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Edited Transcript of HTA earnings conference call or presentation 27-Apr-17 5:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Healthcare Trust Of America Inc Earnings Call

Scottsdale May 1, 2017 (Thomson StreetEvents) -- Edited Transcript of Healthcare Trust Of America Inc earnings conference call or presentation Thursday, April 27, 2017 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Robert A. Milligan

Healthcare Trust of America, Inc. - CFO, Treasurer and Secretary

* Scott D. Peters

Healthcare Trust of America, Inc. - Chairman of the Board, CEO and President

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Conference Call Participants

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* Austin P. Caito

Jefferies LLC, Research Division - Equity Associate

* Karin Ann Ford

MUFG Securities Americas Inc., Research Division - Analyst

* Michael Stephen Knott

Green Street Advisors, LLC, Research Division - Director of United States REIT Research

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Presentation

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Operator [1]

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Good day, and welcome to the Healthcare Trust of America Q1 2017 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Mary Jensen, Vice President of Capital Markets. Please go ahead.

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Scott D. Peters, Healthcare Trust of America, Inc. - Chairman of the Board, CEO and President [2]

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Good morning, and thank you for joining us today for Healthcare Trust of America's First Quarter Earnings Conference Call. Joining me on the call today are Robert Milligan, our Chief Financial Officer; and Amanda Houghton, our Executive Vice President of Asset Management.

HTA's first quarter results of 2017 has been a continuation of our strong 2016 results and a continued focus on executing on our 2017 business plan. From an overall perspective, our financial performance this quarter resulted in: one, strong same-store cash NOI growth of 3.2%. This included a 2.2% increase in base revenue, tenant retention of 80% and a continued emphasis on maintaining and raising annual rental escalators; two, continued investment in our key gateway markets of $35 million at an average cap rate slightly over 6%. And in addition, we have another $150 million in MOBs under signed PSA located in our key markets that we expect will close by the middle of the second quarter; three, normalized FFO of $0.41 per share, up 3% compared to the first quarter of last year; four, a quarter ending investment grade balance sheet with leverage below 30%; and finally, after quarter-end, we raised $62 million on our ATM. These results show that our team is executing on our long-term business plan focused on key markets, critical core locations, critical mass end markets and an asset management platform that continues to drive both cost savings and margin expansion. The medical office market overall continues to perform well with steady and consistent growth. Cap rates for MOBs continue to range from 5% to 7%, depending on size, quality of the asset, market and location.

Our investment philosophy remains the same. We're focused on 15 to 20 key markets that we believe will experience significant growth, that are attractively positioned as a result of high academic university concentrations, a highly educated population with above-average wage growth, economic growth, low unemployment and unique characteristics relative to the infrastructure within the city. Two, MOBs located on growing core critical health care systems, academic medical university campuses and in key core community outpatient locations. We believe these outpatient locations are, in fact, some of the fastest-growing parts of the health care sector. And three, assets where we can utilize our asset management platform to accelerate and improve earnings growth, perhaps our biggest competitive advantage relative to our peers.

The acquisition market for 2017 started slowly as buyers and sellers adapted to the new administration and the new interest rate environment. However, activity has recently increased, and we are well positioned with a strong balance sheet, attractive cost of capital and the ability to drive incremental earnings from our platform. This allows us to remain aggressive and disciplined while we pursue opportunities to expand accretively to benefit our shareholders.

Turning to the quarter. From an operating perspective, we grew our same-store cash NOI by 3.2%, led by a 2.2% increase in base rent, accounting for almost 80% of our NOI growth with the remaining growth coming from our 40 basis points in margin expansion. Our leasing performance was steady. Tenant retention came in at 80%, and total occupancy for the quarter remained relatively flat at 91.8%. Re-leasing spreads were up 1%, excluding one lease, which we had previously included a significant amount of tenant improvement amortization. During the quarter, we remain focused on margin expansion opportunity and using our platform to provide additional services to our properties. We see 24 to 36 months of runway from these activities.

Our leasing in Dallas, at the former Forest Park assets, remains active. During the quarter, we signed over 20,000 square feet of new leases and have over 75,000 square feet of proposals currently issued. We continue to believe these properties will achieve lease rates of 80% to 90% over the next 12 to 18 months due to the strong demand for a well-located Class A medical office space without any ground lease restrictions.

Finally, yesterday, we announced that Mark Engstrom, our Executive Vice President of Acquisitions, will be leaving HTA at the end of the quarter. Mark has been with us since we went to self-management in 2009, and we wish him well on his future endeavors.

