Healthcare Realty Trust Inc (HR) 2013 Q3 法說會逐字稿

Good morning, and welcome to the Heathcare Trust of America third quarter 2013 earnings conference call. All participants will be in listen-only mode. 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. Welcome to Heathcare Trust of America's third quarter earnings call. Joining me on the call today are Scott Peters, our President and Chief Executive Officer, and Kellie Pruitt, our Chief Financial Officer. We will be happy to take your questions at the conclusion of our prepared remarks.

Last night we filed our third 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 will make forward-looking statements. These forward-looking statements 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, they are not guarantees of future performance. Therefore our actual future results can be expected to materially differ from our expectations. For more a detailed description on some 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 Heathcare Trust of America.

Thank you Robert. Good morning everyone. We appreciate you joining our call today as we discuss Heathcare Trust of America's third quarter performance. Last night we released our financial results for our third quarter 2013. And we will discuss today we believe that our results reflect the steady and consistent performance of HTA's MLB portfolio, and the continuing impact from our national in-house leasing and property management platform. This quarter we again grew our same store operating performance by over 3%. This is the fourth consecutive quarter of over 3% same-store growth.

On the acquisition front, we acquired approximately $150 million of what we believe to be class A core critical medical office buildings in our key markets of Dallas, Pittsburgh, and Denver, as well as entering a new key market in south Florida. Finally, we continued our disciplined philosophy of maintaining a balance sheet that is investment grade, and maintains the financial flexibility that positions HTA for future earnings growth, regardless of any short term uncertainty on the capital markets.

Turning to events in Washington, the implementation of the Affordable Care Act continued this quarter, with the rollout of the Health Insurance Exchanges. Our view on this has been relatively consistent over the last year. We believe the first phase of the implementation will take a few years to complete. Certainly longer than originally planned. However, this will prove to be a good things for our tenants. The healthcare systems physicians and physician groups that generally move slowly, and could use the additional time to adapt.

Further, the Affordable Care Act has already start to do change the healthcare landscape, driving considerable integration and consolidation, and forcing healthcare into the most cost-efficient setting. As a result we believe that as an owner and operator with a dedicated in-house platform, we will be the beneficiary of the healthcare delivery changes over the next ten years. We are certainly starting to see it in our leasing.

At the end of the quarter, HTA operated a platform that had 13.6 million square feet, located in 27 states. The majority of the platform is located in 12 key markets. We have highlighted these markets in our portfolio supplement that we filed last night on our website. This includes meaningful statistics and information on the markets. We expect to continue to grow in other markets when opportunities present themselves. This is the case in Austin, Texas, where we currently have under contract two on campus assets for approximately $30 million, that are in the process of closing over the next month.

Looking at our overall portfolio performance year-to-date, there are several key points that stand out. First and foremost when evaluating our results, it is important it note that our results include 100% of our assets. We do not have buckets of development or assets in or out of stabilization, or assets being repositioned. Our numbers are quite straightforward. We are 91% occupied, and have grown occupancy by 40 basis points since the end of the first quarter. This increase is held by tenant retention of over 84% for the year, we are seeing a leasing pipeline that continues to grow, with increased interest from health systems, large physician groups, and healthcare educators.

This growth comes at the expense of a solo practitioner, who continues to either retire, sell, or get bought out by healthcare systems, or alternatively move to a lower cost of space away from campus. We like the macro trend of multi-tenanted buildings, with typical occupancy of 4,000 square feet or above. There are still remains pressure on the healthcare space as it relates to pricing. Tenants are extremely cost conscious, and concerned about the competitive rent, and additional expense costs associated with common area charges. These larger spaces are certainly more efficient for the physicians, and allow for greater shared overhead within their practices. Over 96% of our buildings are either on campus or affiliated with major health systems. 72% of the buildings are directly on campus.

We continue to believe the on campus location is critical to the long term value of our real estate, especially as the health systems look to improved integration between physician and hospital. Our view continues to be focused on MOBs on campus, and in markets with hospitals that are not in secondary locations, and that our asset management platform can bring value. Approximately 70% of our MOBs are multi-tenanted buildings, with average lease terms between five to seven years. These shorter leases provide with us the opportunity to react to changing market conditions, and allow us the ability to roll to market as the economy improves, and the Affordable Care Act is implemented.

Looking to 2014, we only have approximately 6% of our portfolio rolling. With only one expiring lease greater than 15,000 square feet. I think we are well positioned to increase occupancy from a leasing perspective. Approximately 56% of our annual base rent comes from credit rated tenants, primarily health systems, who continue to be the major source for new tenants. We are seeing the major source of new leasing from expansions of existing tenants, where healthcare systems which are requiring physician practices. The value of these tenants are the strong financial stability they bring to a significant portion of our rental income, and the ability for these new tenants to continue to expand and grow.

