Good morning and welcome to the Healthcare Trust Of America Q1 2016 earnings conference call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Alisa Connolly, Director of Finance. Please go ahead.

Thank you and welcome to Healthcare Trust Of America's first 2016 earnings call. Yesterday we filed our first quarter earnings release, our financial supplement and our second quarter dividend announcement. These documents can be found on the Investor Relations section of our website or with the SEC. This call is being webcast and will be available for replay for the next 90 days. We will be happy to take your questions at the conclusion of our prepared remarks. During the course of this call, we will make forward-looking statements. These forward-looking statements are based on 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 some 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?

Good morning and thank you for joining the management team of Healthcare Trust Of America on our first quarter 2016 earnings conference call. We appreciate you joining us today as we discuss our first quarter results, our thoughts on the MOB sector and our company's overall progress in 2016. Joining me on the call today are Robert Milligan, our Chief Financial Officer, Amanda Houghton, our Executive Vice President of Asset Management and Mark Engstrom, our Executive Vice President of Acquisitions. As we discussed on our last call, the medical office building sector continues to prove it's increased value to investors based on consistent annual NOI growth, strong tenant retention, increased outpatient occupancy demands from healthcare systems, physician groups, academic universities and what we see as significant macroeconomic drivers for the sector. Management continues to be disciplined and to execute on our business strategy focusing on annual same-store growth which drops to the bottom line, disciplined and targeted and a rifleshot acquisition strategy focused on key markets which allows us to generate critical mass in which to leverage our asset management platform and create cost synergies in the markets, investments in three significant medical office building segments that will serve the future of the changing healthcare sector on or adjacent to high-energy hospital campuses and community core locations that give healthcare providers the best access to patients and academic university medical campuses that are driving patient care, research, education and employment growth and finally maintaining a well-positioned and low leverage balance sheet to protect shareholders for the long-term. Our asset management platform is delivering steady growth primarily from our in-place annual lease escalators of currently 2.3% portfolio wide, 92.1% occupancy, strong renewals averaging approximately 85% annually, expense savings from our increased efficiencies and our leasing team actively managing the modest rollover…

Thanks Scott. I will now walk through our first quarter earnings results, our balance sheet and capital funding plans for the remainder of 2016. For the first quarter, normalized FFO per diluted share was $0.40, an increase of $0.03 per diluted share or 8.1% compared to the first quarter of 2015. Overall, normalized FFO increased almost 12% to $52 million as compared to the prior year. The increase in year-over-year normalized FFO was primarily due to our same property cash NOI growth of 3% and the accretive NOI generated from almost $400 million in acquisitions completed over the last four quarters. Our same property cash NOI growth was primarily driven by our contractual base rent which accounted for 80% or 2.4% of our growth. The remaining 20% of our NOI growth was driven by a mild winter and operating efficiencies realized primarily through facilities initiatives. We continue to have consistency driven by limited lease rollover and contractual in place escalators of over 2.3%. G&A was $6.8 million for the quarter which is within our expectations of approximately $26 million to $27 million annually. G&A is typically elevated in the first quarter from the timing of year-end activities. Interest expense for the quarter excluding the change in fair market value of derivatives was approximately $14.8 million. Normalized FAD per diluted share ended the quarter at $0.37, an increase of $0.02 per diluted share or 5.7%, compared to the first quarter of 2015. Of note is a decline in our straight-line rent of over $500,000 per year, primarily driven by a relatively low level of lease rollover in the portfolio. We continue to be committed to a strong and conservative balance sheet and ended the quarter with leverage at 30% debt to total capitalization and six times debt to EBITDA. We continue…

Thank you, Robert. As we continue into the second quarter and the second half of the year, we are very well-positioned to continue our pragmatic, disciplined and long-term business plan. Our goal simp0ly is to acquire, own and operate core critical medical office buildings in 15 to 25 key markets located in three distinct locations which are on or around healthcare systems, in community core locations and on or around academic medical university campuses. We believe that this will be the core infrastructure for healthcare and for outpatient delivery in the U.S. for the next 50 years. Our company is uniquely well-positioned from an infrastructure perspective to continue to grow in our markets over the next few years with minimal organizational needs while we do that. Our company is uniquely positioned from an infrastructure position to continue to grow over the next couple years with very minimal additions from an organizational perspective. This simple focus will drive earnings growth, develop synergies, maximize expense efficiencies and deliver consistent annual cash flow growth. Thank you for joining us on today's first quarter earnings call. I will now turn it over to the operator for questions.

