Healthcare Realty Trust Inc (HR) 2016 Q3 法說會逐字稿

Good day and welcome to the Healthcare Trust of America third-quarter 2016 earnings conference call. All participants will be in listen-only mode.

(Operator instructions)

After today's presentation there will be an opportunity to ask questions.

(Operator instructions)

Please note this 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 third-quarter 2016 earnings call.

Yesterday we filed our second third quarter earnings release and our financial supplements. 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'll be happy to take your questions at the conclusion of our prepared remarks.

During the course of this call, we will make forward-looking statements. These forward-looking statements are based on the current beliefs of management and information currently available to us. Our actual results will be affected by known and unknown risks, trends, uncertainties, and factors that are beyond our 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 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.

Good morning and thank you for joining us today for Healthcare Trust of America's third 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.

Here today 2016 has been one of our most active years since we listed on the New York stock exchange of June in 2012. We have invested over $640 million in key acquisitions, generated over 3% same-store growth, raised almost $500 million of equity, and repositioned our debt with over $550 million in financings. Our business philosophy continues to revolve around creating a portfolio and operating platform that's positioned to serve the fast growing future of healthcare delivery.

First we're committed to focusing our portfolio on key markets, investing and creating critical mass in gateway cities that are unique, employment rich, economic hubs with superior economic fundamentals, higher academic university concentrations, and strong healthcare growth.

Second, targeted investments in core critical assets that will be central to the future healthcare delivery on or adjacent to high energy hospital campuses, academic university centers, and in core community outpatient locations that provide the best access to patients in high density locations.

Third, utilize a property management and leasing platform that brings consolidation and institutional performance to this fragmented MOB sector with critical mass in key markets. And finally, fourth, maintaining strong investment grade balance sheet and equity allocation discipline.

Our year-to-date investment activity of $640 million has been consistent with this philosophy and has focused on growing our 20 to 25 key markets and achieving critical mass. We have acquired these assets at an average cap rate between 5.75% and 6.25%. In the first quarter we invested approximately $160 million with $82 million in Houston, Texas, doubling our presence in the Texas Medical Center to almost half a million square feet and expanding into the El Paso market.

In addition we invested $74 million in New Haven, Connecticut with the acquisition of One Long wharf, and began a relationship with Yale medical and Yale University. In the second quarter, we invested $274 million, with $200 million focused on expanding in the Northeast where our investment is now almost $1 billion with over 3 million square feet and a 100-mile radius between Boston, Albany, White Plains, Hartford, and New Haven.

In the third quarter, we invested $197 million, which included $150 million investment in a new key market, the high barrier to entry market of Orange County located in Southern California. We acquired four medical office buildings on the St. Joseph Mission Hills campus, totaling over 262,000 square feet in a fee simple ownership transaction with no ground lease encumbrances.

The remaining acquisitions focused on building out existing key markets in the southeast. Overall our acquisitions are reflective of our ongoing portfolio strategy. Almost 2/3rds of our transactions have been on or adjacent to leading hospital campuses with the remaining located in strategic outpatient locations.

The majority were multi-tenant assets or assets where large physician subtenants occupy the space. We focus on fee simple assets, which have significant leasing advantages with many opportunities to generate NOI over the long-term.

Overall less than 27% of our portfolio is subject to the customary ground lease restrictions. We have balanced our investment activity this year with a blend of equity and long-term debt that's effectively lowered our leverage for the year while also extending our debt maturities. We've issued almost 17 million shares through our ATM OP unit transactions and two marketed equity options generating gross proceeds of almost $493 million at an average price of $29.33 per share.

This year we have also issued $350 million of unsecured bonds in a seven-year, $200 million term loan. From an operational perspective, our dedicated asset management and leasing platform is focused on producing same-store NOI growth, not simply occupancy.

Our third quarter results were solid with strong execution. Our portfolio key markets produced normalized funds for operations of $57.1 million, a 14% increase when compared to this time last year. We delivered a 3.3% increase in our same-store growth, the 15th quarter since our public listing of over 3%.

Our entire portfolio continued to be around 92% occupied this quarter. Tenant retention for the year remains around 80%. Our new leasing activity remains strong, and though the occupancy was down slightly from the second quarter, we remain optimistic on our leasing growth heading in to 2017.

