Healthcare Realty Trust Inc (HR) 2016 Q2 法說會逐字稿

Good morning and welcome to the Healthcare Trust of America's Second Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. (Operator instructions) Please note, today's event is being recorded.

I would now like to turn the conference over to Mary Jensen, Vice President of Capital Markets. Please go ahead.

Thank you and welcome to Healthcare Trust of America's second quarter 2016 earnings call. Yesterday, we filed our second quarter earnings release and our financial supplement. 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 ability to project. 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 risks, 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?

Thank you, Mary. Good morning and thank you for joining us today for our Second Quarter 2016 Earnings Conference Call. 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.

We are extremely pleased with our second quarter results, our year-to-date operating performance and the continued execution of our business plan. Over the last 10 years, we have grown into the largest dedicated owner of medical office buildings in the US. We have invested $4 billion in over 343 medical office and other healthcare real estate assets, aggregating over 17 million square feet across 31 states.

We believe this focused growth has been and continues to be the direct result of our disciplined rifle-shot acquisition philosophy, which is centered around key markets, key cities and clustered asset management synergies that we believe result in superior returns, asset performance, same-store NOI growth, and total investor returns.

We have purposefully and strategically invested in top markets across the country, resulting in 91% of our GLA being located within the top 75 MSAs across the United States. These markets post above-average medium household income, stronger higher educational systems that foster a strong workforce and other unique economic drivers, pushing the local economies forward. 67% of our MOBs are located on or adjacent to prominent hospital campuses and academic medical centers, while 33% of our portfolio represents core community outpatient facilities that are strategically located within the community and around other key healthcare assets.

Further, according to recent Revista data, more than two-thirds of all physicians practice off-campus, a trend that we see evolving within the healthcare sector, as cost pressures continue. As a result of this execution and business philosophy, we have generated total returns of 195% since our founding 10 years ago, which outperforms our direct MOBs here, the diversified healthcare REITs, the Standard & Poor's 500, and the US REIT indices. In fact, an investor who invested $10 in HTA 10 years ago has almost tripled their investment today.

As we look to the next several years, HTA's medical office space is uniquely positioned for continued growth and performance. The MOB sector is benefiting from fundamental tailwinds that include an aging population with 10,000 individuals turning 65 years old per day over the next 20 years, the Affordable Care Act and the continued growth in healthcare spending, overall employment growth and a continued pressure on healthcare to shift to low-cost healthcare delivery in outpatient location. With current valuation gap to other sectors such as traditional office and the depth of HTA's MOB platform, I cannot think of a better real estate asset class to invest.

Now let me turn to the second quarter performance. During the quarter, we generated a 5.3% increase in normalized FFO per share to $0.40. We generated 3.1% same-store NOI growth, which we have consistently generated over the last 15 quarters, since the fourth quarter of 2012. This is also above the midpoint range of 2.5% to 3.5% growth, which we anticipate to deliver in the future. Year to date, we have issued $365 million of equity, including $272 million in second quarter consisting of $172 million in an overnight offering and $73 million of OP units, issued at an average price of $28 and an implied cap rate that was accretive to our acquisitions during the year.

In addition, in July, we closed on our third unsecured public bond offering, issuing $350 million of 10 year unsecured notes at attractive pricing of 3.5%. We used proceeds from the bond offering to extinguish outstanding debt on our unsecured revolver, extinguished other short-term debt and further laddered out our maturities.

During the quarter, we expanded our portfolio with high performing assets within our key markets, acquiring almost 1 million square feet of MOBs for $237 million. To date, we have acquired 1.7 million square feet for $435 million, with the expectation that cap rates that we'll achieved will be between 5.5% and 6.5%. In addition to our acquisition activity, we recycled $26.5 million of our non-core assets, selling four senior care facilities. We acquired these assets back in 2008 and achieved a yield of 9.5%. The proceeds from this sale we'll recycle into more strategic medical office buildings that better fit and better meet our investment criteria.

