Healthcare Realty Trust Inc (HR) 2014 Q4 法說會逐字稿

Good afternoon, and welcome to the Healthcare Trust of America fourth-quarter and 2014 year-end earnings call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Jessica Thorsheim, Director of Investor Relations. Please go ahead.

Thank you, and welcome to Healthcare Trust of America's fourth-quarter and 2014 year-end call. Yesterday we filed our fourth-quarter earnings release, our financial supplement, and fourth-quarter dividend announcement.

These documents 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 will be happy to take your questions at the conclusion of our prepared remarks. During the course of this call we will make forward-looking statements.

These forward-looking statements are based on the current beliefs of Management and information currently available to us. Our actual results will be affected by known and unknown risks, trends, uncertainties, and factors that are beyond our control or ability to predict.

Although we believe that our assumptions are reasonable, they are not guarantees of future performance. Therefore, our actual future results could materially differ from our current expectations.

For a more detailed description on some potential risks, please refer to our SEC filings which can be found in the investor relations section of our website. I would now like to turn the call over to Scott Peters, Chairman and CEO of Healthcare Trust of America. Scott?

Thank you, Jessica. Welcome to Healthcare Trust of America's fourth-quarter and year-end 2014 earnings conference call. We appreciate you joining us today and we look forward to sharing our fourth-quarter results, year-end financials, 2014 significant milestones, and thoughts on the medical office sector for 2015.

Joining me on the call today from our Management team are Robert Milligan, our Chief Financial Officer; Amanda Houghton, our Executive Vice President of Asset Management; and Mark Engstrom, our Executive Vice President of Acquisitions. 2014 was our second full year as a public company.

The Management team continued its focus on consistency, discipline, and execution of our business plan and in our communications to the public markets. Looking at 2014, a few of HTA's accomplishments included: reporting record earnings for the year; maintaining and improving an already conservative balance sheet; improving our investment-grade ratings and extending our debt maturities; increasing portfolio occupancy; which includes all assets not just selected buckets; and growing our portfolio by over 12% for the third year in a row.

Our fourth-quarter results were again very consistent and dependable; a 12% increase in FFO per share to $0.37, 3.3% same-store NOI growth, our ninth consecutive quarter over 3%. Achieved 92% portfolio-wide occupancy, an increase of 40 basis points over the prior year, acquired $122 million of core critical medical office buildings within key markets, raised $170 million of equity at accretive pricing which also expanded our shareholder base, lowered total debt to enterprise leverage to under 30%, and closed on $42 million of non-core asset sales generating $16 million in gains.

Our results continue to demonstrate the strength of our business plan and reinforce that the Company is dedicated to the ownership and management of a portfolio of medical office buildings located primarily on or adjacent to growing healthcare systems, which are located in healthy and growing markets. We believe these assets and locations are core critical real estate today and will remain so for many decades, delivering strong, dependable return to investors. A simple but powerful story with tremendous opportunities.

The macroeconomic tailwinds specific to the MOB space that began in 2010 remain intact. Strong healthcare employment growth, continued implementation of the Affordable Care Act, aging demographics requiring increasingly greater healthcare services, and healthcare expenditures continuing to grow as a percentage of US GDP overall.

Following the 2014 enrollment period, an additional 8 million individuals have received coverage through the health insurance marketplaces. And important to HTA, outpatient demand within the ACA is just starting to be felt, and the leasing patterns for healthcare systems and physician groups are beginning to take shape.

There is a push for increased efficiencies and physician groups are consolidating and growing. As an example, over 50% of our new leasing in 2014 was expansion space for existing tenants, a trend that is continuing in 2015.

In light of the changing healthcare environment, we believe that over the last seven years we have assembled an irreplaceable portfolio of medical office assets located on campus and affiliated with the nation's leading healthcare systems comprised of 15 million square feet with approximately $3.3 billion invested in 28 states. Our disciplined and targeted acquisition and asset management philosophy has positioned us today in 16 key markets, representing almost 10 million square feet and 70% of our total portfolio.

We are acquirers of targeted assets in specific markets that we expect will generate value for the long term. We are not acquirers of large aggregated and diversified portfolios that may have positive initial spreads, but consist of a varied mix of quality, locations, tenants, and lease types.

Our portfolio is operated by our in-house national asset management and leasing platform, which not only positions us as a leading operator and landlord, but also has generated same-store annual NOI growth of 3% or more over the last nine quarters. The leasing and property management professionals we have in local markets continue to develop strong and lasting relationships that ultimately drive higher tenant retention and NOI growth.

