Healthcare Realty Trust Incorporated (HR) Q1 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to the Healthcare Realty Trust First Quarter Results Conference Call and Webcast. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. David Emery, Chairman and CEO. Please go ahead, sir.

Good morning, thank you. Joining us today on the call are Scott Holmes; Doug Whitman; Todd Meredith; Carla Baca; and Bethany Mancini. Ms. Baca will now read the disclaimer.

Thank you. Except for the historical information contained within, the matters discussed in this call may contain forward-looking statements that involve estimates, assumptions, risks and uncertainties. These risks are more specifically discussed in the Form 10-K filed with the SEC for the year ended December 31, 2012. These forward-looking statements represent the company's judgment as of the date of this call. The company disclaims any obligation to update this forward-looking material. The matters discussed in this call may also contain certain non-GAAP financial measures such as funds from operations, FFO or FFO per share, funds available for distribution, FAD or FAD per share. A reconciliation of these measures to the most comparable GAAP financial measures may be found in the company's earnings press release for the quarter ended March 31, 2013. The company's earnings press release, supplemental information, Forms 10-Q and 10-K are available on the company's website. David?

Thank you. We're pleased, again, today, to report a solid first quarter and continued our positive outlook for growth in 2013. With the extension of the company's $700 million line of credit to 2017, the issuance of $250 million in tenure senior unsecured notes and the recent redemption of the 2014 notes, we've enhanced the company's liquidity and extended maturities. And locked in lower interest rates for many years to come. The company's conservative capital structure positions us well to fund increasing investment opportunities. We're seeing more low-risk properties that meet our quality and pricing objectives. We expect a measured but increasing acquisition pace in the balance of 2013 and into 2014. We continue to evaluate worthy opportunities for new development. We view risk adjusted development as a key part of the company's FFO growth. The nature of the current demand that we're seeing for new facilities is largely hospital-driven, with considerable leasing by hospital affiliates at hand. Approximately $4.3 billion in total outpatient-related property construction was completed in 2012. $6.9 billion broke ground, an increase from the prior year. And according to industry sources, hospital-based outpatient facilities in the $20 million to $50 million range show the most opportunity for development. Health reform and the onset of Accountability Care Organizations, or ACOs, are incentivizing health systems to partner with physicians to decrease admissions and ER visits and to offer more services and lower cost physician office settings. In fact, physicians are leading the majority of ACOs, and reporting better patient outcomes and higher pay for quality. Health systems are faced with a critical need to acquire physician practices and consolidate services to position themselves to take advantage of reform opportunities and protect against tighter reimbursement policy. We expect consolidation in the healthcare industry will require capital in new facilities in cost-effective centralized locations. We believe these trends are benefiting the lease-up of our stabilized properties and we remain focused on investment that will prosper in the new environment. Healthcare Realty continues to see steady performance from our core portfolio, sustaining strong turn gains in same-store NOI growth. Looking ahead, the company will bring online 2 fully leased Mercy Health properties later this year, along with our expected progress in the stabilizing properties and a steadily increasing pace of acquisitions. The company is in a solid position for accelerating FFO growth into 2014. We see the future is increasingly bright for the company's prospects, given the size of the industry and reforms that support booming demand for outpatient facilities and tenants. We believe our investment strategy will continue to produce solid near-term operating results, decrease leverage and foster strong long-term growth. Now we'd like to ask Ms. Mancini to kind of summarize our view on current events and trends related to the healthcare industry. Bethany?

