Healthcare Trust of America, Inc.
Q2 2018 Earnings Call Transcript

Published: 3 Aug 2018

[Operator:]

Good day, and welcome to the Healthcare Trust of America Second Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] And please note that today's event is being recorded. I would now like to turn the conference over to CEO, Scott Peters (sic). Please go ahead.

[Caroline Chiodo:]

Thank you, and welcome to Healthcare Trust of America's second quarter 2018 earnings call. We filed our earnings release and our financial supplement yesterday after the market close. These documents can be found on in the Investor Relations section of our Web site 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 future results could materially differ from our current expectations. For a detailed description on potential risks, please refer to our SEC filings, which can be found in the Investor Relations section of our Web site. 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's second quarter earnings conference call. Joining me on the call today are Robert Milligan, our Chief Financial Officer; and Amanda Houghton, our Executive Vice President of Asset Management. As we report the second quarter results for HTA, our portfolio fundamentals remain solid. We continue to execute on our 2018 strategic business plans, and private capital demand for MOB assets remain strong. Since our founding in 2006, we identified medical office as a unique sector of core critical real estate, where location, building quality, and service matters; attended by one of the fastest-growing sectors in the U.S. for the next 20 years, outpatient healthcare. Outpatient demand continues to increase as the population ages, and cares delivered in more convenient and cost-effective locations. The real estate characteristics are similar to core traditional office of 20 to 30 years ago, where stable tendency, growing space needs, and growing rents from a diverse group of tenants in and related to the healthcare industry. We've always believed that the medical office industry has been under-owned and under-invested in with less than 20% owned by institutional investors. And that with additional opportunities, capital would flow into the sector and decrease the spread between traditional office and medical office pricing. The good news is that we've seen this come true with current institutional investors coming from both core and traditional real estate funds, which continues to drive and stabilize pricing for high quality MOBs in the 4.5 to 5.5 range. As such, we have positioned our company to take advantage of just not the core asset value appreciation, but also the benefit of combining high quality assets with the best-in-class asset management platform that can uniquely provide property management, building services, leasing, and development in our key markets. Our long-term view remains that the MOB sector will produce strong and consistent returns going forward. Our strategic focus of

[Amanda Houghton:]

Thanks, Scott. Our leasing and management teams were very active during the quarter as we met increased demand and activity in our key gateway market. On the leasing front, we entered into a million square feet of new and renewal leases during the quarter. Tenant retention remained high at 86% and re-leasing spreads on renewal leasing remained strong, averaging 1.7% year-to-date. Excluding one lease, which we had underwritten to roll down upon expiration, our renewal spreads would've been over 3% in the quarter. We continue to believe re-leasing spreads should remain in the 2% to 3% level in the back half of the year. Turning to new leasing, our nearly 200,000 square feet of new lease assigned were pretty evenly spread throughout a number of our key markets including Houston, Miami, El Paso and Phoenix. On a year-over-year basis, we saw continued strengths as our leased percent grew 30 basis points over last year to 92% and our occupied percent remained stable. Leasing metrics continued to improve as we're generally seeing demand from larger, well-established tenants and position groups where a 3% rental escalator is commonplace and little to no free rent is expected in our stronger markets. Throughout the portfolio, we continue to see demand for our longer term leases with the average term for new leases this quarter up to 7.8 years. Given the leased but not occupied rate, we continue to see continued revenue growth benefits as these leased spaces are built out and are converted to fully paying and occupied spaces towards the end of the year. Looking into the coming quarters, the Forest Park Dallas campus continues to be a great source of growth. Year-to-date, we assigned over 41,000 square feet on the Dallas campus and we continue to have approximately 70,000 square feet at various stags of negotiation. The hospital's budget for the conversion of this hospital to a specialty use has now been approved. And as that use is made public, we expect to see conversion of these prospects into rent-paying tenants. Turning to expenses, expense savings on a year-over-year and quarter-over-quarter basis are substantial to do largely to the savings HTA generated due to the economies of scale we achieved through the Duke transactions. I'll now turn the call over to Robert to discuss financials.

