Healthcare Realty Trust Inc (HR) 2014 Q2 法說會逐字稿

Good afternoon, and welcome to the Healthcare Trust of America second quarter 2014 earnings conference call. (Operator Instructions). I would like to turn the call over to Robert Milligan, Executive Vice President, Corporate Finance. Please go ahead.

All right. Thank you, and welcome to Healthcare Trust of America's second quarter earnings call. Last night, we filed our second quarter earnings release for 2014. This document can be found on the Investor Relations section of our Website or with the SEC.

This call is being Webcast and will be available for replay for the next 90 days. We'll be happy to take your questions at the conclusion of our prepared remarks.

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 would 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 current expectations.

For more detailed description on some potential risks, please refer to our SEC filings, which can be found in the Investor Relations sections of our Website. I will now turn the call over to Scott Peters, Chairman and CEO of Healthcare Trust of America. Scott?

Thank you, Robert. And we appreciate everyone for joining us this morning to discuss our second quarter results. Joining me on the call today are Kellie Pruitt, our Chief Financial Officer; Mark Engstrom, our Executive Vice President of Acquisitions; and Robert Milligan, our Executive Vice President of Corporate Finance and Equity Markets.

Last night, we reported our second quarter earnings, which again demonstrated our ability to drive shareholder value by executing on all aspects of our business, asset management, acquisitions, financial reporting, and capital markets.

Our results were highlighted by a 12.5% annual increase in second quarter normalized FFO to $0.18 per share; a 7% portfolio growth with $212 million of medical office building investments, all in HTA's existing key markets; 3.1% same-store growth from our asset management platform, the seventh consecutive quarter of 3% or greater growth.

Occupancy grew to 91.5%, an increase of 30 basis points from the first quarter and the result of consistent levels of leasing activity and our capital markets activity that extended maturities and locks in today's low cost of capital through the issuances of $300 million seven-year notes at 3.375%.

This overall execution is significant for shareholders today and in the coming quarters as management continues to concentrate our performance on earnings growth, NAV accretion, asset quality, and enterprise platform value.

Yesterday, our Board of Directors announced HTA's first dividend increase as a public company. Starting with the third quarter, HTA's dividend payout will increase to $0.145 per share or $0.58 on an annualized basis. This is consistent with the stable and growing cash flows generated by HTA's medical office buildings.

From a sector perspective, healthcare real estate continues to be a compelling investment that will benefit from macroeconomic tailwinds for the next decade. These fundamentals are attracting significant new investor interest, increased liquidity in the space, and improved leasing fundamentals.

MOBs are traditional real estate, where location and barriers to entry are critical. Lease terms for multi-tenanted buildings are shorter in nature and marked to market more frequently. And a focused, dedicated, internalized property management and leasing platform makes a significant impact on performance.

We currently have a portfolio of over 14.5 million square feet in 27 states. Our property management and leasing platform manages and operates over 90%. This allows us to focus on the day-to-day activities of our properties and understand the long-term drivers of each asset.

This attention to detail is important to HTA's portfolio performance and certainly influences the way we allocate capital and make investment decisions.

Within the quarter, we were able to close on $212 million in investments. These included $148 million in Downtown Boston with the Tufts Medical Center; $28 million in Miami, where we have now opened our first property management and leasing office; $24 million in Baltimore attached to the hospital; and $12 million in Raleigh, North Carolina, next to Rex Hospital.

Over the last 12 months, we have invested over $500 million in high-quality MOBs. This includes over $2 million invested in Florida, primarily Miami and West Palm Beach; $148 million in Boston, making it our largest market by invested dollar; and over $50 million in Texas.

For shareholders, these are great markets to be invested in and will benefit from the healthcare expansion and the Affordable Care Act.

Over the last three years, we have acquired almost $1 billion in assets and grown HTA's portfolio by 30%.

Our current 2014 investments were 96% occupied. Approximately 88% of the total GLA is on campus with approximately 90% of the NOI coming from these key critical on-campus assets. They were acquired at an accretive spread to our cost of capital and within our targeted cap rate range.

Given our size, these investments year to date represent total portfolio growth of over 7%. We were able to accomplish this while continuing our rifle-shot approach to investing, improving the quality of our portfolio, and avoiding the portfolio premiums and low relative cap rates for certain transactions that have occurred in the market recently.

As we've discussed previously, we intended to begin recycling certain assets in 2014. These assets are no longer a strategic fit within our portfolio and are either considered noncore, located in secondary locations, or ones for which we believe have achieved substantial value.

As of today, we currently have several assets under contract to be sold. These sales are expected to generate gains over book value and executed to what we believe are attractive cap rates. The proceeds are targeted to match currently identified acquisitions.

For the full year, we continue to expect to achieve net portfolio growth of around 10%.

In the second quarter, we continue to see performance from our asset management platform with our existing portfolio growing at 3% or more for the seventh quarter in a row. We were able to accomplish this growth with continued leasing momentum for both new leasing and renewals, with our occupancy increasing over 20 basis points year over year to 91.5%.

This also led to same-store base revenue growth just over 2.1%, a rate which, given our portfolio composition generates the significant amount of our annual same-store NOI growth.

The overall leasing environment remains positive and consistent and has improved from the slower first quarter that was impacted by the weather.

We also continue to see most new demand coming from larger physician groups and hospital-affiliated practices, with declining demand from solo practitioners.

In today's environment, practice groups are focused on growing their volume and top line. From a real estate perspective, this means they are focused on key locations that allows for synergies with technology and with other doctors that drive referral patterns.

