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Healthcare Trust of America Inc (HTA)
Q3 2019 Earnings Call
Oct 29, 2019, 12:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day. And welcome to the Healthcare Trust of America Third Quarter 2019 Earnings Conference Call and Webcast. All participants will be in listen-only mode.
[Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]
Please note this event is being recorded. I will now turn the call over to David Gershenson, Chief Accounting Officer.
David A. Gershenson -- Chief Accounting Officer
Thank you. And welcome to Healthcare Trust of America's third quarter 2019 earnings call. We filed our earnings release and our financial supplement yesterday after the close. These documents can be found on the Investor Relations section of our website or with the SEC.
Please note this call is being webcast and will be available for replay for the next 90 days. We will be happy to take your questions at the conclusion of our prepared remarks. During the course of the call, we will be making forward-looking statements. These forward-looking statements are based on the current beliefs of management, and information currently available to us.
Our actual results will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although, we believe that our assumptions are reasonable, they are not guarantees of future performance. Therefore, our actual future results could materially differ from our current expectations.
For a detailed description on potential risks, please refer to our SEC filings, which can be found in the Investor Relations section of our website.
I will now turn the call over to Scott Peters, Chairman and CEO of Healthcare Trust of America. Scott?
Scott D. Peters -- Founder, Chairman, President and Chief Executive Officer
Thank you, David. And good morning, and thank you for joining us today for Healthcare Trust of America's third quarter earnings conference call. Joining me on the call today are Robert Milligan, our Chief Financial Officer; Amanda Houghton, our Executive Vice President of Asset Management; and Caroline Chiodo, our Senior Vice President of Acquisitions and Development.
As we move into the end of 2019 and look forward to 2020, HTA has positioned itself to be the sector leader in the ownership and operation of medical office buildings. With an irreplaceable key market focused portfolio, a fully integrated, full service operating platform and a fortress investment grade balance sheet that positions our company to deliver earnings growth and shareholder returns over the next three years to five years.
We have talked for years about our view of the overwhelming trends in healthcare that reflect a move to an integrated outpatient experience. This delivery will take place in three settings. One, on-campus where we are the largest owner of MOBs in the country. Two, off-campus in the community locations where all leading healthcare providers are focusing. And three, in academic university healthcare system locations, where academic and healthcare combinations are critical.
Our portfolio composition over the last 12 years has referred to these trends and a critical nature of this real estate, where the best assets in each location demonstrate high levels of tenant retention and rental growth opportunities. Our portfolio and investment strategy has reflected these key trends and HTA has targeted key fast growing market that we believe will outperform the rest of the country.
Our targeted market approach also allows us to create size and scaling markets, with 15 markets with over 500,000 square feet and nine markets with approximately 1 million square feet or more square feet. This scale allows us to effectively create a deeper and strategic local operating platform with relationships and operating capabilities. This market focus is a key pillar of our growth strategy going forward.
In the third quarter, we saw the power of our platform and portfolio start to working ways that generates both internal and external growth opportunities, led by same-store growth of 2.5%, driven by rental revenue growth of 2% and margin expansion from increased utilization of our property management platform and certain expense savings. Increased levels of acquisition activity, closing acquisitions of $135 million in the period, bringing our total for the year to $228 million and an average year one cap rate of 5.75%. These are all well-located medical office buildings, located primarily in our existing key markets in which we can add our operating platform to drive additional value for shareholders.
Although, the acquisition markets remain very competitive for larger deals, we are focusing on one-off opportunities that fit in our portfolio, but which we are able to acquire a yield that allow for immediate accretion. As of today, we have approximately $200 million in additional acquisitions under exclusive control. Although, these remain subject to customary diligence and closing conditions, it shows a level of opportunities we are currently seeing. Development, where we have announced two new on-campus developments with expected investment of up to $90 million.
These MOBs will be anchored by key health systems HCA and Dignity now CommonSpirit that we have strong relationships with over the years. This brings our total development pipeline to over $150 million in projects with key relationships. And finally, our investment grade balance sheet remains strong with leverage of 30% of total capitalization and 5.7 times debt to EBITDA. In addition to these activities, we are also seeing new opportunities, and redeveloped some of our older properties located in great markets. I consistently note in my view that there are many opportunities within the MOB space to redevelop older buildings, especially ones located on campus.
We have identified several opportunities in our own portfolio where the investment of additional capital will allow us to modernize our buildings and significantly increase rents, with returns of this capital in the 10% to 12% range making it quite attractive to pursue and for investors. In this period, we are announcing the redevelopment of two of our four MOBs that we own are fee-simple basis on the St. Joseph Health-Mission Viejo campus in Orange County, California. These two buildings were constructed in 1972 and are coming off a 20 year hospital master lease. With renewal rents that are more than 30% less than the campus average, we are moving forward with a redevelopment that will modernize the facilities and allow us to command rents in line with market.
While there will be some downtime in occupancy, the long-term value creation of these improvements are significant. Finally, as a result of our acquisition pace, refinancing activities and portfolio performance to date, we are reiterating our 2019 normalized FFO guidance of $1.63 and $1.65 for the full year. In addition, we are increasing our acquisition outlook to $375 million to $425 million.
I will now turn the call over to Amanda.
Amanda L. Houghton -- Executive Vice President of Asset Management
Thanks, Scott. Our team continues to focus on delivering high quality operating and leasing performance that bring value to tenants and shareholders alike. As we look forward into the coming quarters, we believe our greatest opportunities to add value are, one, leveraging our size, scale and in-house infrastructure to maximize efficiencies within our markets, and deepen relationships with our existing tenant base.
