Good morning. And welcome to the Healthcare Realty Fourth Quarter Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask question. [Operator Instructions] Please also note that this event is being recorded. I would now like to turn the conference over to Mr. Todd Meredith, Chief Executive Officer. Please go ahead.

Thank you. Joining on the call this morning are, Kris Douglas, Rob Hull, Doug Whitman, Carla Baca and Bethany Mancini. Ms. Baca will now read the disclaimer.

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, 2016 and in subsequently filed Form 10-Q. 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, normalized FFO, FFO per share and normalized 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, 2016. The Company’s earnings press release, supplemental information, Forms 10-Q and 10-K are available on the Company’s website.

Thank you, Carla. We’re pleased to report steady results for Healthcare Realty’s fourth quarter and strong performance for the year. The Company’s same-store multi-tenant MOB portfolio continues to lead the way performing on all cylinders and exemplifying our commitment to the pursuit of lasting growth from on-campus medical office prosperities. MOBs are an increasing share the Company’s portfolio. Pro forma NOI for our medical office buildings reached 86% at year-end and is expected to push towards 90% over the next few quarters. Robust rent bumps and cash leasing spread across the multi-tenant properties indicate favorable growth trends ahead. Combined with operating leverage from effective expense management, Healthcare Realty’s NOI growth should remain above what most expect from medical office portfolios. Same-store NOI growth of 5% for 2016 was strong, even if somewhat muted by the performance of the single-tenant net lease facilities in particular the non-MOB properties. Going forward, we will look to selectively divest any assets that are masking the solid growth of the portfolio. We sold three inpatient rehab facilities in 2016 and are inclined to sell more, find properties, but not a fit with our outpatient focus and ongoing portfolio refinement. We believe the modest dilution is well worth the trade for more reliable, higher growth in the long run. Regarding 2016 investment activity, we were pleased to complete the Company's largest volume in several years. More importantly, the properties we acquired are associated with top health systems, predominately A and AA rated incisable markets including Seattle, Los Angeles, D.C., Baltimore and Minneapolis, St. Paul. All are located on or adjacent to hospital campuses with half representing our second, third or fourth MOBs on the same campus. And more than half of these investments should lead to additional acquisitions development or redevelopment in the years ahead, a…

Healthcare providers are moving forward in 2017 with a sound operational environment in a new health policy agenda in Washington. One that the industry is hopeful, we will carefully repair far reaching regulations and foster a favorable environment for providers, insurers and patients alike. Congress approved in January, a budget blueprint to enable the repeal of the Affordable Care Act and Republicans are actively working on replacement legislation possibly leaning toward a transition period to amend or withdrawal various aspects of the law in particular related to the problematic health insurance exchange, rather than an unabridged comprehensive repeal. President Trump issued an executive order last month to begin dismantling parts of the ACA and allow time for Congress to pass replacement legislation. And HHS released yesterday a ruling to address the regulation of insurers and improve the risk pool of patients on the exchange. Prominent insurance leaders have voiced approval that the Trump administration and Congress are listening to their proposals especially as companies weigh their participation in the individual market for 2018. Hospital leaders have been relatively quiet partly because their exposure to patients with ACA coverage on average is quite minimal. And because the current focus in Washington is primarily on insurance issues not delivery of care. As an example, HCA announced that exchange insurance directly impacts only 2% of its overall business. And Tenet Healthcare similarly announced that only 3% of its admissions and 1.5% of total revenues are derived from exchange patients two thirds of which had insurance prior to the ACA. Furthermore, Tenet calculates it has received $230 million in benefits from the law since 2010 offset by Medicare cuts of $350 million, a net negative impact of $120 million. Well we do not know exactly how the repeal will play out or what specific…

Thank you, Bethany. Now, Mr. Hull, who will provide an overview of our investment activities. Rob.

In 2016, the Company saw a pick up in investment activity and also maintaining the discipline required to pursue only properties that meet our criteria. We looked at several hundred investments of which about a third were on-campus and of those thoroughly evaluated 85 on-campus properties and acquired 10. The 10 medical office buildings we acquired total $242 million and comprise more than 580,000 square feet on or adjacent to campuses of leading health systems and markets where we already have a presence. Combined with development and redevelopment funding of $45 million, new investment activity totaled $297 million. The sale of six buildings for 95 million brought net investment activity to 190 million for the year. In the fourth quarter the Company invested $64 million in five medical office buildings located on three different hospital campuses. On average the properties are 91% lease and expected to generate a first-year yield of 5.8%. All of the properties are on-campuses associated with investment grade health systems including Providence Health in the University of Maryland Medical System. And represent our continuing effort to increase the growth potential of the portfolio through on-campus multi-tenant MOBs. Over the last year we have seen private equity groups, foreign capital sources and other non-traditional buyers interested in the MOB space. Many looking to deploy large blocks of capital forcing them to pursue portfolio size rather than quality. Despite an increase in interest rates over the past year more buyers focused on the space of health cap rate stable. We continue to expect quality assets to trade in a range between 5.5% and 6% with some trading in the low-5s or even lower. The Company currently has one property under contract and a pipeline comprised primarily of one or two building opportunities that should provide a solid start…

Thank you, Rob. Now Mr. Douglas will provide a summary of our financials and operational results. Kris?