Within the quarter, we generated same store growth of 3.2%. This reflects both the quality of our assets, and the progress of a dedicated asset management platform in growing our leasing pipeline and improving operating efficiencies. We now have over 11.5 million square feet, or 86% of our portfolio. Our total base rent growth continues to be very good,showing an increase of 2% on a year-over-year basis. This steady growth was primarily driven by annual rent escalators, our ending same store occupancy was up 10 basis points year-over-year, however, this increase had minimal impact during the quarter, as a number of new space released but in the process of TI improvements and not yet occupied.

Tenant recoveries were down 9.9% year-over-year, as a result of our continued focus on lower operating expenditures. As a result, our same store total revenue grew 1.4%. Our operating expenses in the third quarter for our portfolio declined by approximately $600,000, through a reduction in management overhead, utilities, maintenance, and property taxes. HTA was able to capture the benefit from approximately $500,000 of this, with the remaining $100,000 going back to the tenants in the form of lower tenant recoveries. Between second and third quarter we have now saved our tenants almost $1 million in operating expenses.

As we discussed in depth in our last call, this focus on operating efficiencies is important to our tenants, and enables us to deepen our long term relationships with physicians and healthcare systems. Lower costs allow both higher rent and higher escalations. Looking forward to the next 12 to 18 months we continue to expect quarterly same store growth to range between 2.5% and 3.5%. This growth will come from a variety of sources, including our annual rent escalators of close to 2%, continued operating expense improvement, and from our occupancy growth which we should start to see drive NOI within the next few quarters.

Our leasing activity continues to remain strong compared to 6 to 12 months ago, with significant interest from larger tenants looking for 5,000, 10,000, 15,000 square feet of space. These are the healthcare systems large physician groups and healthcare educators that we believe are the major users of space going forward. The healthcare user is in the process of changing. Days of the sole practitioner and small group practices are behind us. In the third quarter we closed approximately 170,000 square feet of new and renewal leasing. Approximately 78,000 square feet of these leases were for new tenants. 6 of these leases were for tenant spaces from 5,000 to 15,000square feet in size. Our tenant retention continues to be excellent at 82% for the quarter.

In addition, releasing spreads were slightly positive. But we continue to focus our leasing teams on reducing leasing concessions, especially in highly-occupied MOBs. As a result of this activity, our lease occupancy increased 10 basis points, 91.4%,our highest rate in over three years. In addition, our near term leasing pipeline remains very robust. These new tenants are taking larger spaces, but these larger users take a bit longer to close their deal due to the additional levels of approval and execution.

Our fourth quarter leasing continues to be active with over 50,000 square feet of new leases already in hand, or in final lease negotiations as of today. This should continue to move our occupancy higher for year-end. Our focus on portfolio wide same store growth extends to our acquisition activity. Although the current economic conditions remain slow, at some point we expect the economy to accelerate its growth, or to see additional inflation.

As a result, we have increasingly turned our acquisition underwriting focus towards opportunities that allow us to increase our overall portfolio growth through occupancy gains, rents that roll up to market, and locations that allow higher annual rent escalators. We continue to use our rifle shot approach on an acquisition basis. Within the quarter, we acquired $147 million of high quality MOBs. That we believe are well positioned for the future of healthcare in their markets. These acquisitions are immediately accretive, and should build upon the same store growth inherent in our existing portfolio.

Since our last earnings call we announced two significant transactions, the first was a $28 million acquisition in a Dallas suburb of Frisco, with the Forest Park Medical Center. This is a very high quality asset that is located in an attractive market, just down the road from the new Dallas Cowboys Training Center. This is our third building acquired from the developers of Forest Park, and demonstrates our continuing ability to partner with developers and health systems.

The other significant transaction was our $63 million investment in the south Florida markets of Miami, West Palm Beach. In total we purchased six on campus MOBs, located on four healthcare system campuses. The portfolio totals approximately 420,000 square feet, and is highlighted by the Victor Farris Medical Office Building, a 153,000 square feet Class A building in West Palm Beach, Florida. It is attached to the tenant, Good Samaritan Medical Center. The portfolio also includes the Palmetto Medical Plaza, a 135,000 square feet Class A MOB that is attached to the Palmetto General Hospital in the Miami suburb. Palmetto General is one of the tenants healthcare's best performing hospitals. Overall the south Florida portfolio was 88% occupied at closing, with in place rental rates that we believe are positioned to grow over the next several years.

On top of these third quarter acquisitions, we also have commitments to acquire two medical office buildings in Austin, Texas, for approximately $3 million. Austin represents a new market for us, but one that we have been targeting given its strong employment growth, attractive demographics, and key healthcare system relationships in the area. One asset is less than one mile from the University of Texas campus. When these acquisitions close this quarter, we will have completed $272 million of acquisitions year-to-date which represents an expansion of almost 10% of our asset base for the year.

In total, our third quarter acquisition cap rate was between 7% and 7.5%. These cap rates reflect the majority of our acquisitions were sourced through off market deals that were privately negotiated. However, we continue to see a significant and growing interest in a medical office space from private and new institutional investors. These investors have identified the macro economic trail winds that this sector has, and aggressively targeting high profile deals.

