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Physicians Realty Trust (NYSE:DOC)
Q3 2018 Earnings Conference Call
Nov. 2, 2018, 2:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Physicians Realty Trust third quarter 2018 earnings conference call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press *0 on your telephone keypad. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Bradley Page, Senior Vice President, General Counsel for Physicians Realty Trust. Thank you, Mr. Page. You may begin.

Bradley Page -- Senior Vice President, General Counsel

Thank you. Good afternoon and welcome to the Physicians Realty Trust third quarter 2018 earnings conference call. With me today are John Thomas, Chief Executive Officer; Jeff Theiler, Chief Financial Officer; Deeni Taylor, Chief Investment Officer; John Lucey, Chief Accounting and Administrative Officer; Mark Theine, Senior Vice President, Asset and Investment Management; and Daniel Klein, Deputy Chief Investment Officer.

During this call, John Thomas will provide a summary of the company's activities during the third quarter of 2018 and year-to-date, as well as our strategic focus. Jeff Theiler will review the financial results for the third quarter of 2018 and our thoughts for the remainder of the year. Mark Theine will provide a summary of our operations for the third quarter of 2018. Following that, we will open the call for questions.

Today's call will contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. They are based on the current beliefs of management and information currently available to us. Our actual results will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe our assumptions are reasonable, our forward-looking statements are not guarantees of future performance. Our actual results could differ materially from our current expectations and those anticipated or implied in such forward-looking statements. For more detailed description of potential risks, please refer to our filings with the Securities and Exchange Commission. With that, I would now like to turn the call over to the company's CEO, John Thomas.

John T. Thomas -- President and Chief Executive Officer

Thank you, Brad. Good afternoon and thank you for joining us for the Physicians Realty Trust third quarter 2018 earnings call. We are happy to report a steady-as-she-goes quarter. Medical office buildings continue to be the strongest performing class of real estate in all economic conditions. Private and foreign capital continues to pour into our space, in spite of rising interest rates, keeping asset prices very high. A good-and-bad phenomenon that inhibits external growth, while also growing our underlying net asset value.

In anticipation of this continued inflow of capital, we entered 2018 expecting a year of low external growth and chose to take advantage of a favorable market by pruning our portfolio at attractive prices, while deploying our modest acquisition capital with existing partners. We are well positioned for this period of discipline, with the highest medical office occupancy among all public REITs at 96%, growing cash flows, and favorable capital allocations. We don't have to grow or take short- or long-term risk in different or riskier asset classes to cover our dividend, and we continue to grow our FAD.

As we entered 2018, we expected to be selective with new investments and to fund those investments from the sale of older, smaller, less long-term strategically important assets to our long-term plan. The third quarter reflected those plans. During this quarter, we sold $127 million worth of medical office facilities and deployed that capital indirectly with Northside Hospital in Atlanta, Georgia, in their brand-new medical Midtown MOB, a 169,000 rentable square foot medical office facility. 82% is leased directly to Northside Hospital, and the building is 98% leased overall, with outpatient services, including urgent care, specialty physician services, radiation and oncology, and outpatient surgery.

We have a letter of intent signed with a tenant to occupy the last 2% of the space. This real estate is core to Northside's mission and core to the real estate in Atlanta's dense Midtown, located near Georgia Tech University, the Varsity, and some of Atlanta's most popular businesses and urban residential neighborhoods. We look forward to organizing an Atlanta property tour to share this and some of our other newest and best MOBs with you in the near future.

Our first year cash yield in this facility is 5%. While expensive, we are pleased that Northside came to us directly with the opportunity to expand our relationship with them. They selected us for this sale-leaseback and agreed to a price we believe is very attractive compared to the yield and IRR of other Class A medical office facilities that have traded this year and over the last two years.

In addition, this investment is yet another in our collaborative partnership with Northside that delivers other mutually valuable benefits. We believe this asset will yield strong and reliable growing cash flow for a very long time. Including our relationship with Northside Hospital, we now have more than 56% of our gross leasable space leased directly to an investment-grade, credit-worthy tenant or their affiliate, and to our knowledge, this is the highest such percentage in actual gross space so leased in our industry. Fortunately, because of the continued transformation of our portfolio toward the best healthcare credits, we can continue to enjoy the benefits of a very healthy portfolio.

Healthcare is local and as we have always believed, the health of our investments is not directly tied to the credit quality of the corporate parent, but the health of the hospital, physicians, and economy where our investments is located, which has been a critical part of our underwriting. We're also very focused on the scope of services in our facilities. Approximately 20% of our buildings are anchored by outpatient surgery. Another 20% are anchored by oncology services. These anchor tenants not only attract synergistic, ancillary, and complementary services, but are also unique and sticky anchors.

Many of these anchors also benefit by grandfathered hospital outpatient department reimbursement status we call 603. As our growth and strong relationship with Northside demonstrates, we execute our vision on behalf of our investors and stakeholders every day with care. We live this out every day as we collaborate and communicate, act with integrity, respect the relationship, and execute efficiently and with a win-win approach to our business. This makes us different and better.