Normalized FFO grew 15% of our fourth quarter 2015 was flat on the per share basis at $041, because of $450 million of equity issued in 2016. The equity raised combined internal growth substantially reduce leverage, improve credit metrics and position the Company for future investments. In the last 12 months, debt-to-cap improved 800 basis points to 33.9% and debt-to-EBITDA was down over return to five times. Trailing 12-month same store NOI growth for the fourth quarter was 5%. 6.9% for the one 139 multi-tenant same store properties, which account for 75% of total same store NOI and negative 0.3% for the 30 single tenant net lease properties. 2016 same store NOI for the single tenant net lease properties decreased to $159,000. The slight decline was a result of two discrete situations, where we improved term in credit and exchange for lower rent. The details of these events are more fully described on Page 25 of the 10-K. The 2016 trailing 12-month same store NOI for the multi-tenant properties increased $11.2 million to $173.9 million. The 6.9% NOI growth would have been 7.4% if not for the expiration of three legacy property operating agreements in April and September of 2016. The portfolio is healthy contractual bumps, cash leasing spreads and occupancy gains generated through the strong efforts of our leasing team more than offset these expirations, trailing 12-month multi-tenant revenue for 2016 increased to 4.2%, driven by 3.5% growth and revenue per occupied square foot and a 50 basis point increase in average occupancy. Operating expenses grew 0.7% below our historical average, primarily due to a 3.1% decline in utility expenses. The utility savings resulted from slightly lower average degree days across the portfolio as well as decreases in energy usage from prior investments in energy management systems. Excluding utilities,…

Thank you, Kris. Operator that concludes our prepared remarks. We are now ready to begin the question-and-answer period.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Jordan Sadler of KeyBanc Capital Markets. Please go ahead.

Thank you. Good morning. I wanted to formally congratulate you Todd on the promotion, although, we do miss David on the call.

He is not too far away. He is actually in the room.

Hi, David. So I had a question regarding the transaction pipeline in terms of acquisition, so you obviously had an active 2016 and towards the end you actually sold some assets and I noticed it looked like you parked some of the proceeds from those sales with an intermediary for a 1031 exchange perhaps. So I would be curious if you've identified an asset there and just generally what you're seeing in terms of the pipeline for MOBs?

I would say you're correct. Obviously, we did put some of those proceeds into 1031 account to reinvest and so I think that does certainly suggests that I think as Rob outlined, we're certainly have some things that we're working on in the pipeline that look like a good start to the year that we'll use some of those proceeds. Our guidance, obviously if you look back to a year ago where our guidance was I think we're starting out as strong as we did last year. I think I mentioned in my comments, we certainly think we could see that easily being in line in the normal course and maybe even exceeding. So I think it's our outlook here at the beginning of the year because as Rob and I both said pretty good start to the year. And I think Kris mentioned, we certainly think we can invest a lot of the proceeds really by the early second quarter from the inpatient rehab sales.

Okay. It’s helpful. And then just looking at cap rates along the same lines in those your guidance this year doesn't seem to show any sensitivity to rising rates or anything like that and I was kind of curious as you were putting the guidance together, how you thought about it. Pricing assets 5.5% to 6% cap rates versus I think you were maybe a notch higher at the beginning of last year and certainly higher the year before. Are you seeing any – or do you have any sensitivity to the move up in the tenure?

I certainly think we have some sensitivity to it, but I think maybe Rob a little color on what you were talking about with additional buyers.

Yes. I mean I think we've seen – you expect cap rates to possibly start to increase, but we haven't seen that and I think that's because there is quite a bit of number of buyers out there. There's a lot of money out there that we think is contributed to keeping cap rates in this space stable. So we think that 2017 because of that cap rates will continue to remain in about the same range as we were towards the end of last year which is in 5.5% to 6% range where we’ll be buying.

Yes. I think there could be an argument to say that this additional capital could even cause rates to go down. I think we're being cautious about saying that at this point because of interest rates. I think that's probably how we think about it, but it is a tremendous amount whether they pursue the types of assets, the individual assets that we're going after remains to be seen. I think as Rob said, we're really seeing them, look at the big portfolios which is you know we tend to not chase as much just based on quality.

And then just one clarification. The life care affiliated facility, what's the status of that exactly?

