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Edited Transcript of HTA earnings conference call or presentation 29-Oct-19 4:00pm GMT

Q3 2019 Healthcare Trust Of America Inc Earnings Call

Scottsdale Nov 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Healthcare Trust Of America Inc earnings conference call or presentation Tuesday, October 29, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Amanda L. Houghton

Healthcare Trust of America, Inc. - EVP of Asset Management

* Caroline E. Chiodo

Healthcare Trust of America, Inc. - SVP of Finance

* David Gershenson

Healthcare Trust of America, Inc. - CAO

* Robert A. Milligan

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

* Scott D. Peters

Healthcare Trust of America, Inc. - Founder, Chairman, President & CEO

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Conference Call Participants

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* Connor Serge Siversky

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Daniel Marc Bernstein

Capital One Securities, Inc., Research Division - Research Analyst

* Lukas Michael Hartwich

Green Street Advisors, LLC, Research Division - Senior Analyst

* Michael William Mueller

JP Morgan Chase & Co, Research Division - Senior Analyst

* Nicholas Gregory Joseph

Citigroup Inc, Research Division - Director & Senior Analyst

* Omotayo Tejamude Okusanya

Mizuho Americas LLC - MD & Senior Equity Research Analyst

* Piljung Kim

BMO Capital Markets Equity Research - Senior Real Estate Analyst

* Tao Qiu

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

* Todd Jakobsen Stender

Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst

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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 Third Quarter 2019 Earnings Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded. I will now turn the call over to David Gershenson, Chief Accounting Officer.

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David Gershenson, Healthcare Trust of America, Inc. - CAO [2]

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Thank you and welcome to Healthcare Trust of America's Third Quarter 2019 Earnings Call. We filed our earnings release and our financial supplement yesterday after the close. These documents can be found on the Investor Relations section of our website or with the SEC.

Please note, this call is being webcast and will be available for replay for the next 90 days. We will be happy to take your questions at the conclusion of our prepared remarks.

During the course of 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. 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 that our assumptions are reasonable, they are not guarantees of future performance. Therefore, our actual future results could materially differ from our current expectations. For a detailed description on potential risks, please refer to our SEC filings, which can be found in the Investor Relations section of our website.

I will now turn the call over to Scott Peters, Chairman and CEO of Healthcare Trust of America. Scott?

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Scott D. Peters, Healthcare Trust of America, Inc. - Founder, Chairman, President & CEO [3]

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Thank you, David, and good morning and thank you for joining us today for Healthcare Trust of America's third quarter earnings conference call. Joining me on the call today are Robert Milligan, our Chief Financial Officer; Amanda Houghton, our Executive Vice President of Asset Management; and Caroline Chiodo, our Senior Vice President of Acquisitions and Development.

As we move into the end of 2019 and look forward to 2020, HTA has positioned itself to be the sector leader in the ownership and operation of medical office buildings. With an irreplaceable key market focused portfolio, a fully-integrated, full service operating platform and a fortress investment grade balance sheet that positions our company to deliver earnings growth and shareholder returns over the next 3 to 5 years.

We have talked for years about our view of the overwhelming trends in healthcare that reflect a move to an integrated outpatient experience. This delivery will take place in 3 settings: One, on-campus, where we are the largest owner of MOBs in the country; two, off-campus in the community locations where all leading healthcare providers are focusing; and three, in academic university healthcare system locations where academic and healthcare combinations are critical.

Our portfolio composition over the last 12 years has reflected these trends and the critical nature of this real estate, where the best assets in each location demonstrate high levels of tenant retention and rental growth opportunities.

Our portfolio and investment strategy has reflected these key trends and HTA has targeted key fast-growing markets that we believe will outperform the rest of the country. Our targeted market approach also allows us to create size and scale in markets, with 15 markets with over 500,000 square feet and 9 markets with approximately 1 million or more square feet. This scale allows us to effectively create a deeper and strategic local operating platform with relationships and operating capabilities. This market focus is a key pillar of our growth strategy going forward.

In the third quarter, we saw the power of platform and portfolio start to work in ways that generates both internal and external growth opportunities. Led by same-store growth of 2.5%, driven by rental revenue growth of 2% and margin expansion from increased utilization of our property management platform and certain expense savings. Increased levels of acquisition activity, closing acquisitions of $135 million in the period, bringing our total for the year to $228 million at an average year 1 cap rate of 5.75%. These were all well located medical office buildings located primarily in our existing key markets in which we can add our operating platform to drive additional value for shareholders.

Although the acquisition markets remain very competitive for larger deals, we are focusing on one-off opportunities that fit in our portfolio of which we are able to acquire a yield that allow for immediate accretion. As of today, we have approximately $200 million in additional acquisitions under exclusive control. Although these remain subject to customer diligence and closing conditions, it shows the level of opportunities we are currently seeing.

Development, where we have announced 2 new on-campus developments with expected investment of up to $90 million. These MOBs will be anchored by key health systems, HCA and Dignity, now CommonSpirit, that we've had strong relationships with over the years. This brings our total development pipeline to over $150 million in projects with key relationships.

And finally, our investment grade balance sheet remains strong, with leverage of 30% of total capital utilization and 5.7x debt to EBITDA.

In addition to these activities, we are also seeing new opportunities to redevelop some of our older properties located in great markets. I've consistently noted in my view that there are many opportunities within the MOB space to redevelop older buildings, especially ones located on-campus. We have identified several opportunities on our own portfolio where the investment of additional capital will allow us to modernize our buildings and significantly increase rents with returns of this capital in the 10% to 12% range, making it quite attractive to pursue and for investors.

