Healthpeak Properties Inc (DOC) 2017 Q4 法說會逐字稿

Greetings and welcome to the Physicians Realty Trust Fourth Quarter 2017 and Year-end Earnings Conference Call. (Operator Instructions)

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

Thank you. Good morning and welcome to the Physicians Realty Trust Fourth Quarter and Full Year 2017 Earnings 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 and Administrative Officer; Mark Theine, Senior Vice President of Assets and Investment Management; and Daniel Klein, Deputy Chief Investment Officer. During this call, John Thomas will provide a company update and overview of recent transactions and our strategic focus for 2018. Jeff Theiler will review the financial results for the fourth quarter and full year of 2017 and our thoughts for 2018. Mark Theine will provide a summary of our operations for the fourth 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. John?

Thank you, Brad. Thank you, everyone, for joining us this morning. In 2017 Physicians Realty Trust delivered another record year of value-creating growth while demonstrating the strength of our hospital relationships through the acquisition of some of the finest quality--highest-quality medical office facilities in the world. We invested nearly $1.4 billion in 2017 at an average first-year yield of 5.6%.

During the fourth quarter, Mark Theine's outstanding asset and property management team delivered 3% same-store NOI growth, driven by occupancy gains, outstanding lease renewals and absorption as well as attention to operating expenses. We now have more than 14 million square feet of high-quality medical office space, with approximately 50% of all of that space leased to investment-grade health systems and their affiliates. We believe that is more space leased to an actual investment-grade health system than any other medical office REIT or investor. 85% of our gross space is on campus or affiliated with a healthcare system.

We began 2017 with 6 of our top 10 tenants being owned by investment-grade, credit-quality providers. We began 2018 with 9 out of the top 11 being investment-grade quality. Our success is the result of our outstanding relationships with the finest healthcare providers in the United States, our execution, disciplined strategy, experienced team and superior insight into the future of healthcare delivery in the United States. We welcome you to visit our assets and speak to our hospital clients.

Our commitment to operational excellence and asset management has also furthered our reputation as the preferred owner and manager of medical office facilities in the public REIT market and otherwise. In a moment, Jeff will discuss our financial results and Mark will provide more color on our portfolio management and results. But I'd like to share with you our 2017 success story, an update on our opportunities for improvement and our commitment to patients in the long term in this capital market.

2017 was a year for high quality. As of December 31, 2017, we now own more than $4 billion of medical real estate assets, with none more impressive than the 458,000-square-foot Baylor Charles A. Sammons Cancer Center in Dallas, Texas. This mission-critical facility is arguably the best medical office building in the United States, if not the world. Our acquisition of this property was the direct result of our relationship-centric approach to investing, as we were chosen by Baylor Scott and White to step into their rights to purchase that building.

In addition to Baylor, we were in fact invited by a number of hospital tenants to acquire properties through these types of rights during 2017. Such acquisitions include state-of-the-art facilities leased to affiliates of Ascension Health in Austin, Texas and Indianapolis, Indiana as well as Northside Hospital in Atlanta. We were also invited by CHI to expand our relationship with them, and we did so very successfully. CHI has been and continues to be a fantastic partner.

During the fourth quarter, all of our investments were relationship-driven and off-market, expanding 7 different existing relationships. These include Ascension Health facilities in Tennessee and Indianapolis, USPI in Tennessee and Arizona, Northside Hospital and their newest affiliate, Gwinnett Health in Atlanta. We also acquired a brand-new on-campus medical office facility from Dignity Health in Phoenix in a strategic and creative structure that enhanced our relationship with IMS, our existing large, multi-specialty physician group partially owned by Dignity Health. This acquisition helped further Dignity's goals of getting the aligned IMS physicians under their new hospital campus as well as strategically positioning IMS in the market. CHI and Dignity Health have announced their intentions to merge, and we are excited to explore future opportunities with the new combined health system once completed. We understand they're working toward closing that merger later in 2018.

Following our investments in 2017, Physicians Realty Trust now owns 14 million square feet that is 96.6% leased -- again, with over 50% of that space leased directly to investment-grade rated healthcare systems and their subsidiaries. During 2017 the weighted average age of our buildings improved from 20 years to 18 years, and the average size of our facilities increased from 44,000 feet to 50,000 feet. Our occupancy leads the public medical REIT industry and our average lease term is 8.3 years. Our portfolio is extensive, stable and resilient, a combination which we believe will produce reliable dividends for years to come.

2017 was an eventful year in medical office real estate, with industry data indicating that more than $13 billion of facilities were purchased, highlighted by 3 major portfolios that traded at 7.5% cap rates.