Yes. We actually we worked out a terminations, early termination of that lease with the Tenet which included them paying rent through the fourth quarter. So we did not have a fourth quarter impact related to that asset, but they have terminated and are no longer occupying or paying rent in the first quarter. So we'll have a first quarter impact of about $500,000. We are in discussions with a couple of groups about taking occupancy in the building the most promising or with actually a couple of acute care hospitals that are located adjacent in the near vicinity of this facility. So those are probably the most promising, but we're having discussions with other operators as well.

Okay. Thank you.

Our next question comes from Michael Knott of Green Street Advisors. Please go ahead.

Hey, guys, good morning. I was just curious if you can talk a little bit about your operating expense savings on the multi-tenant side year-over-year as it looks in the supplemental. And then also can you just yours talk about your thoughts on the lease roll for 2017, I think it’s about 18% of your revenue base and just how are you feeling about that? Thanks.

I’ll handle the operating expenses. I mentioned in my prepared remarks you know for that we kind of look at things more on a 12-month basis and operating expenses were up slightly at 0.7% that was driven which is below what we would expect long-term. Long-term we think that around 2% is a good run rate. The lower mark this last year is really driven by some savings on utilities which was benefit from degree days of temperature as well as some investments that we've made and will continue to make to control usage. But I think 2% it's a good long-term, I think I have heard some people asking about the drop year-over-year or quarter-over-quarter fourth quarter of 2015 to fourth quarter of 2016. And that drop is primary related to the fourth quarter of 2015 we had a large property tax kind of catch up for the year that you may recall us talking about a year-ago, which added about $1.9 million, $2 million of additional property taxes in the fourth quarter that we would typically have been spread out through the year. So once you adjust for that the growth year-over-year is kind of more in line with that 2% that we would expect. And then on the lease roll being 18%, 19% I think from our standpoint you've heard us talk about how that is really a design of our portfolio. You've heard several of us talk about shifting to multi-tenant MOB less and less single-tenant and non-MOB and I think - as you think about those lease term the typical lease would be around five years and I think our average remaining lease term for a multi-tenant property is just under four years. So we expect that year in and year out and we have a nice slide on that or page on that in our presentation that shows you know we've been doing that for years and expect it in the years ahead. And frankly with our cash leasing spreads as strong as they've been and pushing on that. We actually like to see that because it gives us a chance to push the revenue growth profile continue to push rents up obviously we think that only works when you have the right kind of properties with the right kind of fungibility dynamics where you don't have a lot of competition and forces that would prevent you from doing that. So we year in and year out and as we shift more and more to multi-tenant I think you'll see it's around that level.

Okay. Thanks for that. And then one more if I could just sort of tagging on that that last set of comments there. It sounds like you're not worried about the health systems slowing down decision making because of any ACA and certainty. And then I thought I heard you guys you mentioned the development leasing lease was pretty strong. Can you just maybe give a little more color on that and maybe tie those together?

I'd say on the development leasing and just generally as it relates to hospital demand we're not hearing you know these concerns. I mean obviously everybody is focused on the headlines and hearing what's going on politically trying to keep up, but there's certainly some uncertainty as it relates to the headlines. But we think when it gets down to what hospitals are doing what providers are doing. We're not hearing that lack of confidence. It's really almost the opposite. We're hearing some optimism, some relief as Bethany described in her remarks that a little less regulation addressing some of the issues more of a replace and repair sort of approach to things. So we're seeing confidence, obviously this will play out in the year ahead. But it's a really good development specifically, I think Rob talked about several of the projects whether they're redevelopments or developments where we're getting a lot of interest from hospitals and third parties and I would say hospitals are the driver of that. So it probably speaks to your point specifically that we're seeing confidence. And if anything even if there it does become a little directional turn in where hospitals come out on this and maybe it's not as optimistic, it just put that much more pressure on shifting the outpatient setting. We certainly saw that once people got their legs under our [indiscernible] Affordable Care Act and I think you will see that going forward.

Thanks and congratulations Todd. It seems like HR’s and good hands going forward. Thank you.

Thank you, appreciated.

Our next question comes from the Viki Malhotra of Morgan Stanley. Please go ahead.

Thank you. So I just wanted to get a sense of how you're now thinking about development versus acquisitions? I know it seems like pricing is stable on the acquisition side, but potentially could take down. If you could maybe give us a sense of how you're feeling about the mix between the two and if there additional opportunities on the development side you could perceive in 2017?