With that, I will now turn the call over to Robert Milligan.

Thanks, Scott.

We had a good steady third quarter with solid operating performance in addition to our strong acquisition activity in attractive debt and equity transactions. All positioned us for the rest of 2016 and going in to 2017. As Scott mentioned, we have been active from an investment perspective, acquiring almost $640 million of properties in key markets that will allow us to efficiency manage them for long-term performance.

Despite growing our medical office real estate portfolio by almost 20%, our balance sheet is in great shape as direct result of our recent capital market acquisition. We have low leverage at 26% debt to market capitalization and five and a half times adjusted debt to EBITDA.

Higher liquidity and fewer near-term debt maturities than we started the year with. In the third quarter, we raised over $675 million of total capital, including approximately $127 million of equity at very attractive pricing, bringing our total year-to-date equity issuance to $493 million including overnight, ATM, and OP unit transactions. We're only 23% leveraged on our year-to-date investments.

From a debt perspective in the quarter we issued $550 million of long-term unsecured debt with average duration of nine years at a fully fixed coupon of 3.3%. This included a $350-million10-year note issuance in July and a new $200-million seven-year term loan, which is due September 2023. These proceeds were used to pay down our revolver and repay over $75 million of mortgage debt which carried 6% interest rates.

We also incurred a $3 million prepayment penalty as part of these mortgage refinancings. Our debt is now very well laddered, with less than $100 million coming due before 2019, with an average overall maturity schedule of 6 years.

From an earnings perspective, third quarter normalized FFO diluted share was $0.40, an increase of 6.2% per diluted share compared to the third quarter of 2015. Overall, normalized FFO increased over 14% to $57.1 million as compared to the prior year. The increase in year-over-year normalized FFO was primarily driven by same property cash NOI growth of 3.3% and NOI derived from the strong investment activity over the last seven years.

From an operational perspective, our medical office platform is uniquely scalable with lower tenant releasings cost than traditional office. This is depicted in our operating efficiencies and consistent cash flows, which currently supported the 11% increase in year-to-date normalized funds available for distribution.

Occupancy remains around 92%, which continues to demonstrate the stickiness of our tenants. We did have a slight decrease in occupancy on a sequential basis as a result of our Forest Park Medical Center direct leases ending.

However, we've now gone direct with some of the subtenants and are seeing good leasing activity for the rest of the space, especially as tenants realize the opportunity to have class A medical space in the newly expanded HCA medical city Dallas hospital campus, one of the most profitable in the country, and one where HTA owns the medical office buildings on a fee simple basis with no restrictions on leasing.

Leasing spreads remain on pace from previous quarters, up 2.6% for the year and around 1% for the quarter. Tenant improvements increased slightly on a per square foot basis to $2 per year of term on renewals and $4 per year of term on new leases. Physician consolidation is driving larger space requirements and allowing us to refresh older space with new capital.

Free rent remains low at less than one month per year of term. G&A was $7.3 million for the quarter, up slightly from $6.8 million last quarter. This is due primarily to an increase in noncash stock compensation that was issued during the period.

During the quarter G&A remained low as a percentage of total revenues, around 6% and supports the scalability of the HTA platform. The synergies within our core markets and our ability to effectively manage our property and corporate expenses, which has trended down since we went public in 2012.

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

Thank you, Robert. We'll turn it over to the operator to open it up for questions.

Thank you. We'll now begin the question-and-answer session.

(Operator Instructions)

Our first question will come from Karin Ford of MUFG. Please go ahead.

Hi, good morning out there. My first question is just on, Scott, your comment on you're feeling optimistic on leasing heading into 2017. Can you just give us more color on that optimism and then talk about prospects for backfilling the Forest Park leasing, how long you think it will take to release that space back up, and what type of rents you think you're going to get versus the vacated space?