Our team is now close to 200 property management, building management construction and leasing professionals, span across 23 offices and directly interface with the vast majority of our tenant base. We believe our infrastructure, not only allows us to bring the power of a national company to a very local healthcare provider community, but also helps us generate strong local knowledge, relationships and capabilities that have resulted in high levels of same-store growth, sector-leading operating efficiencies, strong leasing and retention, and also great opportunities for acquisition and our development.
Two, continued focus on executing quality leases with strong tenants at rental rates and escalators, that reflects the quality of our buildings and locations and will translate to long-term cash flow growth for our shareholders. And three strategic investments in our markets and buildings that will maximize rate, tenant retention, and efficiencies in our operations. However, we will continue to be strategic in our use of capital in an effort to maximize returns.
Turning now to the third quarter, our same-store growth this quarter came in at 2.5% driven by a 2% base revenue growth and 50 basis points of rental margin expansion. In the period, we signed approximately 700,000 square feet of leases. This included 156,000 square feet of new leases and almost 540,000 square feet of renewals. Our total tenant retention for same-store portfolio was 86% while our total portfolio releasing spreads remained strong at 2.7%.
Our annual escalators for leases signed in the period were 3%, continuing our trend of increasing escalators toward that 3% mark, as we continue to roll our leases. TI's remained consistent at $1.24 per square foot per year of term on renewals, and $3.65 per year of term on new.
We came into 2019 with slightly higher amount of expirations than in years past, 12.8% of our portfolio. For the year, we have now leased 2.6 million square feet or more than 11% of our total portfolio GLA. Same-store retention for the year is 85%, while our releasing spreads are now 3.6%. I would note that we have seen an increased level of early renewals with over 1 million square feet of leasing for the year related to leases that expire in 2020 and beyond.
This is driven by tenant seeking to lock in their space for the long term as they consolidate practices and invest in their infrastructure. In the period, we did see our occupancy rate decline on a sequential basis. Most of this was directly attributable to our repositioning of certain assets, including our redevelopment of our Mission Viejo MOBs. These fee-simple buildings are situated directly on the St. Joseph, Mission Viejo campus, South Orange County's only regional trauma center.
The competitive buildings on this campus are more than 90% occupied at market rates more than 30% higher than where we would be doing leases today. By modernizing these buildings, we believe we can add significant value and bring rates up to market. While leasing efforts are ongoing at the properties, the renovation is expected to be completed by the second quarter of 2020, and we expect to stabilize the MOBs by the first quarter of 2021. We also saw our occupancy decline by 60 basis points year-over-year in our same-store portfolio. Much of this is related to specific actions we are taking at key assets to upgrade our tenants transitioning from lower quality, smaller tenants to bring in larger practices in health systems, like we are doing in our Long Wharf asset in New Haven and Clear Lake in Houston.
However, it also relates to our higher level of rollover in 2019, where our rent expirations increased 50% versus prior year. Even with our strong retention, it does take a couple of quarters of new leasing for occupancy to catch up. Overall, we are encouraged with the strength of our current leasing pipeline and the long-term value creation it brings to our assets. We expect to see occupancy normalize and regain its growth in the first and second quarter of 2020. On the expense front, we continue to show the benefit of our economies of scale, and ability to perform services using our internal engineering platform, which leads to a direct reduction in cost, and much more technical focus on our building operations, leading to better utility performance as we roll programs out to our properties.
These operating efficiencies are currently being offset by increases in property taxes primarily in Texas. In these cases, we continue to appeal these assessments and believe favorable outcomes are likely. However, those appeals do take time and could result in favorability in the next couple of quarters. As we go forward, we believe we are still in the early to middle innings of our platform progression. We believe our integrated platform is positioned to continue to generate additional returns at annual growth through both revenue and incremental expense savings.
Areas of focus on the expense side, include taking our remaining acquisition properties in-house, rolling out our energy efficiency programs to our entire portfolio, and increasing our maintenance capabilities in our key markets to perform more work-in-house. In addition, we are working on our tenant services and satisfaction and ways that can help drive tenant retention and rental rates higher. We are uniquely able to do this because of our existing built out infrastructure of over 200 property management and engineering staff in 23 offices across the country. We expect this will continue and financial impacts become more pronounced as HTA continues to purchase assets and grow out our existing markets.
Also as HTA continues to grow in our key markets, and markets currently at 500,000 square feet grow to 1 million square feet, those with 1 million square feet grow to 2 million square feet with the additional size, come the new wave of service offerings that makes sense for us in-house. We believe we are uniquely suited in the REIT space to take advantage of these efficiencies, the size and scale it provides.
I will now turn the call back to Robert.
Robert A. Milligan -- Chief Financial Officer, Secretary and Treasurer
Thanks, Amanda. We will now turn the call over for the first time to Caroline Chiodo, our Senior Vice President of Acquisitions and Developments to discuss the current state of the market and the opportunities we are seeing. Caroline joined us almost two years ago from Duff & Phelps Investment Management and has brought a unique view and perspective to our investment philosophy. Caroline?
Caroline E. Chiodo -- Senior Vice President of Acquisitions and Developments
Thanks, Robert. From an investment perspective, we've experienced an uptick in activity in 2019. With the increase in opportunities, we remain disciplined in our capital allocation, where we are focused on quality assets in our key markets. We continue to target 15 to 25 key markets with the goal to increase our share to at least 1 million square feet in [indecipherable] market.
As we increase our geographic concentration, we gain brand relevancy with health system, academic universities, and large physicians' groups. In addition, we improved operational efficiencies as we leverage them to platform. It is important to note this geographic concentration cannot be easily replicated, and more importantly, this platform generates significant local knowledge. This local expertise has a competitive advantage and improved underwriting and in addition allows us to source a significant number of off-market transactions within these targeted markets. Not only do these deals meet our quality and key market characteristics, but they are also accretive to our cost of capital on day one, based solely on the economics of the property.