The current level of investment opportunities that we have in our pipeline demonstrates the strength of our team. As part of this transition, we announced the promotion of 2 individuals who have been instrumental to our growth over the last 5 years, including our new Senior Vice President of Investments, Ann Atkinson. Ann has been with HTA for over 5 years and has played a significant role in more than $2 billion in investments since we were listed in 2012. She has strong health care relationships across the country and is based here in Scottsdale.

In addition, we also promoted Todd Sloan to Senior Vice President of Leasing and Acquisitions. Todd is based out of Atlanta and currently leads our leasing efforts in the East Coast and has sourced a number of opportunities on the acquisition front for us from health care systems on the East Coast. Todd has many tremendous relationships that he has established over the last 15 years of his career. Todd has also been with HTA for over 5 years.

This expansion in role recognizes the efforts and talents that we have here at HTA as we continue to grow such a strong management team and strong leasing individuals in our different key markets. We are confident these changes will enable us to continue our aggressive and disciplined growth as we've achieved over the last 10 years.

I will now turn the call over to Robert Milligan.

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Robert A. Milligan, Healthcare Trust of America, Inc. - CFO, Treasurer and Secretary [3]

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Thanks, Scott. Our first quarter continues to demonstrate the consistency of the MOB sector and our company performance: solid same-store growth, margin expansion, investments in key markets and a strong balance sheet. From an earnings perspective, first quarter normalized FFO per diluted share was $0.41, an increase of 3% per diluted share compared to the first quarter of 2016. Overall, normalized FFO increased over 15% to $60 million as compared to the prior year. The increase in year-over-year normalized FFO was primarily driven by our same-store cash NOI growth of 3.2% and NOI derived from the strong investment activity over the last year and a reduction in year-over-year leverage. Our normalized funds available for distribution increased 9% to $52.9 million compared to the prior year.

In the first quarter, which includes all properties acquired through the fourth quarter of 2015, our NOI growth was driven by a 2.2% increase in base revenue, which falls entirely to the bottom line. Our expenses for the comparative period actually increased slightly, based on higher utility spending. However, our overall margins expanded by 40 basis points as we were able to perform additional services using our internal platform that we continue to roll out and utilize, especially as we consolidate management in our key markets. This is a key strength of our platform and one that really drives our investment philosophy within our key markets.

Our leasing activity remains high. In the period, we entered into over 770,000 square feet of new and renewal leases. This totals almost 4% of our portfolio and is almost 3x higher than the first quarter of 2016. Overall, our lease rollover is increasing in 2017 from a previous run rate of 6% to 8% per year to 13% for 2017, including month-to-month leases. However, the occupancy in our same-store portfolio remained around 92%, demonstrating the strengths of our markets and the high-quality tenant base. Sequentially, our same-property portfolio continued our normal first quarter pattern and declined slightly to 91.7%, given higher levels of lease rollover in the period. However, tenant retention remains high at 80%, and our re-leasing spreads were up almost 1%, excluding one lease that had significant TIs. We continue to expect our tenant retention to remain around 80% for the year and expect new leases to lead to overall occupancy gains for the rest of the year.

Tenant improvements decreased slightly year-over-year on a square foot basis to $1.45 per year of term on renewals and less than 1 month per year of term for -- of free rent. New leases came in around $3 per year of term on the TIs. However, the total amount of leasing completed led to an overall increase in capital expenditures to almost $10 million on a recurring basis. We also had an additional $3 million of nonrecurring capital with most of that relating to recent acquisitions and first-generation TIs.

G&A for the period was $8.3 million for the quarter, an increase from the prior year and almost entirely related to noncash stock compensation. G&A remained relatively low as a percentage of our total revenues, around 6% on a trailing basis. And for the year, we expect to be closer to $30 million to $31 million.

Our balance sheet is simple, low levered with ample liquidity. We have low leverage of 28% debt-to-market cap and just 5.7x debt-to-adjusted EBITDA. During the period, we also repaid $40 million of mortgages and have just $40 million of debt maturing over the next 24 months and have an overall weighted maturity of 5.5 years. All in all, very strong balance sheet.

I will now turn it back to Scott for final remarks.

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Scott D. Peters, Healthcare Trust of America, Inc. - Chairman of the Board, CEO and President [4]

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Thank you, Robert. We'll turn it over to the operator to line up questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) I would like to hand the call back over to Robert Milligan.

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Robert A. Milligan, Healthcare Trust of America, Inc. - CFO, Treasurer and Secretary [2]

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Thank you. And just to be clear, during the course of the call, we will be making forward-looking statements. These forward-looking statements are based on the current beliefs of management and information currently available to us, and our actual results will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. And although we believe that our assumptions are reasonable, they're not guarantees of future performance. Therefore, our actual future results could materially differ from our current expectations. For a detailed description on some of the potential risks, please refer to our SEC filings, which can be found in the Investor Relations section of our website. With that, we're now happy to take questions.

