Good day, and welcome to the Healthcare Trust of America's 2017 Third Quarter Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Michelle Murphy, Director of Financial Reporting. Please go ahead.

Thank you, and welcome to Healthcare Trust of America's 2017 Third Quarter Earnings Call. Yesterday, we filed our earnings release and our financial supplement after the close. These documents can be found on the Investor Relations section of our website or with the SEC. Please note, 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 ability or control 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 web filings, which can be found in the Investor Relations section of our website. 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 Earnings Conference Call. Joining me on the call today are Robert Milligan, our Chief Financial Officer; and Amanda Houghton, our Executive Vice President of Asset Management. I'm excited to talk about our third quarter performance and the broader medical office market. This has been a transformational year and quarter for Healthcare Trust of America and demonstrates the opportunities in the performance metrics that can come from being the largest medical office owner with critical mass and scale in key markets and an integrated full-service operating platform in this fragmented but very attractive and rapidly changing sector. From an overall perspective, HTA has never been in a better position to be a leader in medical office. As of today, we are the largest public owner of medical offices in the U.S. with over 24 million square feet and over $7 billion invested, with 70% located on-campus and with the other 30% of our assets located in community core and academic university campuses across the country. We have targeted and focused on 20 to 25 key gateway markets with strong underlying economic fundamentals, with 93% located in the top semi 5 MSAs. Our scale in these markets allows us to have key benefits of critical mass and operating scale with 11 markets approaching 1 million square feet, led by Dallas, Houston and Boston. This gives us significant presence with healthcare providers and physician groups and allows our asset management platform an opportunity to drive consistent profitability from operations over the next 3 to 5 to 7 years. We have established a stable and consistent stream of cash flows for our shareholders, with our top 10 gateway markets making up less than 50% of ABR and no…

Thank you, Scott. When we started our in-house property management and leasing efforts in 2010, we did so for two fundamental reasons that remain true today. The first is that it allows us to better service our tenants. By in-housing management, maintenance services and leasing, we not only have a more complete picture of what the tenant needs, we are more directly able to respond to those needs in a coordinated and consistent manner. Establishing direct relationships with tenants has proven to increase our overall retention and has also generated countless expansion and acquisition opportunities across our portfolio. Secondly, in-housing allows us to increase efficiencies. When we in-house the management of a property, we are able to generate immediate synergies by simply eliminating the third-party management fees. Those synergies continue to build over time as we hire and train a team of building maintenance and engineering professionals, who are able to perform a greater amount of services in-house. Thus, further capturing third-party markups and generating increased profitability for our shareholders. You can see this in our financial this quarter by noting that the increase in our tenant reimbursements outpaced the increase in our expenses year-over-year. I would like to note that this platform operates at its fullest potential, increasing efficiencies and providing superior tenant services when we have the size and markets to justify bringing service lines in-house at rates less than those that would otherwise be charged by third parties. We can do this more as we increase our management density or scale in market, which allows us to hire more specialized staff and keep them operating at full capacity. The Duke transaction was transformational in that it significantly increased our size and ability to drive scale in many of our markets. We have created what we believe to…

Thanks, Amanda. The third quarter for us was a relatively clean quarter that allows us to demonstrate the impact of the 2017 acquisitions in our underlying portfolio performance. Third quarter normalized FFO per diluted share was $0.42, up 5% from the third quarter of 2016 and only included partial period impacts from the final closings of the Duke and Tampa portfolios as well as 2 of the developments that were completed. Our normalized funds available for distribution increased 52% to $74.8 million compared to the prior year. We no longer report this on a per-share basis as we believe this is a liquidity measurement, however, our payout ratio for an increased dividend was 83%. Our same-store cash NOI growth was 2.9% despite a slight decline in occupancy. As Amanda discussed, we have increased the profitability of our platform, and this performance demonstrates our ability to continue to grow our cash flows even as we focus on pushing rental rates where appropriate, which sometimes comes at the expense of short-term occupancy. You can see this in our 2.2% cash re-leasing spreads in this period, which is up from the flat to 1% we have been averaging. As importantly, we are increasing rates without spending a significant amount in tenant improvement dollars, which tend to offset any additional NOI that could be generated. We continue to demonstrate our ability to grow our NOI for shareholders through multiple avenues. Our ability to grow these margins is demonstrated in our reported same-store rental revenue margin, which increased 90 basis points year-over-year. We are providing this metric as we think it demonstrates our true profitability growth on our base revenue without the distorted impact in our recoveries has on other margin metrics. We are focused on increasing this margin as we continue to utilize and…

Thank you, Robert. Thank you, Amanda. I'll now open it up for questions.

[Operator Instructions]. Our first question will come from Karin Ford with MUFG Securities.

Robert, I just wanted to ask about your comments there at the end about the $200 million of ATM issuance that you did post quarter end. Is the goal with driving down leverage to be in a position to be an acquirer of another large portfolio? I know there are a few kicking around out there. Or is there something different in mind when you're thinking about capital allocation and the leverage plan with the ATM issuance? Can you talk about that?