In a few moments, Mark Theine will share more details about our portfolio's operating results. Mark's leadership running our best-in-class operating platform delivers strong operating results, and we are on track to have our best year ever from operations. Mark and his team have had an eventful quarter, tracking multiple hurricanes and preparing for any recovery that would've been necessary.

Fortunately, our facilities have weathered those storms well, with minimal downtime. Unfortunately, those storms had a major impact on the regions affected, and others lost lives, property, and access to healthcare and other services. Our hearts and prayers go out to all of our clients, patients, and their families as we do our part to aid in the recovery.

For the balance of the year, we do not anticipate a significant amount of investment activity, as we continue to look for high-quality assets at a price that is accretive to our cost of capital. We remain on the hunt for investment-grade quality tenants and their assets, and welcome opportunities with existing and desirable high-quality health systems who reach out to us to partner with them on a purchase or monetization of their outpatient care facilities. Under the right circumstances, we may partner with private capital to make these investments in an effort to meet our clients' needs, but at the same time preserve our access to these long-term investments without burdening our balance sheet or FAD.

A few updates. The Vatican has approved a pending merger of CHI and Dignity Health. Each system continues to work through the details to complete their merger and become the largest health system in the United States, perhaps as soon as the end of the year. Trios and Foundation Legacy Providers are all paying rent, as scheduled, and we continue to expect to sell the Foundation assets.

Jeff will now review our financial results, and then Mark will share more about our operations, and then we'll be happy to take your questions. Jeff?

Jeffrey N. Theiler -- Executive Vice President and Chief Financial Officer

Thank you, John. In the third quarter of 2018, the company generated funds from operations of $51.7 million, or $0.28 per share. Our normalized funds from operations were also $51.7 million and $0.28 per share. These statistics include the net positive $1.8 million impact of a lease termination at an asset we own in Appleton, Wisconsin. Our normalized funds available for distribution were $45.7 million, or $0.24 per share, which included the $2.2 million cash impact of the same termination.

The lease termination fee occurred when our tenant, Fox Valley Hematology & Oncology was purchased by ThedaCare, and A1-rated health system and leader in that marketplace. We entered into a new lease with ThedaCare effective October 19th, and added two years to the back end of that lease. So the lease term is now 15 years, with an A1-credit-rated health system tenant, all in all a good outcome for us.

We continue to see strong pricing of the medical office buildings in the third quarter, and as previously announced, took advantage of this pricing to sell a $127 million portfolio to a private equity sponsor. This portfolio consisted of solid assets, which we considered to be non-core because they were generally smaller in size, not leased to investment-grade-rated healthcare systems, and in secondary markets.

On the acquisition side, we completed a transaction that had been negotiated at the end of 2017 for the brand-new, Northside Medical Midtown MOB in Atlanta. The longer lead time worked for us in this regard as we believe the asset would trade at a better cap rate today than our price of 5.0 stabilized yield. If the acquisitions and dispositions that took place in the third quarter had both occurred at the beginning of the quarter, the net impact to cash NOI would have been an additional $225,000.

On the capital market side of the business, we were able to take advantage of the favorable bank market environment to amend and extend our credit facility. We reduced the cost of our revolving line of credit by 10 basis points to LIBOR plus 110. We also reduced the cost of our $250 million term loan expiring in 2023 by 55 basis points to LIBOR plus 125. Considering the effect of our in-place hedges, this term loan now bears interest at a fixed rate of 2.3%.

Our balance sheet remains in great shape this quarter, with less than $100 million of debt maturing over the next three years, all of which are existing mortgages with an average interest rate of 4.5%. Our net debt to adjusted EBITDA RE is 5.4x, and our debt to total capitalization is less than 33%, giving us plenty of financial flexibility to adjust to different market environments.

At the end of the quarter, our portfolio was 96% leased, with 52% of that space leased to investment-grade-rated health systems or their subsidiaries. Our same-store portfolio occupancy decreased by 90 basis points, and generated same-store cash NOI growth of 5.6%, including the lease termination fee on the Fox Valley asset previously mentioned. If we exclude that asset, our same-store cash NOI growth was 1.8%.

G&A expense was $6.6 million, as expected this quarter, and we continue to expect to finish the year within our guidance. Finally, a note about FASB Topic 842. We have historically classified the indirect costs of leasing impacted by this guidance in our G&A already, so we would expect no material changes to our income statements as a result of adopting this rule in 2019. I will now turn the call over to Mark to walk through some of our operating statistics in more detail. Mark?

Mark D. Theine -- Senior Vice President, Asset & Investment Management

Thanks, Jeff. Solid revenue and FAD growth continue to highlight the company's positive operating metrics. As John mentioned, our asset management platform is delivering steady internal growth, primarily generated from [inaudible] lease escalators of 2.3% across the portfolio, and an industry-leading 96% leased. Our leasing and CapEx teams helped drive top and bottom-line improvements in the quarter as well, including limited CapEx investment that totals just 6.9% of our cash NOI.

