Healthpeak Properties Inc (DOC) 2016 Q1 法說會逐字稿

Greetings and welcome to the Physicians Realty Trust first quarter 2016 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. Bradley Page, Senior Vice President, General Counsel. Thank you. You may begin.

Thank you. Good afternoon and welcome to the Physicians Realty Trust first quarter 2016 earnings release conference call and webcast. With me today are John Thomas, Chief Executive Officer, Jeff Theiler, Chief Financial Officer, Deeni Taylor, Executive Vice President of Investments, John Lucey, Chief Accounting 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 the financial results for the first quarter of 2016 and our thoughts for the remainder of 2016. Following that, we will open the call for questions.

Todays 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 the companys CEO, John Thomas.

Thank you, Brad. Good afternoon and thank you for joining us. Physicians Realty Trust began 2016 where we left off last year, strong growth, strong balance sheet management and strong operational performance. During Q1 2016, we added $202 million of investments in their excellent medical office facilities, with the first year un-levered cash yield on these investments expected to be approximately 7.2%. Every one of these investments came through existing relationships mostly, off-market, consistent with our strategy and where we can continue to focus our time and attention for accretive private pay outpatient medical office facilities. These investments included our third acquisition affiliated with HonorHealth in Phoenix, our sixth, seventh and eighth acquisition anchored by a USPI-affiliated and managed ambulatory surgery center, and our fifth acquisition affiliated with Ascension Health. This Ascension Health-affiliated transaction consisted of a particularly large complex of three buildings on the campus of Ascensions St. Vincents Health in Birmingham, Alabama. The 224,000 square foot complex is anchored by St. Vincents and is 95% occupied. The first year unlevered yield from this investment is expected to be 7.3%.

We are also excited to expand into the New Mexico market. These high-quality facilities are optimally located and occupied by best-in-class ophthalmology surgeons. We continue to source, diligence, and acquire excellent medical office and outpatient facilities affiliated with the best healthcare providers in the United States.

As Jeff will discuss in a minute during the first quarter, we also enhanced our already excellent balance sheet with long-term, low cost unsecured investment grade debt as well as an equity raise in January and most recently in April. We have built an excellent team that can source, underwrite, diligence and close and then manage these outpatient medical office facilities, where the vast majority of healthcare services are delivered and will continue to be provided in greater proportions, and that is outpatient relative to inpatient facilities. All of this hard work led to ending the first quarter of 2016 with approximately $1.9 billion in total real estate assets with year-over-year quarterly revenue growth of 80%.

The focus and leadership of our team is one of the reasons we were able to complete another quarter with high investment growth and high attention to operations, while at the same time underwriting, diligencing and papering what we believe to be one of the largest medical office investments directly with the healthcare system in the United States -- our recently announced investment in 51 medical office facilities, the value over $700 million owned by affiliates of Catholic Health Initiatives, or CHI. We believe the CHI medical office investment is one of the largest and most important medical office facility relationships ever established by a REIT directly with a major healthcare system. CHI has over 103 hospitals, 3,950 employed affiliated physicians, 95,000 employees. In 2015, these providers served over [16 million] outpatient visitors and admitted [500,000] of inpatients, realizing more than $15 billion in annual revenue. We are honored and humbled to be selected to monetize these facilities and enhance CHIs healthcare real estate service delivery platform through this partnership. Our investment provides substantial capital to CHI, but more importantly, we are hoping to free CHI executives, management physicians, provide us the staff to focus on thire primary mission. We in turn will provide real estate capital management and strategic intellectual support to enhance their existing facilities, physician recruiting, and outpatient strategies. Altogether, this relationship empowers CHI to enhance and provide greater access to care the community they serve.

The total purchase price for these facilities will be approximately $687 million. We have also agreed over the course of time to invest $31 million into these facilities, which leads to a total investment of approximately $718 million. All totaled, we are acquiring just 15 medical office facilities containing more than 3 million square feet located in ten states, with an average size just over 60,000 square feet. 20 of these facilities are off campus, 19 of these are 100% leased by CHI health system affiliate, and one is anchored by a CHI affiliate. We estimate 14 of these are Section 603 assets representing about $16 million of first year NOI. 32 of the facilities are on campus, with those hospitals leasing approximately 64% of the on campus space.

