Healthcare Trust of America, Inc.
Q4 2018 Earnings Call Transcript

Published: 15 Feb 2019

[Operator:]

Good morning, and welcome to the Healthcare Trust of America Fourth 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] Please note this event is being recorded. I would now like to turn the conference over to Caroline Chiodo, Senior Vice President of Finance. Please go ahead.

[Caroline Chiodo:]

Thank you, and welcome to the Healthcare Trust of America's fourth quarter 2018 earnings call. We filed our earnings release and our financial supplement yesterday after the close. 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:]

Thank you and good morning, and thank you for joining us today for Healthcare Trust of America's fourth quarter and full year 2018 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 with a balance sheet, portfolio, leasing and property management platform, and development platform that management believes is extremely well-positioned to deliver growth and shareholder returns over the next three to five years. Our focused, disciplined, and strategic investment strategy has resulted in HTA becoming the largest best-in-class owner of medical office buildings in the U.S. HTA has accumulated its irreplaceable portfolio located in key, high growth markets over the last 10 years while also delivering 5% annual FFO growth since 2012 while at the same time maintaining a conservative, disciplined, investment-grade balance sheet. Our full-service leasing and property management platform has delivered same-store cash NOI growth of approximately 3% annually since 2013, while also focusing on efficient annual capital utilization, approximately 13% of cash NOI. We have talked for years about our view of the overwhelming trends in health care that reflects a move to an integrated outpatient experience. This delivery will take place in three settings; one, on-campus where we are the largest owner of MOBs in the country; two, off-campus in community locations where all leading health care providers are focusing; and three, in academic university health care system locations where academic and health care combinations are critical. Our portfolio composition reflects these trends and the critical nature of this real estate, where the best assets in each location demonstrate high levels of tenant retention and rental growth opportunities. As such, a focus on one or two of these locations without all three removes opportunities for accretive external growth and also importantly, the alignment with the future of healthcare and healthcare system requirements in the U.S. As we have started to see recently, this view is shared by both public and private markets where cap rates for both on-campus and off-campus assets have compressed over the last five years. Our portfolio and investment strategy has reflected these key trends in HTA’s targeted key fast-growing markets where we have presently gained scale in 15 markets with over 500,000 square feet and eight markets with approximately one million square feet or more. Our future strategy is the same; continue to add to our scale in these and selected markets allowing HTA to utilize our asset management platform which generates long-term value for our shareholders. To add to our ability to execute our investment strategy, our platform now includes an integrated development team that has completed over 300,000 square feet of development since we acquired it in 2017 and has an additional 175,000 square feet under development today. We certainly feel that this is just the beginning of the capacity and opportunities that will present themselves to HTA in the future. The recent ebbs and flows in the public market has allowed HTA to demonstrate our disciplined capital allocation and capital markets execution and strategy, focusing on patient, pragmatic decision-making, reflecting a long-term disciplined accretive growth strategy. In 2018, we focused on recycling the assets and ended the year with a fortuitous balance sheet with 31% leverage and over $1.1 billion of liquidity. We maximized our 2009 $163 million investment in Greenville, South Carolina with a $285 million disposition resulting in a 14% unlevered IRR return for shareholders. This positions us in 2019 to aggressively pursue growth as we find investment opportunities that are accretive to our long-term enterprise value and annual earnings. Turning to our operational performance in 2018 and our same-store portfolio, we achieved strong results. Same-store growth is 2.5% for the year and 2.7% for the fourth quarter, driven by strong 2.6% rental revenue growth. Solid leasing performance with a total leasing of over 2.8 million square feet for the year and 625,000 square feet in quarter four, including 139,000 square feet of new leasing. Our cash re-leasing spreads from renewals for the year increased to 2.6% for the year and accelerated to over 4.4% in quarter four. Strategically in 2018, we focused on specific objectives including internal growth, integration of assets, expanding healthcare system, and tenant relationships. Looking at the Duke acquisition in 2017, our platform has achieved over $7 million in annual synergies. And most importantly for shareholders, the investment yield has grown to 5.4%, 40 basis points above the acquisition yield. This high-quality, strategically located portfolio is performing as we expected when we underwrote the assets and the investment and we believe the assets will continue to outperform in future years compared to many of the portfolios that have recently traded. From a capital allocation perspective, we remain very active and disciplined focused on identifying opportunities that meet our acquisition criteria of

