Healthcare Trust of America's (HTA) CEO Scott Peters on Q4 2015 Results - Earnings Call Transcript

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Healthcare Trust of America, Inc. (NYSE:HTA)

Q4 2015 Earnings Conference Call

February 19, 2016, 11:00 ET

Executives

Alisa Connolly - Director, Finance

Scott Peters - Chairman & CEO

Robert Milligan - CFO

Analysts

Karin Ford - Mitsubishi UFJ

Chad Vanacor - Stifel Nicolaus

Todd Stender - Wells Fargo Securities

Michael Gorman - Cowen Group

Vikram Malhotra - Morgan Stanley

Rich Anderson - Mizuho Securities

Kevin Tyler - Green Street Advisors

John Kim - BMO Capital Markets

Doug Christopher - D.A. Davidson

Operator

Welcome to the Healthcare Trust of America Q4 2015 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Alisa Connolly, Director of Finance. Please go ahead.

Alisa Connolly

Thank you. And welcome to Healthcare Trust of America's fourth quarter and 2015 year-end earnings call. Yesterday we filed our fourth-quarter and year-end earnings release, our financial supplement and first quarter dividend announcement. These documents can be found on the investor relations section of our website or with the SEC.

This call is being webcast and will be available for replay for the next 90 days. We will be happy to take your questions at the conclusion of our prepared remarks. During the course of this call we will make forward-looking statements. These forward-looking statements are based on current beliefs of management and information currently available to us. Our actual results will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict.

Although we believe our assumptions are reasonable, they are not guarantees of future performance. Therefore, our actual future results could materially differ from our current expectations. For a more detailed description on some additional 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 Peters, Chairman and CEO of Healthcare Trust of America. Scott?

Scott Peters

Thank you and good morning. Welcome to Healthcare Trust of America's fourth quarter and year-end 2015 earnings conference call. We appreciate you joining us today as we discuss our fourth-quarter results, 2015 execution and the outlook for 2016. Joining me on the call is Robert Milligan, our Chief Financial Officer; Mark Engstrom, our Executive Vice President of Acquisitions; and Amanda Houghton, our Executive Vice President of Asset Management.

In 2015 the medical office sector continued to prove its value with steady and consistent NOI growth, strong retention, continued occupancy gains and very little supply growth. This is in contrast to some of the fundamentals and influences in other parts of the healthcare sector. It will be 10 years since HTA was founded in May of this year and four years public in June.

HTA continues to stay disciplined in our investment strategy, stay focused on the simplicity of our operational results and asset management platform, expand key markets, critical mass and relationships and stay away from development and the inconsistencies associated with it. Looking back at 2015, HTA fundamentals were extremely predictable. 5% growth in FFO per share, same-store annual growth at just under 3%, 92% occupancy, 5.5% lease rollover less than 1.5% per quarter, 80% retention with leasing spreads flat or up 1%, expense savings across the platform of over 2% trued-up quarterly, no developments or redevelopment lease-up exposure and net acquisitions of $256 million invested in our key markets and leverage under 35%.

Looking forward to 2016, it should be as consistent also. Same-store growth of 2.5% to 3.5% in line with 2015 and driven by annual escalators of 2.3%, 8% lease rollover no more than 2% per quarter, retention around 80%, continued new leasing activity, expense savings of 1% to 2% across the platform, leverage under 35% and net acquisitions of roughly $300 million.

From a broader market perspective, the tailwinds in the MOB space continues to be strong. The Affordable Care Act continues to bring people into the healthcare system. The U.S. continues to grow older with over 55 million additional individuals turning 65 over the next five years and healthcare GDP and healthcare employment continue to grow and lead our economy forward.

At HTA we look at the MOB sector as a combination of healthcare, traditional real estate and an asset management platform that is focused on service. The space is growing, changing and transitioning rapidly. We're investing in high energy markets with strong demographic growth and growing healthcare systems. Specifically focused in core critical locations that are positioned for growth over the next 5 to 10 years.

We do this on a targeted basis. As we will discuss, every asset has unique qualities which ultimately determine performance over the future period of time and there is no easy checklist. We believe that the future presents three great acquisition segment within the medical office sector to invest in and generate good returns. MOBs that are on campus or adjacent to leading healthcare systems in key markets. These need to have a high-energy campuses.

Academic medical centers which are paving the way for healthcare of the future; community core locations, off-campus locations in great high-density neighborhoods where healthcare providers compete to take space given their proximity to patients. These are not one off off-campus properties. These locations are high-end, regional, local, high-end malls that will become destinations for healthcare were tenants compete for space next to each other as their business feeds off the synergies that they get from being located there.

All three types of assets are core critical to the delivery of healthcare in the future, as healthcare systems and providers work towards healthcare delivery that is cost-efficient and accessible to patients. Key MOBs are developing into highly sought-after real estate for the end-user. What makes the MOB space exciting is that it's still relatively new segment for a number of investors and liquidity is just beginning.

Historically, medical office has been grouped together with other healthcare sectors. But with three MOB-focused public companies each with distinctive business philosophies, the sector's generating increased attention on a standalone basis. The level of sophistication, understanding and articulation within the space continues to improve. Investors are asking far more questions relative to investing.

For example our view is that not all on-campus assets are created equal. Things like supplier product, location, density and the overall energy of the campus will determine the real estate performance of that MOB over time. Perhaps more so on campus than even off-campus assets.

Tenant credit, certain opportunities look good on the surface, but assets with master leases can mask vacancy, above market rents and a changing dynamic within that campus.

Tenant mix, physicians stay in place because their business benefits from the referrals generated within each location. Maintaining a balanced and appropriate mix of tenants is extremely critical to long-term value of the MOB. This is a critical key part of our leasing strategy.

For 2015, HTA's execution on our business plan was good, but we see opportunities to improve our execution in 2016.

We're better positioned now to be a leading owner and operator of medical office buildings in key markets than we have at any point in our ten-year history. Our property management leasing platform continues to deliver strong and steady same-store growth. Our balance sheet is in great shape. Our platform is generating attractive opportunities to invest in core real estate in our key markets and we believe our platform will continue to generate efficiencies as we move forward.