Turning to our acquisition philosophy, we remain disciplined and targeted in our approach. In today's environment investors are seeking out stable and secure income, exposure to strong macroeconomic tailwinds, and consistent long-term growth. As a Company we are uniquely positioned to provide investors with these attributes today and over time.

Our rifle shot approach to acquisitions and underwriting of each individual asset allows us to be very specific in how we invest our capital. Our size, relationships, and history still affords us the ability to grow the portfolio by approximately 10% a year, even in today's competitive marketplace. From a financial perspective we remain committed to a low leveraged investment-grade balance sheet, consistent capital allocation, and strong annual cash flow growth.

Now turning to our 2014 acquisition activity, we acquired $440 million in assets. 88% of the acquisitions were located on campus or aligned with a healthcare system. Average occupancy for the 1.2 million square feet was approximately 95%, and in-place lease escalations averaged 2.7%. Over 70% was multi-tenanted, and overall cap rates for the year were in the 6% to 6.5% range.

Our acquisitions this year were focused on continuing relationships and expanding our presence in key markets including Boston, Miami, Raleigh, White Plains, and Denver. These core markets all have strong economies and leading and growing healthcare systems.

We also entered a new market in Hawaii with the purchase of two medical office buildings for approximately $50 million in two separate transactions. Hawaii is a very attractive market from a healthcare perspective. It has high quality healthcare systems and strong clinical care. The market is characterized as having high barriers to entry, and HTA's investment not only gives us a critical mass, but also gives us an avenue to more opportunities.

I would also like to highlight that in two of our acquisitions in 2014, one in Denver and one in White Plains, the sellers elected to invest a portion of their proceeds in HTA's operating partnership units by way of an UPREIT. These sellers were long-term real estate professionals with significant experience and ownership in medical office buildings that chose to remain invested in a national platform of MOBs given their long-term view and outlook on the sector. Our institutionalized in-house asset management team has developed valuable relationships in their local markets, which has resulted in solid performance.

As I mentioned, our same-store NOI growth was up 3.3% in the fourth quarter, consistent with the 2.5% to 3.5% we believe our portfolio should and will generate over the long term, including 2015. In the quarter we renewed almost 270,000 square feet, or 1.8% of our portfolio, and our tenant retention was 81% of GLA.

We continue to see physician groups consolidating to gain scale and increase efficiency. As I mentioned earlier, a direct proof point for that is that the amount of releasing that we did this year in 2014 was the expansion space with current tenants.

In general, lease terms remain between five to seven years, and bumps continue to be 2.5% to 3% in most markets. We have been able to hold our rates on lease renewals, especially in our multi-tenanted assets, confirming that our existing expiring lease space are generally in line with market.

Overall renewal spreads for the year were essentially flat, excluding our leasing completed in the Sun City in Phoenix. As you know, we've sold a couple of those single-tenant assets for significant gains once the leases were renewed.

Looking to the next three years, we have almost 24% of the portfolio rolling, with approximately 5% in 2015, 8% in 2016, and 10% in 2017. This limited amount of rollover near term will allow our leasing teams to focus on attracting key new long-term tenants, which we believe will allow us to not only increase our occupancy but increase the long-term value of our buildings.

And most importantly, improve the quality of our revenue stream not only next year, but over the next 5 to 10 years to come. As we know, physicians and healthcare systems don't traditionally move out.

Let me turn now to our strategic disposition strategy, which we began in the third quarter of 2014. We were successful in recycling $83 million in non-core assets, and HTA recognized gains of $27.9 million on these dispositions.

The sale of non-core or single-tenant MOBs at favorable pricing improves our portfolio and continues to allow us to deploy funds into key markets. Our philosophy remains focused on the continued improvement of portfolio quality, both in what we currently own and in what we acquire. We expect to continue to selectively recycle certain assets in 2015 and focus on improving our portfolio quality. It is an exciting time for our company.

Our dialogue with healthcare systems and physician practices is active and increasing. The demand for well-located medical office space is growing. We are in a good position to continue our performance in 2015.

I will now turn the call over to Robert Milligan to discuss our financials for the quarter and the year, as well as our capital markets activity and philosophy. Robert?

Thank you, Scott. From a financial perspective 2014 was a strong year for us, and the fourth quarter was no exception.

We continued to grow in a consistent and disciplined manner, both internally through same-store growth and externally through accretive acquisitions. On top of that our balance sheet is in great shape as we head into 2015, with significant flexibility and liquidity.

As Scott mentioned, we completed our one-for-two reverse stock split in mid-December. All of our results reflect this split.

