Healthcare Realty Trust Inc (HR) 2014 Q1 法說會逐字稿

Good day. And welcome to the Healthcare Trust of America first quarter 2014 earnings conference call. (Operator Instructions). I would like to turn the call over to Robert Milligan, Senior Vice President of Corporate Finance. Please go ahead, sir.

Thank you. Welcome to Healthcare Trust of America's first quarter earnings call. We'll be happy to take your questions at the conclusion of our prepared marks. Last night, we filed our first quarter's earnings release for 2014. This document can be found on the Investor Relations section of our web site or with the SEC.

This call is being webcast live from our web site and will be available for replay for the next 90 days. During the course of this call, we'll 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 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're not guarantees of future performance. Therefore, our actual future results could materially differ from our current expectations. For more detailed description of some potential risks, please refer to our SEC filings, which can be found in the Investor Relations section of our web site. I will now turn the call over to Scott Peters, President and CEO of Healthcare Trust of America. Scott?

Thank you, Robert. And good evening to everyone. Welcome to Healthcare Trust of America's first quarter 2014 earnings conference call. We appreciate you joining us today as we discuss our performance for the first quarter and the outlook for the remainder of the year. 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.

Last night, we reported our first quarter earnings, which were highlighted by a 12.5% increase in first quarter normalized FFO to $0.18 per share from a year ago, which would be the second quarter in a row that we've increased our FFO by a penny. 3% same-store growth from our Asset Management platform, that has now had six consecutive quarters of 3% or greater growth.

And 300,000 square feet of new and renewal leasing in the quarter. Our financial performance in the first quarter was, again, very consistent, and disciplined, and the result of the specific steps taken over the past 12 months. These included the acquisitions that we executed upon and closed late in the fourth quarter of 2013. HTA's credit ratings upgrade late last year and the refinancing this quarter of some debt. And, finally, the continued same-store cash NOI growth from our Asset Management platform. We were able to deliver this earnings growth in the first quarter while also maintaining a strong balance sheet.

Our leverage at the end of the quarter was, approximately, 31%, based on enterprise value. This allows HTA ample liquidity, great balance sheet flexibility, positions us to pursue opportunities that meet our discipline criteria for portfolio growth, and aligns our business plan and company fundamentals, which continues to focus on increasing shareholder value per share.

It continues to be a very good time to own high quality, on-campus medical office buildings. Health care, in general, has seen several favorable tail winds, including the rollout of the Affordable Care Act, in which a reported 7.5 million individuals obtained health insurance coverage since the law's passage.

Plus, the aging of the US population and, finally, the continued health care employment demands that we see from quarter-to-quarter. On top of that, the medical office base is the added benefits of the continued focus on clinical efficiency and physician integration by health systems and physician practices.

And increased demand for the strategically located outpatient space on campus, or a key off-campus location, and the limited new development in the pipeline now and over the last several years. These trends have created a steady environment for leasing, in which larger physician groups and health systems are growing at the expense of the smaller physician practice. However, these trend have also brought an increased focus and attention to the medical office space, from real estate investors, resulting in increasing interest in the MOB assets and the health care portfolios as a whole. We continue to remain disciplined and focused on our core investment criteria. On-campus assets with solid occupancy and rent growth that benefit from our in-house Asset Management platform.

The good news is that the MOB space remains widely fragmented, with less than 10% of the $250 billion in the sector owned institutionally. In addition, HTA is a mid-cap company, whose acquisitions loss of $200 million to $300 million annually can still demonstrate meaningful portfolio growth. In reviewing our portfolio results, we were able to grow our same-store portfolio at a very steady 3% growth rate. A rate we achieved or exceeded over the last six quarters. This growth was driven, primarily, by a 2.5% same-store base revenue growth. The first quarter, also, consisted of an especially tough winter season, with the cold and snow causing an increase in operating expenses of, approximately, $1 million, higher than a year ago this quarter.

