Healthpeak Properties Inc (DOC) 2018 Q2 法說會逐字稿

Greetings, and welcome to Physicians Realty Trust Second Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Bradley Page, SVP, General Counsel. Please go ahead.

Thank you, Devon. Good afternoon, and welcome to the Physicians Realty Trust Second Quarter 2018 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, Asset and Investment Management; and Dan Klein, Deputy Chief Investment Officer.

During this call, John Thomas will provide a summary of the company's activities during the second quarter of 2018 and the year-to-date as well as our strategic focus. Jeff Theiler will review the financial results for the second quarter of 2018 and our thoughts for the remainder of the year. Mark Theine will provide a summary of our operations for the second quarter of 2018. Following that, we'll 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 the company's CEO, John Thomas.

Thank you, Brad. On July 19, Physicians Realty Trust celebrated our fifth anniversary as a public company. Like our 5-year track record of success, our team and relationships delivered outstanding results during the second quarter of 2018. Consistent with our plans for 2018 announced earlier this year, we've had an acute focus on improving the overall quality of our real estate assets, operating results and relationships. So far this year, we've accomplished all 3 while also improving our balance sheet. Year-to-date, we have completed $236.4 million of dispositions at favorable valuations while reinvesting $179.1 million of those proceeds to expand existing relationships in newer, higher-quality facilities leased to strong credit tenants, while also reducing debt with the balance of the proceeds. We will continue to be selective in deploying capital in this market, but remain very optimistic about our ability to continue to execute and grow in the years to come. We believe we have the best overall portfolio of medical office facilities in the United States, approaching 97% occupancy, almost 90% on campus or affiliated with a health system, and over half of our rentable square feet is leased directly to an investment-grade credit health system. We look for a continuation of this strategy and execution during the second half of 2018, with the potential for more dispositions, selective investments and an eagle's eye focus on operating performance.

Consistent with our mission and vision, our ultimate goal is to help medical providers, patients and clients and shareholders realize better health care, better communities and better returns. We do this by offering broader and deeper health care expertise than any other REIT by crafting solutions that benefit all parties and by consistently executing for our long-standing industry relationships to source and sustain the highest-quality properties and tenants in the industry. We are investing in better across our team, our assets and our future.

Recently, The Wall Street Journal and other media outlets reported on the sale of a very high-quality medical office facility in Houston, Texas, at a record price. We continue to see a premium bid on medical office assets, especially from private buyers, as in the case of the Houston MOB. And there seems to be no shortage of cash available to invest in the space. We've had the opportunity to pair up more and more of these private investors, but haven't found a suitable opportunity to do so. We do not have to invest or grow for growth's sake and do not see any benefit changing asset classes in order to achieve higher yields. We invest for the long term, and while ebbs and flows and government policy can favor one health care asset class over a better in the short term, the short- and long-term trends in health care policy and demographic demand continue to support our thesis and strategy that we should invest in facilities that host outpatient care providers, especially providers with high market share who provide care in locations that attract patients who live and work in favorable locations.

From the latest year of data available, the annual U.S. health care spend was $3.2 trillion. 26% of that spend or $840 billion was spent on outpatient services, with commercial insurance being the largest payer for these services. For at least the 10th year in a row, outpatient business for Medicare beneficiary increased while inpatient business declined, and those trends continue to grow in opposite directions. As a comparison, care and nursing facilities was only about 5% of the annual spend, with government payers, particularly Medicaid, being the largest payer. We will certainly need inpatient facilities and nursing facilities in the future, but the more significant growth in care and demand is outpatient services, especially specialized care like ambulatory surgery.

Medicare recently proposed enhancements to the payment rates for outpatient surgery as part of their policy to continue to encourage more outpatient services in lieu of more expensive inpatient care and surgery. Health systems continue to shift here to the outpatient setting and off-campus. Off-campus project starts are expected to be 73% of the total 2018 MOB construction, above the 4-year average of 60% off-campus. Technology improvements, lower occupancy cost and the requirement for more medical services within the community setting continue to prompt more off-campus development.