As result we continue to see deals that have been completed in the low 6% cap rate range. Many of these were highly brokered transactions. With our history of acquisitions, industry relationship and regional operating platform, and no in-house development platform, we believe we will continue to be competitive in acquiring and pursuing relationships and opportunities with the right fundamental characteristics. We will certainly continue to evaluate each opportunity on its merits and from an accretive perspective, and we continue to see opportunities that make sense for our Company.

We believe that one of our advantages that our size allow us to grow at a significant rate, while still taking a rifle shot approach to acquisitions, as we have done over the last two years. We like the abilities talk about each and every one of our acquisitions, and the specific characteristics they bring to our portfolio. In fact, today we published a portfolio and acquisition book that does the very thing. At the Company, we are committed to match funding our acquisitions with current capital to best accomplish our economic underwriting and long term accretion. This also forces us to remain disciplined in our acquisitions to ensure that they are completed at pricing that is beneficial for our shareholders over the long term.

Given the uncertainty in the equity markets, we believe it has been prudent to raise equity when it has been available. As a newly listed company we have also been fortunate to be able to expand our investor base. We believe we have a balance sheet that is second to none in our sector, we ended the quarter with 30% leverage. We have almost no near term maturities to 2016, and have over $700 million of liquidity to utilize.

Finally, last night we also announced that the Board of Directors had elected to accelerate the conversion of our class B3 shares. This conversion will be effective as of the close of business on November 7. When we listed our shares on the New York Stock Exchange we split our shares into four classes, as many of you may recall, we did this based on input from our advisors, in order to provide a staged and disciplined rollout to the publicly traded markets. Basically to provide us with time to introduce HTA to new investors, and then demonstrate our consistency on the public stage.

At this time, this listing was a unique strategy. We utilized a one-time tender of $150 million to provide some stability to our first 45 days of trading. We needed a mechanism to ensure some stability for our original shareholders who invested so much in our Company. The staggered unlock helped provide that, as a result our Board has decide to do accelerate the unlock for three reasons, first our Company has now reported for six quarters as a public company, with what we believe is some consistency and discipline.

Second this unlock now puts the issue of liquidity in our stock behind us, it unlocks all $2.3 billion of original investors equity, and completes our listing. From management's perspective, we could not have to discuss this issue going forward, and have any intangible constraints impacting on our business plan. Third, we are now able to focus exclusively on growing our Company, allowing investors to focus completely on our operating fundamentals within our sector, and competing with our public company peers.

With that, I turn the call over to Kellie, who will discuss our financials in greater detail.

Thank you Scott. We are moving into the fourth quarter and 2014 with a very strong financial position, so I would like to start with three key points.

First, our balance sheet and liquidity continue to be in excellent shape, with our leverage moving from 37.6% debt to gross assetslast quarter, to 36.3% at the end of the third quarter. Second, we continue to have no maturities from a debt perspective through 2016. And third, our consistent portfolio performance continues to generate increased cash flow from quarter to quarter. In the first nine months, we generated an additional $4.7 million of cash flow.

As I look at our asset management platform, as we have mentioned, we continue to see improved leasing, better financial fundamentals, streamlining our operations, and generating improved efficiency of our assets. With that, I will first turn to our capital funding activities for the third quarter.

We funded third quarter investments of $147 million entirely with the equity from our ATM. We utilized the ATM to raise approximately $105 million in the third quarter with what we thought was a very good execution. We continue to execute on our philosophy of match funding our acquisitions, maintaining a strong balance sheet, and attracting institutional investors into our stock when appropriate.

As a result, in the third quarter, we reduced our leverage by over 100 basis points, again giving us the financial flexibility to both execute our acquisitions and grow earnings. On Friday, we filed a $300 million ATM program to replace the ATM program that was terminated. Our view is that this checks the box. Also, as we have done in the past prudently utilized when appropriate. From a management perspective, we continue to believe our balance sheet remains a key strength of our Company.

From a cash flow perspective, we ended the quarter with debt to EBITDA of 4.9 times, $82 million of cash, and an unused $650 million line of credit. All of these metrics are extremely competitive relative to our peers, especially given the stability of the medical office sector. We continue to view the stability of our rental income, the investment grade quality of our tenants, our low leverage, and think that 35% to 40% leverage is very appropriate for this asset class. As we continue to grow, we will appropriately move to those metrics.

For our third quarter, we reported normalized FFO of $0.16 per diluted share, this was equal to the year ago period primarily as a result of our higher overall share counts from our ATM activity. In the fourth quarter we look forward to having a full quarter impact from these acquisitions that closed late in the quarter. Normalized FAD was $0.14 per share in the quarter, an increase of 8% compared to the year ago period. Our payout ratio was right around 100%.

