Healthpeak Properties Inc (DOC) 2016 Q2 法說會逐字稿

Greetings and welcome to the Physicians Realty Trust second-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I'd now like to turn the conference over to your host, Mr. Brad Page, General Counsel for the Company. Thank you. You may begin.

Thank you.

Good afternoon and welcome to the Physicians Realty Trust second-quarter 2016 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 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 second quarter of 2016 and our thoughts for the most remainder of the year. 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 the Company's CEO, John Thomas.

Thank you, Brad.

Good afternoon and thank you for joining us for the Physicians Realty Trust second-quarter earnings call. We just celebrated the third anniversary of our initial public offering on July 19 and are very pleased to report the record results of the second-quarter of 2016.

In just three short years we have grown from 19 medical office properties valued at about $124 million to 222 high quality, well diversified facilities representing total investments of more than $2.6 billion in 29 states. This growth is fueled by a strong investor base, strong personal and professional relationships with outstanding healthcare systems, excellent physicians and other providers, and a team of hard-working smart people dedicated to building and managing a best-in-class medical office portfolio and operating platform.

Our incredible team of professionals and partners have completed substantially all of the Catholic Health Initiatives, or CHI, acquisitions we announced in April with only 4 of the 51 buildings left to acquire. Three will close during the third quarter, while the other one will close later this fall or early 2017 after construction is completed. We are proud of our team's unique ability and hard work to underwrite, inspect, document, and close on acquisition of over 50 facilities this quarter, investing $680 million over just three months' time.

In addition to the CHI portfolio, we also completed a handful of smaller acquisitions during the quarter, all of which are organic, off-market growth opportunities with existing clients or relationships, including one leased to CHI's KentuckyOne Health that is adjacent to another facility we own and lease to them in Kentucky. We also added another adjacent to St. Vincent's East Hospital campus near Birmingham, Alabama.

Jeff will review our financial results, but needless to say, our growth and attention operations continues to produce very good results. We were opportunistic in the third quarter to access the debt and equity capital markets, demonstrating our commitment to financial strength and prudent growth. On April 11, we completed our eighth and largest follow-on equity offering with net proceeds of approximately $443 million.

We appreciate the continued support from our loyal and growing investor base in this oversubscribed offering. The net proceeds from this follow-on offering fueled another record quarter of strong growth, investing almost $680 million primarily driven by the substantial completion of the CHI investments and the handful of mentioned client relationship acquisitions we completed.

With our new debt facilities and placements Jeff will describe in a minute, we have strengthened our long-term balance sheet and are well fueled to continue our outsized growth as we continue to source opportunities through our relationship business development model efforts some have called proprietary.

We are also pleased to announce we have strengthened our property and asset management teams as well with the addition of Mark Dukes, VP Property Management, who will be responsible for the primary nationwide management of all of our CHI facilities. Mark has a long history in medical office management coming to us from Duke Realty, and Mark was most recently recognized by his peers as one of three property managers of the year of the Building Owners Management Association, or BOMA.

We have also added Amy Hall as VP of Leasing. Amy joins us from CBRE in Louisville, Kentucky, and has a strong history and medical office leasing, planning, and real estate in general. With over 1000 leases across our 200 plus buildings, Amy's leadership and focus on both renewals and new leasing will strengthen our property operations and our financial results. Amy joined us July 1 and has already produced several new leases in process for our vacant space in the CHI KentuckyOne facilities, as well as many pending renewals. We are very pleased to welcome Amy and her leadership.

All total, our portfolio has grown to almost 10 million square feet of on- and off-campus medical office facilities with just over 95.7% leased with an average lease term of 8.6 years. Many of the off-campus buildings are new, strategically placed in sub markets with strong insure demographics and providing comprehensive outpatient services and procedures. We believe 50 of our buildings are anchored by hospital outpatient departments, or HOPDs, in existence as of November 2, 2015, and thus are grandfathered 603 assets. These assets represent approximately 30% of our current NOI.

