Physicians Realty Trust's (DOC) CEO John Thomas on Q4 2016 Results - Earnings Call Transcript

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Physicians Realty Trust (NYSE:DOC) Q4 2016 Results Earnings Conference Call December 24, 2017 10:00 AM ET

Executives

Bradley Page - SVP and General Counsel

John Thomas - CEO

Jeff Theiler - CFO

Mark Theine - SVP, Assets and Investment Management

Analysts

Jordan Sadler - KeyBanc Capital Markets

Juan Sanabria - Bank of America

Michael Carroll - RBC Capital Markets

Jonathon Hughes - Raymond James

John Kim - BMO Capital Markets

Chad Vanacore - Stifel

Craig Kucera - Wunderlich

Tayo Okusanya - Jefferies

Operator

Greetings and welcome to the Physicians Realty Trust Fourth Quarter 2016 and Yearend Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I’d now like to turn the conference over to Bradley Page, Senior Vice President and General Counsel. Please go ahead, sir.

Bradley Page

Thank you. Good afternoon and welcome to the Physicians Realty Trust fourth quarter and full year quarter 2016 earnings release conference call and webcast. With me today are John Thomas, Chief Executive Officer; Jeff Theiler, Chief Financial Officer; Deeni Taylor, Chief Investment Officer; John Lucey, Chief Accounting Officer; Mark Theine, Senior Vice President, Assets and Investment Management; and Daniel Klein, Senior Vice President and Deputy Chief Investment Officer.

During this call, John Thomas will provide a Company update and overview of recent transactions and our strategic focus. Jeff Theiler will review the financial results for the fourth quarter and full year of 2016 and our thoughts for 2017. Mark Theine will present our CHI integration update, 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 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 morning and thank you for joining us for the Physicians Realty Trust fourth quarter 2016 earnings call.

We are pleased to report a record-setting year for Physicians Realty Trust. We completed almost $1.3 billion in new investments in 2016 and our consistent fast growth in medical office facilities continues on into 2017. Our best-in-class operating platform delivered 2.6% same-store net operating income during the fourth quarter. We’re very pleased with our fourth quarter results.

During the fourth quarter, we invested $227 million including expansions in our relationship with Scottsdale’s HonorHealth system, and United Surgical Partners. We’ve also invested over $100 million already in 2017 in very high quality medical office facilities including investments leased to credit rated health systems in Dallas, Texas; and Harper, Connecticut; and investments in suburban New York City through a sale leaseback with an outstanding, very large multispecialty physician group. We now own nearly 11 million square feet that is over 96% leased for an average lease term of approximately 8.5 years. We’re well on our way toward another strong year of growth.

Mark Theine, our Senior Vice President of Asset Management will provide an update in a few minutes on our fantastic integration of the CHI medical facilities. We’re getting very positive feedback from our CHI hospitals, physician and other provider tenants on the service provided to them under Mark’s leadership. His efforts and our entire team’s attention to the operational excellence as well as new and renewal leasing is producing far better results than we anticipated this early in a relationship. We’re establishing a new high standard for medical office asset management as we help our clients as they meet the clinical needs of their patients.

We are different, and we seek to earn the trust of our hospital and physician tenant clients and believe over the long-term that not only feels our growth but also our ability to earn outstanding same-store operating results. In our industry-leading occupancy of 96%, the fourth quarter represents the sixth straight quarter of positive net absorption of space available in our portfolio.

2017 brings us to a New Year with a new U.S. presidential administration and Congress focused on healthcare policy and tax policy. We are monitoring each closely. Our Chairman is former U.S. Secretary of Health and Human Services, Tommy Thompson, who is actively involved in health policy discussions. While we expect changes, at this time, we expect more change to occur in the Secretary’s power to make regulatory changes than a wholesale repeal of the Affordable Care Act. As details are being worked out, we see efforts to retain many of the benefits in the ACA that will help expand the insured population, including the funding for that expansion, with efforts to preserve Medicaid expansion and incent all states to participate in some level of Medicaid expansion by providing those states more flexibility in how they provide that coverage. Whatever happens, it continues to appear that any changes that might affect existing coverage available, will not go into effect for several years.

We continue to believe that aging demographics and the strength of the U.S. employer-based insurance market will continue to drive strong demand for outpatient medical care delivered in outpatient medical office facilities like ours. The vast majority of our physicians’ hospitals continue to perform very well with high volumes.

Unfortunately , we have shared today that one of our hospital management company clients experienced challenges beginning in the third quarter of 2016 which became much more acute in the fourth quarter. Foundation Healthcare, an organization that has a long history of success, beginning in 1996 and operating very strongly for almost 20 years, suffered unexpected operating losses in the second half of 2016 due primarily to lawsuits and management’s focus on a hospital investment in Houston, Texas. We had no involvement in that Houston asset. Unfortunately Foundation’s lawsuits and attention to that hospital impacted their ability to support their physician joint venture hospitals in El Paso and San Antonio, Texas that we own.

To be specific, Foundation’s attention to cash collections declined significantly in the fourth quarter. We’ve been working with Foundation and most importantly, the physician co-owners of those hospitals in San Antonia and El Paso to transition management and eventually Foundation’s ownerships in each of those hospitals.