We have grown rapidly since our humble beginnings, transforming Physicians Realty Trust from a small-scale investor in medical office buildings to the premier partner of the largest and most extensive healthcare systems in the U.S. Through our buildings we help healthcare systems service their physicians, providers and, most importantly, patients as they visit our facilities for their outpatient healthcare services. Our operating platform, led by Mark Theine, improved our operating metrics across the board with a focus on people, process, and performance.

Last year we seamlessly absorbed over 3.3 million square feet of medical office space from new acquisitions. In 2017 our leasing team also created significant shareholder value. Mark will provide more details in just a minute.

Our commitment to service excellence drives retention at reasonable rental rate growth, and just as importantly, as we saw it and realized in 2017, when healthcare systems have the choice of who owns their medical office building facilities on their campus or mission-critical off-campus locations, they choose Physicians Realty Trust.

I'd like to update you on Foundation and Trios. As you know, each had challenges last year. We're very pleased to report that Foundation facilities in San Antonio paid all of their rental obligations in 2017 and have made additional rent payments to catch up on their 2016 back rent due. They are substantially in compliance with their lease obligations, and we continue to process with them the opportunity to sell those facilities back to the physicians.

El Paso has paid their hospital rent consistently since April 1, 2017, and we continue to work with them to catch up on their prior rent obligations, which have been previously shared with you. The Oklahoma building is stable and we continue to seek to rent the space vacated by Foundation Healthcare, but all of the non-Foundation-related tenants in that building have performed per their lease obligations.

Trios continues to filter through the bankruptcy reorganization process, and Regional Care, a well-capitalized hospital operator backed by Apollo Capital, continues to work toward an acquisition of the hospital. We have a tentative agreement with Regional Care to lease 100% of our medical office building if they are successful in acquiring the Trios hospital operations. And we understand they are making slow but steady progress in negotiating agreements with all the material parties necessary to acquire that operation, including the Attorney General of the State of Washington.

It's important to remember that our medical office that we lease to Trios is 100% occupied and never went dark. In fact, physicians in the hospital are there today, treating patients and serving that community. The same is true of the Foundation facilities in San Antonio and El Paso.

We've added dedicated credit risk expertise to our underwriting and asset management teams, and just as importantly, focused our business development and investments more on investment-grade health systems to enhance the overall stability of our portfolio, as reflected in the improvements in the credit quality of our top 10 tenants. These are great improvements for the future, for the positive developments in San Antonio, El Paso and Trios are a tribute to our team's healthcare expertise and ability to manage challenges.

Congress passed and the President signed sweeping tax legislation in 2017. These new laws dramatically changed how corporations and pass-through entities like real estate investors and their owners are taxed. We are excited that individual shareholders will now have a lower effective tax rate on their REIT dividends, enhancing your after-tax returns from owning shares of Physicians Realty Trust. This rate is now an effective tax rate of 29.6%. Also, new limits on the ability to deduct interest expense without similar limitations on rent expense potentially enhance the benefit of renting versus owning medical office space for our physicians and taxable providers. These and other changes in the tax laws are a net benefit to Physicians Realty Trust.

In contrast, the financial market's renewed expectations of economic growth, driven in part by the tax law changes as well as the Federal Reserve's decisions to increase interest rates, has caused investors to rotate their investments from REIT equity to more economically cyclical securities. While growth and employment are great for our core business and our providers are getting better and more secure reimbursement, the short-term impact of the lower stock price in REITs. As a result, Physicians Realty Trust and all of our REIT peers began 2018 through today with lower stock prices.

History shows us that REITs can deliver attractive total shareholder returns in periods of rising interest rates, as real estate can increase in value as a hedge against inflation. REITs with strong balance sheets and low ratios of debt, especially variable debt in relation to their total capitalization, tend to fare better. Physicians Realty is well positioned as we enter 2018 with very little short-term debt. We've termed out our short-term debt with 10-year publicly traded bonds in December 2017, and we have substantial liquidity available to us. We've used this capital selectively as we continue to evolve and improve the overall quality of our medical office facilities and investments, growing where and when we can deploy capital accretively and for the long-term benefit of our shareholders. Our board and team are committed to patients in this capital market, maximizing the performance of our industry-leading occupancy and quality while also pruning assets that no longer fit our long-term plans.

This year we also welcomed and would like to introduce Pam Kessler as our newest board member. Ms. Kessler brings 11 years of experience as a senior executive of LTC, a REIT focused on the long-term care industry, and she adds depth and excellent counsel to our board. And her experience and leadership in previous capital market cycles like we are experiencing now is invaluable.

Jeff and Mark will now update you on our financial and operating results. Then we'll be happy to answer your questions. Jeff?