[Amanda Houghton:]

Thanks, Scott. In 2018, our team remained focused on delivering high-quality operating and leasing results, while integrating our 2017 acquisitions onto our platform and capturing the efficiencies and synergies, anticipated as part of these acquisitions. Having now demonstrated the ability of our platform, to bring $7 million to the bottom line in synergies, the Duke acquisition is a great representation of the significance of both our platform and our key market concentration and the value they jointly bring to shareholders. Our asset management platform which consists of 59 property managers, 106 building engineers, 18 leasing professionals, and nine construction managers across 23 offices in the United States is the byproduct of 10 years of deliberate effort, planning, and training. Our team is focused solely on the management, leasing, and maintenance of the largest portfolio of owned medical office buildings in the country with 15 markets over 500,000 square feet. This platform and our key market concentration would be extremely difficult to replace in today's environment. When we started the initiative to in-house management and leasing services in 2009, we did so with an intention of establishing direct relationships with our tenants, to enable us to better serve them as landlord. This immediately, led to improved leasing and retention versus years past and a third-party management. As we gained scale, we quickly recognized the expense savings opportunities that our size and market concentration provided us and have continued to capitalize upon that competitive advantage. It is this focused concentration in key markets that allows our platform to maximize value as it is in these larger markets where we are able to better allocate staffing, expand those services, we're able to in-house and more efficiently bundle services for discounted pricing. The combination of our specially trained in-house asset management team along with our key market concentrations puts HTA in a position to uniquely create long-term value for our shareholders and tenants alike. To further demonstrate the quantitative impact of the platform, it's worth noting that over the past five years or 20 reporting quarters, we have generated average quarterly same-store operating expense savings of nearly 1.4%, while our peer group has generated an average operating expense increase of 1.3%. Our ability to operate efficiently without sacrificing service or quality is what we believe sets us apart in our markets. Turning to our Q4 and year-end results. We had a very good year in which our same-store lease rate increased 20 basis points year-over-year, ending the year at 92.2% leased. And our same-store occupancy increased 60 basis points ending the year at 91.6% occupied. For the year, we signed over 2.8 million square feet of leases or over 12% of our total GLA. This included over 700000 square feet of new leasing and 2.1 million square feet of renewals. During 2018, our total tenant retention was 81% while our re-leasing spreads averaged 2.6%. We saw this positive re-leasing accelerate in the back half of 2018 increasing to 4.4% in Q4 and included a mix of large and smaller renewals. Average annual escalators across our leases signed in the period were 3% and 2.6% for the year. This continued blending effort of our in-place escalators on the 92% of our portfolio that is leased is a key to our continued and consistently strong rent growth. Our TIs remained steady at $1.26 per year of term on renewal and under $2 per year of term overall. In addition, during 2018 we demonstrated our ability to successfully transition assets that have undergone hospital sales or changes. The most extreme example was at our Forest Park Dallas campus. We came into 2018 with approximately 100000 square feet of vacant space and buildings that were approximately 50% occupied. During the year we signed over 87000 square feet of new leases and ended the year at 86% leased. We expect to fill this campus in the first half of 2019 with rates that are 20% above our portfolio average. As we look to 2019 expiration, we have over 12.5% of our leased square feet expiring including month-to-month tenants and expect our current leasing momentum to continue. Across these leases, we expect to achieve 75% to 85% retention with re-leasing spreads between 2% and 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 additional services using our internal engineering platform. Although our same-store expenses increased, these were mostly entirely driven by an increase in property taxes primarily in Texas. Outside of this we were able to hold expenses relatively flat despite inflationary pressures. I will now turn the call over to Robert to discuss the financials.

[Robert Milligan:]

Thanks, Amanda. From a financial perspective, we have continued to execute our strategic plan of growing our financial performance and maintaining our balance sheet positioning. Despite our significant growth in our portfolio improvement over the last five years, we have continued to execute on our existing portfolio, allocate capital in a manner that has maintained our strong balance sheet and importantly grew earnings by more than 5% per annum. In 2018 we operated effectively

[Scott Peters:]

Thank you, Robert. And we'll turn it over to the operator to get questions.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Daniel Bernstein of Capital One. Please go ahead.

