Healthcare Realty Trust Inc (HR) 2015 Q1 法說會逐字稿

Good afternoon and welcome to the Healthcare Trust of America First Quarter 2015 Earnings Conference 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 First Quarter Earnings Call. Today, we filed our first quarter earnings release, our financial supplement and first 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 following year. We'll 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 (Audio Gap) for 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 on the Investor Relations section of our website. I will now turn the call over to Scott Peters, Chairman and CEO of Healthcare Trust of America. Scott?

Thank you, Jessica and good morning and afternoon to everyone. Welcome to Healthcare Trust of America First Quarter 2015 Earnings Conference Call. We appreciate you joining us today as we discuss our first quarter results and the progress we've made so far in 2015. Joining me on the call today are Robert A. Milligan, our Chief Financial Officer; Amanda Houghton, our Executive Vice President of Asset Management; and Mark Engstrom, our Executive Vice President of Acquisitions.

As we begin 2015, our management team continues to focus on our business strategy of expanding our portfolio in key markets increasing HTA's enterprise value and most importantly being good stewards of capital. And looking at the first quarter, we continued our outstanding performance steady and consistent. Our MOB dedicated Asset Management platform generated sector-leading same-store growth. Our acquisitions team work directly with the leading health system in a key market to expand our portfolio. And as a Company, we maintained our commitment to financial strength, balance sheet flexibility and positioned HTA with a debt to enterprise value of 29%. As we look specifically at the first quarter, our results were again very consistent and dependable. A 6% increase in FFO per share to $0.37, 3% same-store NOI growth, the 10th consecutive quarter of growth of 3% or higher. No development or JVs. We acquired $35 million of an on-campus and healthcare system located MOBs, continuing to utilize the relationships our acquisition team has developed in our key markets. We are also currently under contract (inaudible) closed over $90 million in additional investments located in these key markets. We're intently focused on expanding the relationships that we have established over the last eight years with the local hospital systems, developers and physician groups.

As I mentioned earlier, we maintained our strong balance sheet with total debt to enterprise leverage of under 30% and continue to keep our capital structure, investment philosophy and business strategy, straightforward and focused. We are executing as a pure play at the lowest end of the risk spectrum, as it relates to healthcare real estate. Investor interest in the medical office market continues to increase and cause cap rates in most cases to continue to go lower. It is also significantly increased the liquidity in the overall healthcare sector. Recent transactions in the healthcare space and the focus on integrated healthcare services will continue to expand our opportunities. With less than 20% of all MOBs owned by the public markets, we believe there is a tremendous opportunity for us to grow and benefit our shareholders.

This opportunity is even greater as healthcare volumes increase and are delivered in key outpatient settings on campus and in core community locations. That dynamics within the healthcare sector remained favorable. Our population is aging, preventative medicine is taking hold and the Affordable Care Act is adding millions of additional insured individuals.

This is increasing demand for healthcare services; a key reason that healthcare is projected to be the leading growth engine for jobs in the United States. As we mentioned in our year-end call, our focus this year is to drive portfolio quality through acquisitions in key markets and in key healthcare settings.

As capital investors in individual assets, we are more disciplined than ever on our underwriting and these assets must perform to the long-term and also improve our portfolio quality before we allocate capital. Medical offices traditional real estate were key locations, building quality, property management, market rates and tenant mix are critical to generate strong returns and creating value over the long-term.

We evaluate our opportunity to such, for healthcare providers, we bring a balanced approach to relationships, where good locations, expense efficiencies and great service generate demand that is win-win for all parties.

HTA focuses on growing in our key markets, allowing us deploying benefit from our asset management infrastructure. This allows us to operationally provide a superior experience for our tenants. What does not show in our reported numbers, that we underwrote and ultimately passed on a number of investment opportunities due to poor portfolio fit, generally related to long-term performance, above market rents, pricing concerns, geographic locations and co-mingled asset quality.

As of today, the primarily invested in 17 key markets across the U.S., 13 of which are in the top 50 MSAs. Our goal is to have between 700,000 and a 1 million square feet in a key market that allows us to truly generate operational efficiencies and economies of scale. We look to grow into a national platform of 20 to 25 key markets, providing dedicated asset management and leasing in superior locations and markets.