Although this did not have any economic impact on our shares, it greatly increases the transparency of our per share financial results on a year-over-year basis. For the quarter normalized FFO increased 13% to $45.3 million. On a per share basis normalized FFO was $0.37, an increase of 12% compared to the fourth quarter of 2013. This increase was primarily driven by our 3.3% same-store growth, the accretive impact of our full-year acquisitions, and lower average weighted interest expense resulting from debt refinancing and credit rating improvements, offset by our dispositions and a slight increase in G&A.

As part of our credit facility refinancing, we also wrote off almost $1 million of deferred financing, which we have normalized out of our FFO to provide a more accurate recurring metric. Our normalized FAD per share for the fourth quarter, which incorporates our recurring capital expenditures and leasing costs, increased 11% to $0.32 per share.

Our dividend payout ratio for the fourth quarter was around 90%. For the full year 2014 normalized FFO increased 19.5% to $176.7 million compared to 2013. On a per-diluted share basis normalized FFO increased 13% compared to 2013, up $0.17 to $1.46. Normalized FAD per share increased 11% to $1.29 per share.

For the year our G&A expense totaled $24.9 million, in line with the $24 million to $25 million range we provided at the beginning of the year and relatively flat to 2013, despite increasing the portfolio size by almost 40% since going public. This reflected our ability to generate significant operating leverage from our platform as we continue to grow our portfolio.

G&A increased slightly from Q3 run rate and included several year end items. For 2015 we expect G&A to increase slightly to around $26 million. This increase is primarily related to our stock compensation issued since our listing. This stock is expensed over its primarily three-year vesting period, and 2015 will include expense for three full years of stock grants.

From a balance sheet perspective we run our company for the long term with a focus on low leverage and NAV growth. Further we are committed to matching our investments with long-term capital that locks in the long-term nature of our assets.

For the year, we executed on several fronts that are consistent with our philosophy and position us for continued growth in 2015. First, we raised over $173 million of equity, including over $150 million in the fourth quarter at pricing that was near our 52-week high, and were accreted to our investments made during the year. Second, we sold $83 million in non-core assets, including $42 million at the beginning of the fourth quarter. This generated $16 million in gains and begins to improve our portfolio quality for the long term.

Third, we lengthened maturities with a $300 million unsecured bond issuance at the end of the second quarter. And fourth, we closed on a new $1.1 billion senior unsecured credit facility consisting of an upsized $850 million five-year revolver and a $300 million term loan maturing in four years with a one-year extension. This locks in our pricing and credit availability for the near term.

As a result of these activities we ended the year with a great balance sheet, leverage that is less than 30% on a debt to capitalization basis, and approximately 5.7 times debt-to-EBITDA. We also took steps to improve our debt portfolio, lowering interest rates and extending maturities. At the end of the period our weighted average interest rate on our debt was 3.76%, down 16 basis points from the same period last year. And the average remaining term of our debt increased to 5.6 years.

Our credit ratings remain strong, with S&P upgrading us during the year to BBB flat. We remain committed to a flexible, conservative, and investment-grade balance sheet, and our execution gives us the ability to be strategic, but also keeps us protected and secure as things change.

I will now turn the call back over to Scott.

Thank you, Robert. I'd like to extend a thank you to our shareholders this year for their support of our business plan. Our strategy continues to revolve around core long-term real estate principles and generating shareholder value. We run our business and make capital allocation decisions for the long term.

Lastly, I cannot reiterate enough how important it is in today's market to look at the quality of the investments we are buying and the markets we are investing in. I would encourage anyone to come visit with us to see our properties, get educated about medical office buildings, and see the great opportunities that exist for us in our markets.

This concludes our remarks for today. Thank you for joining our call. I will now turn it over to the operator and open it up for questions.

(Operator Instructions)

And our first question will come from Kevin Tyler of Green Street Advisors.

Hi, good morning. Robert, I think you've said in the past that your lease rate tends to run roughly 30 to 40 basis points above actual occupancy. And I was just curious as we think about 2015, is this still kind of a good proxy?

You know, Kevin, it's a good question. We certainly do think that's a good proxy kind of on a run rate basis.

Obviously any quarter it might fluctuate up and down depending on movements and lease signing kind of timing. But I think 30 to 40 basis points is a pretty good proxy for us.

Okay, great, thanks. Then along the same lines on the occupancy front, your off-campus lease rate added about 100 bps in the fourth quarter. I was just curious if you could talk a little bit or elaborate a little bit on what you're doing to keep that number heading higher?

