Healthcare Realty Trust Incorporated
Q1 2017 Earnings Call Transcript

Published: 8 May 2017

[Operator:]

Good morning, and welcome to the Healthcare Realty Trust First Quarter Analyst Conference Call. [Operator Instructions] Please note, that this event is being recorded. I would now like to turn the conference over to Todd Meredith, CEO. Please go ahead, Mr. Meredith.

[Todd Meredith:]

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

[Carla Baca:]

Thank you. Except for the historical information contained within, the matters discussed on this call may contain forward-looking statements that involve estimates, assumptions, risks and uncertainties. These risks are more specifically discussed in our Form 10-K filed with the SEC for the year ended December 31, 2016, and in subsequently filed Form 10-Q. These forward-looking statements represent the company's judgment as of the date of this call. The company disclaims any obligation to update the forward-looking material. The matters discussed in this call may also contain certain non-GAAP financial measures such as funds from operations, FFO, normalized FFO, FFO per share and normalized FFO per share, funds available for distribution, FAD, FAD per share, net operating income, NOI, EBITDA and adjusted EBITDA. A reconciliation of these measures to the most comparable GAAP financial measures may be found in the company's earnings press release for the first quarter ended March 31, 2017. The company's earnings press release, supplemental information, Form 10-Q and 10-K are available on the company's website.

[Todd Meredith:]

Thank you, Carla. The first quarter of '17 marks another solid quarter of steady operating results for Healthcare Realty. We are pleased to see continued strength from the multi-tenant MOB portfolio leading the way and exemplifying our commitment to sustainable growth from on-campus medical office properties. MOBs now comprise 88% of the company's NOI, almost 90% of which is multi-tenant. Healthcare Realty's portfolio performance is benefiting from years of refinement, which continued in the first quarter with the sale of three inpatient rehab facilities. While selling higher yielding properties results in some dilution, we have achieved attractive cap rates on the sale, booked material gains and reduced the risk profile of our portfolio. With strong demand for healthcare real estate keeping cap rates low, it's been a good time to divest assets to hinder Healthcare Realty's growth, mostly single tenant non-MOB and smaller properties that were included in portfolios. This ongoing recycling of assets generates better risk-adjusted returns and magnifies the company's potential for internal growth. Proceeds from the company's expected 2017 dispositions were concentrated in the first quarter of the year with a solid pipeline of investment opportunities, we expect to meet our acquisition expectations for the year, reinvesting proceeds in well-located and aligned outpatient properties accretive to FFO and NAV. Repeat business and existing markets with known health systems continues to be our preference, investments that yield further acquisitions, development or redevelopment in years ahead and generating value creation rather than unwary growth for growth's sake. With robust demand for MOBs, we have seen cap rates drift a bit lower for the better properties. We continue to pursue quality over quantity, which is reflected in our valuation and affords us the ability to remain selective. The company's development and redevelopment pipeline is picking up steam with physicians and hospitals actively engaged and expanding their outpatient service lines and driving the need for new MOB space. We see strong leasing momentum at our development and redevelopment properties, lowering execution risk, while generating higher returns than comparable acquisitions. Most providers remain focused on practical matters regarding clinical delivery and coordinated care, rather than being distracted by the politics of insurance exchanges and Medicaid expansion. Recent discussions with hospitals and physicians have been very productive with more development and redevelopment starts expected over the next few quarters. While a lot of new supply and capital is funneling to off-campus developments. We remained committed to on-campus investments with top health systems where barriers to entry are higher, fungibility is lower and rent growth is more secure. On-campus MOB's attract high acuity specialties such as orthopedics, oncology and surgery centers that require proximity to inpatient services translating to better retention rates, sustainable rent growth and increased long-term asset value. Leading indicators including robust rent bumps of over 3% on recently executed leases and cash leasing spreads well above 4% point to favorable internal growth ahead. In addition, occupancy gains across the portfolio along with operating leverage from effective expense management continue to contribute to the company's strong overall NOI growth, over 5% for the multi-tenant properties, and well above the 2% to 3% level most expect from a typical medical office portfolio. Looking ahead, Healthcare Realty is positioned well with low leverage and multiple options to fund new investments, employees to take advantage of the positive market for outpatient facilities. I am pleased with the steady performance of our leasing and management staff and the discipline of our investments group, pursuing properties and enhance both safety and growth in our portfolio. Now I'll turn it over to Miss. Mancini to share our perspective on current healthcare policy. Bethany?

