Bradley Page - SVP and General Counsel John Thomas - CEO, President and Trustee Jeffrey Theiler - CFO and EVP Mark Theine - SVP, Asset & Investment Management.

Vikram Malhotra - Morgan Stanley Jordan Sadler - KeyBanc Capital Markets Jonathan Hughes - Raymond James & Associates Michael Carroll - RBC Capital Markets Chad Vanacore - Stifel, Nicolaus & Company Juan Sanabria - Bank of America Merrill Lynch John Kim - BMO Capital Markets Andrew Babin - Robert W. Baird & Co. Omotayo Okusanya - Jefferies.

Welcome to the Physicians Realty Trust Second Quarter 2017 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Bradley Page, Senior Vice President and General Counsel. Thank you. Mr. Page, you may now begin..

Thank you. Good afternoon and welcome to the Physicians Realty Trust Second Quarter 2017 Earnings Conference Call and webcast.

With me today are John Thomas, Chief Executive Officer; Jeff Theiler, Chief Financial Officer; Deeni Taylor, Chief Investment Officer; John Lucey, Chief Accounting Officer and Administrative Officer; Mark Theine, Senior Vice President, Asset & Investment Management; and Daniel Klein, Senior Vice President and Deputy Chief Investment Officer.

During this call, John Thomas will provide a company update an, overview of recent transactions and a summary of our strategic focus. Then Jeff Theiler will review the financial results for the second quarter and our thoughts for the remainder of 2017. 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 some 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?.

Thank you, Brad. Thank you for joining us this afternoon. We're proud to announce another very successful quarter of growth, continuing our long term strategy of partnering directly with high-quality health systems and physician groups.

We acquire their mission-critical medical office facilities in a manner that provides them the capital they need to grow and thrive while building a portfolio that will create long term value for our shareholders.

The DOC strategy remains unchanged since our IPO, creating value through our relationship-based investing, earned through our unique understanding of health care operations from inside of the building and out.

Our pipeline has never been more robust, driven by these long-standing relationships directly with health system leaders and physician at valuations that are accretive on both on NAV and FFO basis for our stockholders.

We continue to demonstrate the strength of our relationships with premier health care systems, including the Baylor Scott & White Health, Ascension Health, Northside Hospital and Catholic Health Initiatives, proving that when health systems and providers have the option to choose their real estate capital and operating partner, they will choose Physicians Realty Trust.

All in all, we completed $588 million of new acquisitions in the second quarter at an average expected first year cash yield of 5.3%, representing the highest-quality real estate we've acquired. We continue to grow intentionally and intelligently, not just for the sake of growth.

So far in 2017, we have increased our gross real estate assets from $2.9 billion to $3.8 billion and our total portfolio square footage has increased 16% this year from 10.9 million to 12.6 million square feet. Our portfolio occupancy continues to lead all publicly traded MOB REIT and has increased from 96.1% to 96.3% this year.

The average age of our buildings has improved and the average size of our buildings has improved from 44,000 to 48,000 square feet. We continue to build scale in key target markets that we know well and that offers strong local economies.

After the completion of all announced acquisitions, our largest single market will be Dallas, Texas which is the fourth largest MSA in the country. Our second largest market will be Atlanta, the ninth largest MSA and our sixth largest market will be Indianapolis, the 34th largest MSA in the country.

Perhaps most importantly, the credit quality of our top 10 tenants has improved substantially. We began the year with CHI-KentuckyOne as our one largest single tenant by annualized-based rent and now CHI-Nebraska leads our top 10, with Baylor Scott & White joining the list at #3 and McKesson's U.S. Oncology is now our fourth largest tenant.

Our HonorHealth relationships in Scottsdale, Arizona has expanded, moving them to seventh in our listing of top 10 with more assets coming.

Upon closing of our announced transactions with the prominent health -- Atlanta health care provider, Northside Hospital, we project that Northside will join our top 5 tenants list as well Investors from around the world are increasingly recognizing what we have believed for years, medical office space is not just the most attractive asset class for resiliency and long term cash flow and healthy real estate but across all classes of real estate.

This realization has resulted in a very competitive acquisition environment. As values have increased, we believe our strategy of partnering and cultivating long term relationships with the best health care providers will help us maintain a robust acquisition pipeline of attractive, off-market, on- and off-campus medical office facilities.

We believe this will enhance the quality of our portfolio while maintaining our track record of making accretive investments for our shareholders. Since our IPO in July of 2013, Physicians Realty Trust portfolio has grown by approximately $1 billion per year from a portfolio of $150 million to nearly $4 billion today.

Our growth originally limited by a relatively high cost of capital, started with finding arbitrage opportunities with smaller assets in secondary markets.

