Healthpeak Properties Inc (DOC) 2017 Q1 法說會逐字稿

Greetings, and welcome to the Physicians Realty Trust First Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Bradley Page, Senior Vice President, General Counsel. Thank you. Mr. Page, you may begin.

Thank you. Good afternoon, and welcome to the Physicians Realty Trust First Quarter 2017 Earnings Release Conference Call and Webcast. With me today are John Thomas, Chief Executive Officer; Jeff Theiler, Chief Financial Officer; Deeni Taylor, Chief Investment Officer; John Lucey, Chief Accounting Officer; Mark Theine, Senior Vice President, Assets and Investment Management; and Daniel Klein, Senior Vice President and Deputy Chief Investment Officer.

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 2017 and our thoughts for the remainder of 2017. Mark Theine will provide a summary of our operations for the first quarter of 2017. 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 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.

Good afternoon, thank you for joining us for the Physicians Realty Trust First Quarter 2017 Earnings Call.

We're very pleased to share our results for the first quarter. Our disciplined growth strategy continues to enhance our operational scale and platform as evidenced by our outstanding operating results for this quarter. Our portfolio is now more than 96% occupied, among the best in the healthcare REIT industry. We believe this high occupancy not only provides our shareholders with reliable dividend income and strong earnings growth potential, but also benefits the health system and provide our clients who trust us with their facilities. Our ability to attract and lease space to additional physicians within these facilities furthers the health systems' clinical and business interests while increasing access to care for everyone.

Our relationship with Catholic Health Initiatives or CHI and the integration of their outpatient medical facilities into our platform has been outstanding. And the CHI portfolio continues to perform better than expected.

This quarter, we made over $248 million of new investments, including some of the best investments we've made in the short history of Physicians Realty Trust. The 127,000 square foot Strictly Pediatrics Specialty Center in Austin, Texas, featured in our supplement, is one of the best medical office facilities in the country. It is 100% leased, anchored by Ascension Health's Seton Healthcare, which occupies more than 50% of the building, and also features space leased by Dell Children’s Hospital, the only freestanding pediatric facility in the Austin region.

Our team earned the trust of physicians who owned and occupy the building with our exceptional reputation as the MOB owner of choice. And we were able to execute on a creative acquisition structure, which addressed the goals of physicians as a whole and individually.

This quarter, we also acquired the 72,000 square foot Hartford Healthcare MOB in Connecticut. The 95% leased MOB is anchored by Hartford Healthcare and the Hospital of Central Connecticut, which leases 60% of the space for comprehensive outpatient cancer care. The remaining space is leased to physicians providing oncology services and the dominant orthopedic practice in Hartford, Connecticut. This is a lightly marketed acquisition that we acquired through the owners.

Our discipline and focus on enhancing the overall quality of our medical office portfolio with premium quality acquisitions at the right price will build long-term value and earnings for our organization.

Last quarter, we announced guidance expecting to invest between $800 million to $1 billion in 2017. We are well on our way for meeting those expectations. Our best-in-class operating platform delivered an outstanding 6.7% same-store cash net operating income during the first quarter. And even after adjusting for some exceptional one-time positive events, Mark Theine and his team delivered 3.5% same-store cash NOI. Mark will share more about our operational performance in a few minutes.

As we progress through the second quarter and the remainder of the year, our balance sheet couldn't be stronger. Our first quarter included another milestone event as we issued $400 million of inaugural investment-grade bonds at excellent pricing. We also had a successful $300 million equity raise, which Jeff will discuss in a few minutes.

We'd like to provide a quick update on the Foundation Healthcare facilities. As we reported last quarter, Foundation Healthcare facilities in El Paso, San Antonio, and Oklahoma City, again, struggled in the fourth quarter of 2016, and we announced reserves related to their ability to pay rent. We're pleased to report that the El Paso Hospital has been recapitalized and operations have improved. The hospital resumed paying their normal monthly rent on April 1, and we expect them to pay rent as schedule going forward. Further, we're working with the physicians on the collection of back rent as well as a potential sale of the facility to the physician group.

We are also pleased to report that the San Antonio operators have paid rent every month this year and we're working with them on a scheduled plan to recoup the unpaid rent from 2016.

Finally, the Oklahoma City MOB remains under a binding purchase agreement and on track to complete the sale under that contract. We cannot provide any assurance that it will close, but we're optimistic about the resolution.

