Healthcare Realty Trust Incorporated (HR) Q3 2016 Earnings Report, Transcript and Summary

Good day and welcome to the Healthcare Trust of America Third Quarter 2016 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 over to Mary Jensen, Vice President of Capital Markets. Please go ahead.

Thank you. And welcome to Healthcare Trust of America’s third quarter 2016 earnings call. Yesterday we filed our third quarter earnings release and our financial supplement. These documents can be found on the Investor Relations section of our Web site or with the SEC. This call is being webcast and will be available for replay for the next 90 days. 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 detailed description on some potential risks, please refer to our SEC filings, which can be found in the Investor Relations section of our Web site. I will now turn the call over to Scott Peters, Chairman and CEO of Healthcare Trust of America. Scott?

Good morning, and thank you for joining us today for Healthcare Trust of America's third quarter 2016 earnings conference call. Joining me on the call today are Robert Milligan, our Chief Financial Officer; Amanda Houghton, our Executive Vice President of Asset Management; and Mark Engstrom, our Executive Vice President of Acquisitions. Year-to-date, 2016 has been one of our most active years since we listed on the New York Stock Exchange in June of 2012. We have invested over $640 million in key acquisitions, generated over 3% same-store growth, raised almost $500 million of equity and repositioned our GAAP with over $550 million in financings. Our business philosophy continues to revolve around creating a portfolio and operating platform that is positioned to serve the fast growing future of healthcare delivery. First, we are committed to focusing our portfolio on key markets, investing and creating critical mass in gateway cities that are unique, employment rich economic hubs with superior economic fundamentals, higher academic university concentrations, and strong healthcare growth. Second, targeted investments in core critical assets that will be central to the future healthcare delivery on or adjacent to high energy hospital campuses, academic university centers and in core community outpatient locations that provide the best access to patients in high density locations. Third, utilizing property management and leasing platform that brings consolidation and institutional performance to this fragmented MOB sector with critical mass in key markets. And finally, fourth, maintaining a strong investment grade balance sheet and equity allocation discipline. Our year-to-date investment activity of $640 million has been consistent with this philosophy, and is focused on growing our 20 to 25 key markets and achieving critical mass. We have acquired these assets in the average cap rate between 5.75% and 6.25%. In the first quarter, we invested approximately $160 million with $82 million in Houston Texas, doubling our presence in the Texas Medical Center to a most 0.5 million square feet and expanding into the El Paso market. In addition, we invested $74 million in New Haven Connecticut with the acquisition of One Long Wharf, and began a relationship with Yale Medical and Yale University. In the second quarter, we invested $274 million with $200 million focused on expanding in the Northeast, where our investment is now almost $1 billion with over 3 million square feet and a 100 mile radius between Boston, Albany, White Plains, Hartford and New Haven. In the third quarter, we invested $197 million, which included $150 million investment in a new key market, the high barrier to entry market of Orange County, located in Southern California. We acquired four medical office buildings on the Saint Joseph Mission Health Campus, totalling over 262,000 square feet and a key simple ownership transaction with no ground lease encumbrances. The remaining acquisitions focused on building our existing key markets in the Southeast. Overall, our acquisitions are reflective of our ongoing portfolio strategy. Almost two-thirds of our transactions had been on or adjacent to leading hospital campuses with the remaining located in strategic outpatient locations. The majority were multi-tenanted assets or assets where large physician sub-tenants occupy the space. We focused on key simple assets, which have significantly leasing advantages with many opportunities to generate NOI over the long-term. Overall, less than 27% of our portfolio is subject to the customary ground lease restrictions. We have balanced our investment activity this year with a blended equity and long-term debt that has effectively lowered our leverage for the year while also extending our debt maturities. We've issued almost 17 million shares to our ATM OP unit transactions and two marketed equity offerings, generating gross proceeds of almost $493 million at an average price of $29.33 per share. This year, we have also issued $350 million of unsecured bonds in a seven year $200 million term loan. From an operational perspective, our dedicated asset management and leasing platform is focused on producing same-store NOI growth, not simply occupancy. Our third quarter results are solid with strong execution. Our portfolio of key markets produced normalized funds from operations of $57.1 million, a 14% increase when compared to this time last year. We delivered 3.3% increase in our same-store growth, the 15th quarter since our public listing of over 3%. Our entire portfolio continued to be around 92% occupied this quarter. Tenant retention for the year remains around 80%. Our new leasing activity remained strong. And though occupancy was down slightly from the second quarter, we remain optimistic on our leasing growth heading into 2017. With that, I will now turn the call over to Robert Milligan.