On the operations front, we continue to benefit from a flexible, scalable business. Over the last few years, we have successfully reduced expenses by bringing our property management and leasing activities in-house and driving expense efficiencies, as we consolidate operations, fund the contracts, and use internal staff members be -- more effectively perform building services. We are able to achieve these efficiencies with critical mass we've achieved in our targeted markets, a key component of our investment strategy.

As of the end of this quarter, approximately 92% of our properties are being internally managed through our in-house full service operations platform, a good example that benefits derived from our market clustering lie in our Boston, Albany and Connecticut markets, $1 billion invested and 3 million square feet within a 125-mile radius.

We have a solid MOB portfolio with assets that are on or adjacent to high energy hospital campuses and in core community outpatient 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. We believe our dedicated MOB focus is the best, disciplined [path] to sustain growth that will continue to benefit our shareholders now and in the future.

With that, I'll turn it over to Robert.

Thanks, Scott. For the first part of 2016, we have combined steady financial performance with significant amounts of capital markets activity that put our balance sheet in great shape to execute going forward. From an earnings perspective, our second quarter normalized FFO per diluted share was $0.40, an increase of $0.02 per diluted share or 5.3% compared to the second quarter of 2015. Overall, normalized FFO increased over 16% to $56.5 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 3.1%, and the accretive NOI generated from more than $480 million in acquisitions completed over the last four quarters.

Additionally, we continue to ensure capital expenditures remain efficient that all cash outflows produce acceptable returns. As a result, our normalized funds available for distribution, which includes recurring capital expenditures, increased almost 13% year-over-year. Business operations remain steady, partly the result of very limited lease rollover, plus an 8% rolling over the last 12 months, consistent leasing with high tenant retention, 87% in the quarter, and releasing spreads that remain in the [five to plus one] range on average.

Our same-store growth was 3.1% and quarter-ending same store lease rate increased 40 basis points, with the majority of the new leasing being signed towards the end of the quarter. Annual escalators on the over 528,000 square feet of leasing in the quarter was 2.5% on average, with leasing concessions remaining low. Our margins expanded slightly as our property expenses were down across the board, excluding property taxes.

G&A was $6.8 million for the quarter and $13.6 million for the first half of 2016. We continue to expect G&A to trend around $27 million for the year. G&A was 6% of revenue in Q2 compared to 6.5% in the first half of 2015. These improvements support the scalability of the HTA platform, the synergies within our core markets and our ability to effectively manage our property and corporate expenses, and has trended down since we went public in 2012.

As Scott mentioned, for the year, we have invested approximately $435 million in medical office building, primarily in key markets that allow us to drive operating synergies and generate yields, which we can grow faster on our platform than on a standalone basis, generally an additional 50 basis points within the first 18 months.

Consistent with our financing philosophy, we have largely financed these investments with long-term capital, raising just over $365 million of equity at attractive prices relative to our investment. This includes over $292 million of equity raised through the public markets and $73 million of OP units. This balanced equity raising allowed us to effectively lower our leverage while still growing earning. Following the quarter end, we completed our third public debt offering, issuing $350 million in 10 year senior unsecured notes with a 3.5% coupon. As a result, we have very limited near-term debt maturities and continue to ladder our maturities into the future.

As I started, our balance sheet is in good shape with leverage at quarter end of 26.2% debt to total capitalization and 5.5 times debt to EBITDA. We continue to target leverage of 30% to 35% and below 6 times. So we may run lower than that and continue to extend debt maturities as the real estate cycle continues and the capital markets remain open.

I'll now turn it back to Scott for final remarks.

Thanks, Robert and we'll turn it over to the operator to open up for questions.

(Operator Instructions) Vikram Malhotra, Morgan Stanley.

I just wanted some more color on the new markets you guys have entered, sort of how did you view these versus maybe other alternatives you were considering in other markets that might fall into the strategic category?

