Healthcare Realty Trust Incorporated
Q1 2016 Earnings Call Transcript

Published: 5 May 2016

[Operator:]

Good morning, and welcome to the Healthcare Realty Trust Quarterly Analyst Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. David Emery. Please go ahead, sir.

[David Emery:]

Thank you. Good morning everyone. Joining us on the call today are Doug Whitman, Todd Meredith, Kris Douglas, Carla Baca, and Bethany Mancini. Now Miss. Baca will read the disclaimer.

[Carla Baca:]

Except for the historical information contained within, the matters discussed in this call may contain forward-looking statements that involve estimates, assumptions, risks and uncertainties. These risks are more specifically discussed in the Form 10-K filed with the SEC for the year ended December 31, 2015. These forward-looking statements represent the company's judgment as of the date of this call. The company disclaims any obligation to update this forward-looking material. The matters discussed in this call may also contain certain non-GAAP financial measures, such as funds from operations, FFO or FFO per share. A reconciliation of these measures to the most comparable GAAP financial measures may be found in the company's earnings press release for the first quarter ended March 31, 2016. The company's earnings press release, supplemental information, Forms 10-Q and 10-K are available on the company's Web site.

[David Emery:]

Thank you. Positive operating results this quarter continue to reflect the quality of Healthcare Realty's portfolio distinctive in the medical office sector and characterised by low risk intrinsic value and long term growth potential. The path to executing the company’s strategy is simple and well defined. Focus on internal growth, diligently refine the portfolio and remain judicious and discerning with new investments. The stability and need driven dynamics of the MOB market -- the property market differentiate the company and accordingly are reflected in our relative cost of capital. The company is intent on deploying its capital in a manner that amplifies its inherent advantages and fosters long term growth and sustainability. Healthcare Realty’s time tested business model is anchored on a foundation of solid internal performance affording us staying power and broadening the bandwidth of our growth opportunities. We are pleased with our progress and expect the months and years ahead to be steadfast and prosperous. Now Miss Mancini.

[Bethany Mancini:]

Health systems continue to expand operations and pursue greater efficiency as providers meet increasing demand for services from an ageing population. Health systems balance sheet are benefitting from consolidation unless uncompensated care from the uninsured is correlating with higher Medicaid revenue. Contrary to some industry misperception not for profit health systems continued to generate healthy profit from productivity gains and positive commercial pricing. And Moody’s and S&P have reaffirmed their stable outlook for 2016. Even with ongoing negative to flat margins on hospitals Medicare business overall margins from all payers are expected to reach a 30-year high this year, after a high of 7.3% last year. Moreover 90% of the top 100 ranked health systems by Modern health care are not for profit. These leading health systems remain Healthcare Realty’s focus with 80% of our outpatient properties associated with health systems that rank on the top 100 list. In a relatively quite quarter for healthcare legislation government regulatory efforts were quite active on reimbursement policy. The centers for Medicare and Medicaid services continue to roll out new alternative payment model and a rather piece meal effort to move healthcare services from paying for volume of services to value of care. These models including merit-based incentive pay, bundle payments, primary care management, site neutrality adjustment, revised rules for ACOs and more share the goal of limiting growth and healthcare cost, but still lacking over our team strategy for how they will fit together within the current legislation governing Medicare reimbursement and their long term effectiveness remains in question. However, the payment initiatives are resulting in a broad alignment of state and federal government, employers, hospitals and health insurers alike. All now having a vested interest in managing healthcare cost and monetizing on those savings. For health systems and physicians this means creating large network that allow providers to leverage collective size and efficiency, increase their physician referral base and improve market share. Health systems are pursuing partnerships to coordinate care with doctors and enhance the vision leadership within their systems. And the optimization of out patient capabilities and facilities are becoming increasing paramount across the healthcare delivery continuum. Even patients now share a greater interest in this effort as they contend with high deductible and health insurers continue to rate their premiums to make exchange products more profitable. In theory, patients rising share of cost along with new value based reimbursement models could result in lower volumes of physician services. In actuality however, healthcare utilization is on the rise and physicians continue to generate significant revenue each year for hospitals, averaging $1.6 million per physician in net revenue per hospital according to a recent merit Hawkins study. On another positive note, Medscape’s annual physician survey last month reported that physician compensation by speciality actually increased on average 4.8% in 2015. Healthcare Realty has seen evidence of this heightened demand for on-campus medical office space by market leading healthsytems, those that are proactively seeking opportunity to enhance their physician led out patient care and capitalize on shared incentive in government healthcare policy. The company’s portfolio of out-patient facilities is well positioned to benefit from these trends. Along with the recent changes to Medicare rates included in the section 603 of the bipartisan budget act from last year that keeps higher Medicare payments for hospital based out-patient services delivered in on-campus settings versus off-campus that will reimburse at lower physician office rate. 75% of the company’s out-patient facilities are located within 250 yards of the hospital. Qualifying our tenants for higher Medicare rates result in strong demand for space and the ability to grow rental income steadily. With the remaining 25% of the out-patient portfolio, only 12% is leased to hospital tenants that could potentially be subject to section 603 if not grandfathered in or not already billing at the physician office rate which is not uncommon. Overall, the company’s portfolio comprises a broad base of physician tenants across more than 30 specialities with relatively lower concentration of Medicare and Medicaid patients and high rent coverage. David.

