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Healthcare Realty Trust Inc. (NYSE:HR)

Q1 2014 Earnings Conference Call

May 1, 2014 10:00 a.m. ET

Executives

David Emery - Founder, Chairman, Chief Executive Officer

Carla Baca - Director of Corporate Communications

Scott Holmes - Chief Financial Officer, Executive Vice President

Doug Whitman - Executive Vice President - Corporate Finance

Todd Meredith - Executive Vice President - Investments

Bethany Mancini - Corporate Communications

Analysts

Karin Ford - KeyBanc Capital Markets

Michael Carroll - RBC Capital Markets

Michael Mueller – JPMorgan

Daniel Bernstein - Stifel

Operator

Good morning, and welcome to the Healthcare Realty Quarterly Analyst Conference Call. [Operator Instructions] Please note, this event is being recorded.

Now I would like to turn the conference over to Mr. David Emery. Mr. Emery, please go ahead.

David 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?

Carla Baca

Thank you. Except for the historical information contained within, the matters discussed in this call may contain forward-looking statements that 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 first quarter ended March 31, 2014. The company's earnings press release, supplemental information, Forms 10-Q and 10-K are available on the company's website.

David Emery

Thank you. We’re pleased again to report year- over-year growth in growth and FFO for the first quarter. Not surprisingly the harsh weather did affect NOI growth for this quarter but leasing momentum continued at a strong pace with the company’s tenant retention, cash releasing spreads and annual bumps showing solid increases.

Since 2007 we’ve continually refined the portfolio to focus on almost exclusively on outpatient properties with stable tenants, superior rent coverages and low fungibility. The company now is in a position to make most of the embedded internal growth dynamics of the company’s properties. We expect to continue to build on our well developed expertise by isolating and measuring the leasing and operational behaviours that we expect over time will enhance revenue per occupied square foot.

And to the extent that we have definitely managed expense growth, operating leverage will expand. We continue to refine our practice of writing properties by inherent fungibility to maximize their propensity for rent growth and performance. A modest increase in core portfolio NOI far outweighs incremental acquisition. In the abstract, every half percentage increase in internal growth would be akin to buying several hundred million dollars worth of buildings but with a lot less risk.

The nearly 80% of our $3.2 billion portfolio associated with rated health systems and an average of multi-tenant lease size of only 4500 square feet, the company fundamentally has a higher likelihood for lease renewals, consistent demand and steady occupancy. These distinct characteristics should prove increasingly valuable as they further enable the company to pursue only strategic investments to enhance growth without placing the company further out on the risk curve to produce additional spread particularly in a highly sought after asset class.

We expect attractive investment opportunities in the coming quarters. Given the size and annual growth of the outpatient property market, we anticipate that new construction as well as acquisitions will proceed at a measured and balanced pace throughout this year. We believe our investment strategy remains on point relative to the current trends in the health care industry, enable to produce sustainable and growing long-term returns.

Now we will move on to Ms. Mancini who will give us a review of the current event and trends related to health care industry.

Bethany Mancini

Thank you. After a difficult first enrollment season for the health insurance exchanges, marked by controversial delays and administrative tweaks and ongoing exemption to the Affordable Care Act, overall health insurance enrolment looks positive for the year which should bode well for healthcare providers.

National healthcare spending is accelerating even ahead of any impact from the newly insured, signalling positive momentum from the improving economy. Historically economic growth and consumer demand have fostered the profitable sustainability of health systems and physician despite adapting to changes in healthcare policy from year to year.

We believe our physician tenants are moving on from the introduction of health insurance reform, looking to position themselves opportunistically ahead of more changes to come. Recent industry reports announced increasing growth rate in healthcare services, including 5.6% growth in overall spending in the fourth quarter of 2013, a 10-year high driven by hospital revenue growth and an increase in patient encounters and physician office visits up 3.2% in 2013.

Over the past five to six years, hospitals have started to offset slower revenue growth from soft inpatient volumes and reimbursement pressures, with aggressive cost management, market share gains and increased outpatient services. As these efforts continue, any improvement in hospital revenue growth should benefit operating margin.

