Healthcare Trust of America, Inc.
Q4 2014 Earnings Call Transcript

Published: 18 Feb 2015

[Operator:]

Good afternoon and welcome to the Healthcare Trust of America Fourth Quarter and 2014 Year End Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jessica Thorsheim, Director of Investor Relations. Please go ahead.

[Jessica Thorsheim:]

Thank you, and welcome to Healthcare Trust of America’s fourth quarter and 2014 year-end call. Yesterday, we filed our fourth quarter earnings release, our financial supplement, and fourth quarter dividend announcement. These documents can be found on the Investor Relations section of our website or with the SEC. 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 this 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 can materially differ from our current expectations. For a more detailed description on some potential risks, please refer to our SEC filings, which can be found in the Investor Relations section of our website. I would now like to turn the call over to Scott Peters, Chairman and CEO of Healthcare Trust of America. Scott?

[Scott Peters:]

Thank you, Jessica. Welcome to Healthcare Trust of America’s fourth quarter and year-end 2014 earnings conference call. We appreciate you joining us today. We look forward to sharing our fourth quarter results, year-end financials, 2014 significant milestones and thoughts on the medical hospice sector for 2015. Joining me on the call today from our management team are Robert Milligan, our Chief Financial Officer; Amanda Houghton, our Executive Vice President of Asset Management; and Mark Engstrom, our Executive Vice President of Acquisitions. 2014 was our second full year as a public company. The management team continued its focus on consistency, discipline, and execution of our business plan and in our communication to the public markets. In looking at 2014, a few of HTA’s accomplishments included

[Robert Milligan:]

Thank you, Scott. From a financial perspective, 2014 was a strong year for us and the fourth quarter was no exception. We continue to grow in a consistent and disciplined manner, both internally through same store growth and externally through accretive acquisitions. On top of that, our balance sheet is in great shape as we head into 2015 with significant flexibility and liquidity. As Scott mentioned, we completed our one-for-two reverse stock split in mid-December. All of our results reflect this split. Although this did not have any economic impact on our shares, it greatly increases the transparency of our per share financial results on a year over year basis. For the quarter, normalized FFO increased 13% to $45.3 million. On a per share basis, normalized FFO was $0.37, an increase of 12% compared to fourth quarter of 2013. This increase was primarily driven by a 3.3% same store growth, the accretive impact of our full year acquisitions and lower average weighted interest expense resulting from debt refinancing and credit rating improvement, offset by our dispositions and a slight increase in G&A. As part of our credit facility refinancing, we also wrote off almost $1 million of deferred financing, which we have normalized out of our FFO to provide a more accurate recurring metric. Our normalized FAD per share for the fourth quarter, which incorporates our recurring capital expenditures and leasing costs, increased 11% to $0.32 per share. Our dividend payout ratio for the fourth quarter was around 90%. For the full year 2014, normalized FFO increased 19.5% to $176.7 million, compared to 2013. On a per diluted share basis, normalized FFO increased 13% compared to 2013 up $0.17 to $1.46. Normalized FAD per share increased 11% to $1.29 per share. For the year, our G&A expense totaled $24.9 million, in line with the $24 million to $25 million range we provided at the beginning of the year and the relatively flat to 2013, despite increasing the portfolio size by almost 40% since going public. This reflected our ability to generate significant operating leverage from our platform as we continue to grow our portfolio. G&A increased slightly from Q3 run rate and included several year-end items. For 2015, we expect G&A to increase slightly to around $26 million. This increase is primarily related to our stock compensation issued since our listing. This stock is expense, it’s primarily three year vesting period and 2015 will include expense for three full years of stock grants. From a balance sheet perspective, we run our company for the long-term with a focus on low leverage and NAV growth. Further, we are committed to match our investments with long-term capital that locks in the long-term nature of our assets. For the year, we executed on several fronts that are consistent with our philosophy and position us for continued growth in 2015. First, we raised over $173 million of equity, including over $150 million in the fourth quarter at pricing that was the near our 52-week high and were accretive to our investments made during the year. Second, we sold $83 million in non-core assets, including $42 million at the beginning of the fourth quarter. This generated $16 million in gains and begin to improve our portfolio quality for the long-term. Third, we lengthened maturities with $300 million unsecured bond issuance at the end of the second quarter. And forth, we closed on a new $1.1 billion senior unsecured credit facility, consisting of an upsized $850 million five-year revolver and a $300 million term loan which is for four years with a one year extension. This locks in our pricing and credit availability for the near term. As a result of these activities, we ended the year with a great balance sheet, leverage that is less than 30% on a debt to capitalization basis and approximately 5.7 times debt to EBITDA. We also took steps to improve our debt portfolio, lowering interest rates and extend maturities. At the end of the period, our weighted average interest rate on our debt was 3.76%, down 16 basis points from the same period last year and the average remaining turnover debt increased to 5.6 years. Our credit ratings remain strong with S&P upgrading us during the year to BBB flat. We remain committed to a flexible, conservative and investment grade balance sheet and our execution gives us the ability to be strategic, but also keeps us protected and secure as things change. I will now turn the call back over to Scott.