In this period, we are announcing the redevelopment of 2 of our 4 MOBs that we own on a fee-simple basis on the St. Joseph Health Mission Viejo Campus in Orange County, California. These 2 buildings were constructed in 1972 and are coming off a 20-year hospital master lease. With renewal rents that are more than 30% less than the campus average, we are moving forward with a redevelopment that will modernize the facility and allow us to command rent in line with market. While there will be some downtime in occupancy, the long-term value creation of these improvements are significant.

Finally, as a result of our acquisition pace, refinancing activities and portfolio performance to date, we are reiterating our 2019 normalized FFO guidance of between $1.63 and $1.65 for the full year. In addition, we are increasing our acquisition outlook to $375 million to $425 million.

I will now turn the call over to Amanda.

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Amanda L. Houghton, Healthcare Trust of America, Inc. - EVP of Asset Management [4]

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Thanks, Scott. Our team continues to focus on delivering high-quality operating and leasing performance that bring value to tenants and shareholders alike. As we look forward into the coming quarters, we believe our greatest opportunities to add value are:

One, leveraging our size, scale and in-house infrastructure to maximize efficiencies within our markets and deepen relationships with our existing tenant base. Our team has now close to 200 property management, building management, construction and leasing professionals, span across 23 offices and directly interface with the vast majority of our tenant base. We believe our infrastructure not only allows us to bring the power of a national company to a very local healthcare provider community but also helps us generate strong local knowledge, relationships and capabilities that have resulted in high levels of same-store growth, sector leading operating efficiencies, strong leasing and retention, and also great opportunities for acquisition and now development;

Two, continued focus on executing quality leases with strong tenants at rental rates and escalators that reflect the quality of our buildings and location and will translate to long-term cash flow growth for our shareholders;

And three, strategic investments in our markets and buildings that will maximize rates, tenant retention and efficiencies in our operations. However, we will continue to be strategic in our use of capital in an effort to maximize returns.

Turning now to the third quarter, our same-store growth this quarter came in at 2.5%, driven by a 2% base revenue growth and 50 basis points of rental margin expansion. In the period, we signed approximately 700,000 square feet of leases. This included 156,000 square feet of new leases and almost 540,000 square feet of renewals. Our total tenant retention for same-store portfolio was 86% while our total portfolio releasing spreads remain strong at 2.7%.

Our annual escalators for leases signed in the period were 3%, continuing our trend of increasing escalators towards that 3% mark as we continue to roll our leases. TIs remain consistent at $1.24 per square foot per year of term on renewals and $3.65 per year of term on new.

We came into 2019 with slightly higher amount of expirations than in years past, 12.8% of our portfolio. For the year, we have now leased 2.6 million square feet or more than 11% of our total portfolio GLA. Same-store retention for the year is 85% while our releasing spreads are now 3.6%. I would note that we have seen an increased level of early renewals with over 1 million square feet leasing for the year related to leases that expire in 2020 and beyond. This is driven by tenants seeking to lock in their space for the long-term as they consolidate practices and invest in their infrastructure.

In the period, we did see our occupancy rate decline on a sequential basis. Most of this was directly attributable to our repositioning of certain assets, including our redevelopment of our Mission Viejo MOBs. These fee-simple buildings are situated directly on the St. Joseph Mission Viejo Campus, South Orange County's only regional trauma center. The competitive buildings on this campus are more than 90% occupied at market rates more than 30% higher than where we would be doing leases today. By modernizing these buildings, we believe we can add significant value and bring rates up to market. While leasing efforts are ongoing at the properties, the renovation is expected to be completed by the second quarter of 2020 and we expect to stabilize the MOBs by the first quarter of 2021.

We also saw our occupancy decline by 60 basis points year-over-year in our same-store portfolio. Much of this is related to specific actions we are taking at key assets to upgrade our tenants, transitioning from lower quality, smaller tenants to bring in larger practices and health systems like we are doing in our Long Wharf asset in New Haven and Clear Lake in Houston. However, it also relates to our higher level of rollover in 2019 where our rents expirations increased 50% versus prior year. Even with our strong retention, it does take a couple of quarters of new leasing for occupancy to catch up.

Overall, we are encouraged at the strength of our current leasing pipeline and the long-term value creation it brings to our assets. We expect to see occupancy normalize and regain its growth in the first and second quarter of 2020.

On the expense front, we continue to show the benefit of our economies of scale and ability to perform services using our internal engineering platform which leads to a direct reduction in cost and much more technical focus on our building operations leading to better utility performance as we roll programs out to our properties. These operating efficiencies are currently being offset by increases in property taxes, primarily in Texas. In these cases, we continue to appeal these assessments and believe favorable outcomes are likely. However, those appeals do take time and could result in favorability in the next couple of quarters.

As we go forward, we believe we are still in the early to middle innings of our platform progression. We believe our integrated platform is positioned to continue to generate additional returns and annual growth through both revenue and incremental expense savings. Areas of focus on the expense side include: Taking our remaining acquisition properties in-house; rolling out our energy efficiency programs to our entire portfolio; and increasing our maintenance capabilities in our key markets to perform more work in-house. In addition, we are working on our tenant services and satisfaction in ways that can help drive tenant retention and rental rates higher. We are uniquely able to do this because of our existing built out infrastructure of over 200 property management and engineering staff in 23 offices across the country. We expect this will continue and financial impacts become more pronounced as HTA continues to purchase assets and grow out our existing markets.

Also as HTA continues to grow in our key markets and markets currently at 500,000 square feet grow to 1 million square feet, those at 1 million square feet grow to 2 million square feet, with the additional size comes a new wave of service offerings that makes sense for us in-house. We believe we are uniquely suited in the REIT space to take advantage of these efficiencies this size and scale provides.