The physician co-owners in San Antonia and El Paso continue to support the hospitals and ended 2016 and began 2017 with the strong volumes and revenues. We continue to believe, both can and will recover as both our open and operating as they have continuously for years and we expect to work through both situations positively moving forward. Nevertheless, with our commitment to transparency and appropriate accounting, we took the charges for the fourth quarter we announced today and putting the charges against the MOB foundation leases from us in Oklahoma City.

We are pleased to report, we have entered into a purchase and sale agreement for the sale of that facility, that MOB for $15.3 million, a $1.6 million gain on our current basis in that facility. While we can provide no assurance that that sale will be completed or that the there will be a successful transition of Foundation’s ownership interest in the El Paso and San Antonia surgical facilities, we are working hard with the local physicians to accomplish a satisfactory result in each location. Both El Paso and San Antonia have special legal status as grandfather physician owned surgical hospitals, which makes this particularly attractive to other hospital management companies as well physicians who seek to own such hospitals.

We’re excited to share much more positive news. We’ve shared with you over our three-year history our own examples of healthcare consolidation that we believe benefit the medical office real estate investments we have made. More than 10 years ago, we invested in several facilities in Bloomington, Indiana, owned by and now leased to Premier Health, a leading large multi-specialty provider group located in that community. The group announced last week that they’ve agreed to join Indiana University Health, Moody’s Aa3 rated health system, more commonly known as IU Health.

IU Health provides care through their own network of hospitals and outpatient facilities across the state of Indiana. Premier joined IU Health’s facility at Southern Indiana Physicians which includes 265 employee providers and 19 specialties including 11 primary care centers in the South Central region of Indiana. We’re very happy for Premier and the new partner with IU Health and look forward to working more closely with them, as IU Health assumes our leases as part of the transition with Premier. Mark will share more about discussions with CHI and Dignity, about an alignment for their respective organizations.

With that, I’d like to turn it over to Jeff Theiler to discuss our financial results. Jeff?

Jeff Theiler

Thank you, John.

In the fourth quarter of 2016, the Company generated funds from operations of $34.6 million or $0.25 per share. Our normalized funds from operations was $38.2 million, normalized funds from operations per share was $0.27 and our normalized funds available for distribution were $34.2 million or $0.24 per share. For the full year 2016, the Company generated normalized funds from operations of $128.5 million and normalized FFO per share of $0.98, which is roughly 7% over 2016.

As John mentioned, in the fourth quarter, we reserved $3.7 million for uncollectable rent and prepaid expenses associated with four properties, whose tenants were affiliated with Foundation Healthcare, a company that is currently undergoing a restructuring. The fundamentals underlying these assets remain strong, and we’ve had substantial interest from healthcare companies that wish to partner with the physicians in the building. We also believe however that a compression in cap rates for these assets and the quality of these facilities in markets, particularly the surgical hospitals, makes it an opportune time to put them in a disposition program and recycle the capital into newer and more strategic buildings.

In the fourth quarter of 2016, we closed on $227 million of investments at an average first year yield of 6.8%. Had we acquired all of these assets at the beginning of the fourth quarter, they would have contributed an additional $2.4 million of cash NOI. We’re seeing more acquisition opportunities than ever through both our existing healthcare system relationships as well as the more traditional marketed deals, and feel comfortable issuing full year 2017 acquisition guidance of $800 million to $1 billion, assuming stable capital market conditions.

Turning to operations, our same-store portfolio, which represents 51% of our total portfolio, generated year-over-year NOI growth of 2.6%; primary drivers of this growth included a 20 basis-point increase in occupancy and contractual rent increases. We expect to be able to achieve 2% to 3% year-over-year same-store NOI growth on a long-term basis. So, this quarter is representative of that range. We had another quarter of net absorption of 23,750 feet on the leasing front, as our team continues to make excellent progress leasing the portfolio, now at 96.1% occupancy.

We have a modest level of lease expirations in 2017, amounting to just under 4% of the annualized base rent of our overall portfolio. We’ve had a strong start for leasing in 2017. Leasing spreads so far have averaged 5.1%, and we expect total leasing spreads for 2017 to average around 2%.

We continue to maintain an exceptionally strong balance sheet. We ended the quarter with debt to total capitalization around 27% and net debt to adjusted EBITDA of 5.1 times. We issued $2.6 million through our ATM program in the fourth quarter of 2016 and have just over $297 million remaining on the ATM program. Our balance on the revolving line of credit at the end of the year was $401 million. And we expect to convert much of this balance to long-term fixed rate debt in 2017, as we have been doing ever since we achieved our investment grade rating.

Finally, we continue to make significant progress on scaling down our G&A costs relative to the size of our portfolio. Our total G&A costs for 2017 were $18.4 million, which was below our previously stated guidance range of 19 to $21 million.

With that, I’ll turn it over to Mark to provide a progress update on the CHI transaction. Mark?

