Healthcare Realty Trust Inc (HR) 2018 Q2 法說會逐字稿

Good day, and welcome to the Healthcare Trust of America Second Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to CEO, Scott Peters (sic) [Director of Financial Reporting, Michelle Murphy]. Please go ahead.

Thank you, and welcome to Healthcare Trust of America's Second Quarter 2018 Earnings Call. We filed our earnings release and our financial supplement yesterday after the market closed. 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 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 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 our current expectations. For a detailed description on 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 Second 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 report the second quarter results for HTA, our portfolio fundamentals remain solid. We continue to execute on our 2018 strategic business plan, and private capital demand for MOB assets remain strong. Since our founding in 2006, we identified medical office as a unique sector of core critical real estate where location, building quality and service matters.

Tenanted by one of the fastest-growing sectors in the U.S. for the next 20 years, outpatient health care. Outpatient demand continues to increase as the population ages and care is delivered in more convenient and cost-effective locations. The real estate characteristics are similar to core traditional office of 20 to 30 years ago, where stable tenancy, growing space needs and growing rents from a diverse group of tenants in and related to the health care industry. We have always believed that the medical office industry has been under-owned and under-invested in with less than 20% owned by institutional investors. And that with additional opportunities, capital would flow into the sector and decrease the spread between traditional office and medical office pricing.

The good news is that we have seen this come true with current institutional investors coming from both core and traditional real estate funds, which continues to drive and stabilize pricing for high-quality MOBs in the 4.5% to 5.5% range. As such, we have positioned our company to take advantage of just not the core asset value appreciation but also the benefit of combining high-quality assets with the best-in-class asset management platform that can uniquely provide property management, building services, leasing and development in our key markets.

Our long-term view remains that the MOB sector will produce strong and consistent returns going forward. Our strategic focus of; one, creating a portfolio of critical mass that is concentrated in key gateway markets; two, operating our properties effectively utilizing our differentiated full-service operating platform; and most importantly, three, allocating capital in a manner that is accretive for shareholders through both investing and recycling when appropriate.

From an operational perspective, we remain committed to our internal growth plan, integration of the Duke Assets, expanding our development pipeline and relationships and actively managing our portfolio, maximizing exposure to our key markets where we have our full-service property management platform in place that can service our relationships with key health care systems and large physician groups. As a reminder, despite our key market concentration with 10 key markets encompassing more than 1 million square feet, our tenant base remains highly diversified with no single tenant comprising more than 4.2% of ABR.

Now let's discuss quarterly results. Our operating fundamentals remained solid. One, we achieved 2.6% same-store growth or 3.1%, excluding our Forest Park Dallas MOBs. Two, continued integration of our 2017 acquisitions, which are now yielding 5.3% on a run rate basis. Three, leasing performance that remained steady with 86% retention and cash releasing spreads of 1.7%. And four, our balance sheet is in excellent shape with leverage of 32% or 5.8x net debt to EBITDA, which was further improved by the repricing of our $200 million term loan which we announced today. Finally, we continue to believe 2018 same-store NOI growth will be 2% -- will be in the 2% to 3% range.

Now turning to our announcement regarding the Greenville transaction. This was an opportunity to recycle out of an noncore market at attractive pricing that allows us to our accretively redeploy proceeds into, one, paying down debt; two, investing in acquisitions and development in faster-growing markets where we can utilize our asset management platform; and three, utilize our share repurchase plan when appropriate. As a recap, we purchased the Greenville portfolio in 2009 for $163 million, and we are now recycling the assets for $285 million and achieving a 13% unlevered IRR, an extremely profitable transaction for shareholders.

We are starting to gain traction on expanding our development pipeline and have announced several new development and redevelopment projects since the end of the quarter. We now have 3 projects totaling 230,000 square feet and $70 million in total construction costs. These projects are approximately 80% pre-leased and are expected to yield between 6.5% and 7% when they are completed in 2020 and 2021. We continue to see a very active development pipeline in our key markets.

With the addition of the development capabilities to our asset management platform, we have created an all-inclusive solution for our health care system partners. This competitive advantage will help strengthen our relationships and market share in our targeted markets. We continue to see with this new ability development opportunities, and are continuing to have conversations with key health care systems as we discuss opportunities to integrate our platform in our markets.

I will now turn the call over to Amanda.

Thanks, Scott. Our leasing and management teams were very active during the quarter as we met increased demand in activity in our key gateway markets. On the leasing front, we entered into 1 million square feet of new and renewal leases during the quarter. Tenant retention remained high at 86%, and releasing spreads on renewal leasing remained strong, averaging 1.7% year-to-date. Excluding one lease, which we had underwritten to roll down upon expiration, our renewal spreads would have been over 3% in the quarter. We continue to believe releasing spreads should remain in the 2% to 3% level in the back half of the year.

