Healthcare Realty Trust Inc (HR) 2016 Q1 法說會逐字稿

Good morning, and welcome to the Healthcare Trust of America Q1 2016 earnings conference call.

(Operator Instructions)

Please note that this event is being recorded. I would now like to turn the conference over to Alisa Connelly, Director of Finance. Please go ahead.

Thank you, and welcome to Healthcare Trust of America's first-quarter 2016 earnings call. Yesterday, we filed our first-quarter earnings release, our financial supplement, and our second-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 detailed description on some potential risk, please refer to our SEC filings which can be found in the Investor Relations section of our website.

I will now turn the call over to Scott Peters, Chairman and CEO of Healthcare Trust of America. Scott?

Good morning, and thank you for joining the Management Team of Healthcare Trust of America on our first-quarter 2016 earnings conference call. We appreciate you joining us today, as we discuss our first-quarter results, our thoughts on the MOB sector, and our Company's overall progress in 2016. Joining me on the call today 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.

As we discussed on our last call, the medical office building sector continues to prove its increased value to investors, based on consistent annual NOI growth; strong tenant retention; increased outpatient occupancy demands from healthcare systems, physician groups, academic universities; and what we see as significant macroeconomic drivers for the sector.

Management continues to be disciplined and to execute on our business strategy, focusing on: annual same-store growth, which drops to the bottom line; disciplined, targeted, and a rifle-shot acquisitions strategy, focused on key markets, which allows us to generate critical mass in which to leverage our asset-management platform and create cost synergies in the markets; investments in three significant medical office building segments that will serve the future of the changing healthcare sector -- on or adjacent to high-energy hospital campuses, in community-core locations that give healthcare providers the best access to patients, and academic university medical campuses that are driving patient care, research, education, and employment growth; and, finally, maintaining a well-positioned and low-leveraged balance sheet to protect shareholders for the long term.

Our asset management platform is delivering steady growth, primarily from our in-place annual-lease escalators of currently 2.3% portfolio wide; 92.1% occupancy; strong renewals, averaging approximately 85% annually; expense savings from our increased efficiencies; and our leasing team actively managing the modest rollover of 8% to 9% in the portfolio.

Our acquisition prospects are continuing to grow. We are seeing far more inbound calls from our key markets, from relationships that we have established over the last five to six years. This has been the most significant factor in our last six quarters of acquisitions.

In addition, the utilization of OP units by long-term owners or developers to minimize tax impacts and maximize estate planning has also become a contributing factor to our Company's growth. With any investment opportunity, we're keeping in mind the fundamental principle that each investment must perform financially over the long term, be additive to the overall portfolio quality, and fit within our key market concept and also generate synergies for our asset Management Team.

Turning to specific results in the first quarter, we achieved an 8% increase in FFO per share, to $0.40; 3% same-store NOI growth, the 14th consecutive quarter of growth at 3% or higher; tenant retention of 82% and occupancy of 92.1%; acquisitions of $162 million and leverage at approximately 30%; and we maintained a fortress investment-grade balance sheet, positioned extremely well for the remainder of 2016.

Year to date, we have been active, disciplined, and accretive in putting capital to work. Year to date, we have achieved $367 million of investments. This includes $162 million closed in the first quarter; an additional $205 million that closed in April. These investments strategically expand our presence in our New England markets, as well as Texas -- Charleston and Columbus -- and were acquired at average cap rates between 6% and 6.5%. Robert will give more details in a moment.

We have also accessed the capital markets, raising over $336 million of equity. This includes $93 million raised on the ATM in the first quarter; $172 million raised through our overnight offering in April; and over $70 million raised in OP units, relating to our acquisitions. These investments underscore our business strategy of investing in key markets. For example, in the last six months, we acquired over $275 million in assets in the New England markets, focused in or around New Haven and Hartford. In the first quarter, we acquired Yale Long Wharf, located in New Haven, a 99%-occupied, 287,000 square-foot medical office building, located approximately one mile from Yale University and approximately one mile from downtown. This investment and major tenant, Yale University and Yale Medical, creates a new relationship with one of the nation's top universities in medical systems.

In April, we acquired $182 million of assets in the Hartford and New Haven markets, consisting of a portfolio of approximately 600,000 square feet that has a combined occupancy of 98%, of which over 90% is leased to or affiliated with the leading area healthcare systems. This relationship and partnering will also align HTA with a leading developer and major player in the region.

These investments represent over 885,000 square feet of GLA, at approximately 99% occupancy, with annual rent escalators of over 2.3% and minimal short-term rollover. As a region this expansion in the New England market brings HTA's total investment in the Boston, Albany, White Plains, New Haven, and Connecticut markets -- all within an approximately 100-mile radius to each other -- to over $1 billion, and over 3 million square feet of GLA.

Turning to leasing, our total portfolio ended the quarter at 92.1% leased, up 40 basis points from the first quarter of 2015. We expect to grow overall occupancy 2016 by an additional 50 to 75 basis points. We continue to see much of this growth being focused on larger spaces, leased by physician groups that are consolidating and expanding in key locations.

With that, I'll turn the call over to Robert.

