Healthcare Realty Trust Incorporated (HR) Q1 2015 Earnings Report, Transcript and Summary

Good afternoon and welcome to the Healthcare Trust of America First Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jessica Thorsheim, Director of Investor Relations. Please go ahead.

Thank you, and welcome to Healthcare Trust of America’s first quarter earnings call. Today, we filed our first quarter earnings release, our financial supplement, and first quarter dividend announcement. These documents can be found on the Investor Relations section of our website or with the SEC. This call is being webcast and will be available for replay for the following year. We will be happy to take your questions at the conclusion of our prepared remarks. During the course of this call, we will make forward-looking statements. These forward-looking statements are based on the current beliefs of management and information currently available to us. Our actual results will be affected by known and unknown risks, trends, uncertainties, and factors that are beyond our control or ability to predict. Although, we believe that our assumptions are reasonable, they are not guarantees of future performance. Therefore, our actual future results can materially differ from our current expectations. For a more detailed description on some potential risks, please refer to our SEC filings, which can be found on the Investor Relations section of our website. I will now like to turn the call over to Scott Peters, Chairman and CEO of Healthcare Trust of America. Scott?

Thank you, Jessica. Good morning and afternoon to everyone. Welcome to Healthcare Trust of America’s first quarter 2015 earnings conference call. We appreciate you joining us today as we discuss our first quarter results and the progress we made so far in 2015. Joining me on the call today are Robert Milligan, our Chief Financial Officer; Amanda Houghton, our Executive Vice President of Asset Management; and Mark Engstrom, our Executive Vice President of Acquisitions. As we begin 2015, our management team continues to focus on a business strategy of expanding our portfolio in key markets, increasing HTA’s enterprise value, and most importantly being stewards of capital. And looking at the first quarter, we continued our outstanding performance, steady and consistent. Our MOB dedicated asset management platform generated sector leading same store growth. Our acquisitions team was directly the leading health system in a key market to expand our portfolio. And as a company, we maintained our commitment to financial strength, balance sheet flexibility and positioned HTA with a debt to enterprise value of 29%. As we look specifically at the first quarter, our results were again very consistent and dependable. A 6% increase in FFO per share to $0.37, 3% same store NOI growth, the tenth consecutive quarter of growth at 3% or higher; no development or JVs. We acquired $35 million of an on-campus and healthcare system located MOBs continuing to utilize the relationships our acquisition team has developed in our key markets. We are also currently under contract or have closed over $90 million in additional investments located in these key markets. We are technically focused on expanding the relationships that we have established over the last eight years with the local hospital systems, developers and physician groups. As I mentioned earlier, we maintained our strong balance sheet with total debt to enterprise leverage of under 30% and continue to keep our capital structure, investment philosophy and business strategy straightforward and focused. We are executing as a pure play at the lowest end of the risk spectrum as it relates to healthcare real estate. Investor interest in the medical office market continues to increase and caused cap rates in most cases to continue to go lower. It is also significantly increased the liquidity in the overall healthcare sector. Recent transactions in the healthcare space and the focus on integrated healthcare services will continue to expand our opportunities. With less than 20% of our MOBs owned by the public market, we believe there is a tremendous opportunity for us to grow and benefit our shareholders. This opportunity is even greater as healthcare volumes increase and are delivered in key outpatient settings on-campus and in core community locations. That dynamics within the healthcare sector remain favorable. Our population is aging, preventative medicine is taking hold and the Affordable Care Act is having millions of additional insured individuals. This is increasing demand for healthcare services, a key reason that healthcare is projected to be the leading growth engine for jobs in the United States. As we mentioned in our year-end call, our focus this year is to drive portfolio quality to acquisitions in key markets and in key healthcare settings. As capital investors and individual assets, we are more disciplined than ever on our underwriting and believe the assets must perform to the long term and also improve our portfolio of quality before we allocate capital. Medical office has traditional real estate where key locations build in quality, property management, market rates and tenant mix are critical generating strong returns in creating value over the long term. We evaluate our opportunities as such. For healthcare providers, we bring a balanced approach to relationships where good locations expense efficiencies and great service generate demand that is win-win for all parties. HTA focuses on growing in our key markets allowing us deploy and benefit from our asset management infrastructure. This allows us to operationally provide a superior experience for our tenants. What does not show in our reported numbers is that, we underwrote an ultimately passed on a number of investment opportunities due to poor portfolio fix generally relates to long term performance above market rents, pricing concerns, geographic location and comingled asset quality. As of today, the company has primarily invested in 17 key markets across the U.S. 13 of which are in the Top 50 MSAs. Our goal is to have between 700,000 and 1 million square feet in that key market that allows us to truly generate operational efficiencies and economies of scale. We look to grow into a national platform of 20 to 25 key markets providing dedicated asset management and leasing in superior locations and markets. Overall, today we have close to 90% of our portfolio invested in our top markets and across the top 50 MSAs. We continue to focus on investment strategy on core critical real estate. With over 70% of our properties located either on or adjacent to campus, these on-campus properties have steady and increasing tenant demand primarily from specialists that benefit from a proximity and infrastructure of the hospital. Our off-campus properties are largely aligned leading healthcare systems, primarily multi-tenanted and located in medical clusters with strong demographic repositions and help systems compete for space, truly long term community core locations. I’d now like to turn to portfolio performance and operations. Our institutionalized property management leasing platform drives our consistent internal growth. At the end of the first quarter, over 30 million square feet or 90% of our total GLA was managed in-house. In the last quarter, we transitioned our recent South Florida portfolio in-house. The portfolio ended the quarter at 91.7% leased, up 50 basis points from the first quarter last year. Similar to last year’s first quarter, there was a bit of seasonality in our leasing activity. We expect to grow our overall occupancy in 2015 by 50 basis points to 100 basis points over last year. Total leasing activity for the quarter was approximately 185,000 square feet, representing 1.2% of our total GLA. Tenant retention was 77%. This is partly due to the fact that smaller practices continue to consolidate into larger physician groups to manage cost and drive efficiencies. These larger groups are looking to lock up space for long term and we are managing our portfolio to meet the needs of these larger tenants that will be critical tenants over the long term. Our lease spreads were up 1.3% in the first quarter. We continue to push average escalators in this 2.5% to 3.5% range. Our new leasing in the quarter included 3% bumps on average. This quarter, HTA acquired two MOBs for $35 million in our key market of Atlanta, directly with the healthcare system, one of which was directly on-campus and the other over 60% occupied by the same healthcare system in that key location and the community. The acquisitions will expand HTA’s Orlando portfolio to 714,000 square feet and our cluster close to other HTA assets in the market. The buildings are 98% occupied and the acquired in the mid 6 cap rate range. These assets will be immediately accretive to our in-house platform. As we look to the second quarter, as I’ve mentioned, we have a number of assets into contract in our key markets to meet our investment criteria. Given current market conditions, we are also continuing our recycle program for non-core properties with several currently under contract. We expect these to those throughout the year and be relatively cap rate neutral. With that, I’d like to turn the call over to Robert Milligan, our Chief Financial Officer.