Thank you, John. I'd like to start with a few general comments before discussing our quarterly results. Our company, along with the rest of the REIT sector, has been underperforming over the past couple of months, primarily due to macroeconomic factors. That said, we remain highly confident in our business plan and asset class over the long term. While it's true that MOBs have been the best-performing healthcare asset class over the past few years, we feel strongly that this outperformance will only continue to grow over time. Therefore we remain optimistic on our core business of owning and operating outpatient medical office buildings leased to premier healthcare systems. After all, our ability to source these opportunities and effectively manage our portfolio has delivered extraordinary returns to our shareholders. Since our IPO in 2013, we have generated a 69% total return versus a negative total return for the overall healthcare REIT sector. Importantly, our total return during this time period is also double that of the overall REIT index and more than double that of the composite of our closest MOB peers.

While we have experienced rapid growth in our portfolio over this time, we also truly understand cost of capital. That is why we evaluate every acquisition by our current ability to fund it, using a conservative mix of equity and debt. This philosophy makes certain activities like development difficult for us, as we are hesitant to commit to long periods of capital spending when it's impossible to know the overall cost to our shareholders. The events of the past couple months have certainly reinforced that macro factors can quickly and dramatically impact a REIT's cost of capital, which can make seemingly good developments turn into value destroyers for years to come.

For 2018 our focus will be on squeezing the best performance we can out of our portfolio while keeping our occupancy high and our capital expenditures low so that we can distribute that money to our shareholders instead. We will also be flexible in our growth strategy and be conscious of market conditions on our acquisition plans. We do believe, however, that our relationships in the healthcare industry give us a better chance than any other MOB company to find the occasional deep-value opportunity that meets our cost of capital.

Turning to our quarterly results. In the fourth quarter of 2017 the company generated funds from operations of $46.2 million or $0.25 per share. Our normalized funds from operations were $49.6 million. Normalized funds from operations per share were $0.27, and our normalized funds available for distribution were $44.2 million or $0.24 per share. For the full year of 2017, our normalized FFO per share of $1.04 represents a 6% increase over the comparable period last year.

In the fourth quarter of this year, our management team's unparalleled relationships in the healthcare industry yielded $387 million of additional investments. These included some of our previously announced ROFO-generated deals, where leading health systems like Northside and Gwinnett exercised their right to choose DOC as a landlord, as they felt we were the partner that best understood the healthcare industry and their business. Our acquisitions were fairly well distributed throughout the quarter. Had they all occurred at the beginning of the quarter, we would have expected them to generate an additional $2.6 million of cash NOI.

In the first quarter of this year we have closed on 2 additional investments for $100.7 million. We also have 3 additional acquisition opportunities that we have been negotiating over the past few months. We are working towards respective purchase and sale agreements for each of these acquisitions, which will total roughly $180 million. We believe that we can fund these deals with recycled capital from future dispositions and our line of credit.

Turning to operations. Our same-store portfolio, which represents 66% of our total portfolio, generated year-over-year cash NOI growth of 3%, mostly driven by contractual rent growth and partially offset by increased operating expenses. Our portfolio remains highly utilized, with 96.6% of our space currently leased, and our recurring capital expenditures are well contained at only 6% of cash NOI. This all translates into the generation of more cash flow that we are able to return to our investors.

We issued our second public bond in the fourth quarter, fixing $350 million of debt at a rate of 3.95%. We issued some opportunistic equity in the fourth quarter on the ATM amounting to $40 million, which was used to partially fund our acquisitions, leaving us with only $80 million remaining on the line of credit at the end of the year.

Our debt to total capitalization in the fourth quarter was 31% and our net debt to adjusted EBITDA was 5.7x. We feel comfortable with our current leverage and debt profile, with only 16% of our debt maturing over the next 5 years.

We came in at almost exactly the midpoint of our $22 million to $24 million G&A guidance for the year, incurring a total of $22.96 million of G&A in 2017. Looking forward, G&A for 2018 should be between $27 million to $29 million.

Finally, in terms of the acquisition guidance, we expect a volatile capital environment in 2018 and will adapt to our changing capital costs as necessary. We are therefore not providing explicit acquisition guidance for the year. We are confident, however, that we will continue to have a distinct advantage on off-market acquisition opportunities through our established relationships with leading healthcare systems, which may lead to some investment opportunity. But as we view the market today, it is unlikely to reach the volume we have come to expect over the past several years.

With that, I'll turn it over to Mark, who will walk through some of our operational statistics in more detail.

Thanks, Jeff. 2017 was a landmark year for DOC, with $1.4 billion in total investments, demonstrating the power of our hospital relationships through the acquisition of some of the highest-quality medical office facilities in the country. During the year we seamlessly integrated over 3.3 million square feet and 260 new tenants to our ownership. In total, we acquired 40 facilities this year, which were 98% leased, with an average lease term remaining of 9.8 years upon closing.