As grandfathered HOPDs located in 603 assets, these tenant providers are eligible for higher Medicare reimbursement, the new locations established off the campus of the hospital provider. CMS recently issued proposed regulations that state the provider will lose this grandfathered status if they move the HOPD out of the grandfathered building location: in our case the buildings we own. We anticipate that potential loss of the HOPD reimbursement will enhance the desire of these tenants to remain in these locations, again our building, and will more likely than not renew their leases at reasonable fair market rents.

We would like to address the anticipated general industry classification system changes that will go into effect in September when real estate becomes its own sector within capital market indices, separated for the first time from financials. Green Street Advisors believes this event is a driving visibility in new investment. According to Green Street, the US mutual fund industry is dramatically underweight real estate. REITs have been the best performing asset class since 1998 with a 10% annual return, and this underweight strategy will come under pressure when the S&P 500 and MSCI indices rebound.

Estimates range that generalist investors are underweight REITs by somewhere between $40 billion and $100 billion, and some portion of this imbalance will eventually work its way into REITs. Several sell side research analysts believe the fundamentals for medical office buildings remains the most attractive among all healthcare real estate asset classes. Underscoring the importance of medical office within the evolving healthcare delivery system, hospital admissions and the context of population levels are declining while the ratio of outpatient visits has been steadily climbing over the past two decades.

According to the American Hospital Association, hospital admissions have been declining by approximately 1% per year while outpatient visits have been increasing by more than 2% per year. Rising healthcare costs have led medical service providers to offer increasingly more outpatient services at specialty medical properties. Hospitals are typically associated with high cost treatment, while outpatient facilities in many cases are able to facilitate lower cost and more efficient patient treatment.

Insurance companies and government healthcare programs have also formulated reimbursement policies that favor these less expensive outpatient care centers. As a result of the changes, we've been spending more and more time with generalist investors, some of which have no REIT exposure and others of which are seeking more information specifically about healthcare real estate and healthcare REITs. We believe these funds should flow into healthcare REITs and in particular pure play medical office buildings as the most recession-resilient and most potential growth without material government pay risk.

Medical office buildings in the macro sense also had the least risk for new development competition, as much of the new development is replacing all old hospitals or penetrating new markets, not necessarily creating competition for existing medical office stock. As a high-growth, pure-play medical office REIT investor with the highest occupancy and most stable leases with 96% leased for 8.6 years on average, Physicians Realty Trust is the most attractive healthcare we believe or any asset class REIT the generalist investors consider they initiate REIT investing and eventually getting their investment allocations in line with the Gics industry allocations.

We ended the quarter with 79% of our space either on the campus of the hospital or anchored by a health system up from 73% last quarter. This continues to demonstrate our disciplined plan to continue to enhance the overall quality of our portfolio and our long-term commitment to building and managing this platform as we increase this asset allocation percentage to at least 90% in the next two years.

With that, I will ask Jeff to review our financial results and balance sheet management. Jeff?

Thank you, John.

We are pleased to report another solid quarter of operations. The Company generated funds from operations of $26.3 million, or $0.19 per share. Our normalized funds from operations, which adds back acquisition expenses, was $29.5 million. Normalized funds from operations per share was $0.22, an increase of about 5% over the same period last year, which is a pretty remarkable number considering we pre-funded our large CHI acquisition with our $443 million equity offering in April. Our normalized funds available for distribution were $27 million, or $0.20 per share.

In this quarter we closed on $680 million of investments at an average cap rate of 6.3%. $616 million of this activity was related to the CHI transaction and the remainder consisted primarily of medical office buildings sourced through existing relationships. Our acquisition closing skewed toward the end of the quarter with the second tranche of the CHI deal closing on June 30.

Had all of our second quarter acquisitions closed on April 1, we would've had an additional $7 million of cash NOI. We are pleased to be largely through the closing of the transformational CHI deal and look forward to focusing our attention on the acquisition opportunity ahead of us. We remain comfortable with our acquisition guidance of $1 billion to $1.25 billion for 2016.