[Bethany Mancini:]

The potential reform of the Affordable Care Act and its individual health insurance exchanges continues to dominate the Healthcare landscape. Congressional Republicans have renewed efforts this week to pass repeal and replace legislation. And an amended version of the American Healthcare Act will be brought to the floor for a vote today. Items in the bill include allowing states to waive ACA regulations and establish lower cost plans with fewer covered benefits and higher pricing for pre-existing conditions. The bill also provides additional funding for high-risk patients and keeps the removal of the tax penalty for the uninsured. While Republicans may have the votes this time to pass the house, the fact remains that the more moderate Senate will eventually have the final say. If the law passes in its current form the lack of enforcement of the insurance mandate, along with the loss of Medicaid expansion benefits in 2020, could increase the uninsured by an estimated 24 million people. Supporters of the new bill, however, believe more competition and the freedom for insurance companies to make better risk adjustments will drive down cost and increase insurance coverage. But projections on both sides of the aisle are often based on partisan views and subjective assumptions and, probably, overstated. Regardless of the fate of the American Healthcare Act in the House, a more moderate Senate likely means the status quo for major health policy in today's polarized political environment. Especially with regard to Medicaid expansion and the current growth trajectory of health care spending will remain. Legislation that addresses various aspects of the law, in particular, related to the exchanges, may have more probability of passing with some bipartisan support. Clearly, an ongoing hot political issue in the near-term and heavily publicized albeit affecting a relatively small percentage of the U.S. population, 2/3 of which was covered by insurance prior to the ACA. Hospital leaders continue to be fairly quiet on the insurance exchange issues, their exposure to patients with this coverage, on average, being minimal for most. Healthcare Realty's discussions with health systems and physician tenants have been notably void of concern over the possible repeal of ObamaCare. Physicians have not been meaningful beneficiaries of the ACA to date. The average practice deriving only a small portion of revenues from exchange and Medicaid expansion patients. To offer some context, if a physician sees approximately 25 to 30 patients per day, only two or three patients on average would be covered by ObamaCare. More in practices serving safety net hospitals in lower income urban and rural populations and fewer in growing demographic areas and practices affiliated with market dominant health systems. Of greater concern to health systems and physicians is making profitable use of the expensive technology and affiliations they have put in place since 2010. And ongoing effort in the wake of the ACA to find efficiencies, expand outpatient capabilities and increase market share. Throughout decades of reimbursement changes the trend toward outpatient care has been a critical component for financially sound health systems in cutting costly inefficiency and modernizing care. As government spending on healthcare continues to rise, pressure will remain on providers to lower costs and improve quality. Combined with higher deductibles and cost shares for patients and the aging population, the demand for outpatient services should expand for years to come. Healthcare Realty's portfolio of medical office and outpatient facilities comprises a broad base of physician tenants across more than 30 specialties affiliated with top credit rated health systems in top MSA markets. As our tenants benefit from relatively lower concentration of Medicare and Medicaid patients and high rent coverage, Healthcare Realty's ability to capitalize on inherent growth in its properties will remain secure.

[Todd Meredith:]

Thank you. Now Mr. Hull will provide an overview of our investment activity. Rob?