Healthcare employment trends, particularly in ambulatory care and physician offices also continue to show a stable upward trajectory for the sector. We view Healthcare Realty’s medical office facilities as well positioned to thrive on the growing demand for lower cost outpatient setting providing on-campus space for physicians which foster hospital utilization and direct to new payment and delivery model.

As we mentioned last quarter, the mix of skilled labor may change over time with the evolution of team based care, payment incentive for positive patient outcome and continued advances in outpatient services. 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 physician recruitment and integration essential.

Healthcare Realty’s business remains driven by the average physician in 1500 ft.² of office space along with space for their support personnel. The projected increase in the size of the labor force and the expansion of team based care allowing physicians to meet greater volume demand while keeping cost low should benefit Healthcare Realty and the internal growth of our on-campus medical office and outpatient facilities.

Contrary to general perception, average physician income continues to rise and Healthcare Realty’s tenant rent coverages remain strong. The recent MedScape report on physician compensation in 2013 showed an increase for 20 out of 25 specialties, on average 3.25% higher than in 2012.

In April, Congress passed another modest budget bill that provides for stable physician Medicare rate through the end of March 2015. This represents the 17th time in 11 years that Congress has delayed near term cuts in Medicare reimbursement to physicians by paying for with far off savings in future years provision. We believe the political capital afforded politicians in offering healthcare benefits to the electorate outweighs most other fiscal and entitlement demand and ensures stable public health spending. This imperative could limit the near term challenges of health insurance reform to merely an administrative burden for business managers rather than mount [ph] to be material operational loss for physicians.

Moving forward, Healthcare Realty will continue to pursue investments in the outpatient sector, confident in its low business risk strategy and the internal growth opportunities inherent to these properties, supported by tenant stable revenues from mostly private payer source. David?

David Emery

Thank you, Bethany. Now on to Mr. Meredith to give us some information regarding risk investment, development activities product.

Todd Meredith

During the first quarter, we made steady progress converting leases to occupancy at the development conversion properties, identifying prospective acquisitions, planning dispositions and nurturing prospective development.

The company is reaffirming its acquisition guidance of $75 million to $150 million for 2014. A couple of small acquisitions should close later in the second quarter and the bulk will close in the second half of the year.

With the universe of outpatient facilities well over 250 billion, annual churn of about 3 billion to 6 billion and another 4 billion to 6 billion constructed each year, Healthcare Realty has the ability to invest a couple hundred million or more in most years.

We were fortunate to be able to produce meaningful growth each year while pursuing only assets or portfolios that enhance the company’s internal growth profile and operating leverage. In our experience, these properties are typically multi-tenant properties on or adjacent to the campus of a leading health system and often in markets where the company already has a presence.

We continue to see an abundant supply of these types of assets in the $10 million to $30 million range at cap rates in the mid 6s to the low 7s. The most noteworthy trend for acquisitions is the persistence of low cap rate especially for larger portfolios. Anything of scale about 80 million and greater is uncommon and commands cap rates in the low 6s with some recent talks of less than 6 which bodes well for the valuation of Healthcare Realty’s sizable portfolio.

The company continues to expect dispositions of 40 million to 60 million in 2014. Subsequent to quarter end, we disposed the two off-campus properties for 6.2 million. Dispositions in 2014 will mostly be off campus, single tenant or smaller properties at blended cap rate in the mid to up to 6% range.

The 12 development conversion properties are now 66% occupied and generated $3.1 million of cash NOI in the first quarter. NOI would have been 3.6 million adjusting for deferred rent and personnel occupancy during the quarter.

Leasing edged forward to 81% with three new leases and one expansion at four different properties. 6 of the 12 properties are fully leased about 98% collectively. At another 4 properties that are 79% leased on average, additional leasing progress will be gradual and involve targeted groups or services complementary to the existing tenant base, the current tenant is expanding their suite.

Most of the leasing gains will come from the two properties that are about 40% to 50% lease. Across all filled properties, the remaining signed leases that have not yet commenced are expected to do so by year-end, taking occupancy from 66% to over 80%.