[Robert Milligan:]

Thanks, Amanda. We ended the quarter in an improved financial position as we executed on our strategic business plan despite impacts to public markets and volatility with interest rates. To recap, the quarterly results, second quarter normalized FFO per diluted share was $0.41, an increase of 5.1% year-over-year. Funds available for distribution increased 23.3% year-over-year to $74.1 million and our dividend coverage is in the mid 80% range. Same-store cash NOI was 2.6% compared to second quarter of 2017 and 3.1% excluding the impact of Forest Park Dallas. Base revenue was up 2.1% year-over-year and rental margin improved 40 basis points. Our same-store portfolio pool is a sound representation of the total portfolio. It generally includes all properties that had been owned by us for the last five quarters. We have historically only excluded properties that we intend for sale in the near-term. For us, that requires property meet three key criteria

[Scott Peters:]

Thank you, Robert. Before we turn to questions and answers, I would like to take a moment to address concerns that were raised this quarter related to non-GAAP same-store growth numbers and the consistency of our performance since we became public in 2012. We've always been very confident in our disclosures and results. In addition, our independent board in consultation with our internal and external auditors took this opportunity to diligently review our disclosures, processes and results. They found our accounting was consistently and accurately applied and reported on both a quarterly and annual basis. As a result, they see no additional actions or views that are warranted or required. With that, I will open it up to questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Okay, the first question comes from Karin Ford with MUFG Securities. Please go ahead.

[Karin Ford:]

Hello, good morning. Sorry about that, I was no mute. Just wanted to ask about the Greenville sale, did you consider taking on a joint venture partner for that portfolio yourself? And can you talk about what else might be under consideration for sale, how many -- what type -- how do you use a pool there of assets that are in non-core markets?

[Scott Peters:]

Good morning. And when we looked at the Greenville transaction, I think a little bit of context should be applied to that. We felt that this was a great time as a company, as we always do, and we've talked to investors about -- we always evaluate our assets, and we had bought that in 2009, it was one of the first transactions with Healthcare Systems. We did it as a non-treated REIT. It was a triple net lease. We did not have a management platform, asset management platform in place, hadn't even started one at the time. And escalators were 2%, and at the time 2% escalators were considered to be quite favorable when the market -- when MOBs were really flat to 1% at the time. And so, when we looked at that today, we felt that it had pretty much reached what we believed were its valuations. We had a five-year lease on it. The buildings are 20 years, 25 years old. It's a good healthcare system, but it's triple net lease, it needed capital. And so, when we had the opportunity, and when I say we had the opportunity, I think that's the key word, we were approached about if we had any inclination to sell that. And we said, well, at the right price. We've always said that on calls. And I firmly believe that you always have to look at valuations when someone approaches you. And we did that. And we thought it was a great transaction for us, maximize shareholder value, gives us flexibility and options going forward here in today's market both on acquisitions in our key markets, but also we just initiated a $300 million stock purchase plan, so we have opportunities there if we need to utilize it. So we looked at that as an opportunistic transaction. So that was not in our normal what we would have talked about six months ago as our assets that necessarily we were looking to redeploy. So I think we're still at that $100 million to $150 million to $200 million of assets that are in truly non-core markets. And when we say Greenville, it wasn't core; I would say Greenville is a very constrained market. There's not much more you're going to buy in Greenville. It's really tied to the healthcare system. And for us, now, it's all about the integrated platform. We want to be able to have multi-tenanted buildings, we want to be able to utilize our asset management platform, leasing platform engineer, and we want to utilize our development platform. So we think we can turnaround and redeploy that more accretively for shareholders over the next 10 years, just like we did at Greenville for the last nine.

[Karin Ford:]

Great, thanks for that. Next question is, just -- it sounded like from your remarks, Scott, that the stock has recovered here, and maybe isn't as attractive to you to repurchase at current levels. Is that the case? And can you talk about how you weigh [ph] the decision on how to allocate capital between acquisitions and repurchases?

[Scott Peters:]

Well, a couple of things. We took advantage of the opportunity earlier in the quarter. And as Robert, I think mentioned in his comments, the stock move back up. I think we look at it from simply two aspects. One, is it accretive, I mean is there a long-term value, and buying back stock is not going to move the needle tremendously because you really can't buy back probably enough to do that, but you certainly can make an accretive investment if you have cash on the balance sheet or instead of an acquisition. So I think when we look at it, we look at how do we continue to grow shareholder value. There is two or three metrics. One, recycling assets and moving it into markets where we can get higher growth, we can get better escalators, utilize our platform, but also number two, in a market that we find ourselves in right now if that is accretive to us and if there's an opportunity to utilize our share repurchase plan, I think our board is very open to those suggestions.

[Karin Ford:]

Thanks. And then last question, thank you for all of the detail on the same-store pool composition, can you remind us should we expect the Duke portfolio to enter the same-store pool in the second-half of the year and how do you think it's going to impact the same-store growth?

