Healthcare Realty Trust Incorporated (HR) Q3 2015 Earnings Report, Transcript and Summary

Good afternoon and welcome to the Healthcare Trust of America Third Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference call over to Jessica Thorsheim, Director of Investor Relations. Please go ahead.

Thank you, and welcome to Healthcare Trust of America’s third quarter earnings call. Today, we filed our third quarter earnings release, and our financial supplement. 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 could 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 would now turn the call over to Scott Peters, Chairman and CEO of Healthcare Trust of America. Scott?

Thank you, Jessica, and good afternoon everyone. Welcome to Healthcare Trust of America’s third quarter 2015 earnings conference call. We appreciate you joining us today as we discuss our third quarter results, our progress in 2015 and our views on the medical office building space. Joining me on the call today are Robert Milligan, our Chief Financial Officer; Mark Engstrom, our Executive Vice President of Acquisitions; and Amanda Houghton, our Executive Vice President of Asset Management. I'm pleased to discuss another successful and consistent quarter for Healthcare Trust of America. Our Company continued our philosophy of capital allocations is discipline and commitment to sector leading operational and financial results. This consistency in execution is in part a result of the benefit of operating our own assets without the need to rely on third-party operators. We have direct control over our leasing, cost management and relationship decisions. Our key market strategy rifle-shot acquisition approach and ability to have significant market intelligence drives both our capital decisions and our long-term performance results. Medical office is unique within the healthcare real estate sector and highlights the fact that the MOBs are traditional real estate and that location and management significantly influence results and create long-term value. In the quarter we achieved FFO per share of $0.39 an increase of 3% year-over-year and up one penny from the second quarter. 3.1% same-store NOI growth the 12th consecutive quarter growth of 3% or higher, accretive investments of $29.1 million bring the full-year total $254.6 million. Capital recycling was $35.7 million in dispositions of non-core assets. Maintained a strong investment-grade balance sheet with 33% leverage and ample liquidity and continued focus on our key pillars. Capitalizing on critical mass in key markets laying the groundwork for institutional cost efficiencies driven by our in-house asset management and leasing platform and generating long-term enterprise value for shareholders. And looking at the healthcare sector today specifically as it relates to medical office we've seen several positive. We're witnessing good leasing activity continued expansion space as it relates to renewals, positive rent spreads, strong retention, little development and the flow-through of employment growth into the space from the Affordable Care Act. HTA’s acquisition volume this quarter was not due to lack of activity in the MOB space. In fact we continue to see increased liquidity and opportunities. Our process was far more focused on the accretive nature of the opportunity and the quality of assets relative to the acquisition criteria that we have utilized over the past several years. Although on the surface of these assets would supplement short-term growth we felt that the overall quality of the market, the tenants, the in-place rents and the growth dynamics did not fit our current portfolio characteristics or result in an appropriate risk-adjusted return profile for HTA. Our approach to acquisitions continues to be buy-quality, buy-in key markets, buy assets that we can own manage, focus on same-store growth and buy accretive to our cost of capital. We believe this is unique and deserves emphasis in a market where external growth is either expected or required in order to move the growth needle. Being good stewards of capital should include focusing on a strong internal growth strategy that ultimately drives enterprise value for shareholders. In the quarter, we did acquire two MOBs in Columbus, Ohio, increasing our Columbus portfolio to 208,000 square feet across four MOBs, all aligned with leading healthcare systems. Both deals were not marketed and sourced directly from local developers. The buildings include new relationships with Ohio Health and Mt. Carmel, and expand our relationship with Nationwide Children's Hospital in Columbus. We also acquired a newly developed 20,000 square foot MOB adjacent to the Rex Healthcare, Main Campus in Raleigh, North Carolina for $4.2 million. This asset is directly between two medical office buildings we currently own and expands our existing square footage at the Raleigh Medical Center by approximately 25%. We currently have a lease out for signatures for 100% of the space. We continue to look for opportunities to recycle capital with non-core asset disposition to increase our overall portfolio quality. This quarter we completed the sale system of six MOBs for $35 million bringing our total disposition activity over the last 12 months to a $118 million with total gains of $45 million. Currently, we have targeted 7 to 10 non-strategic asset for approximately $75 million to $100 million that we expect to recycle in the next several quarters. We would anticipate that these assets would generate gains and returns for shareholders similar to those assets we have sold over the last 12 months. In addition based on current market pricing metrics we would recycling new assets relatively cap rate neutral. Turning to our portfolio and operations performance, our total portfolio ended the quarter at 92% leased up 20 basis points year-over-year and the same-store portfolio ended the quarter at 93% leased up 40 basis points year-over-year. Total leasing activity for the quarter was 274,000 square feet or 1.8% of total GLA and retention in our portfolio was 84%. Consistent with the last 12 months we continue to see expansion activity with existing tenants. As we look at the remainder of the year, we expect results to be consistent with prior performance to be disciplined in our capital deployment decisions, and maintain our investment-grade balance sheet. With that I will turn it over to Robert.