[Scott Peters:]

Thank you, Robert. I'd like to extend a thank you to our shareholders this year for their support for business plan. Our strategy continues to evolve around core long-term real estate principles and generating shareholder value. We run our business and make capital allocation decisions for the long term. Lastly, I cannot reiterate enough how important it is in today's market to look at the quality of the investments we are buying and the markets we are investing in. I would encourage anyone to come visit with us to see our properties, get educated about medical office buildings, and see the great opportunities that exist for us in our markets. This concludes our remarks for today. Thank you for joining our call. I will now turn it over to the operator and open it up for questions.

[Operator:]

[Operator Instructions] And our first question will come from Kevin Tyler of Green Street Advisors.

[Kevin Tyler:]

Robert, I think you said in the past that your lease rate tends to run roughly 30 to 40 basis points above actual occupancy and I was just curious as we think about 2015, is this still kind of a good proxy?

[Robert Milligan:]

Kevin, it’s a good question. We certainly do think that’s a proxy on a run rate basis, obviously any quarter it might fluctuate up and down depending on movements and lease signing timing. But I think 30 to 40 basis points is a pretty good proxy for us.

[Kevin Tyler:]

And then along the same lines on the occupancy front, your off-campus lease rate added about 100 bps in the fourth quarter and I was just curious if you could talk a little bit or elaborate a little bit on what you’re doing to keep that number heading higher?

[Scott Peters:]

This is Scott, I think one of the things that has happened and is occurring for us in a couple of markets where we have what I would say more of the off-campus MOBs, Indianapolis, Atlanta, we’re seeing some very good activity there and that obviously has shown some growth in our portfolio. And I think 2015 is actually going to be very big year for both of those markets, which has been something – they’ve been slower, Indie was slower three or four years ago, Atlanta has been slower the last couple of years, but what you’ve seen in Atlanta here recently is maybe a merger between a couple of the large healthcare systems and I think that’s always at forefront of what we see in the Affordable Care Act, which is the leasing space and where it predominantly ends up. So I think that really was the driver for the off-campus, but from an overall portfolio perspective, we are pretty excited about the opportunity into 2015 to move our occupancy on other 50, 100 basis points and that will be both the on-campus stuff and also the off-campus stuff that we have that we haven’t or are going to recycle. I touched upon it on the call, but I think from a management perspective in 2015 we’re focused on three or four things, but one or two of those are number one, quality of assets. I think this is a great opportunity for companies to really fine tune the quality of their assets for what they believe is going to be the future of healthcare, we are dedicated MOB owner, so we like certain characteristics and we need to make sure as we roll forward here in 2015, 2016, that we take advantage of that. And second, I think that the quality of the revenue stream coming from your tenants is important. We talked about sole practitioners moving out of on-campus space, we’ve talked about physician groups with expansion space, the hidden benefit of this 50% expansion space is actually not just the expansion space itself, but they are adding more physicians, they are adding more revenue generating synergies within the practices that are increasing and improving the profitability of the practices. And of course, you want strong healthcare systems. So quality of assets and quality of earnings is something that we’re focused on in 2015 and 2016.

[Kevin Tyler:]

And then as you think about quality of earnings and moving to your recycling disposition program, appreciate the color that you gave initially, but I think in the past you’ve talked about 6%-ish cap rate give or take, is that still indicative of where the market is today for those assets?

