Healthcare Realty Trust Inc (HR) 2013 Q1 法說會逐字稿

Welcome everyone to the Healthcare Trust of America first-quarter 2013 earnings conference call. All participants will be in listen-only mode.

(Operator Instructions)

After today's presentation there will be an opportunity to ask questions.

(Operator Instructions)

Please note this event is being recorded.

I would now like to turn the conference over to Robert Milligan, Senior Vice President of Corporate Finance. Please go ahead.

Thank you.

And welcome to Healthcare Trust of America's first-quarter earnings call. On the call today we have Scott Peters, our President and Chief Executive Officer, and Kellie Pruitt, our Chief Financial Officer. We'll be happy to take your questions at the conclusion of our prepared remarks.

Last night we filed our first-quarter earnings release for 2013. This document can be found on the Investor Relations section of our website or with the SEC. This call is being webcast live from our website and will be available for replay for the next 90 days.

During the course of this call we'll be making forward-looking statements. These forward-looking statement are based on 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 that our assumptions are reasonable they are not guarantees of future performance. Therefore our actual future results can be expected to materially differ from our expectations. For a more detailed description on potential risks, please refer to our SEC filings which can be found in the Investor Relations Section of our website.

I will now turn the call over to Scott Peters, President and CEO of Healthcare Trust of America. Scott?

Thank you, Robert.

Good morning, everyone. I'd like to thank you for joining us on our call today. Last night as Robert mentioned, we filed our first-quarter results and financial supplement. This is now our fourth-quarter reporting as a public Company since our listing on the New York Stock Exchange on June 6, 2012.

We're happy to report that since our listing we have continued to be patient, prudent, and disciplined in implementing our business plan. We are focused on asset management and the internalization of our leasing and property management platform. We remain disciplined in our acquisition philosophy, building and expanding our healthcare relationships, and have continued to focus on the acquisition of medical office buildings on or adjacent to healthcare systems campuses in our targeted range of $25 million to $75 million.

We have also worked on and improved our balance sheet metrics and continue to maintain the conservative debt to equity philosophy. For the first quarter of 2013 we were able to continue to deliver strong and consistent results that we believe are representative of the medical office building sector and the current and future impact of the Affordable Care Act. Our same-store cash NOI grew by 3.4%. Our normalized FFO grew by 23% to $0.16 per share year over year, and we acquired $88 million of high-quality on-campus MOB in Texas, representing an additional 254,000 square feet.

From an equity and debt perspective we positioned our balance sheet for long-term stability by completing our initial $300 million 10-year bond offering, which we believe locks in today's low cost of capital and extends our average debt maturity to almost six years. In addition, we utilized our ATM to raise $107 million, primarily in March at an average price of $11.51 to match our acquisitions and pipeline. From the Company perspective we believe that the above performance and actions have continued to improve the fundamentals of Healthcare Trust of America as we move into our second year as a public Company.

In looking at our portfolio we think that based on current dynamics surrounding the MOB space and the healthcare systems that the core sustainable, same-store performance for HTA on an annual basis over the next 6 to 12 months should be in the 2.5% to 3% range. While we have outperformed this range for the last few quarters, and are certainly focused on our continued results from our in-house Management, our current focus is to look [monthly] at the best combination for achieving long-term value from our portfolio leasing as it relates to tenant concessions for free rent, term, TI, credit, and size of space rented.

One of the effects of the Affordable Care Act has been widely discussed, has been the increasing consolidation of physicians by using health systems or larger physician groups. What we are now seeing unfold is an increasing demand for the larger tenant suits 5,000, 10,000, 15,000 square feet and up. This has certainly come into the expenses of solo practitioners.

We have begun to see leasing activity coming from these larger tenants. However these larger leases take a little longer to negotiate and complete and can require us to consolidate space, relocate smaller tenants within the building, and also be user-friendly during the process.

It is extremely beneficial to have an internal asset management platform in place and specifically the ability for HTA leasing Directors who are established in our markets that can interact directly with the respective new tenant, the existing tenant, Senior Management here at HTA, and can see the big picture in each market and asset.

We ended quarter one with a portfolio of totaling 12.8 million square feet across 27 states. 96% of our portfolio is on campus or aligned with leading health systems. 72% of this is directly on campus. The portfolio is 91% occupied, with 58% of our annual base rent coming directly from credit-rated tenants. 42% from investment-grade tenants.

These credit rated tenants are our health system tenants, a segment that we expect to continue to grow in our portfolio as the Affordable Care Act is implemented. An example, recently Highmark investment-grade rating in Pittsburgh completed the Allegheny Penn merger associated with over 200,000 square feet (inaudible). And Steward Health Care System became credit rated with over 386,000 square feet in Boston that we acquired last January.

In the quarter we transitioned another 2.4 million square feet onto our internal property management platform. Our asset management team and platform now operates approximately 87% of our portfolio. We have a few more properties and healthcare system assets that we will transition into our platform by year end, but we believe the bulk of the in housing is complete.

