Healthcare Realty Trust Incorporated (HR) Q3 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to the Healthcare Realty Trust Third Quarter Analyst Conference Call and Webcast. [Operator Instructions] Please note that this event is being recorded. Now, I'd like to turn the conference over to Mr. David Emery, Chairman and CEO. Mr. Emery, please go ahead.

Thank you, and good morning, everyone. Joining us on the call today are Scott Holmes, Doug Whitman, Todd Meredith, Carla Baca and Bethany Mancini. Now, Ms. Baca will 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 third quarter ended September 30, 2013. The company's earnings press release, supplemental information, Forms 10-Q and 10-K are available on the company's website.

Thank you. We're pleased to report another positive quarter and continued progress across the portfolio, delivering strong operating results and sustained fundamentals. We remain confident in the company's low-business-risk strategy, particularly, in light of the recent events in the political realm and the troubled implementation of the government's health insurance overhaul. We've had a number of questions regarding how this might affect our business. Throughout the last 3 decades, health care providers have had to adjust to the introduction of inpatient DRGs in 1983, the passage of the Balanced Budget Act in '97 and a series of actual and threatened cuts to Medicare rates in recent years. Undoubtedly, the burden to reduce cost has fallen on health care providers, driving the trend toward lower cost outpatient care, which has benefited Healthcare Realty and our remarkable portfolio of low risk, medical office, outpatient properties. Now with the onset of the Affordable Care Act, health care providers, again, face the headwinds of greater patient demand and lower reimbursement rates. Strong political deference to voters and heightened fiscal pressures will keep the onus, mainly, on health care providers, to curb the growth of public spending and extract cost savings as utilization skyrockets. Looking forward, the accelerated expansion of outpatient real estate will strengthen the company's growth prospects. Moreover, we believe the quality of the company's health system partners will prove beneficial to the long-term value of our investment. It has been our experience that market-leading, credit-ready providers are less dependent on government reimbursement and have larger reserves to withstand pressures on operating margins. With nearly 80% of our $3 billion in properties associated with rated health systems, the company, inherently, has a higher propensity for lease renewals, consistent demand and steady performance. Healthcare Realty's diligent focus on such health systems throughout our 20 years has resulted in consistent growth in rental rates and superior rent coverages. With the size of the industry and vigorous demand accelerated by the health insurance overhaul, we believe our investment strategy will continue to produce solid near-term operating results and foster strong long-term growth. Now I'd like to move on and ask Ms. Mancini to summarize our views on the current events and trends related to the health care industry. Bethany?

Thank you. Earlier this month, the nation's federal budget and debt crisis was, again, side-stepped by extending the government's borrowing authority and current federal spending levels into early 2014, and establishing another committee to devise plans for long-term fiscal solutions. Even with the budget standoff in Congress over health reform, there were no major alterations to the 2010 Affordable Care Act. Federal insurance exchanges opened for enrollment on October 1. However, significant technological glitches and weak infrastructure, still need to be resolved, along with battles in the states over Medicaid expansion and renewed efforts in Congress to defund the law. In the face of these challenges and with limited visibility on the benefits of the health insurance overhaul, we strongly believe Healthcare Realty is positioned well to profit from rising health care demands and the need for physician and outpatient services in the post-reform era. Healthcare Realty's outpatient investment strategy has guided the company since its inception and resulted in an unparalleled portfolio of stable outpatient facilities that meet demand for lower-cost setting and provide on-campus space for the physicians that drive hospital utilization. Both are critical pieces for health systems adapting to new payment models by enhancing their efficiency and outpatient delivery. We expect Healthcare Realty's medical office facilities to thrive on health systems efforts to recruit physicians, enhance outpatient services and gain market share. Health care employment has been steadily increasing over the past 10 years, with 2012 among the sector's strongest gains in the past 5 years. An unparalleled track record that spans 2 major Medicare reforms and the Great Recession. Since August 2003, the health care sector has added 2.8 million jobs, or nearly half of all new jobs created in the nation. Interestingly, at the same time, national health care spending growth slowed from 8% in 2003 to 4% in 2013. Less spending on inpatient care and a trend toward health care delivery in lower cost outpatient facilities has contributed to the slower spending growth while, at the same time, increasing outpatient employment. This job creation demonstrates that health systems and physicians are focused on positioning their services to meet the long-term needs of their market, rather than responding to short-term challenges. The latest jobs report showed an increase of 6,800 health care jobs in September, which included ambulatory and physician office job gains of 8,100, hospital inpatient jobs remaining essentially flat and nursing homes decreasing jobs by 4,300. Questions certainly remain regarding the long-term effect that the Affordable Care Act will have on the health care sector, including employment. We have already seen negative headlines reporting job losses, mostly related to health systems operating at the margin, or those with the inefficiencies and inpatient care that can't be supported by tighter profit margins. We remain confident that the need for physicians will continue to increase as the population ages and the number of insured patients rises. The mix of skilled labor may change over time, primarily with the shift away from inpatient care but also as health systems look to cut labor costs, increase technology use and expand the capabilities of lower-level employment positions. However, Healthcare Realty's business remains driven by the average physician, which needs 1,500 square feet of office space. If, in time, a drastic physician shortage materializes and patient wait times increase, Healthcare Realty's physician office tenants will become even more critical to the hospital business next door. Furthermore, the expanding bureaucracy that may come with health reform, in addition to the specter of lower Medicare profit margins, will foster hospital and physician consolidation which, in turn, will enhance tenant's credit profiles and market share and new investment opportunities. We remain confident in the value of our low-risk portfolio to deliver long-term shareholder return, largely inoculated from health reform's challenges, thanks to the low fungibility of our properties and strategic alignment with market-leading investment-grade rated health systems.