Mark Theine

Thanks, Jeff. As John mentioned, 2016 was a transformational year for DOC with $1.3 billion in real estate investments, including the Catholic Health Initiatives hospital monetization. We are honored to have been chosen by CHI to acquire 53 mission-critical medical office buildings leased primarily to CHI’s affiliated hospitals in 10 markets. This was not only the largest-ever hospital monetization of medical office buildings but also the first step in establishing a long-term partnership with CHI.

In choosing a partner, the healthcare system was focused on selecting a long-term owner who understands healthcare operations, has first-class property management experience, values, relationships, and shares the same commitment to high-quality patient care. We are proud to be that partner to CHI.

To-date, we have completed the acquisition of 49 of the properties in the CHI portfolio, representing 3 million square feet. We have two facilities located in Omaha, Nebraska and Fruitland, Idaho respectively yet to acquire in 2017, and we elected not to purchase two facilities during the due-diligence process.

The Omaha, Nebraska facility is a newly constructed medical office building, 100% leased by CHI’s affiliate, Creighton University Medical Center. Upon completion of its construction in the first quarter of 2017, we anticipate purchasing the facility for $33.4 million. Later, in 2017, we anticipate closing the Fruitland, Idaho facility, which is 100% leased and under contract for $4.5 million.

Our team has worked closely with CHI and its local hospital leadership teams in each markets over the last six months to complete the acquisition and exceed expectations in the transition of these facilities to our ownership. We are proud of our team’s unique ability and hard work to underwrite, close, and transition property management and leasing services for the portfolio in such a short amount of time. In the six months since the majority of our acquisitions were completed, we have outperformed our underwriting expectations and leasing projections, all while executing our business plans and expanding our asset management and leasing platform.

On an annualized basis, the CHI portfolio has outperformed our initial underwriting of a 6.3% cap rate by 20 basis points and is yielding a 6.5% unleveraged first year return. These results are driven primarily by 30,000 square feet of new leasing, which has increased the portfolio’s occupancy from 94% at closing to 95% today. Additionally, through a number of early lease renewals, we have extended the average lease term remaining for the CHI portfolio from 8.37 years at the time of closing to 8.44 years today. We have strong leasing velocities to fill a significant portions of the 156,000 square feet available in 2017, primarily in the Houston, Texas and Louisville, Kentucky markets.

In fact, in the last week, we signed a 26,000 square-foot lease with a large physician practice to relocate that group to our newly constructed 101,000 square foot Spring, Texas facility located near Exxon’s world headquarters and located in the large parts of the Houston MSA. The lease will commence on July 1, 2017 and is a prime example of our ability to structure unique, creative deals that add significant value to the hospital and the patients.

Local hospital executives at CHI previously identified this very important physician group as an ideal component to complete the healthcare ecosystem in the building, but the group still had two years remaining on their existing location. As CHI’s real estate partner, we are able to facilitate and early buyout of the physician group’s existing lease in exchange for a long-term mutually beneficial lease commitment in our facilities. This lease arrangements would have been difficult for CHI or any other hospital to complete on its own without a specialized and nimble real estate partner.

Looking ahead in 2017, we will continue to grow our integrated management leasing platform and are well-positioned to drive operational excellence and consistent same-store growth in our MOB portfolio. Our management structure is scalable and we’ll continue to benefit from concentration as we invest in top quality properties and portfolios in the future, ultimately producing outstanding total shareholder returns year in and year out.

Finally, as reported last quarter, CHI is exploring discussions with Dignity Health to align their organizations. If the organizations were to merge, the joint organization would have $27.8 billion in combined annual revenue and would create the nation’s largest not-for-profit hospital company, ahead of Ascension with $20.5 billion in annual revenue. The geography of CHI and Dignity Health locations complement one another with no geographic overlap of acute care facilitates.

While we remain close with the senior leadership at the CHI in Denver, we do not have any additional information to share at this time. Our relationship with CHI has only strengthened over the first six months of our partnership, producing far better results than we could have anticipated this early. And we look forward to continuing to demonstrate why we are the preferred partner for hospital monetization.

With that, Rob, we’ll be happy to answer any questions at this time.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Thank you. Our first question is coming from the line of Jordan Sadler with KeyBanc Capital Markets. Please go ahead with your questions.

Jordan Sadler

Thank you, and good morning. I wanted to follow up on the acquisition volume guidance. And just sort of given the context of one of your comments, Jeff, regarding more opportunities than ever, can you maybe give us a sense of where that’s coming from or where you guys think this transaction volume acceleration has stemmed from? Does it have anything to do with the sort of the CHI-Dignity discussions or is it -- or maybe just as a function of your success with the CHI portfolio? Any sense would be helpful.

John Thomas

I think it stems primarily from the success of that transaction, the CHI transaction. We’ve got a lot of trade bust, [ph] not only in the MOB investment world but in the hospital world as well. So, we’ve got a lot of inbound calls from health systems and that is evolving to continuing discussions. So, we’ll see how much -- if there’s more monetizations like that, to be clear nothing specifically related to the Dignity Health, CHI discussions. And as Mark said, we remain close to situation but we don’t know if that transaction, that merger is going to happen or not and really don’t have a time schedule from them on decisions there, so But, good volume and it’s reflected by both Hartford Medical and large physician sale leaseback and just out of sight of New York City and we just see a lot of great opportunities at very attractive high-quality real estate and really expect, absent any major capital market changes that we’ll be able to get that acquisition volume again this year.