While that strategy served as well, our cost of capital today is competitive with our peers across the health care realty space, allowing us also to pursue value among the larger, newer, Class A real estate facilities in key markets. Four years of hard work in the building of our DOC culture have led us to our second quarter investment opportunities.

In particular, we're proud to have acquired several of the best MOBs in the country, including the Baylor Charles A. Sammons Cancer Center built by Deeni Taylor and Jim Bremner in Dallas, Texas and 2 Ascension St. Vincent facilities in the Indianapolis MSA. The Baylor Charles A. Sammons Cancer Center is particularly impressive.

Developed by Jim Bremner and our Chief Investment Officer, Deeni Taylor while they led the Duke Healthcare development team, this may be the most impressive and valuable medical office facility in the United States. With approximately 460,000 square feet, the Baylor cancer center was completed in 2011, rated LEED Gold by the U.S.

Green Building Council. The building is 95% occupied, with the largest not-for-profit health system in Texas, Baylor Scott & White, rated Aa3 by Moody's, leasing approximately 55% of the buildings. McKesson's U.S. Oncology physician group, rated Baa2, leases 40%.

In addition to hosting Baylor's oncology clinics and outpatient space which includes 4 linear accelerators, the facility is also home to Baylor's world-renowned transplant surgeons and clinics. The facility is the center of the Baylor University Medical Center campus, Baylor Scott & White's flagship hospital located in downtown Dallas, Texas.

Cancer center is connected by a sky bridge directly to Baylor's T. Boone Pickens Cancer Hospital. But you won't have to just take our word for how impressive this building is, we intend to host an investor and analyst tour of this facility in conjunction with the upcoming November NAREIT conference in Dallas. So be on the lookout for your invitation.

Like Baylor Scott & White, who chose Physicians Realty Trust as their preferred real estate partner, Ascension's St. Vincent's Hospital, rated Aa2 by Moody's and the largest not-for-profit health system in the United States, exercised the ROFO option to partner with DOC for 2 of their real estate properties.

These properties, located in Indianapolis, include an 86,000 square foot property on the campus at the St. Vincent Carmel Hospital and a 100% leased MOB on the campus of the St. Vincent Fishers Hospital, St. Vincent's newest hospital in Central Indiana.

Established in 2013, the Fishers Hospital specializes in pediatric specialty care in conjunction with the on-site Peyton Manning Children's Outpatient Center. As previously announced, we've entered into purchase and sell agreements to acquire 2 multi-tenant properties affiliated with Northside Hospital in Atlanta.

One of the 2 properties comprises 363,000 square feet on campus, while the other is off-campus in a strategically important location with very attractive demographics. As part of the deal, Northside Hospital also granted a certain development rights to some of the last available real estate on Atlanta's Pill Hill medical market.

Those rights were not available as part of a larger Duke portfolio transaction. The acquisition of the Northside MOB is expected to be completed during this third quarter of 2017.

Finally, our execution in a very successful integration of last year's roughly $700 million portfolio investment with CHI gave us the opportunity to acquire another $157 million in high-quality facilities with this system in an exclusive off-market transaction valued at a 6.8% cap rate.

These 13 buildings total 677,000 square feet, are 99% leased, with 93% of that represented by new, 10-year leases and 2.5% annual escalators with the applicable CHI hospital.

The average age of this portfolio is 10 years, with the price of this investment being the brand-new, 129,000 square foot on-campus CHI health clinic building in Omaha, Nebraska.

CHI is the third largest not-for-profit health system in the United States and we're pleased to have worked in direct negotiations with them to expand the relationship with this latest acquisition.

All in all, our disciplined and relationship-based investment approach has once again brought us the best possible outcome, outstanding, A+, high-quality medical office facilities without the all-or-nothing approach required in a typical portfolio transaction.

The scope of opportunities available to Physicians Realty Trust has changed, but the strategy of sourcing the best possible facilities for investment through our relationships with health systems and physician groups has not.

In fact, the number and quality of our relationships continues to grow every quarter as our reputation for partnership and customer service with providers continues to spread. Our asset management team's keen focus on operational excellence and outstanding customer service is proven in our just completed Kingsley tenant satisfaction survey.

We surveyed more than 400 tenants, representing over 2.5 million square feet and are proud to report that we received an industry-leading 64% response rate while beating the Kingsley average index score in every major category.

Typical response rates for these surveys are between 45% to 55%, so 64% demonstrates the close relationship between asset -- our asset management team and our health care provider partners. DOC's score of 90% for both management satisfaction and responsiveness beat the Kingsley REIT average.