Our operations team, known for its close hospital relationship, also continued to execute on the plan to expand in-house property management and leasing, laying the groundwork for additional, institutional cost efficiencies, and generating long-term enterprise value for our shareholders.

In Q3, leasing activity totaled 325,000 square feet, including 283,000 square feet of lease renewals, and 42,000 square feet of new leasing. Tenant retention, excluding the Fox Valley facility and the favorable outcome as Jeff mentioned, is 93%. Rent concessions, including TI and leasing commissions in the quarter for lease renewals totaled approximately $2 per square foot per year and $2.50 per square foot per year for new leases.

The positive cash releasing spreads for the quarter were 1.7%, and included average annual escalators of 2.51%. Our in-house leasing team continues to do an exceptional job renewing our existing healthcare partners at market rental rates, and recruiting the right mix of physicians critical to creating a dynamic healthcare economic, and ultimately generating strong returns from predictable, long-term triple-net leases. Year-to-date in 2018, this team has saved our investors approximately $3 million in leasing commissions compared to what we would have paid to third-party brokerage companies assuming a 3% commission rate.

Looking ahead, we expect this savings to continue to grow, as we are proud to welcome two new leasing team members to the DOC team. Audra Cunningham, based in Atlanta, Georgia, will focus on the Southeastern portion of the country, bringing over 20 years of leasing experience to DOC. Alison D'Amato, based in Denver, Colorado, will focus on the Western part of the country, adding her excellent healthcare and REIT experience.

Similarly, we added to our property management team this quarter by transitioning facilities in our third largest market, Louisville, Kentucky, and our eighth largest market, Columbus, Ohio, to our in-house platform. We are very proud to welcome Bart Bennett, Sydney [Inaudible], Amy Washburn, and Angela Zarete to the DOC family. All are impressive individuals tasked with delivering outstanding customer service and the diligent care that our team has become known for, also known as the DOC difference. We believe that tenant retention starts with property management the day the lease is signed, and we are committed to showing our hospital and physician partners through our actions that we care about enhancing the patient and physician experience.

From an overall operations perspective, DOC has never been in a better position to service our healthcare partners, invest in our relationships, and efficiently manage our facilities to drive FAD to the bottom line by keeping occupancy high and our capital expenditures low.

Finally, we'd like to take a moment to thank our operation team members and our partners for the tremendous preparation and communication during the recent Hurricanes Florence and Michael. While DOC ultimately had just 8,400 square feet directly in the path of Hurricane Michael, the entire Southeastern region prepared well for high winds and severe rain. Fortunately, our facilities fared well with very minimal downtime, and we have already offered assistance to some less fortunate healthcare providers who lost their facilities to use the limited amount of space we have available in those markets.

Again, we sincerely thank our Southeast team for their preparedness, communication, and care. With that, I'll now turn the call back over to John.

John T. Thomas -- President and Chief Executive Officer

Thank you, Mark. We'll now take questions, please.

Questions and Answers:

Operator

Thank you. We will now begin conducting a question-and-answer session. If you'd like to ask a question, you may press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press *2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the * key. Our first question comes from the line of Juan Sanabria with Bank of America Merrill Lynch. Please proceed with your question.

Juan Sanabria -- Bank of America Merrill Lynch -- Analyst

Good afternoon, guys. Just hoping to start on the acquisition side. There's a couple larger portfolios out there. Just trying to get a sense of where you think pricing is for high-quality portfolios and your appetite to do it either on balance sheet and/or via joint ventures. You kind of threw that out there with our prepared remarks, John.

John T. Thomas -- President and Chief Executive Officer

Yeah, Juan, thanks for the question. We look at everything. As we noted, we focus primarily on the higher-grade health systems, especially where we have existing relationships. I think the two portfolios that you're speaking of or I assume you're speaking of are large enough that they'll probably attract some portfolio premium, but also a lot of interest from private capital. So we would anticipate the cap rates to be in the 5's, with various levels of quality in each portfolio. So the sizing of that and where our stock price is and cost of capital, if we pursued those, it'd probably be with a private capital partner and some level of mix.

Juan Sanabria -- Bank of America Merrill Lynch -- Analyst

Great. Thank you. Then one for Jeff on the balance sheet. I think you've got about $439 million on a credit facility. Any plans to term that our or balance sheet initiatives that we should be thinking about '19 earnings?

Jeffrey N. Theiler -- Executive Vice President and Chief Financial Officer

That's going to include the $250 million term loan, which we have fixed with hedges. You're really closer to $200 million, a little under $200 million on the line. We always think about terming out our debt. We're always in conversations with banks and private capital sources to see where that pricing is. But where we sit today, I don't think it's urgent, but it's something that we always look at.