Turning to new leasing. Our nearly 200,000 square feet of new leases signed were pretty evenly spread throughout a number of our key markets, including Houston, Miami, El Paso and Phoenix. On a year-over-year basis, we saw continued strength as our leased percent grew 30 basis points over last year to 92%, and our occupied percent remained stable. Leasing metrics continue to improve as we're generally seeing demand from larger, well-established tenants and physician groups where a 3% rental escalator is commonplace, and little to no free rent is expected in our stronger markets. Throughout the portfolio, we continue to see demand for longer-term leases with the average term for new leases this quarter up to 7.8 years. Given the leased but not occupied rate, we expect to see continued revenue growth benefits as these leased spaces are built out and are converted to fully paying and occupied spaces towards the end of the year.

Looking into the coming quarters, the Forest Park Dallas campus continues to be a great source of growth. Year-to-date, we have signed over 41,000 square feet on the Dallas campus, and we continue to have approximately 70,000 square feet at various stages of negotiation. The hospital's budget for the conversion of this hospital to a specialty use has now been approved. And as that use is made public, we expect to see conversion of these prospects into rent-paying tenants.

Turning to expenses. Expense savings on a year-over-year and quarter-over-quarter basis are substantial due largely to the savings HTA generated due to the economies of scale we achieved through the Duke transaction. I'll now turn the call over to Robert to discuss financials.

Thanks, Amanda. We ended the quarter in an improved financial position as we executed on our strategic business plan despite impacts to public markets and volatility with interest rates.

To recap the quarterly results. Second quarter normalized FFO per diluted share was $0.41, an increase of 5.1% year-over-year. Funds available for distribution increased 22.3% year-over-year to $74.1 million, and our dividend coverage is in the mid 80% range. Same-store cash NOI was 2.6% compared to second quarter of 2017 and 3.1%, excluding the impact of Forest Park Dallas. Base revenue was up 2.1% year-over-year, and rental margin improved 40 basis points.

Our same-store portfolio pool is a sound representation of the total portfolio. It generally includes all properties that have been owned by us for the last 5 quarters. We have historically only excluded properties that we intend for sale in the near term. For us, that requires a property to meet 3 key criteria. First, that they've been approved by sale by our board and have been vetted from a financial and strategic perspective. Secondly, they are actively being marketed. And third, they have received offers at pricing at which we would transact.

In the quarter, we excluded 22 properties that are currently under signed purchase and sale agreements, which includes the 16 MOBs in Greenville that we announced yesterday morning. With our business evolving, we have started redeveloping assets, moving tenants out to develop improved properties at attractive yields. As such, we will now also exclude redevelopment properties and have 2 such properties this quarter, primarily our recently announced WakeMed redevelopment in Cary, North Carolina. All of our exclusions are reviewed and approved by our board on a quarterly basis, which is consistent with the procedures we have had in place for several years. To highlight the impact of the various pools, we have included new disclosures in our supplement detailing these impacts.

Our 2017 acquisitions ended the period yielding 5.3%, still on pace to reach the mid-5% range as the final developments come online. We delivered one property within the second quarter, and the final development, which we acquired in 2017, will be delivered this quarter.

G&A for the period was $8.7 million, which is approximately 5% of revenue. We expect G&A to remain between $8.5 million and $9 million per quarter for the remainder of the year.

In terms of the balance sheet, we closed our equity forward at the end of the period, obtained $74 million of equity at a price of nearly $29 per share, almost 10% higher than our average price during the quarter. We used these proceeds and available cash to pay off $96 million of seller financing and ended the period at 5.8x net debt to EBITDA or 32% debt-to-enterprise value.

To further optimize our balance sheet, this week we closed on an amendment to our $200 million term loan due 2023. This reduced pricing by 65 basis points and extended the maturity into 2024.

From a capital allocation perspective, equity pricing continues to trail private market valuation. As a result, we are focused on recycling out of noncore markets to accretively redeploy funds, paying down debt, investing in key markets and repurchasing shares as appropriate.

As Scott discussed in detail, we've reached an agreement to sell our Greenville portfolio, receiving proceeds of $285 million. We bought these properties in 2009 for $163 million, generating 13% unlevered returns. This is a profitable outcome and allows us to redeploy into other markets and pay down debt accretively.

The proceeds from this transaction will be used several ways. First, we will pay down $142 million in mortgage debt, yielding 5.3% through October 1 when a $70 million loan enters a prepayment window. This will help drive leverage closer to 5.5x debt to EBITDA by the end of the year on an earnings-neutral basis. We also use funds to invest in our key markets through acquisitions where we can generate an incremental 25 to 35 basis points from our property management platform and drive greater growth and also through developments at yields 100 to 150 basis points above current acquisition pricing. Finally, we will use proceeds to repurchase shares as they trade below NAV. To that end, the board increased our share repurchase program to $300 million. Although we have only repurchased $9 million of shares under the old program before our share price increased, we are ready to increase this amount should valuations fall. Similar to our first quarter call, we recognize the timing of these actions may cause near-term earnings dilution. However, we believe it will create a more focused and higher-quality portfolio that is positioned for accelerated growth over the longer term.

