sometimes you can and sometimes you can't, and again, we're taking that into consideration and keeping our eye out for clarifications.

Okay. And then lastly, on 603, I might have missed this, have you guys been able to assess what percentage of the portfolio is now 603 or falls within the writing of the law?

Yes. We've got pretty good transparency on that in our investor presentation. If you look at that, it is probably the best way to get an answer to your question. The one online.

Okay. And is that in terms let's say on campus, will that ultimately refine your definition of an on-campus or approximate to campus asset?

Well we joke that Deeni and John Sweet now carry a tape measure around with us to see if it is within 250 yards of the hospital. I played football and I kept a pretty good feel for how long 100 yards is and can double that.

Plus a little bit.

Like I said, the on-campus buildings, if they have vacancy, it creates one more opportunity for the leasing space.

All right. Thanks, guys.

John Kim, BMO Capital Markets.

Couple of follow up questions. Can you provide us an update on the percentage of your portfolio that is on-campus versus off-campus affiliated and then maybe also the cap rate differential you're seeing between the two?

If you look at just the on-campus, it is a little over 50%. Again, I think the more relevant is -- appreciate the question, but we think the more relevant is what health system anchored and that number is in the high 70%s and moving to 90% and that is how we focus on that definition.

On the cap rate differential, it is hard to say. So may things influence cap rate, but just purely being on-campus or off-campus. Again, we tend to buy, when we are buying off-campus, it is health system or physician group anchored and there is a lot of capital chasing those assets. So there may be fewer buyers, but there is still plenty of capital chasing those assets. 25 basis points on average maybe, but I wouldn't say there is a big spread from a quality perspective in the kind of buildings we're buying.

To get to your 90% target within two years, is that fully through acquisitions or are you also looking to sell some of your off-campus assets?

We don't have any plans to, we don't have any near-term plans to sell anything. It's driving through acquisitions and, again, we have got some great relationships with some developers that have some good product coming down the line and we think we'll have the opportunity to acquire those assets as well and the development we have our eyes on are health system anchor, tend to be 100% pre-leased before they are ever built. So to be very clear, we're not funding those developments, but we have some expectations that we'll have good opportunities to acquire those developments.

Okay. I may have missed this, but can you provide the releasing spreads during the quarter and maybe the year on a cash and GAAP basis?

It was about 2%.

2.1%.

2.1% from Mark.

During the quarter, we had 43,000 square feet up for renewal and 33,000 square feet of those renewed, 78% retention and the ones that renewed were up 2.1%.

And that is cash?

Yes, that is cash.

Finally, on 603, John, you mentioned that the American Hospital Association is looking to repeal the legislation on this. Can you maybe provide an handicap of how long you think that may take?

Not expected to, Congress is actually working 111 days this year. So there is no expectation of any meaningful legislation. There is nothing they have to do this year after the bipartisan budget act. Fairly minimal chances this year, tell me who wins the presidency and I will tell you what the chances are next year.

What side would be more adaptable to change it?

I'm not going to answer that question. In all sincerity, I think no matter who wins the presidency, as the healthcare policy gets tweaked by anybody, that will be the AHA's chance to kind of claw some of that back, if not all of it.

Okay. Got it. Thank you.

Vikram Malhotra, Morgan Stanley.

Thank you for taking the questions. Just going back through your acquisitions, I am just trying to, if you can give us more some color on how you are thinking about these larger markets, the process that you had probably started 1.5 years, 2 years ago.

On the one hand, competition maybe a little lighter, but pricing, cap rates are still stickier, maybe moving a little bit, but given all the volatility in the markets, I'm just trying to figure out is this the right time to make that move and what would maybe make you say hey, we want to pause from going to these larger markets and maybe stick to what we have done historically?

Vikram, that is a great question. I think it is an evolution, so the larger markets, we have been fortunate to make a couple of big acquisitions to move into the Minneapolis market and the large transaction out of Phoenix, which is already having some, I will say, some organic growth opportunities coming out of that IMS in the hospital systems relationships we developed out there through that transaction. It is an evolution, but we're not forsaking some of the smaller markets and high coverage and working with great physician groups as well.

I think it is, we looked at opportunities across the spectrum and once we are in a market, we tend to have the opportunity to grow more, like in Minneapolis, like in Phoenix, Atlanta and Columbus, Ohio is a market we continue to find lots of great opportunity and that is just a booming market. Some of those, some of the opportunities, say in Columbus, tend to be in the surrounding communities as well where there is less competition, back to your point about staying in the secondary markets.

Given that some of these could be lumpy, are you targeting every quarter for there to be a mix or could it be one quarter you are more secondary market heavy and then the other quarter, it is the opposite?

I wouldn't say we are targeting at all. We are targeting great physician groups and hospital systems and evaluating the market where the building is located. As you said, it is lumpy, but we continue to have plenty of opportunity to pick and choose from and some sellers are looking at second and third quarter for some reason or another and so we tend to manage the deal flow that way.

Just maybe shifting to your watch list or the performance of certain hospitals given what we have seen in the public markets, any insight maybe given your exposure to community or any of the other hospitals, any insight from what the hospitals are thinking in terms of expansion or even maybe closures, or I shouldn't say closures, but maybe just a pause?

The whole post Q world is obviously feeling a lot of cost pressures right now. Probably the most specific issue in that world, we have three L-Tags that do great. The L-Tag industry is going through a transition. They've been going through it, but this year in particular, it kind of get full of impact of the patient criteria, legislation and rules which is a re-evolution of that business. But Life Care, which is our only tenant in that space, is doing fine, but it is going to be a transition year as they move into a new reimbursement scheme.

