Healthcare Realty Trust Incorporated Management Discusses Q4 2013 Results - Earnings Call Transcript

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 |  About: Healthcare Realty Trust Inc. (HR)
by: SA Transcripts

Healthcare Realty Trust Incorporated (NYSE:HR)

Q4 2013 Earnings Call

February 20, 2014 10:00 am ET

Executives

David R. Emery - Founder, Chairman of the Board, Chief Executive Officer, President and Chairman of Executive Committee

Carla Baca

Bethany Mancini

Todd J. Meredith - Executive Vice President of Investments

Douglas Whitman

Scott W. Holmes - Chief Financial Officer and Executive Vice President

Analysts

Jeffrey Pehl - Goldman Sachs Group Inc., Research Division

Karin A. Ford - KeyBanc Capital Markets Inc., Research Division

Jeff Theiler - Green Street Advisors, Inc., Research Division

Daniel M. Bernstein - Stifel, Nicolaus & Company, Incorporated, Research Division

Richard C. Anderson - BMO Capital Markets U.S.

Michael W. Mueller - JP Morgan Chase & Co, Research Division

Todd Stender - Wells Fargo Securities, LLC, Research Division

Michael Carroll - RBC Capital Markets, LLC, Research Division

Operator

Good morning, and welcome to the Healthcare Realty Trust Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. David Emery. Please go ahead, sir.

David R. Emery

Thank you. Good morning, everyone. Joining us on the call today are Scott Holmes, Doug Whitman, Todd Meredith, Carla Baca and Bethany Mancini. Now Ms. Baca will read the disclaimer.

Carla Baca

Thank you. Except for the historical information contained within, the matters discussed in this call may contain forward-looking statements and involve estimates, assumptions, risks and uncertainties. These risks are more specifically discussed in a Form 10-K filed with the SEC for the year ended December 31, 2013. These forward-looking statements represent the company's judgment as of the date of this call. The company disclaims any obligation to update this forward-looking material. The matters discussed in this call may also contain certain non-GAAP financial measures, such as funds from operations, FFO or FFO per share, funds available for distribution, FAD or FAD per share. A reconciliation of these measures to the most comparable GAAP financial measures may be found in the company's earnings press release for the fourth quarter ended December 31, 2013. The company's earnings press release, supplemental information, Forms 10-Q and 10-K are available on the company's website.

David R. Emery

Very good. Thank you. We are, again, pleased to report another solid quarter and the completion of a good year of progress. In 2013, the company completed its 20th year and continued to execute its initial simple strategy of investing in medical office and outpatient properties as demand for facilities accelerates. The company's low business risk model and its established relationships with investment grade health systems have yielded a distinct portfolio of outpatient facilities with stable tenants, superior rent coverages and sustainable growth. This past quarter, we, again, saw meaningful leasing progress in our recently developed facilities and positive same-store NOI growth from our core portfolio. 2013 also marked the achievement of our objective over the past 5 years to fine-tune the portfolio. We have sold and reinvested over $350 million during that period, while in addition, acquired over $1 billion in properties, carefully avoiding portfolios that frequently contain small, overvalued off-campus buildings. The company is now well-positioned to take advantage of the intrinsic value of our assets, benefiting from their low risk, resilient fundamentals. The opportunity embedded in our portfolio should prove increasingly valuable as it further enables the company to pursue strategic investments to enhance growth.

Healthcare Realty's diligent focus on investments, aligned with leading credit-rated health systems, has been vital to our strategy, and the stability and performance that distinguish our properties. It has been our experience that market leading providers are less dependent on government reimbursement and have larger reserves to withstand pressures on operating margins. With nearly 80% of our $3.2 billion in properties associated with rated health systems at an average multi-tenant lease size of only 4,400 square feet, the company fundamentally has a higher propensity for lease renewals, consistent demand and steady occupancy.

Looking forward, the federal government's health insurance overhaul and expansion of public health spending will continue to pressure healthcare providers to find cost savings as utilization accelerates and further drives the demand for outpatient care, strengthening the company's future. Health systems are looking beyond the current woes of the health insurance reform rollout to secure their long-term viability amid a challenging operating environment. Capital's being devoted to improving their market share, operational efficiency, technological advantages and clinical integration with doctors. We see opportunities in 2014 to provide health systems with expansion capital for outpatient services through build-to-suit type developments. We anticipate that new construction, as well as acquisitions, will proceed at a measured and balanced pace. We remain quite pleased with the lease up and stabilization of the company's 12 development properties. The strong leasing activity throughout 2013 affirmed their strategic value in growing markets. The increasing NOI from these properties will augment the company's backdrop of internal growth in 2014. With the size of the industry and the vigorous demand for services and facility, our investment strategy remains on point, and places the company in a unique position to benefit from the acceleration of outpatient healthcare delivery.

Now I'd like to have Ms. Mancini to summarize our views on current events and trends related to the healthcare industry. Bethany?