This was especially pronounced in our Indianapolis, Atlanta and Albany markets, as well as our other markets in the Northeast. The majority, but not all, of these expenses were passed onto our tenants in the form of common maintenance charges. Excluding the impact of these higher-than-normal expenses, our same-store growth would have been much closer to 3.3%.

The significant increase in these particular expenses were partially offset by property expense savings generated by our Asset Management platform throughout our portfolio. Overall leasing volume remains consistent in terms of the activity we have seen over the last six to nine months. We continue to see significant activity among larger tenants. The larger physician groups, health care systems, and health care educators. As demonstrated by our first quarter occupancy, we also continue to see some seasonality in certain parts of our portfolio, primarily smaller physician groups that are reacting to the rollout of the Affordable Care Act, and are looking for cheaper, off-campus space.

These tenants, also, have tended to have calendar-year leases that have expired. We, also, have lost a few tenants who have been bought by other health care systems and, thus, moved away from campus. Or from our campus. An occurrence that has, generally, benefited us in the past and we expect to benefit us in the future.

One positive sign we are seeing in our portfolio is the advanced discussions we were having with several of our large single-tenant users, with leases expiring in the next 24 months. These users have been working through their business plans for life under the Affordable Care Act for the last several years and are, now, ready to implement their long-term plans for their real estate needs.

In total, the space under discussion includes between 400- and 500-thousand square feet. And we expect to execute these renewals in the next several quarters, with positive economic terms for our portfolio. As part of these renewal, these tenants have, also, committed to taking additional space in our assets.

These early renewals significantly reduce our rollover risk in the coming years. This limited exposure allows us to dedicate 100% of our attention to our most favored asset class, which is the multitennanted buildings, that offer the most opportunity for upside in the future. We ended the quarter with total occupancy of 91.2%, up 30 basis points from our occupancy in the prior-year period.

There does seem to be some seasonality to our leasing activity, as our overall occupancy declined slightly from the year end. This is similar to what occurred last year and we expect to see occupancy get back to 2013 year-end levels and grow as we proceed into the second, third and fourth quarters of 2014. In the quarter, we completed a total of 300,000 square feet of leasing. Our retention for the quarter was 75%. Our renewal rates were slightly positive. However, we continue to be able to push rent escalators, which average between 2.5% and 3% on deals signed in the first quarter.

Given the level of leasing activity and the free rent that companies have with sizable long-term leases, we continue to anticipate that same-store growth for the rest of 2014 will be in the 2.5% to 3.5% range.

This is the range we have continually indicated we believe MOB should deliver on a consistent basis to investors. This quarter was relatively quiet for us on the investment front. As far as closed transactions are concerned. However, our pipeline is strong and we see no reason that we should not close on the $200 million to $300 million in high-quality acquisitions that fit our criteria, as we did in 2013 when we acquired almost $398 million.

We have spent a lot of time communicating our philosophy on our high-quality, on-campus MOBs in key markets that are core critical to health care systems and will benefit long-term, as our country continues to transition under the Affordable Care Act. We saw a limited number of these high-quality deals available to close in the first quarter. However, we have seen several attractive opportunities more recently and we'll continue to pursue these investments that meet our quality standards and fit within the key geographic areas that we have targeted. From a cap rate perspective, the overall acquisition environment continues to be extremely competitive, with multiple active participants pursuing acquisitions this sector.

As a result, we have seen cap rates continue to remain low in the mid- to low-six cap rate range. And it, also, depends on the type of specific circumstance regarding the asset or the portfolio. From a construction standpoint, there does not appear to be any significant pick up in projects underway. And those that are starting seem to be driven by regional or local players, who have very direct relationships with the health care systems. As a company, we do not have any plans to add a development infrastructure to pursue these projects and continue to look to be the equity takeout in a relationship on a long-term basis.

With that I will, now, turn it over to Kellie.