We saw this play out in the early renewals of several large single-tenant buildings that were signed in the first half of the year and into July. These single-tenant buildings accounted for over 360,000 square feet and were part of larger campuses where the tenants occupy additional space. They also involved leases that were originally entered into in the mid-2000s before the economic downturn.

As you would imagine, these leasing negotiations were tough. However, we were able to renew all of the tenants on favorable economic terms when factoring in concessions relative to the market and their existing deals in place.

For instance, we were able to save well over $1 million in leasing commissions by negotiating these directly, these savings that fell to the bottom line.

These larger healthcare system tenants each also agreed to take an additional 15,000 to 20,000 square feet in adjacent buildings, demonstrating the importance of owning high-quality, well-located buildings in today's environment.

These early renewals also significant reduced our rollover risk in 2015 and 2016 as no single tenant building over 40,000 square feet will now roll in the next 18 months. This limited exposure allows us to dedicate the majority of our leasing attention to our multi-tenanted buildings that offer the most occupancy opportunities.

Within the quarter, a significant amount of our leasing activity took place on our Sun City campus here in Phoenix. As discussed in our previous calls, this part of our portfolio has been one of the slower markets in recovering from the economic downturn.

However, we are now seeing activity increase in this market on both the new and renewal leasing front. In fact, about a third of our leasing within the quarter took place in Sun City, including 24,000 square feet of new leasing, allowing us to increase our occupancy for the first time in three years.

Overall, our leasing retention in the quarter was strong at approximately 86% and continues to reinforce our target of growing our total portfolio occupancy to 92% by the end of the year.

In addition, we continue to focus on increasing the annual rent escalators. For the year, our new and renewal leases have included average rent escalators of approximately 2.8%.

Given the level of leasing activity and the free rent that accompanies these sizable long-term leases, we anticipate that same-store growth for the rest of 2014 will be in the 2.5% to 3.5% range, consistent with our view over the last couple years. This is a range we believe MOBs should deliver to investors on a consistent basis.

As a company, we remain dedicated to a strong, conservative, flexible, and liquid balance sheet that allows for opportunistic growth. We accomplished that in the second quarter, ending with a very low leverage of approximately 32% net debt to enterprise value and significant amounts of liquidity.

Our balance sheet was also recognized by Standard & Poor's, which upgraded our credit to BBB flat in May, joining Moody's, which upgraded us in December of 2013.

As you can see, we had a very active second quarter on all fronts of our business. And the results are flowing to our bottom line.

I will now turn it over to Kellie.

Thank you, Scott. Let me walk through our second quarter earnings and portfolio performance. Normalized FFO per diluted share was $0.18, an increase of $0.02, or more than 12%, compared to the second quarter of 2013.

Normalized funds from operations increased 22% to $43.5 million compared to the prior year. The increase in year-over-year normalized FFO was primarily due to the same-property cash NOI growth of 3.1% and additional NOI generated from the more than $500 million in acquisitions we have completed over the last 12 months.

Despite having a portfolio at the end of the period that was almost 19% larger, our G&A was actually down year over year, while our interest expense was relatively flat. This allowed the significant increase in NOI to fall straight to the bottom line.

Our G&A expense was $5.9 million for the second quarter, down from the $6.2 million we had in the second quarter of 2013. For the year, our G&A is now at $12.2 million, consistent with the $24 million to $25 million run rate we have previously discussed.

With the basic infrastructure of our asset management and leasing platform largely built out now, we should continue to see significant operating leverage as we grow our portfolio in our existing key markets.

At the end of the period, our average interest rate on our debt portfolio was 3.9%, down 30 basis points from the 4.2% in place at the end of the second quarter of 2013. This is largely the result of the impact of our credit rating improvements, which lowers the rates on our credit facilities and term loans, with total interest savings in the range of $2.5 million for all of 2014. This was also the key driver for our relatively flat interest expense year over year despite higher overall debt balances.

Our cash flows are very stable with very manageable leasing rollover in the next several years. Only 20% is expiring in the next three years, including about 4% for the rest of 2014, which includes 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. Our renewal leasing spreads for the quarter were flat to slightly positive, excluding our Sun City portfolio, where we renewed a third of the total occupied space. Leasing concessions for both new and renewal leases remain low, given the tenor of the leases.

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.

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%, the second consecutive quarter below our targeted payout ratio of 90%. The acquisitions within the second quarter all closed after the first week of June, limiting their earnings impact within the period. With a full-period impact from these investments, the payout ratio would've been even lower, in the low to mid-80% range.

Although it is important to note that our normalized FAD will be impacted by some quarterly ebbs and flows related to the TIs for some of our larger, longer-term leases, our normalized run rate remains consistent with these levels.

As a result of these improved cash flows, our Board of Directors authorized our first dividend increase to a rate of $0.58 per share on an annualized basis or $0.145 on a quarterly basis effective in the third quarter.

This amounts to a 1% increase in the dividend payout, symbolizing our focus on generating steady returns to our investors while also allowing HTA the ability to reinvest some of our earnings to grow our portfolio.

I will now turn it over to Robert to discuss our balance sheet and the capital markets activities within the quarter.

Thanks, Kellie. Within the quarter, we demonstrated the strength of our franchise and our ability to access multiple sources of capital as a result of our stable business model and our very strong and flexible balance sheet.

We ended the quarter with excellent credit metrics with leverage of 32% net debt to enterprise value, one of the lowest in our peer group, and net debt to EBITDA of 5.7 times. In addition, we had over $750 million of liquidity through available cash in our line of credit.

This combination of stable cash flows, balance sheet strength, and access to capital was recognized by S&P, which raised our credit rating to BBB flat in May, matching the upgrade we received from Moody's in December of last year.