I will now turn the call back to Robert.

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

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Thanks, Amanda. We will now turn the call over, for the first time, to Caroline Chiodo, our Senior Vice President of Acquisitions and Developments, to discuss this current state of the market and the opportunities we are seeing. Caroline joined us almost 2 years ago from Duff & Phelps Investment Management and has brought a unique view and perspective to our investment philosophy. Caroline?

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Caroline E. Chiodo, Healthcare Trust of America, Inc. - SVP of Finance [6]

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Thanks, Robert. From an investment perspective, we've experienced an uptick in activity in 2019. With the increase in opportunities, we remain disciplined in our capital allocation where we are focused on quality assets in our key markets.

We continue to target 15 to 25 key markets with the goal to increase our shares to at least 1 million square feet in each affected market. As we increase our geographic concentration, we gain brand relevancy with health systems, academic universities and large physician groups. In addition, we improve operational efficiencies as we leverage the platform.

It's important to note that geographic concentration cannot be easily replicated. And more importantly, this platform generates significant local knowledge. This local expertise is a competitive advantage and improves underwriting, and in addition allows us to source a significant number of off-market transactions within each targeted market.

Not only do these deals meet our quality and key market characteristics but they are also accretive to our cost of capital on day 1 based solely on the economics of the property. In addition, we expect to see between 25 to 30 basis points of incremental yield, when the assets are added to the platform. This is critical as we focus on driving overall performance to the bottom line.

In Q3, we closed on acquisitions of approximately $135 million at an average cap rate just over 5.6%. This brought our acquisitions for the year up to $228 million at an average cap rate of 5.75%. This is before we add any incremental property savings from our platform which should bring yields over 6%. These properties are located in our key markets, including our new market of Boise, Idaho and we're 91% occupied as of closing. Approximately 71% of these transactions are located on or adjacent to hospital campuses. However, they are all fee-simple.

Subsequent to quarter end, we have entered into an exclusive agreement to acquire approximately $200 million of properties in our key markets. These have similar characteristics to the deals we have closed year-to-date. We are focused on closing these transactions and integrating the office into our portfolio to drive earnings going forward. Robert will expand on the updated guidance and mass funding for these transactions.

In addition to the uptick in acquisitions, we were also active on the development front in the third quarter, announcing 2 on-campus projects totaling $90 million. These development wins highlight our strategic focus to partner with key health systems in our markets. By providing development capabilities, this allows our health system partners to drive improved care in the community as they expand their market reach in innovative and efficient states. The projects also meet returns for shareholders with expected stabilized yields of over 6.5% and will come online in the beginning of 2021. In addition to our wins within the quarter, we remain on track and on budget within our development pipeline, including a 125,000 square foot MOB on the Wake Med Oslo Campus in Cary, North Carolina, a vibrant suburb of Raleigh.

We continue to have additional discussions with health systems and work towards getting our expected development and run rate to $100 million to $200 million per year. Please see the September press release for further details on our year-to-date transactions for acquisitions and development.

I will now turn the call over to Robert to discuss financials.

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Robert A. Milligan, Healthcare Trust of America, Inc. - CFO, Secretary & Treasurer [7]

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Thanks, Caroline. From a financial and capital markets perspective, we had a very active quarter, capitalizing on opportunities to invest in accretive acquisitions and developments, refinance near term maturities at attractive rates and raise equity efficiently to preserve our balance sheet strength and remain active in all of our -- in pursuit of our growth opportunities.

We also saw our year-to-date investments and operating performance fall to the bottom line and lead to our third quarter in a row of sequential earnings growth.

Turning to the specific financial results. Third quarter normalized FFO per diluted share was $0.42, up 5% for the first quarter of the year as we continue to generate same-store growth and close on our acquisitions, redeploying capital raised in last year's Greenville sale into better assets and markets.

Funds available for distribution increased to $70.9 million which includes $17 million of recurring capital expenditures in this seasonally high third quarter or approximately 14% of NOI. Our run rate for the year however remains around 12% of NOI.

G&A for the quarter was $9.7 million with the year-over-year increase driven primarily by the expensing of internal leasing in which we had capitalized $1.5 million in the year-ago period. We continue to expect our G&A run rate to go -- run between $10 million and $11 million the rest of the year. This remains extremely efficient relative to our peers.

As Scott and Caroline noted, we are seeing many new opportunities to invest in assets that will be accretive to our cost to capital. With our equity trading at implied cap rates in the low 5s, debt in the low 3% range and acquisition opportunities yielding over 6% once we add in our platform synergies, we will continue to be very active in our pursuit of these opportunities and raise the capital as we go to preserve our balance sheet strength.

In addition to the acquisition opportunities that yield immediate earnings, we are also seeing attractive development and redevelopment opportunities in our portfolio. With yields on these high-quality assets over 6% per development and over 8% returns on redevelopment, this provides another avenue for long-term earnings growth. With these now kicking off, we will see these return to hit our bottom line starting in the fourth quarter 2020 and accelerate into 2021. Funding these requires a strong balance sheet and active capital management. And we are very well-positioned to do that, ending the quarter at 5.7x debt-to-EBITDA with $1 billion of liquidity and very limited near term maturities.

In the third quarter, we took advantage in the reduction of interest rates by raising $900 million of senior unsecured notes at a blended rate of 3.04% and a weighted maturity of 9.5 years. We use the proceeds to repay our '21 and '22 senior notes as well as pay down our revolver. While these repayments resulted in a onetime $21 million debt extinguishment cost, they allowed us to lock in our interest rates for long-term and eliminate any potential refinancing risk while also pushing out our near term maturities. In addition, we also re-hedged our floating-rate term loans, fixing our LIBOR portion at 1.38%, more than 60 basis points below current rates. We also took down the $50 million of equity we raised at the end of June.

