Healthpeak Properties, Inc. (DOC) Q2 2015 Earnings Report, Transcript and Summary

Greeting. And welcome to the Physicians Realty Trust's Second Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Brad Page. Thank you. You may begin.

Thank you. Good afternoon and welcome to the Physicians Realty Trust second quarter 2015 earnings release conference call and webcast. With me today are John Thomas, Chief Executive Officer; Jeff Theiler, Chief Financial Officer; John Lucey, Principle Accounting and Reporting Officer; And Mark Theine, Senior Vice President of Assets and Investment Management. . During this call, John Thomas will provide a company update and overview of recent transactions and our strategic focus. Then Jeff Theiler will review the financial results for the second quarter and our thoughts for the remainder of 2015. Following that, we will open up the call for questions. Today's call will contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. They are based on the current beliefs of management and information currently available to us. Our actual results could be affected known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe our assumptions are reasonable, our forward-looking statements are not guarantees of future performance. Result could differ materially from our current expectations and those anticipated or implied in such forward looking statements. For more detailed description of some potential risks, please refer to our filings with the Securities and Exchange Commission. With that, I would now like to turn the call over to our company CEO, John Thomas.

Thank you, Brad. Good morning, everyone. Thank you for joining us. Just two short years ago on July 19, 2013, we started Physicians Realty Trust with 19 medical office facilities worth $124 million, generating $9.5 million of annual revenue. Since that time we've increased both the quality and size of that portfolio and today it exceeds $1.3 billion and generates annualized cash revenue of more than $98 million. And just as importantly, we continue to see high quality opportunities to continue this growth. We shared in our IPO road show a long-term plan to grow the organization quickly but in a discipline way with low leverage all for the long-term benefit of our shareholders. This morning we've announced a number of exciting events all consistent with our original message and plan which further enhance and establish our shareholders company as a growth stock investment. We've strong liquid balance sheet, high quality of healthcare facilities, industry leading occupancy and lease stability with over 95% occupancy and an average lease term with 9.25 years including the medical office investment closed announced today they closed after June 30. These announcements include total year-to-date investment of $480 million at an average first year cash yield of 7%, growth of 57.8% in gross real estate year-to-date. Upon closing of the IMS Phoenix investment, we then completed $621 million investment this year. We now own $1.3 billion of medical office facilities, growth of 942.5% in our 24 month life. Additionally, we feel confident enough with our visible pipeline to increase our acquisition guidance by $200 million this year. We are now projecting total acquisitions of $700 million to $900 million of high quality healthcare facilities in 2015. Revenue has grown 45.7% this year-to-date and our annualized cash revenue now stands at $98 million compared to our $9.5 million revenue when we completed our IPO. The average size were 19 facilities at our IPO was 27,000 feet, today we own 124 facilities with an average size of almost 38,000 feet. Our original 19 facilities were 85% occupied as compared to 95% as of this morning. With the anticipated August closing of the $141 million IMS Phoenix investment, our total investment balance will grow to $1.43 billion and our average building size will grow to approximately 40,000 feet. With IMS we will add yet another healthcare community to the 14 marker where we have geographic concentration, enhancing our -- scale for efficient property and asset management and multiple provider relationships. IMS is a very high quality physician owned and led multi specialty group, affiliated with Dignity Health, one of the largest healthcare system in the West. IMS has already has 140 providers and has added 31 physicians already this year. The physicians are owned outpatient care office building, three of which or on hospital campuses contain over 400,000 feet of Class A real estate. We believe this investment will be just the beginning of the opportunity to grow with this leading physician organization. We also announced Moody's Investor Services has recognized Physicians Realty Trust organization, asset, balance sheet and operating philosophy of highly coveted Baa3 investment grade rating. Since the IPO we have approached our growth with the mindset of an investment grade company and we intend to continue to manage the organization this way. Our Board and management believe low leverage and disciplined balance sheet management will optimize total shareholders returns over the long term. Finally, in March we announced our founder John Sweet had agree to extend his contract to service our Chief Investment Officer through the end of 2016, and that we had plan to identify and retain successor Chief Investment Officer before the end of 2015. This morning we announced the appointment of Deeni Taylor as our Executive Vice President starting October 1st, 2015. And we plan for Deeni to assume the additional title and responsibly Chief Investment Officer upon John Sweet's retire. Deeni has over 25 years of hospital executive management, 25 years of experience with hospital executive management with a largest healthcare system in the United States. Since 2006, he self lead the medical office building division at Duke Realty and through his tenure that ended in June, 2015, his team built one of the best portfolio as a medical office building in the United States. Deeni will hit the ground running and only work John Sweet and our team to evaluate and manage our investment opportunities. Deeni has a depth of relationships coast to coast that I believe in further enhance our ability to identify, underwrite and grow our investments in high quality medical office facilities with the highest quality providers. We look forward to introducing Deeni to you in the future as part of the DOC team. On our last earnings call we announced our goal to pursue an investment grade rating in 2015 and if successful begin the transformation to a long-term capital structure. As noted, Moody's has recognized our team asset and balance sheet with this investment grade rating. The Board, management and team have worked hard to achieve this recognition, but we want to recognize our CFO Jeff Theiler and his leadership and hard work in achieving this recognition. Before I turn the call over to Jeff, I'd like to conclude with the note of appreciation to you on the call. We are a growth healthcare real estate company. We pursue this growth from the beginning with the commitment to be disciplined and transparent to our stakeholders and clients. We are proud of -- to transparency and the content of our communication was recognized by NAREIT with the gold care as the communications and reporting excellence award for small cap REIT. Winners of this award are selected by panel of securities analysts and portfolio managers. Thank you to those who on the call, who are on the panel and selected us for this award. The privilege to communicate with you. Your feedback makes us better, we encourage you to provide all the constructed feedback you can and we look forward to your questions later today. With our ability to grow and your support, we look forward to earning this award from you in the future, perhaps in the future piece of the large cap REIT category. I will now turn the call over to Jeff to discuss our financial results for the quarter. And the short and long term benefits of our investment grade rating and after that we will be happy to take your questions. Jeff?