Yes. Absolutely, Karin. First and foremost, as we look at our overall capital structure leverage liquidity, we're really focused on making sure we head into 2018 with the balance sheet in great shape. I think, certainly as we look at the long term -- from a long-term perspective, we think our increased size and scale and diversity combined with strong balance sheet certainly positions us to lower our cost of capital. So we do remain committed to bringing that leverage certainly down below 6x by year-end and certainly back to our long-term average, where we've been running at 5.5 to 6x area, which we think will certainly help on that path. So the $200 million that we raised, $125 million taken immediately really gets us just from a positioning perspective to the below that 6x metric. And we do want to make sure we have a significant capacity to take advantage of any acquisition opportunities. But I think as Scott talks, we're very focused on being disciplined in our acquisitions. We've made a great deal already this year. I don't think we need to chase portfolio pricing. That still is extremely competitive. We're going to be focused on buying in our markets, where we can immediately add property management, building services, leasing capabilities that really gets us 25, 35 basis points, which would then allow us, really, to make accretive acquisitions that's good for all shareholders.

Yes. Karin, I would just add on Robert's thing. I think we're, as a company, we're focused on an investment-grade upgrade. We think that being the size of a company now with the stability of cash flows and the demonstration of the synergies, the occupancy that we've demonstrated, I think that puts us in a strong position to continue to lower our cost of borrowing. And as far as the bigger portfolios go, my understanding is that the cap rates that are being chased on some of these are actually lower than the acquisition price that we did for Duke. And as we've demonstrated, we're performing at a 5% yield now and want to move it up to 5.25%. So will we see something in our market on a single asset basis that we find attractive and that Amanda can bring into her asset management platform, and we can gain those synergies, we would do that. But we're not looking are the larger portfolios. They're not the quality that we bought, and we're very happy with where we are today.

That's helpful. My second question is, I just want to make sure I understand the roadmap on what takes the investment yield -- the yield on the investments up from 5.1% to 5.5% by mid-2018. It's -- the developments coming online and what else is in the assumption there?

Well, certainly, it's the developments coming online is going to add a significant piece to that. When you look at the cash flows we've had from the developments in the period, on the 7 projects, we only had $600,000 of NOI. When we look to get them fully stabilized, that should produce about $2.5 million per quarter of cash NOI. We anticipate that being really in place by the second quarter -- end of the second quarter of '18 is 2 of the projects are finished, going into the third quarter of 2018 to be kind of fully realized. So that's certainly the first piece of it. The second piece of it, as we've talked about from a total 2017 acquisition perspective, we see property synergies of $5 million to $7 million. We achieved run rate of about $5 million this quarter, largely driven on property management fees. But we anticipate being able to get another $500,000 and $600,000 a quarter to really help drive that. Those are the 2 main areas that we have that will take it from the 5% in place that we bought it, really going up to that 5.5% area. It's the combination of those factors.

Karin, in regards to the synergies, we've talked here as a management team and what we've seen is we've been now 18 or 20 quarters in a row talking about synergies from asset management and synergies from our leasing core critical markets and gateway markets with core critical mass and NIM. This Duke transaction and adding $2.7 billion of assets to this platform really puts us, what we feel, is almost a couple of years and the ability for us to continue to generate greater savings. The more assets you have in markets, the more you can realign your staff, the more services that you can bring to the tenant. We just think that this opportunity now, for us, over the next 2 or 3 years is very exciting.

Great. And just my last question, it sounds like you're having success in pushing rents a little harder in your core critical locations. Have you also been trying to push escalator levels? And what type of escalators are you getting on new leases these days?

This is Amanda. Our escalators, for the most part, were trying to maintain consistent with the market-based escalators, and we're seeing 3%, sometimes 4% annual escalators now we're able to get. So I think, I mean, we factor in many aspects when we're looking at lease deals, not only that rental rate and that re-leasing spread, but the escalator is a big one, and that's a big driver of our growth going forward. So I think -- this quarter, I think we were just under 3% on average, but as we're seeing the new deals coming on in our pipeline, we're re-leasing a lot more than that, 3% and even 4% on some of our core markets.

The next question will be from Todd Stender of Wells Fargo.

Just my first question, if we could stick on the subject of development. You've got the 4 properties generating $600,000 of cash. You said maybe it gets to 90% preleased. Is it fair to assume that the contribution ramps each quarter until you get to that $2.5 million run rate? And is that a Q3 of '18 number that gets to that $2.5 million to $2.75 million range?

Yes, Todd. It should ramp up really sequentially, certainly, as projects are completed in the ones that are 100% build-to-suit. You should have another certainly about $400,000 coming online in the fourth quarter just from the projects that we completed in the third quarter. Those were 100% occupied. There's various level of free rent in them. But you should see about $400,000 being added to that in the fourth quarter. The other 2 projects that are still being built -- I'm sorry, there's 3 projects still being built. One of the projects will come online midway through the fourth quarter and can start contributing, but really will have a big benefit in the first quarter with the final 2 being done second quarter. So full stabilization cash NOI by the third quarter of 2018.

And that's a cash number?

That's a cash number, correct.

Okay. And then I have a couple of questions regarding CapEx specifically just on the recurring CapEx piece. First, when you look at the recurring CapEx as a percentage of NOI, it fell to about 10%, I believe, in the quarter. How has that trended historically if you back out TIs and LCs? What's an appropriate level we should look at maybe for the foreseeable future? And how does that compare to, say, traditional office?