Juan Sanabria -- Bank of America Merrill Lynch -- Analyst

Great. Just one quick one for me. The term fee, it sounds like you had a replacement tenant. Is there any impact on a go-forward x that one-time income on the rent you're getting from the new tenant versus the old?

Jeffrey N. Theiler -- Executive Vice President and Chief Financial Officer

Yeah, it's really a good situation. The hospital bought the group that was occupying that space. It's an oncology group. We worked with the hospital to alter the lease going forward. We extended it. The group paid us a termination fee at the same time as we entered into a new lease with the hospital. So there's a momentary lapse in occupancy, which hits our statistics negatively, but it was literally a 24-hour impact on the statistics. So we took the fee in hand and had this new 15-year lease with an investment-grade tenant. So it's really a win-win situation for everybody involved.

Juan Sanabria -- Bank of America Merrill Lynch -- Analyst

But the rents are the same?

Jeffrey N. Theiler -- Executive Vice President and Chief Financial Officer

The rents are lower, and the balance of the economic impact from the old lease to the new lease was essentially made up by the termination fee.

Juan Sanabria -- Bank of America Merrill Lynch -- Analyst

Gotcha. Great, thank you.

Operator

Our next question comes from the line of Jonathan Hughes with Raymond James. Please proceed with your question.

Jonathan Hughes -- Raymond James & Associates -- Analyst

Good afternoon. Thanks for the time and the prepared remarks earlier. For the most part, the entire portfolio was bought within the past 5 years. My question is, when you underwrote those properties, how did you look at the required CapEx at the time of acquisition, and then how did you look at any future lease expirations that may come with some needed second-gen TI spend that could impact your FAD? I know most of your tenants are on longer-term leases, so those expirations may be years away, but I'd just like to get a better understanding of expected TI spend in the future.

Mark D. Theine -- Senior Vice President, Asset & Investment Management

Sure, John. This is Mark. When we're underwriting our acquisitions we, of course, assume a renewal probably and TI associated with renewing those tenants, and we look very closely at what the rental rates are, and how we can renew those at least in place, if not continue to escalate them and assume a TI along with those renewals. We also property condition reports done during our due diligence, and we identify immediate repairs needed, as well as strategic capital so that we can make enhancements in those buildings. So we layer all that in to our underwriting, and creating our capital expense budgets. As I mentioned, we're at about 7% of cash NOI this quarter, and that's where we try to budget, in the high single digits for our CapEx spends.

John T. Thomas -- President and Chief Executive Officer

Jonathan, just to add. So much of our business is direct relationship negotiated transactions. Our CHI investments, which were approximately $900 million, if you'll recall, we disclosed a fairly large adjustment to the purchase price to address deferred maintenance that the hospital left in place and have spent that. Most of all that has been deployed now, back into the buildings per agreement with the hospital, the seller. So we certainly take all that into account and increases in property taxes as well, which is very important, a critical part of underwriting this high-priced market.

Jonathan Hughes -- Raymond James & Associates -- Analyst

Okay. So, Mark, is this high single digit percentage of NOI for CapEx spend next year, that's a fair estimate and run rate to go by?

Mark D. Theine -- Senior Vice President, Asset & Investment Management

Yes.

Jonathan Hughes -- Raymond James & Associates -- Analyst

Okay. Then an extension of that, maybe one for you or John, but are physicians groups and healthcare systems, are they demanding more customized buildouts or configurations than say 5 or 10 years ago? Meaning has the cost of acquisition of a new lease inflated more that construction cost of inflation? Just curious to hear your thoughts there.

John T. Thomas -- President and Chief Executive Officer

I don't think so. On a gross dollar basis, our buildings have a large percent of outpatient surgery and oncology facilities, which those spaces in and of themselves are more expensive and require more TI, but typically the TI contribution from us is pretty much the same across the board, and then we work with the tenant to either finance that excess TI dollar, or they'll provide it themselves. We just renewed a lease with a large group in one of our buildings and we put in $1 million of new TI and they put in a couple million dollars of TI to convert the space. So it all gets blended in. You've got to stay within market rents when you're providing that TI, and that's what we do as we change those leases or change the space for them.

Jonathan Hughes -- Raymond James & Associates -- Analyst

Okay. Then just one more. On the lease expiration for next year, granted it's pretty minimal at only 4% of ABR, but where are those rents relative to the market? I think I saw they were a little bit above the portfolio average. I get that it's market specific, but just any color there?

Mark D. Theine -- Senior Vice President, Asset & Investment Management

John, Mark again. You're exactly right. It's market specific, but if you look at it across the whole portfolio, in the next 12 months upcoming, our average rate is $22.08, so right in line with where we think rental rates are for those markets, and we'll work hard to continue to renew those at favorable terms.

John T. Thomas -- President and Chief Executive Officer

Those are in place, so right now it's an inflationary market, should not catch up to those if they are at the higher end, but also be able to push those rents more than we have historically been able to in the past.

Jonathan Hughes -- Raymond James & Associates -- Analyst

Okay. That's it for me. Thanks.