[David Emery:]

Thank you, Bethany. Now to Mr. Douglas to give us some overview of results from operations and other financial matters. Kris?

[Kris Douglas:]

Normalized FFO per share grew 5.1% to $0.41 compared to the same period a year ago. The increase in FFO was driven by trailing 12-month same store NOI growth of 5.1%, 3.1% for the single tenant net lease properties and 5.8% for the multi tenant properties. Multi-tenant revenue a product of revenue per square feet and occupied square feet increased 4.0%. Revenue per occupied square foot increased 3.2% while average occupancy improved 60 basis points. Operating expenses increased 1.9% which is consistent with the long term average. This revenue growth and modest expense increase generated positive operating leverage in the period. Future revenue growth is gaining momentum in the same store multi-tenant properties as seen through the following metrics. Tenant retention in the quarter was 87.2%, occupancy at quarter end was 87.9% which is 40 basis points higher than the trailing 12 month average occupancy and 10 basis points higher than the year end 2015 occupancy. Future contractual rent increases for the leases that commenced in the quarter was 3.0%. Cash leasing spreads on renewals were 7.2%. This quarter’s cash leasing spreads were impacted by an outsize mark-to-market on two leases in Hawaii totaling 21,000 square feet. As of these two leases, cash leasing spreads were 4.9%. We achieved cash leasing spreads greater than 4% to 29 leases in 13 different markets. The cash leasing spreads for our on-campus renewals in the last 12 months have averaged 3.8%, which is more than two times the cash leasing spreads for our on-campus renewals at 1.8%. Across the portfolio, we completed 547,000 square feet of renewals, new leases and expansions in 148 separate transactions. That volume is approximately 1.5 leases or 6,100 square feet per day. This activity which is on par with our normal quarterly leasing provides constant insight and informs our acquisition and development efforts. We received a few questions recently about the leasing progress of the 102 month to month leases by year end, as well as whether or not these leases have outsized holdover rate impacting our cash leasing spreads. To answer the second question first, no. Month-to-month leases are not included in our cash leasing spreads. Further, the majority of the month-to-month leases are typically related to delays in execution of renewal documents and not the traditional holdover tenants who pays a significant premium to remain in their space while waiting to move out. In 205, we had only 12 leases totaling 26,000 square feet who paid $56,000 in holdover rent or approximately 1/10 of 1% of our total 2015 revenue. And the retention for the year end 2015 month-to-month leases has been consistent with the remainder of the portfolio with over 81% of these leases renewed at March 31 and an additional 10% in progress. Regarding the balance sheet, debt and liquidity metrics improved over the same period a year ago. Debt to total book capital decreased 180 basis points to 40.8%, fixed charge coverage ratio increased from 2.9 times to 3.4 times net debt to EBITDA declined to 6.3 times and the normalized FFO payout ratio decreased from 77% to 73%. This quarters result and momentum are indicative of our outlook for the coming quarters.

[David Emery:]

Very good, Kris. Now onto Mr. Meredith to give us more specific information regarding recent investments and development activities. Todd?