Thanks, Scott. I will now walk through our third quarter earnings results. Our balance sheet and capital funding plans for the remainder of 2015. For the third quarter, normalized FFO per diluted share was $0.39 an increase of 3% compared to the second quarter 2015. Overall normalized FFO increased 9.9% to $50 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 3.1% in the accretive NOI generated from over $375 million in acquisitions completed over the last four quarters offset somewhat by our capital recycling. Our same property cash NOI growth was primarily driven by increases in basement rent which was up 2.7%. The result of our annual rent escalators and a 40 basis point increase in leased rate. We recognized expense savings of 1% on the same-store portfolio excluding a one-time property tax throughout in the third quarter of 2014 on to newly acquired properties that were net leased and had no impact on overall NOI. Cash lease spreads are out for the year and our tenant TI and free rent for the new space continues its downward trend. Year-to-date, renewal leases included a $1.29 for TI per year term and approximately one week of free rent per year term. Our average term continues to steadily climbs physicians and health systems are executing on their long-term plans. Annual escalators in our leases signed this quarter were 2.7% on average. And our lease roll-over remains limited averaging just over 9% per year over the next five years. We believe we’re still in the early innings of expense savings in our markets. Keep in mind, we have only operated our platform for the last few years and are just now starting to take advantage of the synergies and economies of scale we see out there. Today we have approximately 10 markets with 700,000 square feet of space or more and as we build on the critical mass across these key markets, we expect our asset management and leasing teams to improve their expense efficiencies. G&A was $6.4 million for the third quarter bringing year-to-date G&A up to $19.2 million slightly below our run rate expectations at $26 million for the full year. Interest expense for the quarter excluding the change in fair market value of derivatives was approximately $14.4 million. Normalized FAD per diluted share ended the quarter at $0.35, an increase of $0.04 or 13% compared to the third quarter of 2014. Our dividend payout ratio for the quarter was comfortable at 84% 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 33% debt to total capitalization and 5.9 times debt to EBITDA. At the end of the period, we had total liquidity of $679.6 million including $11 million of cash. Our average interest rate on the portfolio was 3.31% down over 40 basis points from the comparative period last year. Including hedges, we remain approximately 75% fixed rate at the end of the period. The weighted average remaining term of our debt is 5 years roughly equal to our outstanding leases, a very balanced position. I will now turn it back to Scott.

Thank you, Robert. And thanks for joining us on our third quarter earnings call. I’ll now turn it over to the operator to open up for questions.

[Operator Instructions] Our first question comes from Daniel Bernstein at Stifel.

Hi, I guess Good morning, good afternoon. Good morning, still for you. I guess I missed maybe a little bit of the call or maybe didn't hear you right. I just wanted to make sure, when I look at the overall occupancies for off-campus assets that went up, is that because of the dispositions in the quarter?

Dan, I think – this is Robert. I think it's a combination partly of the dispositions in the quarter, we just sell a couple off-campus building, but we also continue to see pretty strong recent activity even in the off-campus assets throughout just as you continue to see medical systems and physicians continue to expand and book their long-term plans.

Dan, this is Scott. I think the healthcare sector is going through this transition that we talked about for two, three years, but I think it's starting now. We are seeing good activity, there is some tailwinds I think that are taking place, expansion space, but the community core concept physicians healthcare systems grouping around key central locations not just one-off building outskirts of communities or one asset located in a subdivision or something. I think that there is a movement and that has helped us. We've seen a good leasing in some of the community core stuff, Atlanta has done real well for us and we don't own a lot of stuff in Atlanta that is right on the on campus I think more stuff that is off-campus from our perspective and that’s gotten occupied and we are seeing with larger physician groups and they are grouping around of key locations.

Okay. And also, I don't want to call it pause, but you moderated the acquisition pace in the third quarter, I assume in response to the cost of capital, where your stock price was at one point. Now that the cost of capital's come back a little bit, what are you seeing out there in terms of bid/ask spread on an MOB space? And that temporary moderation in acquisition pace, is that something that's going to be something that we don't see going forward?