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

Hi. Good morning. Just wanted to ask first on the acquisition front. If you could talk a little bit about the pipeline of deals that you are looking at today and then talk about pricing? Have cap rates for medical office breached the 5% level? And would you consider later in the year buying anything if cap rates move lower below the 6% that you bought here, up in April?

Well, thank you for joining us this morning. I think that we are seeing opportunities in our markets. I think that's been a process now over the last four or five years and with our asset management program and our leasing folks in these markets and the relationships that we got through the way that we done it, which is a targeted acquisition approach, we are seeing some folks who, as you have seen in this last quarter, come forward to us and say, we would like to do a transaction with you. So there is definitely liquidity in the space. I think it's going to continue this year. I think this is a great asset class. Sellers are seeing opportunities to get decent value, good value. Certainly I think it's an underinvested asset class, both from all sorts of levels. There are people, there are different types of groups who are looking for investments. I think we continue to see opportunities in that 6%, 6.5% range. We continue to see opportunities to get synergies from our asset management when we buy into these markets. And there are cap rates that have moved down into the 5%. There are assets that we have not gone after or we have been priced out of and that will continue, I think. I think you are going to continue to see very good assets with very good fundamentals in good markets be continue to be priced aggressively.

Thanks for the color. And why don't you just talk further about the New York, New England market now that you have amassed $1 billion of investment there. What is it about those markets that you find most attractive? And from a capital allocation standpoint, could you see more capital going here? Or do you like the position of that market in your portfolio today?

Well, we certainly like the market. When you look at Boston and you look at White Plains and you look at Albany, the Hartford, the New Haven markets, you have got aging demographics, you have got strong healthcare systems, you see very strong universities from an economic perspective, from an intellectual talent. They still attract a lot of companies, a lot of investment from other folks. And so you get better healthcare systems. You get a better need for delivery of healthcare. We like the markets. I think that we would continue to grow in these markets when the right opportunity presents itself. We have got relationships in these markets now where some of the stuff that we see comes to us first and we have an opportunity to decide how we feel about that particular investment. So we like it. But more importantly, the targeted market concept that we think is so important. This is an illustration of putting together $1 billion of assets in five or six great markets that generate tremendous synergies from an asset management perspective. If you look at what we have done in Florida, we have got now in excess of $250 million in good markets in Florida, all targeted investments. So we like this process and I think you can expect for investors to continue to see us do this.

Great. Thanks. And then just last one for me. I know you talked last quarter about asset sales being a source of capital for you guys this year. It didn't look like you sold anything in the first quarter. Can you just talk about the progress on that front?

Yes. We had we mentioned in the last conference call which wasn't too long ago that we expect go ahead and recycle $150 million of assets. We are on target to do that. We will see that second, third, fourth quarter. We are making sure that we are doing the best job for shareholders, making sure that we find the right targeted buyer for the assets. And so I think it's just the process that we are going through and we will get through that this year.

Great. Thanks very much.

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

Hi. Thanks. Just to go back on the cap rates, 6% to 6.5%, is that it in place? Or do you guys project for what you assume to be bringing property operations in-house.

Yes. Good morning, Todd. That's in place under the existing sellers management structure what we are buying on. So anything we are able to generate by bringing it in-house would be on top of that.

Can you guys quantify how much do you assume, maybe 12 or 18 months out of here? If you are going to bring it in-house, how many basis points would that add to your going in yield?

I think it obviously depends on the acquisitions, but in key markets we typically are able to get 50 to 75 basis points of additional yield.

And that's really the first level, Todd, of yield for us. But the second level, which is what excites us right now from a platform perspective, is the actual maintenance of the asset, the opportunity to find leasing groups, physician groups that move to your building when they are in three locations in your entry locations. It's nice to get incoming calls from folks who say, we know that one of our friends are a tenant in your building, we know you actually own the building and we would like to see if you have space somewhere. So it's really we think were still in the second part of a four-part process of getting these savings from the assets and from the regions and from the markets that we are concentrated in.