I will now turn it back over to Scott.

Thank you, Robert. Before we turn to questions and answers, I would like to take a moment to address concerns that were raised this quarter related to non-GAAP same-store growth numbers and the consistency of our performance since we became public in 2012. We have always been very confident in our disclosures and results. In addition, our independent board in consultation with our internal and external auditors, took this opportunity to diligently review our disclosures, processes and results. They found our accounting was consistently and accurately applied and reported on both a quarterly and annual basis. As a result, they see no additional actions or reviews that are warranted or required. With that, I will open it up to questions.

(Operator Instructions) The first question comes from Karin Ford with MUFG Securities.

Just wanted to ask about the Greenville sale. Did you consider taking on a joint venture partner for that portfolio yourself? And can you talk about what else might be under consideration for sale? How many -- what type -- how big is the pool there of assets that are in noncore markets?

Good morning, when we looked at the Greenville transaction, I think a little bit of context should be applied to that. We felt that this was a great time as a company as we always do, and we've talked to investors about which to always evaluate our assets. And we have bought that in 2009. It was one of the first transactions with health care systems. We did it as a non-traded REIT. It was a triple net lease. We did not have a management platform, asset management platform in place, hadn't even started one at the time. And escalators were 2%. And at the time, 2% escalators were considered to be quite favorable when the market -- when MOBs were really flat to 1% at the time. And so when we looked at that today, we felt that we -- it had pretty much reached what we believed were its valuations. It had a 5-year lease on it. The buildings are 20 years, 25 years old. It's a good health care system. But at triple net lease, it needed capital. And so when we had the opportunity -- and when I say we had the opportunity, I think that's the key word. We were approached about if we had any inclination to sell that, and we said, "Well, at the right price." We've always said that on calls, and we -- and I firmly believe that you always have to look at valuations when someone approaches you. And we did that, and we thought it was a great transaction for us, maximize shareholder value, gives us flexibility and options going forward here in today's market, both on acquisitions in our key markets. But also, we just initiated a $300 million stock purchase plan, so have opportunities there if we need to utilize it. So we looked at that as an opportunistic transaction. So that was not in our normal, what we would have talked about 6 months ago as our assets that necessarily we were looking to redeploy. So I think we're still at that $100 million to $150 million to $200 million of assets that are in non -- truly noncore markets. And when we say Greenville wasn't core, I would say Greenville is a very constrained market. There's not much more you're going to buy in Greenville. It's really tied to the health care system. And for us now, it's all about the integrated platform. We want to be able to have multi-tenanted buildings. We want to be able to utilize our asset management platform, leasing platform, engineer, and we want to utilize our development platform. So we think we can turn around and redeploy that more accretively for shareholders over the next 10 years, just like we did at Greenville for the last 9.

Great. Next question is just -- it sounded like from your remarks, Scott, that the stock has recovered here and maybe isn't as attractive to you to repurchase at current levels. Is that the case? And can you talk about how you weigh the decision on how to allocate capital between acquisitions and repurchases?

Well, a couple of things. We took advantage of the opportunity earlier in the quarter. And as Robert, I think, mentioned in his comments, the stock moved back up. I think we look at it from simply 2 aspects. One, is it accretive? I mean, is there long-term value? And buying back stock is not going to move the needle tremendously because you really can't buy back probably enough to do that, but you certainly can make an accretive investment if you have cash on the balance sheet or instead of an acquisition. So I think when we look at it, we look at how do we continue to grow shareholder value. There's 2 or 3 metrics. One, recycling the assets and moving it into markets where we can get higher growth. We can get better escalators, utilize our platform. But also, number two, in a market that we find ourselves in right now, if it's accretive to us and if there's an opportunity to utilize our share repurchase plan, I think our board is very open to those suggestions.

And then last question, thank you for all of the detail on the same-store pool composition. Can you remind us, should we expect the Duke portfolio to enter the same-store pool in the second half of the year? And how do you think it's going to impact same-store growth?

Yes. Karin, this Robert. And you will see it enter the pool in the third quarter. Our view has been that the Duke portfolio was very similar to our existing portfolio. We were certainly able to get a significant amount of synergies from the property management and building services platform very early on, so it'd be our expectation that, really, that you'd see just further consistent growth.

The next question comes from Jonathan Hughes with Raymond James.

You've been very consistent talking about narrowing your focus to 20, 25 key markets or so, and Greenville was one of those markets with 1 million square feet so I wouldn't have thought exiting there was likely. And I know you just talked about why you sold the portfolio of assets announced yesterday. But I guess my question is why not just sell the whole 1 million square feet Greenville portfolio since that sounds like a market that you can't really expand in any more, didn't have a management platform there? I'm just curious why not sell more in that market?