Thank you, John. We are pleased to share our results for another successful quarter of operations. Our second quarter 2015 funds from operations or FFO were $13.2 million or $0.18 per diluted share. Our normalized FFO, which added back $2.6 million of acquisition expenses and some other small normalizing adjustments were $15.7 million or $0.21 per diluted share, a year-over-year increase of 23.5% from the second quarter of 2014. Normalized funds available for distribution or FAD were approximately $15 million or $0.20 per diluted share, a year-over-year increase of 25% from the second quarter of 2014. We are excited that we have able to continue this high level growth for our shareholders and we see the opportunity in front of expanding. With the pending appointment of Deeni Taylor as Executive Vice President of Investments, the signing of $141 million IMS portfolio and the state of our current pipeline, we now feel comfortable increasing our acquisition guidance by $200 million for the remainder of the year. This equates to total acquisition of $700 million to $900 million for 2015. In the second quarter of this year we invested $157 million in 13 high quality healthcare facilities with an average first year cash yield of 7.4% and one mezzanine loan investment that paid interest at the rate of 8.4%. And we acquired all these assets at the beginning of the quarter; they would have generated an additional $1.8 million in cash net operating income. In addition, subsequent to the end of the second quarter inclusive of the Phoenix IMS portfolio, we've acquired or entered into agreements to acquire additional $229 million assets with an average unlevered first year cash yield of 6.6%. We funded our acquisition primarily with our revolving line of credit which we upsize to $750 million in July and now have the ability to expand to total size of $1.1 billion. At the end of the quarter, our revolving line of credit had a balance of $191 million leaving us with plenty of capacity to fund our growth plans. We continue to maintain a strong balance sheet. Our total secured debt is $95.7 million or 8% of our asset value. Our overall debt to asset is just under 24% and net debt to adjusted EBITDA is 3.4x. Both of these metrics are solidly in the investment grade range. Moody's Investor Service specifically recognizes that fact yesterday as they initiate re-coverage of senior unsecured debt for the Baa3 investment grad rating. This rating was earned by a disciplined growth and commitment to building a long-term company. This excellent outcome will enable us to access the debt market to favorable rates and will lower our cost of capital significantly, on both the revolving credit facility as well as on any long -term debt we issue in the future. On the operations front, our portfolio is just under 95% leased at the end of the second quarter. Additionally, this is the second quarter in which we have reported our same-store portfolio statistics. As a reminder, our same-store portfolio is relatively small part of our overall portfolio at 37% and relatively small adjustments can significantly impact the results. Our same-store cash NOI for the second quarter of 2015 grew 2.3% year-over-year, which was driven primarily by contractual rent increases of roughly 2.8% and offset by operating expense growth of 4.9%. Finally, our general and administrative costs for the quarter were $3.9 million, or $3.1 million on a cash basis. The increase was primarily driven by salary expense accrual which was in line with our expectations. We continue to maintain effective control on our cost and make progress towards our target of reducing overall G&A to less than 1% of assets. With that I'll turn it back over to John.