Well, I think we've been cautious I think most folks say that that's the right thing to do and like everyone else we are very cognizant of not painting ourselves in any particular corner from a balance sheet perspective. We are seeing opportunities out there I think that there is more opportunities in the MOB space certainly in the last three or four months and I frankly remember in the last 18 months. For us we're going back to what we do best and the first thing we do real well I think is that we look at each individual asset, how that asset from a budgeting and an underwriting perspective how is that going to perform over the next five, seven, nine years. There shouldn’t be a lot of variance if you're picking strong buildings with strong tenants that are going to stay in that space, you know where the escalator should be, what the expenses that you can get out of our asset management program. So we are focused on key markets, we are focused on the type of asset that is going to fit into our consistency, because we've now been consistent for 12 quarters in a row and we've always said that well-positioned, well-managed, well tended building this core critical should perform in a 2.5% to 3.5% range. We think that still is the right way to look at MOB space. So we’re seeing opportunities but we’re being very, very critical because every asset we add, we wanted to be in addition to our performance not something that we had simply because it might be available or because some sellers asking for a price that in fact may be unrealistic from a performance perspective. So we’re being very critical.

Okay. And there's always room to nitpick, so I'll ask you about the Forest Park properties. We've seen the hospitals there. Some of those have been in Texas, have filed bankruptcy, or I think one in San Antonio shut down. So if you could talk a little bit about your Forest Park assets, what you're seeing in terms of any impact on occupancy, and your expectations for those assets going forward?

Well, I mean the Forest Park transition and I think that’s a transition to an operating hospital platform that’s far more now consistent going forward. We been there a couple times and two or three times and they got a very good from our operating perspective I think I got a very good model now that they going to stand the test of time. For us you know again the beautiful nature of MOBs is that there we don't come off the vagaries of operations, we still have tenants in the building are still paying us. I think that going forward their great locations we've always heard that rents are relatively market for what we have and we’re very little occupancy by the hospital itself. So we like both sides and I think that we like the opportunity to be owners of the MOBs. We don’t know hospital so we don't have to deal with that transition or that uncertainty.

Okay. Thanks for the color on answering that question, and congrats on a nice, good, consistent quarter.

Thank you.

The next question is from Todd Stender of Wells Fargo.

Hi, thanks, guys. Just to piggy back off some of Dan's questions. With the REIT stock prices experiencing what we thought were pretty good volatility in Q3, does that provide an environment where private buyers maybe have a brief advantage when acquiring marketed deals? Maybe their cost of capital may be competitive to yours or other REITs. Anything you've noticed against some of your private peers?

Well, I think, Todd, the private capital looking for investment into the core-core or the very good medical office it's been there now for a good 9 months, 12 months and I don't see it disappearing I think in fact that the goods part about being a very strong asset classes its performing well is that people get attracted to it and bad news is that again you have more folks looking at things and so forth are two buildings in Columbus were off market we bought some stuff in the second quarter that I think is good product as you could buy that was pretty much off market. We are looking at some stuff now and key markets based on relationships that we have that we think are going to really add to our portfolio we can recycle out of non-core market. So you know are focus continues to be relationships I mean we’re seeing some requested are coming in our markets for third-party asset management. And that’s a complement to the relationship that were establishing with our tenants, it is very tough to be in 50 states or 100 markets. So we want to be in 20, 25 markets we want to know those markets and now this is moving to the fourth year of our private consider our asset management leasing platform. We’re seeing some really good advantages, but it's a very good asset class and now that you're seeing some of the hesitancy in the diversified space. I think you'll find even more attention to the MOB space this is great product its consistent and what we continue to see pretty good tailwinds from a leasing perspective.

Thanks, Scott. And can you talk about what the cap rates you acquired the Columbus assets at and who's currently managing those assets? And can you just talk about some of the value creation that you kind of underwrote?

I'll let Robert answer that.

The cap rates on the Columbus assets we are really in 6.5 areas and does bring our total Columbus portfolio up over the 200,000 square feet Mark what we can really start to get some synergies through that. So the second half is really based off in-place yields.