The overall portfolio was 94% leased and the weighted average lease term remaining is 8.6 years. In total, CHI hospitals lease and occupy approximately 2.6 million square feet of these facilities and they will sign new ten-year triple net leases at local market rates for their space, which will contain annual rent increases of 2.5%. The first year NOI from these CHI leases alone is $40 million or 93% of the first year in-place NOI of $43 million from this investment.

Since the end of the quarter, we have also completed two acquisitions of three healthcare properties in two states containing in aggregate of 51,600 net leasable square feet. These investments total approximately 17.6 million at an average first year unlevered cash yield of 6.7%. We ended the quarter with 74% of our space either on the campus 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. Upon completion of the CHI investment, we will be at approximately 83%.

Physicians Realty Trust continues to focus on the long-term and to build this organization on a very solid foundation, enabling us to deliver high growth, excellent returns and a value to our providers that will continue to fuel our growth and prosperity with the future of US healthcare in well-located outpatient medical office facilities. With that, I will ask Jeff to review our financial results and balance sheet management. Jeff?

Thank you, John. I will start with a brief review of our operating performance and then touch on our investment in capital activity year-to-date. We generated first quarter 2016 funds from operations, or FFO, of $20.4 million or $0.19 per diluted share. Our normalized FFO has added back $3.4 million of acquisition expenses and some other small normalizing adjustments were $23.7 million. Normalized funds from operations per share, was $0.22, which represents the year-over-year increase of about 16% from the first quarter of 2015.

Normalized funds available for distribution, or FAD, for the first quarter were approximately $21.1 million or $0.20 per diluted share, an increase of 11% over the first quarter of 2015. NOI growth in our same-store pool of assets, which represents about half of our total portfolio was 2.1% year-over-year and was impacted positively by a 2.5% increase in rental revenues and negatively by a 130 basis point loss of occupancy and 3.7% increase in operating expenses. Also on the operational side, I would like to highlight our leasing retention rate which was far lower than typical this quarter at 16%. The largest driver of this reduced retention rate was our refusal to renew a 27,000 square foot lease on our newly acquired HonorHealth asset in Arizona. We instead entered into a 15-year triple net lease with the seller of the building have contemplated in our underwriting of the transaction.

Leasing activity across our portfolio was positive overall with the net absorption of almost 3,000 square feet. Our investments for the first quarter 2016 totaled $202 million at an average stabilizing cap rate of 7.2% and we are sourced from existing relationships. This external growth was the primary driver of our 16% year-over-year FFO growth for the quarter. Approximately $87 million worth of our investments closed in the last two weeks of March, which limited their contribution to the first quarter operating results. Had all of our first quarter acquisitions closed on the first day of the quarter, we would have recognized approximately $2.3 million of additional cash NOI. Although the single asset acquisitions sourced from existing relationships continue to be our primary focus, we have entered into a moderating competitive environment, which gave us the opportunity in April of this year to enter into the largest ever monetization of medical office buildings from a healthcare system. Through this transaction with CHI, we are adding approximately $719 million to our asset base and have already funded it with about 65% equity, leading to a deal that will be accretive to both NAV and FFO per share.

CHIs desire for a lasting partnership, and the relatively limited competition from the usual market participants, led to a much smaller portfolio premium than we typically deceived a great deal of this size. With CHI, we instantly achieve a critical mass in four new markets, enhance our existing portfolio and are able to foster relationship with a top tier healthcare system that we expect will continue to be one of the most important systems in the country going forward. The transaction is still expected to close in two tranches as certain assets require Vatican approval at the last condition to close, but we have been able to move additional assets into the first closing tranche. We now expect to close on up to 28 assets worth $335 million in the new two weeks, while the remaining 23 assets are expected to close prior to the end of the second quarter. One asset worth approximately $6 million was removed from the portfolio as we worked through our due diligence process. While we are intensely focused on closing the CHI transaction, we continue to see a steady stream of acquisition opportunities and remain comfortable with our existing acquisition guidance of $1 billion to $1.25 billion for the full year of 2016.

Turning to equity capital markets activity, we have raised over $750 million so far this year, placing us in a strong capital position. Pro forma for close of the CHI transaction, and the $17 million of additional closings announced so far in the second quarter, our debt to gross assets will be about 25%. On the debt side in January of this year we were able to issue $150 million of 4.5% private placement debt with the weighted average term of 12 years. As we look to the balance of the year, we will continue to match our long-term fixed rate leases to long-term fixed rate debt and expect to take advantage of one or more of the bank loan market, the private placement market, and the public bond market to do so.