Well, we've always wanted to be in 20 to 25 core markets. And I think our view right now is that we're in a good 15 markets, and 15 markets where we have that -- our asset management, our leasing, we've got relationships, we're seeing off-market transactions. I'm sure we'll talk a little more about that in a minute. But, we'd like to be in another three, four, five, six markets. We've identified them, we're starting to see opportunities there. And the biggest thing for us, of course, is our view that we want depth and we want critical mass in the market. We don't want to be in 50 markets with one asset each. We want to be in 20 to 25 markets with a concentration that allows us to really bring in accretive value to the acquisition and being a targeted buyer like we are, I think that's our best ability to execute for the long term.

And then just on the expense side, can you maybe just walk us or give us some more details on how much of the decline in [same store] expenses was just from additional savings you've got from the in-house management and if you can give us some more color on things like property taxes?

Really what we saw throughout the quarter was pretty broad based kind of expense reductions, kind of go through all the different lines from ground maintenance, building maintenance, down to utilities, even -- just our internal costs are kind of down across the board, especially on a per square foot basis. From a property tax perspective, we did see some slight increases this year, kind of going along with general inflationary pressures. So a couple percentage points. Nothing really too alarming on the property tax front. But that was really more offset by the efficiency that we've been able to generate out of our in-house platform.

One of the things that -- I just like to close up with that comment is that we're excited about the fact that over the next 12, 18 months, if we continue to be target buyers in selected markets with some clustering ability, we can bring down our G&A and you've seen it from last year, as Robert pointed out, we're continuing to see it as we put together our budget for 2017. So, I think it's just a very, very strong efficiency aspect of HTA that perhaps some other folks don't have in the sector.

And then just last one on sort of the acquisition, or the opportunity set on acquisitions, a lot of product out there, you alluded to that at NAREIT. Can you maybe just give us an update, sort of portfolios you're tracking and what you may be interested in?

There is a lot of product out there. I think that there is more product that has either transacted through this year or is going to transact theoretically this year. I think a lot of the product -- the majority of the product frankly is not our type of product. In fact, if you look at three of the opportunities out there, they're really portfolios or assets that were accumulated in -- really this the third trade in three or four years and I think you have to be careful about -- certainly one has to wonder about the value that has left in those portfolios. They are also in secondary markets, secondary campuses, they really were not put together as a long-term hold or they came in larger portfolios. So we are looking at very targeted disciplined acquisitions in the markets we're in, typically with the relationships that we have. And so you're not going to see us be one of these buyers that come in and want to just add size to the equation and think that by size you're going to get performance, because I don't think that happens.

Todd Stender, Wells Fargo.

I hopped on late, so sorry if I've missed this. Your in-house property management dipped a little bit into the low 90% range. Is that just a reflection of new acquisitions hitting, or have you guys transitioned any properties off of HTA's management?

No, it is a direct result of the recent acquisitions, especially the one up in Connecticut. We're in a transition period with them, which is very important to us, because it helps us get to know the market, helps us to get to know the tenant and they've got great synergies up there, and we're actually working together on some -- they are developers, as you know. So we're working in coordination with them on some projects. So it's important to keep that relationship open. We still want to manage, I would say, on average 95%, Todd, and it will ebb and flow during the period of time, but typically that's where we'll end up.

How long is the transition period would you say? Is it typically 12 months and in this case is there any difference between that traditional and what's going to happen in Connecticut?

Traditionally, it's 12 to 24 months. I mean, that's really what -- it allows for a number of transitions. It allows us to get very familiar, especially if it's a larger portfolio. In this particular case, for example, in the Connecticut market, it was a new market for us along with our acquisition in New Haven and great relationship. We take advantage of those relationships. So it's a good partnering aspect of what we want to try to do in markets where we want to have that strong presence.

And then Robert, just looking at your stock price, obviously, your valuation has benefited from not having skilled nursing, or assisted living exposure compared to your more diversified peers. Is there a way to quantify how much your cost of equity has benefited this year? I guess, maybe how it compares now to maybe where you drew up your budget back in December?