Thanks, Scott. I'll now walk through our first-quarter earnings results, our balance sheet, and capital funding plans for the remainder of 2016. For the first quarter, normalized FFO per diluted share was $0.40, an increase of $0.03 per diluted share, or 8.1%, compared to the first quarter of 2015. Overall, normalized FFO increased almost 12% percent, to $52 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 almost $400 million in acquisitions completed over the last four quarters.

Our same-property cash NOI growth was primarily driven by our contractual-base rent, which accounted for 80%, or 2.4% of our growth. The remaining 20% of our NOI growth was driven by a mild winter and operating efficiencies realized, primarily through facilities initiatives. We continue to have consistency, driven by limited lease rollover and contractual in-place escalators of over 2.3%. G&A was $6.8 million for the quarter, which is within our expectations of approximately $26 million to $27 million annually. G&As typically elevate in the first quarter from the timing of year-end activities.

Interest expense for the quarter, excluding the change in fair market value derivatives, was approximately $14.8 million. Normalized FAD per diluted share ended the quarter at $0.37, an increase of $0.02 per diluted share, or 5.7%, compared to the first quarter of 2015.

Of note is a decline in our straight-line rent of over $500,000 per year, primarily driven by a relatively low level of lease rollover in the portfolio. We continue to be committed to a strong and conservative balance sheet, and ended the quarter with leverage at 30% debt-to-total capitalization and 6 times debt to EBITDA. We continue to target leverage at 30% to 35%, but this may vary, depending on the capital market environment, as well as our share price, in relation to NAV. At the end of the period, we had total liquidity of $562 million, including $14 million in cash.

As Scott mentioned, we are seeing a significant opportunity to invest in our focus on investments that are accretive to us, both day one and also over the long term, as they season and expand our portfolio. Through April, we have closed on $360 million of investments, which includes over $250 million invested in New England. Approximately $110 million of the remaining investments this year were focused in our existing key markets in Texas, primarily Houston, Columbus, and Charleston.

Approximately half of the remaining investment -- of this remaining investment, was in the Texas Medical Center in Houston, with a 250,000-square-foot MOB attached to the Park Plaza Medical Center. The Texas Medical Center is the largest of its kind, and receives over 7 million annual patient visits, and is affiliated with some of the top medical institutions in the country. As we roll this into our platform, we expect to generate significant efficiencies from our other Houston assets, as we grow our mass and expand best practices.

The investment in Charleston and Columbus were directly sourced from existing developer relationships and will supplement our existing portfolios in those markets. In total, these $367 million of acquisitions average between 6% and 6.5% cap rates and were a mix of on-campus and community-core locations. In total, the investments are 94% occupied, with expected long-term, same-store growth of between 2.4% and 3.5%. These acquisitions will be immediately accretive by 2% to 3%, using long-term financing, and more importantly, allow us to increase our critical mass and relationships in key markets.

Consistent with our financing philosophy, we have largely financed these investments with long-term capital, raising over $330 million of equity at attractive prices, relative to our investments. This includes over $265 million of equity, raised through the public markets, using our ATM and a targeted overnight offering. It also includes what became $70 million of OP units, that were priced at the trailing 20-day share price when we locked in the acquisition, but whose amount was finalized when we closed our deal just a few days ago.

We recognize that our equity capital is precious and believe that this execution has a balanced performance, both for our existing shareholders, and has also positioned us for future opportunities in flexibility by keeping our leverage low and our balance sheet clean. From a debt perspective, we continue to have limited near-term maturities, however, we are evaluating the long-term debt markets to view our ability to lengthen our maturity schedule and may take advantage should attractive opportunities arise.

From an operating and leasing standpoint, our first quarter performed much like our previous quarters. With solid leasing spreads, annual average portfolio escalators of 2.3%, consistent quarterly retention, very modest quarterly rollover, increasing occupancy, and a dedicated property-management operating platform in place, our results continue to be consistent, reliable, and driving cash flow to the bottom line.

Total leasing activity for the quarter was 254,000 square feet, or just 1.6% of total GLA, and same-property tenant retention was 82%. Annual escalators in our leases signed this quarter were 2.7% on average, and our lease rollover remains limited, averaging just over 9% per year over the next five years. Cash leasing spreads have increased 1.4% for the quarter. Leasing concessions for tenant TIs and free rent for new space continues to remain at low levels; however, as a whole, tenants continue to invest dollars into their spaces.

I will now turn it back to Scott.

Thank you, Robert. As we continue into the second quarter, and the second half of the year, we are very well positioned to continue our pragmatic, disciplined, and long-term business plans. Our goal, simply, is to acquire, own, and operate core-critical medical office buildings in 15 to 25 key markets, located in three distinct locations, which are on or around healthcare systems, in community-core locations, and on or around academic medical university campuses. We believe that this will be the core infrastructure for healthcare and for outpatient delivery, in the US, for the next 50 years.

Our Company is uniquely well positioned, from an infrastructure perspective, to continue to grow in our markets over the next few years, with minimal organizational needs. We'll redo that: our Company is uniquely positioned from an infrastructure position to continue to grow over the next couple years, with very minimal additions from an organizational perspective. This simple focus will drive earnings growth, develop synergies, maximize expense efficiencies, and deliver consistent annual cash flow growth.