And I think you know we talked about same-store growth and I know that folks have that question for us. But we’ve said that three years ago, that you know the consistency the variables, we spend a lot of time underwriting the asset. And we get our asset management team involved we look at it. We understand or try to understand where the next five years look like. We got it, I think a very good handle on how we can bring the first level of savings to the asset, we’re getting even better handle, we’re already working in the 2016 on our asset management and our focus on cost and expense savings and consolidation in synergies. And so as Robert said you know 200,000 square feet in Columbus, that’s going to show some dividends in 2016. Our addition in Boston, those additions, that value really starts showing up in 2016. So as we get into these markets, I think we are doing a pretty good job of anticipating what that performance is and budgeting accordingly. And then it’s just about achieving those expectations.

Are those assets in Columbus, are you going to be able to manage them in-house right away or are they under a different agreement?

Yes, they are in-house right away.

Okay. Thank you. Just to look at dispositions, it looks like you sold a four-building portfolio in July. Can you talk about pricing on that? And was there any cap rate premium on the fact that you did sell it as a whole and not to break it up individually?

I don’t think it was big enough necessarily to get a big premium. So I wouldn’t say that in that particular case we got a premium. They were non-core to us. I think we got a very good price for shareholders. I think the group we’re looking at now actually has a little bit better synergies to it from a grouping perspective. We’re looking forward to that culmination over here - over the next several quarters because I think that will be very beneficial. We can redeploy into markets that we’re going to be in long-term, but we didn't see much of a pricing premium from the last group of $35 million.

Okay. And then Scott, just to stick with you, in your disposition comments earlier, you mentioned you've generated $45 million in gains over the past 12 months. It isn't something investors talk too much about, as it's not included in FFO. But those gains sound pretty meaningful. And just wanted to see, were those largely taken from properties you've acquired right after the credit crisis, so maybe your timing was good, you benefited from cap rate compression? Or really, do you look at how much value creation can be attained at the in-house property management once you get a hold of the building? I'm just trying to see how you can quantify what you've done with the portfolio.

I think that’s a great question and I think we need to internally have a better answer for you even than I’ll give you now. Because I think that we’re looking forward to the opportunity to again execute on what should be a big part of what companies do which is recycle, improve the performance of the asset, buy it at the right time. And I think we were beneficiary of it I said this many times, very fortunate to be able to buy assets in 2008, 2009, 2010 turn those assets into a better marketplace bring our leasing team to put some effectiveness to it. So that you're going to get the benefit of cap rate compression performance enhancements and then you are going to get that opportunity. But when you look at what we've done and we look at what we've done the last three years, since 2011 what we have bought beginning in 2012. We are very, very happy with the performance of those assets to. And so I think it's a combination company should hopefully be able to show that what they buy over time if it's a good location, good asset, it generates some gains. So we will I think come up with a better – I’ll have Robert looking exactly something that says this is how we look at those prior sales. And then we’ll also include the ones that we’re come up into the next several quarters. So I will give you some insight on how those gains were truly derived

Great. Thank you.

Next question is from John Kim of BMO Capital Markets.

Thank you. Just to follow-up on the capital recycling and the gains that you achieved, I believe these are the GAAP gains, and I was wondering if you could disclose the economic gains or the IRRs you've achieved.

I think right now as I said that to Todd I think we’ll go back and get those and will convey those. I think we know they're very favorable. I think it’s a great complement to our team and we were able to execute and I think will continue as I said with the assets that we are looking to dispose of in the next several quarters. We expect to do a similar type of execution. Now that does say that interest rates have come down, cap rates have come down and desire for the product is increased, but from a performance perspective we think that we put the numbers together so folks can actually see something.

Okay. And then as we approach the end of the year, do you have an acquisition target for 2015?

Well, we’ve always said that we would like to do something in the $300 million range. We don't do guidance because we don't do guidance specifically because markets have been slow, capital markets do. You can’t determine necessarily when that asset is going to come available in a market that its going to add synergies to what you're trying to accomplish. But I think we are seeing opportunities, we are going to be very selective, we are recycling, we are coordinating timing on that so it doesn't have the impact to shareholders and I think it will continue to do what we've done on average over the last three years to the public company. Good opportunities in this space, great opportunities for us to continue to focus on our key markets and the relationships that we've established are starting to continue to payoff.

I guess I was wondering, have there been any acquisitions that are under contractor or under due diligence, and how important it was for you to achieve a $300 million acquisition hurdle that's part of the incentive plan?