I think we've certainly seen stock prices increase across the board, especially as investors start to recognize some of the value that medical office truly has behind it. I think, as we've seen our cost to capital continue to decline, it has allowed us to look at more opportunities than maybe we had originally budgeted, because I think, as we've talked about for a long time, we do see -- we are committed to being very conservative from a balance sheet perspective. In fact, we've been able -- because of some of the cost of capital going down, we've actually raised more equity that allowed us to effectively delever throughout the year at this point in time, even while being very acquisitive as we found good assets. So, I think that's what we would like to continue to do is, keep the balance sheet exactly where it is, make sure it's fairly lowly levered to allow us to take advantage of opportunities when we see them.

Jonathan Hughes, Raymond James.

Looking at portfolio deals, and I guess not including the ones being marketed by some of your competitors you mentioned earlier, but have you changed your outlook towards portfolio deals in the $100 million, $200 million range?

Well, if you look at our history, we've had three or four or five of those. We were really the first buyer, if you remember back in 2010, to buy the portfolio in Greenville, which was at the time $160 million, I believe, and then we followed it out with a concentration of assets in New York for about $192 million. And then we had, what I would call, a portfolio of another $100 million or so in Florida. So we are not at all adverse to taking large gulps. We just took a gulp here recently, $172 million in Connecticut.

So, it's really the concentration. If we find a portfolio, a group of assets that has concentration, it has the criteria that says that for the next 10 years it's going to deliver great returns, we are very competitive, and I think, as we just talked about, we are in a very competitive position. So it's more about the assets, it's about the assets, it's about the location, it's about the concentration and it's about the long-term viability of those assets to produce 2.5% to 3.5% same-store growth. A lot of the assets I see on the market right now, frankly, I think that they are over-market. I think rents have a propensity over the next three, four, five years if they roll, they may roll down, and that's not really what we're looking for. We're looking for assets that bring synergy, they have core market value rents and those rents can move with that 2.5% to 3% on an escalated basis for the next 10 years.

And then that's a segue to my next question. Have you seen more international investors or sovereign wealth funds for high quality MOBs in core markets following the Brexit vote?

We have seen -- I think the good news is, it's a good news, bad news. Good news is that medical office building market in great markets is very, very attractive. Bad news is that folks realize that it is very, very attractive and they have an appetite to get invested in it. Our advantage is that we are in market, and we have these relationships and not every asset is sold simply for the last price. In addition, not every asset is sold with the same sort of criteria that a buyer looks at. A lot of the foreign capital does not have a management arm, does not have an asset management or leasing platform. We've gotten quite a few calls coming in that says, we'd like to take advantage of your asset management and leasing program, and would you like to manage our assets? Well, we manage assets for our investors. That's the primary goal for us. And so, we have an advantage and we don't want to give that advantage away. And I think it is something that you'll see over the next -- rest of this year that we continue to execute on.

And then just one more. Robert, you touched earlier on cost controls and the benefit from rolling assets on your platform. And I think you quantified this at about 50 basis points. Has it increased recently from a few years ago, and if so, what's the main reason for that expansion?

I think, it certainly has -- and really what we're talking about is when we buy assets, let's say, we're buying them at a [6%] cap, and within 18 months we think we can generate that incremental 50 basis points of yield. It probably has increased somewhat over the last couple of years. Certainly as we roll out our platform, there is a level of sophistication that has certainly been added to the platform that allowed us to generate some incremental yield there. I mean, it really comes across the board, certainly by eliminating some management fees, but then also from bundling contracts. And just a simple fact that when you add an asset to a platform, the staff that you need to operate that doesn't increase on a proportional basis there. So it certainly has -- we think it's increased, especially as we built out the platform last couple of years.

One thing we're seeing is that, that the MOB, the way that we buy assets, which is on a targeted basis, it's a very fragmented industry and it has been fragmented and it's going to continue to consolidate. And through that fragmentation is when you buy it from a developer, you buy it from a one-off owner, or you buy two or three assets that are being operated in that small pool, there is such a significant amount of synergies and efficiencies you can bring to that operation. And then when you add that to a regional focus on our part, two-thirds of our portfolio is on the East Coast. Almost 25% is within a 125 miles of each other, and we've got a large presence in Florida. So, we can start bringing some of these synergies that continue over, not just a quarter or a year, but as we go through 2017 and in 2018, our budgets are being focused on how do we bring this -- for a better word -- institutionalization to the asset management platform. It's very hard to do that if you're buying $1 billion portfolios. I think, some of our peers have found that out, because it's an asset-by-asset, market-by-market process. And so, I think, we bring that synergy and that efficiency quicker to our bottom line. And that's what the purpose of the whole process is, is buy accretively, drive earnings to the bottom line, generate returns for shareholders.

