Healthpeak Properties Inc (DOC) 2018 Q3 法說會逐字稿

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

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

Thank you. Good afternoon, and welcome to the Physicians Realty Trust Third Quarter 2018 Earnings Conference Call. 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 Daniel Klein, Deputy Chief Investment Officer.

During this call, John Thomas will provide a summary of the company's activities during the third quarter of 2018 and year-to-date as well as our strategic focus. Jeff Theiler will review the financial results for the third quarter of 2018 and our thoughts for the remainder of the year. Mark Theine will provide a summary of our operations for the third quarter of 2018. 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 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. And good afternoon, and thank you for joining us for the Physicians Realty Trust Third Quarter 2018 Earnings Call. We're happy to report a steady-as-she-goes quarter. Medical office buildings continue to be the strongest performing class of real estate in all economic conditions. Private and foreign capital continues to pour into our space in spite of rising interest rates, keeping asset prices very high. A good and bad phenomenon that inhibits external growth while also allowing -- while also growing our underlying net asset value. In anticipation of this continued inflow of capital, we entered 2018 expecting a year of low external growth and chose to take advantage of a favorable market by pruning our portfolio at attractive prices, while deploying our modest acquisition capital with existing partners. We are well positioned for this period of discipline with the highest medical office occupancy among all public REITs at 96%, growing cash flows and favorable capital allocations. We don't have to grow or take short- or long-term risk in different or riskier asset classes to cover our dividend, and we continue to grow our FAD. As we entered 2018, we expected to be selective with new investments and to fund those investments from the sale of older, smaller, less long-term strategically important assets to our long-term plan. The third quarter reflected those plans. During this quarter, we sold $127 million worth of medical office facilities and deployed that capital directly with Northside Hospital in Atlanta, Georgia in their brand new Medical Midtown MOB, a 169,000 rentable square foot medical office facility. 82% is leased directly to Northside Hospital, and the building is 98% leased overall, with outpatient services, including urgent care, specialty position services, radiation oncology and outpatient surgery. We have the letter of intent signed with the tenant to occupy the last 2% of the space. This real estate is core to Northside's mission and core real estate in Atlanta's dense Midtown, located near Georgia Tech University, The Varsity and some of Atlanta's most popular businesses and urban residential neighborhoods. We look forward to organizing an Atlanta property tour to share this and some of our other newest and best MOBs with you in the near future. Our first-year cash yield in this facility is 5%, while expensive, we are pleased that Northside came to us directly with the opportunity to expand our relationship with them. They selected us for this sale and lease back and agreed to a price we believe is very attractive compared to the yield and IRR of other Class A medical office facilities that have traded this year and over the last 2 years. In addition, this investment is yet another in our collaborative partnership with Northside that delivers other mutually valuable benefits. We believe this asset will yield strong and reliable growing cash flow for a very long time. Including our relationship with Northside Hospital, we now have more than 56% of our gross leasable space leased directly to an investment-grade credit-worthy tenant or their affiliates. And to our knowledge this is the highest such percentage in actual growth space so leased in our industry. Fortunately, because of the continued transformation of our portfolio toward the best healthcare credits, we continue to enjoy the benefits of a very healthy portfolio. Healthcare is local, and as we have always believed, the health of our investments is not directly tied to the credit quality of the corporate parent but the health of the hospital, physicians and economy where our investments are located, which has been a critical part of our underwriting.

We're also very focused on the scope of services in our facilities. Approximately 20% of our buildings are anchored by outpatient surgery, and another 20% are anchored by oncology services. These anchored tenants not only attract synergistic, ancillary and complementary services but are also unique and sticky anchors. Many of these anchors also benefit by grandfathered hospital outpatient department reimbursement status we call 603. As our growth and strong relationship with Northside demonstrates, we execute our vision on behalf of our investors and stakeholders every day with care. We live this out every day as we collaborate and communicate, act with integrity, respect the relationship and execute efficiently and with a win-win approach to our business. This makes us different and better. In a few moments, Mark Theine will share more details about our portfolio's operating results. Mark's leadership running our best-in-class operating platform delivered strong operating results, and we are on track to have our best year ever from operations. Mark and his team have had an eventful quarter, tracking multiple hurricanes and preparing for any recovery that would've been necessary.