I would say that if you look at our long-term history, we've probably been two-thirds to 70% acquisition versus development. I think over the course of a longer timeframe, we don't see a huge departure from that. Some of that is just by design. We know that we can sort of year in, year out to a certain amount of acquisition, whereas developments a little more driven by the opportunities, the relationships, the situations that we create for ourselves. I'd say we would be comfortable with that having and flowing a little higher than just 30%, but as you know it's also a matter of two or three year timeframes to spend that money. So you can certainly bounce around a little bit. We like development fundamentally because it gives us not only wholesale type cost and a little higher yield, but it also really is a way to get to the best properties. We actually added some things to our presentation regarding our benchmarking that we do, we call it vendibilities for and the best properties at the top of the scale of nines and tens is very hard to come by on the acquisition side and we see development as a direct way to produce those types of quality assets at the top of that scale.

This is Rob. I'd say we see more development coming from relationships that we currently have and if you look at our existing pipeline and we've got one underway for third building on that campus, we're commencing with design on another one where we already own a couple of buildings. So those types of developments are obviously good development for us. We know the system. We know the market and so we view those as a good low risk opportunity for us, as well as on the redevelopment side where we're looking at campuses where they're tied, what can we do to the existing buildings that we own on that campus to create some incremental growth. We're much more focused on that going forward from here.

Okay, that’s helpful. And then just your comments on you are maybe some of your clients being comfortable with potentially changes on the ACA side, last year we saw a couple of interesting sale leasebacks. So I’m just wondering with the potential changes, any conversation, any color you can give us that you're having with other hospital companies about a potential sale leasebacks?

We've always been sort of cautious about climbing on this notion that policy change and industry shifts are causing this acceleration or this wave of monetizations or sales by hospital systems. I'd say we're still cautious about that those cases that you are probably thinking of last year are very specific to situations that health systems went through to shore up credit ratings, not that they were in a bad credit rating, but just improve their days cash on hand and had a specific a key situation from a years of consolidation. So we don't see that widespread. I think you see also have the impairment that philosophically health systems are slow to make that decision, and then they are trying to time cap rates. That said I think every year we expect a couple, maybe not the scale of say the CHI deal last year at $700 million plus, but $100 million to $200 million, you're going to see a couple of those a year and I think we always expect that and it's sort of the random effect that you might get occasionally where something bigger comes along. So most of what we see is not hospitals selling, it's really buildings that have already been owned by financial investment groups or operators and they're looking to recap or sell those assets.

Okay. Thank you very much.

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

So just looking at your supplement it looks like there are some occupancy pressures in the quarter. Can you tell us what drove that sequential decline whether it’s a life care hospital or something else?

Actually the occupancy was for the most part flat for the quarter on a sequential basis. We did add a new historical occupancy cable and occupancy reconciliation page to supplemental and think it may take a little bit of time for people to kind of adjust exactly what we're showing there, but the occupancy reconciliation is really tied to the historical occupancy, so it's not the same property set on occupancy reconciliation page even when you look at the same-store.

All right.

I would say to look at it that you can see more clearly of what's going on is on the next page, the same-store properties page. We show the occupancy. And so you'll see that occupancy for the total portfolio was flat at 89.3% and it was flat at 87.3% for the multi-tenants. And then on a year-over-year basis, we're actually up slightly 30 basis points on multi-tenant and 20 basis points on the total portfolio, same-store portfolio.

All right. So in occupancy we should consider flat sequentially not that there is couple different numbers in there that I disagree.

And I think that maybe it takes some time, look at that occupancy reconciliation page. And we're trying to kind of walk people through the ends and outs of that page, so what we do if you look at the sequential kind of start with what the occupancy was at September 30, 2016. We show what was added to the portfolio including 49,000 square feet addition for the redevelopment in Nashville that we showed on our Investor Day and then also the acquisitions completed during the quarter as well as a couple reposition properties that came in and the dispositions that we had during the quarter which were at 100% occupancy. So that change is really what drives down the sequential occupancy inside the portfolio. But if you then look at the next section, the new leases versus the move outs. That's where you really start to see the net absorption and you should see those kind of net each other, they were effectively flat. That's where the occupancy really shows up of the same-store properties being flat for the quarter.

Okay. So thinking about life care facility that is not occupied as at the first quarter, let’s think about the specialty hospitals that you have, you sold three IRS. Can you tell us how many beds where in those and then what specialty hospitals are left in the portfolio?

I could guess on the number of beds that I would be wrong, so I probably shouldn't do it. I can follow back up with you and give you the total beds.

Okay. I’m just thinking about what kind of valuation they went for?

Yes. It was a 7.6% cap rate, is that helps you on a valuation perspective and I can get back to you on the bed count.

Okay. And then what's left in the portfolio as far as specialty hospitals?

We certainly have some additional inpatient rehab facilities, right five or six of those and then also we've got a couple of what we call specialty or surgical facilities. And you may have heard us talk about them four, one is a surgical hospital in Dallas and it's associated with Baylor. It's a very high end surgical hospital, they do orthopedic and general surgery and also OB into affluent just provide service to affluent community up there, very profitable facility with very strong rent coverage. And the other one is an Orthopedic Specialty Hospital in Missouri and same story but more focused on just orthopedics and very strong rent coverage there as well, aligned with AA credit systems and I think that's probably the biggest differential see from us is something the line with AA systems especially when we're looking to do more business with already have other business with you know that probably has a different tone to it than something that is more independent like what we sold in the fourth quarter.