Finally, our general and administrative costs for the first quarter were $4.1 million, which was within our expectations. We continue to believe our full year G&A will range between $19 million to $21 million which includes some new hires brought on to help manage the CHI portfolio.

Pro forma for the CHI transaction, our G&A to asset ratio will be below our 1% target. We remain focused on streamlining our overheads to provide immediate value to our shareholders, while continuing to build our infrastructure to accommodate our increased asset management responsibilities. As long as the capital markets remain open, we believe we can maintain our growth trajectory which will help provide superior total returns for our shareholders as we move through the rest of the year.

With that I will turn it back over to John.

Thank you, Jeff. And I look forward to your questions. Michelle?

Thank you. (Operator Instructions). Our first question comes from the line of Craig Kucera with Wunderlich Securities. Please proceed with your question.

Hi guys. I appreciate the color. I wanted to talk about the competitive environment. You mentioned that that things sort of moderated which opened up the window for you guys to close on the Catholic Health transaction, but the cost of capital with some of your competitors, certainly on the public side, has come back quite a bit, since back then. Are you seeing them more now and if so does that leads you back, if you are doing more one-off transactions or are you continuing to see larger portfolio opportunities that where the pricing can still make sense for you?

Yes. Craig, its John and good afternoon. We are -- the biggest buyer kind of out there in the space is still private equity and we are seeing probably more private equity than public buyers. And even some new existing recognized firms with the new -- some new capital coming to the private equity side. And there still continues to be plenty of bank debt and other leverage for them to use. There are -- we are still not seeing say the big three -- I think all three have basically said they are net sellers or at least two of them have this year and there are some -- there are several portfolios out in the market today that are floating around. And again I expect the private and some of those are REITs selling so my assumption is those will be private equity or the non-listeds are coming back a little bit and we dont see that much. So we are going to continue our onesie, twosie straight down in the middle of the fairway is business like we always have and to take advantage of good portfolios like a CHI which is outstanding from time to time. But we will continue to see our onesie, twosie thats what this business is about.

Got it. And I appreciate the going over the guidance certainly in regard to acquisitions but you are closing this large transaction this quarter? You usually close call it maybe [$150 million to $250 million] a quarter sort of onesies and twosies as you put it. Does that seem reasonable or are you guys more likely to focus on just getting the Catholic Health deal done this quarter and then kind of get back to ramping things up on the back half of the year?

Yes, we have some other activity this quarter, but it wont be sizable as we close on and operationalize and integrate the CHI facilities. Obviously, we want to do that extremely well and extremely impressive to our new physician partners and tenants and the hospitals themselves. We are very focused on that, but getting it done sweet. Myself and others are still busy outsourcing new opportunities. So we feel good about the guidance and the second half of the year and if there will be some other opportunities out there. But you will see focus -- we will be very focused on integrating CHI for the next few months.

Got it. And one last one, I appreciate you guys noting the -- giving the color on the retention rates. Can you talk about the occupancy on the same-store portfolio? Its not as meaningful given the growth of the company, but it still was down quarter-over-quarter and certainly year-over-year. Are these tenants -- can you give us some color on who these tenants were they leaving, are there kind of situations where the (inaudible) will be relatively brief or maybe more extensive?

The major contributor to that was a couple of leases in one building. The hospital system in that building was consolidating some sleep center and related pulmonary physician groups into another sleep center. And its one of our premier buildings done in Atlanta on Pill Hill and we feel very good about the repositioning that building and backfilling that space. It just takes a little transition time. So that building should demand high end of the market rental rates and we are going to be very picky about how we reposition that space. So we do think we will good demand for it and we will get that backfilled.

Okay, great. Thanks.

Our next question comes from the line of Juan Sanabria with Bank of America. Please proceed with your question.

Good afternoon guys.

Hi Juan.

First question maybe just for Jeff, in terms of the balance sheet you kind of briefly touched on different opportunities on the debt side, what quantum and pricing are you seeing across the different avenues that are open to you?

Sure. So I would say that the bank loan market on a term loan basis is pretty attractive right now. I would say if you are looking at a seven-year term loan you are probably -- spreads of LIBOR just under 200 somewhere around there. So if it's swapped out, you are probably in the low 3% range if you were to fix the payment. On the private placement side we think we could probably execute a deal in line with what we did before, it not a little bit better and so that was a about 4.5% rate on the ten-year term if you average it all out. And then on the public bond market side thats a little bit more difficult. We -- certainly we would be looking to get an S&P rating before we did an investment grade rating which we feel hopeful that we can get this year. And so that market is a little bit more difficult to read particularly as an inaugural issuer. But I imagine it would be pretty close to the private placement market, maybe a little bit more expensive.