That's helpful. And I just look at your in-house property management, now it's edged higher. It's about 97%, I think. The byproduct of that is driving cost lower. I just want to see, is there room to run just improving efficiencies because that's been a pretty good driver in your consistent same-store NOI growth.

Well, we spend a lot of time on the efficiency side of the equation building asset management platform in-house. We are now up to a couple hundred people. We have had consistency in markets. We have been able to develop programs where now, Amanda Houghton, our Executive Vice President of Asset Management is putting together templates on how we are operating. We are able to buy contracts for utilities that include more than just one assets. So the efficiencies that you have, this is a very fragmented space. It's a space that is fragmented with small buildings, owned or operated by, what I would say, not institutionalized or getting the benefit of efficiencies from groups of assets. And so we are, again, I think we have opportunities to continue this expense savings, which is still only a small part of our same-store growth. But we have a chance to continue this for, we have been at this now four years in the public markets and I certainly don't think that it will go away anytime soon over the next four years. I think we will be talking about this to you for the next four years.

Thanks Scott. And then just of a bigger picture question. Can help us understand some of the nuances surrounding implementation of Section 603 the federal budget. I know it's specific to off-campus MOBs. It is supposed to into effect January 1. Just wanted to see what your thoughts are on that and what percentage of your portfolio, I guess, could be subject to this?

Yes. Todd, it's a good question. First of all, just from an overall perspective, Section 603 really just levels the playing field between hospital providers, specifically observatory centers off-campus and physicians and other groups and other independent groups that are already running them. So it really just puts them on a level playing field from a reimbursement perspective. I think the second thing is, for us observatory centers are only 5% of our total GLA. So any impact would be pretty negligible, one way or another. It's just a small part of our portfolio. And them from a third point, we do have a lot of conversations obviously with health systems and the real estate partners and while they are always looking at how the program mean is both on-campus and off-campus and really looking to maximize the program in really in both locations, they talk about potentially moving it around a bit, but they are really focused, one of the big focus continues to be off-campus and where do you put the right physicians and the right practices next to each other to generate the best volume and best revenue for them. So that might change, but I don't think any of their commitment to both locations have changed, from what we have seen.

Is there a grandfathering in? Does the higher reimbursement levels stay with the provider or does it stay at the facility level?

I think it's unclear at this point. So I think that really remains to be seen.

Great. Thank you.

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

Hi. Good morning.

Good morning.

All right. So investment pipeline for you is clearly strong. What do you suppose is motivating sellers? And why do you suppose activity has picked up so much in 2016 to-date?

Well, I think that this has been a transition. If you think about it, we have been talking about activity in the MOB space and the Affordable Care Act for about six years, but it's has really been effective may be in the last two or three. And I think healthcare systems, they always do five-year plans. Liquidity is generated by fair, better and better pricing which is happening. I think from an investment perspective, we are finally getting an opportunity to see now that there is three public companies. You have got the big three, who pay more attention to the MOB space. I think you are starting to see some of the tremendous fundamentals in this asset class. I think it's becoming an investable asset class itself and it is still distinctively different than the other diversified healthcare assets in this space. So you are getting an opportunity to see this continue and I think it does continue. I think we are at the beginning stages of 12% of the space is really in public hands right now, $350 billion of product. Again I think that this is an initial transition and as people see the opportunity to sell, good values, as it gets more invested in, you will see opportunities continue.

All right. Thanks Scott. And then, what kind of competition are you seeing for these assets? Are there still nontraded REITs really competing? Or is this mostly private equity that's the larger competition?

For us, it's really private equity that's the biggest competition. Again you are looking at private equity having different financing needs. They look for different types of assets. We look for multitenanted assets. We look for that tenant mix within a building that allows us to bring our asset management to the equation. Most times private equity is not looking for that type of complexity in their assets. But we don't see nontraded REITs. They are pretty much, the yield this is too difficult for them to get to. The public REITs, I think we are each in our distinctive locations. We see each other once in a while, but not tremendously. And for us, it's really our markets. We know the folks in our markets and we have been at this now for 10 years in May and we have been very active. So the issue for us, always is that each asset must perform. It must perform, not just when you buy it, but needs to perform when rents roll and it needs to fit into our overall portfolio, which is that we want to continue to improve the portfolio each time we make an acquisition.