Overall today, we have close to 90% of our portfolio invested in our top markets and across the top 50 MSAs. We continue to focus our investment strategy on core critical real estate, with over 70% of our properties located either on our adjacent campus. These on campus properties have steady and increasing tenant demand primarily from specialists that benefit from a proximity and infrastructure of the hospital. Our off-campus properties are largely aligned leading health care systems, primarily multi-tenanted and located in medical clusters with strong demographic were positions and health systems compete for space truly long term community core locations.

I'd now like to turn to portfolio performance and operations, our institutionalized property management, leasing platform drives our consistent internal growth. At the end of the first quarter, over 13 million square feet or 90% of our total GLA was managed in-house. In the last quarter, we transitioned our recent South Florida portfolio in-house. The portfolio ended the quarter at 91.7% leased, up 50 basis points from the first quarter last year. Similar to last year's first quarter it was a bit of seasonality in our leasing activity. We expect to grow our overall occupancy (Audio gap) 57% this is partly due to the fact that smaller practices continue to consolidate into larger physician groups to manage cost and drive efficiencies. These larger groups are looking to lock up space for long-term and we are managing our portfolio to meet the needs of these larger tenants that will be critical tenants over the long term.

Our lease spreads were up 1.3% in the first quarter, we continue to push average escalators in this 2.5% to 3% range. Our new leasing in the quarter including 3% bumps on average. This quarter HTA acquired two MOB's for $35 million in our key market of Atlanta, directly with the healthcare system, one of which was directly on campus and the other over 60% occupied by the same healthcare system in a key location in the community. The acquisitions will expand HTA's Atlanta portfolio to 714,000 square feet and are clustered as opposed to other HTA assets in the market. The buildings are 98% occupied and are acquired in the mid-6 cap rate range. These assets will be immediately accretive to our in-house platform.

As we look to the second quarter as I've mentioned, we have a number of assets under contract in our key markets that meet our investment criteria. Given current market conditions, we are also continuing our recycle program for non-core properties with several currently under contract. We expect these to flow throughout the year and be relatively cap rate neutral.

With that I'd like to turn the call over to Robert Milligan, our Chief Financial Officer.

Thanks, Scott. I'll now walk through our first quarter earnings results, our balance sheet and capital funding plans for the remainder of 2015.

For the first quarter, normalized FFO per diluted share was $0.37, an increase of $0.02 or 6% compared to the first quarter of 2014. Overall, normalized FFO increased almost 10% to $46.6 million as compared to the prior year. The increase in year-over-year normalized FFO was primarily due to our same property cash NOI growth of 3% and the accretive NOI generated from the almost $400 million net acquisitions completed over the last four quarters.

Same property cash NOI growth was driven by over 2% in contractual rent bumps across the portfolio, relatively stable occupancy year-over-year and additional operating efficiencies and lower weather-related expenses this quarter.

G&A was $6.6 million for the first quarter in line with our expectations of $26 million for the full year. As you're aware, G&A tends to be slightly elevated in the first quarter from the timing of year-end activities.

Normalized FAD per diluted share ended the quarter at $0.35, an increase of $0.03 or 9% compared to the first quarter of 2014. One thing to note is that given the relatively low level of lease rollover in our portfolio, our same-store non-cash straight-line rent actually declined by almost $800,000 year-over-year. This creates a bit of an earnings headwind that is not reflected in our FAD per share.

Our dividend payout ratio for the quarter was a comfortable 83% within our 80% to 90% range that we target over the long-term. We remain committed to a strong and conservative balance sheet and ended the quarter with leverage of 29% debt-to-total capitalization and 5.7 times debt-to-EBITDA. At the end of the period, we had total liquidity of $856 million including $14 million of cash.

Our average interest rate of the portfolio was 3.6%, down 20 basis points from the comparative period last year. And the weighted average remaining term of our debt has been extended to 5.4 years from 5 years in the first quarter of 2014. We will continue to extend debt maturities as the market allows.