Okay. And then just on cap rates maybe a question for John, as you think about kind of the deals you were seeing in the pipeline today, what should we expect for the onesies and twosies as we go forward for the balance of the year, what you are seeing in the pipeline today?

Yes. I think cap rates generally they have got I will say stabilized with 6% being the highest quality opportunities. I think what we are saying right now is come more in that 6.5% range and thats probably the right average for the rest of the year, the rest of the acquisitions. We had a good strong first quarter, some very high quality buildings mostly off market. That large St. Vincents investment that is being sourced from his colleagues at Ascension and positions in those buildings with an attractive 7.3%. So we still see good opportunities like that. But I think you will see 6.5% probably good average for the rest of the year.

Just one last quick one for me and I think I know the answer, but any interest in any of the portfolios that maybe out there from some of the larger REITs?

We know some of the buildings. We know some of the providers, but I think we are very focused on the provider portfolios like CHI is our primary source of portfolio review.

Thanks.

Cant really talk too much about those portfolios, yet we are all under -- indeed everybody out there looking out on their NDAs, but we have kind of given you a good range of our guidance for the year.

Thanks John.

Our next question comes from the line of Jordan Sadler with KeyBanc Capital Markets. Please proceed with your question.

Good afternoon, I just wanted to follow-up on the cap rate discussion a little bit. So the 6.5% cap for the rest of the year, is that a function of whats happened in terms of market cap rates, or is it partially a function of the assets you are targeting or is that for sale?

I would say primarily what they asked is they were targeting of the quality scale when we can, so in bigger markets.

Bigger assets, bigger markets kind of thing?

Yes. Bigger assets, bigger markets, newer buildings.

Okay.

And thats an average to be clear, so its kind of what we see the average working up for the rest of the year.

And thats I mean excluding CHI. Just looking up the stuff that basically closed in the first quarter, first year cash yield was 7.2%...

Right.

So its down 70 basis points? Just making sure we are focused on the same things here.

We are so obviously like I said I just highlighted the big acquisition which had an influence on that 7% average with the St. Vincent given off-market transaction building (inaudible) in an associated way for many years of physicians and the developer of those buildings, so just we are able to get a very attractive price there. So

Right. Okay. And then, just in terms of the pipeline and the pacing you are seeing. Is there -- are you seeing more products coming for sale,? I mean obviously the REITs we talked about but what about the more traditional stuff you guys have been acquirers of?

Yes. Our pipeline is pretty robust.

Okay. And then releasing spreads in the quarter any color you can offer around that I may have missed this?

Yes. Jeff mentioned our retention -- this is Mark Theine. Jeff mentioned our retention rate earlier. We had 9000 square feet or so renewals. It was two leases and those leases were both flat for this quarter. (inaudible)

About 2%.

Yes.

Thats cash releasing spreads on the 9000.

Thats right Jordan.

Okay. Is there a number you can offer or that may not be meaningful on the new leases, new leasing spreads or was that space vacant the whole time you owned it?

That was vacant space.

Okay. Just kind of multi-vacant and then just lastly trends and escalators that you are seeing were they still in the 2% to 3% range?

Yes. And again you are looking at CHI, $40 million of that NOI is going to escalate by lease by2.5% or so continue to move that average up.

Okay. And then the last piece should be just any further thoughts or updated thoughts on 603 or are we sort of status quo for right now in terms of assets you are targeting or just asset management?

Yes. So as I have mentioned in the comments the nice portion of the CHI assets were 603. [DHA] and McKesson on the opposite sides of changing or fighting that legislation or trying to amend that legislation in Washington but we dont see that getting any traction. But they are making a big effort, havent seen any regulatory moves that haveCMS on it yet. And so again we are, we still see a lot of good 603 opportunities and things that are unattractive, so they should be attractive parts of our investments going forward.

Okay. Thank you.

Thanks Jordan.

Our next question comes from the line of Chad Vanacore with Stifel. Please proceed with your question.

Good morning all.

Hey, Chad.

So just thinking about the timing of the close in the CHI acquisitions. You moved some things around a little bit and some assumptions -- how do you think that should change our FFO assumptions through the year and does that move anything $0.01 here or there?