What we have now is an asset management platform that does the property management new leasing for approximately 11.2 million square feet of space. It is run through our regional offices in Indianapolis, Atlanta, Scottsdale, and Charleston, and can accommodate significant additional acquisition activity over the next several years with little or no incremental overhead cost.

The focus of our internal property management and leasing platform is threefold. Improve our touch and feel of our tenants, engage directly with the healthcare systems about their plans, needs, and campus objectives, and improve our overall enterprise value through our local teams' deep knowledge of their local and regional markets. We believe this platform continues to differentiate us and our markets as our recent results indicate.

As we discussed on our fourth-quarter call, we had a significant amount of lease roll over in the first quarter, almost 3.2% of our total portfolio. Despite this we are still able to generate same-store growth of 3.4% in total. We've completed approximately 400,000 square feet of new and renewal leases. Our tenant retention remained high at 85%. We've also seen a little improvement in our positive cash releasing spreads, about 1%, while also reducing the total number of concessions.

As we mentioned last quarter, our typical free rent period has declined by about a month for typical five-year lease. TI is also lower, about $0.80 per square foot per year upturn in quarter one versus $1 per square foot in 2011 and early 2012.

While our overall leasing remains positive in most regions we continue to have a few properties and areas that continue to struggle. The most significant of these as we mentioned last quarter were our portfolio in Sun City, located on or around Banner, the Delaware Hospital campuses, and also certain assets in our Atlanta portfolio. It's good to see that the leasing in Arizona is just starting to improve as the economy continues to improve.

In January we transitioned leasing for our Arizona portfolio in-house and are working diligently to expand our direct relationships with physician groups, Banner Hospital, Sun Health, and the local individual doctors. We took similar steps several years ago in Indianapolis, which resulted in a 6% occupancy increase over the last 12 months. We view these as opportunities in our portfolio as very good growth drivers over the next several years as it results to earnings.

On the acquisition front, there's far more activity in the medical office sector today than we've seen in the past four years. Investor interest in this sector continues to remain high. We are seeing many new investors coming to the MOB acquisition space, pension funds, foreign investors, and some private equities. We are attracted by the strong underlying fundamentals and the relative value they see vis-a-vis other opportunities. It certainly indicates that the ownership of MOBs is becoming a specific asset class for investors long term.

All of this interest has resulted in meaningful cap rate compression for MOBs across the board over the last couple of years. It has caused increased competition for certain deals that have been competitively bid. The good news is the healthcare space remains fragmented and it continues to be one-off opportunities to acquire high-quality MOBs without going through the bidding process.

Since I founded HTA in 2006 we have acquired over $2.6 billion in medical office building assets basically through individual transactions or modest sized portfolios. This has allowed us to develop significant relationships that continue to lead the very selective acquisition opportunities for us as a Company.

Given our size, we have the ability to take a rifle-shot approach, acquiring single assets, $25 million to $75 million in size, and still demonstrate a meaningful portfolio expansion similar to the $292 million in acquisitions and 10% expansion that we've demonstrated in 2012. Looking forward, we will continue to be selective in the assets that we pursue. We will certainly avoid acquisition opportunities that we're seeing in the marketplace that are marginal in value or stretched from an asset blended healthcare asset perspective. We are dedicated to core critical MOB and prudent and disciplined growth.

In the quarter we were able to acquire two high-quality on-campus medical office buildings for $88 million for an average cap rate of 7.10%, both 100% leased. These transactions fit directly within our acquisition discipline. These were both acquired directly from the developer, are core critical on-campus assets, and were acquired from established relationships that we expect to expand with over the coming months and next several years.

Our first 2013 acquisition, which we had previously announced was for the Forest Park Tower located in the Forest Park Medical Center campus in key North Dallas medical submarket. This is 130,000 square foot building and is 100% leased, with 3% annual bonus. As you will or member from last quarter in December 2012 we acquired the initial MOB on campus from Forest Park for $27 million.

The second property we acquired this quarter was the Texas A&M Health Sciences Center. This is a 128,000 square foot building that is located on the new Texas A&M Health Science campus in College Station, Texas. This property will be acquired from the regional and national developer upon completion, and again demonstrates our ability to not directly compete with the local developer.

This building is 100% leased and includes an attractive mix of clinical, research, and educational tenants. The tenants are primarily affiliated with A rated A&M University and the A minus rated Blinn College. We like the university medical centers because the campuses will be key innovators for healthcare delivery in the future.

Turning to the balance sheet. We believe that now more than ever it is important to maintain a strong balance sheet that gives HTA the ability to grow and match current acquisitions with the current cost of capital. We ended the quarter with total leverage of 30% and significant capital liquidity to fund our acquisition pipeline and pursue prudent opportunities. From an equity perspective we raised $107 million at an average price of $11.51 per share. We used these proceeds to finance our first-quarter acquisitions, locking in the NAV earnings accretion inherent in these transactions.