Thank you for joining us on today's first-quarter earnings call. I will now turn it over to the operator for questions.

(Operator Instructions)

Karin Ford, Mitsubishi UFJ.

Hi, good morning. Just wanted to ask, first, on the acquisition front, if you could talk a little bit about the pipeline of deals that you're looking at today and then talk about pricing. Have cap rates for medical office breached the 5% level, and would you consider, later in the year, buying anything if cap rates move lower, below the 6% that you bought it here, up in April.

Thank you for joining us this morning. I think we are seeing opportunities in our markets I think that's been a process now over the last four or five years, and with our asset management program and our leasing folks in these markets, and the relationships that we've gotten through the way that we've done it, which is a targeted-acquisition approach, we are seeing some folks, who, as you've seen in this last quarter, come forward to us and say, you know, we'd like to do a transaction with you. So there's definitely liquidity in the space. I think it's going to continue this year.

I think this is a great asset class. Sellers are seeing opportunities, to get decent value, good value. Certainly, I think it's an under-invested asset class, both from all sorts of levels. There are people who, there are different types of groups that are looking for investments. I think we continue to see opportunities in that 6%, 6.5% range. We continue to see opportunities to get synergies from our asset management when we buy into these markets, and there are cap rates that are moved down into the 5%s. There are assets that we have not gone after, or we have been priced out of, and that will continue, I think. I think you're going to continue to see very good assets with very good fundamentals and good markets be continued to be priced aggressively.

Thanks for the color. And wanted to just talk further about the New York, New England market, now that you've amassed $1 billion of investment there. What is it about those markets that you find most attractive and, from a capital allocation standpoint, could you see more capital going here or do you like the position of that market in your portfolio today?

Well, we certainly like the market. When you look at Boston and you look at White Plains and you look at Albany, the Hartford, the New Haven market, you've got aging demographics, you've got strong healthcare systems; you see very strong universities. From an economic perspective, from an intellectual talent, they still attract a lot of companies, a lot of investment from other folks, and, so, you get better healthcare systems, you get a better need for delivery of healthcare.

We like the markets. I think that we would continue to grow in these markets when the right opportunity presents itself. We've got relationships in these markets now, where some of the stuff that we see comes to us first and we have an opportunity to decide how we feel about that particular investment. So, we like it, but more importantly, the targeted-market concept that we think is so important, this is an illustration of putting together $1 billion of assets in five or six great markets that generate tremendous synergies from an asset management perspective. If you look what we've done in Florida, we've got now in excess of $250 million in good markets in Florida, all targeted investments, so, we like this process and I think you can expect for investors to continue to see us do this.

Great. Thanks. And just last one for me, I know you talked last quarter about asset sales being a source of capital for you guys this year. It didn't look like you sold anything in the first quarter. Could you just talk about the progress on that front?

We had mentioned, last conference call, which wasn't too long ago, that we expect to go ahead and recycle $100 million, $150 million of assets. We are on target to do that. We'll see that second, third, fourth quarter. We are making sure we are doing the best job for shareholders, making sure that we're finding the right targeted buyer for the asset, and, so I think it's just a process that we are going through and we'll get through that this year.

Great thanks very much.

Todd Stender, Wells Fargo

Hi, thanks. The cap rates, just to go back on the cap rates, 6% to 6.5%, is that an in-place, or do you guys project for what you assume to be bringing property operations in-house?

Good morning Todd. That's in place, under the existing kind of sellers' management structure of what we are buying on, so anything we're able to generate by bringing it in house would be on top of that

Can you guys quantify how much do you assume, maybe 12 or 18 months out, if you're going to bring it in-house, how many basis points would that add to your going in yield?

It obviously depends on the acquisition, but in key markets, we typically are able to get 50 to 75 basis points of additional yield

That's really the first level, Todd, of yield for us. But the second level, which is what excites us right now from a platform perspective, is the actual maintenance of the asset, the opportunity to find leasing groups, physician groups, that move to your building when they're in three locations, in you're in three locations. It's nice to get incoming calls from folks who say we know that you, that one of our friends are a tenant your building. We know you actually own the building and we'd like to see if you have space somewhere. So, it's really, we think we're still in the second part of a four-part process of getting these savings from the assets and from the regions and from the markets that we are concentrated in.

That's helpful. And then just looking at your in-house property management, it is now edged higher, about 97%, I think. The byproduct of that is driving costs lower. I just want to see, is there room to run, just improving efficiencies, because that's been a pretty good driver in your consistent same-store NOI growth

We spend a lot of time on the efficiency side of the equation. Building an asset-management platform in house, we are now up to a couple hundred people. We've had consistency in markets. We've been able to develop programs. We are now -- Amanda Houghton, our Executive Vice President of Asset Management, is putting together templates on how we are operating. We are able to buy contracts for utilities that include more than just one asset, so the efficiencies that you have.