[Robert Milligan:]

Yes, Karin, this is Robert. And you will see it enter the pool in the third quarter. Our view has been the Duke portfolio was very similar to our existing portfolio. We were certainly able to get a significant amount of synergies from the property management and building services platform very early on. So, our expectation is really that you'd see just further consistent growth.

[Karin Ford:]

Great, thank you.

[Operator:]

Okay, the next question comes from Jonathan Hughes with Raymond James. Please go ahead.

[Jonathan Hughes:]

Hey, good morning. Happy Friday, and thanks for taking my questions. You've been very consistent talking about narrowing your focus to 20, 25 key markets or so, and Greenville was one of those markets with a million square feet, so wouldn't have thought exiting there. It was likely, and I know you just talked about why you sold the portfolio of assets announced yesterday, but I guess my question is why not just sell the whole one million square feet Greenville portfolio since that sounds like a market that you can't really expand in anymore, it didn't have management platform there, I'm just curious why not sell more in that market?

[Robert Milligan:]

So we actually have -- it's interesting, we really looked at as a portfolio overall, one of the reasons why Greenville, good market, but Scott mentioned, we really don't have a property management building services platform there, it's 99% occupied. So there wasn't a whole lot of value add left that we thought our platform could add. So we actually have completely exited the market. The transaction we announced yesterday morning with the 16 MOBs in the $285 million, we certainly executed on that. But we also did end up selling the last remaining property, and we ended up closing on that yesterday as well. So we're completely out of the market, and it continues to allow us to focus our operations. And I think you'll see us exit one or two other markets by the end of the year as well, just inability to gain the scale to really utilize our operating platform that does give us that incremental value.

[Jonathan Hughes:]

Okay, and then I guess this one for you Robert or Amanda but looking at the expense growth or rather decline in the same-store pool is a pretty big drop and I know you said in scale earlier as the main driver, can you just give us some more detail there, it just seems like an awfully big decline?

[Robert Milligan:]

I think first overall, we are seeing expense benefits and Amanda will talk a little bit about where but we did have a true-up with the health system on some shared services over several years where we're able to successfully negotiate those expenses down and come to a settlement, so that's about half the expense savings that we've seen but Amanda will talk about the rest of the operational benefits there.

[Amanda Houghton:]

Sure. The remainder was largely our maintenance services, so that's where engineers are performing services in-house and allow using these third-parties.

[Jonathan Hughes:]

Okay, so that half from maybe one-time non-recurring and then half from your actual the scale of your platform?

[Amanda Houghton:]

Yes.

[Jonathan Hughes:]

Okay, all right. And then one more higher level one and I'll jump off but Scott earlier you've made the argument that MOBs should be comped to Core officer real estate and I have made that argument for a while now for the record, I don't disagree, I think we're finally there though given where some recent deals the traded but when you look at core real estate sectors among the REITS, those stocks have traded some of the largest discounts to private market values for years now while the more niche sectors that MOBs used to be lumped in trade at premiums to NAV with a combinative cost of capital to grow, I guess the question is now that you are a core asset class and the private markets really found the sector in a meaningful way, does future growth for HTA look more like capital recycling versus expanding the balance sheet?

[Scott Peters:]

No, I think there continues to be opportunities for acquisitions, we're in our key markets and I think what we did with the transaction last year on the Duke transaction, besides the ability to get such high quality assets and they really were and they allowed us to get the concentration in our markets for our asset management platform but we added the development side of the equation and so we talked about the fact that we have now three in process, 250,000 square feet, we're actively in discussions with folks to be able to continue to do that and those cap rates are 100 to 150 basis points higher than what you would traditionally have to buy in that market, there is activity going on, we are I think that that's the biggest change or second biggest change in HTA in the last 12 months is our ability to now be an integrated platform for healthcare system or for physician group looking for a building where it's multi-tenanted and so I think that's an opportunity to grow that we didn't have, but we are seeing opportunities. I think we're being selective like everybody is in the public marketplace right now but if you look at Greenville and I think this is one of the points that Robert and I talked about when we were looking at and evaluating this was that if you were looking at office in Greenville, the pricing for office in Greenville is probably 200, 300 basis points higher than what the pricing was for the MOBs. If that's not sort of an indication that the quality of the MOB, the quality of the income stream that represents that sort of investment, I think it's now become very clear to folks that these are very high quality long-term value creation assets and that they're going to be core ownership for quite some time, so I think it's just starting, I think again 20% is only owned and as we all know once asset class gets in favor, it certainly moves much higher from an ownership perspective.