In particular, S&P noted the quality of our portfolio, our conservative balance sheet, and the strength of our internalized asset management and leasing platform as reasons for the upgrade. We appreciate the recognition that both of these agencies have given to our company.

We have consistently outlined our focus on matching our acquisition activities with long-term capital and followed through with that with our opportunistic issuance of $300 million in seven-year notes at the end of the period. These notes priced at a very attractive coupon of 3 3/8 and fill a hole in our long-term debt maturity schedule, which remains very well laddered.

The proceeds were used to pay down our existing revolver balance, fund part of our $212 million in acquisitions, and repay secured debt. In total, we'll pay down approximately $75 million of mortgage debt with average interest rates of 6.5% and an average remaining tenor of three years.

We expect the total prepayment to be approximately $6.5 million, resulting in annual interest savings of almost $2.5 million, while simultaneously locking in today's low interest rates and providing greater portfolio flexibility.

We also raised approximately $18 million in equity through our ATM program in the second quarter at an average price of $11.86. This match funded some of our acquisition activity within the period. Additional funding came from the $15 million repayment of an outstanding note receivable that was coming due.

For the rest of the year, our balance sheet strength provides us with the flexibility to be very opportunistic as it relates to our capital funding, using the appropriate blend of debt, equity, and dispositions, depending on market conditions, to maintain our conservative balance sheet and position us for flexibility to grow going forward.

I will now turn it back to Scott.

Thank you, Robert and Kellie. The second quarter demonstrated the power of the enterprise platform that we have created here at Healthcare Trust of America. We grew earnings in the low double digits. We expanded our company's portfolio by more than 7% on an accretive basis.

We grew our existing portfolio by more than 3% from an NOI perspective on strong leasing and continued efficiencies. And we maintained a very strong balance sheet and lowered our overall cost of capital to position us for continued performance long term. We think we had a very good quarter.

With that, conclude our remarks, and we'll open up for questions.

(Operator Instructions). Daniel Bernstein, Stifel.

Good afternoon.

Good morning from our part.

I guess good morning on your part, yes. I got a question on the acquisition you just did this quarter. The Tufts Hospital is rated BBB and not A. How does the credit rating of the hospital affect how you bid for an asset, how you think about the due diligence of the hospital, what you're willing to pay for the property?

Well, that particular acquisition, the location is just so paramount in Boston, right outside the financial district there. And I've personally been familiar with those two assets for six, seven years, eight years now. And the hospital's so busy. It's a critical part of delivering healthcare from that location.

And the healthcare system we thought obviously is very strong. So, I think we bought two great assets that are going to truly -- lease runs through 2027. And it will -- shareholders will welcome the opportunity for that lease to roll in 2027 because of just the location and the core critical nature of their delivery. Tufts can't go anywhere. They need those spaces.

So, we're very happy with it. And I think the healthcare system's going to do real well. That's one of the stronger ones we have in our portfolio.

All right. So, on-campus and hospital locations going to be more important than a credit rating when you think about the -- .

-- Well, when you're in that level, yes. And in this particular case, to get to the hospital, you have to walk through our entry and for one building. And in the second building, you're connected where all their healthcare folks are going to every day. If you've been there, it's an extremely connected two buildings with the hospital itself.

Okay. And I have a little bit of a related question. In the last quarter, we saw some hospital and medical office buildings being built by hospitals. Are you seeing -- one, how competitive are the hospitals in terms of bidding on their own MOBs that are on or near campus?

And then when we think about that credit rating, are the folks that are A rated and have very good access to capital, are they less likely to be sellers of the MOBs versus somebody who has a BBB credit rating, which isn't bad, but just trying to think about the -- how competitive the hospitals are on MOB bidding and who maybe those sellers are within the hospital space.

Well, we have seen -- certainly over the last I'd say 12 months, we've seen a couple assets that actually have been exercised, bought back by the healthcare systems or the hospital, not -- it happened to us in one situation, and I know that there's been a couple other portfolios out there that had gone out with a bigger group of assets. And in fact, when it actually closed, my understanding is that two or three or four had been exercised out of that group from the healthcare systems.

It -- we had an asset in Florida that we -- in Miami actually that we really were after, and the hospital ended up buying it back from the developer. I think that's a short-term acquisition on the healthcare particular -- from their point of view. But, they felt it was so core critical to the delivery of their services that they wanted to take it out of the hands of the developer.

And so, I do think this is just another indication of how the Affordable Care Act and how healthcare systems are looking at their medical office buildings. And more importantly, the more on-campus MOBs you can get, the more valuable in fact the assets that you own long term are going to become.

So, in one hand, it's unfortunate that some of these assets are going back to the healthcare systems. On the other hand, I think, over time, they're going to pick their -- they're going to pick the company or the relationship that they want to have.

And then that's the opportunity I think we get or other folks in our sector get to buy these assets because, long term, the healthcare system probably doesn't want their capital invested in that asset. But, they certainly care a lot about who owns it and about the ability for them to utilize it and have it as a key function going forward.

Okay. Okay. I appreciate the candor. I'll hop off and let others ask questions.

Todd Stender, Wells Fargo.

Hi. Thanks, guys. Just on that last question, Scott, the on-campus asset that the hospital took out, what did -- what kind of cap rate did that go for?

Well, that actually went for a cap rate that it was half occupied. I think it was 60% occupied. And as I said, we really liked it. We still like it. And we're actually actively having dialogue about trying to get that asset down the road.