This is a very fragmented space. It's a space that is fragmented with small buildings, owned or operated by what I would say, not institutionalized, or getting the benefit of efficiencies from groups of assets, and, so, we are again, I think we have opportunities to continue this expense savings, which is still only a small part of our same-store growth. But, we have a chance to continue this for -- you know, we've been at this now four years in the public markets and I certainly don't think that it will go away anytime soon over the next four years. I think will be talking about this to you for the next four years.

Thanks, Scott, and a bigger-picture question; can you help us understand some of the nuances surrounding implementation of Section 603 of the federal budget? I know it is specific to off-campus MOBs. Supposed to go into effect January 1. I just want to see what your thoughts are on that and what percentage of your portfolio, I guess, could be subject to this

Yes, Todd, it's a good question. First of all, just from an overall perspective, Section 603 really just levels the playing field between hospital providers, specifically, in surgery centers off-campus, and physicians in other groups and other independent groups that are already running them. So it really just puts them on a level playing field, from a reimbursement perspective. I think the second thing is, for us, surgery centers are only 5% of our total GLA, so any impact would be pretty negligible, one way or another. It's just a small part of our portfolio.

And then, from a third point, we do have a lot of conversations, obviously, with health systems and the real estate partners and, while there always re-looking at how their programming is both on-campus and off-campus and really looking to maximize programming, really in both locations. They talk about potentially moving it around a bit, but they're really focused -- one of the big focus continues to be off-campus and where do you put the right physicians and right practices next to each other, to generate the best volume, best revenue for them. So, that might change, but I don't think any of their commitment to both locations has changed, from what we've seen.

Is there a grandfathering in? Does the rehire reimbursement level stay with the provider or does it stay at the facility level?

I think it's unclear at this point. So, I think that really remains to be seen.

Great thank you

Chad Vanacore, Stifel

Hey, good morning.

Morning

So the investment pipeline for you is clearly strong. What do you suppose is motivating sellers and why do you supposed activity has picked up so much in 2016 to date?

I think that this has been a transition. If you think about it, we've been talking about activity in the MOB space and the Affordable Care Act for about six years, but it's really been effective, maybe, in the last two or three, and I think healthcare systems, they always do five-year plans. Liquidity is generated by fairer, better and better pricing, which is happening. I think from an investment perspective, we are finally getting an opportunity to see now that there's three public companies. You've got the big three, who pay more attention to the MOB space. I think you're starting to see some of the tremendous fundamentals in this asset class. It's becoming, I think it's becoming an investable asset class by itself, and it is so distinctively different than the other diversified healthcare assets in this space.

So you're getting an opportunity to see this continue and I think it does continue. I think we're at the beginning stages of -- 12% of the space is really in public hands right now, $350 billion of product. Again. I think this is an initial transition and, as people see the opportunity to sell good values, as it gets more invested in, you'll see opportunities continue.

All right, Thank you, Scott. And what kind of competition are you seeing for these assets? Are there still non-traded REITs really competing, or is this mostly private equity that's the largest competition?

For us, it's really private equity. That's the biggest competition. Again, you're looking at private equity having different financing needs. They look for different types of assets. We look for multi-tenanted assets; we look for that tenant mix within a building that allows us to bring our asset management to the equation. Most times, private equity's not looking for that type of complexity in their asset. But, we don't see non-traded REITs. They're pretty much, the yield is too difficult for them to get to. The public REITs, I think we each are in our distinctive locations; we see each other once in a while, but not tremendously.

And for us, it's really our markets. We know the folks in our markets and we've been at this now for 10 years in May, and we've been very active, so, we've got -- the issue for us always is that each asset must perform. It must perform, not just when you buy it, but it needs to perform when rents roll and it needs to fit into our overall portfolio, which is that we want to continue to improve the portfolio each time we make an acquisition.

All right and one more for me, can you give us some color on the mix of types of properties acquired at post-quarter close? How much multi-tenant versus single? On campus versus off, and any terms to maturity?

Yes, I think, overall, they're all multi-tenanted buildings. There's a lot of kind of -- and it's a mix of both on-campus and, really, community-core locations, and, by community-core locations, it's going to be a handful of really a cluster of buildings together that serves multiple key buildings, which -- I'm sorry, key tenants, which we find attractive.

One of the things that we are seeing is that the community core, and community core is not a one-off building, located in a location around a bunch of office buildings. A community core is a location that a group, a couple, two, three, four physician, larger physician groups have decided that they want to be at, because it services a demographic that is high density, it has access off of freeways, and it has ample parking, and it generates referrals and synergies. These locations are going to be here in healthcare for, I think, for the next 20, 30, 40 years. As 10,000 individuals turn 65 on a daily basis for the next 20 years, they're going to need more and more active care, not hospital care, necessarily, but, certainly, active care.

And the location needs to be accessible and it needs to be something that the physicians feel that can be accommodated to them, because we actually now, when we talk to larger physician groups, there's two questions that they ask. There's three questions they ask. Number one, where are we going to be located within your building, because that's a key component, depending upon the physician group; Number two, do we have the opportunity to expand?

And, because that's the other thing. If you've got a physician group that's growing within a market, their sites are typically more than just one location. And the third, actually, is how's the parking is the parking? Is the parking that we see, is it expandable, so that our patients have easy access? So it's becoming a very sophisticated leasing opportunity and, also, more sophisticated from a use perspective. And healthcare systems ask the same thing.