Jordan Sadler

And then, as it relates to this year-to-date activity that you guys discussed, it does look like the overall size and quality have crept up the cap rate; ERGO [ph] has crept down, looks like an average of a six cap on 100 million plus you’ve done to-date. Is that sort of more along the lines of what we should be anticipating for the 2017 pipe?

John Thomas

Yes. You could continue to expect us moving up the quality scale. Again, we’ve been very proud of all of our investments to-date over the last three and half years. But, as our cost of capital has improved and our name and frankly reputation amongst hospital systems and physician groups has continued to spread, we’re just seeing more and more attractive opportunities of bigger, newer, -- bigger markets health systems, affiliated opportunities.

Jordan Sadler

Is there a cap rate range that we should be expecting, is it like in the 6 to 7?

John Thomas

Yes. I think 6 to 7 is probably about right. Last year, we were about 6.6? Yes, little higher than 6.6, heavily influenced by the CHI investment, as Mark pointed out. That was a 6.2 on in place and we’ve already moved that up to 6.5 with Mark’s leadership in both leasing and expense management in that portfolio also. But 6 to 7 is what we’d expect to see this year. The tenure has spiked a little bit from last year; it’s kind of still a lot of capital, chasing the assets, a lot of foreign capital coming on through those [ph] platforms to chase the asset So, again, the best healthcare and real estate is medical office and people recognize that.

Jordan Sadler

And then just one clarification on Foundation, can you break out the 3.7 for us? What does that represent entirely? You gave a little bit of insight in the release in terms of which buildings it comes from, but how many months rent versus prepaid expenses versus deferred rent, how does this break out?

John Thomas

It’s 1.1 with respect to the Oklahoma City asset, which we also entered into the purchase agreement to sell that is rent and property taxes. And again, Foundation has potentially withdrawn from that facility. They’re subtenants in the building and that’s where [ph] we’re working with [indiscernible] members of that group. The…

Jeff Theiler

So, Jordan, just to kind of roughly break it out, just under 2 million of that is rent that was not collected, we determined to be not collectable, and that represents the majority of the fourth quarter of four of these buildings. Once they had some property tax expenses that we had paid and had accrued a reimbursement for that we didn’t get -- that was call it 0.5 million, actually a little bit more, 600,000, and then there’s some revenue that we didn’t record in December as we realized that this would uncollectable, and that’s the balance of it.

Operator

Our next question is from the line of Juan Sanabria with Bank of America. Please proceed with your questions.

Juan Sanabria

Hi. Good morning, guys. Just hoping you could talk briefly, Jeff, about balance sheet plans. I think you referenced a debt issuance to term out the revolver at some point this year, kind of what the options you’re looking at from timing and as well as any views on equity at this point?

Jeff Theiler

Sure. Hi, Juan. So, yes, when we ended 2016 with just over $400 million on a revolving line of credit, we’ve -- since we got our investment grade rating and started terming out debt with -- in the private market with AIG [ph] at the beginning of last year, that’s really been the strategy to try to -- to fix our debt as quickly as possible into long-term fixed rate bonds. Beginning of last year, the private market was far more attractive than the public market in terms of bond opportunity. I would say this year that it’s much closer. And so, I think we’d evaluate the public market very, very carefully as we think about terming out debt. I think for inaugural issuers, it’s actually a really, really good time right now. So, I would expect to see something hopefully early in 2017 on the public bond side.

Juan Sanabria

And any thoughts on equity at this point, how comfortable are you with kind of the current leverage and show we expect secondaries or these ATMs?

Jeff Theiler

We communicated our target leverage level to be about 30 to 40% debt to assets; we’re probably 33% debt to gross assets right now. So, certainly well within our target leverage range. Certainly, we always look at equity as we put out $800 million to $1 billion pipeline, it’d be hard to acquire all of that without any equity. So that’s something that we always look at and we could always to -- the ATM program, we have plenty of capacity on that or the secondary offering market at some point. But it’s something we’ll evaluate, although we’re under no pressure to do anything in the near term.

Juan Sanabria

Okay. And then second question from me just on Catholic Health, some of their numbers haven’t been -- at least the headline numbers as robust as I guess we would have expected but any sense of how their kind of turnaround, now there’s some management changes there, how that’s progressing and expectations or an update and expectations for rent coverage levels from CHI?

John Thomas

Yes. Juan, it’s JT. They’ve had some good success. I think the COO retired and they brought in another gentleman who’s -- his primary focus is on the strategic operational plan. And they communicate pretty frequently with the bond market about progress there. So, continue to have book lawsuits [ph] across system wide but the revenues continue to be strong and growing. Kentucky just -- Juan that large dollar’s reflective of their management -- clear management of risk just got a net positive payment from the ACO that they participate in the Louisville and Lexington markets. So, lots of things going and there is still lots of opportunity for improvement. I think we’ve talked about it before, but just on the supply chain in particular, just a very modest improvement in their supply chain as a percentage of revenue, more than covers in the aggregate our annual rents, I mean very modest chain. So, we see a continued very positive improvement, and no concerns -- or see any concerns in drops [ph] in rent coverage to pay a rent [ph] to the local market.