As we look at medical office and, particularly, our portfolio, I think you've traditionally seen medical office run about 12% to 14% of cash NOI. I think that's been somewhat of an industry standard, really, looking back over the last 10 years. I think we've historically run in that kind of 12% to 13% range. I think some of our peers put a lot more capital in their building. We've seen some of them up towards the 20% range. But I think the industry standard tends to be 12% to 14%. Traditional office, on the other hand, is much higher than that, 20% to 25% would be typically what we would see there. So first of all, I think medical office is just that much more capital efficient from the ability to reuse the spaces, have high levels of tenant retention and then we do go find new tenants, they're typically going to be able to use the space that's built out for physician's offices. As we've looked at our portfolio over the next 5 years, one of the things that we talked a lot about doing these acquisitions, especially the Duke portfolio, was really the ability to add very recently developed properties. The Duke portfolio had an average age under 9 years, which significantly reduces just the standard building maintenance that you're going to have to perform. So as we look at it, we think from our perspective, we should be at this 10% to 11% of NOI. We think that compares very favorably, certainly to the sector on an overall basis. And I think it's not just the building capital, I think it's also the leasing commissions. What Amanda talked about was just in this quarter alone, we saved $0.5 million that we would have had to pay out to the third-party leasing broker. $0.5 million is meaningful but when you look at it in the context of overall NOI, that's 1.5% of NOI. That's a key benefit that we get from doing the synergies, buying properties in our markets, and you don't really see that in some of the other acquisitions that are getting done.

That's helpful. And then just a final question I guess somewhat related. We saw an uptick in your average term, I guess, on both new and renewal leases, but also rents are coming up as well. But also an uptick in TI dollars per square foot. How do you think about your economic rents, I guess, after you backed that out? And any color you could provide on any trends you're seeing there?

Yes. So I would say when you kind of factor in your TI per square foot per year of term, we're actually pretty consistent with where we've been historically. I will say that what we've seen lately is that there is more required to build out many of these spaces to kind of fit the needs of the groups that we're working with now. There are a lot of larger groups who are consolidating smaller spaces so they are looking to do more 7- and 10-year terms, and I think that's what you see that sort of blending that overall term up. But even the TI that we're providing, many times it doesn't cover it. So we're also getting physician group and hospital system contribution towards that TI, which to us is kind of the best way to ensure their long-term tenancy. They're invested in the space along with you.

Todd, to build on what Amanda said, we are seeing larger groups. We're seeing the smaller practices, of course, disappear on little larger areas. And for these physician groups, they are practicing longer, they are looking for more TI dollars. We, obviously, are -- we look at the -- each individual deal. We extend it if they get -- go from 5 to 7, they get a little more TI from us. But as Amanda said, they are putting in more dollars into their spaces. So I think it's a blend of the 3 things.

The next question will be from Vikram Malhotra with Morgan Stanley.

This is Kevin on for Vikram. I just had a question in regards to just portfolios in the market right now. I know you've definitely heard about a few out there. Just in terms of -- what are you seeing in terms of demand? And how are investors? Are there any changes from the prior quarters?

Well, there are portfolios out there, as we've mentioned. We're very happy with our acquisition. I think we did it early in the cycle, frankly, with just a superior quality portfolio, 85%, 90% in our markets. So we couldn't have been more happy with the opportunity to have acquired that last quarter. The portfolios that are out there right now are a little more diverse in location. They're not in our key markets, as a whole. There is a lot of appetite out there, I will say that. I think there's still a very high degree of interest in getting size and bulk into the MOB space. So I think you're going to see these be very competitive. And we're, as I've mentioned, we're looking for, as we move forward, those assets in our gateway markets that bring additional synergies like we see in the Duke transaction, which I think demonstrates everything we've been talking about the last 5 years. We like those type of acquisitions.

And you would say, just in terms of the players that are, I guess, kind of chasing these deals, what would you say? Are they typically public REITs or are there other players as well?

Well, I can't speak for the public REITs. I wouldn't do that. I do think that there's a -- from what we understand and the feedback we've gotten, there's a diverse same type of group of folks that were looking at the Duke transaction that are looking at these portfolios. I think you have to look at size. I mean this portfolio at Duke, I thought when we looked at it and when we underwrote it and we looked at the markets and we did our analysis, I thought this was the best, highest-quality portfolio that would be available for an acquisition opportunity, either in the last 5 years or in the next 5 years. So I think there is a high degree of appetite when someone can get a large group of assets, and hopefully, they hope that they're quality assets. We certainly thought that the Duke portfolio was quality from top to bottom.

The next question will be from Jonathan Hughes with Raymond James.

Maybe one for Amanda, and you touched on this earlier. But looking at the tenant recovery debt ratio to expenses, it was north of 71%, up nearly 400 basis points year-over-year. What's the target or ceiling on that ratio? And does that change once the Duke assets are rolled into the same-store pool?