Thank you, David. The federal budget entitlement spending, congressional gridlock and implementation of health reform remain the critical issues of the day concerning government reimbursement to health providers. Expanding enrollment in Medicaid and the onset of insurance exchanges in 2014 are expected to lower bad debts for hospitals and increase patient utilization and operating margins. However, they're a driving concern that the cost of funding these programs could reach twice what was originally projected. In regard to the federal budget, in March, lawmakers approved a bill that funded all federal spending through the end of September, and maintained budget-wide sequestration cuts of 2%, which went into effect April 1. The President recently issued his proposal for the 2014 federal budget, including approximately $400 billion in cuts to the growth in Medicare spending over the next 10 years. Some measures being positive and some negative for providers. The budget proposal is certainly subject to change during the legislative process, particularly as the House and Senate leadership pursue alternative budget framework. The staying partisanship in Congress could again prevent any significant actions on entitlement reform this year. Gaining support in Congress, however, is legislation to fix the controversial Medicare sustainable growth rate formula, or SGR, used in calculating physician reimbursement. The House have proposed legislation that will provide for more stable, predictable payments to physicians as new payment models and performance criteria under health reform are being developed. Rating agencies expect most healthcare providers to weather these reimbursement changes, particularly the sequestration cuts, and stress that providers with investment-grade credit ratings have proven their ability over the years to manage cost and find new revenue streams. Such health systems are less dependent on government reimbursement and have larger reserves to withstand any hit to operating margin. Healthcare Realty's diligent focus on investing with such health systems throughout our 20 years has resulted in consistent growth in rental rate and solid rent coverages in our core portfolio. And one could say, without effect from years of dithering government reimbursement policy. With nearly 60% of our $3 billion in properties aligned with investment-grade rated health systems, the company benefits from a higher certainty of renewal, market stability and long-term value. We expect any clarity in reimbursement policy and expansion of the insured population to have the potential to improve the already positive growth in physician office employment and new medical office development. Our properties are comprised of a diverse mix of primary care physicians, hospital outpatient operations and physician offices from over 30 specialties, with each practice varying in Medicare and Medicaid case mix, the average physician office receiving only 30% of revenue from these programs. Amidst all the budget numbers, cost projections, cuts that are cuts, versus cuts to the increase, we believe the driving forces, both in the public sector and the private sector, are advancing the population's access to care, emphasizing lower cost to outpatient care and supporting physicians who must provide that care. Ambulatory care is becoming even more critical to health systems, as new payment models reward efficiency for the entire continuum of the patient's needs, making outpatient service delivery an integral and profitable part of the hospital's clinical mission in revenue growth. Healthcare Realty is solidly positioned to benefit from the rising tide of healthcare demands and the need for its physician tenants to meet that demand. David?

Thank you, Bethany. Now onto Mr. Whitman with comments regarding the balance sheet, capital markets activity, etc. Doug?

Thank you, David. In February, the company closed on an extension of its revolving credit facility with 15 banks, all of them participants from our previous facility. The overall facility size remained unchanged at $700 million, and we extended the term from October 2015 until April 2017. In addition, the company had the option to add an additional year which would extend the maturity until April 2018. Pricing for this credit facility also improved. The annual facility fee for the revolver declined from 35 to 30 basis points, and the LIBOR spread was reduced from 150 to 140 basis points. As a result, the company will pay lower fees and less interest each year and gain an additional 18 months of term. On March 26, the company issued $250 million of unsecured senior notes due April 15 2023, with a coupon rate of 3.75%. In conjunction with the issuance of these 2023 notes -- senior notes, the company called its unsecured notes due in April 2014. The redemption occurred on April 18 at a price of $277.3 million, paid with the net proceeds from the 2023 notes and availability under the unsecured credit facility. As a result of these debt transactions, the company's nearest maturity on its long-term debt is 2017, with over 2/3 of the company's long-term debt now maturing in 2021 and 2023. With the strength in balance sheet, the company is well-positioned to address potential disruptions in the interest rate environment or economic outlook. The funds from late fourth quarter acquisitions, the company sold 1.6 million shares in January under its at-the-market equity program were approximately $39.7 million in net proceeds. In advance of additional acquisitions that have either -- that have closed this year or will close later in the second quarter, the company sold 1.4 million shares during April, generating $40.7 million in net proceeds. Looking ahead, the company will likely, from time to time, use its ATM as an accretive source of capital to match funds similar to small and midsized acquisitions. With our ready access to capital and a solid investment pipeline, we will continue to focus on boosting NAV through accretive investments. Finally, we will be attending the NAREIT Investor Conference in Chicago next month, and we expect to see many of you there. David?

Thanks, Doug. Now to Mr. Meredith for more specific information regarding investments and development. Todd?