We note that our conservative leverage does sometimes come at the expense of earnings; we ran leverage at some of our peer levels. We would certainly have higher earnings. However, we believe the added flexibility and certainty of earnings more than makes up for it and should be reflected in our multiple. As Scott mentioned, we purchased two MOBs this quarter for approximately $35 million. We acquired at average cap rate in the mid-6s and we immediately added these to our in-house asset management platform, which layers in additional accretion that would not otherwise be realized. We expect to finance these in a manner that maintains a strong balance sheet position, utilizing additional capital recycling to balance out any additional borrowings. I'll now turn it back to Scott.

Thank you, Robert. Thanks to all of you for joining us in today's First Quarter Earnings Call. Before we conclude, I would like to take a moment to formally introduce Mr. Peter Foss, as the newest Independent Board Member at HTA. Peter, brings an extensive amount of healthcare industry experience to the Board. He has worked with the General Electric Company for 38 years, in various sales and marketing executive roles and has spent a significant amount of time engaging and educating healthcare systems, providers and physicians on GE's innovation within healthcare.

This concludes my formal remarks for today's call. And operator, will now open the call up for questions.

Michael Gorman, Cowen Group.

Thanks, good morning guys. Scott, I was wondering if you could spend a few more minutes talking about the pipeline maybe beyond the 90 million, that you've either closed or have under contract and to give a sense for kind of how large the opportunities that you're looking at, maybe over the balance of 2015 and kind of what you mentioned on the number of deals that you passed on in the first (inaudible) as the markets become more competitive?

Well, good question. And I think our view is that we continue to see transactions in the marketplace. I think that's the theme that we're continuing to hear from our peers also. Our pipeline has been consistent from a perspective that we are focused on our key markets, relationships, transactions really $25 million, $50 million and so that hasn't changed at all from our -- from how we've gone after fighting our acquisitions over the last three years. I think that's a lot to do with our consistency that we've been able to produce over the last three years. So I think from that perspective, we're not finding ourselves in a significantly different position. I think there are some, cap rates are always now -- you have to be careful that they're coming down. You have to look more carefully, I think at the asset -- I think from our perspective, what we're doing differently right now is we're saying, what assets are most accretive to our overall platform. We've been in a very, we've been very fortunate three years ago in 2012 we went public, we've now acquired about a billion I think since then close to that. So we put our asset management platform in place, it's continuing to produce very good results, I think sector-leading results (Audio gap) from a same-store perspective.

So when we're looking at acquisitions, it’s the content of the tenant mix, which really was why we passed on several opportunities that in fact have been bought by some other folks, they didn't fit what we thought was going to be truly accretive to us as a portfolio, focused with opportunity to continue to acquire our assets down the road. And then, how did it fit with the new transition in healthcare. Healthcare is truly is becoming integrated from efficiency and from a patient perspective as hospitals look at this.

So I think that we continue to look core on campus across the street, continue to find great opportunities, community core location. But for us that's really not just one building located in a suburb, it's a location like White Plains, where there're six assets that we own, bought four, bought another one and then I came to us in an (inaudible) -- that's a great synergy for us and that's how we're trying to build our key markets.

Okay, great. And then I guess maybe stretching that beam up maybe a little bit more over the longer term you talked about the 20% MOB ownership in the public markets. How much of the remaining pool would you say is both available to the investment universe and would fit your criteria. I know that's, maybe not getting into specifics, but what's the general opportunity set for you guys over the next, call it five years, 10 years?

I think, three to five years, I think that's a view that we're fortunate enough to be able to see. Five years ago, we were far different as a company than we are today. We actually just started our asset management in housing five years ago in 2009. So it's been a very good process for us this five years, we focused on moved on campus, we focused multi-tenanted buildings more than single tenant. So we moved our business model but we've always said, core locations, core critical infrastructure in place that makes these locations for our assets destinations. Now, we've been, we've also got now Mass, Boston where we've in Pittsburgh, so we have added markets. And I think our opportunity next three to five years is to continue to grow at the pace that we've demonstrated, good buildings, good locations build out to a 1 million square feet in great markets. I don't see that necessarily having any significant hurdles, I think it's just a matter of, as any team has to do is just execute.

Okay, great. And then maybe just one last one on the same store side, can you talk a little bit about how long we can expect these kind of positive expense comps to continue to kind of help same-store NOI?