A lease for 25,000 ft.² will commence in early May with the majority of the remaining leases likely taking occupancy in the third quarter. By the end of 2014 occupancy is expected to be between 80% and 85% generating quarterly cash NOI in the range of 4 million to 4.5 million in line with our expectations to reach stabilized annual NOI 25 million to $30 million.

Developments remain a key component of Healthcare Realty’s investment strategy and a clear way to enhance the company's growth profile. We've identified and continue to foster several attractive development for couple on rent parcels already owned by the company, some on campuses where we’ve recently completed developments as well as some new relationships.

A typical development would be 50,000 to 100,000 in square feet in size and a total investment of about $15 million to $25 million. Combining hospital alignment with our local market knowledge, these developments are likely to involve significant leasing commitments from hospitals with one or more physician groups. We intend to start couple of developments in 2014 likely in the second half of the year.

Our investment outlook remains positive, and in line with previous guidance for 2014. Importantly, the company's investment thesis is not predicated on outsized acquisition growth. The company employs a balanced investment strategy of targeted acquisition, strategically aligned developments and selective non-core disposition, with the goal of amplifying the internal growth profile of the company’s existing portfolio.

David Emery

Thank you, Todd. Now to Mr. Whitman, to update us on balance sheet and capital market activities.

Doug Whitman

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.

In the first quarter, we secured commitments from nine banks in our current revolver for a $200 million five-year term. We closed on this transaction which eliminated most of the outstanding balance on our $700 million revolver at the end of February.

Capital costs have improved steadily so far this year indicative of pricing for equity and that shows a strong appetite among investors for Healthcare REIT. With the rise in HR’s share price since the beginning of the year, our equity trades have contracted to imply cap rate relative to investment opportunities.

In addition, interest rates remain low and credit spreads have tightened over the past year making debt a low-cost funding option. This ready availability and attractive pricing at both debt and equity allow us to pursue accretive investments in a balanced and flexible manner. Given our expectations of investment activity later in the year we will continue to be judicious in raising additional debt or equity being care for the balance, the need to fund new investments at low-cost capital, maintaining a healthy and flexible balance sheet and allowing our shareholders to benefit from the AFFO growth we expect in 2014.

We do plan to attend next month’s May REIT conference in New York and have already had meeting requests, do contact us if you would like to get together at that meeting.

David Emery

Very good. Thank you, Doug. And now on to Scott to give us some updates on operations and other financial matters. Scott?

Scott Holmes

The company reported first-quarter normalized FFO per diluted share of $0.35 and normalized FAD per share of $0.36. There were no normalizing items. So no REIT defined AFFO was also $0.35 in the first quarter.

The dividend payout percentage on FAD for the first quarter is 83.3% and for FFO is 85.7%. Normalized FFO grew 5.7 million or 20.3% year-over-year to 33.5 million. Over the same period, normalized FFO per share increased 9.4%.

FFO dollars decreased sequentially 1.1 million or 3.1% from the preceding quarter, attributable primarily to three items in the first quarter. First, we experienced our usual first quarter increase in general and administrative expenses of about $400,000. The other two increases are seasonal in nature and are due to the extremely cold and precipitous winter which increased utility expenses and the cost of snow removal by 400,000 and 500,000 respectively.

In several of our largest markets, places like Washington DC, Richmond and Des Moines, our January heating degree days jumped anywhere from 19% to 49% compared to last year. The same top markets also experienced significant snowball with cities like Charlotte and Indianapolis seeing snowball at 2.5 times their historical norms.

In fact, nearly 40% of the sequential increase in our operating expenses can be attributed just to snow removal. The company again produced solid leasing results. The first quarter cash leasing spread of 1.4% -- in the multitenant portfolio is in the middle of the range of 1.5% to 2.5% in recent quarters.

Annual rent bumps were 2.9%, tenant retention was 81.9% and the spread on releasing yields was again positive in the first quarter. With strong tenant retention and leasing activity, occupancy in the same score portfolio remains steady at 90.5%. The same seasonal expense increases in utilities and snow removal that lowered FFO during the quarter also lowered NOI in our same store pool of properties.

