Healthcare Realty Trust Incorporated (HR) Q4 2015 Earnings Report, Transcript and Summary

Good morning, and welcome to the Healthcare Realty Trust Quarterly Analyst Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to David Emery. Please go ahead, sir.

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

Thank you. Except for the historical information contained within, the matters discussed in this call may contain forward-looking statements that involve estimates, assumptions, risks and uncertainties. These risks are more specifically discussed in the Form 10-K filed with the SEC for the year ended December 31, 2015. These forward-looking statements represent the company's judgment as of the date of this call. The company disclaims any obligation to update this forward-looking material. The matters discussed in this call may also contain certain non-GAAP financial measures, such as funds from operations, FFO or FFO per share. A reconciliation of these measures to the most comparable GAAP financial measures may be found in the company's earnings press release for the fourth quarter ended December 31, 2015. The company's earnings press release, supplemental information, Forms 10-Q and 10-K are available on the company's Web site.

Very good, thank you. We're pleased to report a solid quarter and a strong year end results. 2015 was another successful year for the company. Positive operating metrics continue to attest to the Healthcare Realty's quality portfolio, and validates our selective investment strategy centered on low risk, intrinsically-valued real estate within the expanding outpatient medical office sector. We expect the company's progress to continue in the months ahead and years to come. The stability and need-driven dynamics of the MOB market -- the property market differentiate the company and have accordingly lowered our relatively -- relative cost of capital. Moreover, our portfolio is arguably unmatched within the sector. We've prospered from years of selective investment and own campus properties with the top health systems in the country. Recurrent tenants, higher rent coverages, and low fungibility characteristic determine the company's resilience, and allow the company to be disciplined avoiding the often latent perils of unbridle growth from heedless spread investing. We remain confident in the soundness of Healthcare Realty's conservative growth model coming from multiple balanced sources and set on a foundation of solid internal performance. With proven consistency and deliberate execution, Healthcare Realty will continue to advance and extend its distinctive position. Now as we do each quarter, Ms. Mancini will summarize the views on current events and trends related to the healthcare industry. Bethany?

Events in the healthcare industry during the quarter centered more on investor sentiments, driven by negative headlines rather than major substantive developments. Political rhetoric from presidential candidates and large health insurers making a case for reform-related concessions set off a flurry of headlines on pharmaceutical price inflation and an increasing concern over the sustainability of Affordable Care Act benefit to hospitals and insurers. In general, fundamentals for hospitals continue to remain stable. Public exchange enrollment is expected to have decent upside left for providers, and Medicaid still has opportunity to expand in some states, but the question of sustainability across all reform-related benefits certainly remain. Better margins from newly insured patients, the feasibility of health insurance exchanges, the current boom in healthcare hiring, and the transition to value-based reimbursement, each bring the issue of long-term profitability to the forefront. However, all agree, whether state and federal government, consumers, employers, hospitals or health insurers, that it is the management of healthcare cost and the ability to monetize on those saving through shared risk and reward payment model that will become increasingly valuable to sustain margins. For health systems and physicians, this means creating large network that allow providers to leverage collective size and efficiency, increase their physician referral base, and improve market share. Health systems are pursuing partnerships to coordinate care with doctors and enhance physician leadership within their system. And most importantly, the optimization of outpatient capabilities and the expansion of ambulatory and outpatient facilities are becoming increasingly paramount in the post-reform environment. Healthcare Realty has seen evidence of this greater demand for on-campus medical office space by market-leading health systems, those that are proactively seeking opportunity to enhance their clinically integrated network and capitalize on shared incentives and rewards in healthcare delivery. Providers and insurers alike are making positive strides to advance the growth of outpatient services, and the role of physicians and their value as tenants are rising within health systems. Healthcare Realty's portfolio of outpatients facility and physician tenants are well-positioned to benefit from these trends along with the recent changes to Medicare rates that benefit on-campus setting for hospital-based outpatient services. Approximately 80% of the company's outpatient facilities are located on hospital campuses and 89% are affiliated with credit rated health systems, resulting in high demand for space and tenant retention, and the ability to grow rental income steadily. In addition, the company's portfolio comprises of broad base of physician tenants across more than 30 specialties with relatively lower concentration of Medicare and Medicaid patients and high rent coverage. In the midst of a complex time of change in the healthcare industry, given our years of experience, we see a simplified and sustainable trend. Physician led care in lower cost outpatient settings has the strongest propensity for growth and remains the driving force for incremental demand of medical office space. David?

Thank you. Now, on to Mr. Whitman for an update on balance sheet, capital markets, and other activities. Doug?

Thank you, David. For the first couple of months, healthcare rates have exhibited differing results amid investor worries about weak fundamentals in the skilled nursing sector and over building in senior housing. However, HR has performed well maintaining its focus on multi-tenant on-campus MOBs, an asset type that's showing its trademark resiliency. In the fourth quarter, we sold 1.2 million shares through our At-The-Market or ATM program, generating net proceeds of $33.5 million. For the year, we sold 2.7 million shares through the ATM, generating net proceeds of $74.5 million. In 2015, our acquisition and development funding totaled $215.1, while proceeds from our ATM and dispositions totaled 232.5 million. Throughout the year, HR sought to lock in its spread on new investments by match funding acquisitions with disciplined equity issuance. In addition, we've used the strong demand for MOBs and low cap rates to proactively harvest the value from properties in our portfolio that no longer fit because of geography, relative value, or growth potential. We remain confident that our strategy of strong internal growth paired with moderate levels of acquisition and development funded judiciously with a combination of equity, debt, and dispositions will increase value over the next several quarters. And as a reminder, I encourage you to attend our Investor Day which will be held here in Nashville on May 11th and 12th. In addition to meeting with senior management, attendees will have the opportunity to tour several of company's on-campus properties including one of our redevelopment projects. David?