Thank you, Jeff. We will now turn it over for questions-and-answers.

[Operator Instructions] Our first question comes from Jordan Sadler with KeyBanc Capital Markets. Please proceed with your question.

Thank you, good morning. So congrats on the investment grade nod from Moody's, I guess I am curious about the follow up we might see or expected timing on a second rating if you think that's imminent. And sort of maybe if you can sort of provide a little bit of color, little bit of an update on when your inaugural on deal you may look to get off.

Hi, Jordan. It's Jeff. So we spent the last two years with Moody's, walking them through our assets, talking to them about the company strategy, laying out a game plan, executing on that game plan and so benefit of that was by the end of the process they felt very comfortable with the company strategy, the management team, the portfolio and gave us that investment grade rating. So it was a pretty long engagement. We are continuing to do that with the other rating agencies and if and when we receive an investment grade rating from them, we will certainly report that to you. But I think that the key here is that the first one is here is Moody's one is really the important one. Because it does the couple of things immediately. It reduces the cost on our revolving line of credit. We go from a leverage base grid where we currently at the lowest leverage level we pay 150 basis points over LIBOR, to an investment grade pricing metrics which will charge us LIBOR plus 120 at our current Baa3 rating. So you get an immediate benefit there. It also gives access to the private debt market and investment grade rates. And if you look at the private debt market versus the public debt markets, right now for fairly new investment grade issuers you get much better execution in the private debt market on the pricing basis. So we feel that we got really a great ability to go out there and access capital right now in the private debt market as well as our bank markets actually. But all that being said, we are continuing to engage with S&P and fair action will report those ratings if and when we get them.

Okay. I think are you suggesting that you could do the private deal or bank deal in advance of second ratings, second investment grade rating?

Yes. We are. I mean we are looking at all the options and we continue to weigh all the options but we certainly have the ability to go do private deal right now with our current rating.

Okay. I guess as you relates to this cost to capital shift somewhat which I know you are guys were anticipating. How does this impact John underwriting or so on assets and or the target assets that you might be looking at?

And I think we've said from the beginning, as our cost to capital improves we can be kind of move up the quality scale but we are still seeing lots of great opportunities in secondary markets where we get favorable pricing. I think our relationship model continues to get us favorable pricing even in the bigger markets and with bigger higher quality assets i.e. the IMF portfolio we talked about. So I think you'll still see just the range across the board where we pay up the quality now we have the cost to capital, continue to have cost to capital allows us to do that. And but we are still seeing lots of great opportunities are -- not as if expensive higher yielding helping us fuel growth so--

Okay. And then last one, Jeff, just a follow up on sort of the quarter. I feel like you are relative to model and we can follow up on this off line little bit but relative to model, I know there are lot of moving pieces, lot of acquisitions in the quarter and last quarter, feel like the FFO came in little bit later than expected relative to our model but probably relatively to the rest of this street as well. Was there anything driving that in particular that you can flag for us in the quarter that more of one time item or do you think it was all purely acquisition timing.

Yes. It is hard to answer without directly looking at your model. I am happy to that with you off line and if I can flag what might be a difference in this quarter. I think a lot of it is the acquisition timing. If you look at our acquisitions for the quarter, the bulk of them were kind of June and lot of them are actually the last day in June. So while the number -- the overall number seems to be in line with probably have most people are modeling it. I would imagine most people are modeling those acquisitions to occur early in the quarter at least midway through the quarter. So I think from my perspective the vast majority of that probably going to be acquisition timing.

Our next question comes from Juan Sanabria with Bank of America, Merrill Lynch. Please proceed with your question.