We continue to think that it's 2.5 to 3.5 from our company perspective and we continue to see escalators in that 2.5% to 3% as we enter into new leasing in and as we have rollover. From an expense perspective, we've taken out as most folks have commented on and some others are doing now that third-party easy fee, what now is really the differentiator. And I think that the nice thing about being a dedicated company, being dedicated to MOBs, being in specific markets, having our own leasing teams and property management teams, is the differentiator for us as a company over the next five years is can we achieve through expense synergies, through critical mass in markets through the institutionalization of our asset management program. Can we achieve that extra 50 basis points and can we do it on a consistent basis. I'm more excited about the opportunity to do that now, that I actually was when we just said let's bring things in-house and do away with just a third party fee. The future of what our platform should be is 20 to 25 key markets, million square feet and being able to deliver services to our tenants that are truly something that is better than what a fragmented market or fragmented owners can do. That's what healthcare systems are looking for. I think that's what larger physician groups are looking for.

Todd Stender, Wells Fargo.

On the Wellstar properties acquired in the quarter. Can you talk about the process went through to get these with a widely marketed, assuming any debt and then second are these assets can be managed in-house right away?

Three answers here, first they were not marketed. This is a relationship that markings from our Executive Vice President of Acquisitions had in his work and it's something that we've been in the market now for three, four, five years. So they were not marketed. Second, they will be in-house immediately, and I think Robert.

No debt assumed on any of those.

So those were opportunities, that's what we're looking for, that's the benefit of having folks in the marketplace and being a buyer of what we know, what we like and we also know what we don't like.

Thanks, Scott. And just how about the seller profile for the properties you have under contract right now, stuffs you'll be I guess announcing in Q2. Anything that you can share that differentiates you guys from maybe private competition using OP units or anything differentiated?

We continue to have opportunities to talk to folks about OP units. I think that is one thing that continues to come as liquidity comes as more opportunities or people to look to say that they want to diversify. That is something that Mark is having an opportunity and I do to talk with specific folks that are reaching out. Second, what you're going to see from us from an acquisition perspective and from a seller perspective is pretty much the same thing that you've seen. There will be -- in our markets they will be with folks that traditionally more of them than less of them will be probably not widely marketed. And we'll be able to talk specifically about the story what the assets and so I think when we get these done and when we get to end of the second quarter, we'll have some more just very consistent, I would say that our conversation will be 90 days from now.

Okay, thanks. And just looking at the off-campus portfolio, the occupancy dipped just from last year, from Q1 last year. It had been up about 100 basis points in Q4, but now it's below 85%, which is why bring it up, anything with off-campus, any specific move-outs, or anything you can wrap around that?

Well, I'll have Robert talk to that in a moment, but our off-campus is what we consider to be integrated real estate. We're looking for that off-campus acquisition that surrounded by a couple other assets, but more importantly, the only thing it may not have is that may not have beds over night, but it's a destination location, high geographic concentration, investment by the physician groups, by the healthcare system.

So we look at this is a transition of healthcare and you see it when some folks have seen our acquisition in Tampa. That's a true example of something that was completely integrated in Florida Blue is actually work with those physicians because of their cost structures that they can deliver. So Robert about the occupancy.

Yes, on the specific stats on the occupancy, you know that off-campus metric really only applies to about the percent of our portfolio that is off-campus and also not aligned. So it is obviously both a very small portion of our portfolio. So individual tenant move-in, move-out this is very cleanly seen. I think we need -- we look across the board of all off-campus assets including those are -- that are aligned. We're actually seeing some of our best leasing activity across the portfolio taking place in these assets like Scott was talking about where -- there is a true community destination where tenants and health systems are competing for space given the both facility quality as well as the access to the patient base there. So I think your specific question, it's a very small portion of our portfolio in that number. And I think more broadly, we are seeing very good leasing activity in the off-campus locations given some of this dynamic.

Kevin Tyler, Green Street Advisors.

Yes, Scott, based on your comments earlier, I think I know the answer, but -- we've seen other healthcare REITs expand their business in the UK and not as much so in the MOB space. Have you looked at any opportunities in the UK or in Europe or just internationally generally at this point?

