Physicians Realty Trust's (DOC) CEO John Thomas on Q2 2016 Results - Earnings Call Transcript

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Physicians Realty Trust (NYSE:DOC)

Q2 2016 Earnings Conference Call

August 03, 2016 02:00 PM ET

Executives

Brad Page - General Counsel

John Thomas - CEO

Jeff Theiler - CFO

Analysts

Jonathan Hughes - Raymond James

Craig Kucera - Wunderlich Securities

Vikram Malhotra - Morgan Stanley

Juan Sanabria - Bank of America

Michael Carroll - RBC Capital Markets

John Kim - BMO Capital Markets

Jordan Sadler - KeyBanc Capital Markets

Chad Vanacore - Stifel

Tayo Okusanya - Jefferies

Operator

Greetings and welcome to the Physicians Realty Trust Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Brad Page, General Counsel for the Company. Thank you. You may begin.

Brad Page

Thank you. Good afternoon and welcome to the Physicians Realty Trust second quarter 2016 earnings release conference call and webcast. With me today are John Thomas, Chief Executive Officer; Jeff Theiler, Chief Financial Officer; John Sweet, Chief Investment Officer; Deeni Taylor, Executive Vice President of Investments; John Lucey, Chief Accounting Officer; and Mark Theine, Senior Vice President of Asset and Investment Management. During this call, John Thomas will provide a company update and overview of recent transactions and our strategic focus. Then Jeff Theiler will review the financial results for the second quarter of 2016 and our thoughts for the remainder of the year. Following that, we will open the call for questions.

Today’s call will contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. They are based on the current beliefs of management and information currently available to us. Our actual results will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe our assumptions are reasonable, our forward-looking statements are not guarantees of future performance. Our actual results could differ materially from our current expectations and those anticipated or implied in such forward-looking statements. For a more detailed description of some potential risks, please refer to our filings with the Securities and Exchange Commission.

With that, I would now like to turn the call over to the Company’s CEO, John Thomas.

John Thomas

Thank you, Brad. Good afternoon and thank you for joining us for the Physicians Realty Trust second quarter earnings call. We just celebrated the third anniversary of our initial public offering on July 19 and are very pleased to report record results of the second quarter of 2016. In just three short years, we've grown from 19 medical office properties valued at about $124 million to 222 high quality well diversified facilities representing total investments of more than $2.6 billion in 29 states. This growth is fuelled by a strong investor base, strong personal and professional relationships with outstanding healthcare systems, excellent physicians and other providers, and a team of hardworking smart people dedicated to building and managing a best in class medical office portfolio and operating platform. Our incredible team of professionals and partners that completed substantially all the Catholic Health Initiatives or CHI acquisitions we announced in April with only four of the 51 buildings left to acquire, three will close during the third quarter while the other one will close later this fall or early 2017 after construction is completed.

We are proud of our team's unique stability and hardwork to underwrite, inspect, document and closing the acquisition of over 50 facilities this quarter investing $680 million over just three months time. In addition to the CHI portfolio, we also completed a handful of smaller acquisitions during the quarter all of which are organic off-market growth opportunities with existing clients or relationships including one lease to CHI’ KentuckyOne Health that is adjacent to another facility we own and leased to them in Kentucky. We also added another addition to sentence in St. Vincent's East Hospital campus near Birmingham, Alabama. Jeff will review our financial results but needless to say our growth and attention to operations continues to produce very good results.

We were opportunistic in the third quarter to access the debt and equity capital markets demonstrating our commitment to financial strength and prudent growth. On April 11, we completed our eighth and largest follow on equity offerings with net proceeds of approximately $443 million. We appreciate the continued support from our loyal and growing investor base in this oversubscribed offering. The net proceeds from this follow on offering fuelled another record quarter of strong growth investing almost $680 million primarily driven by the substantial completion of the CHI investment and the handful client relationship acquisitions we completed. With our new debt, facilities and placements Jeff will describe in a minute, we have strengthened our long-term balance sheet and are well fueled to continue our outsized growth as we continue to source opportunities through our relationship business development model efforts some have called proprietary.