Well, this is Scott. I think one of the things that has happened and is occurring for us, in a couple markets, where we have, I would say, more of the off-campus MOBs, Indianapolis, Atlanta, we've seen some very good activity there. And that obviously has shown some growth in our portfolio.

And I think 2015 is actually going to be very good years for both of those markets, which has been something -- they've been slower. Indy was slower three or four years ago. Atlanta has been slower the last couple of years.

But what you've seen in Atlanta here recently is maybe a merger between a couple of the large healthcare systems, and I think that's always the forefront of what we see in the Affordable Care Act, which is the leasing space and where it predominantly ends up. So I think that's really the driver for the off campus.

But from an overall portfolio perspective, we're pretty excited about the opportunity in 2015 to move our occupancy another 50, 100 basis points. And that'll be both the on-campus stuff, but also the off-campus stuff that we have, that we haven't or aren't going to recycle.

We touched upon it on the call, but I think from a Management perspective in 2015, we're focused on three or four things. But one or two of those are number one, quality of assets. I think this is a great opportunity for companies to really fine tune the quality of their assets for what they believe is going to be the future of healthcare.

We're dedicated MOB owners, so we like certain characteristics and we need to make sure as we roll forward here in 2015, 2016 that we take advantage of that. And second, I think that the quality of the revenue stream coming from your tenants is important. We've talked about sole practitioners moving out of on-campus space. We've talked about physician groups with expansion space.

The hidden benefit of this 50% expansion space is actually not just the expansion space itself, but they're adding more physicians. They're adding more revenue-generating synergies within their practices that are increasing and improving the profitability of the practices. And of course you want strong healthcare systems. So quality of assets and quality of earnings is something that we're focused on in 2015 and 2016.

Okay, thanks, Scott. As you think about quality of earnings and moving to your recycling disposition program, appreciate the color that you gave initially, but I think in the past you've talked about the 6%-ish cap rate give or take. Is that still indicative of where the market is today for those assets?

Well, I would say they are in a 6%, 6.25% range. I think, again, it continues to be a very competitive marketplace. I think that the spreads from an investment perspective is certainly decreased for buyers. It's improved for sellers.

Again, I think it's a tremendous opportunity for companies to refine what their true business plan is. What do they want to own as we move through this process? So I think that from a disposition perspective and an acquisition perspective we'll try to stay flat from a dilutive or accretive prospect. And I think we can do that.

Okay. Thanks for the time.

And our next question will come from Todd Stender of Wells Fargo.

Hi, good morning. You guys issued OP units to a seller in Q4.

Can you just talk about the process that you went through with the seller, just share some of the characteristics of these units, mainly the yield, maturity. And then do you expect to use more of these in the near term?

Well, I'll start and then I'll let Robert talk about some of the specifics. Both of these cases were really cases that came to us. We were fortunate to have acquired some great assets in White Plains and there was a local person who was familiar with our acquisition and happened to be on the campus that we acquired in, and approached us about -- and they had been long-term owners of the MOB next to ours, and they approached us about that opportunity. This is great for us.

Not only do we get another acquisition, but we got it with somebody that after they did their diligence on HTA said, I'll be an investor alongside other investors. So it was -- that was a very quick, smooth process. When Mark Engstrom first got the call, normally depending upon the level of experience and expertise of the person or people involved, it takes a little longer and it's far more complicated.

Then we had another opportunity in Denver that came along, and that one was primarily a tax-driven decision. A, they were comfortable with our portfolio. It was an MOB, of course. They owned MOBs and that's what we do. But from their perspective they liked the opportunity to perhaps determine when that event was going to be taxable to them. And that was done in a pretty reasonably quick process.

So having been now public for a couple of years, it's gotten easier for us to have that communication. We're very simple. That's the other thing that I will bring up from this process with folks. We don't have JVs. We don't do development. We don't have a complicated balance sheet. We don't have a lot of difficult issues that pretty reasonable people look at and say, boy, that's a little complicated for me. We're trying to keep it simple.

We're very focused on capital allocation. In the discussion with these folks I think they judge us by what we demand in that relationship. I'm not going to buy something -- if I buy something from them that they think is priced outside the range of what it should be, the last thing they would want to do is be owners of OP units because that's a bad business decision. So I was very -- as a team we were happy with the fact that we were able to have that opportunity. And I think that's going to be more opportunity as we continue certainly in 2015 and maybe 2016.

And then just from a structure perspective, they basically share all the same characteristics as our common traded stock only they're held at our operating partnership unit. So there's no maturity on it. They get the same dividend payout as the common stock shareholders.

Does it convert to a common share 12 months from now?

It's at their -- they have to keep it for at least --

At least a year.

