Healthcare Realty Trust Inc (HR) 2018 Q1 法說會逐字稿

Good day, everyone, and welcome to the Healthcare Trust of America First Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note that today's event is being recorded. I would now like to turn the conference over to Caroline Chiodo, Senior Vice President of Finance. Please go ahead.

Thank you, and welcome to the Healthcare Trust of America's First Quarter 2018 Earnings Call. We filed our earnings release and our financial supplement this morning prior to the market open. These documents can be found on the Investor Relations section of our website or with the SEC.

Please note 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 the 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 the current expectations. For a detailed description of our potential risks, please refer to our SEC filings, which can be found on the Investor Relations section of our website.

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

Good morning, and thank you for joining us today for Healthcare Trust of America's First Quarter Earnings Conference Call. Joining me on the call today are Robert Milligan, our Chief Financial Officer; and Amanda Houghton, our Executive Vice President of Asset Management.

As we begin 2018, we remain focused on being the leading owner and operator of medical office buildings with critical mass in 20 to 25 key gateway markets across the United States. We remain steadfast in our optimism regarding the medical office sector as demand continues to increase and there is limited supply coming online. This demand continues to be driven by the aging demographic trends and industry focus on making health care more cost-effective. These trends continue to drive patients out of hospitals and into outpatient settings such as medical office.

Our portfolio, focused on both on-campus and core community outpatient MOBs, offers the best solution to meet these needs of patients and tenants alike. In addition, a few other positive attributes of the MOB space are that: one, rent coverage remains meaningful above other health care sectors; two, re-tenanting costs remain below traditional office properties; and three, tenant retention remains high.

Our portfolio is over 24 million square feet, which includes 17 million square feet on or adjacent to health care campuses, the largest on-campus portfolio in the country. We are strategically invested in key gateway markets that are the economic hubs of the future. These markets should continue to grow faster than the national average due to greater job creation, wage and population growth and a strong academic university presence.

Not only are we located in faster-growing markets, but our geographic concentration allows us to efficiently operate our best-in-class, fully integrated asset management platform, which offers leasing, building services, property management and now development expertise. This platform continues to deliver consistent cash NOI growth that will continue to translate to annual bottom line results. This property sector focus, portfolio concentration, asset management platform continues to distinguish us in the medical office space.

As we look at the current economic environment, which include the uncertainty regarding interest rates and economic growth, we look at 2017, our execution regarding the 2.7 billion in transactions and we recognize that this has positioned our company today with the size, scale, market depth and balance sheet to allow us to focus on internal growth to drive shareholder returns.

Just to put this in perspective, we have 11 markets with nearly 1 million square feet and 16 markets that encompass over 500,000 square feet or more. This market depth drives deeper relationships with health care systems that translate to future growth opportunities. For example, given our deeper relationships and new development platform, we're in the process of various development and redevelopment projects in Miami, Raleigh, Boston and Orange County. These projects will continue to increase our market share and, most importantly, provide solutions to our tenants' future growth requirements and generate accretive returns for our shareholders.

As a management team, we continue to focus on: one, growing revenue through leasing through an improvement in mark-to-market lease rates and higher annual escalators; two, utilizing our development platform to invest in key markets with leading health care systems at accretive returns; three, recycling capital out of noncore markets; and finally, four, paying down debt to position our balance sheet for the time when acquisitions are once again accretive.

As we look at the quarter, same-store growth came in within our long-term and 2018 view of 2% to 3%. If we exclude the Forest Park MOB repositioning, our same-store growth for the quarter would have been 3.2%.

Our leasing volume and activity remained solid as we continue to focus on lease spreads and long-term occupancy. Renewal lease spreads were 2.7% for the quarter, while our retention was around 81%.

The 2017 investments are performing as expected. In quarter 1, we achieved $1.8 million of synergies from property management and building services. These investments' yields are now 5.2%, up from 5% at acquisition. Over the next few quarters, we expect these yields to be closer to the 5.5% range as the remaining developments come on line.

As part of our 2017 investments, we added a new development platform to our capabilities. We intend to use this platform on a targeted basis to invest in key markets with key health care systems. I'm pleased to announce our first new development, a $20 million project in Miami, Florida. The state-of-the-art 50,000 square-foot MOB will be built next door to Jackson South Hospital, with the hospital pre-leasing 70% of the building. We expect to break ground in 2019 and develop to a stabilized yield of over 7%.

We expect to announce additional developments and redevelopments in the coming months. These additional opportunities were brought directly to HTA by existing health care system relationships. We appreciate this confidence in our platform and look forward to working hard with these relationships and achieving accretive yield for shareholders as we develop.