Fortunately, our facilities have weathered those storms well with minimal downtime. Unfortunately, these storms had a major impact on the regions affected, and others lost lives, property and access to healthcare and other services. Our hearts and prayers go out to all of our clients, patients and their families as we do our part to aid in the recovery. For the balance of the year, we do not anticipate a significant amount of investment activity as we continue to look for high-quality assets that are priced as accretive to our cost of capital. We remain on the hunt for investment-grade quality tenants and their assets and welcome opportunities with existing and desirable high-quality health systems who reach out to ask to partner with them on the purchase or monetization of their outpatient care facilities. Under the right circumstances, we may partner with private capital to make these investments in an effort to meet our clients' needs but at the same time, preserve our access to these long-term investments without burdening our balance sheet or FAD.

A few updates. The Vatican has approved the pending merger of CHI and Dignity Health. Each system continues to work through the details to complete their merger and become the largest health system in the United States, perhaps, as soon as the end of the year. Trios and Foundation legacy providers are all paying rent as scheduled, and we continue to expect to sell the foundation assets. Jeff will now review our financial results and then Mark will share more about our operations, and then we'll be happy to take your questions. Jeff?

Thank you, John. In the third quarter of 2018, the company generated funds from operations of $51.7 million or $0.28 per share. Our normalized funds from operations were also $51.7 million and $0.28 per share. These statistics include the net positive $1.8 million impact of a lease termination at an asset we owned in Appleton, Wisconsin. Our normalized funds available for distribution were $45.7 million or $0.24 per share, which included the $2.2 million cash impact of the same termination. The lease termination of fee occurred -- the lease termination fee occurred when our tenant Fox Valley Hematology & Oncology was purchased by ThedaCare, an A1-rated health system and leader in that marketplace.

We entered into a new lease with ThedaCare, effective October 19, and added 2 years to the back end of that lease. So the lease term is now 15 years with an A1 credit-rated system tenant, all in all, a good outcome for us. We continue to see strong pricing of the medical office buildings in the third quarter and as previously announced, took advantage of this pricing to sell a $127 million portfolio to a private equity sponsor. This portfolio consisted of solid assets, which we consider to be non-core because they were generally smaller in size, not leased to investment-grade-rated healthcare systems and in secondary margins. On the acquisition side, we completed the transaction that has been negotiated at the end of 2017 for the brand-new Northside Medical Midtown MOB in Atlanta. The longer lead time worked for us in this regard as we believe the asset would trade at the better cap rate today than our price of 5.0% stabilized yield. If the acquisitions and dispositions that took place in the third quarter had both occurred at the beginning of the quarter, the net impact to cash NOI would've been an additional $225,000. On the capital market side of the business, we were able to take advantage of the favorable bank environment to amend and extend our credit facility. We reduced the cost of our revolving line of credit by 10 basis points to LIBOR plus 110. We also reduced the cost of our $250 million term loan expiring in 2023 by 55 basis points to LIBOR plus 125. Considering the effect of our in-place hedges, this term loan now bears interest at a fixed rate of 2.3%. Our balance sheet remains in great shape this quarter with less than $100 million of debt maturing over the next 3 years, all of which are existing mortgages with an average interest rate of 4.5%. Our net debt to adjusted EBITDAre is 5.4x, and our debt to total capitalization is less than 33%, giving us plenty of financial flexibility to adjust the different market environments.

At the end of the quarter, our portfolio was 96.0% leased, with 52% of that space leased to investment-grade-rated health systems or their subsidiaries. Our same-store portfolio occupancy decreased by 90 basis points and generated same-store cash NOI growth of 5.6%, including the lease termination fee on the Fox Valley asset previously mentioned. If we exclude that asset, our same-store cash NOI growth was 1.8%. G&A expense was $6.6 million as expected this quarter, and we continue to expect to finish the year within our guidance.