Thank you, Doug. On to Mr. Holmes to give us an overview of results and operation and other financial matters. So, Scott?

The company reported fourth quarter normalized FFO per share of $0.41, and NAREIT defined FFO per diluted share of $0.40. The primary normalizing item for the fourth quarter is acquisition cost, totaling $1.1 million. Normalized FFO for the fourth quarter grew 2.1 -- excuse me, 2.7 million or 7.0% year-over-year to 41.1 million. Over the same time period, normalized FFO per share increased 5.1%. For the full year 2015, normalized FFO grew 15.7 million or 10.9% to 160 million and normalized FFO per share grew 7.4% to $1.60 per diluted share. Also for the full year 2015, revenue was 388.5 million, an increase of 4.8% over the 370.9 million for the full year 2014. For the fourth quarter, the board of directors declared a dividend of $0.30 per share and the dividend payout percentage based on normalized FFO is 73.2%. In the same store pool for the fourth quarter, property taxes increased 2.6 million over the same quarter a year ago. Of that amount, almost $2 million was applicable to the first three quarters of the year. But the full impact of the expense occurred in the fourth quarter when amounts became known. This resulted in a 1.8% fourth quarter same store NOI growth rate. This type of uncontrollable operating expense increase is the reason why results can fluctuate so dramatically from quarter to quarter. Because of this volatility, we continue to point to a 12 month over 12 month comparison for trends in same store performance. For the trailing 12 months, the same store NOI growth rate over the same period a year ago was 5.4% for the multi-tenant properties and 4.8% for the single tenant net leased properties for a blended NOI growth rate of 5.2%. The more predictive same store metrics for the fourth quarter were contractual rent increases of 3.0%, cash leasing spreads of 3.7%, tenant retention of 91.2%, and the average yield on renewal leases for the quarter increased 60 basis points. These metrics are partially reflected in the average rental rate per occupied square foot in the same-store pool which increased by 2.8% year-over-year in the multi-tenant portfolio and 2.9% in the single-tenant net leased properties. Compared to the fourth quarter a year ago, average same-store occupancy increased from 88.5% to 89.4%. The low fungible nature of the assets is reflected in the company's strong tenant retention which enables us to maintain positive cash leasing spreads, improve re-leasing yields, and consistent annual rent bumps. These key drivers suggest positive future revenue growth. And we continue to be pleased with the direction of our leasing initiatives and our operational expense management and our leasing initiatives. David?

Thank you, Scott. Now on to Mr. Meredith to give us some information and overview of recent investments and development activities. Todd?

Investment activity in the medical office sector achieved record levels in 2015 and shows no signs of abating in the year ahead. MOB transaction volume exceeded $10 billion last year, reflecting a tight market and resulting in historically low cap rates. Recently, a fully leased on campus MOB in the Seattle CBD traded for a sub 5% cap rate. The buyer was a core institutional fund rather than a traditional MOB buyer. While not the norm, it is indicative of the current demand for MOBs and a sign that cap rates are not moderating especially for the most sought after properties. While most have historically viewed MOBs as sleepy relative to other healthcare real estate sectors, now more than ever investors are appreciating MOBs for their trademark stability, low risk, and steady long term growth buoyed by favorable demographic trends, the ongoing shift to the lower cost outpatient setting, natural supply constraints, and financially sound tenants. These attributes contrast starkly with the oversupply and reimbursement concerns weighing on senior housing and skilled nursing, sectors that drove much of the rapid consolidation and recapitalization by healthcare REIT over the last decade. Now that the space of transactions slowed, the cyclical nature and co-dependence of these operators with REITs have become problematic. Healthcare Realty's approach in this environment remains unchanged, disciplined, and sticking to our focused low risk strategy. The company has been fortunate in recent months amid market volatility that investors have recognized the inherent value and low risk nature of HR's portfolio of outpatient hospital centric properties created over many years of refining and streamlining which has proven to be resilient and is poised for continued steady growth. As we make investment decisions, our primary motivation is to refine the portfolio, shifting to higher quality, multi-tenant on campus properties aligning with leading health systems and increasing follow-on investment opportunities including development and redevelopment to create economic value and generate incremental growth. We recently completed or commenced -- excuse me, commenced development of a 98,000 square foot MOB located on the campus of CHI affiliated St. Anthony's Hospital in Denver, the campus where we have already developed and owned two well leased MOB. With the budget of $26.5 million, the MOB is scheduled to be completed in mid 2017. Hospital lease commitments totally 35% include a surgery centre and multi-specialty clinic with more clinical leasing to follow during construction. Progress continues on a 12,900 square foot retail center in Austin with completion expected in April. The center is located adjacent to the Baylor Scott & White campus where the company already owns two 100% leased MOBs totaling 206,000 square feet, and one of which the company developed. We are currently planning a third 60,000 square foot MOB on this campus, which we intend to get started later in 2016. The redevelopment in Birmingham is complete with only tenant improvement funding remaining. And in Nashville, we recently topped out at four storey 70,000 square foot expansion and started vertical construction on an adjacent 907 space garage. Both of these should be complete by early 2017. As a byproduct of recent acquisition efforts, several prospective development projects have emerged. We are currently pursuing two developments in the Seattle market that has a potential to start later in 2016 or early in 2017. In the heart of the First Hill medical district near the Seattle CBD, the same location is the sub 5% cap rate I mentioned, we are in MOBs totaling 135,000 square feet. And we are currently designing 133,000 square foot MOB that will be integrated with one of these two existing MOBs. We are also in discussions with a separate health system regarding the development of a sizable on-campus MOB in another part of Seattle. Budgets for these two MOBs will likely exceed $60 million each. While the process can be lengthy, development remains a key component of the company's strategy; sharpening our views owner and operators of medical office properties have always delivered at a measured pace and dictated by hospital-driven demand for incremental outpatient capacity. In the fourth quarter we acquired four MOBs for $99.5 million, bring our year-to-date acquisition total to 187.2 million. All eight properties acquired in 2015 are located on or adjacent to the campuses of investment grade health systems such as Providence Health, Catholic Health Initiatives, Sutter Health, Allina Health, MultiCare, and UW Medicine. We also sold two MOBs for 19.3 million in fourth quarter, bringing our 2015 disposition to 158 million. We sold nine properties during 2015; all properties that no longer meet our objectives because of the lack of health system alignment, geographic fit, relative value, or growth potential. Our average acquisition cap rate in 2015 was 6%, while our average disposition cap rate was 5.3%; a favorable rotation in pricing in addition to an improvement in asset quality. The company is currently under contract to acquire two MOBs for approximately 60 million that should close later in the first or early in the second quarter. The company expects 2016 acquisitions to be between $125 million and $175 million and cap rates in the mid 5% to low 6% range. Dispositions for 2016 should be between 50 million and 100 million, and cap rates averaging 6% to 7%. MOB portfolios are now clearly being recognized as having favorable intrinsic value relative to other healthcare facility types. And even within MOBs Healthcare Realty portfolio epitomizes the attributes most discerning investors look for: stability, growth, and long-term value. Dave?