In addition, we expect to see between 25 basis points to 35 basis points of incremental yield when the assets are added to the platform. This is critical as we focus on driving overall performance to the bottom line. In Q3, we closed on acquisitions of approximately $135 million at an average cap rate just over 5.6%. This brought our acquisitions for the year up to $228 million at an average cap rate of 5.75%. This is before we add any incremental property savings from our platform, which should bring yields over 6%. These properties are located in our key markets including our new market of Boise, Idaho and we're 91% occupied as of closing. Approximately, 71% of these transactions are located on or adjacent to hospital campuses. However, they are all fee-simple.
Subsequent to quarter end, we have entered into an exclusive agreement to acquire approximately $200 million of properties in our key markets. These have similar characteristics to the deals we have closed year-to-date, we are focused on closing these transactions and integrating the assets into our portfolio to drive earnings going forward. Robert will expand on updated guidance and match funding for these transactions.
In addition to the uptick in acquisitions, we were also active on the development front in the third quarter announcing two on-campus projects, totaling $90 million. These development wins highlight our strategic focus to partner with key health systems in our market. By providing development capabilities, this allows our health system partners to drive improved care at community as they expand their market reach in innovative and efficient space. The project also meet returns for shareholders with expected stabilized yield of over 6.5%, and will come online in the beginning of 2021.
In addition to our wins within the quarter, we remain on track and on budget within our development pipeline, including the 125,000 square foot MOB on the WakeMed Hospital campus in Cary, North Carolina [indecipherable]. We continue to have additional discussions with health systems and work toward getting our expected development run rate to $100 million to $200 million per year. Please see the September's press release for further details on our year-to-date transactions for acquisitions and development.
I will now turn the call over to Robert to discuss financials.
Robert A. Milligan -- Chief Financial Officer, Secretary and Treasurer
Thanks, Caroline. From a financial and capital markets perspective, we had a very active quarter, capitalizing on opportunities to invest in accretive acquisitions and developments, refinance near term maturities at attractive rates and raise equity efficiently to preserve our balance sheet strength and remain active in pursuit of our growth opportunities. We also saw our year-to-date investments and operating performance fall to the bottom line and lead to a third quarter in a row of sequential earnings growth.
Turning to the specific financial results, third quarter normalized FFO per diluted share was $0.42, up 5% for the first quarter of the year, as we continue to generate same-store growth and close on our acquisitions, redeploying capital raise in last year's Greenville sale into better assets and markets.
Funds available for distribution increased to $17.9 million, which includes $17 million of recurring capital expenditures in the seasonally high third quarter, or approximately 14% of NOI. Our run rate for the year, however remains around 12% of NOI. G&A for the quarter was $9.7 million with the year-over-year increase driven primarily by the expensing of internal leasing in which we had capitalized $1.5 million in the year ago period. We continue to expect our G&A run rate to go run between $10 million and $11 million through rest of the year. This remains extremely efficient relative to our peers.
As Scott and Caroline noted, we are seeing many new opportunities to invest in assets that will be accretive to our cost of capital. With our equity trading at implied cap rates in the low-5s, debt in the low 3% range and acquisition opportunities yielding over 6% once we add in our platform synergies. We will continue to be very active in our pursuit of these opportunities and raise the capital as we go to preserve our balance sheet strength.
In addition to the acquisition opportunities that yield immediate earnings, we are also seeing attractive development and redevelopment opportunities in our portfolio. With yields on these high-quality assets over 6% for development and over 8% returns on redevelopment, this provides another avenue for long-term earnings growth. With these now kicking off, we will see these return to hit our bottom line starting in the fourth quarter 2020 and accelerate then into 2021.
Funding these requires a strong balance sheet and active capital management. And we are very well positioned to do that. And in the quarter at 5.7 times debt to EBITDA with $1 billion of liquidity and very limited near-term maturities. In the third quarter, we took advantage of the reduction in interest rates by raising $900 million of senior unsecured notes at a blended rate of 3.04% and a weighted maturity of 9.5 years.
We use the proceeds to repay our '21 and '22 senior notes, as well as pay down our revolver. While these repayments resulted in a one-time $21 million debt extinguishment costs, they allowed us to lock in our interest rates for long-term, and eliminate any potential refinancing risk, while also pushing out our near-term maturities. In addition, we also rehedged our floating rate term loans, fixing our LIBOR portion at 1.38% more than 60 basis point below current rates. We also took down the $50 million of equity we raised at the end of June.
Given the significant number of investment opportunities we are seeing in the fourth quarter, we also raised $172 million of equity on our ATM subsequent to quarter end. We did this on a forward basis at a price of $29 per share or an implied cap rate in the low 5% range. Raising this capital ensures we locked in our accretion to these additional acquisitions and it will allow us to slightly lower our leverage, while still being accretive to our earnings in 2020. We will also continue to dispose our non-core assets to balance out our acquisition opportunities. As a result of these activities, we are maintaining our 2019 normalized FFO guidance, while increasing our same-store outlook range for the year to between 2.4% and 2.8%, and increase in our acquisition guidance to $375 million to $425 million.
With that, I will now turn it back over to Scott.
Scott D. Peters -- Founder, Chairman, President and Chief Executive Officer
Thank you, Robert. And we'll open it up for questions.
Questions and Answers:
Operator
We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from John Kim with BMO Capital Markets.
John Kim -- BMO Capital Markets -- Analyst
Thank you. Scott, you mentioned on the redevelopment projects that you expect 10% to 12% returns. Can you just elaborate, is that a cash-on-cash development yield or is that more of an IRR concept?
