Healthcare Realty Trust Inc (HR) 2013 Q4 法說會逐字稿

Good day, and welcome to the Healthcare Trust of America fourth-quarter 2013 earnings conference call and webcast.

(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, sir.

Thank you, and welcome to Healthcare Trust of America's fourth-quarter earnings call. We will be happy to take your questions at the conclusion of our prepared remarks.

This morning, we filed our fourth-quarter and year-end 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 that our assumptions are reasonable, they are not guarantees of future performance, therefore our actual future results could materially differ from our expectations. For a more 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 Healthcare Trust of America. Scott?

Thank you, Robert, and good morning. Welcome to Healthcare Trust of America's fourth-quarter and year-end 2013 earnings conference call. We appreciate you joining us today, and are happy to report on fourth-quarter results, and review the significant strides that HTA and the management team have made during 2013. In addition, please note that we also filed our fourth-quarter supplement today.

Joining me on the call today are Kellie Pruitt, our Chief Financial Officer, Amanda Houghton, our Executive Vice President of Asset Management, and Robert Milligan, our Senior Vice President of Corporate Finance.

This morning we reported our fourth-quarter earnings which were highlighted by what we thought was strong execution on many fronts, including a 6% increase in fourth-quarter normalized FFO moving to $0.70 per share, 3% same-store growth from our asset management platform, acquisitions of $156 million of on-campus MOB's, the final unlock of our shares from our listing in 2012, and a ratings upgrade from Moody's that will positively impact our interest expense and bottom line for 2014.

Entering 2013, we focused our business plan and management strategy on key goals and objectives that we believe were critical for positioning us for a consistent and disciplined 2013, and a strong 2014 for our shareholders. Let me take a minute to review these objectives and accomplishments.

As a dedicated owner of medical office buildings, we believe that it is imperative to have an in-house leasing and property management platform. This approach allows our team direct contact with our properties, tenants, and key healthcare participants. It also allows us to focus on the efficiency of our buildings through expense containment, generate strategic local market knowledge which is important for both leasing and acquisition opportunities, and establish important local developer relationships.

We started building our asset management program in 2010, and entered 2013 with 70% in-house or 8.8 million shares -- million square feet. During 2013, we were diligent and expanded the platform to over 85% in-house, or more than 12 million square feet. We feel that this platform has been instrumental in achieving five quarters of at least 3% same-store growth.

As mid-cap Company, we were committed to an acquisition philosophy of growing our Company through a disciplined rifle-shot approach, that focused on acquiring high-quality on-campus or across-the-street MOBs that fit our disciplined criteria. This philosophy, combined with our asset management approach and focus on partnering with local and regional relationships, allowed us to acquire almost $400 million of Class A medical office buildings in key markets in 2013. In the fourth quarter, we were able to acquire $156 million, mostly through seller-direct transactions.

Given our size, this rifle-shot approach allowed us to grow our portfolio by over 15% in 2013. In addition, we accomplished this growth without increasing leverage, and we are able to expand our presence in strong markets such as Austin, Dallas, Miami, Tampa, West Palm Beach and Pittsburgh.

Finally, we focused our attention on utilizing the capital markets in a timely manner for both debt and equity. In March, we completed our debut unsecured bond issuance, and during 2013 raised $245 million of equity at attractive pricing that was accretive to our acquisitions. We also completed unlocking the remaining shares from our listing in June and July, which increased our equity flow by over 50%.

From a macroeconomic perspective, the MOB sector's biggest influence has been and will be the rollout and implications of the Affordable Care Act. This process certainly does not impact the other healthcare sectors with the same type of significance. We view this as an extremely important factor in the future performance of on-campus MOB's over the next five to ten years.

Over the long-term, the combinations of the aging US population, the ACA's efficiency demands, higher demand for healthcare services and preventative care, strong healthcare employment growth, and the increased importance of medical office buildings and healthcare delivery will continue to create high levels of user demand for medical office buildings, particularly for core critical on-campus locations.

At the end of the quarter, HTA operated the platform of14.1 million square feet located in 27 states. The majority of the platform is located in key markets in which we expect to continue to grow and selectively expand. We target markets that are experiencing significant economic and population growth, and have demographics that will drive healthcare demand.

Over 96% of our portfolio is either on-campus or affiliated with leading health systems. 74% is directly on campus. We have grown the percentage of the portfolio that is located on-campus with our recent acquisitions, 92% of which were on-campus.

From a Company perspective, we will be focused on moving HTA's on-campus percentage to the 80% range over the coming 12 to 24 months. We believe that the on-campus multi-tenanted assets lease terms of five to seven years is a real estate that will garner the greatest returns in the future, especially as healthcare systems look to improve integration between physician and hospital.

An example is our the Largo acquisition, where the building quality and key on-campus location has allowed the major tenant, a 100 physician multi-specialty group to generate significant efficiencies and improve profitability, relative to other locations. This result in them looking at our property is a key part of their practice. These multi-tenanted assets allow us the flexibility of leverage to grow revenue, as demand increases and the economy improves.

Currently 68% of our assets are multi-tenanted. From a leasing perspective and same-store growth results, we see this type of tenant mix allowing us to move our current portfolios annual lease escalation from approximately 2% to a much better annual growth rate closer to 2.25% to 2.5% over the next two to three years, as our rents roll and our acquisition volumes continue.

Finally, a few important comments about our 2013 acquisitions, and what we are seeing in the marketplace. All of our acquisitions last year were affiliated with leading health care systems, with 92% of them located directly on or adjacent to healthcare campuses. Occupancy at closing for these properties was approximately 95%, and in-place lease escalation averaged over 2.5%.