Sure. And I think you're referring to that same-property NOI schedule on the supplement. So overall, I think -- in 2016, our recovery ratio was right around 59% and now, we're seeing right around that 71%, 72%. I think there are a couple of dynamics that are sort of changing our recovery ratio overall as a portfolio. I think the first, and I mentioned it in my opening remarks, we are doing more higher-margin maintenance services in-house. So instead of paying a third party, we're able to provide the same services at the lower cost with market-based rates. So that is, I think forever sort of changing that recovery ratio that you're going to start to see for our portfolio. But, secondly, I think, especially this year, you're starting to see the benefit of some base-year resets. So over the past several years, we've seen continued expense declines, I think, across our portfolio through these savings -- initiatives that we've done. And many of our tenants got underneath their base year essentially, throughout that period. Over the last 12 to 24 months, we've been resetting base year. So now when expenses go up, we can actually pass that through. So I think there is a fundamental change in some of the makeup of our portfolio that you're seeing there with the recovery ratios.

Okay. So is maybe, like, 75%, your target, or...

Again, the Duke portfolio is largely a triple-net portfolio. So any kind of a triple-net structure, you've got 100% recovery ratio. So you will see a blend upwards as we integrate the Duke portfolio.

Okay. And then earlier you mentioned aggressively fighting property tax increases. And maybe what markets drove that? And I assume that was the main driver of the 4.5% growth in OpEx in the quarter.

That's right. I mean property taxes were about half of that increase and that was largely due to our Northeast market and, specifically, properties that we had acquired during the first half of last year. It was underwritten. We expected it, but particular markets in the Northeast did have a 5-year sort of reassessment year this year, and that's where we saw that increase.

Okay. And then just one more from me, and this is for Robert. On the new ATM program, can you just talk about how you think about using that in the traditional sense versus the forward-sale feature? And when you prefer to do one over the other? Is this just related to maybe timing of development cash outflows or just certainty of financing? I mean any color there would be great.

Well, typically, we've used the ATM, really, to match fund small acquisitions, that typically $35 million, $50 million to keep the leverage in check. We're going to continue to do that. This was an opportunity as we looked at it. We want to get leverage below 6x. We've got a couple of opportunities. We wanted to make sure, in this kind of volatile interest rate environment, we had the equity to go pursue. So we took advantage of it. But we've traditional viewed the ATM as a method to really fund kind of the small to midsize acquisitions that we've typically made.

Okay. And that's up, 6% leverage target. I mean is that what's needed to get to maybe another credit ratings upgrade?

Well, we think it's important to get sub-6%. We think 5.5% to 5.75% is the stated targets. We think we can get there with natural earnings growth and really managing the balance sheet, how we've typically done that.

Next we have Tayo Okusanya with Jefferies.

Thanks for giving quite a lot of detail on the earnings call. That is appreciated. A couple of things from my end. Could you just talk a little bit about tenants' retention trends? It's kind of been on a downward trend the past few quarters. Just curious whether it's very specific to just the leasing going on in the quarter or there is something else going on?

Yes, I think overall, I mean we've target a range of 75%, 85% on our retention, but our focus has been and continues to be on the quality of our deals. So you saw re-leasing spreads at the highest levels. Our new leasing terms are at highest levels. We're trying to get good-quality tenants that will generate synergies for our building and other tenants from the building. So I think anything sort of within that 75%, 85% range is well within what we would consider to be sort of a good progress. And that's kind of what we look to see at, going forward.

Okay. So is it fair to say, you purposely sometimes willing to let space just expire because you think you can get either better tenant credit, better rents, what have you, just because of just a really strong demand right now?

Yes. I think we do require market-based rents, so there are still some legacy tenants that aren't used to paying those sort of rents, so we would let those tenants leave. But we also have had some examples of smaller tenants that we have not been able to renew because we are making room for larger tenant.so I think that you can see more of that going on, as we do try to sort of transition to some -- to accommodate some of the larger groups in our buildings.

And one of the factors we have seen, and we continue to see, Tayo, is the expansion. Just it's just a core part of what the medical office sector is today. You get a good tenant -- you get a tenant of 5,000 square feet, 3,500 square feet, and they continue. And this is -- I would say they continue greater than 50% of the time that we're seeing in high-quality locations. They're looking to expand because these groups are growing, they're consolidating, and so retention can look a little low. But when you're expanding it, you don't look at that as a new tenant. So I think that's a little bit of what you're seeing in our numbers.

Got you. That's actually very helpful. Okay, so that's the first thing. Then the second thing I wanted to ask, just around again, leasing spreads, when I take a look at the supplemental -- Page 17 of the supplemental, when I just take a look at new and renewal leasing activity, on a year-to-date basis, expiring leases averaged base rent $22.47. Starting leases, $22.46. So it's basically flat, so there's no real spread here. But in the meantime, you do spend some money in regards to TI and leasing commissions. I'm just trying to understand, I mean, kind of the economics around re-leasing, just kind of given this situation where there doesn't seem like there's a mark-to-market here, but yet you are still spending money on the space to get it ready for the new tenant.

Yes, Tayo, thanks for going through that, those numbers on there. First thing is a bit mechanical in nature, you take the third quarter, for example, what will you put in the supplement was the base rent of the entire expiring leases, not just what was renewed. So when you look on a suite versus suite basis, you are seeing that rent roll up, which is a little bit different map on there. So I think that's the first thing really mechanically, that's taking place. So what we are seeing on the renewal -- and again -- and then the overall just comes from a mix of where we are doing leases, where we are seeing leases and where you're seeing that shake out.

