Q4 2019 Earnings Call

Thank you, and welcome to healthcare trust to America's year-end 2019 earnings called. We filed our earnings release in our financial supplement yesterday after the close. These documents can be found on the investor relations page of our website or with the sec. Please note that this call is being webcast and will be available for Replay for the next ninety 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 and 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 there for our actual or future of bolts can 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 website. I will now turn the call over to Scott phone number.

chairman and CEO of

Healthcare Trust of America Scott good morning, and thank you for joining us today for healthcare. Trust of America's fourth-quarter and full-year 2019 earnings conference call joining me on the office today or Robert Milligan our Chief Financial Officer Amanda Holden our Executive Vice President of asset management and Caroline Tre Otto our senior vice president of Acquisitions and development. As long as we begin twenty-twenty h d a has positioned itself to be the sector leader in the ownership Leasing and operation of Medical Office Buildings. We have a key Market Focus portfolio that is irreplaceable was almost twenty five million square feet. Our portfolio is comprised of a fully integrated full-service operating platform and HTA is positioned itself with a fortress investment grade birth sheet that positions us to uniquely pursue Investments and deliver earnings growth and shareholder returns over the next three to five years.

As Healthcare enters the new decade it continues to move towards an integrated outpatient experience that is cost-effective and convenient for patients. This delivery will take place in three settings took one on campus where HTA is the largest owner of MLB's in the country to off-campus in the community locations where all leading Healthcare Providers are focusing and growing their presence in three in academic University locations were academic and Healthcare combinations are critical.

over the last thirteen

Years, we have built a portfolio of MLB's that reflects these Trends so they focus on finding core critical real estate in great markets that will deliver high levels of tenant retention and Rental growth opportunities over future years. Our experience has demonstrated that properties with the strongest performance occurred both on and off campus with the primary drivers more related to Market quality patient demand building characteristics and increasingly critical tenants energies strategically HTA is targeted Ki fast-growing markets that we believe will outperform other markets throughout the country are targeted Market approach allows HDA to maximize returns by creating size and scale and markets. We now have 17 markets with over five hundred thousand square feet long and ten markets with approximately a million square feet or more. This scale allows us to effectively create a deeper and more strategic local operating platform with relationships and operating off.

that are you

This approach is a key pillar for our growth strategy going forward.

In 2019, we saw the positive attributes of our platform and portfolio start to work in ways that generates both internal and external growth opportunities led by one same storm that 2.7% driven by rental Revenue growth of 2.3% and margin expansion from increased utilization of our property management platform and certain expense savings this in fourth quarter same sort growth of two and half percent.

To leasing where we least almost 15% of our portfolio or more than three point six million square feet with full year releasing spreads of 3.5% and same-store tenant retention of 85% total Acquisitions of $558 million at a blended cap rate of 6.1% After taking into account expected synergies from our asset management platform package includes / 330 million closed in the fourth quarter. These are well-located a Moby's located primarily in our existing markets where we are at a scale and we'll utilize our operating platform to drive additional value for shareholders. Although the acquisition markets remain very competitive for larger deals. We're focusing on one-off opportunities that fit in our portfolios, but where we have been able to acquire yield that allow for immediate secretion.

finally for

Developing we have announced a hundred ten million of new developments and redevelopments in 2019, including two on campus developments with HCA indignity now called, may we have strong relationships with both of these entities over the years and continue to work with them for future developments. We now have for developments and process with total Investments of over a hundred fifty million. It will start to be delivered in 2020. We've also announced the Redevelopment of to MLB's on our Saint Joseph's Health Mission Viejo campus in Orange County, California that will include up to twenty million of cash investment. Our balance sheet has never been stronger with leverage of 29% of total capitalization and 5.7 times debt-to-ebitda. This leverage goes down to five times 25% of total capitalization when Factory in the approximately three hundred million in equity available to us to take down on it Forward bases over the next six months. We purposely built our Capital available.

in the fourth quarter of 2019

Give them the deal flow. We are seeing and expect to deploy this Capital over the next two quarters.

Earnings growth is a result of her performance and acquisition activity. We were able to grow our normal lives funds from operations to a dollar sixty four per share and forty two cents in the fourth quarter note that in 2019. We had more than two pennies per share and costs that were capitalized that HTA must now expense. These costs were associated with in our with our in-house leasing teams Thursday looking at a 2020 HTS focused on driving performance in a way that hits the bottom line from an asset management perspective. We are focused on using our platform to drive occupancy growth to a thousand five hundred to two hundred basis points while continuing to maintain releasing spreads that we achieved in 2019.

From an investment perspective are focused continues to be on finding closing on Acquisitions and development opportunities that meet our discipline criteria in our key markets.

baking

Advantage of the increase in opportunities that we're seeing now to both our acquisition and development platforms that have been in place now for five to ten years.

For a balance sheet perspective. We are focused on maintaining a strong balance sheet with leverage between 5 and 5.5 * + 6.0 * investing the equity we have raised on a forward base wage on an accretive from an accretive perspective from a guy's point of view for 2020. We're expecting normalized ffo per share to reach between a dollar sixty-nine and a dollar seventy three per share with growth of over 4% at the midpoint of the range. We expect our same-store growth to range between two to three percent for the year, but they focus on growing occupancy to achieve the table outside of the range. We will fully deploy our existing Equity Capital with Acquisitions projected between 500 and 600 million for the year with expected yields after centers use of 5 and 1/2 to 6 months later. Finally. We will start to deliver our development switch with our first project and Cary North Carolina being delivered at the beginning of the third quarter. Robert will give some additional color in his comment dead.

Finally I wanted to point out.

Healthcare Trust of America's first sustainability report that was published in January since we started our operating platform in 2010. We have focused on the efficiency of our buildings and our footprint in the communities in which we invest I will now turn the call over to Amanda. Thanks Scott in 2019. Our team remained focused on delivering high-quality operating and leasing results in our existing portfolio while integrating new properties onto our platform and capturing the efficiencies and synergies anticipated as part of these Acquisitions over the last decade. Our in-house asset management team had repeatedly our ability to add between twenty-five and thirty five basis points of incremental yield as we bring new properties into our platform the most visible example of this being the do portfolio which we bought it in 2017 and over a 12-month. We generated savings between seven and eight million dollars largely the result of replacing third-party management and Engineering staff with our own teams dead.