In the quarter we also completed our initial 10-year bond issuance, raising $300 million at a coupon at 3.7%. We think this is a strong execution for first-time issuer, and was largely driven by the attractive fundamentals of the medical office sector and the portfolio that we have put together. We are happy that Moody's recognized the strength of this Company and increased our outlook to positive with our new debt issuance.

However, we continue to communicate the strong underlying real estate fundamentals associated with the ownership of MOBs as an asset class that produces steady and predictable performance, and provides a stable yield to investors over the long term, and we believe these characteristics are just starting to be recognized. We are pleased with the results of this quarter and look forward to the rest of 2013.

Now for a more in-depth look at our financial and operating results for the quarter, I will turn the call over to Kellie.

Thank you, Scott.

Let me start with our first-quarter results. Normalized FFO, which excludes our final quarter of listing expenses increased 23.1% to $0.16 per diluted share, compared to $0.13 per diluted share a year ago. FFO growth is primarily driven by our same-store portfolio growth, acquisitions made over the past year, and slightly lower share count, somewhat offset by an increase in G&A and interest expense. Normalized FAD was $0.14 per share in the quarter, an increase of almost 17% compared to the year-ago period and our payout ratio was 100%.

Our same-store cash NOI growth was 3.4% for the quarter. This was driven primarily by annual contractual rent bumps and savings generated from our internal property management platform, and to a lesser extent operating expense savings and lower pre-rents. This was slightly offset by a decrease in the base rent related to a decline of 40 bps in same property occupancy.

As Scott mentioned previously, we had approximately 3.2% of our portfolio with expiring leases in our first quarter. In total, we completed over 400,000 square feet of new or renewal leases executed in the quarter. This resulted in a tenant retention of 85%. Our average lease term for these new leases was five years and included four months of free rent. Renewals average five-year terms with one month free rent and just under $4 per square foot of TI.

Listing expenses for the third quarter totaled $4.4 million. Similar to last quarter this expense is primarily related to our LTIP program, but also includes some additional items related to our share conversion and year-one stock implementation. This is the final quarter for these expenses.

Our G&A expense was $6.4 million for the first quarter. This is up from $6 million in the year-ago period, primarily related to the rollout of our internal property management and leasing platform over the past year. Our first-quarter G&A is above our expected run rate for the year as a result of normal seasonal items, including our annual audit and other year-end items.

And in-house, 85% our property management and leasing to date we expect to have a total run rate of around $23 million to $24 million for the year. Our performance has demonstrated that our platform is effective, and with the infrastructure we have in place we are well-positioned to expand our platform and our markets over the next three or four years without adding any additional costs.

It is important to note that our year-ago period also included $2.3 million in nontraded REIT expenses, primarily related to our Investor Relations program. Including these expenses we actually decreased our public Company overhead by $1.9 million, or almost 23%. In the first quarter we acquired $88 million of on-campus MOBs at an average cap rate of 7.1%. We financed these transactions with equity rates through our ATM at an average price of the $11.51 per share.

These are high-quality acquisitions that improved the long-term value of our portfolio and should improve our normalized FFO run rate by just over $0.005 per share on an annualized basis. Financing them with equity at this point in our Company's listing process ensures that we keep our leverage low. We also believe that it's prudent in this cap rate environment to match fund our acquisitions with debt and equity that reflects today's long-term fundamentals.

We ended the quarter with a very strong balance sheet that is positioned for strength and a disciplined approach for the long-term value. By utilizing our ATM to fund our acquisitions we were able to lower our total leverage to 30%. Debt to EBITDA was 5.4 times, giving full credit to the recently completed acquisitions.

Importantly, we executed on our previously announced debut bond issuance at the end of March with a $300 million 10-year senior unsecured bond. Given the strong investor demand we were able to upsize our offering to $300 million and still price it at 3.7%.

We were pleased with the execution on this deal, which was the culmination of our efforts over the last two quarters as introducing ourselves and the HTA story to the fixed income investor community. We offer fixed income investors one of the best credit stories in the REIT space, with a great portfolio that is uncomplicated and straightforward in a stable and growing asset class.

Given the success of the bond offering, we ended the period with an average interest rate just under 4.2%. We also lengthened the average maturity of our debt to 5.9 years, including the extension option available in our term loan. Upon launching our bond offering, Moody's announced that they were raising our outlook to positive from stable.

The rating agencies have taken note of the progress we have made as a public Company. While they don't always move as we would like them to, with the strong fundamentals of MOBs, our continued capital market discipline, and the performance of our in-house property management and leasing platform, we believe we are poised for an upgrade over time.

At quarter end we had over $750 million of available liquidity, including $120 million of cash on the balance sheet. We expect to utilize this liquidity to fund current year acquisitions and to repay the small amount of secured debt that is coming due. In addition to this liquidity we have also started to recycle some of our assets, putting our first property, a healthcare related property in California, up for sale at the end of the quarter. Proceeds will not be significant but we want to start pruning our portfolio at some of our non-core properties.