From an acquisition's perspective, we remain disciplined. While we continue to see a pipeline of investment opportunities, both through traditional marketing channels and directly from our relationships in key markets, we are committed to the patience necessary to acquire best-in-class real estate at accretive valuations. We are always looking to continue to concentrate our portfolio in key markets or are in active discussions to sell assets in noncore markets. This is similar to our execution in quarter 4 '17 when we sold assets in Milwaukee and Long Beach. This year, we would expect total proceeds on dispositions to be between $25 million and $100 million.

Lastly, our balance sheet is in great shape. Our leverage, as predicted, is low at 5.9x net debt to EBITDA. We have in excess of $1.1 billion in liquidity, and our debt maturity schedule is well laddered regarding limited near-term maturities.

Finally, before I turn it over to Amanda, I would like to take a moment to welcome our 2 new board members, Roberta Bowman and Vicki Booth, both to HTA. Both bring a depth of experience and relationships that will benefit the company and bring some diversity of thought to our board. As you can see from our recently filed proxy, from a government's perspective, we have been active and responsive to the changing environment and to our shareholders, bringing in new board members, opting out of the Maryland Unsolicited Takeover Act and, most recently, allowing shareholder access to our proxy. These changes reinforce our commitment to keeping HTA a leading company for shareholders.

I will now turn the call over to Amanda.

Thank you, Scott. I'm, once again, pleased to highlight the strength our underlying assets and value of the asset management platform we put in place over the past 7 years. This is a full-service offering platform that offers tenants the benefits of a national owner with scale as well as the insight and dedication of a local team. This platform cannot be easily replicated and certainly benefits from concentrations we have developed in our key markets.

Each year, we continue to learn from best practices, innovate our service offerings and optimize our scale advantages. Given our recent acquisitions, the ability for HTA to create value through our platform has been magnified, and our team has lost no time in capitalizing on those opportunities.

Over the last 3 quarters, HTA has systematically evaluated and acted upon opportunities to internalize services we previously paid third parties to perform, thus eliminating costly third-party fees and markups. We now provide specialty electrical, mechanical and plumbing services out of 80% of our in-house managed properties compared to approximately 30% of our portfolio a year ago. We are also undergoing an extensive rebidding process throughout our portfolio, where we have been able to bundle our demand and command sizable discounts as vendors competitively bid for our business. While our rebidding process is still underway, we have begun to receive initial feedback and believe that an annual savings of 5% to 10% on those items being bid to be reasonable.

Our best-in-class platform is executed by our 164-property management building service and construction management employees who are out in the field. They are the face of HTA brand, working with tenants on a daily basis, and we owed a significant part of our performance to their hard work and dedication.

From a performance perspective, our same-store NOI in the first quarter was 2.3%. However, excluding the MOBs on the legacy Forest Park campuses now owned by HTA, our same-store NOI would have been 3.2%, reflecting the strong underlying fundamentals of our core portfolio. Our base revenue was up 1.5% in the period, again excluding Forest Park-based cash revenue growth would have been over 2%.

Turning to leasing activity, we continue to see significant opportunities to add value as we capitalize upon increased demand we are seeing in many of our core markets. With 24 million square feet in key gateway markets, our portfolio ended the quarter at 91.8% leased and 90.7% directly occupied. During the period, we executed 672,000 square feet of new and renewal leases or 2.8% of the portfolio. Tenant retention was healthy at 81%. Re-leasing spreads on a cash basis were 2.7%, the third quarter in a row we have seen spreads increase above our historic range of flat to 1%. We remain disciplined in our efforts to move rents and ensure we secure the right long-term tenants for specific spaces and buildings.

In addition, I wanted to provide some color on our Forest Park Dallas asset, where we ended the year with 100,000 square feet of vacancy related to the hospital transition. In the first quarter, we entered into 41,000 square feet of new leases at the Dallas campus, but the majority, 37,000 square feet being signed direct by HCA. This brings the lease rate on this campus up to 65% with occupancy scheduled to take place later in the year. This is a positive step with the hospital and one that has already prompted a sizable increase in activity and interest at the buildings. We have an additional 50,000 square feet of deals under various stages of negotiation and are gaining significant traction on the overall restabilization of this campus.

The remainder of the growth in same-store NOI came from increased utilization of our asset management platform, which allowed our same-store margin to increase 70 basis points year-over-year. Although our total expenses were down on a year-over-year basis, our expenses related to the colder weather, specifically utilities and snow removal, were actually up $1.5 million. However, this is more than offset by savings generating from -- generated from spreading our property management platform over our 2017 investments and increasing the use of our internal building services platform relative to third parties.