And capturing the markups and process.

It's previously passed to third party managers this transition from third-party management to our in-house platform is seamless from a tenant perspective as they see no net Financial impact damage our shareholders to benefit from profits previously passed on to third parties with over 200 Property Management engineering and leasing staff across over 20 offices h t a r m as uniquely suited in the space to benefit from the synergies and savings of full service operating platform provides. We believe as a company we are still in the very early stages of recognizing the full benefit of our platform as we grow in markets where able to hire more specialized and skilled staff to do additional Services previously done by Third Parties by way of example that five hundred thousand square feet in a market and housing mechanical electrical and plumbing services begins to make sense from a cost standpoint.

With a focus on growing our key markets and continue training for in house staff. We expect over the next three to four years investors will continue to see margin expansion and value-creation from our platform turning now to the fourth quarter our same-store growth. This quarter came in at two and half percent driven by a 1.4% base Revenue growth and a hundred basis points of rental marginal on a year-to-date basis same store noi growth increased 2.7% driven by full-year Revenue growth of 2.3% during the quarter. We signed approximately 1 million square feet of leases. This included 180,000 square feet of new leases and almost eight hundred and thirty thousand square feet of renewals our total tenant retention for same-store portfolio with 77% while releasing spreads on renewals remain strong at 3.4%

annual escalated

For Lease sign in the. We're 2.9% continuing our trend of increasing escalators towards 3% as we continue to roll our leases the eyes remain consistent at $1,000.96 per square foot per year of term on renewals and $4.11 per square foot per year of term on new for the year. We have now least three point six million square feet or 15% of our total portfolio GLA same-store retention for the year is 83% while are releasing spreads on our nols are strong 3.5% further contractual increases on both new and renewal leases signed during the year average 2.6% strengthening our recurring Revenue stream and quality growth. Our investors have come to expect

New trends to note on our renewals. We have seen a notable increase level of early renewals with over a million square feet of leasing for the year related to leases that expire in 2020 and Beyond. This is driven by tenant speaking to lock in their space for the long term as they consolidate practices and invest in their infrastructure. We have also seen an increase interest in longer-term renewals as evidenced by the average renewal term 2019 of 7.2 years nearly 25% higher than our 2018 renewal term average of 5.8 years. These are both positive trends that we believe will continue into twenty-twenty as tenants are trying to lock in key real estate for their health care delivery strategies.

Expense front we continue to show the benefit of our economies of scale and Specialty Service offerings for the quarter. We are able to keep expenses relatively flat over the fourth quarter of 2018 chef and down over 2% sequentially, despite an overall increase in property taxes during 2019 primarily in Texas. Our teams have largely been able to offset this impact through efficiencies and our tax form and continued focus on utility Savings in the fourth quarter. We did begin to see some of the favorable outcomes of our property tax appeals and believe we will continue to have success with our appeal efforts in Iraq in quarters. 2019 performance is a great reflection of the resiliency of our portfolio and ability to continue to deliver quality and a wide growth through changing external and internal environment. We came into 2019 with a slightly higher amount of exploration than in years past 12.8% of our portfolio vs are historical 10% average. We all suck.

had several asset trends

Kitchens the largest of which included our Mission Viejo Medical Office Buildings for Moby's that we own fee simple on the st. Joseph Health Mission Viejo campus in Orange County, California. These bills were constructed in 1972 and are coming off a 20-year Hospital Master Lease. We're moving forward with Redevelopment on two buildings that will modernize the facilities and allow us to come and rent a specifically above their current rent and More in line with this Market while these factors contributed to an overall decrease in your over your same-store occupancy and least percentage much of which was manifest in the third quarter. Our same-store least rates remained steady in the fourth quarter and occupancy grew ten basis points to 90.9% over Q3.

As we looked at twenty twenty, we have approx 9% of our portfolio expiring with another 1.6% in month-to-month status given current discussions with tenants. We expect to get attention to be around 80% with renewal spreads in the two to four percent range our new leasing efforts continue to be strong with over 40% of our pipeline comprised of large deals greater than ten thousand square feet while these deals do generally take longer to sign and ultimately build out we expect to see the benefits of these deals through meaningful increased least and occupancy levels off towards the second half of 2020 with an overall Outlook of moving occupancy between one hundred and two hundred basis points within the next twelve to twenty-four months. I will now turn the call over to Robert. Thanks Amanda 2019 ended up being a very active year for us on the investment in Capital Market front which when combined with our continued seems to work growth allowed us to demonstrate an accelerating level of birth.

And the fourth quarter we generated same store growth of two and a half percent with full-year same stroke coming in at 2.7% This continues to be generated by both steady consistent Revenue growth and margin expansion through increased performance and utilization of our operating platform from an infrastructure perspective. We remain very efficient with GNA for the quarter come in at ten point two million with the year-over-year increase driven primarily by the expensing of in terms of leasing cost and which we have capitalized 1.2 million in the year-ago. For the year. We came in at 41.3 million which remains extremely efficient relative to our peers as a result. We just need normally death of per diluted share in the fourth quarter of 42 cents up 5% from prior year as we continue to generate same store growth and close on our Acquisitions redeploying the capital raised in last year's Greenville in the better assets and markets funds available for distribution increased seventy two point three million in the quarter which includes 17.6 million of recurring Capital expenditures or approximately 14% of birth.

Our run rate for the year. However

Remains around 12 and half percent of our recurring capex is slightly higher than normal given the relatively high amount of total leasing we've entered into in 2019 or close to I'm close to 15% of our portfolio month for almost 25% more than we completed in 2018. We expect some of this will continue into twenty-twenty given the lag and tenant Improvement utilization.