I think they're planning to move some folks into it, which is one of the reasons that they went ahead and took it, exercised it pretty quickly. But, in-place NOI would've been close to a sub if not a sub-six cap rate that they exercised it, which was even more amazing from that particular transaction.

But, again, I think that, as you've seen when we've gone and visited some of our assets, some of these assets are truly core critical. And the value of these assets are really coming into play in the forefront.

Thanks. And just to stick on that topic, down in Miami, you made some acquisitions. I think it was a couple properties in Miami. Can you just tell us about those properties? The one that sticks out on your supplemental is the occupancy. But, the lease rate is 81%. Can you just talk about your plan there and maybe why it's been that 80% range?

Yes, we had an opportunity to buy really three groups of assets in that particular acquisition group. We bought the Boston stuff. We bought an asset in Baltimore that's actually connected. The line of transition is inside the hospital. So, you could be on each side. You could be on our side with one leg and their side with the other leg. So, that's integral to the hospital. And we think that was a very good acquisition.

And then we had the opportunity to buy a couple assets in Miami. We've been very active in Florida. We've been active in Miami. Folks that have been down there I think really see the change in housing, see the change in the economy, see the impact of the financial impact from Central America coming through there. And some article said Florida's going to be the most populous state in the country here in the next couple, two, three years.

So, we like Miami. We thought these assets were well positioned, one on campus, one off campus, which was within a mile of a hospital, very busy intersection. And our play, of course, is a couple things. One, we think our property management and leasing teams [had value]. We think that that's a big component of 3% same-store NOI growth for an MOB sector.

So far, we've had seven quarters in a row. We continue to see what we think is benefits from our expense savings. And the expense savings not only benefit us, but more importantly, they benefit the tenant.

And I was down there three times. I've been down there four times, ultimately. We first didn't get a chance to buy it almost a year and a half ago. And then we ended up coming back and being able to work on it a year later.

And there's no reason these assets aren't going to be 90%, 92%, 94%, 95% occupied in the next 12 months. And for us, it's a great opportunity, brings some efficiencies from our platform, focus on delivery of services to the tenant, and really take it out of the third-party management that it was in.

Thanks, Scott. And just transitioning, for the space that you brought in house to your in-house property management this quarter, it was 500,000 square feet or so, is there any cost associated with that, like contracts you need to terminate or expenses we should think about going forward as you bring more of your square footage in house?

No, most of the things that -- well, fact, 99.9% of the contracts are 30-day cancelable. So, there's really no cost associated for when a developer has it or when we're bringing it in house from a third party.

One of the things that excites me from our platform, we've had some comments that say: Gee, whiz, Scott, this is pretty boring, 3% same-store growth, $200 million of acquisitions. Work on your balance sheet. Raise your dividend by a penny, and so forth.

But, one of the things that we're doing here from a management team is really starting to see the opportunities after now two, three years of starting the in-house property management, getting it to 90%, really starting to see the opportunities bring value and values multiple things, one, savings to tenants, two, savings to shareholders that flow through the bottom line, three, the occupancy that we're getting excited about.

We've seen it here in Phoenix now. We've been in house for 18 months in Phoenix and have struggled for the first 12 months because of the market. But, now, we're seeing Phoenix really come back. Atlanta has come back. Our leasing team in Atlanta and our property management folks have done a very good job in Atlanta.

So, from a management perspective, we feel acquisitions -- and again, we feel very comfortable with our number this year that 10% for portfolio growth. We got some dispositions that we're going to take care of that are noncore, which we'll start that program.

But, the real focus for our management team continues to be bring that value to the property management platform. And so, you'll hear us talk more and more about that as we move through the year because I think there'll be more and more opportunities for Amanda Houghton and her team to really show the value to the platform.

Thanks for that. And, Kellie, I think you mentioned that the releasing spreads were flat in the quarter. I think they were up about 80 basis points in the first quarter. What are your expectations for the remainder of the year? And do you have any feel for how 2015 is trending?

I'll let Scott answer that. He's much more involved on the leasing standpoint. But, I think we're generally expecting it to be fairly consistent with second quarter.

I think what one of the things that we have done is we had said that we were working on free rent and working on concessions. And we continue to do that. We saved $1 million on two leases here in Phoenix from a commission perspective. That's a lot of money that doesn't go to third parties. And it doesn't go out of our balance sheet. But, it actually goes to the benefit of shareholders because we didn't have to pay it.

Leasing spreads in Phoenix are starting -- I think we're starting to see some momentum, occupancy. So, this renewal of a third of the portfolio was real important to us. It certainly gave us a very sound floor to begin with.

But, you're starting to see rents move. And I think you might, hopefully, hear that from other folks as they talk through their quarters. But, we're seeing opportunities, especially on the East Coast. I think the East Coast continues to be a very strong market from a leasing perspective and from a rent perspective.

So, I would expect us to continue to show and demonstrate that we have positive leasing spreads. Free rent is really where we're now focused on trying to reduce it, maybe by half a month or by a month where it's appropriate. And I think TIs and so forth are pretty consistent now across our platform.

Great. Thank you.

Michael Knott, Green Street.

Hi, guys. Just curious if you see or expect any changes in either the demand or supply picture within your business. It sounds like it's going to remain pretty steady, but just curious if there's anything else that you see over the next couple years that makes you more positive or negative.

Well, it's a double-edged sword. I think we talked about it a couple months ago. But, I see a lot of liquidity coming into the marketplace. Cap rates are coming down, have come down. You still -- you have to find those assets, those opportunities. The larger portfolios are being targeted by a multitude of different investors. There's nothing like liquidity to start folks who have assets to sell to start looking and saying this is a pretty good opportunity to monetize and move onto my next project or move onto my next opportunity.