Very good, thank you. Now, on to Mr. Whitman to update us regarding the balance sheet, capital market activities. Doug?

As the capital markets continue to be volatile in reaction to the slightest bit of news, whether it's the fiscal theatrics in Washington, or perceived hints by the FED regarding its tapering strategy, the company has been prudent in sourcing capital to fund new investments, lower its cost of capital and strengthen its balance sheet. Using its ATM program in the first half of the year and a follow-on equity offering early in the third quarter, the company has raised $219 million of equity to fund acquisitions accretively. The refinancing of our 2014 senior notes and the repayment of secured debt, earlier this year, have bolstered our balance sheet and improved our debt and credit metrics. Just as we have strengthened the quality and performance of our portfolio, with the acquisition of stable on-campus properties, selective dispositions and continued leasing and occupancy gains in our SIP portfolio, we have also enhanced our financial position with more NOI and lower leverage. Our fixed charge coverage ratio stands at 2.4x and our debt-to-EBITDA ratio fell to 6.7x, an improvement of 2 full turns since 2011. In addition, our leverage ratio was 40.6% at the end of the third quarter, its lowest level in 5 years. We will continue to be judicious in raising additional capital, balancing the need to maximize the accretion of new investments with low cost capital, with the need to maintain a healthy and flexible balance, sheet, able to withstand the volatility of the capital markets. We will see many of you in NAREIT, at the NAREIT conference in San Francisco, in a couple of weeks.

Okay, Doug. Now, onto Mr. Meredith, to give us some specific information regarding investments and development activities. Todd?

The company made steady progress on its acquisition, disposition and development objectives during the third quarter. Of the 5 acquisitions announced last quarter, the company closed on 2 properties during the third quarter and 3 more in October, totaling a new investment of $154.3 million, over 525,000 square feet and 93% leased. The caliber of these 5 properties reflects our disciplined approach to increase the value and long-term performance of our portfolio. We view location and alignment with strong health systems, systems that can adapt and thrive in a changing health care environment, as key to owning and managing a resilient portfolio that will outperform and increase net asset value over the long run. The 5 recently acquired properties are located in several markets where the company has an established presence and each is aligned with a market-leading health system. These include a pair of on-campus attached MOBs in Loveland, Colorado, affiliated with A+ rated University of Colorado Health; an on-campus attached MOB in South Bend, Indiana, affiliated with AA rated CHE Trinity; and an MOB in Seattle adjacent to 2 campuses leased to an affiliate of AA rated Providence Health & Services; and an MOB adjacent to campus in suburban Charlotte, North Carolina and affiliated with A+ rated CaroMont Health. All acquired at initial cap rates of 6.5% to 7%, with capital raised earlier in the year. We've profiled these properties in an acquisitions look book that is available on the to the company's website alongside the company's investor presentations. Last quarter, we tightened and modestly increased our 2013 acquisition guidance to $200 million to $225 million, with year-to-date acquisitions of $186.1 million, and 1 or 2 additional acquisitions by year-end, the company is reaffirming this guidance. In recent months, we've seen several sizable investor-owned portfolios being marketed. While the vast majority of these portfolios have not merit our criteria, we continue to see aggressive bidding by less discerning buyers. Cap rates for larger portfolios continue to remain in the low to mid-6% range despite changes in the cost of capital for most buyers. Demand for medical office buildings continues to outweigh supply, and we expect cap rates to remain in this range for some time. Rather than chasing every available portfolio, paying top prices and generating minimal accretion, the company continues to focus on markets and health systems it knows well, targeting individual assets using local knowledge and operating experience. In sizes of about $20 million to 50 million, these properties typically attract fewer buyers and can be acquired more accretively. As expected, the company sold 4 HealthSouth inpatient rehab facilities for a total of $64.6 million during the third quarter. Year-to-date, the company has sold 9 properties and one land parcel for $81.6 million. The company placed 5 properties in assets held for sale and expects to sell some off-campus facilities by year-end that would generate disposition proceeds at the upper end of the company's 2013 guidance of $80 million to $100 million. At the 2 build-to-suit facilities that are 100% leased to Mercy Health, the company funded $11.9 million towards both facilities during the third quarter. Completed in August, the orthopedic facility in Springfield was acquired by the company in September for $102.6 million, followed by post-closing funding of $2.8 million in the quarter. The remaining budget of $6 million will be funded in the fourth quarter. Rental income in the fourth quarter will be $2.3 million at an annual yield of just over 8% compared to construction period interest and rental income of $1.8 million in the third quarter. The outpatient facility in Edmond, Oklahoma, that was damaged by a tornado, is under repair and scheduled to be completed by June of next year. Builder's risk insurance is in place to cover repair and delay costs and the mortgage structure will remain in place through completion, and interest payments will be paid in cash from insurance proceeds. The 12 properties in stabilization, or SIP, are on track at 72% leased. Occupancy jumped almost 10 points to 57%, and we funded over $4 million towards tenant improvement allowances in the quarter. Had all occupants at September 30 taken occupancy and paid rent for the entire quarter, NOI would've been approximately $2.4 million. When fully stabilized, these properties are expected to generate annual NOI of $25 million to $30 million, consistent with our original guidance. Two of the properties, one in Scottsdale and another in suburban Chicago, representing only about 10% of SIP, have been slower to lease, but recently, much improved. In Chicago, the adjacent hospital was sold to [ph] market leading Advocate Health Care in June, after a protracted process. Since then, we signed a large specialty group for about 12,000 square feet. Excluding these 2 properties, the remaining SIP portfolio is collectively 81% leased, and 65% occupied. And is expected to be about 85% leased and 75% occupied by year-end. Given the level of leasing and momentum, we will transfer the properties out of SIP next quarter, but we will still provide key progress metrics. Looking ahead, the health insurance overhaul is accelerating the shift toward outpatient services and increasing the influence of larger health systems. The company is well positioned to benefit from this growing demand for new outpatient facilities, aligned with market-leading health systems. We are currently working with several systems on their space needs for additional outpatient services and we anticipate at least one development start by the end of the year. I'm pleased that the company is on track to meet its investment objectives for 2013, with the prospect for additional accretive investments, as we look ahead to 2014.