Run an investment perspective. We are seeing an increased number of opportunities that meet our disciplined underwriting criteria and have an improved cost of capital that allows us to close and lock in attractive day one increased for shareholders for a 2019. We were able to find and close on over $550 million dollars of Investments at yields of over 6.1% including day one synergies from our operating platform and the fourth quarter we closed on 338th and Investments including the mix of sales from developers private owners and health care providers our investment criteria remains straightforward identifying assets that are positioned to grow over the next five to ten years by focusing on Iraq or critical real estate. They'll be in high demand as health care delivery continues to evolve mix of on and off campus buildings as well as those on academic Medical Center locations.

you're located in key markets that are

Burn faster than us average where we can increase our scale and relevancy and assets where we can utilize our platform Drive additional value and yield to our investments. And finally we're focused on achieving a creative opportunities that drive dead returns as well as long term growth or 2019 Investments met all of these criterias. They were all located in our key markets in court critical locations with the opportunity to drive additional value over time through an increase in occupation in the opportunity to push rents. The properties were almost 60% on or adjacent to campus while still acquired entirely on a fee simple basis, which we think is critical to long-term performance from polio construction perspective. We continue to grow with our scale and key markets increasing that number of markets with more than five hundred thousand square feet 2/17 as we increase our Geographic concentration, we gain the brand relevancy wage systems academic universities and large physician groups and improve operational efficiencies as we leverage a platform.

Our balance sheet philosophy is to remain lowly leveraged and raise Capital the time we make Acquisitions to lock in the earnings of creation and ensure we are always in a position to pursue transactions opportunistically. This is especially true in both markets where we have the ability to pursue growth like creatively can turn quickly. We Finance their Acquisitions in 2019 by raising approximately $637 of equity including $5,085 million in the fourth quarter at average prices around $2,900.70 or an implied low five cap rate. That is at least sixty five bases lower than our acquisition price. We're a capital through ATM allowing for very efficient transactions and took slightly more than three hundred million dollars on a Ford basis which will serve as dry powder for Acquisitions as we had in 2020.

I would know that we have a number of ways.

In which we can raise equity and are always evaluating the opportunities in any given market and the fourth quarter we chose to use a forward given the potential for Market volatility and election year and the pipeline of opportunities that were seen. This is give us the strength of a five times leverage balance sheet without the immediate burning solution that comes from raising the equity on a traditional basis something we believe will be valued by shareholders as a result our balance sheet continues to change shape to finance growth in 2020. We end of the year at five point seven times debt-to-ebitda with 1.2 billion of liquidity, including the equity forwards and very limited near term maturities.

In the third quarter, we took the opportunity to extend these maturities at very attractive rates.

Factory in the Ford Equity into our liquidity in our balance sheet standing at 5.0 times debt-to-ebitda. We have the capacity to buy over seven hundred million dollars and Acquisitions while remaining within our targeted age range of 5 and 1/2 to 6 x. Twenty twenty. We have provided our initial earnings guidance that is in the range of a dollar sixty-nine to a dollar seventy three is normalized ffo per share. This guidance assumes facts for growth of 2 to 3% with a high end of the range based on achieving increasing levels of occupancy by the end of the year G&A of 44 to 46 million as we grow our platform capabilities to increase occupancy Acquisitions at five hundred or six hundred dollars at a blend Blended cap rate of 5 and 1/2 to 6 and 1/4 including synergies, the utilization of our $300 of equity Ford towards the end of the second quarter resulting in an average shares of approximately 226 million with a remainder of our Capital Finance on a revolver.

And a 2 and 1/2 to 3 million dollar head.

As a result of our Redevelopment properties at Mission Viejo with the expectations that they will achieve positive cash flow towards the end of the twenty-twenty our maintenance capex for the year will be thirteen to fourteen percent of them as a relatively higher levels of leasing in 2019 heads into twenty-twenty. We could also see non-recurring Capital increased slightly as we look to increase our occupancy Levels by a hundred to two hundred basis points throughout the year, which will position us for solid growth in to 20 21 in total. We think 2020 will be the year. We return to her normal levels of growth. You should expect from HTA in the mod sector. I'll now turn it back over to AG. Thank you Robert. Thank you. Amanda will now open it up for questions.

We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press * then two. Please limit yourself to one question and one follow-up. If you have further questions, you may re-enter the Queue at this time. We will pause momentarily to assemble our roster. Our first question comes from Te'o okusanya with Mizzou. Ho please go ahead. Yes, good afternoon. And uh a solid quarter great guidance question around same-store Guidance with twenty-twenty. I just kind of giving your goal of increasing occupancy of a good basis points. Just a little bit surprised that the same story know I guidance is and higher

well, I think you know as we look at how we

The Performing how the m o b sector should certainly perform. We think two to three percent is is a pretty consistent range that we're going out with you know, our view is from an occupancy perspective. We saw a slight decline in the third quarter from an occupancy perspective that's carried into the 4th. We'll see that carry into the first certainly the first quarter next year which will provide a little bit of occupancy Head Start which we anticipate will potentially lead to occupancy Tailwind by the time we get to the end of the year. So there's a little bit of a balance from an occupancy perspective as to how it relates same-store that's helpful. And then you I appreciate the commentary you made about your acquisition Outlook and kind of you know what you're looking at relative to some of the big transactions out there. But again, it's generally talk about the overall kind of acquisition Market where cab rates are whether there's a big difference between trying to buy on campus which is off campus and and things of that sort.

Sure, this is Scott. I think that you know, we have seen over the last certainly 24 months and maybe even a little longer than that that the quality of of what we call Community Corps or off campus buildings if they have the right synergies the right location in the right size and I don't mean size necessarily by a single building but by off buildings and and then the tenant occupancy is is critical but we've seen that cat break compression come down and I think it continues to in certain cases get even you know closer to what traditionally has been on campus. I think you're seeing if you look closely and if you know, you never know what the future brings but I think we feel here or you know, we started Community Corps almost ten years ago. We started academic University Acquisitions six seven years ago, and if you log

the future of healthcare your

Seeing on campus become far more selective. I think when you buy something on campus if you used to be able to just buy it and assume that it's going to perform or the demand was going to be their own Healthcare System was going to be fully Cooperative. I think you know, the Health Care Systems now are focused out into communities. They're focused in two locations where they can generate the greatest patient 6 and from from an ownership perspective, you know, we've seen many situations and and I think our peers are seeing situations where traditional what used to be called an off-campus Community Coeur location from a perspective or a return perspective compares favorably if not more favorably to to what may have been a traditional on campus. So, you're going to continue to see the the evolution of and migration of continued services from on campus to community Corps and I go back to the FAQ.

you know we can pick your

Key cities and and those key cities are those key communities are growing and and the infrastructure of those cities are continuing to expand the only logical place where for one of these Health Care Systems to reach out to is back into the community Corps locations. So they're doing that and you know, we're very we're very happy with our cities that that we've got depth and breadth in and we can continue to see acquisition opportunities both on campus and in the community course setting but what are those cap rates kind of around one of those aspects of trading for my relative to maybe some other stuff you bought in fourth quarter.