All right. I think that's good for me. I’ll hop back off. Thanks.

Thanks Chad.

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

Thanks and good morning.

Good morning.

And Todd welcome. I need a little bit more vocabulary from you but on that. On the development side you said you know things are picking up steam. Can you give a sense of how much more you would think in terms of potential development spend next year versus this year and also since you did the equity and you got your debt levels down, to what degree can that 5 times debt-to-EBITDA go up to pick a number tell us kind of what it is and to also to what degree disposition proceeds will go towards development funding in 2017.

Sure. I think on just broad leverage strokes. We have guidance out there in our supplemental and we say 5 to 5.5 times is sort of where we see this year. I think your question maybe goes beyond this year. We're certainly comfortable in that range in the normal course as it relates to development putting any stress on that certainly we're okay you know going a little higher than 5.5 if it's a temporary thing. So that that doesn't concern us but I think where we want to live sort of permanently long-term would be more you know for the time being is in that 5 to 5.5 range you know development to your point can be a little bit more of - can kind of flex that here or there, but generally speaking we're not looking to take have development take us way out of line with that. In terms of spend I would say Rob touched on the development in Seattle that we're starting as well as a couple of redevelopments and I think our spend this year is around…

35 million to 55 million

45 million

I'm just curious more about you know beyond that we've kept the guidance but circulating more to be realistic.

I think you could see it certainly go up from there I think if you look back at our history on spend probably not much more than 100 million. So I think that's probably a ballpark way to think about it. We've talked about another development in Seattle down the road that we're we hope to get started you know maybe end of this year early next year that would add to that pick that pace up.

Yes, but I think if we look at the developments we have I mean the value one that we talked about that we're looking for a construction commitment later on this year with the majority of that's been really ramping up towards the end of the year and into the next. And that has a $64 million budget there are some other developments Todd mentioned on a Seattle that we’re working on and we have another couple of others that that to related to say one way the other but we think that there probably further out in the 18 timeframe.

Ultimately do you want single tenant to be kind of a 0% number or do you think there's some value in having some of that in your portfolio.

We're okay with some of that it's not - we're not on a mission to zero or buzz. So I think we view it is if it's MOB if it's an important location if it's valuable to a health system we're okay with that. Obviously if it's an on-campus MOB in single tenant that probably the best example of the things we would keep. I just mentioned on another question about these surgical facilities specialty hospitals. We're comfortable with those as well I mean anything that single tenant that is not specifically on a hospital campus I think our view is that we have to just diligently manage sort of what that leads renewal timeframe is what it looks like what are the implications on the renewal the value from that. So we're okay with some of that but having 10% of that is probably fine by us.

Okay. Last question this is kind of a trivial way of asking the question. But why isn't your lease percentage your occupancy more above 90%. If things are going so well in medical office and yet you kind of still hover below that 90% level is some of that self-inflicted because of the redevelopment and development activity and maybe some of these other non-MOB assets or is it something else or do you see yourself kind of ultimately getting into that and staying in that kind of low-to-mid 90% range. What's the functional vacancy I guess of the portfolio?

Well, there’s two things there. To go back to your last question, multi-tenant versus single-tenant, our ratio there is heavy already low-to-mid 80s on square feet, which relates to occupancy towards multi-tenant. Interestingly, and I’m not isn't picking on HTA, but just as a near example of another portfolio of MOBs. If you take their occupancy, which is around 91 to 92 and you look at their ratio like 70% multi-tenant versus single-tenant and you assume with the 100% for single tenant, if you backwards saw for what occupancy would be on their multi-tenant, it’s not what they disclose. They just do the total. They're actually right under 88% as well.

Okay.

So I think you would find if you did that across multiple people of the MOB portfolios, you would run into the same thing [I would probably] to HDP as well as an example. But to your question, I think we do see an ability to go to that 90% range that low 90% range and it's probably not just a function of leasing up everything. It's probably also a function partly of selling certain assets the just aren't living in that 80% to 90% plus range. So and that’s the process you've seen us do. We saw a couple MOBs, three MOBs in the fourth quarter. So it’s the combination of absorption, steady absorption, but also selling assets that are just not at the right occupancy levels long-term.

Fair enough, thanks. Good quarter.

Thank you.

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

Yes, good morning. A couple of questions for me, first of all the disposition outlook that you put together for 2017, could you just talk about what you are targeting to sell and whether any of those sales are the result of tenants exercising their purchase options?