[Robert Hull:]

During the first part of 2017 we saw a steady stream of prospective investments and we currently have three properties under contract for $68 million. Combined, these properties total 181,000 square feet, are located in California and D.C. and have first year yields of around 5.3%. We have seen modest cap rate compression of about 25 basis points for the highest quality properties and locations. Our robust pipeline is poised to meet our 2017 investment guidance of $175 million to $225 million. In the first quarter, the company acquired it's second on-campus medical office building on the St. John’s Hospital campus in Minneapolis-Saint Paul, part of HealthEast Care System. The 100% leased building that's 35,000 square feet and reflects our philosophy. Acquiring and developing medical office buildings on the campuses of leading health systems in markets with strong demographics. Opportunities that afford us the chance to make not one investment on a campus but multiple. HealthEast recently announced plans to merge with Fairview Health Services. One of the 50 largest health systems in the country, Fairview operates 7 hospitals in the Minneapolis-St. Paul market and carries and A rating. The combined organization provides additional scale the hospital can leverage to grow its services. Development activity remains vigorous in the healthcare sector with outpatient and medical office starts holding steady over the last few years at about $10 billion per year about 1/3 of which meets our on-campus criteria. In Seattle, we continued with late stage design and planning for our 151,000 square foot development on UW Medicine's Valley Medical Center campus. The hospital recently executed a lease for almost 20,000 square feet bringing the total lease percentage to 60%. Earlier this year, the hospital commenced construction on an 1,100 space ramp that will provide the necessary parking for our building. We expect to commence construction on the new building once the garage is completed likely in September 2017. In Denver our 98,000 square foot medical office building, currently under development, is set to receive its certificate of occupancy at the end of the second quarter with initial tenants taking occupancy shortly thereafter. We have one letter of intent and are in late stage negotiations with another tenant that, combined, will bring the leased percentage of the building to over 45%. Additional leasing discussions with the hospital and several third-party groups should advance leasing levels to 80% in the coming quarters. Redevelopment of existing assets continues to be an area of focus. We view it as a lower risk method of deploying additional capital where we already have a deep working knowledge of the market. At our Nashville redevelopment the first tenant in the expansion space took occupancy in the first quarter. Over next four to five5 quarters, we will see the building reach stabilized NOI as new and relocated tenants finish construction of their space and begin paying rent. Recently, we commenced with the redevelopment of an existing asset on Carolinas Healthcare System's university campus in Charlotte, North Carolina. This AA- rated system is the leading provider in the state with whom Healthcare Realty has enjoyed a relationship since 2008. With a budget of $12 million, the project will add two floors totaling 38,000 square feet. It is currently 85% leased and will produce an incremental yield of over 7% once stabilized. As we've seen with other recent redevelopments, our efforts on the campus is beneficial to the hospital by helping attract a key group and provide an existing tenant with a large block of contiguous space to expand its services. Our development pipeline is active. Over next two to three years we have a number of opportunities totaling over 650,000 square feet and more than $250 million. Yields on these potential developments are in line with our targeted range of 100 to 200 basis points above today's cap rates for similar stabilized acquisitions. Healthcare Realty's disposition team had a busy first quarter. The company sold six properties for $82 million at an average cap rate of 7.3%. The company recognized a substantial gain with an internal rate of return of 11% over an average hold period of 13 years. The largest individual transaction was the sale of three inpatient rehab facilities for a total price of $69.5 million at a 7.3% cap rate. The fourth inpatient rehab facility is under contract with the same buyer for $14.5 million and is expected to close in the second quarter at a similar cap rate. Our revised disposition guidance for 2017 is $82 million to $125 million. Disposition levels in the quarter provide capital for solid investment activity through the remainder of the year. Our history of investing using a discerning balanced approach has produced meaningful returns and increased the growth potential of the portfolio. 2017 is well underway in the same manner. We remain committed to our strategy and disciplined in our execution.

[Todd Meredith:]

Thank you, Rob. Now Mr. Douglas will provide a summary of financial and operating results. Chris?