95% of the total GLA of 1.5 million square feet acquired was multi-tenanted. Geographically, approximately 80% of MOBs were located in strong markets of Florida and Texas, and the vast majority of our acquisitions were sourced through our relationships with regional developers, and local healthcare real estate professionals.

The acquisition environment continues to be extremely competitive, as it has been for the last two or three years. The MOB sector has not seen any real movement in cap rate expectations from the sellers, relative to the type of deal being marketed. We are still seeing anywhere from the low 6%s to low 7%s.

Fortunately, we are not pressured from a growth expectations that view bidding on or having to acquire large portfolio brokered transactions to move our needle. Nor do we have large amounts of cash on hand that requires immediate use as we see in the non-traded REIT space. The MOB space is really a great sector for us to be positioned in, since both the typical size transaction, longer-term relationships involved, and the fact that it is traditional real estate are exactly what we do best

From a construction standpoint, there does not appear to be any significant pickup in projects underway, and those that are starting to seem to be driven by regional or local players with very direct relationships with the healthcare systems. Amanda will now discuss our asset management platform, and operating performance for our portfolio.

Thank you, Scott, and it is good to be on the call. I am pleased to announce another strong quarter delivered by our internal operations and leasing team. We ended the year on a very strong note, with our fifth consecutive quarter of same-store growth at 3% or greater. This included growth through a mix of increased revenue and improved operating efficiencies in our buildings.

Same-store occupancy for the year was up 20 basis points over 2012. The strength and consistency in our growth is a true testament of the depth of our operating platform, leasing platforms, and local employees, as well as the resiliency of assets we have together in key, critical locations on or around significant hospital campuses.

In 2013, we brought in-house over 3.2 million square feet, and had 85% of our portfolio managed in-house as of year-end. We now have property management offices with teams on the ground in each of our key markets, including Phoenix, Denver, Dallas, Houston, Indianapolis, Atlanta, Charleston, Orlando, Pittsburgh, Boston and as of this month, Albany.

HTA asset management team continues to focus on improving operational efficiencies and tenant satisfaction through its integrated platform of property management, engineering, construction management, and leasing services. Each component of our platform works hand-in-hand, a true continuum of care model is applied to tenants. This past year. HTA achieved industry high-retention and generated substantial expense savings with this model.

We expect to continue to bring savings to our tenants, as we further streamline our processes and invest in the training of our personnel. Through enforcing standard protocol such as bundling of building services to achieve bulk discounts for national pricing, and utilization of our in-house engineers to perform or repair preventative maintenance services previously done by third-parties, HTA continue to take an increasingly active role in managing the cost and quality of services at our buildings, fundamentally setting up the [parts] within our market.

Our leading activity continues to see positive momentum. The majority of our leasing demand stems from four types of users, hospital systems, large physician groups, national healthcare groups and healthcare educators. We are seeing these types of tenants generally take larger blocks of space with lease terms between five and seven years.

By example, over 60% of our new leasing pipeline consists of deals of 4,000 square feet and over. However, these deals also take more time to move through the lease negotiation and approval process.

We felt particular leasing strength this quarter in our Eastern region, with Raleigh, Albany and Orlando seeing positive momentum. We are also beginning to see increased activity in Tucson and Atlanta, which for the past 18 months have had relatively flat leasing markets. Phoenix and several smaller markets in the Midwest continue to be soft, relative to what we have seen in the rest of our portfolio, however we are confident in our long-term value of these properties and expect them to recover along with their respective markets.

We ended the year with total occupancy of 91.6%, an increase of 20 basis points from third-quarter, and up almost 50 basis points from year-end 2012. Our tenant retention for the year was a very strong 85%. Total leasing activity in the quarter included 66,000 square feet of new leasing, and 133,000 square feet of renewals, bringing our annual new leasing to 336,000 square feet and renewals to 1.1 million square feet.

Renewal spreads for the year continue to be lightly positive, up 1.6% on average. However, our concessions associated with these leases are down significantly. TIs for renewals were approximately $0.90 per square foot per year of term, down from over $1 in 2012.

TI for new leases were less than $4 per square foot year of term, down close to $5 in 2012. Abated rent similarly declined year-over-year, as we are providing fewer months free per year of term.

Our leasing and operations teams are focused on maximizing the long-term value and economics of our properties, attracting the right tenants who will succeed and expand in the changing healthcare marketplace, while balancing rate and concessions. One area that we continue to focus on during lease negotiations, is ensuring we have the appropriate rent escalators in place, with the average escalators on our executed leases in 2013 averaging north of 2.5%. With 91.6% of our portfolio CLA already contracted, these escalators constitute a large portion of our growth, and will continue to be a focus for our leasing teams.

Looking at the next three years, we have approximately 25% of our leases rolling, with approximately 8% rolling in 2014, and 7% rolling in 2015. As was the case in 2013, we have a disproportionate amount of our 2014 leases roll in the first quarter, which may cause a temporary decline in occupancy. However, we are confident in our pipeline and current outlook for retention, and anticipate that our 2014 annual occupancy will continue to move up.

Overall HTA staggered roll over is amongst the lowest of our peer group. We continue to monitor and manage this roll, as we view this as a key component of our ability to provide stable and consistent long-term growth.

I will now turn it over to Kellie.

Thank you, Amanda.