Scott D. Peters -- Founder, Chairman, President and Chief Executive Officer
I'll let Robert go ahead and talk through that. I think we said 8% to 12%, but...
Robert A. Milligan -- Chief Financial Officer, Secretary and Treasurer
Yeah, John, we're really looking for 8% to 12% returns on that and that's a cash-on-cash return on that.
John Kim -- BMO Capital Markets -- Analyst
So in your current project that you are just modernizing and then retenanting, multi-tenanting the space or are you adding any leasable square footage?
Scott D. Peters -- Founder, Chairman, President and Chief Executive Officer
It's a little bit of both, but the majority of it is just really modernizing the existing space, taking some master lease spaces that were much larger allowing for some smaller spaces and moving what we think are better equipped long term tenants into the spaces. I think, medical office is going through its middle innings right now of physician groups, healthcare systems, even academic university initiatives to determine where they want to be and what type of space they want, we're seeing as we've talked about the last three, four quarters, larger spaces being utilized.
We've seen as Amanda pointed out, pre-leasing that was expiring in 2021, 2022 our folks have come forward and looked for extensions to opt to extend the lease but also to add improvements to the space. So this is really in line with what we would look for as a portfolio objective, which is over the next 18 to 24 months really putting in place what we think is a long-term rent escalators for our space, but also the right tenants that are going to be there and continue to be there for three or four iterations of their lease.
John Kim -- BMO Capital Markets -- Analyst
Okay. And my second question is on your different portfolio occupancy, which attributed to I think improving your tenant quality and also due to expirations, I'm wondering how much is left as far as the tenant's improvements is concerned. And then looking forward, you have about 10% to 11% of release expiring per year. So are we going to see a noticeable improvement in occupancy in the near future?
Scott D. Peters -- Founder, Chairman, President and Chief Executive Officer
I'll take that from a top level. I think we're very fortunate actually in 2019. We've been able to, this quarter, get active in our acquisitions, fill in our markets, which we purposely took up to the breadth last year based upon wanting to get our leverage in place, making sure that we felt comfortable with accretive investments and being able to put our asset management program in place with our engineering and services that we're providing now to the majority of the buildings.
I think that we see from where we look at right now, continued occupancy gains from here. I think that we've taken a specific management decision process of, if you talk about first question redeveloping some space. I think every portfolio in America has some space that has been 15, 20, 30 years old and has been maintained or occupied by the original tenant. You need to go forward and change that space out, improve rents, get the correct escalators in place and we really took 2019 to try to go through that process and I think as we move into 2020, we're looking for some occupancy increase, some continued rent increases and again focused on escalators for the long-term five, seven, 10 year leases.
I'll let Robert add anything else.
Robert A. Milligan -- Chief Financial Officer, Secretary and Treasurer
Yeah, I think from like you know -- from a role perspective, we're pretty comfortable that we're working in this quarter and in the last couple of quarters on a couple of specific scenarios. That's going to continue to happen, but we don't see that as a material reduction in our occupancy. I think you've seen this come down a little bit here and I think you'll see us look to regain that in the first half of next year certainly, looking to grow it by the end of 2020.
John Kim -- BMO Capital Markets -- Analyst
So is it fair to assume that you expect an improvement in same-store NOI growth as well?
Robert A. Milligan -- Chief Financial Officer, Secretary and Treasurer
Well, I think from a leased rate perspective, I think that always kind of follows the -- the NOI follows the leased rate and the occupancy after that. So I think you'll see us look to get into next year in the 2% to 3% range. And then as occupancy increases then you'll see the NOI growth kind of follow suit after that.
John Kim -- BMO Capital Markets -- Analyst
Great, thank you.
Operator
Our next question comes from Chad Vanacore with Stifel.
Seth Canetto -- Stifel, Nicolaus & Company, Inc. -- Analyst
Hey, good morning. This is Seth Canetto on for Chad. The first question I had, I just wanted to touch on the acquisition pipeline and the pace of acquisitions this year, you know in the first half, you guys had stated that it would be back half weighted and here we stand today with you guys closing a significant amount of deals and increasing that for 2019. So how should we be thinking about the pipeline going forward, and just what had changed in the environment from the first half till now?
Scott D. Peters -- Founder, Chairman, President and Chief Executive Officer
Well, obviously, we've always put shareholder value first, and that means accretive acquisitions. We've also said for many years now that we like the key market concept, and so we've been focused on the right timing as a company, we found that the second half of this year, we've started seeing opportunities that really fit in our portfolio. As Robert pointed out in his remarks, we see that it is accretive. We were fortunate to be able to match funding, so that we feel very comfortable that we can continue to grow earnings. And if you heard our first call, as we talked about at the beginning of the year, we've now been third year from the Duke transaction.
We've certainly continued to grow earnings as we talked about with that portfolio, we've integrated it throughout the portfolio. And our focus is really shareholder value continuing to invest in our markets, and really taking advantage and of the right timing to do that and we're seeing opportunities. This has been a very fortuitous time for us, and we continue to see opportunities. And I don't like to talk about the future because you really don't know, but I think we will continue to see opportunities in our markets and we will take advantage of those as long as it's accretive to us and we find them in the markets that we like.
Seth Canetto -- Stifel, Nicolaus & Company, Inc. -- Analyst
All right. And just continue on that path, are you seeing any large deals out there, and I know you mentioned the pricing for large deals remains competitive. So should we still expect you guys to do a lot of deals in the $25 million to $35 million range. It seems like you're kind of in that 5.6% to 5.75% yield, is that correct?