Very good, Todd. Now on to Mr. Holmes to give us an overview of results, operation and other financial matters. So, Scott?

The third quarter produced normalized FFO per diluted share of $0.32 and normalized FAD of $0.34. The dividend payout percentage on normalized FAD for the third quarter is 88.2%. Normalized FFO dollars increased $1.9 million, or 6.6%, to $30.6 million in the third quarter, up from $28.7 million in the previous quarter. Rental income increased sequentially from new and recent acquisitions, while utility expenses, which typically rise in the third quarter of each year because of seasonally hot temperatures, increased sequentially $1.3 million, about what we expected. Also, interest expense decreased sequentially because of the debt refinancing activity earlier this year. With 3 of the acquisitions closing in October, due to loan assumptions, acquisition timing resulted in FFO being marginally lower in the third quarter by approximately $1 million or about $0.01 per share. During the quarter, the company produced excellent results through our leasing efforts. The cash releasing spread of 2.5% in the third quarter is the highest quarterly percentage increase over the past 4 quarters or more, demonstrating the value of well-located real estate associated with market-leading hospital systems. In particular, we executed significant lease renewals for dialysis, pulmonology, women's services and internal medicine. Beyond just lease rates, we focus on managing all elements of renewals, including annual contractual increases, tenant improvement dollars and broker commissions. As a result of these efforts, one of the most important metrics, the spread on re-leasing yields was, again, positive in the third quarter. With strong tenant retention and leasing activity, occupancy in the same-store portfolio increased to 91%. Lease rate increases were also positive in the third quarter. The contractual increases for in-place leases, or the annual bumps as we call them, for the multi-tenant properties were, again, in the historical 3% range, and for the single tenant net lease properties were, again, in the historical 2% range. We are pleased that this quarter's results, again, validate the company's long-term strategy and demonstrate our portfolio's ability to thrive, despite the government's attempt at health insurance overhaul. Kudos to our leasing and property management teams for their diligent efforts, tenacity and solid results.

Very good, Scott. Thank you. With that, finishes up our prepared remarks. So, operator, we are ready to open for the question-and-answer period.

[Operator Instructions] And the first question comes from Jeff Theiler with Green Street Advisors.

Can you please walk me through the changes to your same-store portfolio? Looks like 9 assets came out, I think some went to repositioning, some went to sales, can you just go through that really quick?

Jeff, this is Todd. The way that works is we evaluate it once a year and we look at the properties that are in the same-store group. And so, you're right, we moved a couple of properties into the reposition category. Those were assets that had significant changes and that we may be redeveloping or putting significant capital in and taking them, essentially, down and off-line, from a stable level. And then, we also have assets, as you said, that we've moved into assets held for sale, and then some assets that were sold. So that's the combination of that.

Okay. And do you have an estimate of what the same-store would've been if you hadn't moved the asset under redevelopment -- or repositioning, excuse me.

We don't that have that off the top of my head here. Well, we can certainly look at that and see what that would be.

