Healthcare Trust of America, Inc.
Q1 2019 Earnings Call Transcript

Published: 26 Apr 2019

[Operator:]

Good day everyone, and welcome to the Healthcare Trust of America, First Quarter 2019 Earnings Results Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Please note this event is being recorded. And I would now like to turn the conference over to Caroline Chiodo. Please go ahead with your presentation.

[Caroline Chiodo:]

Thank you, and welcome to the Healthcare Trust of America's First Quarter 2019 Earnings Call. Yesterday after the market closed we filed our earnings release and our financial supplements. These documents can be found on the Investor Relations section of our website or with the SEC. Please note this call is being webcast and will be available for replay for the next 90 days. We will be happy to take your questions at the conclusion of our prepared remarks. During the course of the call we will make forward-looking statements. These forward-looking statements are based on the current beliefs of management and information currently available to us. Our actual results will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance. Therefore, our actual and future results could materially differ from our current expectations. For a detailed description of our potential risks, please refer to our SEC filings, which can be found on 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?

[Scott Peters:]

Good morning and thank you for joining us today for Healthcare Trust of America first quarter 2019 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. HTA begins 2019 as the largest dedicated owner and operator of medical office buildings. One of the most attractive real estate asset classes for the next five to 10 years. Our philosophy in 2019 continues to be focused on key principles of being disciplined, pragmatic and focused on delivering and growing shareholder value over the long term. We are extremely proud of our track record since we became public in June of 2012, generating over 95% total return since that time through the end of the first quarter. As a company we have a best in class portfolio of over 23 million square feet invested in assets both on campus where we have the largest on campus portfolio in the country and off-campus in core critical locations where healthcare is positioned to grow over the next decade. We are concentrated in 20 to 25 key growth markets and now have nine markets of approximately 1 million or more square feet and 15 markets with 500,000 square feet or more. Given this concentration and scale, HTA can continue to leverage our unmatched full service asset management platform that provides property management, building services, leasing, construction and development services to our tenants. We have multiple avenues for external growth through both acquisitions in our key markets and our recent entrance into development where we are gaining traction with a number of opportunities. In addition, we also have strong and stable cash flows. We are diversified by market, where our top 10 markets make up less than 55% of ABR, and by tenant, where no single tenant makes up more than 4.4%. We also have limited near term lease expirations with an average of less than 10% per year through 2023. We continue to maintain a fortress balance sheet with low leverage at 5.6x net debt to EBITDA and significant liquidity of almost $1.1 billion at quarter end, and finally a track record of bottom line growth, where our consistent store growth and investment activities have allowed us to generate total shareholder returns of over 95% since we became public in June of 2012. From a strategic perspective in 2019 we are intently focused on ensuring that our same store growth and capital allocation decisions translate to bottom line growth for investors in 2019 and in future years. During the first three months of the year we once again have presented strong performance which was highlighted by one, same store growth of 2.7% year-over-year driven by 2% rental revenue growth and a 70 basis points expansion in our rental markets; two, solid leasing performance with total leasing of over 1.1 million square feet in the quarter, our largest quarter of leasing in our history including over 207,000 square feet of new leasing. Our cash releasing spreads for renewals increased to 5.9% while retention remained high at 86%. Three, we have closed or entered into exclusive agreements on over $100 million of opportunities, with a going in yield of approximately 5.7%, which does not include the 25 to 50 basis points of incremental yield we believe our property management platforms can add over the next 12 to 18 months. This keeps us on track with our $250 million of acquisitions we provided in our initial guidance for the year. We're also pleased to see HCA announce the opening of their Medical City Heart Hospital and Medical City Spine Hospital this fall on the former Forest Park, Dallas Campus. These hospitals are attracting many of the top doctors in the area and bringing a lot of activity to the campus. As a result, we are now seeing demand for our MOB space exceed, our available vacancy and we are evaluating our options for potential expansion and new development on the site. We believe this is proof that our investment thesis of investing in good buildings, in great markets is paying off, even as health systems continue to consolidate over time. From an operating perspective, we're seeing healthcare providers take definitive action on their space requirements, as they focus on moving to a model that is focused on outpatient delivery of care that is more convenient and cost effective. This is translating into strong leasing activity both on and off campus. It has also led to significant number of requests for early renewals as tenants are seeking to invest in their spaces and lock in their location for the foreseeable future. This dynamic has allowed us to continue to push rents in many of our markets and resulted in our higher renewal spreads. A significant amount of this outperformance was the result of a 500,000 square foot renewal with a single health system that was originally supposed to expire in 2021. This lease has been flat for the last seven years and this renewal provided the opportunity to move rates higher, add annual rental escalators and lock them in place for an additional 12 years, while providing the tenant with a capital to refresh their space and move forward with their strategic plans. As I mention, we are seeing the strong performance both on and off campus, where healthcare is increasingly moving. This quarter we published the breakdown of our tenant specialties, including the break down my campus. Despite the common perceptions that are out there, the break down the specialists in our building is very consistent between on campus and community core outpatient locations. From a capital allocation perspective we remain very active and disciplined, focused on identifying opportunities that meet our acquisition criteria of one, located within our key gateway markets; two, quality real-estate that will generate same store growth of 2% to 3% consistently over the long term; and three, being accretive to our cost of capital. In 2017 and 2018 we have seen large portfolio transactions dominate the medical office marketplace. 2019 we have seen the smaller one-off opportunities return. These are the type of transactions on which we established and grew our company and we are happy to see them return. These one-off transactions allow us to be targeted and to fill in our key markets. They are also available without the portfolio premiums we have been seen, allowing for them to be accretive to our cost of capital day one, while also allowing us to add the incremental 25 to 50 basis points of yield that we can achieve when we layer on our platform capacities. We have made significant strides from our development perspective deals and are in advanced discussions on several opportunities which we expect to announce in the near term. In addition we continue to add key piece to our team, with the recent addition of David Chung a former Health System Real Estate Executives; Kim Brubeck, a Business Development Leader; and Caroline Chiodo who is adding Investments and Acquisitions to her role. This team complements our local operating teams and in place construction and development teams and should help us reach our targets of being a leader in the medical office building space. The recent ebbs and flows in the public markets have allowed HTA to demonstrate our disciplined capital allocation and capital markets execution strategy, focusing on patient pragmatic decision making, reflecting a long term disciplined accretive growth strategy. We remain on track to hit 250 million that we targeted in our 2019 guidance that we have provided the market place earlier this year. Although we do not need additional capital to close on our acquisition targets, we always evaluate our balance sheet from a long term perspective and when we – as we go forward. With that I will turn the call over to Amanda.