[Daniel Bernstein:]

Good morning. Actually I wanted to ask you guys a little bit about the leasing expirations for 2019. When I was looking at the supplement, it looked like the -- excluding the month-to-month, the expirations went down from 11.1% to 10.4% of rents -- actually GLA sorry. So were some of the rents -- the leases pushed up to early renewals into 2018? And maybe how should I think about that affecting CapEx spending in 2019 versus 2018? Can you hear me?

[Scott Peters:]

Can you hear us now? Is that better?

[Daniel Bernstein:]

I can hear you but did you guys hear my question.

[Scott Peters:]

Yes, we did, we did.

[Daniel Bernstein:]

You did hear. Okay.

[Scott Peters:]

So we'll start with the overall. We've been seeing numerous tenants, larger tenants, also physician groups coming to us with lease expirations that are in the next 24 months coming and talking to us about extensions, talking about putting in TI dollars or renovating some space. So I think our expiration schedule, as we see it right now will actually change somewhat in the first six months of this year. I think you'll see expirations over the next two years that we've anticipated or are scheduled to renew probably go down because we are going to -- we are having those discussions right now. And I think we'll get to some place that gets those completed in the next six months. Robert, can answer your question about capital.

[Robert Milligan:]

Yes. I think from a capital perspective, as we look at some of the earlier renewals as we lease space and extend it, that certainly brings in additional TI. But I think our anticipation still is holding in that 10% to 15% kind of a little bit of a broad range on a quarterly basis as a percentage of cash NOI averaging out to the 12% to 13% overall.

[Scott Peters:]

We've also seen -- just to touch on that, we've also seen over the last, I would say three years, but certainly over the last 12 to 18 months, we've seen far more tenants putting their own dollars in. We've tried to be very consistent with our application of CapEx. We've always felt that we want tenants to put dollars in. We're not trying to boost any of our rents by putting TI -- additional TIs in. So we try to keep to that 13% or as Robert said 10% to 15%, but I think the middle is probably much closer to where we're going to be. But we've seen some larger tenants with larger leases come forth with some additional TI dollars when they wanted things that are above that sort of internal guidance that we put for ourselves.

[Daniel Bernstein:]

And I imagine also that range depends upon the length of the lease. In 4Q, it looks like your lease lengths went up to like 7.5 years on renewals. Was there anything specifically unique to the renewals or is there some kind of a trend that -- maybe larger tenants, hospital tenants are looking for longer leases? Just trying to again understand the trend there.

[Scott Peters:]

Yes, I think we've seen more -- the larger leases and leases we're discussing now that are out there, they are 10-year. It's probably up from 5 or 7, but we're seeing more 10, not more than that. And so, you might see that move out a little bit. But that also gives us the ability to get some of these rent spreads that you're seeing. We picked up in the fourth quarter and we're continuing to see good activity in the ability to move those rent spreads.

[Daniel Bernstein:]

Okay. And then, just one more question for me, and I'll get back in the queue. It’s actually, just a question for Amanda. You’ve brought a lot of management in-house. You controlled the expenses. So I'm trying to understand what's maybe the next iteration of your operational platforms, investments in technology, more automation, energy, something like that. Just trying to understand what that next phase of operational improvement might be.

[Amanda Houghton:]

Sure. So I think, as we're looking into 2019 and we’ve really started a lot of this in 2018, we see a lot of opportunity with increased efficiencies in our buildings and in particular energy spend. So we brought this up on the last call, but we believe that there is significant savings opportunity, as we're looking at our building and bundling services. And we brought on a Head of Facility, who actually is solely focused on evaluating control systems and making them more efficient within the building. So we think that, as we continue to kind of go through our portfolio, there's going to be additional significant savings there.