How much capital would you expect to put in that repositioning bucket, call it, over the next year?

It varies. I mean, there were 3 particular assets that went in this period, this quarter, this year, and we might -- we're looking at spending $5 million to $10 million, probably, over the next 12 months, maybe 12 to 18 months, on that.

And what kind of a return do you need to put something into a repositioning bucket? I mean, how do you evaluate the opportunity? What's needed?

Well, there's no, I mean, there's not a specific number that we say that has to meet to go into reposition. I think it's more about, where is the occupancy? What are we doing to reposition or redevelop that asset? So it's really more of a what's -- down on the ground, what's going on at that asset? If we start looking at occupancy that's below 60%, and that's where it's going, we think that's a key trigger that says, we need to be looking at reevaluating that, is that something we're going to sell? Or is that something we're going to reinvest in and lease back up. So to your -- obviously, we look at that in the context of other returns that we've either had at those particular assets or that -- things we can buy or develop to. So it's in that same context of 6% to 8%, 9% depending upon the situation.

And the next question comes from Michael Carroll with RBC.

Todd, I know you indicated that the SIP portfolio would slowly lease up, maybe 500 basis points a quarter, but is it safe to assume that will be fully stabilized by the end of next year?

Well, obviously, we can't give you the crystal ball, but certainly, what we're seeing is -- are good trends. And so I think what you saw this year -- and our objective is to go -- average about 5% a quarter. We don't see any reason why that can't going except to the extent that we're clearly approaching a higher level of occupants -- or leasing and occupancy. So that will slow down because what you're left with are smaller suites that are -- you don't have a whole floor that you can put anybody of any size, anywhere on that floor. So you just naturally will -- you may see some slowdowns, some of those assets that are 80%, 85%, 90% leased. But generally we still see good progress and I think that's a fair assumption.

Can you describe, I guess -- I know you kind of mentioned it, about the remaining vacant blocks in the SIP portfolio, are there several large blocks available right now or are you starting to get that smaller block stage?

It varies by asset. I've mentioned the 2 properties, one in Scottsdale, one in Chicago. Certainly, we have some larger blocks in those particular cases. A couple other buildings have some larger blocks as well, but I would say, the majority of them, probably 8 or so of them, are getting to those smaller blocks. So you're getting to leasing where it's 70%, 80%, 85%, 90% leased, and it is getting that way.

Okay, then. Can you give us an update on your development, I guess, plans, how your discussions are going on right now? And what can we expect maybe in 2014?

Sure. I alluded to one development that we're trying to start by year-end. You and others were on a property tour in May, we showed you that campus in Denver that -- where we were talking about that. So that's the one we were referring to. We have one or two others that are in similar stages, may be a little behind that. And really, it's talking with health systems and working with health systems on their space needs. And I would say those are probably $15 million to $20 million type investments with some nice initial leasing with those. So that's the scope of it. I don't -- I wouldn't think there would be more than a couple that we have visibility into, on timing, in terms of starts right now. I think we're generally, as David and others described, we're optimistic about what we're seeing out there and the needs these health systems have. So I think we'll continue to be looking at more development opportunities like that.

Next question comes from Karin Ford from KeyBanc Capital Markets.

I wanted to ask about the occupancy in the multi-tenant same-store portfolio. It obviously saw a really nice lift this quarter after sort of holding around the same level for a while. Just talk about what might have changed and what was sort of the -- can you just characterize the 121,000 of square feet and new leasing that you did in that space?

Well, I guess, really, all I have to say there is that our property management and leasing group was very active and very successful this last quarter. And got some space filled that wasn't previously filled and got good lease rates on the leases that were renewed.

I think that leasing, it was spread throughout the country, it wasn't concentrated at any one system or one geography. So I think it's fairly broad-based in terms of new leasing activity. So we're pleased with that.

I think it's also a little bit of a product of -- people are kind of moving on a little bit. So I think we got the benefit of that just from standpoint of that particular quarter. It's just like a lot of people, as we've said in previous quarters and over the last year, a lot of people sitting on their hands. So I think to some degree, it's combination of many factors. But a little bit of it is just the psychology that -- moving on.

That's helpful. Do you think that the portfolio -- do you think occupancy can rise in that portfolio above 91%? Or do you think that sort of full at this point?

I think, sort of for a multi-tenant portfolio like ours, somewhere in the low 90s, 91%, 92%, 93%, I don't know. It's probably a sort of natural or sort of a status quo kind of level that you can kind of stay at. Beyond that, I think you have to introduce a lot of single tenant buildings to get it much above that. Just because you have a natural churn at any one time of tenants kind of moving in and out.

Makes sense. My next question is just on the same-store NOI guidance for the multi-tenant portfolio. You kept it the same at 2% to 4% for the year, if I'm doing my numbers right, it looks like you're running a little bit low in that range year-to-date. Can you just talk about how you think you'll get up to the range there?