So we actually have -- it's interesting. We really looked at as a portfolio overall, one of the reasons why Greenville -- good market, but as Scott mentioned, we really don't have a property management building services platform there. It's 99% occupied, so there wasn't a whole lot of value add left that we thought our platform could add. So we actually have completely exited the market. The transaction we announced yesterday morning with the 16 MOBs and the $285 million, we certainly executed on that. But we also did end up selling the last remaining property, and we ended up closing on that yesterday as well. So we're completely out of the market, and it continues to allow us to focus our operations. And I think you'll see us exit 1 or 2 other markets by the end of the year as well. Just inability to gain the scale to really utilize our operating platform, that does give us that incremental value.

Okay. And then I guess this is maybe for either you, Robert or Amanda. But looking at the expense growth or rather decline in the same-store pool, it's a pretty big drop. And I know you cited scale earlier as the main driver. Can you just give us some more detail there? It just seemed like an awfully big decline.

I think, first -- overall, we are seeing expense benefits, and Amanda will talk a little about where. But we did have a true up with the health system on some shared services over several years where we were able to successfully negotiate those expenses down and come to a settlement, so that's about a half the expense savings that we've seen. But Amanda will talk about the rest of the operational benefits there.

Sure. The remainder was largely in our maintenance services, so that's where our engineers are performing services in-house and no longer using those third parties.

Okay. So about half from maybe onetime nonrecurring and then half from your actual -- the scale of your platform?

Yes.

Okay. All right. And then one more, a higher level one, and I'll jump off. But Scott, earlier, you made the argument that MOBs should be comp to core office real estate and have made that argument for a while now. For the record, I don't disagree. I think we're finally there, though, given where some recent deals have traded. But when you look at core real estate sectors among the REITs, those stocks have traded at some of the largest discounts to private market values for years now, while the more niche sectors that MOBs used to be lumped in traded at premiums to NAV with a culminative cost of capital to grow. I guess the question is now that you are a core asset class and the private markets really found the sector in a meaningful way, does future growth for HTA look more like capital recycling versus expanding the balance sheet?

No. I think there continues to be opportunities for acquisitions. We're in our key markets. And I think what we did with the transaction last year on the Duke transaction, besides the ability to get such high-quality assets, and they really were, and they allowed us to get the concentration in our markets for our asset management platform. But we added the development side of the equation. And so we talked about the fact that we have now 3 in process, 250,000 square feet. We're actively in discussions with folks to be able to continue to do that, and those cap rates are 100 to 150 basis points higher than what you would traditionally have to buy in that market. There is activity going on. We are -- I think that that's the biggest change, or second-biggest change in HTA in the last 12 months is our ability to now be an integrated platform for health care system or for a physician group looking for a building where it's multi-tenanted. And so I think that's an opportunity to grow that we didn't have, but we are seeing opportunities. I think we're being select like everybody is in the public marketplace right now. But if you look at Greenville, and I think this is one of the points that Robert and I talked about when we were looking at and evaluating this, was that if you were looking at office in Greenville, the pricing for office in Greenville is probably 200, 300 basis points higher than what the pricing was for the MOBs. If that's not sort of an indication that the quality of the MOB, the quality of the income stream that represents that sort of investment, I think it's now become very clear to folks that these are very high-quality, long-term value creation assets and that they're going to be core ownership for quite some time. So I think it's just starting. I think, again, 20% is only owned. And as we all know, once an asset class gets in favor, it certainly moves much higher from an ownership perspective.

The next question comes from Rich Anderson with Mizuho Securities.

So Scott, you mentioned I think -- looking at 2% to 3% same-store NOI growth for 2018, is there -- again, below the -- kind of that 3% threshold you've been able to achieve over past many quarters. Is there anything about the business that's moderating? Or are you just sort of just being not overly conservative but just sort of setting a realistic target for the company?

Well, we started 2018, and I think we had been 2.5% to 3.5% for a number of years or certainly last year. We went to 2% to 3% basically because we thought let's be a little cautious. Let's integrate the portfolio with the Duke side of the equation. I think adding 1 plus 1 here made a much solid 2. It didn't necessarily -- when you've got a 3%, 2 companies put together, you should get 3%. So I think we're -- if you took Forest Park out of our numbers the last 2 quarters, we were north of 3%. And Forest Park is getting traction. And in fact, we're seeing some traction that just happened for us recently, which is going to show up in the third quarter, which is good for us, which we've anticipated and talked to people about. Third, fourth quarter was going to be positive. So I think that the portfolio continues to perform in the traditional side of the equation that you've seen over the last 5 years. I don't see anything right now from an infrastructure position that would change those sort of fundamentals.

Okay. Second question is now you have done 2 deals with public REITs, one on the buy side, one on the sell side, curious if you think there could be more in the way of sort of asset trading amongst the public REITs or should we not read too much into those 2 large deals in your recent history?