Yes. Chad, this is Jeff. I mean it will move a little bit right because we had initially anticipated kind of about a month -- a month ago that we are going to be closing -- pretty close to it. So I think its a bigger tranche upfront. So the way I model is $335 million in mid-May, the rest in mid-June -- and that will probably get you pretty close. These closing days fluctuate a little bit, but that will get you pretty close.

Alright. And then just looking at the same-store portfolio. Cash NOI growth was pretty decent 2.1%, but occupancy was down and same-store occupancy or same-store operating expense grew faster than same store revenues. Can you add color on whats going on in that same store pool?

Its almost entirely attributable to those two leases we just talked about, Chad. So operating expenses in with the lease gone, there is no -- we have less tenants to allocate those operating expenses to. So there are some other smaller buckets but thats the material part of that issue.

Yes. I mean Chad this is Jeff. Just to add on some of the other little tiny pieces which we were a little bit bigger than normal with some garage work on the Peachtree Dunwoody building. And then there is a tax increase in our Napoleon asset which is grossly, so we end up taking that. But other than that it was pretty standard on the operating expense front.

Alright and just a follow-up to that, what should we expect as far as like same-store NOI growth through the rest of 2016?

Yes. I think we have been kind of in the low 2% range. So I think if you average out its going to fluctuate like all these REITs do. But I think the average of that over the next year you will probably be around 2%.

Alright. And then just one last question on the -- on your ATM still around $70 million or so remaining in authorization?

Yes. We actually -- we terminated that ATM agreement so if you remember that ATM agreement was with NLB. We terminated that agreement. They were purchased by FBR. So, we will be looking at implementing a new ATM agreement at some point. Clearly we just raised a bunch of equity, so we are not in a huge rush to do that but we will contemplate putting together a new ATM agreement as we go forward through 2016.

Alright. Thats it for me. Thanks.

Our next question comes from the line of John Kim with BMO Capital Markets. Please proceed with your question.

Thanks. Good afternoon. On the CHI acquisition, can you just elaborate a little bit on their rationale to fill at this time, I realized there is $31 million of CapEx that probably helped out, but if you could just add some color to that?

Yes, John and good afternoon. CHI has gone -- made a number of major acquisitions over the last five years. They expanded dramatically with the merger in Louisville with the Jewish Health system there. They acquired or merged with the St. Luke system down Houston, expanded their operations in Omaha. Its just that they have been growing very rapidly through kind of M&A and frankly needed to kind of replenish their balance sheet with cash. They have been working with the rating agencies on that as well. So one of the factors and the rating agencies in noting as a factor for an upgrade was for them to kind of replenish the cash and the balance sheet. So its a good capital allocation and a good way to source capital at a good cost for them and potentially improve their credit rating. They are an A, so there is strong credit. And the hospital systems with a bit of actually tenants in our buildings we did -- we had a third-party doing indicative rating analysis for us. And some of the systems are high Bs and some are better than the system rating of A. So, we feel very good about the credit quality there.

With M&A potentially picking up in the healthcare world, do you see other big health systems likely following suit?

We wouldnt be surprised. We dont see anything actionable right now. But we do expect it to be a trend that will continue and we think we are well positioned with our relationships between again Deeni and myself and John Sweet and Governor Thompson. We get phone calls routinely from health system CEOs looking for sourcing of capital for M&A opportunities.

Okay. And then can I ask you on some granularity on the private equity buyers that you are seeing as competition? It is sort of a largely encompassing term, but are these mostly high IRR-opportunistic buyers or do you see them as sort of longer term owners?

I think IRR-opportunistic using a lot of leverage using both secured senior debt and a lot of mezzanine debt thats out there. So thats where we see the capital coming from. There has been one of the big name brand private equity shops that you would know has just funded a new core fund. So with the kind of lower return, lower leverage expectations, but they are targeting kind of major market large kind of core type buildings that just may or may not be medical. But these two or three private funds that have been value-add slow growers over the years, but both have exploded and put a lot of capital to work in the last 18 months and we see them playing into at least one of them was actively involved in the CHI discussions and we would expect probably bid a lot higher than we did.

Do you see the possibility of another MOB-focused REIT in the public space?

I think we have plenty, Joe. I dont know what they -- I think everybody in the space is curious about what the exit strategy of at least one or two of these private funds is, but the way their capital structure is, it doesn't look like they are kind of structured themselves for a public exit, but we will see.