I would now like to turn the call over to Robert to discuss the financials.

Thanks, Amanda. We ended the first quarter of the year in a very strong financial position that should allow us to continue to execute our strategic business model regardless of the public equity markets or the impact of interest rates.

Our leverage at the end of the quarter stands at 5.9x net debt to EBITDA, with over $1.1 billion of available liquidity, including $50 million of cash and almost $75 million of equity raised on a forward basis in October of last year, which will take over the coming 5 months. In the near term, we intend to use our liquidity to pay down debt, fund development and make the occasional one-off acquisition in our key markets.

From a debt perspective, we have approximately $100 million coming due in 2018, including $96 million of the 4% Duke seller financing in June. We also have over $100 million of mortgage debt with interest rates over 5% that we can retire early with additional liquidity including a $68 million 5.5% mortgage that we can prepay without penalty in October. This should enable us to drive leverage to the mid-5x debt to EBITDA by year end.

Turning to earnings for the period. First quarter normalized FFO per diluted share was $0.41, consistent with the first quarter of 2017. Our operational performance remains strong and should accelerate throughout the year as our leased but not occupied backlog comes online, Forest Park leases up and development stabilizing come online. However, we are also focused on recycling assets out of noncore markets, using the proceeds to lower leverage and invest in longer-term development. We recognize that these actions cause near-term earnings solution. However, they create a more focused and stronger company that has greater growth prospects over the longer term.

Our normalized funds available for distribution increased 43% to $75.8 million compared to the prior year, and our dividend payout ratio is in the low 80% range. As Amanda noted, our same-store cash NOI growth was 2.3% compared to the first quarter of 2017 and 3.2% excluding the impact of the Forest Park MOBs. Our base revenue was up 1.5%, and our rental margin improved 70 basis points year-over-year.

On a sequential basis, our same-store NOI was down $1.2 million compared to the fourth quarter of 2017. This was driven by an $800,000 decline in cash rental revenue, primarily the result of a $700,000 increase in leasing concessions [where] leases in free rent periods. The remainder was driven by a $2.8 million increase in seasonal expenses, primarily utilities and snow removal, which we do not fully recover from tenants.

Our 2017 acquisitions ended the period yielding 5.2% on pace to reach the mid-5% range as the final developments come online. This includes almost $1.8 million of synergies from the elimination of third-party property management and building maintenance expenses.

G&A for the quarter was $8.8 million, which was approximately 5% of revenue and less than 50 basis points of gross asset value. We expect this to remain between $8.5 million to $9 million per quarter for the remainder of the year.

Finally, we had $11.3 million of recurring capital expenditures or less than 10% of cash NOI. This includes building capital, tenant improvements and leasing commissions, including $1.5 million of internal leasing costs, which are subject to changes in accounting rules in 2019. This demonstrates the capital efficiency of our portfolio and our ability to drive performance to the bottom line.

I will now turn it back to Scott for final remarks.

Thank you, Robert, and we'll open up for questions.

(Operator Instructions) Our first questioner today will be Jonathan Hughes with Raymond James.

What are you guys seeing out there in terms of cap rates on MOB acquisitions and the higher cost of capital environment? Has this changed? Or is the bid from PE just still really aggressive?

Well, from what we understand and we've been -- there are some assets and there are some portfolios that are out in the market right now. Cap rates seem to be pretty consistent. We haven't seen anything close, which I think in this year we'll give some indication when the first couple 2 or 3 assets close or the first portfolio closes. But right now, there certainly is -- there seems to be a consistent private equity desire for a medical office.

Okay. So no change, still probably, what, low 5% for high quality or even lower for high-quality assets?

Well, it appears that it could be even lower. There's a couple of very high-quality assets in Texas that are out on the market, and our understanding is that those cap rates are certainly 5 or sub-5. And if that's an indication of where that strength is for real, real high-quality asset, then things haven't moved at all. We're still seeing some opportunities in our gateway markets or our select markets on a one-off basis that are quality assets that aren't that low from a cap rate perspective, but it's still very competitive out there.

Okay, that's great. And then I'll just ask one more, and I'll hop off. But Scott, earlier you highlighted the shareholder-friendly changes made recently, and I appreciate those. But I know you've been pretty frustrated with the share price of late, like virtually all of your health care and all REIT peers. But we've seen a few M&A transactions in the past week, and I'm just curious if the changes made in HTA are being done in an effort to remove any potential hurdles from any institute-level activity at HTA.