Thanks, Scott. I will now walk through first quarter earnings results, our balance sheet and capital funding plans for the remainder of 2015. For the first quarter, normalized FFO per diluted share was $0.37, an increase of $0.02 or 6% compared to the first quarter of 2014. Overall, normalized FFO increased almost 10% to 46.6 million as compared to the prior year. The increase in year-over-year normalized FFO was primarily due to our same property cash NOI growth of 3% and the accretive NOI generated from the almost $400 million in net acquisitions completed over the last four quarters. Same property cash NOI growth was driven by over 2% in contractual rent bumps across the portfolio, relatively stable occupancy year-over-year and additional operating efficiencies, and lower weather related expenses this quarter. G&A was $6.6 million for the first quarter, in line with our expectations of $26 million for the full year. As you all are aware, G&A tends to be slightly elevated in the first quarter from the timing of year end activities. Normalized FAD per diluted share ended the quarter at $0.35, an increase of $0.03 or 9% compared to the first quarter of 2014. One thing to note is that, given the relatively low level of lease rollover in the portfolio, our same store non-cash straight line rent actually declined when that was $800,000 year-over-year. This creates a bit of an earnings had one that is not reflected in our FAD per share. Over dividend payout ratio for the quarter was a comfortable 83% within our 80% to 90% range that we target over the long term. We remain committed to a strong and conservative balance sheet, and ended the quarter with leverage at 29% debt to total capitalization and 5.7 times debt to EBITDA. At the end of the period, we had total liquidity of $856 million including $2 million of cash. Our average interest rate in the portfolio was 3.6% down 20 basis points from the comparative period last year. And the weighted average remaining term of debt has been extended to 5.4 years from five years in the first quarter of 2014. We will continue to extend debt maturities as the market allows. We note that our conservative leveraged us sometimes come of the expensive earnings. We ran leverage at some of our peer levels, we would certainly have higher earnings. However, we believe the added flexibility and certainty of earnings more than makes up for it and should be reflected in our multiple. As Scott mentioned, we purchased two MOBs this quarter for approximately $35 million. We acquired an average cap rate in the mid6s and we immediately added these to our in-house asset management platform, which layers in additional accretion that would not otherwise be realized. We expect to finance these in a manner that maintains our strong balance sheet position, utilize an additional capital recycling to balance out any additional borrowings. I will now turn it back to Scott.