Thank you, Scott. Let me start with our first quarter results. Normalized FFO per diluted share was $0.18, an increase of $0.02, or more than 12%, compared to the first quarter of 2013. Normalized FFO increased 24% to $42.4 million, compared to the prior year. The increase in year-over-year normalized FFO was due to the same property cash NOI growth, and the additional NOI generated from our $398 million of acquisitions in 2013.

As we discussed on the last call, we achieved a credit upgrade from Moody's in December and we, also, refinanced our $300 million term loan. These two actions will generate, approximately, $2.5 million of annual interest expense savings on our term loans in 2014. As a result, FFO was positively impacted by more than $600,000 in the first quarter, due to interest savings. With our continued 3% same-property NOI growth, and our expectation of closing [$200 million] to [$300 million] of acquisitions for the year, we expect to continue to produce predictable results.

Sequentially, normalized FFO increased 6% from $0.17 per share in the fourth quarter, to $0.18 per share this quarter. This increase was, primarily, driven by the full-period impact of the $156 million of acquisitions acquired in the fourth quarter, and our interest expense savings, and also resulted in a $0.02 increase in the normalized FFO run rate, relative to where we were just two quarters ago. Normalized FAD increased to $0.16 per diluted share, an increase of $0.02, or 14.3%, compared to the year-ago period.

Our payout ratio was 88%, down from 96% last quarter. We expect that $0.16 is an appropriate quarterly run rate for our FAD, based on our current fundamentals. However, looking forward, there may be some ebbs and flows by quarter that would be attributed to TI for some of the larger, longer term leases that Scott previously mentioned. But, overall, we expect to be in a 90% payout range for the full year.

Our G&A expense was $6.3 million for the first quarter, slightly lower than our expense of $6.4 million in the first quarter of 2013. The first quarter G&A tends to run slightly higher than the second, third, and fourth quarters, given seasonal items such as our year-end compensation and annual reporting. As I stated on our last call, we expect our full-year G&A to be in the range of $24 million and $25 million. With the Asset Management platform in place, our infrastructure changes should be minimal and we are well positioned to expand our platform in our markets, without adding additional costs. Turning now to our balance sheet.

We took immediate steps with our balance sheet at the beginning of the quarter by refinancing our $300 million term loan, which extends maturities by two years, and reduced our borrowing costs on the term loan by 35 basis points. With this transaction, we have minimal maturity levels in the next three years. We have less than $10 million maturing in 2014; $74 million maturing in 2015; and $197 million maturing in 2016. We continue to monitor the debt markets and we'll look to refinance these maturities when we have a use of proceeds, along with the financing of future transactions with long-term debt. Our balance sheet remains strong and flexible, which is critical as we continue our strategy of external growth through acquisitions.

We ended the quarter with excellent credit metrics, with debt-to-enterprise value of 31%, one of the lowest in our peer group, and debt-to-pro forma EBITDA of 5.3 times. In addition, we had over $600 million of liquidity through available crash and our line of credit. Our operating cash flows continue to grow.

Our quarterly cash flow from operations increased by more than $5.5 million, or almost 20% to $33.5 million. Our cash flows are very stable, very manageable lease rollover in the next several years. Only 23% is expiring in the next three years, include about 6% for the rest of 2014, including month-to month-leases; 7% in 2015; and 10% in 2016. With our track record of tenant retention at 80%, our risk is less than $500,000 per quarter.

We continue to focus on our capital expenditures, including leasing concessions. Renewal spreads for the quarter continue to be strong, up 80 basis points on average, while leasing concessions on, both, new and renewal leases continue to trend downward. Our Asset Management and Leasing Teams are doing more leasing, negotiations directly with tenants, reducing the overall cost paid to third parties and maximizing the overall deal economics.

In summary, our first quarter was steady, disciplined, and consistent financially. We continue to make strides on the leasing front. From a capital perspective, we continue to focus on lowering our overall costs of capital. As for our balance sheet, we're continuing to address our debt maturities. With our disciplined focus, we'll continue to position HTA for long-term value.