All in all, we're pleased with the progress of the Foundation portfolio and we will provide updates if and when we complete the sale of each of those assets.

I'm sure you are all aware of a new high watermark in the valuation of medical office buildings that were set this week. While the overall price paid for these assets exceeded our disciplined approach to underwriting evaluation, the interest this portfolio generated confirms what we've always believed: medical office offers the best risk-adjusted return in healthcare real estate and perhaps in any real estate asset class.

We are as optimistic as ever about our growth and the opportunities in front of us. We are focused on investing in the highest quality medical office with the highest quality health systems and physicians.

As we do, we remain firmly committed to transparency with our investors and are proud to do so as we seek long-term support for our long-term business plan, which will benefit our health system clients and physicians. We see every opportunity to continue our high pace of growth, growing intelligently without undue risk, while maintaining a strong balance sheet to answer the call from the hospitals and physicians we work with, providing them the capital they need to execute on their clinical missions and business.

I'll now turn it over to Jeff to discuss our financial results and balance sheet. Jeff?

Thank you, John. In the first quarter of 2017, the company generated funds from operations of $34.1 million or $0.24 per share. Our normalized funds from operations were $39.6 million. Normalized funds from operations per share were $0.28 and our normalized funds available for distribution were $35 million or $0.25 per share.

We again demonstrated outstanding earnings growth for our shareholders with year-over-year growth of 27% in normalized FFO per share and 25% in FAD per share compared to the first quarter of 2016.

We continue to find great value on the acquisition front in the first quarter, closing on $248 million of investments at an average first-year cash yield of 6.0%. This quarter's acquisitions represented outstanding quality at truly outstanding value. Our best-in-class acquisition team continues to do the hard work in sourcing deals that will create value for our shareholders on both an earnings and net asset value basis. Had we acquired all these assets at the beginning of the quarter, they would have contributed an additional $2.4 million of cash NOI. Our pipeline is strong, and we remain confident that we'll be able to source the $800 million to $1 billion of acquisitions that we guided to for 2017.

Turning to operations. Our same-store portfolio, which represents about 54% of our total portfolio, generated year-over-year cash NOI growth of 6.7%. While same-store cash NOI growth is a number that tends to vary from quarter-to-quarter, the variance this quarter is larger than usual, primarily due to tenants taking occupancy in our Nashville medical office building. Absent this unusual item, our portfolio generated 3.5% same-store growth.

Leasing activity on our portfolio has been outstanding, with 96.5% of our portfolio leased. This fits our strategy of keeping our buildings full. Full buildings create a vibrant atmosphere for our tenants as well as value-enhancing referral patterns. It is one of the operational philosophies that we believe distinguishes us and makes us a favored partner of many healthcare systems.

Mark will provide more detail on operations in a few moments.

As usual, our balance sheet metrics were ranked as the best in the sector as we focus on building the company in a methodical way with a priority of keeping a strong fundamental capital base. We issued 17.25 million shares of stock in an overnight offering in the first quarter, raising net equity proceeds for the company of $301 million, which fully funded our first quarter acquisitions.

At the end of the quarter, we had debt to total capitalization of 24% and net debt to adjusted EBITDA of 4.4x. Our $850 million line of credit is fully available and as of quarter end, we had $117 million of cash on hand.

We also entered into the public bond markets in the first quarter with our $400 million inaugural bond offering in March. We were able to upsize that offering from our planned $300 million raise due to the high investor demand, and we're able to price the coupon at 4.3%, truly an outstanding result for the company.

With access to both the public and private debt markets and our loyal equity investor base, we believe the company has never been as well positioned on the capital side as it is today.

I'll now turn it over to Mark to provide some additional commentary on operations.

As Jeff mentioned, DOC began 2017 at the same fast pace where we left off last year. Our portfolio now totals more than 250 medical office buildings poised for continued strong growth and operational excellence.

The first quarter of 2017 marks our seventh consecutive quarter of positive net absorption in our portfolio, with nearly 143,000 square feet of new or renewing leases executed.