Our consistent results throughout the year are a direct reflection of both the company's portfolio fundamentals, management's ability to execute and the continuation of strong macroeconomic tailwinds that benefit our sector. At year-end, HTA's portfolio consisted of almost 16 million square feet located across 15 to 20 key markets in 27 states.

70% of our assets are directly on hospital or academic medical center campuses. Another 27% of our MOBs are affiliated with large healthcare systems with over half of these in a high traffic area or on a multi-clustered MOB campus that is a community core location and critical to the healthcare delivery within the community. From a leasing standpoint, the occupancy of our off-campus MOBs performed well, slightly higher than the 92% portfolio-wide occupancy of our entire portfolio. We currently property manage and lease over 95% of our portfolio or over 15 million square feet.

We continue to believe this platform and the relationships we have developed with healthcare systems and physicians are a key driver of our asset management success. Despite that, we're still early in our process of bringing best practices and economies of scale to our properties and see the potential to continue to generate efficiencies over the next three to five years.

As we try and move the property management of a fragmented MOB sector closer to those found in other real estate property types. In 2015, total acquisition volume was $281 million. Average occupancy was 787,000 square feet, for 2015 acquisitions was 97% and all were in our existing key markets of Atlanta, Boston, Charleston, Columbus, Indianapolis and Raleigh.

As I mentioned we have seen great opportunities for investment in MOBs across the healthcare sector and since year-end we have closed on $156 million in acquisitions. This includes expanding our portfolio in the Texas Medical Center in Houston and a large destination MOB in New Haven, Connecticut anchored by Yale Medical Center, located less than a mile from Yale University. We will finance these transactions with the $91 million in equity we raised on our ATM in January at an average price of $27.25, as well as some additional dispositions which are currently under contract.

For the year, we expect that we will recycle $100 million to $200 million in assets. This will include the sale of some of our non-core MOBs as well as a portion of our diversified healthcare assets. We expect our MOB recycling will be on a relatively cap rate neutral basis giving still strong demand for single tenant assets, while our diversified sales will be slightly dilutive. I will now turn the call over to Robert Milligan to discuss our financials for the quarter and the year as well as our capital markets activity.

Robert Milligan

Thank you, Scott. 2015 was another consistent year with disciplined growth on both the internal and external fronts. Our portfolio is built to deliver consistent growth and it did. We will disciplined allocating our capital and invested in properties primarily located in our key markets that will benefit from our operating platform and we positioned our balance sheet to take advantage of significant opportunities we see for 2016, including ones that we've already closed.

For the quarter, normalized FFO increased 12.1% to $50.7 million. On a per-share basis normalized FFO was $0.39, an increase of almost 5.5% compared to the fourth quarter of 2014. Our normalized FAD for share for the quarter which incorporates our recurring capital expenditures and leasing costs as well as our straight-line rent, increased 9.4% to $0.35 per share, putting our for dividend payout ratio at approximately 84%.

For the full year of 2015, normalized FFO increased almost 11% to $196 million with normalized FFO per share increasing to $1.53 per diluted share, an increase of almost 5% compared to 2014. Our normalized FAD per diluted share increased 8.6% to $1.39. Our performance was primarily the result of our same-store NOI growth and for the quarter which includes properties owned since the third quarter of 2014 we generated 3.1% same-store growth.

For the year which includes properties owned since the end of 2013 we generated 2.9% same-store growth. Both of these are consistent with the 2.5% to 3.5% growth we expect our portfolio to generate on a consistent basis. Approximately 80% of our same-store growth for both measurement periods was driven by base revenue growth. With just under 95% of our leases locked in place coming into the year, our base rent grew almost 2.2%, mostly the results of our in-place leasing escalators.

This base rent growth translates into about 2.5% of the NOI growth given our existing margins. We expect a similar result in 2016 when we only have 8% of our leases rolling. The remaining NOI growth was generated by additional expense efficiencies and the ability to perform more work on our in-house property management platform. As we've indicated previously we believe we can continue to generate additional growth of 20 to 30 basis points for the next few years as we get our property management platform closer to the platforms found in more traditional office and multifamily sectors.

To get this we're targeting 5% to 6% cost-out over the next three years, certainly achievable, outside of any other disruptions. In the quarter, we renewed 162,000 square feet of leasing and entered into 106,000 feet of new leasing. This brings our 2015 leasing activity up over 1 million square feet or approximately 7% of our portfolio.

This includes about 1.5% of our portfolio which we renewed early given tenant request to expand or invest in their space as they plan for the future. Tenant retention for the year was just above 80%. Average lease terms in 2015 was 6.3 years on a blended basis, above the five and half years we had in 2014. Contractual rent increases were 2.7% on average for leases signed in the quarter consistent with the 2.5% to 3% range we're executing in most markets.

Overall rent spreads were essentially flat for the year. And we also continue to focus on leasing concessions with free renter renewals on the year down to almost one week of free rent per year of term or just over one month in a five-year deal. Given our portfolio structure and current performance you should expect very consistent performance. Our lease rollover's limited with about 5% in 2015 at 8% in 2016.

Our tenets are renewing at existing rates with low levels of concessions and our expenses are down. Combined with the fact that we reconcile expenses and expected tenant reimbursements on a quarterly basis, you should expect our same-store growth to continue on a consistent basis, excluding any one-off situations that may arise. From a corporate infrastructure perspective, our G&A expense totaled $25.6 million for the year, in line with the $26 million that we discussed at the beginning of the year and up slightly from 2014, primarily as a result of additional stock-based compensation expense amortization.

For 2016 we expect G&A to remain relatively flat to this year around $26 million. In the fourth quarter we also recognized a $1.5 million charge in other income. This was a trailing fee related to our large Florida acquisition in 2013 that was payable when we took over the asset management which we did in Q4 and will not recur. On the investment front, we continue to focus on growing our platform in key markets. In the fourth quarter, our primary investment was in the $21 million acquisition of the 102,000 square feet Stetson MOB that's located in the South Shore area of Boston, our largest market.

The property is 81% occupied but is located within the South Shore medical mile which it has less than 1% vacancy and has seen significant expansion from the major downtown providers creating significant upside potential. The primary tenets include Boston Children's Hospital and Brigham and Women's.