Yes, well we don't comment on acquisitions until they close. Second, our compensation is extremely minimal as it relates to acquisitions and the focus of our whole management team and we said this specifically is the return to shareholders. Do what is in the right in the best regard for shareholders. I started this almost 10 years ago and I think the decisions that we've made being a non-traded REIT, moving down the path is actually listing our company as the first one on the New York Stock Exchange without raising equity. We've made hard decisions, we haven't made decisions simply for the paycheck and we will continue to do that and we want to build the best portfolio we can as a public company with a reputation of institutionalized asset management. So we don't look at it from that perspective so we’ll do what we've done to find great assets, make sure that they're accretive to shareholders and make sure they fit into our business strategy and then we’ll just continue to execute.

On the expense savings, can you just remind us how often taxes are reassessed, real estate taxes? I imagine they're going to be going up as the NOI's been going up. But maybe if you could elucidate as to how you manage this.

Well, it depends on the state, it depends on, actually the jurisdiction. Some are annually, some are two, three years. We actively manage it and I think that the number one concern and this is something that when you look at an acquisition. We look at acquisitions and our first criteria of course is location and tenant composition and escalators that the local areas so that you're not out of bounds and core critical requirement for the tenants that are there, but the biggest concern for tenants right now are two things that you can bring value to them. Number one, they understand property taxes and so when they see buildings change hands they have that impact if you have a pass-through of taxes. We actually take that into consideration and we are looking at whether or not we think that’s the building for us, because to do an in proportionate or to have tenant and the rent disconnect from that. They'll come down the road and get you when renewals happen or when you're trying to lease vacant space. And when we look at our property taxes by jurisdiction on a quarterly basis actually so big issue, got to manage it, the fortunate part is that we talk to our tenants about it directly.

Okay. And then finally, can you comment on the lease escalators that you've achieved on leases you've signed this quarter?

Yes, I’ll let Robert.

Yes, the leases that we signed were about a 2.6% escalator. So for the year, we’ve been closer to 2.7%, 2.8% on a blended basis, but 2.6% in the quarter.

And that's higher than prior years, or can you remind us how that compares?

In the portfolio currently were between 2.2% and 2.3% and so you averaging out 2.6% in the quarter certainly helps with that efforts up. So we’re getting bigger bumps then were currently in place.

Got it. Okay, thank you.

The next question is from Kevin Tyler of Green Street Advisors.

Hi, good morning, guys.

Good morning.

I’m hearing specific cap rate of the dispositions and you said cap rate neutral so if safe to assume 6.4 or so in line with the Columbia purchases or what was the cap rate?

It was right in line it might have been tad lower but for I would say it was neutral.

Okay. Thanks and then in terms your outlook for cap rates or you define that things have kind of flattened or what was your forecast, or where do you see things heading?

Well, my view is the cap rates are still are going to be very competitive and I'm not sure that they stopped going down, the market specific is very important, quality of assets very important, the type of buyers that’s looking after the asset looking for the asset is critical, but I do think there was a pause in the third quarter and in more critical outlook more perhaps will focus diligently the asset because as you go through this phase is a lot of folks that are selling C assets for B prices, B assets for A prices and the A assets you got to find A assets and you got to find those that they really are going to perform under the underwriting criteria that you bought. So I do think that has gone on and we'll see how and what people have bought as we move through some of the earnings calls.

Okay, I appreciate that and then given the recent activity from private equity in the REIT space and buyouts that we’ve seen, Scott you alluded to it earlier this about the desirability of the MOB assets at present. So I’d expect HTA to be on a short was the name that would make sense for someone like Blackstone. I guess how do you think about the private equity player in terms of the partner for you guys going out and continuing to run and delivery on your strategy.

Well, I’ve always said and I believe wholeheartedly little bit if you perform well and you have something that people look at and say they done a good job and I think we've done that I think we have a very good footprint I think we’ve articulated our markets I think we started and are still in the early innings of our asset management plan and that can be extrapolated because as I mentioned earlier we are getting inbound calls for asset management for leasing and for property management from folks that frankly surprised Amanda, surprised me. And we are here to make the greatest value for shareholders. And if that would entail something that would be a complement to our shareholders to be and someone of values says here's a value that you can't refuse then and it would be something that we would always do were to do what is right for shareholders and what were management team is trying to do as well as we can.

Okay, appreciate it, guys. That’s all thanks.

The next question is from Rich Anderson at Mizuho securities.

Thanks. Good morning. How many employees are at HTA?

Yes, I think about 185 or so.

I wanted to close to 185 Richard might be one or two or three that I want 190s what I would say instinctively.

Okay and what percentage of your portfolio's triple net?