Hi, good morning, guys. And congrats on the investment grade rating. John, I was just hoping maybe if you could speak to the pipeline and kind of what we should be expecting for the balance of the year. Most skewed toward the cap rate we were seeing earlier in the year is sort of closer to 7% plus or more sort of mid 6, maybe as a quality improves with some of the more recent deals, with the ballpark of that range should be.

Yes. The IMS portfolio which has not closed, we described today in our release and we talked about today. It is a very nice, bulky and that help drive and fuel the increase in guidance from the $700 million and $900 million for the rest of the year. And again easy to say that we feel pretty good about that range particularly at mid point of the range. And a high degree of confidence there. We are seeing some high quality assets out there. There are some high qualities I'll say small portfolio that are floating around and we will track and we will demand a higher price forward. We are still in that 6.5% to 7% plus range. I think right at 7% for this quarter. Blended basis across the pipeline and so I think you can high 6%, 7% is still a good number for the remainder of the year.

Are you seeing any movement in cap rates or sense the things may begin to turn, what's happen in the capital market or still too early to tell or and if there is any change in the level of competition for deals?

Yes. I think the easy answer is too early to tell but I do think there is more talk, investors like us that the pricing need to start adjusting and I think that's translating into the market discipline, again this -- there is two or three portfolios out there that we are really not involved in, but they are going to command a pretty high price from a size volume discount or volume premium if you will. And so I think overall class A on campus building is going to attract the most potential bidders or going to command in the low 6s or 6 and portfolios that are having a quality and may demand six or less. But I do think it is too early to tell but I do think that the market generally that the buzz if you will is asset price needs to start reflecting where the 10 year debt is moving.

And for just as a couple quick ones. Expectations for G&A. How should we think about that with Deeni's addition and just any thoughts on timing of dividend coverage?

Yes. So for G&A, at the end of last year or I guess fourth quarter earnings call we talk about G&A of $14 million to $15 million for 2015. I think we are still on track for that. I mean I think with Deeni it would probably pushes to high end of that range frankly. But we still feel good about that number. And then in terms of dividend coverage, we continue to make very good progress towards covering our dividends, we feel -- we talked about by the end of the year we still stick to that. I don't see any reason why we wouldn't be recovering by the end of the year.

Our next question is from Michael Gorman with Cowen Group. Please proceed with your question.

Thanks, good morning. Just could if I just could follow up on Juan's question maybe ask it a different way. As you are looking at the investment pipeline and as you are out in the marketplace, have you started to see any deals maybe that you had missed on that you had one come back to you or are you starting to see any assets being re-traded in the marketplace?

That's an interesting question, Mike. We are actually having been seeing some of that. I think some for different reasons but some for private buyers who won reason another didn't get to the finish line with their capital stake, but we have seen that two three instances of that. And frankly if it is something that we had looked at and either put an offer or passed on it our price is typically been higher-- excuse me lower than kind of where the deal have been struck and they are not closed. So seen a couple -- we have seen couple try to just flip their contracts to us in the most part we -- not just been there.

Sure, okay. And then as we think about the back half of the year and kind of giving maybe the midpoint of that acquisition guidance. I mean should we think about it more in terms of the smaller deals that we saw through the first six months or is it going to be little bit chunkier like the Washington acquisition and now that the Phoenix acquisition is that going to be more prevalent in the back half of the year?

I think we've got some sizable opportunities. We got lots of our bread and butter $50 million opportunities as well. So I would say things kind of set down in December, so I think most of work would be -- most of the closing would be by then but otherwise I think it would be kind of the blend what you have seen throughout the year. But we work through December 31st

Okay. And then maybe just one last one on the investment front. Can you just talk about as your out there working with the physicians group what you are hearing on kind of seller motivation right now, what's driving, is it investment in their practices, is it just trying to expand or is it kind of what's the motivation to cash up the real estate or to find the partner for the real estate.