Well, you do tend to point out some things that I don't think about. But yes, this is the second one. I mean, Duke was a public company and obviously HCP which we just did with. This was a great opportunity, and I think it was a win-win. And I think -- I hope that HCP talk that way about it because I think it was. I think their joint venture was looking for a little bit different type of returns than what we were looking for. When we looked at the opportunity a year ago when the health care system had 5.5 years left on the lease, our desires for yield was different than their desire -- than their desires for rents. And so we were at a disagreement, quite frankly. And what HCP was able to do was bringing equity to the table that was acceptable as something that they wanted to do. And in our turn, we got to recycle those assets. But we, as a company, I think we will look and we were happy to work with and we had a very good experience with HCP. I think Duke was a very good experience. So if the right transaction happens, then -- right opportunity happens, we're happy to do something like that.

Right. So do you find yourself having more conversations with sort of public companies as opposed to private equity or that has not changed much?

Hasn't changed much. I mean, this -- yes, it hasn't changed much.

The next question comes from Todd Stender with Wells Fargo.

Probably for Robert. You mentioned that there's $142 million of mortgage debt you'll pay down. Is that on the Greenville assets or that's on other properties?

That's actually a combination of mortgage debt on there. There's about $20 million specifically associated with the Greenville mortgage -- or Greenville properties. From a timing perspective, we'll close that at the same time as we close the transaction. We'll also pay off another $50 million of mortgages associated with other properties about that same time, then we've got about a $70 million mortgage that we'll pay off on October 1 once the prepayment window opens up on that. So from a timing perspective, it's really a combination of properties that are securing these number of different loans. And the timing is probably $70 million, half of it, at the time we close on the transaction, half on October 1.

It sounds like debt paydown like you mentioned. What are the coupons on that debt? Because ultimately, I'm going with about how much dilution can we expect just from timing and deploying those proceeds?

Yes. So overall, it's blended about a 5% to 3% interest rate on that, so it's actually pretty earnings-neutral as we look to delever and use the proceeds on that basis.

Okay. And then looking at tenant recoveries. I think we're used to that being a tailwind for you guys, specifically in Q2 was down about 9%. Can you just talk about the quarter specifically that may not be as durable as income as the rental income? But just talk about maybe what we can expect going forward from that contribution or lack of contribution to same store.

Well, the tenant reimbursements is really contractual in nature, and so it's as durable as your base rent is. And so really what you see is that it follows suit with our expenses. And so when you saw our expenses go down significantly year-over-year, again partly because we had a large true up with a health system on some shared services that went -- took it down. But then also from additional cost savings, you should see the tenant reimbursements go down. That's actually a good thing. And as we look at our tenants paying less money, it's less money out of their pocket, but it's certainly not affecting our NOI in any way.

Okay. And then last question. You completed the Memorial Hermann project in Q2. There's been some transactions in the private market regarding Memorial Hermann. Can you talk about what your development yield expectation was on that project and maybe just compare that with some cap rates you're hearing in the market?

Well, I think from a yield perspective, the projects that we're developing now are all in the -- certainly the 6% to 7% range. So from a yield-on-cost perspective, it certainly would hit that bogey there. That was one that we acquired from Duke, and so I think that's what's interesting about the whole transaction now is you're looking at our total 2017 investments. We talked a lot about how we push the cap rate lower there, but they are now yielding 5.3%. And you're certainly seeing those transactions of similar tenancy with similar durability of income now going in the mid to high 4%s.

Can you still enter at those high development yields, 6% to 7%? Because that would be a pretty good arbitrage for what's transacting out there.

Todd, it's interesting. As I've talked about, I think the biggest pleasant surprise or perhaps the one unanticipated result of the Duke transaction has been the development opportunities with the relationships that we have in markets. Over the last 6 months, we've had an opportunity to talk to health care systems that aren't in their RFP process and were not necessarily looking for -- to go out on development opportunities. And so we're having conversations. And I would say the yield that we are discussing with them is the 6% to 7%. And traditionally, I would say that it's probably about 6.25% to 6.5%. Now we're also having an opportunity when we're looking at redevelopment, which we're also looking at in some of our assets because we have the ability now to be more efficient and have fuller discussions, and some of those yields are much closer to 7%. So that's a great opportunity for us here in the next 12 to 18 months to start bringing some very accretive earnings to the bottom line.

The next question comes from John Kim with BMO Capital Markets.

I think in your prepared remarks, Amanda mentioned that the renewal leasing spreads were strong at 1.7%. I don't really want to nitpick too much on that word, strong. But I'm wondering when you're buying MOBs today, whether it's you or someone else, at a 5% cap rate right around, are you underwriting 2% renewal growth or something higher than that?