[Scott Peters:]

I would say that they are in a 6.25% range, I think again it continues to be a very competitive marketplace. I think the spreads from an investment perspective has certainly decreased for buyers, it’s improved for sellers. Again, I think it’s a tremendous opportunity for companies to refine what their true business plan is, what do they want to own as we move through this process. And so I think that from a disposition perspective and an acquisition perspective, we’ll just try to stay flat from a dilutive or accretive prospect and I think we can do that.

[Operator:]

And our next question will come from Todd Stender of Wells Fargo.

[Todd Stender:]

You guys issued OP units to a seller in Q4, can you just talk about the process that you went through with the seller, just share some of the characteristics of these units mainly the yield maturity, and then do you expect to use more of these in the near term?

[Scott Peters:]

I'll start and then I'll let Robert to talk about some of the specifics. But, both of these cases were really cases that came to us. We were fortunate to have acquired some great assets in White Plains and there was a local person who was familiar with our acquisition, it happened to be on the campus that we acquired in and approached us about and they have been long-term owners of the MOB next to ours, and they approached us about that opportunity and this is great for us, not only do we get another acquisition, but we got it with somebody that after they did their diligence on HTA said I'll be an investor alongside other investors. So that was a very quick smooth process. When Mark Engstrom first got the call, normally depending upon the level of experience and expertise of the person or people involved, it takes a little longer and it's far more complicated. Then, we had another opportunity in Denver that came along and that one was primarily a tax driven decision. A, they were comfortable with our portfolio, they were an MOB of course, they owned MOBs and that's what we do. From their perspective, they like the opportunity to perhaps determine when that event was going to be taxable to them and that was done in a pretty reasonably quick process. So having been now public for a couple of years, it's gotten easier for us to have that communication. We are very simple. I mean, that's the other thing that I'll bring up from this process with folks. We don't have JVs, we don't do development, we don't have a complicated balance sheet, we don't have a lot of difficult issues that pretty reasonable people look at and say, boy, that's a little complicated to me. We are trying to keep it simple, we are very focused on capital allocation. In the discussion with these folks, I think they judge us by what we demand in that relationship. I'm not going to buy something, if I buy something from them that they think is priced outside the range of what it should be, the last thing I would want to do is be owners of both the units because that's a bad business decision. So I was very – as a team, we were happy with the fact that we were able to have that opportunity. And I think there's going to be more opportunity as we continue certainly in 2015 and maybe 2016.

[Robert Milligan:]

And then just from a structure standpoint, they basically share all the same characteristics as our common traded stock, only they are held at our operating partnership units. So there is no maturity on it, they get the same dividend payout as the common stock shareholders.

[Todd Stender:]

Does it convert to a common share 12 months from now?

[Robert Milligan:]

It's that they have to keep it for at least a year and then they actually get to make that determination of when they would convert it. When they convert it, it becomes taxable.

[Scott Peters:]

But it’s convertible on a one-to-one basis.

[Todd Stender:]

Okay, so those are the sellers. How about the buyer profiles, as you guys looked at more assets for sale this year, anything you’re seeing from a buyer profile perspective, whether you’re seeing more 10/31 buyers or foreign buyers, anything new that you are seeing?

[Scott Peters:]

Again, I think it's become a very competitive space. I think the big difference perhaps in the MOB space right now that maybe a little bit different is that it might not be looking at traditionally the bond alternative. I know that the healthcare sector is in the past have looked at something and said, okay, I can buy a bond, I can buy healthcare. I think MOBs have been somewhat undiscovered in that specific allocation of one's capital. But now that we've been nine quarters and we've had 3% or better, we feel comfortable that we are in that 2.5%, 3.5% range, the leases that we're signing are market and continuing to be market, we're very specific in the type of asset we like, which is multi-tenanted, we're not spread investors, so we're not buying a bunch of assets that have varying degrees of quality or term or location or make up from an asset perspective. So I think that this space is still becoming a place where people want to invest. We just need to continue to do what we do, which is we base our acquisitions on one-off transactions, each of the sellers that we bought from we know, we know individually who owned that asset, Mark Engstrom continues to talk with them, in most cases we actually have re-occurring discussions with them about their markets and about other things that they are doing. It is different than when you buy a portfolio from a portfolio aggregator. They really don't have those contact that go back to who did this and built it and who put the leases in and who were the people that are going to expand. So I think we are in a pretty good position, Todd, but it certainly has changed over the last three years.