I think the changes we are making or the progress we are making are simply the natural progress, one, from being public after 5, 5.5, 6 years. Second, we've been now, since 2006, since I founded the company. So the opportunity to add some diversity to the board was certainly welcome, and I think it will be well received by shareholders. And then the 3 or 4 things that we've done relative to proxy are really changes that are going on in the industry and the sector, and I think most -- all companies are moving down that path.

Our next questioner today will be Michael Knott with Green Street Advisors.

Scott, on the last call, you mentioned if HTA shares were down like 30%, you would sell your house or mortgage your house and buy the stock. I don't think we're down that much, but I think certainly the opposite happened a little bit with respect to your holdings. Just curious how you're thinking about the valuation here. And sort of like the last question, it seems like you could go private tomorrow at a price that's compelling relative to where we're at today. Just curious how you're thinking about that opportunity and how persistent the discount here has been.

Well, I think the discount across the whole REIT sector has been very consistent. It seems to be trading off with the 10-year treasury, as expected. We'll certainly see how that terms going forward, for the next 2 or 3 months or next 3 or 4 weeks. We continue to see, from an operational perspective, good leasing, good synergies from our markets, from our operations. From a company perspective, other than the fact that the stock price has been responsive to the 10-year treasury, we're doing exactly what we anticipated doing. The Duke transaction, I think, was a huge, transformative equation for us. It allows us to not rely upon acquisitions as a growth metric but actually do the things that we're talking about on this phone call and things that we talked about to shareholders in the past. So 2018 for us is if we recycle, we're recycling out the secondary markets, recycling into gateway markets and our core markets, taking advantage of our synergies from an asset management and leasing platform and just continuing to do what we should be doing to generate long-term shareholder value.

Okay. And then maybe just one other one. I think also on the last call, you talked about the long-term importance in medical office of a few things: one, on-campus across the street; two, community core and good markets; and then three, top universities and top health systems getting together. Just curious if you can maybe expand on that a little bit and how you are positioned for that sort of third aspect there of what could happen in MOBs going forward.

Well, again, I think that there's going to be a continued movement from a medical office perspective. Institutionalized process of managing these assets has just started. You look 5 years ago and MOBs were really a secondary asset class. And now I think with our size and with the addition of a couple other MOB companies from public perspective, it's become a major asset class. And I think that's what you're seeing with regards to cap rates. It's such a dependable asset class. You see the synergies that are associated with the demographics that are coming on board. You see the tailwinds that continue to propel health care systems moving to lower-cost locations. So I think the MOB space continues to be a strong place to be over the next 5 or 10 years. We're seeing it in our leasing. We're seeing it in our markets. Health care systems are looking to do a little bit of a development, but it's very specific. It's to their needs, and it's to what they're looking to do. We're fortunate enough to be working with 3 or 4 of our direct relationships with opportunities that will add to our development platform. Also, it will be accretive, which is good for us. So I think that all in all, we're very positive about where we are and where our markets are going.

And our next questioner today will be Karin Ford with MUFG Securities.

Thanks for all the detail on the debt that you have available for paydown potentially this year. Should we assume that the $50 million of dispositions you've got under contract today, the priority is going to be towards leverage reduction as opposed to one-off acquisitions? Or is there maybe another development start coming later in the year we should think about as well?

Yes, Karin, I think that's a good point. From a disposition perspective, most likely, the priority is going to be to continue to pay down debt. We kind of outlined the potential uses of the cash there. The $100 million roughly in Duke seller financing and the other $100 million of mortgages that we could prepay early varying over 5%. So that's most likely the use for any near-term cash proceeds. We are excited about the developments that we have, certainly the one that we announced and the ones that we're in discussions with, but those are going to be more of a 2019 start date before we really start spending any money. So there are going to be great opportunities that really help us grow our portfolio, but I think that the funding needs won't be until later in 2019.

Got it. And then just one clarification from Amanda's comments. You mentioned there's a piece of your cost structure you're renegotiating on where you think you can achieve 5% to 10% savings on. What percentage of your total operating expense cost do you think that would be?

So the services that we have currently under rebid are about $8 million.

And our next questioner today will be Todd Stender with Wells Fargo.

Can we hear more about the development contract you entered where you own the land? Can you tell us a little bit more about Jackson South Hospital? And then, it sounds like it's 70% pre-leased. Is that the threshold that you need to feel comfortable with before breaking ground?