I will now turn it back to Scott.

Thank you, Kellie. The first quarter demonstrated a strong earnings growth. We expected to see, as our same-store growth in 2013 activity fell to the bottom line. As we look at the rest of 2014, we expect that trend to continue.

Finally, I would like to take a moment and welcome Steve Patterson to our Board of Directors. Steve is currently the Athletic Director at the University of Texas, one of the leading academic institutions in this country.

He is a first Director that we've he added since 2007, and will certainly bring new insight to the Board Room. Steve has a tremendous track record, with a diversified business background. He brings with him a wealth of business relationships that he's developed over the years, is on the cutting edge of today's academic business models. Steve will be a key asset for HTA as we continue to develop and expand our company in the coming years.

With that, it concludes our prepared remarks and we'll now open it up for questions.

(Operator Instructions). And our first question will come from Jeff Theiler of Green Street Advisors.

Hi, there. You know, I guess the first question is just on the external growth front. You know, obviously slow quarter for you. Would you attribute that, primarily, to increased competition and pricing, or was there just not enough product on the market that interested you? Can you just expand on that a little bit?

Sure. You know, we had a good fourth quarter, when we closed, roughly, $150 million. You know, the activity right now, we've got a good pipeline, that's why we're very comfortable with believing and saying that we think we can, certainly, get our $200 million to $300 million for this year. The pipeline, for us, is pretty consistent from what it was last year. I think that, if anything, it represented the first quarter, it was more from a processing perspective. You know, we want to make sure we do our diligence, appropriately.

Some of our acquisitions, as you know, come from relationships that have their own timing, not our timing. We don't go and, necessarily, get broker transactions, so that there are specific hard dates for closing. So, we like the environment right now. I think that the rest of 2014. We're very comfortable with that. And I think the things that are in our pipeline will be very indicative of what we bought the last 18 months.

Okay. Thank you. In terms of just the operations, drop in tenant retention this quarter, is there some lease, in particular, that drove that? Or something more globally happening there?

I'll let Amanda talk about that.

Hi, Jeff. You know, it's not attributed to any one particular lease. In fact, the average deal size that vacated during the first quarter was around 2,000 square feet. And that's compared to the average new deal that we executed around 3,000 square feet. So, the dynamic that we're really seeing is that trend of the sole practitioner, small physician office, moving off campus and being replaced and back filled by the larger physician groups.

Yes. I think our retention, you'll see in the next quarters, will move back into the mid-80s. So, I think that the first quarter has a disproportionate rollover for us. And it is seasonal. I mean, I think that seasonal from a perspective that the smaller leases, tentative, tend to expire at the end of the year. We are seeing folks move off our campuses, if they're small, sole practitioners and we're seeing back filling with the larger groups. And so, again, we think the occupancy will get up to the 92%, like we think it will. And you'll see positive occupancy quarter-over-quarter-over-quarter moving into 2014.

Okay. Thank you. And, then, finally, just on the disposition program, is that still on pace? When should we be expecting to see most of this happening and what kind of yields should we be thinking about?

Well, you know I'll say you'll see some dispositions from us n the second, third quarter of this year. The good news is that the opportunity to sell some of the assets that we think are non-core, but that are performing very well for us, and were bought in 2009 or 2008, are being very well received, or looked at, from an acquisition perspective. We want to make sure that we do the right job for shareholders and get the best value associated with those dispositions. But, certainly, we think that if it's an MOB, that we're moving away from, because it's not in a core geographic location for us, it's going to be very competitive.

And, then, we've seen, of course, the diversified side of the equation. Those cap rates come down over the last 12 months. You know, I think it's been very fortuitous for us to, frankly, be in a position now to start our disposition program versus having started it, perhaps, a year ago, when we've continued to see cap rates come down for diversified assets and, also, for the MOB side of the equation.

Okay. And so in terms of yields, would you expect them to be, you know, 100 basis points above your current portfolio or how -- any guidance there?

