Healthcare Realty Trust Incorporated (HR) Q1 2018 Earnings Report, Transcript and Summary

Good day everyone and welcome to the Healthcare Trust of America First Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] And please note that today's event is being recorded. I would now like to turn the conference over to Caroline Chiodo, Senior Vice President of Finance. Please go ahead.

Thank you and welcome to Healthcare Trust of America's first quarter 2018 earnings call. We filed our earnings release and our financial supplement after this morning, prior to the market open. These documents can be found on in the Investor Relations section of our website or with the SEC. Please note, this call is being webcast and 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 the call, we will make forward-looking statements. These forward-looking statements are based on current beliefs of management and information currently available to us. Our actual results will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although, we believe our assumptions are reasonable, they are not guarantees of future performance. Therefore, our actual future results could materially differ from our current expectations. For a detailed description on some potential risks, please refer to our SEC filings, which can be found in the Investor Relations section of our 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 first 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. As we begin 2018, we remain focused on being a leading owner and operator of medical office buildings with critical mass in 20 to 25 key gateway markets across the United States. We remain steadfast in our optimism regarding the medical office sector as demand continues to increase and there is limited supply coming online. This demand continues to driven by the ageing demographic trends and industry focus on making healthcare more cost effective. These trends continue to drive patients out of hospitals and into outpatient settings such as medical office. Our portfolio focus on both on campus and core community outpatient MOBs offers the best solutions to meet these needs of patients and tenants to like. In addition a few other positive attributes of the MOB space are that. One, rents coverage remains meaningful above other healthcare sectors. Two, re-tenanting cost remains below traditional office properties. And three, tenant retention remains high. Our portfolio is over 24 million square feet which includes 17 million square feet on or adjacent to healthcare campuses, the largest on campus portfolio in the country. We have strategically invested in key gateway markets that are the economic hubs of the future. These markets should continue to grow faster than the national average due to greater job creation, wage and population growth, and a strong academic university presence. Not only are relocated in faster growing markets, but our geographic concentration allows us to efficiently operate our best-in-class fully integrated asset management platform which offers leasing, building services, property management and now development expertise. This platform continues to deliver consistent cash NOI growth that will continue to translate to annual bottom-line results. This property sector focus, portfolio concentration, asset management platform continues to distinguish us in the medical office space. As we look at the current economic environment which includes the uncertainty regarding interest rates and economic growth, we look at 2017, our execution regarding the 2.7 billion in transactions, and we recognized that this has positioned our company today with the size, scale, market depth and balance sheet to allow us to focus on internal growth to drive shareholder returns. Just to put this in perspective, we have 11 markets with nearly 1 million square feet and 16 markets that encompass over 500,000 square feet or more. This market depth drives deeper relationships with healthcare systems that translate to future growth opportunities. For example, given our deeper relationships and new development platform, we are in a process of various development and redevelopment project in Miami, Raleigh, Boston and n Orange County. These projects will continue to increase our market share and most importantly provide solutions to our tenants' future growth requirements and generate accretive returns for our shareholders. As a management team we continue to focus on; one, growing revenue through leasing through an improvement in mark-to-market lease rates and higher annual escalators; two, utilizing our development platform to invest in key markets with leading healthcare systems at accretive returns; three, recycling capital out of non-core markets; and finally four, paying down debt to position our balance sheet for the time when acquisitions are once again accretive. As we look at the quarter, same-store growth came in within our long-term and 2018 view of 2% to 3%. If we exclude the Forest Park MOB repositioning, our same-store growth for the quarter would have been 3.2%. Our leasing volume and activity remains solid as we continue to focus on lease spreads and long-term occupancy. Renewal lease spreads were 2.7% for the quarter while our retention was around 81%. The 2017 investments are performing as expected in quarter one, we achieved 1.8 million of synergies when property management and building services. These investments yields are now 5.2% up from 5% into acquisition. Over the next few quarters, we expect these yields to be closer to 5.5 range, as the remaining developments come online. As part of our 2017 investments, we added a new development platform to our capabilities. We intend to use this platform on a targeted basis to invest in key markets with key healthcare systems. I'm pleased to announce our first new development, a $20 million project in Miami, Florida. The state-of-the-art 50,000 square foot MOB will be built next door to Jackson South Hospital with the hospital preleasing 70% of the building. We expect to break ground in 2019 and develop to a stabilized yield of over 7%. We expect to announce additional developments and redevelopments in the coming months. These additional opportunities will brought directly to HTA by existing healthcare system relationships. We appreciate this confidence in our platform and look forward to working hard with these relationships and achieving accretive yield for shareholders as we develop. From an acquisitions perspective, we remain disciplined while we continue to see a pipeline of investment opportunities both through traditional marketing channels and directly from our relationships in key markets, we are committed to the patients necessary to acquire best-in-class real estate at accretive valuations. We are always looking to continue to concentrate our portfolio in key markets are in active discussions to sell assets in non-core markets. This is similar to our execution in quarter four '17 when we sold assets in Milwaukee Long Beach. This year, we would expect total proceeds on dispositions to be between $25 million and $100 million. Lastly, our balance sheet is in great shape. Our leverage as predicted is low at 5.9 times' net debt-to-EBITDA. We have in an excess of $1.1 billion in liquidity and our debt maturity scheduled is well laddered regarding alluded near term maturities. Finally, before I turn it over to Amanda, I would like to take a moment to welcome to our two board members Roberta Bowman and Vicki Booth, both to HTA. Both bring a depth of experience and relationships that will benefit the Company and bring some diversity of thought to our board. As you can see from our recently filed proxy, from a government's perspective, we have been active and responsive to the changing environment and to our shareholders, bringing a new board members opting out to the Maryland Unsolicited Takeovers Act and most recently allowing shareholder access to our proxy. These changes reinforce our commitment to keeping HTA a leading company for shareholders. I will now turn the call over to Amanda.