Of the 400 projects completed in 2017, 64% were affiliated with hospital systems or on a hospital campus, up from 57% in 2016. Health care providers self-developed 69% of the projects completed in 2017, indicative of a trend where providers have ready access to sites and capital for development. CHI, HonorHealth, Northside Hospital and many of our physician group clients have pursued this model and strategy with a long-term plan to monetize the asset with DOC, and we believe more and more providers will continue to do so.

In addition to these tailwinds for our core business, we are pleased to report continued progress with the Trios medical office building in Kennewick, Washington. RegionalCare has regulatory and court approval to complete the acquisition of the Trios Hospital, which includes the lease for 100% of the medical office building we own attached to that hospital. We expect ramp to commence immediately upon closing, which we believe to be imminent.

As you may have heard, RegionalCare for their -- and their sponsor, Apollo, have announced RegionalCare is combining with LifePoint and taking LifePoint private in a $5.6 billion transaction. According to their public announcement, if they close, the combination of these 2 companies will create an even stronger health care provider with pro forma 2017 revenues of more than $8 billion

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as well as 7,000 affiliated physicians, approximately 60,000 employees and more than 12,000 licensed beds. Following the close of that transaction, LifePoint will operate a diversified portfolio of health care assets, including 84 nonurban hospitals in 30 sites. We look forward to working with RegionalCare and moving forward with the Trios transition.

In conclusion, we have spent the last -- the past 5 years building a great company and appreciate your support. We've evolved as we have grown with an intense focus on our health system and large physician groups, but we remain dedicated to investing in the future of health care delivery, outpatient medical office facilities. Our underlying business is outstanding, and we believe the investor community will benefit long term by long-term investments in our asset class and in particular, our organization.

Jeff will now discuss our financial results. Jeff?

Thank you, John. In the second quarter of 2018, the company generated funds from operations of $51.9 million or $0.28 per share. Our normalized funds from operations were also $51.9 million and $0.28 per share. Our normalized funds available for distribution were $43.4 million or $0.23 per share. This is our second quarter of demonstrating restraint in our investment activity and keeping our focus on dispositions as we seek to maximize the return to our investors in this difficult market environment.

We closed on our previously announced acquisition of the $71 million, 231,000 square foot HMG Medical Plaza in Tennessee, which is expected to produce an unlevered cash yield of 6.0%. Had we closed on the HMG deal in the beginning of the quarter, it would have generated an extra $28,000 of NOI.

Aside from the single acquisition, our portfolio strategy was to take advantage of the strong MOB market by selling a variety of our noncore assets to private buyers. The assets we sold were selected primarily based on relative tenant strength, geography, asset size and core value to the occupying tenants.

We closed our first significant disposition, a 15-building, $91 million portfolio at the end of the quarter. Subsequent to quarter end, we sold another 17-building portfolio for $127 million. Since the start of our disposition program in December of 2017, we've sold a total of 35 assets for proceeds of $223 million, resulting in a combined gain on sale of nearly $13 million. The blended cap rate on the combined sales is 7.0%. These were older and smaller assets on average, so postdispositions, the weighted average of our portfolio dropped by a half a year, and the average size of the buildings in our portfolio increased by about 3,000 feet. There remains a potential for a few additional asset sales this year as we still have 6 assets slated for disposition as well as our LTACHs, which we would always consider selling at the right price. However, we currently don't expect to continue our dispositions at the same pace as we did this second quarter.

Looking forward on the acquisition side. We have one additional asset expected to close in the third quarter that has been in negotiations since the beginning of the year, and we continue to review multiple potential opportunities from our health system partners. Importantly, if the current capital market environment remains static, we would expect any proceeds for investments to come from recycled capital or additional debt as opposed to equity proceeds.

As John noted, we expect to start receiving rent imminently on our repositioned asset in Kennewick, Washington, that is now leased by RCCH. Once back online, that asset is expected to generate about $700,000 of GAAP NOI per quarter.

We issued no stock in the ATM this quarter and paid down our line of credit by $8 million. Our balance sheet metrics remained strong, with debt to firm value of 34% and net debt to EBITDA of 5.5x. We are extremely well positioned in the rising rate environment we have been experiencing so far in 2018, as aside from our revolving line of credit, 99% of our debt is at a fixed interest rate or is completely hedged with no significant maturities until 2023.