Well, you know, I think that, roughly, that's probably a good guidance. Frankly, I have seen, when Robert, and I, and Kellie have looked at our view here over the last 12 months, we've seen the spread from what a disposition looks like to what we can -- what we've been able to acquire really come in. So, we're hoping, of course, to make it almost neutral from a disposition acquisition perspective. Just move into markets we like better. Move into multi-tenant versus single tenant. Make a geographic concentration with a particular relationship we have. And that's really the focus that we're looking at for the disposition program, is to make sure it's strategically positions us for the next three to five years. Not just simply a disposition for disposition sake.

Okay. Thank you very much.

And the next question will come from Daniel Bernstein of Stifel Nicolaus.

Hey, how are you?

Good.

I've got a question on the -- what is the difference, are you seeing, between large and small cap tenants that are moving in, in terms of lease rates, length of the lease, TI, anything else? If you're losing small tenants and you're bringing in large tenants, how should we think about the lease structure going forward?

I'll spend a couple seconds and, then, turn it over to Amanda. But, first of all, I think it's real positive. There's a positive from a financial perspective. We're seeing, as we mentioned, in the last two quarters -- let me rephrase that. For 2013, and the first quarter of 2014, we have averaged 2.5% to 3% on rent escalators. That's coming off something two, three, four years ago that was struggling to get to 1.5% to 2% with tenants.

The consolidation of practices makes that escalation of rent far less important to that group, practice group, than the location and the ability to get the right mix of space that they need in a particular asset that they found they want to expand in. You know, last year we had almost 40% of our leases with expansions to it, which was a big key. We're seeing that continue, as we mentioned, with our triple net leases. Folks are taking more space now, in conjunction with the extension that we're talking to them about, which has taken a little longer because there's a mix of that now, then, just a flat, Let's extend. So, I like this trend and I think I'll let Amanda talk about some term issues. But it's very positive.

I mean, the small groups that we refer to are, really, the one and two-physician offices, kind of your standard dentist office. And what we've seen that they're requesting, as their leases come up, well, first they're evaluating, you know, is this an opportunity to join with a health system? Or if they are evaluating going in an alternative direction, they're really focused on terms. They're wanting more flexibility, ultimately, shorter terms. And sometimes we just can't accommodate them on campus and it gives them an opportunity to move to off-campus facilities.

We do want to reserve spaces for the tenants that are expanding. As Scott mentioned. 30%, 40,% of our deals that we did last year were existing tenant expansions. This year, we're seeing a similar demand for larger physician groups to continue to take space, add physicians to their group. That group, typically, has five docs plus. They're looking for a longer term lease. They're looking for a buildout that accommodates them in the long-term and are, actually, putting their own dollars in. So, we're able to get a better tenant quality on the tenant side and, then, ultimately, improve the overall mix that we have within our buildings. We like that trend.

Are you seeing any increase in number of small tenants who are joining the hospital system or jumping on a large hospital, a large physician group lease? Are these small physician groups mainly, just, deciding they still want to stay on their own, but not stay with the MOB?

I think that we are seeing the disappearance of the sole practitioner, or the small practitioner group, even in the smaller markets that we are involved in, we're seeing that come to fruition. Most of the single -- the physicians that are retiring, or they're moving off campus to a cheaper space, in order for them to accommodate this transition, that really starts in 2016, with the records requirement, which is quite costly for these physician practices.

And so, you do see them, if they move out, they may move in with another group, which is, i.e., the expansion, or they're, basically, I think, you're losing that sole practitioner to retirement. The health care systems fundamentally like physician groups when they acquire. They're not acquiring individual physicians. You have to have some scale for that health care system to say, We like the volume. We like the integration that you're bringing to us. So, therefore, we want you on staff, so to speak. The sole guy is not getting that benefit.

Okay. One more quick question, if I could? On the expenses, the seasonality of the expenses, you mentioned it was $1 million higher than last year. How would you categorize last year's expenses, relative to normal? Was that below normal, and this year above normal? Should I think, when I model out in the future --

I'd go back to last year.