We are also pleased to announce we have strengthened our asset management teams as well with the addition of Mark Dukes, VP, Property Management who will be responsible for the primary nationwide management of all of our CHI facilities. Mark has a long history in medical office management coming to us from Duke Realty and Mark was most recently recognized by his peers as one of three property managers of the year by the Building Owners Management Association or BOMA. We've also added Amy Hall, VP of Leasing. Amy joins us from the CBRE, in Louisville, Kentucky and has a strong history in medical office leasing, planning and real estate in general. With over 1,000 leases across our 200 plus buildings, Amy's leadership and focus on both renewals and new leasing will strengthen our property operations and our financial results. Amy joined us July and is already produced several new leases and process for our vacant space in CHI KentuckyOne facilities as well as many pending renewables. We are very pleased to welcome Amy and her leadership.

All totaled, our portfolio has grown to almost 10 million square feet of on and off campus medical office facilities with just over 95.7% leased with an average lease term of 8.6 years. Many of the off-campus buildings are new and strategically placed in sub- markets with strong insure demographics and providing comprehensive outpatient services and procedures. We believe 50 of our buildings are anchored by hospital outpatient departments for HOPDs, in existence as of November 2015 and thus our grandfather 603 assets. These assets represent approximately 30% of our current NOI. As grandfather at HOP is located in our 603 assets, these tenant providers are eligible for higher Medicare reimbursement, the new locations established of the campus at the hospital provider. CMS recently issued proposed regulations that state the provider will lose his grandfather status if they move the HOPD out of the grandfather building location.

In our case, the buildings we own. We anticipate the potential loss of HOPD reimbursement will enhance the desire of these tenants to remain in these locations, again our buildings and we’re more likely than not renew the relations at reasonable fair market rents. We would like to address the anticipated general industry classification system changes that will go into effect in September. When real estate becomes it’s own sector within capital market indices separated for the first time from financials. Green Street Advisors believe that this event is a driving visibility in new investment. According to Green Street the US mutual fund industry is dramatically underweight real estate. REITs have been the best performing assay class since 1998 with a 10% annual return and this underweight strategy will come under pressure when the S&P 500 and MSCI indices are rebound. Estimates range that generalized investors are underweight REITs by somewhere between $40 and $100 billion and some portion of this imbalance will eventually work its way into REITs.

Several sell side research analysts believe that the fundamentals for medical office buildings remains the most attractive among all healthcare real estate assay classes. Underscoring the importance of medical office within the evolving healthcare delivery system, hostel admissions in the context of population levels are declining while the ratio of outpatient business has been steadily climbing over the past two decades. According to the American Hospital Association hospital admissions have been declining by approximately 1% per year while outpatient visits have been increasing by more than 2% per year. Rising healthcare costs have led medical service providers to offer increasingly more outpatient services especially medical properties. Hospitals are typically associated with high cost treatment while outpatient facilities in many cases are able to facilitate lower costs and more efficient patient treatment. Insurance companies and government health care providers have also formulated reimbursement policies that favor these less expensive outpatient care settings.

As a result of these changes, we have been spending more and more time of generalist investors, some of which have no really exposure and others of which are seeking more information specifically about healthcare real estate and healthcare REITs. We believe these fund flows should flow into healthcare REITs and in particular pureplay medical office buildings as the most recession resilient and most potential growth without material government pay risk. Medical office buildings in the macro sense also have the lease risk for new development competition as most new development - as much of new development is replacing old hospitals or penetrating new markets not necessarily creating competition for existing medical office stock.

As a high growth pureplay medical office REIT investor with the highest occupancy and more stable releases with 96% leased for 8.6 years on average. Physicians Realty Trust is the most attractive healthcare we believe or any asset class REIT that generalist investors consider as they initiate REIT investing and eventually getting their investment allocations in line with the gigs industry reallocation. We ended the quarter with 39% of our space either on the camps of the hospital or anchored by health system, up from 73% last quarter. This continues to demonstrate our disciplined plan to continue to enhance the overall quality of our portfolio and our long-term commitment of building and managing those platforms as we increase this asset allocation percentage to at least 90% in the next two years.

With that I will ask Jeff to review our financial results and balance sheet management.

Jeff Theiler

Thank you John, we are pleased to report another solid quarter of operations. The company generated funds from operations of $26.3 million or $0.19 per share. Our normalized funds from operations which adds back acquisition expenses was $29.5 million. Normalized funds from operations per share was $0.22, an increase of about 5% over the same period last year which is a pretty remarkable number considering we pre-funded our large CHI acquisition with our $443 million equity offering in April. Our normalized funds available for distribution were $27 million or $0.20 per share. In this quarter, we closed on $680 million of investments at an average cap rate of 6.3%. $616 million of this activity was related to the CHI transaction and the remainder consisted primarily of medical office buildings sourced through existing relationships. Our acquisition closing skewed toward the end of the quarter with a second tranche of the CHI deal closing on June 30. Had all of our second quarter acquisitions closed on April 1, we would have had an additional $7 million of cash NOI.