Okay. And then my final question is on potential conversation opportunities. One of the office REITs this quarter signed a deal that surprised the market, I think, to convert a modern Class A office building into basically medical center/hospital. Do you see further conversion opportunities either through your network or through some of your partners?

Yes, its not an unusual experience. Our Peachtree Dunwoody building was exactly that. It was a general office building that was sitting right next to the hospitals and the original owner didnt want to lease to physicians and then it was empty and then second owner came in and leased it up to physicians in the hospitals on the market. So, its not an unusual phenomenon and usually a pretty low cost way to convert those buildings. I wouldnt say we fear that business. I think we see opportunity in that was well.

Great, thank you.

Yes.

Our next question comes from the line of Jonathan Hughes with Raymond James. Please proceed with your question.

Hey, thanks guys and good afternoon.

Jon.

Whats your underwriting differential on your single versus multi-tenant MOBs? And then is that maybe less important than finding assets either on campus or affiliated with healthcare systems?

I wouldnt say we have a canned underwriting differential there. I mean, I think you will probably see it be 25 to 50 basis points in practice, but we dont go into an underwriting with a this was going to be 25 or 50 basis points left. We look at the whole tenant roster, single tenant obviously being kind of easier to think about. But some of the 603 assets not exactly true, but are essentially tended to be the single tenant buildings and now with 603 and a lot of those have CON as well like the Louisville, Kentucky buildings with CHI. They tend to be more attractive and thus attract a higher price, lower cap rates.

Okay. And then some of these sellers out there -- is there increasing willingness to accept OP unit deals or actually wanting unit deals, not only because of the tax advantages, but also just to participate in the growth trajectory of DOC?

Yes. So, our OPs are very -- so, I mean we have a lot of physicians seeking us out for -- to do OPU transactions. Lot of our physicians that have participated over the last three years have done very well with theirs and are great referral sources. So, frankly, we have probably more demand for OPUs than we want to put out, but they're a very attractive tool. And it seems to be a couple of other REITs in the space offering OPUs that didnt used to offer OPUs. I am not sure who started that trend.

Okay, thanks for that. And then just -- I guess just one more, everything sounds to be pretty good in the MOB sector rate now, I mean whats the biggest headwind or potential risk to your story? Is it new supply, regulatory, growing too fast? I'm just trying to get like any sense of the downside that we may not be thinking of here/

I think your raging hot economy slows down our growth as you guide people to transition into more economically sensitive REITs. But even that will be good for our business. It would probably temporarily slow down our growth. Jonathan, we focus on good underwriting selecting the best providers to work with, the best facilities to invest in and so we dont see any headwinds right now. We are just very focused on operations and managing the buildings we own well and improving them and keeping them leased and leased up and continued growth.

Okay. Yes, now I was more so focused on your operating fundamentals than how the market changing, but thank you for the color. I appreciate it.

Yes. Thanks, Jonathan.

Our next question comes from the line of Michael Carroll with RBC Capital Markets. Please proceed with your question.

Yes, thanks. John, could you describe the type of assets that you are going after now and how they are different versus the ones that you were underwriting 12 months ago? I mean specifically how are those properties different? Are they I guess closer to campus now, are they new or they are bigger multi-tenant? What are the kind of the things you are looking for?

Yes, I think its a great question. I think we continue to focus -- we have always had a goal of getting to 90% of the portfolio being either on the campus or affiliated with a health system. Nothing has really changed about our kind of underwriting views of off-campus versus on-campus other than whats the -- who is the anchor tenant, great health system or large physician group. And so we are still doing lots of physicians, direct transactions with physicians. We talked about the OPUs a minute ago, which continue to be a very attractive request from our physicians that we are buying from. But our cap rates are tightening down because of cost of capital is allowing us to access higher quality newer bigger buildings. And again, those at the highest prices are ones that are leased by credit rated health systems and in bigger markets. So the CHI investment in Seattle is a great entrie into that market and we are already getting inbound calls and other opportunities for growth in that market. Thats an expensive market. So thats where some of that kind of guidance to the lower ends gets. We are still seeing lots of great opportunities in the El Paso, Texas (inaudible) as well. So, I dont think we will avoid those markets by any means, but when we can get newer, bigger health system credits we are going to take advantage of it.

And then what are the size of the transactions that you consider your bread and butter right now? I am assuming the smaller ones are getting a little bit less interesting as you are getting bigger.