Turning to our balance sheet we continue to focus on low leverage in a conservative balance sheet with flexibility. We ended the year with 31.4% debt to total capitalization and approximately six times debt-to-EBITDA. We continue to have access to multiple sources of capital that we will utilize to grow our portfolio while also maintaining our conservative and flexible position. To this end, during January we raised over $90 million in equity using our equity at the market program at a price of $27.25.

As we continue in 2016 we will balance equity needs with capital recycling and debt issuances as the markets and acquisition opportunities present themselves. I will now turn the call back over to Scott.

Scott Peters

Thank you, Robert. I would also to welcome a new member to HTA, Dan Klein. Dan joins us as Executive Vice President of Business Development. And with Dan's experience in the healthcare sector we definitely think he will assist us and allow us to continue to expand our investment opportunities and the opportunities we see in the three segments that we talked about on the call. With that I'll turn it over to the operator for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. The first question comes from Karin Ford of Mitsubishi UFJ. Please go ahead.

Karin Ford

First just wanted to focus on the investment side, you guys are obviously off to a great start so far this year. I think I heard you say that you expect $300 million of net investments and $100 million to $200 million of dispositions this year. Is that roughly correct? So are we saying sort of $400 million to $500 million potentially on the acquisition side?

Scott Peters

Karen. Yes. We see a lot of activity right now, more liquidity in the space I think that's consistent with what you've heard from other folks. And we're seeing some good opportunities. Just an example the opportunities that we've mentioned here today, Stetson in Boston, it builds out our Boston platform and it was really something that we had sourced from a relationship perspective. And New Haven we really like that asset. It's 50% Yale and we think it will get even greater opportunities there with them. We have an opportunity to expand, add square footage if the demand is needed.

And then we find something in Houston which is a mile and half away from our core asset called Fannin. So we're finding opportunities that help build out our platform and not only do we get opportunities for growth, but we get the opportunities that come from the core critical mass within the market. So we're excited about 2016.

Karin Ford

Are you seeing any less competition given some of the capital market challenges of some of your more diversified competitors?

Scott Peters

You know I think that is really dependent upon the type and quality of the asset that is in the marketplace right now. I think that the Class A "medical office building" is being highly sought after. I think that there are in fact the asset class and the performance that we're seeing from it from everybody along with the issues that are in the more diversified space in healthcare has started to focus more folks on the core qualities of being a medical office building next to a campus or downtown or something like we have in Houston and folks are seeing that and it's still generating a lot of traction.

I think some of the secondary assets, the one offs in the communities, the sale-leasebacks from physicians and so forth. I think you will have seen or will be seeing a little less competition for that type of asset because you don't have the a non-traded REITs out there. You've got, right now, a little less the amount of folks looking at that, so I think that the core critical MOB investment-grade credit, high energy, high synergy, great location asset is still pretty consistent from a cap rate. But I wouldn't be surprised to see some softness perhaps in the secondary markets.

Karin Ford

And then just last question for me, have you seen any change in behavior by the healthcare systems or developers or others as a result of the site neutral legislation yet?

Scott Peters

We have not. In fact we had a tour in Boston and Robert conducted it with some folks and we actually asked the question. I think they're still working their way through it. We asked the question of one of the folks who was with Boston Medical and I think that they're working their way through it. I don't expect to see a lot, but we will have to see.

Operator

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

Chad Vanacor

You guys can cover a lot of ground really quick in the opening statements. Can you remind me what you said about re-leasing spread?

Robert Milligan

Yes. Releasing spreads, Chad, are really kind of flat-to-up 1%. I mean it's been pretty consistent throughout the year. You know I think as we also continue to focus from the releasing perspective, we really are focused on the leasing concessions. So you see the amount of free rent that we're given is quite low this year, for all of 2015 it's really been about a week per year of term.

Scott Peters

And I think that that's one of the areas that we've talked about our consistency and I think we talked through the levers that we have and how we view it. One of the things that we have done this year, in hindsight or in 2015 in hindsight, we focused a lot specifically on reducing concessions. I think that the reduction of concessions, we spread free rent for example. Other folks sometimes or in some markets they give it all up front. We don't do that. We like to spread it.

We look for the physician practitioners for the healthcare systems to put dollars into the space. I think that is why some of our occupancy did not grow as we would have liked it to grow. I think in 2016 we're going to be able to see some occupancy growth more so than we did in 2015 now that we see that the concessions within our markets and really the key markets that we're in, that's where we’ve moved to and I think you've got some upside in the medical, the MOB space from upside to leasing.

Chad Vanacor

And then, Scott, you're also mentioned about possibly investing in maybe some off-campus high-traffic areas. What other factors are you taking into account that may persuade you to invest in off-campus MOBs?

Scott Peters

Well I think as a mentioned on the call, one offs off-campus, we struggle with that. I don't think that that's the definition we see and I think everyone is trying to figure out and I think the distinction between the public companies that are out there right now is really good. It's good for investors and it's frankly good for each of the companies where we each see a future that says here's how we envision making good investments and generating strong returns.

Our view is and we've seen it in White Plains, we've seen it in Albany, we've seen it in markets that -- and all of our stuff has been bought the last five to six years, so it's not like we've had a lot of stuff that we've owned for 15 - 10, 15, 20 years. We haven't. So we're seeing regional high-end, high density, high traffic, lots of parking. I mean one of the things that I find that has really jumped out at me in the last six months in looking at the opportunities that are out there and this is an example of our New Haven asset. Parking has become a very, very big component and consideration for physicians. They need a lot of parking.

And so if you've got a building and you're constrained with parking, it is impacting your ability to for them to expand and it's impacting what I consider to be the long-term viability of moving rents. So that's one of the things that have jumped up and New Haven it's, the asset that we have there, the single biggest reason that it's attracted to tenancy that it is, is because of the parking and the accessibility off the highways.

So that's kind of what we look at. Is key synergies from physician groups and healthcare systems and the ability to make this a high-traffic area because in our view that the future of healthcare being served in communities.