Bethany Mancini

Thank you. Despite ongoing negative headlines concerning the rollout of the Affordable Care Act and extended federal budget cuts to healthcare providers in 2013, the fourth quarter brought positive developments for physicians and continued signs of a national surge in outpatient care. In December, Congress passed a modest budget bill that provided for stable physician Medicare rates through the end of March. With broad bipartisan supporting Congress for a more lasting fix, several committees recently approved legislation to increase physician Medicare rates by 0.5% annually for 5 years, and the legislation should pass if funding can also be agreed upon. The Center for Medicare and Medicaid Services released national health spending data for 2012 showing moderate growth in overall spending totaling $2.8 trillion, and accelerated spending on hospital and physician services. The American Hospital Association's recent release of their annual statistics reported an increase in total outpatient visits, up 2.9% versus a decline in inpatient admissions of 1.2%.

In a challenging operating environment, hospitals still manage to sustain revenues through aggressive cost management, market share gains and higher inpatient acuity, increased outpatient services and consolidation. We view Healthcare Realty's medical office facilities as well positioned to thrive on the growing demand for lower-cost outpatient settings, providing on-campus space for physicians which foster hospital utilization and direct new payment and delivery models. Looking forward, health systems are faced with meeting the demand of an aging population, but will be increasingly restricted by the physician shortage and tighter reimbursement, making sufficient recruitment and integration essential. Team-based care will expand and physician extenders will allow providers to meet greater volume demands while keeping costs low and garner reimbursement incentives from positive patient outcomes. Of note, health systems expect physicians to drive this clinical transformation. Healthcare employment, particularly in ambulatory care and physician offices, has been a bright spot in our economy over the past decade and should continue to increase. The mix of skilled labor may change over time as team-based care evolves and outpatient volume grows. The Healthcare Realty's business remains driven by the average physician, which needs 1,500 square feet of office space, along with space for their support personnel. The projected increase in labor force should benefit Healthcare Realty and the internal growth of our on-campus medical office and outpatient facility. In short, we view the effects of the national health insurance overhaul as an incentive to healthcare providers to position themselves profitably for the long term, advancing Healthcare Realty's investments and the stability of our hospital and physician tenants. Contrary to general perceptions, physician incomes continue to rise, and Healthcare Realty's tenant rent coverages remains strong. With healthcare employment and spending trends in our favor and no direct exposure to government reimbursements, Healthcare Realty provides a valuable vehicle to gain return on investment opportunity in the healthcare sector with a low risk strategy. David?

David R. Emery

Thank you, Bethany. Now on to Mr. Meredith to give us more specific information regarding recent investments, development activities and other material.

Todd J. Meredith

Thank you. The company's investments results improved steadily throughout 2013. 12 properties in stabilization are now 80% leased, 63% occupied and generated $2.3 million of cash NOI in the fourth quarter. Adjusting for partial occupancy during the quarter and deferred rents that on average will burn off in 3 to 4 months, NOI would have been $3.4 million. This level of NOI is in line with our guidance for year-end 2013. As we indicated would happen, the 12 properties were graduated into the stabilized portfolio at year end. And for the next 5 quarters, these properties, now classified as development conversion, can continue to be tracked in our supplemental in the occupancy and net asset value schedules. We anticipate that leasing momentum going forward will be less predicable as we target complementary tenants for the limited remaining space and push the economics of each new lease. Over the course of 2014 and into 2015, our focus will be producing stabilized occupancy and realizing annualized NOI of $25 million to $30 million. In the fourth quarter, the company acquired 5 properties for $102.6 million, bringing total acquisitions for 2013 to $212.6 million, in line with our guidance of $200 million to $225 million. For the year, we acquired 9 properties totaling 755,000 square feet that are 93% leased at an average cap rate just below 7%. The properties were acquired in 1 and 2 building transactions that we specifically targeted to fit into our existing footprint and expand the company's alignment with leading health systems such as A+ rated University of Colorado Health, AA rated Providence Health & Services and AA- rated CHE Trinity. Dispositions for 2013 totaled $101.9 million, just above our guidance of $80 million to $100 million. The average cap rate was skewed by 4 HealthSouth properties subject to purchase options at double-digit cap rates. Excluding these, the company sold 8 properties for nearly $40 million at an average cap rate below 5%. These properties were all off-campus and averaged about 30,000 square feet in size. The company's investment outlook for 2014 remains positive. The shift to lower cost outpatient setting is accelerating, with health systems increasingly focused on improving their cost structure and increasing their scale. With acquisition guidance of $75 million to $150 million and cap rates between 6.5% to 7.5%, and disposition guidance of $40 million to $60 million at similar cap rates, the company expects to generate accretive net investment activity in 2014. By the end of 2014, quarterly cash NOI from the development conversion properties is expected to be in the range of $4 million to $4.5 million on occupancy of 80% to 85%. Development being a key component of Healthcare Realty strategy, and with the development conversion stabilized, we intend to start at least 2 moderate-sized developments in 2014 born out of existing relationships with leading health systems, and likely to come with significant leasing commitments. David?

David R. Emery

Thanks. Now on to Mr. Whitman to give us an update on balance sheet matters and capital market activities. Doug?