Thank you, Scott. I'm once again pleased to highlight the strength of our underlying assets and value of the asset management platform we have put in place over the past seven years. This is a full service operating platform that offers tenants to benefits of the national owner with scale as well as the insight and dedication of the local team. This platform cannot be easily replicated and certainly benefit from concentrations we have developed in our key market. Each year, we continue to learn from best practices, innovate our service offerings, and optimize our scale advantages. Given our recent acquisitions, the ability for HTA to create value to our platform has been magnified and our team has lost no time in capitalizing on those opportunities. Over the last three quarters, HTA has systematically evaluated and acted upon opportunities to internalize services we previously paid third parties to perform thus eliminating costly third-party fees and markups. We now provide special fee electrical, mechanical and funding services at over 80% at our in-house managed properties, compared to approximately 30% of our portfolio a year ago. We are also undergoing in an extensive rebidding process throughout our portfolio where we have been able to bundle our demand and command sizeable discounts as vendors competitively big for our business. While our rebidding process is still underway, we have begun to receive initial feedback and believe in an annual savings of 5% to 10% on those items being bid to be reasonable. Our best-in-class platform is executed by our 164 property management building service and construction management employees that were out in a field. They are the face of HTA brand working with tenants on a daily basis, and we all significant part of our performance to their hard work and dedication. From a performance perspective, our same-store NOI in the first quarter was 2.3%. However, excluding the MOBs on the legacy fourth part campuses now owned by HTA, our same-store NOI would have been 3.2%, reflecting the strong underlying fundamentals of our core our portfolio. Our base revenue was up 1.5% in the period again excluding the Forest Park based cash revenue growth would have been over 2%. Turning to leasing activity, we continue to see significant opportunities to add value as we capitalize upon increase demand we are seeing in many of our core market. With 24 million square feet in key gateway market, our portfolio ended the quarter at 91.8% at least and 90.7% directly occupying. During the period, we executed 672,000 square feet of new and renewal leases or 2.8% of the portfolio. Tenant retention was healthy at 81% re-leasing spreads on a cash basis were 2.7%. The third quarter in a row we have seen spreads increase above our historic range of flat to 1%. We remain disciplined in our efforts to move rents and ensure we secured the right long-term tenants for specific spaces and buildings. In addition, I wanted to provide some color on our Forest Park Dallas assets, where we ended the year with 100,000 square feet of vacancy related the hospital transition. In the first quarter, we entered into 41,000 square feet of new leases at the Dallas campus with the majority 37,000 square feet being signed direct by HTA. This brings the leased rate on this campus up to 65% with occupancy scheduled to take place later in the year. This is a positive step with the hospital and one that is already prime to the sizable increase in activity and interest as at buildings. We have an additional 50,000 square feet of deals under various stages of negotiations and are gaining significant attraction on the overall re-stabilization this campus. The remainder of the growth in same-store NOI came from increased utilization of our asset management platform, which allowed our same-store margins increased 70 basis points year-over-year. Although, our total expenses were down on a year-over-year basis, our expenses related to the colder weather, specifically utilities and snow removal were actually up 1.5 million. However, this more than offset by saving the generating from -- generated from spreading our property management platform over our 2017 investments and increasing the use of our internal building services platform relative to third parties. I would now like turn the call over to all of the Robert to discuss financials.