[Kris Douglas:]

Normalized FFO for the first quarter of 2017 increased 7.8% over the first quarter of 2016, up to $44.9 million or $0.39 per share. Sequentially, FFO per share for the quarter decreased $0.02, largely attributable to the timing of two items. First, there was $0.01 per share of dilution due to $700,000 of noncash amortization of stock-based compensation and $441,000 of typical first quarter-only administrative cost. Second, there was $0.01 per share of dilution due to the sale of three inpatient rehab facilities late in the fourth quarter of 2016 for $68 million. The $0.01 will continue into the second quarter until the proceeds are fully reinvested likely by the end of June. Looking ahead, the $82 million of first quarter dispositions will result in another $0.01 per quarter of dilution until those proceeds are fully reinvested, likely in late third or early fourth quarter. Moving to portfolio performance. Same-store NOI for the trailing 12 months, which we believe provides the best indication of long-term trends, increased 4.4% in the first quarter. Trailing 12 months NOI increased by 5.6% for the multi-tenant properties and 0.6% for the single-tenant net-leased properties. Two items moderated our same-store single-tenant NOI growth. First, we restructured two leases in the last year in exchange for increased term and improved credit. Excluding these two leases single-tenant NOI for the trailing 12 months would have increased by 1.5%. Second, 20% of the square footage of the single-tenant net-leased properties have non-annual rent increases and none of these leases has experienced a rent increase in the last 24 months. Moving forward, we expect to see accelerated rent growth in the single-tenant portfolio. In April, we negotiated a new 2% annual escalator for a lease formerly subject to non-annual escalators. And in the second half of 2017, two leases with non-annual rent increases will experience escalations above 5%. In addition, we will benefit from a recent uptick in CPI on the 67% of the single-tenant properties with CPI-based rent increases. Shifting to our multi-tenant portfolio. The same-store multi-tenant properties once again delivered strong revenue growth with a 3.8% increase year-over-year as a result of a combination of 3.2% growth in revenue per occupied square foot and a 50 basis point increase in average annual occupancy. This revenue growth combined with a modest operating expense increase of 1.5% provided operating leverage and resulted in multi-tenant same-store NOI growth of 5.6%. This solid growth in the multi-tenant properties would have been 100 basis points higher if not for the expiration of four legacy property operating agreements in the past year. These expirations also explain the lower than historical quarterly year-over-year same-store NOI growth of 2.5%, which, excluding their impact, would have been 4% and more indicative of our fundamental performance. The multi-tenant same-store portfolio is positioned well for continued strong revenue and NOI growth as seen in the following three metrics from the first quarter. First, sequential occupancy increased 40 basis points as a result of 34,000 square feet of net absorption from 167,000 square feet of new or expansion leases executed in the quarter. Second, contractual rent increases occurring in the quarter were 2.9%, while leases commencing in the quarter will grow by 3.1% in the years ahead. Third, cash leasing spreads were 4.5% with 78% of the 358,000 square feet of leases renewed in the quarter having a cash leasing spread of 3% or greater. With regard to the balance sheet there is ample liquidity and capacity to fund future investments with $105 million of restricted cash and 5x debt-to-EBITDA as of March 31. Overall, we are pleased with the positive trajectory indicated by this quarter's results as they, once again, validate our investment strategy. We expect solid long-term growth as we continue to deploy our disciplined model of owning and operating first-class medical office buildings.

[Todd Meredith:]

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

[Operator:]

[Operator Instructions] The first question comes from Jordan Sadler with KeyBanc Capital Markets. Mr. Sadler?

[Jordan Sadler:]

Thank you, good morning. First question. Regarding the recent portfolio sale by Duke, I'm curious what your view is on the impact on MOB asset valuations and how that may inform your allocation strategy going forward?