[Todd Meredith:]

Healthcare Realty’s outpatient thesis has remained largely unchanged for over 20 years. But the strategy and execution have evolved. Our efforts in recent years have been about refinement of crafting a portfolio that performs well overtime and through cycles. Not just reacting to what is for sale, but proactively unlocking value from properties with the right combination of quality, risk and growth should serve us well and extend our competitive position in the years ahead. We continue to find attractive acquisitions mostly one or two buildings at a time and expect 2016 acquisition volume to be in the range of $125 million to $175 million at cap rates averaging between 5.5% and 6.25%. Larger portfolios would be incremental to these levels but that are less likely to meet our criteria. In March, we acquired a 69,700 MOB in Seattle for $38.3 million at a cap rate of 5.5%. The property is located adjacent to UW Medicine's Northwest hospital campus and sits in between the hospital and access the [Indiscernible] interstate. The multi tenant property is 100% leased and anchored by two 10-year hospital related leases totaling 53% of the property including primary care, urgent care, and a radiology joint venture. Rents for most of the in place leases are scheduled to grow 3% each year. Five months ago, we acquired a 60,400 square foot MOB on the same campus for $27.6 million. In late April, the company acquired another MOB in Seattle for $21.6 million at a 5.9% cap rate. The 46,600 square foot MOB is located on another UW Medicine campus called Valley Medical Center. The building is 100% leased by the hospital with staggered lease terms ranging from 8 to 12 years and rents escalating above 3% each year. With this recent activity, Healthcare Realty has $330 million invested in 12 properties totaling 820,000 square feet in the Seattle Tacoma MSA making it the company’s second largest market by investment. Each of these properties is located on or adjacent to our hospital campus and aligned with one of five investment grade not for profit health systems, including UW Medicine, Providence, CHI, Multicare and Overlay [ph]. And we anticipate further expansion in Seattle including two separate development projects with budgets that exceed $60 million each. One project that started as early as fourth quarter 2016 and the other is likely a mid 2017 start. The company currently has two MOBs under contract for approximately $30 million at stabilized cap rates between 5.5% and 6.25%. First quarter and subsequent investment activity was funded with equity using net proceeds of $86.7 million generated from the company’s after market equity program. Additional acquisitions, developments and re-developments in 2016 are likely to be funded with proceeds from dispositions and equity. In the first quarter $16.6 million was funded for the four on-going development and re-development projects including $10.8 million towards the national re-development properties. The 70,000 square foot building addition and the 900 space parking garage are coming along quickly with some initial tenants taking occupancy in September. We are currently in discussions with the hospital to take an additional 30,000 square feet for oncology services bringing the percentage lease closer to 90%. In Denver, site work is underway on a 98,000 square foot MOB with the development budget of $26.5 million, our third MOB developed on this CHI campus. Funding activity will increase through 2016 with completion expected in mid 2017. The four developments and re-development projects underway are 79% leased with more active discussions underway. With budgets totaling $99 million or less than 3% of un depreciated book assets, these development and re-development projects exemplify a low risk approach to achieving stabilized yields at 100 to 200 basis points above acquisition and cap rates. Healthcare Realty subscribes to a balanced sustainable approach to external growth. Selective acquisitions, relationship based development, demand driven re-development, all paired with proactive dispositions each of these components contributing to robust internal growth. Not being dependent upon acquisitions having multiple ways to create values allows us to have -- allows us to wait patiently for the right circumstances. Bolstered by our continual efforts to optimize internal growth with minimal capital, minimal risk and attractive incremental returns. A final item of note, we’ve produced a new schedule on page 12 of our supplemental, a breakdown of our properties by distance from the nearest hospital campus. You can also find a file on our website with a list of our property addresses. In the medical office sector location monitors [ph] inferring proximity to a hospital campus are poorly defined. In our view, proximity to campus is the most important indicator of risk, growth and potential value. This disclosure gives investors the ability to derive valuations from empirical [ph] data rather than subjective classifications. David.

[David Emery:]

Very good. Thank you. Operator, we are ready to begin the question period.

[Operator:]

[Operator Instructions] The first question is from Mr. Jordan Sadler of KeyBanc Capital Markets. Please go ahead sir.

[Jordan Sadler:]

Thank you. Good morning. First question is regarding – is the transaction market, the competition for assets particularly those on close to campus seems pretty intense, and I think that's reflected in the pricing and cap rates that we're seeing. Just curious what you guys are seeing in the market in terms of volume if there's been a pickup and whether or not you guys had interest in the portfolio that traded during the quarter for the Catholic Health portfolio.