[Jonathan Hughes:]

Okay, that's great color. I appreciate it. I will jump off, thanks for the time.

[Operator:]

Okay. The next question comes from Rich Anderson with Mizuho Securities. Please go ahead.

[Rich Anderson:]

Thanks, good morning. So Scott, you mentioned I think looking at 2% to 3% same-store NOI growth for 2018, is there again below the kind of that 3% threshold you've been able to achieve over the past many quarters, is there anything about the business that's moderating or you just sort of just being not overly conservative but just sort of setting a realistic target for the company?

[Scott Peters:]

Well, we started 2018 and I think we had been 2.5 to 3.5 for a number of years or certainly last year, we went to two to three basically because we thought let's be a little cautious, let's integrate the portfolio with the Duke side of the equation, I think adding one plus one here made a much solid two, didn't necessarily when you got a 3%, two companies put together you should get three. So I think we're if you took Forest Park out of our numbers, the last two quarters we were north of 3% and in Forest Park it's getting traction and in fact we're seeing some traction it just happened for us recently, which is going to show up in the third quarter, which is good for us, which we've anticipated, and talked to people about third, fourth quarter was going to be positive. So I think that the portfolio continues to perform in the traditional side of the equation that you've seen over the last five years. I don't see anything right now from an infrastructure position that would change those sort of fundamentals.

[Rich Anderson:]

Okay. Second question is, now you have done two deal with public REITs one on the buy side, one on the sell side. Curious, if you think there could be more in a way of sort of asset trading amongst the public REITs or should we not read too much into those two large deals in your recent history?

[Scott Peters:]

Well, you do tend to point out some things that I don't think about. But yes, this is the second one, I mean Duke was a public company and obviously HCP, which we just did with. This was a great opportunity and I think it was a win-win. And I think I hope that HCP talked that way about it because I think it was. I think their joint venture was looking for a little bit different type of returns than what we were looking for; when we looked at the opportunity a year ago when the healthcare system had 5.5 years left on the least. Our desires for yield was different than their desires for rent. And so, we were at disagreement, quite frankly, what HCP was able to do was bring equity to the table that was acceptable with something that they wanted to do and in our term, we got to recycle those assets but we as a company I think we were looking and we were happy to work with and we had a very good experience with HCP I think Duke was a very good experience. So if the right transaction happens then, right opportunity happens. We are happy to do something like that.

[Rich Anderson:]

All right and so do you find yourself having more conversation with sort of public companies as oppose to private equity or that has not changed much?

[Scott Peters:]

It hasn't changed much I mean, it's yes it hasn't changed much.

[Rich Anderson:]

Okay. Fair enough. Thanks very much. That's all I got.

[Operator:]

The next question comes from Todd Stender with Wells Fargo. Please go ahead.

[Todd Stender:]

Hi, thanks. Probably for Robert, you mentioned that there is a $142 million of mortgage that you'll pay down, is that on the Greenville assets or that's on another properties?

[Robert Milligan:]

That's actually a combination of mortgage debt on there. There is about $20 million specifically associated with the Greenville mortgage or Greenville properties. From a timing perspective, we will close that the same time as we closed the transaction. We also payoff another $50 million of mortgages associated with other properties about that same time. Then we've got about a $70 million mortgage that will payoff on October 1, once the prepayment window opens up on that. So from the timing perspective, it's really a combination of properties that are securing these number of different loans and the timing is probably $70 million half of that at the time we closed on the transaction, half on October 1.

[Todd Stender:]

It sounds like debt pay down like you mentioned, what are the coupons on that debt because ultimately I'm going with about how much dilution can we expect just from timing and then deploying those proceeds?

[Robert Milligan:]

Yes, so overall it's blended about five to three interest rate on that. So it's actually pretty earnings neutral as we look to de-lever and use the proceeds on that basis.

[Todd Stender:]

Okay. Thanks. And then, looking at tenant recoveries I think we are used to that being a tailwind for you guys specifically in Q2 it's down about 9%, can you just talk about the quarter specifically that may not be a durable as income as the rental income but just talk about maybe what we can expect going forward from that contribution or lack of contribution at the same store.