[Operator:]

And our next question will come from Andrew Schaffer of Sandler O'Neill.

[Andrew Schaffer:]

Have you seen any change in tenant behavior? Are they trying to proactively reach out of you and try to re-engage in your lease discussions or do you feel that business is as usual and they wait more than 8 to 12 months timeframe?

[Scott Peters:]

I'm going to break that into two separate categories, and Amanda can jump in here if she either agrees or disagrees. But I think the single tenant occupiers are being a little more aggressive in reaching out to try to get some consistency in what they see for their lease term. And I think that if you have a healthcare system or if you have a large single tenant, we had both of the situation last year for us, one in Albany and one here out in Phoenix, they reached out to us to try and get longevity in their term and get some structure in what they wanted to do from an organizational perspective. But with the multitenant folks, the three, five years, the physician groups, I would say it's business as normal. I think that if anything, the expansion requests are far more than they happen at any time in the past. When we have our leasing meetings every week or every other week, the first question we're talking about is, okay, what do we have an expansion request or have you gotten any calls, those calls are coming to us more than we have seen. So I think the single tenant guys, they are trying to get may be advantage from a longer term perspective, but the multi tenanted guys that are reaching out to us are really on expansion needs. Amanda?

[Amanda Houghton:]

Just to elaborate a little bit, I would agree exactly what Scott said, but the larger health systems, the tenants that are growing, concentrating and meeting expansion, if they are coming to us in advance it could be 12 months, 18 months before their expirations and they're trying to really capture the space that they can do their five and 10-year plans and remove that variable from it. The smaller tenant again, that is business as usual, 12 months out we will typically approach them, in certain markets its six months out, but there's not really much changed with our smaller tenants.

[Scott Peters:]

One thing that Amanda touched on that I would say is that for the first time in the last 12 months and really it's accelerated somewhat in the last nine months and six months is that healthcare systems or some of these larger uses are trying to work with us to determine their needs. We've actually been asked to look and say, okay, if we move some stuff around in some of our other stuff, can you accommodate us over here and if this move is going to take an 18 month period of time, we don't want to make a decision to move or relocate a practice, they required practice if you're not going to have this space available for us to be able to expand and relocate. That's great, but it does read a little more complexity to the equation because you've got to make sure that you have the space you might need to relocate someone to give them this space which in fact we had a discussion this morning about with somebody, so that it's more dialogue and I guess it's true real estate, multi tenanted buildings typically tend to be managed as if it’s true real estate.

[Andrew Schaffer:]

And could you talk about cap rate spreads between the on-campus line versus off-campus line and if you see a compression, are these spread starting to gap out?

[Scott Peters:]

No, I think to some extent my general comment to that is that the differentiation that buyers are putting on the different revenue streams do not take into account in some cases the risk that is associated with those different revenue streams. I think that they've compressed, I don't think that they have widened, but I think as a buyer, there is always that old saying, buyer be aware and we've diligence some assets frankly here in the first quarter that we were very excited about and actually backed off after we looked at what we thought was the quality of the revenue stream and the credit of the tenants in the long term synergy of how we saw that that was going to impact the future. We're very cognizant of our desire to have an annual NOI growth of 3%. That isn't going to happen if you're not extremely diligent upfront. It takes a lot of work at the end and in the middle, but the real is upfront when you look and say is this quality of income going to be at market, does it move up, can you get 3% escalators, are they going to be able to pay it. So I think that is some folks that are less discriminate than others.

[Operator:]

And the next question is from Daniel Bernstein of Stifel.

[Daniel Bernstein:]

I didn't hear, and maybe you talked about it, but I didn't hear, what is your forecast for cash NOI growth in 2015? And maybe talk about some of those component occupancy expenses and the contractual rates?