Well, I think the cap rates haven't haven't moved. You know, I I frankly haven't seen I thought we got extremely aggressive with cap rates, maybe 12 months ago sixteen months ago on some charger portfolio transactions and you know that got a lot of publicity and and so therefore other perception was that my individual asset or my one or two assets can take that type of pricing and that's backed off a little bit. You know, we're we're finding is Robert talked about in his comments, you know, we're finding very good strong opportunities in the 5 and 1/2 to 6 and 1/4 Thursday. We like that that seems to fit right where we like to be and you know, we're very optimistic about 20 20. We've got the balance sheet that allows us to be disciplined and and execute them. We like where we are and I I frankly like the the environment that we see right now.

Great. Thank you.

Our next question comes from Daniel Bernstein with Capital One, please go ahead. Hi, I guess a follow-up question about the tile wage occupancy, uh and same-store in Hawaii for the 2020. So is the right way to think about it that maybe growth your your will be roughly like to purchase in the first half and then three three and half percent in the second half of the Year and that flows through into 21. Is it is that the right way you think about the noi growth? Well, you know, we we certainly Target have have our same store growth in each of the quarters, you know above the 2% range, but I think as we look at how the occupancy and the comparative periods lines out, you know, our view would certainly be the first quarter first half has a little bit more of a revenue year of your head winds just giving that occupancy with the potential for that to shift as you get into the back half of the year.

Okay, and then she been in.

421

you know shoot see some acceleration 2120. Yeah, we're we're seeing you know, where we look at this and I think we tried to be pretty forthright with with investors is you know, we positioned ourselves in 2024 both the same store where where we like to see it to to 3% We think we have occupancy and we focused on occupancy and we've focused on our own platform. We've got some Redevelopment that starting to take traction and and and as a man to point it out in her comments, we've seen traction frankly with some large groups or large space and they you know, it's it's a catch-twenty-two if we had smaller spaces adding up to the larger spaces. I think they'd be done by now, but the larger spaces are just by by the fact that who who does them they have more processes. They want to make sure that that's the right location. We're seeing good activity. So we're we're very excited about the fact that we can see some occupancy Gaines, Georgia.

We've repositioned our portfolio.

In the development that we're doing I think is going to pay dividends from a pricing perspective in in where we are with those assets and then in terms of dispositions you only offer guided to fifty million. I don't know if that's slower or not. But it seems with cap rates fairly low may be slightly compressing and certainly technology package of MLB's the the size of the oven these demands of the hospitals are changing as well. You know, are are there. Is there a possibility that fifty million dollar disposition number could be higher as you off of you the portfolio. I I think you know, we we're sort of fortunate I was talking to someone the other day and we were talking about Healthcare Trust of America and you know, I am 14 years old. So we're not Thirty forty years old. We've gone through a process over the last ten years and we've been public doubt about 7, you know, there was a huge focus on on Thursday.

as far as a quality of product

When we went public and frankly as we got bigger and bigger and we've gone through a very diligent process with our investment committee, you know, our investment committee sees every acquisition that we buy whether it's for a dollar whether it's for two billion dollars. So we've been very selective in our cities. We've been selective in our assets and you know, when you go through and you say they're you know, every company should dispose of things that don't fit them and folio, but if you look at what we put together with the Duke acquisition with the Acquisitions that we've done since then they're in our markets their purposeful. They're disciplined. There's not something that we say, okay, we bought twenty assets and we don't like five of them. So therefore, you know, we don't we were going to dispose of those five. We've been very diligent. We've been very disciplined. And so I think the 15th on a on average is probably right number but you know, we've always said and and I continue to say, you know, everything is for sale at the right price and you know, we we were fortunate to have a job.

opportunity to do Greenville

By the time that we thought it was good for both parties. And so if something came about that, it said wow, you know, you just bought it again and and should we think about that we would but we don't have what I would consider to be a lot of assets that we don't like what we do like is the opportunity for our platform to lease them up and to bring value to them if they're not ninety ninety-five percent occupied. Okay, that's good. I'll you before. Thank you.

Our next question comes from Nick Joseph with City, please. Go ahead.

Thanks, when you underrated in that position, what additional benefit do you typically take in for putting in acid onto your operating platform? Well, you know everyone or not anything but certainly our platform gets that immediate bump, you know traditionally in most all cases. We've seen that there's been third party or there's been you know, third-party managing that asset and so we bring it in on board and in most cases now, we don't bring on extra people because we've got our markets built out and we've got them built out to a point where you know, one one or two aspects in that market doesn't generate a huge change in in how we're operating. In fact, it brings synergies and benefits and you know, so the first part of the equation is pretty clear pretty just Inked in and we proven it, you know over the last three years certainly with the Duke acquisition, but second and more importantly in and we're we're focused on and what we've talked to investors about and what we need to do a better job.

up with is

The benefits of managing your own your own assets when you have five hundred thousand square feet a million square feet, you know, we're building out teams now of Engineers property managers that I'm bringing the services that are traditional third-party services were bringing them in house, you know for for a number of years, you know, people said well, how can you you know own a medical office building and and what benefits can you bring to to that building? Can you bring to the tenants? Well you what you can do is you can do two things one. You can train put in systems put in processes to make it consistent so that a tenant feels that their consistency you get a reputation within the market because physician groups and Physicians talk a lot. But second from an investor perspective we can bring those synergies off and get those benefits of bringing that third-party services in-house have our people do it have them do it quicker faster. And and of course we're in early process of doing that. I mean, that's the nice job.