Best of all, only a handful of tenants throughout the survey indicated their intentions of not renewing their lease. Just as we have worked hard to leverage our relationships to grow, we have also worked hard to maintain and enhance our relationships and reputation as the preferred health care real estate owner of hospitals and health care providers.

Before Jeff reviews the second quarter financial results, consistent with our commitment to transparency, we want to provide an update on Foundation Healthcare and Trios.

With respect to the foundation assets, San Antonio and El Paso are each making their regularly scheduled rental payments per their leases and have done so throughout the entire second quarter. The business for each surgical hospital is improving and we're optimistic that the operations, management and improvement plans are working for each.

San Antonio has begun paying additional rent payments to get caught up within the next 12 months with the fourth quarter 2016 rent payments and 2016 real estate taxes that are due.

El Paso is paying their currently scheduled rent and did so throughout the second quarter and we continue to work with them on plans to recoup the 6-month arrears on rent, representing the fourth quarter 2016 and the first quarter of 2017.

We continue to work towards the disposition of these 4 buildings as well as the Oklahoma City Foundation asset but can't yet provide definitive timing or pricing information. Due to the current rent payments, we're recording cash revenue for each of these buildings and currently do not anticipate future additional accounting charges related to them.

In Trios, the Kennewick, Washington medical office building, as we have shared over the last couple of months, Trios Health system in Kennewick, Washington has struggled this year and, unfortunately, as of May, has not been paying rent in the medical office building we own which is attached to their new hospital and leased to them for 30 years.

As of June 30, 2017, the hospital government agency filed for Chapter 9 reorganization with the intention of reorganizing and emerging from the reorganization process with an improved balance sheet.

Trios is a local community hospital mission-critical to the city and they are working on a turnaround plan, including, most importantly, with HUD, to refinance the hospital's debt which should provide substantial relief to their cash flow. They are also considering potential strategic transactions.

Because we can't project when they will be paying rent, we elected to take a $2.8 million charge this quarter for past accrued straight-line rent which we disclosed during our recent offering. We will not be booking any revenue in this lease until we get more certainty of payment as we work with them on a resolution through the Chapter 9 process.

After considering revenue not recorded during the quarter, the total impact to earnings due to the Kennewick delinquency was $0.03 per share for the second quarter, with the forward quarterly impact being approximately $1.2 million per quarter in lost cash revenue until resolved.

While we're disappointed in the current status of this asset, we remain optimistic this investment will be accretive long term to DOC. And note, neither the hospital nor the medical office facility has ceased providing services to this community. Jeff will now discuss our results for the second quarter.

And after that, we'll address any of your questions.

Jeff?.

Thank you, John. In the second quarter of 2017, the company generated funds from operations of $32.6 million or $0.20 per share. Our normalized funds from operations were $37.9 million. Normalized funds from operations per share were $0.24 and our normalized funds available for distribution were $34.2 million or $0.21 per share.

As John discussed in his prepared remarks and as detailed in our June press release, our tenant in Kennewick, Washington ceased paying rent and has entered into Chapter 9 bankruptcy.

While we strongly believe in the value of that building, we did not collect the full second quarter of rent and wrote off the previously recognized straight-line rent asset for a total charge of $4.1 million or about $0.03 per share.

Our acquisitions this quarter totaled $588 million and we purchased some extremely high-quality medical office buildings, including some that would be widely considered as among the best in the country. The average first year expected cash yield on these investments is 5.3%.

Our relationship strategy of investing continues to pay dividends for us and our pipeline continues to build. As a result, we recently increased our acquisition guidance to $1.2 billion to $1.4 billion for the full year of 2017. In terms of timing, the vast majority of our acquisitions took place at the very end of this quarter.

Had we acquired all of the second quarter acquisitions at the beginning of the quarter, they would have contributed about $7.5 million of additional cash NOI. Turning to operations. Our same-store portfolio which represents 55% of our total portfolio, generated year-over-year cash NOI growth of 1%.

This number is heavily impacted by the loss of the Kennewick rent in the second quarter. We continue to believe that assuming reasonable capital expenditures, our MOB portfolio can expect to achieve 2% to 3% year-over-year same-store NOI growth on a long term basis. Our overall occupancy remains the best in the sector at 96.3%.

Recurring capital expenditures for the quarter were $4.9 million and should trend a bit lower in the second half of the year as we benefit from our 8.5-year average lease term and our less than 1.2% of GLA rolling in the remainder of the year.

Our balance sheet is the healthiest in the sector and was fortified by our 20 million-share follow-on stock offering in early July which funded our second quarter acquisitions and prefunded our acquisition pipeline. We also issued just over 4 million shares through our ATM program in the second quarter of this year.