Thanks Amanda. We ended the first quarter of the year in a very strong financial position that should allow us to continue to execute our strategic business models, regardless of the public equity markets or the impact of interest rates. Our leverage at the end of the quarter stands at 5.9 times net debt to EBITDA with over 1.1 billion of available liquidity, including $50 million of cash and almost 75 million of equity raised on a forward basis in October of last year, which we will take over the coming five months. In the near term, we intend to use our liquidity to pay down debt, fund development and make the occasional one-off acquisitions in our key markets. From our debt perspective, we have approximately 100 million coming due in 2018 including 96 million of the 4% Duke seller financing. We also have over 100 million of mortgage debt with interest rates over 5% that we can retire early with additional liquidity, including a 68 million 5.5% mortgage that we can prepay without penalty in October. This should enable us to drive leverage to the mid-five times debt to EBITDA by year-end. Turning to earnings for the period, first quarter normalized FFO per diluted share was $0.41 consistent with the first quarter of 2017. Our operational performance remains strong and should accelerate throughout the year as our lease but not occupied backlog comes online, Forest Park leases up and development stabilize and come online. However, we are also focused on recycling assets out of non-core markets using the proceeds to lower leverage and invest in longer-term development. We recognize that these actions cause near term earnings solution. However, they create a more focused and stronger company that has greater growth prospects over the longer-term. Our normalized funds available for distribution increased 43% to $75.8 million compared to the prior year and our dividend payout ratio is in the low 80% range. As Amanda noted, our same-store cash NOI growth was 2.3% compared to the first quarter of 2017 and 3.2% excluding the impact of the Forest Park MOBs. Our base revenue was up 1.5% and our rental margin improved 70 basis points year-over-year. On a sequential basis, our same-store NOI was down 1.2 million compared to the fourth quarter of 2017. This was driven by an $800,000 decline in cash rental revenue, primarily the result of $700,000 increase in leasing concessions were leases in free rent period. The remainder was driven by $2.8 million increase in seasonal expenses primarily utilities and snow removal, which we do not fully recover from tenants. Our 2017 acquisitions ended the period yielding 5.2% on pace to reach the mid 5% range as the final developments come online. This includes almost $1.8 million of synergies from the elimination of third party property management and building maintenance expenses. G&A for the quarter was 8.8 million, which was approximately 5% of revenue in less than 50 basis points in gross asset value. We expect this to remain between $8.5 million to $9 million per quarter for the remainder of the year. Finally, we have 11.3 million of recurring capital expenditures or less than 10% of cash NOI. This includes building capital, tenant improvements, and leasing commissions including 1.5 million of internal leasing costs which are subject to changes in accounting rules in 2019. This demonstrates the capital efficiency of our portfolio and our ability to drive performance to the bottom line. I will now turn it back to Scott for final remarks.

Thank you, Robert, and we'll open up for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first questioner today will be Jonathan Hughes with Raymond James. Please go ahead.

So what are you guys seeing up there in terms of cap rates on MOB acquisition and higher cost of capital environment? Has this changed or is the bid from PE just still really aggressive?

Well, from what we understand and we've been -- there are some assets and there are some portfolios that are around in the market right now, cap rate seemed to be pretty, pretty consistent. We haven’t seen anything close, which I think in this year, we will give some indication when the first couple two or three assets closed or the first portfolio closes. But right now, there certainly is -- there seems to be a consistent private equity desire for medical office.

Okay, so no change still probably about low 5% for quality or even lower for high quality assets?

Well, it appears that it could be even lower compared to couple of very high quality assets and taxes that are out in the market, and our understanding is that those cap rates are certainly 5 or sub-5. And that's an indication of where that strength is to a real, real high quality assets then things haven't moved at all. And we're still seeing some opportunities in our gateway markets or our select markets on a one-off basis that our quality assets that aren't that low from a cap rate perspective, but it's still very competitive out there.

But Scott earlier, you highlighted the shareholder friendly changes made recently and I appreciate those, but I know you've been pretty frustrated with the share price of late like virtually all of your health care and all REIT peers, but we've seen in a few M&A transactions in the past week. And I'm just curious, if the changes made at HTA are being done in an effort to remove any potential hurdles from the entity level activity at HTA?