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Operator [3]

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Our first question comes from Karin Ford from MUFG.

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Karin Ann Ford, MUFG Securities Americas Inc., Research Division - Analyst [4]

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Robert, I think you said in your remarks that you expect occupancy to potentially push higher later on this year based on your leasing pipeline. Can you just elaborate on that a little bit and just talk about the leasing pipeline you have today and where you think occupancy could head by the end of the year?

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Robert A. Milligan, Healthcare Trust of America, Inc. - CFO, Treasurer and Secretary [5]

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I think as we've talked about things, I think we've had a very strong activity, certainly as we started the year. The activity in the leasing that we closed in the first quarter was certainly about 3x as high as what we did in the first quarter of last year. As we continue to gain traction, specifically in the Dallas market, and get some of the prospects that we currently have out there closed, we think we could certainly see that get back up to the 92% range. And I think after that is where we see continued upside from there.

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Karin Ann Ford, MUFG Securities Americas Inc., Research Division - Analyst [6]

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And with the momentum you had so far this year, do you think there's an opportunity potentially to push rent harder in the portfolio later on in the year?

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Scott D. Peters, Healthcare Trust of America, Inc. - Chairman of the Board, CEO and President [7]

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This is Scott. I think that that's the blend that we're working on. We talked last quarter on our call that we had talked internally about moving rates spreads, reducing concessions, which we've done over the last 18 months very successfully. But I think that you're seeing with the activity, with the momentum in the sector as a whole, I think there will be opportunities for landlords, such as us, in key markets, key locations to move spreads and to really start seeing, perhaps, some momentum that we haven't seen in the last couple years.

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Karin Ann Ford, MUFG Securities Americas Inc., Research Division - Analyst [8]

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Great. And then just last question for me. You mentioned in the press release that you're expecting to invest in an expansion in your project at New Haven. Can you give us some detail on that: how big the investment would be; what your expected returns are; and, since this is -- since development is a little bit of a new area for you guys, how you're approaching it, what role you're going to have on the development side?

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Robert A. Milligan, Healthcare Trust of America, Inc. - CFO, Treasurer and Secretary [9]

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Really, all we did in the -- is really in the Hartford, New Haven marketplace. We have an expansion with the existing developer that we actually bought the properties from. These were, frankly, expansions that were already underway when we closed the deal last April, and so it's pretty minor. I think they're developing them to -- higher than what we're acquiring at the 6%, 6.5% range. So they certainly have another 50 to 100 basis points on it in that market. So overall, just a small expansion really on an existing property that we already own there.

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Operator [10]

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Our next question comes from Aaron Wolf and Chad Vanacore from Stifel.

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Unidentified Analyst, [11]

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Quick question on the same-store tenant retention. Was there any primary factors that contributed to the dip from last quarter?

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Robert A. Milligan, Healthcare Trust of America, Inc. - CFO, Treasurer and Secretary [12]

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Well, I think overall, we've historically run somewhere between 80% to 85% retention for the overall portfolio, and I think that certainly was the case here again this quarter. So I think there's naturally going to be some volatility within that number from quarter-to-quarter. Overall, for the year, we expect 80%, 85% retention is going to be the norm.

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Scott D. Peters, Healthcare Trust of America, Inc. - Chairman of the Board, CEO and President [13]

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I think the big focus for us, and this is kind of -- plays upon the question that we just got from Karen, is that we're actively and, I would say, aggressively looking at our leasing transactions from a return perspective, based upon the amount of capital we're putting in, the amount of capital that we're requesting that the tenant put in, which is increasing, certainly that we've seen over the last 12 or 18 months. And so we're trying to make sure that we maximize the potential of the space they were leasing. Robert mentioned that we'll get -- we think 92%, 93% is achievable over the next 12, 18 months. I think it's very achievable. but I think again, the key that you want to look at is how are you maximizing your dollars that you're putting in to incentivize or to retain tenants, and we put a lot -- big emphasis on that. And I think we've talked about that in the past about the amount of capital that is put in by each of the peers in the marketplace. I think we perform extremely well to that comparison.

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Unidentified Analyst, [14]

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Okay, that's helpful. In terms of the Baylor Medical office building dispo, can you provide any color on what type of cap rate you received on that? And are there any more planned dispositions in 2017?

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Scott D. Peters, Healthcare Trust of America, Inc. - Chairman of the Board, CEO and President [15]

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Well, that particular asset was a very small asset located in -- outside of...

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Robert A. Milligan, Healthcare Trust of America, Inc. - CFO, Treasurer and Secretary [16]

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Outside of Dallas.