All right. And then just one more for me. So can you give us some color on the mix of types properties acquired post quarter close? So how much multitenant or single, on-campus versus off and in terms of maturity?

Yes. I think overall, they are all multitenanted buildings. There is a lot of it and it's a mix of both the on-campus and really community core locations. And by like community core locations, it's going to be handful, really a cluster of buildings together that serves multiple key tenants which we find attractive. One other thing that we are seeing is that the community core and community core is not a one-off building located in a location around a bunch of office buildings. A community core is a location, a couple or two, three, four physician, larger physician groups have decided that they want to be at because it services that demographic that has high density, it has access off of freeways and has ample parking and it generates referrals and synergies. These locations are going to be here in healthcare for the next 20, 30, 40 years. It's 10,000 individuals turn 65 on a daily basis for the next 20 years. They are going to need more and more active care. Not hospital care necessarily, but certainly active care and the location needs to be accessible and it needs to be something that the physicians feel that can be accommodated to them. Because we actually now, when we talk to larger physician groups, there are three questions they ask. Number one, where are we going to be located within your building because that's a key component depending upon the physician group. Number two, do we have the opportunity to expand and because that's the other thing if you got a physician group that's growing within a market their sites are typically more than just one location. And the third actually is how is the parking? Is the parking that we see, is it expandable so that our patients have easy access. So it's becoming a very sophisticated leasing opportunity and also more sophisticated from use perspective and healthcare systems ask the same thing.

All right. Thanks.

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

Thank you. Scott, you mentioned in your prepared remarks that you expect occupancy to increase 50 to 75 basis points this year, which I think will be an all-time high for your company. What's driving the increase at this time?

Well, we have gone through a process and I think the space has gone through a process. If you expand and contract, you gain some space, but also the physician groups that are expanding have typically taken, a physician or small physician group in that space is no longer needed because they are getting efficiencies. It's not a one-to-one addition. They hire two physicians and only need half the space that they need to expand to. So that has been in the process and I think that's starting to come to certainly the middle part of that transition in the healthcare transition from a sector perspective. Second, we have worked on TIs and free rent. We have worked on leasing concessions. And then we have worked on escalators. Folks look at us and say, you have been very consistent in your same-store growth. This isn't by chance. It is because we focus the escalator we were first talking about. We were the first company talking about rent escalators three years ago. We were talking about getting those to 2.5% to 3% and getting them portfolio wide and getting them consistently. So we have been focusing on that and so therefore we have frankly not given away some space that we could have leased for occupancy, but not leases because of the right rate or without the right escalator or perhaps without the right physician group. So I think that we have done that. We have been through a three-year process. The next two years for us, the next two-and-a-half years is really to move the occupancy of this portfolio up to where MOB key critical location occupancy probably should be, which is in that 94%, 95% range and much more occupancy than that and you are probably not maximizing value to the asset. So I think we are in that process right now and we feel pretty good about it.

Okay. And you mentioned the escalators, the 2.7%, on what you are signing today. But what are you seeing as far as market rental growth? Either what you are seeing or what you are underwriting in acquisitions?

Yes. I think, John, what we are certainly seen is, as we role our leases, we are rolling flat to up. This quarter we are up 1.4%. So we are seeing across. So we think our leases are pretty much at market and they are escalated at market. So we are seeing that 2.5% growth, certainly.

And that would include the markets that are more CPI based, as far as leases?

Yes. Certainly every market is a little bit different. What we see in our portfolio, we have less than 10% of our leases are really CPI driven. So we are not necessarily as impacted by that overall.

And I think that's a good question. And I think what we do as we look at our markets, 16 months ago we went through an in-depth analysis of every market, all rollovers, all leases, lease spreads on rollover and said, there are markets that you want to be in and there are markets you do not want to be in. That's why we don't buy big portfolios because if you buy $600 million, $700 million, $800 million portfolio, you are going to get all sorts of different markets and you are going to get all sorts of different assets and you are going to get different types of blends. We truly like to be targeted buyers. We know what we are buying. We underwrite the leases and we underwrite the market from a market rent perspective. And I think we have been very good at that. We have put a lot of time and consideration in it. The team here has been together for over six years. And so that's the result of what we get from a performance perspective.