I think that the changes we are making or the progress we're making are simply the natural progress; one, from being public after 5, 5.5 to 6 years; second, we've been now since 2006, since we have founded the Company. So the opportunity to add some diversity to the board was certainly welcome and I think you will be well received by shareholders. And then the three of four things that we've done relative to proxy are really changing that they are going on in the industry in the sector, and I think most all companies are moving down that path.

And our next questioner today will be Michael Knott with Green Street Advisors. Please go ahead.

Scott, on the last call, you mentioned if HTA shares were down by 30%, you would sell your house or mortgage your house and buy the stock. I don’t think we're down that much, but I think sort of the opposite happened a little bit with respect to your holdings. Just curious how you're thinking about the valuation here like? And sort of like the last question, it seems like you could go private tomorrow at a price that's compelling relative to where we're at today. Just curious how you're thinking about that opportunity and how persistent the discount here has been?

Well, I think the discount across the whole REIT sectors have been very consistent. It seems to be trading off with the 10 year treasury as expected. We'll certainly see how that turns go in forward for the next two to three months or next three or four weeks. We continue to see from an operational perspective, good leasing, good synergies from our markets from our operations from a company perspective other than the fact that the stock price has been responsive to the 10 year treasury, we're doing exactly what we anticipated during the Duke transaction. I think was a huge transformative equation for us. It allows us to do not rely upon acquisitions as a growth metric, but actually do the things that we're talking about on this phone call and things that we've talked about the shareholders in the past. So, 2018 for us is if we recycle or recycling out the secondary markets recycling into a gateway markets and our core markets taking advantage of our synergies from an asset management and leasing platform and just continuing to do what we should be doing to generate long-term shareholder value.

And then maybe just one other one, I think also on the last call. You've talked about the long term importance in medical office of a two things; one, on campus across the street; two, community core and good markets; and then three, top universities and top health systems getting together. Just curious, if you can maybe expand on that a little bit? And how you are positioned for that sort of third aspect there of what could happen in MOBs going forward?

Well, again, I think that there is going to be a continued movement from a medical office perspective, institutionalized process of managing these assets just started. You look five years ago when MOBs were really a secondary asset class. And now, I think with our size and with the addition of couple other MOB companies from public perspective has become a major asset class, and I think that's what you're seeing regards to cap rates. It such a dependable asset class you see the synergies that are associated with the demographics that are coming onboard. You see the tailwinds the continued to propel healthcare systems moving to lower costs locations. So I think the MOB space continues to be a strong place to be over the next 5 or 10 years. We're seeing it in our leasing. We're seeing it in our markets. Healthcare systems are looking to do a little bit of development, but it's very specific. It's to their needs and it's to what they're looking to do. We're fortunate enough to be working with three or four of our direct relationships with opportunities that will add to our development platform also it will be accretive which is good for us. So I think that all in all, we're very positive about where are and where our markets are going.

And our next questioner today will be Karin Ford with MUSG Securities. Please go ahead.

Thanks for all the detail on the debt that you have available for pay down potentially this year. Should we assume that the $50 million of dispositions you've got under contract today the priority is going to be towards leverage reduction as opposed to one-off acquisitions or is there maybe another development start coming later in the year we should think about as well?

Yes, Karin, I think that's a good point. From a disposition perspective, most likely the priority is going to be the continued to pay down debt. We kind of outlined the potential usage of the cash. There is a $100 million roughly in Duke seller financing and the $100 million of mortgages that we could prepay really bearing over 5%. So, that's most likely the use for any near term cash proceeds. We are excited about the developments that we have certainly the one that we announced and the one that we're in discussions with, but those are going to be more of a 2019 start date before we're really start spending any money. So, there're going to be great opportunities that really help us grow our portfolio, but any of the funding needs won't be until later in 2019.

And then just one clarification from Amanda's comment, you've mentioned there is a piece of cost structure you're renegotiating on where you think you can achieve 5% to 10% savings on. What percentage of your total operating cost do you think that would be?

So the services that we have currently in the rebate are about $8 million.

And our next questioner today will be Todd Stender with Wells Fargo. Please go ahead.

Can we hear more about the development contract you entered, we own the land? Can you tell little bit more about Jackson South Hospital? And then it sounds like its 70% preleased. Is that the threshold that you need to feel comfortable with before breaking ground?