Given the significant number of investment opportunities we are seeing in the fourth quarter, we also raised $172 million of equity on our ATM subsequent to quarter end. We did this on a forward basis at a price of $29 per share for an implied cap rate in the low 5% range. Raising this capital ensures we locked in our accretion to these additional acquisitions and it will allow us to slightly lower our leverage while still being accretive to our earnings in 2020. We will also continue to dispose of non-core assets to balance out our acquisition opportunities.

As a result of these activities, we are maintaining our 2019 normalized FFO guidance while increasing our same-store outlook range for the year to between 2.4% and 2.8%. And increasing our acquisition guidance to $375 million to $425 million.

With that, I will now turn it back over to Scott.

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Scott D. Peters, Healthcare Trust of America, Inc. - Founder, Chairman, President & CEO [8]

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Thank you, Robert, and we will open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from John Kim with BMO Capital Markets.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [2]

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Scott, you mentioned on the redevelopment projects that you expect 10% to 12% return. Can you just elaborate, is that a cash on cash development yield or is that more of an IRR concept?

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Scott D. Peters, Healthcare Trust of America, Inc. - Founder, Chairman, President & CEO [3]

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I'll let Robert go ahead and talk through that. I think we said 8% to 12%, but...

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Robert A. Milligan, Healthcare Trust of America, Inc. - CFO, Secretary & Treasurer [4]

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Yes, John, we're really looking for 8% to 12% returns on that and that is a cash on cash return on that.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [5]

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So in your current projects, are you just modernizing and then retenanting, multitenanting the space? Or are you adding any leasable square footage?

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Scott D. Peters, Healthcare Trust of America, Inc. - Founder, Chairman, President & CEO [6]

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Well, a little bit of both. But the majority of it is just really modernizing the existing space, taking some master lease spaces that were much larger, allowing for some smaller spaces and moving what we think are better equipped long-term tenants into the spaces.

I think medical office is going through its middle innings right now of physician groups, healthcare systems, even academic university initiatives to determine where they want to be and what type of space they want. We're seeing, as we've talked about the last 3, 4 quarters, larger spaces being utilized. We've seen, as Amanda pointed out, preleasing that was expiring in 2021, 2022. Folks have come forward and looked for extensions to extend the lease but also to add improvements to the space. So this is really in line with what we would look for as a portfolio objective, which is over the next 24, 18 to 24 months, really putting in place what we think is the long-term rent escalators for our space but also the right tenants that are going to be there and continue to be there for 3 or 4 iterations of their lease.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [7]

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Okay. My second question is on your dip in portfolio occupancy which you attributed to, I think improving your tenant quality and also due to expirations. I'm wondering how much is left as far as the tenant improvements is concerned? And then looking forward, you have about 10% to 11% of your leases expiring per year. So are we going to see a noticeable improvement in occupancy in the near future?

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Scott D. Peters, Healthcare Trust of America, Inc. - Founder, Chairman, President & CEO [8]

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I'll take that from a top level. We're -- I think we're very fortunate, actually in 2019. We've been able to, this quarter, get active in our acquisitions, fill in our markets which we purposely took a breath last year based upon wanting to get our leverage in place, making sure that we felt comfortable with accretive investments and being able to put our asset management program in place with our engineering and services that we're providing now to the majority of the buildings.

I think that we see, from where we look at right now, continued occupancy gains from here. I think that we've taken a specific management decision process of, if you talked about the first question, redeveloping some space, I think every portfolio in America has some space that has been 15, 20, 30 years old and has been maintained or occupied by the original tenant. You need to go forward and change that space out, improve rents, get the correct escalators in place and we really took 2019 to try to go through that process. And I think as we move into 2020, we're looking for some occupancy increase, some continued rent increases and again, focused on escalators for the long-term, 5, 7, 10-year leases. I'll let Robert add anything else.

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

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Yes. I think from a, from a role perspective, we're pretty comfortable that we're working in this quarter and the last couple of quarters on a couple of specific scenarios. That's going to continue to happen. But we don't see that as a material reduction in our occupancy. I think you've seen us come down a little bit here and I think you'll see us look to regain that in the first half of next year, certainly looking to grow it by the end of 2020.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [10]

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So is it fair to assume that you expect an improvement in same-store NOI growth as well?

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Robert A. Milligan, Healthcare Trust of America, Inc. - CFO, Secretary & Treasurer [11]

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Well, I think the -- from a leased rate perspective, I think that always kind of follows. The NOI follows the leased rate and the occupancy after that. So I think you'll see us look to get into next year, in the 2% to 3% range. And then as occupancy increases, then you'll see the NOI growth kind of follow suit after that.

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Operator [12]

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Our next question comes from Chad Vanacore with Stifel.

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Tao Qiu, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [13]

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This is Seth Qiu on for Chad. The first question I had, I just want to touch on the acquisition pipeline and the pace of acquisition this year. On the first half, you guys had stated that it'd be back half weighted. And here we stand today with you guys closing a significant amount of deals and increasing that for 2019. So how should we be thinking about the pipeline going forward? And just what had changed in the environment from the first half until now?