Thanks, Scott. We had a good steady third quarter with solid operating performance in addition to our strong acquisition activity, and attractive debt and equity transactions. All positioned us for the rest of 2016 and going into 2017. As Scott mentioned, we have been active from an investment perspective, acquiring almost $640 million of properties in key markets that will allow us to efficiently manage and for long-term performance. Despite growing our medical office real-estate portfolio by almost 20%, our balance sheet is in great shape as we direct result for recent capital market execution. We have low leverage at 26% debt-to-market capitalization and 5.5 times adjusted debt to EBITDA, higher liquidity and fewer near-term debt maturities than we started the year with. In the third quarter, we raised over $675 million of total capital, including approximately $127 million of equity at very attractive pricing, brining our total year-to-date equity issuance to $493 million, including overnight, ATM, and OP unit transaction. We’re only 23% leveraged on a year-to-date investments. From a debt perspective, in the quarter, we issued $550 million of long-term unsecured debt with average duration of nine years at a fully fixed coupon of 3.3%. This included a $350 million 10-year note issuance in July, and the new $200 million seven-year term loan, which is due to September 2023. These proceeds were used to pay-down our revolver and to repay over $75 million of mortgage debt, which carried 6% interest rate. We also incurred a $3 million prepayment penalty as part of these mortgage refinancings. Our debt is now very well lathered with less than a $100 million coming due before 2019 with an average overall maturity schedule of six years. From an earnings perspective, third quarter normalized FFO per diluted share was $0.40, an increase of 2.6% per diluted share compared to the third quarter of 2015. Overall, normalized FFO increased over 14% to $57.1 million as compared to the prior year. The increase in year-over-year normalized FFO is primarily driven by our same property cash NOI growth of 3.3%, and NOI derived from the strong investment activity over the last several years. From an operational perspective, our medical office platform is uniquely scalable with lower tenant releases costs and traditional office. This is depicted in our operating efficiencies and consisting cash flows, which currently supported the 11% increase in year-to-date normalized funds available for distribution. Occupancy remains around 92%, which continues to demonstrate the stickiness of our tenants. We did have a slight decrease in occupancy on a sequential basis as a result of our Forest Park Medical Center direct leases ending. However, we have now gone direct with some of the sub-tenants and are seeing good leasing activity for the rest of the space. Especially, as tenants realized the opportunity to have Class A medical space in the newly expanded HCA Medical City Dallas Hospital campus, one of the most profitable in the country. And one where HTA owns a medical office building on a fee simple basis with no restrictions on leasing. Leasing spreads remain on pace from previous quarters, up 2.6% for the year and around 1% for the quarter. Tenant improvements increased slightly on a per square foot basis to $2 per year of term on renewals and $4 per year of term on new leases. Physician consolidation is driving larger space requirements and allowing us to refresh older space with new capital. Fee rent remains low at less than one month per year of term. G&A was $7.3 million for the quarter, up slightly from $6.8 million last quarter. This is due primarily to an increase in non-cash stock compensation that was issued during the period. During the quarter, G&A remained low as a percentage of total revenues around 6% and supports the scalability of the HTA platform. The synergies within our core markets and our ability effectively manage our property and corporate expenses, which has trended down since we went public in 2012. I will now turn it back to Scott for final remarks.

Thank you, Robert. We’ll turn it over to the operator to open up for questions.

Thank you. We will now begin the question-and-answer session [Operator Instruction]. And our first question will come from Karin Ford of MUFJ. Please go ahead.

Scott, you comment on you are feeling optimistic on leasing, heading into 2017. Can you just give us more color around that optimism? And then talk specifically about prospects for back-filling in the Forest Park leasing? How long you think it will take to release that space back-up? And what type rents you think you are going to get versus the vacated space?