Thank you, Robert. Thank you all of you for joining us in today’s first quarter earnings call. Before we conclude, I would like to take a moment to formally introduce Mr. Peter Foss, as the newest independent Board member at HTA. Peter brings an extensive amount of healthcare industry experience to the Board. He has worked with the General Electric company for 38 years in various sales and marketing executive roles, and has spent a significant amount of time engaging and educating healthcare systems, providers and physicians on GE’s innovation within healthcare. This concludes my formal remarks for today’s call. And operator, we will now open the call up for questions.

Thank you. [Operator Instructions] And our first question comes from Michael Gorman from Cowen Group. Please go ahead.

Thanks. Good morning guys. Scott, I was wondering if you could spend a few more minutes talking about the pipeline maybe beyond the $90 million that you’ve either closed or have under contract. And just give a sense for how large the opportunities that you are looking at maybe over the balance of 2015? You mentioned on number of deals that you’ve passed on in the first quarter, how is that pass rate changed overtime as the markets become more competitive?

Good question. And I think our view is that we continue to see transactions in the marketplace. I think that’s the theme that we’re continuing here from our peers also. Our pipeline has been consistent from a perspective that we are focused on our key markets, relationships, transactions really $25 million, $50 million and so, that hasn’t changed at all from how we’ve gone after finding our acquisitions over the last three years. I think that’s a lot to do with our consistency that we’ve been able to produce over the last three years. So I think from that perspective, we are not finding ourselves in a significantly different position. I think there are some cap rates are always now, you have to be careful they are coming down. You have to look more carefully I think at the asset. I think from our perspective what we are doing differently right now is, we are saying what assets are most accretive to our overall platform. We’ve been very fortunate three years ago in 2012, we went public. We’ve now acquired about $1 billion I think since then close to that. So we put our asset management platform in place. It’s continuing to produce very good results, I think sector leading results from a same store perspective. So when we are looking at acquisitions, it’s the content of the tenant mix which really was why we passed on to several opportunities that in fact have been bought by some other folks. It didn’t fit what we thought was going to be truly accretive to us as a portfolio, focused with opportunity to continue to acquire assets down the road and then how did it fit with the new transition in healthcare. Healthcare truly is becoming integrated from a efficiency and from a patient perspective as hospitals look at this. So I think that we continue to look core on-campus across the street continue to find great opportunities at community core location but for us that’s really not just one building located in a suburb, it’s a location like White Plains, where there is six assets that we own, bought four, bought another one and then one came to us in an up REIT. That’s a great synergy for us. And that’s how we are trying to build our key markets.

Okay, great. And then I guess maybe stretching that beam out maybe a little more over the longer-term, you talked about the 20% MOB ownership in the public markets. How much of the remaining pool would you say is both available to the investment universe and would fit your criteria? I know that’s – maybe not getting into specifics, but what’s the general opportunity set for you guys over the next call it five years, 10 years?

I think three to five years, I think that’s a view that – if we are fortunate enough to be able to see, five years ago we were far different as a company then we are today. We actually just started our asset management and housing five years ago in 2009. So it’s been a very good process for us this five years. We focused and moved on. Campus, we focused multi-tenanted buildings more than single tenant. So, we’ve moved our business model, but we’ve always said, core locations, core critical infrastructure in place that make these locations for our asset destinations. Now, we have also got now mass. Boston, where we’ve built some mass. We have it in Pittsburg. So we have it markets and I think our opportunity in the next three, five years to continue to grow at the pace that we’ve demonstrated. Good buildings, good locations, build out to 1 million square feet in great markets. I don’t see that necessarily having any significant hurdles. I think it’s just a matter of, as any team has to do, just execute.