[Scott Peters:]

We actually embarked upon a sustainability program. We've allocated certain assets and prioritized them and reaching out to tenants and giving them an idea of what that means. It means better efficiency within the building. It means energy savings. It means -- but there's also some components to the fact that in some cases certain tenants are getting energy for free so to speak on spaces that should actually be reimbursed and not passed on to other tenants, so that's part of the program that we're embarking on. But to answer your question about what can we improve, we also put together an internal -- we handle almost all of our calls from our tenants. So we have a tenant connect service where we have five folks, six folks who handle all of our internal calls, push them out to our engineers, push them out to our property managers. And we're putting in a system to be able to analyze the efficiency, the timing, how we go about utilizing services and what the cost of those services are. And so, we are continuing to, what I think is put together a platform that we hope to be state-of-the-art from a perspective of technology efficiency, generating revenue for shareholders, but also passing along and generating cost savings for tenants.

[Daniel Bernstein:]

Yeah. Okay. Appreciate all the color, and I'll hop off and get back in the queue.

[Operator:]

And our next question comes from Karin Ford of MUFG Securities. Please go ahead.

[Karin Ford:]

Hi. Good morning. Thanks for the detail that you provided about what the forecast is baked into it, in terms of spreads and retention this year. Can you just give us any other details on the assumption underlying the 2% to 3% same-store NOI growth in terms of what you're expecting for occupancy and expenses, et cetera?

[Robert Milligan:]

I think from a same-store growth, there will be quarterly fluctuations as you'd expect. But our anticipation is for occupancy to pick up slightly throughout the year. I think as we're looking at our overall targets, our expectation would be 25 basis points, 50 basis points by year-end as we move through a multi-year progression to get a point or so of occupancy growth. So it's mostly driven by annual escalators with some additional re-leasing spreads and then probably another 20 basis points of margin expansion, really as we work on some of the bundling tactics working on the energy savings, but having some of that offset by increases in property taxes that we're seeing in certain jurisdictions.

[Karin Ford:]

That's helpful. Do you anticipate any new development starts this year?

[Scott Peters:]

We do. We're very fortunate right now that we've been engaging with and having conversations with several health care systems that are very interested in commencing some development. We'll announce those I think certainly as we get forward to the end of the first quarter earnings call. We've really integrated this development platform now and feel really good about the ability to get in front of health care systems, get in front of larger physician groups and be able to bring the expertise and the capital that's needed to the equation. So yes, we're very excited about that part of the platform that we have.

[Karin Ford:]

Great. And then just last one, what do you think is driving the acceleration in rent spreads that you saw this year? Can you talk about any changes you're seeing in tenant demand? Is it in specific markets, specific sub-sector asset classes? Did you change how your leasing people are compensated at all?

[Scott Peters:]

Well, I think with the leasing spreads, we've picked up and we've pushed leasing spreads. But I think it's very important to note that we kept our capital consistent to where it's been over the last three years or four years. So we're not pushing rent spreads at the cost of capital utilization or capital allocation, which is important. We've gotten size now in the market. We've got 500,000 square feet in 15 markets. We're able to get some synergies. We've been able to cross-market some space to folks that already have a space with us. And so we see a better marketplace frankly.

[Amanda Houghton:]

And in addition to that, I think, that with some of the re-leasing spreads, you're starting to see the impact of the expected savings take place manifest within the actual rental rate. So when a tenant is looking at the rent, they're looking at their all-in cost structure. And if we've been able to save expenses over the past several years, I can increase that rent and effectively they'll be paying a very similar amount to what they were paying in the past. So the two really do go hand-in-hand, and that's why we continue to focus on the expense side. And I think you're starting to see the benefit of that in rent as we get that rollover.

[Karin Ford:]

Thank you very much.

[Operator:]

Our next question comes from Tayo Okusanya of Jefferies. Please go ahead.

[Tayo Okusanya:]

Yes. Good morning, everyone. Just following up on Karin's question about the development side. I know you haven't put out any formal guidance on this, but from your presentation, you talked about potentially starting about $75 million worth of development. Can you just kind of talk a little bit about that?