Finally, looking at June of this year we are excited to have our third tranche of shares converting to the Class A shares that trade on the New York Stock Exchange. This will increase our float by an additional 57 million shares, bringing our total float to 75% of our total outstanding shares. It will also increase our exposure in the public markets and improve our eligibility to be added to additional indices. It will also qualify us for additional RMB rebalancing in August.

We are encouraged by the increased exposure we have achieved in the public market thus far. Since our December unlock, we have gone from having two research analysts covering our Company to eight as of today. We are appreciative of the work that each of you have done and look forward to discussing our performance for many quarters to come.

In summary, our first quarter was steady and consistent operationally. We continue to make strides on the leasing and acquisition front. From a capital perspective we were able to opportunistically raise debt and equity capital that lowered our overall cost of capital and positioned us for strength over the long term.

That concludes my prepared remarks. I will now turn it back to Scott.

Thank you, Kellie.

I'd like to conclude by saying that we were encouraged by our financial performance in the first quarter. However, our focus in the coming quarters and for the remaining 2013 will continue to be on the following. One, the performance of our assets and our asset management platform. Two, we want to and are committed to maintaining strong and conservative balance sheet. Three, we are going to continue to focus on the increasing quality of our portfolio. And four, we want to acquire only those assets that both fit our acquisition criteria and are accretive to our NAV.

With that, I will open it up for questions.

(Operator Instructions)

James Milam, Sandler O'Neill.

My first question is -- and you touched on this a little bit, Kellie, but the cash balance now as you work your way through some acquisitions this year, how should we be thinking about future capital raises, whether it's the ATM or the line of credit or unsecured debt for funding purposes?

We've always said that we would use, if we have use of proceeds, that we would use an appropriate mix of debt and equity. So we're comfortable with the 40% level on debt, so I think we have the ability to use debt going forward, but depending on the use of proceeds we would certainly be using our ATM.

Okay. And you guys still feel pretty good about the $250 million target acquisitions for the year, given Scott's comments on the competition in the acquisition market now?

Well, I'll answer that. This is Scott. We are on pace. I would look at 2013 as the following. We had a great 2012 with about $300 million of acquisitions that I think are grade A from a quality perspective. We've told folks that we want to duplicate that going forward in 2013 and 2014. I think the first quarter actually duplicates that. I think that the two assets that we have bought, the asset we bought in December, the relationship that we have gotten over the last four years, we're on pace. We've found great acquisitions. We have great opportunities with some folks that we have had relationships with. So we're on pace for I think another very consistent replication of 2012. Having said that, also we think it allows us to be very selective in addition to that, because the relationships we have, we have an understanding of what we like to buy. We have an understanding of what they're building. We have an understanding of where they're located and that's good. So that's right down the middle of the fairway.

So now what we get to do -- this is something that is so fortunate for us as a Company -- to have put in our asset management platform now 85%, 87%, to have gotten what we think is a very good start into 2013 from a market perspective and an acquisition front, we can be very selective. We don't need to be the person out there or the Company out there that is being purely motivated by growth. We don't need to go after, won't go after blended assets that are stretched in value. Folks out there right now are putting things together and they put two good and three bad. And then try to get the valuation that's representative of the two better assets. We're not a buyer of that portfolio. We're a buyer of the individual assets or the two assets that are grade A quality, and so I'm very excited about 2013. So from a competitive perspective, we are seeing a lot of opportunities. I think we have a very good ability to execute consistent with 2012 and perhaps actually do better than that. So we're excited.

Okay. That's great. And then my last one and I'll yield to one of the seven other analyst that are behind me now. Just on the off-campus occupancy, it looks like that was the driver of the occupancy, the majority of the occupancy declined in the quarter. Scott you touched on Sun City and maybe some Atlanta issues going on there. I was just wondering if that's basically the driver of that and maybe you could help us think about what we should expect for that occupancy level through the rest of this year or maybe into next year as well?

I think it was a combination of two or three things. Number one, we did have about 3.5% of our portfolio rollover in the first quarter. And we wanted to focus, we continue to focus on quality tenant, credit tenant -- the amount of space that that tenant is taking. We started to see -- and I mentioned this last November -- I think early on for folks that we were seeing some increased activity. I think that's now been repeated by most folks. The next thing that we're seeing is larger spaces, and so we actually had an occurrence this last quarter which was unfortunate for us. We couldn't accommodate a space within our building that they wanted to expand. They wanted 20,000 square feet, we only had 10,000. That was a situation that we are seeing a little more of now. There are larger transactions in the marketplace. So first quarter for us I thought was very good. Same-store growth was good. I think we're going to see, over this next 2013, 100, 150 basis points of growth from an occupancy perspective. And you're going to see larger tenants sizes from us.