John T. Thomas -- President and Chief Executive Officer

Thanks, John.

Operator

Our next question comes from the line of Jordan Sadler with KeyBanc Capital Markets. Please proceed with your question.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Thank you. Good afternoon. First, just wanted to ask you a question about the capital markets. I wouldn't say you're trading at a big discount NAV, per se, but your cost of capital is not what it was, and obviously it's tough to compete versus all the capital that you talked about that's out there. What are you doing or what are you planning to do to capitalize on the differential or the opportunity there in terms of the assets that you own and the valuation of them versus all the capital that's out there?

John T. Thomas -- President and Chief Executive Officer

Jordan, it's JT. I think as we've demonstrated all year, we've really funded acquisitions. We've been very selective with what acquisitions we would do, in a limited amount. And we funded those by selling some of our older and less strategic assets are pretty favorable pricing than we anticipated would've been available when we bought those assets. I think for the foreseeable future, that will be the primary funding source. So noted to do much more volume.

If you looked at a larger volume or three or four buildings in a portfolio that we would explore private capital partnering and 50/50, 70/30, whatever blended math that worked for a capitalization standpoint. So being able to grab hold of those assets with our clients for the long term, but do it in a way that doesn't impact the balance sheet. I don't think you'll see anything different for the foreseeable future. Stock has been acting better, but certainly not today. I think this market's got a downdraft. Hopefully we'll get back to going in the right direction here soon, with all the healthcare REIT stocks and equities.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Can you maybe speak to the acquisition in the quarter of Northside? First, I'd be curious what the GAAP cap rate looked like, what the escalators are there. And separately, to the extent that going forward if the stock remains down here, would you be a buyer at a similar price level going forward?

John T. Thomas -- President and Chief Executive Officer

Again, I think the asset's well worth the price, as noted. Northside itself developed that building and entered into a pre-sell agreement, if you will, with us last year. So in many respects, we looked to funding that from our capitalization from last year, and then the sale of assets this year. So a fantastic asset, as I said, and I think it reflects off-market pricing, expensive as it is. And then from an IRR perspective, nice traditional bumps in the lease that gets up to the high single digits.

Jeffrey N. Theiler -- Executive Vice President and Chief Financial Officer

And the GAAP cap rate is kind of in the high 5 range, Jordan.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

GAAP in high 5, OK. Then the same-store occupancy, the decline year-over-year, the 90 basis points? Was that a function of the moveout in the quarter [crosstalk] lease termination fee?

John T. Thomas -- President and Chief Executive Officer

That's all it was. Same impact, same renewal or lack of renewal with just replacing a tenant with one tenant, affiliated tenant.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Can you just break out the rent that was included in the quarter from that tenant who moved out, as opposed to the lease term fee? There was something incremental above the 1.8.

Jeffrey N. Theiler -- Executive Vice President and Chief Financial Officer

So the rent, it actually works out about the same. Because the tenant moved out before the end of the quarter, so as JT mentioned earlier, it's a slightly reduced rent, but there's going to be no net impact between this quarter and the fourth quarter because of the time that the asset sat vacant, or not vacant, but sat without a lease.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Okay. Thank you.

Operator

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

Seth Canetto -- Stifel, Nicolaus & Company -- Analyst

Good afternoon. This is Seth Canetto on for Chad. Not to beat a dead horse, but I do have a question about the MOB you guys acquired in Atlanta, anchored by Northside. I know you said you extended that least by two years, but was there any change to the rent escalators going forward or any other incremental details you can provide?

John T. Thomas -- President and Chief Executive Officer

It's two different situations. The Northside building has long-term leases in it. There was no change there. We bought those with those new leases in place. The Fox Valley situation, we changed the lease from a physician group that the hospital bought to the hospital itself, and then adjusted the rent, in addition to the termination fee, and extended the lease term. So it's two different situations.

Seth Canetto -- Stifel, Nicolaus & Company -- Analyst

All right. Great. Thanks for clarifying that.

John T. Thomas -- President and Chief Executive Officer

I'm sorry, with the same bumps in that lease.

Seth Canetto -- Stifel, Nicolaus & Company -- Analyst

Okay. Great, thanks. Then looking at the press release, you guys had mentioned the expected yield on that acquisition as 5% upon stabilization. That building is 98% leased, so that does assume that the yield is lower than that right now? Or can you just explain that a little bit?

John T. Thomas -- President and Chief Executive Officer

We have 2% of the building that's not currently leased. We have a letter of intent for that lease. It's that 2% is really the delta; it's minor.

Seth Canetto -- Stifel, Nicolaus & Company -- Analyst

Okay. Then can you guys provide same-store NOI excluding the lease termination fee but inclusive of the six assets slated for disposition?

Jeffrey N. Theiler -- Executive Vice President and Chief Financial Officer

We don't have that, Seth. Two of those are now held for sale. These are assets that we're selling in the near term, so we don't include those in our same-store NOI.