Douglas Whitman

In 2013, Healthcare Realty took several steps to bolster its balance sheet and improve several key debt and credit metrics. Using our aftermarket program in the first half of the year and a follow-on equity offering early in the third quarter, the company raised $219 million of equity at an average net price of nearly $27 per share with an implied cap rate of about 6.1%. That cost of equity compares favorably to the 6.9% cap rate for the acquisitions we closed in 2013. The refinancing of our 2014 senior notes and the repayment of 7.25% secured debt lowered our annual interest expense and reduced the effective interest rate on our debt by 76 basis points to 4.85%. Those debt transactions, coupled with the performance of our existing portfolio and occupancy gains in our development conversion properties improved our fixed charge coverage ratio from 2.3x a year ago to 2.8x today. In addition, our debt to EBITDA ratio has declined to 6.4x from 7.9x at the end of 2012. Those credit metrics should continue to improve in 2014 as we realize the growth from our existing portfolio, recent acquisitions and stabilizing developments. as we look ahead to investment opportunities in 2014, we are taking steps to ensure that our balance sheet has the capacity and flexibility to capitalize on them. We have secured commitments from several banks in our current revolver for a $200 million 5-year term loan, and we expect to close on this transaction, which will eliminate most of the outstanding balance on our $700 million revolver, sometime next week. As you may have noticed, yesterday we filed an unlimited shelf registration statement. This registration statement replaces our old shelf, which expired on February 18. We have also filed a new perspective supplement for our aftermarket equity offering program. This perspective supplement relates to the shares and that we registered last year for our ATM program, and was filed solely to roll the unsold shares over to the registration statement.

Looking ahead to 2014, we will continue to be cautious in raising additional debt over equity, being careful to balance the need to fund new investments with low-cost capital, maintaining a healthy and flexible balance sheet and allowing our shareholders to benefit from the solid FFO growth we expect in 2014. David?

David R. Emery

Okay, Doug. Thank you. Now onto Scott to give us an overview of the results of operations and other financial matters. Mr. Holmes?

Scott W. Holmes

The fourth quarter produced normalized FFO per diluted share of $0.36 and normalized FAD of $0.37. NAREIT-defined FFO was $0.37 in the fourth quarter. The dividend payout percentage on normalized FAD for the fourth quarter is 81.1%. Normalized FFO dollars increased $4 million or 13.2% to $34.6 million in the fourth quarter, up from $30.6 million in the third quarter. For the full year of 2013, revenues increased by $32.9 million, or 10.8%, to $337 million, while expenses increased only $18.5 million, or 8%. In the fourth quarter, rental income increased sequentially by $7.5 million, primarily from recent acquisitions. Portfolio expenses, which always have variations from quarter-to-quarter, decreased $600,000 in the quarter. Utility expenses, which had risen $1.4 million in the third quarter, because of seasonally hot temperatures, reversed to normal levels in the fourth quarter. Also, interest expense increased sequentially $730,000 because of the increase in volume over the fourth quarter, as we assumed debt in several of our acquisitions. The company sold its interest to the joint venture during the quarter, which resulted in a gain of $1.5 million. This joint venture investment was accounted for on the cost method, and no depreciation was taken. So the gain was included in NAREIT FFO, but was excluded for normalized FFO. And during the fourth quarter, the company, again, produced solid results through our leasing efforts. The fourth quarter cash re-leasing spread of 1.5% in the multi-tenant portfolio sits in the middle of the range of 0.4% to 2.5% in recent quarters. Beyond just lease rates, we focus on managing all elements of renewals, including annual contractual increases, tenant improvement dollars and broker commissions. As a result of these efforts, one of the most important metrics, the spread on re-leasing yields, was, again, positive in the fourth quarter. With strong tenant retention and leasing activity, occupancy in the same-store portfolio remains steady. Lease rate increases were also positive in the fourth quarter. The contractual increases for in-place leases or the annual bumps for the multi-tenant properties were, again, in the historical 3% range, and for the single tenant net leased properties were also at 3%, which is an increase over the historical 2% range. David?

David R. Emery

Okay, Scott. Thank you. Operator, we are now ready to begin the question period.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Jeffrey Pehl from Goldman Sachs.

Jeffrey Pehl - Goldman Sachs Group Inc., Research Division

Just of your planned disposition this year, how much is related to tenant purchase options?

Douglas Whitman

I would think that this year we don't expect any tenant purchase options. We're not aware of any at this point in the year. Those, generally, have a very long notice period ahead of time so I think we would've been made aware of one occurring this year.

Jeffrey Pehl - Goldman Sachs Group Inc., Research Division

And then also just on your lease-up of your SIP portfolio, is the timing of the lease-up also progressing as expected?