Thank you, David. The company made positive steps in the first quarter towards 2013 investment expectation. Again, this quarter, we were pleased with the progress of the 12 stabilizing properties, which are now 65% leased. With healthy activity at each property, the company estimates leasing to be around 70% at midyear, and 75% to 85% by yearend. These properties generated NOI of $1.35 million in the first quarter, with occupancy at 45%. By the end of 2013, quarterly NOI is estimated to reach $3 million when the current leasing at 65% takes occupancy. With leasing, occupancy, and NOI progressing as expected, these 12 properties will soon shift into the company's stabilized portfolio. We continue to estimate that these properties will generate stabilized annual NOI of approximately $25 million to $30 million. The company funded $24.3 million through 2 construction mortgages during the first quarter for the 2 build-to-suit facilities that are 100% leased to Mercy Health. When the remaining budget of $59.9 million is fully funded and the facilities are completed in July and November, the company will assume ownership of these facilities at a yield of 8%, generating $600,000 more in FFO per quarter compared to mortgage interest generated at a rate of 6.75%. For 2013, the company is modestly increasing its expectations for dispositions to $50 million to $70 million, including the 2 HealthSouth facilities for $29.4 million, scheduled to be sold in July, and several other smaller dispositions. The company is also having discussions with HealthSouth about the possible renewal of 2 additional leases that expire in September. Should HealthSouth choose to purchase these facilities instead of renewing the leases, the company sees ample opportunities to reinvest the proceeds. The company is reaffirming 2013 acquisition expectations of $100 million to $200 million at a blended cap rate of about 7%. Timing of these acquisitions will likely be skewed towards the second half of the year. In January, we acquired a 52,000 square foot 100% leased medical office building for $16.2 million. This property is adjacent to an MOB we acquired last year in Memphis, where we own and operate several properties. In April, we also acquired an inpatient rehab facility for $16.3 million in the Dallas area, that is 100% leased to one of our existing operators. With a robust flow of investment opportunities, the company remains disciplined, focusing on asset quality, rather than transaction volume. Several large high-profile portfolios have been marketed recently, however, we have found that most of these did not meet our criteria. We target properties that are aligned with leading health systems, in well-located growth markets, and that complement our existing properties. All characteristics that enhance the low risk nature of the company's cash flow and generate attractive long-term yield. We continue to find that with individual assets and smaller portfolios valued at $20 million to $50 million, we compare assets that meet our criteria with attractive pricing, which drives net asset value. Given the strong leasing momentum at our development properties, the Mercy Health projects coming online soon and an attractive environment to make accretive investments, our outlook for 2013 remains positive. David?

Thanks, Todd. Now on to Mr. Holmes for an overview of results in operation and other financial matters. Scott?

The first quarter produced a normalized FFO per diluted share of $0.32, and normalized FAD of $0.34. Normalized FFO dollars increased $1.3 million to $27.9 million in the first quarter, from $26.6 million in the fourth quarter. The normalizing items in the first quarter included acquisition costs for real estate assets closed in the quarter, interest incurred related to the timing of the issuance of the 2023 senior notes and concurrent redemption of the 2014 senior notes, the writeoff of deferred financing costs related to the renewal of the unsecured credit facility and severance cost. The dividend payout percentage on normalized FAD for the fourth quarter is 88.2%. During the first quarter, NOI on the properties in stabilization increased about $500,000 over the previous quarter, while total NOI increased as a result of the first quarter acquisition and the full effects of prior quarter acquisitions. These increases were offset by a G&A increase due to the typical first quarter expense related to the employee stock purchase plan, payroll taxes and related payroll expenses. Adjusted for the normalizing items that impact G&A, our G&A was approximately $5.7 million in the first quarter. Normalized G&A for the full year 2013 is expected to range between $21 million and $23 million. Now a few comments on selected operating metrics. In the same-store portfolio, occupancy essentially held steady in the first quarter at 90%, which is 87.4% for the multi-tenant properties, and 100% for the single tenant net leased properties. The 50 basis point reduction from the previous quarter end in multi-tenant same-store occupancy is not indicative of any trend, it is simply a function of timing in the ordinary course of releasing vacated space. The vacancy that created that momentary reduction in occupancy has since been leased. Same-store NOI dollars held steady at $44.5 million. As a result, the first quarter same-store NOI was even sequentially, and grew 2.5% year-over-year. Lease rate increases were also positive in the first quarter. The contractual increases for in-place leases or the annual bumps for the multi-tenant properties were consistent with previous quarters in the 3% range, and for the single tenant net lease properties, were 1.8%. With positive re-leasing spreads and increasing re-leasing yields, the cash leasing spread on newly executed leases increased from 1% to 1.8% sequentially, and was consistent year-over-year. Notably, the releasing yield spread increased again in the first quarter. Tenant retention increased from 76.4% to 84.2% sequentially, and was stable year-over-year. The leasing and property management teams continue to boost results with consistent and improving leasing metrics, NOI, and operating results from the existing portfolio, with the acquisition and development teams providing additional growth. David?

Thanks, Scott. Operator, I think we are ready to begin the question period. So you may proceed.