Yes, thats right. And I mentioned the growth of USPI. The USPI kind of relationship those buildings tend to be smaller, so really have to be something special about it for us to do something less than $10 million. When I say special, I mean a relationship that where our total portfolio of USPI affiliated buildings is getting pretty sizable, but those tend to be smaller on a unit by unit basis. So, $10 million is getting to be small. But again if its related to an existing hospital or physician group relationship, we will work on those sized transactions, but we're trending to potentially bigger --

And what about the ambulatory surgery centers? I know that you bought one I guess in the April. Is that a property type you still want to pursue and do those -- are those big enough to really move the needle for you?

Again, thats another one thats related to USPI and the tenant there is Brookwood Hospital which is a tenant hospital in Birmingham, very profitable hospital in a great kind of suburban location. So the physician who developed that MOB -- or excuse me that ASC and operates that of this is one of the kind of worlds leading sports orthopedic surgeons. So, it's part of the relationship there and its a great tenant, great credit and kind of adds on to an existing relationship.

Okay great. Thank you.

Our next question comes from the line of Vikram Malhotra with Morgan Stanley. Please proceed with your question.

Thank you. So just sticking to the topic of acquisitions, now that you have done a couple of larger deals and between the sale/leaseback -- any thoughts or color you can give us as to just how is there some thought process and how larger you would actually like to be? And given the current G&A load what sort of volume could you do without meaningfully increasing the G&A?

Yes. I think we have scaled pretty well in anticipation of closing CHI which has obviously a lot of total assets. We continue to maintain 1% or less of assets with our goal for G&A. And I will let Jeff speak to that a little bit further, but the -- we can really see a runway of $200 million to $250 million of acquisitions a quarter and feel good about that guidance going forward into next year. So Vikram as long as our cost of capital makes sense with the asset quality thats available and we will continue to grow and really dont have any breaks on it. But setting goals for next year will kind of come out of next the next couple of months -- next couple of quarters and see where we end of the year and where the cost of capital is and what the market environment is. We are going to continue to grow and be the leader in this space.

Okay. And then I apologize if you touched on this I joined a bit late. Just on the CHI portfolio are there parts of it that you could look to sell, do you have any targets in mind? If so, how much?

Yes. Thats a great question. So, we have no intentions to sell any of the buildings we bought. On the other hand we dont have any restrictions. There are -- some of the -- many of the buildings are on (inaudible). So we will work closely with CHI if and when we ever decide to sell anything, but we are not prohibited from doing that. We have complete flexibility there. But there are some brand new buildings and there are some older buildings that some of that CapEx that we need to make is going to go into some of the older buildings. So over time, you would expect out of any large portfolio to transition some of those. So those are -- some of the buildings are smaller and could be torn down and replaced with better newer facilities. So no plans or intentions to do anything but you should expect over the next couple of years did you see some more dispositions as we grow and no plans to do that now.

So it sounds like some of your peers were interested in parts of the portfolio and just based on my connotations willing to pay probably 50 basis points for the lower cap rate for some of that. So it could be some interesting recycling opportunities for you. Just last one, on the Section [602] assets, maybe if you could clarify, I am a bit confused as to whether the grandfathering actually lies with the landlord or with the tenant and what happens when that tenant decides to move somewhere else?

Thats yet to be decided. The CMS will have to issue regulations. But as the law is written and based upon historical practice with CMS as they interpret grandfathering. Typically that stays, that is address-specific with that provider as applied for and gotten the reimbursement status. So the rules could be different but approximately we dont anticipate it. Within the CHI portfolio I mentioned we have a couple of 603 assets there that are also CON assets. There is really two regulatory kind of restrictions. They make those buildings very sticky. And those are very volume, very profitable facilities for them. So we expect long-term that grandfathering and CON makes those buildings very long-term attractive holds for us.

Okay. Thanks guys. Congrats on a strong quarter.

Thank you very much.

There are no further questions at this time. I would like to turn the call back over to Mr. John Thomas for any closing remarks.

We appreciate all of the support. Just looking at our stock, we appreciate -- I think we are bouncing around some of our all-time highs. We appreciate the opportunity to do that for you and continue to work with you and our shareholders and your clients. So thank you for joining the call today. And we look forward to any follow-up questions you may have.

This concludes todays teleconference. Thank you for your participation. And you may disconnect your lines at this time.