Alright, thanks

John Kim, BMO Capital Markets

Scott, you mentioned in your prepared remarks that you expect occupancy to increase 50 to 75 basis points this year, which I think will be an all-time high for your Company. What's driving the increase at this time?

Well, we've gone through a process. I think the space has gone through a process. As you expand and contract, you gain some space, but also the physician groups that are expanding have typically taken a physician, or a small physician group, and that space is no longer needed, because they're getting efficiencies. It's not a one-to-one addition. It's -- they hire two physicians and only need half the space that they need to expand to. So, that is been the process and I think that starting to come to the, certainly, the middle part of that transition in the health care transition from a sector perspective.

Second, we have worked on TIs and free rent. We have worked on leasing concessions and we have worked on escalators. Folks look at us and say, you been very consistent in your same-store growth. This isn't by chance. It is because we focus the escalator; we were first talking about -- we were the first company talking about rent escalators three years ago. We were talking about getting those to 2.5% to 3%, and getting them portfolio-wide and getting them consistently. So we've been focusing on that, and, so therefore, we have, frankly, not given away some space that we could have leased for occupancy, but not leased it, but either the right rate or without the right escalator or, perhaps, without the right physician group.

So I think that we are, we've done that. We've been through a three-year process. The next two years for us, the next 2.5 years, is really to move the occupancy of this portfolio up to where MOB, key, critical location occupancy probably should be, which is in that 94%, 95% range, and much more occupancy than that and you're not probably maximizing value to the asset. So I think we're in that process right now and we feel pretty good about it.

Okay, and you mentioned the escalators at 2.7% on what you're signing today. What are you seeing as far as market rental growth, either what you're seeing or what you're underwriting in acquisition?

I think, John, what we're certainly seeing is, as we roll our leases, we are rolling flat up, this quarter up 1.4%, so we are seeing across -- and so, we think our leases are pretty much at market and they're escalated to at market, so, we're seeing that 2.5% growth, certainly.

And that would include the markets that are more CPI based, as far as leases?

Certainly every market is a little bit different. What we see in our portfolio, we have less than 10% of our leases are really CPI driven, so we are not necessarily as impacted by that, overall, but.

That's a very good question and I think what we do is we look at our markets. 16 months ago, we went through an in-depth analysis of every market, all roll overs, all leases, lease spreads on rollover and said, there are markets you want to be in and there's markets you don't want to be in. That's why we don't buy big portfolios, because, if you buy a $600, $700, $800 million portfolio, you're going to get all sorts of different markets and you're going to get all sorts of different assets, and you're going to get different types of blends.

We truly like to be targeted buyers. We know what we are buying. We underwrite the leases and we underwrite the market, from a market-rent perspective, and I think we've been very good at that. We've put a lot of time and consideration in it. The team here has been together for over six years and, so, that's the result of what we get from a performance perspective.

Okay, and then, Robert, you mentioned you're evaluating long-term debt markets. Can you share an estimate of where you could price [ten-year] unsecured notes today? And would the use of proceeds be for the, to pay down the credit facility?

I think as we look at it, you've certainly have seen credit spreads come in here recently and, you know, that's been kind of one of the things we've been monitoring and I think you're looking at, you know, the low 4s, right now, from an unsecured perspective. And, yes, revolver term loans, we could certainly take out longer-term. Obviously, as we dispose of some assets, that's another way to pay down some of that and free up some liquidity

Okay, great, thank you

Vikram Malhotra, Morgan Stanley

Thanks, good morning, guys. Can you, maybe, just going back to the cap-rate question, given where cap rates are, kind of what's your view? I guess there's some concern on pricing more broadly in the commercial real estate space. And I'm just wondering if you were to look out over the next 12 or 24 months, do you see a scenario where MOB cap rates could move even further, even towards the 4 handle? And kind of, what level makes you pause and say, hey, we are buying these for 10 or 15 years. We'd like to pause, from an acquisition standpoint.

I think there's two answers to that. One, I think you're going to see MOBs start -- you're going to see large portfolios or public companies start being priced like office. We've had that conversation and I think the fundamentals, the consistency, the core critical nature of the medical office building, as more and more people visit it and see it, they go to Investor Days and they see the quality of these assets. I think that's going to continue to make this a very, very attractive investment and I think is going to show up in cap rates.

For us, I think we look at it very simply, and we are simple as a company, and our investment philosophy is simple. It needs to be accretive. We need to be able to buy assets. We need to utilize our equity, so that it is profitable and is good for shareholders. And I think that's the pause. If you get into position where that's not the case, then you don't buy.

We went through that last year. The end of last year, there were lots of transactions going on and we didn't have a big year. I think we did $250 million, but they were in markets, they generated synergies, they were accretive. We got those benefits of that Robert talked about earlier. This year, we've seen some very good acquisitions in our markets, Many of them have come to us and they were not marketed broadly and so -- and they were accretive to shareholders. So, I think that's our philosophy, is that we want to make sure that it is in the best interest for our investors and that's how we look at it.

