Q3 2019 Earnings Call
Good day and welcome to the Healthcare Trust of America third quarter, 20, Nike Inc. earnings conference call and webcast.
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I will now turn the call over to David Gershenson, Chief Accounting Officer.
Thank you and welcome to health care trusted Americas third quarter 2019 earnings call. We filed our earnings release in our financial supplement yesterday. After the close these documents can be found on the Investor Relations section Upper web site for with the FCC.
Please note this call is being webcast and will be available for replay for the next 90 days, we'll be happy to take your questions at the conclusion of her prepared remarks during.
During the course of the call we will maybe 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 Petersen, Chairman and CEO of Health Care Trust America.
Scott. Thank you David and good morning, and thank you for joining us today for health care costs of America's third quarter earnings Conference call.
Joining me on the call today, or Robert Milligan, Our Chief Financial Officer, Amanda Houghton, Our executive Vice President up asset management.
And care Liontree, Odell, our senior Vice president of acquisitions and development.
As we move into the end of 2019 and look forward to 2020 H.D.A. has positioned itself to be the sector leader in the ownership in operation of medical office buildings with an irreplaceable key market focused portfolio portfolio, a fully integrated full service operating platform and a fortress investor.
Great balance sheet that positions our company to deliver earnings growth and shareholder returns over the next three to five years.
We have talked for years about our view of the overwhelming trends in health care that reflect they moved to an integrated outpatient experience. This delivery will take place in three settings. One on campus, where we are the largest owner and we'll be in the country to off campus in the community locations, we're all leading health care providers.
These are focusing and three in academic University health care system locations were academic and health care combinations are critical.
Our portfolio composition over the last 12 years has reflected these trends and the 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 investment strategy has reflected these key trends and H.D.A. 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 scale in markets with 15 markets with over 500000 square feet and nine markets with approximately 1 million a more square feet. This scale allows us to effectively create a deeper and strategic local operating platform with relationships and operating capabilities.
Yes.
This market focus is a key pillars of our growth strategy going forward.
In the third quarter, we saw the power platform and portfolio start to work in ways that generates both internal and external growth opportunities.
[noise] led by same store growth at 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 at 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're 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 an additional acquisitions on an exclusive control. Although these remain subject to customary diligence in closing condition. It shows the level of opportunity. We're currently seeing.
Development, where we have announced two new on campus development with expected investment it up to $90 million. These MLB will be anchored by key health system, HD DTA and dignity now common spear than we've had 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 leverage at 30% of total capitalization and 5.7 times debt to EBITDA.
In addition to these activity, we're also seeing new opportunities redevelop some of our older properties located in great market.
I've consistently node in my view that there are many opportunity within the MLP space to redevelop older buildings.
Especially ones located on campus.
We have identified several opportunities our own portfolio, where the investment of additional capital will allow us to modernize our building and significantly increased rents with returns of this capital in the 10% to 12% range, making a quite attractive to pursue and for investors in this period, we're announcing the redevelopment.
Two of our for MLP that we own fee simple basis on the Saint Joseph Hell Mission Viejo campus in Orange County, California. These two buildings were constructed a 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're moving forward with a re.
Redevelopment that we'll monitor ice the facility and allow us to command rent in line with market.
While there will be some downtown occupancy the long term value creation of these improvements are significant.
Finally, as a result of our acquisition pace refinancing activity and portfolio performance. Today, we are reiterating our 2019 normalized FFO guidance of between $1.63 and $1.65 for the full year. In addition, we're increasing our acquisition outlook two to 375.
Five to 425 million.
I will now turn the call over to Amanda.
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 opportunity to add value. Our one leveraging our size scale and in house infrastructure to maximize efficiencies within our markets and deepen relationships with our debt.
In tenant base.
Our team is now close to 200 property management building management construction and leasing professionals span across 23 offices and directly interface at the vast majority of our Kennedy.
We believe our infrastructure not only allows us to bring the power of a national company to a very local health care provider community, but also helped 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.
Also great opportunities for acquisition and now development.
To continued focus on executing quality leases with strong tenant at rental rates and escalators that reflect the quality of our buildings and location and will translate to long term cash flow growth for our shareholders and three strategic investments in our markets and building that will maximize rate tenet.
Retention and efficiencies in our operation. However, we will continue to be strategic and our use of capital and an effort to maximize return.
Turning now to the third quarter, our same store growth. This quarter came in at 2.5% driven by a 2% based revenue growth and 50 basis points of rental margin expansion.
In the period, we signed approximately 700000 square feet of leases.
This included a 156000 square feet of new leases and almost 540000 square feet of renewal our total tenant retention for same store portfolio was 86%.
While our total portfolio releasing spreads remain strong at 2.7%.
Our annual escalators for leases signed in the period, where 3% continuing our trend of increasing escalators towards that 3% Mark as we continue to roll our leases.
I have remained consistent at $1.24 per square foot per year of term on renewal and $3.65 per year of term on new.
We came into 2019 was slightly higher amount of expirations than in years past, 12.8% of our portfolio.