Operator

Our next question is coming from the line of Michael Carroll with RBC Capital Markets. Please proceed with your question.

Michael Carroll

Yes. Thanks. John, with regards to Foundation, did you indicate how well the three assets in San Antonio and El Paso are currently performing?

John Thomas

They all had -- they all finished the year well. San Antonio had a really blowout month in December. And it actually had pretty strong revenue last here between its issue or actually our issues related to lease payments there have not been revenue or volumes, it’s been on the cash collections, which is function of the management that the Foundation didn’t provide. El Paso was performing well throughout the first half of 2016; they lost some profitable ancillary business at the beginning of the third quarter and then lost a physician participant that set them back. So, El Paso is a little bit more of a revenue and exacerbated by the cash collection’s issue. San Antonio is performing very well. And El Paso, we continue to believe is performing strong right now. I’m actively engaged with the physician leadership there, week-by-week, day-by-day basis and continue to see a lot of positive movement there. So, just working those through transition, both management and the Foundation’s ownership interest, but we continue to see right things and right opportunities there for them.

Michael Carroll

Okay. And then is the preferred path to sell those assets? And if so, can you give us some color on who are the potential buyers of those types of properties?

John Thomas

Yes. We have the purchase and sale agreement with the Oklahoma City facility. We’ve been approached by both physicians and institutional investors in both San Antonio and El Paso for those real estate assets. And so, as we work through this, again, this is -- these are both fine hospitals, physical plants, both in good markets, they’re both in attractive markets, so lot of players. So, really help facilitate in working with physicians that help facilitate a smooth transition and then the positive outcome for everybody. We just thought it was time to move these to a disposition status and expect to work through a sale in an orderly fashion on both assets. It could be one buyer or my expectation is two different buyers. And again, the physicians may be involved in or more situations.

Michael Carroll

Okay. And then, sorry, if I missed this. But, did you guys mention about the LTAC portfolio and what’s the driver there that pushed those coverage ratios lower?

John Thomas

Yes. So, the LTAC has been going through patient criteria conversions in the Medicare rules. That’s something that we knew about when we bought these assets, work for the management team to evaluate what the impact is going to be there. So, they may get changes or evolve to comply with those rules and kind of manage their business to outside of the patient criteria where they can drive additional revenues. Plano, for example, set a very successful wound care business. It’s really ancillary, it’s complementary to their existing service line and the physicians that refer patients to them. Unfortunately, they’re trying to move that same ancillary service into Fort Worth facility, and that has taken longer than expected.

So, the drop in our coverage is all attributable to Fort Worth. It’s still doing fine, it’s still a good facility and good location. But obviously we’d like to see in the aggregate, and that’s a master lease, those three facilities, Pittsburgh, Fort Worth and Plano, it’s all under one master lease. And we’d like to see the Fort Worth coverage improved and we expect it will.

And then Foundations continues to -- excuse me, LifeCare continues to focus on other ancillary opportunities in Pittsburgh. They’ve expanded some of the service lines, again complementary to those long-term future business in that facility. And hopefully, we’ll start seeing the benefit of that in the near-term. This year, don’t expect any issues. We think the management team is very focused on improving and increasing EBITDA. They clearly had an impact on EBITDAR and EBITDA across the organization, as well as the patient criteria with revolving through it in a good way.

Michael Carroll

And then just lastly, I guess or two quick ones, do you expect the 1.7 is the low point in the coverage ratios and what’s the average rental rate bump on those leases?

John Thomas

Those have CPI increaser and also a kicker and in extraordinary revenue year, we haven’t been able to get -- or got opportunities to get the kicker but they increased at a floor of 2.25%, CPI [ph] has not moved more than that. So, I think we have a ceiling of 3.75.

Mark Theine

That’s right.

John Thomas

Correct Mark? So, 2.25% in those. Mike, we wouldn’t expect coverages to drop there. Plano does extremely well, as I mentioned. And again on a master lease perspective, the coverages continue to be strong but on a facility-by-facility basis, we monitor closely. We don’t expect it but we can’t say that that’s a problem.

Operator

The next question is from the line of Jonathon Hughes with Raymond James. Please proceed with your question.

Jonathan Hughes

Just touching on Foundations more, you mentioned collections deteriorated pretty rapidly with those assets. Was there a deterioration in admissions as well? And are you seeing any similar trends in any of your assets? And if so, have you taken steps to prevent this going forward, like rent relief?

John Thomas

So, San Antonio, the volumes have been very strong, the payer mix has been very strong. One of the good and bad things, I’d say, our mix in San Antonio is that a lot of -- in the industry called PI work, personal injury work, which is accident victims who come in and ultimately look into an insurance company, not an health insurance company but insurance company that is involved in settling claims related to that injury. And those usually collected a very-high percentage of net revenues; they’re very profitable. The downside is a longer time -- take longer to collect those receivables. So, San Antonio is investing part of their issue but they ended the year and have a strong year from a volume perspective in any event. Again, El Paso had a drop-off in volume, really beginning mid third quarter and exacerbated by the kind of fourth quarter and lack of management attention from the Foundation level. But in the volumes, ended the year and so far this year looks strong both in locations.