At the end of the quarter, our net debt-to-total assets was 38%, but pro forma for our July equity offering, this ratio would have been about 28%. We're in excellent shape from a capital standpoint going forward and have more than adequate debt capacity to fund the rest of our 2017 acquisition pipeline. Turning to our dividend.

In the second quarter, after closely examining the situation in Kennewick as well as our projected earnings growth, the board recommended an increase in our quarterly dividend of $0.005 per share, bringing it to $0.23 per share.

Finally to briefly touch on G&A, our G&A for the quarter was $6.25 million which puts us at about $11 million for the year and on track to meet our previously discussed guidance range of $22 million to $24 million for 2017. And with that, I'll turn it back over to John..

Thank you, Jeff. From the beginning, our mission has been to very selectively cultivate a pure-play medical office building portfolio with our best-in-class operating platform to produce reliable, rising cash flows and dividends for our investors that will endure all economic cycles. Our strategy is intact and thriving.

Now we'll be happy to take your questions..

[Operator Instructions]. Our first question is from Vikram Malhotra of Morgan Stanley..

So just sticking on or focusing on tenants.

Any thoughts around the planned sale of some of the KentuckyOne Health assets? Does that impact you in any way? And just once again on the tenant question, can you give us a sense of your exposure to 21st Century Oncology?.

Yes, sure, Vikram and good afternoon. So CHI announced earlier this summer and they had shared it with us before they announced it, that they were going to sell their Louisville-based hospitals, not the Lexington hospitals which perform very well, but the Louisville facilities themselves. They hired, ironically, Morgan Stanley to run a process.

I think they've had a fairly large number of hospitals, both for-profit and nonprofit, including some of what we understand to be the largest health systems in both spaces across the country, are looking at the possible purchase of those buildings.

We believe the operations in those have deteriorated historically and from their historically very strong position. So we think new management, I think, CHI, concluded a different management would -- could be very successful there. So we think it's going to be a positive for us.

The leases that we have there are mostly with the hospitals, any buyer would have to assume those leases as well as part of the transaction. So we're monitoring it and look forward to working with the pending potential owner there. It's 4 buildings that are 100% occupied there. On 21st Century -- excuse me, not 4 buildings.

On 21st Century, we have 4 buildings, about 45,000 square feet that -- 3 of those buildings are some of the most successful practices within the 21st Century Oncology organization. So the bankruptcy there is at the corporate parent, not at these individual locations.

We had actually recently negotiated long term extensions on those leases and believe those will be executed in time. So 100% occupied, currently about 8 years on the lease, but we have extensions pending. And they're currently paying their rent and always have as -- on time and schedule..

And Vikram, this is Jeff. It works out to about 0.5% of our annual base rent. So it's a pretty small number..

Yes..

Okay. And then just one other bigger-picture question. Developments, obviously, become more of a focus some of your peers now. Just maybe update us on your thoughts, sort of acquisitions versus trying to kind of maybe follow a development route given where we're in the cycle..

We have great relationships with developers. We recently announced that Jim Bremner is restarting his development firm and we'll be working closely with Jim. We work closely with Mark Davis, John Klauzada [ph] at Cambridge. We're real excited about the developer relationships where they have the local relationships with health systems.

They get pre-leased buildings. And typically, if we have the opportunity, we might provide some low-risk, but nice-yielding mezzanine capital and have the optionality but not the obligation to purchase those buildings upon completion.

So we think that's the right strategy for a public company and for us and really maximizes our opportunities with those developers that have health system relationships.

And then Deeni and myself and Dan Klein and our old team really actually source development relationships, then we find developers to hand those off to and then deliver them for the health system client and then bring us back the opportunity to purchase them later. So we think it's a good, low-risk strategy but maximizes the opportunity..

The next question is from Jordan Sadler of KeyBanc Capital Markets..

Curious, coming back to Kentucky for a second. I think in June, you had a $38 million portfolio under a letter of intent. I was curious if that was in the pending acquisition still..

Oh, the Lexington, yes. So we're still working with the physician group there. In fact, they moved that transaction forward, but we're not yet closed. So probably -- I mean, it'll be third or fourth quarter at the latest, but....

Okay. And then on sort of the pipeline, what's the appetite from a pricing perspective for some of the higher-quality assets? Obviously, for some of the highest-quality assets, so you're seeing the sub-5% cap rates you guys have executed.

Should we anticipate that that's now in the range?.

Now what you should still anticipate and what you'll see more of sort of our pipeline is really as good and the highest quality it's ever been. Cap rates have tightened and we paid for an incredibly fantastic quality, as we've pointed out and will show you when we tour the buildings in Dallas.