So our re-leasing spreads -- I'll just kind of reiterate the intention of the comment. At 1.7%, that did include one lease at a particular building that we acquired from Duke that we had underwritten to roll down. And excluding that, we would have been right around that 3%. So we continue to think that our re-leasing spreads are strong. And I think on a -- from an underwriting perspective, we invest in markets that have inherent growth so, so long as we are underwriting market rents and assuming that the building has rents that approximate the market rent. Yes, we are assuming that they're going to continue to increase, consistent with the growth of that market. And we like markets that are growing 3% and 4% a year.

One of the things that we're paying attention to and this is something that we've kind of looked at from a sector perspective and a macro view on lease spreads is that my view has always been -- and I think that lease spread today is 2% to 3%. I think if you're at market, if you're in a strong, multi-tenanted building, if you have a strong tenant and you've got 3% escalators inherent in their lease for 3, 5, 7 years, you're going to get that 2% to 3% rent spread in today's marketplace. That's up from what it has been or what it was 3, 4 years ago. Now I think if you look at the second segment of that is that how much capital are you providing for the tenant. Above 3%, I think you're starting to buy rent growth, additional TIs, additional capital. You're -- the rent is showing that sort of investment that you're giving to the tenant. We've tried to maintain a very consistent capital allocation from our TI allocations and our new leasing. So when we look at it, we try to be very consistent. We like to see the tenant put some of their own dollars into the space besides just our dollars, and so that's one of the things that we look at is trying to get the tenant to put in some of their dollars. We could probably get higher rent spreads if we were prepared to put in additional dollars above what we've been doing traditionally.

Sure. But over the last 10 years or so, the cap rates have come down for MOBs, and the buyer composition has changed, which includes REITs like yourself but also private equity firms. And I'm just wondering if the new owner shift changes the landscape as far as their expectations to push rents a little bit higher.

I think 2% to 3% is about what you can expect. If you try to push it much further than that, I think that that's probably not market. Now a year from now, 2 years from now, if inflation runs through, is that different? I don't know. But we're not seeing what I would consider to be outsized rent increases in any of the sectors from an MOB perspective.

And I think, John, what we would just add is that when you go back and actually backtest some of the comparisons of rent growth versus total returns over time, you've seen that over the course of a full cycle many times MOBs with a steady, dependable 2% to 3% rent growth year after year after year actually ends up with just as much growth as kind of traditional office has without all the volatility that you might have seen. So I think that's why you're seeing some of the core buyers start to come in. You get to the same place with a lot less volatility.

On your new share repurchase program of $300 million, why did you decide to put a new one in place when the previous one was just installed and you only used about $9 million of that $100 million of the prior one?

Right. Well, we had talked about this, I think, prior. That would have been in place for a number of years. I mean, I think that have been in place -- the $100 million was in place when we went public. We were a much smaller company. Certainly, our balance sheet was far less able to handle opportunities or options. A company of our size now, 5 years being public, much larger, I think that's more appropriate size wise. We have the flexibility. And obviously, we have the options to be able to utilize our balance sheet to do so. So it was just more appropriate to do it, and we had talked about doing it. And what we like to do here is be pretty transparent about how we view our company and how we view the business, and it was just another step to take.

The next question comes from Chad Vanacore with Stifel.

So on dispositions. You formally targeted $25 million to $100 million. Now you get this incremental Greenville portfolio of sale that's getting close to $300 million. And then, Robert, you mentioned exiting maybe 1 or 2 markets by the end of the year. So how should we think about total disposition target and then timing through the year?

Yes. I think from a total perspective, we talked about $50 million more. So $50 million to $60 million under current contract, it allows us to exit kind of 2 smaller markets, again really with a focus of the saying our operating platform adds a lot of value, especially when it's concentrated and focused on markets where we have economies of scale. So really looking to take advantage of getting out of a handful of smaller markets where we don't have that presence. I think that cap rates were attractive.

And I would add, kind of follow-up from Robert's thought process is that we're not necessarily selling assets simply because they're poor assets or assets that are in distress or underperforming. What we're trying to do, and I think this is a time period -- and I talked about this early in the year, which is that at this particular timing, the stage of the ebb and flow of REITs, I think it's a time to always prune your portfolio. It's time to improve the value of your long-term income revenue stream from rent income, pick your markets, pick your core critical mass and utilize our platform. So when we talk about recycling the assets, other folks may be talking about, well, we're getting out of assets we don't like. We're getting out of assets in a class that is not performing well or we're getting out of something that is causing issues. I think our purpose and our presentation to our board has always been, "Here's our strategic plan. Here's where we want to be the next 10 years. Here's where we want to get critical mass, develop our asset management platform." And we may be selling some very good assets at some very strong cap rates. And other people will get -- will -- who buy, they will get good assets. But again, improve the quality of our assets, improve the focus of where we're spending our time as a business and then continue to grow the portfolio over the next 5, 7 years.

All right. Then you upped the share repurchase authorization from $100 million to $300 million. So presumably, with the asset sales, you should have some capital availability and you saw some potential timing of share repurchase?