[Robert Milligan:]

I think from a cash NOI perspective, we continue to expect to see 2.5% to 3.5% same store growth, I mean I think that's pretty consistent with what we've talked about really over the last – since we've listed. I think what you have started to see certainly over the course of 2014 is our base rent growth has taken a much larger percentage of the overall NOI growth. In place escalators that we have across the portfolio are about 2.2% right now. And as we continue to renew leases for the year, we've been certainly in the 2.5% to 3% annual escalator range for that. So our in place escalators continue to move up. From an expense standpoint, we are really just starting to get into the operational efficiency gains that we expect to see from our in-house management platform. I mean, you certainly see some nice expense savings when you initially take things in-house, but from there it really takes 24, 36 months to really get your processes in place and take advantage of certain national accounts you do. So expense savings, we will continue to see 20 to 30 basis points of growth there. So you kind of put those together and we are looking at a pretty nice 2.5% to 3.5%.

[Daniel Bernstein:]

Do you still see the portfolio getting to – I think in the past, you said 94% occupancy. Is that still an achievable goal? If my memory recalls correctly, is that still an achievable goal?

[Scott Peters:]

Yeah, you do recall correctly. I think we hit 92% this last year in 2014, that was our objective and we started off close to 91%. So we were able to make good gains. I do think it's achievable. I've always said that it was going to take us 30 months and that was about 12 months ago and I think that we are seeing a lot of activity, the key for us really is to make sure that when we play some of the space that it's leased in the right perspective, which is long-term, good tenant, growing tenant, grow revenue and that's a building and the make-up of the revenue stream of the building is something that is going to work. We don't want to just put people in in order to fill space. And so we are being - we have turned down folks in space where we felt that A, it was going to be needed for expansion or B, the underwriting of that particular tenant or those tenants was not the same quality of perhaps somebody else that would bring greater synergy to the building. In Atlanta for example, that was the case in 2013 and we've seen some real improvement in 2014, but we did pay a little bit of a price in 2013.

[Daniel Bernstein:]

Okay. And then in terms of the acquisitions you did in the fourth quarter, could you talk some more about whether those are on or off campus and maybe the hospital affiliations with those, if you can?

[Scott Peters:]

Yes, start with the opportunity to invest in Hawaii, we would have only did that if we could get a critical mass and we were able to put two acquisitions together at the same time, one that had been in the work for us for over a year and a half, really focused around an extension of Kaiser and we were not as a buyer prepared to take the risk of that extension, even though the seller was convinced and certainly should have been and they did extend if that was going to happen. So we had pushed that off and we were very interested if A, that would happen and B, if we could find something else of opportunity and it so happened that we were able to find that which was just as good a quality acquisition. So that to us is a very good market. I think historically it's been a very strong market and the cap rates that we bought those assets in frankly were probably 50 basis points better than what we would have anticipated if someone has just said what does it take to get invested in Hawaii. We also bought something in Charleston, a couple of building, which is why the cost in street from a larger building which is less than a quarter mile down from the hospital. It's full, it's going to bring some synergies to all building across the street. So I think that's a critical mass. Mount Pleasant is top five growth city in its size last year, Boeing, if you go to Charleston, it's just amazing what that market is doing and what Mount Pleasant is doing. So Denver was an opportunity for us to fill in, we're less than a mile away from campus with both the assets, Lincoln was less than a mile away from these two assets. So more synergy in that location. Amanda is able to – we hired a leasing person in Denver, handles our leasing in house. You know from us that leasing in house to me is sort of like if you are going to own the assets, only relationships, these are valuable long-term relationships in recent groups, healthcare systems don't change a lot, sometimes executives change, but the core relationships tend to stay with people who are there. So these are good acquisitions for us. And we just continue to, I think, find good individual assets in great markets.

[Operator:]

And next we have a question from Rich Anderson of Mizuho Securities.

[Rich Anderson:]

So they're off campus in the fourth quarter, right? I just want to make sure I got that right.

[Scott Peters:]

Yeah, the types of off-campus, Denver would technically be off-campus even though you can see the hospital a quarter mile away, and the two assets in Hawaii, even though they are destination resorts from a healthcare perspective, they don’t have a hospital campus next to them.

[Rich Anderson:]

Okay. I just wanted to clarify that. So you mentioned the lease, expiring leases. You indicate you're at market pretty much across the portfolio. I guess are you saying then that the market rents are going up by the rate of your escalators? Is that how we should be thinking about that?