But we're seeing a lot of opportunities in the mid-5s to 6% cap rate range and I think the rest of the year is going to look more like that. We don't think it's necessary to dip below 5% for outstanding quality unless the quality and other ancillary benefits of those relationships prove out, but we're seeing plenty in the 5.5% to 6% range..

Okay. And then just one for you, Jeff, on -- oh, sorry on Foundation.

What was the rent that was paid during the quarter on Foundation? And is that -- was that a full quarter's run rate?.

Yes. So between the three different locations, it was about $2.3 million and that's a pretty good run rate for at least the foreseeable future. It does include a $330,000 catch-up payment that San Antonio has been making that they'll make through the end of this year. So that's a good run rate for at least the next couple quarters..

Okay.

And that's what you're booking in the top line, the $2.3 million?.

Correct..

And same -- staying on Trios, just a clarification. I think you said you took a $4.1 million charge in the quarter. That's also running through the top line.

And so what portion of that? Was it the $2.8 million that was onetime?.

Yes, the $2.8 million was onetime, that's exactly right. And then there's $1.2 million that's not recorded rent. So -- but the $2.8 million is the write-off of previously booked straight-line rent..

So sequentially, you need to pump that up by $2.8 million, okay..

Exactly..

The next question is from Jonathan Hughes of Raymond James..

Can you talk about the 3.5% NOI growth in the quarter that excludes Trios and what drove that and then also the 60% retention rate which is kind of a bit lower than I would have expected?.

Yes, Mark?.

Sure, Jon, I'm happy to. So in the same-store analysis, we had some successful lease-up of a few buildings.

Our Peachtree Dunwoody Medical Center, as we've talked about in previous quarters, we've done a great job of re-leasing the building up to 95% with leases signed and some of those tend to be taking occupancy in the fall and continuing to pay rent there. And then a couple other buildings, our Nashville MOB and HonorHealth building and Napoleon.

So it's really all lease-up driving our same-store this quarter, in addition to our annual average rent bump of 2.4% across the portfolio, that's really driving that up to 3.5%..

And then the retention?.

Yes, retention rate, we re-leased 60% and what's driving that down is really one lease. It's the Oklahoma City Foundation mass re-lease which we terminated. Now we entered into a new lease directly with the group of physician subtenants in that building. So it had no impact on our leasing -- on our overall rent rate.

But it -- on the retention rate, it hurts that -- sorry..

Found that statistic. The other thing I want to mention was the other part of that retention rate, Jonathan, was the expiration of space in our corporate office building which we intend to occupy. So we essentially let them move out..

Okay.

So a bit of it was planned?.

Yes. So it's just under 80%. I think it was 78% without those 2 items..

Okay, yes, that sounds more like it.

Okay and then turning back to Trios and sorry if I missed this, but is there a chance of recovering that $5 million or so in annual rent from the parent? Any plans to maybe sell that asset if an offer comes to you as part of their restructuring and that process that they're running?.

Yes, Jonathan, this is J.T. We'll evaluate all those options. We certainly intend to recover as much of their past due rent as possible and non-paying rent going forward during the bankruptcy process.

Right now that hospital and that market supports -- still supports this investment to get their balance sheet corrected and get back to the kind of historical run rate that they had and that we underwrote when we did the transaction.

We really re-evaluated and looked back at everything we looked at in our underwriting and it's hard to say -- other than the fact that they ultimately had a major misstep this year, it's hard to say we wouldn't have made that investment again.

And going forward, we'll just evaluate all options and see who they -- if they become a part of a bigger system, it may create more opportunity for us and maintain and start recovering not only the actual cash rent but back on straight line as well. So we'll just have to let it play out.

Our expectation is probably nothing gets recovered in 2017 while it goes through the bankruptcy process. And hopefully, it's resolved by 2018..

Okay. All right, just one more for me. The assets slated for disposition were paid at kind of like $100 million, $125 million at the start of this year.

Is that bogey still standing? Can we expect a similar pace in future years?.

Great question. So we're still working -- most of that is the -- are the foundation assets. We're still working with the physicians.

They've been focused on operational improvement and doing a great job while, at the same time, having ancillary discussions with us, secondary discussions with us about purchasing those buildings and working with capital providers and banks to evaluate that option. So we still think that's the route that those will go.

We don't have anything signed today. And I think we're getting to a point in time in our -- in the life of the organization. We just had our fourth anniversary. we'll start looking at kind of on an annual basis assets for disposition to, again, just totally or do -- continue to enhance the quality of the portfolio and appropriate grooming..

Yes..

And Jonathan, sorry, this is Jeff. Just to jump in. That $100 million to $120 million, part of that was the $4 million portfolio in Georgia that we sold already for about $18.5 million and that was about a 6.8% cap rate..