Okay, great. And then maybe just one last one on the same-store side. Can you maybe talk a little bit about how long we can expect these kind of positive expense comps to continue to kind of help same-store NOI?

We continue to think that it’s 2.5% to 3.5% from a company perspective and we continue to see escalators in that 2.5% to 3% as we enter into new leasing and as we have roll over. From an expense perspective, we’ve taken out, as most folks have comments on, and some other are doing now, that third-party easy fee. But what now is really the differentiator and I think that the nice thing about being a dedicated company, being dedicated to the MOBs, being in specific markets, having our own leasing teams and property management teams is that the differentiator for us as a company over the next five years is can we achieve through expense synergies, through critical mass end markets, through the institutionalization of our asset management program, can we achieve that extra 50 basis points and can we do it on a consistent basis. I’m more excited about the opportunity to do that now than I actually was when we just said, let’s bring things in-house and do it away with just a third-party fee. The future of what our platform should be is 20 to 25 key markets, million square feet, and being able to deliver services to our tenants that are truly something that is better than what a fragmented market or fragmented owners can do. That’s what healthcare systems are looking for. I think that’s what larger physician groups are looking for.

Great. Thanks, Scott.

Your next question comes from Todd Stender from Wells Fargo. Please go ahead.

Hi, thanks, guys. On the WellStar properties acquired in the quarter, can you talk about the process that you went through to get these with a widely marketed – are you assuming any debt? And then second, are these assets going to be managed in-house right away?

Three answers here. First, they were not marked. This was a relationship that Mark Engstrom, our Executive Vice President of Acquisitions, has had and it’s worked. And it’s something that – we’ve in the market now for three, four, five years. So they were not marketed. Second, they will be in-house immediately. And I think, Robert, third…?

Yeah, no debt assumed on any of those.

So those were opportunities that – that’s what we are looking for. I mean that’s the benefit of having folks in the marketplace and being a buyer of what – we know what we like and we also know what we don’t like.

Thanks, Scott. And just how about the seller profile for the properties you have under contract right now, the stuff you will be, I guess, announcing in Q2? Anything that you can share that differentiates you guys from maybe private competition, you are using OP units or anything differentiated?

We continue to have opportunities to talk to folks about OP units. I think that is one thing that continues to come as liquidity comes as more opportunities for people to look to say that they want to diversify. That is something that Mark is having an opportunity and I do to talk with specific folks that are reaching out. Second, what you are going to see from us from a acquisition perspective and from a perspective is pretty much the same thing that you see. In our markets, they will be with folks that traditional more of them than less of them will be probably not widely marketed. And we will able to talk specifically about the story what the assets. And so, I think when we get these done and when we get to the end of the second quarter, we will have some more – very consistent, I would say, that our conversation will be 90 days from now.

Okay, thanks. And just looking at the off-campus portfolio, the occupancy dipped just from last year, from Q1 last year. It had been up about 100 basis points in Q4, but now it’s below 85%, which is why bring it up anything with off-campus, any specific move outs or anything you can wrap around that?

Well, I will have Robert talk to that in a moment. But our off-campus is what we consider to be integrated real estate. We are looking for that off-campus acquisition that’s surrounded by a couple other assets. But more importantly, the only thing it may not have is, they may not beds overnight. But it is a destination location, high geographic concentration, investment by the physician groups, by the healthcare system. So we look at this as a transition of healthcare. And you see it when – some folks have seen our acquisition in Tampa, that’s a true example of something that is completely integrated. And Florida Blue is actually a work with those physicians to – because of their cost structure that they can deliver. So, Robert, about the occupancy?

Yeah, on the specific stats on the occupancy, that off-campus metric really only applies to about the 4% of our portfolio that is off-campus and also not aligned. So it is obviously a very small portion of our portfolio. So individual tenant move in, move out. This is very clean we’ve seen. I think when we look across the board of all off-campus assets including that are aligned, we are actually seeing some of our best leasing activity across the portfolio taking place in these assets like Scott was talking about where there is a true community destination where tenants and health systems are competing for space given both the facility quality as well as the access to the patient base there. So I think – your specific questions, it’s a very small portion of our portfolio in that number. And I think more broadly we are seeing very good leasing activity in the off-campus locations given some of this dynamic.