Well, part of the year-to-date result is reflected in the utility expenses in the properties, it was down $1.3 million. We do expect a lift in the fourth quarter and that reversing back to normal levels. Frankly, I think, if we get to the 2% range for the year, probably about where we'll come in, I don't think it will be substantially more than that, but that way would get there, we think, might be with the lift from the total expenses. And a good successful fourth quarter.

And I think continued leasing that we've seen maybe in the third quarter continuing on in the fourth quarter.

I think, too, Karin, the other -- the idea with that guidance is that, that is really the profile we expect from the properties. As Scott as described, last quarter and this quarter we've had a couple of things of that have challenged that a little with real estate taxes last quarter and the utilities. And so it's more importantly I think it's indicative of what we think the portfolio can do. As Scott said maybe we're on the low end, the light end this year.

That's helpful. And just last question, can you just tell us what the cap rate was on the inpatient rehab facility sold in September?

As you know, there were 4 HealthSouth facilities. All of those were in the 13%, 14% range. Subject to purchase options. So I think we put the NOI and the disclosure on that in there for some time. But those were all in about that range.

The sale price was the greater fair market value of subject to certain floor.

Next comes from Rich Anderson from BMO Capital Markets.

I'm sure -- I didn't get a chance to look at the look book, but what's the value of the acquisitions closed in the fourth quarter, so far?

Let's see. I think we've got that in the press release. $77 million, it's about -- it's almost equal between third and fourth quarter.

Okay, $77 million, so far, in 4Q.

Correct. Correct.

Doug, any ATM activity this quarter or is it all just the equity earlier in the quarter, the offering?

We had a handful of days, one handful of days, the very beginning of the third quarter and then we had a follow-on equity offering in mid-July and the ATM has not been activated after that.

Okay. The -- regarding the SIP portfolio, I guess, you said, now, that you're just going to fold it into the operating portfolio next quarter from a disclosure standpoint, is that right?

E Rich, yes, that's what I said.

Rich, they're all 50 or seniors. They've got their caps and gowns, they've had them in the boxes for some time.

And as we've described earlier, when you get down to some of the last space on these buildings, obviously, it's just going to be a process of picking, getting the right fit and the right tenants, and a lot of it, frankly, from expansions, too, of existing tenants, so it's a process. But the reality is, in disclosure form, we will not obviously put them in same-store, that's not what we're doing. But we will not call them SIP and we will continue to track them for everybody's benefit and show that. But they'll sort of live in a -- kind of like an acquisition when you buy something that kind of lives for 5 quarters until you've had it for enough periods to have same-store comparisons.

Are any of the 12 already stabilized?

In terms of occupancy, pretty close on, I'd say, 3 or 4 of them, so they are pretty close. So technically as to your point, we could probably put a few. We could, but at the same time I think what we've been trying to do for some time is keep those together. So people can kind of keep an eye on the group and not confuse everyone. So that's the plan for now.

Okay. What's interesting in your disclosure -- your outlook, or your components of your outlook, you have this cap rate range for acquisitions, it's pretty wide, 6% to 8%, have you -- when's the last time you did an 8% cap rate deal?

Well, we just closed on the Mercy price.

Well, that's sort of the loan, known [ph], right?

So you have to make everything sit in the range, right? Sure, yes, the range we talked about for acquisitions, for the assets we just bought, were 6.5% to 7%. So more of the straight acquisition range.

Okay, and then last question is, you made a comment, Todd, about there being fewer buyers for smaller deals which, to me, sounds counter-intuitive. I would think it will be, fewer buyers for larger deals. I'm curious why that's the case. You would think that smaller deals you'd have more potential buyers because it's just less money?

Well, it's really, probably, more about characterizing the buyers and who they are and what their appetites are. And I think the larger deals command very aggressive buyers. You're right, it may not be, by count, as many, but I think it's more just -- yes, the smaller assets might get -- it maybe some fewer, maybe some more, but the point is it's just not as aggressive...

I think, also, Rich, it's a little bit of marketing. If you have a small property, not as many people know about it. So it's not spooled up into some big offering that's brokered and so on and so forth.

And I would say a couple of assets that we just bought, the 5, some of those I would characterize as very limited as David's describing, very limited marketing and/or in a couple of cases off-market. So that's really where we are focused on little more is we're always look at the marketed deals, but we're going to look at the very closely for quality and deciding whether we're going to pay up at the levels that are out there for the larger portfolios. But we see the ability to kind of get things early a little off-market, limited marketing, as David said. And we think there's just more opportunity there for us in terms of fit and price.

Okay. And I'm sorry, one last kind of just modeling question. I'm looking at your investment activity disclosure and I'm sure I'm just missing something, but it's $210 million, $211 million as of the end of the third quarter and how are you not... go ahead.

That has the Mercy acquisition in it, so it does throw things off a little bit in terms of thinking about we've acquired this year, the $186 million, which is what I would say are the traditional acquisitions. But we did include the Mercy acquisition in there. It will look larger than kind of what we think of as just straight acquisition.