Were about two-thirds actual triple net leases about 30% is also single tenant triple net lease overall.

Okay single tenant triple, but in that two-thirds of single tenant 30%? Right.

Yes, and the two-third of that included the single tenant triple net.

Okay and just I am just – couple quick here Scott in terms of disposition of the questions kind of asked you know on the 36 million you sold when you bought them where they were not when you're non-traded REIT in 2008 and 2009. So that you really did have that big, kind of the low basis? So to speak.

I think that the five that we sold or four that we sold, this 35 was pretty much at comprised of assets that were bought in that 2009, 2010 they were parts of portfolios, Rich. And I'll have Robert give you the exact answer, but my instinct is that they were.

Larger part of portfolio is there.

And then you also, the question was brought up about Forest Park. You start to think about hospital systems like community and others that are really starting to struggle stocks are not doing well at all. A lot of questions about what's causing that in terms of admissions and everything else. And I get it. You are kind of once removed in the medical office field. But eventually that's going to do, if that lingers this could turn bad for you just because that's the hub to your spokes. So just curious how you would think about that in terms of wealth hospitals really start to suffer for whatever reason, be it systemic or whatever what you do as a company because eventually that's got to hit you guys somewhere at some point.

I think that the hospital efficiency processes is still moving forward. I think there are going to be transitions in different systems in different hospitals that either improve or need changes or do what they need to do to stay. I don't think profitable but stay marginally neutral and give the service they need to the geographic locations that they are servicing. We are such a small part and I go back to the fact that why MOBs are so consistent is we are such a small part of the physician, if it’s a physician group they are focused on revenues, they are focused on generating synergies and energies and they need to be at locations that are to maximize that. Now, if this persisted, and if physicians ended up, or healthcare systems ended up having a longer-term issue of profitability then ultimately it might in fact end up hurting or impacting the MOBs. But frankly we haven't seen that in fact we're seeing actually the opposite as you know 15 years ago if you were only owner of a MOB you would have 30 or 35 different physicians of one or two or three folks now you don't or our average increase in expansion space is about 2,000 square feet, we had most tenants that we’ve actually lease to have been in buildings that were in. So they're actually seeing a need for more space and need to see more patients take market share. So we haven't seen that yet and I guess there would be other folks who own hospitals or other folks who own some things that would probably give you a better dynamic into how that is going to impact them specifically first and then down the road. And I think it’s a lot further down the road if in fact MOBs would be impacted.

Okay, couple of just two more questions. On the first one is the familiar one for me acquisition costs, $900,000 on $29 million worth of the activity, it’s over 3%. Yes, that’s out of range than what we normally see. Can you just kind of go through the components to that $900,000 and why it’s as large as it is on relative basis?

Rick, I think you got to look at it on a year-to-date basis, we close a lot of the deals in the second quarter, when did it over $200 million as there at the end. And so when you really look at it we’re at 1.3% year-to-date on acquisitions expenses in terms of total acquisitions.

Yes, I think Rich, to be a little more specific, we did a lot of all diligence on some stuff in different locations and there was opportunities out there and we may not be necessarily the right buyers of those opportunities. But we certainly take the effort we take the knowledge we want to understand the dynamic of the opportunity and that takes some time and I think it's paying off I don't know how other people diligence their assets or diligent to the larger portfolios if they buy or so forth. But we take some time and effort added and I would say that in this last third quarter, there was a lot of activity out there, I don't know how much actually transacted because we were not either the ultimate buyer of those opportunities or they may still be out there. So I think from an annual basis it’s very reasonable, from a quarter-to-quarter basis it ebbs and flows a little bit.

Okay, so the 900 necessarily tied to the 29 and it’s tied to all the effort…

Yes, I mean if there is probably someone that is responsible for some of that, it’s me. You know I go to seed stuff and we diligence it and we want to understand the market and we want to use resources that we have if there is concerns about the capital associated with things and so we try to do a really good job, but we do try to keep it in perspective and make sure that we keep it from an annual yearly thing consistent with what one would expect.

Okay, and then final question is going to be on the consistency issue of same-store. I know you kind of framed it all differently. You mentioned true up Robert versus the third quarter of 2014 so looking back and in that year or that quarter you had expense reduction of 1.1% that got you to the over 3% same-store number for that quarter. So is it fair to say then if you would place this in the right spot initially or not and I’m not saying that. The true up did never had to happen that you would have been below 3% three year ago in terms of same-store?