Overall occupancy in our portfolio remained the same as last quarter at 96.6%, with 52% of that space leased to investment-grade-rated health systems or their subsidiaries. Our same-store portfolio occupancy increased by 30 basis points, and we had same-store cash NOI growth of 3.3%. As predicted on the last earnings call, G&A expense normalized back down to $7.1 million, and we remain comfortable with our G&A guidance for the full year of $27 million to $29 million.

I'll now turn the call over to Mark to walk through some of the operating statistics. Mark?

Thanks, Jeff. We're pleased to report another successful quarter of operating performance as we continue to manage our properties efficiently and profitably. As we celebrate the 5-year anniversary of Physicians Realty Trust this quarter, we are proud to report a robust same-store growth performance and our best-ever tenant satisfaction survey results. DOC's relationship-centric approach to asset management continues to enhance the value of our portfolio, resulting in higher revenue for the quarter and strong internal growth.

As Jeff mentioned, our portfolio is an industry-leading 96.6% leased and delivered strong 3.3% same-store NOI growth. The company's substantial same-store growth is propelled by a 3% increase in rental revenues, resulting from contractual rent increases, and a 30 basis point improvement in the same-store occupancy from 95.6% to 95.9%. The 207-property same-store portfolio operated efficiently as well, with just a 2.3% increase in operating expenses year-over-year. Our asset management team's keen focus on operational excellence and outstanding customer service is supported by the results of our 2018 Kingsley Associates Tenant Satisfaction Survey. This year, we surveyed nearly 250 tenants, representing 5 million square feet or about 40% of the portfolio. Physicians Realty Trust received an industry-leading 77% response rate. Typical response rates for these surveys are between 45% and 55%, so 77% demonstrates the exceptional relationship between our asset management team and our health care partners.

We also earned a company record score in overall management satisfaction of 4.4 out of a possible 5.0, and an overwhelming 97% of tenants surveyed gave positive indicators as to their future lease renewal intentions. Our asset and property management teams should also be particularly proud of the year-over-year scoring improvement in our Catholic Health Initiatives portfolio acquired in 2016. These properties were surveyed immediately following the 2016 acquisition and were resurveyed for the first time this year. The overall management satisfaction scores improved by over 10%, illustrating the value of DOC ownership and property management.

During the quarter, we saw strong leasing momentum, and our team continues to excel at producing outstanding results by using our responsive, nimble approval process as a competitive advantage. In the quarter, we completed over 290,000 square feet of leasing activity, including 58,000 square feet of new leases and 233,000 square feet of lease renewals. These numbers include several early lease renewals initially scheduled for 2019. The average lease term for new deals executed in the quarter was 9.1 years, and the average lease term for lease renewals signed in the quarter was 8.8 years. Notably, net absorption for the quarter was essentially flat, with tenant retention being approximately 80%.

New leases for the quarter contained an average rent escalator of 2.7%, while renewed leases contained an average annual rent escalator of 2.9%. The strength of our portfolio and excellent work of Amy Hall and our leasing team has allowed us to achieve 3% annual rent increases in nearly 40% of all of the 2018 leasing activity on a square footage basis. Rent concessions for the quarter remained low, with minimal free rents and TI allowances of approximately $1.68 per square foot per year for lease renewals and $1.98 per square foot per year for new leases.

In total, we invested $6.2 million in capital expenditure or approximately 8% of the portfolio's cash NOI. And as a result of a few large tenant improvements that were completed in the quarter in conjunction with long-term lease extensions, when compared to our peers, these relative low capital expenditure investments are driven by our tenant relationships and the desirability of our medical office facilities, ultimately delivering significant cash flow directly to FAD.

Looking ahead to the remainder of 2018, DOC has 42 leases totaling 148,000 square feet scheduled to renew, representing approximately 1.1% of the portfolio. The average rent per square foot for those leases scheduled to renew is $20.83, in line with national averages for medical office building rental rates.

In close, we've worked hard over the last 5 years to invest in better as the preferred health care real estate owner for hospitals and health care providers, creating lasting value for our partners and shareholders. Our operation team continues to outperform, and the fundamentals of our portfolio remain solid. We are investing the time wisely to deepen our health care partner relationships, enhance operational efficiencies, increase management revenue, prune noncore assets and ultimately focus on driving internal growth.

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

Thank you, Mark. Devon, we'll now take questions.