Todd J. Meredith

This is Todd. Yes, we're definitely, I think, on track with what we had set out in the range -- an expected range for 2013 at 80%, we're right in the middle of that range. And I think you heard my prepared remarks that certainly going forward it could be a little less predictable. Obviously, a lot of these properties are essentially fully leased or close to it, so you end up with spaces that are smaller and maybe broken up. And so the point is you really have to think about who are those tenants, is it expansion space, and being careful about that to make sure they are tenants that fit well in the mix, in the building, as well as being able to push the economics on those leases. So we're certainly not concerned moving from 80% to over 90%, but whether or it's predicable per quarter is probably less important at this point. More about putting the right tenants in there and getting the right economics.

Operator

Our next question is from Karin Ford from KeyBanc.

Karin A. Ford - KeyBanc Capital Markets Inc., Research Division

First, just a couple of questions on the components of 2014 FFO. The acquisition guidance that you provided seemed a little lower than, say, what you've done in the last couple of years. Was there a reason why you dialed that back or was it just being conservative? And does the acquisition guidance include the Mercy Health development presales? Is that still on track?

Todd J. Meredith

The guidance does not include that. So just to make that clear, that's a good question, so it would be incremental acquisitions. The guidance being a little lower than last year, I think, obviously, there's a little different environment this year than a year ago when interest rates hadn't made their large moves, and obviously, cost of capital hadn't shifted. So that environment has changed. I think on the deal flow side, nothing has changed. We're still very positive and think we can find a good amount of acquisitions. I think, just making sure that they're accretive. And we really haven't seen a lot of cap rate change yet. So, obviously, those spreads are a little different this year than they were last year. So we want to be careful about that.

Karin A. Ford - KeyBanc Capital Markets Inc., Research Division

Are you seeing more competition? It seems like we're hearing about more and more institutional interest in the MOB asset class?

Todd J. Meredith

I think the headlines that you see are for the bigger portfolios, and that there may be a little more competition at the margin for that. But we, frankly, have been seeing that for a long time. I'd say the non-traded REITs, who have been very active on everything, had been there for some time. The names and players have changed a little, but no real material change. I think the important note is if you look at the acquisitions we made in '13, if we like the assets and we think they fit well with our story and our portfolio, then we usually can get them.

Karin A. Ford - KeyBanc Capital Markets Inc., Research Division

Okay. My next question's on the 2% to 4% same-store NOI growth guidance for the multi-tenant portfolio for 2014. Can you just tell us what the components are, the revenue and the expense growth underlying that, and how you think what sort of the main components are to achieve that given that you're a little bit light on that front this year?

Todd J. Meredith

The same-store, if you look at our supplemental, I think the revenue growth was in the 1, 8 [ph] range on multi-tenant for the fourth quarter. It was actually a little higher full year. We don't actually report full year same-story year-over-year. But if you look at it, we have internally, and it's a little higher than it's over to. And I think that is the most important component to look at is the revenue side. The expense side gets a little noisy and moves around. We had some real estate tax issues and utilities moved around a little bit this year and obviously last year, too. It was favorable last year. Overall this year it was less favorable. So I think in the long run, it's really a revenue model question, and then it's about keeping your operating expenses grow -- managed to grow a little less than that and getting some operating leverage. And that gives you revenue being in the 2% to 3% range, you can move NOI to 3% to 4% off some operating leverage.

Douglas Whitman

And a little bit of occupancy growth as well.

Todd J. Meredith

Yes, yes. Those are kind of your main components, Karin.

Karin A. Ford - KeyBanc Capital Markets Inc., Research Division

That's helpful. And my last question is maybe more of a bigger picture one. You described a couple of things. It seems like the company has reached an interesting milestone in its history. You've got your portfolio repositioning done. The SIP portfolio is closer -- pretty close to reaching stabilization. Have you guys thought about what sort of a next driver of growth is for Healthcare Realty? And have you thought about sort of succession planning as part of that sort of overall strategic deal?

David R. Emery

Karin, this is David. I think to some degree, as we move the pieces around over the last 4 or 5 years, as I mentioned, I think it's -- we have kind of reclined the portfolio to where basically the internal growth prospects of the properties; we continue to work on that internally as to how we can continue to move that up. Julie Wilson and her group do an excellent job in managing the property. As you know, most of ours is boots on the ground with company management. So I think you'll see more and more internal focus because it's just the math. If you have $3.2 billion, the accretion is frankly a lot easier through the internal growth of what you have rather than what you buy at the margin. So with that said, we still think acquisition's a major portion of what we do. I think to some degree the development is really the opportunity. We've done a lot of that over the years. And sometimes, that can be FAD, 100, 200 basis points over what you can buy in the open market. So I think we'll be balanced about that. I don't think we're -- we don't view that our growth is from buying a whole lot of properties. And so it's internal. I think as far as future and growth and acquisition, I think the succession planning that we have been through, I think you know all the members of the team. And we're all busy and involved in that. And I think that will play out over time over the next 2, 3, 4 years.

Karin A. Ford - KeyBanc Capital Markets Inc., Research Division

So we probably shouldn't expect any changes in the senior management suite in 2014?

David R. Emery

No.

Operator

Our next question is from Jeff Theiler from Green Street Advisors.