Healthcare systems now, when they weren't necessarily happy with 8.5, now it's at 6.25 or whatever they can get. That becomes much more opportunistic for them. So, I expect activity to continue.

Good news is that we are still seeing a lot of our activity from repeat sellers, meaning that folks that we've done business with. And we're still finding opportunities in our markets, which is important to us. And the other good part of the equation is that we have some opportunities to dispose of some noncore assets to (inaudible) to find that the attributes of these assets are very important to them. So, we're getting good cap rates.

And so, I do think we're in a very good (inaudible) differentiator I think is the leasing, the NOI growth. Anybody can buy assets. We all know that. You need to pay enough. Can you buy them right? Can you operate them right? And can you continue to grow NOI for shareholders on a quarter-over-quarter basis? And that's what -- I think that's going to be the key for the next two or three years.

Okay. And then the projection that NOI growth will continue in that 2.5% to 3.5% range, should we infer from that that there's not much occupancy upside from your current 91% lease?

No. We try to be conservative. I always like to -- one of the reasons we don't go and put out guidance is because we like to talk about what we do, not what we didn't do or thought we were going to do.

I think our goal is 92% by the end of the year. This -- our portfolio over the next 30 months, I've said to folks should be in that 94% to 95% range. I think there's nothing that we see right now that should change that. We're seeing activity. We're seeing activity in locations that have struggled.

We're -- if you look at what we bought over the last three years, over $1 billion, great locations, key markets. And so, we like the opportunity. It's really just management needs to deliver.

Okay. And then just to clarify, the 92% by year end that you cited and then the 94%, 95% that you aspire to, is that affected by your pending asset sales, or is that the current portfolio?

I think it's a mix. I think, as you'll see, we have also looked to sell some longer-term triple-net lease stuff that's 100% occupied that isn't critical to our market. So, there'll be a blend of that. I don't think that the disposition of our assets will be assets that [improportionately] impact that number.

I think, when you all -- when we go through it and discuss them quarter to quarter to quarter, you'll find out that they're probably right in that ballpark of where we're at today. So, fundamentally, we need a net-net growth from the assets that we manage, that we own.

Okay. I have some more questions. But, I'll get back in the queue.

Dave Rogers, Robert W. Baird.

Hey, good morning to you guys out there. It's actually Jonathan Pong in for Dave. A question just on the acquisition environment. So, obviously, we're seeing cap rate compression. Can you give us an update on where you are with forward development takeout agreements? Is that an incrementally attractive option for you guys at this time?

It is. We have seen -- now, I'm going to preface this remark with that, if you see more of zero, then you're seeing one. It's not like we're seeing a 10 from one, zero to 10. We're seeing more development opportunities for us to be a takeout. That has certainly happened in the last six, nine months.

Mark Engstrom and myself, we get out a lot. I don't know if he likes to travel. But, I certainly think that it's very important to be out and talking to folks. And so, we're seeing some activity.

But, it's focused with the healthcare system. The healthcare system is the driver of the development to a great extent. The developer is a relationship that is already had with the healthcare system. And what we like to do, as you know, is we like to be that relationship that says: Okay. We're the end capital user. And let's do this not just once, but two or three times.

So, you're starting to see that, which is again good for the sector. But, it's still -- like I said, from zero to 10, it's a two. And maybe it was a one a year ago. You've got to have that healthcare system who really comes and says: I need extra space, and I'm willing to get behind this.

Sure. That makes sense. And if it's going from a zero to a one or a zero to two, can you give us a sense of how far along we are in that process and maybe the size, dollar amount that you'd be thinking of that would make sense?

Well, I think we're very early in the cycle. Development, certainly, when development becomes a seven or eight, six, seven, or eight, then you know you're in the latter half of the game from a supply perspective.

So, I still think that the supply is limited. I still think the occupancy's going to go to locations that are on campus or critical to the healthcare delivery of physicians. And I think there's redevelopment. We've had some opportunities to reenergize the space that we've owned with new leases, which certainly helps.

For us, if we can do $100 million of that stuff, takeout where we do it in the next 12 to 18 months, we would feel comfortable with that. But, we don't want to get too far out ahead of our skis. We're not developers. We don't have -- I don't want to be a developer. That's -- other folks do that. They do it real well. And we just want to be able to have that ability to buy it when it's 85%, 90% leased.

Great. That's helpful. And then just a quick question on the ATM. As you think about wrapping up your disposition in the back half of the year, how are you guys thinking about using the ATM? Have you been active in July? Just give us a sense of how you're thinking about that.

Well, we did mention that we did a little bit of our ATM in the second quarter to kind of match an acquisition that we had. We're really not in need of capital. We're doing what we had said. A year ago, 18 months ago, we outlined to investors the things that we were going to do. I think we've checked off, or at least in my notebook, I've checked off four of the five that we've continued to do.

And the one we didn't -- hadn't done yet was let's recycle some assets. And I think that's the mark that we're going to get checked here in the next six months. I think it's an extremely advantageous time to do it for our shareholders. I think the recycling of assets from either noncore locations into core locations adds tremendous value for us as a company when you look at our portfolio of $3.5 billion.

So, again, net-net, we'll be that 10%, 12%, 14% from a portfolio addition. And we'll be very, very cognizant of the fact that we are focused on NAV. We're focused on improving earnings for shareholders. So, we will be very, very particular about when and how we raise equity because, right now, I think we're in a very good position to continue to drive earnings to the bottom line.

Great. Thanks a lot. Appreciate it.

Colin Mings, Raymond James.