[Amanda Houghton:]

Thank you, Scott. In 2019 our team continues to focus on delivering high quality operating and leasing performance that bring value to tennis and shareholders alike. Our scale in our key markets has enabled us to build our team of over 180 property management and leasing professionals spread across 23 offices. This allows us to bring the power of a national company to a very local health care provider community. It has also helped us generate strong local knowledge, relationships and capabilities that have resulted in high levels of same store growth, sector leading operating efficiencies, strong leasing and retention and also great opportunities for acquisition and now development. Turning to our Q2 results, we had very good quarter operationally. Our same store growth came in at 2.7% driven by a 2% base revenue growth and 70 basis points of rental margin expansion. Our quarter ending same store leased rate was flat year-over-year at 91.9%, while our occupancy increased 10 basis points to 90.8%. In the period we signed almost 1.1 million square feet of leases. This includes 207,000 square feet of new releases and almost 900,000 square feet of renewal. Our total tenet retention was 86%, while our releasing spreads increased to 5.9%, our highest spread in our reported history. These leasing results included the early renewal of over 500,000 square feet of leases with a single tenant that was originally scheduled to expire in 2021. This lease had been flat for over seven years and we were able to renew this rents up more than 10%, while also establishing annual escalators and keeping TI at $2 per square foot per year of new term. Excluding these leases our releasing spreads were up over 1.5%. Our annual escalators on all leases signed was 2.7% increasing our average escalator in our portfolio to over 2.4%, up from the low 2% range three years ago, for the 92% of our portfolio that’s leased. This movement is key to our continued and consistently strong rental growth. Our TIs increased slightly to a $1.62 per square foot per year term on renewals and $2.09 per square foot, per year of term overall. As we look to the remainder of 2019 expirations, we still have more than 11% of our lease square feet expiring, including month to month tenets and expect our current leasing momentum to continue. Across these leases we expect to achieve 75% to 85% retention with releasing spread of between 1.5% to 4% and annual escalators of approximately 3%. On the expense front we continue to show the benefit of our economies of scale and ability to perform services using our internal engineering platform. We continue to see an increase in our property taxes on our portfolio primarily in Texas. However excluding property taxes, our total expenses were down approximately 0.5%, primarily as a result of lower utilities costs. This has been a significant focus of our operating platform and we continue to see the benefits as we bring all of our properties up to HTA standards. I will now turn it over to Robert to discuss financial.

[Robert Milligan:]