Thanks, Todd. Now, a few comments about recently announced changes in the Board of Directors and transition of senior management; in November, the company announced the appointment of three new Board members to the positions vacated by the retirement of three individuals who has served on the Board for many years, including two original founding Board members. We are pleased that the new directors, Ms. Vasquez, Mrs. Agee, and Mr. Lyle are well-versed in the healthcare industry and bring to the company insight in skills from many years of leadership. I want to express my sincere appreciation to our retiring Board members, Batey Gresham, Errol Biggs, and Roger West for their dedicated service to the company. In recent days, we announced the appointment of Kris Douglas for the position of Chief Financial Officer, and yesterday Todd Meredith to the position of the President and Chief Executive Officer. The invitation of the Board's senior management succession plan is a result of a long-term effort to build an experienced and skilled management team with considerable depth. My roles as Executive Chairman, I look forward to working with Todd, Doug, Chris, and John, along with the next-generation of managers and employees as we continue to advance the strategy of the company. Most of you know Kris and Todd, and have likely met with him many times over the last few years, and I expect that you already have some insight into their abilities to lead the company in these key roles. They have been decisive in expanding Healthcare Realty's strategic position in the medical office sector. The company is very fortunate to have such qualified and seasoned executives to promote from within our ranks. Kris has been with the company 13 years, and he has been involved in most aspects of the business; most recently in capital markets activities and new investments. Given his tenure with the company and his insights, deep understanding of the business and his background in commercial investment banking, he is well-suited for the CFO role. Scott Holmes will continue to be involved in accounting and financial reporting over the next two years. I want to express my appreciation for Scott's steadfast leadership over the past 18 years. It's been great, Scott.

Thank you.

And thank you for your worthy contribution and support. Todd has been instrumental in shaping and honing the company strategy during his 15 years with the company. He has been influential in developing a team of managers to expand the company's portfolio and further its operations. And his leadership on defining investment criteria and structuring long-term operational goals has been invaluable. Todd has an admirable grasp for the mechanics, and the agility, and the resolve necessary to lead a public company. The Board is very pleased to make this appointment. Operator, Chad, I think with those comments, we are prepared for the -- move on to the question-and-answer period.

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Vikram Malhotra with Morgan Stanley. Please go ahead.

Thank you. David, if you could maybe give us a bit more insight into sort of the process for the appointments announced? Was there an external search considered or done? And then maybe specifically for Todd, just anything that you –- you've obviously been with the company for a while, but anything different you'd like to do or add on to?

No, I think the process -- I think just generically I think it's commonly known that internal advancement has a lot less risk profile than outside recruitment. So with that said, for years we always hire for talent. And I told Todd yesterday, I remembered 16 years ago, standing in the parking lot of the restaurant, and today was a long day from that. So we have always felt like that internally folks that we hire, we always like to have the attitude of them being in the corner office, or at least close to it. So our focus for the Board overall these years has been basically internal and developing talent within that. As far as going forward, a lot of things I think from everybody's viewpoint who would be leading the company, not a lot is going to change. I think we've got a well-refined strategy. There's no reason for departure on that. Most of the day-to-day will shift off to those folks, and I will have more of an avuncular role, and from the standpoint of being Executive Chairman for the years to come. And I'll continue to have substantial stock ownership. And so I will have an interest in that.

And Vikram, this is Todd. I certainly would echo what David said. I think, as you pointed out, I've been here a long time. And certainly me and along with a bunch of us here have really helped shape the strategy and refine it over the last five, 10 years, and really not departing from the original thesis of the company. So I think you'll see more of that, maybe just a natural evolution as things evolve. The industry has changed, but in the end we've stayed with the same strategy, and I think you'll see us doing a lot of the same.

And then just, who will manage the investments?