We are pleased to be largely through the closing of the transformational CHI deal and look forward to focusing our attention on the acquisition opportunity ahead of us. We remain comfortable with our acquisition guidance of $1 to $1.25 billion for 2016. On the operations side, our same-store portfolio which includes every asset that we have owned 15 month period generated year over year NOI growth of 1.7% with the 10 basis point decrease in occupancy. Contractual rent escalations were responsible for the majority of the NOI increase offset by the lease expiration move out of the other North side tenant in our building in Peachtree Dunwoody building in Atlanta, Georgia. But we don't like any moveouts, the Peachtree Dunwoody building is a premier building in Atlanta with strong leasing potential. We will have back filled about one third of that space already by September and have some significant traction for a large chunk of the remaining space.

We had a very busy quarter on the financing side, we started the quarter with our April issuance of $443 million of equity, our largest equity raised to date which was primarily used to fund the CHI transaction. This has enabled us to close the majority of that transaction as well as certain other acquisitions while keeping our debt to assets at 25%. Which is considerably lower than our peers. Also on the equity front we are process of negotiating a new $300 million ATM program in order to provide some additional financial flexibility. Moving to debt, in June we entered into a new credit agreement that increased our revolver size by $100 million to $850 million and provided the option to draw $250 million seven-year term loan at a rate of LIBOR plus 180 basis points.

We do that term loan in early July and immediately entered into a swap arrangement that fixed our payments at an annual rate of 2.87% over the next seven years. The term loans used to pay down revolving line of credit, so as we sit here today, we have $158 million outstanding on the line with additional capacity of $692 million. Our balance sheet is as strong as ever. At the quarter end, our debt to total capitalization was 18% and our net debt to adjusted EBITDA was 4.2 times. We expect to continue to issue long-term fixed-rate debt in the second half of the year. We will evaluate both the private and public debt markets for this activity. Finally our G&A for the quarter was $4.9 million bringing the six month total to $9 million. We remain on track with our previously announced G&A guidance of $19 to $21 million for the year.

With that I will turn it back over to John.

John Thomas

Operator, we’re ready for questions and answers.

Question-and-Answer Session

Operator

[Operator Instructions] First question comes from Jonathan Hughes from Raymond James. Please go ahead.

Jonathan Hughes

Can you just talk about the outlook for quarterly acquisition volume now that the CHI deal is closed? I know you maintained the range and touched on this earlier but I think there might be some concern about a slowdown in this pace as we approach 2017.

John Thomas

Hey Jon, this is John Thomas. We communicated in the past, we tapped the brakes a little bit just while we integrated CHI and had such massive investment in work to do to complete that investment this quarter. The pipeline for the rest of the year looks pretty good and I think we feel good about the guidance that we are not previously announced 1.2 to 1.25 billion. Could surprises to be more but we feel good about that guidance and I think the pipeline for ‘17 particular about relationships is also starting to build, so, for now, we will issue 2017 guidance later but still feel good about the pace and the opportunity.

Jonathan Hughes

And speaking on relationship have any other large national health care systems reached out to looking for a deal similar to CHI or had any discussions?

John Thomas

There's been a lot of interest from the hospital industry about the CHI opportunity.

Jonathan Hughes

I will leave it at that and then I will just ask one more and I’ll jump off but last quarter you gave some color on pricing for potential debt raises and obviously did the term loan last month, but could you give us an update where you can think you get priced debt today, given the tenure dropped 30 basis points since your last call and the fact that one of your MOB focused peers recently issued some pretty attractive tenure notes.

Jeff Theiler

Jonathan, it’s Jeff, the tenure is bouncing around quite a bit, right now I’d guess we'd been in the low 4s probably in the private market, if we were to do public market offering its hard to tell as an inaugural issuer but probably that same ballpark, so I would guess the very low 4s.

Operator

Our next question comes from Craig Kucera from Wunderlich Securities. Please go ahead.

Craig Kucera

Just want to follow up on the question regarding the balance sheet, Jeff when we think about the back half of this year, you just did the term loan, do think a private placement is likely to take out the rest of line of credit or you more likely than not just continue to use the line?