Jonathan Hughes

Okay, thanks for that. Is this year’s asset sale pace something we might expect to see for the years ahead, as you maybe prune the portfolio or is this just a one-off year?

John Thomas

I think, this is the beginning of a long-term practice that we would continue to prune the bottom, some bottom percentage or be opportunistic. And frankly we think, focus the case with the assets that we put in the business and bucket so far this year. And Mark Theine -- four of the assets are -- that we announced today, moving into that, four of our legacy assets that we [indiscernible] And there are some really good leases and good tenants in those buildings but they’re -- it’s time for kind of start pruning some of those assets out, smaller and older -- smaller communities. And Mark Theine has done a nice job, not only with the leasing and continued leasing and management of those facilities but actually working through the process to -- where the buyers have approached us about those, and move forward very positively. So, I think this is a beginning in the trend you’ll see. But for this year, I wouldn’t project to be more than a 100 million but that could change.

Jonathan Hughes

Okay. And then, sorry, if I missed this, but could you remind us of the amount of MOBs that CHI owns that would fit your investment criteria?

John Thomas

Well, they own several hundred more, I wouldn’t say -- they range from brand new to old small little buildings in rural markets. So, it’s a very large opportunity, additional opportunities there, but we don’t know we’d have a catalogue of buildings [ph] Jonathan. But I’d say, there’s lots of opportunities for Class A assets that are anchored by or leased 100% by CHI.

Jonathan Hughes

Okay, thanks. And then, I’ll just -- one more and I’ll jump off. Touching on the question earlier about debt issuances, has the upcoming change to the Barclays index were only issuances of 300 million or more will be included, change your assumptions on that front and could you give us some color on pricing you think you could achieve on expected debt issuances?

Jeff Theiler

Hey, Jonathan, it’s Jeff. You’re exactly right. I mean, I think what that change to the index eligibility criteria does is it bumps up the minimum amount of debt that you’re going to issue -- that you don’t want to issue to get a great execution. So that used to be a minimum 250, now it’s a minimum of 300. So, I think as we look at the public markets, we’re always kind of looking at it with that minimum in mind. In terms of pricing, it’s I think right now in the public markets, probably anywhere just above mid 4.4, 4.5 to 4.75, somewhere in that range I think would probably be a reasonable pricing assumption.

Jonathan Hughes

Okay. And then, what about like if you did private notes and you opted not to go the public route?

Jeff Theiler

Yes. So, if you did private notes, I think the volume is lower, the amount you can issue is probably lower, unless you get a lot of interest in the private market. I think you’re probably capping out closer to 200 there on a deal. And the pricing is probably pretty similar right now, it might be a little bit inside of that, but it’s not as much as it used to be at the beginning of last year.

Operator

Thank you. The next question is from the line of John Kim with BMO Capital Markets. Please proceed with your question.

John Kim

Thanks. Good morning. John, I was interested in your comments that any changes to the ACA and impact on existing coverage will not occur for several years. Is that a consensus to be among your tenants and partners?

John Thomas

Yes, I think so. And I think the hospital industry’s really rallied around a focus on Medicaid expansion what has occurred and the desire in those states where it didn’t expand, so some kind of expand. So, I think that’s where the hospital provider were always focusing their attention. But as I mentioned with Tommy’s engagement, we have other Board members close to Capitol Hill as well. We stay pretty engaged in real time discussions that are there. So, there is only so much you can -- or just stepping back, I mean, there is only so much you can do to the reconciliation process. So, the idea of just completely wiping out the Affordable Care Act and completely replacing it in part or all or even repairing and if some would like to say, it’s very difficult through the reconciliation process. So, absent some getting nine or I guess eight democrats and a few Republicans who’d be resistant to major change without significant alternatives to keep the ensured, to keep the benefits of what’s current of the ACA but also address the deficiencies.

So, as I mentioned, Secretary has a lot of power under the law, but that’s tweaking things with the regulatory process. So, SCHIP is up for renewal this year, so that’s something that bipartisan [ph] way is vehicle for potentially some bipartisan changes. But, it’s not as easy as it sounds by its [indiscernible]. I think the hospital industry is focused on Medicaid expansion. We have analyzed our portfolio, it’s ironically right at 50%, is in the states that expanded and the 50% of the states that didn’t expand. And we didn’t use that as an underwriting or targeting of analysis, just a way to forecast. Kentucky being probably the most important where they did expand and Texas been maybe most important where they did not -- Texas did not expand.

John Kim

Okay. And then, can you comment on competition, as you look through for acquisitions? It seems like it’s been a renewed focus as far as growing MOB portfolios for the big three healthcare REITs. But, I’m wondering if you could also just comment on whether you’re seeing more of those companies or other capital sources, as you look through acquisition?