[Operator Instructions] First question comes from James Milam from Sandler O'Neill. James Milam - Sandler O'Neill + Partners, L.P., Research Division: My first question is on the disclosure in the 10-Q that you guys are going to be prepay the secured loan from CREF, I just wondered if you could walk through the thought process behind prepaying that, given the penalty, and then what the sources of funds will be to repay that?

Yes, James, this is Doug. As we're kind of looking at our liability management thought process, one way to think about the TIAA is that the effective yield on those secured mortgaging, including the penalty, it's about 5.9%, the coupon is 7.25% but the penalty is 5.9%, which is similar to our -- basically, our implied cost of capital. And so this was a way for us to through the liability management efforts to kind of -- it's an opportunity to take some secured debt off the balance sheet, accretively reduce leverage and improve several of our debt metrics. James Milam - Sandler O'Neill + Partners, L.P., Research Division: So you will be repaying it with ATM issuance? Is that the plan?

It's going to be a mix of stuff, it's going to -- temporarily, it will be on the line, there will be some asset dispositions, they may be a little bit of ATM sprinkled in there. I mean, it's just going to be kind of a blend but we'll do so such that, again, it ought to be very accretive. And again, improvement on the balance sheet should be noticeable in the coming quarters. James Milam - Sandler O'Neill + Partners, L.P., Research Division: Okay. Great. And then my second question is on the MOB leasing. Scott, I think you touched on the fact that the occupancy, the client was temporarily just based on when leases roll. So I guess my question is, is it typical to have more leases expire at yearend and be re-leasing in the first quarter based on the way MOB leases are structured or is it just -- it seems like we've seen this from a couple of different REITs that have reported? And then, I was wondering if you could give us the occupancy now that most of that space has been filled, so what the current occupancy rate is today?

To your first question, no, I would not describe it as typical being front-end-loaded in the first quarter. It's going to be kind of randomly distributed quarter by quarter, just depending on the leases that are maturing and when they were entered into. I don't have the updated or revised occupancy statistic other than to say that -- I would kind of equate this whole occupancy timing issue as being sort of the difference between accrual and cash basis accounting. At the moment in time that we report at the close of business on the 31st, this space was vacant, it subsequently re-leased, it was in the process of being re-leased but the lease wasn't signed yet. So now it has been and that kind of thing. So it's not indicative of a trend, I guess, is our point. It's going to tend to bounce around a little bit.

Next question comes from Jeff Theiler from Green Street Advisors.

I was looking at this $100 million to $200 million of acquisition guidance that you have. And with this time of really cheap capital, I would think you'd be trying to do everything you could to increase that volume. Can you talk -- you touched on it a little bit, but could you talk a little bit more specifically about what is limiting the acquisition volume? Is it the amount of product that you like on the market? Is it the competition from the other REITs has increased pushing cap rates down to a place you're not comfortable with? Just a little bit more color and why your acquisition guidance isn't higher?

Jeff, this is Todd. I think it's more of the quality factor. Certainly, you're right, cost of capital is very effective to place that capital accretively right now and we're doing -- we're looking at that. And I think, on cap rates, we're very comfortable with where the market cap rates are relative to our cost of capital. So it's not an impediment there. Competitively, as always, we see lots of competition out there, that's not a change. I think the key is, when we see something we like, it meets our quality criteria, we go after it and I think, for the most part, when we want to, we can win those. So it's really more of that quality index on what we're buying.

And do you see any change in the amount of that type of product coming on the market going forward? Is this pretty standard run rate for the kind of product that you've looked at or is it abnormally lower or how do you view that?

I think, compared to a year ago, it's up, the quality, I think David mentioned that in his prepared remarks, that we're seeing more and I think that's true on acquisition and development. So we're encouraged by the trend we see, the pipeline is as good as it's been in a long time. So we like that. I think we're just cautioning about some of the larger transactions that people hear about and see and some of those that would drive a much larger acquisition level, we're just not seeing quite the level of quality we want.

Next question comes from Karin Ford from KeyBanc.

I wanted to ask about rent spreads. As you mentioned in your remarks, it ticked up sequentially to 1.8%. Are you seeing potential -- the possibility that on your expirations, this year and next, that you may have opportunities to push that number higher, given the increasing levels of demand that you're seeing from potential tenants?

I think the potential is there. We do the best we can with the re-leasing spread. But I would remind everybody that there's more to it than just the old rent and the new rent. There's how much TI is involved, all the things that factor into that big beautiful formula that we have on Page 24 in the investor presentation. All those are relevant to us as we go into a lease negotiation. So we try to do the best overall deal that we can for the company in the leasing process but we always try to push those cash re-leasing spreads as much as we feel like we can. I think the opportunity is there. We'll just have to see what it develops into.