So if you do it through apples to apples, space being filled up versus space where someone's moving out, how should we'd be thinking about that spread?

Well, that's what we're seeing as the 2.2% of the third quarter. We see that being pretty consistent on a go-forward basis as we're looking at the renewals in our key markets.

Okay. That's helpful. Then last one for me, thanks for indulging me. A lot of talk on the call about the development platform and HTA-Development and I'm just getting serious, last quarter when you bought the platform from Duke, there was a lot of excitement about Keith coming on board, to kind of lead the strategy. He's kind of since left. It doesn't sound like that's disrupting the business in any way, shape or form based on some of the comments you made on the call, but what exactly caused him to leave? And how are you kind of thinking about either backfilling him? Who's going to be new leadership? That type of thing.

Well, as Robert mentioned in his comments, Tayo, we've sort of taken the folks that came from the Duke platform, and I think we've now tailored that platform to our size and our scope and our -- to our discipline. Frankly, we're going to be very disciplined in our development. We're going after medical office buildings. We're not going after a diverse group of assets, as the Duke development team had done prior to this. So we are being very consistent on what we're chasing. We're being very consistent in putting our relationships first, meaning the relationships that either Duke had or frankly we've had and it's been a surprise to me, we've had as many relationships or if not substantially more, that we've reached out to from a development perspective and have generated opportunities. But there's 2 or 3 opportunities that we think we'll be talking to you about specifically, probably in the fourth quarter and that will be exciting. We don't see that we're going to add anybody. We may add 1 person or something, but we've realigned some folks. We've taken the development guys. They're also doing acquisitions. They had a pretty talented group of people at Duke, so there's been an opportunity to move a couple of people up, as there's been a change. And frankly, I think we're now at a point where we're very comfortable with the team that we have and there's always movement in and out, and that's just part of things. And so we're -- it isn't going to be, in my view, and again, go back 3 months and have we done exactly, what we said we would do, when we underwrote the portfolio? I think you would check every box, if you look at our call that we went through when raised equity. I think the development objectives and strategy that we thought we're going to do, is right in line with where we're headed.

The next question will be from Rich Anderson with Mizuho Securities.

Rob, if I could just get back to the re-leasing spread math. I see what 2.2 is, that's just on renewals for the third quarter. I'm -- but isn't the real number 1.8? Because you still re-leased, you put a new tenant in, but it's still re-leasing spread, right? So I'm just trying to understand.

Yes. No, it's really you go to a 75% retention in there. 1/4 of the expiring leases didn't -- space did not get renewed there. You take the 75% of the space that got renewed, that expiring rate or the new rate was 2.2% higher. So when you look at the expiring rate that we put in there, it's blended with the additional 25% of space that wasn't actually renewed.

Okay. So then a question -- I get that. So now the question is, how does that become a sudden run rate for you? Because when you look back at the first and second quarter, it was basically pretty flat, even down in the first quarter -- if we're just looking at the renewal part of the equation. What has happened to this -- miraculously go up by 200 basis points or so in terms of the cash re-leasing spreads?

Rich, this is Scott. I don't think it's miraculous. But if you go back to our first quarter call, we talked about moving rent spreads in the third or fourth quarter. We thought we were going to be able to do that in our key markets, and we focused on doing that. We have seen the market get stronger. I mean, Amanda mentioned, the fact that we've done more new leasing this quarter than we'd ever done since we've been public. We continue to see opportunities and obviously, we're almost -- unfortunately, you're almost in the fourth quarter -- through the fourth quarter. We continue to see the same sort of activity this quarter. So when you see activity and you see the opportunity, our retention was 75%. It was a blend of expansion space, where we didn't renew somebody as we had made a commitment to a larger tenant. But it was also a distinct purpose on our part to move rent spreads in markets where we think there's limited space. And we've got, I think, a very good portfolio, the Duke portfolio will be a great addition to that. So I think our run rate for lease spreads are probably 1.5 to 2.5. I think that's where we see it today given the fact, that we've looked at this fourth quarter, we've looked at the first part next year, so we -- that's kind of where we see it.

Okay. Fair enough. Robert, when you were kind of going through the accretion analysis, you mentioned the development ramp, the property synergies. You didn't mention the new leasing, which I think was 29,000 square feet or something like that, out of the 17 investments. Is that -- like should we think about that as the gravy part of the story and the primary growth will not necessarily come from new leasing, but from the other 2 buckets?

Yes. As we look at that, in our underwritten 5% cap rate, there was 30 basis points of leased, but not occupied space that was there at the time we closed. That will come on really in 2018, the first 2 periods. So you get a little bit of a lift, just in our natural underwriting of that 5 cap over the first year. But yes, the occupancy we didn't underwrite a lot of occupancy upside, as part of that. So we do view that as gravy. I think that was one of the things we looked at and said, we like being in the market. We know these assets. We know a lot of the tenants. I think we've seen some of that cross over, frankly, be a little bit more effective earlier on, than what we had necessarily originally expected. So yes, we see that as just upside and entire proof that the scale in the market is helping on the leasing front.