On operation side our same-store portfolio, which includes every asset that we have owned for a 15-month period, generated year-over-year NOI growth up 1.7% with a ten basis point decrease in occupancy. Contractual rent escalations were responsible for the majority of the NOI increase, offset by the lease expiration and move out of the other north side tenant in our Peachtree Dunwoody building in Atlanta, Georgia.

While we don't like any move outs, the Peachtree Dunwoody building is a premier building in Atlanta with strong leasing potential. We will have backfilled about one-third of that space already by September and have some significant traction for a large chunk of the remaining space.

We had a very busy quarter on the financing side. We started the quarter with our April issuance of $443 million of equity, our largest equity raised to date, which was formerly used to fund the CHI transaction. This has enabled us to close the majority of that transaction, as well as certain other acquisitions while keeping our debt to assets at 25%, which is considerably lower than our peers. Also on the equity front we are in the process of negotiating a new $300 million ATM program in order to provide some additional financial flexibility.

Moving to debt, in June we entered into a new credit agreement that increased a revolver size by $100 million to $850 million and provided the option to draw $250 million 7-year term loan at a rate of LIBOR plus 180 basis points. We drew that term loan in early July and immediately entered into a swap arrangement that fixed our payments at an annual rate of 2.87% over the next seven years. The term loan was used to pay down the revolving line of credit, so as we sit here today we have $158 million outstanding on the line with additional capacity of $692 million.

Our balance sheet is as strong as ever. At the quarter end, our debt to total capitalization was 18% and our net debt to adjusted EBITDA was 4.2 times. We expect to continue to issue long-term fixed-rate debt in the second half of the year. We will evaluate both the private and public debt markets for this activity.

Finally, our G&A for the quarter was $4.9 million, bringing the six-month total to $9 million. We remain on track with our previously announced G&A guidance of $19 million to $21 million for the year.

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

Operator, we are ready for questions and answers.

Thank you.

(Operator Instructions)

Jonathan Hughes from Raymond James.

Good afternoon. Thanks for taking my questions, guys. Can you just talk about the outlook for quarterly acquisition volume now that the CHI deal is closed? I know you maintained the range and touched on this earlier, but I think there might be some concern about a slowdown in this pace as we approach 2017?

Yes, Jonathan, it's John Thomas. We communicated in the past we tapped the brakes a little bit just while be integrated CHI and had such massive investment and work to do to complete that investment this quarter. But the pipeline for the rest of the year looks pretty good and I think we feel good about the guidance that we previously announced $1.1 million to $1.25 billion. Could surprise us to be more but we feel good about that guidance and I think the pipeline for 2017 in particular with our relationship is also starting to build. For now, we will issue 2017 guidance later but still feel good about the pace and the opportunity.

Okay. And speaking of relationships, have any other large national healthcare systems reached out to you looking for a deal similar to CHI or had any discussions?

There's been a lot of interest from the hospital industry about the CHI opportunity.

Okay. I'll leave it at that. And I'll just ask one more and I'll jump off. Last quarter you gave some color on pricing for potential debt raises and obviously you did the term loan last month, but can you give us an update we think you can price debt today given the tenure dropped 30 basis points since your last call and the fact that one of your MOB focused peers recently issued some pretty attractive ten-year notes?

Jonathan, it's Jeff. The ten-year is bouncing around quite a bit. Right now, I'd guess we'd be in the low 4's probably in the private market. If we were to do a public market offering it's hard to tell as an inaugural issuer, but probably that same ballpark, so I would guess the very low 4s.

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

Thanks, Jonathan.

[Fred Kusara] from Wunderlich Securities.

Thanks, guys. I just want to follow up on the question regarding the balance sheet. Jeff, when we think about the back half of this year you just did the term loan. Do you think a private placement is likely to take out the rest of the line of credit or you more likely to not continue to use the line?