Finally, a note about Status B Topic 842. We have historically classified the indirect costs of leasing impacted by this guidance in our G&A already. So we would expect no material changes to our income statement as a result of the documents rule in 2019. I will now turn the call over to Mark to walk through some of our operating statistics in more detail. Mark?

Thanks, Jeff. Solid revenue and FAD growth continue to highlight the company's positive operating metrics. As John mentioned, our asset management platform is delivering steady internal growth, primarily generated from anyplace annual lease escalators of 2.3% across the portfolio and an industry-leading 96% leased. Our leasing and CapEx teams helped drive top and bottom line improvements in the quarter as well, including limited CapEx investment that totals just 6.9% of our cash NOI. Our operations team known for its close hospital relationship also continued to execute on this plan to expand in-house property management and leasing, laying the groundwork for additional institutional cost efficiencies and generating long-term enterprise value for our shareholders.

In Q3, leasing activity totaled 325,000 square feet, including 283,000 square feet of lease renewals and 42,000 square feet of new leasing. Tenant retention, excluding the Fox Valley facility and the favorable outcome as Jeff mentioned, is 93%. Rent concessions, including TI and leasing commissions in the quarter, for lease renewals, totaled approximately $2 per square foot per year and $2.50 per square foot per year for new leases. The positive cash re-leasing spreads for the quarter were 1.7% and included average annual escalators of 2.51%. Our in-house leasing team continues to do an exceptional job renewing our existing healthcare partners at market rental rates and recruiting the right mix of physicians critical to creating a dynamic healthcare ecosystem and ultimately generating strong returns from predictable, long-term triple net leases. Year-to-date, in 2018, this team has saved our investors approximately $3 million in leasing commissions compared to what we would have paid to third-party brokerage companies assuming a 3% commission rate. Looking ahead, we expect this savings to continue to grow as we are proud to welcome 2 new leasing team members to the DOC team, [Arthur Cunningham], based in Atlanta, Georgia, will focus on the southeastern portion of the country, bringing over 20 years of leasing experience to DOC; [Alison d'Amato], based in Denver, Colorado, will focus on the western part of the country, adding her excellent healthcare and REIT experience. Similarly, we added to our property management team this quarter by transitioning facilities in our third-largest market Louisville, Kentucky, and our 8th-largest market, Columbus, Ohio to our in-house platform. We are very proud to welcome Barb Bennett, Sydney Friddle, Amie Washburn and Angela Zarate to the DOC family. All are impressive individuals, tasked with delivering outstanding customer service and the diligent care that our team has become known for, also known as the DOC difference. We believe that tenant retention starts with property management, the day the lease is signed, and we are committed to showing our hospital and physician partners through our actions that we care about enhancing the patient and physician experience.

From an overall operations perspective, DOC has never been in a better position to service our healthcare partners, invest in our relationships and efficiently manage our facilities to drive FAD to the bottom line by keeping occupancy high and our capital expenditures low. Finally, we'd like take a moment to thank our operation team members and our partners for the tremendous preparation and communication during the recent hurricanes, Florence and Michael. Well, DOC ultimately had just 8,400 square feet directly in the path of Hurricane Michael, the entire southeastern region prepared well for high winds and severe rain. Fortunately, our facilities fared well, with very minimal downtime, and we have already offered assistance to some less-fortunate healthcare providers, who lost their facilities, to use the limited amount of space we have available in those markets. Again, we sincerely thank our southeast team for their preparedness, communication and care. With that, I'll now turn the call back over to John.

Thank you, Mark. We'll now take questions, please.

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

Just hoping to start on the acquisition side. There is a couple larger portfolios out there. Just trying to get a sense of where you think pricing is for high-quality portfolios and your appetite to either do it on balance sheet and/or via joint ventures. You kind of threw that out there in your prepared remarks, John?