[Todd Meredith:]

Sure Jordan. I think, our general view is that we weren't surprised to see the depth of interest in the deal. Obviously, a high quality portfolio and certainly reflects our long held view that there is high intrinsic value for top-tier MOB portfolios. And I think our view is that price that was paid certainly reflects an extraordinary premium but it's for a rare opportunity to get a combination of size and quality. So we certainly participated in the process in terms of how we looked at it. We didn't see the FFO or NAV accretion at that price. From our standpoint. I think there is just obviously a lot of analysis going on about the cap rate. We saw it in that 4.7% range on a stabilized cap rate basis. So obviously, for us, that wasn't -- that didn't work. I think, probably, the thing we aren't seeing people dig into a little bit yet is the fact that there is a healthy portion, almost 20%, of the portfolio is not MOB ERFs and EDs and if you kind of back those out, you obviously, get down into the sub-4% or 5% range. So again, just not something we could get to. I think, our view as you look forward to what is the impact. Our view would be that was a large premium and we think the market for individual properties for smaller portfolios should remain in the 5% plus range. I think you heard Rob and me both mention, we've seen a little compression that really, probably had not much to do with the Duke portfolio. So certainly, we're seeing continued compression. I think there is just a lot of appetite for the MOB space. But again, not surprised by the Duke transaction. For us, I think, it really -- for us it's focused on internal growth first and looking for things that enhance our internal growth. Being able to add properties through acquisition, develop them accretively is really our focus. So we don't really see a big change. Obviously, we'll be paying addition to see how things are affected in the cap rate market. But we think that's a little bit of an outlier.

[Jordan Sadler:]

Okay, and you guys have been out front, you mentioned even in your prepared remarks, selling opportunistically some of your slower growth properties, obviously, the ERFs. You been reducing your exposure. Given the appetite here, is there anything in the MOB portfolio that's -- is this a good opportunity to sell or reduce some exposure to some stuff that may not be as highly valued by you guys?

[Todd Meredith:]

Sure obviously, in the first quarter, we predominately had the ERFs but there was also $12 million, $13 million of sales that were candidates, as you say, smaller MOB's, off-campus, single tenant, maybe locations, health systems that we're not looking to expand with. So there are certainly candidate for that. And I think as Rob mentioned in our guidance for dispositions, we certainly expect some more dispositions this year. And I think you mentioned that one of those would be another a fourth ERF under contract. But there certainly are other MOBs that kind of fit that bill as well.

[Jordan Sadler:]

Okay, that's helpful. So on the 1031 side, you've got $105 million teed up or at least in restricted cash, I'm assuming that's going to be a 1031. But can you verify that and have you identified assets beyond the $68 million, I think you guys mentioned.

[Kris Douglas:]

Yes, you're right. The $105 million is related to 1031s. The $68 million we have identified the assets with which we plan to rotate in, into -- through the second quarter. The second tranche of that is related to the ERFs that we sold at the end of the first quarter. We have a couple of more weeks before we have to identify the assets on those, but that process is underway. So I mentioned in my prepared remarks, we expect to deploy those assets into the third quarter and within the 180 days that you have for the 1031.

[Jordan Sadler:]

Okay, that's helpful. Lastly, just any thoughts on -- I may have missed this, on the floating rate exposure. You're comfortable where you are right now?

[Kris Douglas:]

Yes, I think so. We continue to watch that and look at where we think interest rates are going long-term. But at this point, we still feel comfortable with the exposure we have.

[Jordan Sadler:]

Thanks.

[Operator:]

Our next question is from [indiscernible] with Green Street Advisors.

[Unidentified Analyst:]

Hi, this is Andrews [ph] calling in for Michael Knott. I'm just looking at your lease explorations, about 14% of your leases are expiring this year. Can you comment a little on where the current rent is relative to the market and your thoughts on how releasing is going to look?

[Todd Meredith:]

I mean, I think the key thing there is to look at our leasing spreads. Obviously, our tenant retention continues to be in that 75% to 90% range. So I think our cash leasing spreads are probably the most indicative answer there, and we certainly provide some guidance around that. But we've been sort of in 4.5% to over 6% call it 4% to 6% plus range and we continue to see that being the case.

[Unidentified Analyst:]

And on the asset allocation front, you guys mentioned some assets you guys are looking at in pipeline. Beyond that, do you see some more activity happening in the MOB space this quarter or the quarters moving forward than last quarter? Have you seen less deals coming through in the first quarter, is that a reason why there was limited acquisition happening?