And then just following on, you know, post the CHI deal, are you seeing, are you having conversations with any more hospitals? Are there any large sale lease-backs in the market you may be interested in? And, for these larger deals, what are some of the things that may perhaps make you stay away from that deal?

Typically we are not a large portfolio buyer. The first and foremost reason is, that, typically, they're not in a concentrated marketplace, or the majority of the assets are not in markets that we necessarily want, that we want to grow in. So, we haven't been in the chase for large portfolios. There are, I believe, conversations that are going on in the marketplace, with larger type portfolios, and I don't have any details, but if there was a portfolio that was in a concentrated market and we could get the synergies and it was in a market that we liked, we certainly would be, look at it, and take it very seriously.

So I think as a company, you have to do two or three things. You have to be disciplined, you have to stick to what you do well, and then you have to be consistent. And, we have tried to be very consistent by picking our markets, getting mass in those markets, generating synergies, and doing it on a targeted asset-by-asset basis, and so far it's worked out well for us, but I would not expect us to be large, a buyer of large portfolios that are scattered throughout 20 states or 10 states. A lot of effort. You struggle with getting the synergies and I think that you don't know the assets as well as you should, necessarily.

Okay, thanks, and then last one. You've painted a picture over here, which would suggest a good trajectory from here on, fundamentals look good, and then you're seeing a bunch of -- the pipeline is good. What are some of the, maybe, the red flags that you may be watching for? Is new supply an issue? How should we think about the risk, given where the space is priced today?

I think the risk is that as you see more and more activity in the space, like we're seeing today, you see a lot of different types of assets. I think you have to be -- I think that means you have to be even more selective and you have to make sure that your criteria checks the boxes that you want. Don't stray because you might think that something works.

There's a lot of activity out there and there are folks that are buying things that -- and they're buying them for different reasons. Some are buying them just to get bigger. Some are buying them because they can leverage it. Some are buying them because they have to buy in order to show growth. I think we're looking at it from a perspective of being consistent, making sure that -- you talked about pricing.

I think as important as pricing is, also as market rents. Are the rents that you're buying going to roll down? Are the tenants that are in your buildings growing or stagnant? Is the building that you're buying older, or is it newer? How's it going to be maintained? Those are some key things that, again, if the space heats up and there's more opportunity, sometimes not at -- you may skip some of those small details. We're trying to be very, very disciplined in what we look at.

Okay thanks guys

Kevin Tyler, Green Street Advisors

Scott, going back to occupancy for a minute. 12 months ago, I know you guys were seeing occupancy in the 94% level as achievable for the portfolio, and you mentioned earlier, 94%, 95% is the point at which you hit some sort of maximum capacity, but what's the timeline for that 94%, with you guys encroaching 93% by the end of the year? Is 94% a 2017 event?

You know, I'm going to be very cautious here because Amanda's looking at me and telling me to make sure that I'm being very patient. I think it's an event over the next couple years. Again, if we can get 50, 75 basis points this year, that will get us to 93. I think that, then, we're getting momentum. I clearly think that in the locations that we are at -- our leasing teams are generating some synergies that we haven't seen before, so I think it's achievable, which is good. I think it's pragmatic, which is good.

And I think that it's generating a good value, meaning that we what we are leasing, the space we're leasing, I think ends up being leased and the retention ends up being in the 90%, not 85%, people won't move. If you put the right people in the right locations, you service them in the proper manner, they don't move on you. So, we're excited. I think that as a team, when we got together earlier this month, we're seeing some very good activity and I think, over the next couple years, we'll get to that number.

Okay. That's helpful, thanks. And then, Robert, you guys improved the balance sheet during the quarter mostly through equity issuances to fund the deals, but -- and then I think, on the call here, you talked about long-term debt and some asset sales for other sources of funding, but as you look forward for the balance of the year, is equity, does that remain kind of top of the list for asset funding or would you say the others take priority, given the propensity towards equity in the first part of the year?

Well, you know, as we look at it, first and foremost, what we've always communicated and what we're committed to is being fairly lowly levered, and making sure, as we are doing our acquisitions, we lock in the equity at the same time. I don't think we're going to stray from that. So, as there's opportunities, you know, one of the interesting things we've seen a lot more recently, as Scott mentioned, is OP units. You know, that's a great way for us to finance deals, as we acquire them. You're immediately locking in a good chunk of the equity to do those deals. So, I think we're going to continue to look at them in a very consistent manner with what we're doing now

You know, one of the things that we can probably count on, in the rate space, is that it isn't going to be always like it has been in the last couple months. So, there will be ebbs and flows; the ebbs and flows will offer opportunities. So, as we have always said, and I'm a firm believer that, you know, low leverage allows you opportunity to take advantage when other folks may not be, may not have that opportunity.

So, we will continue to balance our acquisitions as we have; we will continue to be in a position like you see us today; and, in fact, every year for the last three years, we've entered the year lower leveraged than when we started it. So, we try to position ourselves to be good, pragmatic, opportunistic buyers, in key markets, of great assets.