Amanda talked about it. I think we

Have years left where we can get more and more of these services in house and remove them from third-party processes and they just to be clear on on the cap great disclosure. The only thing that we're we're factoring into the year 1 cap rate to HTA is really the elimination of the third-party property management fee come back to us. We do see additional benefits beyond that but we we haven't factored that in so it's it's typically the twenty to Thirty basis points that come from that that we've included into disclosure. Thanks. That's very odd that maybe just on GNA The increased expected in 2020 guidance. You give some more color on what's driving that

You know, I think as as we looked across our platform, you know, it's gotten a man of talked a lot about you know, how how we expect to and plan to build and grow the occupancy of the portfolio throughout the years. We've we've expanded the leasing team in the asset management team a bit as we had into this year partly as we've gotten some more scale in our markets. It makes sense to get more leasing people there to really dead dive into the the depths of how do we grow those relationships and we expected to pay off from an occupancy perspective really as well as as a depth and relationships that leads to other Acquisitions and developments as well.

Thank you.

Our next question comes from chat vanacore with default, please go ahead. All right. I'm going to trot on some territory that tile Dan asked about occupancy wage directions since Amanda mentioned about a hundred two hundred basis points of improvement potential that makes me think that you might Target some specific opportunities, maybe give us an idea of what those would be on some of your name be under occupied properties.

Well, you know, I think as as we looked at our portfolio, you know, as a man just talk through things certainly in third-quarter this year. There's a couple of properties where we've essentially acquired them. We knew we were going to transition from a tenant perspective move some smaller tenants out Make Way for some of the larger tenants to come in in place. So we saw the the occupancy decline take place in in the third quarter. Now, we expect it through the course of the year of many of those same assets to get tenanted back up. So she's mentioned properties in in New Haven some some we've got in Charlotte that we bought the lower more lowly off some in Houston as well that we've kind of gone through this also our our mission Redevelopment campus. We're expecting to gain some traction there. So,

All right, and then you know end of the year, what's your property tax been experienced?

And how that trend.

A property taxes are are certainly as we've talked about and I'm sure other folks had talked about a big issue you buy something and it gets revalued. You know, we go through a very diligent processing and I don't think our process is is any different than any of our peers we go through and and we actively try to appeal and and get the property tax to a to a nearest Value we can so it is an issue you we look at it when we do an underwriting we look at it. When we do an acquisition, you know, when we do an acquisition, there's there's three or four things that we look at that one. Of course is location Center G's of tenants and synergies of Health Care Systems. We're assuming of course it's in our market. So we have a pretty good depth of what that is second. We look at Grant because I think that you know right now there are when you see a asset and it may be overvalued. I think it's less overvalued relative to the cap rate than that. Someone's asking for dead.

it's probably overvalued based upon the rent that you can get on rollover or you can get on a renewal so we look very carefully at

The rent, you know is the rent proportionate to what we can see in an escalator and what we can see in in that growth over the next seven years. And then third we look at the property taxes because you're going to eventually you know in a relationship with the tenants your relationship with the ability to to renew release that communication is something that's going to impact them. Whether it's the first year you own it or the second year that comes through so it is something now that that is a you know, a significant discussion Point both with us internally, but also with our investment committee.

All right. One quick last one any notable lease expirations either in 2020. We should be thinking about not you know, we're pretty consistent. I mean, I tend not to like to use that word much but with the portfolio of almost twenty five million square feet, you get Ebbs and flows. We're very diligent right now on on when leases of five seven thousand years or rolling. We want to make sure the right tenant is there we want to make sure it's the right grant the right amount of T I both by us and by the by the occupant so long we've taken 2019. We're diligently focused in twenty-twenty on putting the principles of of our platform to play in decisions on on both of one-off basis, but accumulated basis that adds up to focusing on the bottom line. I mean, we are focused as an organization in moving the results to the bottom line for HTA.

All right.

For me. Thanks.

Our next question comes from Connor sabarsky with berenberg, please. Go ahead.

Oh and thanks for having me just a quick question on Redevelopment. Could you provide any color in regard to how you identify the properties that may need renovation or modernization? And then in terms of execution on that end you Jeff follow a preconceived strategy maybe in terms of modernization or is he project strictly addressed on a case-by-case basis?

Well, you know, I think as as we go through our our you know, annual budgeting and asset management process, we certainly identify kind of our strategic positioning of assets within the market in typical if we find assets that are are of lower quality and lower rent but have the opportunity for significant increase in in either occupancy or rate will take a pretty hard look at that and evaluate our plans for the building and any Capital required to go into that made us talked about Mission Viejo. I think this is a perfect example, we had to you know, some older buildings coming off long-term leases the rents of those dead relative the campus where you know, probably ten eleven dollars, which is in this case twenty-five 35% below where the potential could be. So we did identify improvements within their part of the office is typically going to be MEP. How do we make the buildings more efficient? How do we drive more energy controls through the buildings? And that just becomes part of the overall Redevelopment process?

got you, and then in terms of

Development team in general any plan to bring on any more people and maybe increase your bandwidth in that area? Well, you know, we're always looking too bad truly, great people. I mean, this is a we think it's an opportunity for four people to come aboard and and really take a unique approach and and improve their career and so forth. So we're always looking but specifically as it relates to do we need to add anyone do we need to add additional people for our bandwidth? We're pretty well-positioned. We're always looking at opportunities were very disciplined. I mean, you know, we want to do development with medical office buildings that fit our criteria. We don't just want to build a building. We don't want to just build a building and have it off at least and then five or seven years from now say, okay. What am I going to do with that building? So we are being very diligent. We've got opportunities. We continue to see development. We we also control

to see most of our

Communities with our existing relationships and you know, I guess timing was pretty good for us with the Duke acquisition. We'd been around for you know, eleven twelve years decide self. Just get to a place where we were more recognizable. And then now it's been a year year and half and and our introductions to folks that we've already known in the completion of some of the development team leads to the discussion of okay, you know, there's more development to be done in and we'd like you to consider doing it and will include you with the opportunity that that's out there and so we're we're we're in a good place. But again, we're very disciplined and what we want to develop. Okay. Thanks for that. Have a good weekend everyone.

Our next question comes from Jonathan Hughes with Raymond James, please go ahead. Hey, good morning out. There was hoping you could walk us through the progression or how you get to the App Store and in my growth in the quarter look at it was down 75th renewal spreads up mid three, but at 75% attention to that gets you to the the mid 1% Revenue growth. I'm just where does this other hundred basis points come from it gets it two and a half.

You know.