Jeff Theiler - Green Street Advisors, Inc., Research Division

You had a great leasing quarter for the development conversion properties. Within that overall pull, I'm trying to figure out if there's a couple of properties that are -- that you're having an especially hard time leasing? So to try to quantify it, what are the lease percentages of the 1 or 2 properties in that pool that you're having the most difficulty with?

Todd J. Meredith

Jeff, this is Todd. You're right, we've talked about that in the past, a couple of properties, one in Scottsdale and one outside of Chicago. Actually, last quarter, or the fourth quarter, we had good leasing at 6 properties within the 12. One that stood out was the one in Scottsdale. And we actually had a large user come in and lease the entire building, which we sort of had in the plan long ago, it just took a little longer than we had anticipated, but that's obviously great news for that property. So that kind of moves that one off the scorecard. And we're down to one that probably sort of lives in that description you said that's been a little slower than we'd like. And that's the one outside of Chicago, which we talked about that. That one's at about 35%. So that's the lowest. The next lowest is just over 50%. That's the building outside of Seattle that we have a great degree of confidence in. And in general, everything else is 75% and up.

David R. Emery

And then the one outside Chicago, as you might recall, the Advocate purchase, the community hospital, and they're still implementing their management team and their strategy for that community for that hospital. So as they solidify their plans going forward, we've seen heightened interest from physicians, those plans that sort of circulated in the community. This is a new hospital, and we'll -- I think we'll benefit from their plans going forward.

Todd J. Meredith

And we had just a lease there in the third quarter, not in the fourth, but in the third quarter. And that's being built out. So there's some good signs there in that building.

Jeff Theiler - Green Street Advisors, Inc., Research Division

Okay. So how long before you think the demand really hits for that Chicago building? Is that a year away, 2 years away?

Todd J. Meredith

It's really hard to predict, Jeff. I think it could easily be within the year if something major comes along. But then again, it could take longer than that. I think it's hard to say. We have some good activities that are probably not full users. So it'll take a process of a few quarters.

Jeff Theiler - Green Street Advisors, Inc., Research Division

Okay. And then you mentioned that you have 2 developments that you're looking to get significant leasing commitments before you start. Can you be a little bit more granular on what you would need to have before you proceed with those developments?

Todd J. Meredith

Well, we don't have specific leasing, pre-leasing thresholds. I think it's more looking at the situation and the context of what makes sense to start. The one in particular we've shown many of you on a property tour last year, a property in Denver we're working on, we're pretty close on that, some good discussion lately on that, that should get that one going. That may be 50% or more, but we're not particularly worried about it because we own 2 buildings that are full that we developed right next door. So we have a very good insight into the leasing pipeline and what the hospital needs are. So that one is strong. We've got another one that could be more than 75% leased and a couple. So it's just going to be a timing issue on getting them started. A lot of hospital use to start off those buildings which will drive much of that initial occupancy.

Douglas Whitman

And one issue is when the hospital did that primary use going in, their programming timeline doesn't always kind of mesh with when the development start needs to happen. So it's a little bit fluid. So we saw that with the 2 buildings in Denver that were on the property tour. The hospital initially committed to 1/3 and ended up taking 1/2. So their needs can change during that 12 to 14 months of consignment.

Todd J. Meredith

That same process is going on right now with the new building. And we even looked at some alternative locations to the building. So just it's a lengthy process to work with their programming.

Operator

The next question is from Daniel Bernstein from Stifel.

Daniel M. Bernstein - Stifel, Nicolaus & Company, Incorporated, Research Division

In the 10-K, you mentioned that most of the leases that are expiring this year, a significant portion, I think 88% are on-campus, and that those leases tend to have better retention rates. I was wondering if you could just maybe clarify that. The difference in retention rate between an on-campus and off-campus property? And it's on-campus 90% and off-campus 80%? Just trying to understand the difference in that retention rate.

Scott W. Holmes

I think Doug has some -- he has some numbers.

Douglas Whitman

And we actually included in our presentation. On Page 10, we've shown the historical progression of our on- versus off-campus kind of thing. And we did -- we'd look back at the last 24 quarters, last 6 years. I mean, the occupancy, the on versus off is generally 300 basis points higher. Tenant retention is upwards of 500 higher -- or 400 basis points higher, 400 to 500. Re-leasing spreads is over 100 basis points higher. So you're going to have to go over a 6-year history going back to 2008 through the downtime in the economy and then with the slow rebound. So we think inherently it makes sense why an on-campus building would have better performance metrics. I think that the research that we've done into our own portfolio bares that out.

David R. Emery

I think they're also saying is it's just part of what you heard me say about fungibility. You get on-campus next to the hospital. The fungibility of that property is very, very low. And just by instinct, you would think that it would do better. And so we did do some work on the on-campus, off-campus. And I think the numbers now over the past 6 years support it. Even as Doug pointed out, that was during the financial panic and everything else.

Daniel M. Bernstein - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay. And how does that compare to the leases that expired in 2013? Is it a higher percentage that's on-campus in 2014 versus 2013? Just trying to think about how maybe as your leasing progresses over the year that when you look in the supplemental, we'll see the retention rate higher than it was in 2013. Just trying to...