Yes, Juan, thanks for the question. The -- we look at everything as we know that we'd look, focus primarily on the higher-grade health systems and especially, where we have existing relationships. I think the 2 portfolios that you're speaking of -- I assume you're speaking of are large enough that they'd probably attract some portfolio premium but also a lot of interest from private capital. So we would anticipate the cap rates to be in the 5s with various levels of quality in each portfolio. So the sizing of that and where our stock price is and cost of capital, we -- if we pursued those, it'd probably be with a private capital partner and some level of mix. So...

Great. And then one for Jeff on balance sheet. I think you've got about $430 million in -- on the credit facility. Any plans to term that out or balance sheet initiatives that we should be thinking about '19 earnings?

Yes. So that does kind of include the $250 million term loan, which we have fixed with hedges. So you're really kind of closer to $200 million, a little bit under $200 million on the line. So what we always think about terming out our debt, we're always in conversations with banks and private capital sources to see where that pricing is. But where we sit today, I don't think it's urgent, but it's something that we always look at.

Great. And just more quick one for me. The termed fee, so it sounds that you had a replacement tenant. Is there any impact on a go-forward basis ex that one-timed income on the rent that you're getting from the new tenant versus the old?

Yes, it's really a good situation. The hospital bought the group that was occupying that space, it's in an oncology group. And we work for the hospital to kind of alter the lease going forward. We extended it, and the group paid us a termination fee at the same time as we entered into a new lease with the hospital. So it's a momentary lapse in occupancy, which hits our statistics negatively. But it was a -- literally a 24-hour impact on the statistics. So we took the fee in hand and have this new 15 lease with an investment-grade tenant. So it's really a win-win situation for everybody involved.

Of the rent service in?

No, the rents are lower, and that's the balance of the kind of -- the economic impact from the old lease to the new lease was essentially made up of the termination fee.

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

So for the most part, your entire portfolio was bulked in the past 5 years. So my question is when you underwrote those properties, how did you look at the required CapEx spend at the time of acquisition? And then how did you look at any future lease expirations that may come with some needed second-gen TI spend that could impact your FAD? I know most of your tenants are on longer-term leases, so those expirations may be years away. But I'd just like to get a better understanding of the expected TI spend in the future.

So Jon -- and this is Mark. So when we're underwriting our acquisitions, we, of course, assume a renewal probability and TI associated with renewing those tenants. And we look very closely what the rental rates are and how we can renew those at least in place if not continue to escalate them and assume a TI along with those renewals. We also have property condition reports done during our due diligence. And we identify immediate repairs needed as well as strategic capital that we can make enhancements in those buildings. So we layer all that into our underwriting and creating our capital expense budgets. As I mentioned, we're at about 7% of cash NOI this quarter, and that's where we try to budget is in the high single digits for our CapEx spend.

And Jonathan, just to add. So much of our business is direct relationship-negotiated transactions, so like our CHI investments, which were approximately at $900 million, if you recall, we disclosed a fairly large adjustment to the purchase price to address differed maintenance of the hospitals had, kind of, left it in place and had spent that. Most of all that has been deployed now back into the buildings per agreement with the hospital, the seller. So we certainly take all that into account and increases in property taxes as well, which is very important, critical part of underwriting in these high-priced -- in this high-priced market. So...

Yes. Okay, and so Mark, it's mid- to high single digit that's percentage of NOI for CapEx spend next year. That's a fair estimate and run rate to go by?

Yes.

Okay. And then an extension to that, maybe one for you or John. But our physicians groups and healthcare systems, are they demanding more customized build outs or configurations in, say, 5 or 10 years ago? Meaning, has the cost of acquisition of new lease inflated more than construction cost inflation? Just curious to hear your thoughts there.

