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Healthcare Realty Trust  (NYSE:HR)
Q3 2018 Earnings Conference Call
Nov. 02, 2018, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Healthcare Realty Third Quarter Financial Results Conference Call. All participants will be in listen-only mode. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Todd Meredith, President and Chief Executive Officer.

Todd Meredith -- President and Chief Executive Officer

Thank you. Joining me on the call today are Rob Hull, Kris Douglas, Bethany Mancini and Carla Baca. After Ms. Baca reads the disclaimer, I'll provide some initial comments, followed by Ms. Mancini with an update on healthcare trends. Then Mr. Hull will discuss investment activity and Kris Douglas will review financial and operating results before we move to Q&A. Carla?

Carla Baca -- Director of Corporate Communications

Except for the historical information contained within, the matters discussed in this call may contain forward-looking statements that involve estimates, assumptions, risks and uncertainties. These risks are more specifically discussed in our Form 10-K filed with the SEC for the year ended December 31, 2017, and in subsequently filed Form 10-Q.

These forward-looking statements represent the company's judgment as of the date of this call. The company disclaims any obligation to update this forward-looking material. The matters discussed in this call may also contain certain non-GAAP financial measures such as funds from operations, FFO, normalized FFO, FFO per share, normalized FFO per share, funds available for distribution, FAD; net operating income, NOI; EBITDA and adjusted EBITDA.

A reconciliation of these measures to the most comparable GAAP financial measures may be found in the company's earnings press release for the quarter ended September 30, 2018. The company's earnings press release, supplemental information, Forms 10-Q and 10-K are available on the company's website.

Todd Meredith -- President and Chief Executive Officer

Thank you, Carla. Healthcare Realty's third quarter results and positive operating fundamentals continue to exemplify the intrinsic value of our medical office portfolio. The company's same-store metrics consistently outpace norms for the sector, anchored by steady tenant demand, solid tenant retention and rising rental rates. The strength of our medical office properties lies in their integral location on leading hospital campuses, where higher acuity patients drive the need for specialists and concentration is high in top markets were thriving population centers ensure increasing demand for healthcare services. As the MOB transaction market has gained momentum in recent years we have remained sober and purposeful in our investing. We view Healthcare Realty's relative valuation as a reflection of our commitment to sustainable growth and careful management of risk. Quality, not quantity has led us to an enviable balance of higher growth and lower risk. With today's market dynamics, our focus is on extending our competitive advantage through operational performance and continuous improvement of our portfolio through recycling of assets and often underappreciated, but effective form of long-term value creation.

We have no interest in chasing large portfolios at historically steep pricing with subpar growth merely for the sake of buying assets. As cost of capital has risen in recent quarters experience compels us to be more patient and prudent, targeting investments where we can better control quality and avoid performance diluting assets often embedded in larger portfolios. Much of our recent acquisition activity has encompass redevelopment potential that has expanded our development pipeline, generating a store of future value that can be garnered for years to come. Our development pace is somewhat tempered by our adherence to on-campus focus where supply is constrained, rent growth is demonstrably higher and risk is lower as a result of perpetual demand for more specialized hospital based tenant.

Although off-campus healthcare delivery has gained attention, most MOB investors have gravitated toward on-campus investments as they achieve scale and lower their cost of capital. Off-campus properties are much easier to accumulate, but there are many costly and probable risks that play out over time. Namely, slower growth, lower tenant retention and difficulty back filling vacancies, which in our experience leads to longer downtime, rent roll down and costlier capital and tenant improvements. While we tend to avoid off-campus properties for these reasons; they do serve a clinical role, meeting the rising demand for low acuity care and improving population health across markets, but not to the detriment of on campus services where health systems are actively centralizing and expanding their more complex inpatient and outpatient care. This optimization of services across different settings will effectively meet patient demand, ease cost pressures and bolster profit margins.

The company's investment strategy has been consistent over 25 years, honed through hands on experience and acumen gained over multiple lease cycles, both on and off-campus. We see growth potential and lasting value creation across our portfolio through operational know-how disciplined investing and adept portfolio management. With outpatient care shaping the future of an industry that exceed 18% of GDP and is projected to grow 5.5% annually, Healthcare Realty is well positioned to deliver steady growth with a low risk profile in the years ahead. Bethany?

Bethany Mancini -- Associate VP, Corporate Communications

The spotlight on the healthcare sector shifted this quarter more toward hospital performance, provider consolidation and market expansion and away from public health policy, which has been relatively quiet as the mid-term election nears. Hospitals and physicians are focused on balancing cost containment and tighter reimbursements, while meeting the aging populations demand for greater healthcare services. The strength of our hospital is critical when Healthcare Realty considers an investment. We look beyond just credit ratings to the hospital underlying operating fundamentals. Over 90% of Healthcare Realty's NOI from on-campus MOBs is associated with hospitals ranking above the median of the nation's 4,800 hospitals when measured on net patient revenue, occupancy, population growth and density case mix index and surgical mix.

Healthcare Realty has generally avoided investments on the campuses of row (ph) for profit and stand-alone hospitals, often located in sluggish market, which in today's healthcare environment are contending with lower inpatient volumes and declining profit margins. These troubled hospitals often drive national headline perception of the sector. In contrast, not-for-profit hospitals in markets with favorable demographics are generating positive growth in revenues per inpatient admission along with a steady rise in their surgical cases and outpatient services. Health systems across our portfolio and investment markets are building new inpatient towers and moving forward to expand capacity.