Well, the leasing, we're seeing a lot of activity in our leasing. Obviously our same-store number was very good this quarter. Occupancy was still very strong even with the transition that we see going on at Forest Park. So we're very encouraged. We're now working on the first, second quarters for next year frankly, from a leasing perspective. That's good. It's always good to be ahead of the game when you're looking at what assets and what potential expansions. Frankly, we're seeing more expansions and more existing relationships filling up our space. Our campuses are seeing activity by the healthcare systems or by the larger physician groups, so we think that's a very good forecast looking at 2017. As far as Forest Park goes, HTA being that campus, having expended those dollars, it's going to go through a process over the next 6 to 12 months where the specialties come in and the focused physician groups that really are targeted by HTA will move to the campus. Rents, we see no difference in rents because frankly we're in market before and we're in market afterwards. What we do see frankly, is a stronger campus with a lot longer expectation for growth than we had probably before HTA bought that campus.

Thanks for that. Do you expect the downtime at Forest Park to cause a dip in same-store NOI growth in the fourth quarter or the first quarter?

We don't see that. The nice thing about a large portfolio, we do have 17 million square feet. There's always going to be ebbs and flows in the portfolio. That's a natural process. We've had some opportunities in other locations where we're looking at leasing opportunities that will certainly backfill if we are slower or this transition at Forest Park. I don't think we're looking at Forest Park as being anything other than the normal part of business that goes through, and I don't think you'll see any changes from what you can expect from HTA.

Thanks. And last question from me, just turning to the deal pipeline, any changes in the volumes of deals that you're seeing out in the marketplace, the types of deals, pricing, competition? Any changes on that front?

I think the cap rates for in between great assets and secondary market assets are widening a little bit. They tightened up in the middle of the summer where people were chasing all types of assets. Perhaps there's a little more discipline and selective acquisitions going on. I think this is a time where folks who are in the MOB space, meaning public companies, or even private equity are determining what their longer term plans are, what type of assets they like, what qualities they like, what criteria are they looking for. We are seeing -- continuing to see, I was talking to Mark Engstrom today, about 60% of our acquisitions are from relationships that we've had from other transactions. I would expect we see that continuing.

We know our markets and I think the biggest thing that you'll see over the next two or three years is you'll see the public companies decide how they want to grow their platform, what their brand is for a better word, meaning are they wanting to be in certain key markets? What type of assets do they want to own? We're heavily focused on, what I call, gateway cities, those cities driven for the next 15 or 20 years by academic university concentrations. Jobs come to -- that's where the jobs come to now because millennials are educated. They don't move like they did 20 years ago. We're looking for specific assets. This has been a good year for us.

When we started out beginning of the year people kind of wondered were there going to be opportunities? We're finding opportunities. I think we'll still see opportunities. We're very excited about it. But our discipline and our focus is, I think, as strict as it's ever been if not stricter meaning we want them in our markets. We want them with our criteria and we want them to fit in to our asset management leasing platform and we want long-term same-store growth from those assets. So we're -- I would call us an extremely selective buyer.

Thank you for the color.

Our next question will come from Chad Vanacore of Stifel.

Good afternoon. Scott, you had just mentioned you think cap rates between primary and secondary assets are widening. Are you seeing any change in a competitive bid from the private side that may be driving that or what else could be driving that?

There may be a more selective process going on. I still think that assets in key markets, key locations, great criteria, iconic assets for better word or assets that have high synergies with tenants and healthcare systems, those are just as sought after as they've ever been. In fact, I don't think that, that changes much. I think that, that continues as we've seen it which is great assets, good performance, good returns for investors. Those are long-term opportunities to be had. I think secondary markets or assets that are in outlying areas, the growth of the criteria is different. I think perhaps you're seeing a little bit of a widening in the cap rates and maybe fewer folks looking to necessarily buy some of those secondary assets.

I guess the inverse of that would be that you've seen elevated investment activity this year. You've been over $200 million in the last couple quarters. Can you point to anything there that's driving the pickup in transactions?

If you look at our transactions it's been a phenomenal year for us. We started out the year investing in Houston. That was an asset and a group of assets we had been after. Mark Engstrom's relationship with that worked out and that was a two-year process. Our relationship with the healthcare system there really helped us acquire that group of assets for $82 million. You move in to the second quarter and we have an opportunity to partner ourselves with a large group of assets that combine with OP units and that's a very important transaction for us because it put together $1 billion, 100 miles radius, it combined our acquisition in New Haven where we introduced ourselves to Yale and Yale Medical. Then we added Boston. Then we just added Orange County.