Seth Canetto -- Stifel, Nicolaus & Company -- Analyst

All right. Thanks a lot.

Operator

Our next question comes from the line of Drew Babin with Robert W. Baird & Company. Please proceed with your question.

Andrew Babin -- Robert W. Baird & Company -- Analyst

Good afternoon.

Jeffrey N. Theiler -- Executive Vice President and Chief Financial Officer

Hey, Drew.

Andrew Babin -- Robert W. Baird & Company -- Analyst

Quick question on the asset sold during the quarter. You talked about the IRR economics of Northside building up to a high single-digit return. Can you talk about the un-levered IRR realized on the assets that were sold during the quarter and then how you think about the IRR from this point forward if you were to continue to own those assets and how it compares to the acquisition?

Jeffrey N. Theiler -- Executive Vice President and Chief Financial Officer

That's a good question, Drew. The IRR on those assets is also kind of a high single-digit IRR. We felt that the pricing was particularly good right now in the market. So clearly, we felt that by selling it now, our IRR is going to be a little bit better than if we held it for the longer term and put in the necessary capital and everything to release it. The return on the assets was pretty much what we had underwritten when we bought them. We felt like it was a good time to prune the portfolio a little bit, sell assets at what we thought was a pretty good IRR, and they redeploy those assets into these higher-quality, investment-grade-rated anchored systems that we've been looking at.

John T. Thomas -- President and Chief Executive Officer

Drew, as noted, those are older buildings that were going to require more CapEx over time. This is a brand-new building, again self-developed by Northside. Again, no deferred maintenance, no expectation of capital needed for a very long time.

Andrew Babin -- Robert W. Baird & Company -- Analyst

Great. That's helpful. Just one quick follow-up here. You talked before about potentially selling the L-techs. I guess have there been bidders out there? What does pricing look like? Should we expect that the L-tech portfolio is sold ratably over the next year or so?

John T. Thomas -- President and Chief Executive Officer

I think that'd be our expectation. There frankly aren't a lot of buyers for the L-tech, but they've been performing reasonably well. We've never had a rent issue or a payment issue there. We've got 14.8 years left on those leases, and lots of credit enhancement from the parent. Again, we'd like to sell them, but we don't feel compelled to do that at a low price.

Andrew Babin -- Robert W. Baird & Company -- Analyst

Great. That's all for me. Thank you.

Jeffrey N. Theiler -- Executive Vice President and Chief Financial Officer

Thanks, Drew.

Operator

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

Michael Carroll -- RBC Capital Markets -- Analyst

Thanks. Just on the L-tech portfolio, it looks like coverage bounced pretty well in the past quarter. Do we expect that to be a trend or do you think it's going to be stabilizing around that 1.7 level?

John T. Thomas -- President and Chief Executive Officer

I think it's hit the floor and gone back in the right direction, so I think it'll continue to creep up. It's not going to be huge, but it's coming from expansion of services in those buildings primarily. The owner has been buying a lot of home health and generating a lot of revenue from their home health acquisitions, again, which are complementary services to the L-tech business. I think it'll continue to improve and hopefully, as we talked about on the last question, increase the opportunity to sell those at a good price.

Michael Carroll -- RBC Capital Markets -- Analyst

Okay, great. Then related to Foundations, I know that's the plan to still sell those assets. They're not included in the one slated for sale and if not, do you have a timing or is that just something that you have targeted to do sometime in the future?

John T. Thomas -- President and Chief Executive Officer

Yeah, two are in the held for sale and we've been in negotiations and trying to finalize the process to sell those to the physicians that are currently providing services there. Hopefully that's a near-term event and a 2018 event. We can't know for sure, but we expect it to be. Certainly, within the year, but hopefully within this current calendar year.

Michael Carroll -- RBC Capital Markets -- Analyst

Okay, great. Thanks.

Operator

Our next question comes from the line of Vikram Malhotra with Morgan Stanley. Please proceed with your question.

Vikram Malhotra -- Morgan Stanley -- Analyst

Thanks for taking the question. Just wanted to first get your thoughts on the Fox Valley asset. I don't know. Would there be a difference in cap rate, just given the credit enhancement if you had sold that building pre-kind of the 10 moveout versus now, where you have this hospital. Is there a difference, do you suspect in the cap rate if you were to sell it today?

John T. Thomas -- President and Chief Executive Officer

Yeah, no question at all. We've got an investment-grade, long-term lease in there now. It was a great group. The physicians themselves we bought it from in a sale-leaseback, and they later sold themselves to the hospital. So it was, I wouldn't say a substantial different gap rate, but it would be an improved cap rate.

Vikram Malhotra -- Morgan Stanley -- Analyst

Okay. Then with Northside, you have a couple of buildings with them. I'm just wondering from here on, what sort of opportunities exist with Northside on off-campus? Maybe is this sort of a tenant where you'd look to expand with?