Well, the leasing, we’re seeing a lot of activity in our leasing. Obviously, our same-store number was very good this quarter. Occupancy was still very strong, even with the transition that we see going on into Forest Park. So, we’re very encouraged. I think that we’re now working on the first-second quarter, so next year, frankly, from a leasing perspective and that’s good. It's always good to be ahead of the game when you are looking at what assets and what potential expansions. And frankly we’re seeing more expansions and more existing relationships filling up our space. Our campuses are seeing activity by the healthcare systems or by the larger physician groups. So, we think that that’s a very good forecast looking at 2017. As far as Forest Park goes, HCA being in that campus having expanded those dollars is going to go through a process over the next six, 12 months where the specialties come-in and the focused physician groups that really are targeted by HCA will move to the campus. Rents, we see no difference in rents, because frankly we were at market before and we’re at market afterwards. And what we do see frankly is a stronger campus with lot longer expectation for growth than we had probably before HCA bought that campus.

Do you expect the downtime at Forest Park to cause a dip in same-store NOI growth in the fourth quarter and the first quarter?

We don’t see that. I mean, the nice thing about a large portfolio, we do have 17 million square. There are always going to be ebbs and flows in a portfolio, I think. So that's just a natural process. We've had some opportunities in other locations where we were looking at leasing opportunities that will certainly backfill if we are slower or this transition in Forest Park. I don’t think we are looking at Forest Park as being anything other than the normal part of business that goes through, and I don’t think you will see any changes from what you can expect from HTA.

And then just last question from me, just turning to the deal pipeline. Any changes in the volume of deals that you are seeing out in the marketplace, the types of deals, pricing, competition, anything just on that front?

I think the cap rates between great assets and secondary market assets are widening a little bit. I think that they tightened up in the middle of the summer where people were chasing all types of assets. And perhaps there is a little more discipline and selective acquisitions going on. I think this is a time where folks who are in the MOB space, in public companies, or even private equity, are determining what their longer term plans are, what type of assets they like, what qualities they like, what criteria are they looking for. We are seeing, continuing to seeing, I was talking to Mark Engs from the day, and about 60% of our acquisitions are from relationships that we've had from other transactions. I would expect that we see that continuing. We know our markets. And I think the biggest thing that you'll see over the next two or three years is you will see the public companies decide how they want to grow their platform, what their brand is for better word, meaning are they want to be in certain key markets to what type of assets do they want to own. We’re heavily focused on what I call gateway cities those cities that are driven for the next 15 or 20 years by academic university concentrations, jobs come to, that's where the jobs come to now, because millennials are educated. They don’t move like they did 20 years ago. So, we are looking for specific assets and this has been a good year for us when we started out beginning the year, people wondered where they are going to be opportunities. We’re finding opportunities, I think, we’ll still see opportunities. We’re very excited about it. But our disciplined and our focus is I think has strict as it's even been, if not stricter, meaning we want them in our markets, we want them our criteria, and we want them to fit into our asset management leasing platform, and we want long-term same-store growth from those assets. So, we were, I would call us an extremely selected buyer.

Our next question will come from Chad Vanacore of Stifel. Please go ahead.

Scott, you had just mentioned that you think cap rates between primary and secondary assets are widening. Are you seeing any change in the competitive bid from the private side that maybe driving that, or what else could be driving that?

There may be a more selective process going on. I still think that assets in key markets, key locations, great criteria, iconic assets for a better word, or assets that have high synergies with tenants and healthcare systems. Those are just sought after as they have ever been. In fact, I don’t think that that changes much. I think that that continues as we’ve seen it, which is great assets, good performance, good returns for investors, those are long term opportunities to be had. I think secondary markets or assets that are in outlying areas, the growth -- the criteria is different. And I think perhaps you are seeing a little bit of a widening in a cap rates and maybe a fewer folks looking to necessarily buy some of those secondary assets.

I guess the inverse of that would be that you’ve seen elevated investment activity this year. You’ve been over 200 million in the last couple of quarters. Can you point to anything there that’s driving the pick-up in transactions?