Obviously, we don't comment on things like that. All I can say is that we have the flexibility. We have a very strong balance sheet. I think we put ourselves in a position to both to redeploy into development at positive cash spreads. We have the ability now to acquire in markets or key markets where we can add not only getting into cap rates that are fair and attractive but also add our asset management platform. And now we have another tool, and that tool is also one which is stock repurchase plan should we make a decision that it's appropriate to do so.

All right. Well, related on the capital side is you had originally had a leverage target of around 5.5x by the end of the year. Does that stay in place?

Yes. I think we're certainly working our way towards that. We ticked back down to 5.8x debt to EBITDA here at the end of the quarter with the targeted debt repayments with proceeds from the Greenville sale. That's going to move us pretty darn close to where we're trying to get to.

And the next question comes from Dan Bernstein with Capital One.

Feeling a little bit better about Greenville, but I have a question on that. And which is did you guys actually consider maybe doing the joint venture yourself with private equity? I mean, I understand the triple net nature didn't work with your platform, but it's still a good asset. Did you guys think about doing a JV with that, maybe trying to build a joint venture capital arm that would support your business as well?

Well, go back to our thought process is that Greenville -- we like the utilization of our asset management platform, and we think it brings additional value to whatever we do, whether that would be owning an asset 100% or participating in a joint venture with someone who felt that and gave us the credit and the economics of that strength that we bring. In Greenville, I think there were 2 things. Number one, we were not going to get that, those economics, because it was a triple net lease. Number two, as I talked about earlier, we were -- we thought that the economics of that transaction had maximized itself for us. I was not looking to do a transaction that would lower the yield in a renegotiation with a tenant in that particular market. Market's a good market, but we were very opportunistic in 2009 when we bought it. I think we're very opportunistic in 2018 when we sold it. I think the key when you look at assets and you look at a portfolio is to maximize value. Don't fall in love with an asset. You don't fall in love with something. What you do is you look at the economics, and these were older assets. They needed additional capital. The leases were rolling, and I think that the yields that the equity was willing to accept was probably something that we weren't willing to renegotiate down to.

Okay. So even if you look to the 50-50 JV, the economics, you just didn't see that working as well?

Yes. I don't think that the next -- and again, I don't want to -- I think it was a win-win transaction. But I think that we are better able to get greater yields with the $285 million or whatever portion of that we would have gotten from a JV, redeploying it in development or in acquisitions within key markets where we use our platform, then we would -- keeping it there for the next 5 to 7 years. So it's where do I get the most yield for the dollar that I'm going to re- now buy.

Okay, okay. You also have about 11.8% on your base rents expiring in '19. I just wanted to get over what those expirations were? What -- are those able to be mark-to-market higher? What kind of your expectations are on the releasing there?

So we're typically 12 months out on all of our renewals, so we are ahead of at least half of the 11.8% that's rolling next year. And again, just to reiterate, we continue to think that we'll -- that 3% re-leasing spread is something that's very doable for our portfolio. As those leases roll, we expect to continue to get right around there on the re-leasing spreads.

When we look at 2019, we like where we see occupancy and we like where we see rents. And I think that as we mentioned earlier, 2% to 3% same-store growth, but also we are seeing the consistency that Amanda talked about on renewals. And we don't move tenants on renewals. I mean, we -- if there is a lease that's over market, we deal with that tenant. We don't move them within buildings or anything like that. So we try to be very forthright and get a real good view of what we're looking at, and 2019 seems to be very consistent for us.

Okay. And one last question and I'll hop off. It sounds like you're getting some momentum on the development side. You've kind of said $100 million, $200 million a year in development. Should we be thinking you could do more than that as you go forward? Is that kind of part of the strategic plan? Or would you want to keep it still to that $200 million kind of a year investment in development and be select?

I think right now, I would say that that's still a very comfortable number for us. MOB development is different. I've been in development over the years. And in the MOB side, if it's 100% occupied or 90% occupied, you've got a lease with the credit health care system. You know what your time line to deliver the asset is. You really removed a lot of the risk. And so I think that as we continue to move through the latter half of this year, by the fourth quarter or by the third quarter conference call, I think we'll be able to give you a little more insight into where we see 2019 and 2020. As I mentioned, we are having what I consider to be very active and good conversations with some folks about the opportunity to do that. But we're not into the building spec. We're not into building something with a lot of risk, or for an indefinite delivery time. So our goal, our discipline is make sure it's defined, make sure that the occupancy is there and make sure the credit is there. And we will have a better insight, I think, in the next 90 to 120 days.

The next question comes from Vikram Malhotra with Morgan Stanley.

Sorry I joined -- sorry if you already talked about this. But Forest Park, can you sort of just give us an update, a reminder on what's going on with the hospital there and give us a sense of timing for kind of lease-up as well as where things are versus what you've got prior?