So currently -- obviously this is a year end transition, so I'll continue to do that, but we will -- we certainly have a rule around here that says you don't move up unless you've got somebody that you've mentored with you. So we've got a deep investment team. We've got obviously investment committee, it doesn't really change. Kris will join the investment committee. So it's the same group making those decisions, but in terms of the staff running investments we've got a deep bench there, and one of the guys, Rob Hull, you may know, is out on the road with us sometimes. He'll begin to take on some additional responsibilities as Kris moves to the CFO role this year.

Okay, thanks. And then just last one, quick numbers question, the G&A growth seems a little high relative to overall top line growth. And just wondering if there's anything one-time in it for this year?

Are you talking about the guidance range in terms of…

Yes, the guidance for '16.

Sure. Really the kind of the way to think about it is a pretty standard 3% sort of increase in G&A. I think the thing that you're seeing that is causing that is the non-cash amortization of performance-based awards. A lot of that is -- it's described some more in detail in the K.

For 2015 performance.

For 2015 performance. So you see the amortization of that beginning in '16. So, your normal increase plus some performance-based pay, and obviously the range would be -- the higher end of the range would be additional performance-based pay.

Okay, thanks guys.

Thank you.

The next question is from Jordan Sadler with KeyBanc Capital Markets. Please go ahead.

Good morning. Just a follow-up; congratulations to everyone who is moving on and have been promoted, but I wanted to just sort of touch on the changes here to drill down a little bit. David, it sounds like you're moving into this Executive Chairman role. Is this more of just a changing of title for yourself and Todd, or are there a specific set of responsibilities and hours that will be changing, I mean, how will the day-to-day change?

Well, I think from the standpoint that I will be less involved in the day-to-day, such as quarterly reporting, and these calls, and those kind of things, but will still be involved. I'll still have an office here. I'll still be involved in, you know, lunches. Those kind of things where a lot of -- over the years, a lot of strategy and thing [ph] evolves from those lunches from day-to-day. And then from standpoint of the investment committee, I would imagine that I'll still be involved in that. So in large degree the mantel kind of shifts from the daily steering the boat, I'm just going to be on the poop deck on the starboard side, so hopefully not on the windward side. So, not much change from that standpoint.

Okay. But you don't expect to be on these calls a year from now, is that what you're suggesting?

That's correct.

Okay, all right. Well, keep us posted on -- so we have an appropriate time and place to say goodbye to you…

Okay. Well, I'm not to say that or some sense of time or something might happen that I might not be on a call from time to time, but I don't expect that to be the norm.

Okay. And then just drilling down into the investment activity, so the guidance in terms of acquisitions, dispositions, '16 relative to '15 you were able to obviously sell assets in '15 at cap rates inside of what you were able to buy, and as you focus on '16 I'm just curious it seems like that opportunity is not necessarily the same, and is that -- can you just drill down on that and talk about what you're anticipating and why that spread has changed?

Jordan, I would say that the real issue there is that if you look at '15 we had one large transaction that certainly helped that cap rate. That was the OrthoIndy Hospital, an MOB that was in the low-six cap rate range. And that certainly -- that was a 100 million out of the 158 million, almost 100 million. And also, we actually had a couple of buildings that were in kind of a unique situation where the occupancy was not particularly high. So therefore the NOI was pretty low, but we sold it at a very attractive price, just given the desirability of the asset location, and it just made sense for us to sell those. So, all that went to a blend. That was very favorable [ph] as you say. I think looking forward, I would say, we've guided six to seven on dispositions versus a little lower for acquisitions. I think that's more the norm, just given sort of the nature of things, the rotating assets in terms of quality, improving the asset quality, it's going to vary year-to-year just depending upon the composition of what you're selling. I don't think -- there's obviously a chance that it could be a little tighter spread there, but I think in general '16 has probably more of a normal sort of concept on that.

You expect the market to remain as tight as it was in '15? Are you bumping up to folks still, or do you expect it to tighten further or loosen up? I mean what are you anticipating here?

It's a little hard to say if it's going to tighten further. I think we have just seen, and I pointed out a particular transaction, some pretty aggressive pricing. So as you get to the really sought-after assets, you see some of that type of pricing. But in general, I'd say it's very tight, a lot of competition. We don't really see that changing. Whether it goes tighter, it's hard to say. Certainly there are some cracks maybe in cap rates on other asset types, and whether that kind of pervades into the MOB space, we'll see. But we're hearing about a lot of things coming to market. We think there is still a healthy buyer market out there, not just REITs, but also private buyers. So I think it will remain pretty tight.

Okay. And then lastly just on the developments that are currently being planned, you talked about Seattle, can you talk about development returns that you are underwriting today and then what the expected -- how pre-leased are these properties?

So development returns, we actually provided a little guidance on that in our supplemental in the range we provide is six and three quarters to 8%. Those are obviously what we are performing and sort of putting in our numbers as we look at things, some things as the leasing gets higher. So if you have something that's you know 70% 80% leased, you're probably going to see the lower end of that pushed, and maybe beyond through that. I think maybe a way to think about it is a spread to acquisition cap rate. So if something were to sell in the market at five and a half, the development maybe -- if it's well leased it could be in the low sixes in some cases. So it really becomes a spread relative to what the acquisition cap rate would be for that asset, but the situations we are looking at, some are relationship-driven, not necessarily being widely marketed and we are able to push some of those north of seven, and up as you see toward eight in some cases. And that is usually places where we are embedded and have some insight. And then redevelopment is even little higher than that. So we have redevelopment kind of a seven and a half to eight and a half range, and we see some opportunities to exceed eight in some of these cases. And you mentioned pre-leasing, I would say you have seen it sort of at a low -- probably a low is around a third, maybe 35%, probably I think all of our redevelopment and development projects right now are about 78% leased. So it's always going to be a mix, but I think low 35, but maybe some are closer to 100.