Okay. And then, Robert, you mentioned that you are evaluating long-term debt markets. Can you share an estimate of where you could price 10-year unsecured notes today? And would the use of proceeds be to paydown the credit facility?

I think as we look at it, you have certainly seen credit spreads come in here recently. That's been one of the things we have been monitoring. And I think you are looking at the low-fours right now from an unsecured perspective. And yes, revolver term loans, we can certainly pick out longer-term obviously as we dispose of some assets. That's another way to paydown some of that and free up some liquidity.

Okay. Great. Thank you.

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

Thanks. Morning, guys. Can you maybe, just going back to the cap rate question, given where cap rates are, what's your view? I guess there is some concern on pricing more broadly in the commercial real estate space. And I am just wondering if you were to look over the next 12 or 24 months, do you see a scenario where MOB cap rates could move even further or maybe even towards the four handle? And what level makes you pause and say, hey, we are buying these for 10, 15 years, we would like to pause from an acquisition standpoint?

I think there is two answers to that. One, I think that you are going to see, MOB start or you are going to see large portfolios or public companies start being priced like office. We have had that conversation and I think that the fundamentals, the consistency, the core critical nature of medical office building as more and more people visit it, see it, they go to investor days and they see the quality of these assets, I think that's going to continue to make this a very, very attractive investment and I think it's going to show up in cap rates. For us, I think that we look at it very simply and we are simple as a company and our investment philosophy is simple. It needs to be accretive. We need to be able to buy assets. We need to utilize our equity so that it is profitable and is good for shareholders. Now I think that's the pause. If you get into position where that's not the case, then you don't buy. We went through that last year. At the end of last year, there were lots of transaction going on and we didn't have a big year. I think we did $250 million, but they were in markets, they generate synergies, they were accretive. We got those benefits that Robert talked about earlier. This year, we have seen some very good acquisitions in our markets. Many of them have come to us and they were not marketed broadly and they were accretive to shareholders. So I think that's our philosophy, is that we want to make sure that it is in the best interest for our investors and that's how we look at it.

And then, just following on, post the CHID, are you having conversations with anymore hospitals or are there any large sale-leasebacks in the market that you may be interested in? And for these larger deals, what are some of the some things that perhaps make you stay away from that deal?

Well, typically we are not a large portfolio buyer and first and foremost reason is that typically they are not in a concentrated marketplace or the majority of the assets are not in markets that we necessarily that we want to grow in. So we haven't been the chaser of large portfolios. There are, I believe, conversations that are going on in the marketplace with larger type portfolios and I don't have any details, but if there was a portfolio that was in a concentrated market and we could get the synergies and it was in a market that we like, we certainly would look at it and take it very seriously. So I think as a company, you have to do two or three things. You have to be disciplined. You have to stick to what you do well. And then you have to be consistent. And we have tried to be very consistent by picking our markets, getting mass into those markets, generating synergies and doing it on a targeted asset-by-asset basis. And so far, it's worked out well for us. But I would not expect us to be a buyer of large portfolios that are scattered throughout 20 states or 10 states. A lot of effort. You struggle with getting the synergies and I think that you don't know the assets as well as you should necessarily.

Okay. Thanks. And then just last one. You have painted a picture over here which suggests a good trajectory from here on, fundamentals look good and you are seeing a bunch of -- the pipeline is good. What are some of maybe the red flags that you maybe watching for as new supplying issue? How should we think about the risk just given where the space is priced today?

I think the risk is that as you see more and more activity in the space, like we are seeing today, you see a lot of different types of assets. I think that means you have to be more selective and you have to make sure that your criteria checks the boxes that you want. Don't stray because you might think that something works. There is a lot of activity out there and there are folks that are buying things and they are buying them for different reasons. Some are buying just to get bigger. Some are buying them because they can leverage it. Some are buying them because they have to buy in order to show growth, I think we are looking at it from a perspective of being consistent, making sure that you know you talked about pricing. I think as important as pricing is also as important as market rents. Are the rents that you are buying going to roll down? Are the tenants that are in your buildings growing or stagnant? Is the building that you are buying older or is it newer? How is it going to be maintained? Those are some key things that, again, if space heats up and there is more opportunity, sometimes you may skip some of those small details. We are trying to be very, very disciplined in what we look at.