Got it. Thank you.

Your next question comes from Kevin Tyler from Green Street Advisors. Please go ahead.

Yeah, Scott, based on your comments earlier, I think I know the answer, but we’ve seen other healthcare REITs expand their business into the UK and not as much so in the MOB space. Have you looked at any opportunities in the UK or in Europe or just internationally generally at this point?

No. And I think you did know the answer. I think there is a couple of things. One we are going to – we won’t be doing a development part of HTA. We work with developers. We think that’s important. And we won’t be going overseas. So this is a – we have tremendous opportunity in the markets in this country. There is no better transition in healthcare going on in the world than what’s going on in the United States. And if we can buy more and more core critical locations and put our asset management teams in place and generate the relationships that are going on here, that will – to me over the next five years, that will produce the greatest amount of value to our shareholders than trying to diverse overseas or something like that.

Okay. Thanks. And then you’ve talked to this earlier as well, but you have a high quality portfolio across many core markets in the U.S. and there has been a lot of positive tailwinds for the MOB space and obviously the continue decline in cap rates. Would you certainly setup HTA nicely for attractive takeout for a number of buyers either private [indiscernible] large diversified REITs, et cetera, but maybe you can elaborate a little on how you would approach an offer for the company should want to materialize at this point?

Well, I think that, what we do as a management team and what our board looks at from a fiduciary responsibility is we try to run the business as best we can and we try to be top of the class from a asset management perspective. We like the assets we buy. We are continuing to try to improve the quality of our portfolio and that results in something that is to the best benefit of shareholders. And, obviously, that’s something that this company would do. But I think all I can do frankly is continue to try to do and our management can do is dedicate ourselves everyday to try to generate the best value we can with what we have.

Okay, great. Thanks for the time guys.

And the next question comes from Mike Mueller from JPMorgan. Please go ahead.

A REIT band on the products that you are looking at that’s closing in the market, is it –5 is the low end, is it going to the 4, is it what you are seeing on the high-end?

I didn’t hear the first part, but I think your question revolves around where we see cap rates?

You know like how wide the band is? Like low side and the high side?

I think the band continue to be brought in. I think that again looking at some of the transactions that have gone on here in the last six months in the healthcare space, it certainly shows that the breadth of the bandwidth for the healthcare sector as a whole continues to move in. I think that’s just a number of positive tailwinds that everybody talked about. But I think MOB is being at the most secure part of that spectrum, it looks a lot like very secure, dependable, consistent growth that looks like a good office replacement for folks. And when one looks at that from a dynamic like that, I think it becomes very attractive to say that I can get investment credit, I can get relationships that are long-term, I can get core critical locations that generate synergies from where this transition in healthcare is going. And if I can get into that and invest in that, then it’s very attractive. So I think that the – you see 5s, I think that there are a number of different buyers and also I think bandwidth is at 200 basis points that we are seeing in the space. And I think that’s just a fundamental valuation that is somewhere now started for a while about what medical office looks like and how it can perform long-term.

Okay. And then looking at dispositions, I think that you made the comment in your remarks that there was stuff under contract. I was wondering can you throw out like a rough ballpark number and just timing, does it sound like a stuff that would close in the second half of the year, more in the summer, et cetera?

I think we’ve got some stuff that will occur in the second quarter and then we are still very disciplined on what we are looking at. From a year perspective, I think that – I hate to go back to where we started or where I started this from is that we will be very consistent and there won’t be many surprises and we will continue to build out our platform and we will continue to add good acquisitions to our portfolio. So I think we are moving along as I hope you would expect us to and as we expect to.

Okay. Thank you.

Our next question comes from Rich Anderson from Mizuho Securities. Please go ahead.

Hey, thanks. Good morning over there. So on the same-store target of 3%, you are kind of relying on cost savings, can you kind of breakdown what these cost savings are that you are getting outside of internalizing management, what’s – and like maybe the efficiencies and thereof, what other cost savings are getting you to this target of 50 basis points on an ongoing basis?