In the past 5 years, specifically 40% of Healthcare Realty's hospital partners completed, have under way or are planning an inpatient expansion. Nationally, acute care hospital construction in 2018 will be the strongest in 5 years with $20 billion in completions. Hospitals currently have under construction $50 billion and another $20 billion are in the planning phase. With an eye toward expansion, more hospital leaders are asserting their need to capitalize on core strength and profitable services in their market, in order to accelerate revenue growth, both inpatient and outpatient, while also controlling costs. Off-campus facilities offer multiple points of access throughout communities for patients with lower acuity needs. While on-campus facilities are moving toward higher acuity services with better margins. 80% of Healthcare Realty's MOBs are located within 250 yards of a hospital and 84% of our physician tenants are specialists. In our experience, this translates into valuable tenant retention and higher renewal rates.

Medicare policy continues to support higher reimbursement, for on-campus services at the Center for Medicare and Medicaid Services just finalize their 2019 rates yesterday, and extended their 2018 policy to lower payments to off-campus hospital outpatient department to 40% of their on-campus rate and closer to the physician office level. This policy should further motivate hospitals to streamline care in off-campus settings and centralize higher acuity services on-campus, reinforcing the relative value and stability of on-campus outpatient care. 30 years ago many thought the rise in ambulatory surgery centers would put hospitals out of business. On average over half of hospital revenues are now outpatient, partly attributable to a 50% increase in hospital ownership of ASD (ph), over the past six years. The resiliency of this sector combined with the rising tide of healthcare demand will ensure its profitability and breadth to potential for lasting investment. Rob.

Rob Hull -- Executive Vice President, Investments

Our investment efforts this year have been balanced, redeploying $65.5 million of proceeds from asset sales into $74.5 million of new investments with better long-term growth potential. Acquisition activity was intentionally muted during the quarter. We purchased a 17,000 square feet MOB, on 1.7 acres in Denver for $4.2 million at a 6% first year yield. The building is adjacent to CHI's St. Anthony Hospital, where the company owns six other buildings. This property gives us control of a contiguous 14.7 acre site at the front entrance to the hospital, securing a sizable future redevelopment opportunity. We continue to successfully identify one and two building opportunities in markets where we already have a presence, the company has under contract two properties totaling $37.3 million scheduled to close by year end, bringing us to $112 million in new investments for the year on the upper end of our guidance range.

Overall, the acquisition environment remains active with several portfolios in the market. For better asset quality, pricing is expected to be in the low to mid-5s and occasionally below 5, consistent with levels over the past 12 months to 18 months. Implied cap rates for public healthcare REITs earning meaningful MOB portfolio currently range from 5.8% to 6.4%. Healthcare Realty's implied cap rate of around 5% gives us one of the lowest cost of capital relative to our public peers. A clear advantage in most circumstances. Nevertheless, we are not inclined to raise incremental capital. Given that valuations for most quality properties remain below our current implied cap rate. As a result, our approach to fund future acquisitions with disposition proceeds remain sensible during this period of disconnect between public and private valuations. We will continue to evaluate the relationship between our implied cap rate and market asset pricing as we establish future acquisition levels.

Turning to dispositions, we sold one off-campus and MOB in St. Louis for $9.8 million at a cap rate of 4.3%. With this sale, year-to-date dispositions totaled $65.5 million at a blended cap rate of 13.7%. Our disposition activity for the balance of the year will range from $20 million to $50 million at a projected blended cap rate between 5.5% and 7%. This range represents up to six transactions, one or two of which could slide into early next year. Disposing of these properties comprised primarily of off-campus MOBs located in smaller markets and one inpatient rehab facility continues our disciplined strategy of improving the growth profile of our portfolio by reinvesting proceeds in more desirable properties.

On the development front, the company is making steady progress on the construction of its 151,000 square foot MOB on UW Medicines, Valley Medical Center campus in Seattle. The building is 60% leased and demand for the remaining 40% is strong. Our current pipeline of prospective tenants totaled more than two times the remaining space in the building. This level of activity is promising and is why last year, we purchased an additional property adjacent to the campus. This 33,000 square foot MOB under-utilizes a 4-acre site that could accommodate 150,000 square foot redevelopment.

Measured development remains a key component to our long-term investing strategy. We expect $50 million to $100 million of development starts each year on average, primarily derived from our embedded development and redevelopment pipeline, made up of over 1.5 million square feet and $750 million development potential in locations that are largely in our control. I am pleased with the patients and discipline our team has demonstrated throughout the year, positioning the company well in a shifting environment for attractive investment opportunities when they arise. Kris?

Kris Douglas -- Chief Financial Officer

Core fundamentals, such as leasing performance, operating leverage and internal revenue growth remain on a positive track, generating third quarter same-store NOI growth of 3.1% over the same period in 2017. Normalized FFO in the third quarter was $48.2 million or $0.39 per share. Normalized FFO decreased sequentially to $800,000, $500,000 for net dispositions in the second quarter and $300,000 from reduced straight-line rent. As we ordinarily see in sequential Q2 to Q3 results, NOI was flat due to a $1.4 million increase in seasonal utilities, offset by increased operating expense recoveries and contractual rent escalators.

Looking forward, third quarter seasonal utility expenses typically reversed in the fourth quarter, historically, leading to NOI growth of approximately $750,000 to $800,000 from third quarter to fourth quarter. This anticipated expense reversal combined with robust cash leasing spreads, escalators and retention, signals a positive trajectory in coming quarters. Same store performance in Q3 was reliably strong with NOI from the same-store portfolio growing 2.9% on a trailing 12-month basis. NOI for the 15 single-tenant net leased assets increased 4.1% with the higher than normal growth, primarily a result of two non-annual rent increases over 5% in the fourth quarter of 2017 and one asset with free rent in early 2017. These two items create a favorable comparison in the current trailing 12-month period. But we expect this benefit will normalize over the next three to four quarters and bring NOI growth closer to the single-tenant net lease average in-place escalator of 2.4%.