Chad Vanacor

All right. And I know that's, that 91, 95 interchange near where you bought your building very well that is high-traffic. You've got some - - you're stepping up your asset recycling in the next year. What types of considerations are you taking into account, as far as which assets to recycle and what should we assume on those cap rate on dispositions?

Scott Peters

Well from the MOB side it's really markets that we're not going to expand in. It's markets or it's an asset, one-off asset. We still, we still have some assets that are one-off in the market that we're not going to stay in, so I think it's a very good opportunistic for us to go ahead and recycle out of that.

I mean the goal that we have the next five years, we've spent five years, four years now in June being public, but the next five years is to continue to improve the quality and the dynamics within that quality of assets in our portfolio. So we'll get out of the one-off assets in markets that we -- for whatever reason don't want to continue to grow in or aren't able to find the ability to grow in because there's always that component of it.

You can't get everywhere you necessarily want to be. And then the other side of the equation is we will continue to dispose -- recycle out of the non-MOB assets that we have on the balance sheet.

Operator

The next question is from Todd Stender of Wells Fargo. Please go ahead.

Todd Stender

Can we hear more details on the Stetson acquisition? Maybe what the lease role looks like. What the in-place rents are compared to market. And then what the cap rate was on a trailing basis just looking at the 81% occupancy and then what did you underwrite that out say 12 months from now?

Robert Milligan

Sure. I think the exciting part for us in the Stetson and I'll turn it over to Robert in a minute, is the fact that is 81% occupied. It's in a great location. We believe that we will see the opportunity to get that 19% occupied in the next 12 to 18 months if not sooner.

Part of the equation is that being a Company such as ours we can bring the capital to the buildout. Which was really the differentiation between the folks who had owned it and their decision to move the asset. And they were moving into some other asset classes and we've known them for a while and it was a good transaction for us. And I think that there again, we have a huge parking that benefits the two healthcare systems that are in there.

Both are fighting for market share and I frankly expect one of the two to take the space. Robert you want to add any other talk? Yes, I think Todd, on the trailing basis we bought it at about a 6.25 cap rate there, so it was still right within the cap rate we'd expect, we expect to get the stabilized cap rate obviously up quite a bit once we've filled the remaining 20% vacancy. I think the other part that we like about it is when you look at the general market right around there, within the mile, it's all around South Shore Medical Center kind of going up north about a mile.

There a significant amount of medical activity and there is really only about 1% vacancy there. So the rents we think are at or slightly below market and then we'll try to balance that as we lock in some of these larger tenants long-term and look to expand on. So we feel pretty good, but there's definitely kind of that 6.25 on a trailing basis.

Scott Peters

You know, Todd, we've look at markets and markets changes as everywhere else does, but Boston with GE moving in there, we love the Boston market, we believe that it's 10 years ahead of most major markets, maybe not ahead of Seattle, maybe not head of San Francisco, but you see these larger markets now really revolving around the infrastructure to healthcare, the attraction of really educated individuals to work at companies and healthcare is such a big part of it. We like the Stetson asset. We would expect that we can continue to grow in the Boston market

Todd Stender

Thanks. And I don't know if I missed this. Did you guys talk about the acquisitions you've made so far this quarter? I just want a sense of the off-campus community core philosophy you guys have been talking about. Has that come to fruition yet?

Robert Milligan

You know I think the two big transactions that we did in the first quarter that was the bulk of it you know about 60% of it was actually all on-campus stuff with good hospitals in Texas. That we mentioned a little bit, especially the one in the Texas Medical Center that it's not only great real estate attached to a hospital, it's just in a dynamic area for healthcare. So about 60% of that was on-campus.

The Yale New Haven one is about a mile from the hospital but quite frankly it enjoys much better traffic and greater visibility which is really important to the medical centers that are really attracting patients from the broader area. So I'd say we have kind of a nice mix of both the on-campus that we like and high-energy campuses with some of the community core. That's still close to a hospital, but definitely more attracting patients there.

Todd Stender

And just to stick with you, looks like the ATM funded at least a portion, a pretty good portion of the acquisition activity already this quarter. How about the remainder of the sources of funds? Is that sitting on your line? I wonder is there any assumed debt?

Scott Peters

No assumed debt. Yes, we did finance it on the line and as I think as we mentioned, we feel pretty good about the flexibility we have to term it out. We've got some dispositions we plan on doing as markets cooperate. We have opportunity in the debt market, so I think we feel pretty good with the flexibility we continue to have.

Todd Stender

And just lastly, just talking about tenant retention. It's in the 75% range for Q4. What represented that? Any large tenants comes out?

Scott Peters

You know Todd I think we did touch on a little bit. We focused 2015 on rent concessions. We also have focused -- I mean there is three things, as you continue to see the space evolved from a leasing perspective, I think that is all assets are not created equal and all on-campus aren't the same and so forth and all credit leases are not the same. I think you have to look at the leasing process and how you as a company want to differentiate yourself going forward. What we have done as we said to ourselves we wanted to focus on concessions, we wanted to have tenants, put some money into the game so to speak or put some money into their suite. We've also took a third approach which was who should be at locations where we feel that the energy of that asset on that campus or in that community core location is going to benefit for the next 5, 10, 15, 20 years.

We have had a couple of folks move out on us, because one they didn’t want to pay the rent that we thought the asset needed we had an example of someone who wanted a whole first-floor and that meant we had to dislocate a PT practice that really shouldn't be on the first floor of a key asset on the key campus. You ought to have the larger physician group that was a woman's group. So it is still shaking out. We have said this and I continue to believe it that we're in the early innings of the healthcare transition as it relates to the Affordable Care Act which really only impacted hospitals, physicians and from an asset perspective medical office buildings. I mean they're going to the most efficient, most productive location and we as owners need to make sure that our assets are getting the rewards of that not only today, but more importantly down the road.

Operator

The next question is from Michael Gorman of Cowen Group. Please go ahead.

Michael Gorman

I was wondering if you could talk a little bit about on the disposition side of things how we should think about the timing in terms of matching the funding on the disposition side versus the acquisition? Obviously you started the year strong but should we consider the rest kind of pro-rata over the course of the year or are these things that are actively in the pipeline right now?