I think that we're really going to be focusing on keeping our debt termed out, particularly as we look at the interest rates that we have right now, so it's certainly likely that we're going to use the long-term debt markets and again, I think the private debt market is a great spot for us. We've got a great relationship in that area that we can build on pretty easily. And then as we look toward the back -- the end of the year certainly the public debt markets if they remain open would be a good option for us as well to expand the number of capital avenues that we have available.

Got it. And I wanted to go a little deeper into some of the details of the smaller acquisitions you did this quarter. The medical village facility it looks like you bought about $9 million, yielded 9.3. What's the entire pool going to yield approximately?

So that entire relationship is much larger a couple of buildings under construction but one of the things that is so attractive to us about it is the great cap rate and kind of the aggregation of independent physicians altogether who aggregate those medical [buildings] in the Orlando market. So, pretty excited about it. I think most of it will close this year at some point, but that was just the first two buildings in the relationship.

Got it. So do you have a field and is the entire pool going to close north of 9 or is it going to settle closer to your kind of what you've been more typically doing right around a high 6, low 7?

No. These will be in the low 8s, but the first two that closed were older buildings that had been rehabbed substantially. The newer buildings trading at a tighter cap rate but overall it's over 8 for the relationship.

Got it. And how long is the renovatement period on the Children's Hospital MOB in Milwaukee?

Six months? Six months. Beautiful facility and a great new relationship for us that Mark Theine and John Sweet worked hard to develop.

Got it. And one last one for me. With the land purchase you did in Jackson, Tennessee, how do you think about the cash on the cash returns on expansion and MOBs, and are you hearing from any other tenants that are looking to expand their buildings?

Yes, and that's exactly what that is, is a small investment of land so we can expand that building which has a surgery center in it so 7 yield is the expansion ramp once it gets developed.

Okay, thanks. I'll hop back in the cue.

Okay, thanks, Fred.

Vikram Malhotra from Morgan Stanley.

Thank you. Just first on your same-store NOI trends, now that you have a decent sized pool in the same-store portfolio, can you maybe just give us a sense of what you expect over the next few quarters and just how the components would stack up? I'm just trying to get a sense of where the trend is relative to your peers?

Sure, Vikram. Right. Our same-store pool is continuing to grow. We have 1.7% growth this year. That was disproportionately affected by an additional move out that we had in Peachtree. We had two of the north-side tenants vacate the Peachtree Dunwoody building, so that's what dropped it down a little bit. We'd expect certainly over any kind of reasonable period of time that you're going to be in the 2% to 3% same-store growth arena. So we'd expect rental revenues to kind of increase to a more normalized 2%, 2.5% and operating expenses to probably start increasing a little bit.

And then, just on tenant retention as you look out in 2017, and I know you don't have a lot of leases over the next year coming due, but as you look throughout at 2017 based on early discussions, do you have a sense of where tenant retention might pan out?

It's hard to know exactly where it's going to pan out in 2017. We've talked a lot about 80% to 90% retention rate goals. If you eliminated that Peachtree Dunwoody move out from this quarter we would have been at 84%, so we think it's probably going to be 80% to 90% but it's not definitive right now.

Okay. And then just last one on CHI. Just walk us through plans or as you've looked at the portfolio sort of what are the, in your minds, the more riskier parts of the portfolio, especially in light of the several credit downgrades that we've seen recently?

Yes, Vikram. This is John Thomas. That was not unexpected, Fitch just kind of caught up with the other agencies. If you read the S&P report, you get substantial detail about kind of their evaluation of the long-term prospects, frankly for a credit upgrade. There are two key components of that. One was recapitalization which was what our transaction did for them and then the second was just operating history to see their kind of strategic operational improvement plan go into effect. So it was no surprise to us. We had done our own individual and gotten a third party to work with us on an individual region by region analysis.

Certainly some room for improvement. Louisville being probably the lowest, North Dakota and the Houston area being part of the strongest regions within that platform. Seattle being very strong, but even in Louisville we have four times pro forma EBITDAR coverage and have a lot of new leasing activity, particularly with Amy Hall joining us and one of the reasons we are so excited about her, so we feel very good about the long-term prospects and where they're headed.