I don't think so. I mean on the gross dollar basis, our buildings are noted -- have a large percentage of outpatient surgery and oncology facilities, which those places in and of themselves are more expensive and require more TI. But typically, the kind of the TI contribution from us is pretty much the same across the board, and then we'll work with the tenant to either finance that excess TI dollar or they'll provide it themselves. We just renewed a lease with a large group in one of our buildings, and we put in $1 million of new TI, and they put in a couple million dollars of TI to convert the space. So it all gets blended in. You got to stay within market rents as you're providing that TI, and that's what we do as we change those leases or change the space for them.

Okay. And then, just one more on the lease expirations for next year. Granted, it's pretty minimal at only 3% of ABR. But where are those rents relative to the market? I think I saw they were a little bit above the portfolio average. I get that it's market-specific, but just any color there.

Yes, Jonathan, Mark again. You're exactly right, it's market-specific but if you look at it across the whole portfolio in the next 12 months upcoming, our average rate is $22.08. So right in line with where we think rental rates are for those markets, and we'll work hard to continue to renew those at favorable terms.

Yes, and those are in place so that right now, in this inflationary market, should not have to catch up to those. If they are at the higher end, but also be able to push those rents more than we have historically been able to do in the past.

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

First, wanted to just ask you a question about the capital markets. It's -- I wouldn't say you're trading at a big discount NAV per se, but your cost of capital is not what it was, and obviously, it's tough to compete versus all the capital that you talked about that's out there. What are you doing or what are you planning to do, to sort of capitalize on the differential or the opportunity there in terms of the assets you own and the valuation of them versus all the capital that's out there?

Yes, Jordan, it's JT. The -- I think as we've demonstrated all year, we've really funded acquisitions -- we've been very selective with what acquisition we've been doing in a limited amount, and we funded those by selling, kind of some of our older and less strategic assets at pretty favorable pricing than we anticipated would've been available when we bought those assets. So I think just for the foreseeable future that will be the primary funding source. So I noted to do much more volume. If you looked at a larger volume or 3 or 4 buildings in a portfolio that we would explore, private capital and now partnering. And 50/50, 70/30 kind of whatever blended math, it worked from a capitalization standpoint. So to be able to grab hold of those assets with our clients for the long term, but do it in a way that doesn't impact the balance sheet. So I don't think you'll see anything different for the foreseeable future. Stocks -- has been acting better, but certainly not today, and I think this market's got a downdraft, hopefully we'll get back the -- going in the right direction here soon, with all the health care REIT stocks and equities.

Can you maybe speak to the acquisition in the quarter with -- of Northside? First, I'd be curious what the GAAP cap rate looked like if -- with the escalators over there? And separately, to the extent that you, going forward, if the stock remains down here would you be a buyer at a similar price level, going forward?

Yes, I think it's -- again, I think the asset's well worth the price, as noted. We -- the -- Northside self-developed that building and entered into a presale agreement, if you will, with us last year. So in many respects, we look to funding that from, our kind of our capitalization from last year and then the sale of assets this year. So the fantastic asset is I said, I think it's -- reflects off-market pricing, as expensive as it is and then from an IRR perspective, a nice kind of traditional bumps in the lease that gets us kind of to the high single-digits.

Then the GAAP cap rate's in kind of the high five range, Jordan.

Cap in the high five, okay. And then the same-store occupancy, the decline year-over-year, the 90 basis points, was that a function of the move out in the quarter or the lease termination fee?

That's all that was. And the same impact, seeing the renewal, or lack of renewal was just replacing a tenant with 1 tenant, affiliated tenant, so.

So can you just break out the rent that was included in the quarter from that tenant who moved out, as opposed to the lease term fee?

Yes, so.

There was something incremental above the 1.8.

Yes and that was -- so the rent's -- it actually works out about the same and because the tenant moved out before the end of the quarter. So it's as JT mentioned earlier, it's a slightly reduced rent. But there's going to be no net impact between this quarter and the fourth quarter because of the time that the assets sat vacant. Or not vacant, but sat without a lease.