Okay, thank you.

Thanks, Jordan.

Thanks.

The next question is from Chad Vanacore with Stifel. Please go ahead.

Hey, good morning.

Good morning.

All right. So, looking at the same-store NOI in the fourth quarter, it was muted and you mentioned the uncontrollable OpEx increase. What was that again? I missed it.

Really that was driven by -- with Scott's remarks, he mentioned about 2.6 million of property taxes, and really this is just kind of the dynamics of reporting and looking at quarterly results. A lot of that if you -- almost 2 million of that as Scott mentioned really relates to the last three quarters of the year, and so this is just sort of the cycle and nature of property taxes. And it's really kind of the primary reason we -- well, quarterly is interesting, I think people try to infer trends from and really you have to look at the 12-month comparison to see that. So, really if you go back and adjust that, you know, we don't normalize, we don't adjust, we don't do anything to our same-store results. So that gets a little bit tricky to start trying to adjust when you have operating expense reimbursement and all of that. And so we did look at that and say what would happen if you sort of pull this out for the prior quarters, the portion that applies to the prior quarters. And you would probably look at same-store NOI growth in the multi-tenant portfolio closer to 5.4% rather than the 1.8% that we reported. But again, we would just point that that's just the nature of quarterly variability, and if you look over at the annual, it was 5.4, which is actually similar to what it would be on an adjusted basis. So -- and that's a range that you saw us in that range last quarter; it's kind of the range closer to what we are pointing to in 2016 as well.

All right, that is a great color.

Chad, another thing I may add is this kind of thing from quarter-to-quarter just points out what we say over and over again, the quarter-to-quarter SS NOI is always false positives and always false negatives. And so we continue to try to emphasize the importance, and that's the reason we came up with the four predictive measures that we publish every time is those four things are okay; everything's okay. And the reporting stuff is always out of period and it's -- everybody is focused on SS NOI from quarter-to-quarter is just ill formed. It doesn't provide any probative information.

All right. So, to your point, Dave, thinking about re-leasing spread as a good indicator; you gave 2016 re-leasing spreads in a range of 2 50% to 6%, is that right?

Yes.

What do you think that would be on average, because that's a pretty wide range.

Well, it is, but I think it's just an indication again of quarterly variability. And so, I think if you look at the midpoint of that range, that's a fine place to think about the year.

I mean we get a cash released and spread -- we get a Fed report every week. Sometimes they're 30%, sometimes they're 1%. A smaller tenant might be way off the map. So it's just a range. Again, you have to look at it over a yearly period and year-to-year to get an indication.

Okay. And then, in your prepared remarks you mentioned maybe a tighter labor market in 2016; how should we think about wage inflation impact on OpEx for you in 2016?

I don't know. I'm not sure where that comment was placed. I don't know that we see anything in particular in terms of G&A or otherwise at the property level that would portend some kind of increased wages. I'm sorry, is that the question you're asking?

Yes.

Okay.

All right. I think that's it from me for now. I will hop back in the queue.

Thanks, Chad.

Thanks.

The next question is from Rich Anderson with Mizuho Securities. Please go ahead.

Thanks, and good morning, and congratulations everybody.

Thank you, Rich.

There is hope for all of us; I'm just kidding. So I wanted to dig a little bit more into your mindset about investing, Todd, you talked about some of your developments underway and looking at -- besides this kind of spread versus acquisitions in the way you kind of think about the return, is there something deeper that you are seeing about willingness to take on incremental risk of development in terms of how the markets are behaving, or are these just really just one-off situations that you see opportunity and not sort of more of a holistic change going on that is making you guys more willing to be a little bit more proactive from an investing standpoint?

Well, just as a general comment, Rich, we do not have people that are dedicated to development.

Okay.

And I think to some degree, it's ad hoc, it just comes up from time to time with existing relationships, and what we found is you need the chops and the ability to do that, which gives you competitive advantage, which improves margin. The larger you get and the more sustained underbelly of performance that you have, the more risk that you can take at the margin, but we always consider that to be measured, and really it's more just the opportunity of "Hey, we know how to do that, let us do that," kind of thing.

And I think, Rich, with development I think the thing we see is we are out buying and then you contrasted with what we see when we develop, and the experiences we have there. You have a lot more ability and development to -- well, it takes longer, and admittedly there is certainly some other risks related to it. We can mitigate those risks in a lot of ways with the relationship that we might have and that's how a lot of this comes about is we're pursuing an acquisition. There is a good example now. I mentioned some things we have in our contract. Well, it's part of that discussion, this helped us to looking an develop another on-campus MOB, and rather than just sort of moving on to next acquisition we say, we have those capabilities and we are in discussion with them about putting a new sizable MOB on their campus. So it comes out as David said, kind of at ad hoc rate, but it's through relationships, and then we see it as a way to really build the quality of the portfolio, because you can control a lot more in development situation of what you build and what you inherit. And I think what's important about that is what we've asked our folks who are running the portfolio, Julie Wills and her team, for them to have a nice brand new building that's on a great campus and a great location and we can control a lot of the elements of that whether it's lease type, the building design, all those things, and it gives us an ability to really drive better growth and have better operational performance.

But is there anything about strategically coming out of the SIP portfolio and some of the problems you initially there, I mean, how has that changed your way of thinking from a development standpoint?