[Robert Hull:]

This is Rob. No, I think, we've seen a steady stream of opportunities. Beyond the three properties that I mentioned in my prepared remarks, we do have an active pipeline that we're working on. The timing of those we would see kind of occurring through the remainder of the year. And they would get us well into our projected guidance range of $175 million to $225 million. So a little bit of a slow start out of the gate, but we had some good activity and we have a lot of opportunities out there.

[Unidentified Analyst:]

Okay, thank you.

[Operator:]

Our next question is from Rich Anderson with Mizuho Securities.

[Richard Anderson:]

Thanks, good morning. Sorry for the nose in the background. Can you guys comment if you think you'll be a part of the right-of-first-refusal set of assets related to the Duke transaction?

[Todd Meredith:]

Sure. A man on the go there. Thanks, Rich. Obviously, we can't comment a lot on that. I would say that that's not in our control. Obviously, that's up to the various health systems that have those rights. We don't have those rights, relative to that. So we'll see how that plays out. Our expectation, generally, not getting specific to that -- the Duke portfolio would be that health system, especially not-for-profit health systems, aren't likely to exercise. And I think the price paid will maybe exacerbate that. So we're not expecting to see a lot, but obviously if we were called to look at something like that we'd look at it case-by-case, but that's not something that we would initiate and it's certainly not in our control.

[Richard Anderson:]

And as far as the same-store growth profile. Obviously, you're doing well there. And finally, we're starting to see some growth that is maybe indicative of the big rent spreads that we see in the multi-family -- I'm sorry, excuse me, the medical office space. I'm curious if you think that's a sustainable number for you to be in that mid-5 range? I mean, I know that's the guidance for '17, but where do you think the industry is going or do you think HR is going in terms of the same store growth profile going forward? Is it becoming a bigger number now through execution -- better execution and whatnot?

[Todd Meredith:]

I think, Rich, you have to parse it a little bit. You have to look at single-tenant versus multi-tenant. I think Kris went thorough that in pretty good detail. For us, certainly, we're seeing a slower growth profile on the single-tenant side, Kris, walked through a few things that suggests that will be improving from sort of the lows it's been at, just 0 to 1% range. But we certainly see the multi-tenant side as fitting that description of a higher growth profile. I think for us we have some materials in our investor presentation where we talk about the business model, the multi-tenant side, and we really do see a topline revenue growth rate that can be north of 3%, an expense control level that can be in and around that 2% level, and then that converting to an operating leverage and NOI improvement that can be north of what people are thinking 2% to 3% is the long-term profile. For us, we think that can be in the mid-3s and then push over 4%. And then probably the last piece that certainly helps, and we see that from time to time, is the absorption side. So to the extent that we get some occupancy gains, which we certainly have some room for and expect in the coming quarters and years, then that's how we see a longer-term sustainable level that might be 3% to 4% pushing 4% to 5% at times.

[Richard Anderson:]

Okay, great. And then my last question. Do you see the playing field for one-off type deals and smaller transactions getting incrementally better? I know you'd mentioned cap rates compressing a little bit, but now I noticed a lot of your REIT peers are becoming bigger and bigger. And small transactions won't move the needle as much. Do you think that the competition will lighten a little bit for your neck of the woods from an investing standpoint?

[Todd Meredith:]

It's hard to say, Rich. I would say, we tend to always see different forms a competition and I wouldn't say that it's been tremendously more lately than it was five plus years ago. You always end up with different parties, whether they're private or public. I think you have a point, I do think the bigger, especially the really large healthcare REITs, probably don't have as much need to go after the smaller one-off assets. And obviously, to the extent that is true of HTA getting bigger. We'll see, that will play out. Time will tell. But it doesn't hurt and certainly, they'll be busy for a while and little things won't move the needle as much. So certainly, we see a potential opportunity but there's plenty of other competitors out there. And I'd say, there's just obviously a robust demand for MOBs. We certainly saw that flush out with this Duke deal, a lot of parties interested around this. So continued competition, and certainly, part of the reason why I think we're seeing some cap rate compression.