Approximately 70% of these acquisitions are multi-tenant facilities now under DOC's management including several of the largest and most complex facilities that we've acquired to date. These properties require the skillful coordination, constant communication and diligent care that our team has become known for, also known as the DOC Difference.

In fact, the average size facility acquired this year was nearly 55% larger than those acquired in 2016, averaging nearly 83,000 square feet. Similarly, the average age of the acquisitions improved in 2017 by nearly half, from 20 years in 2016 to 11 years in 2017.

Lastly and perhaps most importantly, the credit strength of our tenant base also improved with the 2017 acquisitions, as 49% of our occupancy is from investment-grade quality tenants compared with 44% a year ago. Altogether, we believe that our 2017 investments will provide outstanding returns for years to come and demonstrate the standard of exceptional quality to expect from acquisitions in the future.

Total same-store NOI for the trailing 12 months ending December 31, 2017, increased by 3%, led by 3.7% growth from multi-tenant facilities and 2.2% for single-tenant facilities. The same-store increase was driven by a 3.3% increase in rental revenue attributable to the increased same-store occupancy to 95.6% from 95.3% in the comparable period. Same-store revenue was also fueled by contractual annual rent escalators that averaged 2.3% across the portfolio, which is predictable, stable and not influenced by operating results or flu season. Looking ahead, we expect that our same-store cash NOI growth will be between 2.5% and 3% over the next 12 months, unadjusted for any prospective dispositions.

Turning to leasing activity. Our leasing team has created significant shareholder value by completing over 1 million square feet of leasing activity in 2017. We continue to see strong leasing momentum, and our team has produced outstanding results through our responsiveness and streamlined approval process. Overall in 2017, we completed 840,000 square feet of lease renewals with an average lease term of 9 years and a 78% retention rate. Additionally, we completed 224,000 square feet of new leases with an average lease term of 9.2 years. For the fourth quarter specifically, we completed 464,000 square feet of lease renewals with an 89% retention rate. Our leasing spreads for the quarter were a negative 2.2% as the result of an early blend-and-extend master lease, but if excluded, the leasing spreads for the quarter were a strong 6.15%.

We are proud to report that rent concessions in the quarter are among the lowest in the industry, with no free rent and very little TI required to renew our existing healthcare provider partners. In the fourth quarter TI for lease renewals was $0.54 per square foot per year on a weighted average basis. In fact, approximately 75% of the lease renewals completed in the quarter did not require any TI to renew the lease, and the remaining 25% averaged $2.10 per square foot per year.

Tenant improvements for the new leases were approximately $4.75 per square foot per year during the quarter. In total, we invested $15.3 million in tenant improvements on leasing commissions in 2017 or just 6.2% of the portfolio's NOI. The low investment in capital expenditures relative to our peers is driven primarily by our low lease expiration schedule. Our portfolio, known for its high occupancy and low turnover, will continue to deliver significant cash flow directly to FAD as it requires little tenant improvements and leasing commissions due to our staggered lease expiration schedule.

In 2018 we have just 2.9% of the portfolio scheduled to renew, and we have no more than 8% of the portfolio scheduled to renew in any 1 year through 2025. Our lease expiration schedule is deliberately laddered to stagger lease expiration dates, ultimately driving a predictable, growing cash flow for our investors for years to come.

As we begin 2018, we have built a high-quality portfolio that is operating well with an exceptional asset management and leasing team that has and will continue to deliver bottom line results. Our commitment to relationships and service excellence for our healthcare partners is the trademark of the DOC Difference, and will, we believe, ultimately drive tenant retention, cost efficiencies and a profit, consistent growth for our shareholders.

With that, I'll now turn the call back to John.

Thank you, Mark. Now I'd be happy to take questions.

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

Jeff, you talked about acquisitions, and I think I heard $180 million are under contract but are not giving formal guidance beyond that. But it sounds like it's fair to assume some deals will happen. So how do you plan to fund those deals, given leverage will be kind of near the high end of your previously stated target range and if shares still trade at a double-digit discount to NAV?

Yes, that's a great question, Jonathan. So if you look at what we completed in the first quarter plus what we announced as future additional acquisitions that are under some form of LOI at this point, that would bring us right up to kind of close to 40%, which is probably near the top of our target leverage range. We're planning on -- we have assets slated for disposition and some other assets that we're thinking about disposing, which I think could fund the majority of those acquisitions in a leverage-neutral manner. And then as far as future acquisitions over that, I think we tried to be clear in the prepared remarks that we're really going to evaluate that such that it only makes sense at our current cost of equity capital. So yes, we think it will be fewer overall acquisitions, a lower overall volume. But to the extent that we do additional acquisitions, they will be value enhancing at our current cost of equity and debt.