Jeff Theiler

I think that we are really going to be focusing on keeping our debt termed out particularly as we look at the interest rates that we have right now. So it’s certainly likely that we are going to use the long-term debt markets and again I think the private debt market is a great spot for us, we've got a great relationship in that area that we can build on pretty easily. And then, as we look toward the back - the end of the year certainly the public debt markets if they remain open would be a good option for us as well to expand the number of capital avenues that we have available.

Craig Kucera

And I wanted to go a little deeper into some of the details of the smaller acquisitions you did this quarter, the medical village facility, it looks you bought about 9 million, it has yielded a 9.3, what’s the entire pool of the yield approximately?

John Thomas

The entire relationship is as much larger couple of buildings under construction but one of the things that’s so attractive to us about it was the great cap rates and kind of the aggregation of independent physicians altogether who aggregate those medical village [indiscernible] Orlando market, so pretty excited about it, I think most of it outflows this year at some point but that was just the first two buildings in the relationship.

Craig Kucera

So do you have a field then, is the entire pool going to close it north of a 9 or it is kind of several closer to your kind of what you do more typically right around high sixes low seven?

John Thomas

No, these will be in the low eights, but the first to get the closed were older buildings being rehabbed substantially the newer buildings trying to get a tighter cap rate, but it’s overall the rate for the relationship.

Craig Kucera

And how long is the renovating period on the Children Hospital, MOB in Milwaukee?

John Thomas

Six months. It is a beautiful facility and a great new relationship for us that Mark Theine and John Sweet worked hard to develop.

Craig Kucera

And, one last run from me, with the land purchase you did in Jackson, Tennessee, how do you think about cash on the cash returns on expansion in MBOs, are you hearing from many other tenants that are looking to expand their building?

John Thomas

And that's exactly what that is, a small investment of land, so we can expand that building which has a surgery center in it, [indiscernible] expansion ramp once it’s developed.

Operator

Our next question comes from Vikram Malhotra from Morgan Stanley. Please go ahead.

Vikram Malhotra

Just first on the same-store NOI trends, now that you have a decent size pool in the same-store portfolio. Can you maybe just give us your sense of what you expect over the next few quarters and just how the components would stack up, I’m just trying to get a sense of where the trend is relative to your peers?

John Thomas

Sure Vikram, so you are right, our same-store pools continuing to grow, we have 1.7% growth this year, that was disproportionally affected by an additional move out that we had in Peachtree so we had two of the North side tenant vacate the Peachtree Dunwoody building so that’s what dropped it down a little bit. We would expect certainly over any kind of reasonable period of time that you are going to be in the 2 or 3% same-store growth arena, so we would expect rental revenues to kind of increase to a more normalized 2%, 2.5% and operating expenses to probably start increasing a little bit.

Vikram Malhotra

And then just on tenant retention as you look out in ‘17 and I don't know you don't have a lot of leases over the next few years coming to you but as you look throughout at ‘17 just based on early discussion, do you have a sense of where tenant retention might pan out?

John Thomas

I mean it's hard to know exactly where it's going to pan out in 2017. I mean we've talked a lot about 80 to 90% retention rate goals, if you eliminated that Peachtree Dunwoody move out from this quarter we would have been 84%. So we think it's probably going to be 80 to 90% but it's not the definite right now.

Vikram Malhotra

And then just last one on CHI, just walk us through you plans or as you’ve looked to the portfolio so what are in your minds the more riskier part of the portfolio especially in light of this several downgrades credit downgrades that we’ve see recently?

John Thomas

Vikram this is John Thomas, so, that was not unexpected, Fitch just kind of caught up with the other agencies, if you read that S&P report you get a substantial detail about kind of their evaluation of the long-term prospects frankly for a credit upgrade there are two key components of that one was the recapitalization which was what are transaction did for them and in the second was just the operating history to see they are kind of strategic operational improvement plan go into effect. So, it was no surprise to us we had done our own individual and gone to third party to work with us on an individual region by region analysis and certainly some room for improvement, global being [indiscernible] lowest North Dakota and Houston area being part of the strongest regions within that platform, Seattle being very strong but even in [indiscernible] we had four times pro forma EBITDA coverage and had a lot of new leasing activity particularly with Amy Hall joining us and one of the reasons we are so excited about her. So we feel very good about the long-term prospects and where they’re heading.

Vikram Malhotra

And then just to clarify, so you’re still in the camp of more of the portfolio remain as there is very little dispositions at least over the near term?