Sorry?

I'd go back to last year. This year, truly, the impacts of the winter in the first quarter were unusual, even if you go back over a ten-year period of time. I think the last snow that came, and cold that came was four years ago, four-and-a-half, five years ago. This was even double what that was. When we look at our modeling, and when we're talking to our tenants, because this is part of our in-house program, where we communicate these things, these issues to our tenants, realtime, not when they get something in the mail. They're recognizing that their 2015 will look more like 2013 versus the first quarter of 2014.

That's really helpful. Thanks a lot for taking my questions.

Thank you.

The next we have a question from (Inaudible) of Wells Fargo.

Hi, thanks. Scott, just can you comment on how your investment criteria has changed, I guess, since you listed? You've proved yourselves as being debt buyers of high-quality stuff. Just kind of getting a sense of where we stand right now. About how maybe you've narrowed your potential acquisition candidates? Am I reading too much into that? Maybe acquisitions could, potentially, slow, but you're buying better stuff?

Well, I'll take both of those three questions. I think that our acquisitions volume that you've seen from us will not flow. I think the $200 million to $300 million that we have told folks from the day we listed, which is a very good representation for us of what we think we can accomplish in any type of market, we're continuing to see the ability to do that. I think what you have seen from us is we want to continue to stay disciplined from what we buy. Does it fit with our geographic Asset Management program? Does it come from a relationship that helps with us another acquisition down the road? So, that has, perhaps, become more prominent for us.

We like to do business with folks more than once. The first time you do it, it may take a little longer. It certainly fits into a program that becomes far more routine over the years. We have fine tuned what we think is our best and most favorite type of asset to own. It's multitenanted. I think the Affordable Care Act has moved folks in that direction. You know, a triple net lease with a health care system, 100%, we would say that the MOB needs to be attached to the hospital in that situation, so that when renewals come up, or when leasing synergies occur, there's not an unfavorable balance between landlord and tenant.

But a multitenanted health care system has 20% to 30% of the space. A couple of large physician groups take the 20%, 30%, 40% of the space. High-energy building and relatively well-updated. We have passed on some acquisitions, specifically because of the age of the building, perhaps the quality of the infrastructure. We do do, what I consider to be a lot of diligence from an infrastructure perspective, because we want to make sure that there's not large amounts of capital that need to be put into things once you own it.

So, I think we've -- over the last two years now, almost two years, being public, I think we've explained to investors the type of asset we like. We've been able to accomplish that and I think that we're in a better position today to be able to continue that execution than we have been at any time since we've been public.

That's helpful, Scott. And $200 million to $300 million still the right number to assume this year?

It is. And I think that it's going to ebb and flow, but we see no reason to think that that $300 million number that we've always talked to folks about, that's probably a very good target for us. And based on our pipeline today, very achievable.

And just to switch gears. Kellie, I think you said rent spreads were up 80 BIPS in the quarter. Can you break that out by, both, new leases and renewals?

I'm going to let Amanda answer that question.

Sure. Thanks, Kellie. You know, our new leases -- we were, approximately, flat on a leasing spread basis. Renewal leases were up over 1%. So, that blend got to the 80 basis points that we're referring to.

Okay. Thank you.

And our next question is from Colin Ming of Raymond James.

Hey, Good morning. Congrats on the solid quarter, guys. Most of my questions have been answered. Just a couple of quick follow-ups here. The last quarter, you guys mentioned, just between the different geographies some relative weakness in Phoenix and several of the smaller markets in the up Midwest. Can you, maybe, update us a little bit more on those markets? If you're starting to see things really turn there? Any other notable markets that stand out for you guys right now?