A year, and then they actually get to make that determination of when they would convert it. When they convert it, it becomes taxable.

Right. But it's convertible on a one-to-one basis.

Okay. That's helpful. Okay, that's the sellers.

How about the buyer profiles? As you guys look to tee up more assets for sale this year, anything you're seeing from a buyer profile perspective, whether you're seeing more 10-31 buyers or foreign buyers? Anything new that you're seeing?

Again, I think it's becoming a very competitive space. I think the big difference, perhaps in the MOB space right now that may be a little bit different, is that it's not -- it might not be looking at traditionally as a bond alternative. I know that the healthcare sector in the past has looked at something and says, okay, I can buy a bond, I can buy healthcare. I think MOBs have been somewhat undiscovered in that specific allocation of one's capital.

But now that we've been nine quarters and we've had 3% or better, we feel comfortable that we're in that 2.5%, 3.5% range. The leases that we're signing are market and continuing to be market.

We're very specific in the type of asset we like, which is multi-tenanted. We're not spread investors, so we're not buying a bunch of assets that have varying degrees of quality or term or location or makeup from an asset perspective.

So I think that this space is becoming -- still becoming a place where people want to invest. We just need to continue to do what we do, which is, we base our acquisitions on one-off transactions. Each of the sellers that we bought from we know. I mean we know individually who owned that asset. Mark Engstrom continues to talk with them. Most cases we actually have recurring discussions with them about their markets and about other things that they are doing.

It's a little bit different than when you buy a portfolio from a portfolio aggregator. They really don't have those contacts that go back to who did this and who built it and who put the leases in and who are the people that are going to expand.

So I think we're in a pretty good position, Todd. But it certainly has changed over the last three years.

Great. Thank you, Scott.

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

Thanks. Have you seen any change in tenant behavior? Are they starting to proactively reach out with you and try to reengage in these leasing discussions, or do you feel that business is as usual and they wait more the 8- to 12-month timeframe?

Well, I'm going to break that into two separate categories, and Amanda can jump in here in a minute if she either agrees or disagrees. But I think the single tenant occupiers are being a little more aggressive and are reaching out to try to get some consistency in what they see for their lease term.

And I think that if you have a healthcare system or if you have a large single tenant -- we had both of the situations last year for us, one in Albany and one here out in Phoenix. They reached out to us to try and get some longevity in their term and get some structure in what they wanted to do from an organizational perspective.

But with the multi-tenanted folks, the three/five years, the physician groups, I would say it's business as normal. I think that if anything the expansion requests are far more than they have been at any time in the past.

When we have our leasing meetings every week or every other week the first question we are talking about is, okay, what do we have from an expansion request or have you gotten any calls? Those calls are coming to us more than we have seen.

So I think the single-tenant guys, they are trying to get maybe advantage from a longer-term perspective. But the multi-tenanted guys that are reaching out to us are really on expansion needs. Amanda?

Just to elaborate a little, but I would agree exactly with what Scott said. But the larger health system, the tenants that are growing, consolidating and needing expansion space, they are coming to us in advance. It could be 12 months, 18 months before their expirations and they are trying to really capture the space that they can do their 5- and 10-year plans and remove that variable from it.

The smaller tenants, again, that is business as usual. 12 months out we'll typically approach them. In certain markets it's six months out, but there's not really much change with our smaller tenants.

One thing that Amanda touched on that I would say, is that for the first time in the last 12 months, and really it's accelerated somewhat in the last nine months and six months, is that healthcare systems or some of these larger uses are trying to work with us to determine their needs.

We've actually been asked to look and say, okay, if we move some stuff around in some of our other stuff, can you accommodate us over here? And if this move is going to take an 18-month period of time, we don't want to make a decision to move or relocate a practice or acquire a practice if you're not going to have the space available for us to be able to expand and relocate.

Now that's great, but it does lead a little more complexity to the equation because you've got to make sure that you have the space, you might need to relocate someone to give them the space, which in fact we had a discussion this morning about with somebody. So there is more dialogue. And I guess this is -- it's true real estate. Multi-tenanted buildings typically tend to be managed as if it's true real estate.

Thanks. And could you talk about cap rate spreads between the on-campus aligned versus off-campus not aligned? And did you see any compression? Are these spreads starting to gap out?

No, I don't think they -- I think that to some extent, my general comment to that is that the differentiation that buyers are putting on the different revenue streams do not take into account, in some cases, the risks that are associated with those different -- the revenue streams.