Scott Peters

Well we would like to believe that we can be pragmatic. And basically say that we would like to be able to time, certainly don't want to be look like it's haphazard and mismatches. So I would expect that your pro rata so to speak, we want to be net acquirers of assets in this marketplace. I think you can find good assets in key markets that we have with relationships that have come to us where we want to be involved in those acquisition. On the other side we want to make sure that dispositions we recycle out of what we have and move into 2017 probably with 90% of that completed. But I would hope that we can do it on a very orderly fashion.

Michael Gorman

Okay. And then Scott just sticking with that topic. You talked about increasing liquidity in the space, as you think about dispositions this year, who are sort of the target buyers here. Are these private equity? Are these single asset owners? Who is the key target?

Scott Peters

I think a lot of what we're selling are probably going to be for single buyers because the stuff that we're looking to sell really has no key asset management component of it. It's triple net like we've done last year where we got rid of -- not got rid of but we recycled out of a couple of two, three assets. We’ve renewed the leases, it was triple net there was not a lot of active asset management property management, leasing going on in those buildings. So that's a different type of buyer. It probably isn't an asset that we're looking to buy going forward. We want to bring in what I think is the true value of the future of medical office which is the ability to move rents with the synergies that are located and that means that there will be some rollover and the people that you are operating it bring some value to the equation. So I think it's one off buyers. I think it would be private folks that are looking for particular assets I think that's what we'll see buying our assets.

Michael Gorman

And kind of slipping to the acquisition side, I'm interested with the Stetson acquisition. You know there's a lot of talk about the portfolio management platform and controlling expenses and some talk about on the same-store site. I'm curious as you guys think about your investments going forward are we likely to see more instances like this where it's a core market for you guys that you understand very well and have a big platform in where we could see more of a value add acquisition where there's leasing upside or there's vacancy or their something like that could drive additional growth beyond a more stabilized asset?

Scott Peters

Will I think that's a good point. In the last four years this is the first asset that we've acquired actually it's the second and third asset that we've acquired under 90% occupied, we acquired two assets last year in Miami that have leased up and are actually going to get close to 100% in 2016 actually by the second quarter. This was an example of we feeling that we really like the market we know the market. We know the mile that's associated with it, we’ve been there. We're feeling very good about the opportunities to lease that space. So you're correct. I think that and when we find opportunities where we know the market, we've got our leasing people in the market. We've got our property management folks in the market. We know local folks more so than in other markets. We would like to be, to take that opportunity to see some growth once we buy an asset and frankly move rents. So you would see that from us and we're focusing on key markets. That is a big focus of ours. We would like to add a market or two each year, is it one market, is it two markets? But certainly 80% of our time and effort and focus is in our key markets.

Operator

The next question is from Vikram Malhotra of Morgan Stanley. Please go ahead.

Vikram Malhotra

I just wanted to follow-up on the acquisition's post quarter, you said there was one in Connecticut. If I'm correct is that the one which is about 280,000 square feet. And I think in the deal at least it's reported there were maybe three acres of lease to a hospital as well? Can you maybe just give us some additional color on cap rates and maybe with the rent bumps are over there?

Scott Peters

Yes. It is in New Haven and I think you’re right, it's about 280,000 square feet. I think the rent bumps are to 2.5 close to 2.5 to 3. We don't have a lot of rollover in that asset. What we do have is the ability as a couple tenants role is to move rents that because I think that the rents functionally are under market. Now that's going to be a time period I think over the next two or three years. As we turned some of the space that is not medical space into medical space we're going to get what we believe is a pretty good bump in rents. The overriding benefit of that asset as I mentioned again, is the location, location, location with the parking off the freeway within a mile of Yale. That's the only place, they're picking that place to go from a infrastructure position to service the community from the medical side. So we like that asset. If you go there you walk --and we have an opportunity to increase some space there when the demand requires it or when we think the demand is going to be met. So there's upside for us. There's upside for investors in that asset.

Vikram Malhotra

And the land that's leased to a hotel what's the plan for that?

Scott Peters

If I could say that was leased, they have a lease on it. Frankly, that is under utilizing the income stream for that parcel. And so we obviously would like to maximize the whole parcel if we could.

Vikram Malhotra

Okay and then just if you can give us some color on what you're hearing from some of your tenants, some of the hospitals that have been in news whether it's Forest Park or community, just trying to get a sense of some of the systems that may have been facing some near-term challenges what are you hearing from them?

Scott Peters

We have read as everyone else have and heard as everyone else has about the Forest Park Frisco that's coming up and I think that that's going to be a really good outcome at least for us. You're going to have a major healthcare system operating that hospital and I think we're full but that can only mean that folks are going to want -- physician practices are going to want to group around those key operators certainly in Frisco. I think we see the same thing happening in Dallas in fact I think the assets better positioned in Dallas that it is in Frisco.

So we're waiting to see the outcome of that and I read what you read. But I do understand having been there the last couple of months that there's a high activity of interest in that location. So we're looking forward to a resolution there and I think the resolution is going to reinforce the value of the space that we have. In fact it's going to be an upgrade of credit and it's going to be an upgrade of operator which that's even better when you started.

Robert Milligan

Community, I think community just kind of points out that every campus is completely different than another campus. It can be all under one brand name but the true value depends on the energy of the specific campus. I think from a real estate perspective, certainly the outpatient procedures continues to increase really across the country. You know it just goes back to every campus is different and just because it has a brand name on it doesn't mean it's going to be a good campus just like it all comes down to location. So I think that's kind of more what we see coming out of it but we haven't seen any real impact to any of our tenants to-date on any of our community health campuses.

Vikram Malhotra

And then just last one, just Robert sticking with you the expenses ticked down year-over-year quite a bit if you could just break that out how much of that maybe was synergies and if there's anything else in their?

Robert Milligan

I think it was really across the board as we look at the expenses kind of from year-over-year perspective. It was really down across all categories. I mean we certainly benefited in the fourth quarter from having a warmer season with less snow. That certainly helped with from a snow removal and utility perspective. But then as you go across the rest of the line items, things like insurance we continue to drive down that's really from a national positioning perspective as well as some of the other contract. It really was across the board, and I wouldn't say there is any one thing specifically but we did benefit from having a warmer fourth quarter.