Thanks Amanda. From our financial position we ended the quarter in great shape, with low leverage, limited near term debt maturities and cash on the balance sheet. This positions us with significant flexibility to deployed capital strategically as we have seen our investment opportunities improve. Turning to the specific financial results. First quarter normalized FFO per diluted share was $0.40, flat on a sequential basis from Q4 and down from the prior year. Note that this includes the impact of Topic 842 in which $1.3 million of direct leasing costs were capitalized in the year ago period. Eliminating this impact and holding leverage constant would have been flat to up on a year-over-year basis. Funds from distribution decreased to $73.2 million reflecting our dispositions over the prior year. Same store cash NOI was 2.7% compared to the first quarter 2018. This growth was driven by rental revenue growth of 2% and margin expansion of 70 basis points. This continues to reflect our ability to grow revenues while also growing our efficiency long term. G&A for the quarter was $11.3 million with the increase driven primarily by the expensing of internal leasing costs. Our recurring capital expenditures in the period were just under $12 million or approximately 10% of cash NOI. Note that we expect this to range between 10% to 15% per quarter before any potential impact from the early renewals Amanda noted previously. From an accounting rule change perspective, this was the first period utilizing the new Topic 842 Lease Rule Changes. The impact largely related to the expensing of direct leasing costs in 2019, as well as the addition of certain Right To Use Assets and Liabilities related to our ground lease obligations on the balance sheet. In addition there were two other changes that impacted the comparability of the statements between the periods, but had no impact on total earnings. The most significant of this was related to the accounting for single tenant buildings which tenants directly pay property taxes, under 842 we will no longer recognize either the revenue or expense related to these payments. In the first quarter of 2018 we recognized approximately $3.4 million of both revenue and expense related to these. In addition the rule change now also requires bad debt to move from expense to a reduction of revenues. In Q1, 2018 this amount was immaterial. From a capital allocation perspective, we saw an increase in investment opportunities in Q1 that fit both our market and quality criteria and are accretive to our cost of capital. These transactions are the type of one-off acquisitions that we have historically executed to grow our company. They are focused on our key markets and allow us to add an incremental 25 to 50 basis points of platform synergies. In Q1 we acquired an MOB in Westport Connecticut for $18 million. We also have an incremental $70 million of acquisitions under exclusive contracts or have already closed in Q2. These opportunities located in our key markets are roughly 70% on campus with great health system anchors and should perform over the long term. Given their one-off nature, year one yields are expected to be over 5.7% before any incremental synergies. As a result we remain confident in our previously stated guidance of $250 million of acquisitions, with an incremental $75 million of dispositions. As a result of these activities we are reiterating our 2019 guidance and we continue to expect same store cash NOI growth of 2% to 3% for the year and slightly lower than that on a GAAP basis given the impact a straight line rent. We expect our normalized FFO to range between a $1.62 to $1.67 per share with the main driver being the timing and amount of our acquisitions. Regardless we expect momentum and earnings building in the second half. I will now turn it back over to Scott.

[Scott Peters:]

Thank you, Robert. We’ll open it up for questions.

[Operator:]

[Operator Instructions]. And the first questioner today will be Chad Vanacore with Stifel. Please go ahead.

[Chad Vanacore:]

Alright, thanks a lot and good morning all.

[Amanda Houghton:]

Good morning.

[Chad Vanacore:]

Robert you had mentioned CapEx expectations of 10% to 15% for the yeah. Would it be fair to assume that the first quarter is pretty low and that should take up through the year as it goes and sort of backend weighted than in the past?

[Robert Milligan:]

Yeah, you know we typically see our first quarters as typically the lowest from a capital expenditure basis just given some of the seasonality of there – and we’d expect that trend to continue this year.

[Chad Vanacore:]

Okay, thanks. And then just on acquisition, you’ve lined up some acquisitions. How do those cap rates compare to what you have on your contract compared to what you have been seeing in the market recently and then is there any view that maybe, cap rates may be expanding or contracting from here?

[Robert Milligan:]

You know I think from our perspective you know we are really focused on really the one off acquisitions that we are seeing in the market. I think we are seeing more of those opportunities now. They are in our key markets. They don't necessarily have the portfolio premium associated with them, so we're being able to pursue them in the you know 5.5% to 6% range. I think there certainly are a number of deals that are getting done much slower than that, but for us that's where we are focused right now.

[Chad Vanacore:]

So fair to say portfolio deals are sub-5.5% cap rate, but one off they are 5.5% to 6% from what you are looking at?

[Robert Milligan:]

Yeah, you know I think that still continues to be our expectation or at least what we've seen so far.

[Chad Vanacore:]

Alright, and then how should we think about best use of the capital right now? You made some advantageous share repurchase early in the year. Anything material left to do there and how would you allocate cash to acquisitions, debt repayment development and share repurchase?

[Robert Milligan:]

Well, you know I think as we look at really across the spectrum you know we do have multiple uses of cash for capital as we look at it. I think first and foremost the priority now probably is acquisitions in our key markets, as well as increasingly development. You know we continue to make some traction on some projects and look forward to announcing those. The share repurchases tend more to be when there's a dislocation in the capital markets and we see the implied cap rate on that being in excess of what we were able to buy really in our markets today, but it does continue to be an option and you know the very first couple weeks of the year we certainly saw an opportunity to buy back our shares at a very attractive rate and so we took advantage of that.

[Chad Vanacore:]

Alright, that’s it from me. Thanks for taking the questions.

[Operator:]

And our next questioner today will be John Kim with BMO Capital Markets. Please go ahead. And actually our next questioner today will be Jonathan Hughes with Raymond James. Please go ahead.

[Jonathan Hughes:]

Hey, good morning. Amanda thanks for the color earlier on the leasing spread. I think I heard they were up 1.5% excluding that big 500,000 square foot early renewal lease from the Healthcare System. That’s kind of below the 3% to 4% from the prior two quarters. Can we expect that to rebound kind of back to that low mid-single digit range throughout the year?

[Amanda Houghton:]

Yeah, I think each quarter is going to be a little bit different, but generally anywhere between 1% and 4% I think would be something you would expect to see on an ongoing basis.