Yes. So from a Forest Park perspective, we ended the year with 100,000 square feet of vacancy. Most of that had rolled off in the first 3 quarters of last year, so we're 41,000 square feet leased to date with about 70,000 square feet of activity right now in various stages. And the hospital has received its budgeted approvals to move forward with its conversion to the specialty hospital that we anticipate. That was a key kind of milestone for them, and so we'd expect that to be announced here anytime in the near future.

And we are seeing some activity with larger leases that indicate that they are moving forward, and so we're -- we feel very good about the time line that we've talked about in regards to HCA and the -- what we see is the lease-up over the next 6 months for that, for those 2 assets.

Maybe with specialty cancer hospital and one thing I want to clarify. The rents that you're getting now would be (inaudible)

You're kind of breaking up a little bit, Vikram, but I think we -- certainly, we're not going to get ahead of whatever HCA is going to announce from the specialty hospital itself. I think we have a good indication, obviously, internally and in the marketplace, but we're not going to get ahead of the hospital itself. But the rents we're seeing are very strong. They're 30%, 40% higher than our portfolio average. I think we're at $26, $27 net rents, so very strong rents that we're asking and receiving given the quality of the real estate there.

Okay. So just to clarify, so is that 30% higher than what you were previously getting at the building? Or is that -- that's 30% higher than your portfolio average?

It's been pretty consistent with what we were previously getting, but that rent is 30% to 40% higher than our portfolio average.

Okay, got it. And then just -- I wanted to check on the other smaller markets that you may be considering where you might not have scale. Could you maybe just talk about some of the markets where you might, at some point in the future, decide you just want to exit completely?

Well, I think without getting too far ahead of ourselves, I will give you some view of how we look at these markets. I mean, first of all, is it scale that we can get? Is it a market that we think is driven by the academic university concentration, the new attraction of jobs and so forth? But we recently sold out of Milwaukee. We did some sales in Milwaukee, and that's been something that we have been pretty -- that's not a market that we know that well. That was -- again, that was an acquisition on a triple net basis from the health care system early -- very early in our history. And it was there, really, as a protection against the economy that we were seeing in 2008, '09 and '10 when we did that transaction. So I would think that that's a market that you wouldn't see us move into but instead probably move out of. We have -- we're not big in the Chicago area. I mean, that's something that's been very tough for us to underwrite. There's been portfolios there that have come to market that we just haven't felt that we were the best choice to own or that necessarily the rewards over the next 5, 7 years would be there. And then the smaller markets, I mean, we bought -- when we were getting our size, we were buying portfolios. And so we've gotten off -- trying to get out of any one-off assets. So those are the things that we're doing. And again, it's probably $100 million to $150 million of those type of assets that are good assets but not what we want to build a long-term critical mass concentration of what we have and what we own over the next 5 years.

(Operator Instructions) The next question comes from Mike Mueller with JPMorgan.

Just a quick question on the development pipeline. If we're thinking about that next $100 million to $200 million of opportunities that you're talking about, what portion of that are you kind of coming up with in development and reaching out to prospective tenants for it versus getting reverse inquiries from different systems, wanting a new building in a certain location?

Well, and this is again where I kind of mentioned give us 3 or 4 months. The Duke transaction was a year ago. It takes a while to integrate. I think it took us a while to really recognize as a management team because we have a little bit different organization here at HTA where most of our leasing folks have been with us 5 or 6, 7 years. We've got 3 or 4 key leasing individuals who head up each of the regions. There's obviously the management team, Amanda, Caroline, Ann, Robert, myself. We were out talking to health care systems. And so I would say that 90% of what we have been talking to over the last 6 months have been conversations that have come to us. We have not yet gone to the next phase, and the next phase would be -- and I don't think that next phase is in the next 12 months. I think, actually, that next phase is a ways away because we have a lot of opportunity in that line. We have opportunity with the relationships we have now in the markets we have that if we can just take those to conclusion will be very successful. And I think fill that development side of the equation that we've been talking to you about, which would add in 2019, 2020. I think as you get into 2022, 2023, maybe, in fact, that is where we would, as a company, look to go out and make new relationships. But the relationships traditionally come from the ownership of an asset, the relationship with the tenant or a longer-term involvement with the real estate sector because a lot of the real estate folks at the health care systems, they move around and so they know you, someone moves from one health care system to another health care system. And you now have an opportunity with that new health care system that you may not have had before that person might have moved, and so we're trying to take advantage of those relationships. So we're very happy with the fact that most of what we've seen right now is just handling conversations that have come in to us or when we've sat down with someone we know, they have brought it up.

Seeing no further questions in the queue, this concludes our question-and-answer session. I would like to turn the conference back over to Scott Peters for any closing remarks.

Well, I'd like to thank everybody for joining us today and look forward to seeing you over the next 2 or 3 months as we get out in the market and talk to folks. Thank you.

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