Yes, we look at the disposition range for this year. It's pretty similar to what we actually closed on for all of 2016 and I would say it's probably going be a similar mix more of what Todd was just talking about single tenants, potentially off-campus buildings maybe and smaller markets and it will just be continue to look for those opportunities and where we sell those and continue to refine the overall growth rate of the portfolio. But when you do sell those assets – do not comment the same cap rates that you're going to have for your on-campus multi-tenant MOBs and so we are looking the cap rate range, obviously is a bit wider, a little bit higher than what you're going to see are acquisition cap rate range.

Okay.

In terms of the – I think your purchase option reference, we really view that more as an 18 event. So we would say that's really not in the range of guidance for this year.

Yes, I think we've talked about we do have one purchased option that is does become available to be exercised on December 31, 2017, but really that would obviously not impact 2017 income. It would have 2018 impact.

Gotcha. So that’s helpful. Then the second question just around your tenant improvement and leasing cost both for renewals and for new leases. Again it’s trend high relative to your peers and I just wanted to find out, and can you kind of reconcile why your numbers or why your TIs and LCs simply trying to little bit higher than some of the other peers that have large MOB portfolios?

If you look at our disclosure on that, we're in the $1 to $2 range for lease commitments for lease renewals, second generation. And interestingly if you going to look at HTA or HDP, we’ll have pretty good disclosure on that as well, I think you'll find we're in the same range. I think HTA was the lever $2 this past quarter, HDP same, the lever $2 and we average I think $1.88 in a fourth quarter, $1.80 for the year. So I don’t know that we’re really out of line with what’s you see obviously, we have a fair amount renewals and expiring leases. So when you multiply it out, we did have a slight increase in the average lease term, which when you roll that math out, can lead to few more dollars, but we don’t expect or don’t see that we're out of line. I think part of it is to just really making sure the comps you look at are really multi-tenant MOB companies not necessarily the other health care folks that's obvious. And then if you comp it to the office space it's a lot less than office.

Okay. That’s helpful. Thank you.

Thank you.

Our next question comes from John Kim of BMO Capital Markets. Please go ahead.

Thanks. Good morning. Todd, I think in your opening remarks you referenced your same-store NOI growth in the future being higher than what we expect from MOB Company. Are you suggesting it could be higher than what you delivered this year at 5%?

I think what we're suggesting here is that people tend to expect 1% to 2% to 3%, let's call it, 2% to 3% long-term from MOBs and that's been evidenced by a lot of history. We've averaged out at three if you look over three years, I think and HTA has so and others have, so few people maybe a little lower. I think our point is that we acknowledge that certainly our 5% and if you look at our 6.9% for the multi-tenant properties that had acceleration from some absorption and lease up in some of the previous development properties. So no we're not saying it's always 5% or greater from here on out. However, the long-term profile we think is revenue growth that can be in the 3% to 4% range and expenses at the 2% range as Kris described and getting that operating leverage where you can be in that 3% to 4% and even above 4% into the 4% to 5% range. So that's our long-term view. We will obviously have some additional pick up again in 2017 from just additional absorption, but a little more muted because those properties are fairly stabilized. So more of the 3% to 5% is our thinking versus I think long-term expectations of 2% to 3%.

And on the contractual rent increases of 3.2% on leases commenced, how does this compared historically and how much to give further push?

We've seen that over the last year or so in that 3.2%, 3.3% range, so it's within the range of what we've seen and so maybe a little closer to the higher end of the range, but we tried to stay focused on is are we able to push that above what we have in the underlying portfolio, so that we can expect to accelerate growth. You don't find very many, although we do have some markets where you're able to push over 3% to 3.5%. We have a few markets in California where we're able to get some annual escalators in the 4% range, but 3% plus for an overall average we think is a good target.

On the acquisition front, you remain very focused on high-quality on-campus investment grade rated partners. Your average cap rate was 5.6% this year, but I was wondering if there were any assets types that are non-on-campus that you think maybe mispriced in the market and are potentially more interesting to you?

For us it is pretty focused on-campus, multi-tenant preference, but also single-tenant on-campus. So I think that's where we see it. I think when you get off campus, we just see and that it really gets back to what you just asked Kris about growth profile. The difference is off campus, the pricing power that you don't have to the extent you do on-campus generally gets you longer term leases, but the offset and maybe often credit, but the offset is maybe a 2% escalator. So just taking that 2% escalator in that situation versus 3% as you know it changes IRR and therefore, if you assume the same terminal value assumptions you get it all back to cap rate less than 100 basis points in cap rate, the market doesn't reflect that in our opinion. The market is probably more like 25 to 50 basis points in a similar asset on versus off. So that probably speaks to our interest level off is just not there. In terms of other asset types completely, we're not looking to ramp that up. Obviously, we've got a couple of these surgical specialty hospitals. Those are case by case, but certainly not a huge priority in terms of expanding. Those are sort of more interesting relationship one-off deals that may or may not happen, but we're not out trying to grow that in particular.