Good question. We probably should have covered that in our presentation. We've seen some improvement in Phoenix over the last six months, where we had not seen that, certainly, over the last couple years. We've seen, you know, we've had three, four, five folks looking for 3,000, 4,000 square feet on our campuses, which is good news for us. And I think we're starting to see that. Atlanta has been very good. It goes from being good to very good. The Atlanta market and our leasing folks in Atlanta have done a really good job of reaching out to folks and our occupancy in Atlanta will be very good by the end of this year, with things we're working on. Indianapolis has slowed a little bit. But we've got good occupancy there.

That really transition started the change that we saw a couple of years ago. But I think that's, probably, went through the process sooner than other markets. And, then, the East Coast, we're pretty much 98% occupied on the East Coast. Pittsburgh is 100%, and Raleigh is 98%. So, that's hard to say that things are better or worse. It continues to stay very occupied. We're very enthused about the Southwest, seeming to have generated some momentum here in the last three or four, five months.

Okay. I know that's very helpful. Thanks for the extra color there, Scott. Recognizing again it's a very small part of the overall portfolio, but I was just looking at your off-campus lease rate. That's steadily trended higher here over the last several quarters. Can you, maybe, just talk a little bit more about what you see there, again recognizing it's a small part of the portfolio, what you see that kind of maxing out at? Or does it really even matter, is it really the assets you look to dispose of here in the next six, nine months, anyway?

Not to say that it doesn't matter, but the majority of those off-campus assets are, probably, what we would consider to be the noncore assets that other folks tend to see attractive. Occupancy has moved up. It doesn't help from us a geographic perspective -- from an in-housing, asset management side of the equation. So, I still think there's movement. We are seeing, as you have heard from a couple other folks I think already, there is some positive movement in the rent. There's positive movement in the reduction of TIs, free rent, and, then, the third thing that Amanda pointed out, which I want to reinforce, is that we're seeing physician groups put their own money into spaces, which really starts to tell you that there's a good occupancy trends coming down the road.

Okay. And, then, just one last one, Scott. Just can you remind us the type of tenant that, typically, makes that up month-to-month bucket? Again, it's 2% of your portfolio, but just what type of tenant is that; and how sticky is that tenant, typically?

So, the month-to-month tenants, generally, kind of vary between 1% and 2% of our portfolio GLA. And really is just a factor of the timing it takes to move some of these teal deals through the lease negotiation process. I don't think this particular tenant, necessarily, has any particular characteristics. But we do, generally, we are able to achieve the -- a similar retention on a month-to-month group, as the rest of our contractually rolling leases.

Okay. All right. Great. Good luck during the quarter, guys.

Thank you.

And the next question is from Dave Rogers of Baird.

Oh, yeah. Hi, everybody. I just wanted to follow-up with brackets around the yields that you talked about. I guess I understand the high-quality nature of the assets in the pipeline. I, also, understand kind of the neutralness of the dispositions versus acquisitions. But maybe talk a little bit about what the brackets are that you're seeing for your acquisition pipeline, in terms of going in yields. And, then, what you've seen broadly still trading the market out there.

Well, it goes back to the attributes of the acquirers, I think. You have got the different buckets of capital chasing different types of investment demands. You know, some of the larger folks, or some of the nontraded groups that have cash that they've got to put out, or that they need size, they're going after the larger portfolios. That really hasn't been our -- we haven't done that. You know, we're not in a position, nor do we want, to put our investors in a position of being the buyer at the lowest price for something that may not, necessarily, warrant that. We like the fact that we've been able to, now, do this over the last six years in a very -- I think, a very prudent process. So, I think the cap rates, as whole, as I mentioned, you've seen folks buy stuff at six.

And I think they have a number of different reasons to do that. Our acquisition philosophy has always been that we're going to be a little more diligent, we're going to have, hopefully, an ability to be competitive, because we can be competitive. But it's more important to us the quality and the fundamentals to the assets. And, you know, we said last quarter that our acquisition, we think, it's 6.5% to 7%. I think that's exactly where we feel comfortable now. That doesn't mean we can't get more competitive, but we haven't had to be more competitive. And, yet, what we bought has been, I think, as good as, if it not better, than anything else that's gone on from an acquisition perspective over the last 18 months.