I think that they've compressed. I don't think that they have widened, but I think as a buyer there is always that old saying, buyer beware. And we diligenced some assets frankly here in the first quarter that we were very excited about, and actually backed off of after we looked at what we thought was the quality of the revenue stream and the credit of the tenants and the long-term synergies of how we saw that that was going to impact the future.

We are very cognizant of our desire to have an annual NOI growth of 3%. That isn't going to happen if you're not extremely diligent up front. It takes a lot of work at the end and in the middle, but the real work is up front when you look and say is this quality of income going to be at market? Does it move up? Can you get 3% escalators? Are they going to be able to pay it? I think there are some folks that are less discriminate than others.

Okay, thanks. That's it for me.

And the next question is from Daniel Bernstein of Stifel.

Hi, good afternoon. I didn't hear, and maybe you talked about it but I didn't hear, what is your forecast for cash NOI growth in 2015? And maybe talk about some of those component occupancy expenses and the contractual rates?

I think from a cash NOI perspective we continue to expect to see 2.5% to 3.5% same-store growth. I think that's pretty consistent with what we've talked about really over the last -- since we've listed. I think what you have started to see certainly over the course of 2014 is base, our base rent growth has taken up a much larger percentage of the overall NOI growth. In-place escalators that we have across the portfolio are about 2.2% right now.

And as we continue to renew leases for the year, we've been certainly in the 2.5% to 3% annual escalator range for that. So our in-place escalators continue to move up.

From an expense standpoint, we are really just starting to get into the operational efficiency gains that we expect to see from our in-house management platform. I mean, you certainly see some nice expense savings when you initially take things in-house. But from there it really takes 24, 36 months to really get your processes in place and to take advantage of certain national accounts that you do that.

So expense savings, we'll continue to see 20%, 30%. I'm sorry, 20 to 30 basis points of growth there. So you kind of put those together and we're looking at a pretty nice 2.5% to 3.5% consistent same-store growth.

Do you still see the portfolio getting to -- I think in the past, you said 94% occupancy. Is that still an achievable goal? If my memory recalls correctly, is that still an achievable goal?

You do recall correctly. We hit 92% this last year, in 2014. That was our objective and we started off close to 91%. So we were able to make good gains. I do think it's achievable.

I have always said that it was going to take us 30 months and that was about 12 months ago. And I think that the -- we're seeing a lot of activity. The key for us really is to make sure that when we lease some of this space, that it's leased in the right perspective, which is long-term, good tenants, growing tenants that can grow revenue, and that the building and the makeup of the revenue stream of the building is something that's going to work. We don't want to just put people in in order to fill space.

And so we are being -- we have turned down folks in space where we felt that A, it was going to be needed for expansion or B, the underwriting of that particular tenant or those tenants was not the same quality as perhaps somebody else that would bring greater synergy to the building. And that's in Atlanta, for example, that was the case in 2013, and we've seen some real improvement in 2014. But we did pay a little bit of a price in 2013.

Okay. And then in terms of the acquisitions you did in fourth quarter, could you talk some more about whether those are on or off campus and maybe the hospital affiliations with those, if you can?

Yes. We start with the opportunity to invest in Hawaii. We would have only did that if we could get a critical mass, and we were able to put two acquisitions together at the same time.

One that had been in the works for us for over a year and a half. It really focused around an extension of Kaiser. They had -- and we were not as a buyer prepared to take the risk of that extension, even though the seller was convinced, and certainly should have been, and they did extend that that was going to happen.

We had pushed that off and said that we were very interested if A, that would happen and B, if we could find something else of opportunity. It so happened that we were able to find that, which was just as good a quality acquisition.

So that to us is a very good market. I think historically it's been a very strong market, and the cap rates that we bought those assets in frankly were probably 50 basis points better than what we would have anticipated if someone would have just said, what does it take to get invested in Hawaii?

We also bought something in Charleston, a building there which is right across the street from a larger building which is less than a quarter mile down from the hospital. It's full. It's going to bring some synergies to our building across the street. So I think that's a critical mass. And Mount Pleasant is top five growth city in its size last year.

Boeing, if you go to Charleston, it's amazing what that market is doing and what Mount Pleasant is doing. Denver was an opportunity for us to fill in. We are less than a mile away from campus with both the assets. Lincoln was less than a mile away from these two assets, so more synergy in that location. Amanda's able to -- we hired a leasing person in Denver now that handles our leasing in-house.

You know from us that leasing in-house to me is like if you're going to own the assets, own the relationships. These are valuable, valuable long-term relationships and physician groups. Healthcare systems don't change a lot. Sometimes the executives change, but the core relationships tend to stay with people who are there. So these are good acquisitions for us, and we just continue to I think find good individual assets in great markets.