[Robert Milligan:]

Well, the tenant reimbursements is really contractual in nature and so it's durable as your base rent is and so really what you see is that it follows through with our expenses. So when you saw our expenses go down significant year-over-year again partly because we had a large drop with a health system on some sharing services that when took it down but then also from additional cost savings. You should see the tenant reimbursements go down, that's actually a good thing, as we look at our tenants paying less money, it's less money out of their pocket but it's certainly not affecting our NOI in anyway.

[Todd Stender:]

Okay, and then last question. You completed the Memorial Hermann project Q2. There has been some transactions in that private market regarding Memorial Hermann, can you talk about what your development yield expectation was on that project and maybe just compare that with some cap rates you're hearing in the market?

[Scott Peters:]

I think from a yield perspective, the projects that we're developing now are all in the certainly the six to seven range, so from a yield on cost perspective, it certainly would hit that bogey there, that was one that we acquired from Duke and so I think that's what's interesting about the whole transaction now is you're looking at our total 2017 investments, we talked a lot about how we pushed the cap rates lower there but they're now yielding 53 and you're certainly seeing those transactions of similar tenancy with similar durability of income now going into mid-high 4s.

[Todd Stender:]

Can you still enter at those high development yields 6 to 7 because that would be a pretty good arbitrage of what's transacting out there?

[Robert Milligan:]

You know Todd, it's interesting. As I've talked about I think the biggest pleasant surprise of perhaps the one unanticipated result of the Duke transaction has been the development opportunities, with the relationships that we have in market over the last six months, we've had an opportunity to talk to healthcare systems and the RFP process and we're not necessarily looking for to go out thing on development opportunities and so we are having conversations and I would say the yield that we're discussing with them is the 6 to 7 and traditionally I would say that it's probably about 6.25 to 6.5. Now we're also having an opportunity when we're looking at redevelopment which we're also looking at in some of our assets because we have the ability now to be more efficient and have fuller discussions and some of those yields are much closer to 7, so that's a great opportunity for us here in the next 12 to 18 months to start bringing some very accretive earnings to the bottom line.

[Todd Stender:]

Okay, thank you.

[Operator:]

Okay. The next question comes from John Kim with BMO Capital Markets. Please go ahead.

[John Kim:]

Thank you. I think in your prepared remarks, Amanda mentioned that the renewal leasing spreads were strong at 1.7%, I don't really want to stress too much on that word strong but I'm wondering when you're buying MOB today whether it's you or someone else at a 5% cap rate right around. Are you underwriting 2% renewal growth or something higher than that?

[Amanda Houghton:]

So our releasing spread, I will just kind of reiterate, the intention of the comments that 1.7% that did include one lease at a particular building that we acquired from them that we had underwritten to roll down and excluding that we would have been right around that 3%, so we continue to think that our releasing spreads are strong and I think on from an underwriting perspective we invest in markets that have inherent gross. So long as we're underwriting market rent and assuming that the building has rents that approximate the market rent Yes, we are assuming that they're going to continue to increase and consistent with the growth of that market and we like markets that are growing 3% and 4% a year.

[Scott Peters:]

One of the things that we're paying attention to and this is something that we've kind of looked at from a sector perspective and a macro view on lease spreads is that my view has always been and I think that at least spread today is 2% to 3% I think if you add markets, if you're in a strong multi tenant building if you have a strong tenant and you've got 3% escalators with inherent in their lease for three, five, seven years, you're going to get that 2% to 3% rent spread in today's marketplace. That's up from what it has been or what it was three, four years ago. Now, I think if you look at that the second segment of that is that how much capital are you providing for the tenant above 3%, I think you're starting to buy rent growth, additional TI, additional capital you're the rent is showing that sort of investment that you're giving to the tenant. We've tried to maintain a very consistent capital allocation from our TI allocations in our new leasing, so when we look at it we try to be very consistent we like to see the tenant put some of their own dollars into the space besides just our dollars and so that's one of the things that we look at is trying to get the tenant to put in some of their dollars. We could probably get a higher rent spread if we were prepared to put in additional dollars above what we've been doing traditionally.

[John Kim:]

Sure, but over the last 10 years or so the cap rates have come down from MOBs and the buyer competition has changed which include re-fight this fall but also private equity firms. And I am just wondering if the new ownership changes the landscape as far as their expectations to push rent little bit higher?

[Robert Milligan:]

I think 2% to 3% is about what you can expect. If you try to push it much further than that, I think that that's probably not market. Now a year from now, two years from now, if inflation runs through, is that different? I don't know. But we're not seeing what I would consider to be outsized rent increases in any of the sectors from an MOB perspective.