[Jonathan Hughes:]

Okay, and may be what – you know why was it 1.5% outside of that. Where they just maybe order buildings or more saturated markets, just kind of curious there as it was down a good bit.

[Amanda Houghton:]

Yeah, it really is market specific and lease specific, so no true trend indication, but it's just going to vary depending on the particular lease and the particular market that we are in.

[Jonathan Hughes:]

Okay, that's helpful, and then just one more from me for Robert. You know last quarter you emphasized a desire to return to the historical 4% to 6% annual FFO growth. That just seems very difficult to achieve, to me at lease given your much larger size than say five years ago. I guess maybe how much annual external growth activity is based into that longer term growth outlook?

[Robert Milligan:]

You know I think as we look at our growth profile of how we should operate, you know we view it as 2% to 3% same store growth. You get towards the high end of that and you should be able to see that translate down to earnings growth just giving operating leverage between 3% to 4% holding leverage neutral, and then getting a level of acquisitions development on top of that from an accretive basis is really where you see that ability to go above that level, which is what we’ve done historically. So I think you know as we are looking at 2019, this is a year where we are now at a lower leverage profile going into the year, using some of the disposition proceeds we had at the end of last year from Greenville, allocating that. So it’s really getting back towards those level, towards the end of the year and heading into 2020 that we looked forward to.

[Jonathan Hughes:]

Okay, so maybe you know talking like $250 million or so of annual external growth or even $500 million.

[Robert Milligan:]

Well, you know I think as we look at that it's going to be dependent on the capital markets and the ability to find accretive deals in our market. But you know our expectation is we’ll get to $100 million to $200 million plus in development and then take advantage of the acquisitions on top of that. But certainly you know $200 million to $500 million has been historically what we've been able to do most years.

[Jonathan Hughes:]

Yep, okay that’s it from me. Thanks for the time.

[Operator:]

The next questioner today will be John Kim with BMO Capital Markets. Please go ahead.

[John Kim:]

Sorry about that earlier. On your acquisition pipeline how much of it is off campus versus on?

[Scott Peters:]

Yeah, when you actually look at our full pipeline you know that we talked about, about 70% of it is actually on campus. With what we're looking at, you know pretty well located buildings and then when we're looking at the off campus opportunities, those tend to be more in kind of higher demographic areas with great access from a traffic flow. But I think the characteristics we are looking at from an acquisition pipeline are 70% on campus within our key markets.

[John Kim:]

Can you remind us also if why is the core market for you the market. You have less than a 1 million square feet of MOB space and now there is a bill there introducing the building tax in the state?

[Scott Peters:]

Well, you know I think that's always been – as we look at each of our locations you know we do have a couple of buildings in Hawaii. It’s certainly a constrained area that offers a lot of potential for rent growth and opportunity over time. But you know when we look at our markets I think we're focused. It's not one of our top 15, 20 markets at this time, but I think we always evaluate our markets for the long term opportunities as we go along.

[John Kim:]

But you are sticking to your plan, that if you can’t get a 1 million square feet or so in the scale then it becomes an non-core.

[Scott Peters:]

Well, Scott. I think you know Hawaii is a little bit different. We’ve got a couple good assets; we’ve got some opportunities that we continue to look for. You know one of our peers are there too. It’s just a very solid market and it’s a market that has produced good returns for us. Buildings are full and they have healthcare needs there that I think are changing over time. So while we may not get 1 million square feet, I think that you can certainly think that a location like that can become a key location with maybe 500,000 square feet or something of that nature.

[John Kim:]

And then finally on your cash flow statement, the operating cash flow this quarter is down about $12 million year-over-year, and it looks like it is mostly due to changes in working capital. Can you just maybe discuss that dynamic?

[Robert Milligan:]

Yeah, you know the first quarter of every year there's a bit of seasonality in our cash flows and its really related to two things. You know first of all its actually property tax timing related. In the first quarter of the year we pay out between 40% and 50% of actually all of our property taxes for the year. Most of these are annual payments and just given the locations that we’re in that's the bulk of the timing on that. The rest of the use really relates mostly to kind of our debt service, just given the timing of our unsecured bonds that pay interest semi-annually, they lineup within that. So from year-over-year there is not – there is just some kind of inter period movement between fourth quarter and first quarter associated with a handful of those things.

[John Kim:]

Do you expect that payable and receivable dynamic to reverse next quarter?

[Robert Milligan:]

Yeah, you do see that kind of normalized throughout the rest of the year. Certainly from an expense perspective, the property tax payments are accrued for on a monthly basis because they are an annual expense, but they are heavily paid out in the first quarter. So yeah, you would you would see the typical cash flow timing return in second, third and fourth quarter.

[John Kim:]

Thank you.

[Operator:]

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

[Todd Stender:]

Thanks. Amanda I guess back to the leasing activity. This is a lot to get through in one quarter, but maybe some pretty good data to read into. Any trends that emerged? Your retention was very good, but any nuances around length of renewed leases or size requirements, anything there?