Do you have a sense for what market rent growth is today?

I would say it varies market by market. It's pretty tough to say here's the general average. But I mean, I think, the 2% to 4% range is a very comfortable range. Generally, as Scott said, there's probably some opportunity to push that a little with the demand drivers that are out there. But 2% to 4% is generally a good long-term range.

It also kind of depends upon which type property it is. In other words, ones that are on a hospital campus attached to the hospital, obviously, the rent growth opportunity there is higher because of the low fungibility nature of it. The more distant it gets from the hospital, I think, the less opportunity you have to push rents.

That's helpful. Second question is on the big transactions that you mentioned that are out in the marketplace, appreciate your comments on that. Can you talk about what you're hearing and seeing in the marketplace as far as what you think pricing and cap rates might be for some of those larger deals, recognizing that I know you're looking more at the smaller deals that probably have higher cap rates than those do?

Obviously, we're in the market all the time. So we're hearing cap rates on those. But obviously, for us, it's just speculation until those trade. But the good news is we're hearing encouraging levels, I think, from the standpoint of healthy low cap rates, low 6s is probably easily where some of those might trade, some of them could go below that. You had a large transaction last year that traded at that range. So I think it's easy to conceive it being 6% level. And I think, on the smaller acquisitions, some of them, as David just described, some of the on-campus quality assets, even if it's 1 or 2 buildings, they can easily command mid-6s, maybe even less. So again, we can play at that level, if it's the right quality. So a little bit of spread on size, as you indicated, but not always as much as you might think. So that's kind of just how we see it generally. Low 6s.

Next question comes from Michael Carroll from RBC Capital Markets.

Can you guys give us an update on the company's long-term leverage targets? I believe, a year ago, you indicated that you're comfortable with the current leverage ranges. But since then, it dramatically improved, is that just kind of a sign that you're more optimistic about the acquisition and development market?

Yes, Mike, this is Doug. I mean, I think, looking forward, we think leverage in the low 40s, kind of where we've been recently, 40% to 45%, we've been able to kind of nudge that down, the TIAA stuff will help that as well. I think, too, we're also focused on some of the other debt metrics, debt to EBITDA and fixed charge, and as the SIP properties continue to lease up and as that occupancy converse into NOI, those debt metrics will improve. So we look at a variety of debt metrics, leverage metrics, we're just trying to keep them all forward. And obviously, we're worried -- not really worried but we're keeping an eye on maturities and when maturities occur, trying to use our crystal ball to figure out what kind of interest rate environment might look like in the midterm.

Okay. And then, Todd, on your, I guess, comments, you mentioned about the other 2 inpatient rehabilitation facilities that had purchase options. Has the tenant said that they want to exercise those or have you any other additional discussions? I think you said that you were thinking they may renew those leases?

Yes, that's right. They have exercised the purchase option because they had a deadline on that. But they've opened up the discussion for discussing renewal of the leases. So as I said, we're comfortable either way. We're working through that with them right now. So we'll update everybody, obviously, as we get a little closer.

Okay. And then my final question is about the acquisition/development markets. I've known that you've indicated that the acquisition market is more attractive as of now. Has anything kind of opened up on the development side?

We're continuing to see good opportunities. I think David mentioned that, we're having more discussions with health systems about new facilities and we're seeing more and more of those come along. So I think the key is we're not seeing immediate starts but we're seeing more discussions and an increase in activity there. So I think, towards the latter part of this year into next year, we'll see that. And the good news is, too, a lot of that's existing relationships, we're seeing some of the fruits of having done development work with certain hospitals or acquisition work leading to some development discussions. So I think it's probably a little time before that comes along but we are seeing more activity.

This is David. I think, also, there's a background which we just want to try to get a percentage of, but it's a driver, and that is you've got $4 billion or $5 billion every year in new outpatient facilities that are basically fostered by healthcare systems. That's $4 billion or $5 billion. So it goes on that year after year after year. So we always see the opportunity there. I think what's happened is in some of Mrs. Mancini's comments, a lot of the health systems are kind of now moving on from kind of what do we do to going through how do we do to implementation. So I think they've kind of moved on a little bit and everybody goes, "Oh my goodness, we need this building now". And so I think that's a little bit behind kind of the turn, at least, with what we're seeing, a little more urgency involved. And of course, we've done a lot of this, we're good at it. And as Doug mentioned, and Todd did, we have a lot of good relationships in big systems and those are the systems who need these outpatient-type facilities. So I think we're really, really in a good position to advantage ourself from that.