Well, I will start with the threshold. I think we like 70% to 80% occupied. We always talk about your preleased, so that is something that we’re looking forward on a consistent basis and I'll let Robert talk a little more about the opportunity.

Yes, so the specific opportunity, it’s actually a pretty simple land that we have on in the portfolio. We did acquire the land from Duke, but the lease was one we entered into, fresh with the hospital, is one of the public hospitals there in Miami. So from our perspective, it's really an opportunity to develop in Miami, which is you know is one of our core markets where we got a number of health system relationships. There this really allows us to expand that. It's a building that literally right next to the hospital adjacent to it, but again it's pretty simple which we like as you across the rest of the portfolio, 70% from the hospital and most likely before we really break ground. We would expect it to be 80%, 90% leased with independent physicians on top of that.

And then if we can switch gears to the same-store pool. Just looking through 2018, you've got a list coming from Duke maybe which our expectations are. And then you also have a drag from Forest Park, but we also saw some lease activity in Q1. Can you maybe just talk about your expectations for the same-store pool?

Well, I think you hit the nail on the head with Forest Park. One of the things we try to do is make sure we kept all the assets in there. So Forest Park, we use all the impact both with and without it, and certainly as we get the lease up, we would expect both the revenue growth and same-store growth to get a lift once that starts paying cash rent. Realistically, that's is going to be the fourth quarter timeframe with this year into the first quarter really ramping up in the 2019, as we get the benefit of that. From a same-store full perspective, we do use a rolling five quarter methodology. So you will see most of the Duke assets and all the 2017 acquisitions really entered the same-store pool in the third quarter this year. As we talked a lot about it, we see very similar strong growth to 2% to 3% out of the Duke portfolio that we bought. As we bring assets under our platform historically, we get a lift from them certainty of the yield perspective. Amanda and the team did a great job of really getting those synergies, eliminating third-party property management, put building services income in there. So you should see that really baked into those of the baseline numbers, both in the third quarter this year as well as really third quarter of 2017. So, our expectation is the third quarter is going to be entered 2% to 3% really just stabilized by the strength and the debt and the diversification of larger portfolio there.

And our next questioner today will be Omotayo Okusanya with Jefferies. Please go ahead.

Going back to Forest Park, so you've leased 41,000 square feet. Can you talk about the remaining space there? And what kind of prospects you’re seeing to lease up the rest of it?

Sure, there is about 60,000 square feet remaining on the Dallas campus, and we've got various stages of negotiations of LOI negotiations out there right now with prospects at about 50,000 square feet of that. So, we feel really good. I think now that the hospitals committed to the campus. They will be revealing their intended used here in the coming quarter, and I think the word is already on the street on what is intended to be. So we are starting to see a good pick-up in activity.

Do you guys have a sense of what type of hospital it's going to be at?

We don’t comment on that.

And then Miami, the development project there. Could you talk a little bit about how that kind of came about? And then could you also kind of talk about again the pipeline of potential new deals you could announce, just if it's kind of size out for us over the course of the back half of 18 go it into 19?

Well, I think we've founded that we've got what we think is a real good relationship with two or three healthcare systems on the East Coast. In each case, their specific needs that they have they were talking them about its pre-released, so that again goes back to the concept of assuring that the demand is already there. And these three opportunities are critical to what they see as their future growth, the opportunity to have a development platform now in-house is really led the efficiency of being able to sit down with an integrated approach with them. I know the management team here has had great opportunity to do that. We've now worked together for almost two quarters and so that's been a real I think advantage for us in moving these ahead. So as we go down the road, you'll see $100 million, $150 million worth of opportunities that are going to come forth, and we're not going to preannounce anything. We'll wait till we get the leases signed, and we will wait till we get the things that need to be done, so that we don’t move ahead of ourselves. But I'm very exciting and I'll let Robert give any thought that he may have.

And so, what Scott was talking about from a pipeline perspective, most of those are going to be with relationships that HTA has had and really using the capabilities that we had that we acquired and that we've kept to a larger extent. The Miami deal was one that had been on -- there is a partial land that we required as part of the Duke deal. There had been discussions around getting the lease in place there, but they essentially died when we go through a major transaction as the Duke team did most. Health systems step back and wanted to see how that chip might fall. And so, it was one that had kind of falling off. We had taken going back and introduce ourselves. It is in relationship for HTA, but it was one data comfortable with the combined team and decided to move forward with us and we're very excited about the opportunity to get it built, bring demand and really lease up the rest of the space there.