The next question is from Michael Carroll of RBC Capital Markets..

John, can you talk a little bit about how your investment strategy has evolved over the past few years? I mean, obviously, you've been going after lower-cap rate assets over the past several quarters.

I mean, how do these deals differ from the ones that you completed 2, 3 years ago?.

I mentioned that in my comments, Mike, is that early life of the company, we had a relatively high cost of capital. So kind of working with our relationships but really more focused on secondary markets because that's where we could find attractive opportunities, again, that were accretive with our cost of capital.

But as we've grown and investors have supported us and our cost of capital has come down, we still follow our relationships into secondary markets.

But the best health systems, the mass populations are in places like Dallas and Indianapolis and Atlanta, Minneapolis, Columbus, Ohio, Phoenix, Arizona, all great markets for health care and so as our cost of capital has improved, again, same strategies, working with great providers in those markets. But those tend to be more expensive places.

And as investors from around the world have pumped capital into the space and are chasing these assets, the value has obviously increased, reflecting the 4.5% cap rate on the Duke deal and then the 4.7% on the -- what we believe are the 5 best assets in that portfolio that came to us through the ROFO process. So I think the strategy is the same.

Strategy is intact. So obviously, we've got to make investment decisions that are accretive to our cost of capital. And sometimes, things come with the relationships that don't necessarily have a day 1 yield or acquisitions that don't have a day 1 yield.

But when you get outstanding development rights which we would work with a third party to develop future buildings, accretion comes out of the transaction that way..

Yes.

And so I guess would it make sense to go through your portfolio and identify some noncore assets and do some noncore asset sales?.

That's what we were talking about with Jonathan just a minute ago and I think we're getting to point and decide.

We have 275 buildings now, so evaluating whatever -- I think, say, the lowest 10% of the portfolio and evaluating those for potential disposition is something we'll start doing more routinely and annually and we'll talk about those type of decisions and give guidance if and when appropriate in the future.

One thing I wanted to mention as Mark was talking about our same-store performance, 4 of our 5 best same-store performers this quarter were all -- are all off-campus but strategically located, health system-anchored medical office buildings.

So again, we still continue to believe on-campus is great and valuable, but you can have very successful off-campus buildings that are more convenient for patients and physicians and continue to be where health care is going and where you -- where we think we need to be investing as well as on-the-campus are great hospitals..

Okay, great. And then I guess last question, Jeff.

Can you kind of talk about the CapEx assumptions that we should think about going forward? I mean, what's the breakout between your current CapEx and TIs? And what's a typical TI package for the leases that you signed?.

Yes, so I'll let -- I'll turn it over to Mark for the TI packages because we did have some statistics on that for renewal and new leases. And I know you have them right there, Mark..

Sure. So CapEx for the remainder of the year, we see somewhere in the neighborhood of $3 million to $5 million per quarter in kind of recurring CapEx for the next 2 quarters.

And then on leasing, for new leases this quarter, we actually had a very great quarter for 16 new leases that average 10-year terms and 3% annual bumps, with an average of $27 per square foot for TI. So that's $2.70 per square foot per year. That's a bit light than what we normally average, around $5 per square foot per year.

And then on the renewal side, we completed 32 leases in the quarter with an average of 6.4 years at a 1.9% average increase and about $1 per square foot per year for the TI portion there. So great quarter, up over 300,000 square foot of leasing. That's on pretty attractive terms..

The next question is from Chad Vanacore of Stifel..

So what do you have to see -- and this is in light of you doing some sub-5% cap rate deals.

What do you have to see in either property or tenant that makes you want to pay that premium price?.

Well, the credit, the opportunity for growth. As I mentioned, the 5 buildings we bought are anchored by Baylor Scott & White, Ascencion, both Aa, high investment grade, still aggressively growing health care systems in great markets.

If you hadn't been to Dallas lately, it's -- I think there's something like $5 billion for the corporate office under construction right now already leased. So it's a thriving market. And Baylor Scott & White, this is the anchor facility of the State of Texas, the largest non-profit health system.

So -- and then future opportunities that we believe will come out of those relationships as well. I think you know I was General Counsel there. Deeni and Jim Bremner built that building on that campus. I just -- it's hard to imagine a higher-quality real estate investment in any asset class than that building.

The two in Indianapolis are similar ones, both on thriving hospital campuses and fantastic demographics in the suburbs of Indianapolis. And then Atlanta just continues to grow as well and Northside Hospital has one of the strongest financial balance sheets of any hospital in the country and they continue to grow aggressively.

They're already a nice tenant of ours in the Peachtree Dunwoody building. This building that Deeni bought and redeveloped for them at Centerpoint [ph] is right behind it. And kind of cohesively, those 2 buildings strategically work well -- very well together kind of in tandem.