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

This is Seth Canetto on for Chad. Not to beat a dead horse, but I did have a question about the MLB you guys acquired in Atlanta, anchored by Northside. I know you said you extended that lease by 2 years, but was there any change to the rent escalators going forward or any other incremental details you can provide?

It's 2 different situations. So the Northside building's has got long-term leases in it. There was no change there. We just -- we bought those with it, with those new leases in place. The Fox Valley situation, we just kind of changed the lease from a physician group that the hospital bought to the hospital itself, and then adjusted the rent when they -- in addition to the termination fee and extended the lease term. So it's 2 different situations.

All right, great. Thanks for clarifying that. And then...

I'm sorry, with the same bumps in that lease, so.

Okay, great, thanks. And then looking at the press release, you guys had mentioned the expected yield on that acquisition is 5% upon stabilization. That building's 98% leased. So does that assume that yield is lower than that right now? Or can you just explain that a little bit?

I mean, you've got -- we have 1% -- we have 2% of the building that's not currently leased. We have a letter of intent for that lease. So it's that 2% is really the delta. It's minor.

Okay. And then, can you guys provide same-store NOI, excluding a lease termination fee, but inclusive of the 6 assets later for disposition?

We know we don't have that, Seth. Those are assets, 2 of those are now held for sales. So these are assets that we're selling in the near term. So we don't include those in our same-store NOI.

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

Quick question on the assets sold during the quarter. We talked about the IRR economics of Northside, kind of building up to a high single-digit return. Can you talk about the unlevered IRR realized on the assets that were sold during the quarter? And then sort of how you think about, maybe the IRR from this point forward, if you were to continue to own those assets and sort of how it compares to the acquisition?

Yes, it's a good question, Drew. So the IRR on those assets that we sold is also kind of a high single-digit IRR. We felt that the pricing was particularly good right now in the market. So clearly, we felt that by selling it now, our IRR is going to be a little bit better than if we held it for the longer term and put in the necessary capital and everything to release it. So the return on the assets was pretty much what we had underwritten when we bought them, and we felt like it was a good time to improve the portfolio a little bit, sell assets of what we thought was a pretty good IRR and then redeploy those assets into these higher quality investment grade rated anchored systems that we've been looking at.

Yes, as Drew has noted, I mean those are older buildings. We're going to require more CapEx over time, this is a brand-new building and again, self-developed by Northside. So no deferred maintenance, no expectation of capital needed for a very long time.

Great, that's helpful. And just 1 quick follow-up here. You've talked before about potentially selling the LTACH and I guess, have there been bidders out there? What does pricing look like? And should we expect that the LTACH portfolio has kind of sold maybe ratably over the year or so?

Yes, I think that'd be our expectation. There are, I mean frankly, aren't a lot of buyers for the LTACH, so. But they've been performing reasonably well. They've -- I mean we've never had a rent issue or a payment issue there. We've got 14.8 years left on those leases and lots of credit enhancement from the parent. So again, we'd like to sell them, but we don't feel compelled to do that at a low price, so.

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

Just on the LTACH portfolio. It looks like coverage bounced pretty well this past quarter. Do we expect that to be a trend or do you think it's going to be stabilizing around that 1.7 level?

I think it's hit the floor and gone back in the right direction. So I think it'll continue to creep up. It's not going to be huge, but it's coming from kind of expansion of services in those buildings, primarily. They've been buying -- the owner has been buying a lot of home health and generating a lot of revenue from their home health acquisitions again, which are complementary services to the LTACH business. So I think it'll continue to improve, and hopefully, as we talked about in the last question, increase the octane to sell those at a good price.

Okay, great. And then related to foundations, I know that's the plan, to still sell those assets, they're not included in the ones slated for sale, and if not, do you have a timing? Or is that just something that you have targeted to do, sometime in the future?

Yes, we've got -- 2 are in the -- held for sale, and we've been in negotiations and trying to finalize the process to sell those to the physicians that are currently providing services there. So hopefully that's a near-term event and a 2018 event. But we can't know for sure, but we expect it to be certainly within the year, but hopefully within this current calendar year.