From a financial perspective, our fourth-quarter was once again consistent and without any surprises. Normalized FFO per diluted share was $0.17, an increase of over 6% compared to the fourth quarter of 2012. Normalized FFO increased 17% to $40 million, compared to the prior year.

It is important to note from a balance sheet perspective, we ended the quarter with lower leverage than we began the year, grew our investments by 15% or roughly $400 million, lowered our overall borrowing costs and functionally are positioned with more liquidity as we enter 2014. The increase in year-over-year normalized FFO was primarily due to our same-property NOI growth, and the $242 million of acquisitions completed in the first three quarters of the year.

Sequentially, normalized FFO increased 6% from $0.16 per share to $0.17 per share. This increase was primarily driven by the full period impact of the acquisitions acquired in the third quarter, the partial period impact of acquisitions completed in the fourth quarter, and slightly lower G&A expense.

For the full-year of 2013, normalized FFO increased 9.6% year-over-year to $148 million, from $135 million in 2012. On a diluted share basis, 2013 FFO increased to $0.64 or 5% from $0.61 in 2012. 2013 normalized FFO increased from last year, as we see the impacts from our same-store NOI results, as well as our investment activity in 2012 and 2013.

As we have discussed in past calls, we focused in 2013 on stabilizing our G&A expense as we moved to the public market, and away from a non-traded REIT in comparisons. In the fourth quarter G&A was $5.7 million, down slightly from the third quarter.

As we look to 2014, we expect our G&A to remain consistent, perhaps slightly lower than 2013, and fall in between a range of $24 million and $25 million. With the asset management platform built out, any additional infrastructure expense should be minimal.

Looking at or $400 million of investments in 2013, we funded these acquisitions with a good mix of equity and debt, 60/40, which is consistent from our long-term capital structure plan. We utilized our ATM to raise approximately $245 million at an average price of $11.22 per share.

We also worked hard last year to expand our shareholder base, increase our REIT [share] coverage, and as mentioned build our relationships with fixed income investors. In the fourth quarter we acquired $156 million of medical office building, with $147 million of these closing very late in the quarter.

We funded these acquisitions by fully investing our excess cash at the end of the third quarter, $12 million of equity from our ATM raised in the first few weeks of the quarter, and borrowing from our line of credit. Given the timing of acquisitions and the Moody's upgrade late in the quarter, we expect the earnings impact to be truly felt in 2014.

As Scott mentioned, we entered the public debt market in the first quarter at an opportunistic time, executing on at $300 million ten year 3.7% bond issuance. The bond proceeds were used to repay shorter-term secured debt, allowing us to reduce our secured debt ratio below 15%, and lengthen our overall maturities to over five years on average, both of which are consistent with our continued philosophy of strengthening our credit profile.

We ended the year with excellent credit metrics, with debt to unappreciated assets of 38%, and debt to pro forma EBITDA of 5.4 times, lower than where we ended 2012 despite growing externally by more than 15%. In addition, we had over $600 million of liquidity, through available cash and our line of credit.

Based upon the many positive steps we took on our balance sheet in 2013, Moody's upgraded our credit bringing to Baa2 in December. Not only should this lower our cost of capital for future, but it also results in over $2.5 million in annual savings as a result of the pricing structure on our $455 million in bank term loans.

We began 2014 with an active focus on our balance sheet. The first week of January, we refinanced our existing $300 million term loan. The new term loan features 35 basis points lower pricing and extend maturities by two years. We appreciate the continued support from our banking partners.

With this transaction, we have very manageable maturity levels in the next three years. We have less than $10 million maturing in 2014, $74 million maturing in 2015, and $178 million maturing in 2016.

A couple of housekeeping items to note. In November, we filed a new $300 million ATM program. This ATM has gone unused since then. In the coming weeks, we plan to file an updated ATM agreement that simply serves to add additional banks that we view as long-term partners.

Finally, many of our shareholders have received a notice of a special shareholder meeting that will be held March 10. For our special meeting and the proposals set forth in our special meeting proxy, our goal is to align our corporate governance to comply with the standards of our most well-regarded peers. Therefore, promptly upon a favorable stockholder vote, and in advance of our Annual Meeting, we will transition from a majority of shares present voting standard and Director election to a majority of votes cast, standard and uncontested elections, and a plurality standard in contested elections.

The existing standard has the effect of allowing broker non-votes and abstentions to be a vote against a Director nominee, and removed from the charter, the massive REIT guidelines applicable to non-traded REITs, and not customarily applicable to New York Stock Exchange listed REITs. As is the case with our peers, we will continue to be subject to the rules of the SEC, NYSE and Maryland's general corporate law. We encourage our stockholders to vote on these matters.

I will now turn it back to Scott.

Thank you, Kellie.

Looking at 2014 from a management perspective, we will focus on a couple of key items, continue to benefit from our internal management platform with same-store growth in the range of 2.5% to 3.5%, improve our portfolio of high-quality acquisitions consistent with our expectations of growing our portfolio by a net10% on an annual basis, begin a program to recycle non-core or low growth assets, and also ensure that HTA maintains a strong investment grade balance sheet.

I would like to thank those investors and analysts who took the time to look at some of our assets over the last two months. We have had four or five separate groups of investors and analysts join Robert Milligan on assets tours of our properties in Florida and the East Coast, looking at both our new acquisitions and assets that we have had in our portfolio for some time. We appreciate the time they took to diligence our Company, and get a better sense for our investment criteria.

That concludes our remarks. I will now turn it, and open it up for questions.

(Operator Instructions)

And our first question will come from Dan Bernstein of Stifel.