Sure, sure. I think there, certainly we saw some pretty dramatic impacts from a couple of unforeseen things, but learning from that, I think our takeaway is being very careful about the pace of it, and just really letting -- being careful of how much you do relative to the total company, and really it comes down to how much unleased space and risk are you taking on. So I think that's what you've seen us -- we obviously were careful about that as we have the lease up going on, but not piling on with a whole lot of additional risks in a way of unleased space, but as we fill that up, where we began to go back into sort of a measured pace of how much we can bring on in terms of additional development, but again, it's a little more risk, but it's good opportunity. And in the long run we think it really improves the portfolio.

Okay, great. And just a couple of quick ones here' the 3% you mentioned in terms of bumps during the quarter, if you were to include leases that didn't have bumps, in other words, there was an Anniversary Day, but zero growth to the rent. Would that number be materially lower if you included all leases, as opposed to just those with bumps associated with them?

I don't think it will be materially lower. If you look at the number that we have inside of our SGR related to properties with no increases, you're talking with terms greater than a year less than 5%, around 3.50%. So when you take that into account, it could dilute it marginally, but not significantly.

Okay. And then last question; are you guys moving more to a month-to-month lease strategy, or is that -- I saw a footnote in the K, is that something that's strategically underway, or is that a -- maybe just if you couldn't comment on month-to-month leasing?

Rich, it's just doctors and small tenants. It's what it is. It's a fluke of the calendar. You have a very large number of leases that expire at the end of the quarter. In this case 12/31/15, and they will substantially renew -- they will mirror the renewal percentage that you see throughout the year, throughout the portfolio…

In terms of retention?

In terms of retention. So in January, February they will renew. It's just a fluke as of reporting it's 12/31 they are expired, they may renew on January 4.

Okay, I understood. Okay, thank you.

Thanks.

The next question is from Michael Carroll with RBC Capital Markets. Please go ahead.

Thanks. Todd, could you talk about the SIP portfolio and how much did that contribute to the same-store results during the quarter?

Yes, I think the cash NOI that would be in same-store is about 5 million. It also -- those properties in particular did experience a disproportionate amount of the property tax increase. So it was certainly impacted by that. You probably have more than 5.3 million-5.3 million, if you adjust for those taxes, but 5 million would be the number for the -- the numbers you have in the supplemental. Those properties are 83.9% occupied, and at the end of the year 88% leased. They increased -- the leasing percentage increased by little over 1%, I believe, in the fourth quarter. So obviously well-leased, we do have a little more room to go. It looks like the NOI should be moving towards 5.5 million as we move to the first quarter and then really approaching 6 million by midyear. That's for the run rate that you will see -- it may flow into same-store at a quarter off that, maybe a quarter later than that, just given timing of occupancy and so forth of tenants. So they are contributing well, but still a little room in certainly part of why you see our same-store guidance for multi-tenant NOI growth for '16 certainly at a heightened level than maybe the long-term stabilized rate.

It sounds like the incremental NOI growth it generated year-over-year is not as much as we would expect because of the property tax increases?

Well, that certainly has an effect. It moderates it a little bit certainly. But that's certainly not unexpected in the long-term. It doesn't change our outlook for what the stabilized NOI will be once they're fully leased.

Okay. And then in the reposition bucket that's in the supplement, are any of those assets in there that's not included in that SIP portfolio, is there other assets in that bucket?

Say it again; I'm sorry, Mike.

Yes. In the supplement you have, I think the breakout of the same-store portfolio and then you also have like a reposition bucket, I think it's like a 100,000 -- couple of hundred thousand square feet that's in there. Yes, 150,000 -- no, 1 million square feet, sorry, I'm looking at it right now…

Yes, that sounds right.

All right, so the SIP of all those properties; 12 properties are in the same-store properties?

Yes. None of those are in reposition. There are 16 properties inside the reposition bucket.

It's separate 16 properties, and there is a very-defined process. It's outlined in our 10-K. I think page 33 and 34 talks about exactly what the rules are for what's in reposition, what's in same-store.

Okay. Are those redevelopment opportunities that are in that bucket or why are they in that?

Well, there is -- kind of the basic rules are you have occupancy less than 60%, and again, these are not the development properties, so these are properties that had a change in occupancy have lived basically below 60% for some time, felt their properties that have a 30% drop are more, in any particular period, and then once this happens, once they get repositioned they stay there for eight quarters, so that they can be brought in to same-store to kind of use the same-store results. So, they are really pulled out. They have to re-stabilize before they then could be brought back into same-store, and there are opportunities in there. We know certainly some of -- it's not that they are all candidates for sale. Some of them might be. Some of them are candidates for re-leasing and going back up and some of the mare evaluating, waiting for lease renewals and things and maybe they are sales candidates. So, it's a variety of situation.

And Page three of the investor presentation, Mike, has some more detail on those assets. So, it might be a good place to for you to take a look at.

Great. Appreciate it.

Thanks, Mike.

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

Thanks. David, just going to back to succession plan for a second; congrats all around and thanks for formalizing it, but I didn't hear you address this specifically in your past commentary, but has the -- in your mind, has the -- the likelihood a sale the company moved any higher on the list of priorities given kind of the change in day to day or how should we be thinking about that at this point in time?

Well, we really never had a strategy about selling the company, lot of people who follow the company or investors or otherwise have always speculated about that. I said to our shareholders and we're always open to things that make sense so to speak. So, no, there is no particular change in any attitude about that at all.

Okay. Appreciate that. One other kind of high level -- now that we've seen a Bipartisan Budget Act be implemented and be out in the market for a little while, you've seen any change in behaviors of the hospitals or the health systems as a result of legislation?