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

Just wanted to first get your thoughts on the Fox Valley asset. I don't know, would there be a difference in cap rate, just given the credit enhancement if you had sold that building, pre-kind of this, the tenant move-out versus now, where you have this hospital? Is there a difference that you'd suspect in the cap rates if you were to sell it today versus (inaudible) ?

Yes, no question. Yes, no question at all. I mean, we've got an investment grade long-term lease in there now. It was a great group that we -- it was the physicians themselves we bought it from, in a sale-leaseback, and then they later sold themselves to the hospital. So it was a -- I wouldn't say a substantially different cap rate, but it would be an improved cap rate.

Okay. And then with Northside, you've now done a couple of buildings with them. I'm just wondering from here on, what sort of opportunities exist with Northside on, off-campus maybe? Is this sort of a tenant where you'd look to expand with?

Yes, we certainly look to expand with them. We have a great partnership/relationship that primarily that one from Deeni's prior life, where he had developed a couple of buildings with Northside, which we now own. And then I think we have 5 total buildings that are substantially, are anchored by or substantially 100% occupied by Northside, Northside services. So we have some development rights to land next to the Centrepoint building, that again is a building at we helped Northside purchase and redevelop several years ago. So they're a growing system, they're in the process of trying to acquire the Gwinnett Health System, which has been improved by the state attorney general, and they're just working through the FTC and the other regulatory approvals for that. So that'll be a -- 3 buildings to add to that portfolio if that merger is completed. Otherwise, Gwinnett stands on its own just fine. So Northside Midtown, the building we just bought, is really their first kind of move to downtown, and headed towards the south -- the southern part of the city and the counties in the south of Atlanta, and we would expect to grow with them.

Got it. And then last one, maybe for Jeff. Just from a FAD perspective, we should we expect that to trend over '19? I know there was obviously the cash impact from the termination, but can you give us a sense of where you -- just a range where it could trend into '19, then? Just sort of your longer-term target, call it 2 to 3 years out?

Yes, Vikram. Well, so -- I mean, think if you back out the lease termination fee and you do the adjustments that we talked about with the acquisitions and dispositions for the quarter, just to get the timing, you'll see that we're kind of covering the dividend. We're just, paying out just under 100%. I think what you'll see is, assuming no other acquisitions, which I'm not saying that's what we're going to do, but you should see our in-place rent escalators continue to grow at 2.5%. So you can put a leverage on that, and you would see just kind of generally, FAD should be growing at 3% to 4% or so, just on a stand-alone basis. And then, anything that we do on the acquisition side would be complementary to that. So it's kind of hard to put a target on it, because we're not exactly sure what the capital markets are going to give us next year. So we're just trying to take it as it comes.

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

I just wanted to go back to Fox Valley for a second, just from a modeling perspective to make sure we're capturing this out right. Could you tell us what the GAAP rent is for the new lease is? Want to kind of make sense of modeling going forward. We have the right number in there versus the old lease.

Yes. So look, I can tell you for, for a go-forward basis, the cash rent for Fox Valley is going to be just around $100,000 a quarter, a little bit over $100,000 a quarter. And that's a 15-year lease, the escalators on that are 2.5%. So you do -- sorry, I'm just doing it right now.

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

Tayo, we'll come back to you, of course. Go ahead, Dan.

All right. Actually I, most of my questions have been answered. Only one I had really at this point was on Northside. Not so much about any of the particulars of the lease, but the fact that the hospital is selling the asset, maybe how that came about? Did they originally develop it and want to keep it on balance sheet, then decide that they wanted to go ahead and monetize? Given where cap rates are, what others needs they have, and maybe is there anything I should, or others should read into that, in terms of monetizations in the space?