Really right now, if I look at the marketplace, I think folks that own great assets should be very particular about who's going into those assets, the size of the tenant in those assets, and the long-term relationship with those folks. Because we're also seeing national groups taking space in multiple sets of assets, for example in Dallas, the two assets that we bought in Dallas, there's a consistency of space. We expect that to continue. They expect that to continue. So I think we pick up 100, 150 basis points. I think we still focus on same-store growth and we again focus on quality of tenant. The sole practitioner is the gentleman that is being I think slowly making decisions about who he's going to align with, how he's going to align, and unfortunately he's probably not the best tenant in your building long term, because he's going to find the most pressure from a rent perspective.

Thank you. That's really helpful.

Todd Stender, Wells Fargo.

I don't know if I caught this, what was the cap rate on the Texas A&M MOB?

We had a blended rate for the two acquisitions of 7.1%. And I would say that either one of them plus or minus 10 basis points and you got to the average.

Is that about what you're expecting this year in that low sevens range?

I expect a combination of two things, Todd. I think again, I over emphasized and I think it's important to note that we do have certain relationships that we're going to continue to acquire with. One, it's a pipeline that's important to us, and two, it's an understanding and relationship. We are a dedicated owner of MOBs, we have an asset management platform in house, we like to sit down with folks and talk about that. So that's very positive and I think we get that extra 25 basis points because folks that do business for long term, they don't fight over the last 5 or 10 basis points, they're more concerned about who they are doing business with and how that's going to work out over the next three, five, seven years. I think 2013 looks to us to be in that range of 6.5% to 7.25%. And when you blend it I think hopefully will be in that 7% range or 6.75% range. So I think it's very good for us. I know that there are acquisitions and I think you actually had a MOB discussion last week that I had a chance to listen to, and there are some folks that are chasing cap rates in this MOB sector under 6%. And to me, that's folks late into the game from trying to put together a portfolio or folks that are one-off buyers who aren't trying to necessarily look for long-term synergy accumulation from their asset management platform from 5 or 10 year perspective, simply looking for yield in the short term.

That's helpful, Scott. Thank you. Just switching gears, to generate the 3% same-store NOI growth, will that likely be driven by expense control? Is this all really tied to internalizing property management? And will that breakout we saw in Q1 here where expenses declined by 2%, revenue up by about 1 percentage point, is that about the mix we'll see for the remainder of the year?

No, I think the mix will be less expense reductions that you'll actually see in the mix and more rent increases as we rollover stuff that is that three-, five-year stuff that's starting to rollover. I think we're very fortunate we've had the benefit here the last two quarters, three quarters of moving our in-house platform and getting the cost savings. We don't see the leasing savings right now. One thing that I'm going to get Kellie and Amanda to focus on from a reporting perspective is what leasing savings do we generate? 85% retention, and if our leasing folks do 50% of that without third-party brokers, that's a pretty significant number and that's nowhere to be seen from a P&L perspective. So that's an important savings that we're starting to generate and starting to see, so if I had to say I'd say it would be 60/40, 75/25 as we move through 2013.

Okay. And to stick on that last theme, the portfolio retention was high at 85%. What do you think it would have been had your portfolio still been at the 70% level? How much of an impact does internalizing property management have on retention?

I appreciate your compliment of the retention. Amanda's actually sitting here and I think we strive for 90%. She strives for 95%. We continue to strive to get that retention into the 90%s with our own platform. There's no reason, when we have a good asset located in a good place that our relationship of property management and leasing shouldn't keep that physician group or physician at that asset. They don't want to move. It disrupts their business, it disrupts their location, so we have a true home court advantage, so we would like to see another 5%, 7%, 8% in that retention as we move through the rest of this year. In housing I can't overemphasize what a difference it was two years ago, three years ago when we were using third-party compared to what it is today. We have weekly meetings, we get immediate interaction with our leasing folks, so I think that the retention, I think that our performance frankly 25%, 30%, 40% I think is in-house because we brought it in-house. I would compare that to the other reporting folks out there, and I think our 3.4% did very well from a comparison perspective. I think it reflects on our buildings, it reflects on how we're operating, and I think that the last two quarters is something that we want to continue to build on but do not think that the last two quarters are a fluke. We think that's what we should be expecting of our asset management.

Okay. Great. Thank you.

Dave Rodgers, Robert W Baird.

It's Matt Spencer here with Dave. So going along the lines of the ATM, with how much you raised in March and the leverage target metrics that you've outlined, would that imply around $80 million of acquisitions that are fairly far along in the process?

Well, I go back to my process. If you hit $300 million you need about $80 million a quarter or something like that. We're on pace. I feel very comfortable with 2013. We've said that for the last six months and there's nothing to say that that isn't exactly what we're looking at. We've also said that we want to make the right blend of equity and debt with those acquisitions. I think that at the end of the day, a company's going to be judged by their balance sheet. Things are frothy, and from a REIT perspective, every day you see the REITs continue to go up. I think that that's great but I also think that you need to make sure that you're prepared for fundamentals, and fundamentals are a conservative balance sheet, it's an investment-grade balance sheet, it's performance from an asset management perspective.