[David Emery:]

Sure. I would say generally that cap rates are at a historic level certainly in this sector particularly. So, as our guidance suggests 5.5 to 6 in a quarter, we're certainly seeing those prices for the types of properties we're looking on the on campus adjacent type properties. So, we don't necessarily see that moving in tremendous amount at the moment but certainly see a continued demand at those price points. And as we described last quarter, we have seen some things even lower than that. So it's certainly a lot of demand, don't see that really going away for the time being. As far as the larger transaction I would say, as you probably know CHI is one of our larger relationships. It's about our third largest. We've about 1 million square feet in 14 buildings associated with them and we're developing a new building with them that I describe. So certainly enjoy a great relationship with CHI. We certainly looked at the portfolio, certainly like most large portfolios we are challenged to find that all the properties fit our criteria. So, we really were interested in a small portion of the portfolio about 20%, and just unfortunately the balance of it didn't fit, so for us that's not. We certainly looked at trying to get the 20% but it certainly makes sense that CHI went with the single buyer and we certainly understand that. So, that's just sort of some general color on that.

[Jordan Sadler:]

That's helpful. And then from a portfolio management perspective helpful to see the incremental disclosure from you guys formally in the sub. How are you thinking about portfolio management, or how should we expect you guys to behave in terms of assets management around the off-campus versus on-campus, anchored versus non-anchored et cetera? As we watch here, you know transaction activity play out the rest of this year?

[David Emery:]

Sure. I think you'll see us certainly be bias towards what we buy and what we develop to beyond and adjacent to campus. I think in terms of dispositions its not a – we don't have a binary strategy. They were only selling off. But if you look over the last few years certainly 75% of what we've sold, about five years history, 35% of what we sold is off-campus, so that's certainly our bias. So, I would say, certainly this new definition of Section 603 with the 250 yards puts a right line out there, which sort of really just underscores our approach. So, we're certainly not changing our strategy as a result just validating it, and probably shifting over time as you've seen us do to more and more of the on-campus very close to campus.

[Jordan Sadler:]

Maybe ask another way, what sort of characteristics of the off-campus or non-anchored assets should we look to, you know, what makes those assets particularly attractive or keepers?

[David Emery:]

In the existing portfolio, well, it certainly depends, you know, in some cases we have one in particular that's a 200,000 square foot outpatient center associated with Mercy. This is a double-A system. This is in Oklahoma system area. And it's a fantastic facility. It's new. We funded the development of it. It came on line well year ago and it has 14-year lease and we like what we see there. We like what they're planning to do with that area. So, there are times when that make sense. Our view though generally is that off-campus and we have some of this in our materials that – and Kris described on and off-campus cash leasing spread, we just see higher growth on campus and more retention, better occupancy, better long term rent. So that's our general view. It’s the exceptions to that, that occasionally makes sense for us. And so I think you'll always see some amount of off-campus assets. Its part of a strategy for helps systems to reach out to the community and deliver care, but its going to be selective on our part.

[Jordan Sadler:]

And I was looking more at the non-anchored stuff, but that's okay. Any thoughts around that?

[David Emery:]

Well, those are again fall into that same camp, maybe its not anchored but its certainly an expectation and maybe we see some opportunities where there is just a real estate dynamic that allows for unexpectedly high growth in the rents and ability to push rents. So there is always going to be exceptions whether it's anchored or not.

[Jordan Sadler:]

Okay. I'll hop back in the queue. Thank you, guys.

[Operator:]

The next question is from Chad Vanacore of Stifel. Please go ahead sir.

[Unidentified Analyst:]

Hey, good morning. This is [Indiscernible] for Chad. First question on the cash leasing spreads, I know you guys reported 72 [ph] and then you mentioned I think two properties in Hawaii. Could you just go over that again?

[David Emery:]

Yes. So, it was 72, we did have two properties in Hawaii that we're outsized kind of mark-to-market leases that we've had in place for over 10 years as probably time to turns those. Excluding those leases we're at 49 [ph], but I think more indicative of what I would look for going forward is looking at our kind of past 12 months. If you look at our past 12 months we've had about 3.8% is what we had in our on-campus properties compared to our off-campus which is been running at about 1.8%. Now the good news is that on-campus is about 90% of what we've had turning and I think that's will be consistent with what we have going forward. So, three plus three to four, I think is a good expectation of range, understanding that there will be fluctuations in any specific quarter.

[Unidentified Analyst:]

All right, great, that's great color there. And then, just turning to retention I know it went down sequentially from 91 to in Q4, but it seems that that seems to fluctuate in the low 80 to high 80s. Is there sort of an idea of what should happen for 2016?

[David Emery:]

We've given our guidance kind of 80% to 90% which is consistent with what we've had over the last 12 to 18 months. I think our low in that period was 82 and a high 91. So, our expectation is once again, its going to move around quarter to quarter, but long-term average somewhere in that 80% to 90% is a good expectation.