Yes, Section 603. We haven't seen any real updates in the definitions and details that are going to be needed to really see the change in behavior. We did -- and I think we described this quarter, we did see at the margin some behavioral change with some prospective business, specifically as it relates to some development. So we had a situation where hospital system was looking at developing a large outpatient center off campus and we were talking to them to about that and several other things to develop. And they went back to sort of the drawing board and not necessarily that they are going to pull it on campus, but they wanted to revaluate it because they had to put in their pro forma at different level of reimbursement for an off campus outpatient center. So it is going to affect behavior. I think it's going to be very important to see how the definitions come to be in terms of grandfathering whether it sticks with the facility or it sticks with the provider and the provider can pick that up in an off campus location and move it to a different off campus location. So it really remains to be seen in terms of the real effect -- the full effect.

Okay. That makes sense. Thanks. And the last one just more micro point. I don't think you hit on it yet, but what was driving the lease expiries to kind of be bumped up in '16. It looked like the numbers that you reported in the 3Q sub kind of got lumped into the '16 list of expiries, if I am thinking about that correctly?

Yes, anything that -- somebody mentioned month to month earlier, which is sort of a phenomenon at year end, quarter end that they roll into the next year. So really you're just seeing whatever might be in hold over or month to month rolled into the next year. And I think as Doug said, that's a 102 leases just that rolled from month to month already into '16. So just technically that is what happens, but as Doug said, it doesn't concern us. We expect 15% to 20% of our leases to expire every year in multi-tenant portfolio. Our average lease term is 3.8 years in that portfolio. So it's really just the normal course for us.

Okay. Appreciate it. Thank you.

And to answer it, Mike, on the turnover thing; short-term leases in turnover are a good thing, not a bad thing.

Okay.

Good.

The question is from Todd Stender with Wells Fargo. Please go ahead.

Hi, thanks guys. And Dave, I just wanted to say the unsaid. I think you deserve credit for getting the current management team out in front of investors for the past several years. So it sounds like it's going to be a pretty seamless transition; so, nice job.

Hope so, Todd. Thank you for those comments. That was part of the design. And it's nice when you make a change like this, you don't have everybody on the other side saying what's going on here, who are they.

That's right.

So, that was an effort on our part, and I appreciate that.

Sure thing; just on the last question, just looking at discernible trends that you're looking really space needs, you had a fair amount of leases roll in Q4. You have a good number rolling this year. Can you just kind of share what the current demand is for a potentially larger space and maybe less tenants over the long-term?

You're certainly seeing some consolidation among physician practices, but it's still really in our universe of dealing with health system. It really ends up being discrete leases and practices even within a health system. So, our average lease size is still -- in the multi-tenant portfolio is still about 4,800 feet. So it really hasn't changed materially. I think if you went back 5 or 10 years, it was still in the 4500 square foot range. So it maybe peaked up a little on average but not much. So we really don't see a tremendous change in the behavior. We have seen maybe in the development properties with build out, we've seen some bigger users come in, hospital users, which is obviously a nice thing to have happened. So at the margin, I wouldn't say it really changes anything, but fundamentally it's kind of hospital-driven, it's hospital-centric. So whether it's a hospital's name with the physician practice and individual physician practice, we are still seeing fairly discrete smaller practices and suite sizes. And demand wise, I think we are very optimistic about the year. I think you see our cash leasing spread range being 2.5 to 6 which is as strong as we saw in '15 and sort of the trend line. We have a page in our presentation at the end talking about these lease maturities and how despite having a sizable amount of lease maturities, which is our model, we had tenant retention going on for the last three years and cash leasing spreads going out for the three years. So again, that kind of portends how we view -- tells you how we view '16.

And Todd, I think it's a function of sort of on campus nature of the property such that you do have that high retention and you do have that ability to push rents. I don't think in our experience you don't have that ability as much on an off campus MOB.

That's helpful. And just a touch on that tenant retention which was pretty high in quarter, anything you attribute this to? It was Q4, I don't know if that helps with that pushing and pulling of rate. Anything you can share there?

Yes, I think just still again, maybe it's a little above range we have indicated, but again on a quarterly basis, I don't think I would worry too much about that. Page 26 of our investor presentation, you may not have it in front of you, but take a look at that as a lot of folks are asking about lease expirations. And it kind of gives you a little historical perspective as well as future perspective. And again, points out that our average tenant retention was 86% for '15, 85.4% for '14, and 81% in '13. And all the while, cash leasing spreads going up. So the 91 is probably just an upper bound. It's sort of what we see on a quarterly basis.

Got it. Thanks. And then, just touching on your cap rates on acquisitions, looks like it dropped a little bit on the low end of the range into the 5.5% ballpark. Is that a reflection of how your stock has held up, your ability to tap the ATM, your cost of capital has come in a little bit? Can you just talk about kind of reaching into the lower 5s or maybe mid 5% on acquisition?

We're definitely seeing cap rates and not necessarily just because we didn't go there, but we're seeing the market go there. For the better assets, we're seeing that. I mentioned the cap rate in Seattle that we saw. We went after this asset as well, but it got too rich for us. And again, we have two buildings nearby and a development that we can build as well. So, we like our position there. Great asset though and it went for below 5%. So that's a bit extreme. But in general, we're seeing very regularly and especially as you get into certain markets maybe some bigger MSAs and further out on the West Coast and so forth some of the major market. But for us, certainly it helps that we can be competitive at that price with our stock price where it is. But again, we kind of measure it as we go and make sure we stay very aware of where our cost to capital is on implied cap rate.