So yes, we think we're going to do 2013 like 2012. We've also said we're going to match it with the right amount of capital and we're only going to do it if folks want us to invest. And so we're going to continue to be prudent and disciplined. And the nice thing about the opportunity with our ATM was it was a chance to get additional investors in our stock. It really felt that after working for a year doing something unconventional by listing and not going out on a road show and not selling equity at a substantial discount, it was nice to see folks look at our assets, look at our Management team, and say that they would like to invest under the discipline that we've said that we will invest in. So we thought the first quarter was very good for us.

Great. Thanks for that color. Can you also talk about the difference in your underwriting for larger tenants versus smaller tenants? And how you think about term rental rates and leasing costs?

It's mixed. Everything comes with good and bad. The larger tenants, Amanda loves them, because A, they are very, they don't like to move. Larger tenants like to move even less than smaller tenants. Two, larger tenants come with a better credit -- personal guarantee is only as good as you go chase it. So a larger tenant, a physician group, we're seeing better size, we're seeing better credit. On the other hand -- and they're not as concerned about rate. They're more willing, they care more about the space, they care more about the synergies that it's bringing to their physician practice.

And now on the other side they want service, they want their asset maintained, they want their property management to be responsive, they want the leasing person to know exactly who they are and make sure that their physicians are attended to right. When we go to our assets, I always stop in and talk to people and say, how is it? You get the best information from the person sitting at the front desk. And so that's a blend, but we like the bigger asset, the bigger leases. I don't think that it necessarily -- that leverage and balance isn't there necessarily because again, they want to be there. It's a good rent. You've got annual bumps that are representative of the marketplace, and if you're bringing that intangible to it, they stay. And it's a lot easier managing 4 tenants in a 75,000 square foot building than 15.

Right. As I think about that, if that trend continues, could we think about a little bit higher rents, maybe a little bit of an increase in releasing spreads, but maybe a little bit higher TIs?

Well, I do think we are looking at a little higher rents. Amanda focuses every day on the leases that we look at early in the process so that we set the expectations between the tenant, because a lot of cases we're direct. And that makes it so much more important because you're not losing the message. Our guy is directly talking to the physician or the administrator of the physician group that wants to move in. Yes. We've also now started to charge for the additional TIs, which is something I don't want to overemphasize and I certainly want to go and broadcast it, but the physician groups if they're moving into 10,000, 15,000, 20,000 square feet, they get a market allowance and there's still additional dollars that they want to put in because they plan to be there 7, 10 years. We'll help them do that because we again think that that's good business for us.

Okay. Great. That's all for me, thanks.

Thank you.

Rich Anderson, BMO Capital Markets.

So Scott, when asked earlier in the call about success for 2013, you gravitated right to acquisition volumes of $300 million, and I'm curious, as a Company, what if you do zero for the rest of the year? Is that a measure of -- sometimes not doing something is as successful as doing something. I'm curious, how you feel about, do you feel a sense of urgency to grow the portfolio and that's why you went that way with measuring success for 2013?

Well, it's a very good point. I think we measure success by what we're buying. How we're buying it, does it fit the disciplines that we have talked about? If things don't work out and we bought zero, then I've always said if our portfolio is performing better than others, if our assets are great high-quality, that just improves the value for our shareholders. That's the bottom line. We're going to do things here that use the capital appropriately, improve NAV, and make great acquisitions that when someone goes out and we take them there, they walk away and they say, that was a good investment. So no, I don't think we're under any pressure. I think we're fortunate. Number one, we're $3 billion in size so we're not under this tremendous pressure to grow. We're not hugely overvalued in any context of the measure so I think it's just stick to our knitting. Do what we've said we're going to do for the last four quarters, and do it for the next four quarters and things will take care of themselves.

Okay. One of the things I highlighted when we initiated was the affiliated assets, and whether or not they truly are the opportunity that maybe you think they are. I guess my concern would be at lease expiration, whether the tenant leaves or not, they've certainly know that they have a very big say in the negotiating process, so I'm curious, what is your target for affiliated? I think it's 24% today or something around there. Does that number go down over time or do you really like that asset class?

Well, my answer to that is on campus, on campus, on campus, and then across the street, across the street. So I think if something is affiliated it does move down the step ladder of is that a great asset. Every asset is individual. If it's a critical asset to the healthcare system, if the healthcare system has the synergy and they require that from a physician services perspective, you can feel good about that. I don't want to say and make a generalization that all affiliated assets or half the affiliated assets are terrible. But from our perspective, we would like to see HTA as we continue to look at acquisitions and as we continue to redeploy non-core assets into core assets, we much more prefer the on campus or across the street asset class, and I know Amanda does. She certainly thinks that the asset management and the property management and leasing perspective of on campus is far superior.

You'll be selling in your dispositions that to the extent you start doing that will be more in the affiliated side?

Absolutely. I think if you had a definition, non-core would be not on campus or across the street, and then the second classification of non-core would be it's affiliated a mile or two away and we don't think it meets the definition that you and I just talked about.