Year-over-year multitenant same-store revenue was up 1.8% but expenses were up 6.3% which caused NOI to be down 1.4% which does not reflect any cost recovery in future quarters. Sequentially same-store revenue in our multitenant properties was down 0.6% while expenses were up 4%. The revenue decrease was largely the result of a Q4 move out where the space was vacant for a period of time but it’s already being backfilled.

We expect seasonal expenses to return to normal in the second quarter. Our single tenant properties saw strong year-over-year same-store NOI increase by 5.6% with the result being that NOI for the entire same-store portfolio increased by 1.5%.

As we said previously any quarter to quarter changes are not necessarily indicative of a trend and must be viewed in the context of several quarters. We continue to expect the long-term same-store NOI growth profile remain in the 2% to 4%.

David Emery

Operator, that concludes the prepared remarks. So we’re now ready to begin the question-and-answer period.

Question-and-Answer Session

Operator

(Operator Instructions) And the first question comes from Karin Ford with KeyBanc Capital Markets.

Karin Ford - KeyBanc Capital Markets

My first question is a big picture one. We had heard on another call -- another REIT said that they had seen medical office demand pick up pretty measurably through the quarter and they attributed that to surging enrollment under the ACA. It sounds like you guys are seeing positive things as well. But would you characterize it as more steady demand or did you see a pick up as well?

Todd Meredith

Karin, this is Todd. I would say steady, I wouldn’t say we saw a transformational change in the quarter anything of particular note. But I would say just in general in recent quarters it’s certainly picked up, just leasing has been good which obviously then turns around and cost of capital is good and so you have investor demand as well, it’s been steady.

Karin Ford - KeyBanc Capital Markets

My second question, Todd, was a comment you made that there's been talk about cap rates potentially going under 6%. In what context do you think that might happen? Would it be a bigger-sized deal? Is it a particular geography? What are you sort of hearing in that front?

Todd Meredith

Definitely larger portfolio, I think that’s certainly been and we’re seeing that, anything that, I have mentioned $80 million is a threshold there. Things that are in the 50 or less range tend to be as we said kind of mid 6s, even sometimes up to 7 or more. But when you start getting into hundreds of millions and billions in some cases and also you see some things being a little more net fees oriented, I think you start to hear those sub-6 cap rates, the question obviously remains to be seen as to whether that will actually happen, you’ve got transactions in recent past that had some talk at those levels like Wall Street and didn’t quite trade there. But those were some of the things going on in the market. So I think the environment is ripe for it, it'll just be a question if it will actually happens and certainly we are watching that closely.

Karin Ford - KeyBanc Capital Markets

Are there any big portfolios on the market today?

Todd Meredith

There certainly are. There are some in the market, really there is some bigger ones in the market, we can’t say with certainty they are in the market but we know there are couple transactions that are north of that $80 million, $100 million level that could be interesting to large HR REIT.

Karin Ford - KeyBanc Capital Markets

Last question is, do you have an estimate as to what might be the recovery of the utility and snow removal costs that you had in 1Q, what we might see in future quarters on the recovery side?

Doug Whitman

Karin, this is Doug. We estimate operating expenses for the year for our tenants and collect sort of on a level basis throughout the year. So quarter to quarter swings would create the need for a trueup. So to the extent that there are vacancies in the summer where we also tend to see seasonal activity, we will have to kind of net that out, at the end of the year and during the year as we go, there is sort of true-up expenses that way. Some leases are those [ph], so it really isn’t any kind of operating expense recovery or true-up for those, those tend to be a smaller portion of the portfolio but those won’t be involved in that.

Karin Ford - KeyBanc Capital Markets

Do you think you estimate you would be able to cover maybe half of the extraordinary expense, more, less?

Doug Whitman

Yes, the rest of the year we’re normal than – how would I want to define normal, I would say yes, we would be able to recover significant portion of it. It’s just that we get outlier later in the year for other events that makes that prediction more difficult.

Operator

And the next question comes from Michael Carroll with RBC Capital Markets.