Well, I'll start with the threshold. I think we like 70%, 80% occupied, as we always talk about pre-leased. So that is something that we're looking forward on a consistent basis. And I'll let Robert talk a little bit more about the opportunity.

Yes, so the specific opportunity, it's actually a fee simple land that we have in the portfolio. We did acquire the land from Duke, but the lease was one we entered into fresh with the hospital. This is one of the public hospitals there in Miami. So from our perspective, it's really an opportunity to develop in Miami, which is one of our core markets, where we've got a number of health system relationships. There, this really allows us to expand that. It's a building that literally right next to the hospital adjacent to it. But again, it's fee simple, which is like as you see across the rest of the portfolio. 70% from the hospital. And most likely before we really break ground, we would expect it to be 80%, 90% leased with independent physicians on top of that.

Okay. And then if we can switch gears to the same-store pool. Just looking throughout 2018, you've got a lift coming from Duke. Maybe what your expectations are. And then you also have a drag from Forest Park, but we also saw some lease-up activity in Q1. Can you maybe just talk about your expectations for the same-store pool?

Well, I think you hit the nail on the head with Forest Park. One of the things we try to do is make sure we kept all the assets in there. So Forest Park, you saw the impact both with and without it. And certainly as we get the lease up, we'd expect both the revenue growth and same-store growth to get a lift once that starts paying cash rent. Realistically, that's going to be the fourth quarter time frame of this year into the first quarter, really ramping up into 2019 as we get the benefit of that. From a same-store pool perspective, we do use a rolling 5-quarter methodology, so you will see most of the Duke assets and all of the 2017 acquisitions really enter the same-store pool in the third quarter this year. As we talked a lot about it, we see very similar strong growth, 2% to 3%, out of the Duke portfolio that we bought. As we bring assets onto our platform, historically, we get a lift from them, certainly on the yield perspective. Amanda and the team did a great job of really getting those synergies, eliminating third-party management, putting building services income in there. So you should see that really baked into those baseline numbers, both in the third quarter this year as well as really the third quarter of 2017. So our expectation is the third quarter is going to be in our 2% to 3%, really just stabilized by the strength and the depth and the diversification of the larger portfolio there.

And our next questioner today will be Tayo Okusanya with Jefferies.

Going back to Forest Park, so you leased 41,000 square feet. Can you talk about the remaining space there and what kind of prospects you're seeing to lease up the rest of it?

Sure. There's about 60,000 square feet remaining on the Dallas campus, and we've got various stages of LOI negotiations out there right now with prospects in about 50,000 square feet of that. So we feel really good. I think now that the hospital is committed to the campus, they'll be revealing their intended use here in the coming quarter. And I think that word is already on The Street on what is intended to be, so we're starting to see a good pickup in activity.

Great. Do you guys have a sense of what type of hospital it's going to be at?

We don't comment on that.

Okay. And then Miami, the development project there, could you talk a little bit about how that kind of came about? And then, could you also kind of talk about again the pipeline of potential new deals you could potentially -- you could announce, just if you can kind of size that for us, over the course of the back half of '18 going into '19?

Well, I think we found that we've got -- look, what we think is a real good relationship with 2 or 3 health care systems on the East Coast. In each case, their specific needs that they have that we're talking to them about, it's pre-leased. So that again goes back to the concept of assuring that the demand is already there. And these 3 opportunities are critical to what they see as their future growth. The opportunity to have a development platform now in-house has really led to the efficiency of being able to sit down with an integrated approach with them. I know the management team here has had great opportunity to do that. We've now worked together for almost 2 quarters. And so that's been a real, I think, advantage for us in moving these ahead. So as we go down the road, you'll see $100 million, $150 million worth of opportunities that are going to come forth. And we're not going to preannounce anything. We'll wait till we get the leases signed. We'll wait till we get the things that need to be done so we don't move ahead of ourselves. But very exciting. And I'll let Robert give any thought that he might have.

Yes. And so what Scott was talking about from a pipeline perspective, most of those are going to be with relationships that HTA has had and really using the capabilities that we had -- that we acquired and that we've kept to a large extent. The Miami deal was one that had been on -- there's a partial land that we acquired as part of the Duke deal. There had been discussions around getting a lease in place there, but they essentially died. When you go through a major transaction as the Duke team did, most health systems step back and wanted to see how the chips might fall. And so it was one that had kind of fallen off. We have taken, gone back and introduced ourselves. It is a new relationship for HTA, but it was one they got comfortable with the combined team and decided to move forward with us. And we're very excited about the opportunity to get it built, bring them in and really lease up the rest of the space there.