Vikram Malhotra

And then just if we look out kind of what's baked into your model for 2016. Obviously this was a big year-over-year move, so kind of how should we think about the model for 2016 in terms of expenses?

Robert Milligan

Well I think we're going to continue to get some of the benefits by taking things from a national contractor, I think there's still a lot from a maintenance perspective, from a building perspective, from a contract perspective. We continue to roll out our own people in certain markets and gain them efficiencies especially as we grow in them. Places as we talk about Houston, we’re now in the medical center we're up to 430,000 square feet. What we could leverage our platform there and take some folks out and spread them more evenly across two properties. So I think we've still got some opportunity to go and I think we're looking at like we said is really 20 to 30 basis points of expense savings over the next couple of years.

Scott Peters

One of the things that I continue -- we continue to see is when you buy assets in this space and especially one off assets. I won't speak for the large portfolios and I certainly won't speak for the diversified side of the house from an operator perspective, but the local developer or even the local healthcare system or when we see when we buy these assets, there is clear and distinctive opportunities for us to what I would consider to say institutionalize or bundle services and generate savings. I mean Robert pointed out, two assets right off the bat, Stetson is in the market in Boston that we're going to see opportunities to consolidate costs and in Houston where now we have, we double the size within a mile and half of each other where we're going to be able to do the same thing. A one-off operator does not have the same buying power as an operator of a critical mass within a marketplace. And that's one of the things that the MOB sectors going to continue to go through which is I think as it gets more changes hands as healthcare systems look for more consistency in operations or metrics, if you have your asset management platform and if it's performing well, I think you'll get to take advantage of some of those opportunities.

Operator

The next question is from Rich Anderson of Mizuho Securities. Please go ahead.

Rich Anderson

So just on the 2.9% same-store, I realize math is confusing sometimes when you look at different groups of assets even though you did 3% or better each quarter. What was the negative impact that caused that number to come down slightly from what you were able to produce in the quarter? Can you point to any individual asset that underwhelmed you relative to the rest of the portfolio?

Robert Milligan

Rich, I think really what is comparison of the pools as you mentioned from the math. On the quarterly basis, we try to present the most fulsome number and so we do look at anything that we've owned for the full five quarter [ph] period. So that is a different pool slightly than what we look at from a full-year basis. So anything that's in the full year we had to a own sense of the end of 2013. Anything in each of the quarters we had to own basically by the end of the prior quarter before the year before. So it is a slightly different pool and so as we brought the acquisitions on it we get kind of a first-year bump from bringing them on, a slightly higher growth out of the recent acquisitions and that's kind of how the math blends out.

Rich Anderson

Okay, so no specific asset or anything like that?

Robert Milligan

No.

Rich Anderson

Okay. Just sticking with you Robert. Is there any chance that you might be able to adjust some of the accounting treatment for this fair value issue with your swaps obviously creates a lot of -- and I know you take it out of a normalized number but it creates a lot of volatility one quarter to the next. Is there any chance that can happen or do we live with this?

Robert Milligan

Obviously we've talked about it before it does create a lot of noise. It really just relates to the hedges that we have on our variable rate term loans, once they roll-off we'll see the go away and any new swaps will use hedge accounting on a go forward basis. So unfortunately--

Rich Anderson

A couple of years or so?

Robert Milligan

Yes. I would expect in the next two years, I would expect that to go largely go away.

Rich Anderson

Turning back to Scott, you said in your prepared remarks and you guys alluded to true up the quarterly when you're talking about expenses. Can you give some us like incremental color on that and could help explain a lot of things but specifically like on taxes and other kind of bulky pieces of your expense structure how you account for some of that stuff, some of that noise that tends to enter into the system from one quarter to the next?

Scott Peters

I think what we try to do and this is from experience, frankly is that a big picture processes that you don't want to surprise tenants. Not only you don't want to surprise tenants but you want to make sure that you're very close to and have a very good understanding of what your passing through or what they're going to get. We’ve spent a lot of time on it. We spent a lot of attention on it. I think that we do it consistently and from a mechanical perspective I will turn it over to Robert. But I don't know and on the reverse side of the question is I know that there's been some ebbs and flows and other MOB same-store growth but it surprises me frankly, that there is because if you got and we don't do development so you don't have the lower as I mentioned earlier, we really only bought three assets in the last three years to lower than 90% occupancy. If you have 5.5% rollover and you have 80% retention, that's less than 1% that you need to release new if you got a pretty good handle on your expenses from a bottom-up perspective and you've got a good grasp of property taxes which frankly you should have because there are experts out there that do that and we obviously use one of the services that comes in and gives us and we sit down for two days, [indiscernible] does and go through the portfolio. Other than as we've seen snow removal in the past that's impacted folks. I don't know necessarily why there should be a huge variances on a portfolios such as we have. So Robert anything you want to add?

Robert Milligan

Yes. I think mechanically talking through the accounting on it. You know most of the expenses are truly monthly expenses that come in. Utilities, maintenance, things of that nature. You get the expenses really once a month and so your booking those expenses in real-time. I think what certainly what we think is correct treatment that we do is we then look at those expenses and see what percentage of them we expect we're going to be recovering for the year. And we match that reimbursement in the period the expenses are there. It's pretty straightforward matching of reimbursement with when the expenses are there from a GAAP perspective. So we do that monthly frankly, and we do that quarterly. So you know the beginning of the year expenses come in higher than we had estimated. We would expect that we be reimbursing. We get more of a tenant reimbursement through that and we do that quarterly.

Rich Anderson

And sometimes you're at the whim of a municipality and when they send you the property tax bill I mean how do you manage those because we saw that kind of fluctuation with HR, this quarter with a bigger true up type number in the fourth quarter. How you manage situations like that?

Scott Peters

I can't speak to their situation obviously. I think from our perspective we do a couple things first of all, in all almost all the municipalities that we deal with on a property tax you get an estimate at the beginning of the year well before you actually get the final tax bill. So you’ve at least in our portfolio we’ve had a pretty good idea of what it's going to be. And then we assume that's going to be the actual expense despite the fact that we might be appealing and trying to get it lower.