These are opportunities that I think when you look at them and you put them all together, it doesn't do it justice. I actually like going through and saying, why did you do each one? What did it bring to the platform? How is it going to benefit over the next five years? Each one of these I think built really well on our ability to compete and then you combine that with our execution of capital and our balance sheet and I like where we are as a company today probably better than I've liked it any time in the last 10 years.

Okay. That's good. One more for me. So CapEx and tenant improvements picked up every quarter sequentially this year. How should we be thinking about normalized CapEx and tenant improvements? And how long until we see this either normalize or would it remain at this elevated level?

I think what we've certainly seen in our portfolio is what's driven at higher has been the level of tenant improvements. As we talked about, we continue to see the consolidation of physician practices and larger physician practices taking space. As we look to combine several suites together to accommodate the floor space they need, that's going to take a little more tenant improvement dollars. For instance, we've got a tenant here in Phoenix that went from 10,000 square feet to almost doubled the size of their space. We had to take out a hallway as they look to consolidate [things]. That's good leasing activity that really drives long-term value for the building.

We've got another large tenant down in Tucson, 17,000 square foot user that came into the building. That's going to take some tenant improvement dollars to get them in, but they anchor the building for the long-term. While we've seen slightly elevated expenditures there, it's gone to things that again, improves the value of the building long term, modernizes some of the spaces as we work through that. So to the extent we continue to see strong leasing, we could see tenant improvements higher, but that's really a good sign as we continue to fill the buildings.

That's it for me. Thanks for taking my questions.

Our next question will come from Todd Stender of Wells Fargo. Please go ahead.

Thanks. And just to stick with you, Robert, with the $3 million prepayment penalty, you guys I think swapped some unsecured debt for secured debt. Can you just point to some things that may offset that or how you kind of justify that cost up front?

When we look at the ability to take out some of the mortgages on a little bit earlier than they would naturally expire, these are mortgages at 6% interest rates. We look to do the debt that we've done this year -- in the third quarter alone we did $550 million of unsecured debt, average nine years duration. That's going to be fully swapped at 3.3%. You look at that and the interest rate savings there is tremendous. It's a very short payback period window so it just made sense for us to go ahead and take it out a little bit ahead of time.

Okay. Thanks. Then just kind of moving towards visibility on expense growth going forward. You've been successful at driving 3% NOI growth for some time. Certainly a lot of it has got to be the result of the movement, the in-house management. Can you really just talk about the visibility on keeping expense inflation down? You've got 2% to 3% revenue growth. You've got some expense savings which gets your NOI to 3% and 3%-plus. Just talking about visibility on expenses.

Todd, this is Scott. We're going through a process that I think everybody is going through right now which are budgets and we like what we see in 2017 from a -- when I say -- it's not necessarily an expense reduction perspective, but a review of and a focus on continuing to institutionalize the cost savings associated with our platform. The 20% increase in assets that we've put in place this year are going to show benefits next year. Those benefits are going to be extrapolated by some efficiencies that we're starting to put in place, have put in place.

So I think -- and I've said this now. I think this is the third year that people have said, how long can you continue to move through expense savings? The answer is as long as we stay in our key markets, as long as we have the ability to add assets and make the efficiency from operations better and as long as we can continue to add some of the -- take away the fragmentation and make it more consolidated from an operational perspective, I see this going for another at least 2017, 2018. I know that as an organization we are focused and we look out three years, we take it a three-year look when we do things. So I don't think you're going to see -- this is 15 quarters in a row, and I think that HTA is looking at it now. We're very well positioned to continue the execution from the management team and from our property managers, engineers, over the next two or three years.

Thanks, Scott. I don't know if this one is for you or maybe for Amanda, but can you provide what the releasing spreads were in the quarter and maybe how they compare to budget?

Yes, this is Robert. I'll take it because I've got the numbers sitting here in front of me. I think the releasing spreads, I think from an overall basis we continue to see them rolling up flat to 1%. I think in this quarter we're above that target. Releasing we're about 2.6% releasing spreads there but I think under an overall basis we continue to see our leases rolling up in market. I think we continue to focus on rolling the escalators up to 2.75 range from across the portfolio at 2.3. We continue to focus on ways we can position our capital to position the buildings for the long term.