Michael Carroll - RBC Capital Markets

Doug, you don't expect operating expenses to decline in the second quarter because you stabilized those numbers, is that correct?

Doug Whitman

No, I think operating expense numbers will decline, we certainly won’t have higher than normal utilities, snow removals and so on. So it’s just the collection may be delayed by a particular quarter but the actual incidence of operating expenses we would expect to decline.

Michael Carroll - RBC Capital Markets

And then how has your guys' negotiations changed as more hospitals are buying out physician offices? Have you noticed any differences in that recently?

Todd Meredith

No, we really haven’t, Mike, I think this is Todd, and I think really we’ve been seeing this trend flow but steady for some time. I think you have heard some other people talk about and for us we don’t have any concern about working with hospitals versus physician groups, a lot of time even we’re working with hospitals that maybe the owner of the physician groups you are still dealing with different – discrete, so from the business side of the ladies, and so it really hasn’t changed that dynamics tremendously. Sometimes when working with a hospital you’re working with [indiscernible] organization and frankly sometimes that can be frustrating but then sometimes they have some real estate expertise and it’s real easier. So we really don't see a tremendous change in the business over recent time period.

Michael Carroll - RBC Capital Markets

I guess how should we expect the lease-up of the SIP portfolio to continue? I know it’s going to continue to be modest. But will those assets be stabilized by the year-end 2015?

Todd Meredith

Well, that’s certainly a good question, Mike. I think that’s a reasonable assumption, obviously the pace of that is a little bit unpredictable, we’re at 81% lease and you have got 10 of the properties that really are at 90%, if you kind bundle together, I went through some of that in my remarks, so you’re really looking at some modest increases in some of those properties, 4 of those 10 and then you're looking at two properties in particular. So really kind of get down to two properties and we’re seeing some good momentum there, but even sizable leases at those respective properties are going to be small relative to the total square footage. So just think about it as kind of 1%, 2%, 3% range per quarter, if you play that out, that plays out as we say you could probably see that at the end of ’15, just kind of on a linear basis. It won’t be linear but in that range.

Michael Carroll - RBC Capital Markets

And then my last question is, related to the SIP portfolio, I believe last quarter you said if all of the leases were in place and occupied, the NOI run rate would be about $3.4 million, but in this past quarter it was only $3.1 million. What's the difference between those two numbers?

Todd Meredith

Okay, the 3.1 is cash NOI from the properties for the first quarter. Last quarter that same number cash NOI was 2 .3, so the pick up was 800,000, so that’s on an apples to apples basis. The 3.4 from last quarter is equivalent to 3.6 this quarter. And all we are doing there is explain the difference between cash and run rate. And obviously you have two things that impact that, you have deferred rents and then you have partial period occupancy. So the number to think about in terms of what the current occupancy can generate is the 3.6 per quarter.

Michael Carroll - RBC Capital Markets

So the $3.4 million, is that a GAAP number? I mean I guess if the run rate was $3.4 million at the end of the year, why was it only $3.1 million in the first quarter?

Todd Meredith

The number, again it was 2.3 cash last quarter, you also have straight line rent that you would add to that, that would be closer to that run rate but you also have partial period occupancy, somebody that might have taken occupancy a month or two at the end of the quarter, so they are only partially in the quarter. So that would explain that difference.

Operator

And the next question comes from Michael Mueller with JPMorgan.

Michael Mueller – JPMorgan

A couple of things, I know you touched on this before. You talked about cap rates on portfolios potentially going below six and other stuff in the sixes. The stuff that you're buying, where do you think the blended will actually end up?

Todd Meredith

For the year we think that can be around 7, could be a little less or little more, just depending on the composition and mix of that. Again I think what we’re looking at and we see ability to find good quality assets in the small -- individual size of that $10 million to $30 million, those are 6.5, 6.75, 7, sometimes a little over 7. So in around 7 for the year.