Okay, okay. I'll hop off. Thanks.

Next we have a question from Rich Anderson of Mizuho Securities.

Good morning out there. So they're off campus in the fourth quarter, right? I just want to make sure I got that right.

The Tides was off campus. The Denver would technically be off campus, even though you can see the hospital a quarter mile away. And the two assets in Hawaii, even though they are destination resorts from a healthcare perspective, they don't have a hospital campus next to them.

Okay. I just wanted to clarify that. So you mentioned the lease, expiring leases. You indicate you're at market pretty much across the portfolio. Are you saying then that the market rents are going up by the rate of your escalators? Is that how we should be thinking about that?

You know, Rich, there's two answers to a great question. And this is one of the things you and I actually talked about, I think last year at this time or last year in February. I do think that this market, medical office buildings with healthcare systems, with larger physician groups, and I put an asterisk between both of those statements.

They are in fact showing that 2.5%, 3% gain. You are getting that on renewals. You are getting that in new leasing in your building. I think that's a very important component of what maybe our other asset classes may be struggling with in the economy.

And second, our leasing concessions. One thing Amanda wanted me to talk about, and she was going to jump in here if I didn't, was that we are continuing to see a reduction in the leasing concessions that we are giving. It doesn't show up in our numbers per se. It shows up slowly, just like the fact that we don't pay leasing commissions on 30%, 40% of the stuff that we lease, because we do it without a third party broker, shows up because you don't spend the money, but doesn't show up necessarily in a number. So those two components -- the space continues to get better.

Okay. I'm going to do a little groundhog with you.

The acquisition cost numbers came down significantly. Can you talk about how that happened?

I'm going to do a groundhog for you. I'm going to turn that over to Robert. (laughter)

I think kind of what we've discussed with the acquisition expense is certainly there's a couple -- every acquisition is unique and the payments or lack of payments that we make with them depending on who is actually paying the cash will impact that acquisition cost. I think in fourth quarter, certainly they were much more traditional acquisitions, very limited loan assumptions, very limited fees that we had to pay on our side versus what traditionally is paid for by the seller.

So I don't think we really did anything special or unique in the fourth quarter. It just happened to be that these were a little bit more traditional closings.

But we were aware of it.

Okay. So do you think the acquisition expensed line item might sort of moderate in 2015?

I think that when I say we're aware of it, I think that there are some things that sellers can pay for traditionally that sometimes they say will the buyer pay for it and the cost equation doesn't change. We'll certainly be very cognizant of the -- of making sure that we don't spend any acquisition cost that is unnecessary. And I think Robert wants to try to make sure that we are consistent in how we manage those expenses, if there is a opportunity to have either the seller pay for something in a normal course or if we pay for it in a normal course.

All right. And then one more from the groundhog file.

The incentive comp issue that I brought up in the past related to acquisition volume, wondering where you stand on that issue? I know it's very small relatively speaking, but would you think it might come out of the equation at some point down the road?

Well we look at -- mostly we look at our governance issues once a year as a Board. As I told you, this was discussed last year at the end of the year. It will be discussed at our annual later in the second quarter.

It is small. And I think that one of the things that we debated to some extent the first time we tossed it around a table was that it is small, but a Real Estate Investment Trust should have some focus on quality of acquisitions.

We also, Rich, and I didn't bring it up last time, we have an investment committee that is made up of independent directors. Every acquisition we do goes through that investment committee. I don't know how other companies are necessarily aligned or how they coordinate their process, but I don't have the authority to approve an acquisition simply to approve it. It has to go to the acquisition committee for approval.

So in some degree, that gives some constraint to the fact that -- or the fear that we're just trying to buy acquisitions in order to make some number or make some bonus. But I do think -- it will be on our list of discussion and based on your question, I think all of our folks are aware of it.

Great. I appreciate it. Thank you.

And the next question comes from Jonathan Hughes of Raymond James.

Hi, good morning, guys. Good afternoon, let me say. Just quick question, most of mine have been answered so far, but wanted to ask about the Honolulu acquisitions and your outlook expectations for additional acquisition opportunities in that market, and at what size would you presumably take that in-house management?

I think that one, we would like to have other opportunities there. One of our peers are there and I think they like the particular metrics of Hawaii. We know we like it.

I think it's an opportunity for us to add some more depth in the marketplace. We wouldn't have done it without the thought that perhaps some folks that we have dealt with or are dealing with can help us in that regard.