(Operator Instructions) Our first question comes from the line of Jordan Sadler with KeyBanc Capital Markets.

Wanted to see if we could talk a little bit about the investment marketplace and what the opportunity looks like on the investment front today.

Thanks, Jordan. There's a fairly large portfolio that's expected to hit the market soon. It'd be fairly widely marketed. We have plenty of off-market opportunities that we're exploring, but in this capital market, we're being very selective. And we have one acquisition pending with an existing client, but the opportunities are there. But as I said in my comments, the private bid is really strong for the high-quality assets and hard to compete with.

So for the time being, we'll continue to see you guys buy a little, sell a little here and there until either the private market bid goes away and pricing sort of normalizes or moves up a little bit, moves down a little bit or...

Yes. As I said, I mean, we don't have to grow for growth's sake. We're just being very selective in this capital market. Balance sheet's in great shape, so right opportunities, we'll deploy capital, if we can find assets at the right price. But the private bid is still strong, as reflected in Houston. And again, we'll be very selective.

Any update on sort of potential joint ventures or thoughts surrounding maybe forming a fund or an alternative vehicle?

Yes. There's -- I mean, there's plenty of parties interested in doing something like that. I think our friends out in California announced something like that today. I think there's a lot of interest in private capital pairing up with public, high-quality operators with relationships like we have. So I think that's something that is possible later this year. But again, still the underlying assets have got to fit our long-term strategy.

Okay. And then Trios, I didn't catch, Jeff, if you mentioned the NOI per quarter that will come online. What was that number?

About $700,000 a quarter of GAAP.

$700,000? That's GAAP?

Yes.

Okay. And do you know what cash looks like?

I think it's $583,000, just under $600,000.

And there -- what are the terms of escalation on that lease?

They're modest for the first couple of years, Jordan, and then they move aggressively as we get that lease back to market rates out there. So it was part of a -- essentially a blend and extend to help that hospital get back on its feet. And excited about RegionalCare and, again, their bigger operation, that they expect to have at LifePoint. And the University of Washington is also in there. So we -- it's on the road to recovery. It will take a couple of years to fully recover on the wraps.

Okay. And I guess, lastly, on the portfolio trimming side, it sounds like -- it still sounds like the LTACHs are potentially for sale. Is a bid there pretty firm in the private market? Or is it -- is the bid asked spread too wide to close something like that?

Yes, we haven't had a buyer hit our ask yet, so we're still exploring it.

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

Just curious on the asset sales. Is this sort of a result of you relocating the portfolio? I remember, maybe 2 NAREITs ago, you had hired someone to relocate credit and portfolio quality. So can you give us a better sense of like what are you actually selling? And do the sales include the Foundation assets?

Yes. So Vikram, this is John. Yes, I mean, a part of our analysis is long-term credit quality. These are -- these were noncore, smaller assets that, again, we bought at favorable cap rates at the beginning of the company and just had the opportunity to kind of trim the portfolio and look for better uses of that capital going forward. So...

Okay. And are the Foundation assets still held for sale? Or were they included in this?

Yes, I apologize. They were not included. We're still exploring different options with those assets, primarily with the physicians that operate out of those hospitals. They've continued to do well, both in San Antonio and El Paso. And we think we'll have more news to share there, except telling what -- but they're not -- they're still held for sale and not included in the dispositions yet.

Okay. That makes sense. And then, Jeff, maybe just from a leverage perspective, utilizing some of the proceeds to bring down debt. Where -- can you kind of maybe walk us through latest thoughts, what's your target maybe year-end and maybe the next few quarters? And would you also look to use some of those proceeds as most of it -- or the rest of it just to recycle into other assets, higher-quality assets?

I think that's right, Vikram. I think we feel pretty good at where we are from a leverage perspective, particularly after these sales. But we would expect to be recycling this -- these proceeds into additional acquisitions through the rest of the year. I can't imagine we'd really lever up that much, maybe temporarily if we saw something and it was a mismatch of timing. But like I said, I think we've kind of reached the maximum velocity of dispositions for this year for sure. As John mentioned, there might be something somewhere down the road on the assets that we have held for -- slated for disposition, but we wouldn't expect to be selling a bunch more of assets this year. And anything we do sell, we'd likely recycle into new health system-anchored assets just to help continue our relationships with those tenants.