Okay, that's fair. And then I know you source a lot of deals through the relationship network, generally get better pricing because of that. But have you seen any change in cap rates for marketed deals, given the rise in rates over the past several months?

No, all the reason prints have been in line with last year, so still a lot of capital flowing into the space, primarily by private investors. There's a deal bidding in the market now. We're not participating in it, but we heard that it's the same bid to low 5 cap rate as the discussion.

Is that a portfolio or just a large single asset?

Portfolio.

And then just one more and then I'll jump off. So with lower actual growth prospects, focus will kind of shift internally for growth. And Mark, you touched on this earlier, but could you just talk about expectations for specific same-store growth opportunities and how that should trend throughout the year within that kind of 2.5% to 3% range?

As I mentioned in the prepared remarks, we expect that our same-store, looking forward, will be in the 2.5% to 3% range. One of the benefits that we're starting to see as a 5-year-old company is the same-store portfolio is increasing in size. 66% of our portfolio is currently in the same store. And then as an embedded growth rate in the contractual rent increases of 2.3%, the same-store portfolio is very well leased at 95%, almost 96%. So we see maybe just a little bit of upside in that, but the majority of same-store going forward will be based upon the contractual rent bumps built into the leases.

Are there any expense savings opportunities in there with the larger company gaining scale in certain markets -- you can leverage contracts across that portfolio?

Absolutely. As we gain concentration in certain markets, we'll continue to benefit from some economies of scale. Our portfolio's 91% triple net leased or absolute triple net leased, so a lot of that savings will go back to tenants, but we will certainly experience some of that ourselves as well.

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

So I want to just come back to the acquisition market a little bit. Sounds like it's still pretty heated in terms of pricing. What would we expect, or should we expect, for the 180 or any other opportunities, given where your stock price is today, cap rate-wise?

So for the 180, it's hard to say exactly because we're still finalizing the negotiations. But at this point, we would expect a high 5% cap rate on those acquisitions. And then as we look forward, we're just going to really be patient and see where we are on a cost of capital standpoint, see where the market's shaking out. And that's really going to dictate the volume for the rest of the year.

Okay, and that's to be funded predominantly from dispositions, it sounds like. So are the dis -- is that right?

Yes, that's right.

And so that's -- the assets slated for sale will be in a range of 150 to 200? Is that a fair assumption, or is that for additional assets in there?

Yes, I think that's fair.

Okay.

Yes, that's fair. There's other assets, the LTACHs, for example, that we could put in there which we're not really explicitly modeling. But that general range is correct.

And the MOBs. You didn't ask the question, but you probably will. They'll probably sell in the range of the mid-6% cap rates.

In the mid-6s, okay, perfect. Thanks for jumping ahead of me on that one. Saved me a question. And then the last question I have for you is on Trios. You've got, it sounds like something teed up, potentially, if the bankruptcy goes through, with RCCH. What would the rate be, or what would the haircut be relative to the previous in-place rent?

Yes, we can't share that just yet, but you can expect it will be a cut near term with the opportunity to make that up over the long term on the new lease.

Okay. Any anticipation or expectations on timing? Seems like it's getting some pretty good progress.

We hope for July 1. Yes, we think -- we hope it's July 1. We've done what we can control and we're just bogged. The process is just bogging or clogging through the bankruptcy process and in the State Attorney General's office. That's our expectation or hope.

Our next question comes from the line of Daniel Bernstein with Capital One.

I just wanted -- I may have not heard it, but is the 3% same-store NOI growth that you posted this year, that excludes Kennewick? What would be the same-store growth if you included Kennewick?

Yes, sir. That same-store number does exclude Kennewick. If Kennewick was included, it would have been about a positive 63 basis points.

And then the 2018 guidance, is that including anything from getting that back from the Trios Kennewick property?

No.

Okay. Do you expect -- is the expectation that you'll have some additional rent in 2018 from Trios, or is that just too early?

Yes, that's our expectation. That's what we were just talking about, Dan. We hope that we begin again in July, around July 1. Could be sooner, but could be later, but that's our expectation.

Okay, so there's a little bit of upside in the same-store if you could get some...

That's right.

Okay. And then one other quick question: in terms of the quality of assets that you're seeing out there and cap rates -- cap rates, obviously, you just said, are staying very low and there's lots of private equity. Is there any movement in the A assets versus B assets or on campus versus off campus that might give you a little bit of wiggle room to maybe make some more acquisitions this year? Not that you would discount in quality, but are you seeing any better pricing in maybe some of those off-campus assets at this point?