[Robert Milligan:]

Yes. So most of what we talked about from a start perspective is our projects that we've already announced primarily the two projects of our WakeMed project in Cary, North Carolina, where we're putting up 125,000 square feet of new MOB there as well as our Coral Reef project down in Miami, MSA. So I think those are the two projects where we expect to break ground on those this year. But I think our anticipation is certainly that we'll announce new development wins throughout the year. And I think that's where I think we're excited to see that pipeline built.

[Tayo Okusanya:]

Got you. Okay. That's helpful. And then thank you very much for providing guidance. I think that's helpful to everyone. From an acquisition's perspective the $250 million that you talked about, can you just give us a sense around again at this point what you're thinking timing-wise how quickly that may hit, whether there's a whole bunch of one-off deals that kind of hit throughout the whole year or it's one good transaction you expect at a particular point in time?

[Scott Peters:]

Well, I think it's more of the one-offs or the smaller group of assets. We've seen some of the larger portfolios trade here recently and there might be a couple more out there, but I'm not specifically aware of any what I would consider to be really high-quality key market type of portfolios that would necessarily either gain our attention or be at a valuation that probably would make it attractive. We really underwrote the Duke transaction, and it's performing for us and we want to continue to have those yields continue to move up as we continue to get better at the integration from our asset management platform. So I think that's where, I see us consistent acquisition in our markets, adding to our platform and being able to get those efficiency that we showed that we can get when we bring assets in-house. Robert, anything on that?

[Robert Milligan:]

I think from a timing perspective that's obviously what's going to drive the bulk of the range of our estimate within there. The midpoint has been evenly spread throughout the year. And I think as we look to deploy capital that's going to be kind of a driving force on there. We're coming into the year, certainly with a good place from our balance sheet with 5.4 times debt to EBITDA down significantly over 101 full turn since we completed the Duke transaction. But we also have a $125 million of cash on the balance sheet. So, really as we look to redeploy that is when you'll start to see the earnings accretion pick up.

[Tayo Okusanya:]

Got you. And then one more for me, if you don't mind. I know you guys have been very focused on this idea of building scale in some key markets. But again, I just kind of take a look at – again the top 30 MSAs out there. Any sense that you guys may decide to kind of break into another MSA because you like the demographic, or you kind of like the growth prospects of that market?

[Scott Peters:]

There is. I think there is two or three markets that we think very highly of that, we have done our homework in reached out to folks. And we want to make sure that the biggest thing that I think of investments philosophy is that the assets are critical meaning that they're key from a delivery perspective of health care. Number two, that they're in the right location and are going to be in the right location for the next 5, 10, 15 years; and number three that we can get size and we need 500,000 square feet. We need some scale because I think over the next 15 years, the differentiation on a platform perspective cap rates for acquisitions ebbs and flows, but performance doesn't. I mean, the bottom line cash NOI on a consistent basis dropping to the bottom line with earnings that's really going to be the differentiator. And I think that, we're very proud of what we've done over the last five years and we're focused on if we enter a market being able to then have that continuity and have that consistency and being committed to get that size. It's going to add to the overall value of our enterprise value because one of the things we don't want to do and we haven't done and you haven't seen us do, you haven't seen us have to really divest ourselves of assets that have changed substantially in value overtime. I mean I think we bought well, we bought very disciplined and these assets that we have are continuing to perform.

[Tayo Okusanya:]

That’s helpful.

[Operator:]

Our next question comes from Jonathan Hughes of Raymond James. Please go ahead.

[Jonathan Hughes:]

Hey, good morning. Thanks for the time and thank you for providing guidance. Appreciate that. You did give formal acquisition guidance so that was helpful. But can you just elaborate a little more on the transaction market? Maybe talk about the one-off deals you're looking at? Where you've seen pricing trend over the past six to nine months? And then any color on those recent large deals or the recent large deal that traded and the other big one that's currently marketed out there?