Our same store cash NOI growth was 3.2%, an increase of $1.6 million in cash flow. I would like to point out that we have enhanced our disclosure on page 12 of the supplement this quarter, to provide better transparency to the components of this growth, as Scott previously described. I am pleased that our tenant retention has remained consistent at 82% for the quarter. This further enhances our cash flow as TEI costs are significantly lower for renewals, and we can typically minimize or even eliminate the cost of leasing commissions. For the quarter, TEIs on renewals were around $0.89 per year of term, and average terms were five years. New leases averaged six years of term with TEIs coming in at $4.28 per year term.

Our G&A expense was $6 million for the quarter, down slightly from the second quarter. As we look to 2014, we continue to focus on a corporate infrastructure that is appropriate and efficient for a national platform that operates almost 90% of its assets. As a result, we expect our 2014 G&A to be flat to slightly lower than 2013, and fall in between the range of $24 million and $25 million.

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

Thank you Kellie. That concludes our prepared remarks, we will now open up for questions.

(Operator Instructions). Our first question comes from Jeff Theiler at Green Street Advisors.

Good morning. So looking at your investment grade and credit rated tenants, it seems like there was a little bit of a drop this quarter presumably from new acquisitions. Can you talk a little bit about your philosophy on this metric, are you less concerned with tenant risk than you were before, are you looking at it as a necessary trade-off to achieve higher rent bumps?How important are those metrics to you, and do you have targets for them?

I think that is a good question. I think it certainly has changed for us over the last three or four years, even in the last 12 months. I think the healthcare sector has really been the focus of what has changed our view on a mix. Originally, I would be very surprised to see as much credit rated tenant portion of our income as we did, we were up to about 56% or 57%. Going forward, I think that you are seeing the larger physician groups who are now combining, while they are not credit rated, they are much larger. They are taking larger space from us.

So I think the long term metric for us is that there is a combination, you are going to get probably better bumps, shorter lease term, which would be five or seven years, with a larger physician practice with 4,000, 5,000, 6,000 square feet, better growth compared to a longer term 10 or 12 year lease with a healthcare system that is looking for, that has investment grade credit that is looking for a flat, more bond-like transaction.

So I think our view is that we would like to see more growth. We would like to see the ability of our asset management program to be able to bring savings to tenants. So I think it drops it a little bit as we continue to grow, and I think you are correct in the fact that if you look at our acquisitions, certainly over the last 12 months, we are focusing on specific markets and specific underwriting fundamentals, that allow us to believe that we are going to be able to move rents up, and get escalations in that 2% and 2.5% range going forward.

Okay. Thank you. And then just quickly on the Florida acquisition, I know there this big movement to in house, all of the property management, but it looks like they will still continue to manage those properties. Can you talk about why that is, and how you thought about that, is that something that you will eventually try to bring in house later, or what is the long term plan?

Well, we have got a huge advantage and we have always said that, which is that we don't do development. And so, therefore, our opportunity to work with developers, and if you look at our acquisitions that we have done and actually acquisitions that we are seeing right now, quite a few of those, or I would say a significant portion of those, are with folks that are developers, and traditionally have what they believe are a vested interest in some continuality in that particular asset before they move on. With the [APLFHA] Waxman transaction, these folks have been in that market for 15 to 20 years. We are fortunate that we were able to do a transaction, they will manage it for a couple years which is good for them, because I think it brings us additional opportunities that we will get to work with them on acquiring assets that they are able to buy or develop. And then we will build our asset management program.

So from an investor perspective, I think it gives our investors, it gives our acquisition team and our acquisition, and our asset management team a win/win. So we don't have a problem working with someone for a couple of years. But ultimately, they don't want to be long term managers of the assets. They simply want to be able to continue their relationships, and utilize those things that they have gained over many, many years for new business

Okay. And given the estimate on what the potential future acquisition opportunity is with this group in that market?

Well, I don't want to put any number on something, because looking forward then everybody sort of gears that, and then compares that quarter to quarter to quarter. But I would say that our view of that relationship, it started, our first initial discussion has been over 1.5 years ago. And I think they are an extremely good developer, they have done a good job with these assets. These assets I think are second to none, and I look forward to folks going down to see these assets. So we obviously did a transaction with them, versus other folks in that marketplace, because the hope is that our relationship continues for the next five, six, seven, ten years. So yes, I would expect that we will do more with them, just like we have done more with Forest Park, just like we have done more with a couple of other folks that we are talking with today.

Okay. And sorry, one last thing on this. It says in your book that you were provided with preferential acquisition rights, are those right of first offer, or what is that?I'm sorry for the Florida--?

Most of the time what we do and I think pretty much what we have done in everything that we have done in this regard, is that it is a relationship. I mean you sit down and someone is selling you their asset, they have something vested in it. Our view is that, yes, it is great to be able to do this but we want to be able to do more with them, so we do get that opportunity to be able to get a first opportunity to buy things that they have coming up.

Okay. Thank you.

Our next question comes from Rich Anderson at BMO.