And if you can we're just indulging with one more. Just latest was community agenda, it's kind of in the headlines as having issues. Can you talk about what that kind of saying to you guys at this point?

Well, I think from a community perspective, our relationship by and large continues to be with the local hospital operators. I think within a company of the size our communities, as we talked about each of the local markets and especially the local hospitals, are really the key to our performance on an ongoing basis. And so, as we have talk with the local teams, certainly some of their hospitals are going to continue to be sold. I think we've seen that across the portfolio you've seen some of that with community. You've seen that with tenant. As we've gone through a couple a the transitions, we've actually seen a reinvigoration of the campus if you will where there is new ownership looking to put new capital to work there. So we would expect community continues so hospitals, but our hospitals continue to perform well and any transition is likely to be a good one as we've seen.

And our next questioner today will be Rich Anderson with Mizuho securities. Please go ahead.

So Scott, Just looking back in 2016, your stock picked out at $34 and change. Do you recall thinking at that moment what -- directionally, there was fork in the road, let's keep growing. obviously you chose that, or did you have any serious consideration toward strategic event of some sort. And if the answer is yes, how would you describe the marketplace for medical office then versus now? Would you say it was strong -- it's even the stronger now or was it stronger then?

Rich, looking back, I think the market is stronger now. I think there is much more relevancy to the asset class. I think that the last couple of years have brought significant attention to the tailwinds associated with this type of owners. So I think when you look at this as an asset class, when you look at the type of investors that we want to get involved in it. When you see some of the private equity folks trying to put together portfolios, it's much more than it was 2 or 3 years ago. I think we as a company compared to where we were back then as we actually now have an integrated platform. I mean I think the difference between us when we were much smaller and in today's that today we have significant relevance in 11 key markets as Robert touched on and as Amanda touched on. We have a platform that's integrated with asset management leasing, property management. We have 115 engineers that are now servicing the assets on a full service basis and providing services to those assets. So as a company, I think we are significantly much further ahead than where we were when we were as you said, a couple of years ago, when perhaps the stock price peak for that particular time and price. But from a company perspective, I think we are much stronger than we were then.

Did you recall having a temptation to think about a deal or you are pretty held bent on continuing as a publicly traded company?

Rich, I think day 1, from the moment when we listed the shares on the New York Stock Exchange in 2012, our comment has been and I think the direction that the directors have always taken is that they want to maximize the shareholder value. I think that we've always been very open about the fact that we don't have any long term prohibitive things in our buy laws, or we don’t have any management contract that did prohibit from a takeover or merger perspective. This is about shareholders value. So I think we were open to it then we are open to it now. We're doing one thing, continue to focus on the business, continue to put a strong balance sheet in place that shareholders feel good about where they are from a yield perspective and maximize shareholders value however that maybe.

And then just kind of following in that, back in 2008-2009, when you start to build this portfolio. You have to certainly take -- we have to give you a credit for buying an interesting and low basis in a market that has obviously gotten much better over that period of time in the past 10 years. Do you see where we are today? So if they didn't have caps in 2008, do you almost see today as a mirror image of what was happening back then?

I think that we have over the last 10 years interest rates have continually traded down. And I think that, but if you go back and you look over, rolled over a 30 year period of time and unfortunately I've been around that long. The REIT markets ebbs and flows and I think that it's always been that REITs, when public markets have a accretive cost to capital compared to private markets and you have an opportunity to buy accretively you do. On the other side I think when it's the opposite. And I definitely think right now that opposite is in-place. I think the people forgot because it's been a long time since that's really been prevalent. You focus on internal growth. You focus on the balance sheet. You focus on positioning your company solutions change. So I think from some extend, I see this is opportunity to be very patient and very disciplined.

And our next questioner today will be from Vikram Malhotra with Morgan Stanley. Please go ahead.

Scott, just building on your last question -- over the last when you started the Company and maybe if you went public, there are probably lot of asset that you bought in that higher cap rate trend which are arguably lot more valuable today. Can you just maybe talk about thinking about dispositions, maybe more strategically upping that to just take advantage of where private market pricing is today?