Yes. IMS in the most recent example. And their motivation is couple of old one, they are hearing from people it's kind top of the market of the seller so they are capturing that. They've added 31 provider this year, I mean they are growing like crazy and they need additional facilities and so they kind of self funded, self developed these beautiful Class A, three of which are on campus, 100,000 square feet facilities, and they need to develop more those and they want to develop more those, they kind of like this development model, it is very large, very sophisticated physicians group that got this alignment now with Dignity Health and who is really providing capital for them to grow but they need both real estate capital and this capital for their baseline growth so, same things we hear from -- we've been hearing and have been talking about for a couple of years. IT investments and investments in new physicians and --

Okay, great. And then one last I think for Jeff, can you just talk about, I know it is still minority the portfolio but in the quarter what kind was driving the operating expense line? I know it is not that bigger number but I am just curious that the 5% growth in same store expenses and kind of what that should -- that's going to look like over long term?

Mark, you want to address that. Mark Theine is sitting here so

Yes. Certainly, and as you mentioned as the same store percentage isn't that all large 37% of the portfolio, so and Jeff mentioned in his comments that some small adjustments can make large numbers and percentages. The one or actually there are two that are one time event, one is in insurance invoice there is we have one time payment for triple net 2000 increase and expense there. And the second was in increase in expenses that are building with some at health plus where we reduce some of the lease payment, we do that because of -- evolve with that because they try new 20 year lease that will be commencing this fall at that particular property. So couple of one time item that happen in the quarter.

[Operator Instructions] Our next question comes from Jonathan Hughes with Raymond James. Please proceed with your question.

Hi, guys. Thanks for taking my questions. I was wondering if you could give us an update on maybe any development deals you maybe looking at or projects under development that you have agreed to acquire upon completion and then maybe what yields as potentially would be bought at.

This is John. Some of the biggest maybe we made in this space, we close in July, we did expect that close in June and the project was completed in June but for a couple of reasons we just -- it didn't close until July. So that was the Kennewick, Washington medical office building, very large investment $64 million and our price was about, our deal Jon net is, first year yield is 6.6%, 20 years lease with the 100% lease for the hospital and two in quarter two on 3% increase so really attractive investment, developers were Wisconsin based company and long relationship with governor Thomson and it is really the source and how we secured that deal. We got some optionality on couple of projects that one that may close by the end of the year. Again assuming the CF is delivering them and lieutenant commences and we have every expectation they will, we've got a very attractive price on that in the high eight on that investment. If we proceed with it and frankly we expect we will but we have the ability to walk away as well so got a couple others but smaller maybe -- again we are not taking any development risk and we have some optionality to acquire in the back end and exchange for small either mezzanine debt or small no capital commitment upfront.

Right. And then thanks for that and then lastly just kind of touching on Jordan's question earlier about the FFO discrepancy versus almost versus model down, you should have breakdown of lease side by grossing that on 2016 which is helpful, if you have to kind of like NOI margin split between specifically for the gross leases. I think that maybe it would be helpful to try and clear some of that going forward.

We lost you hear just for second, what was your -- what was the point the question.

I was just trying to see if you could maybe give kind of an NOI margin breakdown for the gross leases and kind of help because we were little high on NOI margin that we had model for the quarter.

We will follow up with you on that.

Our next question is from John Kim with BMO Capital Markets. Please proceed with your question.

Good morning. I was wondering with Deeni's appointment to the executive team, how if any or acquisitions going to change at all? For instance are there going to be more acquisitions with hospital bands or potentially any acquisition from Duke?

Great question. We expect Deeni to bring a lot of his relationships, it is kind of funny John, Deeni, John Sweet, and Deeni must have competing with each other for so many years, chasing the same relationship, same quality and kind of high profile healthcare providers. So again we are excited while the three of us together for the next 18 months or as John Sweet wants to work, we just see additional opportunity to --an additional wheel to the team and the breadth of the relationships and the quality of -- and frankly less competition from Deeni and Duke. So all of those are good things. I don't think it changes so much the nature of it other than Deeni's focus has been very health system driven and but he also had some physician group versus well, exactly the same kind of things we've been pursuing for investments. So broader reach, broader opportunity, and broader ability to get to more opportunities.

And just to clarify your answer to a previous question, are you going to be looking to do more development type of acquisition or something that's some kind of development angle potentially?

Yes. We've always said we like to be kind of the partners to developers and exit path for developers but not building the development engine or team. Did a lot of development with Duke's, much more of development REIT than we are, far more than we are in more healthcares REIT. So as a percentage as we grow the percentage of creative development take out relationships will have will grow with -- because their denominators growing but we will still keep a very modest path to chamber kind of our pipeline committed to those kinds of structures. And with a lot of optionality so I wouldn't really see anything change there the way and how we are approaching development.