Hey good morning.

Good morning.

So I don't know. I want to get back to the lower, the intentionally declining exposure to credit rate tenants. It sounds a little bit, I am throwing you a softball here, but you are making a deal with the devil a little bit. So you take lesser credit, and you get more growth. And on top of that, your starting point cap rate is significantly higher than HR's at 7% to 7.5%. So you get a better cap rate, better bumps, and you lose some credit. Can you connect those dots for me, to tell me why we should be at least not a little bit nervous about something going wrong with that math on a go forward basis?

Well, first of all, I think that there are those dynamics when you look at any particular acquisition. And I think that one of the things that we wanted to do when we looked about, in the last year is we wanted to be able to balance our growth. Ultimately, at some point in time as everyone knows, there are going to be changes economically, and folks are going to look at us, and one of the complaints they had was that, gee whiz, it has got no growth to it. I think our asset management program, now four quarters in a row, over 3% seems to our growth occupancy moving up, I think we feel very good about those dynamics going forward.

If you look at the assets we buy, we have seen pretty much everything that has been on the marketplace. We haven't gone after some opportunities that have been what you just described, which are maybe with healthcare systems, or with a longer term lease with 1% escalator for 12 years in a secondary market, and you are paying a 6.5% or 6.25% cap rate, and by the way you have to buy a bunch of them, not just one or two. That is not really what we looked at. We want to be able to bring both security which is again I think 56% credit rated tenant is very good, we want to continue to be able to grow on a quarterly basis, like we have indicated our goal is 2.5%to 3.5%. And I think it is a good trade-off.

I think that the larger square feet that you are getting from the larger physician groups, and from the healthcare educators, they are better credit than we have ever seen in the healthcare sector before. The solo practitioner, or the person that is two or three doctors or physicians in it, we went through that transition both as a Company and as a sector, during the depression two or three years ago, where they were really struggling. And as I have said, those folks are moving off campus. If they are still in business, they're looking for the most truly efficient rent that they can pay. And we like our asset, key critical location on campus across the street, larger space uses, and frankly, our defaults have gone down significantly over the last two years, so I think it is a win/win/win.

Okay. You mentioned expectation of fee occupancy to start to lift to maybe a faster pace. Is that purely just the renewed or an increased interest in larger space usage, or is there more to it than that?

Well, I think there is more to it than this. But I will tell you this. We are seeing more, larger spaces than we have seen in eight years. I mean I have been doing this for this Company for eight years, and I have never seen the amount of large spaces that we are currently negotiating right now. Some of them won't happen, of course. Some have taken longer to get executed. But we are seeing occupancy gains. We have worked very hard at our local relationships with the physicians. It sounds, I think, maybe naive when we say it, but we communicated to folks that we are maintaining, or we are concerned about their cost to run the cost that we are passing on to them. These things are starting to take traction.

And we look at 2014 in three ways. One, I think our leasing occupancy moves up. I think our performance continues, and I think that the opportunity with our balance sheet now, positioned the way it is and the opportunities that we are seeing, we are very excited about the next 12 months.

Okay. And then when you mentioned also a relatively slow economy in terms of growth. So that is prompting you to be looking for more value add type of acquisitions. Did I get that right?

Well, I think when you say value add, we have one group of assets. We don't have any boxes. When you look at our financials, I hope that you find them very straightforward. So when I say value add, or when you say it, I say if something is 85% occupied, and we think that by management and by the wherewithal that we can bring to it, that we can move it to 95% over 12 to 18 months, that is great for us. I think that is exactly the type of growth that --

That is a great plan in any economy. Why is it necessarily associated with a slow economy, or did I put words in your mouth?

Yes. I think it is more of a transition from us, from a Company. We have been public now 16 months. We had been a non-traded REIT prior to that. We were working on making sure that we had stability, we had credit rated tenants, we had good rental revenue. Now we are blending it. Now that we are a public company, now that we moved ourselves down the road a bit, I think we can take a look and we have an asset management platform in place now, that is a big component of that. I think when you turn your leasing and your property management over to a third party, I don't think you get the same type of results. So I think we are just more confident right now, and I think that confidence is paying off in what we will see in our performance, and what we have done the last four quarters.

Okay. And then last question for me is Austin and Miami, new markets for you. I mean do you have, maybe you don't want to give specific markets, you can if you want. But going, looking forward two or three years, how many more additional markets might you think the Company will enter?

Well, I would say that we have been on the road a lot, certainlyI have been on the road a lot in the last six or seven weeks, in fact every week, and it has been specifically both in our leasing, visiting our offices in our major locations, and also meeting with folks and talking with acquisition opportunities, and looking at markets. I think we have looked at states and markets.

We really like Florida. The Affordable Care Act, if you go down to Florida, you will see that that is going to be a prime beneficiary of how that is, eventually the Affordable Care Act is moved forward. If look at Texas, which is another market, you go there and you look around. These are two assets we are buying in Austin. We worked in that Austin market for at least a year, been there four times, five times, Mark Engstrom and I, and now we have got the assets that we have been looking after, the relationship we have there it is not just one or two assets that we want there. There are a couple more in that location. Great growth in that city.