And the next question comes from Michael Mueller from J.P. Morgan. Michael W. Mueller - JP Morgan Chase & Co, Research Division: A few things here. First of all on the fourth quarter dispositions, I mean, what's the ballpark cap rate we should thinking about for those?

Mike, the challenge with that is some assets that we might be selling might be nearly 0% occupancy. Some might be well-occupied. So the average, generally, is kind of comes in the range of that 7%, but I would say it varies depending on the asset. And so it's quite a range. And so I would say that 7% is a good number to think about, but generally, each one could be very different depending on the occupancy and the situation. Michael W. Mueller - JP Morgan Chase & Co, Research Division: Got it. Okay. And I have a question, looking at the supplemental Page 8 for the development properties, and can you just explain the differences in the NOI? So, it says in footnote 4, the NOI in the third quarter is $1.5 million. You've got an adjusted NOI of $2.7 million and then, if everything's fully occupied as of the third quarter, the NOI is $2.4 million. I mean, how do you -- how should we think of those? Like, what are the different numbers there?

Well, the number that is, obviously, in the financial statements, as reported, is the $1.4 million that you're seeing in that page. And that's the cash NOI from the properties. The $2.4 million that you see in the footnote, and what I talked about in my remarks, is giving everyone an indication of, if you took all the tenants that were truly occupying the space at the end of the quarter and you had them in there for the entire quarter, they were all paying rent, then that's the level of NOI we would expect from those. So it's -- the number in between, the $1.5 million, the difference there is just simply some out-of-period adjustments that happened. It might be a real estate tax issue or something that's pretty minor, but a small difference. Michael W. Mueller - JP Morgan Chase & Co, Research Division: Okay. So the footnote, just to clarify here, so the $2.4 million ties to the -- so the $1.4 million is what's in the P&L. So we should ignore the $1.3 million of up above. So everything is tying to this $1.4 million. So it's $1.4 million in the third quarter financials, you're saying that $1.4 million in the third quarter financials, if we're starting Q4, it would be $2.4 million? So this $2.7 million we should just completely ignore because that pulls in the $1.3 million above, is that right?

Right. Just to clarify, the $1.3 million, that's actually interest on a construction mortgage. That's -- it's not in the SIP. That's a different -- completely different animal. And we have it at the same table because it's a construction -- under construction project. Michael W. Mueller - JP Morgan Chase & Co, Research Division: Okay. So it's basically a couple of quarters...

So don't worry about that.

Got it. Okay. So it's basically, bottom line is $1.4 million in the third quarter, you're starting off of a $2.4 million run rate in the fourth?

Correct. Correct. Michael W. Mueller - JP Morgan Chase & Co, Research Division: Got it. Okay, that's helpful. And then, Scott, your comments about the utilities picking up $1.1 million, I think, sequentially in Q4, does all that pretty much go away? Or Q3, does all that pretty much go -- revert back to normal? So theoretically, they go down in Q4 by $1 million?

Yes. Basically, the history has been that it pops up about $1.3-ish million. This quarter it was $1.3 million. And that should revert back to normal level which would be a reversal of that $1.3 million in the fourth quarter. That's what we would expect to see. Now that, of course, depends on prevailing weather and all that sort of stuff, but -- that would be normal. Michael W. Mueller - JP Morgan Chase & Co, Research Division: And last question, going back to Todd for a second. The 5% pick up sequentially that you're targeting, you think, if you straight line the lease up, it kind of picks up 500 basis points? Are you talking about -- is that occupancy or is that leasing? So if you're at 72% now, you pick up 500 basis points a quarter, theoretically, you'd end 2014 at 92%, on a blended basis. And then, is that the way you're talking about that? And we should think of occupancy filling in 1 to 2 quarters behind that? I mean, is that how you think about that?

I think, generally, you're on the right track. I would say, I don't want to give the impression it's 5% per quarter because we just had a quarter that was 3%. So the range is really 3% to 6%, is what our historical range has been. But, correct, in general, that it's 3%, 4%, 5%, 6% on leasing, per quarter. As we said, there may be some easing of that as we kind of get to the top end of stabilizing here. And so but that's something that I think makes sense over the course of '14 to think about. And then, occupancy, you're right. It does lag, 1 to 3 quarters, depending on the scope of the build out of the suite. So it could lag, that 1 to 3 quarters, and that can be a little bumpier just because of the timing of the leases. So this quarter we had a almost 10 point jump. And we had a lot -- we still have a lot going on right now, build out right now. So next quarter should be a nice jump as well. Michael W. Mueller - JP Morgan Chase & Co, Research Division: Okay. So you're probably on this pace, it seems like stabilizing from a leasing percentage sometime early in 2015, and then, from an occupancy standpoint, maybe by the end of 2015?

I think that's generally right. It could be a little sooner, just depending on how things play out. The leasing side, obviously, is a little less known. The occupancy side, is a little more clear. Just because we have signed leases.