And Todd, this is Doug. I would also add that I think we've seen more compression on the cap rate side on the off campus properties because I think if you look about 70% of the acquisition opportunities that we looked at last year which is very similar to what we saw in 2014, but 70% of those are off-campus. And so, you've got folks who are obviously very eager to build there more sizeable positions in MOBs and they are really pushing the off-campus cap rates down. Yes, you have seen some compression as Todd indicated on the on campus side, but more movement on the off-campus side.

And on the low-end of the cap rate -- this is -- Todd, this is Kris. We are also seeing some opportunities like is Seattle that Todd mentioned earlier as well as in California and just generally those costal we end up with some lower titter cap rates. But the good news is we're also seeing better bumps and better spreads in some of those opportunities.

Great. Thanks guys.

Thank you, Todd.

The next question comes from Tayo Okusanya with Jefferies. Please go ahead.

Good morning everyone. Let me also echo Todd's comment that these management changes just good to have had several years of experience with everybody already, so again, I am looking forward to this being very seamless and all very well earned.

Thank you.

My question is just around again the intrinsic relationship between hospitals and MOBs. It's interesting we have seen fairly good stability on the MOB side amidst all this volatility on the hospital side. But just wondering if you can kind of see all this volatility on the hospital side, everyone is struggling with ACA, volume gains, bad debt, whatever have you. Does it at some point really have an impact on the MOB side? Whether it's a case of do we get more acquisition opportunities because hospitals are now kind of trying to raise capital elsewhere? Or, maybe a situation where hospitals actually start to slow down development plans on the MOB side because they are struggling?

I think really -- you really at the top line or sort of overall I think especially if you look at not for profit not just the for profit world, but the not for profit world which is much bigger part of the hospital universe, actually the strong ones are doing well. I mean -- and you are right there is the inpatient side; there is certainly some softness there. But it's really because they are all shifting more work and more of their care into the -- the outpatient side. So I think it's quite opposite that really you are going to just see more and more push to the outpatient side as technology and modalities permit. And as much as they can do in the outpatient setting, they will continue to push there because lower cost setting and obviously generally has better outcomes and so forth.

And higher margins I think.

And higher margins. So I think you're going to really just see more of the push into that. And again, the inpatient side is not struggling maybe quite as much as some of the headlines might suggest. We're seeing a lot of strength as a lot of these big health systems consolidate and expand their networks and their market share.

I think -- Tayo, this is Doug. I think what you are also seeing too is hospitals are pursuing different strategies as they sort of implement the ACA. And some of them are becoming more -- they are taking different path. And some of them I think are more successful at least in the near term in making those adjustments and those adaptations to adjust to the new post ACA world weather. It's moving to outpatient, changing their payer mix and so on. And so, I think you're starting to see some differentiation on the hospital provider side because of that.

Thank you.

Thanks, Tayo.

The next question is a follow-up from Rich Anderson with Mizuho. Please go ahead.

Yes, hi. I just wanted to talk a little bit quickly about the 2.6 million of property taxes that you are having to book in the fourth quarter. How does it happen that -- that, that happened? I guess. I mean I am just curious where these situations that we were in an appeal and so you had no way of knowing what the number would be? I am just curious why this kind of sprung up suddenly.

Hi, Rich. This is Kris. Yes, maybe these were under appeal. Some of them actually are still under appeal. So I am not saying we are going to get a huge windfall if we win those appeals, but there is some marginal improvement we might see depending on how those appeals go over the next year. It really was isolated to a handful of properties. And so get into -- you kind of get into the reassessment timing as it relates to each of these jurisdictions. And so, 70% of that increase in property tax in fourth quarter came from 10 properties; with eight of those properties basically being in two markets in San Antonio and Denver. So as you have the reassessment cycle going on in those specific jurisdictions as well as some of these had been properties that we bought or that we have developed. And so, as you hit that reassessment that we realized additional value or the taxing authority recognized the additional value that comes in place as these buildings were originally developed. So really it comes into a lot of timing differences and jurisdiction by jurisdiction.

So when you look to 2016, to what degree do we have these kind of phantom taxes lingering behind the scenes that won't pop up until later on? Or, is that -- is that something that we shouldn't have to worry about on a go forward basis as significantly?

This is Todd. Remember, if you look at this on a 12-month trailing -- 12-month basis, so it's on the same page in our supplemental, the expense growth was actually only about 1.8%, and interestingly absent property taxes, which property taxes are about 25% of our operating expenses. So it's a significant portion, but absence of property tax change, we actually had a slight decrease in all our other operating expenses. So it's -- property taxes are just disproportionately large, and when you look at it through the year and smooth it out, it actually is -- I mean we'd love to build a -- replicate 1.8% operating expense growth for all expenses every year. So it's actually a very fine sort of number of role, it's really just that quarterly process of how it comes in. As Kris said the timing of how those assessments and those bills come in, the appeals in. So in our view, if you are not doing anything, but reporting the cash, you know, the numbers that go into GAAP and then adjusting to cash, that's just is what it is. That's the timing process from a quarter-to-quarter. And because probably tax is typically billed once a year -- that's sort of this kind of catch-up thing, whereas what's janitorial are maintenance or utilities, obviously you are getting billed more in a monthly basis, and so you don't have sort of this catch-up effect, where -- yes, we have a large tax bill in the fourth quarter, but if they are billed on a quarterly basis you would have seen that increase happened by quarter.

Got you. Okay, thank you.

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

All right. Thank you every one. We appreciate you being on the call today, and as Doug says, we hope to see many of you on May the…

11th and 12th.

11th and 12th in Nashville. And with that said, I guess our next call will be early May. So, have a good day.

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