Well, if you look at our transactions, it's been a phenomenal year for us. We started out the year investing Houston. And that was an asset and a group of assets that we had been after marking strengths, relationship with that worked out, and that was a two year process. And our relationship with the healthcare system there really helped us acquire that group of assets for $82 million. And then you move into the second quarter and we have an opportunity to partner ourselves with a large group of assets that combined with OP units. And that’s a very important transaction for us, because it put together $1 billion, 100 miles radius it combined our acquisition in New Haven where we introduced ourselves to Yale and Yale Medical. So then we added Boston. And so if you -- and then we just added Orange County, these are opportunities that I think when you look at them and you put them all together, it doesn’t do a justice. I actually like going through when saying why did you do each one? What did it bring to the platform? How is it going to benefit over the next five years? And each one in these, I think build really well on our ability to compete. And then you combine that with our execution of capital and our balance sheet. And I like where we are as a company today probably better than I have liked it anytime in the last 10 years.

And then just one more from me. So CapEx and tenant improvements picked up every quarter sequentially this year. How should we be thinking about normalized CapEx and tenant improvement? And then how long until we see this either normalize or issue? Would remain at its alleviative level?

Well, I think what we certainly seeing in our portfolio is what's driven a higher been a level of tenant improvements. As we talked about, we continue to see the consolidation of physician practices and larger physician practices taking space. As we look to combine several suites together to accommodate a floor space that they need, that’s going to take a little bit more tenant improvement dollars. For instance, we’ve got a tenant here in Phoenix that went from 10,000 square feet. They almost doubled the size of their space. We had to take out as they look to consolidate thing. That’s good leasing activity that really drives long-term value for the building. We have got another large tenant down in [Thusanyo] 17,000 square feet user that came into a building. That’s going to take some tenant improvement dollars to get them in. But they really anchor the building for the long-term. So, while we’ve seen some slightly elevated expenditures there it's going to things that again improves the value of building long-term, really modernizes some of the spaces as we work through that So to the extent we continue to see strong leasing, we could see tenant improvements higher but that's really a good sign as we continue to fill the building.

Our next question will come from Todd Stender of Wells Fargo. Please go ahead.

And just to stick with you Robert with the $3 million prepayment penalty. You guys, I think, swapped some unsecured debt or secured debt. Can you just point us some things that may offset that or how you justify that cost upfront?

When we look at the ability to take out some of the mortgages a little bit earlier than they would naturally expire, we need the mortgages at 6% interest rates. When we look to do the debt that we've done this year, the third quarter alone we did $550 million of unsecured debt, average nine years duration that's going to be fully swapped at three year. If you look at that the interest rate savings there is tremendous. And so it's very short payback period window. And so it's just made sense for us to go ahead and take it out a little bit ahead of time.

And then moving towards visibility on expense growth going forward, you've been successful at driving 3% NOI growth for some time. Certainly, a lot of it's got to be the result of the movement the in-house management. But can you really just talk about the visibility on keeping expense inflation down? Because you’ve got, call it, 2% to 3% revenue growth, you've got some expense savings, which gets your NOI to 3% and 3% plus. Just talking about visibility on expenses.

Todd, this is Scott. I think that we're going through a process that I think everybody is going through right now, which are budgets. And we like what we see in 2017 from a -- when I say it's not necessarily expense reduction perspective, but a review of and a focus on continuing to institutionalize the cost savings associated with our platform, the 20% increase in assets that we've put in place this year are going to show benefits next year. Those benefits are going to be extrapolated by some efficiencies that we’re starting to put in place, have put in place. So I think, and I've said this now, I think this is the third year that people have said, how long can you continue to move through expense savings? The answer is, as long as we stay at our key markets, as long as we have the ability to add assets and make the efficiency from operations better, and as long as we can continue to add some of the takeaway to fragmentation and make it more consolidated from an operational perspective, I see this going for another at least 2017, 2018. And I know that, as an organization, we are focused and we look out three years. We take it a three year look when we do things. So I don’t think you are going to see, this is 15 quarters in a row, and I think that HTA is looking at it now. We’re very well positioned to continue the execution from the management team and from our property managers, engineers, over the next two or three years.

Thanks Scott. And I don’t know if this one's for you or maybe for Amanda. But can you provide what the re-leasing spreads were in the quarter, and maybe how they compared budget?

This is Robert. I'll take it just because I got the numbers that you are hearing from me. And I think the re-leasing spreads, I think from an overall basis, we continue to see them rolling about flat to 1%. I think in this quarter, we’re above that target, re-leasing were about 2.6% r-re-leasing spreads there. But I think on an overall basis, we continue to see our leases rolling up at market. I think we continue to focus on rolling the escalators up to 2.75% range from across of the portfolio at 2.3%. We continued focus on ways that we can position our capital to position the buildings for the long-term.