Okay. And as you are growing your portfolio, how do you feel about your staffing level particularly on the asset management side?

Yes. Asset management is really rounded up well recently we've said couple of really great new additions in that space. Mark Davis, our partner Minneapolis, we bought his portfolio back in the spring. Frankly, he has been a great addition to the organization just to the partnership because he is the kind of front end property manager and asset manager of that portfolio and others in his market that we've been sourcing. And so we feel really very good about that. The scalability the team is for what we got on our plate for foreseeable future and we think is very strong, very high scalability. Same thing on the accounting and kind of other back office we had three recent additions there that, again these are added up physicians but we continue to focus on finding DOC eligible people so we have three great addition in that group as well so feel very good about that. With Deeni's addition we will always be helpful to find some underwriting and local support, always got -- doing it now

Jeff, it is maybe little bit early to ask about this but what are you plans for the mortgage debt when they come due in the next couple of years?

Yes, as we can pay off mortgage debt we will be paying off mortgage debt. We like running an encumbered portfolio, I think it is gives us lot of flexibility as we consider our options on the financing side, so I can't imaging that we'd really be adding mortgages to new properties or even keeping mortgage on existing properties.

Okay, great. And then final question, you needed $9 million mezzanine this quarter, it is not very big but can you just maybe elaborate on the strategy of this like how big do you want your mezzanine investments to get and maybe the rationale of this particular investment?

Yes. This is John Thomas again. That doesn't mean to an end, we've had we got a few those mezzanine loan structures out there. They happened to be all with GE that is senior debt, it all have been in connection or most of them have been in connection with developer recap -- recapitalization looking to afford a five year hold post construction. The developer of that facility owns hundreds of millions of dollars buildings and we have had a great relationship through several years and he was looking to recap sell that building, it is very large medical office building built in Jacksonville, every healthcare development firm in REIT that our there that does development chase that opportunities several years ago and landmark wanted and delivered facility lease primary to the University of Florida health systems, so very strong credit, GE put our press release about this as well. It is about $100 million building. So we get a nice premium yield on our mezzanine loan, we got a lot of equity behind this. And we have some rise in the back end, not a pure call option but some preference for rights in the back end deposit building. At the end of the-- at the long term so we see that as mezzanine a nice tool box for investment and building the pipeline over time, lot of optionality, there is no put in that deal. So we will get paid a premier yield on a very premier building that University of Florida is going to build the hospital next to it in the next couple of years, so before we had the -- expect to own it, but we have to see what they have done on that campus as well. And again as a percentage of our pipeline, mezzanine loans as a tool development take out for the tool, I would say 5% to 10% -- 5% less kind of a borrow, kind of asset mix and pipeline commitment expectations.

So the mezzanine is going forward, are you going to be investing in them with the idea to purchase the options or purchase the assets?

That's exactly right. It is a good summary and it is like -- we are not all shopping for mezzanine that we are out shopping for great healthcare facility investment, buildings to invest in and some of the owners are start ready to sell and we got good access points in the future.

Our next question comes from Craig Kucera with Wunderlich Securities. Please proceed with your question.

Hi, good morning, guys. Couple of questions here. Would be -- and I apologize as I had miss this but with the increase in acquisition guidance how do you think about the size of the professional bond offering and kind of where do you think pricing is going to settle in today?

Craig, it is Jeff. So we are flexible on the bond offering. I think right now we are probably looking $250 million $300 million range but again we've always treating that depending on the pipeline that we see going forward and all that. But that's a pretty good base estimate. And what we are seeing now in the private markets is probably all in pricing on 10 year average duration, we have to tranche it out, you could do a 10 or 12 something but probably 2 in a quarter to 2.5 over trajectory, so that's about the pricing that we are seeing right now in the private market and it is about -- if you were to go to public market you probably an additional 25 basis points to 50 basis points is our preference.

Got it. That's helpful. I understand from the modeling perspective. And doc question for you, can you give us some additional color on the concept of the treaty?

What did you say, Craig?

Can you tell us a bit about the dream team?

Are you talking about Deeni? Yes, they are adding Deeni to the team. If that's what you are referencing.