Get the It's a combination of things one as we've talked about. There's just a normal progression of what we've seen throughout the year of doing more within our our property are operating platform. I think if you were able to achieve one of the focus areas, we've talked a lot about this year was focused on utility savings as we've gone through in the teams gone through and recommissioned certain the buildings. We certainly saw some pretty good increases are pretty good improvements there within the fourth quarter that we got some additional margin out of we also got some property tax appeals that came back and and as we go through Thursday. We had a couple of hundred thousand dollar benefit from both property tax appeals where we received refunds as well as just where we were able to get valuations and assessments lower that also May grow probably another twenty basis points in twenty Thirty basis points of the Improvement there.

Okay, so most expensive but I mean if say like if you didn't have that opportunity and I realized it's part of the platform you build but if they expenses had been up like 2% and then bring it in closer to flatter 1% Is that is that right?

well

As you said, I mean it's hard to Discount the portfolio. We've you know over the last three years we've out performed our peers from a expense perspective. Most expenses have been up and down platforms are our platform has actually been lower we've taken advantage of that. We continue to think that we can take advantage of that. So, you know, I it's fortunate that we take advantage of these things. I don't think that we will continue to not be able to have those advantages advantages as we go forward. So sort of asking a question of of negative negative, so I wouldn't know how to answer that.

Yeah, okay, and then my my one follow-up you started last year with $75 million of expected dispositions ended up doing five for the year. You're starting this year with fifty million of expected dispositions. Can you remind us what's the definition of requirement for a property to be classified as held-for-sale Thursday are all if fifty million of expected dispositions, um in the intended for sale adjustments the same server analyze and stuff.

The definition on that is simply that it's kind of a four-step process to qualify for that first. We have to have board approval to sell the assets to walk the boardwalk through the rationale For What and why in potential impact of that? The second thing is we have to have actively marketed it so it's got to be taken to Market being shown to sellers walk you through a broker process sometimes on a direct basis. The third thing is we actually have two received an offer on it for us to add a price that we expect to to go through and actually proceed to save on that. So, you know when you look at what's out or in the intended for sale bucket in the fourth quarter, there's only two properties that met that criteria both have had PSA signed and have gone through various parts of the month to get there. So it's a very disciplined and and frankly limited process to to fall within that bucket and you know, as you know, we talked about this before we actually have a third party diligences and signs off.

To our audit committee on both our same-store growth and our disposition process. So HTA is probably the most

Dila just company that I've been associated with from that perspective from an internal consistency and criteria and monitoring service active. But we have gone through situations where we have put things up for sale got an offer and try and and folks have tried to retreat us and we don't re trade-off, you know, we tend to buy what we buy we tend to agree to sell but we sell and there's been a couple of examples where we've seen opportunities where lease is coming foolish and we wanted to get paid for them and and wage has decided not to pay for them. And so we've said well then guess what that that's something we're not going to sell. So we make business decisions as you would expect whereas I said our investment committees phone not active and so we are very cognizant of making the best decision that we can on a consistent basis for shareholders and kind of just the final thing. Just just on that point. I think if you look and wage

Through the you know, I walk that we have if we had actually included are intended for sale properties into our same store pular same store growth would have actually gone up we would have reported I think at two 6 versus a to 5 same store. So it's it's it's it's a very defined process that we go through and it works both ways.

Okay, instead of fifty million in this is guidance right now. I mean you have PSAs for for that fifty million. I think you said it's two properties, right? Yeah, we've had we've had we had we've had psa's real life. Yeah. All right, that's it for me. Thanks for the time.

Our next question comes from Rich Anderson with SMBC, please go ahead. Thank you and Happy Valentine's Day God. There's love in the air for HDA today. Just loving the are just. Okay, so you guys mentioned Amanda you mentioned longer lease duration in 2019 for leasing activity to 7/7 years. I'm wondering if you get by by granting that do you get bigger escalator out of it and wondering if that's part of the I'm sure it is part of negotiation and how much more you know in so that you you know, you you allow for a longer longer stay home.

Are you talking?

Up on the releasing spread or on the contractual annual escalators on the contractual annual escalator, you know, it's it's determined by the market. So we typically try to page are annual escalators Mira the growth in the market so that at the end of the lease term, we don't have a significant role up or roll down. So generally we've been right around that three to four percent regardless of the term okay with you know, rich I think in some situations what we have seen though, is that the larger the space, you know Thirty forty fifty thousand square feet the whole be more cognizant the

Opportunity is that you're trying to get to negotiate the escalator the smaller leases you get the escalator a lot quicker than you do on the large releases and that's just sort of the page. Is that feeling today in the market that larger groups larger Health Care Systems recognize their permanence in in in that negotiation. I think that is one of the things that has changed substantially both in the acquisition market and the leasing Market is that medical office is no longer surprised medical office is no longer something that is a you know, distant asset group Brokers and Healthcare System executives are very very competent who have expertise and have knowledge about what's going on in the market. Okay. So 2018 you didn't do much in the way of Acquisitions and of course you did a lot more this year off.

Is it a simple?

Is the cost of capital conversation or is there something else that drove you to do? Much much more clearly, you know, your stock was is done much better in 2019. But nothing else is influenced this change in the external profile of the company, you know last year and going into twenty-twenty simply cost the capital. I think there's three things and foremost cost of capital. I mean it needs to be a creative. We need to find Opportunities to do that. So first and foremost is is that fact and in the next one below that is probably a couple of steps down but the next one is, you know, are we finding are we comfortable with where Cap rates are, you know, are we comfortable where the cap rates that that other folks? Are you asking for bidding for assets if you remember 2018 first part of 2019. I thought it got very very aggressive on on certain cap rates for portfolios dead.

First of all, they didn't necessarily meet.