Robert A. Milligan -- Chief Financial Officer, Secretary and Treasurer
Well, we certainly like the 5.5% to 6.5% again. We've also looked at some assets that aren't 100% occupied. We bought some assets here recently, 85%, 90% occupied, being able to bring our leasing expertise and our management team to in that market to bear on the asset. Larger portfolios are certainly here recently in certainly in the last three quarters in 2019, maybe the end of 2018, a highly sought after by a multitude of different investors and some folks have paid very, very what we would consider very high prices for not as quality of assets as you would like to see or that you'd would like to acquire. Our focus has been not on buying something in looking at the first year NOI, of course we do that, but we want to make sure that we see consistent escalators, consistent occupancy and a five to seven year pathway that says that this asset is going to continue to a drive NOI at the asset not be flat or potentially face issues where they are over market. We've seen some assets, we've seen some portfolios where I personally have felt that the rents in place are over market and that when come roll over time, there may be some issues and when that happens, we pass.
Seth Canetto -- Stifel, Nicolaus & Company, Inc. -- Analyst
Got it. Thanks for the color. And then releasing spreads have been really strong over the last year, they did decelerate a little bit to 2.7% in the quarter, is that sort of the run rate we should think of going forward for that metric?
Scott D. Peters -- Founder, Chairman, President and Chief Executive Officer
Well, I think we've seen some strength in 2019 for rent growth and I think you'll continue to see it this year. We're already in the fourth quarter and from what we can see in our leasing pipeline, we're pretty happy with where we are with renewals that Amanda mentioned that we're in the process of -- as we rolled over the larger amount of the portfolio, it takes us a longer especially when you're dealing with healthcare systems or dealing with larger physician groups. I don't know, 2020, I think that if I was to say it in 2020, I think if you can get somewhere in the 2% range you may be looking at probably a pretty good indication of good solid space, a good asset and a good relationship with the tenant.
I think that as we look forward into 2020, we may be seeing some slowing in the economy and if that happens, then medical office is such a safe space, but it is not immune to the influences of the general economic environment. So I would say that this has been a very good year for the MOB space.
Seth Canetto -- Stifel, Nicolaus & Company, Inc. -- Analyst
Alright great. And then just last question from me, looking at the Same Property Cash NOI guidance. I understand that you guys tightened that range 2.4% to 2.8%, implying 2.6% the midpoint. But year-to-date, you've done 2.7%. So is that slight downward revision at the midpoint due to the lower occupancy or how should we think about that?
Scott D. Peters -- Founder, Chairman, President and Chief Executive Officer
I'll let Robert answer that.
Robert A. Milligan -- Chief Financial Officer, Secretary and Treasurer
Yeah, I don't think there's any real change in outlook for us. I think when we said start of the year we thought we'd be 2% to 3%. I think we continue to think 2% to 3% is the right range for any given quarter depending on rollover and whatnot that's taking place. And so it's just largely the reflection of where we are to-date.
Seth Canetto -- Stifel, Nicolaus & Company, Inc. -- Analyst
All right, great, thanks for taking my questions.
Operator
Our next question comes from Nick Joseph with Citi.
Nick Joseph -- Citi -- Analyst
Thanks. Maybe, following up on one of those questions. What differences are you seeing in terms of the buyer pool in cap rates between portfolio deals of one-off properties?
Scott D. Peters -- Founder, Chairman, President and Chief Executive Officer
Well we've always built, except for the Duke transaction, we've built in the last 12 years through one-off acquisitions. We were fortunate to be able to define our markets and early on trying to get a some depth in the markets and some market knowledge. Our leasing folks have been with us primarily five, six, seven, eight years, and they get relationships within the market. Our acquisitions, we have always been active. So we like frankly, the one-off deals, because you know what you're getting, you get to blend that asset into the portfolio, and you don't pick up what could be troubled assets along with it.
I think the pricing is more favorable. You've seen that I think from us, and I think from others that have bought one-off assets and if we can continue to articulate our game plan and our strategy, I think we can be successful. I wouldn't expect us to be in the hunt for larger portfolios just because there is that capital out there that seems to be extremely aggressive, and I think we want to make sure that we are accretive in our acquisitions, we want to grow earnings, we don't want to go backwards in any particular year based upon decisions made in prior years, and so we're going to be very conscious of how we spend shareholder capital.
Nick Joseph -- Citi -- Analyst
Thanks. if you have to quantify it, would you say it's about 50, 75 basis points spread between where you can execute on the one-off versus where you've seen some of these portfolios trade?
Scott D. Peters -- Founder, Chairman, President and Chief Executive Officer
I think that's a good general statement, but I would -- I actually think that if you look at the quality of the assets, vis-a-vis the cap rate spread, it's even wider, and I'm talking about performance. I'm talking about not just buying it today and saying it's 50, 75, 100 basis points. But OK what's it going to do in year 2, 3, 4 and 5, and how much capital do you have to put in the assets and our rents over market when they roll. I think it could be wider than that and we'll see as we go through the next two or three years from folks who have bought portfolios, and bought assets and the whole key and the whole processes can you consistently grow earnings year over year over year over year without having a period of time where you have to retrench or divest of things which are dilutive.
Nick Joseph -- Citi -- Analyst
That's helpful, thanks. And then you've been using the forward [indecipherable] to match on the external growth, how do you think about the timing and execution of both issuing the equity and then ultimately settling it versus where the deals are in the pipeline and ultimately closing and spending the cash?