That's helpful. And finally, when you guys entered the Mission Viejo market, can you talk about the ability to tap additional assets in this market or if you're going to come up north to L.A. Just want to see if that relationship, if that can bear more fruit or how often we can see you guys in these high barrier markets.

We like the market. We looked at it a couple years ago and I think it was a great execution for us. I think we need as a company to maximize it. The healthcare system is looking for some redevelopment onsite. They're looking for some continued expansion because they're continuing to grow. It's great real estate. I think it's one of the best transactions from an investment perspective that we've done in our 10-year history.

As far as moving up into Los Angeles or expanding on the relationship, we want to expand on the relationship but it all depends upon where the real estate is located. Is it in a market that's going to continue to grow? Probably. We would be very, very selective as we continue to expand in California. If we find an opportunity to like the one in Mission Viejo, we would do that transaction, Todd. And I think you build on something, you do something well, and what you don't want to do is deteriorate what you've done by doing something not as good. So we're going to be very disciplined as we work the relationship and Mark Engstrom is going to spend a lot of time and attention with that. I think we're excited about the next couple years.

Great. Thank you.

Our next question will come from Jonathan Hughes of Raymond James.

Hi, guys. Thanks for taking my questions. Robert, can you give color on the same-store operating expense decline and what specifically drove that? And have you maybe considerd breaking this out in your supplement like some other sectors?

When we look at the expense savings that we had this period, it was kind of across the board savings. Certainly I think utilities were a driver there. I think that will be a consistent theme as you talk with REIT folks across the way. On top of that we had kind of a normal course of efficiency we've been getting out of maintenance, building maintenance, ground maintenance, consolidation, some insurance savings, things like that. So it's been across the board but certainly utilities played a large role just from a weather perspective.

Right. And then were there any benefits from property tax appeals? I think earlier in the year you had a few favorable rulings there. Any benefit there in this quarter?

We had a little bit of benefit. Like most folks we continue to challenge the property taxes. Then we only recognize them if we actually achieve the savings there. So we certainly get some expense savings that can get expense savings there. Most of that goes back to the tenants as we look at it and as you kind of see in the financials but we certainly did get some there this quarter.

Okay. And then earlier in the year I think you said dispositions, you're targeting something around $100 million or so. You've done almost $30 million year-to-date. Can you expect a big quarter of dispositions here in the fourth quarter, or do you think some of that will roll in to next year?

We will have more in the fourth quarter. There's a couple things that look like they'll come to fruition. I would say we'll probably roll a little of that into the first quarter just because of timing. We're getting later into the holiday season and things tend to slow down from a perspective of execution so we'll probably over the next fourth quarter, first quarter, you'll see us do that $100 million or so that we've talked about.

Okay. Great. Then last one, are you partnering more with developers to acquire properties, like upon completion to achieve better pricing? Just wondering if that's like an option you've explored in the past couple quarters.

We do. I think everyone you talk to will say that they do. I think to a great extent that's one of the competitive aspects of the public companies and so forth, is who can align themselves with a local regional developer and work best with that type of relationship. We focus on it. We've always focused on it. And as you know, I felt that not being a developer gives us somewhat of a little bit of an advantage because we don't compete. We don't compete with the local developer.

We have an instance for example, where one of our assets on the east coast, the healthcare system wants to put -- redevelop the site that we have some buildings on and they're going to occupy it. Now they have the architect and they have the developer. We have the land. That's a great combination and that's something that we're seeing now two or three times. So we work with the regional folks. We work with the local folks. We like to work with the healthcare systems. I just want to bring the best folks to the table to get the result that the people -- that the individuals want.

That's very helpful. Thanks for taking my questions.

Our next question will come from Vikram Malhotra of Morgan Stanley. Please go ahead.

Thank you. I just want to understand over the next two or three years you have several of your large tenants coming up for renewal. Can you give us some sense of any early conversations you had with them, whether it's Providence or Indiana University, just trying to get a sense because over the next three years you do have a fairly sizable expiration.