The next question comes from Daniel Bernstein with Stifel. Daniel M. Bernstein - Stifel, Nicolaus & Co., Inc., Research Division: I guess I've heard, and maybe seen, a few MOB developers switching their focus to, or adding a division that focuses on seniors housing. I'm not going to ask you whether you're going to switch to seniors housing, but have you seen that and is that allowing you to maybe have some more development opportunities or less competition for development? Just trying to understand the development landscape there a little bit.

I can't say that we've discerned that particular trend popping up or becoming more noticeable now. I would say that most developers that we see locally, they're pretty opportunistic. They'll do just about anything and become experts in anything pretty quick. So it could be that there are some unique situations right now where that's happening, but we haven't discerned any trend on that. Daniel M. Bernstein - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then, just also sticking to development. Given where cap rates are compressing the MOB space, I know you just made some comments earlier that you're seeing some less competition for small deals, but, generally, cap rates are compressed over the last few years. Is that -- are you more inclined to say, 2014, 2015 maybe shift some of your investment focus back towards development in any kind of significant way? I mean, I don't know how you want to characterize if you're going to shift -- but it seems like the yields are higher.

Right. I don't think we have any particular target for doing that. I think we tend to -- I think, on development, I think we're going to be pushed on development by the hospital systems. It's not going to be a pull process, it's going to basically be a push process. Because I think the hospitals have delayed a lot, there's just a lot of conversation. Anecdotally, there's several conversations we've had where we go and meet with some people, they've been thinking about it for a year or so, they've talked to a lot of people and our follow-up call is, could we get started by the year end? So I think there's a lot of that kind of this latent development stuff that's there. Is it a lot? No. But is it good quality? Yes. And it's more negotiated than it is bid. Daniel M. Bernstein - Stifel, Nicolaus & Co., Inc., Research Division: Okay. So it's not you going out there to -- even if you wanted to do more development, it's really up to -- where the hospitals and...

Yes. We see things from time to time that are opportunities, but if you've got people calling you and it has significant leasing and it has impetus, then it's a little easier to default to that, because, just from a standpoint of the risk profile.

Well, and Dan, you know, too, I mean, the landscape has changed and health systems and physicians, they're getting together more and it's more integrated now. So you, as David said, you're really more intertwined and dependent with the health system than just going out and forcing it. Pushing it. Or pulling it along ourselves. So I think we do sort of work with the health systems. And it's a lot easier to do on a negotiated basis, as David said, with folks we already know, markets we already know, than trying to forge new ground on that. Daniel M. Bernstein - Stifel, Nicolaus & Co., Inc., Research Division: Okay, okay. And then I just also want to go over dividend policy. I mean, you're starting to get to the point where it seems like and, we may have gone over this in other quarters, maybe gone over this in the past in other quarters. But your point where your FFOs go and exceed your dividend, certainly, FAD, the way you computed it, payout ratio is, I think you said, they're only about 88%, somewhere in there. Under what criteria, what situations would you consider raising the dividend? What has to be in place for you to raise the dividend at this point?

Well, Dan, as you know, there's been a long policy, we don't speculate on dividend or dividend policy. I think, to some degree, that's evaluated and there's usually a discussion about that, both currently and prospectively, at each board meeting. Obviously, you're right on about the numbers. I mean, if you kind of look out, it's kind of a natural process. And I think the board will always evaluate that. So I don't think there's anything contrary to what your perception is. But that's a matter of timing and discretion.

And the next question comes from Todd Stender from Wells Fargo.

You guys have a mix of properties that you manage and also blended with some that are third-party managed. One of your peers has made a concerted effort to internalize property management. How do you balance the inefficiency that comes along with -- or the efficiency that comes along with outsourcing this versus potentially building stronger relationships with your tenants? Just kind of how do you think about this?

It has to do with scale, as much as anything. I think, that's kind of the first cut. So there may be a property -- all of our investment analysis and underwriting takes that all into consideration. So we'd be less inclined to kind of buy one building that we didn't think we had the legs to do more in that market, or something like that, so that we could eventually expand management. I think, typically, when we buy a building like that, it would be and we might retain the existing management, some of those kind of things. There's not a real hurry to necessarily change it just because we have a stellar development arm that's done an outstanding job. This is spread out all over the country. We've got wide area networks, communications, all kind of ASync [ph] going on. So it's fairly easy for us to do it, but it's not necessarily financially prudent to do that. So it kind of depends on each individual building or size, but more important it's the market and kind of how we see it. So if we think there's some legs to the market, yes, we might go ahead and manage it. If we think it might be some time, then we'd outsource them.

And I think the other benefit we get from managing our own properties, and our bias towards that, is that we -- it's very integrated with how we think about acquisitions and development. And so those folks, Julie Wilson and her team, they're all part of the process when we buy and develop. So they're very -- having that expertise and the local expertise and experience is very helpful in the process rather than any other tradeoffs with outsourcing it, where you don't have that, the people on your team, that you can pull in and work with on that.