Performance of the same-store multi-tenant properties was also sound, with NOI increasing 2.7% on a trailing 12-month basis, due to operating leverage generated by revenue growth of 2.6% and a modest 2.3% increase in operating expenses. It is worth noting, multi-tenant, same-store revenue growth for the trailing 12 months, would have been 20 basis points higher, but for changes in rent concessions and legacy property lease guarantees, which represent 1% and 0.2% of revenue, respectively. Highlighting, how changes in even small categories can impact overall growth percentages. When controlling for these items, trailing 12-month NOI growth would have been 3%.

Our internal growth continues to be propelled by solid contractual increases and cash leasing spreads. Future contractual increases were 3.7% for leases commencing in the quarter, which helped boost average in-place contractual increases to 2.88% compared to 2.78% a year ago. Cash leasing spreads were 3.8%, with approximately 85% of the 96 renewals having cash leasing spreads equal to or greater than three. Our ability to achieve superior rent growth on both new and renewal leases reflects the value of owning well-located and affiliated properties with low fungibility. We continued to dispose the properties with below average revenue drivers and rotate into properties that allow us to bolster cash leasing spreads and annual increases. Thus far in 2018, the weighted average in-place contractual escalators for properties we sold was 2.4%, well under our in-place average. This rotation allows us to accelerate NOI growth over time, even if there is temporary dilution due to lower initial cap rates. This strategy is especially affective for spurring safe growth in the midst of a disconnect between public and private cap rates.

Additionally, by using proceeds from dispositions to fund investments, we've been able to maintain a healthy balance sheet. Leverage remains low at 5.1x with no significant near-term maturities. Year-to-date FFO payout ratio is 77% and FAD payout is approximately 100%. Excluding the same unusual items I mentioned last quarter, TI averaged -- to be reimbursed by tenants, dollars per move-in-ready suites and delayed acquisition capital, year-to-date FAD payout ratio would have been 95%. We expect the full year to follow a similar pattern and our internal growth to improve the FAD payout ratio in 2019. With ample liquidity, low leverage and capital from a healthy pipeline of dispositions, we remain committed to our proven strategy of targeting investments that will further our ability to generate NOI growth at the high-end of the sector.

Todd Meredith -- President and Chief Executive Officer

Thank you, Kris. Terry, that concludes our prepared remarks. We're ready to begin the question-and-answer period.

Questions and Answers:

Operator

(Operator Instructions). The first question comes from Vikram Malhotra with Morgan Stanley. Please go ahead.

Vikram Malhotra -- Morgan Stanley -- Analyst

Thanks for taking the questions. In your opening remarks, you kind of alluded to the fact that you'd stay away from pricey portfolio, and then really focus on the one-off quality portfolio -- quality assets. Does that say that -- of the two large portfolios out there, Landmark and CNL, that's something you would not be looking at?

Todd Meredith -- President and Chief Executive Officer

Generally, yes. That is true. We've certainly looked at them. We certainly look at everything. And I would say that in both of those portfolios, there's -- maybe individual assets that we certainly would find attractive, but it's the challenge of the larger portfolios that is often accompanied by too many properties that don't fit. So from our standpoint, those portfolios are not a fit.

Vikram Malhotra -- Morgan Stanley -- Analyst

Okay. And then just the commentary on the FAD payout. I understand there were a lot of one-time items, and the number would have been 95%. Something, I guess, we've been talking about now, throughout the year, when do you see sort of this -- the FAD payout coming down to a level where you can actually raise the dividend? Because it's been several years, we're obviously late in the cycle, 95% is certainly better than 100%, but it doesn't give you a lot of room. So I'm just wondering, if you look out over the next 12 months, like -- if you can give us a sense of the range that where do you think you can get the payout to?

Kris Douglas -- Chief Financial Officer

Vikram, this is Kris. As we talked about, the FAD payout ratio this year is pretty similar to what it was last year. A lot of that has to do with some of the one-time items that I talked about as well as the fact of the rotation of -- if you look at all the assets we sold in the first half of the year, they were all single tenants, so don't have much capital associated with them and then we're reinvesting in multi-tenant properties that we think have better value long term. I think we expect to be able to drive payout down in '19 and continue to drive that in the years ahead. I will point out though that where we are going to make what we think are the right prudent long-term decisions, even if it does mean slightly higher payout ratio in the near term. For example, this year we had a couple of leases where we signed longer term -- longer term extensions on renewals than we typically do. These were 10- and 12-year leases and the reason we did that was to position these properties for potential sale in the years ahead. With those longer-term leases even with the same TI per square foot commitments, it increases your spend, but we think it will certainly paper itself, in the end, when we -- when we potentially sell those properties at higher values and see greater gains. So we're not going to pass up good long-term decisions just looking at that payout ratio on a short-term basis.

Vikram Malhotra -- Morgan Stanley -- Analyst

Okay, just last one for me. So you have an asset in Garland, Texas, which I know we've talked briefly a bit about. There was a hospital right next to that that did shut down and I believe the Garland asset was part of a larger portfolio. Can you give us an update what's the status of that asset, like what's the occupancy and maybe that one of your disposition candidates?

Todd Meredith -- President and Chief Executive Officer

Sure. Vikram, that hospital did close actually in February of this year and so the hospital has been closed for a while. We really have been sort of at about 56% occupancy recently, so that hasn't changed dramatically. We do expect it will move probably closer to 40% over the next year or so. So really kind of where we're at is obviously looking at them as potential dispositions. We have gained some improvements on the ground lease in terms of ability to lease to non-medical tenants by virtue of the hospital closing and also we're looking at working with Baylor to purchase the fee simple interest. So obviously working toward improving the marketability of those assets, I would say that the NOI from those properties is about $1 million. So -- while it's an important piece to look at in terms of the disposition strategy, it's obviously not a material amount of NOI.