[Amanda Houghton:]

Yeah, I think that our trend for you know larger leases and longer term request is definitely continuing. You know we're seeing many health systems reach out as the particular tenet that we described on the call did you know multiple years ahead of their expiration wanting to lock in longer term and it really seemed as if the health system’s physician groups are wanting to secure space and at least get that part of their business plan set, so that they can focus on other things.

[Todd Stender:]

Thanks, and then what proved most important to you in these leases? Was it holding REIT or not giving up the TI that you have in the past and any nuances there as well.

[Amanda Houghton:]

I mean we really look at our least holistically and we don't particularly focus on one aspect of the lease. We look at it on a net effective rate which captures the rental rate, the escalators, the tenant improvement, even leasing commission that we're paying out and free rent. So I think all of those components factor into our overall return and we continue to focus on all of them and not one particular area.

[Todd Stender:]

Alright, thank you. And then when it comes to acquisitions, it looks like that's been picking up obviously and you got what I would consider an above market cap rate; I guess that blended rate of 5/7. Can you speak to maybe some of the assumptions in these properties at a slower growing different markets, maybe just talk about acquisitions and then some of the cap rates you are seeing.

[Robert Milligan:]

No, you know I think as we’re looking at the acquisitions you know, I think we're looking not just at the initial cap rate, but certainly the ability for us to grow the properties long term. You know I think the biggest difference really as we look at it is these are opportunities again that are a little bit more like what we used to buy, really from 2012 to 2016 before some of the larger portfolios came on where they are one off acquisitions, they are in the markets, we understand the dynamics of what you know – really what we're looking at and what we're getting into, and that just provides a little bit more opportunity for initial going in yield, but certainly we don't see these as sacrificing any of the long term growth. They just happen to be smaller and a little bit more one-off in locations that we know very well.

[Todd Stender:]

Okay, thank you.

[Operator:]

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

[Austin Caito:]

Hey guys, this is Austin Caito on for Tayo. Just two quick questions. The first one is just around the lease rate. I saw take downs slightly in the quarter, any reasoning behind that?

[Amanda Houghton:]

You know overall I think that we really look at the year-over-year changes and I think our occupancy trend up 10 basis points is ultimately what's driving that revenue growth. So I think if you look at a sequential quarter basis we were down slightly. The last quarter of last year we did have a disproportionate amount of role and any time that happens you are going to get a little bit of a dip, but again on a year-over-year basis we continue to see that positive trend and that's what's driving our revenue growth.

[Austin Caito:]

Okay, thank you. And then I guess the next one is for Robert. Earlier you mentioned you know $200 million of development potential. Is that differ from the $75 million that you were seeing on an annual basis from the development pipeline and how is that trending for the rest of 2019?

[Robert Milligan:]

You know really what we're looking to get is you know $100 million of announcements per year. You know I think we got a couple of different projects and opportunities that we’re having very good discussions with and it's just a matter of getting to a point where we can announce the deal. So you know we really have invested heavily in our development platform; you know we brought on some key players and we see that as the opportunity to take off from here. So we are excited to announce some new projects, but we're having good dialogue right now and it's getting those to the point where we can announce them.

[Austin Caito:]

Okay, great. Thank you.

[Operator:]

And the next questioner today will be Daniel Bernstein with Capital One. Please go ahead.

[Daniel Bernstein:]

Hey guys, good morning. I guess the one question I had revolved during – you guys really didn’t talk about and nobody asked about the joint ventures and private equity opportunities that you might have and so your stocks trading still below NAV, so are you thinking about or considering any, you know raising equity indirectly through JV – selling assets into a JV with institutional private equity.

[Scott Peters:]

Well, you know we continue to look at all options as all companies do. One of the things that we feel is that we've got some very key markets and some best-in-class assets and so for us to go and and put together a joint venture that makes sense for our shareholders, you know it seems to be a little more difficult than in other cases where folks are trying to put maybe secondary assets or groups of assets that may not be critical to their long term success or may not even be involved in their platform growth. So you know we look at it, but frankly we haven't seen something yet that has been compelling to us on a short term position or either more importantly says you know this is a long term opportunity that somehow generates value attributable, comparable to value that we're finding in – you know even the one offs that we just announced here, I think those assets will perform 100% very well for shareholders and we'll just continue to move down that path unless we found something that could equal it.

[Daniel Bernstein:]

I guess a related question will be, do you see any opportunities to scale your management platform into something that's more third party, whether that's again for maybe an institutional investor or for the hospitals themselves?

[Scott Peters:]

I think the more logical answer to that would be probably if we assisted some healthcare systems in their desire to perhaps either modify what they do from a real estate perspective or to assist in their “back office,” we do some of that up in Boston. We've had some overtures from some of the healthcare systems on the east coast. You know there's not a lot of margin to be made on a third party fee basis. You know where we generate our platform is we only ask that we’re able to push through the services and can get them through a market and do them a little better pricing, so that we can get those, our margins and drop them to the bottom line. I don't necessarily want to give away that type of expertise and that type of profit to third parties for just a small fee. So we're very particular in how we want to utilize that, but if there was an opportunity to “partner” and that partner means we own some assets and then we help use our assets and help some of their assets and that may be something that would work for both parties.