We definitely are going our secondary markets. We’ve gone through a progression and early on some of the criticism that we encountered. And frankly, when you starting something, you become an eclectic group of assets which someone told me once and I took that to heart. So we look at where do we want to invest, we picked 15 to 20 markets, gateway markets. And then you know we really got came in fruition last year when we bought Duke and Duke was in 90% of the markets that we were in. And so, now we become what I think is a very focused centric investment vehicle where investors or folks look and they say, they have got critical mass in these markets and they're relevant. They know these markets and they got an operating infrastructure that brings the advantage to that location. We did buy -- we’re very fortunate in 2008, 2009, 2010, but we've also increased the quality of our portfolio that's the second thing that I think we focus very heavily on the three things I would say that we took to heart over the last six or seven years. As one, focusing on key markets and getting critical mass. Two, putting an operating platform in place so that we weren’t subject to third-party oversight, which is never the same as is internal. And third, making sure that we are making higher quality portfolio each time that we were in the acquisition of valuation of what to buy? So I think we continue to look at that. They're -- we’ve always said there's probably 5% or 10% of our portfolio that we will continue to look to just recycle. But if there are opportunities where we think that there is a every time someone -- every time someone gives you an offer and you turned down, you just re bought it and so we do look very carefully when someone gives us an offer, if it something that we feel as maximizing value were defiantly open to taking that opportunity.

And then maybe this one for Robert as well. You talk -- you touched a little bit around buybacks, just maybe give us some color on how you see sort of private market versus the way you stock implying today? What sort of spread or discount would make you say might this doesn’t make sense, we just see a lot of value so up the buybacks or engage in that.

I think right now, as we talked about I think from my prospective, buybacks always get a little bit tricky, as we’re in the capital allocation business and were in the business where capital is always scares, as we look to pay it out. I think our focus right now as we sold assets, we've got a good use of capital to really position our company and our balance sheet for the future with you seeing any sale from dispositions to effectively, pay down debt that we can do right now that debt were paying down, the Duke seller financing there is a 4% the mortgages that we look to sell back has seen in north of 5%. So I think anything that we look to do right now with the first use of capital is going to be the ability to pay down debt and deleverage. I think beyond that, we've got decisions to make that we will obviously look at that time.

And then one last just quick clarification in terms of the larger physician groups that private physician groups that maybe tenants, is envisioned one of them.

No.

Our next questioner today will be from Daniel Bernstein with Capital One security. Please go ahead.

I appreciate you given the both with and without Forest Park in your cash NOI, I appreciate that. On the cash ROI releasing spreads, you indicated that there has been improving. I just want to understand what's behind that sum and is that also in conjunction with some higher CapEx TI so that on the effort CapEx basis it's kind of the wash.

So, I think overall the strength that you are seeing in a re-leasing spread is largely driven by our market. And so, some of our markets are growing quicker than other markets and those are the ones where can see 3% and 5% releasing spread. And as far as TI goes, I think if you look at on a square foot per year basis, you can see the were actually trending down so that's not a big factor in the releasing spread that you are seeing.

And then going back to -- it seems like the topic of today is valuation and shareholder value. Have you thought about or considered again short of go private or merger with another company selling off or part of the portfolio to private equity and some type of joint venture raising equity that way and maybe putting us some kind of special dividend?

We continue looking joint ventures and I wouldn’t say in a passive just type of way. If we are always open to opportunities that improve our bottom line, I think that most of the JVs that I've seen or that have come fast to us really haven't been to the advantage of our shareholders and in fact it's I think a very short sides way to try to demonstrate some growth or generate some management capacity. We have a great management infrastructure and I think we deserve our shareholders deserve the 100% of that benefit and just like when there is opportunities to grow over these opportunities from an acquisition perspective that there that great. It's hard to giveaway so much of the pies to someone else. We're fortunate now with the Duke transaction from last year with the size within our markets, I think there is not a burden on us to grow externally. I think the burden on us continues to be to perform the Duke transaction as you continue to see. This is only the second quarter or third quarter that we reported. So, it seems like it's been two years, but it's only been three quarters. We continue to get the synergies out of adding we're continued through this year to gain those synergies. So I think for us it's just continuing to do what we have done over the last 10 or 11 years. I think the only difference in getting 2011, we only bought $50 million worth of assets that particular year even though we're non-traded REIT at that time. It's really disciplined and making sure that your allocating your capital appropriately at this time.

And our next questioner today will be Chad Vanacore with Stifel. Please go ahead.

Just a few modeling questions here. So that $3.9 million spend on consolidation and ownership, was that buying a minority interest or what was that?