Okay. And then, so you don't issue guidance. So that's also like HR, I guess. Wondering if that's something that you maybe would consider as you grow as a Company, to provide some insights into the future?

Well, I think I go back to your first question. We don't provide guidance. We're not going to provide guidance, because I think guidance puts companies in a position you just talked about. It requires them then to live up to or to make decisions that project out to compare to something that's down the road. As you said, if I don't find any acquisitions that fit my discipline and if it isn't accretive, if it doesn't work on NAV, if it's not great assets, then we wouldn't be buying. And so I'm not going to come up to the next quarter and define why it changed. I'm just going to tell you here's what we did, and here's why we did it. So we're going to continue to make decisions on a quarter-to-quarter basis for the long-term and not for simply because it's an annual guidance of some nature.

Fair enough. So let me ask the real question to that. Kellie, you mentioned the payout at 100%. I'm curious, is there any reason why that number would gravitate back up higher for any period of time, or do you see that number continuing to trend down from this point?

No. There's no reason it would go higher. I would expect that it would continue to go down over time as we continue to acquire, as we continue to get same-store growth in our portfolio, that should move down.

And do you all feel like -- the CapEx numbers don't sound like a whole lot. Is there any chance that you could see CapEx tick up and hence play a little bit of wiggle room with that payout number on an AFFO basis?

I think we as a Company -- Amanda again, and Kellie and Robert, they've been very focused on being conservative. I think the Management team has done a very good job of restricting or restraining their CEO from being very aggressive. And I think that's good. So I don't think we are concerned about the CapEx, because a lot of the conversation six months, nine months ago was exactly about that. Give us detail. And we've gone through a pretty exhaustive process internally, and we feel pretty comfortable with that.

Okay. Fair enough. Thank you.

Jeff Theiler, Green Street Advisors.

Just a quick one, on your disposition program. As you think about it, how big is your non-core portfolio? And if you had to put an average cap rate on what you would expect to realize upon that sale, where would that be?

I'm not going to be as specific as you would like, probably, but I would say that we look at our portfolio and think that there's $200 million of what I call non-core or assets that were acquired in a portfolio that really don't fit our on campus, across the street philosophy. And I think as we've said over the next 18 to 36 months we'll move through that. It might be sooner. If cap rates continue to go down in what I consider to be these other healthcare assets sectors -- I'll leave it at that, we need to take advantage of it, because we bought these three, four, five years ago early in our cycle as a Company at cap rates that were much higher back then. And people have determined that this stuff is more valuable, ours are performing well. So I think you'll see us do that, because it makes a lot of sense for us, as long as we can redeploy the proceeds, redeploy them into good assets, that's what we should be doing.

Okay. And lastly I don't know if you -- sorry if I missed this, but did you talk about the terms of the Texas A&M Health and Science Center lease?

The average term is about seven years on that facility. So we really like that acquisition. It's Texas A&M credit, it's for a lot of that facility. We think the healthcare campuses at the university campuses out there are an opportunity to expand the quote-unquote MOB asset class. And so we like that one and we hope that we continue to look in that direction for key relationships.

Okay. Great. Thanks very much.

Daniel Bernstein, Stifel.

On the operating margin, on the MOBs clearly benefiting from the moving in-house especially when I look over 1Q '12, 1Q '13, is there any seasonality when you think about for the remaining quarters? And then also from the assets that you moved in-house in the first quarter is there any additional margin improvement that we might expect for the second quarter? That wasn't pulled into 1Q?

Seasonality, we haven't seen a lot of seasonality. We certainly have seen political or economic seasonality. We saw a hesitation last August as we were moving through that process. Then it accelerated when people got some certainty. We've seen, -- we're very happy with the activity that we are seeing in 2013, which is consistent to where we were. I haven't seen the seasonality that you see in other sectors in real estate, and probably don't expect to see them, other than the fact that major healthcare systems tend to do things in their cycle. And that can be at the end of the year or the beginning of the year, whatever may be the case.

Margin, we're continuing to work on our margin improvement, but I think that we have room to continue that for a couple quarters. We've now got our property managers, we've got our folks in our regions who are looking at every asset from a BOMA perspective. And how do we compare from an expense perspective, and are we conveying that to the tenants, and are we looking at the right type of measures to allow them to generate the savings? Because again your building is only as good as the tenant thinks it is, and he thinks at it from a cost perspective. So we're focused on that. Atlanta is an example where we've brought it in-house, Arizona is another example where we're trying to really show savings. And we get some of that, we don't get all of it, because we actually pass it on to the tenants, and we make a big deal out that because they get the benefit under the lease structure. So I think a couple quarters Amanda is going to continue to focus on that. By 2014, we should be plus or minus where we're going to be and then we're going to just have to work hard to stay there probably.

Okay. And on the acquisition pipeline which you said now is as big as you've seen it, are the hospitals, now that they've gotten through electronic medical records or looking at their capital structure going into the Affordable Care Act, are they starting to now open up the process to go ahead and monetize some of the MOBs? I know it's different for each system and maybe even geographically, but are you seeing some trend there in terms of the amount of assets coming from the hospitals?