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Scott D. Peters, Healthcare Trust of America, Inc. - Founder, Chairman, President & CEO [14]

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Well, obviously, we've always put shareholder value first and that means accretive acquisitions. We've also said for many years now that we like the key market concept. And so we've been focused on the right timing as a company. We found the second half of this year, we've started seeing opportunities that really fit in our portfolio. As Robert pointed out in his remarks, we see that this is accretive. We were fortunate to be able to match funding, so that we feel very comfortable that we can continue to grow earnings. And if you heard our first call, as we talked about at the beginning of the year, we've now been third year from the Duke transaction. We've certainly continued to grow earnings as we talked about with that portfolio. We've integrated it throughout the portfolio. And our focus is really shareholder value, continuing to invest in our markets and really taking advantage of the right time to do that. And we're seeing opportunities. This has been a very fortuitous time for us and we continue to see opportunities. And I don't like to talk about the future because you really don't know. But I think we will continue to see opportunities in our markets and we will take advantage of those as long as it's accretive to us and we find them in the markets that we like.

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Tao Qiu, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [15]

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All right. And just continuing on that path. Are you seeing any large deals out there? And I know you mentioned the pricing for large deals remains competitive. So should we still expect you guys to do a lot of deals in the $25 million to $35 million range? It seems like you're kind of in that 5.6% to 5.75% yield. Is that correct?

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Scott D. Peters, Healthcare Trust of America, Inc. - Founder, Chairman, President & CEO [16]

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Well, we certainly like the 5.5% to 6.5%. Again, we've also looked at some assets that aren't 100% occupied. We've bought some assets here recently, 85%, 90% occupied being able to bring our leasing expertise and our management team to -- in that market, to bear on the asset. Larger portfolios, certainly here recently, certainly in the last 3 quarters in 2019, maybe the end of 2018, are highly sought after by a multitude of different investors and some folks have paid very, very, what we would consider, very high prices for -- not as quality of assets as you would like to see or that you would like to acquire. Our focus has been not on buying something and looking at the first year NOI. Of course we do that, but we want to make sure that we see consistent escalators, consistent occupancy in a 5- to 7-year pathway that says that this asset's going to continue to drive NOI at the asset, not be flat or potentially face issues were they're over market. We've seen some assets, we've seen some portfolios where I personally have felt that the rents in place are over market and that -- when come rollover time, there may be some issues. And when that happens, we pass.

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Tao Qiu, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [17]

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Got it. And then releasing spreads have been really strong over the last year. They did decelerate a little bit to 2.7% in the quarter. Is that sort of the run rate we should think of going forward for that metric?

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Scott D. Peters, Healthcare Trust of America, Inc. - Founder, Chairman, President & CEO [18]

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Well, I think we've seen some strength in 2019 for rent growth. And I think you'll continue to see it this year. We're already in the fourth quarter. And from what we can see in our leasing pipeline, we're pretty happy with where we are with the renewals that Amanda mentioned that we're in the process of. And as we rolled over the larger amount of the portfolio, it takes a little longer, especially when you're dealing with healthcare systems, you're dealing with larger physician groups. I don't know, 2020, I think that if I was to say in 2020, I think if you can get somewhere in the 2% range, you may be looking at probably a pretty good indication of good, solid space, a good asset and a good relationship with the tenant. I think that as we look forward into 2020, we may be seeing some slowing in the economy. And if that happens, then medical offices, such a safe space, but it is not immune to the influences of the general economic environment. So I would say that this has been a very good year for the MOB space.

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Tao Qiu, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [19]

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All right. Great. And then just last question for me, looking at the same property cash NOI guidance. I understand that you guys tighten that range, 2.4% to 2.8%, implying 2.6%, the midpoint. But year-to-date you've done 2.7%. So is that a slight downward revision at the midpoint due to the lower occupancy or how should we think about that?

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Scott D. Peters, Healthcare Trust of America, Inc. - Founder, Chairman, President & CEO [20]

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I'll let Robert answer that.

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Robert A. Milligan, Healthcare Trust of America, Inc. - CFO, Secretary & Treasurer [21]

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Yes, I don't think there's any real change in outlook for us. I think when we said, started the year we thought we'd be 2% to 3%. I think we continue to think 2% to 3% is the right range for any given quarter depending on rollover and whatnot that's taking place. So it's just largely the reflection of where we are to date.

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Operator [22]

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Our next question comes from Nick Joseph with Citi.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [23]

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Maybe following up on one of those questions. What differences are you seeing in terms of the buyer pool and cap rates between portfolio deals and one-off properties?

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Scott D. Peters, Healthcare Trust of America, Inc. - Founder, Chairman, President & CEO [24]

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Well, we've always built, except for the Duke transaction, we built the last 12 years through one-off acquisitions. We were fortunate to be able to define our markets. And early on, try to get some depth in the markets and some market knowledge. Our leasing folks have been with us for primarily 5, 6, 7, 8 years and they get relationships within the market. Our acquisitions has -- we've always been active. So we like, frankly, the one-off deals, because you know what you're getting. You get to blend that asset into the portfolio and you don't pick up what could be troubled assets along with it. I think the pricing is more favorable. You've seen that, I think from us and I think from others that have bought one-off assets. And if we can continue to articulate our game plan and our strategy, I think we can be successful. I wouldn't expect us to be in the hunt for larger portfolios just because there is that capital out there that seems to be extremely aggressive. And I think we want to make sure that we are accretive in our acquisitions, we want to grow earnings, we don't want to go backwards in any particular year based upon decisions made in prior years. And so we're going to be very conscious of how we spend shareholder capital.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [25]

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If you had to quantify, would you say it's about 50, 75 basis point spread between where you can execute on the one-off versus where you've seen some of these portfolios trade?