We wanted to buy but it was aggressive and and therefore people kind of got themselves in a place where they started out at a cap rate. That was oh my goodness. I think that's mellowed out a little bit. I think that that now, there's a little more rationality in the markets that we are in and and with the Acquisitions that we're seeing. So it's cost of capital. It's then we're kapre cap rates that we can find assets and then third it's it was where is the interest rate environment? If you you know, I look back at 2018 and Robert and I were talking about he thought it was going to for the 10,000 and I thought it was going to one and it ended up in between but somehow Scott one that one well, but you know, but that was a big that was a big decision point and I think you know management teams Boards of directors had conversations about how did they want to use their balance sheet and you know traditionally over the last thirty years of interest rates go up cap rates. Go up rich. I mean, I I don't know it, you know, that's I'm not sure.

work like that anymore, but

So we we were very cognizant of not wanting to be on the wrong end of a move that maybe we didn't see or or was projected to come. I think that that feeling internally now is that interest rates are probably where they're going to be for a while cap rates become more consistent and our cost of capital is something that we can find a creative Acquisitions for Thursday. Yes good stuff. Thanks. And then last for me, how much does your external growth expectations for twenty impact your per share guidance in other words, if you did nothing this year, how much growth Would we not see if that makes any sense does and all that Robert answer that. I think it's you know, a penny or two and and I think summer frankly factored into the range that that we provided, you know, if if if we're unable to hit our acquisition targets not deploy the capital, you know, I think we ended the low end of our earnings range if we're a bath

To certainly meet our acquisition targets and exceed them.

I think we end up closer to the higher end of our our agreed to target range. Okay, and I got one more for you Robert. What what do you assuming from? The timing of the forward settle over the course of the year off ya know. So we we put in that are Orion estimates has an average of 226 million diluted shares which would imply that we settle it close to June 30th or spread it right around the mid Pac. Okay. Perfect. Thanks very much.

Our next question comes from Todd's Thunder with Wells Fargo, please go ahead. Thank you. Yeah, my question piggybacks on that last one regarding the 4th. So that's all you have for the equity. But when you look at your stock price right now relative to where you price the forward could you you can still tap your regular TM, right? But you still have to balance the good ffo guidance that you've projected how you kind of thinking about using more Equity than maybe what you have in the forward. Well, I will go back to the you know, we're fortunate right now. I think we're we are seeing opportunities. We started to see those in the last half of the year. We wanted to put ourselves into June twenty one where you know you and I've actually talked about it where we focus on our ffo growth and we focus on on getting shareholder value back to we're not backing but to where we think it should be dead.

We've we're in a position to do that. I

Always try to put us in a position that you know, if nothing else happens. We are at least successful for what we communicate to people when we talk to them and I think we're there now, I think with the opportunities we have the balance sheet. We may have what we're seeing in our leasing pipeline, you know, 2020 is the year where we just need to execute and and and do a decent job on that if we see other opportunities or if there are opportunities where we can make it a creative make our ffo growth in addition to what we would normally have done then we would take advantage of that. But right now we're very well positioned and you know, we just need to execute

Thank you Scott. That's helpful. Cuz when you look at your debt to ebitda. 5 7 Pro Forma with the forward it gets you down to 5, but it may not necessarily go to 5 and that just assumes that you're going to have incremental debt coming with not new equities that fair to say a little more debt Maybe.

Well, I think it you know, what what it assumes is that we stay kind of at the 5-7 range. So as we make Acquisitions, you know will draw down the equity that maintains our leverage and that 5 and 1/2 to 6 range that we're comfortable with it, but the important thing is we do have the dry powder. The capital is all we've already raised. We've got the certainty to pursue the, you know, the acquisition pipeline that that we see in the opportunities that we see a dog bite any kind of volatility that we have that that might come up throughout this year. So we we feel comfortable in how we're pursuing those. Okay. Thank you. And the last question when you look about when you look at the spread between f f o & F a d you've got the recurring capex in there that can chew away at some of your per share growth. How you guys thinking about capx2020 maybe on a percentage of noi basis. Maybe just talk about that. Thank you.

Well, we think from a maintenance perspective that that you know, we've we've outlined that we would expect it to be in the call it 13-2.

10% of noy, uh consistently and we expect that to be the case in in in twenty-twenty. I think where the opportunity is for it to go hires if we took it to if and when we start to get occupancy growth associated with that, you might see the capital associated with that take a little bit higher, of course, that's kind of a one-time item. And then you see the NY increasing a corresponding basis. So we expect 13 to 14 with anything above that really driven by occupancy growth.

Okay. Thank you.

Our next question comes from Sarah tan with JPMorgan, please. Go ahead.

Hi, I'm on the floor. Michael Miller. Just a question on development extensions. I'm wondering if there is a shadow pipeline of development in extensions that you have. And how big is a good terms of dollars given that to recent announcements the additions you made to development pipeline last quarter. Well, we you know, the answer that is as I mentioned. Yes, we do have opportunities Thursday. We see now that we have discussions with that are in already inherent in our portfolio. You know, I don't want to talk about them specifically because we haven't either determined to move forward or or transaction has been been concluded. So, you know, we do have that opportunity. Now, we also are looking for new opportunities that are out there that that I quote unquote would say are more are competitive. We're dead, you know, there's two or three of us looking to do the development and it's in a in a Major Market and it's with a you know, the right Health Care system and so forth. So we've got a combination of those but we do have you know,

I always

Like to feel that we control our own success and in the development side of the equation now, we have taken it last 18 months 12 months six months to find those opportunities to develop those opportunities that are inherent in our portfolio so that certainly for the next a couple of years. We have the development that that we can bring on board to help us with that tool that that adds on to our other abilities to generate earnings.

Thank you.

Our next question comes from Lucas hardwicke with Green Street advisors, please go ahead. Thanks under yield guidance for 20 Acquisitions. What is that before synergies? And how long do you think it takes to get to the to the number you quoted?

Yeah, we baked in a typical twenty to Thirty basis points that we typically achieve when we buy in our markets on that so you can take about 25 basis points off to get what we had clearly.

provide

On just a straight cash arm's length transaction and for us to get you know, those synergies, like I said, the only synergies were included are really the elimination of a third-party Property Management managing the third-party Property Management fees. So typically that happens within the first 90 days of a new acquisition in our in our key markets great and then just took a quick one. Do you guys ever underwrite non MLB Acquisitions? Can you be more clear on that just other segments of healthcare Real Estate School senior housing? I know you guys have a a smattering of that in your portfolio curious if you underwrite New Deals. Well, I I think that we don't underwrite them. I I would tell you that we are we try to be as knowledgeable about the whole Healthcare sector as we possibly can, you know, if you don't actually buy it I step back and say those that do have far greater expertise than we do but dead.

internally and externally we try to be as as in tune with

Transactions that happen across the whole spaces as I possibly can be Caroline does the same thing Robert Amanda are people in the in our our leasing teams. We've got what we call Senior vice presidents of leasing. They're very experienced having been with us now mostly five six seven years. So we try to keep ourselves very much aware of where Faith Care Systems are going what transactions are in the marketplace and what transitions may or may not be going on.