So you know from our portfolio I think the second thing that we do as Scott mentioned we do spend a lot of time with property tax, people that do that all the time. Really experts in the field and we use them outside services to do that to really get a good feel for what it's going to be and I think the third thing is that most of our acquisitions we've acquired most of our portfolio over the last five, six years. At that time is really when the property taxes get trued up to the current market value and so there's there just haven't been that surprise because I think one it hasn't moved all that much but two I think we spent a lot of time trying to get the estimate right.

Rich Anderson

And then last for me. I know we’ve talked about this also in the past but incentive comp structure, just wondering if you have any comment about how that's set up, how that might change in the future and one thing I guess you talked about the consistency with same-store and how that dials into the incentive comp structure so consistent it's kind of like I don't know, the sky is blue today -- so I'm going to get paid. You know what I mean like it's just so consistent how do your peers get compensated if you kind of know you're in the bag in that 3% range. Is it over and above that that they get compensated?

Scott Peters

Two questions, one we are addressed and did address the acquisition side of the equation. That it come up in the past and we will see that and I think our board was very reactive to that. I frankly don't - - I think the goal the executive team needs to be the shareholder return. It needs to be doing the right thing for shareholders and public markets ebbs and flows and sometimes you're not supposed to buy assets and sometimes you are and you should be judged by what you buy and how they perform. So that was a step forward or it was something that you'll see here coming up I think it's comes out pretty soon in a proxy or something like that.

Second on the same-store growth, certainly there's a range and I think that it's like anything else, we want good performance, I think that the range that we've always said is 2.5 to 3.5. I mentioned earlier that our consistency, we don't have a lot of levers. We did focus in 2015 on rent concessions and if there was arguments or if there was push backs in our leasing and we have leasing folks they want to get leasing deals. We're sitting here trying to make sure that we get the highest and greatest value for the space. It was in that area. It wasn't really 3% escalators. We kind of overcome that two years ago, that was probably the big part of the equation from a tenant perspective.

So we do have a range I think the ranges is 2.5 to 3.5. This year I think our focus and we talked about this as a management team, is occupancy. We have 92% to 95%. If you've got your concessions down to where you think they should be, if you are seeing good activity in your assets. Now we should hope and we should focus as a management team on occupancy, that has a chance to move things up a little bit. That's really the movement here. And we're focused on that in 2016.

Operator

The next question is from Kevin Tyler of Green Street Advisors. Please go ahead.

Kevin Tyler

Going back to on the dispositions, in 2015 you sold mostly MOBs, are all MOBs and then you said earlier you're looking at non-MOBs it's this year but what are some of the synergies you get by owning senior care assets in particular and I guess I'm just thinking why not put these at the top of the list given market conditions.

Scott Peters

The list is pretty short so to speak. I mean it's only got a couple hundred million dollars in it. I think they're very high on the list. Maybe we have a list and they're all got ones decided I would like to do that. I think it's time for us to do that. You'll see us I think in the next quarter's show activity on that. There's not many synergies that come from the senior housing side of the equation. That's not our business. I don't like to be in the business of the operator underneath it. We've been fortunate so I'll knock on wood and say that we've had no issues in the few properties we have had, we bought them early on in our process so -- but they are high on the list.

Kevin Tyler

And then on the MOB siding and on the hospital site too. We've seen development creep up a bit and I know completions this year will accelerate but have you seen any impact at all on your portfolio? Do you expect to see any impact? How should we think about new construction, new supply in this sector versus others?

Scott Peters

Well I think one of the interesting things that have popped up for us the last 6 to 9 months is that we've received some calls where we've had some conversations with healthcare systems that are looking for specific development on their campus or on a location that we frankly have that they want to change the use of. They think there's a higher, greater efficiency used for that particular building or that particular location.

And so I think healthcare systems are doing two things. I think one, they are truly looking for efficiency of location for practices, they are looking to where they want to be. In one case they did not want to be across the highway they wanted to be next to their campus and that really led to our building and they came and said well we need this building and its different use form, would you work with us on that?

So I think you're going to see -- this is a very good sector. There's not a supply issue. Redevelopment is part of it where you are adding dollars or your changing a use because if you're landlocked from a hospital perspective, then there is not a lot of places to go. They could not go as they said across the street so they came to us and that's a great opportunity.

So I think you'll see some continued opportunities like that. The sector will. We won't be the only one. But I would expect that you'll see some decrease in activity in some other locations like Texas. I don't think you'll be seeing a lot of secondary markets being built in Texas. In the next 18 months. I don't think I would want to be in owner of a MOB on a secondary campus. I think we'll let that cycle roll through. So we have seen more conversation about locations from hospitals thinking forward.

Operator

The next comes from [indiscernible] of Oppenheimer. Please go ahead.

Unidentified Analyst

Can you guys comment on any trends in cap rate that you’re seeing in your markets for MOB assets?

Scott Peters

Yes. Again I think the key markets, Boston is just very solid if you go back to next in the key market in Houston right next to the medical center, solid cap rates because you've got great performance. If you look at the Raleigh [ph] markets very strong, Charleston's off the charts from a growth perspective. You know you look at Florida, Florida continues to be strong. But again I think if you move outside key critical assets, are assets that really have a high demand of use, you may have some at least not maybe not weakness but I don't think you will see a lot of contraction in cap rates in secondary markets or one-off buildings or even in sale leaseback's. I think those may be something that have come a long way and may pause for a while.

Unidentified Analyst

And are you seeing any opportunities in new markets?

Scott Peters

Yes. We really want to take a very pragmatic and long-term view of markets. I mentioned early in on the call that would be 10 years in May that I've been doing this and it will be four years in June that we're public and we started out in one of the criticisms that we got early on that I got was where an eclectic group of assets located everywhere and how are you going to build a philosophy and how are you going to differentiate yourself from ownership and so about five years ago we really about 5.5 years ago we really started focusing on markets and we started focusing on getting critical mass and building up knowledge within these markets.

We want to continue to do that. We're probably what I would say 15 to 20 really good markets where we can continue to see traction and get traction and build mass and then as we add a market I don't want to make it a one off market, I want to make in a market that when we spend time in that market and we know that market then we have an advantage in it. Can't be in all markets we won't be in all markets and there's other folks in this sector that do a great job in certain markets and if they're doing a great job and we can't get there that we don't go there. But we do have two or three markets that I'm very interested in looking at and time down the road when do make an opportunity in an acquisition, we'll give you some view of why we like it.