(Operator instructions) Kevin Tyler, Green Street Advisors.

The bigger health systems, we continue to see them move their brand out into the more suburbia type locations and away from their core [main] location. And I'm just curious, as we see that happen more and more, how do you think that impacts the second and third tier hospitals that might be more in that suburban area? And if those hospitals are impacted and we start to see them either shrink or shutter eventually, how does that play out and impact your portfolio?

I think the secondary markets, and as you said, as healthcare systems move out to, what I call, distant or one-off MOB markets with a hospital, I think you'll see some consolidation. I think if you're an owner of that MOB, you have very little pricing power. I think, in fact, the pricing power becomes less the further you move away from the campus. And then, if you're right on campus, the healthcare system has pricing power with you also. So that is also a consideration. And then if you're constrained with a ground lease, and if that ground lease is restrictive that even comes into play more with that negotiation of rent, and only 30% of our on-campus properties have ground leases. We pay attention to that. We think that without a ground lease it would be simple interest ownership, you have a little more leverage in the negotiation process. So, we don't like the off-campus secondary markets, even if it's on campus. But we are very cognizant of what we buy on-campus, so that we're not constrained by ground leases and what we're really -- what I think moves forward is there's going to be continued cost pressure on our healthcare system, and physician groups and healthcare systems are going to look at the most efficient place to put the most revenue generating parts of healthcare. And if you look at some of the East Coast, and I go back to Boston, I go back to Albany, I go back to Florida and Tampa, you see that some of these, what we call community core campus locations. They are populated by one or two or three healthcare systems, they are populated by the physician groups that haven't gone away. And their focus is on access, their focus is on synergies from referrals and they're also very cost conscious about the $6 or $7 or $8 to differentiate itself from on-campus to this core location. Now, that helps us, because we get typically 3% escalators. We've seen growth in our portfolio over the last few quarters, and spreads better than on-campus in some locations. And so, I think, that's where healthcare is going. I think it's a very selective -- still a very selective business. The one thing about real estate is that it is location, location, location. And I think that in some cases in a very, very hot market and certainly this is a very hot market for medical office. People forget that. And so, I like our targeted acquisition approach and I like the fact that we can get concentration and operating efficiencies when we acquire something.

And then to that point, you mentioned it earlier as well, you said that folks continue to look to get invested and it's getting more competitive, naturally there is more supply probably than we've seen in the past. But I wonder if there is any markets in particular that may be concerning or on the radar screen for development?

Well, we are seeing -- the interesting thing is we don't do development and we haven't done that. But what we are finding in -- it's frankly exciting for us and I know that there are several folks on our management team, Mark Engstrom and Amanda Houghton, who are very active in this particular issue is that we've been approached by a couple of healthcare systems that we have relationships with, who are looking to build something, want to build something, have a developer in a local market that they're familiar with and are looking for that long-term equity hold. So, we have opportunities and I think you're going to start seeing those and they'll be all leased, which is the good part of it. And so we'll get that opportunities continue to expand by a second arrow in our bucket, which is where healthcare systems want us as the owner, familiarity with us from having done business with us and are looking to use that local developer or that opportunity that they've already done in that local market.

And the flip side, you're not seeing anybody pop up in size on the development side where you're concerned or seeing a direct impact on the portfolio to any degree at this point?

In fact, I think it is the opposite. I think the developers are -- there are fewer developers out there today than they were three years ago. We've got a couple national developers, with the large REITs. I think, it's interesting how that's playing out, but it still is a regional and local developer market from what I can tell. When folks go in, most of the time I think the healthcare has a desired partner or they want a desired developer and then they have some idea about who they want to have long hold -- long-term equity ownership with.