Well, Rich, I think, it’s like every other sector that you see in the REIT world. As it gets more concentrated as you go from fragmented to more centralized, as you get better core synergies within a market, you are able to do it more efficiently. You are able to get contracts that are more friendly from a cost perspective. You are able to bundle things not only from local market perspective, but to a national market. As you become a company, you get more efficient from the information that you convey to your tenants. I think that those are things that in the healthcare sector they’re just starting. This is all about healthcare systems and we sit down with healthcare systems or with the real estate folks from these healthcare systems, it’s all about synergies, it’s all about if I can get a million square feet, I have a million square feet, I am looking to get 15% cost savings because I can bundle services and I can make it more efficient. So, I think we’re going through a transition. I think this is a transition that’s in its early innings. I think the difference and I go back to what I said earlier, the differentiation for a MOB operated ownership platform will be what kind of services and what kind of growth and what sort of expense synergies can I get and can I get and, will I get those not just for a quarter, for a year, will we get those for a period of much longer time and I think that’s where we are. We are starting to see that, we are starting to get depth in the markets and we are starting to take what started four years ago as an asset management program and get into the second quarter. We are not even at half-time yet, from my perspective of what we can do and what Amanda is putting through in our asset management process.

But there is a finiteness to expense savings right, because pretty soon you will be at zero expenses, I mean, I’m exaggerating, but I mean isn’t there an end game here, I mean you can, in the first year, I can understand how you introduced inefficiency bringing in your platform, but in year two it's just got to be harder right, because you owned it the previous year. So, I mean how long do you think that this decline in expenses has, you think it’s a tenure thing or do you think it is a couple of year thing?

Well, I think that when I read some stuff you’ve written lately on - in the space and I think that all companies in the healthcare sector are focusing on expenses, on efficiencies, on being able to better bringing services to their tenants or to their healthcare system relationships. I don't think it's a one-year thing, I think it's five, six, seven year thing. I think the platforms, we are $4 billion company, you get to $6 billion or $7 billion and there is great efficiencies that come from that alone. When we were $2 billion folks at [indiscernible] what happens when you get bigger, well right now we could add a couple of billion dollars of assets to our portfolio and Amanda really doesn't have to add much of anything from an infrastructure perspective or from a core management perspective. And in fact, we are getting better at allocating our personnel, our personnel are becoming more efficient. So instead of handling 150,000 square feet of buildings in the market, they are being able to stretch themselves or manage 200 or 250. So, I think that this is a process and I understand that eventually you get to a zero sum, but I also challenge that because I think as the company continues to improve as you see opportunities to change then you are able to continue to get savings and I go back to 2012 when we said we could to 2.5 to 3.5 and people said, well let's see it for two or three quarters and now I think we are in our tenth quarter. And so back in 2012, they said well how long will the expense savings last and so I think it is, you just need to run your platform, you need to work with the healthcare systems and the physicians and you need to continually focus on how to generate savings and that's what businesses do.

And so at the very beginning of the call you said you had three priorities for the company and the second one was to grow the enterprise value, is that what you're talking about, just getting bigger and really thinking about becoming more efficient or do you just, is that empire building, what's the thought process behind being a bigger company being the second priority in your mind for the HTA?.

Well I think there is two tremendous values in HTA and I'm not sure that how necessarily folks have looked at this, but I look at number one as you got great assets and great locations and they are core critical and okay, so that's a value in itself and no one would go out and sell individual assets, but you get a greater value by having a far greater sum of those types of assets, but the second part of this enterprise creation is this asset management platform that brings value that competitively performs better. This is a competition, it is a competition you want your platform to be best in market, you want your platform to deliver services. So, I think that is our challenge in the next five years. If we can be in 25, 20 to 25 markets, a million square feet and deliver our services or generate savings that come to the bottom line for our shareholders by 25, 50 basis points that are different than other fragmented type of services that are delivered. That's a tremendous value. So, I would say that when I look at our company, I do think that there are two tremendous opportunities. One in the assets and the relationships and the tenants; and the second one is, with the people that deliver the services and generate a value that five years from now will set itself apart. So, I think that when we talk when you talk with Amanda that's the passion. The passion is to be able to put - again we are dedicated Rich, we are not 15% or 18% of our portfolio. We don't get into the other sectors when we look at acquisitions. So, all we do is MOBs and we by definition dedicate 100% of people to that.

Okay. And then real quickly, can you list what you think the top five markets for the next 12 month in terms of opportunities for you, could you kind off just list them off right now, where you think the best opportunities are and for whatever reason?