John T. Thomas -- President and Chief Executive Officer

Yeah, we certainly to expand with them. We have a great partnership relationship that primarily went from [inaudible] prior life where he had developed a couple of buildings with Northside, which we now own. Then I think we have 5 total buildings that are anchored by or substantially 100% occupied by Northside or Northside services. We have some development rights to land next to the Centerpoint building, which again is a building that Deeni helped Northside purchase and redevelop several years ago.

They're a growing system. They're in the process of trying to acquire the Gwinnett Health System, which has been approved by the State Attorney Gel and they're just working through the FTC and other regulatory approvals for that. That'll be three buildings to be added to that portfolio if that merger is completed. Otherwise, Gwinnett stands on its own just find. Northside Midtown, the building we just bought, is really their first move to downtown and headed toward the southern part of the city and the counties in the south square foot Atlanta, and we would expect to grow with them.

Vikram Malhotra -- Morgan Stanley -- Analyst

Got it. Then just last one, maybe to Jeff. Just from a FAD perspective, where should we expect that to trend over '19? I know there's obviously the cash impact from the termination, but can you give us a sense of where, just a range where it could trend into '19 then? Just a real longer-term target, call it two to three years ago?

Jeffrey N. Theiler -- Executive Vice President and Chief Financial Officer

Yeah, Vikram, I think if you back out the lease termination fee, and you do the adjustments that we talked about acquisitions with these physicians for the quarter just to get the timing, you'll see that we're covering the dividend. We're just paying out under 100%. I think what you'll see is assuming no other acquisitions, which I'm not saying that's what we're going to do, but you should see our in-place rent escalators continue to grow at 2.5%. So you can put a leverage on that. You'd see generally FAD should be growing at 3% to 4% or so just on a stand-alone basis. Then anything we do on the acquisition side would be complementary to that. So it's kind of hard to put a target on it, because we're not exactly sure what the capital markets are going to give us next year. We're just trying to take it as it comes.

Vikram Malhotra -- Morgan Stanley -- Analyst

Okay. Thank you.

Operator

Our next question comes from the line of Tayo Okusanya with Jefferies. Please proceed with your question.

Omotayo Okusanya -- Jefferies -- Analyst

Good afternoon. I just wanted to go back to Fox Valley for a second, from a modeling perspective to make sure we're capturing this out right. Can you tell us what the cap rent is for the new lease? I just want to make sure on the modeling going forward we have the right number in there versus the old lease.

Jeffrey N. Theiler -- Executive Vice President and Chief Financial Officer

Look, Tayo, I can tell you for a go-forward basis, the cash rent for Fox Valley is going to be just around $100,000 a quarter, a little over $100,000 a quarter. That's a 15-year lease. The escalators on that are 2.5%. So you do, sorry, I'm just doing it right now.

Omotayo Okusanya -- Jefferies -- Analyst

Take your time.

Operator

Our next question comes from the line of Daniel Bernstein. Please proceed with your question.

John T. Thomas -- President and Chief Executive Officer

Tayo, we'll come back to you. Sorry about that. Go ahead, Dan.

Daniel Bernstein -- Capital One Securities -- Analyst

All right. Actually, most of my questions have been answered. The only one I had really at this point was on Northside. Not so much about any of the particulars about the lease, but the face that a hospital is selling the asset. Maybe how that came about. Did they originally develop it and want to keep it on balance sheet and then decide that they wanted to go ahead and monetize given where cap rates are, what other needs they have, and maybe is there anything others should read into that in terms of monetization in the space?

John T. Thomas -- President and Chief Executive Officer

No, they just liked the idea of self-developing it and monetizing it. It worked with several developers now over the years, none of which are available now other than Deeni with us. So they self-developed it. They had their partner, RTG, work with them to do that, and then agreed early on in that process that it was their intention to monetize that at the end, and reached out to us to do that. Great relationship. They've got a great balance sheet. They have virtually no debt. They don't have a credit rating because they don't issue taxes and bonds. They've got a very strong balance sheet. They share their financials with us, obviously as part of our underwriting, but they're not really publicly available.

Daniel Bernstein -- Capital One Securities -- Analyst

Maybe they'll buy another hospital and you can grow with that them way. Trend of the day, right? The only other question I had was on the 2.5% escalators you just mentioned. Are those mainly fixed or CPI? What's the mix there?

Jeffrey N. Theiler -- Executive Vice President and Chief Financial Officer

Those are fixed.

Daniel Bernstein -- Capital One Securities -- Analyst

Okay.

Jeffrey N. Theiler -- Executive Vice President and Chief Financial Officer

Oh, you mean across the whole portfolio, Dan? Sorry.

Daniel Bernstein -- Capital One Securities -- Analyst

Yeah.

Jeffrey N. Theiler -- Executive Vice President and Chief Financial Officer

Those are actually almost all fixed. I'm looking at Mark for the --

Mark D. Theine -- Senior Vice President, Asset & Investment Management

That's correct, yeah.