And just to clarify, you're still in the camp of most of the portfolio remains as is, very little dispositions leased over the near term?

That's right. We don't have any intention to sell anything. There's some buildings that over time probably get redeveloped or replaced but in the near-term they're producing good NOI and anchored by CHI and are on campus. So we feel great about that even the lesser of the portfolio.

Great. Thank you very much.

Juan Sanabria from BofA.

Hi, guys. Just kind of hitting on one of the earlier questions. Any change in sort of market cap rates given lower treasuries and maybe more uncertainty in other areas of healthcare which I know you touched on in your prepared remarks, kind of where do you see the typical bread-and-butter deals penciling out after the cap rate perspective?

Hi, Juan, it's John. I don't think even at the low tenure and debt cost we still are seeing lots of opportunities again between 6% and 7%. There are certainly people pushing for sub 6%, particularly in mid coastal markets, but we still feel very good about the high quality we're finding and again for the year weighted heavily by the CHI transaction which is in place at 6.2%. We still feel good about averaging about 6.5% for what we see in front of us. So you'll see some 6%s and as we mentioned, we got the 8%s, which are brand-new buildings down in Florida that overall we still feel we see lots of opportunities again ranging from 6% to 7%, but as you move up the quality scale like we continue to try to do again you'll see more in the low 6%s.

And then just on the balance sheet with the new ATM, have you guys run the numbers on what potentially you could issue on sort of a quarterly basis? I know the black outs differ from period to period, but any sense of what you could potentially do on a run rate basis?

Juan, it's Jeff. We haven't because we haven't really contemplated just turning it on and leaving it on. I think we want that ATM to have the flexibility to match fund acquisitions when appropriate or get a little bit of equity here and there. I don't think it's going to be a deviation from how we typically fund which is follow-on equity offerings, particularly when associated with a big chunk of investment volume. So we haven't really run that analysis. I could certainly talk to you about it later if you'd like.

Okay, great. And then just on CHI, how do you think about the total exposure? I think it's 25% to 30% of your portfolio. Do you think of them as each individual separate health systems or is it really one whole thing where there is a parent guarantee that kind of overlays over the whole?

Great question, Juan. So technically we have -- it's each region is our tenant and that's where the credit is and the credit risk is. We do you think about the aggregate which is approaching 29% but the corporate super parent, if you will, which is the rated entity, is not a direct obligor on the leases. The only real direct obligation we have from a balance sheet perspective are the bonds that they issue and the aggregate detecting that bond. So again that's why we did individual credit analysis of each region and, as I said, even the worst region is four times EBITDAR coverage and kind of a BB kind of implicit rating from a rating agency perspectives, so that's why you'll see in our supplement we're breaking it out. Our largest tenants, our top 10 tenants now are -- several of those are individual regions within CHI and that's technically where our credit is and technically where the risk and exposure is.

What was the blended coverage for the whole CHI portfolio that you guys expect?

It's close to 10 if not more. Again, we kind of look at them individual. Some regions are in the teens and again the worst is Louisville in four plus.

Okay, great. Thanks, guys.

Yes.

Michael Carroll from RBC Capital Markets.

Thanks. John, how much of your time has been taken up [cleaning] this CHI deal and has that kind of impacted the size of the Company's investment pipeline currently?

Mike, kind of like your hometown Cleveland Cavaliers, we've got an outstanding team between Deeni and Mark Theine and John Sweet and others who are still out there sourcing opportunities. Mark has spent an enormous amount of his time integrating this transaction and with Mark [Duke's] as the [straight edition] work with Mark -- or Deeni Taylor previously at Duke, so it hasn't slowed down at all. In fact, with -- one of the advantages of our kind of proprietary model we were able to kind of pace out, move some of the transactions back into the calendar year when we can pursue them more aggressively. As I mentioned there in my opening comments, Jeff and I frankly have been spending a lot of times with potential new investors, focused on the [GIGS] classification so it's a good balance. I'm still out there knocking on doors as well.