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Scott D. Peters, Healthcare Trust of America, Inc. - Founder, Chairman, President & CEO [26]

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I think that's a good general statement. But I would -- I actually think that if you look at the quality of the asset vis-à-vis the cap rate spread, it's even wider. And I'm talking about performance. I'm talking about not just buying it today and saying it's 50, 75, 100 basis points. But okay, what's it going to do in year 2, 3, 4 and 5? And how much capital do you have to put in the assets? And are rents over marketed when they roll? I think it could be wider than that and we'll see as we go through the next 2 or 3 years from folks who have bought portfolios or -- and bought assets. And the whole key in the whole process is, can you consistently grow earnings year over year over year over year without having a period of time where you have to retrench or divest of things which are dilutive.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [27]

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That's helpful. Thanks. And then you've been using the forward ATM to match fund the external growth. How do you think about the timing and execution of both issuing the equity and then ultimately settling it versus where the deals are in the pipeline and ultimately closing and spending the cash?

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Robert A. Milligan, Healthcare Trust of America, Inc. - CFO, Secretary & Treasurer [28]

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Well, I think from a -- we'll answer that in reverse order. I think from a settlement perspective, one of the reasons we use it on a forward basis is so that we can take the cash when we actually close the transactions. We've had a philosophy along the way since we became public in 2012 that we would really look to finance our acquisitions at the time we close them or as close thereabout to do that. So on a forward basis, we issue it and then we'll take it down as we close the transaction. So we'd anticipate with the fourth quarter specifically that we've closed -- as our guidance indicates, another $150 million to $200 million and we'll look to take down those -- that equity by the end of the period.

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Operator [29]

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Our next question comes from Tayo Okusanya with Mizuho.

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Omotayo Tejamude Okusanya, Mizuho Americas LLC - MD & Senior Equity Research Analyst [30]

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Congrats on a solid quarter. My question has to do more around development and redevelopment. From a development perspective, I kind of recall a year ago, you guys talking about expectations of seeing increased demand from physicians and also from hospital systems. You kind of put out a number back then of hoping to kind of see $100 million or so, anywhere from 0 to $100 million in development starts. And you kind of just announced $90 million. Caroline just talked about a number of $100 million to $200 million hopefully as a new target. I'm just kind of curious, is it fair to kind of say you are seeing more activity from the hospital systems and that you really kind of do see development as being a bigger part of the growth engine over the next 2 years?

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Scott D. Peters, Healthcare Trust of America, Inc. - Founder, Chairman, President & CEO [31]

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I'll do it. Robert just did. I'll take the last question first and then get to the second one. I do. I do think that HTA needs to be a -- needs to have development a fair part of its growth. I don't want it to be overleveraged. I don't want it to be underleveraged. But I think that $100 million to $200 million is where we look at. And we've taken some time to implement our team. We've taken some time to get out and introduce ourselves. We've taken some time to fight the interference that came with the Duke acquisition, and it's a tough environment. I mean, it's -- when you're going after a development deal, it's sort of like a football game, there's all different sides and you go in and you make your best pitch. And we've been fortunate, we've been able to find some development that is occupied as we've talked about. We see some more, we're able to do some things that are already -- that we already control, which I think will help us over the coming quarters. And we've also been out looking for deals that I would say are unattached or just new opportunities with HTA, its development team, the management team, the leasing relationship we have with that particular opportunity.

And so yes, it is something that when we bought Duke, I didn't frankly appreciate the opportunity that it presented. But certainly now that I've seen the integration between development, leasing, acquisitions and relationships with healthcare systems and physicians, I think it was very, very fortunate that we were able to do the Duke transaction but also have as part of that transaction the opportunity to focus on development. So we're very -- I think we're very happy about where we are. I'd like to see it improve and increase and from a management perspective, we're certainly focused on that.

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Omotayo Tejamude Okusanya, Mizuho Americas LLC - MD & Senior Equity Research Analyst [32]

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Got you. And then on the redev side also, could you talk a little bit about kind of opportunities you're looking at in your portfolio? How much of redev you think you could be doing on an annualized basis? And more importantly, as a result of redev, maybe any kind of impact it could have on near term NOI as you kind of empty out spaces to get them redone?

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Scott D. Peters, Healthcare Trust of America, Inc. - Founder, Chairman, President & CEO [33]

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Right. I'll let Robert handle that.

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Robert A. Milligan, Healthcare Trust of America, Inc. - CFO, Secretary & Treasurer [34]

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Yes. I think as we look at redevelopment, we typically, I think as we go through our portfolio, we probably have 3 or 4 assets a year that we can look at as going through this process. I think Mission Viejo is really down the middle of the fairway for what we'd be looking to do. I mean this is a great, fee-simple asset and probably one of the most high-demand areas in the country, at least in our portfolio. And we've got the ability to take a 1970s vintage building that's largely been occupied by the hospital the entire time, take what would be $25 renewals at a campus that's closer to $35 to $40 net rents. And so as we look at that, you put in $100 to $125 a foot, it's pretty attractive returns, cash on cash. So as we look at opportunity set there, there's probably 3 or 4 that we look to do a year. I don't think it's a significant drag, as we look to it. It's $0.01 or $0.02 a year, but I think that's been really how we've been running it over the last couple of years anyways. This just makes it more of a formalized program where the incremental capital really makes a big difference.

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Scott D. Peters, Healthcare Trust of America, Inc. - Founder, Chairman, President & CEO [35]

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Just to kind of conclude what Robert was saying, when we did the Greenville transaction last year, we took the proceeds, we thought it was a great transaction for shareholders, we held on to the proceeds, didn't match them as quickly as perhaps, at that time. A very competitive environment, we didn't want to overpay for assets. One of our focuses as we came into 2019, moving to 2020, 2021 is continued earnings growth. Our focus is not take properties out of production so to speak, simply to put capital into them. We want to make sure that we're focused on shareholder value and continue to move our earnings quarter-over-quarter.