Chad Vanacore, Stifel.

This is [Aaron Wolfe] calling on behalf of Chad Vanacore. Question regarding CapEx, it came in a little -- recurrent CapEx came in a little higher than normal at about $7.7 million this quarter. I'm just wondering what we can expect to see in the back half of the year?

Well, I think, as you look at our capital, you know there is certainly a component of it just proactive maintenance CapEx, which continues to be pretty steady and humming along. I think the biggest driver of the incremental CapEx is related to tenant improvement. If you look at the leasing activity that we had in -- we increased our year-over-year same-store lease rate by about 40 basis points. And so there is tenant improvements that come along with it. When you just look at the pure kind of leased square footage and activity we've had, we've actually had about [50%] more square footage leased in the first half of this year compared to last year. So that really makes the bulk of the difference, and that's all good capital going in with tenants in their place.

Where is it going to in the back of the year?

I think it's all driven by the leasing activity that we have. We continue to see good activity and so as leases continue to get signed, we would expect that to be pretty consistent, depending on the timing of when and what and where it's signed. We really remain focused on making sure that we are getting pretty efficient on the tenant concessions that we're offering. You know, TIs on a dollar per square foot per year continues to remain very low on both a new and renewal basis.

Michael Mueller, J.P. Morgan.

I got on the call late as well, so I apologize if you touched on this. But year-to-date acquisitions already running pretty much where the target is then. What are you expecting for the back half of the year, out of curiosity?

You got on late, but no one asked that. So very, very good question. We've been fortunate. I'd look at it as not a -- we don't give guidance and what we have said is that we've been very consistent from an acquisition perspective. I think, in this particular marketplace, there would be some folks that perhaps put growth over everything else, even at the expense of performance. I think we don't want to do that. We want to be targeted buyers in our market. We had some opportunities in the first half of the year to do that, we've had opportunities where it's been very accretive to us, and helped build our footprint. I think, we'll see some more of those opportunity. I don't want to put a number on it, because I can't tell you necessarily where that opportunity may jump up, but we are actively looking at some things now that if it comes to fruition, I think add to our markets, adds to our portfolio and as Robert talked that earlier, we've lowered our leverage year-to-date. So we've been very disciplined from a balance sheet perspective and the MOB marketplace is -- people are looking to get invested in, and we're the beneficiary of that. So we'll take advantage of it where it's prudent.

John Kim, BMO Capital Markets.

I think, Scott, you mentioned in an answer to a prior question about potential rent rolldown and much of that was in relation to acquisitions you're looking at, but can you provide some color on that and if it's in relation to any particular market?

I think, that again some of the triple net leases that if you look at some of the portfolios that are out to be marketed right now, they have very little CapEx originally attached to them, they have longer-term leases in place and they were pretty fixed. And when we underwrote them the first time, we didn't necessarily think that [it sums again] Henderson, Nevada is going to be a rent driven market of 3% escalators after six years. And I just think that Henderson, up six years, 3%, [rent is] going to roll down. And so there are markets where you see the assets and you're thinking that those potentially could roll down. We don't want to be buyers of those assets. We really want to take our portfolio, fine-tune the targeted markets, fine-tune the clusters, continue to grow in size, and three years from now, two years from now, people say, well geez, they've that $1 billion in this market cluster, they've got $1 billion over here, they're getting the synergies off of that. So that's really our criteria. It's been like that from day one, just like we haven't bought rental rates or occupancy. I think in some cases people have given a lot of concessions. Those concessions now were given five, six years ago and you're seeing large roll-ups on rent, but the performance of the asset over the last six years has suffered. We've tried to keep rents at market, we've tried to keep concessions at market and we've been very consistent with that through our leasing teams.

And then looking at your top markets, I think you mentioned in the past that you want to get critical mass in some of these markets as you enter and build scale. Are there any markets that you're currently in that you're finding it more challenging to build that critical mass and you may end up selling out them?