No, they just like the idea of self developing it and monetizing it. It's worked with several developers over the years, none of which are available now that they've been deeming with us. So they self-developed it, had their partner RTG work with them to do that. And then, agreed early on in that process, and I think it was their intention to monetize that at the end and reach out to us to do that, so. It's a great relationship. They've got a great balance sheet, they have virtually no debt, they don't have a credit rating, because they don't issue taxes and bonds from they've got a very strong balance sheet, which is -- they share their financials with us. Obviously it's part of our underwriting, but they're not really publicly available, so.

Maybe they'll buy another hospital and you can grow with them that way. Trend of the day, right?

The only other question I had was on the 2.5% escalators you just mentioned. Are those mainly fixed or CPI? What's the mix there?

Those are fixed.

Oh you mean, across the whole portfolio Dan? Sorry.

Yes.

Yes, I mean those are actually, almost all fixed. I'm looking at Mark for the...

That's correct. Yes.

And that's right across the whole portfolio, so that 2.5?

Yes, I mean it's a little bit under across the whole portfolio, I think it's 2.3.

2.3.

2.3, okay.

Our next question is coming from Tayo Okusanya.

So the new leases is $105,000 a month in cash and 126,000 month in GAAP.

Okay, and that's the new -- okay, so that's on a going forward basis.

And that's a similar number versus the pro-rater amount you had in your 3Q numbers.

Exactly, that's exactly right.

So that's number 1. And then number 2, could you, I mean -- thank you for the information about the Divinty (sic) [Dignity] deal, now finally happening. I think here we've kind of seen some other hospital mergers get announced very recently as well, when you guys kind of feel this consolidation going on at a hospital space, what do you kind of think about that trend in general. And then two, what do you think it kind of means for MOBs and MOB valuation, if anything at all?

Yes. So again, from our perspective, the mergers that we've seen, or are associated with, we view as very positively. They're not in overlapping markets, there's no a rationalization of closing one hospital to benefit another in those -- in the particular mergers that we see Dignity and CHI in particular. And we see a combined better balance sheet if you read the credit agency reports around that merger in particular, they know the positive impact to CHI, is credit rating from -- as a result of that merger. So we view that very positively, and don't see a negative impact specifically on any market or MOB as a result of the merger. Similarly, like Baylor Scott & White in Hermann Memorial in Texas, we have assets with both hospital systems. Again, they're complementary markets, they don't compete with each other head to head. And we've got great relationships with those. We think -- we view that as positively. So from our perspective, it's even the ones we're involved in, we see it as a win, a net win for us. And in others where you have hospitals in a market that are merging, or you become closer together, like in Chicago, you certainly would see a rationalization of certain sites and locations that would be preferable to other sites and locations. And that would have a negative impact on the owners of those sites that aren't selected. So it just states my case. But think the driving point is, are they in -- competing. Are they in a computing market today, or is it complementary? The Northside-Gwinnett merger is complementary as well, it's just adding another region and location where Northside's not currently in, and adding a great health system to their existing geographic location.

Could you just, the rent on the new Trios lease, as well.

Yes. We -- that lease was the new lease cut the rents in half of the first year. It was part of kind of the turnaround plan that, coming out of bankruptcy with a new owner. But then those grow at better than average increasers over their 8 years and get us back to market fairly quickly. And then have kind of market resets at the end of each lease, which we again, would view to be going up, not down, with those market resets. So a good win-win situation.

Explains it all what happened.

Yes, so this year, it's exactly -- so this year it's about half of what we would have otherwise expected, so that's not good of course, but we do get some substantial increases over the next; every year over the next 8 years and should make a long-term investment for.

But on a straight-line basis, that's kind of half of what it used to be, at least on a near-term basis?

That's cash, that's cash. I mean, on a straight-line basis, it's about 60% of it used to be.

Okay. So that's the cash and that's the GAAP. Okay, perfect.

Thank you. We look forward -- thanks for joining us today, we look forward to seeing you at, in NAREIT, and we'd like to welcome baby Boden Benjamin Becker to the world. Thank you very much.

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