Douglas Whitman

You've got me. There are simply more on-campus and will be expiring -- leases expiring in on-campus will be in '14. I think we have a slightly higher proportion of hospital leases in '14 just because back in 2004, we acquired the Baylor portfolio, the Ascension portfolios, MedStar, some several hospital deals. Several of those deals at the time either have 5 or 10-year leases struck at closing. And so you're coming up on renewal. So you have this sort of anomaly where you've got a little bit more hospital activity in 2014.

Daniel M. Bernstein - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay. And then on the purchase options, I just want to understand how long is the typical lead time that a tenant has to give you notice that they want to exercise the purchase options? Is it 6 months, 12 months?

Douglas Whitman

It's generally 6 to 9 months. Some instances it's 12, but 6 to 9s, generally.

Daniel M. Bernstein - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay. And then one other question here is -- I guess you talked about 3% rate growth. Is that -- and if you look at the Healthcare Trust of America's conference call, they talked about looking to buy more assets than they thought they could get 3% rate growth. Has there been some resistance the last few years or since the recession from tenants to have those 3% rate bumps? And does that change at all with a hospital tenant versus a smaller physician group?

Todd J. Meredith

Yes, I think, Dan, if you look at it, we noticed that. And if you look at our reporting for many, many quarters in our supplemental and even old ones, we've been consistent on our multi-tenant properties at 3% for contractual bumps. And that is the critical driver for revenue. That is the most significant component. It's probably 2/3 of your revenue growth is your contractual bumps, and maybe even higher depending on your lease expirations in any given year. And I think you're right. The contrast, they talked about 2. And I would say that, for us, has long been the criteria in our acquisition efforts and in our management efforts to make sure we're pushing and keeping that 3. And we haven't seen any particular problem getting that. I think where you'd see that difficulty is on the single tenant side. And so our mix, as you've seen over the years, we brought the single tenant side down. That's part of it, because it's natural that when you're dealing with a much larger tenant single user, you get a little more pressure on their contractual bumps because it's longer term, they are having to commit to a longer-term lease. So we like the shorter-lease profile, the multi-tenant properties with higher bumps. And in the end, if you do the math, that leads to higher revenue growth on your same-store -- your core portfolio.

Operator

The next question is from Richard Anderson from BMO Capital Markets.

Richard C. Anderson - BMO Capital Markets U.S.

So I just have, first, a question on the guidance in terms of how you present it. And I'm curious as to why you don't -- you give all this great color, but you never give the FFO or FAD sort of outlook. It's like giving me the beer bottle and not the bottle opener. I'm just curious why you stop short there? Just...

Todd J. Meredith

We want you to sink your teeth into it, Rich. It makes you understand the business.

Richard C. Anderson - BMO Capital Markets U.S.

But I mean, is there something you worry about, about giving that much commitment? Or is it just...?

Todd J. Meredith

It's not a commitment thing. I think it really does get down to if you give one number, that it's like worrying about the odds of the football game rather than the actual football game. And I think, for us, we like the idea of getting into the actual granular elements that drive the business. And we understand that a lot of people do that. And...

Richard C. Anderson - BMO Capital Markets U.S.

I'm not really complaining. I'm just curious why you do it that way?

Todd J. Meredith

It's probably part philosophical, part practical.

Richard C. Anderson - BMO Capital Markets U.S.

Okay, I'll take that. So the other thing is you guys produced a FAD number like a lot of folks. And very often, your FAD is greater than your FFO. And I'm wondering, if you were to apply the type of math that you typically see on the sell side in terms of FFO to AFFO and CapEx and straight line rent and all that sort of stuff, what do you think the difference would be on that measure, FFO versus what we call AFFO?

Todd J. Meredith

Well, Rich, I think that's kind of something we, as you know, we have a long going discussion about that's not our approach and our philosophy. Certainly, the tools are there for everyone to do their own calculation. So we'd rather not climb out and make that since we don't subscribe to it. But those tools are there, I think, for us, we look at as an investment that we get a return on. In fact, as David said, internal growth is our best investment. Small incremental investment for a large NOI gain. And so we look at it that way as opposed to just saying it's cash out the door to run the portfolio.

Richard C. Anderson - BMO Capital Markets U.S.

Okay. Another philosophy question I didn't expect, but the next is one of the theses that HTA has is they don't develop, and they feel like they can manage relationships better because they're not viewed as a threat to take business away from potential third parties. Do you ever sense that, that is the case with you, that you're approaching an opportunity, but they turn you away or aren't interested because they feel like you're going to take business away from them given your development acumen?

Todd J. Meredith

No.

Richard C. Anderson - BMO Capital Markets U.S.

Okay. Can you get more philosophical?

Scott W. Holmes

Not to be too philosophical, no. I don't know. We just don't subscribe to that.