Okay. Thanks guys.

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

Thanks guys. Scott, going back to occupancy for a minute. 12 months ago, I know you guys were saying occupancy in the 94% level is achievable for the portfolio. And you mentioned earlier 94%, 95% as plan which you hit, some sort of maximum capacity. But what's the timeline for that 94% with you guys encroaching 93% by the end of the year? Is 94% a 2017 event?

I am going to be very cautious here because Amanda is looking at me and telling me to make sure that I am being very patient. I think it's an event over the next couple years. Again, if we can get 50 to 75 basis points this year, that will get us to 93%. I think that then we are getting momentum. I clearly think that in the locations that we are at our leasing teams are generating some synergies that we haven't seen before. So I think it's achievable, which is good. I think it's pragmatic, which is good. And I think that it is generating a good value, meaning that what we are leasing, the space we are leasing, I think ends up being leased and I think the retention ends up being in the 90%, not 85%. People won't move. If you put the right people in the right locations and service them in a proper manner, they don't move on you. So we are excited. I think that as a team when we got together earlier this month, we were seeing some very good activity and I think over the next couple of years we will get to that number.

Okay. That's helpful. Thanks. And then Robert, you guys improved the balance sheet during the quarter mostly through equity issuances to fund the deals and then I think on the call here you talked about long-term debt and some asset sales for other source of funding. Bt as you look forward for the balance of the year, is equity, does that remain top of list for asset funding? Or would you say the others take priority given the propensity towards equity in the first part of year here?

Well, as we look at it, first and foremost, what we have always communicated and we are committed to is being very low levered and making sure as we are doing our acquisitions we lock in the equity at the same time. I don't think we are going to stray from that. So as there's opportunities, one of the interesting things we have seen a lot more recently, as Scott mentioned, is OP units. That's a great way for us to finance deals. As we acquire them, you are immediately locking in a good chunk of the equity to do those deals. So I think we are going to continue to look at them in a very consistent manner with what we are doing now.

One of the things that we can probably count on in the REIT space is that it isn't going to be always like it has been certainly in the last couple of months. So there will be ebbs and flows. The ebbs and flows will offer opportunities. So as we have always said and I am firm believer that low leverage allows you opportunity to take advantage when other folks may not have that opportunity. So we will continue to balance our acquisitions as we have. We will continue to be in a position like to see us today. And in fact, every year for the last three years, we have entered the year lower levered than when we started it. So we try to position ourselves to be good pragmatic opportunistic buyers in key markets of great assets.

That makes lots of sense. Thanks and then last one. Robert, just on the same-store pool for a second, can you provide some transparency related to the process of moving in asset and more obvious on that front, but moving asset out of the same-store pool, what goes into is, who is involved? Any color you can provide would be helpful.

Yes. We follow a pretty simple process for that. We do full five quarter method. So right now in the first quarter pool from an acquisition perspective, we are including everything we acquired through the end of 2014. In order for something to get pulled out of the pool, it's kind to two step test. First of all, it has got to be approved by the Board of Directors for sale and the second test to that is, we have to foresee some sort of an offer on that which means we are more serious about selling that. Now obviously those sales sometimes can take a longer period of time than we would like for that to happen. But certainly that's the process that we walk through there.

And I think just from a governance perspective, it's always nice to point out how a company operates, but every one of our acquisitions goes through the investment committee that is made up of independent directors and every one of those recommendations go to the complete Board. So there is no asset bought here in this company or any disposition that is selected as a disposition that doesn't go through the complete governance. And as you know, our Board has consisted of the same folks plus a couple folks that come aboard. So we have a very active group of directors.

Yes. Thanks guys.

The next question is from Jonathan Hughes of Raymond James. Please go ahead.

Thanks and good morning. Just touching on Vikram's question earlier on any red flags. Are there any markets where you may be seeing elevated levels of construction or deliveries this year?

I think you are seeing more healthcare systems when they need either redevelopment which is, if an asset is on campus and it's constrained fundamentally because it's a buildout campus, there are conversations going on. We have had folks call us and say, we would like to get this renovated and we would like to extend the lease and they are looking for capital and that's a good combination. So I think that is occurring and that's a natural evolution and I think that that's the first step before you see development going off campus or fundamentally, it's either on campus or not, it's either community core or it's not and it's either academic university campuses or it's not. So they are very hard to just generate one-off from any particular standpoint.