Hello. I guess, it is good morning for you, good afternoon for me.

I guess, the only real question I have is I want to understand the difference between the low 6% cap rate MOBs you're looking at and the low 7% cap rate? I mean, is it on-campus versus off location? I just want to understand the difference in the quality, and what goes into that difference?

Yes. What we have seen, as I have mentioned, certainly the last two or three years, things have gotten more and more competitive. Different folks are getting more interested in the space; and certainly, that is a positive and a negative from an investment perspective.

But as we have looked at where we want to move our Company over the next three to five years, it is truly to be a unique owner of what we think are Class A/Class B medical office buildings on campus/across the street.

Now, we have refined that a little bit because we think that the multi-tenanted building, typical maybe it is 75,000 to 100,000 square feet, it has got some healthcare system use, maybe 30%, 40%. It has got some very key larger uses that are in there; and then it is mixed up with five, six, seven, eight, nine type of smaller practices. Great synergy.

That space occupied, it allows Amanda, as we have talked about, another focus because of what we want to invest in. We think annual escalators from the MOB space should be closer to 3% on an annual basis than it is 2%. So we look at that.

We want to make sure that there has been in place an expectation from tenants because of the key location of the building, that they are acceptable with that 2.5% 3% same-store growth. We think that those types of assets are going to get the benefit as the economy recovers.

Three miles from the hospital campus is still three miles away. And so we have refined that criteria. So those are the things that we look at.

Now, back to your low 6%. I think there are some folks that just need to put money out, and are far less concerned about long-term performance. And we don't participate in those auctions.

We don't look probably at the larger portfolios because if you are getting a $1 billion portfolio, you are getting it in many different states. You are normally getting it in many different locations. And are you getting 80%, 90% 100% great assets? Probably not.

So we like the rifle shot approach. We like the relationships that Mark Engstrom has developed, and we have developed as an asset management team and feel very comfortable with. What we have done the last two years, we think we can duplicate in 2014. And in fact, with Amanda's asset management program starting to really hit on all cylinders, we are excited.

Okay.

I guess, on the same note, you seem to be very focused on specific geographies, particularly in Florida lately.

What goes into making good geography, a good state to invest in? And aside from Florida, where else do you find attractive right now?

Well, we visited Florida about a year and a half ago. There were some portfolios that were available. In fact, we ended up not actually participating in the opportunity to acquire those; but we like Florida.

If you look at the Affordable Care Act and if you look at the amount of folks that are going to be included in it, if you look at the type of physicians, there are still many physicians there in Florida, West Palm Beach and so forth, that make up that mix.

And so, you have got great synergies. That is the thing we found when we were down there which attracted us to put almost $150 million, $200 million down there in the latter half of 2013. We think the long-term benefits for that market are very good.

We like Texas. I mean, everybody likes Texas. But we like the fact that Forest Park and our relationship with them allowed us what we thought was a very good start with their three investments. And so, we just bought two assets in Austin.

One of them is half a mile away from the University on-campus. We have got a couple other opportunities.

Raleigh --we like Raleigh because the triangle there has a lot of growth. So we are looking for markets where the healthcare systems are strong, where the growth from a patient perspective is growing.

And then you want to make sure that the physicians, the physician groups, the healthcare systems are moving forward with the Affordable Care Act and are putting their locations where you are actually buying the assets.

One last quick question.

Do you have a same-store NOI growth expectation for 2014? I am not sure if you want to give out a number or not, but do you have an expectation for what that growth should be?

Yes. Amanda did mention -- I think we are very comfortable with 2.5% to 3.5%. Starting 18 months ago, we have always said that same-store growth in the MOB sector should be 2% to 3%. All the acquisitions that we acquired in 2013 had escalators north of 2.5%.

That is one of the criteria that we look at. We don't necessarily think that low-growth assets with escalators that are flat or 1% are where the future is for a company our size.

So we like 2.5% to 3.5%, and we are seeing some tailwinds and some trends that continue to beneficial.

That is it. That's all for me. Thank you very much.

Thank you.

And our next question comes from Rich Anderson, Managing Director with BMO Capital Markets.

I am Director, how about that?

Wow.

So you mentioned a 10% increase in the portfolio net. What does that imply from a disposition standpoint this year, do you think?

I'd like to think that we are somewhere going to be in that $100 million to $200 million range.

The market, as we have talked about still is very competitive. It would allow us to move out of some non-core assets in markets that we aren't going to be able to get the synergies with the healthcare systems or with the relationships we have.

I think that if we can get, as we have said net 10%, dispose of a $100 million/$200 million, it will make our portfolio moving into 2015 better. Our performance will show those improvements, and I think that is the next step for us, moving into the second full year being a public Company.

Okay. And then on the same-store outlook, you always mentioned the 3% and better number, it is my understanding -- and I think we spoke about this when we last saw each other -- about same-store in 2013 benefiting from a fair amount of cost savings.

Assuming that you are not going to get as much out of that bucket for 2014, how do you compensate for that and still able to make that kind of 3% threshold?

I will turn that over to Amanda, let her talk through that.

Sure. Hello, Rich.

2012 was an active year for our in-housing. We in-housed 5 million square feet if you recall, so quite a bit of expense savings as we moved that into our in-house platform.

Much of the savings sort of culminated in the fourth quarter, and that is kind of that larger growth that you saw in the fourth quarter of 2012, as compared to the fourth quarter this year.

Going forward, as Scott mentioned, we are targeting to be in that 2.5%-3.5% growth range. Expense savings, whereas they've historically kind of constituted 50 to 75 basis points of our growth, we expect them to moderate more towards the 25 basis points of growth.