[Scott Peters:]

Well, I think one-offs in markets that we're looking at prices have moved or certainly haven't gone down. I think that's the good indicator for us. 2018 I think was a very difficult year to get a judgment of where interest rates were going to be, where cap rates were going to be versus where they should be and where they're going to move and was medical office going to be affected significantly and some of the other health care asset classes have been impacted? We really didn't see that. What we have seen is other than a couple of buyers out there who have really been -- who have really liked certain assets and went after them pretty aggressively, we've seen a more stable type of pricing environment. And I think that allows us in 2019 at this point to feel a little more positive about being able to accretively acquire these assets do it diligently to bring it into our platform, bring it into the markets that we've now been in for a number of years. We've got leasing folks that have been with us. We've got -- Amanda mentioned, we have a number of leasing folks. We've got seven of them who really have been with us now great, longer than five years. They've got relationships with tenants. They've got relationships with healthcare systems, and helped us on our development side. But it also helps on the acquisition side because you hear things or you get a chance to have an introduction and so forth. And I think the platform that we have in 2019 is going to be a very productive year for HTA. We did take a break in 2018 but it was really a break not based on opportunity really not based upon being able to see things. It was say, being cautious about where cap rates where, what we need to do as a company and being positioned -- in a good position when you felt more comfortable about being able to deploy capital and make good capital decisions.

[Jonathan Hughes:]

Have you -- you mentioned cap rate spreads between on-campus, off-campus have compressed over the past years. Has that remained stable or even maybe expanded a little in the past say three to six months?

[Robert Milligan:]

I think you're seeing recognition of MOBs being driven more by real estate qualities now. So you know certainly the good on-campus assets you've seen a lot of trophy type pricing still. I think you're seeing really good off-campus assets trade more aggressively and within a tight window with the on-campus. So I think we see that being relatively stable. I think the hardest thing always to do as you're looking at the cap rates is really get a read-through to the quality of what you're seeing. Everybody reports cap rates and what is going on out there, but it's really hard to see the quality. I think for us as we're looking at the assets with the stability, it's really making sure those assets will produce the 2% to 3% same-store growth. And I think that's where we're seeing continuing stability.

[Scott Peters:]

Just sticking with Robert to continue to step further. I think when you buy an asset the asset quality is important. The tenant mix is very important, but the rent that you get the capital you put in to sustain the 2% to 3% same-store growth I think that's all -- that all has to be connected. It isn't one you can take one without the other. I think our same-store growth is something that we take very seriously, but it all comes back down to buying well and then ensuring that the amount of capital that you have to put into those assets or the amount of capital that goes into renewals is the appropriate amount in order to get greater returns that dropped to the bottom-line. That's really what shareholders are looking for is cash that drops -- revenue increases that drop to the bottom-line.

[Jonathan Hughes:]

Okay. And then just one more. I mean you've got a great -- you're in a great spot in terms of balance sheet. Obviously, you have a good amount of cash sitting there. Are you looking at the big portfolio transaction out there? Would that meet your underwriting quality? Just curious on your thoughts on that portfolio.

[Scott Peters:]

We've looked at that. We've known that portfolio of course for six, seven, eight years. Probably it does not fit what we would look for from an acquisition perspective and so we're not one of those that are looking at that.

[Jonathan Hughes:]

Okay. All right. Thanks for the color. That's it for me.

[Operator:]

Our next question comes from Michael Mueller of JPMorgan. Please go ahead.

[Michael Mueller:]

Yes, hi. Two quick questions here. I don't think there's any equity in your forecast for 2019. I just want to confirm that first.

[Robert Milligan:]

That's correct. Yes, that's correct. As we look at the use of capital there, $250 million of acquisitions, $75 million of dispositions, we've got $125 million on the balance sheet. So, I think it's pretty leverage-neutral without the use of equity.

[Michael Mueller:]

Got it. And then I think it was mentioned the Forest Park rents where you're looking to fill the remainder of the space were 20% higher than the portfolio average. How do those rates compare to the prior rates for the same buildings though?

[Amanda Houghton:]

Yes, they're pretty similar.

[Michael Mueller:]

Okay. So, kind of flattish?

[Amanda Houghton:]

Yes. I mean we're 18 months past when they expired, so there's a little bit of a difference. But if you adjust for that then they're pretty similar.

[Michael Mueller:]

Okay. Okay, that was it. Thank you.

[Operator:]

Our next question comes from John Kim of BMO Capital Markets. Please go ahead.

[John Kim:]

Thank you. Scott, given your relationships that you have and that you're targeting with academic universities is that something you could extend beyond MOBs into research and lab space?