Okay. And then just one more. Curious if you have had any recent discussions with hospital management teams regarding the changing reimbursement rate environment? And if so, are they concerned or optimistic? Do they plan to expand or take a wait-and-see approach? Just curious if you have any commentary on that front.

Well, it's interesting. The conversations we have with the healthcare folks, it's sort of good news, bad news thing because the bad news is that they say, well we are cost constrained and we are looking for places to save cost and, gee whiz, we need to do this and then in the same breath they say, well we need to move as much as we can to the outpatient locations. So you are getting a demand driven by necessity of the healthcare systems in order to continue to fight their budgeting process and their reimbursement issues that that they face. So that's a positive for the space. Our space, the MOB location is continuing to be the first and foremost location that allows these healthcare systems and physician groups to be able to do what they need to do. Or in that case of healthcare systems to manage their budgets and in case of physician groups to get to locations that generate the greatest revenue. So it's an interesting conversation when you have it with these healthcare systems.

Okay. So it's just give and takes. All right. Thanks Scott. I appreciate it.

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

Thanks. Good morning. So the 70% that you call on or adjacent, can you break out what's actually on and how do you define adjacent?

Rich, the way we define the entire pool there, obviously campuses can stretch for some time. And so the way we define it is really within a third of a mile of a he hospital property.

Okay. And so would you say the actually on-campus number is half of 70%? How would you, it doesn't have to be precise?

Yes. I think that two-thirds. I think as Robert said, we are within that quarter mile. I think that's been a standard or that's been something that has been talked about in the sector for the last three or four years. But I would say two-thirds of our stuff is right on-campus of that 70%.

Of that 70%. Okay.

Yes. And Rich, just one thing on that. To be clear, certain times you might not be on a campus but you are actually closer to the front door of the hospital than if you were on the campus. So that's why we try to set some ground rules and say, it's got to be within a third of a mile just to provide some sort of standard within that.

Okay. And Scott, when you went through three nodes of opportunity, academic, on or adjacent and then community core, would you be willing to say that you are bending more or even away from on-campus and looking at some of these other options as a means to get your 6% plus cap rate? Is that a fair way to look about how maybe the business is changing from your perspective at the margin?

I think there is couple answers there. Number one is that not all campuses are on-campus or are equal. I think a lot of the nonprofit campuses are struggling. Consolidation is going to be an issue in the space. And so you are going to be want to be on campuses that have high energy. So just being on campus, I think, is not what it might have been five years ago or 10 years ago. Number two I think that these three segments are critical for the future of healthcare. I wouldn't want to limit an investment. I look at this as I look at it say this is a 20, 30 year investment that continue to produce 2.5%, 3.5% same-store cash NOI. Where can you do that at? Well I think these three locations are where you are going to get the best opportunity in the longest and most consistent growth. I wouldn't want to put us in a corner and say, all we are going to do is on-campus. Just like Robert mentioned, sometimes the campus is here, but the best building is across the street. Well, it's technically not on-campus but it's a great building and it's got most prominent healthcare physician group in it. So we like the three sectors. We like the fact that key markets, key markets for us mean that there is a high economic, unique economic and high university concentration, because that's s what's going to attract companies in the future. It used to be 20 years ago that people went to the companies. In the next 20 years, companies come to the people. So you want to be in those locations that have academic university centers. Why did GE go to Boston? They went because they wanted the talent that resides in Boston. So we like the three segments. We think the three segments are going to be the leading provider of growth from an NOI perspective. And so we will do 60-20-20. I think that that would be a tremendous opportunity for investors to own this type of real estate for the next 10 years.

Okay. I appreciate that. On a more specific commentary on Forest Park, it seems like that situation is going to get resolved in a positive way if things continue to go along as planned. I am curious, in some ways you might look at it and say well you dodged a bullet because the system itself wasn't necessarily a good one in the current environment, but your assets probably become net winners at some point. Is there anything about that transaction that caused you to reconsider your investment thesis, looking beyond just being on-campus but just Forest Park creating lessons for you on a go forward basis?