Makes a lot of sense. Thanks. And then last one, Robert, just on the same-store pool for a second. Can you provide some transparency under the, related to the process of moving an asset in, more obvious on that front, but moving an asset out of the same-store pool? What goes into it, who's involved? Any color you could provide would be helpful

We follow pretty simple process for that. We do follow the five-quarter method, so, right now, in the first quarter pool, from an acquisition perspective, we're including everything we acquired through the end of 2014. In order for something to get pulled out of the pool, it's kind of a two-step test. First of all, it's got to be approved by the Board of Directors for sale, and the second test to that is, we have to perceive some sort of an offer on that, which means we're serious about selling it. And, while, obviously, those sales sometimes can take a number, a longer period of time than we would like for that to happen, but, certainly, that's the process that we walk through there.

And, I think just from a governance perspective, it's always nice to point out how a company operates, but every one of our acquisitions goes through the investment committee that is made up of independent directors and every one of those recommendations go to the complete Board. So there's no asset bought here in this company, or any disposition that is selected as a disposition, that doesn't go through the complete governance. And, as you know, our Board is consisted of the same folks, plus a couple folks have come aboard, so we have a very active group of directors.

Thanks guys.

Jonathan Hughes, Raymond James.

Good morning. Just touching on Vikram's question earlier on any red flags. Are there any markets where you may be seeing elevated levels of construction or deliveries this year?

I think you're seeing more healthcare systems, when they need either redevelopment, which is, if an asset is on campus and it's constrained fundamentally because it's a built-out campus, there are conversations going on. We've had folks call us and say, you know, we'd like to get this renovated and we'd like to extend the lease, and they are looking for capital and that's a good combination. So, I think that is occurring and that's a natural evolution and I think that that's the first step before you see development going off campus. Because, fundamentally, it's either on campus or not. It's either community core or it is not. And, it's either academic university campuses or it's not. So they're very hard to just generate one-off from any particular standpoint.

Okay. And then, just one more. Curious if you've had any recent discussions with hospital-management teams regarding the changing reimbursement rate environment and, if so, are they concerned or optimistic? Do they plan to expand or take a wait-and-see approach? Just curious if you have any commentary on that front?

It's interesting. The conversations we have with the healthcare folks is sort of a good news/bad news thing, because the bad news is that they say, well we're cost constrained and we're looking for places to save cost and, gee-whiz, we need to do this. And then, in the same breath they say, well, we need to move as much as we can to the outpatient locations. So, you're getting a demand driven by necessity of the healthcare systems, in order to continue to fight their budgeting process and their reimbursement issues that they face. So that's a positive for the space.

Our space, MOB location, is continuing to be the first and foremost location that allows these healthcare systems and physician groups to be able to do what they need to do, and, in the case of healthcare systems, to manage their budgets, and, in the case of physician groups, to get to locations that generate the greatest revenue. So, it's an interesting conversation when you have it with these healthcare systems.

[Especially] give-and-take. Thanks Scott. Appreciate it.

Richard Anderson, Mizuho Securities.

Good morning. So the 70% that you call on or adjacent, can you break out what's actually on and how do you define adjacent?

Rich, the way we define the entire pool there -- obviously campuses can stretch for some time, and so the way we define is really within a third of a mile of a hospital property.

Okay, and so what is -- would you say the actually-on-campus number is half of 70%? Like how would you -- it doesn't have to be precise, but --?

I think that two thirds. I think, as Robert said, we are within that quarter-mile. I think that's been a standard or that's been something that has been talked about in the sector for the last three or four years. It I would say two thirds of our stuff is right on campus,

of that 70%?

Yes.

Rich, one thing on that. To be clear, certain times, you might not be on campus, but you're actually closer to the front door of the hospital than if you were on the campus, so that's why we try to set some ground rules and say it's got to be within a third of a mile, just to provide some sort of a standard within that, so.

Okay. And, Scott, when you went through your three nodes of opportunity, academic, on or adjacent, and then community core, would you be willing to say that you're bending more, even, away from on campus and looking at some of these other options, as a means to get your 6-plus cap rate. I mean, is that a fair way to look about how the business is changing from your perspective, at the margin?

I think there's a couple answers there. Number one is that not all campuses on campus are equal. I think a lot of the nonprofit campuses are struggling. Consolidation is going to be an issue in the space. And, so, you're going to want to be on campuses that have high energy, so just being on campus, I think, is not what it might have been five years ago or 10 years ago.

Number two, I think that these three segments are critical to the future of healthcare. I wouldn't want to limit an investment. I look at this as I look at it and say this is a 20- or 30-year investment that you continue to produce 2.5% to 3.5% same-store cash NOI. Where you can do that at? Well, I think these three locations are where you're going to get the best opportunity and the longest and most consistent growth.

I wouldn't want to put us in a corner and say all we're going to do is on campus. Just like Robert mentioned, sometimes the campus is here, but the best building is across the street. Well, it's technically not on campus, but it's a great building and it's got the most prominent healthcare physician group in it. So, we like the three sectors; we like the fact that key markets -- key markets for us mean that there's a high economic, unique economic, and high university concentration, because that's what is going to attract companies in the future. It used to be 20 years ago that people went to the companies. The next 20 years, companies come to the people, so you want to be in those locations that have academic university centers. Why did GE go to Boston? They went because they wanted the talent that resides in Boston.