Okay. Gravy. Giving approaching, I guess. The other thing I want to -- on the -- it's kind of the breakdown of the portfolio. The hospital count went down to -- from 20 to 15 in the portfolio. What happened there? I know Amanda mentioned re-purposing some assets in Forbes Park portfolio, but what happened there to draw that number down?

Yes. Really what it was, was we took some of the micro hospitals that Duke had. We had originally classified them as hospitals. But frankly, as we took investors on some tours of them and walk them through them, the feedback was overwhelmingly, these are really medical office buildings. The only difference is that on the ground floor, there's an emergency room versus an urgent care room or an emergency room versus a surgery center. And so we made the decision to shift all of those into the medical office building portfolio. That also makes the hospitals really cleanly rehab hospitals and no taxes as well. So that's a much cleaner number for investors to look at. There's a rehab hospitals at all times but quarter-over-quarter, that's what took place.

Okay. Next one, trying to get through this as quick as possible. So 2.9% NOI growth this quarter, still round up, 3%, seems to be staying at range. But the question becomes, if you're going to get accretion, financial accretion from the investments and you're mentioning 5.5% return when it's all said and done. But is there also going to be growth accretion from Duke? I know you mentioned the synergies and all that, but relative to where the company was before, do you see 3% going to 3.5% in terms of the same-store growth profile this company at some point down the road? Or should we still be thinking in terms of 3% on -- from a long-term perspective?

As we look at it, we frankly, as Amanda talked about, one of the occupancy was just the Forbes Park burning off this quarter from a leasing perspective. If Forbes Park was in there, we would have been 3.3%, 3.4%, 3.5%. As we look and really reset property management and building services, we get benefits as you point out, not just on the Duke portfolio, but certainly on the existing HTA portfolio, and that's where, as we look at really in the back half of 2018, we see the opportunity for that to increase. I mean we certainly got to execute on our path to get there. We had to roll out of the building services, make sure we utilize that skill effectively, get that leasing and certainly the Forbes Park asset that Amanda referenced, but we do see that as an opportunity, as we get into the back half of 2018.

Rick, I think as a management team, we added 1 plus 1, it needs to be 2.5. It doesn't -- it shouldn't be just 2. So from a management's perspective, we should see a greater growth in our same-store NOI as we move into the -- into 2018. This will be the first time we're right now going through budgeting, we're going through organizational market decisions because now we have different sized markets. We've got 17 markets with 500,000 square feet. So I think in 2018, we're excited about being able to push that from, as you say, 3%, pretty consistently, maybe up a little bit and really show some benefit from the consolidation.

Okay. Great. And then lastly, before you announced the acquisition, the consensus FFO estimates for 2018 was $1.78. Implies about $0.45 a quarter. So I know you guys don't issue guidance, but is that the way, we should be thinking about $1.78 as sort of the hurdle to prove financial accretion from your investments in 2017? Or am I thinking about it wrong?

Well, I think as we look towards 2018 estimates, I think the biggest driver in all the models was certainly what the level of acquisition was, what the cap rate was and what the financing was. I think the driver for us -- that was the biggest driver for us frankly. And as you've seen MOB cap rates come down, I think the opportunity for external growth has changed fundamentally. As we're looking at 2018 now, what gets interesting to us is, we feel very comfortable with the growth that we're going to have going into the next year with really limited acquisition opportunity. We think we've set ourselves up for a nice 2018 earnings growth profile, again, with the acquisitions coming online, with same-store growth -- I'm sorry, with the developments coming online, with additional synergies. We think we've set ourselves up now to be in a good position from an earnings perspective for 2018. Really without a lot of acquisitions going into next year.

And I think Rich, this put us in a position to be very selective on the acquisition front. Make sure that it's accretive. Make sure it's disciplined in our markets. And I think we're one of the few companies, frankly, certainly within our peer group that can look at the opportunity we have over the next 5 quarters and just look internally and say, gee, wish we can continue to grow shareholder value and FFO growth.

But Duke in itself is absolutely accretive in 2018 in your opinion?

Yes, it is.

The next question will be from Michael Knott with Green Street Advisors.

Just on that point of limited acquisition opportunities for '18, how do you think about maybe the type of volume that might be realistic for HTA next year as we think about, what you might be able to do?

Well, I'd like to clarify. I do not believe there will be limited opportunities from a sector perspective. I think that you're seeing the monetization of MOBs. There's quite a few preliminary discussions that I think I'm aware of, that's in the market with health care systems that have now seen the opportunity to be able to do this. We continue to see individual assets that are out there. I think for HTA, it's all a matter of being disciplined, being in our markets and the cost of capital and the accretion that's associated with it. We will be selective buyers. We're in a great position. We have the ability to add NOI based on our asset management program and our ability in the markets. And so we'll be selective. I think there'll be opportunities, but I don't want to commit or really comment on how many they will be because it really depends on what is in the markets, what's available and, of course, can it be accretive.

Okay. And by the way, what's your takeaway on the high prices that all of these roofers were getting exercise at both in your deal and some of the other deals. Just curious if you view that as something of a floor buffer on pricing and sort of contributing to the high prices in the sector?