And the community health portfolio that was sold to HDP this quarter, was that's something that you look at? And can you just offer to discuss the competitive environment as far as other potential requires in the market today and if you see any new entrants in the market?

We certainly looked at it. Our philosophy is generally that we look at everything, and I think Rob alluded to several 100 deals, is really we actually have a slide or page on that and it's over 600 deals. So we look at everything and that includes the bigger transactions and portfolio. Also Rob mentioned we are seeing some non-traditional players, not all of them our operators. So they're trying to figure out how they tackle the business and get into the space. But certainly we look at everything, no matter the size from $5 million deals that fit strategically that's not our priority, but if it's next door to an asset like one of the ones we closed in the fourth quarter that can be additive all the way up to multi $100 million deals.

So did you pass on that one or not bid as high because of partner issues or…?

That's generally what happens. As we look at these portfolios and it's a matter of the ratio of quality that meets our criteria generally don't measure up. We will sometimes talk to the seller or their representatives about going ahead and trying to buy certain assets even if we have to pay up a little bit for the quality the ones we want, but yes as you know that can be difficult if they're looking for a clean quick process. So again it's just that disciplined making sure if we see something 80% what we like that's a different story, but it's often 20%, 80% meaning we only like 20% or less.

Great. Thank you.

Thank you.

Our next question comes from Mike Mueller of JPMorgan. Please go ahead.

Yes, hi, quick question on leasing spreads, and I know the stuff can be volatile from quarter-to-quarter. But you started off 2016 is around 7% and 6% it’s kind of gravitated to around 4%. I guess number one is that a trend we should looking to or it’s just how it took out each quarter and how do you see that playing up for 2017?

Yes, I think you hit its variable it moves around it's obviously a composition of 50 to 100 leases a quarter and it's just the composition we talk a lot about that in certain things or presentation about that was in history. Our guidance is probably the best indicator of what we think going forward certainly for 2017. We're saying 3% to 6% is our guidance there for cash leasing spreads. So yes, we certainly think 6% and 7% above 6% into the 7% range is probably not a sustainable level to try to tell you will produce. But certainly think that 3% to 6% and it will vary a lot quarter-to-quarter in those ranges. If not a little above or below sometimes, but in that seeing numbers in that range I think is very, very reasonable to assume and it really just comes down to a composition as Kris said this last quarter we had one negative.

Okay.

So you can do that and then you get a few that are double-digit on the top end that are sizable leases. It can skew that the average pretty nicely. So it just depends on the composition each quarter.

Okay.

We say that we look at the kind of the fat part of the distribution to be in that 3% to 4% range. This quarter I think it was around 70%, 72% that was in 3% to 4% range. So then it really is what happens to the distribution beyond that and those tails. And so if you're able to get a few, which we did have this earlier this year there were really strong on the positive end of the distribution that can push the average up. But long-term we kind of say 3% to 4% is the meet and then above or below that period on the vagaries going on in any particular quarter.

Got it. And then just quickly on redeveloping talk about a couple redevelopment projects for $20 million or $22 million. What exactly can you just walk through what is a typical redevelopment for you as an expansion of space, are you reconfiguring space I think what falls into that bucket?

Yes, in the case of those two instances it's actually two different properties and there on different campuses actually on different sides of the country. But there where we've got an opportunity to expand each of the buildings. We've encountered some additional lease demand for being on the campus we have buildings on the campus obviously currently and we've been in dialogue with the hospital and the users of that space and as a result of that. We see a need to expand the buildings and accommodate that demand. So that's generally when we're talking about redevelopment we're looking at primarily an opportunity to expand the building, in some cases as here in Nashville where we tore down part of the asset and rebuilt a brand new building. But it can come in different for us, but generally we're increasing the space of an asset that we already have on-campus.

Got it. Okay.

The two that we're looking at, it's somewhere in the range of 20,000 to 40,000 square feet, each building that we're expanding, which in one cases almost a doubling of the building.

Yes.

In another case, it's a smaller percentage, but it's still a major amount of space.

And one and since we have somebody, actually two different groups that are that are taking all of the space, so it's well least and actually in both cases. So very low risk opportunity and a good chance for us to grow the presence on the campus.

Got it. Okay, thank you.

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

Hi, thanks. Just to hone in on the two Seattle MOBs you acquired in the fourth quarter. What is the lease role look like and what are your growth expectations, when you look at the stabilize one and then maybe just show what your expectations are for the second one, the one that's 65% least?