No. And I think you did know the answer, I think there's a couple of things. One, we're not going to -- we don't, we won't be doing a development part of HTA. We work with developers. We think that's important. And we won't be going overseas. So this is -- we have tremendous opportunity in the markets in this country, there is no better transition in healthcare going on in the world then what's going on in the United States. And if we can buy more-and-more core critical locations and put our asset management teams in place and generate the relationships that are going on here, that will to me over the next five years that will produce the greatest amount of value to our shareholders in trying to diverse ourselves overseas or something like that.

Okay, thanks. And then you've talked to this earlier as well, but you have a high quality portfolio across many core markets in the US and there's been a lot of positive tailwind for the MOB space and obviously the continued decline in cap rates, would you certainly set up HTA nicely for an attractive take out for a number of buyers either private (inaudible) etcetera. But maybe you can elaborate a little bit on how you to approach an offer for the Company should one materialize at this point.

Well, I think that what we do as a management team and what our Board looks at (inaudible) responsibilities, we try to run the business as best we can and we try to be top of the class from a asset management perspective. We like the assets we buy and we are continuing to try to improve the quality of our portfolio and that results in something that is to the best benefit of shareholders. And obviously that's something that this company would do. But I think all I can do frankly is continue to try to do in our management team can do, is dedicate ourselves every day to try to generate the best value we can with what we have.

Mike Mahler, JPMorgan.

A brief band on the product that you're looking at that's closing in the market as we heard five is the low-end is going to the 4s and what do you see on the high end?

I didn't hear the first part, but I think your question revolves around where we see cap rates.

Yes, like how wide the band is like on the low side and on the high side?

Right. I think the band continues to be brought in. I think that again looking at some of the transactions that have gone on here in the last six months in the healthcare space, it certainly shows that the breadth of the bandwidth for the healthcare sector as a whole continues to move in. I think that's just a number of positive tailwinds that everybody talks about. But I think MOBs being at the most secure part of that spectrum, looks a lot like a very secure dependable consistent growth that looks like a good Office replacement for folks in and when one looks at that from a dynamic like that, I think it becomes very attractive to say that I can get investment credit, I can get relationships that are long term, I can get core critical locations that generate synergies from where this transition in healthcare is going and if I can get into that and invest in that then it's very attractive. And so I think that the you see fives, I think that there are a number of different buyers and so I think that bandwidth is that 200 basis points that we're seeing in this space. And I think that's just a fundamental valuation that is somewhere now started for a while about what medical office looks like and how it can perform long-term.

Okay. And then looking at dispositions. I think you made a comment in your remarks that there is stuff under contract I was wondering can you throughout like a rough ballpark number and just timing because it sound likes stuff, it would close in the second half of the year, more in the summer, etcetera.

I think we're, we've got some stuff that will occur in the second quarter and then we're, we're still very, very disciplined on what we're looking at in from a year perspective, I think that I hate to go back to where we started or where I started this from, is that we will be very consistent and there won't be many surprises and we'll continue to build out our platform and we will continue to add good acquisitions to our portfolio. So I think we're just -- we're moving along as I hope you would expect us to and as we expect to.

Rich Anderson, Mizuho Securities.

Hey, thanks. Good morning over there. So on the same-store target of 3%, you're kind of relying on cost savings. Can you kind of break down what these cost savings are that you're getting outside of internalizing management, what's and like maybe the efficiencies and thereof. What other cost savings are getting you to this target of 50 basis points on an ongoing basis?

Well Rich, I think it's like every other sector that you see in the REIT world, as it gets more concentrated as you go from fragmented to more centralized as you get better core synergies within the market, you're able to do it more efficiently, you're able to get contracts that are more friendly from a cost perspective, you're able to bundle things not only from a local market perspective, but to a national market. As you become a company you get more efficient from the information that you conveyed to your tenants. I think that those are things that in the healthcare sector, they are just starting. This is all about healthcare systems, when we sit down with healthcare systems or with the real estate folks from these healthcare systems, it's all about synergies, it's all about -- if I don't get a million square feet I have a million square feet, I'm looking to get 15% cost savings because I can bundle services and I can make it more efficient.