We talked a while ago about Charleston. And we talked about this two years ago, but Boeing's doubling the size of their workforce. You look at -- we talked about Florida two years ago and now you look at Miami and it's just taking off. So you got to be in high-energy markets with reasons to be there because that's where healthcare is. Healthcare provides for the folks that are in the market.

Operator

The next question is from John Kim of BMO. Please go ahead.

John Kim

It was brought to light this quarter that one of your competitors has a high percentage of CPI based leases. Can you just remind us what the percentage that is for you?

Robert Milligan

Yes. We only really have less than 10% of our leases that are CPI driven. And I think the other thing to keep in mind with that is that almost all of our CPI based leases also have a floor so it's kind of a greater up concept so it's usually the greater of CPI up to a certain amount with the floor of say 1% or 2%. So less than 10% and they've all got other floors involved to.

John Kim

Okay I imagine your tenants would prefer CPI based so if you're one of your competitors is giving it and you're not is there anything you're giving back in essence?

Robert Milligan

I think it's all very market-driven, it's kind of like doing gross versus net leases. You stay with what the market, general market convention is that I think where we been you know we haven't really got a lot of pushback on being a fixed escalator versus the CPI with what we’re doing.

Scott Peters

CPI is an interesting thought process. I'm not sure that you're going to get the growth in this current environment that one might expect 10 years ago. You know I don't see huge inflationary pressures coming through markets. So we like the 3% escalator that we work for.

John Kim

Okay. And then Scott I think you created a new role with the Head of Business Development. It's sort of an all-encompassing term. So can you just maybe elaborate what you're focusing on?

Scott Peters

Yes. Dan joined us and many of you know Dan when he was with Welltower and he handled their MOB space and we're an MOB company. So it was a great combination and a great opportunity for us. We've been a team here for four years pretty much and adding another person that could help us take care of the relationships that we're developing in these markets. I mean we talked about key markets and it's great to be in a key market but you really have to be in a key market more than once a month or you have to be if you have an opportunity and you have discussions with healthcare system you need to be there because they want to know that you're somewhat responsive to their needs. And Dan's ability to come aboard and his enthusiasm for our business plan which I thought was, I thought very highly of that because obviously Welltower is a great company and our opportunities we think are good in our space with the size and with the markets and so we're looking forward to that and there's three segments that we have and we think that we -- if you have really good people with great communication skills, that's going to pay off for shareholders.

John Kim

Is forming a new joint ventures with capital partners is that something on his agenda?

Scott Peters

Well I think that's an agenda for all of us frankly. We had talked about -- we haven't done any of that so far because we really haven't seen the opportunity to do it. I think that now that we have been in the public marketplace going on four years and we've got some credibility hopefully we've got some recognition within markets. We've had some performance where folks can see what we bought, what we bought over the last five years and how it's performed and so I think we have the ability when there is the right opportunity to do something like that, but again you have to have the folks that can have those conversations and take care of those relationships and so I would say that by adding another strong executive to the team, we now each of us have a little more time to make sure that we -- to do those things we need to do.

John Kim

Okay and then final question for Robert, you had a small impairment this quarter I may have missed this but what was this in relation to?

Robert Milligan

You know as we talk about the dispositions we continue to look at properties that we're going to sell and put up for sale. And this was just related to that. It's a small property, we'll probably end up selling for $0.5 million to $1 million. It was bought as part of a portfolio and so the purchase price allocation was probably a little bit off but we take the impairment when it's appropriate.

Scott Peters

This was an example of we talked about credit. This building if you could call it a building, happened to be in St. Louis. It was part of a portfolio that came to us through a purchase place allocation based upon a lease in place, it got a value that frankly isn't there. That's an example of if you are buying that asset individually you would not buy that asset. So this is an example of us calling our portfolio and we just go -- we're getting -- recycling it and moving forward. But we don't have -- I don't think we have more than one or two of those assets like that but we will continue to recycle them where we need to and there's just no upside in that that's very small asset in St. Louis.

John Kim

But in essence you're impairing the asset before selling it instead of taking it as a gain or loss?

Robert Milligan

We go through that process obviously on a quarterly basis and we look at our assets as far as their performing from an impairment standpoint and so when you get to a certain point you evaluate its value upon sale and we're at that point with this asset. So it's part of the normal quarterly process we go through.

Scott Peters

I'd rather -- it is what it is.

Operator

The next question is from Doug Christopher of D.A. Davidson. Please go ahead.

Doug Christopher

Just one question, regarding the dividend just some thoughts on the dividend how you are thinking about it -- now you’re thinking about it on the basis of FFO, FAD could you comment on the security and potential growth of the dividend? Thank you.

Scott Peters

We've come a long way in our coverage of our dividend. And I think one of the aspects that we're going to focus on as the management team is the stability of the MOB sector from a dividend perspective. You know we don't deal with operators so we don't have some of the weaknesses that perhaps is out there in the healthcare sector right now. We'd like to have coverage. We think that when we can reinvest cash flow into buildings that are MOBs, that are long-term value. We want to do that.

Now having said that we'll of course continue to reflect the dividend growth that's appropriate on an annual basis and our board looks at it in every meeting just like everyone tells you but we like the dividend security that we have. We like the low leverage that we have. I think at 31.4% for whatever it was for the end of the year, we've consistently if you look at HTA, my philosophy has been the company's get in trouble when they get their leverage out of whack and then the ebb and flow of the marketplace isn't controllable and then they have to do something that they wouldn't do.

So we're in the boat with both of those things. We're always going to be cautious and conservative. The dividend is something that is extremely important. We think the MOB space through good times and bad times is very solid. But we like low leverage and we like a dividend that has a lot of coverage.

Operator

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

Scott Peters

Well I would like to thank everybody and thank everyone for the questions and being on the call. We're going to be out at the Wells Fargo Conference next week. We look forward to talking with anyone and obviously we appreciate everyone's interest in our story. Thank you.

Operator

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

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