And just finally when you guys enter the, you entered Mission Viejo market. Can you just talk about the ability to tap additional assets in this market, or if you’re going to come up North to LA? Just want to see what that relationship is that can bear more fruit. Or how often we could see you guys in these high barrier markets?

Well, we like the market. We looked at it a couple of years ago. And I think it was a great execution for us. I think we need as a Company to maximize it. The healthcare system is looking for some redevelopment on-site. They are looking for some continued expansion because they are continuing to grow. It's great real-estate. And I think that it's one of the best transactions from an investment perspective that we have done in our 10 year history. As far as moving up into Los Angeles, or expanding on the relationship, we want to expand on a relationship. But it all depends upon where the real-estate is located. Is it in a market that’s going to continue to grow? Probably, we would be very, very selective as we continue to expand in California. If we find an opportunity like the one in Mission Viejo, we would do that transaction, Todd. And I think that you first -- you build on something, and you do something well, and what you don’t want to do is deteriorate the -- what you’ve done by doing something not as good. So, we are going to be very disciplined as we work the relationship and marketing to spend a lot of time and attention with that. And I think we are excited about the next couple of years.

Our next question will come from Jonathan Hughes of Raymond James. Please go ahead.

Maybe, Robert, could you just give us some more color on your same-store operating expense decline, and what specifically drove that? And then you may be considered breaking this out in your supplement like some other sectors.

When we look at the expense savings that we had this period, it's kind of across the Board savings. Certainly I think utilities were drivers there, and I think that will be a consistent theme as you talk with folks across the way. On top of that, we had normal course efficiency that we’ve been getting out of maintenance, building maintenance, ground maintenance, consolidation, some insurance savings things like that. So it's been across the board with there. But certainly utilities played a large role just from a weather perspective.

And then were there any benefits from property tax deal and I think earlier in the year you had a few favorable rulings there. Any benefit there in this quarter?

We have little bit of benefit. We like most folks we continue to always challenge the property taxes. And then we only recognize them if we actually achieve the savings there. So, we certainly get some expense saving that can get some expense savings there. Most of that goes back to the tenants as we look at it, and as you see in the financials, right now. We certainly get some there this quarter.

And then earlier in the year I think you said dispositions, you were targeting something around 100 million or so, and then you’re down almost 30 million year-to-date. Can we expect a big quarter of dispositions here in the fourth quarter, or anything some of that will roll into next year?

We will have more in the fourth quarter. There is couple of things that looks like they will come to fruition. I would say that we will probably grow a little of that over into the first quarter just because of timing. We’re getting later into the holiday season, and things tend to slowdown from a perspective of execution. So we’ll probably, over the next fourth quarter, first quarter, you will see us do that $100 million that we've talked about.

And then last one, are you partnering more with developers to acquire properties like upon completion to achieve better pricing. Just wondering if that’s like an option you’ve explored more in the past couple of quarters?

Well, we do. I mean, I think everyone you talk to will say that they do. And I think to a great extent, that's one of the competitive aspects of the public companies and so forth is who can align themselves or with the local regional developer and work best with that type of relationship. We focus on it. We’ve always will always focused on it. And as you know, we’ve felt, I felt, that not being a developer gives us somewhat of a little bit of a advantage, because we don’t compete. We don’t compete with the local developer. We have an instance, for example, where one of our assets on the East Coast, the healthcare system, wants to put -- redevelop the site that we have some buildings on. And they are going to occupy it. Now they have the architect and they have the developer. We have the land. That's a great combination, and that's something that we're seeing now two or three times. So, we’ve worked with the regional folks. We worked with the local folks. We like to work with healthcare systems. I just want to bring the best folks to the table to get the results that the people -- the individuals want.

Our next question will come from Vikram Malhotra of Morgan Stanley. Please go ahead.

So I just want to understand over the next two or three years, you had several of your large tenants coming up for renewal. Can you give us some sense of any early conversations you had with them, whether it's from Providence or Indiana University. Just trying to get a sense because over the next three years, we do have a fairly sizeable expiration?