John Thomas

Yes. I’d say, in many respects, our unique approach and somebody -- one of our let’s call it proprietary approach is we don’t see a lot of competition and lot of our transactions because it’s mostly one-off direct negotiations with physicians and hospitals and developers. But, generally, in the market, private equity backed is probably by volume is the biggest buyer out there other than us. Amongst the big three, I think probably two of the three, their assets declined in 2016, want to probably get a renewed focus on MOB, bumping into them a little bit more. But, I think the big competition is right now as private equity backed. We did the largest transaction directly with the hospital system, but it was a very large transaction that was a new player into the market and [indiscernible].

John Kim

What about like pension funds and foreign capital or maybe some new entrants into market?

John Thomas

Yes, a lot of interest by both. And again, they’re primarily trying to do JV and come in through one of the operating platforms that today winds up with other private equity firms. We have friendly conversations with players like that all the time but you have pieces fully loaded for capital, so we haven’t seen the advantage to do any JV today.

John Kim

Jeff, you mentioned the G&A came in for the year $2 million for your guidance, but have you provided guidance on this for 2017?

Jeff Theiler

I think, John, for 2017 as we look at it, we’ll continue to scale down G&A as a percent of assets. It will probably be somewhere in the $21 million to $23 million on a full year basis, which I think equates fairly well with the other MOB peers in the space.

John Kim

So, that’s an increase, but you’re just saying that as far as cost initiative that there’s still some ongoing components of it?

Jeff Theiler

No, I mean, it’s an increase. As we build our portfolio, clearly, if you’re growing a $1 billion a year, there’s a lot of build outs you need to do to support that acquisition pace and to make sure you’re integrating the properties well, you’re accounting for them well, you’re taking care of the tenants. So, there’s always a fair amount of infrastructure build with every new acquisitions, particularly if you are increasing acquisitions on a multi-tenant side as opposed to a single lease side where there’s just a lot more work to do for each.

John Kim

And then, one last one, four of the six assets held for sell out with Foundation Healthcare, and I just wanted to clarify does that eliminate your exposure to Foundation, if you sell these assets?

John Thomas

If we sell all of those, we have no other exposure to Foundation.

Operator

Our next question comes from the line of Chad Vanacore with Stifel. Please proceed with your questions.

Chad Vanacore

So, just thinking about going back to the operational issues at Foundation, is this related to out of network billings, or is this an issue with third party contractors collections or anything else, what would you say?

John Thomas

Yes. So, again, different payer mix at each location. San Antonio, you can call the PI work out of network but that’s really not kind of the strategy there; it’s just doing the payers, the different type of insurance companies. El Paso, fairly traditional payer mix; they have -- both of these are contracted leases; [ph] it’s not a -- neither one is relying on out of network strategy where it’s difficult to collect period. And then Foundation provided centralized billing offices to each of their affiliates and without CDO, [ph] so Foundation internally didn’t collect the revenues fast and additionally the share; that’s improving but it’s also transitioning to a third-party…

Chad Vanacore

And then, just thinking about the rent collections, right now, you won’t be booking any revenues from these properties or can we expect more write-offs down the line?

John Thomas

At this point, we recognize the fourth quarter, we’re still working through both situations and in San Antonio -- there is two different situations. San Antonio has a lot of revenue to collect; El Pas has less. But, we’re hopeful that this is a one-time event but we can’t make any assurance of that. But that’s where we are focused on right now, the transition. And again, if they get collected, the revenue gets already been generated, then this should get back on track and move in a positive way.

Chad Vanacore

And then just the thoughts on, your thoughts on additional dispositions that aren’t related to Foundation, what are you thinking as far as the facilities that you teed up for sale?

John Thomas

Chad, I’m sorry, I couldn’t quite understand your question.

Chad Vanacore

Okay. I am saying what was the thought process behind the dispositions? When you’re looking to prune your portfolio, what are you taking into account?

John Thomas

Yes, some traditional factors. I mean, the four legacy assets have a nice tenant base, one of them got out of Northside [ph] lease for over 10 years. It’s one of the kind of the best core assets we had as part of the IPO but it’s also kind of a one-off in far north suburban Atlanta. So, again, does it make sense in our continuing for synergies and asset management going forward, these are all older buildings. So, again we’re kind of prune and move the average age of those buildings down. So, those are natural criteria. Again, the whole -- I should say easier but more interesting and maximize the value for selling buildings with still good lease term and get tenants in them and all of those meet that criteria and frankly just represent a good price. But that’ll be -- we’ll apply screen across the entire portfolio and look for opportunities where we’ve got one-off assets and don’t see any opportunity to grow, either in that market or with that client and also average age and size will weigh into those decisions.

Operator

The next question is from the line of Craig Kucera with Wunderlich. Please go ahead with your questions.

Craig Kucera

Hey. Good morning, guys. You had a pretty solid retention rate this quarter, and I appreciate the color on the lease spreads you’ve achieved and what you’re expecting to see. But, how are your discussions going with the 4% or so rolling over next year and kind of what do you think -- what kind of retention rate you think you’ll have?