John Thomas

That's right, we don't have any attention to the selling thing there are some buildings that over time probably get redeveloped or replaced but in the near term they are producing good NOI and anchored by CHI and our own campus so we feel good about even the lesser of the portfolio.

Operator

Our next question comes from Juan Sanabria from Bank of America. Please go ahead.

Juan Sanabria

Just kind of hitting on one of the earlier questions, any change in sort of market cap rates given lower treasuries and maybe more uncertainty in other areas of health care which I know you touched on in your prepared remarks, kind of where do you see the typical bread-and-butter deals penciling out from a cap rate perspective?

John Thomas

Hey Juan, this is John, I don't think even at the lower tenure and [indiscernible] cost, we still are seeing lots of opportunities again between six and seven. There are certainly people pushing for sub-six particularly in big coastal markets but we still very good about the high quality we are finding and again for the year, weighted heavily by the CHI transaction, which is in place at 6.2%, we still feel good about, averaging about 6.5% for what we see in front of us. So, you'll see some 6s and as we mentioned, we got the 8s, which are brand new buildings down in Florida, that overall we still feel and see lots of opportunities, again ranging from 6 to 7. But as you move up the quality scale, like we continue to try to do, again, you'll see more in the low-6s.

Juan Sanabria

And then just on the balance sheet with the new ATM, have you guys run the numbers on what potentially you could issue on sort of quarterly basis, I know the blackout is kind of different from period to period, but any sense of what you could potentially do on a run rate basis?

Jeff Theiler

Yeah. Hey Juan, it's Jeff. We haven’t and I guess that's because we haven't really contemplated just turning it on and leaving it on. I mean I think we want that ATM to have the flexibility to match fund acquisitions when appropriate or get a little bit of equity here and there. I don't think it's going to be a deviation from how we typically fund, which is follow-on equity offerings, particularly when associated with a big chunk of investment volume. So we haven't really run that analysis. I can certainly talk to you about it later if you like.

Juan Sanabria

Okay. Great. And then just on CHI. How do you guys think about the total exposure, I think it's 25% to 30% of your portfolio, do you think of them as each individual separate health systems or is it really one whole thing where there is a parent guarantee that kind of overlays over the whole?

John Thomas

Yeah. Good question, Juan. So technically we have, if each region is our tenant, and that's where the credit is and the credit risk is, we do think about the aggregate, which is approaching 29%, but the corporate super parent, if you will, which is the rated entity is not a direct obligor on the leases. The only real direct obligation they have from a balance sheet perspective are the bonds that they issue in the aggregate [indiscernible]. So, again, that's what we did individual credit analysis of each region and as I said, even the worst region is 4 times EBITDA coverage and kind of a BB, kind of implicit rating from a rating agency perspective. So, that's why I think you'll see in our supplement, we're breaking it out, so our largest tenants, our top 10 tenants now are -- several of those are individual regions within the CHI and that's technically where our credit is and technically where the risk and the exposure is.

Juan Sanabria

And what was the blended coverage for the whole CHI portfolio that you guys expect?

John Thomas

It's close to 10, if not more. We kind of look at it on individual, some regions are in the teens and again the worst is 4 plus.

Juan Sanabria

Okay, great. Thanks guys.

Operator

Our next question comes from Michael Carroll from RBC Capital Markets. Please go ahead.

Michael Carroll

Thanks. Hey, John. How much of your time has been taken up completing the CHI deal and has that kind of impacted the size of the company's investment pipeline currently?

John Thomas

Mike, kind of like your home town Cleveland Cavaliers, we've got an outstanding team between Deeni and Mark Theine and John Sweet and others who are still out there sourcing opportunities. Mark has spent an enormous amount of his time, integrating this transaction and with Mark Dukes that, this great addition that again it worked with Mark or Deeni Taylor previously at Duke. So it hasn't slowed down at all, in fact with one of the advantages of our kind of proprietary model, we're able to kind of pace out and move some of the transactions back into the calendar year when we can pursue them more aggressively. So, as I mentioned here in my opening comments, Jeff and I frankly have been spending a lot of times with potential new investors focused on the [indiscernible] classification and so it's a good balance, but I'm still out there knocking on doors as well.

Michael Carroll

Okay, so I guess in your comments and you said that you’re kind of taking a step back to complete the CHI deal that was more of your choice, just trying to integrate such a large transaction and less of the size of the pipeline and the amount of effort you guys can kind of go out there and find deals?