So we like certain markets, we like certain states, and we are going to continue to take advantage of that. So I do think that as we continue to grow, see opportunities, continue to have relationships with folks we buy from, we will expand into what I would say maybe if there are 12 now, over the next couple years there will be 14 or 15.

Okay. Great. Thank you.

Our next question comes from Todd Stender at Wells Fargo.

Hi. Thanks, and thanks for the additional disclosure in breaking out the rental revenues from tenant recoveries. That is helpful. Is that the right run rate, you think for top line growth call it the 2% range, and then about 3% NOI growth?

Yes. I do. We look at right now, and we have done somewhere, we think what does 2014 look like? I know that Kellie and Amanda and Robert are looking at our underlying operations and leasing pipeline, and how we are executing, I think we feel very comfortable with that. And I would like to always be able to say that we overperformed, but I think comfortable 3% is a nice number for us to certainly set as a baseline.

Do you think that is impacting cap rates, do you think that we are kind of at the bottom when it comes to cap rates, just based on this 2% to 3% growth profile, and how it is shaking out going forward?

Well, I am not sure that the MOB sector, I have always believed that it is very underinvested in. I think that historically, the last five or seven, eight years there hasn't been a lot of attention paid to the medical office building space. I think that has changed somewhat over the last couple of years. I would like to think that our entrance into the public market being a dedicated owner of MOBs has put more of a spotlight on it. But in reality, you are seeing far more interested investors who are looking for solid returns, some growth, in a sector that is very under invested and very fragmented. And so we are seeing the non-traded REITs are buying and they are buying in large bulks without pretty much any consideration to individual performance. You are seeing what we have seen is the financial folks, the funds come in and look for something that is longer term with lesser growth, but very strong credit fundamentals to it. And so I don't see this moving a lot over the next several years. What I do see is a continued desire for folks to own an asset class that has traditionally not been invested in, and can do very well with the macro economic trends coming into it

That is helpful, Scott, thanks. And I think the cap rate range you gave of 7% to 7.5%, was that for the third quarter deals?

Yes, it was.

It sounds a little on the higher side. Is that reflective of your pro forma expectations, or are those trailing results?

Those are our forward 12 on NOI.

Okay. That is helpful. And then Kellie, with the acceleration of the share conversion, any impact to earnings? I didn't know if there were any expenses associated with that?

No.

There shouldn't be any expenses associated with the acceleration.

Okay. So no impact to earnings because it got pulled forward?

We wouldn't expect to see any.

Okay. That is great. Thank you.

Thank you.

Our next question comes from Daniel Bernstein at Stifel.

Hi. Good morning.

Good morning.

I have a question I know it is not a large part of your portfolio, but I noticed that the off campus assets are about 82% occupied, versus near 92% for on campus and affiliated. Are there opportunities to improve that 4% a year portfolio, or reposition the assets, or possibly sell the assets as non core? I am just trying to understand what your strategy is for those assets there?

I think they start with the view that we prefer to be on campus and across the street. So if we go through our budgeting process, and we are doing that now as I am sure everyone is, and we look at an asset that is off campus, if it doesn't have a strong probability and a reasonable expectation that our leasing teams can move that occupancy up to 95%, or 93% over a 24-month period, then that asset becomes something that probably isn't something that we want to continue to have as long-term owned critical asset, and it would, and you will see us take advantage of the opportunities to sell those smaller-type assets, redeploy into what we think are better assets on campus that will generate longer-term value. So that is a consideration. And in fact the process that we go through right now is we look at the ones that aren't on campus first, because those are the ones that typically as we continue to see, they are the ones that have the struggle. You need to make sure that you are addressing the market, and they are far more competitive when it comes to leasing.

Were those assets ever historically higher in terms of occupancy than where they are now? Were they ever in the 90s, or were they always in the low-80s or mid-80s in occupancy?

No. I think what happens is I would say first of all, that more than likely if we went back and looked and I would say that they are probably in that 85% to 90% range. What happens when they are off campus at times is you have a key lessor, or a key tenant move, and so they move down the street, and maybe it is a larger tenant that is in the asset, and so therefore, you have got to go and go release the space, and sometimes it is into two spaces or three spaces, not one space. And that is again if it is core critical, they don't move on you. That group doesn't move and that keeps the momentum of that asset that you have longer term.