Vikram Malhotra -- Morgan Stanley -- Analyst

Great, thank you.

Operator

The next question comes from Chad Vanacore with Stifel. Please go ahead.

Chad Vanacore -- Stifel -- Analyst

Good morning. So given the view of (technical difficulty) and valuation was pretty high. Do you think somewhere in your portfolio where you can harvest stabilized assets where valuations have run up significantly?

Todd Meredith -- President and Chief Executive Officer

Well, I think, Chad. If you look at what Rob described. I mean the acquisition -- the dispositions for the remainder of the year should be in that between what 5.5 and 7 I think Rob said. So certainly there are certain assets that do fall into that category. We're not out looking to sell some of our top assets to show that they're worth a 5 cap or less. I mean I don't think that really is necessary, I think there's plenty of other transactions that support very strong valuations and I think for us it's more just balancing what investments we see there attractive and how can we match that with assets that we're selling that make for some attractive proceeds to reinvest and improve the profile of the portfolio.

Chad Vanacore -- Stifel -- Analyst

Okay and then just one other question, given next year's lease accounting changes and capitalize leasing to the expense line, how do you expect that that shift actually impact FFO next year?

Todd Meredith -- President and Chief Executive Officer

It's really not going to have much impact for us, because we were already expensing the majority of our internal leasing costs. So they're already in our G&A. So, no material impact for us.

Chad Vanacore -- Stifel -- Analyst

All right, that's it, thanks.

Todd Meredith -- President and Chief Executive Officer

Thank you.

Operator

The next question comes from Jordan Sadler with KeyBanc Capital Markets. Please go ahead.

Jordan Sadler -- KeyBanc Capital -- Analyst

Thanks and good morning. No to beat a dead horse, I think it's been a couple of questions and is weighing a little bit so far. But I think the investors are probably scratching their heads and that we are with the underperformance in the group, medical office building focused REITs versus healthcare REITs more broadly year-to-date, I'm sure you guys are doing the same given what seems to be good fundamentals, but now you're trading, probably something looks like a discount NAV about 10% and you've talked about your -- your cost to capital kind of going away from you relative to where assets are priced. So what do you -- what are the plans to narrow that gap versus NAV or capitalize on the opportunity that exists or do you just sit tight?

Todd Meredith -- President and Chief Executive Officer

Well, I think, I think that obvious thing is that we certainly benefit from having a strong portfolio. So, I think the contrast here that you have a lot of folks who are struggling with their operations, maybe not as much in the MOB sector. I think the good news is the MOB sector as you pointed out is really performing well for everyone. We think certainly we're outpacing that group, but I think our view is that we have the ability to wait, we have the ability to rely on our portfolio. We don't think this will last forever. I think whether it's the privates or the public, we've all had a rise in the cost of capital. For the privates, there is usually a delayed effect. And I think the issue we're all looking at and this is not just healthcare MOBs, it's all real estate, there's just a huge amount of capital that's been raised on the private side that I think is keeping that pressure, keeping cap rates low and obviously an interest in the MOB sector specifically for the all the attributes that it brings and so I think we just have to obviously watch that play out. But in the end, the private folks, their cost of debt has risen just like ours has and so I think you just have to have the portfolio to be patient and wait. And we think we're well positioned to do that.

Jordan Sadler -- KeyBanc Capital -- Analyst

And just wait it out?

Todd Meredith -- President and Chief Executive Officer

I mean, there are certain things that we can do and we are doing in terms of selling assets into that trend. I mean there's no doubt we're doing that, taking advantage of that. We'll continue to do that and we'll be selective with investments. I mean, if we can sell some things that are attractive cap rates relatively into that type of environment and we can rotate it into really strong assets, we're going to do that. The level of that as you saw this year at $100 million plus or minus is certainly down from maybe a normal year of $200 million to $300 million, but still allows us to remain active.

Jordan Sadler -- KeyBanc Capital -- Analyst

Okay. I guess the other sort of question I would have, I mean, it seems like there is some kind of a disconnect right, private versus public. So -- and you don't want to sell your high quality, but you guys have talked about your single to -- liking multi-tenant a I like better -- a lot better than single-tenant. I mean, is there an opportunity -- I mean you guys still have quite a bit invested in the -- in certain single-tenant assets and some of them you still going hold, but is there an opportunity to do some monetization in that portfolio.

Todd Meredith -- President and Chief Executive Officer

Well, I think we have been, and we still doubt certainly will be where we will lean, when we're selling assets that typically is where we, where we focus, most of what you've seen is -- I think Kris said most of this year has been single-tenant, and for the balance of this year we have an inpatient rehab facility and some other off-campus in single-tenant. So I think to your point, we're certainly predisposed to go that direction, and I think you will see our multi-tenant continue to incrementally rise. I mean, the good news is we're only -- I think maybe 10% or less of our NOI is from a single tenant, so there's not a lot of room left to change that and we're not looking to get to a 100 just for principle. I think it's more about the assets individually in evaluating the situations case by case.

Jordan Sadler -- KeyBanc Capital -- Analyst

And, any thoughts on -- I mean, it doesn't sound like you're thinking strategic alternatives here at all, but what are your thoughts on MUTA and opting out?

Todd Meredith -- President and Chief Executive Officer

Sure. I think on that, I think what's important there is we understand the ramifications of having that option and obviously folks that have that option because they are incorporated in Maryland. There is certainly a penalty to exercising that. So we were obviously aware of that and our Board, I think first and foremost would want to have investors and shareholders know. We don't view that as some great defensive option. We know there is a lot of negative ramification of using that. So we are certainly aware of it -- evaluating it, but don't really consider that as a very viable option in terms of the use of that.