Our next question comes from Rich Anderson from BMO Capital Markets.

So David, if there's so much more urgency, how come we can't get a few more assets in the CIP pool? What's the holdup do you think?

We're just very selective, Rich, as you know. And part of it is, I don't want to use this in a pejorative sense, but remember my comment about we use watches and they use calendars.

Okay. But $5 billion worth of stuff and you can't find one?

Well, we've got -- well, we're -- I mean, as you know, we've been focused heavily on our leasing at our development properties. So we often say, we like to keep -- that mix appropriate. And the good news is a lot of what we are seeing comes with healthy leasing attached from these health systems. So we're just being selective and kind of patiently waiting for the right opportunities and -- for example, some are with hospitals that we're working with now and it's just a matter of their strategic thinking and planning and it takes time.

I think, also, Rich, that, that amount of money that's being spent, a lot of it is just spent in-house out-of-pocket by the hospital system. They don't put out RFPs for that much stuff.

Got you. Todd, I think you mentioned the 75% to 85% target for yearend leasing for the SIP portfolio. How many of the 12 existing assets will be still in that mix by yearend, do you think?

Well, when we say the 75% to 85%, we're including all 12. So...[indiscernible]

Right. So some of them might be stabilized, my question is what will be the number of assets that will be still in the SIP portfolio, if the average includes those that are 90-plus occupied at that point?

Well, maybe I'm not being clear, but we're going to include all 12 through yearend to hit that 75% to 85%. I guess, if you're trying to get inside that, yes, some of them will be nearly stabilized, 90% type numbers. So -- and remember, leasing, we're talking about leasing, not occupancy, occupancy lags a bit with build out. So again, I think we said 65% to 70% occupancy by yearend. So you've still got some ramp up there to truly get to stabilized NOI levels.

65% to 70% occupancy is what you said?

Yes.

Okay. And what was the occupancy at 65% leased today?

Today, it's 45%.

45%. So it seems like that 20% spread there, is that what we should be kind of -- I mean, it seems wide. I mean, what's taking so long for occupancy to catch up to leasing?

Well, its -- as you're quickly -- as the slope of the lease-up has picked up over the last year, 1.5 years, you get that lag. But as we begin to get towards more stabilized levels, that gap will close naturally. So that's just a natural course pattern. However, I will say, there are -- that we have had a lot of larger tenants that we've worked -- been working through over the last 2, 3 quarters. And those just take longer. We had a group at Briargate Childrens, the children's group which was a large tenant, it might take 9 months as opposed to 3 to 6 months. So it just depends, if it's surgery, if it's imaging, it takes a little longer, but obviously, it's worth the wait when you have a 30,000, 40,000, 50,000 foot tenant.

How does it work? I mean, do they -- did the tenants have a line in the sand, deadline where they have to occupy this space or is it kind of like they're working together with you in trying to get it done as fast as possible or do they...

We always put an outside date that rent commences. So they really do have a line in the sand. Obviously, we don't pinch them too tight, we try to be realistic with them. But we've seen where they sometimes take longer and they're paying rent even though they're not in and occupying. So it gives them an urgency.

Okay. Another question. Same-store disclosure, I guess, expanded, I think, this quarter so thank you for that. The single tenant revenue went up 8.1%, anything to take from that?

No, that was really just attributable to the prior-year quarter. Just some aberrations in the prior-year quarter revenue. So that's not necessarily an indication of some outsized activity during occupancy or rental rates.

Okay. Last question is big picture, maybe for David. Some snags in the system as Obama Care is being rolled out, some states not playing nice with Medicaid expansion and the exchange and all that kind of stuff. I mean, do you have any concern at all about this broader environment kind of keeping people on the sidelines for an extended period of time as they wait for it to find its resting place?