Great. And if you can just indulge me with one more. Just the latest with Community, again. It's always kind of in the headlines of having issues. Could you talk about what they're kind of saying to you guys at this point?

Well, I think from a community perspective, our relationship, by and large, continues to be with the local hospital operators, I think, within a company the size of Community's. As we talk about each of the local markets and especially the local hospitals are really the key to the -- to our performance on an ongoing basis. And so as we talk with the local teams, certainly some of their hospitals are going to continue to be sold. I think we've seen that across the portfolio. You've seen some of that with Community. You've seen that with Tenet. As we've gone through a couple of the transitions, we've actually seen a reinvigoration of the campus, if you will, where there's new ownership looking to put new capital to work there. So we would expect Community to continue to sell hospitals, but our hospitals continue to perform well, and any transition is likely to be a good one, as we've seen.

And our next questioner today will be Rich Anderson with Mizuho Securities.

So Scott, just looking back in 2016, your stock peaked out at $34 and change. Do you recall thinking at that moment what -- directionally, there was a fork in the road. Let's keep growing. Obviously, you chose that. Or did you have any serious consideration toward a strategic event of some sort? And if the answer is yes, I mean, how would you describe the marketplace for medical office then versus now? Would you say it was strong, it's even stronger now? Or was it stronger then?

Rich, looking back, I think the market is stronger now. I think there's much more relevancy to the asset class. I think that the last couple of years have brought significant attention to the tailwinds associated with this type of ownership. So I think when you look at this as an asset class, when you look at the type of investors that we want to get involved in it, when you see some of the private equity folks trying to put together portfolios, it's much more than it was 2 or 3 years ago. I think we as a company compared to where we were back then is we actually now have an integrated platform. I mean, I think the difference between us when we were much smaller than today is that today we have significant relevance in 11 key markets. As Robert touched on and as Amanda touched on, we have a platform that's integrated with asset-management leasing property management. We have over 115 engineers that are now servicing the assets on a full-service basis and providing services to those assets. So as a company, I think we are significantly much further ahead than where we were when we were, as you said, a couple of years ago when perhaps the stock price peaked for that particular time and price. But from a company perspective, I think we are much stronger than we were then.

Do you recall having a temptation to think about a deal or you're pretty hell bent on continuing as a publicly traded company?

Rich, I think from day 1, from the moment when we listed the shares on the New York Stock Exchange in 2012, our comment has been and I think the direction that the directors have always taken is that they want to maximize shareholder value. I think that we've always been very open about the fact that we don't have any long-term prohibitive things in our bylaws or we don't have any management contracts that are prohibitive from a takeover or merger perspective. This is about shareholder value. So I think we were open to it then. We're open to it now. We're doing one thing: continue to focus on the business, continue to put a strong balance sheet in place so that shareholders feel good about where they are from a yield perspective, and maximize shareholder value, however that may be.

Well said. And then just kind of a follow-on to that, back in 2008 and 2009, when you started to build this portfolio, you have to certainly take -- we have to give you credit for buying at an interesting and low basis in a market that has obviously gotten much better over that period time in the past 10 years. Do you see where we are today? So if it was 8.5 cap rates in 2008, do you almost see today as a mirror image of what was happening back then?

I think that we have -- over the last 10 years, interest rates have continually traded down. And I think that if you go back and you look over the REIT world over a 30-year period of time, and boy, unfortunately, I've been around that long, the REIT market ebbs and flows. And I think that it's always been that REITs -- when public markets have an accretive cost of capital compared to private markets and you have an opportunity to buy accretively, you do. On the other side, I think when it's the opposite and I definitely think right now that opposite is in place, I think that people have forgotten because it's been a long time since that's really been prevalent, you focus on internal growth. You focus on the balance sheet. You focus on positioning your company, so that things change. So I think to some extent, I see this as an opportunity to be very patient and very disciplined.

Our next questioner will be Vikram Malhotra with Morgan Stanley.

Scott, just building on that last question over the last -- when you started the company and maybe since you went public, there are probably a lot of assets that you bought in that higher cap rate range, which are arguably a lot more valuable today. Can you just maybe talk about thinking about dispositions, maybe more strategically upping that to sort of take advantage of where private market pricing is today?