Robert A. Milligan -- Chief Financial Officer, Secretary and Treasurer
Well, I think from a -- I will answer that reverse where I think from a settlement perspective, one of the reasons we use it on a forward basis is so that we can take the cash when we actually close the transactions. We've had a philosophy along the way, since we came public in 2012 that we will really look to finance our acquisitions at the time we closed them or it's closed, they're about to do that. Some are forward basis, we issue it and then we'll take it down as we close the transaction. So we'd anticipate with the fourth quarter, specifically that we close our guidance indicates, another $150 million to $200 million and we'll look to take down most of that equity by the end of the period.
Nick Joseph -- Citi -- Analyst
Thanks.
Operator
Our next question comes from Tayo Okusanya with Mizuho.
Tayo Okusanya -- Mizuho -- Analyst
Yes, good morning you, guys. And congrats on a solid quarter.
Scott D. Peters -- Founder, Chairman, President and Chief Executive Officer
Thank you.
Tayo Okusanya -- Mizuho -- Analyst
My question has to do more around development and redevelopment. From a development perspective, I kind of recall a year ago, you guys talking about expectations of seeing increased demand from physicians and as also from hospital systems, and you kind of put out a number back then of hoping to kind of see the $100 million or so, anywhere from zero to $100 million in development starts and you kind of just announced $90 million. Caroline just talked about a number of $100 to $200 million hopefully as a new target. I'm just kind of curious, is it fair to kind of say you are seeing more activity from the hospital systems and that you really kind of, do you see development as being a bigger part of the growth engine over the next few years.
Scott D. Peters -- Founder, Chairman, President and Chief Executive Officer
I'll do it, Robert just did, I'll take the last question first and then get to the second one. I do, I do think that HTA needs to have development as a fair part of its growth. I don't want it to be over-leveraged, I don't want it to be under leveraged. But I think that $100 million to $200 million is where we looked at it and we've taken some time to implement our team, we've taken some time to get out and introduce ourselves. We've taken some time to fight the interference that came with the Duke acquisition and it's a tough environment. I mean it's, when you're going after development deal, it's sort of like a football game.
There is all different sides and you go in and you make your best pitch and we've been fortunate, we've been able to find some development that is occupied as we've talked about, we see some more. We're able to do some things that are already that we already control, which I think will help us over the coming quarters. And we've also been out looking for deals that I would say are on unattached work or just new opportunities with HTA, its development team, the management team, the leasing relationship we have with that particular opportunity. And so, yeah, it is something that when we bought Duke, I didn't frankly, appreciate the opportunities that are presented. But certainly now that I've seen the integration between development, leasing, acquisitions, and relationships with healthcare systems and physicians, I think it was very, very fortunate that we were able to do the Duke transaction but also have as part of that transaction of the opportunity to focus on development. So we're very, I think we're very happy about where we are. I'd like to see it improve and increase, and from a management perspective, we're certainly focused on that.
Tayo Okusanya -- Mizuho -- Analyst
Got you. And then on the redev side also, could you talk a little bit about kind of opportunities you're looking at in your portfolio, how much of a redev you think you could be doing on an annualized basis. More importantly, as a result of redev maybe any kind of impact it could have on near-term NOI as you kind of empty out spaces to get them redone.
Scott D. Peters -- Founder, Chairman, President and Chief Executive Officer
Right. I'll let Robert handle that.
Robert A. Milligan -- Chief Financial Officer, Secretary and Treasurer
Yeah, I think as we look at redevelopment, we typically, I think as we go through our portfolio, we probably have three or four assets a year that we can look at as going through this process. I think Mission Viejo is really down the middle of the fairway for what we'd be looking to do, I mean this is a great fee-simple asset and probably one the most high demand areas in the country at least in our portfolio. And we've got the ability to take a 1970s vintage building that's largely been occupied by the hospital the entire time take what would be $25 renewals at a campus that's closer to $35 to $40 net rents.
And so as we look at that, you put in $100, $125 a foot is pretty attractive returns cash-on-cash. As we look at the opportunity set there, there's probably three or four that we look to do a year. I don't think it's a significant drag as we look to it. It's one or two pennies a year, but I think that's been really how we've been running it over the last couple of years anyways. This just makes it more of a formalized program where the incremental capital really makes a big difference.
Scott D. Peters -- Founder, Chairman, President and Chief Executive Officer
Just to kind of conclude what Robert was saying, when we did the Greenville transaction last year, we took their proceeds, we buy with a great transaction for shareholders. We held on to the proceeds, didn't match them as quickly as perhaps. At the time, we're very competitive environment, we didn't want to overpay for assets. One of our focuses as we came into 2019 moving to 2020-2021 is continued earnings growth. Our focus is not to take properties out of production, so to speak, simply to put capital into them. We want to make sure that we're focused on shareholder value and continue to move our earnings quarter-over-quarter.
Tayo Okusanya -- Mizuho -- Analyst
Excellent. I'm liking your comments about better internal and external growth, and it's good to kind of see that starting to happen. So congratulations.
Scott D. Peters -- Founder, Chairman, President and Chief Executive Officer
Thank you.
Operator
Our next question comes from Connor Siversky with Berenberg.
Connor Siversky -- Berenberg -- Analyst
Hi guys, and thank you for taking my question. Just to piggyback off the previous one. We noticed an increase in recurring capex specifically in second-generation tenant improvements. Can we expect these elevated levels to go forward or maybe a reversion to a historical mean?
Robert A. Milligan -- Chief Financial Officer, Secretary and Treasurer
As I think, as we look at our capital and our TI, it certainly does follow from a leasing perspective. So second generation TIs was a little bit higher. I think it comes down slightly from where we were in third quarter. I think it's important to remember, third quarter is almost always our highest capital period, just from a weather perspective and one, for whatever reason it matches up with some of the leasing trends. So we would expect a recurring capital overall to decrease a little bit. I think as we look at the long-term outlook, it's probably still in the 12% to 13% of NOI range. So third quarter certainly elevated above where we see that playing out over the long term.