[Scott Peters:]

And I think, John, what we would just add is that when you go back and actually back test some of the comparisons of rent growth versus total returns over time, you've seen that over the course of a full cycle many times MOBs with steady dependable 2% to 3% rent growth year after year after year actually ends up with just as much growth as kind of traditional office has without all the volatility that you might see. So I think that's why you are seeing some of the core buyers start to come in. You get to the same place with a lot less volatility.

[John Kim:]

On your new share repurchase program of $300 million, why did you decide to put the new place when the previous one was just installed and you only used about $9 million of that $100 million of the prior one?

[Scott Peters:]

Right. Well, we had talked about this I think prior, that would have been in place for a number of years. I mean think that have been placed -- a $100 million was place when we went public. We were a much smaller company. Certainly, our balance sheet was far less able to handle opportunity to use our options. A company of our size now five years being public much larger I think that's more appropriate size wise. We have the flexibility and obviously we have the options to be able to utilize our balance sheet to do. So it's just more appropriate to do it. And we talked about doing it. And what we like to do here is be pretty transparent about how we view our company and how we view the business. And it was just another step to take.

[John Kim:]

Okay. Thank you.

[Operator:]

Okay. The next question comes from Chad Vanacore with Stifel. Please go ahead.

[Chad Vanacore:]

Good morning. So on dispositions you formally targeted $25 million to $100 million, now you have got this incremental Greenville portfolio sale that's getting closed to $300 million. Robert, you mentioned exiting maybe one or two markets by the end of the year. So how should we think about total disposition target and then timing through the year?

[Robert Milligan:]

I think from a total perspective, we talked about $50 million more. So $50 million to $60 million under current contract that allows us to exit kind of two smaller markets again really with the focus of saying our operating platform adds lot of value especially when it's concentrated and focused on markets where we have economies of scale. So really looking to take advantage of getting out of a handful of smaller markets where we don't have that present. I think the cap rates are attractive.

[Scott Peters:]

And I would kind of followup from Robert's thought process is that we're not necessarily selling assets simply because they are poor assets or assets that are in distress or underperforming. What we are trying to do and I think this is the time period and I talked about this early in the year which is at this particular time in the stage of the ebb and flow of REITs, I think it's a time to always prune your portfolio. It's time to improve the value of your long-term income revenue stream from rent income, pick your markets, pick your critical mass and utilize our platform. So when we talk about recycling assets, other folks may be talking about well, we are getting out of assets we don't like. We are getting out of assets and class that's not performing well or we are getting out something that is causing issues. I think our purpose and our presentation to our board has always been here's our strategic plan, here is where we want to be the next 10 years, here's where we want to get critical mass, develop our asset management platform. And we may be selling some very good assets at very strong cap rates and other people will get who buy there will get good assets. But again improve the quality of our assets. Improve the focus of where we are spending our time as a business and then continue to grow the portfolio over the next five - seven years.

[Chad Vanacore:]

All right, then you up the share repurchase authorization from $100 million to $300 million, so presumably with the asset sales you should have some capital availability and -- potential timing of share repurchase?

[Scott Peters:]

Obviously, we don't comment on things like that. All I can say is that we have the flexibility. We have a very strong balance sheet. I think we put ourselves in a position to both -- to redeploy into development at positive cash spreads. We have the ability now to acquire in markets our key markets where we can add not only getting into cap rates that are fair and attractive but also add our asset management platform. And now we have another tool and that tool is also one which is stock repurchase plan, should we make a decision that it's appropriate to do so.

[Chad Vanacore:]

All right. Well, related on the capital side, you had originally had a leverage target of around 5.5 times by the end of the year. Does that stay in place?

[Robert Milligan:]

Yes, I think we are certainly working our way towards that. We tick down to 5.8 times debt to EBITDA here at the end of the quarter with the targeted debt repayment with proceeds from the Greenville sale that's going to move us pretty darn close to where we are trying to get to.

[Chad Vanacore:]

All right, thanks.

[Operator:]

And the next question comes from Dan Bernstein with Capital One. Please go ahead.

[Dan Bernstein:]

Hi, how are you? Little bit better about Greenville, but have a question on that which is did you guys actually consider maybe doing the joint venture yourself with private equity? I mean I understand the triple net nature didn't work with your platform, but it's still good asset. Did you guys think about doing a JV with that? And maybe trying to build up a joint venture capital arm that would support your business as well?