Well, I think number one is that you don't want a hospital to close the operator there --

That's true.

That's true. I mean it is. And the second most important lesson is location, location, location. You saw it in Frisco where HTA came in and now our building has got better credit, they want more space and we are asked to having to look to kick people out, which isn't as easy as they think it is. I think you look at Dallas and you say that resolution, when that gets done, is going to move to a stronger more dominant healthcare system in that location and there have been folks who said, space is a prominent in it So whoever buys that location. Our building, for example, has the cafeteria. So whoever buys that building has to have cafeteria to operate the hospital. So you want to make sure that what you buy is great location that is going to survive and in this case, as you mentioned, I hate to say that we dodged a bullet, but I think the fact is that it reinforced location, location and then make sure that your MOBs can operate independently which both of ours can and then you go through a process. I think it will be, as you mentioned, a very good resolution over the next couple of months.

Okay. Turning a little bit on the occupancy lift that you are expecting. What are the implications on that and bottom line same-store NOI growth? Does it meaningfully get you above 3%? Or is it rounding error from that standpoint?

I think it would have limited impact this year. As you get new leases, obviously there is a free rent period that you work through. I think it would have a bigger impact in 2017.

I talked about that at the beginning of year. I think our biggest opportunity to move that number higher, there is two things that impact. If we lose occupancy, obviously it would be impacted. And the second one, as we get this next couple hundred basis points of occupancy, that will help us with that number.

Okay. Then a couple one more or so. On the cost savings initiatives, how much does payroll, taxes and insurance represent as your total expense net? Is it 60%, 70%? Is it that much?

No. We can get back to you with specifics, but it's not merely that much.

Okay. And when you talked about this in-house asset management and you have 200 people now working for you, how is that? Is that like a G&A item? Or is that associated with the operating portfolio? How do you deal with that? Maybe that's a good explanation for your consistency too?

Well, the folks that are in the field that are operating in the regions, all run from a simplified perspective, all runs through the operating expense line item. So engineers, property managers, those are all operating expenses as you would expect it to be.

Okay. And then last. Robert, you said 5% exposure to surgery centers. Are you saying that's your entire 603 risk? Or is that just the portion that's associated with surgery centers, because certainly there would be other forms of operation that would be subject to the 603 issue?

The surgery center is receiving the primary impact from the Section 603. And your surgery center, that is only 5% of our total portfolio. So I think that exposure is relatively limited.

Okay. All right. Thank you very much.

The next question comes from Eric Fleming of SunTrust. Please go ahead.

Hi guys. Trying to be quick here. Your guys are towards the end. You guys are running the 2.3% NOI escalators and saying new contracts are coming at 2.7%. When do we start to see that 2.7% start to bump to that 2%, 3% higher?

I think the good news is that we are getting the 2.7%. I think the bad news is we continue to have pretty limited lease rollover. That certainly has been what's been driving our consistency. And so to move the average up when we are only rolling 6% of our leases, it's going to take some time as we continue to move through that process. But the good news is, we are moving them up. That's something that we are seeing pretty consistently across the board.

Okay. And could you guys go through again the Connecticut April investment you did. I just didn't get all the details on them. Is that a new health system relationship you have?

It was an acquisition from a couple of folks that we have known for a while and we have built out now what we think is the New Haven, Hartford region and we think that it's a great opportunity for us, because they have relationships there that I think you will see us have more opportunities to get acquisitions within the region based on this recent relationship, since obviously these folks put close to $70 million of equity into our company because A, they like the MOB space, two, they like our company and three, they think that there is still a great opportunity for returns in this sector.

All right. Great. Thanks a lot guys.

The next question comes from Paul Roantree of JPMorgan. Please go ahead.

Hi. Just a quick one on asset sales. Could you guys provide timing for the asset sales for the remainder of the year? Are they more lumpy towards the back? Or evenly distributed? How should we think about those?

I would say that you will see them more evenly distributed starting this next quarter.

Got you. Thanks.

There are no additional questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Scott Peters, Chairman and CEO for closing remarks.

Thank you. I would like to thank everybody for joining us on the call today and we look forward to seeing you and of course if there is any follow-up questions, please don't hesitate to call myself or Robert, Amanda or Mark Engstrom. Thank you.

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