But I think Amanda would say that, or certainly I would put pressure on Amanda to say, one more acquisition and okay, that's -- now we've got three. We've got enough square feet. It's a small enough demographic distance between folks that this now makes sense. So I think it would be on the next acquisition that you would see us take that next step.

Now having said that, we're getting great help from the folks that are doing it for us there now, and in fact they were part of the folks we bought it from. So good relationship.

Okay. All right. That's it for me, thanks.

And the next question comes from Douglas Christopher of Crowell Weedon.

Hi, thank you very much. Robert, you mentioned G&A outlook for 2015 is approximately $26 million. Can you quantify that three full years of vesting impact versus the $24.9 million in 2014?

Looking at it, I would say the bulk of the increase is related specifically to that. Certainly, we have a number of other moving pieces within G&A that we always look to manage very carefully to make sure we've got the right infrastructure in place for our platform. But I'd say the bulk of the increase is really related to that kind of third year of stock comp expense.

And the other thing that we have done, and I think it's been very important for us, is that we've talked about in-house management both leasing, property management, and we put in a program. And again, I don't know what other companies do, but we believe that the leasing folks in our regions and the -- what we call our diligence officers which oversee a lot of our portfolio regionally, we've invested -- we vested them over -- in the stock program that vests over a period of time.

So we started that about two years ago. Some of the impact that Robert's talking about is in there. We're staffed really where we are so it's not going to be incrementally greater. But I thought it was very important to, just like 2014 was a very good year for us in most all metrics. The folks that are doing it are the folks that are doing it day to day and in the marketplaces that have these valuable relationships.

I think we're really comfortable with what Robert's guidance is on G&A. 2012, people say can you keep it at $24 million, $25 million? We said we could. I think we're very comfortable keeping it in that $25 million, $26 million range over the next two or three years.

Great. Thank you for that detail. And can you describe maybe your discipline to stay above the 6% cap rate area?

Well, I think it's not only discipline, but it's the type of opportunity that you're seeing. I would argue to some that the larger portfolios and the aggregation of portfolios that are going on are really generating cap rates that are maybe 50 or 75 basis points different than what they would be if they were bought individually, on assets with an individual discussion with that primary first seller.

Remember, when you buy something third hand it costs you -- sometimes it costs you a markup. And so some of that stuff that may go sub-6% is probably in that category. Some of it's longer-term lease properties that have fundamentals that certain types of buyers, leveraged buyers, are looking at and they are seeing the great opportunity to do that. But that's a five- or seven-year opportunity for them because when refinancing comes that probably -- that metric may prove out to be one of the opportunities for us to be an acquirer.

We want to stay disciplined in that 6%, 6.25%, 6.5% range. I think that's the best capital allocation that we can utilize. And I think we focus upon the long-term quality of the asset, quality of our portfolio, capital allocation, and the performance of our NOI on an annual basis, and that will reward investors long-term. We don't need, nor should we go hunting for assets that are unusually, for whatever reason, priced at a point where there's basically very little spread to be made and a lot of risk to be had.

All right, thank you. And then lastly, can you describe potentially the effect of the overall economies in the area where you operate?

For example, lower energy prices and lower energy budgets could impact some of the commercial space demands in the areas where there's drilling and production around you. Any thoughts regarding the potential there for the healthcare space?

Yes, three thoughts. Number one is I think that the healthcare sector is probably removed from the localized pressure of those -- the jobs that are at risk because the reduction in the energy. Again healthcare, people need it. They use it. It's continuing to roll out.

Very little do we hear when we are talking about releasing about the economy. We just -- that's not the discussion that the healthcare systems or the large physicians groups have with us. It's more about location and synergies and reimbursements if they are looking for certain things or not. So I think that's good, but I think you should be aware of certain states that may be in that.

Off campus, I think that could be an issue. I think if you're buying off campus in an asset, you might be impacted by that because there's a lot more competition and there could be a lot more competition.

Benefit, I think our tenants will get a benefit from the reduced energy because we'll pass it through to them or pass most of it through to them, as under our leases, we'll benefit from some of it. But that's good because you want to be a good purveyor of their dollars that they are spending to occupy your space.

I think it's interesting to see how and what areas would be impacted. I don't think the healthcare side of the equation -- and again, determining where you may be located from an asset perspective, should not impact us. We have not seen it.

Great. Thank you for taking my questions.

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

Thank you, everybody, for joining us again. I do know that -- I'll let you know the Management team will be at the conference next week, Wells Fargo.

Looking forward to talking about both the results here, thoughts on the medical office space. And we again appreciate all the investors and all the folks that talked to us about what we're doing. Thank you.

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