[Richard Anderson:]

Okay, great. Thanks very much.

[Operator:]

Our next question is from Austin Caito with Jeffries. Mr. Caito?

[Austin Caito:]

Hey guys, thank you for taking my questions, most have been answered so far. But the one I was curious about was, what was the cause of the tenant retention ratio in the quarter?

[Todd Meredith:]

We had -- it's within our range of 75% to 90% first of all. That's our guidance range. It has been for some time. We're just under 80% in the quarter. We don't see that trending down. We see that's staying steady in that 80 plus range in the coming quarters. But obviously, it moves around from quarter-to-quarter. We had one particular campus where we saw a little more movement. Some groups moving to another building and we've already seen a lot of backfill. And as, I think, Kris went through we had net absorption in the same-store portfolio, which really is all in the multi-tenant portfolio. So certainly didn't see any problem backfilling.

[Austin Caito:]

Great, that's all for me. Thank you.

[Operator:]

Our next question is from Todd Stender with Wells Fargo.

[Todd Stender:]

Hi, thanks. Your cash releasing spreads remains pretty strong. Can you share some details around that? Just bouncing off that last question about tenant retention, it seems like you are willing to push rate maybe at the expense of move-outs. Maybe just some color on what you're seeing with your tenants right now?

[Kris Douglas:]

I would say, I don't think I would tie the tenant retention to cash leasing spreads. As we have talked about for some time the tenant retention will bounce around quarter-to-quarter, I think Todd mentioned. We continue to watch and see if people are moving for rate and we're not seeing a lot of evidence of that. So I think, it just still matches with what we've been discussing the low fungibility nature of the on-campus assets and the ability to achieve the cash leasing spreads that we've been recognizing over the last several years. We've talked about it, I think, Todd, with you before. If you look at kind of our history over the last four or five years, our cash leasing spreads have been increasing over that time period, but on average, so has our average tenant retention. So I wouldn't read anything into just a one specific quarter tenant retention being any kind of trend.

[Todd Meredith:]

And I might add, too, Todd, that in the particular case, where we -- this campus where we saw some of that, some of those tenants went to one particular building and actually were at a higher rates. So again, not over rate. They had a reason to put those groups together and again, we had backfill from the hospital and other third-party tenants. So we really don't see it being a rate issue, as Kris described.

[Todd Stender:]

Okay, that's helpful. And then just because we've got the repeal and the replace of the ACA back on the table. Any changes to leasing behavior or tenants, anybody pulling back or don't have the willingness to sign a long-term lease right now, any color around that?

[Todd Meredith:]

We’re not seeing it. We are clearly going to lookout for that. We've been that through that with the adoption of the ACA years ago. And I think, Bethany mentioned it, I mentioned in my remarks. We're keeping a close eye on that. Julie Wilson and her team, out doing the leasing across the country, are certainly keeping their eyes and ears open. So we're not seeing it, and I would say maybe even a more sensitive area would be development and we're certainly not seeing it there. So nothing on the horizon that we can see. Obviously, it remains to be seen. As Bethany described, there's a lot of change and turmoil around this. So we'll see. Hopefully, it's more headline than anything as we've suspected but we'll see how it plays out.

[Todd Stender:]

Great, thank you.

[Operator:]

Our next question is from Jon Kim with BMO Capital Markets. Mr. Kim?

[John Kim:]

Thanks, good morning. On your redevelopments, it sounds like your current pipeline is all expansionary space. And I'm wondering if this is typically vertical construction or you extending adjacent to your existing assets?

[Todd Meredith:]

The redevelopment that we have in there, the one in Charlotte, that's actually an expansion of an existing building. It's two floors on top of an existing four floor building. So we are going vertical there on top of another building. The one in Nashville that I think you saw. You may have -- yes, you came for that, John, and I'd say that was certainly adjacent but connected. So obviously, it's about where can you do that expansion. Not all buildings can be expanded vertically, clearly. So, and depending on how dense it is you may or may not have that room. So it's just case-by-case. And we've got a couple that I'd say, down the line, that probably fit both profiles where you might be going vertically, expanding horizontally. But generally, they're in tight areas. So it's driven by demand from the tenants.