Yes.

I think we started this -- when John and Mark and I started this company with Governor Thomson three years ago, I think we laid out kind of who over time would be the best additions to the organization. Frankly, Jeff Theiler was high on that last as well. So we can be more excited about Deeni coming on Board. And those of who you investors on the phone who know Deeni, I hope you feel the same but there are others hadn't met and he will and I mean Deeni's relationship are so deep and frankly -- most of the deal that I lost they were relationship driven deals were to Deeni so we just think we just building out a great team for the long term and Deeni could be more excited to join the team as well.

Our next question is from Michael Carroll with RBC Capital Markets. Please proceed with your question.

Thanks. John, how did you source the IMS Phoenix portfolio? Was that an existing relationship that you had?

They had an advisor so there was some competition but it was not widely marketed. This is not one that you talked about in the internet for everybody to sign up for the advisor or somebody who is -- we have a great relationship within understands kind of what we are looking for and understands in this particular case trying to match her client or team him and her but so slightly marketed but I am sure it went to five or ten organizations that advisor is trying to match make and we got upfront from the physicians quickly and business development quickly and building a great relationship with that group. Like I said we haven't close yet, got a couple of conditions left to satisfy but we do expect those to satisfy and close quickly.

And then how do you plan on to grow with that to get physician group, how many years set or how quickly are they actually growing in this entirely through development? Do they have existing properties that you could also purchase?

Yes. So they own these four, they have some smaller ones but these were the four ones -- the four that we are focused on. And they weren't really marketing the others or seeking buyers for the others. I think it will be a combination of both ground up development that they will fund through their sources and look to exit to those to us upon completion or thereafter. I think we work through the couple of groups over the last two years who -- we now bought the building, rehab for their purposes and they sold to us upon completion of that profit. So I think it will be a combination of both. No specific color on sizing or how large that can be but this is just said a minute ago, a group is added 30 positions this year already and has a -- the part of big accountable care organization in the Phoenix market and growing relationship with Dignity Health and tenant which operates or the brace in the market is also part of that ACO and looking to kind of explain that ACO provider network which is primarily to the IMF physician network.

Okay. And when did you usually start talking to I guess tenants with expiration in 2016, those discussion already started?

Yes. Those have already started. You typically look at 12 month to two years to initiate those discussion. Mark mentioned minute ago kind of one time adjustment or operating expense this year would be deferred some lease timing in connection with the extension of a lease, that actually extending out beyond 2028. So most of 2016 discussion has already occurred and we have good insight to where those renewals will be and where the renewals will occur.

So you feel very comfortable -- so do you feel comfortable about this expiration over the next I guess 18 months?

Yes. We feel comfortable about it. Yes. We are still working through in terms and how long and the rent bound adjustments but we feel good about and higher renewal rate should be add or increasing rent.

Our next question comes from Paul Morgan with Canaccord Genuity. Please proceed with your question

Hi, good morning. In terms of the -- as we think about kind of modeling the acquisitions for the rest of the year and I think maybe little earlier in the second quarter, I mean how should we think of timing for the third quarter. Obviously you had healthy amount in July that if we -- for what's in your pipeline, I mean is there anyway for us to get a feel for kind of when those deals might close especially since you let the full year guidance.

Yes. Hi, Paul. It is John. We mentioned, I mentioned a minute ago if you think about the mid point of our increased guidance we feel very good about that. And I would say now spreading that out through third quarter, fourth quarter. December tends to kind of shutdown but so we will be working, we will be closing deals in December but they most have occurred between now and first of December, if we get for portion of it to move to the top of our guidance again it would be still can fall in the same general timeframe.

Okay. So I mean if we take from where you are now to the mid point of guidance for the full year and kind of smooth it out over the rest of the year, that's a decent guess.

Yes. It is a decent guess, yes.

Okay.

With the IMS being sooner. Yes, because IMS we expect to close fairly soon. We have come to that additional amount.

And then for the smaller deals that you have announced over the past couple of other you close over the past couple of months .Could you just characterize how did you source those deals and the mix of our preferred from your -- acquisition network that you talk about before versus likely market there or pulling market a deal.