Okay, that's helpful. And then just kind of switching gears. What are some of the drivers behind reclassifying a property, one that moves towards being repositioned? Is it a size issue? Are these undersized properties? Do they have to be on-campus to kind of warrant additional capital? How do you guys think about that?

Well, there's a -- we had a pretty specific disclosure around that in the 10-Q. I can't remember exactly what page it's on, but we do have some kind of rules, base methodology there, that we use every year and -- to run that. So you can look at that. But just, generally, to your point, it's not particularly size-based or location-based. It's just more about -- I mean, each asset has its own plan and how we view it and so -- and then you kind of look at the rules. And that's more important. Some of the assets I just mentioned earlier that moved into reposition are fairly sizable on-campus assets. And to your point, we do view them as well worth the investment. You're right, if it was off-campus, maybe that's a different perspective and we might say, maybe it's not worth the investment. So that's all part of the calculus.

Okay. And, Todd, just sticking with you, you mentioned the sale, the possible sale of some off-campus facilities coming up. What's the ultimate target, I guess, to get to on-campus? Is there a specific target, you're right in that 80% threshold right now, how does that kind of feel?

There's no -- we like that, obviously. We certainly view that as part of our strategy of alignment with health systems. We like the on-campus piece of it. But it doesn't mean we won't look at off-campus assets. One of these Mercy projects that we're funding is an off-campus outpatient facility. It's 200,000 feet. It's a major strategic investment in location for this health system. So we're comfortable with that. What we don't like are small, less strategic type assets that have a very weak, we think, a weak affiliation with systems. And if the lease goes away, the real estate value is not there to justify the investment. So that's the kind of thing that we're -- how we think about it. I don't think there's a magic number. 80% is a good area. If it shifts a little above or below that, we're comfortable.

And the next questions from Jim Sullivan with the Cowen Group.

Just a couple of quick questions, guys, on the Des Moines asset. Appears as if that receivable is heading to foreclosure. And the questions I have, number one, I assume that the borrower is current on your mortgage?

That's correct.

Okay. And the -- you point out in the Q that the asset's 93% leased. I wonder if you could share with us kind of what the terms are of those leases? Do you have some duration and are you comfortable with the credit on those leases?

We are, Jim. The average lease in place is 5 to 6 years, some of them go out to 10-plus years with some very good quality tenants, some of the larger tenants, law firm in the building. So we're very pleased with the quality. It's something we looked at when we underwrote it originally. We really looked to the asset, the quality of the tenants, the fact that we really liked that market, have a good presence there, can manage it efficiently. So we're very pleased with that. And when we underwrote it, we very much took into consideration that we would be comfortable owning the asset. And as we said, their current -- the current mortgage is 7 -- the rate is 7.7. It's yielding 9% and we're looking to go higher. So we're comfortable in any of those outcomes.

And then would it be -- would you expect if you do foreclose that you would pay off the junior slice or keep that in place?

That would -- we would not put additional capital in.

Okay. Would you be likely to sell the asset or is it too early to really make that determination?

I think, it's too early. I mean, we're comfortable with the return, where it is. We like the asset. We like the location. It fits well with our presence there. So we think there's a good trajectory on the yield on that asset. Just based on the existing leases plus just insight into additional leasing.

So for modeling purposes, it goes to a 9 in the first quarter, is that what we should be thinking?

I think that's -- in 2014, you should be thinking at that level. And the timing of when that happens, obviously, remains to be seen.

We have a follow-up question from Karin Ford with KeyBanc Capital Markets.

Just a quick one on the balance sheet. You have $185 million outstanding on the line, given what seems to be sort of a nice window on the interest rate side, any thoughts in accelerating, terming out that exposure and/or given that your stock is trading below our estimate of any V today, where -- what are you guys thinking about in terms of equity funding for your next slug of acquisitions? Are you think about accelerating dispositions, potentially?

No, I mean, I think the dispositions are sort of on a separate track. I mean, we obviously use them to pay down the line of the proceeds, end up paying down the line. But acquisitions we would fund, just really I expect that going forward we would continue to match long-term capital whether it's equity or long-term debt with these acquisitions or new investments. So obviously -- we're looking at the equity market vis-à-vis some of these acquisitions that are coming up on the pipeline, and we also continue to monitor our 2017 in the interest-rate environment, is there are opportunities to do something there. With the ten-year coming back down in the last few weeks, it sort of changes the math from where we were 6 weeks ago. So we'll continue to kind of evaluate.

Okay. And do you guys think you'll term out that line exposure anytime soon?

At that level, we're generally pretty comfortable having some outstandings on the line in the $150 million, $200 million range. That affords us plenty of dry capital to fund the types of investments that we do. We're comfortable at this level.

And there are no more questions at the present time. So I can turn the call back over to management for any closing remarks.

Very good. Well, we appreciate everyone being on the call today and most of us will be around today if anyone has any follow-up questions. And with that, we bid you good day and I guess we will talk 1st of February. I guess it is.

Mid February.

Mid-February. San Francisco, And Doug, we'll see some of you in San Francisco. With that, good day. Thank you.

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