Well certainly we have those internally and we look at both markets that we find are good today. We look at markets that we would like to move into. Give you an example, we liked Florida year and a half ago, I think when you and I met a year ago, I said I thought Florida was going to be the best performing state in 2015, you know it so happens that it probably will overcome Texas. So, we went and put $150 million, $180 million in Florida over the last 12 months. We like Florida, I think Florida is a very - it is a market that’s rebounding economically, it's a market that continues to integrate from a healthcare perspective and you just need to make sure that you are real careful where you buy and when you're buying you’re getting those synergies from your asset management program that makes it accretive. We like Boston, we bought Tufts last year and we - I think that's one of the best acquisitions our company has made, but you look at Boston, I mean if you've been to Boston, it’s tremendous growth market. The healthcare systems have been at this integration for a while. You see some mergers that are going to go on in that system that in that location that's going to continue to improve. So, we like Boston and I think that plays out and then we've always been and this isn’t different from what we've said a very strong component of the Carolinas. South Carolina, North Carolina, you know we like Mount Pleasant about two years ago well Boeing moved in and now Boeing has moved in again. And so you see more Mount Pleasant and you see the Charleston area and you look at the employment numbers and you look at the vacancy, it was economically driven. The physicians are doing well, the healthcare systems are expanding. So, I think there are markets that when you look at these markets you say these are great locations to continue to focus on buy assets and take that and get the benefits of that value.

Great, great color, thank you.

The next question comes from Dan Bernstein from Stifel Nicolaus, please go ahead.

Hi thanks for taking my calls, everything is perfect guys. I wanted to ask about the 50 basis points to 100 basis points of occupancy increase your predicting this year, do you have a significant number of LOIs with tenants, you know to go ahead and take space and commitments here and take space and what kind of TI CapEx should we be thinking about in our models for that?

Well, I think that we feel comfortable, I'm very proud of the fact that we increased year-over-year first quarter. Last year first quarter, we took a step back further because of the seasonality and I think it does take, I think healthcare is changing and I think I mentioned this last year where it's being run as a business and in the business you do a budget at the end of the year and the middle of the year, you get approvals from what you want to do the next year and then in November and December not much is done and then forks start again in the next year. I think we've seen that. We see larger physician groups, they make the decisions by November or they make their decisions starting in January and it takes some time to get to that conclusion. So, I think that is some seasonality to healthcare, when it was a sole practitioners, and when it was running a little less business process, it might not have been as functionally the way that it is today. So that's good for us because I think that shows that we are being more active on our leasing side of bringing deals to a conclusion in the fourth quarter and it shows up in the first quarter. We like where our activity is, of the deals that are larger, we comment to take longer, but you just have to keep at them and we’re seeing consistent activity that gives us a lot of confidence that we can continue to raise that occupancy off of 2014 by that 50 basis points, 100 basis points that we have talked about to folks.

I also want to go back to Richard's question on benefits of bringing management in-house, and more sort of from the perspective of acquisitions, when you're quoting mid-sixes on the acquisitions to begin in the first quarter, does that include any benefits you can get from bringing in those assets in-house versus what the current expenses are at those properties, in other words you're quoting mid-60s, but should I really be thinking that once you integrate those assets in your portfolio it's closer to 6.75% or 7%, I'm trying to think about what that benefit is when you bring those assets in-house to your investment yield?

That's a great question and I will say that when we look at our acquisitions and markets hitting here in and markets shaping its head and saying no I don't get the benefit that Amanda gets to bring, we look at them separately. What we are going to actually right now is and it’s back to what Rich says because I do think that in the market they were going to see you for a reach, it’s going to be about what you buy, the quality of what you buy and the ability to - if that was assets to perform. So, I think we are going to get into a marketplace where from an investor perspective they want to see a benefit, they want to say if I've got three choices, well what choice gives me that little bit of extra. So, what we're doing as a company and this is the enterprise value conversation again as we look at acquisitions when Mark brings it to an investment committee which is made up of our independent directors when he brings it to me when Robert looks at it, we look at it without the expense savings. But then when I look call over Amanda and Amanda gets her voice and do I want to buy this asset, and do I want this asset to come in to our portfolio, she looks at it and she has to be able to sit down and say I get it, how do I generate value from there, how do I save money or how do I make money from bringing this asset into a portfolio. So those two equations are separate. So, when we talk about our cap rates going in, we're giving you that without the benefit of what we think we do from an asset management perspective.