Yes. Smaller ones are -- tend to be when we think about smaller we think about saying below $10 million, it tend to be relationship driven, part of a bigger relationship or physician referral to the physician next door that the we just had a transaction with so they are not ones, we are up spending a lot of time and effort tracking down their physicians to call us and strike conversation and come for mid primitive physicians we are doing business with. And then we properly price those to -- we are getting much bigger yield so we continue to kind of move up kind of the minimum size deal that we do, but we will do -- if it is a relationship driven, I mean if it is -- if we had investments that's bigger with the relationship and they want us to do the smaller things, we are going to bend over back we are still to meet their needs but at the right price.

And in terms of your pipeline, is that kind of similarly spread between our portfolio and one off referral based deals?

Yes. But between I think $50 million average transaction still about the right average size but no they are once a while get lucky by the vague groups at $116 million or IMS and $141 million. You don't see many hundred million deals a year, not at all space so we are really excited we source through this year. I would -- it just not outer that kind of walking, trying to action of that quality and counting we want to invest in.

Okay. And then just last one for me. Now that we have little time to absorb DOC six resolution and are you hearing anything from the other physicians that are changing kind of anything in the industry that might have implications from an investment and perspective for you?

We hear anything new or different I mean that certainly provide some stability then, certainly provide stability for us for the next five years with relationships -- with the physicians' relationship. We haven't count-- we made one best with this year, little bit smaller but with a very large physician owned kind of care organization in the Midwest and this going to back to your last question, it is about $10 million deal but they are growing rapidly and I think DOC experience with the ACO and so strong for them that there are looking for fairly rapid growth and with that come access to real estate opportunities if everybody have with them so some connectivity between the DOC, their incentive to grow and -- with all the insurance company consolidations, headline news in the Wall Street Journal recently, I think both hospitals and physicians feel and an even greater compulsion for consolidation and scale to build, negotiate against even larger and fewer insurance companies got in market.

Our next question is from Wilkes Graham with Compass Point. Please proceed with your

Hi, good morning. John or Jeff, just one question for me. With the sort of weakening public bid to reach out there I am curious as you think about looking pass your current pipeline and maybe until 2016, the idea of continuing to grow your portfolio via acquisitions and improved sourcing ability with addition of Deeni and lower cost to capital with investor grade rating, how do you think about your various ways you can use your capital to continue to create value if your stock is not at a level where you wanted its equity.

Yes. I mean I think part of that; I am going to let Jeff answer as well or ask Jeff answer as well. But I think part of that is being disciplined about match funding and slowing down the pace of growth if necessary the stock pricing is not attractive for raising the equity capital. We are not -- we are very committed to low leverage and not being trapped in a high leverage box and I think we will do -- you will see us be very disciplined with our gross. We are high growth rate organization but we can also slowdown that growth with the investment grade ratings, almost $1.5 billion in real estate with very low leverage and 95% lease we can collect their cash and kind of weighted out while we have the prices adjust for our stock price, just a point but it is attractive.

Yes. It is Jeff. I don't know if I have few much to add to that other than we are not growing for growth sake. We are continuing and monitoring the market and we only grow when we can do so in a way that's going to be accretive to our stakeholders' value. So we are perfectly comfortable seeing, waiting if that's what a market is telling us to do. So we evaluate that, week-to-week, quarter-to-quarter.

I'll just conclude Wills with we still lot of interest in our OPU, upper restructures and so just another tool in the capital tool box.

Sure. I am curious if another tool was -- is perhaps selling a non core assets?

Good question. Eventually we will, we haven't barred any portfolio where we have to buy DMC assets so we actually did dispose one of the kind of the lands in Michigan property this year which was part of the original portfolio, but so really not lot of non core assets, everything we-- $125 million of bonds, we are not a year ago or last month and intentionally purchase those for 10 year plus investment also. So then you don't see anything like that there in the near term but eventually we will move through an annual disposition kind of guidance and process.

There are no further questions. At this time, I'd like to turn the call back to John Thomas for closing comments.

Yes. So again we think we had a fantastic quarter and lots of great things coming. But as we said we are all cognizant of the equity market, the debt markets and kind of the adjustments. Again just I thank Jeff and his leadership in achieving investment grade rating and appreciate Moody's recognition of that. And we look forward to seeing you soon in next quarter. So thanks for taking the call today.