Todd J. Meredith

I guess, Richard, if you look at our activity in the past, we've had good success with developers. So it's hard to make that case stick. We welcome working with developers. We're careful about it. We've been through good and bad situations. So I think we've figured out the right ways to do it. We're flexible. A lot of times, we've structured a mortgage with a takeout, but we've also done direct equity JVs with folks. So we're very open to that, and we haven't seen any resistance to it. I think it's really more just about the rapport you develop, and I think our understanding of development actually aids us in that as opposed to just saying what can we buy it for. We actually can get in and help them with the development, give them pointers as to what we think is -- what helps and works with health systems. So we've had some great outcomes, and we think that advantages us, not disadvantages us.

Richard C. Anderson - BMO Capital Markets U.S.

Okay. And then going from smallest to largest, it was mentioned earlier in the call that a lot of activity in the MOB space is for larger portfolios. You, by definition, are a large portfolio. You've heard me ask this question a million times, different ways about selling the company or you buying another company or whatever. How do you feel about M&A from your perspective given that you think that there's elevated interest, particularly the larger the portfolios get?

David R. Emery

Well, I don't think our view has really changed on that as to what the underlying drivers of that. I think a lot of that has to do with HR's multiple and you add a premium to the multiple and some of those kind of things. And so I just -- I don't know there's a real answer other than the fact that we don't get a lot of calls about that matter. But with that said, we're all shareholders. The value's there. I think some of the transactions for portfolios, surprising that they have, does it make HR $3.2 billion? How many terms below that is it really worth? And so that, probably, if you had somebody that had some interest at that level, we would certainly evaluate that.

Richard C. Anderson - BMO Capital Markets U.S.

Okay. Do you think there's anything material has happened to the portfolio through asset sales or whatever that explains the move from $29 to $23 or $24 a share?

Todd J. Meredith

No. I think basically you're saying, is anything explained on the portfolio that [indiscernible] the care price?

Richard C. Anderson - BMO Capital Markets U.S.

Yes, yes.

Todd J. Meredith

I mean, I think if you look at relative to everybody else, it's all the same thing. It's caught in the sort of the macro issues. We have interest rates which we would obviously argue that shouldn't affect us as greatly not being as net leased-oriented. We're an operating company, but you kind of get thrown in with the industry, and that's hard to separate out until you look at it over a much longer timeframe.

Operator

[Operator Instructions] Our next question is from Michael Mueller from JPMorgan.

Michael W. Mueller - JP Morgan Chase & Co, Research Division

Just going to the same-store NOI growth, the 2% to 4% for the multi-tenant. Do you have a number for the entire portfolio all wrapped up, the whole same-store portfolio, what that expectation is?

Todd J. Meredith

Well, if you look at our guidance, we do give some guidance on the contractual bumps for the single tenant. And I believe it's 2% to 3%. So it's also consistently in that range. There's really no expense to speak of in that -- in those lease structures. So it's going to just follow those contractual bumps except to the extent you have the expiration and cash re-leasing spreads on those. So it really does fall sort of in that same range, probably in the 2% to 3% range rather than the 2% to 4% range.

Michael W. Mueller - JP Morgan Chase & Co, Research Division

Got it. So the whole? Okay.

Todd J. Meredith

Yes, so the whole, and obviously for us, that's probably 17%, 18% of the business. So it's going to just slightly dilute maybe the 3% to 4% that you can get out of the multi-tenant.

Michael W. Mueller - JP Morgan Chase & Co, Research Division

Got it, okay. And then thinking about the development pipeline lease-up, $25 million to $30 million of annualized expected stabilized NOI, you're about 80% leased at this point. So does it feel like you're going to come out closer to $25 million, closer to the $30 million? I mean, what are some of the big swing factors left in that 20%?

Todd J. Meredith

Well, I think you can -- yes, we're comfortable with the range. So if you start looking at the midpoint, we certainly are comfortable with that. I think the factors that could go either way is just noise that you could get from expenses that kind of move up and down depending on when you do developments, the real estate taxes can kind of come in on you in phases. So that could create a little bouncing around. But no, we're comfortable with the midpoint of the range, I would say, over the long run. And then I think the things that can move us towards the high end are the remaining leasings that you -- that we have the opportunity we have on top of the 80%.

Douglas Whitman

As Todd kind of referenced here when you get down to those last few spaces, you get scarcity in some of the buildings. The demand is there. In many cases, it kind of picks up towards the end. And assuming you can find a tenant who fits in the available vacant space, you are able to sort of push the economics, as Todd said earlier, which I think would help us get to the upper end of that range.

Michael W. Mueller - JP Morgan Chase & Co, Research Division

Okay. So you're comfortable at the midpoint. It doesn't necessarily feel like it's a stretch to get there is what you're saying?

Douglas Whitman

No, that's right.

Operator

Our next question is from Todd Stender from Wells Fargo.

Todd Stender - Wells Fargo Securities, LLC, Research Division

Most of my questions have been answered, but just I guess going back to the acceleration in your investment volumes really over the last 2 quarters, you've compared that to what we've seen from the big 3 really moving in the opposite direction are quite a pause in their deal flow. Can we get a little more granular? Really, what do you attribute this to? Deeper relationships? It was a timing issue, just things closed for you? And kind of how do you look at the pipeline right now over the near term?