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Omotayo Tejamude Okusanya, Mizuho Americas LLC - MD & Senior Equity Research Analyst [36]

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Excellent. I'm liking your comments about better internal and external growth and it's good to kind of see that kind of starting to happen. So congratulations.

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Scott D. Peters, Healthcare Trust of America, Inc. - Founder, Chairman, President & CEO [37]

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Thank you.

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Operator [38]

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Our next question comes from Connor Siversky with Berenberg.

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Connor Serge Siversky, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [39]

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Just to piggyback off the previous one. We noticed an increase in recurring CapEx, specifically in second-generation tenant improvements. Can we expect these elevated levels to go forward or maybe a reversion to historical mean?

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Robert A. Milligan, Healthcare Trust of America, Inc. - CFO, Secretary & Treasurer [40]

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As I think was, as we look at our capital and our TI, it certainly does follow from a leasing perspective. So second-generation TIs was a little bit higher. I think it comes down slightly from where we were in the third quarter. I think it's important to remember, the third quarter's almost always our highest capital period, just from a weather perspective and one, for whatever reason, it matches up with some of the leasing trends. So we would expect our recurring capital overall to decrease a little bit. I think as we look at the long-term outlook, it's probably still in the 12% to 13% of NOI range. So third quarter is certainly elevated above where we see that playing out over the long-term.

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Connor Serge Siversky, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [41]

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Okay. And then maybe one more for me. In terms of these development starts, $100 million to $200 million year-over-year, do you see that as the top of your capacity? Or if not, what kind of limiting factors do you guys run into that would increase that level?

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Scott D. Peters, Healthcare Trust of America, Inc. - Founder, Chairman, President & CEO [42]

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Well, I think that the capacity, from an internal perspective and from an organizational, is not a limit. I think that we are staffed and have the ability and we've really got -- put together what we think now is a very solid team. We've made presentations. We've been through the fire, so to speak, of the exchange between information and so forth. So it's not a capacity issue.

I do think though that we want to keep it in moderation, development -- medical office is somewhat different than any other development because typically, medical office needs to be occupied. At least our philosophy is, it needs to be 70%, 80% preleased. It needs to be leased with credit, it needs to be something that's, when it's built, they move in. And so you don't have that risk, so to speak, of well, gee whiz, we hope we're going to find a tenant. So we want to keep it balanced as far as our mix as a company.

Right now for our size and for where we are, I think $100 million to $200 million is probably, one, very achievable, which is important. But also, it probably represents where the sector is from a development perspective. We are not going to win them all, we are not going to go after them all. We're not going to have all the relationships that some other folks have and we have some. And so when we look at what we can do and how we think we can perform, I think for the next 12 to 18 to 24 months, if we continue to do that $100 million to $200 million, I think that will be a very good starting point as this process continues in the medical office sector of either redevelopment of space that's there or new development from healthcare systems for particular new assets.

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Operator [43]

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Our next question comes from Todd Stender with Wells Fargo.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [44]

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Just back to the capital sources. I guess with the 6 million shares that you're -- I guess, you got in the proceeds or you're about to, through the forward ATM, that will essentially fund the incremental acquisitions you've announced, but you also had guided for some dispositions to occur in Q4. Are those still -- are those sales still happening?

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Robert A. Milligan, Healthcare Trust of America, Inc. - CFO, Secretary & Treasurer [45]

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I think as we look at our dispositions we certainly do have several properties that we're in the process of disposing. I think we've been out in the market with those and we do have offers on the table. And so you will probably see us close a couple of those in the fourth quarter. It's going to be, the amount is -- I don't think we've changed our expectation on that. But it could be anywhere from probably $10 million up to the full $75 million we had guided to. It's just a matter of how it goes through the process. That said, I think as we look at our disposition program and how we will utilize dispositions, it will largely go to fund incremental acquisitions. So as we look to dispose properties, we'll look to have incremental acquisitions on top of them to quickly recycle the capital, really outside of, kind of the one-off markets that we find ourselves in, and put them into the markets that are more core for HTA long-term.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [46]

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Thanks, Robert. Just sticking with you, do you need more capital over the near term? Your -- the ATM that you sold, those 6 million shares, I gather the share price was sub-$29. Your stock's now over $30. How are you looking at, maybe going through just your standard ATM or maybe you don't need the proceeds right now?

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Robert A. Milligan, Healthcare Trust of America, Inc. - CFO, Secretary & Treasurer [47]

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I think as we look at it, our balance sheet's in great shape. One of the things that we liked about being able to utilize the ATM in this way was it really did match fundings as you point out. And so anytime from here, the balance sheet's in a perfect position. I think anything, as we look to go forward, we got to find great deals and I think great deals is just a good thing for shareholders and at appropriate time, we would look to come back for equity or dispositions as appropriate.

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Scott D. Peters, Healthcare Trust of America, Inc. - Founder, Chairman, President & CEO [48]

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I think Todd, I think we want to be very selective. We want to continue to focus on earnings, we want to continue to focus on shareholder value. And as Robert said, we want to make sure that we're finding good assets which we're seeing right now in our markets which is also appropriate. But we want to be very, very conscious of earnings growth, match funding and me being very conscious of generating shareholder value.

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Todd Jakobsen Stender, Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst [49]

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That's helpful. And then just switching gears, back to the Mission Viejo redevelopment project, just for clarification. I think you mentioned that some of the leases are expiring in the 2021 era. I would imagine that you'd let some of these leases expire, so the tenants can move out. Maybe just kind of clarify what the timing looks like for some of those leases to expire? And when you're going to break ground? And maybe when we start to see some of those 8% to 12% returns?