No, not really. Like in my previous comment, I think they've kind of gone through various phases here and I think everybody is now kind of moving on. I think what we're seeing is that from Healthcare Realty's view of have the pipe properties we have focused on physician, the eventual outcome of the Obama Care implementation and for lack of a better word, the increase in bureaucracy is only going to increase the attachment to basically people related to a physician. Some people estimate, now each physician has about 16 people kind of attached to that practice. And the amazing thing is 9 of those are administrative. So to some degree, we're seeing that we will have a constant kind of pressure on we need a little more space. So it's not necessarily all related incrementally to new doctors, because I think, as you and I have discussed before, we're going to see a lot more treatment modality changes as this is implemented. And a lot of it will be more bureaucratic and will take more people. So is there angst in all kind of things about how this is going to work out and so on and so forth. But I think, in general sense, and as you know, several of our Board members are involved very deeply in all of this, everything from EMR to all the ACOs and those kind of stuff. So we have very topical information and insight into exactly how, in general, the hospitals feel about it. And I think it's pretty much along the lines is we got to get on with this, I don't anybody is real kind of happy about it but there's probably enough pluses and minuses that, in the end, there's not a big kind of economic difference, that may be an overstatement of it. But I don't know. Doug, do you?

No, I mean, I think, we continue to see, in a short-term, hospitals very focused, again, on the implementation, getting their electronic medical record system in place. Getting all the other infrastructure, quality measures and other countermeasures in place such that they can conform to the new paradigm. But I think they -- the hospitals, I think, are very confident that once they sort of get everything in place, the rules don't change, they can operate efficiently at that level and continue their primary mission of delivering clinical care.

I think, also, Rich, I think, that there's capital implications here, just allocation, from a standpoint of these entities. I was remarking at a meeting with one of our larger systems, how I was kind of taken back by one of our smaller individual hospitals, which is a very high-quality hospital, I was remarking that I was amazed they had spent over $100 million on electronic medical record implementation and had more to come and the CEO kind of smiled at me and said, "Well, we went through 4x that amount 2 years ago." So the amount of capital that's being sucked out of basically cash flow and generation and margins for all of this bureaucracy, for lack of the better term, creates tighter capital constraints which, therefore, should enables us and hospitals to look to us as alternative capital sources for real estate that they're going to need. So I think all the fundamentals, at least the way we see it, we're not overly sanguine about it, but I think, to some degree, we -- it's very positive for us at this point.

[Operator Instructions] Next question comes from Daniel Bernstein from Stifel. Daniel M. Bernstein - Stifel, Nicolaus & Co., Inc., Research Division: Just following up on your just last comment there. I know you talked about watches versus calendars. Do you think they're maybe not looking, given those -- some of those capital constraints and changes coming in the system, are they maybe looking at the calendar on a monthly basis instead of annual basis? I'm just wondering, are they getting more sophisticated on the real estate and moving up their timelines and....

I don't -- like I said, I do want to be pejorative about it. I'm just trying to say that it's -- most of these organizations, Dan, are just bureaucratic and it just takes more time. But I think there's a lot more urgency we see, don't you, Doug, and I think everybody involved. There's a little bit more pace on the ball and that translates to activity regarding real estate and activity -- we had an adjacent hospital recently, just out of the blue, tell us they wanted 37,000 feet in the building that we were finishing up next door to us. And we were kind of taken back by the fact that, that didn't -- that wasn't a long process, that was just weeks, I guess it was. So I think you're right. I think there is more urgency. And I don't mean to denigrate kind of the process, it's more of my disdain, a little bit, for just bureaucracy and timing.

I think, too, you're seeing a lot -- we're hearing -- in our discussions with hospitals, more -- they're having more discussions with each other about some sort of affiliation, alliance, consolidation, whatever, and some of it is outright, "Hey, let's do it," others are sort of it's more contingency planning, like, "Hey, if this happens, I give you a call, can we quickly work something out". So again, I think we're seeing a lot of that. And again, that has major implications on their capital requirements but those discussions are appearing to us, as well as just the implementation of healthcare reform.

This is Todd, Dan. But the side that we're seeing that, I think, impacts us most directly is when it creates urgency is when they have maybe done something like bought a certain number of type of practice and they've amassed enough critical mass in that practice or multi-specialty group that they need a facility urgently. And those are kind of the opportunities we're having discussions about, and so we are encouraged by that. And I think as they do all these other things, EMR and all the other things involved with implementation, that's one area that is getting some urgency. And I think, as we know, the name of the game is not growing the inpatient side, it's growing the outpatient site.

It's building a bigger network.

Yes. And that's good for us, where we see those opportunities. Daniel M. Bernstein - Stifel, Nicolaus & Co., Inc., Research Division: Okay. Again, not trying to forget the bureaucracy that's at the hospitals and the pace there, but is some of that urgency weeding to -- and I think maybe you would've sounds like you would have just in your previous comment, is that pace of urgency kind of allow you to -- they're coming to you rather than saying, let's have a competitive bid or our fee for a project, they're going to the existing relationships and going wanted to get this started. Are you seeing more of that or is it that, that's not the right...