Yes that the one that’s stabilize is they're actually right next to each other. One of them is about 30,000 square feet and it's about 20,000 square feet and they are next to each other, we view the one that is stabilize, they are the rent role solid, we don’t see any significant role there. The one that has some vacancy, we think there's an opportunity there. We have actually two other buildings on that same campus and therefore as well and we've experienced a need from some of our tenants to expand. And so we really view the one that is that we acquire that’s 65% least as an opportunity to maybe move some tenants around and create larger blocks of space for these tenants that are in the building can expand their current space. So it kind of frees us up to work with the tenants that are there on the campus and create an opportunity for us to fill that building up. So we're look to do that over the next – course the next year or two years at leases role people have need.

About rents, what are the rents existing rents and what do think you can get into?

The rents, they're in that $25 range. We think that the rents are fairly stable in terms of being able to push them again I said that was pretty tight market on that campus. So we think that our ability to push rents consistent with what you've seen in other parts of that market. We think we can do in that 3% to 5% range.

But the nice thing is we own four buildings on that campus now. And frankly we kind of have it covered from the rental rate range from low to high. We have some of these that we bought were at some of the lower rates in the market and we think as we put some capital in and are able to move some larger blocks and we have some opportunity to increase. We also have the nicest Class A building on the campus, which have the highest rates. And so we really like the opportunity we have there long-term to drive overall rent growth in the market.

And you see a private range of low 20s to 30 sort of your range is Kris described and not so as we put money in and as Rob said think about how to create lots of space, we have that opportunity. We may not get it from 20 to 20, so we maybe able to move it significantly on the initial lease. And then I’d say Seattle is the place maybe not quite as aggressive as California in some markets, but we've certainly seen an ability to get contracts for bumps throughout the lease term that are 3% plus.

Okay, that's helpful. And then you may have answered my question, but if you're taking doctors and moving them to these new spaces, because if you look at these two recent acquisitions, they're both less than 30,000 square feet. So if you consider that in the smaller side with the trend of sole practitioner joining group practices and they have greater space needs over time. Any expansion opportunities with these or how do you guys look at when you're buying a property that's only 20,000 square feet? How do you think about that?

Well, as I mentioned these few properties are right next to each other. They actually share a parking lot and so it's a very unique situation where we've been able to get control of both billings as well as enough parking to – should demand. Should there be demand for a scenario, which you just describe. We could actually scrape the two buildings and put about 150,000 square feet on the side, so that is one of the aspects of when and our thinking about this property you said looking down the road there's an opportunity to redevelop it and create even more space than from the ground now.

And they share a property line with the hospital campus very much walkable to and from the hospitals, so very, very strategic in terms of location and as Rob said the potential for redevelopment.

Got it. Thank you.

Thank you.

We have a follow-up question from Tayo Okusanya of Jefferies. Please go ahead.

Yes. Just another quick one. How do we think about dividend policy going forward, so the dividend is kind of stayed up $0.30 a quarter for quite a while now?

Sure. I think you'll see in our disclosures, we have some additional disclosure around FAD, funds available for distribution which include some of the maintenance CapEx items, second generation TI commissions and so forth. If you look at our pad on that ratio on that basis, we were about 95% for 2016. So I think we're certainly moving in the right direction. Certainly I think there's room to improve that. But I think being in the right direction certainly gives us an ability to consider that and look at that, but I think we've got a little ways here to be at the right level if you kind of look at comparable peers and so forth before we turn too strongly towards that.

Thank you.

Thank you.

And we also have a follow-up question from Rich Anderson of Mizuho Securities. Please go ahead.

Yes. Sorry to keep you on. Just a quick one. In the guidance where you listed your second generation TIs and leasing commissions and then CapEx. Are all three of those items like sort of AFFO adjustment numbers or is there anything revenue generating in particular the capital expenditure line of $11 million to $22 million?

So we use to break that out a little bit more between the capital expenditures between revenue enhancing and not. I think our view is that most people said well that's fine, but we're still going to subtract all of it and the growth will show up down the road in your income statement or your same-store. So I think we just took a view that will just consolidate that. So the answer is yes, there is revenue enhancing opportunity in there. We are specifically in many cases we were just looking at something in California recently where we've really spend a $1 million or $2 million on a building to enhance the perception and quality of that building on-campus and we can push rates and get great contractual bumps. So it's worthwhile to do that spend, but we do just lump it in there for that guidance as well as…

Yes. There is $40 million maybe half of that non-revenue and half revenue, is that a reasonable?

No, that's probably too much. I’d say more like 75% is recurring versus the balance and we look at the kind of the revenue enhancing more just on the CapEx, the second generation TI and that’s normal course.

Yes, normal course. Okay, thank you.

Yes, probably little more just at the CapEx portion as you start trying to break it into revenue and enhancing non-revenue.

Got it. Thank you. End of Q&A

This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Todd Meredith for any closing remarks.

Thank you to everyone for listening this morning. I will be available today for follow-up if anybody has any additional questions. And everybody have a great day. Thank you.

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