[Daniel Bernstein:]

Okay, okay. And then one more quick question; just in terms of the pipeline, would you I mean say it's a little bit more worn off. Does that imply that maybe there's more triple net in the pipeline than multi-tenant or am I not thinking about that correctly?

[Robert Milligan:]

No, you know I think everything that we've done in our pipeline is actually multi tenanted in nature. I don't think they were more single tenant or anything like that. You know they are very much the characteristics that we would typically be buying.

[Daniel Bernstein:]

Okay, okay. That's all I had, thank you.

[Operator:]

And the next questioner today will be Karin Ford with MUFG Securities. Please go ahead.

[Karin Ford:]

Oh hey there, good morning out there. I was just looking at your 2.7%; the first quarter same store NOI print versus the 2% to 3% guidance range. Was any other first quarter expense decline timing related and going to reverse later this year, and how much do you think Forest Park commencements are going to boost same store NOI growth in the second half?

[Robert Milligan:]

You know Karin, on your first point from an expense perspective, you know I don't think anything is necessarily timing related on anything. I think there's always a sense of seasonality just given the changes in seasons, but there’s nothing inherently that we would expect to see us come back.

[Amanda Houghton:]

Yeah, I would say the biggest driver of you know the 0.5% decline in expenses once you net out taxes was utilities and if you kind of dive into what was driving that, it's really been you know where we focused on reducing our utilities. We've been doing you know LED light conversions, we've been pretty aggressive on our set point control, separate metering and billing for tenants who are using above standard usage, so those are just best practices that we’re implementing and it drove almost a 6% decline in utilities that we expect to see continue throughout the year.

[Karin Ford:]

Great! And can you just comment about how much you think Forest Park is going to boost same store NOI later this year and maybe into 2020 as well?

[Robert Milligan:]

You know what Karin, I think Forest Park coming on, it's when we were talking about it before, but those on a much smaller same store pool basis. You know so the positive impact coming in is probably 20 basis points as we're looking at it, but you know we still continue to view the 2% to 3% as a good range for us as we go throughout the year.

[Karin Ford:]

Got it. And staying on Forest Park, can you talk a little more about the development opportunity there and how much excess leasing demand you are seeing at that property?

[Robert Milligan:]

I think from an overall basis you know it's with the announcement, you know we're essentially full from an MOB perspective and so you know any time you see that dynamic of a lot of energy on the campus and of full MOB’s, then you start to look at the opportunities for expansion and potential ongoing needs there. So I think that's more of a natural extension of being on a good campus and a good market and having the few simple interests.

[Karin Ford:]

And do you have any excess land available there?

[Robert Milligan:]

I think we've got some of – certainly have the ability to expand within the footprint that we own.

[Karin Ford:]

Got it. And my last question is just on the G&A front. You did $11 million this quarter. It’s running a little bit ahead of the pace that you had talked about on the last call. Should we still expect 40 to 42 for the year?

[Robert Milligan:]

Yeah, you know I think as we looked at it, the first quarter is always a little bit heavier from a G&A perspective. There are certain kind of year end activities that fall into that, but that's certainly in the range that we expect to be for the year.

[Karin Ford:]

Great, thank you.

[Operator:]

Our next questioner today will be Rich Anderson with SMBC Nikko. Please go ahead.

[Rich Anderson:]

Thanks, good morning there. So I want to get back to the Cap rate question, because I think it's kind of like being danced around a little bit by not just you, but everybody. The question was, Robert you said while we're focused on one-offs which are 5% to 6%, but how does that compare one-off you know some apples-to-apples to you know a couple years ago or a year ago. Would that number have been 5% to 5.5%? Are we seeing cap rates you know when comparing one-offs to one-offs go up; the same question for portfolios. Just curious if you could just sort of you know hit that one on the nose for me?

[Robert Milligan:]

Yeah, you know I think as we’ve looked at the acquisition, really the acquisition environment, you know all echo in the answer that we had heard earlier today. As you saw interest rates moving up, you know the logical thought process was that you would see the cap rates go up on a corresponding basis. So I think the evidence has shown that there's not been a lot of movement on the cap rates. I think what you have seen though is a change in the opportunities that are out there. So while apples-to-apples you haven't seen a lot of Cap rate movement necessarily, I think the opportunities that are there are no longer being dominated just by larger portfolios.

[Rich Anderson:]

Okay, and so what happened in 2018 that's different in 2019 from your standpoint of investing. You purchased practically nothing last year and sold 300 if memory serves, and now you are flipping that strategy this year. What changed in the marketplace to cause you know sort of that your image of 2018?

[Scott Peters:]

Well, you know we put our balance sheet back in order. I think if you remember 2017 was a big year for us and 2018 we were able to integrate the acquisitions; we were able to move the yields on the Duke portfolio that knows the company at up to 40 basis points than we were focused on and then use some of the proceeds to move our debt down to levels where we were comfortable that you know we could ebb and flow with the market place without putting ourselves in any significant jeopardy if markets would tail off or if cap rates you know stayed stubborn and stayed very low. I think we are a buyer of discipline and when we can find these types of acquisitions that add that 6 plus yield to it over a 10 month period and have good same store growth and fill in our markets, and we are in a position right now as we wanted to be in 2019 to start growing and moving forward and not standing still.