Got it. So current average is a good run rate? And you don't anticipate any more -- any major disposition activity for the rest of the year?

That's correct.

Our next question comes from the line of Kevin Speight with Bank of America.

I just had a question pertaining to your thoughts on the recent CMS Outpatient Rule, I guess in regards to your grandfathered assets, your on-campus assets than just the off-campus assets.

Yes. So they -- the Rule, you kind of get 2 or 3 different things. One is the -- really some enhancements to the ambulatory surgery center rates for non-HOPD facility is something the ASC industry's been fighting for, for years. So that's positive news for those -- particularly physician joint-ventured ASCs like many of ours are with USPI and SCA and others. So very positive moves in that direction. And on the outpatient rates for HOPD off-campus, so the 603 assets, really no change -- unanticipated change there with respect to the grandfathering. I think they do make it, probably, clear about the scope of that grandfathering, which it covers the services that were being provided at the time that the grandfathering went into effect, which is November 2015. So again, no surprise by that clarification. But consistent with that policy inside of service neutrality, they do continue to pare back future locations and the difference between the physician rate and the HOPD rate for those off-campus facilities. But as I noted in my opening comments, the vast majority of new hospital-led outpatient care facilities are being developed off-campus. And so those services and those rates are being taken into account as part of the -- their analysis of where they want to place those locations, and we continue to see a positive trend. But our 603 assets, we continue to be very positive about.

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

Looking at your most recent presentation, you spent some time talking about the momentum in off-campus MOBs. And I'm wondering if you're seeing more opportunities that are acceptable to you from a risk-reward perspective as far as acquisitions?

The answer is yes, John, because again, most of that's being led by health systems trying to plant new flags in strong demographic locations and providing more outpatient, more complicated services in those buildings. So the vast majority of our physicians are specialists and providing specialized services in those buildings and not primary care, which is going to see a lot of competition from them, the CVS -- Aetna-CVS merger, Optum, which employs, I think, more primary care physicians than anybody in the country now. So we see -- we continue to see great opportunities and primarily with our developer friends out working with the health system. So Mark Davis in Minneapolis, Minnesota, and other locations and Jim Bremner, both have nice development pipelines with health systems. And many of those projects are off-campus or near campus. So...

As part of this, are you seeing opportunities as far as conversion of retail space into MOBs?

A lot of people exploring that and interested in it because of the -- at least, the perceived decline in some of the mall space and retail space and the, kind of, empty boxes that have evolved over the last couple of years. We don't see it as a huge opportunity, see it as a selective opportunity from time to time.

John, I think you mentioned in your prepared remarks about the joint venture opportunities and pursuing, I think, some acquisitions, I just wanted to clarify that was the case. And also as part of those conversations, are you also contemplating contributing or selling assets into a joint venture?

John, I'd say all of the above, I mean -- but we're not -- we have not executed on any joint venture, we would talk about it if we had. I think that an opportunity to do so is there, and we take good conversations with high-quality capital partners who are looking for a high-quality operator like us to pair up with. So there's some -- at least one large portfolio coming to market. I would suspect there's going to be lots of private capital pursuing that. And we know it well and other -- have relationships with the health systems involved, and we'll evaluate it. But the underlying investments have got to make sense to us for both the short and long term and that will be the driver, not just doing a joint venture for joint venture's sake.

Fair enough. And last question for me is -- you may have already covered this, but what were the annual escalators on rents in place today and the leasing spreads on leases executed?

The average escalator -- I'm sorry, John, this is my Mark Theine. The average escalator built into our portfolio today is 2.3% on average. And in the quarter, our leasing spreads were negative 5% as a result of one 42,000 square foot lease that reset back to market out of our 230,000 square feet of lease renewals. And without that one lease, the leasing spreads were positive 1.6%. But the large nature of that one lease resetting to market pulled us down in the quarter.

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

I just want to talk a little bit about the dispositions that you could complete in the future. And Jeff, I believe you made a comment, and correct me if I'm wrong, that these sales in the future could relate to health systems to improve those relationships. Do those health systems want to buy your assets? Or how should we think about that?