I don't think any of our hospitals, specific hospitals we're working with, we don't have any concern for them specifically. Obviously the big systems, Tenet had announced a big loss for the year, but they also announced it's part of the subset of they have their outpatient business was very strong. That outpatient business is in large part, their USPI, which is a great client of ours and we're very pleased with the coverage of our USPI which is now Tenet facility. Mark anything else just out to you?

In Atlanta, Northside Hospital, which is one of our bigger clients in that market continues to grow and expand and as that market continues to, or at least with a lot of competition, they tend to be aggressively moving into more markets and Northside has several sponsored new developments ongoing right now.

Okay. This last one, Jeff, this may be for you. In terms of funding the additional acquisitions, or the future acquisitions, just your reference for equity versus debt, I know you have in the past, talked about terming out some more debts. So if you could just maybe update us on your plans.

Yes. Absolutely, Vikram. I think we are currently 15% at the assets now. We would expect the majority of acquisitions to be funded primarily with debt going forward, at least in the near-term. I guess that always depends on the lumpiness of the acquisitions, et cetera.

And we have the ATM program as well that we could utilize if we thought it was necessary, but I think over the year, we would expect to increase that leverage back to a more normalized level and certainly a long-term debt issuance this year is another target of ours so we would probably be looking at that call it mid-year-ish.

Moving the debt up, would that be more close to 30%?

Yes, I think that is more in line with where we historically have been.

Okay. Thanks, guys.

Dan Alger, FBR.

As you think about where the stock has traveled up to and some of maybe the competition in the space having stepped back, do you think maybe the hurdle rate has changed at all for what you are seeing now on an asset basis or maybe a lever basis? I know you talked about 6.5% to 7% being the average, but has your hurdle rate changed at all with less competition?

I think our hurdle rate changes, Dan, to the extent your cost of equity is decreasing with our increasing share price, which it is, and along the debt lines, I think we had a pretty good execution there in January at 4.5%. As we look at those factors, certainly I think our cost of capital is coming down.

The competition, I guess I will let John speak to it, but my view is, some of the higher quality assets were really extremely bid before as you had a bunch of different players going after them. I think there is a little bit lightning up on that side of it, so we see value, a little bit more value there perhaps than we did a year ago as well as seeing value in the assets in the secondary markets that we have also historically participated in.

Dan, one thing I want to add to that is two years ago, when we started the Company, we had $100 million of assets and people tended to be nervous about signing a letter of intent in questioning our ability to close. Now that we have closed an acquisition a week for nearly 2 years now and we are approaching $2 billion in assets and Jeff's management of the balance sheet, we don't have that issue anymore.

It is opening, the reputation and the growth is opening up more and more doors for us for sellers to be willing to work with us and then we tend to find those sellers, like the large physician groups, where we can to build long-term relationships and thus higher quality.

You may have addressed this earlier if you did, I apologize, but as you start to look at maybe some more primary markets or somewhat that's maybe a little bit higher quality, can you just give us an example of whether it is maybe a geography or a group that might fit into that category that before may have fallen off the radar screen but now is maybe on?

It is hard to answer that question because again, we find opportunities in bigger markets. It is not likely draw a line around a New York City and say oh let's go spend the next six months there. We know kind of all markets reasonably reasonable well between, again, John Sweet and Deeni Taylor and myself so when we find the good opportunities in the bigger markets with great hospital systems or physicians groups, then we focus our efforts and work through to process that opportunity.

We've got a little bit in the upper northwest and that is probably, we like to have more scale once we get into a region. We still don't own anything in California, but we have not found anything in value. I, in my past life, bought and sold and managed a lot of property in California. We just, we see things, but we just haven't seen the right kind of value opportunity for us in that market. Again, in the future or for the near-term, you will continue Minneapolis and Columbus, Ohio and Phoenix and Atalanta and some of the bigger markets where we already are and just continue to expand our scale in those markets.

Okay. That works. Thanks so much.

Jonathan Hughes, Raymond James.

Thanks for taking my questions. Most of mine have been answer, but just had a few more. Can you give us any more detail on the St. Luke's MOB acquisition completed last week? Like lease expirations and end place rents versus the market. And then is that 7% unlevered yield there inclusive of additional lease up, given it's only 84% occupied?

I will start with the bag. That's on end place. We do have some color on where we see some growth opportunity there and thus making it even more attractive, but it is nice on-campus building. The seller is a developer and close friend of the Company's and somebody else we have done some business with. Deeni, do you want to? Deeni Taylor's here. I'll ask him to address the other question.

As it relates to potential lease up to the vacancy, one of the good things that hospital has affiliated actually joined the Mondadori system, so there is a real effort to increase the physician side occupancy in that building along with the AFC that is already in there. We see a real opportunity to fill the remaining space over the next 12 to 18 months.

Okay. Great, thanks. And then just one more. The $100 million that has been acquired, $100 million plus that has been acquired so far this year, any debt on those deals or were they all unencumbered?

They were all unencumbered. The one we just talked about, there was some debt on the deal and the lender restructured the debt as part of our transaction. Jeff will give you the numbers.

It's $9.5 million of debt on that one deal.

Okay. That's it for me. Thanks, guys.

There are no further questions at this time. I'd like to turn the floor back over to management for any closing remarks.

Again, we're very excited but the performance of the Company in 2015 and very excited about the very nice accretive acquisition pipeline that we have already started capturing this year and have a good feel for another great year in 2016. So we look forward. Thanks you for taking your time today we look forward to the follow-up.

Thank you. This concludes today's conference. You may disconnect your lines and have a wonderful day.