Well, I think we definitely are going through our secondary markets. We've gone through a progression. And early on, some of the criticism that we encountered and, frankly, when you're starting something, you become an eclectic group of assets, which someone told me once, and I took that to heart. So we looked at where do we want to invest? We picked 15 to 20 markets, gateway markets. And then we really got -- it came into fruition last year when we bought Duke, and Duke was in 90% of the markets that we were in. And so now we've become what I think is a very focus-centric investment vehicle where investors or folks look at and say, "Okay, they've got critical mass in these markets, and they're relevant. They know these markets, and they've got an operating infrastructure that brings an advantage to that location." We did buy -- we're very fortunate in 2008, 2009, 2010, but we've also increased the quality of our portfolio. That's the second thing that I think we focused very heavily on. The 3 things I would say that we took to heart over the last 6 or 7 years is: one, focusing on key markets and getting critical mass; two, putting an operating platform in place so that we weren't subject to third-party oversight, which is never the same as internal; and then third, just making sure that we're making a higher-quality portfolio each time that we were in the acquisition -- valuation of what to buy. So I think we continue to look at that. There are -- we've always said there's probably 5% or 10% of our portfolio that we will continue to look to just recycle. But if there are opportunities where we think that there's -- every time someone gives you an offer and you turn it down and you've just rebought it, and so we do look very carefully when someone gives us an offer. If it's something that we feel has maximized in value, we're definitely open to taking that opportunity.

Okay. And then maybe just for Robert as well, you talked -- you touched a little bit around buybacks. Just maybe give us some color on how you see sort of private market versus where your stock -- what your stock is implying today. What sort of spread or discount would make you say, "This doesn't make sense. We just see a lot of value, so up the buybacks or parts or engage in that."

I think right now, as we talked about, I think from our perspective, buybacks always get a little bit tricky. As a REIT, we're in the capital allocation business, and we're in the business where capital is always scarce as we look to pay it out. I think our focus right now as we sell assets. We've got a good use of capital to really position our company and our balance sheet for the future with using any sale from dispositions to effectively pay down debt that we can do right now, the debt we're paying down. The Duke seller financing is at 4%. The mortgages that we look to sell back is north of 5%. So I think anything that we look to do right now, the first use of capital is going to be the ability to pay down debt and deleverage. I think beyond that, we've got decisions to make that we'll obviously look at, at that time.

And then one last, just a quick clarification. In terms of the larger physician group set, private physician groups that may be tenants, is Envision one of them?

No.

Our next questioner today will be Daniel Bernstein with Capital One Security.

I appreciate you giving the -- both the with and without Forest Park in your cash NOI. I appreciate that. On the cash NOI re-leasing spreads, you indicated that, that has been improving. Just wanted to understand what's behind that sum. And is that also in conjunction with some higher CapEx TI so that on per CapEx basis it's kind of a wash?

So I think overall the strength that you're seeing in the re-leasing spread is largely driven by our market. So some of our markets are growing quicker than other markets, and those are the ones where we can see 3% and 5% re-leasing spreads. As far as TI goes, I think if you look at it on a square foot per year basis, you can see that we're actually trending down, so that's not a big factor in the re-leasing spreads that you're seeing.

Okay, okay. And then going back to the -- it seems like the topic today is valuation and shareholder value. Have you thought about or considered, again, short of go private or merger with another company, selling off a part of the portfolio to private equity and some type of joint venture, raising equity that way and maybe putting out some kind of special dividend?

We continue to look at joint ventures in a -- I wouldn't say in a passive type of way. We're always open to opportunities that improve our bottom line. I think that most of the JVs that I've seen or that have come past us really haven't been to the advantage of our shareholders, and in fact, it's, I think, a very short-sighted way to try to demonstrate some growth or generate some management capacity. We have a great management infrastructure, and I think we deserve -- our shareholders deserve 100% of that benefit. Just like when there's opportunities to grow, where there's opportunities from an acquisition perspective, if they're that great, it's hard to give away so much of the pie to someone else. We're fortunate now with the Duke transaction from last year and with the size in our markets, I think there's not a burden on us to grow externally. I think the burden on us continues to be to perform the Duke transaction as you continue to see it. This is only the second quarter -- the third quarter that we've reported, so it seems like it's been 2 years, but it's only been 3 quarters. We continue to get the synergies out of that, and we'll continue through this year to gain those synergies. So I think for us, it's just continuing to do what we have done over the last 10 or 11 years. I think the only difference, again, in 2011, we only bought $50 million worth of assets that particular year even though we were a non-traded REIT at that time. It's really discipline and making sure that you're allocating your capital appropriately at these times.

Our next questioner today will be Chad Vanacore with Stifel.

All right. Just a few modeling questions here. So that $3.9 million spent on consolidation and ownership, was that buying out minority interest? Or what was that?