[Rich Anderson:]

Okay, fair enough. And Amanda a question to you, for 2018 how much of your leasing activity was early? That is you know not expiring in ’18, but in future years, and how do you see that changing in 2019? Do you think there'll be an increasing percentage of your leasing activity versus 2018 that will be early renewals?

[Amanda Houghton:]

So many of the requests to renew early for the larger health systems and we've seen a lot of those, probably see most of those that we will be seeing for 2019. I mean half of our renewals done in the first quarter were an early renewal with one particular tenant. So I hate to keep giving the same response, but I think it's going to vary by quarter as I look out to the next few years. And the large spaces that we have rolling, I will say that many of those health systems have already reached out to us and we are engaging in those conversations already. So whether we get those signed this year or it rolls into next year, you know time will tell, but those conversations are definitely being had right now.

[Rich Anderson:]

Okay last from me, perhaps to Scott. You know Forest Park started off a pain in the neckandnow starting intoan opportunity for you. Is that you know hindsight, physical owned facilities perhaps made them a little bit – made those hospitals a little bit different than the status quo. I’m curious if you look around your portfolio, have you been kind of on the lookout for sort of unique situations like that and if you are sort of looking to act early before something perhaps goes wrong or if there's just nothing in the portfolio that stands out as sort of “different”.

[Scott Peters:]

You know I think that's an interesting question. You know I think our – from an underwriting perspective we continue to monitor our portfolio from a hospital campus, from an activity perspective and you know I think one trend continues to be the case in healthcare is that they continues to be consolidation in changeover and in our view has been if you're in a good location and a good market with good facilities, there might be some change in ownership and operator, but that campus is going to be dynamic and importantly for us that medical office building is going to continue to be full. You know we saw that play and we are seeing that play out here with the Forest Park assets, all three of them that we’ve had. Maybe not as smoothly as you necessarily would underwriter or want to see happen, but I think the long term value continues to be there. So we continue to see that, we continue to see ownership change on the hospitals and almost all the time that's happened there is new energy, there's new capital and we do see that as new opportunities to move rate than occupancy.

[Rich Anderson:]

Okay, I'm sorry, one more quick question. Thanks for that. Any difference between cash releasing spreads off campus verses on campus and if have answered that I apologize, but just curious if there's any differential that you are seeing?

[Robert Milligan:]

No you know, we really haven't seen a big difference into leasing dynamics on or off campus. If you're well located in great locations off campus, you have just as much you know ability to move places as if you are in a good on campus location.

[Scott Peters:]

And I think that's got a little bit to do also with the tenant mix. We just put out some information on the tenant mix between on campus and off campus and if you look at the type of tenants, they are similar and so similar tenants are not going to be able to have the same type of profitability, same type of synergies and you would expect that you should get the same type of escalators.

[Rich Anderson:]

Yep okay, thanks guys.

[Operator:]

The next questioner today will be Vikram Malhotra with Morgan Stanley. Please go ahead.

[Vikram Malhotra:]

Thanks for taking the question. Just on the Forest Park asset, just curious, so I think you said rates or rents are probably higher than what you had previously; obviously the credit is better. Just curious sort of if you had those two assets sitting side-by-side with the two different tenants, sort of what's the cap rate difference, sort of thinking NAV creation.

[Robert Milligan:]

I think you know if you looked at the same assets today, one with an HTA campus, one with a one off campus, probably 50 to 00 basis points. I think when you are looking at that potentially you know it depends on the situation, but I think when we look at that we've certainly seen a 50 to 100 basis points cap rate value creation, especially given that we won those fees, simple.

[Vikram Malhotra:]

Okay, that's helpful. Just maybe a bigger picture question. I know you’ve talked about being very focused on the one off, they've always been several portfolio that have created arguably varying degree of quality. Assuming you’ve sort of had a similar cost to capital as you did in Q2 ’17 or early ’17. Can you compare and contrast theses bigger portfolio that have created the Duke and what would made you pull the trigger on say the higher quality stuff, call it like a landmark or the Hammes portfolio.