We like our -- in Indiana, which would be in Indianapolis, which is the one you referred to, we feel very comfortable with that. It's all critical space, space that's being used. When you look at renewals, you really have to look at who's using the space, what are they using it for, and is that need still as prevalent as it was before and of course you look at market rents and to some extent you look at competition. As we know, if someone is in a space and they're producing well in a space, they tend not to move in the MOB space so 80%, 85%, 90% retention is something that historically is the case. We look at our next two or three years and we don't see anything that jumps up and creates any fear in us. We've actually renewed quite a bit of stuff last year. We went out and extended and frankly, I think the opportunity with some of these as we look at our next two years, three years in our budget, are expansion opportunities. And there will be renovation opportunities because back to an earlier question, if you've got poor critical space and it's located in a location that tenants where the healthcare system wants long-term presence and occupancy, there's a natural cycle and we're beginning to hit that cycle in the MOB space where you'll see renovations and you'll see added capital dollars. We're the best folks, public company is the best folks to offer that to the healthcare systems and the large physician groups. So we're excited about the opportunities, frankly.

And just to clarify a comment made earlier, I think you mentioned on new leases you're trying to get rent bumps in the 2.75 range from what's probably an average of 2.3 now. Is there an option to move these faculty's renewals to move the bumps up toward that 2.75 range?

Here's a mix. It's interesting. We've looked at this and without getting into a lot of detail because these are always individual negotiations, we think we've got some stuff that's under market. It's been in locations and it might need some capital in order to get it renovated but when it's renovated and moved up, we see opportunities to actually move our same store. So yes, generally we're seeing 2.75 to 3. It's something that's far more normal than it was three years ago, four years ago when we first talked about it. I think most of the public companies now are showing that type of escalator and unless you're in a market or in an asset that is at a competitive disadvantage, I think that's something you can expect when you're entering in to leases in the current environment.

You provided some additional disclosure on the split between fee simple and ground leases. How do you view maybe differences in value between those two buckets? And maybe just what sort of -- how do you view your sales verses some of your private and public peers in terms of the split between the two?

We look at -- I look at fee simple as being far more advantageous. When you own something without ground lease restrictions, it's far more valuable. Is it 50 basis points? I remember 10 years ago when people were talking, 75 to 100 basis points where there were actual differences when you would look to buy assets. You've had ground lease terms, how long does the ground lease go? We go 65 years. But fundamentally the key part of that equation is it's far more -- you have a greater competitive ability to lease space when you don't have restrictions from a healthcare system or from a third party that restricts what you can do or where their interest is the first interest. They're protecting their interest with that ground lease, 75%, 80% of the time that's great. But if you've got occupied space or shell space or space they don't want to lease because they don't want that particular competitive product there or group there, if you don't have a ground lease, it moves the equation. We like and we focus on and frankly we have removed ourselves from opportunities on acquisitions over the last 24 months to 30 months specifically because of the ground lease restrictions associated with certain assets. Again, it would have been easy to say well, everything will turn out fine. It's easy to say that there's always that relationship that will exist. It all works out until it doesn't. For our investors, I think investors look and say do I own it fee simple? Do you have the ability to do what's in my best interest? If you can do that we do that first and foremost.

Thanks. On the last one going back to the acquisition question, there's been a lot of product by a couple of your public peers, I think North Star had product. I believe some of that has closed. Any comments you can share, did you look at them sort of how pricing was on those portfolios?

I haven't seen anything public frankly, on some of this. I know we looked at one of the two. We looked at the assets in one of the two you just mentioned. They were not in our markets. They were not assets we thought were going to be additive to our key market strategy or our platform. If they were, we would have looked at it and we would have certainly looked at it from a competitive perspective but in both those cases if you looked at a blueprint of where they were, they weren't in our markets that we wanted to grow. So we were not part of that.

Okay. Thank you very much.

Our next question will come from Tayo Okusanya of Jefferies. Please go ahead.

Good morning, gentlemen. Just a quick question. This morning we saw a merger deal announced by Dignity and CHI. I think the general census is you're probably going to see more hospital consolidation going forward. How does that ultimately end up impacting the MOB business in your business?