And then the development site, theirs is really the last piece of developer land anywhere near those hospitals. There's 2 other hospital systems right there. So all those are the attributes that led us to see the opportunity even at that high price.

We also got lease enhancements as part of the transaction to make those cap rates even more valuable to us going forward. So those are the kind of things and ideally growing with the relationships. But the -- we see and we still see a ton of opportunities.

Cap rates seem compressed, but we still are seeing a lot of opportunities in the 5.5% to 6% cap range. So I think that's more the norm. And when we get down lower, there's going to be something else there that's going to drive us to pay the appropriate price..

All right. And presumably, the recent acquisitions, they're high quality and good markets.

So what kind of annual rent growth should we expect on those leases?.

Those are all in the 2.5% to 3% range. The cancer center has got 17,000 feet that's vacant and we've got active leases in discussions on those -- on that space. So 17,000 feet. A building in some markets, it's 5% of this building, so it's not a huge driver of future NOI growth there on top of what's already in the building.

But Baylor has got other expansion plans on or near that campus which, hopefully, we'll have the opportunity to work on..

All right.

And then any opportunities for operating cost savings there or maybe increase your NOI a little bit?.

There's some potential. We already have other assets in Dallas and get some synergies out of the property management team that's there. Baylor requires you to use -- it's really an outsourced engineering service, but they require you to use their service at very effective cost then I'll pass it through to them anyway.

But the property management there has Asia's outstanding; and b, she has a lot of strength to kind of manage the region for us in addition to that building. So yes, definitely on synergies. Same with Atlanta..

The next question is from Juan Sanabria of Bank of America..

Juan? You're on mute..

I'm sorry, I was -- yes, sorry about that. Just a follow-up question on cap rates. You guys have come back a bit since your equity raised Cap rates, at least in our numbers, on an implied basis seem to be at the top end of your kind 5.5% to 6% target range.

So is the message that you're still unchanged in terms of that 5.5% to 6% despite kind of a step-back in your cost of capital? Or is that kind of more fluid? As your cost of capital changes, your kind of focus deal-wise kind of goes along with your cost of capital?.

It's Jeff. Yes, I mean, look, we -- it goes without saying we're -- or we try to say it anyway, that all of our acquisition guidance is dependent on maintaining an appropriate cost of capital. So on the one hand, it's very fluid and we're always looking at our cost of capital in conjunction with evaluating any deal.

All that being said, we think we can still do accretive deals for our shareholders at the 5.5% to 6% cap rate range. And so we're comfortable with that right now and -- but we evaluate it on a daily basis..

Okay. And then just tenant watch list. Obviously, Trios just happened.

Anything else that kind of stands out of your mind that is worth flagging as something else that may be an issue down the track? Or any way to quantify that watch list in any form?.

Now -- Juan, this is J.T. The foundation in Kennewick are the 2 of our 275 -- well, 5 Foundation buildings and the 1 Kennewick building. So you've got those 5 buildings and we've been very transparent about the issues there. Across the portfolio, we evaluate all tenants routinely and don't see other material issues, so -- at this time.

So things can change, but we don't have any material issues that we're concerned about..

The next question is from Jared Wagner [ph] of BMO Capital Markets..

It's John Kim actually. So I had a question on your CHI assets, either the ones you bought recently this year or the ones that you've held for a year.

How comfortable are you that these are assets that are long term holds for CHI as they go through their merger talks with Dignity?.

Yes, John, thanks for the question. But we -- the original portfolio that we bought last year had brand-new buildings and some buildings that were older but on-campus of their affiliated hospitals. So over time, we'll evaluate that -- those assets. We have no restriction on being able to sell or reposition those buildings if and when appropriate.

For the foreseeable future, we made that investment expecting long term holds. But in some cases, we did underwrite as part of the transaction kind of shorter hold periods on some of the older assets. In the new ones -- new portfolio, the average age is 10 years. But really, as I mentioned, the price -- the portfolio is brand new in Omaha, Nebraska.

So a strong region for CHI, one of the strongest that they have. And so we expect those assets -- so we really -- we evaluated a lot more buildings than the ones we bought and decided not to buy others and had a good process with CHI to try to get the proceeds -- lower proceeds they were looking for but get the higher-quality assets that we could.

So new 10-year leases, 2.5% increases in those. And we expect them to perform and be in our portfolio for a long time..

So for some of those older assets that you may decide to sell together, how does that work under the master lease agreement?.

There's no restriction at all on us being able to sell any building that we bought from them, one at a time or multiples at a time. So some of those older ones are -- in the original portfolio were actually in that Louisville which is going through the sale process.