Yes, Mike, this is John. I think what Jeff was saying is we had the opportunity to recycle some capital into our existing health system relationships was the point he was making there. So we've talked about kind of 5% of the portfolio in any given year. Again, just kind of looking for assets that are no longer kind of meet our long-term expectations or not core or in markets that we pare back in. So again, we could sell more this year. There's a good bid, and we've got some assets that would be attractive to potential buyers. But I think it's -- that really depends upon if we find the right opportunity to redeploy that capital. And again, as Jeff said, with existing relationships primarily.

Okay, now that makes sense. And then with the sales that you completed so far to date, I guess, the one -- they excluded the Foundation assets. What drove that yield higher? Was it just the asset quality was lower than the rest of the portfolio?

Yes. Mike, that's exactly right. I mean, these are the assets when we went through our portfolio and tried to look for assets that were noncore or kind of repositioned, these were the ones that we came up with. So that drove the cap rate higher. We'd expect -- if we did that exercise again and did another portfolio like this, we'd expect better pricing on any kind of second portfolio that we do.

Okay. And then related to the Trios lease, I guess, John, you kind of indicated that it's going to step up pretty aggressively a few years down the road. I mean, how does that lease really work? Is it the aggressive step up? Does it really get you back close to the old rent? Or is it just above-average bump?

Above-average bump. And over time, it gets us back to the market rent there. So it would eventually get back to the overhead, but it'll take a few years. And there are several options for extension in the lease that reset it at market at the time. So then again, short term, it's significantly less than our original lease, but we'll get back to market soon enough.

Okay. Then last question related to the LTACHs. I mean, how have those been performing? I know it stepped up a tiny bit this past period. Are those trending in the right direction? Or is it going to be bouncing around these high coverage ratios going forward?

LifeCare is trending very much in the right direction. They've made several investments in the home health business and others that are really strengthening their overall balance sheet. They're going through refinancing of their credit facilities right now. They're EBITDA is picking up. So LifeCare, as an organization, is performing well. It's still very tight coverages at the asset level. Again, we've got 3 assets and a master lease, and then we have the LifeCare balance sheet behind the entire lease. So we've got good credit there. The coverages are tighter than we would like, but with the extremely high coverage in Plano and kind of average coverage in Fort Worth, and we have had some recent positive developments with -- LifeCare has been making in Pittsburgh. So again, just not a core asset for us. We would sell them at the right price, but also don't feel pressured to sell them.

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

I've got a couple quick ones. So on LifePoint or RCCH, Apollo taking over Trios, when do you expect that rent collection to commence? And do you think you could potentially collect any back rent through the bankruptcy process?

No back rent. We do have the potential for some of the rent that was -- as part of the unsecured creditor pool, which we are a part of. So -- and we also, as part of the transaction, received the land. Originally, that was on a ground lease. So as part of our renegotiation of the lease with RegionalCare took -- or will take control and ownership of the land itself, so a fee interest -- so we're positive about that. That was an exchange for -- again, for the short-term rent concessions that build over time. We think it's imminent. And so as soon as they close there, the rent commences and they owe us the rent.

So third quarter, fourth quarter, sometime before the end of the year?

3:00, 4:00.

Yes.

All right. I can't pin you down on that one. All right.

Yes. Now hearing out there -- so they've got regulatory approval. They've -- I mean, they've announced it, so it's just a matter of -- I mean, kind of all the paperwork's done. So it literally -- it could be 3:00 or 4:00, but it's imminent. It could be tomorrow, and we can't predict exactly, but it's imminent.

Okay. And then just on the potential dispositions, you've gotten over $200 million dispositions this year, that was sort of your target, so you got around a half a dozen held for sale. How should we think about what you want to do with the rest of the year above that?

Our guidance was $250 million to $300 million, I think that probably is still good guidance. But again, it's really dependent upon, again, both pricing but also use of proceeds, so we're in pretty good shape right now from that perspective. So...

Our next question comes from Tayo Okusanya with Jefferies.

I just wanted to go back to the quarterly results, again, congrats on such strong results. The 3.3% same-store NOI, you talked about the increase in the rent bumps being 3% during the quarter. But you said for your overall portfolio, it's 2.3%. Could you just talk about the quarter versus the overall portfolio, what was kind of unique there?