It's really kind of hard, Dan, to get around the process that you have, a charitable not-for-profit organization in most cases, and they have finance committees and all those kind of things, and it's a little hard for just somebody within the organization to say, "This is a good idea, call Todd," and we ink a deal within a week. It's a process of did we get some bids from some other people, are we sure that we're making a good deal? Because everybody has -- there's a high degree of fiduciary among those committee members because they're community members of the community and all those kind of things. And so, it's a little hard to -- you really can't get around that process. Now with that said, with existing relationships, you tend to bridge across that. And therefore, you're already kind of are part of their organization, so to speak, and it's a little bit more of an insider thing. And so therefore, they may well call you and you have benchmarks of things you've done before and that does facilitate speed and we have 2 or 3 of those underway right now that we're not competing for. It's just let's sit down and work this out because we've got to do something really quick. Daniel M. Bernstein - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then also, you -- I mean, absolutely kind of alluded to higher pre-leasing on potential projects. So do you think the preponderance of the projects you're going to have when you start up later this year, or next year, whatever that is, is going to have a significant pre-leasing and maybe what kind of pre-leasing are you thinking about? Is it 25%, 50%, 75% or -- and how that might affect your yields on future development projects.

Well, I think your last point there, you certainly -- the more leased it is, the more it starts to look more like an acquisition. And so it does pressure those cap rates. But we like the balance where there's some healthy pre-leasing from the hospital. And today, that's just how it works, they typically come to you and they've already either purchased a physician group, put together a plan for an outpatient center of some sorts. So they end up usually taking a significant amount of space. And it might be 30%, it might be 60% or 70%. Not saying we won't do 100%, because we probably -- well, we certainly would, but we'd be careful about the yields on that relative to acquisitions and who we're working with, importantly on that. And so I think, we don't have an absolute threshold but as long as there's 40%, 50% hospital component there, if we like the opportunity and the market and the system, we'll go after it. Daniel M. Bernstein - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And just one last comment. Since it's snowing in Denver and we're seeing your properties in 2 weeks, do you think you can get some Healthcare Realty shovels instead of rent cushions?

That's a good idea. Well, I think, that is the ideal toy for that trip. It's an HR shovel. We'll try to bring some Colorado [indiscernible]

Next question comes from Rich Anderson from BMO Capital Markets.

I can think of a few we can shovel while we're out there. 2 follow-up questions, if I may. The purchase option, should that be modeled as like, I don't know, 11% or 12% type cap rate?

You're talking about the 2 that are slated to sell in July?

Yes, July.

Well, if you look, it's actually higher than that. It's probably about 13% or so if you actually just look at the NOI versus...

Yes, I did the base rent times 4, but then I didn't know if there was something like behind that, that maybe brought it down a little bit. Okay. 13%.

Unfortunately, not. The purchase option is pretty favorable for the tenant. But for us, we're okay with that. We think rotation into some other operators and other assets will be good in the long run.

Okay. And then the last question I have is what's harder to do, get the first amount of square feet leased in SIP portfolio or an SIP asset or the last? In other words, is it harder to go from 0 to 5 or harder to go from 85 to 90?

It's 85 to 90.

That the hardest one?

It's not because of demand or anything else. It's just like a car lot. You got -- you go on, if there's not a lot of cars there, there's not a lot of choices. And so to some degree, if somebody comes in, and they need a service square footage and you just don't have it, you're just -- you're hindered. So...

Right. But I thought maybe a vacant building sometimes maybe somebody doesn't want to be the first one in there.

Well, yes, if it's been there for 2 years vacant, that, I'd say, that's a different story. But generally, early leasing, you've got a lot of momentum and excitement. I think, if it's been sitting around, then maybe you have that problem. I think David is right. It's just things don't necessarily fit as easily, so you tend to rely a little bit for those last bits on expansions and moves within the building by existing tenants and then selectively, something might fit that's new. So it can take a little bit longer right at the end there. But generally, you're in the position where you can push rents because space is limited. So it's kind of a tradeoff there.

This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. David Emery for closing remarks.

All right. Thank you. We appreciate everyone being on the call. And I think we will see lots of folks in Chicago, I guess it is. And also, some in Colorado. So we appreciate you being on the call. And everyone, have a good day.

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