[Scott Peters:]

Well if you look at the two or three portfolios that are out there, and if you didn’t say from the period that we are back in 2017 and you saw cap rates or activity like they were then. I think the Duke portfolio has always been for five, six, seven years considered to be the primary highest quality portfolio and it was even considered at times by a number of pundits that it was the highest quality portfolio public or even private. You know because they were – obviously they were Duke, but it’s a subsection of who they were. So I think that portfolio continues and has acted and continues to perform as the best portfolio that’s been out there in the last two or three, four years. The other two are sort of very interesting, they each have attributes that are different. They don't fit into our markets like the Duke portfolio did. They don't have the same type of multi-candidate rent escalators as some of the Duke portfolio does and they don't have the ability for us to really move our platform on to them. So then you put on top of that these cap rates that are being paid for these portfolios are really -- If you looked just 12 months later, they were equivalent to a Duke portfolio that was a couple, that was a 100 basis points better probably. I don't think we would be chasing those. I think we will again – we like to fill into our markets, we like to get acquisitions that are targeted for our platform, relationship driven in the marketplace and we are and still continue to be weary of secondary markets where there is one off healthcare systems and one off MOBs and we're also consistently hesitant about areas where population growth is not something that you see coming down the road. You know I always go back to academic university concentrations, go back to where you know the highest and brightest technology individuals are moving their companies. You know healthcare is still a private paid majority private pay; that's where most of the positions get their fees from and they want insurance and that means that folks need to be paying their insurance and having jobs. So we like to 15 to 25 markets we are in. I don't think you would have seen us even if the cost to capital would have been appropriate, we would not have been after those two other portfolios.

[Vikram Malhotra:]

Okay, that's helpful. And just last one, one of your peers has been pretty active on what they call it maybe research and innovation, sort of a mix between life science and MOB, all academic oriented. Just curious, I know obviously you have the pure play MOB focus. But is that something of interest maybe longer term. Would you consider sort of having a two pronged approach to the broader call it bucket of MOBs.

[Scott Peters:]

Well I think academic university by definition is going to have that bucket that you just talked about. We have an asset in Boston, 670 that has Boston University in hospital and it's got six or seven floors and those floors are truly made up of each type of service. It’s not one floor; its teaching, its clinical, it's research and so – but the combination of the building is critical to the hospital, critical to the research that's going on there and in that particular case we'd like to have 25 more of them. Now we don't want just a one off biochemical building where you've got one user, whether it's a you know high quality user or not, I think the technology that we see today in these types of firms change so quick that the infrastructure that needed when those lease comes up is very expensive and so I think we like where we are, which is in that fringe in that area where the academic university combines with the research clinical and teaching.

[Vikram Malhotra:]

Great! And so I just want one clarification Robert, I think you mentioned to a prior question sort of no specific situations that you may be monitoring in terms of similar to what happened at Forest Park, but just more broadly anything on the watch list that you're monitoring, we should be aware of system. You talked about consolidation; just is there any specific location or asset that you may be monitoring.

[Robert Milligan:]

You know I think as we look across our portfolio, you know we're on a number of different hospital campuses. I think that's one of the benefits of our size and diversification is that we're very broadly diversified. So there's always different campuses that are at various stages but you know I think as we look across it we're very comfortable that there's not anything material that stands out as a as necessarily want good big one office you.

[Vikram Malhotra:]

Okay, great, thank you.

[Operator:]

[Operator Instructions]. The next questioner today will be Lukas Hartwich with Green Street Advisors. Please go ahead.

[Lukas Hartwich:]

Thanks. Good morning. What was the cap rate for the Westport Center of acquisition?

[Robert Milligan:]

That was around that 5,7 cap rate as we looked at it. And you know I think that’s pretty consistent again. We are going to blend out with 5,7 area for kind of all that we’ve announced there.

[Lukas Hartwich:]

Okay, and that’s 5, 7 because the occupancy was like 82% or is that a stabilizer.

[Robert Milligan:]

No, that's correct. That's on in place, so we would expect that to certainly have the opportunity to increase given for occupancy gains rent improvement. And it’s also before our ability to add incremental synergies from our property management platform.

[Lukas Hartwich:]

Great! And then I know there's been a bunch of questions on this, but I got one more in terms of the acquisition under contract. Can you give us a sense of the quality relative to the kind of your existing portfolio, does it stack up like on par, it is slightly above, slightly below. Just trying to like put some context in that 5/7 cap rate versus the existing portfolio?

[Robert Milligan:]

Well, I think as we are looking to buy, you know we are looking to buy assets that fit in with the quality of our portfolio, you know they fit in with our market and we can add just to the existing portfolio and not see any real differential there.

[Scott Peters:]

I think there's a philosophy, you know we've been thinking through how we as a company want to go forward and how to grow and obviously the challenge is to find the right assets. But there is also a challenge out there that there's a differentiation of assets and even in our peers, there's a differentiation and I think that our view is that if you put together the best quality portfolio and that portfolio represents performance and that's the important part of a quality portfolio, location tenant mix, quality of asset and then you combine that with your geographic location. I don't think that's something you want to anticipate. I think that that's in fact something that you continue to pound the table on and that’s something that investors continue to look at not over monster or couple of months, but years over years where they say this is a portfolio that has performed and its performing in locations, and those locations are getting more valuable and what they didn't do during the period of pause or period of difficulty is go out and somehow infused a bunch of inferior assets into that portfolio. So we're very cognizant of the investment guidance that we get from our investment committee that we want to keep the quality of this portfolio within that range where we feel it is today.

[Lukas Hartwich:]

That's really helpful, thank you.

[Operator:]

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

[Scott Peters:]

Well, thank you everybody for joining us and we look forward to moving forward and talking again at the next earnings call. Thank you.

[Operator:]

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