Jordan Sadler -- KeyBanc Capital -- Analyst

So, why not just take it off the table?

Todd Meredith -- President and Chief Executive Officer

Well, certainly something we're evaluating. I mean, I think the important thing is we didn't go looking for that. We didn't opt into that, it was something that came to those who were incorporated in Maryland. So certainly we understand that and are taking a look at that.

Jordan Sadler -- KeyBanc Capital -- Analyst

It's fair. Thank you for the time.

Todd Meredith -- President and Chief Executive Officer

Sure.

Operator

The next question comes from Jonathan Hughes with Raymond James. Please go ahead.

Jonathan Hughes -- Raymond James -- Analyst

Hey, good morning and thanks for the time and on the earlier commentary. Looking at your second generation TIs on a per square foot per year basis, I think like they're running maybe 50% above the 2015 amount. And I know there was a one-time item in there last quarter that you mentioned earlier in Vikram's question. But even outside of that, it looks like it's still up significantly over the inflation adjusted increase, I would have expected. Has the leasing that's been completed this year occurred at order buildings that maybe had some deferred TIs, were they more exposed to competitive new supply pressures, though I realize that seems unlikely given developments measures has the cost of acquisition still gone up, I'm just curious to hear your thoughts there?

Kris Douglas -- Chief Financial Officer

No, I wouldn't say it's gone up. If you look at just the last five quarters, it's going to bounce around in any particular period. We typically said, we think on renewals you should expect somewhere in the range of $1.50 to $2.00 and we've had a couple of quarters even outside of that. We had third quarter 2017 was $1.38, second quarter of '18 was $2.48 and that did have a specific lease or two on the $2.48, that I talked about last quarter, where we did agree to some higher commitments per square foot for some non-MOB space that we are looking to potentially sell. So what I say anything -- that I would say is out-sized and we think that what we're experiencing is right in the range of what we would expect.

Jonathan Hughes -- Raymond James -- Analyst

Okay. But I mean I was looking at, this up from three years ago and that second-gen TI per square foot per year on those renewals is more like a $1 to $1.5. So, again this increase just seems kind of outside, so was just trying to understand that.

Kris Douglas -- Chief Financial Officer

Yeah. You'd have to look at the specifics of what's going on in that specific period versus this specific period, and as well as where those leases are. It can be in different parts of the country in different markets, and as a result of that the cost on a percentage of NOI could be different. But generally what we've seen in terms of time and inflation and growth and that metric is that it's been fairly consistent.

Todd Meredith -- President and Chief Executive Officer

I think the other thing I would add is that if you look at the limited disclosure that's out there for companies that are in the MOB business, I mean our number was what $1.50 per foot per lease year for renewals this quarter and I think HTA was $1.50.

Kris Douglas -- Chief Financial Officer

It's share was $1.55, HCP was $2.22 this quarter.

Todd Meredith -- President and Chief Executive Officer

So we're not -- it's not as though our number on commitments on second generation TI or high there, in fact lower than the other two, they disclosed something on that. So, again, it does move around, but I would say we've been even over a longer-term average. We were very much in line with the peers on that -- for the disclosure that's out there.

Kris Douglas -- Chief Financial Officer

We've looked at, yes only the three of us HTA and HCP that actually even provide that information. We think that is key to be able to compare across portfolios, but we've looked at that over 3.5 year and 4-year period and it's kind of -- it stayed in that $1.50 to $2.00 range. I think the average across the three of us was like $1.70 and with the low of between us I think HCA were both around $1.55, $1.60 and HCP was slightly higher, like $1.80, $1.85 but all within a pretty tight range.

Jonathan Hughes -- Raymond James -- Analyst

Okay that's helpful. Yeah, I mean your disclosure is great. I do really appreciate all the data you gave there. And then just one more from me, looking ahead to next year about 20% of your square footage leases expire -- not expire, mature, can we expect a similar recurring CapEx spend on those? Are there any outliers in there that we should be aware of as we look ahead? Thanks.

Todd Meredith -- President and Chief Executive Officer

Yeah. Generally, our expectation is that tenant retention and renewals will be similar. We do have one space down in Dallas, which is a -- it's a fitness facility that may convert a portion of that fitness facility into more clinical use. And as part of that you would be kind of -- maybe tear in some out and starting from scratch. So it could be up a little bit, but generally, yes, we feel like it should continue to be in the range of what we have seen historically.

Jonathan Hughes -- Raymond James -- Analyst

Okay, that's it from me. I'll jump off. Thanks for taking my question.

Operator

The next question comes from Rich Anderson with Mizuho Securities. Please go ahead.

Rich Anderson -- Mizuho Securities -- Analyst

Hey thanks. Good morning everyone.

Todd Meredith -- President and Chief Executive Officer

Good morning.

Rich Anderson -- Mizuho Securities -- Analyst

Kris you mentioned just on lease accounting that you already expensed it, can you just tell me how much that number actually is that baked into your G&A?

Kris Douglas -- Chief Financial Officer

Yes, well, it depends on what portion you're wanting to get into. We look at just the lease incentive portion and that runs -- I think it was -- runs from kind of $750,000 to $1 million, but if you take our entire leasing platform, you're probably in the $2.5 million range.

Rich Anderson -- Mizuho Securities -- Analyst

Including lease incentive?

Kris Douglas -- Chief Financial Officer

Yes.

Rich Anderson -- Mizuho Securities -- Analyst

That's annual?

Kris Douglas -- Chief Financial Officer

That's on an annual basis, and I can follow up with you with more specifics, that's just kind of going off of top of my head memory.