[Scott Peters:]

Well, we really like the academic university concentration the relationship with healthcare in the future and I think everybody now is pretty much saying the same thing. For us it really would need to be a type of asset that has multiple uses within the asset. We have something up in Boston that really -- about four years ago, really illustrated to us as a management team and also all the way from our investment committee, the blend between a university, the blend between a hospital, and the ability to have different types of uses in a very nice-sized building and I think a lot of folks have gone up and seen this building because we've had it on tour. But I don't think we're into lab space 100%. I don't think that we would move into a direction that takes us away from medical office. We like clinical space. We like space that is needed. So we are interested in assets that have that blend and can drive that uniqueness. And the asset we have in Boston, for example, it actually has delivery tubes to the hospital for a blood testing. That's something that is unique. It was built that way, and it's just critical, and it's very hard to imagine that that function would ever be eliminated. And so that's a good opportunity for us to do that and we did that. And so we would look at things like that.

[John Kim:]

But your reluctance with that space is because of the CapEx or because of the different relationships with universities?

[Robert Milligan:]

I think typically it's more of a relationship. I don't think it's necessarily a capital perspective. We like being able to service the academic university medical center tenants and relationships. And to the extent they have clinical buildings, many of them also have -- some of them combined the teaching and the lab space on and we're comfortable with those. I think what you won't see us do is go out and be more directed towards pharmaceutical companies or biotechnology companies or anything like that.

[John Kim:]

Okay. And then I wanted to get your thoughts on your updated views on Section 603 and what you think this may have as far as impacting rent asset values and potentially transaction values or volume for off-campus MOBs.

[Robert Milligan:]

Yes. I think as we look across our health care relationships and you really follow the broader health care sector, the predominance of the discussions amongst them is, how do we compete in a more cost-effective manner? The competition is maybe less amongst the hospitals themselves and more with how they compete with other players that are pushing things more off-campus and at lower cost. So when you have conversations with these large health care systems, they're saying how do we get closer to the customer? How do we get closer to our patients to make it more convenient and really bringing them into this system? So to them they'd obviously rather get paid more than less. But from a real estate perspective, we're not seeing any impact from that. I think you might see different groups go on-campus versus off, but the overall emphasis of the health systems continues to remain the same. And so I think you see that really reflected in our portfolio selection. We do like good on-campus assets that have got significant activity, but you also -- we see some of our highest demand in core off-campus locations, where they're in great communities, they've got great kind of traditional real estate metrics. And you're really seeing those health systems compete there. And so that leads to high retention, high levels of rent growth, everything that you would expect as a real estate company.

[John Kim:]

Okay. I have a final question, it's sort of two-part on your development cap page 16 of your supplement. It looks like you still have a fair amount of costs or CapEx on some of the recently completed MOBs and I'm wondering why that's the case. And then second of all, during the quarter you only spent about $1 million of CapEx during the quarter, which is lower than your run rate in prior quarters. And I just want to hear your thoughts on that.

[Robert Milligan:]

Yes. I think the projects that have been substantially completed, many of them still have TIs left to build out in there and that's the bulk of the cost to complete. So as the health system goes in, we complete the building, there's still going to be a lag as we continue to complete the project more from a tenant move-in perspective. I think we've got fixed rent schedules in there. It's just a matter of getting them in the building and operating.

[John Kim:]

And what's the occupancy of those projects?

[Robert Milligan:]

The occupancy of the projects for instance Memorial Hermann is actually 100%. The hospital has taken the entire space. It's just a space -- takedown of the space. And that's going to drive the TI expenditures on those. And that's kind of the top one that you're looking at that I think has most of the cost to complete there. So that's actually 100% leased. It's just not 100% occupied at this point.

[John Kim:]

And my second question was on the $1 million spend during the quarter?

[Robert Milligan:]

Yeah. I think the $1 million spend from a development perspective, I think you'll see two things pick up on that. One, you will see some of the TIs get expensed on the Memorial Hermann project, but you also will start to see us break ground I think in the development projects that we've recently announced down in Cary. You'll start to see costs pick up in really the second and third quarter with the one in Miami most likely breaking ground in the third quarter. So you'll see that development expenditures start to pick up in the back half of the year.