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Scott D. Peters, Healthcare Trust of America, Inc. - Chairman of the Board, CEO and President [17]

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Dallas, and it came with a larger portfolio. It was bought early in our history, back in 2008 or 2009. And as we've talked about it, we'll move through assets as we see the potential, a, to -- that we can't acquire any other assets, or b, they don't fit into a high-energy core critical location that we use our asset management with. And that particular transaction was just an example of that.

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Operator [18]

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(Operator Instructions) Our next question comes from Michael Knott from Green Street Advisors.

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Michael Stephen Knott, Green Street Advisors, LLC, Research Division - Director of United States REIT Research [19]

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Scott, just curious if you can give us a little more color on how you're thinking about capital allocation today. My sense is that you were maybe a little bit cautious heading into the year. And you're sitting now with a better cost of capital, I would say, than maybe at that time. And so just curious, how are you thinking about that, particularly with that Duke portfolio sitting out there?

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Scott D. Peters, Healthcare Trust of America, Inc. - Chairman of the Board, CEO and President [20]

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Well, I think that there's a little more certainty. We're seeing a little more -- certainly, knock on wood here, given interest rates. The 10 year has pulled back, certainly. REITs, in general, have done better. I think our capital allocation really is as it always has been, make sure that it's accretive, make sure that it's in our critical markets, make sure that our asset management program can add the accretion to it once we bring it in-house. And we put a big focus this year, and you're going to see the results. And now we're seeing the results of moving services in our platform to tenants. Instead of going to third parties or instead of employing third parties, we're the ones providing the service and then getting the benefit of that transaction with our NOI and with our margins. And so I think that's really what we're looking at, continue to grow our key markets, our gateway cities and get critical mass. That all drops to the bottom line.

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Michael Stephen Knott, Green Street Advisors, LLC, Research Division - Director of United States REIT Research [21]

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Okay. And I assume you're looking at the Duke portfolio, but that's probably not something that you would ultimately be sort of in the final running for, I would imagine.

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Scott D. Peters, Healthcare Trust of America, Inc. - Chairman of the Board, CEO and President [22]

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I think that's -- I think a lot of people are looking at it, and I really don't have much to add from what is out there in the marketplace.

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Michael Stephen Knott, Green Street Advisors, LLC, Research Division - Director of United States REIT Research [23]

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Okay, that's fair. And then just last question for me, if I could, on the NOI growth for the quarter, the 3.2%. Just curious, as you were giving your 2% to 3% guidance for the beginning of the year -- at the beginning of the year for 2017, just curious if you're off to a better start than what you had sort of anticipated at that point.

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Robert A. Milligan, Healthcare Trust of America, Inc. - CFO, Treasurer and Secretary [24]

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Well, I think as we looked at this year and as we were considering the way the performance would shake out, we certainly were focused on the fact that our leasing rollover schedule is increasing. We've been on a nice run rate of 6% to 8% per year for each of the last 3 years, and that's going up to 12%, 13%, including month-to-month leases in this year. So certainly, there is going to be some volatility in there. I think we were -- we're pleased with the way the first quarter played out. I think the tenant retention of 80% was strong. The amount of leasing that we had was strong. And I think what's really interesting is the way that as we've gotten our portfolio in place with scale in markets, I think the profitability, to some extent, has probably outperformed thus far in the year.

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Operator [25]

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Our next question comes from Austin Caito from Jefferies.

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Austin P. Caito, Jefferies LLC, Research Division - Equity Associate [26]

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I was just curious. Thinking about the acquisition outlook for the year, would it be safe to say to the year will be more similar to historical amounts of $200 million to $300 million? Or is it possible that we could see a year like 2016, where you guys were closer to $600 million to $700 million?

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Scott D. Peters, Healthcare Trust of America, Inc. - Chairman of the Board, CEO and President [27]

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The first quarter, we talked about the fact that the activity in the marketplace had slowed up a little bit. There is more activity right now, certainly seeing opportunities. We're looking at them all. We want to make sure that we go back to our criteria. We've been very disciplined, and we intend to continue to be disciplined. So I think that this year is looking -- it's looking up, and the opportunities that are going to come, I think are going to come maybe consistent, maybe not as much as last year. But I think there'll be opportunities, if one finds the right asset, manages their balance sheet correctly and it's accretive to what they're trying to accomplish.

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Operator [28]

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

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Scott D. Peters, Healthcare Trust of America, Inc. - Chairman of the Board, CEO and President [29]

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Well, thank you, everybody, for joining us on our conference call. And any other follow-up questions, please don't hesitate to give us a call back. Thank you.

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Operator [30]

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