Sure, Tayo, this is Mark. So in the quarter, we did 233,000 square foot of lease renewals. And where we have the chance in those lease renewals, we're pushing for 3% today. Our portfolio average is a little bit lower. I mean, some of the acquisitions that we've done have averaged between 2% and 3%. And so on a weighted average, the overall portfolio is at 2.3%, but we're working to move that up when we have the ability and chance to reset rents through lease renewal.

So I guess, when we kind of think about it on a going-forward basis from a cash same-store NOI growth perspective, just for the rent bump piece of it, it's -- is that 3% number sustainable? Or is it kind of more of a 2.5% based on average portfolio growth?

I think closer to 2.5%. I mean, the average -- the portfolio average is much more meaningful and weighted more than a little bit of lease renewals that we're doing each quarter. In the back half of the year, like I said, about 1% of the portfolio will be renewing throughout the remainder of 2018.

Got you. Okay. And then just to confirm with all the CMS proposals from about a week ago, there's nothing in there that was kind of surprising to you, positively or negatively? You don't really see it having any huge impact? I mean, the ASC stuff sounds like you're a little bit more positive on, but everything else is kind of in -- kind of par for the course and you don't really expect it to have any real impact?

That's right, Tayo, it's -- I think there were no surprises there. I meant the slight positive surprise on the ASC adjustment, which is -- again, the industry's been asking for it for years and trying to move toward more parity, which makes sense for the Medicare program and the commercial insurance to continue to encourage outpatient -- this is on outpatient surgery, in particular. So I think I'd say slight positive surprise overall, and then no real surprise on the HOPD rule.

On the -- yes, okay. And you don't really expect the HOPD rule to kind of change, again, how any of these hospitals are thinking about moving into the -- kind of moving outside into -- further out into the communities and having off-campus locations?

Yes, we really don't. Because again, when they're going off campus and particularly looking -- they're going off campus looking for commercially insured patients. And so -- and again, they're still trying to get those services out there. And the commercial insurance, while it attracts Medicare, it's still a much higher reimbursement generally. So we don't see a big change there.

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

Dan?

You there, Dan?

Can you hear me?

Yes, we can.

Yes? Hear me okay? All right.

Yes.

I was just looking at the Kingsport acquisition, which is a large facility on campus. And how are you thinking about -- or how is the market pricing a secondary market on campus, maybe good facility versus primary and then same thing, maybe off-campus versus on-campus? Is there any change in the market in terms of how the spread between those types of assets, primary, secondary, on-campus, off-campus?

Yes. I mean, I think on- and off-campus is -- it continues to compress to similar credit, similar real estate. And again, as we said, 73% of new constructions is off-campus. And so those are going to be valuable investment opportunities for us going forward. Kingsport's a bit of a secondary market. I think this reflected in very attractive cap rate there. But a credit in a building that in Nashville we traded up at a higher price, so it's very attractive to us. And we -- on a risk-adjusted basis, we think it's outstanding.

Okay. And where -- is that asset a triple-net lease, multi-tenant? Just wanted to understand a little bit about more what attracted you. It is a secondary market, but what attracted you to that property?

Yes. HMG is a huge multi-specialty physician group. We already have a lease with them in one of our legacy buildings, one of the first buildings that we owned as part of a public company. And they have a great relationship with that group. And that health system's got a -- or it's next to the hospital. It's got a very unique 2-state kind of structure, and it's evolved -- special legislation was created to keep it there, so hard to create that organization. So -- and we think just a very positive group. And over time, we'd look for other opportunities to work with them.

Okay. And then I saw some comments over this week of KentuckyOne. I guess Blue Mountain's buying KentuckyOne and that you expect the leases to, I guess, Blue Mountain will take over those leases? Are you expecting any kind of leakage there on the rent side or perhaps some upside on the rent or -- I just wanted to make sure I kind of covered all the bases there.

You -- now, sure. A fair question. We expect -- I mean, they're buying -- what they've entered into -- the letter of intent to buy the health system, we did 10-year leases with that local hospital system when we bought those assets, and we expect those to carry over. And they're mission-critical buildings on the campuses, those hospitals. As we said, Blue Mountain and CHI -- KentuckyOne performs very well in Lexington, they're not selling that part of KentuckyOne. So we'll provide more transparency there when Blue Mountain kind of completes that purchase, but we expect they need the buildings, they haven't asked for any changes. We don't expect they need any, and we continue to go forward with them.