We like our -- in Indiana, which would be in Indianapolis, which is the one you referred to. We feel very comfortable with that. It's all critical space. Space is being used. I mean, when you look at renewals, you really have to look at who is using the space, what are they using it for. And if that need still is prevalent as it was before, and of course you look at market rents. And to some extent, you look at competition. But as we know, if someone is in the space and they are producing well in space, they tend not to move in the MOB space. So 80% to 85%, 90% retention, is something that historically is the case. We look at our next two or three years. And we don’t see anything that jumps up and creates any fear to us. We've actually renewed quite a bit of stuff last year. We went out and extended. And frankly I think that the opportunity with some of these as we look at our next two years three years in our budget are expansion opportunities. And there will be renovation opportunities, because back to an earlier question, if you got poor critical space and it's located in a location that the tenants or the healthcare system wants long-term presence and occupancy, there is natural cycle and we are beginning to hit that cycle in the MOB space where you will see renovations and you will see added capital dollars, and where the best folks -- public companies, or best folks who offer that to the healthcare systems and to their physician -- large physician groups. So, we are excited about the opportunities frankly.

And just to -- as your prior comment made earlier, I think you mentioned on new leases you are trying to get rent bumps in the 2.75% range from what's probably an average of 2.30% now. Is there an opportunity as you tackle these renewals to move the bumps up towards that 2.75% range?

It was a mix, it's interesting. And we’ve looked at this and without getting into a lot of detail because these are always individual negotiation and stuff. We think we’ve got the stuff it's under market. And it's being in locations. And it might need some capital in order to get it renovated. But when it's renovated and moved up, we see opportunities to actually move our same-store. And so, yes, generally, we are seeing 2.75% to 3%, it's something that’s far more normal than it was three years ago, four years ago, when we first talked about it. I think most of the public companies now showing that type of escalator. And in those, you’re in a market or in asset that is at a competitive disadvantage, I think that’s something that you can expect when you are entering into leases in the current environment.

And then you provided some additional disclosure on the splits between fee centered and ground leases. How do you view, maybe differences in value between those two buckets? And then maybe just what sort of -- how do view yourself versus some of your private and public peers in terms of the split between the two?

Well, we look at -- I look at fee simple. It's being far more advantageous. When you own something without ground lease restrictions, it's far more valuable. Its 50 basis points, I remember 10 years ago when people were talking, 75 to 100 basis-point where there were actual differences when you would look to buy assets. You’ve had ground lease terms of course how long does the ground lease go. We go 65 years. But fundamentally the key part of that equation is it's far more -- you have a greater competitive ability to lease space when you don’t have restrictions that will, from a healthcare system or from a third-party, that restricts what you can do or where their interest is the first interest. They are protecting their interest with that ground lease, 75%-80% at the time, that’s great. But if you’ve got occupied space or shelf space, or the space that they don’t want to lease because they don’t want that particular competitive product there or group there. If you don’t have a ground lease, it moves the equation. So we like and we focus on, and frankly we have removed ourselves from opportunities on acquisitions over the last 24 months to 30 months, specifically because of the ground lease restrictions associated with certain assets. Again it would have been easy to say well everything will turn out fine. It's easy to say that there is always that relationship that will exist. It all works out until it doesn’t. And I like, for our investors, I think, investors look and say, do I own it fee simple, do you have the ability to do what's in my best interest. And if we can do that, we do that first and foremost.

And then just last one on the -- going back to the acquisition question. There has been lot of product by couple of your public peers, I think [Ventós], Northstar had product. I believe some of that has closed. Any comments you can share on, did you look at them how pricing was on those portfolios?

I haven’t seen anything public, frankly, on some of this. I know that we typically, we looked at one of the two. We looked at the assets in one of the two that you've mentioned. They were not in our markets. They were not assets that we thought were going to be additives to our key market strategy or our platform. If they were, we would have looked at it and we would have certainly looked at it from a competitive perspective. But in both of those cases, if you looked at a blueprint and where they were, they work in our markets that we wanted to grow. So we were not part of that.

Our next question will come from Tayo Okusanya of Jefferies. Please go ahead.

Just a quick question. This morning we saw a merger deal announced by Dignity and CHI. And I think the general sense was that you are probably going to see more hospital consolidations going forward. How does that ultimately end up impacting the MOB business and your business?