So I think we're going through a transition, I think this is a transition in its early innings. I think that the difference and I'd go back to what I said earlier, the differentiation for MOB operated ownership platform will be, what kind of services and what kind of growth and what sort of expense synergies can I get and can I get and will I get those, not just for quarter, for a year, while we get those for a period of much longer time and I think that's where we are.

We are starting to see that, we're starting to get depth in the markets and we're starting to take what started four years ago as an asset management program and get into the second quarter. We're not even at halftime yet from my perspective of what we can do and what Amanda is putting through in our asset management in process.

But there is a, there is a finiteness to expense savings, right? Because pretty soon you will at zero expenses. I mean, I'm exaggerating. But I mean isn't there an end game here. I mean you can -- in the first year, I can understand how you introduce in efficiences, bringing in your platform. But in year two, it just got to be harder, right, because you owned at the previous year. So, I mean how long do you think that this decline in expenses, you think it's a 10 year thing or do you think it's a couple of year thing?

Well, I think that what I read some stuff you've written lately on -- in this space. And I think that all companies in the healthcare sector are focusing on expenses, on efficiencies, on being able to better to bring services to their tenants or to their healthcare system relationship. I don't think it's a one-year thing, I think it's a five, six, seven year thing. I think that the platforms, we are a $4 billion company, you get to six or seven and there's great efficiencies that come from that alone. When we were $2 billion, folks that you is what happens when you get bigger. Well right now, we could add a couple billion dollars of assets to our portfolio. And Amanda, really doesn't have had much of anything from an infrastructure perspective or from a core management perspective. And in fact we begin -- we are getting better at allocating our personnel, our personnel are becoming more efficient. So instead of handling 150,000 square feet of buildings in the market, they -- they're being able to stretch themselves or manage 200 or 200 in a quarter. So I think that this is a process. I understand that eventually you get to a zero-sum, but I also challenge that because I think as the company continues to improve, as you see opportunities to change, then you are able to continue to get savings and I go back to 2012, when we said we could do 2.5 to 3.5 and people said, well, let's just see it for two or three quarters, and now we're, I think we're on our 10th quarter. And so it back in 2012, they said well how long will the expense savings last in -- so I think it's, you just need to run your platform you need to work with the health care systems and the physicians and you need to continually focus on how to generate savings and that's what businesses do.

Okay. And so the in the very beginning of the call, you said, our second you said this -- you had three priorities for the company. And the second one was to grow the enterprise value. Is that what you're talking about, just getting bigger and really thinking about becoming more efficient or do you just is that empire building like, what's the thought process behind being a bigger company, being the second priority in your mind for HTA?

Well, I think there's two values in HTA and I'm not sure that how necessarily folks have looked at this, but I look at number one, as you got great assets and great locations in their core critical and -- okay, so that's a value in itself and no one would go out and sell individual assets, but you get a greater value by having a far greater sum of those types of assets. But the second part of this enterprise creation is this asset management platform that brings value that is competitively performs better. This is a competition. It is a competition, you want your platform to be best-in-market, you want your platform to deliver services. So I think that is our challenge in next five years. If we can be in 20 to 25 markets, a million square feet and deliver our services or generate savings they come to the bottom line for our shareholders by 25, 50 basis points that are different than other fragmented type of services that are delivered. That's a tremendous value. So I would say that when I look at our Company, I do think that there are two tremendous opportunities. One, in the assets and the relationships in the tenants and the second one is, with the people that deliver the services and generate a value that five years from now will set itself apart. So I think that when you -- we talked, when you talk with Amanda, that's the passion, the passion is to be able to prove it. And we're dedicated rich, we're not 15% or 18% of our portfolio. We don't get into the other sectors when we look at acquisitions. So all we do is MOBs and we by definition dedicate 100% of our people to that.

Okay. And then real quickly, can you list what you think are the top five markets for the next 12 months in terms of opportunity for you. Could you kind of just list them off right now, where you think the best opportunities are and for whatever reason.