Rich Anderson -- Mizuho Securities -- Analyst

Okay, that's fine. I just want to -- kind of just rationalize a little bit. Did you mention Todd or Rob, whoever, how deep your disposition pipeline is, in terms like what you view is the non-core element of your portfolio?

Todd Meredith -- President and Chief Executive Officer

Yes, Rich. I'm not sure I mentioned that, but I think we look at it as the bottom 5% of the portfolio. We're always -- when we work our way through that, that bottom 5%, as the portfolio evolves, it's probably going to be another 5%. But we think that sales of around $50 million to $100 million per year is appropriate for us and if we see an opportunity where we could increase that because there is a good opportunity to reinvest it into quality asset with good long-term growth potential, we would do that.

I'd also say that (multiple speakers).

Rich Anderson -- Mizuho Securities -- Analyst

That could go up if something material --

Kris Douglas -- Chief Financial Officer

Yes, yeah.

Rich Anderson -- Mizuho Securities -- Analyst

Okay. I was just curious, Todd, you opened up with the commentary, quality-over-quantity and I think everyone is in agreement with that and understands it. But to what degree are you almost having to say that -- some of it old cynic because that's probably will do because of where your stock is trading. In Other words you kind of have to sit on the sidelines. So this is -- has to -- we're kind of backing into the thesis, you've never been in that type to be accumulators and I'm not suggesting that, but I mean are you wishing you had this stock to utilize because there's stuff out there that you would normally go after, but you just can't?

Todd Meredith -- President and Chief Executive Officer

It is. I heard somebody else, I can't remember who it was on their call say something similar that they, there really hasn't been as much, maybe quality, I came here from (ph) the HTA, but I would agree with that statement that we just haven't seen this year, the depth of quality that we saw in the past few years. And it's not to say that the portfolios are bad. We're not commenting that there not decent portfolios, but they're certainly not the level of what we're looking for in terms of growth profile, the on-campus, all the things we look for and so I would say, maybe there is an asset or two here or there that would have loved to have been able to participated in. The challenge of course is the bigger portfolios there are just too many things that don't fit. And we've even made some attempts here and there, to see if we can pull asset out here there, but that's obviously not to be expected in a pretty robust environment where there is strong bid for big portfolios. So I think our view is, no, we haven't missed a lot. I think we're watching for that, just like everyone is. And certainly, of course, we would love to have our stock be at a better place and be able to use that, but I think the good news is, it's been an environment where we haven't missed a lot as a result of it.

Rich Anderson -- Mizuho Securities -- Analyst

Okay and then lastly, you talked a little bit about the hospital closure impact on one of your assets and I think perhaps some people worry somewhat about the medical office being -- business being tethered to the hospital industry that's subject to a lot of consolidation and what have you -- specifically to Baylor Memorial Hermann, I mean, one, I know that there's not a whole lot of crossover Baylor being in Dallas, Memorial being in Houston primarily, but do you -- when you look at that, do you have any issues that you've sort of rise to the surface that you have to be watchful of as a consequence of that merger, should it happen?

Todd Meredith -- President and Chief Executive Officer

No, we really don't. I think as you pointed out, they really don't have geographic overlap. I mean they're tangential and certainly improve, I think the competitive position of the combined entities. I think it's a very strong merger for those two entities, I think, it'll give them a lot of strength in the State of Texas in terms of -- especially their insurance side, I think that's really the key play there. It is that not only obviously giving them some leverage with commercial payers, but also increasing their own insurance products that they have, Scott and White really brought an insurance product play to Baylor and now they can expand that to the broader geographic regions. So I think we see that as a positive. I would say -- we really -- we only have really one campus in the Woodlands where we're associated with Memorial Hermann. So that certainly don't see any issue there and then otherwise in the Dallas-Fort Worth area or Austin, we really don't see any issues. So we just see it is generally a positive.

Rich Anderson -- Mizuho Securities -- Analyst

Okay, great. Thanks.

Operator

Your next question comes from Micheal Mueller with JPMorgan. Please go ahead.

Micheal Mueller -- JPMorgan -- Analyst

Hi, on just -- going back to dispositions, the $20 million to $50 million by year-end, I think the range was 5.5% to 7%, if you do all 50, where that range to end up, is it in the middle or something?

Todd Meredith -- President and Chief Executive Officer

Yeah, it's going to be right at the midpoint of that.

Micheal Mueller -- JPMorgan -- Analyst

Got it. And then going on your comment about 50 to 100 go for dispositions per year, I mean, how much of the portfolio is left where it would fall into that 6.5% in cap bucket as opposed to -- we're going to see cap rates on dispositions drift down to the 5%, so what's left is high cap rate ?

Rob Hull -- Executive Vice President, Investments

Yes, I mean, Mike, I think if you -- inside of our supplemental, we've got a section portfolio makeup non-MOB bucket, makes up about 2.5% of our of our NOI. I think that's where it generally disposition of those assets are going to kind of fall into that higher cap rate range that you mentioned. We've got a couple of inpatient rehab facilities in there and one remaining skilled nursing facility there, it's probably going to be in that higher range as you mentioned.

Todd Meredith -- President and Chief Executive Officer

But I guess that -- with your point to on that Rob is not that entire section that we think we would sell, but out of that portion of the portfolio, there's two or three buildings and that's what makes up to 2.5%.

Rob Hull -- Executive Vice President, Investments

Yes, that's correct.

Micheal Mueller -- JPMorgan -- Analyst

Okay. And then one other question on the 50 to 100 development starts per year, does that include expansion work or redevelopment or is that just new starts?

Todd Meredith -- President and Chief Executive Officer

No, it does include that. We include redevelopment and expansion work with our development expectations. So, the deal that we did in Charlotte was 38,000 square foot expansion that would be included in there.