Okay, so I guess in your comments when you said that you kind of had taken a step back to complete the CHI deal, that was more of your choice just trying to integrate such a large transaction and less of the size of the pipeline and the amount of effort you guys can kind of go out there and find deals?

Absolutely. We just moved things from the second to the third quarter and asked sellers in relationships that we work with to be patient. To my knowledge, we haven't lost any opportunities and I'm just kind of spreading them out over the back end of the year. Again, CHI was so important to us, or so important to those other hospital systems that might be calling that we had an extremely high quality integration, and first day on the job managing those buildings, building those physician relationships. And I said Amy Hall started July 1, she was actually working on new leases before she started and has been a very positive impact.

Okay. And can you kind of give us some color on the type of deals that you are currently pursuing today? Should we be thinking more of like a CHI -- Can you kind of give us the type of acquisitions you are pursuing today? Are you still kind of looking for those 7 cap-type deals or are you kind of moving up the quality spectrum looking for cap rates in the mid 6 type range?

Operator?

I am sorry the question got cut out there. We will move on to the next question. That is from John Kim from BMO Capital Markets.

Thanks. Looks like you made your second executive --

John, can you hear us? John Kim?

Yes. Can you hear me? Hello? Hello? John? I think there is an issue with the connection, operator? Hello? This will make for a great transcript.

I'm sorry. Mr. Page, your line is live.

Hello, John. Can you hear me? Hello?

We lost our connection.

I'm sorry, Mr. Page. Your line is live right now.

John? Can you hear me?

Jordan Sadler from KeyBanc Capital Markets.

Can you hear me all right? John Kim, can you hear me? It's a joke. I can hear you. Operator, I don't think that --

If everybody on the call can hear us, for some reason we can't hear you.

Maybe you have got us on mute. Operator, can you hear me?

I can hear you, Mr. Sadler, I'm sorry.

I can hear you but management can't hear me.

I think they can hear you. Why don't you go ahead and try and see if they can answer your question.

John? Jeff? Can you hear me.

I can hear you.

John who? John Kim? Is this the operator? The management team can't hear me, sir.

I think they can hear you.

I just asked of them and they didn't reply. I don't know if you are listening on a different headset. John Thomas, Jeff Tyler, can you hear me? Anyone? Bueller? Sorry, operator, I can hear.

Let me try one moment.

I think you are on it now.

Rejoining the speakers.

John Thomas, can you hear me?

Yes, we can hear you now.

Hi, it's Jordan Sadler.

Hi Jordan.

Nice to be with you. Hi there. Sorry about that. Not sure what happened. This is your second quarter earnings conference call, isn't it?

It is.

Okay, great. Then, I'm at the right place. I was going to ask you about just the cap rates that you guys were seeing. I can't remember if that quite got answered. I think it was being asked by one of the other callers who you couldn't hear, but I was curious if you were seeing better opportunities in the market at all and whether or not you were licking your chops a little bit given the fact that the tenure has come down a little bit and maybe there's an opportunity?

Yes. We did mention this but we are happy to do it again. We still see a lot of really good opportunities, particularly our cost of capital has improved and we'd like it to be better, but we're seeing lots of opportunities between 6% and 7%. I think for the year we'll probably end up about 6.5% on the aggregate heavily influenced by CHI at 6.2% kind of going in place cap rate. There's some portfolios out there that probably will continue to push at 6% and people looking for sub 6%, particularly kind of poor coastal markets, but we're excited about the opportunities we see.

We continue to move up the quality scale. We view that as newer buildings, bigger buildings, on and off campus, but affiliated with health systems which is going to drive those cap rates to that range. 6% is still a good number. Best in quality for us. We've got some 8s in the pipeline that are brand new buildings that we're excited about.

And the pipeline, how would you characterize it? Would you be trending toward the high end of this guidance range still?