Through the leadership of Amy Hall, DOC VP of Leasing; and Dave Domres and Mark Dukes, who leads DOC's asset management teams, our industry-leading occupancy for the full portfolio is 96.5%. Our same-store portfolio saw an increase in occupancy of nearly 1% from 95.4% to 96.3%. This tremendous leasing momentum drove a 6.7% growth in same-store net operating income year-over-year. Excluding the initial lease-up that Jeff mentioned in our Nashville MOB, our same-store portfolio grew at a solid 3.5%, once again driven by the increase in occupancy, including several new leases and lease extensions completed at the Peachtree Dunwoody Medical Center in Atlanta, Georgia.

As you may recall, DOC acquired the Peachtree Dunwoody Medical Center, a trophy 603 asset totaling 131,000 square feet in February of 2014. Situated on Pill Hill, a cluster -- a concentrated cluster of 3 hospital campuses, the facility was 95% leased with an average lease term of 5.3 years at the time of purchase.

Just over a year ago, we reported the Northside Hospital would be vacating approximately 18,000 square feet of the building effective March 31, 2016, due to retiring physicians and a planned consolidation of its space in an adjacent hospital-owned MOB. The vacancy not only lowered the Peachtree Dunwoody's occupancy to 80%, but impacted part of our 2016 same-store results to around 2% at the low end of our expectations.

I'm proud to report that over the last 12 months, our team has worked hard to identify, negotiate and execute nearly 21,000 square feet of new leases to backfill that vacated space and more. Additionally, we completed several early lease renewals, which today extend the average lease term remaining in the building to over 7 years. With leases signed for 96% of the building, only 1 suite is still available totaling about 5,000 square feet and multiple parties are touring that space.

Over the last year, we have enhanced the health care ecosystem and referral pattern within the building by completing leases for orthopedic, cardiovascular, surgery, ophthalmology, and internal medicine practices. As built-outs of tenant improvements is completed and rent commences in the second and third quarter of 2017, we anticipate the building will generate unleveraged cash yield above 7% and will show sizable increases in year-over-year cash NOI growth. These results are not only a testament to the hard work of our leasing and asset management teams, but to the superior location and quality of the building. Peachtree Dunwoody's transformation is just one example of Physicians Realty Trust's dedication to excellence as we continue to maintain and expand our nationwide portfolio of high-quality office -- high-quality facilities integral for the delivery of health care in the community.

Looking ahead to the remainder of 2017, DOC has 97 leases totaling 369,000 square feet scheduled to renew. The average rent per square foot of these leases scheduled to renew is $21.14, in line with national averages for medical office building rental rates. Beyond 2017, lease expirations do not exceed 4.7% of the total portfolio in any 1 year over the next 6 years through 2023. This well balanced and laddered lease expiration schedule is intentional and strategic as we work to drive reliable rising cash flows and investor returns in the years to come.

Our reputation as a trusted partner to our physicians and providers is central to this growth strategy, and our leasing and asset management teams are dedicated to providing outstanding customer service to earn these lease renewals, ultimately, adding long-term value and returns for shareholders and our stakeholders.

With that, I'll turn it back over to John.

Thank you, Mark, and great work this quarter. Desmus, we are ready for taking call.

(Operator Instructions) Our first question comes from the line of Juan Sanabria from Bank of America.

Just a question on cap rates. I know you talked about a new high watermark for the Duke portfolio sold to HTA, but how are you thinking about cap rates? Does that reset the market in anyway. Cap rates that you have been paying for acquisitions have come down, you're at 6% for the quarter, but how should we think about cap rates for the remainder of the year and just generally?

I think -- I mean, we will have to see how that plays out. We got a nice pipeline on the average even in the first quarter and what we've been focused on in our current pipeline is in that 6% to 6.5% range, which is again reflecting very high quality as well as we talked about the 2 buildings that we featured today. So we'll see how it plays out over time. But do -- it does reflect just a high valuation medical office buildings -- should attract and lots of capital are interested in them. But again, we've got a very good pipeline at those top-end numbers and we're going to continue to deploy capital in those ranges. We will see how it plays out.

Okay. And then just on Foundation, any sense of potential proceeds or how should we think about potential dilution from those assets, if they are sold? And if you could comment just on the cap rate on the Georgia assets that were sold during the quarter?

Yes. So Juan, it's Jeff, we haven't -- we don't have negotiated prices on the El Paso and San Antonio Foundation assets. The Oklahoma City asset is pretty low cap rate right now because there is vacancy in there. But I think on the Georgia assets, it was 6, 8 -- $18.2 million and that helped to improve the average age and occupancy of our buildings to fill in those four assets.