Todd J. Meredith

Todd, this is Todd. I think that for us, really, if you look at when those transactions were struck, those were sort of summertime, some of those that closed in September and October were really struck sort of midyear. So I wouldn't say that those are indicative necessarily of those trends in the fourth quarter. What we actually identified and closed in the fourth quarter was a smaller number, $26 million or so, 2 assets. So I wouldn't say that we had some outsized volume in the fourth quarter compared to others, nor do I think it's particularly slowed down. I think, for us, it's a pretty steady pace. And again, as I mentioned, we're looking at the 1 and 2 building type portfolios, transactions that might range from $20 million to $50 million. And we just don't see a particular issue with pace there. Those continue to be plentiful. I think it's at the larger transaction side was where your comments are probably relevant. And I think that is obviously something that we don't compete as much, you don't see the bigger transactions in MOBs as much. So I probably can't comment as much on the other asset types.

Todd Stender - Wells Fargo Securities, LLC, Research Division

That's helpful. And just sticking with you, Todd, it sounds like you sold off the off-campus facilities that you had previously highlighted. Is that it for now? Should we expect further asset sales and maybe any timing on that? And if you can provide just a little more details on the pricing of those sales?

Todd J. Meredith

Yes, the guidance we've given for '14 is $40 million to $60 million. That really is just an ongoing process. As Doug mentioned, that's not related to purchase options. That's planned sales, assets that we continue to identify that don't fit in our portfolio for various reasons. Expectations, performance, otherwise. And they'll -- you'll naturally see, they'll probably tend to be more off-campus and smaller. That's just the nature of it. And again, those are mostly assets we've picked up over the years with other portfolios. But that's just a normal process, I think, as a percentage of our total $3.2 billion of assets. It's small, but it's a necessary process. And I think in terms of pace and timing and price I'd say there's no particular pattern. I don't think it's going to be front-end first-half heavy, it's probably spread through the balance of the year. And I think on pricing, I think we've put in our guidance of 6% to 7.5%. So very similar to the, on average, to the acquisition side, albeit maybe a little lower. And some of that's just because the occupancy is not as high, so you're sort of getting some advantage on cap rate because there's some upside value-added kind of component to it for the buyer.

Operator

The next question is from Michael Carroll from RBC Capital Markets.

Michael Carroll - RBC Capital Markets, LLC, Research Division

I'm looking at the components of the expected 2014 FFO page. And it says that the multi-tenant same-store occupancy ratio between 87% to 89%, and you're at 88.4% currently. So are you expecting the same-store occupancy rates to decline by 40 basis points throughout the year? Is that what we should read into it?

Todd J. Meredith

That's a little too precise, Mike. I think it's more general than that. I think we do expect to stay between 87% and 89% on average for the year, yes, I think over the longer run, which we can see that ticking up. We obviously have a fair amount of lease expirations this year to roll through, so that's probably the one reason we may not see in the near term an increase. But I think that's just really this year. As you said, it's for '14. I think beyond that, we think we can move up. So it's really sort of flat. It's more just suggestive of a flat range that we've been in for some time.

Michael Carroll - RBC Capital Markets, LLC, Research Division

Okay. So how would you get to the low end? It's just the tenant retention ratio is below than you expect?

Todd J. Meredith

Exactly, which we would view as fairly temporary in nature and would recover in subsequent quarters.

Michael Carroll - RBC Capital Markets, LLC, Research Division

Where would you think the long-term stabilized occupancy rate would be?

Todd J. Meredith

90%. One thing you've seen at the acquisitions we've been bringing into the portfolio over the last year or 2 years really have been in that upper -- lower 90%, above 90% range. So if those roll in, I think that will help. But certainly, we think 90%, maybe a little over 90% is sustainable in the long run.

Michael Carroll - RBC Capital Markets, LLC, Research Division

Okay, great. And then, Todd, to -- on the SIP portfolio, I think it's 80% leased right now. Should we say that by the end of this year, it should be around 95% leased given your 300 to 500 bps per quarter?

Todd J. Meredith

We specifically didn't provide a range on that because we think that's less critical. We think that's more important to focus on getting the right tenants at the right economics. So we don't want to suggest that it's going to be 3% to 6% like we have in the last 8, 12 quarters. It's not unreasonable to think it'll be much better than the 80% because we have good momentum. But at the same time, that's probably less important than focusing on where the occupancy will be by year-end, which we said was 80% -- should be 80% to 85%, and the cash NOI that comes from that.

Operator

And ladies and gentlemen, showing no further questions at this time, this will conclude our question-and-answer session. At this time, I'd like to go ahead and turn the conference back over to management for any closing remarks.

David R. Emery

Okay. Thank you. We appreciate everyone being on the call today. I think most -- well, everyone is around, if you have any follow-up. With that said, we will wait to, I guess, talk to you in May, the 1st of May, I guess. So with that, good day.

Operator

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

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