[John Kim:]

Got it. Okay, thank you.

[Operator:]

Our next question comes from Chad Vanacore of Stifel. Please go ahead.

[Tao Qiu:]

Hi, good morning. This is Tao for Chad.

[Robert Milligan:]

Good morning.

[Tao Qiu:]

Hi. I'm wondering if you could help me break down the FFO guidance. So it looks like excluding the $0.02 accounting change impact we are getting $0.05 in FFO growth at the midpoint for 2019. So if my math is correct, so using the acquisition and disposition guidance you provided that would generate maybe $0.02 to $0.04 depending on timing. And also you did some stock repurchase in 2018. I think that would also contribute like $0.005 or $0.01 to that. So that doesn't seem to leave much organic growth at the midpoint of guidance. So how should we reconcile that with the 2%, 3% same-store NOI growth? Is that a result of deal timing? Or is it a relatively more conservative guidance?

[Robert Milligan:]

I think as we look at it, it's more of deal timing. We've historically seen our same-store growth really translate to the bottom line, so most of the difference in our guidance is going to be around deal timing.

[Tao Qiu:]

Okay. So, just to follow-up on that. Could you talk about the same-store pool in 2019? What goes into that and what comes out?

[Robert Milligan:]

There's going to be the majority of our assets in there as it typically is. Our policy around the same-store pool is for any assets that we've owned for five full periods it goes in the same-store pool unless it's been pulled out for being held for sale. So we're for redevelopment, which is what you see the bulk of the assets pulled out in our pool at the end of the fourth quarter. So given the fact that we weren't big buyers in 2018, you'll see the bulk of our assets in the pool.

[Tao Qiu:]

Okay, great. Thanks for the additional details. Last one for me. So you mentioned that the private capital interest remain high in the MOB space, but many of the company REITs that have reported so far also increased their acquisition guidance for 2019. So, are you seeing more competition from public side as well in this year?

[Scott Peters:]

Well, I think we've always been in a very competitive space. And we've been public now almost six years and the first question I was asked when we were going public was how are you going to compete and how would you ever think that you're going to grow your portfolio? And I think we've been very, very confident at being able to find good acquisitions and continuing to build our portfolio. And as you see we've become now the largest owner of MOBs. So we are in an even better position today than we were five years ago. I think that when you look at HTA, people should sit back and say, what are the fundamentals that they have in order to be able to execute their business plan? And we have today in every category from employees, from management to key cities, to balance sheet, to development, to leasing, to our leasing personnel, we have a better-quality infrastructure in every component that we have today than we had five or six years ago. So the opportunities are I think are even better for us going forward over the next three to five years than they've ever been. And that's really what gets us excited in 2019. As I said 2018 was a year that I think everybody was cautious. I think that it was the right thing to be. We specifically needed to rebalance our balance sheet and get ourselves in a position of where we wanted to start 2019. We're there and we're excited about 2019, 2020. And I think you've seen it now in the fourth quarter results that we released.

[Tao Qiu:]

That’s very helpful. Thank you for taking my questions.

[Operator:]

Our next question is a follow-up from Karin Ford of MUFG Securities. Please go ahead.

[Karin Ford:]

Hi, just one quick additional one. You talked about wanting to get FFO growth back up to 4% to 6% to that range in the medium term. This year, you're doing like you said about 3%. I guess it's due to the lingering effects of last year's balance sheet work. Is there any reason why you shouldn't be able to get back up there in 2020?

[Robert Milligan:]

We don't see any issues kind of as we look to 2020. Really, as we're looking at 2019 as you pointed out, we made dispositions in the back half of the year. That certainly flows into the first part of the next year both in the 2019 run rate, but also as a 2018 comp. So our long-term experience running the MOB business with steady and consistent same-store growth in modest acquisitions has been to get to that 4% to 6% range and we expect that to continue.

[Karin Ford:]

Great, thank you.

[Operator:]

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:]

All right. Thank you everybody for joining the call. We look forward to 2019 and we appreciate any calls any questions anyone has. Please just don't hesitate to reach out to us. Thank you.

[Operator:]

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