David Emery

Mike, this is David. It’s also a little bit just supply and demand, if you’re working in the 25 million range, there’s just less people there than they are looking for 80 million, 100 million. So to some degree, it’s just the supply and demand, that’s the factor of why we can get a little higher return plus lot of these we’re in markets that we already know, we try to source within that, a lot of the folks here have relationships with people in that market. So we're in little earlier sometimes, it’s not that we’re necessarily off market but we probably have a discussion advantage in some of those kind of – I think it was not that we’re condensed any better than anybody else but to some degree: it’s kind of the whole environment of the effects of supply and demand and the fact that we try to cultivate opportunity.

Michael Mueller – JPMorgan

I mean how do we tie together -- on the disposition side, you talked about the stuff that you plan on selling. I thought the comment was mid to high sixes. But that's off-campus, it's single tenant, smaller, it's not the stuff you're going after. And it sounds like the cap rates there on a blended basis are below the product that you're buying.

Todd Meredith

Yeah, one important difference there Mike is that those are often times not stabilized, so when you look like last year for example we sold 10 or more properties and I think the average occupancy was around 50%. So it is a totally different play, we’re not trying to explain that hey, off market is getting throughout the year better than on campus, it’s not necessarily that, it’s just different type of play there, different type of investor looking little more at a value add, some more upside from leases.

Michael Mueller – JPMorgan

And just going back to snow one more time, just to make sure we're clear on this. The total snow utilities was about $900,000. But that's above what norm was and that's net of whatever recoveries may have happened? Is that the right way to think about that?

Scott Holmes

This is Scott, except the recoveries are yet to occur. So that kind of grows I guess.

Michael Mueller – JPMorgan

But from a P&L standpoint, you don't recognize the recoveries until they actually come in?

Scott Holmes

That’s right.

Michael Mueller – JPMorgan

You don't accrue for them?

Scott Holmes

Right.

Michael Mueller – JPMorgan

And if everything goes well, how much of that do you think you would be able to recover, substantially all of it?

Scott Holmes

Around half, probably.

Doug Whitman

Again it kind of depends on how expenses play out for the rest of the year.

Michael Mueller – JPMorgan

Okay. And then last thing, it seems like your internal growth has been hovering give or take, around 2%. Is that, as you look out over the next few years, do you think that's a pretty sticky number or do you maybe it bumps up a little bit?

Doug Whitman

Really Mike, that goes back to the revenue model and when you really break down the revenue model and Scott went through some of the numbers but the in-placed contractual bumps are more in the 3% range and have been for a long time, and as David characterized that we are working on a program there to kind of really dial it a little bit up and just a little bit moving in that creates a lot of extra NOI and FFO, so we’re very focused on that. Then you also had cash releasing spreads and so forth. So it’s little bit [ph] depending on where those are relative to the 3. That’s really the driver of the growth model and if you can drive your revenue at 2.5, 3, all in and then you’ve got your expense management more in the 2 or less range then you get that operating leverage and that’s where you can see the NOI sort of more sustainably in the midpoint of that 2.4 range. Now this quarter obviously with the numbers in the weather issues and also just some property tax issues lingering from a year ago you’re seeing a little pressure on that but we think the second half it ought to return more to that range.

David Emery

Mike, it’s pretty much – not to use the old phrase at the end of the day, but to use at the end of the day, it’s all about revenue per occupied square foot. And so if you focus on that, enhance that and grow that everything else tends to work out smooth out, not necessarily quarter to quarter but smooth out year-over-year, as I have said before, our business, it looks like a 2 to 4 business but I have been in the real estate market for 40 and years and given the low fungibility of our properties and the nature of the properties, the growth of the industry all those kind of things, there is no reason why it can’t be the 3 to 5 business. And so that’s kind of what our target is over the long term, it’s to continue to enhance by dispositions, focusing on the characteristics of these individual properties, the fungibility of that property, the ability as Todd says if you can, not own the releasing spread, has a lot to do with how the bumps come around. So if you can get a little bit more of an outsized on the renewals and a little bit more on the bumps and we’ve always been pretty good on that 3 to, a little bit more. Then everything looks up.

Operator

And our next question comes from Daniel Bernstein with Stifel.