I think the broad question that comes from the mergers and consolidation is that there will be some campuses that are very valuable and some campuses that aren't as valuable. Because any time someone goes through a consolidation, they're doing it in a large extent from the synergies that come from either acquiring a market that they don't have or capturing consolidation expenses that they don't need to duplicate. So from our perspective, I think you want to be with the stronger healthcare systems. I think everyone says that. Again, I think the discipline that is going to show through over time is the discipline of underwriting what you're buying and how that looks given an outlook of -- if a merger happens, is this a key critical campus? Or does it become a campus that has duplication which is close to it which therefore means there will be some sort of impact from a leasing perspective because healthcare systems, physician groups, they want to go where the most synergy is from their patient mix. So I do think it continues. I think you're right. I think as a buyer you have to be very disciplined and you have to take the time and commitment to make sure what you're buying is something that will weather 10 to 15 years of changes.

Got you. That's helpful. Just a quick followup on Vikram's question around acquisitions. You guys already had good results today but the stock is somewhat underperforming and I think expectations are really high. One of the questions out there is you've had such a phenomenal year with acquisitions, what will acquisitions look like going in to 2017 and what kind of a good steady state type of amount of acquisitions one could expect from an engine such as HTA?

The opportunities will be there. We are in our key markets. We have concentrations now. We have a great balance sheet. I think that's one of the things that at the beginning of the year we sit down and from a management experience, senior management, we say here are five things we want to accomplish. On that list was same-store growth. On that list was acquisitions in key markets. On that list was expanding our relationships with certain healthcare systems in the markets that we've targeted. On that list was balance sheet. Can we extend the term of our debt, and can we actually lower our leverage? And we've done that.

We're very fortunate. Timely execution that we were able to do, I think benefited us. So if you look at where HTA is positioned, what can we do over the next 12 months, we're in a better position today than we were 12 months ago. The opportunities are I think just as good if not better. I think our challenge is as it always is, focus on leasing because leasing is relationships, leasing our assets. It's not markets. Second, focus on the relationships that we want long-term from an acquisition perspective and make sure that we continue to balance the equity, the debt, as we grow so we don't put ourselves in any difficult position that's unexpected down the road.

Got you. Thank you very much.

Our next question is a followup from Karin Ford of MUFG. Please go ahead.

Hi, just a big picture question for you. You mentioned as one of the things you like in your key locations, proximity to academic institutions and of course you did the Yale deal earlier this year. Do you see any synergies with your business with lab space and would that be of interest to you guys to expand as you're getting some critical mass near academic institutions and there's obviously clusters of lab space real estate available around them as well?

As we've talked about things and as we've invested our dollars, I think we do like investing with health systems. Health systems, especially academic medical centers, in many cases will have buildings that are a mix of research and clinical care. And we like those buildings. They're critically located next to hospital campuses and in many cases they're the same tenants we deal with on a regular multi-tenant MOB situation. It's the hospital with physicians, in many cases the physician that's on the staff of the medical center will do three things. They'll do research, they'll do patient care and then they'll teach. The buildings that certainly service those uses, it's very complementary with our business. What I don't think you'll see us get in to is go into the broad life science type user environment. That's a very different business especially from a tenancy perspective. It's a different business. It doesn't lend itself so much to what we tend to focus on. There's an aspect of it where we do like things, we do like product around the academic medical centers but I wouldn't say broadly life science is an area that you'll see us get into.

We had a tour in Boston that many of the investors had come in to, had an opportunity to look at our acquisition with Boston, with the medical center there and we like that one. We like Tufts for example. It's got a blend of the three components that Robert talked to. We don't want third party companies occupying lab space. We're not buyers of that. We're buyers of assets that would have our same typical tenants involved in it, but perhaps may have the blend of the three attributes that are going to be really the forefront of the healthcare as we go through the next 20 years.

Okay, thanks.

Ladies and gentlemen this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Scott Peters for any closing remarks.

Thank you everybody for taking their time and listening. We really appreciate the opportunity. We thought we had a very good quarter, well positioned for the year and look forward to seeing everyone at NAREIT in Phoenix next month. Thank you.

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