Yes, I think you know in the portfolios you saw 3 large portfolios all traded sub-5%, and that did reflect the quality of those assets. One portfolio traded in the mid-6s which, for lack of a better word, there were some As and Bs in that portfolio, so it was not as -- it was more mixed. So there is some differentiation in the market, but cap rates are just compressed across the spectrum for all levels of medical office. So we haven't seen any new.

All right. And one more quick one, if I can, just -- and I'm sure somebody's going to ask it and had it there on the list. But given the discount to NAV, what's your thought process on buybacks?

I think our board and we'll consider all options with proceeds from dispositions but right now, that's not an expectation.

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

So your multi-tenant MOBs now consist of 59% of your portfolio, and that's up from 54% last quarter. Do you have a goal of where you want this to go to?

John, that's a great question. We've had a lot of discussion about kind of the science of the asset mix in between single- and multi-tenant. We're benefiting and Mark's team is squeezing a lot more return out of the multi-tenant buildings right now, but they are highly leased. So I don't think we have a specific target on multi-tenant versus single-tenant. We do have specific goals to continue to move up the healthcare system on campus or affiliated to 90% or more. We're 85% today, so have some room and opportunity there. And as you see acquisitions throughout the year, whether they be single-tenant or multi-tenant, you'd expect them to be highly leased and occupied by credit-grade healthcare systems.

I was going to ask about that, because the single-tenant, you have higher occupancy, most likely, lower CapEx, which you highlighted in your prepared remarks. And so I was just wondering how you balance the benefits versus the potential higher growth in the multi-tenant assets.

Yes, it certainly goes into the underwriting and the pricing of the asset.

Okay. And then I think, John, you mentioned the willingness to expand your relationship with Catholic Health. Currently they're 19% of your revenue, and I'm just wondering, are you limited by the credit rating agencies to have any tenant more than 20% of your rental portfolio?

I wouldn't say specifically limited, but it is something that we manage to and are very cognizant about. But as you know, CHI is really 12 different tenants, 12 different credits. We think about it that way, but we also think about the aggregate as well. So today -- and Dignity Health, which they're merging with, has a higher credit rating than CHI, so there's going to be an enhancement of the total balance sheet once those 2 come together. So once they do complete that merger, we'll think about those as one aggregated tenant and share that. But at the same time, each market stands on its own from a credit perspective.

Do the rating agencies look at it as one entity or multiple entities?

No, multiple.

Multiple, got it. And then this quarter you had an impairment of $965 million. Was that related to Kennewick or assets held for sale or maybe something else?

To be clear, John, not to correct, it was $965,000. And yes, it was tied to one small asset that we sold at a loss.

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

Maybe just stepping back, a couple of years ago you sort of embarked on this transformation, if I may say that, but it was trying to take the company to a level where, or the portfolio to quote-unquote "higher quality" or lower cap rate or different markets. I think you also sort of, over the last few months, said that you can start disposing some lower-quality assets that would maybe just get the portfolio up. Given sort of where we are with the market in general -- obviously, a lot of it is not in your control -- can you maybe just walk us through over the next -- assuming we stay in a very bumpy environment, sort of where are we in this process today and what can you do over the next 12 months to maybe keep moving in that direction?

Yes, so I think as we've shared, Vikram, and good morning, we have $180 million or so kind of under contract. Those were all deals that evolved out of the fall, and so as we sit here today, we fully expect to fund most or not all of that through dispositions. So there will be a slight dilution. We just shared that those dispositions are probably in the mid-6s range, most likely, and the acquisitions are in the high 5s, just under 6%. So slight dilution in cash, but a substantial improvement in the quality and again, towards the evolution of where we want to go, to continue to go. But it will be a very strong, stable portfolio. And as Mark pointed out, it's going to -- we expect that to grow 2.5% to 3% this year on cash flow. We're in a fantastic position to be in, in this cycle, and we'll be patient for the long term.

Yes, Vikram, just to add on, the bad thing about MOB pricing being so high right now is it's hard to buy things. But the good thing is that it's easier to dispose of assets. So we're really trying to take advantage of the market where we can.

Yes, that makes sense. And then just on the, just going back to sort of Trios, you sort of highlighted maybe midyear is when you can start getting it to come back. Just maybe update us on the broader portfolio. Anything else that stands out as being on the watch list? Anything you're monitoring?

No. Bringing in the credit analyst midyear last year and kind of improved process internally, we've significantly improved overall AR in our process and kind of understanding of what's going on with our tenants, and there's been some asset management and financial review. So we're really excited about the stability of the tenant base overall.

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

So I was just thinking about your cash collection experience in the quarter compared to contractual rents. Were there any other slow payers out there other than Trios? And then you mentioned Trios -- it's 100% occupied, but I don't think you recognized any rents from them in the quarter. So what is the back rent currently owned?

Back rent on Trios, when we stopped accruing it and wrote off the straight line 2 quarters ago -- we'll get you that number.