No, actually let me clarify what that was. Specific tax credit true up are what we referenced in that was actually related to some newly acquired assets in Florida. And so last year they actually weren't even in the same-store pool. So when we brought them we underwrote like we talked about, we underwrote that we expect the property taxes to go up when we got the final bill to memorialize, it was much lower than we expected. So that’s one component within the same-store pool. The second components to that, these are all mostly almost 100% occupied buildings on a net lease basis, so there wouldn’t have been any NOI impact to it anyway.

Okay.

And I think Rich, the consistency question, I continue to say…

I didn’t even ask yet, Scott. You know what it’s going to be.

I know what it’s going to be. I think it’s a complement to a couple of things, because we’ve look at this and think that if you do a good job of underwriting assets. We have pretty new portfolio I mean even though we bought 2 billion of it in eight, nine and 10, the rest of it is been here in the last three years so predominantly most of what we bought, we’ve been around 10 years, but it’s been in the last six, There shouldn’t be a lot of frankly variables. I mean we’ve got occupancy that's been consistent, we’ve got underwriting from an extensive perspective that we continue to see take place. We worked pretty hard at this and I wouldn't want to say that anyone else doesn't do that, but besides buying assets and diligencing assets. Looking at markets, this is what we do. That's why we brought our asset management leasing in-house and so if we budget well, if we managed to those budgets become in the fields on a consistent basis I think we should be very predictable. So the question you ask is when we're predictable is what happened and that's probably when we are going to need to have a real good answer.

I think I’d be relieved when I saw some of that because anything – any portfolio is subject to its ebbs and flows in any given quarter. I think the MOB stability is a wonderful part of the story and that's true of the product type in general, but I don’t know I mean, it’s this consistency you would just think, well not just easier to call this as pure healthcare reality. I mean they’ve kind of run the gamut more like 0% to 5% or 6% in any given quarter and they’ve been around for a long time. I’m just – it just boggles my mind that they both could be so different from one and other.

I think our companies are different. I think that we are consistent in the MOB space, we don't do development, they’ve been around as you said a long, long time I’ve focused on the fact that most of what we bought has been in the last six years. I think we have our own asset management that we started so again I don't know what other folks do I do know what we try to do. We work real hard at this. We said from the day one that we would be within 2.5 and 3.5 ranges. We’ve accomplished that pretty consistently and I would say that’s what we do. I would be – you say I will be disappointed. You will be disappointed – I will be disappointed less through a budgeting process, looked at 2016, looked at what we acquired, looked at how we were going managing and somehow came significantly off that, I would say will what happened, but we got pretty good stuff we got again occupancy, retention.

Rich, I think one of the biggest drivers that consistency we’ve got very limited rollover, we’ve been under 8% rollover each of the last couple of years. So when you kind of narrow down the variables that lead into same-store growth. 92% of our stuff has been baked at the beginning of each year that we’ve been we got 85% retention on top of that with our leasing spreads have been kind of slightly positive. I think the other big variable that that when you go through the formula of what gets into cash NOI growth, free rent periods have a lots of do with that we are very focus on the overall economics for our leasing deals and so we have been a really about a week or free rent per year term leases this year. We’re very focused on that is what you propose altogether theirs is not a lot of variation in the model that could really kind of pop out at you. Listen, as we start to get more lease rollover, will be in that 2.5% to 3.5% range, yes mostly likely but.

I think I want 2.9% would be so happy. That’s just me.

[Indiscernible]

That’s all I have, thanks guys.

Next question comes from Michael Gorman at Cowen Group.

Yes, thanks good afternoon, guys. Just a couple of quick question here. Going back to the dispositions, I am curious how much the current market pricing of the strength in market pricing had influence the pending pipeline of dispositions and how much that pipeline might be influenced by how much you can finds to acquire over the next few quarters?

Well, good question I think we’ve targeted some assets that are non-core and it would been fortunate to see that we continue to stay in a pretty strong MOB market. So I think that we want to move out of non-core markets we want to move into key markets. We really started determining the strategy about a year and a half ago if someone would go back on to our conference calls we started talking about where do we like to be positioned as an owner of assets. So we want 1 million square feet or 1.5 million square feet. So we want to bring our asset management platform to add manage the assets and so we targeted these and I think we will continue to recycle because it makes sense from a long-term view to do that and were fortunate that will be able to do that in an environment that is very cap rate positive and I think that the other thing that assistance to some extent is that we have relationships in markets now where you know it helps us know what's coming to market or it helps us coordinate with someone who says we’ve sold you something before, we want to get rid of this one and we want to talk to you. So I think we’ll move through this in much the same way we’ve done in the last 12 months.