Yes, we feel good about our guidance and being able to accomplish that. We have plenty of fuel to do that. We can do that through debt without increasing our debt levels anywhere that we would be uncomfortable with. We feel good about the guidance as is and if you get lucky and do a little bit better, we could push some things to the first quarter 2017.

Okay. And then someone asked you earlier about dispositions, I think specifically in the CHI portfolio, but I was kind of curious as you anniversary here third year, anything within the broader portfolio that you'd look to pare asset manage out over time?

I think we're probably getting to a time, a scale and -- where we probably do that a little bit more proactively. We don't have anything held for sale today. We sold two of the legacy buildings from the original portfolio last year. There's some older buildings but they are still producing nice NOI. 2017 may be a year to start doing a little bit more of that. Nothing in the CHI portfolio do we have any intention to sell in the near term, but there's some opportunities there for some redevelopment or repositioning some assets. And so, over time there will be some pruning [not] really the whole portfolio but out of CHI as well. There's also some brand new buildings and some high-quality on-campus buildings in that portfolio we expect to own for a very long time.

Okay. Just one for Jeff there on the debt to EBITDA. You guys reported 4.2 times. Is that a pro forma statistic or do you have a pro forma statistic that reflects full quarter's run rate of CHI?

That is not a pro forma statistic that's an actual -- layer in (technical difficulties).

What was that last part?

Mid 3% range or so, mid to low 3%. Three times, sorry.

No worries. Okay. Thank you. I will hop back in the queue.

Thanks.

John Kim from BMO Capital Markets.

Thank you. I thought I said something that might have disappointed you or something.

So compelling we couldn't hear it. We apologize.

So it sounds like you made your second executive hire from Duke. Any thoughts on their appetite to sell MOBs?

We can't speak to what Duke will do, but we're excited about our team. They developed and/or managed that portfolio so we're anxious to hear if you find out anything about it.

I know you said in the past that you want to have G&A at about 1% of assets. Is that still the goal heading into 2017?

Yes. We're under that now and kind of managing that. Jeff will get more precise.

John, it's Jeff. We think our G&A is going to be in line with everybody else's that operates the same kind of business. So as we get bigger we expect it to drift under 1% of assets like the other pure play MOB REITs, so I think you can just plot it on that kind of a line of G&A to assets versus overall asset [buy].

I'm just wondering because you've doubled the size of your portfolio the last 12 months and it sounds like you made some recent hires. Is that going to pick up over the next 12 months?

The team has grown a lot for the implementation of CHI, particularly on the property and asset management side. A lot of that is reimbursed through our rent [cam] charges in the leases there. So it's kind of on a G&A basis it's not only net neutral but positive. So there's still some G&A growth but it's disproportionate and lower than the growth in asset base.

Okay. John, you mentioned conversations with general equity investors. Can you shed some light on your conversations as far as how they are viewing valuation and the disparity, not so much with your company, but with healthcare REITs in general, the disparity between annuity premiums and maybe multiple discounts?

I would say some -- it's interesting kind of the range of education and understanding about REITs generally and health REITs in specifics. Some know a lot. Some are just learning. Obviously we think MOBs are not only the best asset class but we and the other MOB REITs are probably undervalued in comparison. So we think there is a lot of relative upside there, as I mentioned in my other comments. I think some of them come in thinking there is high valuations, but we do a good job. We work hard to kind of help them understand where the opportunity is. We think it's MOBs.

And in comparing MOBs with some other asset classes, can you discuss or estimate the EBITDAR coverage of your entire portfolio or maybe an occupancy cost concept? I know you don't really look at it that way but can you provide maybe a range of what that may be?

Yes, so in our highly specialized facilities, which is a fairly small part of the portfolio, our [L tax] are in the 3% plus EBITDA range, our surgical hospitals are 4 to 5 times EBITDA range. Very good coverages and very low Medicare exposure. No Medicaid exposure. So you distinguish that from skilled nursing in particular and kind of the supply bubble and other senior housing, again MOB just stands out as the high growth, the most stable asset class in healthcare.