I've been very forthright with folks in the Phoenix market. Phoenix is dominated by one healthcare system. The healthcare system hasn't been very active in acquiring physicians and you've got really a dichotomy here, which you have a healthcare system that has 60% of the market share, but isn't growing much from a physician perspective. And so, Phoenix has been a tough market. We've sold a couple assets here in Phoenix. We did well with those assets, but our timing of buying them was back in 2009, when the market was really at the bottom. Phoenix would not be a market that you would see us continue to grow in in its current situation from a rent perspective. So that would be a market. And I think that Vegas -- we own an asset in Vegas, but I don't think we would be a buyer of more assets in Vegas, because that's been a very difficult market from what we can tell. So I think, we look at each of the markets and decide how we see that market over the next 10 or 15 years. Our three components to a market and I think that the long-term value of real estate is driven by the economics within the market. It's great to be on-campus, it's great to have great healthcare system, but if the market itself isn't growing, then you have troubles with rent, you have troubles attracting folks. So we're looking for cities with economic uniqueness. You've seen Boston, Charleston, Austin, Raleigh, Greenville, Tampa, I mean you go through our portfolio and I can point to economic uniqueness in those markets. We like high academic university locations, because that's where folks are moving. Millenials now go to college, they get invested in the community and they stay. And I think, that if have a higher wage -- the wages are higher based around those type of university academics locations. And then you want the healthcare systems that are stronger, you want the locations that attract a lot of patient business, because that's the future of healthcare, is as many healthcare business as you can possibly get through the healthcare systems or the physician group. That's how we target our markets.

And a final question for Robert. The acquisition-related expenses, is this completely tied to acquisitions that have closed, or is part of that in relation to the work you've done on your acquisition pipeline?

The acquisition costs or expenses that we have in there largely ties to acquisitions that are actually closed. There is certainly our external legal costs, where -- are related to acquisitions that either haven't closed or go away. But that's a pretty small component on them. We don't really spend a lot of dollars until we're highly confident that we are going end up closing the deal. So, these are really acquisition expenses that I'd say, by and large, are related to acquisitions that closed.

We have gone after two or three assets. We have been in the process and it's turned out that those assets had reached a price that we felt was frankly not something we wanted to buy. It's been in a couple of our core markets. Again, we were looking for that 7 to 10 year performance as an owner, and hopefully as an investor. And when you get yields that go into the 4s, and you get fixed rent that are in the 2s and you get CapEx that has been deferred, you have to look at that and say, well, maybe there's a better place to put my invested dollar than perhaps that particular asset. We've chased three or four things and we've backed off. And I guess the term is either we backed off, because we didn't want to go as low as other people went, or we backed off because we didn't think the underwriting from a 5, 7, 10 year perspective was something we wanted to invest in.

I may have missed this earlier, but can you discuss the competitive landscape from other REITs? Is it mostly coming from the MOB focused REITs, or also the [big three] healthcare REITs as well?

I think there is more activity in the MOB sector. I don't think that there's been a distinctive change from the public REIT. I think the five of us, or four of us, or six of us, or however many there are now, we pretty much been in this and doing this for certainly 3, 5, 7, 10 years and we have a different focus to a large extent, I think that's been consistent. I think (technical difficulty) invested in and sometimes they're taking the easiest answer. So, that's probably the thing that has generated the most differences. There's certainly foreign capital, there are certain new folks that want us get invested in MOBs and those are the ones, I think, have made it a little more difficult.

And ladies and gentlemen, this concludes our question-answer session. I'd like to turn the conference back over to Scott Peters, the Chairman and CEO for any closing remarks.

I want to thank everybody for joining us on the call again today. And as I've mentioned, I think our quarter -- we are very happy with our quarter. 2016 continues to look for us to be very successful. Leasing is continuing to go forward for us, which is a great indicator of what our assets are doing and how our markets are performing. So thank you very much. And we'll talk to you soon.

And thank you for your time, sirs. Today's conference has now concluded, and we thank you all for attending today's presentation. You may now disconnect you lines and have a wonderful --