[John Kim:]

And how difficult it is to get the approval for this? If you -- I imagine all of this will be done on campus, so you don't really own the land. So I'm just wondering how big this could be and how difficult that process is?

[Kris Douglas:]

Well, as I have described in my remarks. These are generally driven by the hospital. I mean, they're looking -- these are tight campuses. They're looking to provide space for new physician groups to come to campus, existing physician groups to expand. Expanding service lines on the campus. So we're doing this in conjunction with the hospital. So we have the full support of these systems and they're very eager to do it. It's a sign of a healthy campus.

[John Kim:]

Got it, okay. And then in your guidance, you lowered the bottom end of your acquisition cap rate range to 5.25%. Was this impacted at all by the Duke portfolio? And secondarily, what are some of the characteristics of assets that you would buy at that level?

[Todd Meredith:]

I would say, John, that what Rob described were three properties that are, as he said, in California and D.C. Certainly in markets where cap rate tends to be a little lower. So that's possibly one reason. And we don't think it's related necessarily to the Duke transaction, these were in market well before that.

[Kris Douglas:]

These were prior to -- these were agreed prior to the Duke transaction occurring.

[Todd Meredith:]

Exactly. So what the Duke transaction impact will be on, let's say, that same -- one of those same buildings coming to market will be interesting, I think everybody recognizes that's a very different animal, almost $3 billion versus something at $25 million to $50 million. Very different, not to say that they won't try that, brokers won't try that. But Cap rates are already for good quality assets are in that low-five range. Certainly, that's what these three that we have under contract reflect.

[John Kim:]

Okay, great. Thank you.

[Operator:]

Our next question is from Michael Mueller with JP Morgan. Mr. Mueller?

[Michael Mueller:]

Hi, just a couple of things. First of all, anything significant on the purchase option front over the next couple of years that we should be on the lookout for? And if so, can you talk a little bit about pricing?

[Kris Douglas:]

Yes, Mike, this is Kris. We've talked about before. We do have one purchase option that comes available to the end of the year related to some assets in Roanoke, Virginia, it's related to five single-tenant as well as two multi-tenant properties they are all tied together. We will have more information in the next couple of months as to whether they're exercising. Our expectation at this point is that those will be exercised. They are a fixed price purchase option that appears to be in the money. The cap rate on it -- these are legacy deals that we're done back in the 90s, so that kind of reflects the cap rate environment that was in place at that point in time. So the cap rate is going to be around 13%. But beyond that, we don't see really any other purchase options that we would expect to be exercised and especially be significantly in the money and having an arbitrage situation like you're seeing with those assets.

[Michael Mueller:]

And is that in that range?

[Kris Douglas:]

No because it's actually a 12/31 of '17. So it really goes us into -- it's really into your '18 impact and the proceeds will come in early '18.

[Michael Mueller:]

Okay, and I guess the last question. Any anything to be on the lookout for next year or two, just in terms of support agreements, master leases, just changes there?

[Todd Meredith:]

No, I think we have -- the POA's that we've talked about have been mostly run through. We have one that is remaining, that expires in January of '19. The impact of that one will still be -- we'll have to see exactly where we are at the point when it expires. I think right now it's about $150,000, $200,000 a quarter ROG income that's coming in off of that, but that could burn down between now and then as well.

[Michael Mueller:]

Okay, that's it. Thank you,

[Operator:]

[Operator Instructions] This concludes our question-and-answer session. I would like to now turn the conference back over to Todd Meredith for any closing remarks. Mr. Meredith?

[Todd Meredith:]

Thank you, Dana. And thanks to everyone for listening this morning. We'll be available today for follow up if you have additional questions. Have a great day. Thank you.

[Operator:]

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