John Thomas

Absolutely, we just move things from the second to the third quarter and as sellers in relationships that we work with to be patient. To my knowledge, we haven’t lost any opportunities and just kind of spreading them out over the back end of the year. Again, CHI was so important to us, we are so important to build other hospital systems that might be calling that we had a extremely high quality integration and first day on the job, managing those -- building those physician relationships and I said Amy Hall started July 1, she was actually working on new leases before she started and that's been a very positive impact.

Michael Carroll

Okay. And then can you kind of give us some color on the type of deals that you are currently pursuing today, I mean should we be thinking more of like CHI, I mean?

John Thomas

We missed you Mike.

Michael Carroll

Yeah. Can you kind of give us an idea of the type of acquisitions you’re pursuing today? I mean, are you still kind of looking for those 7 cap type deals or you’re kind of moving up the quality spectrum looking for cap rates in the mid-6 type range?

John Thomas

Operator?

Operator

I’m sorry. The question guys cut out there. We'll move onto the next question, that's from John Kim from BMO Capital Markets. Please go ahead.

John Kim

Thanks. Looks like you made your second executive.

John Thomas

John, can you hear us? John Kim?

John Kim

Yes. Can you hear me? Hello. John. I think there is an issue with the connection, operator. Hello. It will make for a great transcript.

Operator

I'm sorry. Your line is live.

John Kim

Hello. John, can you hear me? Hello.

Operator

I'm sorry. Mr. Page, your line is live right now.

John Kim

John, can you hear me?

Operator

Yeah. Okay. We'll go on to the next question. That's from Jordan Sadler from KeyBanc Capital Markets. Please go ahead.

Jordan Sadler

Hey, guys. Can you hear me all right? John Kim, can you hear me? It's a joke. I could hear you. Operator, I don't think that the management.

Brad Page

Yeah. If there is anybody talking here, for some reason, we can't hear you. So...

Jordan Sadler

Operator, can you hear me?

Operator

I can hear you, I can hear you, Mr. Sadler. I'm sorry.

Jordan Sadler

So I can hear you, but management can't hear me.

Operator

I think they can hear you. Why don't you go ahead and try and see if they can answer your question. Mr. Page, are you there?

Jordan Sadler

John, Jeff, can you hear me? They can't. John who? John Kim? Just see operator. Yeah. The management team can't hear me, sir.

Operator

I think they can hear you.

Jordan Sadler

I just asked them and they didn't reply. I don't know if you're listening on a different headset. John Thomas, Jeff Theiler, can you hear me? Anyone? Theiler? Sorry, operator. I can't hear.

Operator

Okay, I don't think for some reason they can hear the questions. One moment.

Jordan Sadler

I think you are on it now.

Operator

Rejoining the speakers.

Jordan Sadler

John Thomas, can you hear me?

John Thomas

Yes, we can hear you now.

Jordan Sadler

Hey. It’s Jordan Sadler. Nice to be with you. Hi, there Sorry about that. Not sure what happened. This is your second quarter earnings conference call, isn't it?

John Thomas

It is.

Jordan Sadler

Okay, great. Then, I’m at the right place. I was going to ask you about just the cap rates that you guys were seeing. I can't remember if that quite got answered, I think it was being asked by one of the other callers who you couldn't hear, but I was curious if you’re seeing better opportunities in the market at all, and whether or not you guys were licking your chops a little bit, given the fact that the 10-year has come down a little bit and maybe there is an opportunity?

John Thomas

Yes. So we did answer this, but we're happy to do it again. So we still see a lot of really good opportunities, particularly our cost of capital has improved and we would like to be better, but we’re seeing lots of opportunities between 6% and 7%. I think for the year, we’ll probably end up about 6.5% on the aggregate, but heavily influenced by our CHI at a 6.2, kind of going in place cap rates. So there are some portfolios out there that probably continue to push at 6 and people looking for sub-6, particularly in kind of core coastal markets, but we’re excited about the opportunities we see and we continue to move up the quality scale and we view that as newer buildings, bigger buildings and on and off campus, but fairly helpful systems, which is going to drive those cap rates to that range, but 6% is still a good number, best in quality for us and we've got an 8 in the pipeline that are brand-new buildings that works out.

Jordan Sadler

And, the pipeline, how would you characterize it, I mean would you be trending towards the high end of this guidance range still?