Off campus, we have gone through a process, and I think everybody has talked about it and it has been brought up, where an MOB is competing against an office building. And you don't want to do that. You want to be a unique provider of space to physicians, or to groups, physician groups that they can't move down to that office building. And so we certainly, our view is that on campus across the street is better than being in one or two other off campus

Okay. And then in terms of the competition for assets and what you are looking at buying, is there I think like Todd said before, you are doing 7% to 7.5% yield, I think Rich Anderson addressed it as well, is there something in the competitive environment that is forcing you maybe to look at some assets that the non-traded REITs or private equity is not competitively bidding on? I am just trying to understand. Do you have a little bit of dip in I guess the credit rating of the tenant? Are there other factors influencing you buying those type of assets, again maybe better assets or more on campus assets with better credit tenants, are being very aggressively bid ups, I am just trying to understand how the competitive environment is influencing what you are buying at this point?

I would say that the assets we bought nobody else looked at, and if they would have they would have looked at it, and they probably would have wanted the asset, we did not run into folks, our relationship in Florida was a one-on-one relationship. Our relationship in Texas was one-on-one relationship. We purposely avoided a couple of larger portfolios that traded in the 6.25% cap rate with far inferior assets , and in fact they were six or seven assets, and three of them were in suburbs of, that were a one-off hospital. So we think that, in fact, it is the opposite.

Again, if someone is wanting out of the business and wanting to sell an asset, they put it on the market, they find themselves a broker, and the broker goes to the three or four REITs that can pay the price, that go out and they try to sell it in bulk at the lowest price possible. We have not participated in those. We are thinking that we can continue to do 250, 350 a year. We can continue to buy assets that someone, you see that they are, what we think are great assets, and improve our portfolio, and not have to deal with the operating results after you buy them. Again, we are over 3% four quarters in a row. We are substantially over our competitive set from that performance, and we will set the bar and continue to say we think the bar is 3% on a quarterly basis. Somewhere between 2.5% and 3.5%. And it starts with what you buy.

Do you think the non-traded REITs and private equity have the ability to go after non-marketed relationship-driven transactions, or is that simply not their style, that is not what their bread and butter is going to be?

I think they are faced with a little bit of, I come from that sector. And I think that the amount of money they are raising requires them to put out significant dollars per transaction. They are kind of having to throw spaghetti against the wall, because the money is coming in. And I think that is a positive and a negative for them. Positive, they get to go out and buy lots of assets, and the negative is that they don't have an opportunity to selectively go through and say, what is it that I own, what can I buy.

And the second thing is, that folks who are selling, the folks that we are buying from want to know who is going to be the long term owner, and the long term relationship that is going to be talking with them over the next five or ten years. Folks in Florida, folks in Austin, folks in Forest Park, folks that we are talking to today. The non-traded REITs, it is going to be interesting to see how they move out of what they are, because they sell to a public REIT, do they list, who knows what they do. That is a very difficult discussion to have when you are talking to someone who has a vested interest in how relationships continue. Because it specifically impacts what they do. We go with these folks to their key relationships, and sit down and introduce ourselves as part of the process.

Okay. Okay. That is a good answer. That is all I have. I will jump off. Thank you.

Our next question comes from Dave Rodgers at Robert W. Baird.

Thank you, this is Matt here with Dave. Just one question from me. You have a pretty muted lease expiration schedule next year, as you mentioned in your prepared remarks. What percentage is related to do off campus occupancy, and what do you think your prospects are to continue to achieve that retention ratio of higher than 80%?

Well, I will have to get back to you on the portion of off campus. That was one question that we certainly didn't put on our list of 15 that we thought. But we will get back to you on that question. I think that the second part of your question is, I do think and we are looking in 2014 to continue to improve across the board both the off campus stuff, which is a smaller portion of our assets, but also the on campus stuff. The nice thing about it as we talked about in our prepared remarks, were that we are being more aggressive with our concessions on our assets that are far more, that are 90%, 95% occupied, 85%, 87% occupied, folks don't want to move. They are staying. And so we are going forward 12 months, we feel better about our asset management and leasing pipeline than we felt 12 months ago.

Great. That is all from me. Thanks.

Our next question comes from Collin Mings of Raymond James.

Hey good morning. A lot of my questions have already been addressed, but just kind of going back to the leasing spread, you noted that they were slightly positive during the quarter. Scott, can you put a little bit more color around those negotiations, and were there any markets in particular that it was hard to try to get any sort of rent bump?

We are seeing better leasing pipeline. Our leasing pipeline has never been as big as it is right now. We are seeing larger leases, which is also the complexity of negotiation. I think that everyone is still cost conscious as we have talked about. But I do think that the markets are getting stronger. We are seeing opportunities in markets that over the last 18 months we hadn't seen opportunities in. That is where we think we are going to see the big occupancy gains, or the occupancy gains that we are going to hope to see over the next 12 months. But, Arizona, Phoenix still continues to be in process. We owned some stuff at Sun City that most folks have seen, great location. As the economy improves, as they roll out the exchanges here in Arizona, as banter continues do expand, we think we will see some traction in Sun City. Atlanta is another market that we think is starting to see improvement. We are very happy with the performance that we got from our leasing team in Atlanta over the last 12 months. In fact, looking forward to the next 12 months, they brought something to us that we said wow, let's look at it one more time because this is good stuff. And so Atlanta has picked up. The East Coast has been good, and Florida is very strong. One of the reasons we like Florida so much is because we were down there, we spent a lot of time down there, and it seems to be that Florida has continued to expand from a physician perspective.