Perfect. Thank you.

Our next question comes from Vikram. Mehrotra with Morgan Stanley, please go ahead. Thanks for the questions Robert just to clarify so. The 1.5 / 1.3 million you have baked in for assets intended for sale is how does that relate to the 50 million in in dispositions? I'm assuming they're related but it just seemed like they seem different numbers.

You know, I think there's there's a little bit of of difference. You know, we put 50 million out there as a this is the normal run rate given our experience of getting things to Market what ultimately closes really and it translates to a handful of dispositions that we think will will ultimately close given the process that that's got mentioned we go through it's a, you know, like five million and analyze would sound like more disposition volume.

I'm not sure what the five million of of Noy. Oh, you're you're taking are intended for analyzing. Yeah, I got you. I understand what you're saying. Yeah, you know, I think there's there's a probability that things ultimately closed in there that we we wait in the disposition guidance, you know, if if things dispositions go higher than that, I think you'd see a corresponding increase in expected Acquisitions on that wage. I think as you look at the intended for sale in the same store though, I think the important thing is there we try to remain conservative and consistent with our guidelines again, if we had included all the properties that are in the intended for sale bucket, we would be reporting higher same-store growth not lower and I I think I'll just you know, I'm not focusing on the growth. I'm just wondering five million means a lot more volume than fifty million. So I'm just wondering like over. What time frame are you looking to sell the intended for sale?

Yeah, no, I think the cap rates that would see on the on the dispositions ends up being in that. I think we

Put in there kind of a 6% I pranged 6 to 6 and 1/2 and I think just from a guidance perspective giving kind of the midpoint of what we ultimately expect will happen, But again, if it ends up being higher than that, you know, I think you'll see a corresponding increase in any acquisitions.

Okay, so they could be very early. Hi kapre deal know I think this is what I would say is if you if you see us transact on the you know, the million annualized you'll see us off have cap rates in that six percent plus or minus range and you'll just see us increase the acquisition range that we're doing.

Okay, got it. And then just to clarify the operating Synergy you you baked in. I'm just I want to make sure with the platform today. You are getting the same day one. But you also referenced that the GNA is going up and you're still building out the leasing and asset management folks. So I'm I guess they're different pieces, but I'm just wondering to shoe is it fair to assume you get the energy of day one as opposed to over time?

well, there's a

There's two buckets one is day. One is Robert pointed out where you just take the third party take it off. And you know, Robert said you get it in 90 days, but traditionally now when you buy an asset the people go away the third party goes away and and maybe there's a 30-day transition because you've notified them and and they go away and they come onto our platform, you know, the second bucket is when we put our Engineers we put our property managers office on the on the asset where we re budget or take the opportunity throughout the year or throughout the next couple of quarters to put their service contracts on to our service contracts within the marketplace that we see that tend to be much more favorable than the contract that they're on typically one off assets with with local representation or smaller or national developers. Their business is not Property Management. Their business is not only 500 to a million square feet in a market so we can bundle I mean that's that's the opportunity that we get. So they're two steps dead.

That we get in and we tend to get one right away and then we get the second one probably half the benefit.

In the first year and then we continue to get the benefit the second year and then we continue after that to provide more and more services to the tenant at retail. Excuse me at home not retail and we get the benefit of that.

Okay, and then just last one Robert you and I briefly talked about this but Vincent in Downtown, LA either closed or deciding to close. I know you guys don't have an MLB on campus. Do you have any ammo be closed by can you talk about serve your experience kind of how you under wrote the original transaction and you know any any puts and takes their given the potential wage?

Yeah, you know this is the the Acquisitions that we we made earlier this year in Downtown LA and 3rd Street, you know from an underwriting perspective. We're always looking at what is the submarket? What's the market? What is the long-term demand for health care that submarket is one that is just exploding. If you look at downtown LA and all the investment that's taking place. You've seen something like twenty billion dollars of investment go in there from a real estate perspective over the last five years and expect over the next five ten years. So it's it's really an area that's growing. Its you're seeing a lot of the incomes come up. And so we like that from a just a demographic perspective from a straight Healthcare perspective and assets. We like to actually that none of the tenants are actually affiliated with the hospital. It's really with competitive practices that wanted to be in that area off from their ability to attract patients in there. So when we did our underwriting we looked at it from that perspective understood where the the the positions and practices in the building where Jeff

Their demand from saw that as a an area.

That was going to continue not just where it is to really increase in in value and demand there. So the hospital being next door was actually if anything a negative at the time because I didn't see that as being additive at the moment. Now, the the interesting thing is, you know, as if the hospital closes we're actually going to likely benefit. We're not subject to ground lease Thursday. We're totally fee simple interest in in some of the tenants that are actually on campus are looking for space and we might see them come into our buildings. So we see no immediate impact. We see the long-term fundamentals of our underwriting playing out if if not slightly outperforming where we thought we'd be at this point in time. I would just reinforce. You know, I I went to the acid before we bought it like to see all the Asus nearby it this is location location location and and its tendency UCLA's in the building. We've got some major tenants. They want to expand. This is a building where we'd love for investors dead.

Look at to see it because what we bought it at and what it's going to be valued at today and what it's going to be valued at 3 five years from now, I think our occupancies up three or four percent. We're 95% added at $90,089 90% If you get full here in the next couple of months, which is what a man is talking about. I wish I had a lot more though that type of asset in our portfolio, but you know, you got to go look up to make sure you know, we had occupancy from the hospital that would have been a problem if it would have been on campus with ground leases that would have been problem. But you know, we've checked the boxes and and in this particular case, it's life is turned out better in his ahead of our underwriting and when we bought it

Okay, great. Thank you.

So thanks bring that one up.

This concludes our question-and-answer session. I would like to turn the conference back over to Scott Peters for any closing remarks.

Well, thank you very much. I know that there's some conferences coming up in the next month or next 2 or 3 weeks. We'll be there and we look forward to talking to as many folks as we can and we're very excited about 20 20. Thank you.

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