That's great. Thank you.

I will add general medical office space can be 10 to 20 times. It just depends.

Chad Vanacore from Stifel.

Good afternoon, all. So my burning question is do you think the hometown Milwaukee Bucks are going to be jealous you compared our management team to the Cavs?

You need to send us some horse picks for the horse matchup there.

We can try that out. So some real questions. Just a follow-up on my colleagues' questions. What should we expect in the balance transactions for the back half of the year? Is it weighted more to the fourth quarter or is it ratably over the second half?

I think it's -- third quarter will be -- we feel good about it. It's probably more in the fourth quarter. It's where the pipeline sits right now, kind of a [regular] business we feel very good about.

All right. Same-store NOI growth under 2%. Was that really due to that prior period tenant loss or is there something else going on there that we should be aware of and then where do you think it trends in the back half of the year?

That's one tenant was the biggest impact. We talked about it last quarter. It's two tenants that were related to each other. One expired first quarter and the other one expired this quarter. I think the trends continue to be in the right direction for the rest of the year.

All right. And I think I'll stop there and I'll talk to you guys later.

Thanks.

Tayo Okusanya from Jefferies.

Good afternoon, guys. Just a quick question around Section 603 since we haven't talked about this in awhile, but CMS did put out some information about their OPPS proposals for 2017 and it sounds like they're talking about grandfathered outpatient departments for the hospital providers that won't be able to relocate and there's a whole bunch of other restrictions. I'm just curious, does this change your mind about how you think about buying off campus versus on campus MOBs or not?

I don't think it changes, I think it enhances. I mentioned in my opening comments that regulation is -- frankly we expected that interpretation and had some insight into that. Again, if you own a grandfathered asset the tenant, if they want to keep that higher reimbursement, have to stay there. They can move it back to the hospital campus, but they put it in that outpatient off-campus setting. For a reason they historically benefited from the HOPD rates and now CMS says you can maintain as long as you stay in that location. As a landlord, we feel very good about that from that perspective.

What about for future acquisitions as you think about making future acquisitions?

I think future acquisitions, if they are a grandfathered asset, great. If they are not a grandfathered asset you will underwrite it from that perspective and again, we like on campus but we think the future healthcare delivery is very consumer driven and consumer oriented driven. You don't plop a new hospital down in the middle of a high network demographic kind of market, you do it in an outpatient setting. Again, there will be future outpatient buildings built there that just have a different reimbursement model. We'll underwrite it from that perspective, but there's a lot of grandfathered assets out there, very large number of our buildings, 50 have some kind of 603 anchor to them. We think they are stronger than ever with this law and these regulations.

Got you. Thank you.

(Operator Instructions)

Jordan Sadler from KeyBanc Capital Markets.

Hi. Just a follow-up on the recent hire. So you commented and answered one of the questions they developed most of Duke's portfolio and so it just raises the question surrounding development. Now that you have kind of -- you're building some of that capability internally, how are you thinking about development?

Really haven't changed our views on development. Again, one of the opportunities we have with our CHI relationship is to work with them as they identify developers that they want to work with and again hopefully we would expect some opportunity to help them in that planning and eventually owning those buildings. But we certainly have the capability to develop and oversee the development, but we're not building an engine to do direct development. We will continue to work with developers and friends around the country. If they need some capital as part of the opportunity and create some opportunity for us, then we'll do that on a case-by-case basis, but you're not going to see a development team start self-developing here any meaningful way. We can expand the building and we have like a TI expansion, but no change in philosophy.

Is that a never?

I would never say never on anything, but we don't have any intention to do that, Jordan.

Okay. Thanks, John.

Thanks, Jordan.

I would now like to turn the floor back over to management for any closing remarks.

Yes, we appreciate you joining us today. We are sorry about the technical glitch. Again, just to reiterate, strong, great quarter and we appreciate your support and we look forward to seeing you at the next earnings call and Investor Conference this fall. Thank you.

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