So maybe an opportune time as part of that to sell them or reposition them with the buyer that comes into there. But we'll just evaluate that as that process plays out. As far as the potential merger with Dignity Health, we don't have any new updates there.

I'd say we continue to expect and continue to hear from CHI management that they expect that transaction to move forward, but it's not a done deal yet. They don't overlap with any markets. You can probably read the tea leaves that selling the Louisville market is probably something that they came to the conclusion together to do that.

But otherwise, their intentions are and they've told us as part of their process, that they don't expect to close any hospitals or to move out of any other markets, so..

Okay. And then can you just elaborate on what your relationship will be like with Jim Bremner going forward? I know you discussed it a little bit earlier in the call, but it doesn't sound like what -- sound like it's exclusive. If you paid on a retainer basis.

Or how does it work?.

Yes, Jim -- we like Mark Davis, who we have a great partnership with as well. Very similar structure. We have a consulting agreement with Jim that provides some incentives for him to help us on some acquisition opportunities and to source some acquisition opportunities with us.

But his developments and development firm is, I'd say, independent of ours, but we do have some opportunities to participate in.

And like I said, it would be in the form of mezzanine debt and most likely in transactions that he sources or that we source with him, with organizations, again, like Baylor and other health systems where Jim has great relationships as does Deeni and myself, so..

The next question is from Drew Babin of Robert W. Baird..

If I remember right, last quarter you talked about 2% as kind of the bogey for renewals and re-leasing spreads going forward.

Would that still be a good modeling assumption as we go through the next couple years?.

Yes, I think that is a good modeling assumption, Drew..

Okay. And then a follow-up question just on the deals closing in 2Q and 3Q.

Longer term and I'm by no means asking for guidance, but do you think that maybe 2.5% to 3.5% same-store NOI growth kind of on a run rate basis a couple years out is something that's potentially achievable given kind of the characteristics of some of the assets you bought more recently?.

Well, look, I mean, I think any time you're buying high-quality assets, you've got the opportunity to grow NOI at a higher rate over a longer period of time. I mean -- but you're somewhat limited in the sense that you're acquiring leases intact.

So I think that we continue to say 2% to 3% NOI growth is pretty much the standard for medical office buildings. We think we'll be, over the long term, right in that range. I think if you're looking out after these leases expire but are -- there's the opportunity to perhaps roll up more than you might otherwise. But that's years out.

Our average lease terms is 8.5 years. So over the long term, yes. Over the short term, I think it's really a 2% to 3% NOI growth story..

Okay.

So a lot of that growth isn't necessarily in scheduled rent bumps but more just in the re-leasing opportunity in the future and just being able to maintain a higher occupancy rate? Is that fair?.

That's fair. Yes, that's fair..

And our final question comes from Tayo Okusanya of Jefferies..

You've done slightly under $1 billion of acquisitions for the year and guidance is $1.22 billion to $1.4 billion. So you still kind of have a fair amount of deals that you're expecting to do.

Could you just kind of talk about what you're looking at? Are they portfolio transactions? One-off transactions? And kind of what you're hoping to add to improve the overall portfolio..

Yes, Tayo, so what you're going to see for the rest of the year is some really high-quality, off-market, hospital system-anchored buildings, some on-campus, some off, again very similar to what we bought for the -- in the first 9 months but the -- more in the 5.5% to 6% range. So we know -- we provided that range for the guidance.

We feel good about that range and we have a balance sheet fully capable of executing on that guidance without raising additional capital..

Got you, that's helpful. And then just the Foundation MOB in Oklahoma City.

Any reason that is no longer under purchase agreement? Did that transaction just not kind of come to fruition?.

Yes, the physician group and a couple of local businessmen in Oklahoma City that they're working with to buy it slowed down their process. They're looking for -- frankly, they're looking for -- trying to figure out their use of the -- the old Foundation space is no longer occupied there and that's that lease that we terminated during the process.

So we entered into a direct lease with that group for their space as opposed to the sublease under Foundation. That lease has a purchase option in it on the terms that we originally negotiated. So we expect that transaction may still come about.

But at the same time, we have the freedom to sell the building to somebody else and we've had an inbound inquiry and kind of working through terms with that buyer as well. So the -- again, we still expect that -- it's a nice building in a great -- good health care location. We do expect to sell it but obviously can't guarantee that..

There are no further questions at this time. I would like to turn the conference back over to management for closing comments..

Again, thank you for joining us. And as we said at the opening, look forward to receiving an invitation to come visit the finest medical office building in the country in downtown Dallas, Texas, 2 -- one of -- 2 of the best health care tenants you could ever want to have. And we look forward to seeing you there and look forward to your calls.

Thanks very much..

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