Okay. Well, just on that front, maybe can you talk a little bit more just about the south Florida assets only being 88% leased, and granted that is not going to be part of the in house leasing platform from the start, can you just talk about the opportunity there to move that higher, and where you see the opportunities there?

We see it in both cases. Again, when we did our transaction with these guys, this transaction is not a one-off transaction. We want a relationship with them. We think they do a great, will give us great opportunities. We give them some ability from a capital perspective that allows them to expand what they are doing. I think we get the 88%. I think over the next 24 months, we move that up to the 95% range. They think we move it up to the 95% range, we looked at the market from a rent perspective and said they are not over market. In fact, there are some leases that have been in place that maybe we can move up as they move over the next two or three years, so we got very excited about the assets, and the relationship in Florida, but we did spend, we passed on another opportunity that presented itself in Florida, because that didn't have the same economics from an asset by asset evaluation. And so we think that that is going to help us, help performance going forward.

Okay. And then just one last quick one, Scott. As far as kind of non-core assets that the non-MOBs as part of the portfolio, any updated thoughts as far as divesting those, and just the environment that you are seeing now, to maybe get rid of some of those assets?

We are continuing to work on that. We continue to see opportunities to do that, and I think six months ago, we said it would be over the next 12 to 18 months. We are on track. When we look at where we are, we have unlocked our shares, which I think is very important to us, because now we get that behind us. We can focus folks and hopefully folks focus on our performance, and focus specifically on the medical office building sector.

Second, now that we continue to have a strong capital balance sheet. We went back to the debt markets earlier in the year. We are positioned to be able to grow, regardless of any temporary uncertainty in the marketplace, and so we also then now have the opportunity probably to go ahead and dispose of as we said $50 million to $100 million as we move into 2014. And do it in what we think will be a very positive way.

Alright. Good luck in the rest of the year, Scott.

Thank you.

Our next question comes from Mike Mueller at JPMorgan.

Hi, I apologize if you addressed some of these earlier, but I have two quick ones. One, how much of a same store occupancy increase do you think you can see in 2014, and then secondly, on the topic of acquisitions, over the next year or so, what do you think the mix is going to be between stabilized, core-type acquisitions versus acquisitions where there is a significant vacancy component that you can try to ramp up?

Let's go from that question backwards. I think that from an acquisition perspective, over the next 12 months, I am excited about it. Again, based on things that we put in place in 2012, 2013, knock on wood so to speak, I think we will be able to continue to execute with the acquisition pace that we have demonstrated in the last couple years.

I think the mix is going to be even more intriguing, because as we have mentioned, if we have opportunities with our partners to get something that is 82%, 85%, 88% occupied, and we see it at market, we see an opportunity to move both occupancy and rents, we see the fact that our asset management leasing team can bring some value and we get some size in the market, that is good for us. I mean so we are excited about that, and we are continuing to evaluate the mix based on that type of decision making.

From an occupancy perspective, I think we will continue to see fourth quarter at positive from an occupancy perspective. I think that will continue in 2014. A lot of what we have seen in the last six months is going to start kicking in in 2014. The larger leases, the occupancy, the actual taking occupancy, getting some stuff signed in the fourth quarter, as we have said, we got 50,000 square feet right now. So we are looking at we think a good fourth quarter. So we feel good about the next 6 to 12 months.

Okay. I mean would you think in terms of the 2014 increase at least 100, I mean how do you think about it, like 200 basis points as a great increase, 100?

Let's put it if we get 91.5% to 92% by year-end, if we move it up to 92.5%, 93%, I think there is a blend there. Because I think investors are going to want us to maximize value. And we could move our occupancy up probably quicker if we were either third-party leasing, which basically gives it away in certain cases, or determine that we want to give away above market concessions. We are doing neither. We want to get value. We want to find the right tenant, because part of what healthcare is transitioning into, if you own a building, it is no longer just renting it up. It is who is renting it. Are they long term users, are they going to bring the ancillary users that keep your building occupied for the next ten years. Is the group a group that has got 15 or 20 folks in it, not 4 or 5 folks in it. Is it key for the healthcare system to have their patients being admitted, and do they have rights at the hospital. So we are actually looking at our assets, we are looking at our budgeting, we are looking at occupancy, we are looking at it from all three or four of those metrics, we are not just saying get occupancy, or get leasing, or so forth, we are actually doing an asset by asset evaluation of how to bring value over the next three years.

Okay. Great. Thank you.

At this time, we show no further questions. Would you like to make any closing remarks?

I thank everybody for joining us, and any follow-up questions of course, or any details, please don't hesitate to call Kellie or Robert or myself. Thank you.

The conference has now concluded, thank you for attending today's presentation. You may now disconnect.