And we expect that to be offset by the annual increases that we are now seeing, moving from 2% on average to 2.25%-2.5% on average, occupancy growth that we are now seeing, and positive leasing spreads that have started to definitely come to fruition.

So how are you getting that increase in your escalators? Is it just the market is getting better, or you are buying better or some combination of the two?

Because that is a significant increase from 2% to 2.5% in the span of the year; isn't it?

Well, let me start; and then I will let Amanda add anything.

Rich, I think it starts with assets. We have been very particular, and I think that over the last 18 months or the last three, four years, it has been very beneficial to have people see the assets that we've picked.

We have been able to rifle shot approach, which is from the larger bigger portfolios. The economy has gotten bigger, better; there is no doubt about it.

2010, 2011, physicians, they were hit 10%, 15% by just the down economy. That has gotten a little better.

But fundamentally, if you look at some of the benefits we have been able to drive to them, it is some of these cost savings So it is a three- or four-packaged opportunity. But it starts, I think, number one, with what you buy; and number two, that you manage it yourself.

Yes, and I would agree with that.

And to just a kind of add a little bit of color to that, for most of the tenants that we have had in place at least for the last three or four years, they have seen significant expense reductions. And when they are looking at their rates and what they are paying, it is not just base rent that they are looking at.

They are looking at the whole package, which includes operating expenses. When we have been able to bring savings to them of the magnitude that we have, the 3% annual escalator isn't as large of a deal as you might think it is.

Even markets that have historically been 1%, primarily up in the Northeast, we have been able to get 3% because of what we are doing on expense side.

And just one final thing that I would add is that the physician groups, there has been a change with the Affordable Care Act. Where now that four years/five years ago, we were dealing with far greater amounts of one or two physicians.

Now the physician groups -- Amanda mentioned that 60% of our new leasing is 4,000 square feet or better. That is a group of 10 or 15. Their P&L is better; their synergies are better.

They are far less concerned or the decision-maker is not 2% or 3%. It is where I am located, good service, consistency in costs; I will take the 3%.

Okay.

And then, last question, just if I can just go back to the external growth story. You mentioned $100 million to $200 million range of disposition.

Would that satisfy your needs for equity to pursue this growth platform? Or do you think that suggests that -- or at least hopefully the market will cooperate and you will be able to tap the equity markets? Or do you not need that to get 10% bigger -- to use that number in 2014?

Well, I think we are very fortunate. We weren't as active perhaps as other folks in 2013.

Kellie mentioned that we actually lowered our leverage and took advantage of raising some equity at a time when we thought it was beneficial. But even more than the fact that it was beneficial, it allowed us to get some other investors in our stock that we greatly appreciated their support.

So if you look at our balance sheet and if you look at the fact that we can acquire $200 million, $300 million, we don't really need to move to the equity markets. That would just bring our leverage back in line with our peers.

So we will be very opportunistic from an acquisition perspective. We will make sure we recycle it at what we think are very attractive cap rates when we sell. because I think we have the opportunity to do that since we bought it five, six, seven years ago in most of these cases.

And then, we have a chance to really reward shareholders moving into 2014.

Perfect -- (Multiple Speakers).

Sorry, this is Kellie. I would just add to that at 30% debt to unappreciated assets, we are significantly lower than our peers. I think most of our peers are around 45%. And given the stability of the MOB asset class, I mean, I think we are in a very good position from a balance sheet perspective.

So re- upping the ATM -- if that becomes a reasonable option, then you go for it, and it is there for you. But right now, it is not really immediate consideration. Is that a fair way to think about it?

Yes. I would say, I -- one, it is not an immediate consideration. Two, when we do we refile the ATM, it's more to reward some folks, bankers, that we want to see help us over the next three, four years and have helped us over the last two or three years.

And so it is check the box and do what our peers have done. But fundamentally, we are very aware of the fact that equity is very precious.

Okay. Thank you very much.

And next we have Todd Stender of Wells Fargo. Mr. Stender, do you have your phone on mute by chance?

I sure did. Thank you for reminding me. (Laughter).

That was a great question, and I will be glad to answer that. (Laughter).

Good answer. Okay, let's try this again.

Kellie, back to you leverage question. Your leverage is down. It is below the peer group. Just thinking about where can that go?

It can still remain, you have plenty wiggle room to remain below the peer group. Just kind of thinking, where could it go, and kind of how does your Board think about that?

Yes. I mean, again as I have said, with a stable asset class like MOBs, I think we can sustain higher levels of leverage. But having said that, we have always had a desire to remain very conservatively leveraged.

And so, longer-term, we intend to really finance acquisitions more at a 40% of debt level.

Okay, and the Board -- has the Board mandated to keep it below the peer group average, or is there any way to quantify that?

Rich, the Board has never really required a mandate. We are by nature -- historically if you look at us, way back when we were a non-traded REIT, when we went to the process, we have always kept our leverage low.

And I know anyone that anyone who has talked to me specifically in person, I have always said that the worst way to run a Company is with leverage that is not conservative. So we will manage our balance sheet conservatively.

We will keep the leverage, which I will always consider to be probably at peer level or below peer level. And I think that is the best way to reward shareholders over the longer term.

Okay. That's helpful, thanks.

And Amanda, thanks for your comments on the rent escalators. Just to get a little more color and insight on some of your new larger tenants, are they more comfortable signing leases closer to five years on average; or will they go further out?