[Unidentified Analyst:]

Okay. Thanks. And then given the low cap rates pricing pressure and more aggressive market should we expect sort of a shift to more development as its harder to find these on-campus acquisitions?

[David Emery:]

I would say, our guidance that you see of $125 million to $175 million is we don't see a change in that. I think we can continue to be active at the cap rates that we suggest 5.5%, 6.25%. We don't necessarily see that going down as a result of the pricing levels we're seeing. Obviously things changed, as cap rate change, your capital market change, those things can change, but really where we're seeing the developments is just out of follow-on opportunities in either markets we're already in or places we're buying assets and then adding developments to that. So, the two I mentioned in Seattle or just that one is follow-on of an acquisition that we've made. And then another is an acquisition several years ago that gives the opportunity to do a redevelopment and built the new building on site connected to that building. So it really is just sort of organic process for development rather than a pendulum swing, because of cap rates.

[Unidentified Analyst:]

All right. Great, Thanks. That's it from me.

[Operator:]

The next question is from Vikram Malhotra of Morgan Stanley. Please go ahead sir.

[Vikram Malhotra:]

Thank you. Just on your lease expirations for 2017, could you just maybe give us some more color. Are there any large tenants expiring particularly in the single-tenant category?

[David Emery:]

In the single-tenant we do have two leases that expiry in the next months. We have some disclosure about that in the Q. Both of those leases except what we're coming out with the next month, one of them we have terms and renewal agree to on that one. The second one they are not renewing, but we have already secured a tenant to come in and backfill that space. So, occupancy will remain 100% in the single-tenant net leased properties. In the multi-tenant properties, nothing to note there of any particular tenants over the next 12 months.

[Vikram Malhotra:]

And then – sorry, just to clarify you said that there was one large tenant coming due in 2016 or that in 2017?

[David Emery:]

In the single-tenant there are two in the next month.

[Vikram Malhotra:]

Okay.

[David Emery:]

Those are the only two in 2016.

[Vikram Malhotra:]

And what about just within the 334,000 expiring in 2017, is there any large lease coming there?

[David Emery:]

All five of those expire on 12/31 of 2017, so at the end of year, so we'll begin have those conversations in the quarters to come.

[Vikram Malhotra:]

Okay. And then just on the – I know you touched a bit upon the CHI deal, are there any other large portfolios out there that you can maybe give us some color about sale leaseback or conversation that you're having on sale leaseback?

[David Emery:]

I would say, Vikram that we certainly are hearing about some other portfolio, one that we know that is in the market and maybe some that might come to market. As I've sort of gave some color on the CHI portfolio, we certainly take a look at these. We look at them closely to see if they fit with our criteria if there is a high enough proportion that meet our criteria that we might go after some of that, either the whole portfolio or a subset, but more often nor it’s a subset and if we can get it that subset that great, we'll try, but as you can imagine more than likely they are selling their whole portfolio. So, I would say, we're always evaluating but we put that in a low probability camp if you will for us closing on large portfolios.

[Vikram Malhotra:]

Okay. And then last one from me. You have a slide in your investor presentation where you highlight rent coverage for the medical office building is over nine times, obviously much higher than some of other medical uses. I'm just curious, do you guys track that or is that just sort of average across the whole space and is there a range that you can kind of maybe give us some color on like what's the low end and versus the high end?

[Doug Whitman:]

Exactly. And this is Doug. It is an average, what we uses, we use data provide by the medical group, management association, MGMA, that surveys physician groups across the country every year. And what they find is that typical occupancy cost for a physician group generally ranges from about 3% to 6% and so from that data we can impute a rent coverage for sort a generic office practice, physician office practice which maybe to the eight to 10 rent coverage.

[David Emery:]

If you look at it by specialty it can range and as you can imagine primary care is on the low end and that's probably in the mid single-digit, five, six, seven and then specialist all the way to orthopedists, another high acute surgeons would be more approaching 15.

[Vikram Malhotra:]

Okay, great. Thanks guys.

[Operator:]

Then next question is from Michael Carroll of RBC Capital Markets. Please go ahead sir.

[Michael Carroll:]

Thanks. Todd, with the with the Seattle developments that you mentioned in your comments, do you need to achieve some type of pre-leasing hurdles before you break ground or do you already have some type of pre-leasing done in those assets?