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Robert A. Milligan, Healthcare Trust of America, Inc. - CFO, Secretary & Treasurer [50]

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Yes. No, Mission Viejo, the tenants actually largely moved out at the -- in the middle of this third quarter on that. So that was reflective of a bit of our overall occupancy decline, a significant portion of that. So we should see that start to release. I think as Amanda noted in her comments, we should see it start to lease up. We'll complete most of the modernization by the second quarter 2020 and see it lease up by the end of the year is our expectation.

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Scott D. Peters, Healthcare Trust of America, Inc. - Founder, Chairman, President & CEO [51]

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We were very excited about that asset. Great location, as you know, being from the West Coast and actually being in that area. We saw that campus much like we saw Forest Park, when we -- even though we didn't anticipate the transition that Forest Park went through with HTA. But we did think that this is a great campus. It's got long-term value. And frankly, there's probably not better real estate in our portfolio, company-wide. So we're excited about putting the dollars in there and then starting to see into 2020, 2021, starting to see the benefits of the rent increases and the occupancy back up to 95%.

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Operator [52]

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Our next question comes from Michael Mueller with JPMorgan.

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [53]

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Most things have been answered. But just on the prior question, the modernization. Can you talk a little bit about what goes into modernizing a building, as opposed to -- is it just facades, doing lobbies, elevators, just changing the space around for different types of uses? Just what's the scope of what's going on there?

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Scott D. Peters, Healthcare Trust of America, Inc. - Founder, Chairman, President & CEO [54]

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Well, I think you just did our answer. It's obviously HVAC, it's elevators, the lobbies. Tenants, when they walk into buildings now, they want to have a nice foyer, what I would call a lighted type of experience where they're not walking into something that's 30, 40 years old. I mean, ceiling heights are also part of the equation, making sure that the space is laid out so that the appropriate tenants are in appropriate places. I think that's a big thing that Amanda and her team is focused on, is putting tenants where they need to be for long-term occupancy because some need first floor space, some need exposure, some don't. And we're putting that in our leasing plans and looking at how we roll this space out. And again, I look at this space now, you remodel it, you put some dollars into it, you move the rents up, you get occupancy and then you're set for the next 15, 20 years. And again, this is really good real estate. And to maximize that is just a real benefit for shareholders.

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Amanda L. Houghton, Healthcare Trust of America, Inc. - EVP of Asset Management [55]

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And just to add a little bit of color to that. I think some of the most important things that we're looking at are things that we can do to the building that'll quickly expand the type of tenants that we can put in, things like the spring clearing of the building, or as Scott mentioned, the raised ceiling types or gurney elevators, ADA upgrades, all of those things that we're doing will now allow us to lease our space to hold different tenancy sets. So those are the kind of things that we're looking for.

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Operator [56]

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Our next question comes from Lukas Hartwich with Green Street Advisors.

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Lukas Michael Hartwich, Green Street Advisors, LLC, Research Division - Senior Analyst [57]

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Just one for me. I'm curious, when you're talking to sellers, how often do OP units come into the conversation?

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Scott D. Peters, Healthcare Trust of America, Inc. - Founder, Chairman, President & CEO [58]

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Well, it's -- we had the opportunity in our acquisition in Boise, and that was one of the reasons that we've always liked that market and it was an opportunity to align ourselves with someone who had been in the market a long time, good asset, good location and that was something that we really liked. We did that on the East Coast, we did it in a transaction in Connecticut, where folks took a lot of OP units and that was one of the reasons that we like that portfolio so well and frankly, it's performed very well and knock on wood, they've done well with us. So we like OP unit opportunities when we see them. It's -- I think you'll see more of those. We certainly talk about it and I know our peers talk about it, because the tax impact of folks who have had property for such a long time, they don't want to pay the taxes, they don't necessarily want to do a 1031 again and -- so we have that conversation. But I would not say that we've seen, or at least I have not seen a tremendous amount of that over the last 18 months.

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Operator [59]

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Our next question comes from Daniel Bernstein with Capital One.

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Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [60]

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Now that you have -- you're doing redevelopments in your own portfolio and -- what are the value add opportunities you're seeing on the acquisition side? Is there some limiting factor in terms of the property age or how much you want to modernize or bring on in terms -- bring on onto the portfolio to modernize? Or is this just a matter of price? Just trying to understand if there's a lot of value add opportunities out there or there's some other limiting factors for you?

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Scott D. Peters, Healthcare Trust of America, Inc. - Founder, Chairman, President & CEO [61]

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We -- as we -- as I mentioned earlier, we've acquired some assets with some occupancy upside. That's very good for us. Number 1, it's accretive to what we paid for with existing NOI. But number 2, we get to bring our leasing teams and we get to bring some increased NOI. I think that's part of our focus on earnings growth.

Buying buildings that need a substantial amount of modernization probably is not something that we would do. Typically those assets are much, much older. They're smaller, they're not necessarily in our key markets. I would make an exception for that, for example, Boston has gone through renovations and we've had some opportunities and are actually, hopefully, have opportunities to do something like that there. But that's where the healthcare system, it's with them, but it has a specific use. And yes, it will take some capital, but it's already preleased in their mind and it's got a great location. But you need to be careful about the market. I think we're not looking to do secondary markets. We are not looking to do markets outside the 15 to 20 that we like. So that's kind of where I would say that our focus is. Moderate is good. Significant is probably not where we are.

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Operator [62]

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

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Scott D. Peters, Healthcare Trust of America, Inc. - Founder, Chairman, President & CEO [63]

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Well, thank you everybody for joining us, and we'll look forward to seeing investors at NAREIT. And again, thank you. And any questions, please call Robert or myself and we'll get back to you. Thank you.

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Operator [64]

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