Connor Siversky -- Berenberg -- Analyst
Okay, thanks for that. And then maybe one more from me. In terms of these development starts, $100 million to $200 million year-over-year, do you see that as a -- at the top of your capacity or if not, what kind of limiting factors do you guys run into that would increase that level?
Scott D. Peters -- Founder, Chairman, President and Chief Executive Officer
Well, I think that the capacity from a internal perspective and from a organizational is not a limit. I think that we are staffed and have the ability, and we've really got put together what we think now is a very solid team. We've made presentations, we've been through the fire so to speak of the exchange between information and so forth. So it's not a capacity issue. I do think though that we want to keep it in moderation, development. Medical office is somewhat different than any other development, because typically medical office needs to be occupied at least our philosophy is it needs to be 70%, 80% pre-leased, it needs to be leased with credit, it needs to be something that when it's built, they move in and so you don't have that risk. So to speak of while [indecipherable], we hope we're going to find the tenants.
So we want to keep it balanced as far as our mix as a company. Right now for our size and for where we are, I think $100 million to $200 million is probably one of very achievable, which is important, but also it probably represents where the sector is from a development perspective. We're not going to win them all. We're not going to go after them all. We're not going to have all the relationships that some other folks have and we have some. And so when we look at what we can do and how we think we can perform, I think for the next 12 months to 18 months to 24 months, if we continue to do that $100 million to $200 million, I think that would be a very good starting point, as this process continues in the medical office sector of either redevelopment of space that's there or new development from healthcare systems for particular new assets.
Connor Siversky -- Berenberg -- Analyst
Alright, great. That's all from me. Thank you.
Operator
Our next question comes from Todd Stender with Wells Fargo.
Todd Stender -- Wells Fargo -- Analyst
Thanks. Just back to the capital sources, I guess with the 6 million shares that you are -- I guess you've gotten from the proceeds or you are about to, through the forward ATM that will essentially fund the incremental acquisitions you've announced, but you also had guided for some dispositions to occur in Q4. Are those still -- are those sales still happening?
Robert A. Milligan -- Chief Financial Officer, Secretary and Treasurer
I think as we look at our dispositions, we certainly do have several, several properties that we are in the process of disposing. I think we've been out in the market with those and we do have offers on the table. And so, you will probably see us close a couple of those in the fourth quarter, it's going to be the amount is -- I don't think we've changed our expectation on that, but it could be anywhere from, probably $10 million up to the full $75 million we had guided to. It's just a matter of how it goes through the process. That I think as we look at our disposition program and how we will utilize dispositions, it will largely go to fund incremental acquisitions.
So as we look to dispose properties, we'll look to have incremental acquisitions on top of them to quickly recycle the capital really outside of kind of the one-off markets that we find ourselves in, input it then to the markets that are more core for HTA long-term.
Todd Stender -- Wells Fargo -- Analyst
Thanks, Robert. And just sticking with you, do you need more capital over the near term? You're -- the ATM that you sold of 6 million shares, I gather the share price was sub-29, your stock is now over 30. How are you looking at maybe going through just your standard ATM or maybe you don't need the proceeds right now?
Robert A. Milligan -- Chief Financial Officer, Secretary and Treasurer
I think as we look at -- our balance sheet's in great shape. One of the things that we liked about being able to utilize the ATM in this way, was it really did match fundings as you point out. And so any time from here, balance sheet is in a perfect position, I think anything as we look to go forward, we got to find great deals, and I think great deals is just a good thing for shareholders and at the appropriate time, we would look to come back for equity or dispositions, as appropriate.
Scott D. Peters -- Founder, Chairman, President and Chief Executive Officer
I think Todd, I think we want to be very selective, we want to continue to focus on earnings, we want to continue to focus on shareholder value and as Robert said, we want to make sure that we're finding good assets, which we are seeing right now in our markets, which is also appropriate. But we want to be very, very conscious of earnings growth, match funding and being very, very conscious of generating shareholder value.
Todd Stender -- Wells Fargo -- Analyst
That's helpful. And then just switching gears back to the Mission Viejo redevelopment project. Just for clarification, I think you mentioned that some of the leases are expiring in the 2021 era. I would imagine that you'd let some of these leases expire, so the tenants can move out. Maybe just kind of clarify what the timing looks like for some of those leases to expire? When you're going to break ground and maybe when we start to see some of those 8% to 12% returns? Thanks.
Robert A. Milligan -- Chief Financial Officer, Secretary and Treasurer
Yeah, no, Mission Viejo, the tenant has actually largely moved out the middle of this third quarter on that. So that was reflective of a bit of our overall occupancy declined a significant portion of that. So we should see that start to release I think as Amanda noted in her comments, we should see it start to lease up. We will complete most of the modernization by the second quarter of 2020, and see it lease up by the end of the year is our expectation.
Scott D. Peters -- Founder, Chairman, President and Chief Executive Officer
We're very excited about that asset. Great location as you know being from the West Coast and actually being in that area. We saw that campus, much like we saw Forest Park, when we even though, we didn't anticipate the transition that Forest Park went through with HTA, but we did think that this is a great campus, it has got long-term value. And frankly, it's probably not better real estate in our portfolio companywide. So we're excited about putting the dollars in there and then starting to see into '20, '21 starting to see the benefits of the rent increases and the occupancy back up to 95%.
Todd Stender -- Wells Fargo -- Analyst
All right, thanks guys.
Operator
Our next question comes from Michael Mueller with JP Morgan.