And how much of the acquisitions will be funded off the disposition pipeline? And, then, how do you look at the remainder or longer term? You talked about leverage going up, potentially last quarter maybe you mentioned it, but would you be more active on the ATM to fill in as additional acquisitions, or will we see leverage move up? How do you think about that?

When we talk about acquisitions, we talk about net. You know, net $200 million to $300 million. We do think that we'll do that $50 million to $100 million of dispositions this year. We think that we've been very prudent from a balance sheet perspective. I mean, we've always said that we want to make sure that our debt is extremely conservative. I think we're one of the lowest-leveraged health care REITS out there right now.

So, we have some room to move, which is good, because that, obviously, rewards our investors and continues to move that to the bottom line. But we'll, also, make sure that when we acquire things, that we'll make sure that there's a right balance between that capital and the debt. Because it's so far over the last couple of years, we've been very specific about that. And we will continue to do that. So, I think we're in a good -- very good position. Because we have the flexibility to grow. We have movement in our balance sheet, from a leverage perspective, and we're also, I think, very prudent when we go and balance those acquisitions with the right cost to capital and putting on as competitive debt as we can with our recent investment upgrade.

Great. Thank you.

And next the question comes from Andrew Shafer of Sandler O'Neill.

Thanks. I was wondering if you guys have seen a commensurate bid up in pricing on off-market transactions, as we've seen on the more-widely marketed deals?

Off market I think is -- people say, well, you get something off market. Well, there's not a lot off market. What off market is, you've had the opportunity to talk with a seller. You may have known the seller from a past transaction. Someone may want to have some certainty of closure with a particular buyer. But they're mostly very intelligent sellers. And so when you still need to be competitive, what you probably remove from the equation is, you remove the irrational buyer, or you remove the process of retrading and retrading. And I think that's the advantage of having a relationship with somebody or being able to sit down with someone and have that discussion, and know the asset or assets that they're trying to sell, have done your diligence before you sit down and talk about pricing.

And get to closing. I mean, that's one of the things that we pride ourselves in, is that before we put offers out, we see the assets. We go see other people's assets. Because we want to know where all of the medical office buildings are in this country, owned by us or owned by other people. So, we look at off market as just the opportunity to get something, get it done very efficiently. Get it done reasonably, from a pricing perspective and, then, do more business together. That's the best relationship we can have. And, then, it takes some time. That takes time. It takes effort. it takes going to see people.

Okay. And, then, secondly, can you just talk about when you internalize asset management, about the benefits you might see next quarter versus long-term?

Sure. When we do in-house properties, we typically do see some expense benefits by bringing the property onto our Asset Management platform. We mentioned during the last call, 25 basis points to our growth is pretty much what we're expecting to see on a going-forward basis, from that expense savings. We would have seen that in the first quarter. We, actually, had over [$300,000] of expense savings benefit, those were offset by the snow removal increases.

One of the things that we do get the benefit of, as we acquire assets, one thing is that you continue to manage those assets on a going-forward basis. That's the institutional Asset Management program that we want to develop and continue to develop and show benefits to our tenants.

Then, the second equation here is that it is a hugely fragmented space and most individual owners don't have the benefits that the Asset Management program can bring. So, you have a one-time savings when you buy the asset and, then, you have, what we like to consider, the ongoing savings that we can generate for the tenants through this process of getting more efficient, and getting national contracts, and having our own property managers, and our own engineers. I think when you put the whole program together, it's very competitive for a tenant when they're looking where they're going to lease space from.

All right. Thank you. That's it for me.

And with that, we will conclude our question-and-answer session. I'd like to turn the conference back over to Scott Peters for any closing remarks.

Well, I'd like thank everyone for joining us this morning. And as we have said, we think it's very consistent, disciplined first quarter. And we're looking forward to the rest of 2014. And, again, thank you.

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