Hey, good morning, guys. First question, and maybe I missed this, but just on -- going back to the rent spreads, what was the differential between new leases and renewals? And then maybe can you be a little bit more specific on what that would've looked like including the Sun City portfolio because I think you said that number you gave or that flat to up slightly number was excluding that? Can you maybe put a little bit more color around that for us?

Yes, I think, as I said, Sun City was a third of the portfolio. It was a large 130,000 square feet. It certainly was a key for us. We were extremely glad that in fact the healthcare system wanted to renew, renew early, and stay in these locations and actually take an extra I think 18,000 square feet.

So, in that particular case, it was going to cost us a buck or two from a rent perspective because that's what it took. And we did that. The rest of the leasing, excluding Sun City, did very well. And I think I'll let Robert give you a view of what it did.

Yes, Colin, on the renewal leasing, we were up about a point overall on just renewal outside of Sun City. I think that's the point that Scott was trying to mention there. And on the new leasing, we were -- that's always a harder comparison to do. But, we were up about the same 1% overall. So, I think we're seeing kind of a consistent amount of growth throughout the portfolio from the rental spreads perspective, really outside of that Sun City portfolio (inaudible).

Okay. And then really, my second question just goes back to that -- the asset sales that you guys were talking about. Can you maybe put a little bit more color on what's the mix between kind of just some of the legacy non-MOB properties that are still in your portfolio versus just noncore MOBs?

Well, I think we're going through a process. And it really -- for our purposes, it looks at, okay, what is the best value that we can get from a particular point of view of what buyer do we have out there?

We'll be working through the noncore MOBs. And we'll be working through what we consider, of course, the other 10% of -- or it's actually less than that now as we continue to grow -- of the other stuff over -- between the rest of this year and 2015. So, you'll see us go through it I think pretty diligently.

Okay. Care to offer any sort of estimate of a cap rate on some of that, again, non-MOB stuff, noncore stuff that you're looking to market?

Well, I would -- I think what we'll do is we'll give you some idea when they close. But, I can tell you that people looked back and said two years ago: Gee, whiz, why didn't you get started? I can only tell you that the fact is that we have -- cap rates have come down across the board.

And it's -- we're going to be selling stuff that we think is noncore, replacing it with stuff that we think is core. And there's almost going to be no dilution in cap rate or change in cap rate. So, that's a pretty good equation if we can find what we think is good stuff or better located stuff, move away from a noncore asset that might've been bought in a portfolio three, four years ago. And so, we're going to do that.

Okay. And then, again, noticed again the G&A number was down a little bit. Can you talk what -- and maybe I missed this, but what drove that and how you think about that run rate going forward?

I'll let Robert talk about that.

I think we've been pretty consistent, Colin, talking about G&A being in the $24 million to $25 million range for the year. When you look at us from a six-month perspective, we're kind of right in the middle of that range at about $12.2 million.

Obviously, in first quarter, we've got a little bit more expense related to timing of annual bonuses, timing of the annual audit, and things of that nature. So, I think we feel pretty good about the range we've talked about $24 million to $25 million. It's a pretty good run rate.

I think it's important to know kind of what Kellie talked about, is that we've been able to maintain that G&A rate despite really adding $500 million of assets to the portfolio over the last 12 months.

So, we spent a lot of time looking at it, making sure we've got the right amount of infrastructure in place to support the overall platform. But, we feel pretty good about the $24 to $25.5 million for the year.

Okay. And then just one last one, and Scott, and just trying to think about the -- recognizing that your tenant retention rate remains very strong overall, but just kind of curious. The tenants that are electing to move out, is it really just a -- is it a pricing issue, or is it a just change-in-needs type of issue? I'm just trying to gauge on if there's -- the ones you are losing out on, recognizing you are trying to be firm on pricing to some extent, what's the dynamic there?

You don't win them all. You win nine out of 10, you're feeling pretty good. And if you win 10 out of 10, you're probably giving it away.

But, I think the sole practitioner, we're certainly losing the sole practitioner. In fact, they're moving to more affordable space. And more than likely, they're looking at a timeframe of staying in that space for -- until they retire, which probably isn't too far down the road. So, that, first and foremost, we are seeing that. We have seen it in the first quarter. We continue to see it here in Phoenix in the second quarter.

Second, you're losing the smaller practices that are merging with the larger practices. And there's a lot of consolidation going on.

So, we -- on our weekly leasing calls, or I was in Charleston last week. And one of the things that we're after is a consolidation of a group of physicians that are coming from two or three buildings. In this particular case, we're trying to get them in our building. But, guess what? In Atlanta, for example, we lost somebody that was doing exactly the opposite. They were moving to some other building that they actually owned. And we were losing about 2,000 square feet.

And there's really nothing you can do about it. It wasn't price. It was just a strategic business decision to allow them to get greater volume of efficiency. And so, that's what you're seeing.

And then from the healthcare systems, I think more than anything, you're seeing from them, they desire some flexibility. They went through a phase where they wanted all 12-year leases. And they wanted control of the space. And now, they're actually realizing that the blend of lease term and the blend of being able to have some flexibility is important to them.

And so, we're seeing five-, seven-year leases from healthcare systems. And we're seeing them move people around a little bit.

So, it's a very active space right now. But, the key is that the physicians are recognizing that volume brings profitability. And size generates efficiency.

Okay. Well, thanks for the extra color, Scott. Good luck during the back half of the year.

Thank you.

Andrew Shafer, Sandler O'Neill.

Thanks. Going back to the G&A, by maintaining your range, I assume that means opening the regional office. I think Miami was in the plans originally, or are there offsetting factors that allow you to maintain that range?