I am just seeing if there is a -- does the size of the tenant have a correlation with how long they want to secure their space needs?

It is typically five to seven years is what we are seeing now with the larger leases that are in our pipeline.

Okay. That's helpful.

And then just finally, Scott, just kind of get the beyond-campus footprint up to the 80% range, and you are going to do some asset sales,. What are you teeing up for sales this year?

Is it going to be any of the off-campus stuff you have? Or are you going to start to look outside of that at some of the ancillary properties you have?

I think it's both. I think it will be off-campus stuff. It will be some markets where we have an asset or two assets and can't get the synergy that we might want or we don't like the market perhaps. It came with the portfolio as a one-off when they were six or seven other assets.

I think that is one of the things that we have a desire to do. Over three to five years from now, we would like to be that 80% to 85% where -- you know where our assets are. It has been very selectively combed through, so that we remove those assets that aren't core, the ones that aren't on-campus or across the street.

And this will be a great opportunity for us to do that. It is another opportunity for the investment place to see our execution.

We are very proud of what we executed in 2013. We met with a bunch of folks early -- end of 2012/early 2013, set ourselves out, and said we wanted to do four or five things. I think we have accomplished those.

And one of the things we did not accomplish was to begin the recycle process and have people say -- Okay, they have done that, and how have they done that, and what are the spreads that they have used, and we have seen it.

So I am looking forward to be able to start the process in 2014.

Do you think we will see a little more on the front end in 2014 as far as asset sales, or any color on the timing of those sales?

I think you will start seeing those in the mid-part of the year.

We are currently considering several discussions, having discussions. But I think the time for us will be second/third quarter and then as we move through the final part of the year.

Okay. Thank you.

And the next question will come from Jeff Theiler of Green Street Advisors.

Good morning. Just one quick follow-up on the dispositions.

I believe you said you are forecasting about $100 million to $200 million in 2014. How much of additional disposition volume is behind that, and what are the estimated yields on your dispositions?

Well, I think a total amount -- if you say that we are $3 billion, and we say that is the invested amount, I think that there is probably 10% of our portfolio that when we look through it and we've looked through it that says, okay, this is not our core stuff.

It doesn't fit within Amanda's Asset Management program. It doesn't have the ability to probably get the appropriate growth rates from escalator perspective.

So I think the number is $300 million, plus or minus. So I think over the next couple years, you will see us do that.

We bought at a very favorable time. We bought 2008, 2009, 2010. That is most of the stuff that I am talking about, frankly.

And so I think we were in a very good position. Where cap rates are today, with an intense desire for some folks to put money out, I think it is a good time for us to do that.

Any estimate on what the average cap rate might be on the dispositions?

It is really going to depend on the type of asset. And so I think as we go through this process, especially as we move to the second or third quarter, as we do this, we will certainly give you some clarity on where we have seen or what those transactions have happened.

Obviously, we are going to try to do it at the best price we can.

Okay. Thank you.

And next we have a question from Craig Kucera of Wunderlich Securities.

Hello, Scott. You mentioned that you are seeing more value in the multi-tenant properties going forward.

Can you talk about sort of the rent differentials that you are able to achieve? Do you maybe have more pricing power with some of the smaller tenants that might allow you to have a greater overall escalation going forward on the asset overall?

Well, I think that what we look at is that right now, if you get an investment grade tenant, long-term lease with a large healthcare system, you need to be very careful that, one, the MOB is really critically located to the healthcare campus.

Because when that lease comes up, you've got that gorilla and ant type of thing going; and you want to make sure that your value to their operations is critical. So we are being very, very specific.

And there have been some portfolios that went out last year where there was some assets like that, and we actually went and visited them all. And they were in secondary markets and you would have to ask yourself -- What is the MOB going to do when in fact that lease is up 5 years, 7 years from now in the middle of a 12-year term?

We have avoided that. So we want to make sure that it is the right synergy for us.

I will let Amanda kind of talk about whether she thinks there is pricing pressure between smaller tenants, or what we call the physician groups. Because again, the long-term, triple-net lease healthcare investment grade tenant, that is being bid down, I think quite low from where it historically has been over the last four years.

With respect to the size of the tenant, I mean we haven't seen a huge differential on the ability to achieve our market rates or get the escalators in place that we need with a smaller physician and physician group versus the larger health system.

Again, going back to what Scott indicated, it really is a factor of, do you need to be at this building? Do you need to be specifically with these physicians and with this hospital system?

And ultimately, the rent is such a small component of the overall expenses for these groups, that we are able to achieve market rates either way.

Right. So it doesn't some like then you are moving to sort of like a retail model, where you have the anchor that is driving this space? It sounds like it is really a different situation?

90% of the time, you are right.

I think the one exception for that is that there are a couple of practices within the healthcare sector that are getting very, very important. Primary care -- fortunately we don't have a lot of off-campus properties; but we actually had an off-campus property where a primary care group was looking to locate.

We went after that pretty hard. Amanda gets on the phone, and again we pitch the cost savings. We pitch the asset quality. We pitch the location.

But there are a couple types of groups that are groups within a healthcare sector that you want to retain or generate the synergy for other ancillary physician groups to be part of.

Got it. Great. I appreciate it.

And the next question is from Collin Mings of Raymond James.

Good morning. A couple quick questions for you.

I might have missed this, but did you provide where you see kind of occupancy ending 2014? I know you said that you expected it to tick down here in 1Q, but did you kind of give a year-end type goal?

I will let Amanda give you her thoughts on where we get to by 2014.