[Doug Whitman:]

Well, they are in process, so that is certainly where we're headed in one case the one that we're looking at a potential start by year-end is probably be in the 40% to 50% range and that's primarily with the hospital. The other one we'll look for something similar to that, probably approaching 50% would be the level at which we would begin to feel comfortable. We'll put that in context with what's going on with the other development activity that we have. So, its really a balance of managing our overall exposure and carry a vacant space in the development group of properties, development and redevelopment

[Michael Carroll:]

Okay. And so, what type of exposure would you be willing to have?

[David Emery:]

Well, I think overall it’s a formula that you really have to think about of your whole portfolio development exposure on vacancy, but it has to do with how large is the property, what's the total script of the budget, so cost per foot apply to this square feet and what kind of targeted stabilized yield you're after. All of that can impact how much absolute carry – cash flow carry you have and we don't have a exact number for you, but certainly we don't want to be coming and saying we're carrying five pennies a quarter of vacant space for development reason. So, we don't have an exact number, but the point is to manage that could be a very manageable numbers, so in the overall enterprise it is not significant. I would say generally speaking we want to keep our total in a different way. Our total development exposure 5% or less of the total asset gross investment that we have in our properties, and right now, as I mentioned we're 3% or less But one thing Mike that might add on that – on those two buildings in Seattle and I think this will impact the amount of vacancy we're willing to carry is our experience in the market. On the one they may start later this year. Its on the same campus where we just brought the property that's 100% lease. So we have an understanding of that market and understand the depth of the need there. The second project is right there on the Pill Hill area where we own two assets and the overall vacancy rate in that market is in the 1% to 2% range. So, in those types of situations we maybe willing to take a little bit more vacancy, so when you hear us talking 40% to 50% you have to take that into account as well.

[Michael Carroll:]

Okay. And then how many development projects are you willing to start a year or can you remind us what your goals are?

[David Emery:]

Well, again, its not – there's not a – it kind of have to fit into that frame work I just described total amount relative to the company and then what the carry would be. So, on a practical level, two or three starts a year it probably can move much beyond that unless there are all 100% leased and therefore you could do some more. But even then the yields on those would probably not be as attractive, so we like having some – we like having multi-tenant number one and number two, some ability to create growth opportunity through some of that lease up process.

[Michael Carroll:]

Okay, great. Thank you.

[Operator:]

The next question is from [Indiscernible] of JPMorgan. Please go ahead sir.

[Unidentified Analyst:]

Okay. It's Mike Moller [ph] actually. So, couple of things. So following up on that with the – about the two to three development starts, so for thinking about in terms of a kind of an ongoing CIP [ph] balance, what you think that in process balance would be over say three to five year period? Would it be, you have projects with the total expected investment of 300 million up and running at any given time or something?

[David Emery:]

$300 million is pretty high as a percentage of the total assets.

[Unidentified Analyst:]

Okay.

[David Emery:]

If you get to 5%, you probably in the 100 million to 200 million range. I think as a practical matter if you look at some of the profiles the ones I mentioned you've got is the one in Denver that's 26.5 million, so there is one into the scale and then these in Seattle that are 60, so call it 40 million, three starts, 120. So again in that range maybe you have some backlog with good leasing that's get you closer to that $200 million number at any given time.

[Unidentified Analyst:]

Okay. And then if you just go back and think of the old before you lumped it altogether, the old SIP properties where you're talking about getting up to $25 million to $30 million of NOI. How is that tracking? Are you still on target to hit that?

[David Emery:]

We are, Mike, if you look at the cash in the quarter from those 12 properties, its $5.6 million, so that gets your annualized $22.5 million. And if you look at the run rate, so you take out any concessions, you take any timing issues with occupancy that's partial in the period that gets over $6 million about 6.1 million, so you're at about 24.5 million annualized. And really if you take the difference between occupancy currently which is all over 84% up to the 88% leased, you get to a run rate of $6.7 million a quarter, which would annualized to 26.8. So you're well above at the low end of $25 million to $30 million we always talk about. And you still have opportunity to go from 88% lease to well over 90% that can take you towards that top end of the range.

[Unidentified Analyst:]

Got it.

[David Emery:]

25% to 30%.

[Unidentified Analyst:]

Okay. That was it. Thank you.

[Operator:]

[Operator Instructions] This concludes our question and answer session. I'd like to turn the conference back over to Mr. Emery for any closing remarks.

[David Emery:]

Okay. Thank you everyone for been on the call today. Thank you everybody's around. Doug, do want to say.

[Doug Whitman:]

I want to say we look forward to seeing several of you at HR's Investor Day here in Nashville next week, as well as NAREIT conference in New York next month.

[David Emery:]

Very good. All right, thank you. And with that good day.

[Operator:]

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