Okay. And just one last quick from me, I don't know if I misunderstood but are you saying the '17 lease expirations are basically in line with market? And if that's so, how should we think about kind of '18 to '19? Or those in line with market as well or above or below?

Yes. This year $21 is in line with market averages. Over the next 2 years and schedule we have in our supplement, it's a little bit below that. And so we expect to continue to grow our rent at 2% to 3% a year upon renewals.

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

I wanted to just follow up on the pricing discussion a little bit. So based on your recent high-quality acquisitions versus recent market portfolio transactions, what would you call a portfolio premium today?

Juan, it's pretty tough, we've always thought about it being 50 basis points, maybe higher, 100 basis points in this context. So -- and I think lots of -- we have seen assets trading sub-6%. We're -- the best-in-class building we just bought was just below 6%. So that 5.5% to 6.5% range should be pretty solid for best-in-class MOB.

Okay. And I know, obviously, that recent transaction may reset some expectations. But I guess, coming back to your pipeline, is it possible on a one-off basis to be able to generally backfill or complete what's in your guidance for acquisitions, similar type of quality to what you did in the quarter at the stated cap rates that you just mentioned, the 6%, 6.5%?

Yes. I think that's where our focus is going to be and we feel pretty good about that. So again, best-in-class single assets may go below the 6% number. But it will have a 5% in it. And like I said, I think on the average maybe the low end goes a little bit below 6%, but we'll see lots of opportunities between that number and 6.5%.

Are these assets that you acquired in the first quarter, can you just characterize ground lease versus fee and then 603?

603 and fee, are the two we featured, yes.

Both, okay, and fee interest. Okay. And then as it relates to the same-store NOI, the 3.5%, is that a sustainable metric so excluding the Nashville lease-up?

No, Jordan, it's Jeff. No, I think we've pretty consistently said that absent kind of unreasonable capital expenditures, we would expect our portfolio to grow between 2% to 3% on a same-store basis. But it varies. I mean, sometimes it's a little bit higher, sometimes it's a little bit lower. But on the average, we'd expect 2% to 3%. So -- I guess that's saying that in future quarters we might be down a little bit and average out probably about 50 to 75 basis points lower.

Jordan, it's JT again. Just looking back at our -- all the investments that we have in the supplement, only Creighton University Medical Center, which is a brand-new building -- they are the last major component of the original CHI transaction -- that's the only one on a ground lease. Again, that's with the CHI-affiliated hospital in that market, Creighton University Medical Center.

Okay. And then lastly, is there any update or insight you might be able to provide on sort of Dignity, CHI. Obviously, nothing on their specific transaction, but in terms of your relationship and discussions with them?

Yes. We don't have any more to add. As far as we know, the discussions continue. And we think if they did merge, all in all, it would be a positive; both to credit and our future opportunities; good relationships with both systems. Our IMS assets in Phoenix are tied to -- IMS is essentially owned or partly owned by Dignity. So all in all, a good thing, we don't know if they will complete that merger, but opportunities there continues with both those organizations.

Our next question comes from the line of John Kim from BMO Capital Markets.

On the Duke portfolio sale, you guys know these assets as well as anyone. Do you have any interest in teaming up with the hospitals on any of the purchase options?

John, we can't really respond to that question. There is -- we just can't respond to that.

Okay. No response means maybe, I suppose.

I have no response.

Okay. On the mortgage debt that's expiring this year, can you just remind us on your plans on how you are going to repay that debt or maybe utilize additional mortgage debt and maybe where do you see mortgage debt on your assets today versus the 4.3% on the unsecured notes that you recently raised?

John, it's Jeff. I mean, as a general rule, unless there is some reason not to, we tend to repay our mortgages when they come due. So we don't have very much expiring this year. I think we only have about $30 million, $31 million. So we anticipate that we'll pay these mortgages off as they expire and then bring those properties into our unencumbered pool and use them to borrow against on an unsecured basis.

Okay. And then I'm sorry if I missed this, but leasing spreads, what you're seeing as far as re-leasing spreads on your portfolio, either what you have already accomplished in the first quarter? Or what do you expect for the rest of the year?

Yes. For this quarter, we renewed 25 leases, about 87,000 square feet. Our leasing spreads were 2.1% and that's normalized; taking out 3 leases that we did a mark-to-market and extended as part of an acquisition and we put those in our underwriting upfront at the beginning to lower those as part of the acquisitions.