Well I -- certainly we have those internally and we look at both markets that we find are good today. We look at markets that we would like to move into, give you an example, we liked Florida a year and a half ago. I think when you and I met a year ago, I said I thought Florida was going to be the best performing state in 2015. It so happens that it probably will overcome Texas and so we went and put it $150 million, $180 million in Florida over the last 12 months. We like Florida, I think Florida is a very, it's a market that's rebounding economically. It's a market that continues to integrate from a healthcare perspective and you just need to make sure that you're -- you're careful, where you buy and when you're buying you're getting those synergies from your asset management program that makes it accretive. We like Boston, we bought Tufts last year and I think that's one of the best acquisitions our company has made. But you look at Boston, I mean if you've been to Boston its tremendous growth market, the healthcare systems has been at this integration for a while, you see some mergers that are going to go on in that system in that location is going to continue to improve. So we like Boston and I think that plays out and then we've always been and this isn't different from what we've said, a very strong component of Carolinas, South Carolina, North Carolina, we like Mount Pleasant, about -- two years ago, well Boeing moved in and now Boeing has moved in again.

And so you see the Mount Pleasant and you see the Charleston area and you look at the employment numbers and you look at the vacancy. It was economically driven; the physicians are doing well, the healthcare systems are expanding.

So I think there are markets that when you look at these markets. You say these are great locations to continue to focus on buy assets and take that and get the benefits of that value.

Dan Bernstein, Stifel.

All Right. Thanks for taking my calls. I wanted to ask about the 50 to 100 basis points of occupancy increase you're predicting this year. Do you have a significant number ROIs with tenants. You have to go ahead and take space and commitments here take space and what kind of TI CapEx should we be thinking about in our models for that?

Well, I think that we feel comfortable, I'm very proud of the fact that we increased year-over-year first quarter. Last year first quarter, we took the step back further because of the seasonality and I think it does take I think healthcare is changing. And I think I mentioned this last year, where it's being run as a business and in the business you do a budget at the end of the year, in the middle of the year, you get approvals what you want to do the next year. And then in November and December, not much is done and then folks start again next year. I think we've seen that, we think we see larger physician groups, they make their decisions by November or they make their decision starting in January and it takes some time to get to that conclusion.

So I think there is some seasonality to healthcare when it was a sole practitioner and when it was running a little less business process, it might not have been as functionally the way that it did it is today. So that's good for us because I think that shows that we are being more active on our leasing side of the bringing deals to conclusion in the fourth quarter and it shows up in the first quarter. We like where our activity is, the deals that are larger we commented take longer, but you just have to keep at them in and we're seeing consistent activity, that gives us a lot of confidence that we can continue to raise that occupancy off of 2014 by that 50, 100 basis points that we've talked about to folks.

Okay. I also want to go back to Richard's question on the benefits of bringing management in house and more sort from the perspective of acquisitions, when you're coding mid-six on acquisition today in the first quarter, does that include any benefits you can get from bringing those assets in-house versus what the current expenses are at those properties? In other words, you're quoting mid 6s, but sure I really be thinking that, once you integrate those assets in your portfolio, its closer to six and three quarters or 7%, I am trying (inaudible) what that benefit really is when you bring those assets in-house to your investment?

That's a great question and I will say that when we look at our acquisitions and Mark is sitting here and Mark is shaking his head and saying no, I don't get the benefit that Amanda gets to bring. We look at them separately. What we're going through, actually right now is and it is back to what Rich says because I do think that in the market that we're going to see for a reads, it's going to be about what you buy the quality of what you buy and the ability to -- for those assets to perform. So I think we're getting, get into a marketplace where from investor perspective, they want to see a benefit. They want to see if I've got three choices, well what choice gives me that little bit of extra. So what we're doing as a company and this is the enterprise value conversation again is where we look at acquisitions when Mark, brings it to our investment committee, which is made up of our independent directors. When he brings it to me, when Robert looks at it, we look at it without the expense savings. But then when I look over Amanda and Amanda gets her voice and do I want to buy this asset and do I want this asset to come into our portfolio. She looks at it and she has to be able to sit down and say I get it. How do I generate value from that or how I save money or how do I make money from bringing this asset into our portfolio. So those two equations are separate, so when we talk about our cap rates going in, we're giving you that without the benefit of what we think we do from an asset management perspective.

Okay. And in terms of cap rates you said broadly they are decreasing, how you should think about where cap rates relative to say A, B assets or primary markets, secondary market, it's the spread between A, B and secondary, primary markets compressing as well, is that getting more narrow?