Yes, we had Miami in our plans a year ago. Our infrastructure -- and I'll just add onto what Robert said. I don't see our G&A from a $24 million, $25 million range moving in the next 18 months. I see nothing in 2015 that moves it significantly in the range that we have it in.

Our platform is pretty well built out. We're getting better synergies. As I said, our focus is really on -- from an organizational perspective, we're focused on bringing national contracts throughout our property management. We're focused on reaching out to national tenants to be able to see where else they need expansion in.

And all these things are helping from our platform being more efficient, so very comfortable with adding another -- I don't know -- $500 million of acquisitions, $500 million, $750 million of acquisitions without any real change in our infrastructure cost.

Okay. And then moving the healthcare system-driven developments, what markets in your portfolio are teetering on having fundamentals that justify building?

Well, I'm not going to talk about specific markets because other people listen on the phone. And so, that's probably not a good idea for me to go and do that. So, but, I will say that the East Coast is active. Certainly, certain pockets in the Midwest have got a little more active. And you're seeing some activity.

We mostly get the input from -- we hear about it, or we get the calls from the developers who are interacting with the healthcare system, or we get it from somebody that we know in the market that has sold us a building who says: Gee, whiz, did you hear this particular thing's going on? But, there is some activity.

All right. Thanks. That's it from me.

Michael Mueller, JPMorgan.

Hi. I was just wondering. On the $100 million to $200 million of dispositions for this year, how should we think of that on a go-forward basis? Does that amount for this year take care of a lot of what you want to cut loose, or is that more of a recurring level for the next few years?

Yes, I think that I have said that there's probably 10% of our portfolio. When I said that, we were at $3 billion. So, that's $300 million to $350 million worth of assets that probably make a lot of sense for us to recycle. They're not in core markets, or they're what we may feel are triple-net leased long term with low growth.

We -- in this environment I think going forward, you want shorter-term leases. You want leases that can roll with the marketplace. And if you're in a great location, you need to take advantage of that.

So, I think we'll do, as we've said, over the next 20, next 24 months, we'll do that $200 million to $300 million. This year, we'll probably do somewhere between $50 million and $100 million, which we've outlined.

But, it depends. If someone comes and says: I'll give you this outrageous cap rate for a group of acquisitions, and we think that they're tremendous, then we'll go, and we'll execute it because it'll be in the best interest of shareholders if -- again, if they fit into this bucket that we pretty much identified internally.

But, we want to try to match acquisitions, match dispositions, match net acquisitions so that we continue to move forward, not just simply sell assets and not go find better assets or better located assets for us to buy.

Got it. Okay. Think that was it. Thanks.

Doug Christopher, DA Davidson.

Hi. Thank you very much. I have two specific questions as a follow up for Kellie. The first is on the payout. I think it was indicated that the payout would be in the low to mid-80%, kind of 80%, 85% area if recent asset acquisitions were in for the full quarter. And does that mean that the FAD would've been about a penny higher on a quarterly basis?

I think roughly about a penny higher is where it would've fallen out, yes.

Okay. Thank you. And then second, on the interest expense savings, I think it was factoring in the $300 million of the new low-rate debt and refinancing. We'll save about $2.5 million annually or approximately a penny a share. Is that correct?

That's correct. The $2.5 million's on our existing facility as well as our term loans.

Okay. Thank you very much.

Michael Knott, Green Street.

Hey, guys. Just curious on disclosure. I didn't see it anywhere in the supplemental. But, releasing costs, the releasing spread, I think you might've touched on here on the call. But, just curious why there's no written disclosure on those metrics. And then also, can you help me understand on the same-store disclosure the occupancy -- or excuse me, the percent leased is there in the same-store disclosure, but not the occupancy?

Yes, I think the gap that we've historically seen talking about lease versus occupied, it's historically been pretty consistent with the 30 to 40 basis points spread there. So, that's been pretty consistent in there.

We just added that disclosure on the overall portfolio last quarter. And it's -- with all the disclosures, we obviously look to continue to improve the amount -- the level of disclosures to give investors the appropriate amount of information over time. So, it's something we're always looking at.

Looking at the leasing cost for the quarter, they've stayed pretty consistent. On the new leasing, the TIs for new leasing, we're actually just under $3 per square foot per year of term. So, the average lease -- tenor of the leases there on new leases was a little over six years. So, we're right at kind of $19 a square foot of TI.

On renewal leases, we were, again, right around that $1 per square foot per year of term, again, right around kind of the $5 to $6 range as far as TIs on the renewal leasing there. So, it's been a pretty consistent story as far as the leasing concessions have been over the -- really over the last several quarters.

Okay. I might be in the minority. But, I'd love to see that in the written disclosure in the future.

Scott, any quest -- or excuse me, any more specific comments on the acquisition pipeline? It sounds like cap rates are down across the board. You can replace your noncore assets with better assets at similar cap rates. But, do you feel like your ability to source acquisitions the rest of the year is going to be tougher, or do you feel like it's not that bad still on a one-off basis?

Well, I think that your last statement was the statement that I would come back to. One-off assets we feel pretty good about. We feel pretty good about the dialogue we're having with certain folks and the opportunity that we have to get acquisitions, as we have over the last 24 months.

I don't see for us a change in our ability to execute. Now, does that mean that we have to talk to maybe one, two, three, four more people than we used to two years ago? I agree with that. I think that it's become more competitive.

We're not after the big portfolios. I think folks after big portfolios might have a different answer for you. Don't know what their answer would be. But, that's just not what we do. And we don't go after the diversified portfolio. So, that's even better.