Daniel Bernstein -- Capital One Securities -- Analyst

Okay. That's right across the whole portfolio, it's about 2.5%?

Jeffrey N. Theiler -- Executive Vice President and Chief Financial Officer

Yeah, I mean, it's a little bit under across the whole portfolio. I think it's 2.3%.

Daniel Bernstein -- Capital One Securities -- Analyst

2.3%? Okay. That's all I have. Thanks, guys.

Jeffrey N. Theiler -- Executive Vice President and Chief Financial Officer

Thanks, Dan.

Operator

Our next question is coming from Tayo Okusanya. Please proceed with your question.

Jeffrey N. Theiler -- Executive Vice President and Chief Financial Officer

Sorry, Taylor.

Omotayo Okusanya -- Jefferies -- Analyst

No worries.

Jeffrey N. Theiler -- Executive Vice President and Chief Financial Officer

Okay. So the new lease is $105,000 a month in cash, and $126,000 a month in GAAP.

Omotayo Okusanya -- Jefferies -- Analyst

That's the new -- OK, so that's on a going-forward basis. And that's a similar number versus the pro rata amount you had in your 3Q numbers?

Jeffrey N. Theiler -- Executive Vice President and Chief Financial Officer

Exactly; that's exactly right.

Omotayo Okusanya -- Jefferies -- Analyst

So that's No. 1. Then No. 2, thank you for the information about the Divinity deal now finally happening. I think we've seen some other hospital mergers get announced very recently as well. When you guys see this kind of consolidation going on, on a hospital state, what do you think about that trend in general? Then two, what do you think it means for MOB and MOB valuation, if anything at all?

John T. Thomas -- President and Chief Executive Officer

Again, from our perspective, the mergers that we've seen are associated with we view that very positively. They're not in overlapping markets. There's no realization of closing one hospital to benefit another in the particular mergers that we see -- Dignity and CHI in particular. We see a combined better balance sheet. If you read the credit agency reports around that merger in particular, they note a positive impact to CHI's credit rating as a result of that merger. We view that very positively and don't see a negative impact specifically on any market or MOB as a result of the merger.

Similarly, like Baylor Scott & White and Memorial Hermann in Texas, we have assets with both hospital systems. Again, they're complementary markets. They don't compete with each other or head-to-head. We've got great relationships with both. From our perspective, the ones we're involved in, we see as a net win for us. In others, where you have hospitals in a market that are merging or have become closer together, like in Chicago, you certainly would see a realization of certain sites and locations that would be preferable to other sites and locations, and that we have a negative impact on the owners of those sites that aren't selected.

It's just case-by-case. But the driving point is are they in a competing market today or is it complementary? The Northside-Gwinnett merger is complementary as well. It's just adding another region and location where Northside is not currently in, and adding a great health system to their existing geographic location.

Omotayo Okusanya -- Jefferies -- Analyst

Got it. That's helpful. Thank you. Then just one more quick one if you could indulge me. The rent on the new Trios lease as well?

John T. Thomas -- President and Chief Executive Officer

The new lease cut the rents in half for the first year. It was part of the turnaround plan coming out of bankruptcy with the new owner, but then those grow at better-than-average increasers over the 8 years and get us back to market fairly quickly. Then have market resets at the end of each lease, which we again would be going up not down with those market resets. [Crosstalk] Exactly. This year it's about half of what we otherwise expected, so that's not good, of course, but we do get substantial increasers every year over the next eight years and it should be a good long-term investment for us.

Omotayo Okusanya -- Jefferies -- Analyst

Thank you. On a straight-line basis, just kind of half of what it used to be, at least on a near-term basis?

Jeffrey N. Theiler -- Executive Vice President and Chief Financial Officer

That's cash. On a straight-line basis, it's about 60% of what it used to be.

Omotayo Okusanya -- Jefferies -- Analyst

Okay. So that's the cash and that's the GAAP. Okay, perfect. Thank you very much.

John T. Thomas -- President and Chief Executive Officer

Thank you. Thanks for joining us today. We look forward to seeing you at [inaudible] REIT, and we'd like to welcome baby Boden Benjamin Becker to the world. Thank you very much.

Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.

Duration: 47 minutes

Call participants:

John T. Thomas -- President and Chief Executive Officer

Jeffrey N. Theiler -- Executive Vice President and Chief Financial Officer

Mark D. Theine -- Senior Vice President, Asset & Investment Management

Bradley Page -- Senior Vice President, General Counsel

Juan Sanabria -- Bank of America Merrill Lynch -- Analyst

Jonathan Hughes -- Raymond James & Associates -- Analyst

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Seth Canetto -- Stifel, Nicolaus & Company -- Analyst

Andrew Babin -- Robert W. Baird & Company -- Analyst

Michael Carroll -- RBC Capital Markets -- Analyst

Vikram Malhotra -- Morgan Stanley -- Analyst

Omotayo Okusanya -- Jefferies -- Analyst

Daniel Bernstein -- Capital One Securities -- Analyst

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