Yes, I think that you know if anything -- when things like this occur there are folks chasing opportunities. I think the one thing I've noticed is that, some of the secondary markets or tertiary markets or assets that are what I would call to be B assets. They're getting chased by more folks because those folks are the ones that need that extra 50 basis points of yield in order to buy it. They don't have an asset management program that makes that core critical mask gets stronger. It's not a core market, wouldn't be classified as a core market. And then on the other side, I think that the core on campus truly MOB quality asset continues to be something that is sought after. So I think that again the tenant mix of assets are very important. We don't want to buy an asset that has a large transition time or that it's not all medical. And you then have to convince yourself that it's going to turn medical and then you have to say yourself, it's going to take a period of time. To me that's up the risk spectrum, but those are being priced with that risk included in it, just like I don't think that large portfolios are being priced with the risk associated with the co-mingled quality of assets. I think that there is a, I think that gets erased because they say this large asset value that comes because it's bundled, was sort of like retail and wholesale. I like it wholesale, and I think that investors over time get the benefits for that approach.

Doug Christopher, DA Davidson.

Hi, thank you. Thanks for the color and the consistency. Just trends, tenant trends other than large physician groups, anything else going on out there? You had mentioned alternative office space. Could you just add a little color there?

Well, I think there's a couple of trends, I think one, that we continue to see solid practitioners pretty much leave, what I would consider to be core properties, the cost of the rents associated with those locations require size. Back to what Rich was talking about physicians understand that they want 25-30-35 folks, they want to generate, create a revenue, but they're also focused on the fact that they can continue to reduce expenses. And I think that in their view is a long-term situation, not just a one-time situation. I think the other trend is that you're seeing universities and medical healthcare systems, become integrated. We recently had here in Arizona, we had a banner in the University of Arizona align themselves. And I think you're going to see much more of that and you're going to see research, hospitals, healthcare systems, MOB space, that whole metric is going to be a very key part of delivery. And so that gives me great enthusiasm -- I think there's opportunities that will come from that. So I think there are trends, I think those trends are continuing and it's exciting to be, frankly right now in the middle of the healthcare sector because it's probably the most, it's transitioning the most out of any other sector in real estate.

All right thank you. And then just a follow-up on the balance sheet. Robert, mentioned Company wants to be prudent with the balance sheet and indicated some recycling. How might we think about and be working in additional share count over the next few quarters?

It's good question, Doug. I think as we look at it, we certainly ended the quarter a very strong position from a leverage perspective less than 30%. So, I think we're very comfortable from where we are from just an overall leverage standpoint at that position. You add on top of that we have pretty sufficient liquidity of over $850 million at the end of the period and then you add to that kind of the capital recycling that were focused on. I think that -- that gives you pretty good idea of how we're thinking about the balance sheet with the opportunities we see in front of us.

Michael Gorman, Cowen group.

Yeah, thanks guys. Just one quick follow-up on the disposition side, should we think of those coming more out of the call at 8% of the GLA if it's non-MOB or we talking about non-core as sort of that 4%, we talked about earlier as off-campus and non-aligned. How should we think about what assets are potentially coming out of the portfolio?

Yeah, right now I think you would look at that as being more of the non-core medical. I think we have tremendous opportunity to recycle some of that right now into better locations, bring that synergies that we've talked about in the key markets. We have a small percentage, as you say that are non-MOBs and as we've said to folks we will -- we're going to commit ourselves over the next period of time to move out of that. But I am not in a huge rush to do that because two years ago they were at one cap rate and I continue to see cap rates in those asset classes move down. In fact those are probably the -- continue to move down because there's just more and more folks chasing that. So I think for right now, it will be a planned, but it will be more, more of the non-core, then it would be necessarily the other stuff.

Having no further questions, this concludes our question-and-answer session. I would like to turn the conference back ever to Mr. Scott Peters, Chief Executive Officer for any closing remarks.

Thank you everybody for joining us. And as always if there is any follow-up questions or comments, please don't hesitate to call either Robert or Mark Mandel or myself or Jessica. So I thank you and everybody have a good week.

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