We don't anticipate collecting that back rent, Chad.

Okay. But just on any other slow payers out there that maybe put your cash collections at lower than your contractual rents?

Not material.

Nothing material, no.

All right. Just one more for me. On dividend payout expectations, it looks like you're running at mid-80s percent of FFO. Should we expect you to continue around that level for the foreseeable future?

Yes, Chad, it's always something that we're evaluating every quarter. Certainly, if you have really accretive acquisitions, you're able to raise that dividend faster. So it's hard to say through the balance of the year how fast we can grow our AFFO. A lot of it is just dependent on external growth. So we'll evaluate it, and we think we're at a pretty good level at this point. So we'll continue to evaluate it through the rest of the year.

All right, I'm going to sneak one more in here, which is on cap rates. So you said that you did in the quarter, at least during the first quarter, some acquisitions in the mid to low 5% range You seem to have LOIs in call it mid to high 5% range. Now previously you expected, I think, 5.5% to 6% cap rates going forward. Are we still in that range, or has that range maybe widened out a little bit?

I'd say we're still in that range, 5.5% to 6% for where we see opportunities. But again, we're going to be patient when pursuing opportunities.

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

Just a few quick ones on Trios. I know there's been a lot of questions on them. But I know Regional Care has been working on acquiring Trios for several quarters now. Is there anything specific hanging up that deal, or is it just a slow bankruptcy process?

It's slow bankruptcy process. They kind of have 3 major creditors, if you will. Goldman Sachs owns the hospital real estate, we own the medical office building in with the lease to the hospital, and then you have equipment vendors and you have other creditors, unsecured creditors out there, and then you have, I think, most of the staff in the hospital, the nurses and others, are unionized, so you've got to work through that. And then ultimately, you've got to get the Attorney General of the State of Washington to sign off on it. So painfully slow, and we're impatient because we execute our deals and move them forward very quickly, and this is just the process of a government entity bankruptcy.

Okay, and then if the doctors are still residing in and operating within the MOB right now -- correct me if I'm wrong -- you're not collecting any rent from them, I guess. Why is that if they're still making money and doing their practices? Are you able to collect rent on that?

No, the bankruptcy process staves off all cash flow and manage this bankruptcy. So at some point the bankrupt court, and we've asked, we've made motions to compel this, require the creditor -- the debtor, excuse me -- to affirm the lease and start paying rent or reject the lease and move out. That's not their intention. The bankruptcy court's, again, really focused on this sale process and really just kind of stayed all cash flow. So they do pay their operating expenses, so there's no negative drag on our NOI. They pay their, to the extent they're paying taxes or otherwise, they're paying that. But the benefits of the bankruptcy process for them is the situation we're in. So we're certainly filing motions and have been trying to force the process and force the hand, but the best conclusion we see at this point is Regional Care finalizing the deal, getting approval and signing a new lease with us.

Okay, great. And then just the last question: can you talk a little bit about the LTACHs? Have you seen improvement in there? I know that the coverage ratio has just kind of held steady at that 1.4 type level. What's the outlook with those assets?

Yes, we've seen improvement there. And I'd say the conversion to critical -- or to clinical criteria -- I think it kind of bottomed out from a reimbursement perspective and made operational improvements otherwise in pursuing these lines of business. So LifeCare's a very strong management team and operation. And we have the full credit of the entire organization, not just our 3 assets. And of our 3 assets, 1 is probably 1 of the 2 or 3 best-performing LTACHs in the country and sitting on a very valuable piece of land in Plano, Texas, north of Dallas. So it's kind of a mixed bag, but we don't have any credit concern issues there. But on the other hand, we would sell them if we got the opportunity to.

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

A quick question on the amount of rent recouped from Foundation during the quarter. Could you tell us what that amount is and then how much is left in terms of what's owed beyond the current rent they're paying?

Yes, so San Antonio for the most part is kind of fully caught up, or they will be this quarter. They're kind of at the end of their payment plan to make up that rent number. The Foundation El Paso had about a little over $2 million in back rent that they -- while they've made improvements in changing management, they haven't made enough improvements to start making catch-up payments, but we're working with them on several different ideas to get that done. So great focus on it, but that little over $2 million is kind of the lop number, maybe $2.5 million in total.

Okay, and a quick question on underwriting.

They've been cash-only for throughout '17. And as I've said, El Paso in particular has been very consistent with their rent since April, and San Antonio's never missed a rent payment and made extra rent payments.

Great, that's helpful. A quick question on new MOB lease underwriting. Has anything changed from the beginning of '17 until now in terms of, kind of call it the occupancy cost to the tenant in the way leases are underwritten? Are we getting to a point where rents paid to the MOB landlord are getting to be a more relevant part of the expense structure of tenants, or is it still pretty low in the grand scheme of things?