Okay, great. And then I am sorry could you talk about the move out? It's been pretty consistent over the – the tenant retention has been pretty consistent. But I'm curious what you guys are hearing from the 15% that choose to vacate. Are they going – are these practices getting consolidated or are people leaving practice? What’s the main reason that people would leave the portfolio?

Well, I think we have had our share, I mean we – there’s situation where we have had folks leave us and move to somewhere else and because they're consolidating or expanding with the physician group that is in the other building. We've been fortunate I think to have more folks moving in then moving out obviously that's the 85%. There are also folks that – the smaller groups that truly are I think exiting the healthcare sector, where if you have a two or three budget docs and they have been there while they probably maybe just hanging up and moving out and the space is vacant. We’re also going through a process and this is again back to the I would consider to be the predictability of what we try to do is, as we go through our leasing project a budgeting process. We are first and foremost looking at who, who is in our buildings and whom can expand and we don't want someone leaving us for expansion space somewhere else. We want that person or that group to be in our building for a long-term and in some situations this is where the space has changed a little bit. We are keeping space available, we’re not leasing 1,000 or 2000 square feet to some one-off group when some physicians, when a larger group in our buildings that we may want that in six months. You made that decision, we make those decisions. They aren't made by third parties. They are made by us and that does impact some of the occupancy that we look at because again physician groups in key buildings and key locations are going to be there a long time under the way the Affordable Care Act is rolling out.

Okay, great. And then may be just one last one on kind of the big picture longer-term basis. There's been a little bit of discussion about the hospitals on the call. But I am curious as some of these trends trickle down to the physician level tracking data out of EMR's outcome-based reimbursements for Medicare and things like where you may see some impact onto the actual P&L of a physician. Is that changing the way that you guys think about future investments or think about the data request that you put into your leases, make sure that you can monitor what's going at the physician level so that you can see maybe if there is a problem coming out from the financial perspective is were maybe in the past it wasn’t necessary because it was more of a flat rate type reimbursement?

I think you've said two or three things there. One it is important, both the healthcare system is important are they growing are they looking for additional volume, because it is a volume business now. So if you go look at an asset its next to a hospital when you go at 5 o'clock or 4 o'clock or 3 o'clock and there is no one in the parking lot. You pretty much know that that's not something that's what you want to have long-term. So we look at volume, we look at financial stability, we look at competition within the market from a physician group perspective and the healthcare. One of the things that we haven't seen yet is that is and this is back to if healthcare systems start struggling is that going to roll down the MOBs. I think actually before we see development we are going to see redevelopment in key locations and key buildings. And I think the second thing we are seeing which we mentioned is that healthcare systems are looking for professionals to manage their buildings. That’s has been a couple calls that we’ve taken which is – if you manage this could we save some money. That's a good conversation to start having, because that conversation hasn’t been had. And I think that's going to be the next step before the healthcare systems trail off, they are going to continue to look at ways to make their operations more effective in one of those ways will be I think to turn their asset management of the real estate to folks that can bring savings to that venture and do it on either regional basis or national basis and take advantage of that.

Very good, thank you.

Our next question is from Doug Christopher at Crowell, Weedon.

Hey, thank you. Thanks for a great call today. I just have one question looking at slide 6, you have the 10 key market. Do you expect those key markets to continue to grow or do kind of the three that aren’t key yet, it has become 2013 over the next roughly 24 months?

Robert just handed me the sheet. I think that we expect each of these markets to grow. I look at the sheet and I say I like these markets. I like the opportunity to expand. I think that we would like to target three or four more markets that we have an eye on that would add to this sheet. So our goal again great quality buildings, good key markets that are going to continue to grow from economic perspective and then use our asset management and our leasing and even our engineers. The most important component of the building is the engineer, make them important in that region, in that location. So we look forward to – I mean this is where we start, we will add some, but we expect to grow in each of these markets frankly.

Thank you. End of Q&A

This concludes the question-and-answer session. I would like to turn the conference back over to Scott Peters for closing remarks.

Well, thank you everybody for joining us this morning and we look forward to seeing folks at NAREIT. I think that's coming up in a couple of weeks, two, three weeks. And if any questions, of course, always just call us. We always invite folks to come out, look at our assets, look at our markets, and we'll welcome those calls if they come. Thank you.

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