[Scott Peters:]

Rich, there is two answers to a great question. And this is one of the things you and I actually talked about last year at this time or last year in February. I do think that this market, medical office buildings with healthcare systems, with larger physician groups, and I put an asterisk between both of those statements, they are in fact showing that 2.5%, 3% gain. You're getting that on renewals, you are getting that in new leasing in your building. I think that's a very important component of what may be our other asset classes may be struggling within the economy. And second, our leasing concessions, one thing Amanda wanted me to talk about and she was going to jump in here if I didn't was that we are continuing to see a reduction in the leasing concessions that we are giving. It doesn't show up in our numbers per se, it shows up slowly just like the fact that we don't pay leasing commissions on 30%, 40% of the stuff that we lease because we do it without a third party broker, shows up because you don't spend the money, but doesn't show up necessarily in a number. So those two components, the space continues to get better.

[Rich Anderson:]

Okay. I'm going to do a little groundhog with you. The acquisition cost numbers came down significantly. Can you talk about how that happened?

[Scott Peters:]

And I'm going to do a groundhog for you, I'm going to turn that over to Robert.

[Robert Milligan:]

I think what we discussed with the acquisition expenses, certainly there is couple, every acquisition is unique and the payments or lack of payments that we make depending on who is actually paying that cash will impact that acquisition cost. I think in the fourth quarter, certainly there were much more traditional acquisitions, very limited loan assumptions, very limited fees that we had to pay on our side versus what traditionally has paid for by the seller. So I don't think we really did anything special in the fourth quarter, just happened to be these were little bit more traditional closings.

[Scott Peters:]

But we were aware of that.

[Rich Anderson:]

Okay. So do you think the acquisition expensed line item might sort of moderate in 2015?

[Scott Peters:]

I think that when I say we are aware, I think there are some things that sellers can pay for traditionally that sometimes they say the buyer pay for it and the cost equation doesn't change. We will certainly be very cognizant of making sure that we don't spend any acquisition cost that is unnecessary. I think Robert wants to try to make sure that we are consistent in how we manage those expenses, if there is a opportunity to have these seller pay for something in the normal course or if we pay for it in the normal course.

[Rich Anderson:]

All right. And then one more from the groundhog file. The incentive comp issue that I brought up in the past related to acquisition volume, wondering where you stand on that issue. I know it's very small relatively speaking, but would you think it might come out of the equation at some point down the road?

[Robert Milligan:]

We look at our governance issues once a year at the board. As I told you this was discussed last year at the end of the year, it will be discussed at our annual later in the second quarter. At the small and I think that one of the things that we debated to some extent the first time we tossed it around the table was that it is small, but REIT, real estate investment trust should have some focus on quality of acquisitions, we also, Rich, and I didn't bring up last time, we have an investment committee that is made up of independent directors, every acquisition we do goes to them, the investment committee. I don't know how other companies are necessarily aligned or how they coordinate their process, but I don't have the authority to approve an acquisition simply to prove it. It has to go to the acquisition committee for approval. So in some degree that gives some constraint to the fact that or the fear that we're just trying to buy acquisitions in order to make some number or make some bonus, but I do think it will be on our list of discussion and based on a question I think all of our folks are aware of it.

[Operator:]

And the next question comes from Jonathan Hughes of Raymond James.

[Jonathan Hughes:]

Hi, good morning, guys. Good afternoon, let me say. Just quick question, most of mine have been answered so far, but wanted to ask about is this acquisitions and your outlook expectations for additional acquisition opportunities in that market, and at what size would you presumably take that in-house management?

[Mark Engstrom:]

I think the one, we would like to have other opportunities there, one of our peers are there and I think they like the particular metrics of Hawaii, we like it. I think it's an opportunity for us to add some more depth in the marketplace, we wouldn't have done it without the thought that perhaps some folks that we have dealt with or dealing with can help us in that regard. But I think Amanda would say that or certainly I would put pressure on Amanda to say one more acquisition and okay, that's now we've got three, we've got enough square feet, it's a small enough demographic distance between folks that now makes sense. So I think it would be on the next acquisition that you would see us take that next step. Having said that, we are getting great help from the folks that are doing for us there now and in fact they were part of the folks we bought it from. So good relationship.

[Operator:]

And the next question comes from Douglas Christopher of Crowell Weedon.