[Scott Peters:]

Well, going back to our thought process is that Greenville we like the utilization of our asset management platform. And we think it brings additional value to whatever we do whether that would be owning an asset 100% or participating in a joint venture with someone who felt that and gave us the credit and the economics of that strength that we bring. In Greenville, I think there were two things. Number one, we were not going to get that -- those economics because it was triple net lease. Number two as I talked about earlier, we thought that the economics of that transaction had maximized itself for us. I was not looking to do a transaction that would lower the yield in a renegotiation with the tenant in that particular market. Market is a good market, but we were very opportunistic in 2009 when we bought it. I think we were very opportunistic in 2018 when we sold it. I think the key when you look at assets and you look at a portfolio is to maximize value. Don't fall in love with an asset. You don't fall in love something. What you do is you look at the economics. And these were older assets. They needed additional capital. The leases were rolling. And I think that the yield that the equity was willing to accept was probably some it we weren't willing to renegotiate down to.

[Dan Bernstein:]

Okay. Because even if you look to 50

[Scott Peters:]

Yes. I don't think that the next -- and again I don't want to I think it was a win-win transaction, but I think that we are better able to get greater yields with the $285 million or whatever portion of that we would have gotten from the JV redeploying it in development or in acquisitions within key markets where we use our platform, then we would keeping it there for the next five to seven years. So it's where do I get the most yield for the dollar that I am going to buy.

[Dan Bernstein:]

Okay. You also have a 1.8% of base rents expiring in '19 and once you get over what those expirations were, what those -- able to be mark-to-market higher? What kind of your expectations are in the re-leasing there?

[Amanda Houghton:]

So we are typically 12 months out on of our renewals. So we are ahead of at least half of the 11.8% that's rolling next year. And again just to reiterate, we continue to think that 3% re-leasing spread that's something that's very doable for our portfolio. As those leases roll, we expect to continue get right on there on the re-leasing spreads.

[Scott Peters:]

When we look at 2019, we like where we see occupancy and we like where we see rents. And I think that as we mentioned earlier, 2% to 3% same-store growth but also we are seeing the consistency that Amanda talked about on renewals. And we don't move tenants on renewals. I mean we -- if there is a lease that's in the market, we deal with that tenant. We don't move them within buildings or anything like that. So, we try to be very forthright and get a real good view of what we are looking at. And 2019 seems to be very consistent for us.

[Dan Bernstein:]

Okay, one more last question and I will hop off. It sounds like you're getting some momentum on the development side, you kind of said $100 million, $200 million at year-end development, should we be thinking you could do more than that as you go forward is that kind of part of the strategic plan or would you want to keep it still to that $200 million kind of your investment in development and be selective?

[Scott Peters:]

I think right now, I would say that that's still a very comfortable number for us, MOB development is different, I've been in development over the years and in the MOB side, if it's 100% occupied or 90% occupied, you've got to lease with the credit Healthcare System, you know what your timeline to deliver the asset is, you really remove the lot of the risk. And so I think that as we continue to move through the latter half of this year by the fourth quarter or by the third quarter conference call, I think we'll be able to give you a little more insight into where we see 2019 and 2020. As I mentioned, we are having what I considered very active and good conversations with some folks about the opportunity to do that but we're not into the building spec, we're not in the building something with a lot of risk or for an indefinite delivery time. So, our goal, our discipline is make sure it's defined, make sure that the occupancy is there, make sure the credit is there and we'll have a better insight I think in the next 90 to 120 days.

[Dan Bernstein:]

It sounds good. I appreciate all the color, thank you.

[Scott Peters:]

The next question comes from Vikram Malhotra with Morgan Stanley. Please go ahead.

[Vikram Malhotra:]

Thanks for taking the question. Now only I joined and sorry if you had already talked about this but this first, you could have just give us an update on reminder on what's going on with the hospital there and give us a sense of timing for kind of lease-up as well as where things are versus supplier?

[Scott Peters:]

So from a part perspective, we ended the year with 100,000 square feet vacancy, most of that had rolled off in the first three quarters of last year. So we're 41,000 square feet leased to-date with about 70,000 square feet of activity right now in various stages and the hospital has received its budgeted approvals to move forward with its conversion to the specialty hospitals that we anticipate, that was a key kind of milestone for them and so we expect that to be announced here anytime in the near future.

[Robert Milligan:]

And we are seeing some activity larger leases that indicated they are moving forward in, so we're we feel very good about the timeline that we talked about in regards to HTA in the but we see as the lease-up over the next six months for those two assets.