We have seen some opportunities based on prior relationships, which is good. We've seen a couple of the healthcare systems reach out and say we want to buy some stuff, and when we buy it, we want you guys to own it. We're looking for the physician or the physician group, and this would be a great way for us to expand that opportunity. I think that does continue. You've seen some larger portfolios out there that everyone has pretty much heard of and so forth. It will be interesting to see how those go because I think there's a limited amount of those. But there are from our understanding some larger portfolios from some healthcare systems that are getting ready to come to the marketplace. And there's some that are frankly not on the market, off market that are out there, so there's more activity than there was last year. And that's good as long as you buy right.

And are you looking to buy any assets from developers? Trying to think about whether development in the MOB space is picking up as well, and if that's going to be an opportunity for you? Maybe other REITs to buy assets direct from the developers?

Well, it is actually one of our -- both of those opportunities that we have bought in the first quarter came from takeouts. We didn't take the development risk, we didn't take the time period to get it developed. It was our takeout -- I expect those two relationships to actually expand significantly. Because they have opportunities and we've basically have got something that's work once or twice and it's going to work three or four more times. So for us, that's good, and I think that that's an opportunity for us. We don't develop. I've said all along that HTA needs to stick to exactly what it does, to see if investors want to invest in it. We're an MOB owner, we want to be on campus, adjacent to campus, we want a high-quality portfolio, and we want to manage our stuff and know the individual markets we're in through our Management teams. And so we like where we are. We like the fact that we don't do development. We like the fact that we are takeout. I don't see a tremendous amount of development starting. From what I've heard from other folks that have reported, I don't think they've reported a bunch of development. I do think though, that there is -- there always is development, but it now comes from the healthcare system who needs to take 40%, 50%, 60% of that new building. And they typically have their guy, because they've worked with their guy, and that's a big part of this.

Do you see yourselves having an advantage by not being a developer to get those assets? I would think a developer trying to sell to another developer? Might be the reach out there in the MOB space they develop, so do you want to sell to a competitor? I'm trying to think about whether you think you've gotten deals because you don't develop?

We have. We absolutely have. Now, guys who do the whole thing, they bring their story to the table, which is convincing in many cases, one-stop shop. But on the other side, any developer from a local or regional perspective, he wants to keep his business. And if we can bring a cost of capital to that relationship that is competitive, he can then be more competitive with his relationship. And so we are the natural opportunity if one wants to look at the bigger REITs. So I do think that this is a unique opportunity for us, and I don't think we want to be a developer, because then there are already folks that do that.

Okay. And one last question, given the value that shares of your stock that's gone up this year, is there any temptation to do some early conversion of the Class B shares, I think you might have an option to do that? Whether that's been discussed or not?

Our next shares unlock in June and I think that that's what everybody's anticipated. And we're -- for the first time I can tell you that I'm actually feeling better about that unlock because I think the unlock for us as a Company has been a constraint. It's constrained us because folks have tried to figure out what that's going to do and so forth and so forth. But I think this next third one is actually an opportunity to benefit the Company. So we're excited about that for the first time, and that's good. After that, our last one is December, and I think it would have to depend specifically on any events or something that would make us change what we want to do, because we were advised very strictly two years ago, and I think we got very good advice on this process when we listed our shares, which was be consistent. If nothing else, be consistent. And so we've tried to be consistent. And write down what we say and then do what we say. So I would imagine that we will stay consistent, and that folks can expect the last shares out in December and the next shares out in June, and plan accordingly.

Okay. That's good. That's all for me. Thank you very much.

Michael Mueller, JPMorgan.

Most of the things have been answered, but if we're looking at the 89.6% same-store occupancy at the end of the quarter, was wondering if you could talk a little bit about are you starting to see that recover a little bit in the second quarter? And where do you think you could end the year on that basis as well?

We are seeing the recovery in the occupancy. As I mentioned we lost a tenant because worst of all things, they needed too much space and they moved out on us. That's just -- so we have some larger deals, and I think that we feel very good about that. We think the occupancy is going to move back up where we thought it was going to be by 100, 150 basis points. We also think we can continue to manage our concessions, which fundamentally helps the value of the asset. If we can move rent, if we can reduce what we put into it as a Company, those are good fundamentals. So we're I think every month we are looking at how we're doing this and what the market is, and every two weeks, every week we get on the phone with the leasing folks, and we're managing our portfolio. We'd like to see it in the 92% range. And then move from there as we move into 2014.

Got it. Okay. And 92% range is on the same basis as the 89.6%?

As the 90.6% or something like that. Robert can clarify that, yes. We're looking for 100, 150 basis points over the next two, three, four quarters.

Got it. Okay, great. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Management for any closing remarks.

I just want to thank everyone for joining us. And we look forward to following up with anyone, and we look forward to the next call. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.