Sure. Well, this year, as you know, we ended 91 ticks up 50 basis points from 2012. Given our leasing pipeline, the deals that we are seeing right now, I think definitely another 40-50 basis points is achievable.

We do have quite a few large leases, as we have indicated before; and the timing is a little difficult to peg. But ultimately, I think the 40 to 50 basis points is a good number to use.

I think it is conservative and achievable, and that is where we want to always set the target, and then overachieve.

Okay. So by year-end, something with a 92 in front of it sounds very reasonable?

Yes. We need to do that because obviously our longer-term goal is higher occupancy, in the 94%, 95% range. And that is a component of making sure we have the right assets, having the tailwinds continue from a leasing perspective. And that is longer-term -- next two, three years is where we want to end that up.

Okay. Well, that actually that kind of leads into my next question, Scott.

I know that you have talked about the timing process for some of the larger tenants. But just more broadly, I mean as you are having either the renewal discussions or going after new tenants, what are really the biggest pushbacks you are hearing right now to tenants wanting to sign a lease with you guys?

I think when we get it in our pipeline, our ability to close it has significantly improved over the last year and a half; and that is important.

I think it is a combination of some things that Amanda has been doing, and she can add some color to it.

But with our own leasing teams, we are getting a much better feedback as to: Is it a real group that is looking to relocate? Are they window-shopping and not really looking for an asset? Are we doing a better job of why our assets is a good location for that group? And then, are we following through?

I think, as in anything else, you want to touch that person as often as possible without being obnoxious because it is important to them. Speed of execution is something that everyone appreciates.

And so, that is one of the things Amanda has really focused our leasing folks on, and we do it here at corporate. So that is a big part of what we are seeing.

Yes, and I would agree.

The main kind of thing that we see for the larger groups that are looking for space is that they want to know what they are going to get, from both a rental rate perspective and from a build-out perspective. Oftentimes they want a gross lease because they want to know specifically what their bottom line will be for their first year, and we are able to provide that.

They also want to know specifics on: How much will the build-out be? When can I get in? And that is kind of where our in-house Construction Management team comes into play.

We guide the build-out, we deliver the build-out, we establish a timeline, work closely with them. So that we are comfortable giving them those initial numbers in the plans, that we can get them in. They know what they can expect, and that gives them comfort throughout the process.

Okay. So I guess, overall, it just sound like it's more of a process of just trying to work tenants through understanding what you have to offer versus any huge pushbacks, in terms of the location of your properties or pricing or anything like that?

Yes.

Usually before they come to our buildings, to our leasing brokers, they know the market, they know the rates. So typically there aren't too many surprises.

And also, I think this is a real compliment to our leasing folks. They do it very good job of mutually identifying what we have and what the new lessee is looking for.

Because one of the things we don't want our folks to do is, we don't want them to chase 80% of deals that really have no chance of happening because there really is not a commonality of space demand, rent, or expense charges or term.

So again, this is true real estate. I mean, this is what we manage on a day-to-day basis. And how we do the leasing is true real estate.

Okay. And then, just really one last one as far as on the releasing spreads. I know you said they are slightly positive or slightly positive overall. Can you talk any sort of divergence within that between either different property types, locations?

Are you seeing any -- I mean, is everything slightly positive or slightly negative and it works out to be slightly positive? Or are you seeing some more divergent trends than that?

I think our spreads are very submarket specific. Across the portfolio, sort of a weighted average across our entire portfolio, approximately at market. So each year, depending on the rollover and which submarkets have rollover, we are going to see a little bit of a fluctuation in our leasing spreads.

Certain markets -- like Pittsburgh, some parts of Florida, the few assets that we have in California where the market has grown faster than the rental rates -- we definitely expect to see a pickup. As we mentioned, there are softer markets -- Phoenix, parts of the Midwest -- where we are going to have slight rolldowns.

Ultimately, kind of the weighted average as we go throughout each of the years, we expect to be somewhat neutral and then picking up positive of these markets recover.

Okay. Well, congrats on the solid quarter and good luck during this quarter.

Thank you.

And the next question comes from Dave Rodgers, Baird.

Good morning. Most of my questions have been answered, but maybe two questions that will tie together.

For you, Scott, to start with, talk about acquiring vacancy. Most of what you acquired to this point is stable or nearly fully stabilized.

And maybe tie into that, Amanda, if you could, the traction that you are seeing in the South Florida tenant portfolio, which was kind of the highest degree of vacancy you have bought of late. And then just kind of interested to see in your demand or appetite for vacancy and the successes you have had.

Well, this is one of those things where if we are on campus, across the street, with a strong healthcare system with a very high-synergy building, there shouldn't be vacancy. So we are a Company that is looking to buy assets that are traditionally 90%, 95% occupied.

If we have an opportunity, like we did in South Florida, to find a relationship really that was a mutual positive, where we got some occupancy at 85% that we thought was a little under market and had a chance to grow, that's good. I mean, I am okay with that.

But we are not a value-add company. We are not a development company. We are not going to put shareholders -- that is not what they are investing in because that is not what we've told folks we are going to do.

So I think our goal is to buy something 90% on average occupied, a key critical location, bring value from an asset management perspective, have strong escalators that are in place, and continue to move those escalators and see that the rents are going to be able to keep up with the improving economy and any inflation that comes through.

So I think that is our criteria, and that is what we will continue to focus on as we grow the Company.

Okay. And with regard to any activity in Southeast Florida?

Yes, we have had a number of prospects, a couple of actual new leases signed, quite a bit of demand from the existing tenant base. So similar with the rest of our portfolio, existing tenants expanding, looking for larger spaces.