[Vikram Malhotra:]

[Indiscernible]

[Robert Milligan:]

You're kind of breaking up a little bit, Vikram, but I think we certainly were not going to get ahead of whatever HTA is going to announce from the specialty hospital itself. I think we have a good indication obviously internally and in the marketplace, but we're not going to get ahead of the hospital itself. But the rents we're seeing are very strong, they're 30%, 40% higher than our portfolio average, I think we're at $26, $27 net rents, so very strong rents that we're asking and receiving given the quality of the real estate there.

[Vikram Malhotra:]

Okay, so just to clarify so is that 30% higher than what you were previously getting at the building or that's 30% higher than your portfolio average?

[Robert Milligan:]

It's been pretty consistent with what we were previously getting but that rent is 30% to 40% higher than our portfolio average.

[Vikram Malhotra:]

Okay, got it. And then just I want to check on the other smaller markets that you maybe considering where you might not have scale, could you maybe just talk about some of the markets where you might at some point in the future decide you just want to exit completely?

[Robert Milligan:]

Well, I think without getting too far ahead of ourselves, I will give you some view of how we look at these markets, I mean first of all is it scale that we can get, is it a market that we think is driven by the academic university concentration of the new attraction of jobs and so forth but we recently sold out Milwaukee, we did some sales in Milwaukee and that's been something that we've been pretty that's not a market that we know that well that was again that was an acquisition on a triple net basis from the health care system early very early in our history and it was there really as a protection against the economy that we were seeing in 2008, 2009 and 2010 when we did that transaction. So I would think that that's a market that you wouldn't see as move into but instead probably move out of. We have we were not big in the Chicago area I mean that's something that's been very tough for us to underwrite there's been portfolios there that have come to market that we just haven't felt that we were the best choice to own or that there's necessarily the rewards over the next five, seven years would be there and in the smaller markets I mean we bought when we were getting our size we were buying portfolios and so we've gotten off to trying to get out of any one off assets. So those are the things that we're doing and again it's probably $100 million to $150 million of those type of assets that are good assets but not what we want to build a long-term critical mass concentration of what we have and what we own over the next five years.

[Vikram Malhotra:]

Great thank you.

[Operator:]

[Operator Instructions] The next question comes from Mike Mueller with J.P. Morgan. Please go ahead.

[Mike Mueller:]

Yes, hi just quick question on the development pipeline, see about that next $100 million to $200 million of opportunities and you're talking about and what portion of that are you kind of coming up with a development in court reaching out to prospective tenants for it versus getting reverse increase from different systems wanting to build in a certain location.

[Scott Peters:]

Well and this is again where I kind of mentioned give us three or four months that do transaction with a year ago. It takes a while to integrate, I think it took us a while to really recognize as a management team because we have a little bit different organization here at HAD, where you know most of our leasing folks have been with us five or six seven years and we've got three or four key leasing individuals who head up each of the regions there's always obviously the management team, Amanda Caroline and Robert myself around talking to health care systems. And so I would say that 90% of what we have been talking to over the last six months have been conversations that have come to us. We have not yet gone to the next phase and next phase would be and I don't think that next phase is in the next 12 months. I think actually that next phase is a ways away because we have a lot of opportunity in a lot. We have opportunity with the relationships we have now in the markets we have that we can just take those to conclusion where will be a very successful and I think fill that development side of the equation that we've been talking to you about which would add in 2019, 2020. I think as you get into 2022, 2023, maybe in fact that is where we would as a company look to go out and make new relationships but the relationships traditionally come from the ownership of the and asked that the relationship with the tenants or a longer term involvement with the real estate sector because a lot of the real estate folks at the Healthcare systems they move around and so they know you, someone moves from one Healthcare system to another Healthcare system and you now have an opportunity with that new Healthcare system that you may not have had before that per person might have moved and so we're trying to take advantage of those relationships. So we're very happy with the fact that most of what we've seen right now is just handling conversations that have come into us or when we've sat down with someone we know his name brought it up.

[Mike Mueller:]

Got it. Okay, that's helpful. Thank you.

[Operator:]

Okay. Seeing no further questions in the queue, this concludes our question and answer session. I would like to turn the conference back over to Scott Peters for any closing remarks.

[Scott Peters:]

Well, I'd like to thank everybody for joining us today, and I look forward to seeing you over the next two or three months as we get out in the markets and talk to folks. Thank you.

[Operator:]

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