[Douglas Christopher:]

Hi, thank you very much. Robert, you mentioned G&A outlook for 2015 is approximately $26 million. Can you quantify that three full years of vesting impact versus the $24.9 million in 2014?

[Robert Milligan:]

Looking at it, I would say the bulk of the increase is related specifically to that. Certainly we have a number of other moving pieces within G&A that we always look to manage very carefully to make sure we've got the right infrastructure in place for our platform. But I would say the bulk of the increase is really related to that kind of third year of stock comp expense.

[Scott Peters:]

And the other thing that we have done and I think it's been very important for us is that we have talked about in-house management both leasing, property management, and we've put in a program and again I don't know what other companies do, but we believe that the leasing folks in our regions and the – what we call our diligence officers which oversee a lot of our portfolio regionally, we've vested them in a stock program that's over a period of time. So we've started that about two years ago, some of the impact that Robert is talking about is in there, we're staffed really where we are, so it's not going to be incrementally greater, but it's very important just like 2014 was a very good year for us in most all metrics. And the folks that are doing it are the folks that are doing it day to day and in the marketplaces that have these valuable relationships. So I think we are really comfortable with what Robert's guidance is on G&A, 2012, people said can you keep it at 24, 25, we said we could. I think we are very comfortable keeping it in that 25, 26 range over the next two or three years.

[Douglas Christopher:]

Great. Thank you for that detail. And can you describe maybe your discipline to stay above the 6% cap rate area?

[Scott Peters:]

I think it's not only discipline, but it's the type of opportunity that you are seeing. I would argue to some that the larger portfolios and the aggregation of portfolios they are growing on are really generating cap rates that are maybe 50 or 75 basis points different than what they would be if they were individually on assets with an individual discussion with that primary first seller. Remember, when you buy something third-hand, sometimes it cost you a markup. And so some of that stuff that may go sub 6 is probably in that category. Some of it is longer term lease properties that have fundamentals that certain type of buyers, leverage buyers are looking at. And they are seeing the great opportunity to do that, but that's the 5 or 7-year opportunity for them, because when refinancing comes, that metric may prove out to be one of the opportunities for us to be an acquirer. So we want to stay is the plan in that 6, 6.25, 6.5 range. I think that's the best capital allocation that we can utilize. And I think we focus upon the long-term quality of the asset, quality of our portfolio, capital allocation, and the performance of our NOI on an annual basis and that will reward investors long-term. We don't need nor should we go hunting for assets that are unusually for whatever reason priced at a point where there is basically very little spread to be made and a lot of risk to be had.

[Douglas Christopher:]

All right, thank you. And then lastly, can you describe potentially the effect of the overall economies in the area where you operate? For example, lower energy prices and lower energy budgets could impact some of the commercial space demands in the areas where there's drilling and production around you. Any thoughts regarding the potential there for the healthcare space?

[Scott Peters:]

Yes, three thoughts. Number one is I think that the healthcare sector is probably removed from the localized pressure of those jobs that are at risk because of the reduction in the energy, again healthcare, people need it, they use it, it's continuing to roll out, very little do we hear when you're talking about re-leasing about the economy. That's not the discussion the healthcare systems, the large physician groups have with us. It's more about location and synergies and reimbursements if they are looking for certain things are not – so I think that's good, but I think you should be aware of certain states that maybe in that off-campus, I think that could be an issue. I think if you're buying off-campus in a asset, you might be impacted by that because there's a lot more competition and that would be a lot more competition. Benefit, I think our tenants will get the benefit from the reduced energy, because we will pass it through to them or pass most of it through to them as under our leases will benefit from some of it, but that's good, because you want to be a good purveyor of their dollars that they are spending to occupy your space. So I think it's interesting to see how and what areas would be impacted. I don't think the healthcare side of the equation and again determining where we may be located from an asset perspective should not impact us, we have not seen it.

[Operator:]

And this concludes our question-and-answer session. I’d like to turn the conference back over to Scott Peters for any closing remarks.

[Scott Peters:]

Thank you everybody for joining us again. I do know that – likely know that management team will be the conference next week, Wells Fargo. Looking forward to talking about the results here, thoughts on the medical office space and we again appreciate all the investors and all the folks that talk to us about what we’re doing. Thank you.

[Operator:]

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