Our next question comes from the line of Tayo Okusanya from Jefferies.

Good to see all the acquisition activity going on. Most of my questions have been answered. But I just -- can u just give us a quick update just on the not often talked about part of your portfolio, which is the LTACH on the hospital portfolio, kind of what's going on with that stuff, simply because there has just been a lot of noise around that area.

Yes, Tayo, this is John. So the LTACHs continue to go through their transition to clinical criteria. The coverage, which is in our supplement, calls for 3 LTACHs this last quarter was 1.6%, which is down. The Plano facility continues to really knock it out of the park. The Fort Worth and Pittsburgh facilities are kind of generally flat. So those are all 3 in a master lease with corporate credits. We feel good about our rent, but we'd like to see coverage being higher of course. The hospitals, again that's really -- again to be clear we just own surgical hospitals on top of the LTACHs -- or separately from the LTACHs. They're all in the 2.5%, 3% coverage, some as high as 5%, I think. So -- again they all continue to operate well. Again with the exception of Foundation, which -- those are operating well today, but had poor performance in the fourth quarter and going into the first quarter, too.

Our next question comes from the line of Drew Babin from Robert W. Baird.

A question on 603 assets. Are you seeing any evidence yet in terms of your re-leasing or upon expirations or just out in the acquisition market, 603 is value enhancing for the assets or enticing stronger renewal spreads with your tenants or is it maybe a little too early for that?

I think it's generally too early. The most significant 603 lease that we renewed -- again we renewed at the high end of our expectations in very large part because of the -- we knew that the hospital was not going to vacate their space because of the 603 rule. So again, stayed at the -- in market, but still at the high end of market in that renewal and got a long-term lease, and Mark did a great job with that. As far as cap rates, we haven't seen a big change there yet. We are very attracted to those -- that qualification in those buildings of that quality. But again, we've always been more comfortable going off campus than most, our underwriting ability and the physicians and hospitals we work with. So we'll see how it plays out over time. We think it's the strength in the asset.

Okay. That's helpful. And 1 question on G&A. This quarter it looks like G&A was below 9% of NOI and about 15 bps of assets, both kind of low levels relative to where you have been and kind of a consistent decline there. Is that the same sort of run rate we should expect for the rest of the year? Or might we see G&A kind of on a proportionate basis decline further?

No, I think that we guided to 22 to 24 for the year. Obviously, we are running a little bit under that right now. My guess is we're kind of more in that guidance range. So I'd expect it will pick up a little bit through the rest of the year.

Our next question comes from the line of Vikram Malhotra from Morgan Stanley.

Just to clarify on the portfolio premium comment which I thought was interesting. So are you saying high-quality individual properties are probably in the 5.5% to 6% or 6.5% range? And then if there was a very high-quality portfolio, the premium could be 50 to 100 basis points?

I think that's pretty fair.

Okay. And do you -- are you aware of any sizable portfolios out there and that you may be looking at?

No, our (inaudible) business is the onesies, twosies. So -- and again, we are not aware of anything on market that's a big portfolio.

Okay. Then just curious the growth or any metrics you can share between your single-tenant and multi-tenant properties in terms of re-leasing spreads or just NOI growth. Any metrics that -- are there any differences between the two that you have seen over the last 2 quarters or so?

Yes. For this quarter, the single-tenant assets in the same-store portfolio grew at 4.9% and the multi-tenant properties grew at 8.3%.That multi-tenant property includes the Nashville MOB. So that one is a bit accelerated this quarter. But normally we see our single-tenant portfolios growing right about 3%. Many of those buildings are sale-leaseback transactions where we've been able to structure the lease up front and we put 3% annual escalators into those. And the multi-tenant buildings on a more normal basis is usually around between 2% and 3% as Jeff had mentioned before.

Okay. And just to clarify on the expirations near term, is there any skew either way multi versus single?

Almost all multi-tenants. We don't have many single -- I don't think we have any single tenants in '17 and maybe 1 in '18. So almost all multi-tenants.

And just last one, just on the watch list or tenant held, just wondering if there are anything you've heard in any of your top tenants -- I think Trios has been in the news a little bit on maybe 1 or 2 of their assets, but any additional color would be helpful?