Micheal Mueller -- JPMorgan -- Analyst

Got it, OK. Okay, that's it. Thank you.

Operator

The next question comes from John Kim with BMO. Please go ahead.

John Kim -- BMO -- Analyst

Good morning. I want to know how sustainable the escalators on leases commence are? At 3.76% was that really just a one-off or is it something that you could sustain going forward?

Todd Meredith -- President and Chief Executive Officer

No, I think that's -- that's higher than what we would tell people to expect for a long-term average. What we've been doing is kind of trending up close to 3%. There are some markets that you obviously can't get 3%, but there are some markets obviously, if you're able to get 3.78% as a blend, we were able to get 3.5% or 4%, but if we can kind of get our overall escalators running around 3%, maybe slightly over on an average, I think that would be -- that would be a great long-term run rate.

John Kim -- BMO -- Analyst

On your redevelopment opportunity those dated with your Denver acquisition, did you need to acquire this asset to get the ability to develop on site give it's adjacent to a number of other buildings? And then also can you just discuss --

Todd Meredith -- President and Chief Executive Officer

No, no, we -- that -- that asset is adjacent to two properties that we purchased in the second quarter, totaled 13 acres. We did not need this property to develop on that site. However, having this property to an 1.7 acres, it does enhance the development opportunity and allow us to do some things that will enhance the positioning with the hospital. So it's an important piece and it consolidated some easement that -- some easements for traffic as well as utilities and so forth, it just makes it easier to control that whole site.

John Kim -- BMO -- Analyst

And what you think the timing is, is it something medium term to long-term or could it be --

Todd Meredith -- President and Chief Executive Officer

Yes, that's -- that's more medium to long term, I would say. I mean, we looked as a long-term opportunity and inside of that embedded development pipeline that I mentioned, it's (inaudible) million. It's really a long-term pipeline that we control the sites and in the process.

John Kim -- BMO -- Analyst

Okay. And then, Todd, I think you've been very consistent with focusing on, on-campus MOBs and you're really talking about as discussed earlier, the risks with off-campus, but acknowledged that there is a purpose and tenant demand, it seems like investor demand for that asset class. I'm wondering if it's something that you have looked at or maybe potentially pursued owning off-campus in a joint venture structure or some other structure where you can benefit from your relationship.

Todd Meredith -- President and Chief Executive Officer

Sure. I think, certainly that's a consideration we thought about that. I think the difficulty is, we're certainly predisposed toward the on-campus just given our position and our history of what we know. And I think that's what people know us for. It's not that -- we have off-campus properties that we think are attractive, certainly some of the risks I pointed out are still there, and we have to monitor those carefully and manage the portfolio accordingly. But I would say that certainly that's a possibility. I think our view would be that there's going to be other people just frankly they are more aggressive in off-campus, they don't see maybe the same degree of risk and they're not going to price it the same. I think it's probably low likelihood that we would go down that path, but I do think, to your point, we might actually here in and with what we've done, selectively where we've done some new investments off-campus. It usually is driven by a relationship situation where we're working with an existing partner or maybe there's a portfolio where you have the same health system and you're doing some on-campus and a little bit of off, we're OK with some of that. I think we just look at is trying to price it accordingly and then managing the risk appropriately once you're on this.

Unidentified Participant -- -- Analyst

Great Thank you.

Operator

The next question comes from Daniel Bernstein with Capital One. Please go ahead.

Daniel Bernstein -- Capital One -- Analyst

Hi, good morning.

Todd Meredith -- President and Chief Executive Officer

Good morning.

Daniel Bernstein -- Capital One -- Analyst

I wanted to dive a little bit more into the renewals, retention rate is very high. Are you seeing -- I think earlier in your call, you talked a little bit about longer lease terms, so I wanted to get some more color on that in terms of -- are you seeing a trend toward longer lease terms even if that means a little bit more CapEx upfront and maybe is there any difference in that between renewals with physician groups versus of individual hospital tenants?

Kris Douglas -- Chief Financial Officer

Dan, it's Kris. No, I mean, the comments that I made in terms of the longer term, that was frankly more driven by us in terms of strategic positioning of being able to set those assets up for potential disposition. It what was not driven as much is coming from the tenant. I would say, I don't think, there's specific cases anecdotes that you can say kind of one way or the other on physician tenants versus hospitals, but I don't feel like there's been a material change in what we're hearing across the country of average of people wanting to go shorter or longer. We're certainly comfortable staying in that kind of average of three to four years on a renewal, given how consistent our tenant retention has been and more just really analyze it from what the needs are on the individual deals.

Daniel Bernstein -- Capital One -- Analyst

And then the other question I had was on development, we heard from a number of other region -- other sectors does decreasing investment yield Okay. And then the other question I had was on development. We heard from a number of other REITs in other sectors that decreasing investment yields -- compression of investment yields on development because of labor costs and even some delays in construction and deliveries. How are the factors that are out there that effect development, impacting -- how much development you want to do and what kind of yields you're requiring and your ability to do more development?

Rob Hull -- Executive Vice President, Investments

I think we continue to look at development and the yields that we get there in relation to where stable asset -- stabilized assets for trading. We've said that you were targeting 100 to 200 basis points above where those yields are, we're finding with the developments that we're doing, that we're still able to achieve those yields -- those stabilized yields in that range. Certainly with some of the rising costs out there, you are seeing in certain cases where that may be a little more difficult, but you're also getting some -- some good increases in rents in good markets. They're going along with that, so you're able to sustain some of those yields. I'd also say that where you might see that more impacting -- more impactful is developments that are more build-to-suit type developments, 100% lease type developments, where the tenant control has a lot more control in terms of the yield that you're generating on the those. That's typically not the type of development that we're doing. We're going on to -- on the campuses, leading hospitals in growing markets and we're working with the systems to put space on their campus that they can utilize to upgrade their campus. And so that that entails some space that you're leaving to lease up and generate as higher returns. So we think that we can continue to hit the yields that we're targeting 100 to 200 basis points above stabilized asset.