Daniel Bernstein - Stifel

I've got a question on the yields on development. I don't know if you can go over -- you mentioned some of your properties are now almost fully leased or 90% leased and you are looking into developments later this year. Just trying to understand what yield did you get on the previous developments? And what kind of yield are you looking at on the developments that you're going to start later this year?

Todd Meredith

Sure, Dan, probably the best example to look at, or some of the maturities at ones and you look at a couple that I think you’ve seen up in the Denver market and one down in Houston, Woodland area and when you look at those and you look at the lease up timeframe of those, you are talking eight to nine even better in some cases initial while stabilized yields. And so that continues to be where we look for yields on new developments. Obviously if you start to get more and more leasing towards the hundred percent level that’s going to come down, you start getting below eight. And we’ve got a little mix of those, that, I think for the most part we are looking at things that might be more in the eight plus range for the developments and that might be as I said a significant commitment from the hospital and a couple of groups maybe you are at 30%, 40%, 50%, 60%, committed before you even start. So that’s kind of where we are focused and targeted.

Daniel Bernstein - Stifel

Have the development yields changed at all with cap rates on acquisitions coming down, kinds of expectations?

Todd Meredith

Not in recent times, I mean I think if you go back a while certainly that would have, I mean back -- we certainly targeted some numbers that were higher on some deals in the past but I would say in the recent few years it’s certainly been in that same range.

Daniel Bernstein - Stifel

And then your peers have reported occupancy declines in 1Q and you had a little bit of a decline in 1Q. Is there a seasonality to occupancy? I kind of hadn't thought there was in the past, but it seems like there is maybe one now. Do you see seasonality in occupancy?

David Emery

I think that’s probably the fallacy of composition, I don’t know any reason why you would have seasonality in physician occupancy now.

Daniel Bernstein - Stifel

I was just trying to understand what I was seeing at some of your peers. In terms of what you're seeing out there -- in terms of portfolios for sale or acquisitions -- or properties for sale. Who are the sellers? I mean are you seeing some more hospitals, post the roll-out of ACA looking to sell assets? Is it developers? Is it smaller owners who are looking at cap rates and going, now is the time to sell? I'm trying to understand who the sellers are and has the compositions changed?

David Emery

One thing, ACA has nothing to do with it. Hospitals are not – have not all of a sudden woken up and monetizing their assets. So that’s not something we see. The composition of the portfolios are all around the block from the standpoint, you have people groups assemble them for the purposes of selling, you have some people who you have accumulated over time, who may change direction and want to sell.

Scott Holmes

Yeah. I think it is more of the physician owners, it’s kind of a one off scenario that physician owner, the developer, we’ve seen some cases where some developers maybe even together with some physicians are looking at moving on, they like the pricing out there and then they may be looking, the developer may be looking to redeploying their money into another development, because development is certainly picking up, not just dramatic but other things, and so some of these multi-patented developers may be looking on to the next thing. So it’s across the board. I mean occasionally, yes there are some hospitals that sell, we’re talking to some currently but we are not seeing a wave or anything –

Daniel Bernstein - Stifel

If you were to split your investments between acquisitions and developments going forward in the next 12 to 24 months, how would you split that? Is it 50:50, development versus acquisition investments, or are you going to tilt more towards development, given where cap rates are and move [ph] the acquisitions?

Todd Meredith

Dan, I think this is a practical matter, we can’t just flip the switch and tilt that dramatically. I mean over time, the issues in development as you know takes a lot of motivation as the relationships and we’re working on that. But they are less predictable, you have to do a lot of work with the health system, to get those started and going. So I think as you have seen our history we’re typically two thirds acquisition and a third development, I think that will continue. It doesn’t mean in any one year it’d be a little off that but I think in general that’s just the good real bump.

Operator

Thank you. As there are no more questions at the present time, I would like to turn the conference over to management for any closing remarks.

David Emery

Well, there are no other questions, most of us will be around today. If there is any followup please give us a call and all the while I guess the next call will be – I guess in June sometimes I guess it is and the next call in -- early August, I think is the next call. Otherwise we'll talk to everyone later. Have a good day.

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