It was actually a couple of buildings where there were some small condos and then really buying those out.

Okay. And then you've got signed NOIs for $50 million worth of dispositions. So what were the cap rates and timing on those?

I think from a timing perspective, with all transactions in this market from an LOI to closing, is often up over 90 days or beyond depending on the assets and what's going on with that. So I think our view is that from a full year dispositions, it will probably be 25 to 100 kind of all-in once the dust settles. You might see some start -- really start in the second quarter, but that's really kind of our full year outlook on that.

And what about cap rates?

I think on a cap rate basis, on a forward cap rate basis, you're looking in the 6 to 7 range, selling out really out of some of the secondary markets that we have.

Got it. And then just one last thing. Recurring CapEx seemed pretty low in the first quarter. What's the run rate of CapEx for the rest of 2018? Do you expect it to ramp or stay steady?

Well, typically, the first and the fourth quarter tend to be the slowest period from a capital improvement perspective. So I think that, that being said, we just outlined a view that we should be for the full year 10% to 11% of cash NOI in the form of recurring capital expenditures. I think as we lease up some of the Forest Park space, some of that continues to be shelf space. We'll have some first-generation TIs that would be added on top of that. That would likely hit the third and fourth quarter.

And our next questioner today will be Michael Muller with JPMorgan.

Just have a quick question. I know in the past, you talked about the engineering services for a little bit. And it looks like in this quarter, the cash NOI, just a little under $2 million of the $34.5 million came from engineering services and property management. Can you just remind us what's in those categories that make them NOI items in your mind?

Yes. Typically -- I'll let Amanda flesh it out, as you're talking about it that was specific in the synergies to the 2017 acquisition. Typically, the building services, these are things like HVAC repair. This is plumbing. This is electrical. This is preventative maintenance work. So all type of things where if we had paid a third party, they would've run through our operating expenses just like you did.

That's right. So on the property management side, we look at property management fees, the elimination of a third-party and internalization of it so that fee entirely is eliminated. On the engineering side, yes, it's 2 factors. One is the specialty services, where we're able to do things that third parties previously had done with a markup. Now we internalize that but keep the markup. It's just an HTA markup at that point. And the second on the engineering is the fee revenue, so our engineers performing direct services for tenants on their premises, things that otherwise wouldn't be covered by the landlord. And that you will see as part of the revenue.

And the next questioner today will be Doug Christopher with D. A. Davidson.

Up through the Duke acquisition last year, HTA had always provided kind of a confident range of cap rates in the market. What would you peg that range at right now?

Well, I go back to what we talked earlier. I don't think we've seen a close of a portfolio or what I would consider to be a Class A asset this year yet. The indications we're getting, and frankly, we have been -- we have not chased 2 or 3 things because of the fact that the cap rates that we're quoted to get into the chase were in the 5s, low 5s. Frankly, there was a high 4 -- a couple of high 4s. And so we weren't going to mislead anyone or we weren't going to go down a path of not being serious. That just wasn't something we were interested in doing at this time based on everything we've talked about on this phone call. So I think the cap rates have not moved much from what people we're talking about late last year.

And then, can you just hit on some of the key points of financial leverage, internalizing escalators, minimizing concessions and, of course, now you have the development as well. How much -- and then how much more is there really to leverage from the Duke acquisition?

Well, we continue to work through the Duke opportunity, certainly for this year and I think into next year. The ability to bring the focus to our regions into the critical mass that we have now in the markets just really is starting to play out from that Duke opportunity. Robert, anything you want to add on that?

Yes. No, I think, as we continue to look at it from an escalator perspective, we've been in place kind of in the low 2s. We've been signing new leases or renewal leases and kind of the high 2% to 3% annual escalator. That's going to continue to play itself out. I think, from a free rent and TI perspective, we continue to keep very low concessions. And I think the last thing that we touched on, on the ability to drive our earnings to the bottom line is really the sufficiency from a capital perspective. Traditional office tends to be in the 20% of cash NOI from a capital perspective. I think we've seen most medical office companies in the 12% to 14% of cash NOI. You're seeing us run in that 10% to 11% of cash NOI generation. I mean, a lot of it is just our focus on our buildings, where we look to allocate capital. But that was one of the added benefits as we acquired the Duke portfolios, very young portfolio, very limited capital requirements, and we're starting to see the benefits of that as well this year.

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

All right. Thank you, everybody, for joining us. Thank you for the questions, and we look forward to continuing and focusing on making Healthcare Trust of America very beneficial for our shareholders. Thank you.

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