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

This is Alex on for Drew. I'm just looking for a little extra clarity on the 6 assets still slated for disposition. I'm assuming that, that does not include in the LTACHs nor the Foundation assets?

It's just the Foundation assets and then one...

And one additional one.

Yes.

Okay. And then kind of -- it sounds like that's a little up in the air. But when that all comes to fruition, would you guys anticipate any noticeable movement after all the -- say, after the '17 portfolio asset sale on these 6 to your expiration schedule looking forward?

No -- noticeable movement in the lease expiration schedule? No. This wouldn't really adjust it too much. Those sales wouldn't matter too much.

Perfect. And this kind of -- this question came up on a call earlier today, but kind of the balance between specialists and primary care physicians, do you guys look at that when underwriting and managing your tenant pool? I'm just kind of curious what your couple of cents are on the matter.

Yes. We focus very much on the specialist, and I think less than 5% of our physicians are primary care physicians generally. Orthopedic surgeons are double digits, our largest single specialty, and those are usually paired up with an ambulatory surgery center and imaging, kind of a full-service outpatient care facility. So very important to us. We've spent a lot of time thinking about it. And in looking at the -- kind of the future of health care, we think those continue to bode very well.

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

Question on -- can you give an update on kind of where things are in development opportunities in the pipeline?

Eric, we have a -- our strategy's always been to partner with kind of regional developers or national developers that have health system relationships. So -- I mentioned this before, Mark Davis and Jim Bremner and then others that we partnered with have got a pretty good pipeline. All health system anchored buildings that -- some which we've supported with some capital, but with no developer risk. So CHI is exploring opportunities in some of their markets. And so those health system relationships really bode well. These would be 2019, 2020 delivery, so nothing imminent, and we just continue to support those where our relationships take us.

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

So not sure if this is a question for JT or Jeff, but you have made great progress on capital recycling so far, faster than I was expecting this year, but if the market doesn't reward you with a more accommodative cost of capital for growth in, say, 6 months or even longer term, what's the next step? Would you look at more aggressive capital recycling in addition to what you've done this year and the 6 slated and maybe in the LTACHs? I realize that might create some dilution, but if that's what's needed to close the gap to demonstrate your private market value, is that something you would entertain?

I think we'll evaluate that. There's, certainly, plenty of opportunities to do that. And we still have some other assets that, again, over the course of the next couple of years, we'd like to prune just as a normal course. 97% occupancy and about 14 million square feet, very little lease roll. I mean, if -- we expect cash flow to continue to grow, Jonathan. So again, at this point, we don't have to go out there and deploy capital in the short term. And as we look at some of these development projects coming online in '19 and '20, we'll continue to grow that way. But by no means do we think we need to make any major moves right now, and be patient, we'll work through this capital market cycle.

Okay. Fair enough. And then I know you just talked about development, and you mentioned it at the start of your commentary. I don't think I heard you mention any spreads though. And I know you don't have any of your own development, but what are projects out there seeing on a stabilized yield basis versus acquisition stabilized cap rates?

The direct negotiated yields with health systems tend to be a little stronger, and those that -- where there's kind of a widespread RFP process get pretty tight. So kind of acquisition rates on those and 100, 150 basis points on the other. So...

Okay. And then just one more question for Mark on leasing. And sorry, you might have touched on this earlier, but have you increased where you start discussions on lease spreads and escalators relative to, say, 2 or 3 years ago as the strong demand for outpatient settings has just continued unabated?

Yes, between that. I mean, in between just general inflationary pressures, construction costs, we're -- we just think it's the time and an opportunity to be more aggressive, both on rate and on annual increases. As Mark mentioned, 40% of the new leases this year have 3% increases. And I think we'll continue to see our kind of 2.5% average kind of continue to bleed up. So...

Ladies and gentlemen, we have reached the end of our question-and-answer session. And I would like to turn the call back over to John Thomas, President and CEO, for closing remarks.

And as I said at the beginning, we're just very excited about the last 5 years and very optimistic about the future of the organization and continue to invest in outpatient care facilities. So thanks, everybody, for joining the call.

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