But, a couple examples of what we have done is Mark and I were, as I mentioned, in Charleston. And we had been after this particular opportunity for a year. And it's a physician-owned group. And we had to go -- Mark's been to two meetings with them. I showed up for a third meeting. And it took a while. But, it's something that came to fruition for us.

And so, we're working as we have consistently done. We don't mind putting some time and effort into an acquisition. We don't mind generating that longer-term relationship. So, that's kind of what we do. And that's how we've been going about it. And I think that that's how we have to execute our strategy.

Some folks can buy larger portfolios or go out and just buy it off an OM. We don't buy off of OMs. We buy off of visiting the asset before we offer for it, meeting with the tenants, at least the ones that are significant, and understanding how it fits into our asset management program.

And most importantly, there's a big box in the first two that says can this asset -- is it at market rates? Are they going to roll up or down? And am I going to be able to continue to get 2.5%, 3% rent escalators in this market in this location with these physicians? So, we have fun at what we do.

Okay. And then just two more for me, one quick one on the Boston acquisition there that you talked about earlier. I think the acquisition cost was about 590 bucks. You think the replacement cost of that building would be today?

Well, we're going to take you there eventually or have an investor meeting there. I think it's irreplaceable real estate. For example, Western just went up across the street I think for $300 million. And it was -- and their location, frankly, isn't as valuable as our location.

Down the road, they just put up a 19-story high-rise condos, condos starting I think at $750,000 in Boston, if you can believe it or not. I can't believe it. But, so, the replacement cost for these buildings I think, when you look at it, is really -- and we got fee simple interest. Mark just whispered over to me and would've jumped in here.

But, we own it fee simple. So, that's not on a ground lease. It's not -- it's ours. Our shareholders own those locations. And I think that it's a real good opportunity for us. And I think we bought it right.

Okay. I look forward to seeing it here in the future.

And then the last question from me is just I was wondering if you could touch on your hospital portfolio. I know you don't talk about it much. I think it's maybe 8% of your revenue. Just curious, it sounds like maybe this is what's going to be part of the disposition process. But, just curious, anything you can give us color on, on coverage, lease maturity, etc., would be helpful, just sort of an update.

Okay. I'll let Robert give [in a moment]. But, one, they continue to perform very well. That's the great news. The cap rates continue to compress on those types of dispositions, which is also a great positive. And we will -- we are not an owner of hospitals. And that's not our long-term focus. So, over time, and time, when I say -- I don't mean five years. I mean in the next couple years or the next 18 months or so. We will move through that with the right execution.

Not sure it's the right time right this moment, frankly. I think there's still a huge amount of demand for that type of acquisition. You just recently saw a huge transaction take place where it had MOBs. It had a whole bunch of diversified stuff, nowhere near actually the quality of stuff that we have in our portfolio.

So, if you bundle that to a larger portfolio, I think you'd have a great opportunity to really get a good transaction for shareholders. So, Robert, anything you want to add about a -- ?

-- Yes, your question about remaining tenor, we actually just renewed about 80% of our hospitals for -- it was an extension for about five years just in over the last 12 months. So, we feel pretty good about those. Those are all actually rolled up on the lease renewals. So, as far as kind of rents go, the remaining tenor on the hospital portfolio, on average, they're all five years left or more.

Typical rent coverage that we're seeing in the operations, kind of in the 2% to 3% range. Plus, these are largely kind of rehab hospitals that have been doing fairly well, great locations.

So, as Scott mentioned, we do get inbound calls from time to time, given the attractiveness of them and a lot of the interest in the sector certainly. So, again -- .

-- We get inbound calls. We give them a number. They hang up. And when they don't hang up, we'll sell it.

Okay. Thanks a lot.

Daniel Bernstein, Stifel Nicolaus.

Hi. Just a quick follow up here. You had about $130 million cash on the balance sheet. Was there anything I missed in terms of debt obligations that you had for that cash early in 3Q?

There are no real obligations. One of the things that we said is that we did say that part of that $300 million note that we were going to do, we were going to use about $75 million of that to repay some secured debt. We repaid about $20 million of that in the second quarter. So, we've got about $50 million, a little over $55 million that we've paid off thus far in the third quarter, again, very attractive spread and rates. And the prepayment penalties actually made it very positive from an [NPV] perspective.

And then the remainder could be used for investments.

And they will be.

And they will be. Okay. And one quick comment. So, you're not going after large portfolios. But, I think in the MOB space, I would've considered $100 million, $200 million portfolio to be pretty large. Are there real -- some really large portfolios out there that people are bidding on?

Well, I guess that I think I'll take that as a complement. The fact that we could buy a $142 million transaction or $200 million transaction with very good execution was a complement to our team. I think that that's great.

When I say large portfolio, most of the ones that I refer to are the ones that have that diversified feel to them, where there's half MOBs, and then there's a third of this and a third of that, and then they add them all together, and they somehow try to manage to the cap rate of the MOBs.

So, there are some portfolios in the MOB space that are in that $200 million to $300 million range. I think we're very competitive for those. I don't consider that a large portfolio transaction. But, again, it depends on the location. It depends on the type of lease. It depends upon the credit of the healthcare system. We're not going into secondary markets with triple-net leases for 12-year healthcare system -- 12-year lease with a healthcare system that came out of bankruptcy. That's not our style.

Okay. Okay. All right. Appreciate it. Talk to you guys soon.

Thank you.

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

Well, I'd like to thank everybody for joining. Appreciate the questions, very good questions. And hopefully, we were able to answer them. And any calls or any questions, please don't hesitate to call any of us. Thank you.

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