Michael Mueller -- JP Morgan -- Analyst
Hi, most things have been answered, but just on the prior question, the modernization. Can you talk a little bit about what goes into modernizing a building as opposed to, is it just facades, doing lobbies, elevators, just changing the space around for different types of uses. Just what's the scope of it, what's going on there?
Scott D. Peters -- Founder, Chairman, President and Chief Executive Officer
Well, I think you just did our answer. With obviously HVAC, it's elevators and the lobbies, tenants when they walk into buildings now they want to have a nice, or what I would call a lighted type experience where they're not walking into something that's 30, 40 years old. I mean ceiling heights are also part of the equation, making sure that the space is laid out so that the appropriate tenants are in their appropriate places. I think that's a big thing that that Amanda and her team is focused on is putting tenants where they need to be for long-term occupancy because some need first floor space, some need exposure, some don't and we're putting that in our leasing plans and looking at how we roll this space out. And again, I look at this space now you remodel it and you put some dollars into it, you move the rents up, you get occupancy and then you're set for the next 15, 20 years and again this is really good real estate, and to maximize that is just a real benefit for shareholders.
Amanda L. Houghton -- Executive Vice President of Asset Management
And just to add a little bit of color to that. I think some of the most important things that we're looking at are things that we can do to the building that will play expand the type of tenants that we can put in things like the sprinklering of the building or as Scott mentioned the raised ceiling heights, or elevators, ADA upgrades all of those things that we're doing will now allow us to lease our space to a whole different tenancy set. So those are the kind of things that we're looking for.
Michael Mueller -- JP Morgan -- Analyst
Got it. That's helpful. Thank you.
Operator
Our next question comes from Lukas Hartwich with Green Street Advisors.
Lukas Hartwich -- Green Street Advisors -- Analyst
Thanks, good morning. Just one for me. I'm curious, when you're talking to sellers, how often do OP units come into the conversation?
Scott D. Peters -- Founder, Chairman, President and Chief Executive Officer
Well, we have the opportunity at our acquisition in Boise. And that was one of the reasons that we've always liked that market and it was an opportunity to align ourselves with someone who had been in the market a long time, good asset, good location and that was something that good, we really liked that. We did that on the East Coast, we did a transaction in Connecticut, where folks took a lot of OP units and that was one of the reasons that we liked that portfolio so well. And frankly, it's performed very well and knock on wood, they've done well with us.
So we like OP unit opportunities when we see them. It's -- I think you'll see more of those, we certainly talk about it, and I know our peers talk about it because the tax impact of folks who've had property for such a long time, they don't want to pay the taxes, they don't necessarily want to do a 1031 again. And so we have that conversation. But I would not say that we've seen or at least I have not seen a tremendous amount of that over the last 18 months.
Lukas Hartwich -- Green Street Advisors -- Analyst
Great, thank you.
Operator
Our next question comes from Daniel Bernstein with Capital One.
Daniel Bernstein -- Capital One -- Analyst
Good morning. Now that you have -- you are doing redevelopments in your own portfolio and -- one of the value-add opportunities you're seeing on the acquisition side, is there some limiting factor in terms of the property engage -- or how much you got to modernize or bring on and bring on to the portfolio to modernize or is it just a matter of price? Just trying to understand if there's a lot of value-add opportunities out there, or there are some other limiting factors for you?
Scott D. Peters -- Founder, Chairman, President and Chief Executive Officer
As I mentioned earlier, we've acquired some assets with some occupancy upside. That's very good for us. Number one is accretive, what we paid for with existing NOI, but number two, we get to bring our leasing teams and we get to bring some increased NOIs. I think that's part of our focus on earnings growth. Buying buildings that need a substantial amount of modernization probably is not something that we would do typically those assets are much, much older they're smaller, they're not necessarily in our key markets. I would make an exception for that, for example Boston has gone through renovations and we've had some opportunities and are actually, hopefully have opportunities to do something like that there, but that's where the healthcare system, it's with them, but that has a specific use and yes, it will take some capital but it's already pre-leased in their mind and it's got a great location.
But you need to be careful about the market, I think we're not looking to do secondary markets. We're not looking to do markets outside the 15 to 20 that we like. So that's kind of where I would say that our focus is. Moderate is good, significant is probably not where we are.
Daniel Bernstein -- Capital One -- Analyst
That's all I had. Appreciate it. Thanks.
Operator
This concludes our question-and-answer session. I would now like to turn the conference back over to Scott Peters for any closing remarks.
Scott D. Peters -- Founder, Chairman, President and Chief Executive Officer
Well, thank you everybody for joining us, and we'll look forward to seeing our investors at NAREIT. And again, thank you, and any questions, please call Robert or myself and we'll get back to you. Thank you.
Operator
[Operator Closing Remarks]
Duration: 56 minutes
Call participants:
David A. Gershenson -- Chief Accounting Officer
Scott D. Peters -- Founder, Chairman, President and Chief Executive Officer
Amanda L. Houghton -- Executive Vice President of Asset Management
Robert A. Milligan -- Chief Financial Officer, Secretary and Treasurer
Caroline E. Chiodo -- Senior Vice President of Acquisitions and Developments
John Kim -- BMO Capital Markets -- Analyst
Seth Canetto -- Stifel, Nicolaus & Company, Inc. -- Analyst
Nick Joseph -- Citi -- Analyst
Tayo Okusanya -- Mizuho -- Analyst
Connor Siversky -- Berenberg -- Analyst
Todd Stender -- Wells Fargo -- Analyst
Michael Mueller -- JP Morgan -- Analyst
Lukas Hartwich -- Green Street Advisors -- Analyst
Daniel Bernstein -- Capital One -- Analyst