John Thomas

Yes. We feel good about our guidance and being able to accomplish that. We have plenty of fuel to do that and we can do that through that, but without increasing our debt levels to anywhere that we’d be uncomfortable with, but we feel good about the guidance as it is, and if you get lucky and do a little bit better, we could push some things to the first quarter 2017.

Jordan Sadler

Okay. And then someone asked you earlier about dispositions and I think specifically in the CHI portfolio, but I was kind of curious as you anniversary here, third-year, anything within the broader portfolio that you’d look to pair asset managed out over time?

John Thomas

Yes. I think we’re probably getting to a time, scale and we probably did a little bit more proactively, we don't have anything held for sale today. We sold two of the legacy buildings from the original portfolio last year and there are some older buildings that are still producing nice NOI, but 2017 might be a year that start doing a little bit more of that, nothing in the CHI portfolio, do we have any attention to sell in the near term, but there are some opportunities there for some redevelopment or repositioning some assets and over time, there will be some pruning, really, the whole portfolio, but out of CHI as well. There are also some brand new buildings and some high-quality on-campus buildings in that portfolio, we expect to own for a very long time.

Jordan Sadler

Okay. And then just one for Jeff there, on the debt to EBITDA, you guys reported 4.2 times, is that a pro forma statistic that or do you have a pro forma statistic that reflects full quarter’s run rate of CHI?

Jeff Theiler

[Technical Difficulty]

Jordan Sadler

What was that last part?

Jeff Theiler

Mid-3% range or so, mid-to low 3%. [Technical Difficulty]

Jordan Sadler

No worries. Okay, thank you. I'll hop back in the queue.

Operator

Our next question comes from John Kim from BMO Capital Markets. Please go ahead.

John Kim

Thank you. I thought I’d said something that might have pointed you or something. Okay. So it sounds like you made your second executive hire from Duke. Any thoughts on their appetite to sell MOBs?

John Thomas

We can't speak to what Duke will do, but we’re excited about our team, and they developed and/or managed their portfolio. So we’re anxious to hear if you find anything about it.

John Kim

I know you said in the past that you want to have G&A at about 1% of assets, is that still the goal as you’re heading into 2017?

John Thomas

Yes. And we are under that now and kind of managing that. Jeff will get more precise.

Jeff Theiler

Hey, John. It’s Jeff. We think that our G&A is going to be in line with everybody else's that operates the same kind of business. So as we get bigger, we expect it to drift under 1% of assets like the other pure play MOB REITs. So I think you could just plot it on that kind of a line of G&A assets versus overall assets.

John Kim

I'm just wondering because you've doubled the size of your portfolio in the last 12 months and it sounds like you’ve made some recent hires, but is that going to pick up over the next 12 months?

John Thomas

The team has grown a lot for the implementation of CHI, particularly on the property and asset management side. A lot of that is reimbursed through our rate cap charges in the leases there. So it's, kind of on a G&A basis, it’s not only net neutral, but just positive, so there is still some G&A growth, but not -- it’s disproportionately lower than the growth in asset base.

John Kim

Okay. John, you mentioned conversations with general equity investors, can you shed some light on your conversations as far as how they’re viewing valuation and the disparity, not so much with your company, but with healthcare REITs in general, the disparity between NAV premiums and maybe multiple discounts?

John Thomas

I would say it's interesting the kind of the range of education and understanding about REITs, generally in health care REITs and specifics on, some are just learning. So obviously we think MOBs are not only the best asset class, but we and the other MOB REITs are probably undervalued in comparison. So we think there is a lot of relative upside there as I mentioned before in our comments. I think some of them will come in thinking there is higher valuations, but we do a good job and we work hard to kind of help them understand where the opportunity is we think as MOBs.

John Kim

And in comparing MOBs with some other asset classes, can you discuss or estimate the EBITDA coverage of your entire portfolio or maybe an occupancy cost context. I know you don't really look at it that way, but can you provide maybe a range of what that might be?

John Thomas

Yes. So on our highly specialized facility, which is fairly small part of the portfolio, our LTACs are in the 3 plus EBITDA range or sort of hospitals are 4 to 5 times EBITDA range. I mean, very good coverages and very low Medicare exposure, no Medicaid exposure. So you distinguish that from skilled nursing in particular and kind of the supply bubble and other senior housing, again MOBs should stand out as the high-growth in the most stable asset class in healthcare.

John Kim

That's great, thank you.