So we are very confident in our underwriting and ability to move that occupancy.

And lastly, just -- (Multiple Speakers).

It is a real good market.

Sorry.

South Florida is a real good market. Right now, you are seeing a lot of activity in the South Florida market, and I think you have read about it.

In fact, South Florida is going to become the number one populated state. So Florida is doing real well in our portfolio.

And Orlando, not South Florida, but Orlando has really -- I think we are almost 100% full in Orlando. and we had been in the 70%s two years ago. So you are seeing a lot of activity there.

Great, thanks for that color.

And then one just follow-up for Kellie. The same-store NOI that we were talking about, is that GAAP or cash? I would assume it was GAAP the way it was presented?

No, it is cash actually,

That is a cash number? Okay. Thank you.

And our next question will come from Andrew Schaffer of Sandler O'Neill.

Thanks. With the full implementation of the Affordable Care Act continuing to be delayed, have you seen any shift in tenant sentiment over the last two months, primarily in regards to tenants -- even as they have attempted to right-size their practices ahead of the changing healthcare landscape?

Well, a great question on the Affordable Care Act.

First off, we haven't had a lot of discussion. There has not been a lot of discussion with tenants. Our leasing folks haven't have lots of discussion with tenants.

It is sort of like there is actually a relief that the implementation of the process is going to be over a period of time and didn't come with a fast stop.

I think that the fact that the sign-ups, that all two people have signed up in a particular month four or five months ago. Well, now it is in the millions, and I think that there is a feeling within the community that that will implement itself over the next two or three, four years.

There will be some modifications. Actually, the modifications that will come out of it will probably help the physician groups and help the individual doctors and be beneficial to the process, whatever, however that turns out over the next five or ten years.

So we have seen healthcare systems continue. We have seen the physician groups -- they are planning for the fact that it is going to happen. And I think you see that the sizes of the groups are bigger, as we have seen. And you see the healthcare systems continuing to expand.

What we have seen change a little bit is, is we do not see the healthcare systems on the same buying spree of physicians that they were 18 months ago moving into 2013 or at the end of 2012.

That is either one or two things. Either the healthcare systems realized that they don't need to own the doctors as long as they are on the campus.

And number two, the doctors realizing they are not going to be a dying breed and that if they combine and that they are the source of the patients, that they can do very well with their group of 15 or 20 or 30 physicians or, as we said in Largo, a 100-physician group that has done very well.

So there are some very detailed changes that we see. But, frankly, it has been very positive for us as owners of medical office buildings.

All right, thanks. That is it for me.

And the next question comes from [Lena Rejeski] of JPMorgan.

Hello, thank you. Just a few quick ones.

First, your off-campus assets are 83.4% occupied, it says in the supplement. What can you do to drive this closer to where on-campus asset occupancies are, which is in the low '90%, I believe?

Well, right. Well, first thing is, we don't have a lot, and I think that is the most important factor there. Again, two, three years ago, when we looked at our portfolio we decided -- first we decided, we want to be dedicated MOBs and not diversify and we are committed to that.

Number two, we looked at the landscape and the Affordable Care Act, and as we moved into our Asset Management program, we realized that our leasing folks were telling us the best assets we can own are actually on-campus or across the street, because the off-campus assets tend to have a little greater hurdles.

Now, having said that, as the rest of the market, the economy improves, the office market improves, the off-campus stuff is going to get occupied because the competition will become less because over the last couple of years everybody who had an office building that was 0% occupied decided that the strongest and most best tenant in town was the physician or physician group or the healthcare system, and frankly, were giving it away.

We didn't want to impair the value of our assets long term, so we have been pretty consistent with our underwriting, pretty consistent with the valuation. But we are seeing occupancy. We have seen strengthening in markets in Texas, for example, that were off-campus that are now occupied.

So we will dispose of some of those, which will move that number up. And we will see occupancy, I think, also go through a process over the next couple of years that is just natural.

Okay. Thanks for that.

And then you mentioned earlier in your comments, you hope to get on-campus up to 80% of the portfolio. Do have a time, or by when do you hope to do that?

Yes, I would like to do that in the next 24 months.

Again, we are not buyers of huge portfolios. So we are not going to be buying $2 billion worth of assets and figure out what they are afterwards. We are going to buy specific assets.

Mark has the relationships, we have the relationship with folks. 50%, 60% of what we have bought has been repeat, and I think that continues. That is a good sign for us, as a Company.

And so we really would like to take this opportunity to define us as a Company from what we own, the fact that we manage it, which is, we began the process of managing our own assets and we know that I think that sector is going to move towards that process over time.

And so it is something we are excited about. In fact, the top three of my goals and objectives over the next three years is to do that. Move occupancy up and put our on-campus MOB at a greater percentage, in the 80%s. And those are two right there that are high on my list.

Okay, great. And then just last one, what was the average cap rate on fourth-quarter acquisitions?

I think we would say the high 6% or very low. We had a couple just above 7%, and then, we had a couple in the 6.75%-6.8%. So we averaged right around 7% or just a hair under 7%.

Okay, great. Thank you.

And this concludes our question and answer session. I would like to turn the conference back over to Scott Peters for any closing remarks.

I would just like to thank everyone for joining us.

Thanks for the questions. They were very insightful, and hopefully we were forthright. And we look forward to talking to everybody.

We all will be in New York next week at the Wells Fargo Conference; and if anyone who would like to meet with us, we would be glad to sit down and have a further discussion. Thank you.

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