So, we like the three segments. We think the three segments are going to be the leading provider of growth from an NOI perspective. And, so, we'll do, you know, 60-20-20. I think that that would be a tremendous opportunity for investors own this type of real estate for the next 10 years.

I appreciate that. On a more specific commentary on Forest Park, it seems like that situation's going to get resolved in a positive way, if things continue to go on long as planned. I'm curious. In some ways you might look at that and say, well, you kind of dodged a bullet, because the system itself wasn't necessarily a good one from, in the current environment, but your assets probably become net winners at some point. Is there anything about that transaction that, you know, caused you to re, kind of consider your investment thesis, looking beyond just being on campus, but, you know, does Forest Park create any lesson for you on a go-forward basis?

Well, I think, number one is that, you don't want a hospital to close. The operator there in that --

That's true.

That's true. I mean, it is. And I think the most, the second most important lesson is, location, location, location. You saw it in Frisco, where HCA came in, and now our building has got better credit. They want more space and we're actually having to look to kick people out, which isn't as easy as they think it is. I think you look at Dallas and you say that resolution, when that gets done, is going to move to a stronger, more dominant healthcare system in that location and there have been folks who said, space is a prominent concern for whomever gets that location. Our building, for example, has the cafeteria in it, so whoever buys that building has to have a cafeteria to operate the, operate the hospital.

You want to make sure that what you buy is great location, that it's going to survive and, in this case, as you mentioned, I think, I hate to say that we dodged a bullet, but I think the fact is that it reinforced location, location, and then make sure that your MOBs can operate independently, which both of ours can. And, then you go through a process. I think it will be, as you mentioned, a very good resolution over the next couple of months.

Turning a little bit on the occupancy lift that you are expecting, what are the implications on that, on bottom-line, same-store NOI growth? Does it meaningfully get you above 3%, or is it kind of a rounding error from that standpoint?

I think it would be, have limited impact this year, as you get new leases; obviously, there's that free-rent period you work through, I think, could have a bigger impact in 2017

I think, Rich, you know, I talked about that at the beginning of the year. I think our biggest opportunity to move that number higher, there's two things it impact. If we lose occupancy, obviously, it would be impacted. And the second one, as we get this next couple-hundred basis points of occupancy, that will help us with that number.

Okay. One more or so, on the cost-savings initiatives, how much does payroll taxes, insurance, represent as your total expense nut? Is it 60%, 70%? Is it that much?

No. We can get back to you with specifics, but it's not nearly that much.

Okay. And, when you talked about this in-house asset management thing, you have 200 people now working for you. How was that -- is that like a G&A item, or is that associated with the operating portfolio? How do you deal with that? Maybe that's a good explanation for your consistency, too.

You know, the folks that are in the field that are operating in the regions all run from a simplified perspective, all runs through the operating expense line item. So engineers, property managers, those are all operating expenses, as you would expect it to be.

Okay. And then last, Robert, you said 5% exposure to surgery centers; are you saying that your entire 603 risk, or is that just the portion that's associated with surgery centers, because, certainly, there would be other forms of operation that would be subject the 603 issue.

I think the surgery center's the primary -- receives the primary impact from Section 603 and surgery centers, like I said, is only 5% of our total portfolio. So, I think that exposure is relatively limited

Okay. All right, thank you very much.

Eric Fleming, Sun Trust

Hey, guys, trying to be quick here, to get us towards the end. With you guys kind of running the 2.3% annualized escalators and saying new contracts coming in at 2.7%, when we start to see that 2.7% start to bump that 2.3 percentage higher?

I think the good news is that we getting the 2.7%. I think the bad news is, we continue to have pretty limited lease rollover. That certainly has been what's been driving our consistency. So when we -- to move the average up, when were only rolling 6% of our leases, it's going to take, it's going to take some time, as we continue to move through that process. But, the good news is, we are moving them up and that's something we are seen pretty consistently across the Board.

Okay, and could you guys go through the details again of that Connecticut April investment you did? I just don't get all the details down. Is that a new health system relationship you have?

It was a new, it was an acquisition from a couple folks that we have known for a while and it's -- you know, we've built out now what we think is the New Haven, Hartford region, and we think it's a great opportunity for us, because they're going to have, they have relationships there that, I think you will see us have more opportunities to get acquisitions within the region, based on this recent relationship, since, obviously, these folks put close to $70 million of equity into our Company because, A, they like the MOB space; two, they liked our Company, and three, they think that there's still a great opportunity for returns in this sector.

Great. Thanks a lot, guys

Paul Roantree, JPMorgan.

Quick one on asset sales. Could you guys provide timing for the asset sales for the remainder of the year? Are they more lumpy towards the back, or evenly distributed? How should we think about those?

I would say that you'll see them more evenly distributed starting this next quarter.

Got you. Thanks

No additional questions at this time. This concludes our question-and-answer session. I'd like to turn the conference back over to Scott Peters, Chairman and CEO, for closing remarks.

I would like to thank everybody for joining us on the call today. And we look forward to seeing you and, of course, if there's any follow-up questions, please don't hesitate to call myself or Robert, Amanda or Mark Engstrom. Thank you.

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