I think the broad question that comes from the mergers and consolidation is that there will be some campuses that are very valuable, and there will be some campuses that are as valuable. Because anytime someone goes through a consolidation, they’re doing it in a large extent for the synergies that come from, either acquiring a market that they don’t have or capturing consolidation and expenses that they don’t need to duplicate. So, from our perspective, I think, you want to be with the stronger healthcare systems. I think everyone says that. But I think you want to -- again I think the discipline that is going to show through overtime is the discipline of underwriting what you are buying and how that looks, given an outlook of -- if a merger happens, is this a key critical campus, or is it become a campus that has duplication that’s close to it, which therefore means there will be some sort of impact from a leasing perspective because healthcare systems, physicians groups, they want to go where the most synergy is from their patient mix. And so I just think it continues. I think you are right. But I think as a buyer you would have to be very disciplined and you have to take the time and the commitment to make sure that what you are buying is something that, whether 10 to 15 years of changes.

And then just quick follow-up on Vikram's question around acquisitions, I think again you guys put out really good result to-date. But the stock is somewhat underperforming. And I just think expectations are really high. And one of the questions out there is kind of you have the phenomena here with acquisitions. What can acquisitions really look like going into ‘17? And what kind of a good steady state type of amount of acquisitions one could expect from an engine such as HCA?

Well, the opportunities will be there. We are in our key markets. We've got concentrations now. We have a great balance sheet. I think that's one of the things that we have the beginning of the year, we sit down. And from a management perspective, senior management will say here are five things we want to accomplish. On that list was same-store growth. On that list was acquisitions in key markets. On that list was expanding our relationships with certain healthcare systems in the markets that we've targeted. On that list was balance sheet. Can we extend our term of our debt and can we actually lower our leverage. And we’ve done that. We were very fortunate. We have timely execution that we were able do, I think, benefited us. So, if you look at where HTA is positioned what can we do over the next 12 months, we’re we are probably -- well, not probably, we are in a better position today than we were 12 months ago. And the opportunities are I think just as good, if not better. I think our challenge is as it always is to focus on leasing, because leasing is relationships, leasing are assets, it's not markets. Second, focus on the relationships that we want long-term from an acquisition perspective, and make sure that we continue to balance the equity to debt as we grow, so that we don’t put ourselves in any difficult position that is unexpected down the road.

Our next question is a follow-up from Karin Ford of MUFJ. Please go ahead.

Just a big picture question for you. You mentioned in as one of the things you like in your two locations are proximately to academic institutions. And of course you did the Yale deal earlier this year. Do you see any synergies in your business with lab space? And would that be of interest to you guys to expand as you’re getting some critical mass near academic institutions, and there is obviously clusters of lab space, real-estate available around them as well?

Karin as we talked about things and as we have invested our dollars, I think we do like investing with health systems. Health system especially academic medical centers in many cases will have buildings that are mix of research in clinical care. And we like those buildings. They are critically located next to hospital campuses and in many cases they’re the same tenants that we deal with on a regular multi-tenant MOB situation. It's a hospital. It's a physician. In many cases a physician that’s on the staff of medical center will do three things; they’ll do research; they’ll do patient care; and then they’ll teach. And so the buildings that certainly service those uses, it's very complementary with our business. I don’t think you will see us to get into as go into the broad life science type user environment. That’s a very different business, especially from a tendency perspective, it's a different business. It doesn’t lend itself so much to what we tend to focus on. So, there is an aspect of it where we like -- we do like things, we do like product around the academic medical centers. But no I wouldn’t say broadly life sciences on the area that you will see us get into.

And we like our jump, we had a tour in Boston and many of the investors have come to have an opportunity to look it our acquisition with the Boston with the medical center there. And we like that one. We like Tufts, for example, it's got a blend of the three components that Robert talked to. We don’t want third-party companies occupying clinic lab space. We are not buyers of that. We are buyers of assets that would have our same typical tenants involved in it. But perhaps may have the blend of three attributes that are going to be the, really the forefront of healthcare as we go through the next 20 years.

Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Scott Peters for any closing remarks.

Thank you everybody for taking your time and listening. We really appreciate your opportunity. We felt we had a very good quarter, well positioned for the year, and look forward to seeing everyone at NAREIT in Phoenix next month. Thank you.

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