Daniel Bernstein -- Capital One -- Analyst

Okay.

Kris Douglas -- Chief Financial Officer

And Dan, I would say to Rob's point, we've seen, maybe two or three specific cases, that were essentially build-to-suit 100% leased to health system where the cap rates on those deals and these are two plus years of construction, so you're taking some risk in terms of time of delivery. And we are seeing cap rates on those pushed to the 5% level. There are certainly some examples of that and one that I can think of was in California and other was in North Carolina, so it's not just in California. So I would say you are seeing it as Rob said more in these build to suite type situations and it has compressed toward acquisition prices.

Daniel Bernstein -- Capital One -- Analyst

Okay, that helps. And I haven't heard you guys talk anything about buybacks versus actual acquisitions or development as an, option given the cost of capital, given where you stock trades relative to private values and just wanted to hear some reiteration of those thoughts good or bad?

Todd Meredith -- President and Chief Executive Officer

Sure, I think for us we certainly -- if there was a prolonged and deeper discount to NAV that might be a relevant -- more relevant discussion. Not saying, we wouldn't consider it, we absolutely would at some point, I think our view is, as long as we have some attractive investments that makes sense, a decent returns that fit with our portfolio well, and we can dispose assets and invest in those, I think that works for us. But obviously in a prolonged period and a deeper discount that some we look at and consider.

Rob Hull -- Executive Vice President, Investments

And we are -- the assets that we are buying are pretty close to the yields we're getting on those -- are pretty close to what our implied cap rate is and so there's not a clear signal of, hey, we can't find anything that we were interested in buying is close to that, that would say a buyback is an obvious more compelling alternative.

Daniel Bernstein -- Capital One -- Analyst

Right. So if you're trading in the mid-60s or something like that, I imply yield then becomes --

Rob Hull -- Executive Vice President, Investments

Yes.

Daniel Bernstein -- Capital One -- Analyst

That's all I have. Thank you.

Operator

The next question comes from Tayo Okusanya with Jefferies. Please go ahead.

Jefferies -- -- Analyst

Hey this is (inaudible) in for Tayo. Just one quick question from me, as we look into 2019, are there any purchase options that we should be aware of that was seen in the past?

Rob Hull -- Executive Vice President, Investments

We have some disclosure in our Q1 on all of our purchase options, there are four that are currently and had been outstanding for multiple years. Those are kind of perpetual, their fair market value could be exercised at any time. There's one additional that comes into that same category, that's fair market value that becomes available in 2017 is related -- I mean 2019 going forward. They become available next year. It's related to an inpatient rehab facility. It is actually on the campus of a hospital and it's the ground lessor who has that option. So that's the only new one that comes available, but not the fixed price purchase options like you saw earlier in 2018.

Jefferies -- -- Analyst

Great, that's it from me. Thank you.

Operator

The next question comes from Lukas Hartwich with Green Street Advisors. Please go ahead.

Lukas Hartwich -- Green Street Advisors -- Analyst

Thanks, good morning guys.

Rob Hull -- Executive Vice President, Investments

Good morning.

Lukas Hartwich -- Green Street Advisors -- Analyst

On the 20% of leases that rolled next year, can you talk about where those rents are relative to market?

Rob Hull -- Executive Vice President, Investments

Yes, I think in general with us having 15% to 20% of our leases rolling in any year we feel like we're always pretty tight to market and you kind of seen that with our cash leasing spreads over the last four to five years. So, our anticipation is, as you probably heard me say before is that we should be able to grow rents in that 3% to 4% on a cash leasing basis. We've been doing better than that over the last three to four years, but still if I'm looking at a long-term average that's what -- that's what I would expect and that's what at this point we're projecting and expecting going into next year as well.

Lukas Hartwich -- Green Street Advisors -- Analyst

Great. And then there's a decent sized balance on the line. I'm just curious if there are any plans to turn that out?

Rob Hull -- Executive Vice President, Investments

Not at this point. We're comfortable with this, especially with our liquidity and the fact of we're looking at really recycling our dispositions into our acquisitions. So we're not looking like we need a ton additional capacity, but that is something that we always consider as well, is we're always kind of watching swaps as well in terms of potentially managing our interest rate exposure. But, no plans currently.

Lukas Hartwich -- Green Street Advisors -- Analyst

Great, thank you.

Operator

Showing no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Todd Meredith for any closing remarks.

Todd Meredith -- President and Chief Executive Officer

Thank you. We appreciate everybody joining the call this morning and we will be around this afternoon or the rest of the day today for any follow-up and hopefully we will see many of you soon. Thank you.

Operator

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

Duration: 61 minutes

Call participants:

Todd Meredith -- President and Chief Executive Officer

Carla Baca -- Director of Corporate Communications

Bethany Mancini -- Associate VP, Corporate Communications

Rob Hull -- Executive Vice President, Investments

Kris Douglas -- Chief Financial Officer

Vikram Malhotra -- Morgan Stanley -- Analyst

Chad Vanacore -- Stifel -- Analyst

Jordan Sadler -- KeyBanc Capital -- Analyst

Jonathan Hughes -- Raymond James -- Analyst

Rich Anderson -- Mizuho Securities -- Analyst

Micheal Mueller -- JPMorgan -- Analyst

John Kim -- BMO -- Analyst

Unidentified Participant -- -- Analyst

Daniel Bernstein -- Capital One -- Analyst

Jefferies -- -- Analyst

Lukas Hartwich -- Green Street Advisors -- Analyst

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