Okay and in terms of cap rates, you said broadly they are decreasing, how should I think about what cap rates are relative to say A, B assets or primary market, secondary market is the spread between A & B and secondary, primary markets compressing as well, is that getting more narrow?

Yes, I think that, you know is anything when things like this occur there are folks chasing opportunities. I think, the one thing I have noticed is that some of the secondary markets are treasury markets or assets that are, what I would call to be, be assets. They are getting chased by more folks because those folks are the ones that need that extra 50 basis points of yield in order to be - to buy it. They don't have an asset management program that makes that core critical mass get stronger, it's not a core market, it wouldn't be classified as a core market and then on the other side, I think that the core on-campus truly MOB quality asset continues to be something that is sought after. So, I think that again the tenant mix of assets are very important. We don't want to buy an asset that has a large transition time. Or that, it’s not all medical and you then have to convince yourself that it’s going to turn medical and then you have to say to yourself it's going to take a period of time. To me that's up the risk spectrum, but those aren't being priced with that risk included in it. Just like, I don't think that large portfolios are being priced with the risk associated with the co-mingled quality of assets, I think that there is a – I think that gets raised because they say there is this large asset value that comes because its bundled for me sort of like retail and wholesale. I like it wholesale and I think that investors overtime get the benefit for that approach.

Okay. Appreciate all the color. I’ll hop off. Thank you.

And our next question comes from Doug Christopher from D.A. Davidson. Please proceed.

Hi, thank you. Thanks for the color and consistency. Just trends, tenant trends other than large physician groups, anything else going on out there? You had mentioned alternative office space. Could you just add a little color there?

I think there is couple of trends. I think one, we’ve continued to see sole practitioners pretty much leave what I would consider to be core properties. The cost of – the rents associated with those locations require size. Back to what Rich was talking about, physicians understand that they want 25, 35 folks. They want to generate greater revenue, but they are also focused on the fact that they can continue to reduce expenses and I think that in their view is a long term situation, not just a onetime situation. I think the other trend is that, you are seeing universities and medical healthcare systems become integrated. We recently had here in Arizona, we had banner in the University of Arizona align themselves, and I think you’re going to see much more of that and you are going to see research, hospitals, healthcare systems, MLB space, that whole metric is going to be a very key part of delivery. And so that gives me great enthusiasm. I think there is opportunities that will come from that. So I think there are trends, I think those trends are continuing and it’s exciting to be frankly right now in the middle of the healthcare sector because it’s probably the most, it’s transitioning the most out of any other sector in real estate.

Alright. Thank you. And then just a follow-up on the balance sheet. Robert mentioned company wants to be prudent with the balance sheet and indicated some recycling. How might we think about working in additional share count over the next few quarters?

It’s a good question, Doug. I think as we look at it, we certainly ended the quarter very strong position from a leverage perspective, less than 30%. I think we are very comfortable from where we are from just an overall leverage standpoint at that position. You add on top of that we have pretty sufficient liquidity of over $850 million at the end of the period, and then you add to that the capital recycling that we are focused on. I think that gives you pretty good idea of how we are thinking about the balance sheet with the opportunities we see in front of us.

Okay. Thanks a lot. Have a good day.

We have a follow-up question from Michael Gorman from Cowen Group. Please go ahead.

Yeah. Thanks guys. Just one quick follow-up on the disposition side, should we think of those coming more out of the call it 8% of the GLA that’s non-MOB or we talking about non-core as sort of that 4% we talked about earlier as off-campus and not align. How should we think about what assets are potentially coming out of the portfolio?

Right now, I think you would look at that as being more of the non-core medical. I think we have a tremendous opportunity to recycle some of that right now into better locations, bring that synergy that we talked about in the key markets. We have small percentage as you say that are non-MOBs and as we’ve said to folks, we are going to come in ourselves over the next period of time to move out of that. But I am not in a huge rush to do that, because two years ago they were at one cap rate and I continue to see cap rates in those asset classes move down. In fact those are probably continue to move down because there is just more and more folks chasing that. So I think for right now, it will be a plan but it will be more of the non-core than it would be necessarily the other stuff.

Great. Thank you very much.

Having no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Scott Peters, Chief Executive Officer, for any closing remarks.

Thank you everybody for joining us and as always if there is any follow-up questions or comments, please don’t hesitate to call either Robert or Mark, Amanda or myself or Jessica. So thank you and everybody have a good week.

Your conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.