Yes. Other than Foundation, which we -- again it's really positive turnaround there, Trios has been in the news a lot. They are working through the refinancing of their hospital, which will make a huge impact. So they've got a balance sheet issue that again gets solved if they can -- or gets addressed; significantly if they can refinance the hospital through the that or otherwise. So -- but they're making cost-cutting moves, but otherwise operational -- so we continue to work with them, but expect to be fine long-term and we will work with them as a good partner in the short term.

Our next question comes from the line of Chad Vanacore from Stifel.

So I was looking at -- what are some of onetime items that buoyed the same-store NOI growth to 6.7%?

Yes. So the biggest onetime item for the 6.7% NOI growth is we had the Nashville medical office building, tenants took occupancy of that and it rolled into our same-store this quarter. So there is a bump up from a previously vacant building to a somewhat occupied building. That was 37,000 square feet of lease that was not on last year that is now included this year.

Okay. Got it. But typically we're expecting it somewhere in the 2% to 3% range?

Yes. We had some other occupancy gains elsewhere in the portfolio as well, Chad.

It's all positive (inaudible).

All right. And then I was just thinking about your FFO. How did the timing of your equity and debt financing impact your FFO through the quarter?

Yes. I mean clearly any time you raise equity it's going to be a little bit dilutive to your FFO as well as terming out the debt on a [tenure] basis. But it's something that we -- we're always looking at our company and trying to build it on a fundamental basis, to be in a good position to execute on. So we felt that the ability to clear out our line of credit completely, put a little bit of cash in the bank as we look at our pipeline right now through the rest of the year kind of set us up for the best possible value-creation opportunity for our shareholders. So we took a little bit of FFO dilution by doing those long-term capital moves.

All right. And then did you mention that Foundation Healthcare issues were becoming a little clear and you took a write-off last quarter and there was about $2 million uncollectible debt. Is it possible that gets reversed?

Chad, we're working with the physicians to recover some of that. And we're also working with them, both in San Antonio and El Paso to buy the buildings back from us. So probably the resolution gets all rolled into 1 solution there. But again, right now San Antonio is operating very well and El Paso has recapitalized and their business has improved. So we're optimistic, but we don't know and we'll see how it plays out.

John, what's improving in the business, is it volumes or is it collections?

Both. El Paso had a volume and a collection problem. San Antonio had just a collection problem. So both are getting resolved. Foundation Healthcare in and of itself is no longer involved in the management of either facility and collections have gone up and improved at both.

Our next question comes from the line of Jonathan Hughes from Raymond James.

So the press release mentioned, the CHI deal is performing better than expected. I think you touched on this earlier, but can you just talk about what's driving that out-performance relative to your underwriting and maybe quantify on a yield basis how much is outperforming?

Yes, Jonathan, it's leasing and leasing both vacant space and renewals better than expected and also better management of the expense controls and really high customer service that we've delivered to that health system and their physicians. And we think on a year-after-year -- on a 12-month basis we'll look more like 6.4% to 6.5% versus our underwritten 6.2%.

Okay. that's helpful. And then earlier you also mentioned G&A expectations for the year. But I saw a news article recently mentioning 10 to 20 employees being added to the headquarters this year. I assume that's baked into your expectations?

Yes, that's baked in.

Okay. And then how much do you think in terms of external growth, how much do you think you can acquire before headcount needs to be materially increased?

I mean, I think on a proportionate basis we've got a lot of scalability. So maybe not a significant headcount increase over what our guidance for this year.

Okay. And then last one, any markets concerning you from a new supply standpoint? And then also if you could just comment on recent articles mentioning mall space as shadow supply for medical office tenants?

Yes. You know that we don't see any real competition from the mall space. That's something that's been going on for years, the B and C malls get bought at cheap prices and physician groups and others, kind of rehab them, but we don't see that as really competing supply with our hospitals and physician groups. We actually own a couple of buildings that are where the end result of that kind of readapted use. But we don't know if that is sustainable or a trend that affects us.

And then any markets from a pure MOB?

No, I'm sorry, from economic standpoint. No, I think the market's have seen a little bit uptick in development, like Minneapolis. That's one of the biggest developments there is with our partner Mark Davis and we think that's supply health system anchored development that -- and hopefully we'll have an opportunity to work with Mark in the future on.

Appreciate everyone for joining us on the call today, and thank you very much.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.