It was, it's actually couple of billions over there some small condos and then really buying those out.

And then you've got to sign NOIs for $50 million worth of dispositions. So, where the cap rates and timing on those?

I think from a timing perspective, as with all transactions in this market for an LOI to closing is often up over 90 days or beyond depending on the assets, and what's going on with that. So I think our view is that from a full year dispositions it will probably be 25 to 100 kind of all in one so that settles. You might see some start really start in the second quarter, but that's really kind of our full year outlook on that.

And what about cap rates?

I think on a cap rate basis --on a forward cap rate basis, you're looking in the 6 to 7 range, selling out, really out of some of the secondary markets that we have.

And then just one last thing. Recurring CapEx seem pretty low in the first quarter. What's the run rate of CapEx for the rest of 2018? Do you expect that the brand for stay steady?

Well, typically, the first and fourth quarter tends to be the slowest period from a capital improvement perspective. So, I think to that been said, we outlined a view that we should be for the full year 10% to 11% of cash NOI in the form of recurring capital expenditures. I think as we lease up some of the Forest Park space, some of that continues to be shelf space. We'll have some first generation TIs that would be added on top of that, that would likely hit the third and fourth quarter.

And our next questioner today will be Michael Mueller with JP Morgan. Please go ahead.

Just have a quick question. I know in the past you've talked about the engineering services for a little bit. Let's looking this quarter, the cash NOI just little under $2 million of the $34.5 million came from engineering services and property management. Can you just remind us within those categories that make them NOI items in your mind?

Typically, I'll let Amanda flush it out. As we're talking about that that was specific in the synergies for the 2017 acquisition. Typically, the building services, these are things like HVAC repair. This is plumbing. This is electrical. This is preventive maintenance work. So, all type of things where if we paid a third-party, they would have run through our operating expenses just like you did.

That's right. So, on the property management side, we look at property management fees, the elimination of the third-party and internalization of it. So that's the entirely is eliminated. On the engineering side, it's two factors. One is the specialty services where we're able to do things at third parties previously have done with the markup. Now, we internalize that to keep some markup it's just an HTA market at that point. And the second, on the engineering is the fee revenue. So our engineers performing direct services for tenants on their premises being said, otherwise would it be covered by the landlords and that you'll see as part of the revenue.

And the next questioner today will be Doug Christopher with D.A. Davidson. Please go ahead.

Up through the Duke acquisition last year, HTA always provided a kind of a confident range of cap rates in the market. What would you take that range at right now?

I go back to what we talked earlier. I don't think we've seen a close of the portfolio or what I would consider to be a Class A asset this year yet. The indications we’re getting and frankly we have been not changed two or three things because of the fact that the cap rates were reported to get into the chase we’re in the five, low five. Frankly, there was a high for, couple of high force and so we weren’t going to mislead anyone we weren’t go down the path of not been serious and that just whether something we were interested doing at this time, based on everything we talked about on his phone call. So I think the cap rates have not lose much from what people were talking about late last year.

And then can you just hit on some of the key points of financial leverage internalizing escalators, minimizing concessions, and of course now you have the development as well. How much and then how much more is there really the leverage from the Duke acquisition?

We continue to work through the Duke opportunity, certainly for this year and I think into next year. The ability of to bring focus to our regions and to the critical mass we have now in the markets just really starting to play out from that that opportunity. Robert, anything do you want to add on that?

I think as we continue to look at it from an escalator perspective, we been in place kind of the low 2s. We've been signing new leases or new leases in kind of the high 2% to 3% in your escalator. That’s going to continue to play itself out I think from a free rent. In TI perspective, we continue to keep very low concessions. And I think the last thing that we touched on the ability to drive earnings to the bottom line is really the sufficiency from a capital perspective. Traditional office tends to be in the 20% of cash NOI from a capital perspective, I think we've seen most medical office companies in the 12% to 14% cash NOI. You're seeing us run in that 10% to 11% of cash NOI a generation. I mean a lot of it is just her focus on our buildings where we look to allocate capital, but that was one of the added benefits as we acquired the Duke portfolio. It’s a very young portfolio, very limited capital requirements, and we're starting to see the benefits of that as well this year.

And this will conclude our question-and-answer sessions. I would like to turn the conference back over to Scott Peters for any closing remarks.

All right, thank you everybody for joining us. Thank you for the questions, and we look forward to a continuing and focusing on making Healthcare Trust of America a very beneficial for our shareholders. Thank you.

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