Jeff Theiler

And I will add, general medical office space can be 10 to 20 times, it just depends.

Operator

Our next question comes from Chad Vanacore from Stifel. Please go ahead.

Chad Vanacore

Hey. Good afternoon, all. So, on some real questions, just some follow-ups to my colleague’s questions. What should we expect in the balance transactions for the back half of the year, is it weighted more to the fourth quarter or is that ratably over the second half?

John Thomas

I think it's -- third quarter will be, we feel good about it. I think it's probably more in the fourth quarter and the pipelines will try them out, but kind of a regular REIT business, we feel very good about.

Chad Vanacore

All right. And then same-store NOI growth dipped under 2%, was that really due to the prior period tenant loss or is there something else going on there that we should be aware of and then where do you think it trends in the back half of the year?

John Thomas

So that one tenant was a biggest impact and we talked about it last quarter and it’s two tenants that were related to each other, one expired in the first quarter and the other one expired this quarter, and I think the trends continue to be in the right direction for the rest of the year.

Chad Vanacore

All right. And I think I’ll stop there and I’ll talk to you guys later

Operator

Our next question comes from Tayo Okusanya from Jefferies. Please go ahead.

Tayo Okusanya

Hi, good afternoon, guys. Just a quick question around section 603 since we haven't talked about this in a while, but CMS did put out some information about their OPPS proposals for 2017, and it sounds like they are talking about grandfathered, what to call it, outpatient departments or the hospital providers, they won't be able to relocate and there is a whole bunch of other restrictions. I'm just curious, has it changed your mind about how you think about buying off-campus versus on-campus MOBs or none?

John Thomas

I don't think it changes. I think it enhances. I mentioned this Tayo, in my opening comments, that regulation is, we expected that interpretation and as had some insight into that, and again if you own a grandfathered asset, the tenant, if they want to keep that higher reimbursement, has to stay there. They can move it back to the hospital campus, but if they put it on the outpatient off-campus setting for a reason, they just totally benefited from the HOPD rates and now CMS, you can maintain that as long as you stay in their location. So, we feel very good about that from that perspective.

Tayo Okusanya

What about the future acquisitions, are you thinking about making future acquisitions?

John Thomas

Yes. I think future acquisitions, if they are grandfathered assets, right, if they are not a grandfathered asset, we’ll underwrite it from that perspective and again, we like on-campus, but we think the future healthcare delivery is very consumer driven and consumer oriented driven and you don't plot the new hospital down in the middle of a high network demographic kind of market, you do it in an outpatient setting, and again there will be future outpatient buildings built there that just have a different reimbursement model. So we will underwrite it from that perspective, but there is a lot of grandfathered assets out there, very large number of our buildings, 50 buildings have some kind of 603 anchored to them and we think they are stronger than ever with this law and these regulations.

Tayo Okusanya

Got you. All right, thank you.

Operator

[Operator Instructions] And our next question comes from Jordan Sadler from KeyBanc Capital Markets.

Jordan Sadler

Hi, just a follow-up on the recent hire, so you commented in an answer to one of the questions that they have developed most of Duke’s portfolio and so it just raises a question surrounding development, now that you’ve kind of - you’re building some of that capability internally, how are you thinking about development?

John Thomas

Yes. So we really haven’t changed our views on development. Again, one of the opportunities we have with our CHI relationship is to work with them, and as they identify developers that they want to work with and again hopefully we would expect some opportunities to help them in that planning and eventually owning those best buildings, but we certainly have the capability to develop and oversee the development, but we are not building an engine business -- do direct development. So, we’ll continue to work with developers and friends around the country and if they need some capital as part of the opportunity and create some opportunity for us, then we'll do that on a case-by-case basis. But you're not going to see a development team starts self-developing here in any meaningful way. We can expand the building where we have like a TI expansion, but no change in philosophy.

Jordan Sadler

Is that a never?

John Thomas

No, it’s not. I would never say never on anything, but we don't have any intention to do that, Jordan.

Jordan Sadler

Okay. Thanks, John.

Operator

And now, I’d like to turn the floor back over to management for any closing remarks.

Brad Page

Yes, we appreciate you joining us today. We’re sorry about the technical glitch, but again, just to reiterate, strong, great quarter and we appreciate your support and we look forward to seeing you at the next earnings call and investor conferences this fall. Thank you.

Operator

This concludes today’s teleconference. Thank you for your participation. You may disconnect your lines at this time.

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