Mark Theine

Yes. Thanks, Craig; this is Mark. In 2017, as Jeff mentioned, roughly 4% of the portfolio scheduled to renew; it’s about 116 leases in total. We feel very positive as we sit here today about the retention of those tenants. We don’t know of any at this point that are not planning to renew but our traditional retention rate has been around that 80% mark, and we’ll continue to try and achieve that goal in 2017.

Craig Kucera

Okay. Going to the dispositions again, I know you’d mentioned that you thought this was a good time to sell because cap rates are compressed. What kind of cap rates you think you will achieve on the assets that you’re selling?

Jeff Theiler

Yes. Hey, Craig; it’s Jeff. So, I think the way we modeled it out is we’ve got two purchase and sell agreements that are already in place. So, as we look at that 100 million to a 125 million kind of valuation range, we include those numbers, the 18.3 million on the Georgia portfolio and the 15.3 million on the Oklahoma City portfolio. And for the remainder of the assets, we kind of look at a cap rate range that goes up to low in the low 70% cap rate on a average. So, that’s you know kind of the high end of that range, the low 7% gap rate. So, we feel pretty good about being able to sell the assets somewhere within that range. And just for clarity, the bottom end of range is essentially what we paid for the assets, not the net book value, but the actual purchase that we’ve had.

Craig Kucera

Got it. And one more for me and I’ll jump back in queue. I just would be curious as to your thoughts on where you’ve seen cap rates move since the election and the move in the tenure?

John Thomas

I’d just say, with move in the tenure, there is so much capital on the other side of the supply side and capital investing in medical office to keep cap rates, I’d say fairly stable but also best in class assets are going to correct below 6, and top markets, the top health systems in the mid 5. So, we’re seeing lots of opportunity in the 6 plus range and that’s where we like to be. But, like Hartford and with other assets, I’ve noted, very attractive long-term opportunities, really assets like that improved the quality of our portfolio and over time we will continue to move all the portfolio a bit more like that. So, 6 to 7 for us, may crack that at appropriate time, and for capital [indiscernible] and we’ll see some -- expect to see some mid-5. Last year, the NorthStar -- Starwood portfolio traded at a something like a 5, 6 separate. So, there are buyers out there that are moving valuations in that range -- to that range.

Operator

The next question is come from the line of Tayo Okusanya with Jefferies. Please proceed with your question.

Tayo Okusanya

Hi. Yes. Good morning, everyone. Just a couple from me. First of all, I was trying to reconcile your $0.27 number versus $0.30 consensus for fourth quarter. And it seems like the biggest -- the big jump in operating expenses. I may have missed any comments that you made earlier on, on that. But could you just talk about the increase in OpEx and how would you think about OpEx in 2017?

Jeff Theiler

Yes. Hi, Tayo; it’s Jeff. You’re right. I mean, the big jump was the OpEx in the fourth quarter, and that was $0.025 per share, that was related that the Foundations reserves that we took on rent that we considered uncollectable and prepaid expenses that we considered uncollectable. We always hope to get some of that back but that was the difference in the fourth quarter.

Tayo Okusanya

So, the charge you actually made it to the OpEx line?

Jeff Theiler

We made it to the OpEx line and we -- and it rolled through into normalized FFO; we did not exclude it.

Tayo Okusanya

Excellent. Okay. That’s helpful. And then, number two, 2017, you talked about cap rates and transactions between 6% to 7%, I think when Jordan asked. But, just kind of given your movement towards higher quality assets, should we be thinking cap rates are closer towards 6 like your January deals or could you just kind of give us more of a kind of a tighter range what we should be modeling in 2017? That would be helpful. And also what cap rates are expecting on the 100 to $125 million of dispositions?

John Thomas

Yes. So, on the -- Tayo, I think it’s a fair question. I think if we focus more on more on the higher quality, it’s going to be more in the 6% to 6.5% range than the higher in the range. But we still see lots of great opportunities in the higher in range that still meet very high quality standards for us. So, maybe 6.25 to 6.5 if you’re modeling but again, I think in the end, we’ll be blending out at 6.5 on just our day-to-day core business.

Jeff Theiler

On the dispositions if you model between 7 and 8, you’ll probably be 3 plus. [Ph]

Operator

Thank you. I will now turn the floor back to management for closing remarks.

John Thomas

Yes. Thanks everybody for joining today, the great questions, and we appreciate it. And I would like to recognize our Founder, John Sweet who started this Company many years ago as a private fund, working with Theine, retired at the end of the year and really left. He hasn’t left us completely but left and help build a great organization that we take forward and look to make it even greater. So, we just want recognize John Sweet and his retirement and look forward to continue to work with him when we have the opportunity. And in that connection, as part of our succession planning for John, Deeni Taylor has been promoted to Chief Investment Officer and Deeni was -- and John both, were huge parts of our success last year in our growth. And I just want to recognize Deeni and their promotion. And then, lastly we are thrilled as we announced earlier to supplement John Sweet’s opportunities with many elections around the country, we are excited to have Dan Klein as the Deputy Chief Investment Officer working closely with Deeni and myself. So, just want to recognize that. We look forward to seeing you soon and working hard during this quarter. Thank you.

Operator

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

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