Well, yes. I mean the short answer to your question is yes. I think it will continue. I think there's some of the portfolio that are out there right now, that have ROFR attach to many of the assets. And I think that you're going to see some of the assets executed on, and I think you're going to see some of them flipped or held for a period of time by the health care system. But it certainly seems to be putting a floor or a continued value to the key critical nature of these MOBs.

Okay. And then any of your markets by chance were a new supply maybe becoming an issue or you think it might become an issue over the next couple of years? And maybe any speculative off-campus type of construction you're seeing? Or is still pretty much the same story there on supply?

The nice thing is now that we have a development group and a team, we actually have insight into what's going out or what's going on in out across the country. And we have not seen an uptick in developments and we haven't seen an uptick in development in our markets. What we have seen uniquely is the ability for us to be involved in 2 or 3 things directly related to a health care system, where we have a current asset, and we have our current relationship. So there -- that's an opportunity. Those are opportunities that we probably would not been able to take advantage of over the next 14 to 18 months without the development team that we have.

Okay. And then maybe just a couple more quick ones. '18 FFO, as mentioned a second ago, can we expect guidance from your next quarter? Or is that not something that you're planning to put out there?

I think we're going to take that under consideration. But right now, we haven't made a determination on that.

Okay. And then last one for me would just be your '18 and '19 lease expiries. I think the average call at 10% of rents per year. Any early read on many challenges or opportunities in that group? Or is it pretty much the same type, 75% to 85% retention that you talked about earlier?

Yes. It's pretty consistent with what we've seen historically. I mean we're always about nine months ahead on all of our renewals. So I think we've got a pretty good pulse on next year, and we'll continue to work 9 months out as we go forward the next year.

Our next question will be from Chad Vanacore with Stifel.

All right. I'll make this short and sweet. I do want to go back to development and just think about what are your pre-leased goals? And what are your expectations on stabilization period?

Well, I think our pre-leasing goal is 80% to 85%. In some cases, it will be 100% in a couple of things that we're looking at simply because it's directly with the health care system and it's a really it's something that they're pushing to get completed. So we want occupancy, we want it pre-leased and that will continue to be our goal.

All right. So if you want to get up to low-90s, is that in the next 12 months? Is it something shorter or something longer?

Well, I'd like to think that you are going to get whatever you build. If it's 80%, 85% pre-leased you get up to 90%, 95% by the time it's built. I think again, if it's in a good market, good location, you got the health care system. Our large physician groups that are locating there, we've got a leasing team in the market. Our goal would be that it's 90%, 95% leased by the time it gets built and placed in service.

All right. And then just thinking about the asset management side of the business. Post the Duke transaction, what kind of improvements in process? Or any particular challenges that you had to overcome integrating this Duke portfolio?

Yes, I'll say that the process itself, it was quicker than I think we all expected or could have hoped. I mean it -- the benefit of already having management offices in 24 locations across the country was helpful. We only had to open up 1 new office. Staffing for the most part, we integrated Duke staff and combined it with our own and made efficiencies were possible. So I think that the property management integration was pretty seamless. I don't know too many other companies that would have been set up to do what we did, in the time frame that we did it. And I really think that our biggest opportunity is the engineering services and maintenance services that we're really starting to see the benefits of, starting this coming quarter, and I think that in 2018, as we continue to train our folks and integrate and specialize in various services, we're going to continue to see some engineering and maintenance margin through our operating results.

I'll just add to what Amanda said. We were -- I've never been accused of being, I think, not aggressive. Conservative, I think, but when we underwrote it, we thought that it would take 75 days. We cut that substantially down and the whole organization from top to bottom, including the accounting because the accounting was such a big -- you've got 600 leases, and we went through the process. And I can't tell you that -- we would have never, I think, thought and going forward, that we could have done it and completed in the time period that we did. And so I would take this point in time to thank all our employees who may listen to this call for all the hard work that went in, in a very short period of time.

The next question will be from John Kim with BMO Capital Markets.

Can you walk us through the mechanics of the forward ATM sale? Is the price fixed? And do you have any influence on when the shares are placed over the next 6 months?

Yes. So the way the forward works, the shares were issued in price at the time of the transaction. We have the ability to take the proceeds and thus, officially issue the shares at any time over the next 6 months. So the price was fixed. There's a small carry fee associated with it. That's less than 2% but essentially, it's fixed. Today, we can take it at any time over the next 6 months.

And what was that price?

Net of all commissions, it was $29.40.

Okay. I guess based on your answers to various questions, it seems like the $200 million that you've placed this month was more of an aberration than the norm, just to produce leverage. Is that the case?

Well, we were very focused on our leverage. We were very focused on our debt-to-EBITDA, and we're also focused on -- there are a couple of opportunities that we like. They're in our markets. It will be very accretive to us. Even today, based on cost of capital, and so it gives us the flexibility but more importantly, it puts our balance sheet and it puts our ability to move to that next level and an investment basis, irrespective of what the market does. And obviously, with the tenure being as unpredictable as it is right now, I think we're in a very solid position, vis-à-vis, what we want to accomplish in the next 6 months.