Yes, I think as a percentage of kind of their operating expenses, it's still, physicians and hospitals are still pretty low. And again, it depends on what's in the space. Cancer center space is going to be much higher. If it's just clinical, orthopedic clinical space can be much lower. But as a percentage of their revenue line, it's still 5% to 10%, generally, at most.

Okay, and one last one just on investments. It looked like you made a very small, looked like a mezz investment, during the fourth quarter. Could this be the start of something larger where we might see more aggressive investment in the mezz space rather than acquisitions this year? Or will it just kind of be a steady drip going forward?

Yes, I think there probably -- you might see more throughout the year. We're seeing a lot of health system-led development plans coming together. So Mark Davis and Jim Bremner and Cornerstone is kind of the 3 developers we work most closely with, and we'll have the opportunity to put some mezz capital out, funding, helping them to fund those health system anchored development opportunities that, again, ideally will be completed in 2019. And we'll have the opportunity to purchase those, again, if the capital markets support that. So probably see a little uptick there, but it will still be a very small percentage of our asset base.

Our next question comes from the line of Eric Fleming with SunTrust Robinson Humphrey.

The question I had is with the cap rates that you're talking about and the low outlook on investments. Any opportunity to get more aggressive on dispositions rather than just the 10 you've got outlined? Could you hear it go deeper?

Yes, we could go deeper. I think we think about 5% to 7% of our portfolio is something that we have filtered through and identified as potential dispositions. So again, depending upon the market and pricing. Some of those are strategic dispositions and some are -- people approach us opportunistically. And that's how some of the dispositions we have in process came about.

Our next question is a follow-up question from the line of Jordan Sadler from KeyBanc Capital Markets.

Sorry, I had a follow-up to that last question, which is, so would you consider carving out, or is there an opportunity to carve out, a larger size, $300 million to $500 million type size portfolio from the legacy DOC portfolio to sort of continue this march to improving quality and maybe saving some of the demand out there for these types of assets?

I wouldn't expect it to be that large. We certainly could, and we'd take advantage of pricing, but really, 5% to 7% is really kind of the top end of what we see as would be strategically well positioning the portfolio. You're not suggesting only 85% of our portfolio is high quality, I hope, because we think it's much higher than that.

No, I'm sure it's very, very high. I just...

That just seems large. But again, I think we'll keep our options open, but we certainly would have the opportunity to that, Jordan, but I wouldn't expect it to get that big.

Okay. And then on this, you made a comment in your prepared remarks regarding renting versus owning benefits. And I'm just curious. It's probably early in the game here, but are you anticipating significant portfolios coming to market for sale, and is there anything that sort of early talks? I know some of the hospitals, for example, have high leverage, and as a result of this tax change, you're only, obviously, able to deduct a certain amount of interest expense, of which some of these hospitals would probably be hurt relative to their effective statutory tax rate. So is there an opportunity between that you're seeing specifically, or does it just kind of make sense to you?

I'd say it's more in the "makes sense" category right now, but I think more and more operators are getting a better understanding of that. And I think it's 2 years from now when that interest limitation goes substantially higher. The limitation is much stronger in a couple of years when it goes from EBITDA to EBIT. And so I think as people are planning out, the future will certainly be coming into their process.

Okay, then lastly and I'll hop off. As it relates to Trios, RCCH announced a public-private partnership with UW Medicine, which RCCH still operating the hospitals, but it is supposedly in Washington and Alaska and in Idaho. Would you expect Kennewick to be one of the candidates for this partnership?

We think that's critical to their plans for that hospital and certainly part of our -- influencing our decision to work with Regional Care and are excited about it.

Our next question is a follow-up question from the line of Jonathan Hughes with Raymond James.

Just one, but on G&A. I think I heard that was expected to be $27 million to $29 million this year. That's up about 15% from the 4Q run rate. Just what's driving that increase? Sorry if I missed that in your prepared remarks.

That's all right, Jonathan. So it's Jeff. We're implementing that ASU-2017-01, which is a different way of accounting for business combinations. So some of the expense that we previously had under acquisition expense gets shifted over to G&A, and that's about $4 million. So that really accounts for the vast majority of that increase. And importantly, it's not a change in any expenses. It's just a shifting from acquisition expense into G&A.

There are no further questions in the queue. I'd like to hand the call back to management for closing comments.

Yes, thank you again for joining us. As we said, we're very excited about the results of 2017 and look forward to kind of steady as she goes in 2018. Got a great portfolio, a great balance sheet and a great team, and we're all optimistic about the future. But in these times we'll be patient and prune where we can and deploy capital where we can do it accretively. But look forward to speaking with you soon.

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.