On the discussion of re-leasing spreads, that will continue to be there, it looks like your 2019 expirations have a high base rents relative to where you've been signing leases today. Should we expect a roll down in 2019? Or is this just a mix issue with that year?

No. I think that the expiration of rent, it just really reflective of the location of our expiring leases. So certain markets inherently have higher rates, and I don't think that's an indication at all of where they'll roll.

Okay. And then finally on the topic of new supply, are you seeing any increase in conversion since MOBs from other asset classes, whether it's retail, suburban office or some other sector?

Well I think this is one of the things that folks have talked about is this conversion of retail. I think that's very difficult. I think the infrastructure that's established in a retail location is far different than the infrastructure needed for a medical office building, especially if a specialized physician group is moving in, it's costly to go through the redevelopment and then the location. I mean I'm not sure there's many locations that are going to be necessarily attractive to health care systems or to large physician groups. So I think that, that conjecture along -- I remember 3 years ago or 4 years ago, there was a huge conjecture that all the vacant office buildings were going to become medical office buildings and we really haven't seen that take any substantial move towards that actualization. What we have seen is in locations that are critical to the health care systems or locations that have been established as campuses that there is redevelopment going on in those situations, where they're taking perhaps an office moving into an MOB or taking a -- something that they can convert and that I think will continue because again, the medical office building space, I think is the most highly focused location, location, location asset in any of the asset classes in real estate. They're very purposeful where they want to be and obviously, on a hospital campus or across the street, that's not a conjecture, that's either there or it's not there. So I think you'll see that -- I don't see that being a great impediment for the MOB sector.

The next question will be from Daniel Bernstein with Capital One Securities.

A quick question on development yields going forward, if you look at the construction cost going up, labor cost going up, should we still be thinking about that 6.75%, 6.8% yield to stabilization? Or is that going to be coming down to say below the mid-6s, when we think about modeling that out?

Yes. Dan, typically what we're seeing is developing getting done 50 to 100 basis points wide, of what an acquisition cost would be. So certainly, as you see an acquisition, pricing comes down I think competitiveness on the development is also coming in as well. So I think we're seeing around 6 to 6.25 would be typically something that we would see on a development basis depending on size, quality and things like that.

Okay. And one quick question on the balance sheet. You're obviously delevering down to the mid-5s debt to EBITDA. But when you look at the competitors for acquisitions out there, they are on the private side, they're probably using 3- to 5-year money. Have you thought about, where you would want to issue unsecured debt in the future in that 7- to 10-year type of range or would you want to shorten the debt duration a little bit down to 5 to 7 years to be more competitive, when you're bidding for assets?

Well, I think we're a long-term owner of assets, and I -- somebody told me 30 years ago that you finance long-term assets with long-term debt, and you don't do it with short term. I think actually that there will be many opportunities or there will be opportunities, in fact we've seen a couple of opportunities where there's some roll over of shorter financed MOBs by some of the private side and those are turning into opportunities that are coming to market. But you are not going to see HTA go short in duration. The whole purpose of our stability of our balance sheet and the opportunity to buy the portfolio that we did was to continue to improve our long-term credit cost to capital.

The next question will come from Eric Fleming with SunTrust.

I'm all set.

The next version will then be from Michael Mueller with JPMorgan.

Just few short ones. Try to be brief here. Shoot for once development ramp, did you say there was another $1 million to $2 million that wasn't in the run rate that will be in the run rate by mid-2018?

Yes, that's the way we see it playing out. We generated a $1 million to $2 million within this quarter. We do see the ability to get to the top end of our initial $5 million to $7 million range. That would equate to another $0.5 million a quarter, $2 million annualized.

Got it. Okay. Looking at the I guess the Duke development people that left, did they had not compete?

I don't believe they did. I'm not a big firm believer in a noncompete, frankly. There wasn't anything in that situation that I would want to get in the way of their ability to continue to do what they want to do. I think, again, we don't see any impact, frankly, to our core business or our ability to keep the development folks busy or our ability to put out the amount of dollars that we really want to do. So I wish all of them the best and that's kind of how business goes. You want the right mix, you want the right tenure tone content for people to be aboard and there's got to be a desire for both parties to do that.

Okay. The last question, since you've been talking to all of your tenants so far and thinking more about the development opportunities, what are the current thoughts in terms of a base case for how much development do you think you could do in a year, say in 2019 or 2020 about how much $100 million, $150 million?

Well, the Duke platform had traditionally, with the infrastructures that they had in place, done about $125 million. Frankly, they had thought that, that was underutilized. And when we look at it and when we talk to people that we have now, I think we can move that up. I would expect that we'll do somewhere between $100 million to $200 million a year and take advantage of the opportunity to be that fully integrated partner with the health care system. And again, if it's fully leased or 90% leased and we're getting the 75 to 100 basis points spread. And its great location, great real estate, that's a good opportunity for shareholders.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Well, I just like to thank everybody for joining us on the third quarter. As you can expect, we're very happy to have released the results and been able to talk about what was a very busy 6 months for us, and we'll be focused certainly on the fourth quarter in 2018. And again, if there's any follow-up questions or comments, please don't hesitate to call either Amanda, Robert or myself. Thank you, guys very much.

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