For the year, we have now these 2.6 million square feet or more than 11% of our total portfolio Gls same store retention for the year is 85% well are 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 speaking to lock in their space over 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 MLB.
These fee simple buildings are situated directly on the same Joseph Missive mission Viejo campus.
South Orange County, only regional trauma center, the competitive buildings on the campus are more than 90% occupied at mark to market rate 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 right 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 MLB by the first quarter 2021.
We also saw our occupancy declined by 60 basis points year over year, and our same store portfolio. Much of this is related to specific actions, we're taking at key assets to upgrade our tenants transitioning from lower quality smaller tenants to bring in larger practices in health systems like we're doing in our long warfare.
A new Haven, and clear Lake and Houston.
However, also relates to our higher level of rollover and 2019, where our rent exploration 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 that the strength of our print leasing pipeline and the long term value creation. It brings to our assets, we expect to see occupancy normalized and regain its growth in the first and second quarter of 2020.
On the expense, but 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 if you will do take time and could result in favorability in the next couple of quarters.
As we go forward, we believe we're still in the early to middle innings of our platform progression. We believe our integrated platform is positioned to continue to generate additional returns and annual growth through both revenue and incremental expense savings.
He is a 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're working on our 10 services and satisfaction in 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 and 23 offices across the country.
We expect this will continue and financial and impact become more pronounced as they see it continues to purchased asset and grow out our existing markets.
Also as HTS continues to grow in our key markets and markets. Currently at 500000 square feet grow to a million square feet. Those at a million square feet grow to 2 million square feet with the additional size comes a new wave of service offerings that makes sense for us in half. We believe we are uniquely suited and the REIT space to take advantage.
These efficiencies this size and scale provides.
I'll now turn the call back to Robert Thanks, Amanda We will now turn the call over for the first time to Caroline Scioto or senior Vice President of acquisitions and development to discuss this current state of the markets and the opportunities we are seeing.
Caroline joined US almost two years ago from Duff and Phelps investment management and has brought a unique view and perspective to our investment philosophy Caroline 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.
Yes in our key market.
We continue to target 15 to 25 key market the goal to increase our share through at least 1 million square feet any market as we increase our geographic concentration we gained ground relevancy with health systems academic University and large physician group. In addition, we improved operational efficiencies as we leverage.
For platform is important to note. This geographic concentration cannot be easily replicated and more importantly, this platform generate significant local knowledge. This local expertise as a competitive advantage and improved underwriting and addition allows us to source a significant number of off market transaction within these targeted market.
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 to 35 basis point that incremental yield one 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 acquisition for the year up to 228 million an average cap rate of 5.75. This is before we add any incremental property savings from our platform, which should bring meals over 6%.
These properties are located in our key markets, including our new market of Boise, Idaho, and more 91% occupied as a closing approximately 71% of these transactions are located on our adjacent to hospital campuses. However, they are all fee simple.
Subsequent to quarter end, we have entered into an exclusive agreements 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 Greens going for Robert will expand on updated guidance.
And match funding for these transaction.
In addition to the uptick and acquisitions. We were also active on the development front and third quarter announcing two on campus projects totaling $90 million.
These development when highlight our strategic focus to partner with key health systems in our market.
Hi, providing developing capabilities. This allows our health system partners to drive improved Karen community as they expand their market reach an innovative and efficiency.
The project also meet returns for shareholders with expected stabilized deal.
Over 6.5% and will come on line in the beginning of 2021.
In addition to our win in the quarter, we remain on track and on budget within our development pipeline, including the 125000 square foot MLB and the way glad hospital campus in carry North Carolina, a vibrant suffered a rally.
We continue to have additional discussions with helped us and work towards getting our expected development and run rate at $100 million to $200 million per year. Please see the September press release for further details on our year to date transit transactions per acquisition first of all that I will now turn the call were to Robert to discuss financial Thanks, Caroline from a financial and capital markets person.
Active we had a very active quarter capitalizing on opportunities to invest in accretive acquisitions and developments refinanced near term maturities at attractive rates and raise equity efficiently to preserve our balance sheet strength and remain active in all of our offered in pursuit of our growth opportunities. We also saw our year to date investments and operating performance fall to the bottom line and.
The door third quarter in a row of sequential earnings growth.
Turning to the specific financial results third quarter normalized FFO per diluted share was 42 cents up 5% for the first quarter. The year as we continue to generate same store growth and closed on or acquisitions redeploying capital raised in last year's Greenville sale and the better assets end markets.
Funds available for distribution increased to 70.9 million, which includes $17 million of recurring capital expenditures in the seasonally high third quarter, where approximately 14% of NOI our run rate for the year, However remains around 12% of NOI.
In a for the quarter was 9.7 million with a year over year increase driven primarily by the expensing of internal leasing in which we had capitalize a million and a half dollars in the year ago period.
We continue to expect our DNA run rate to go run between 10 and $11 million. The rest of the year. This remains extremely efficient relative to our peers.
That's gotten currently noted we're seen many new opportunities to invest in assets that will be accretive to our cost of capital with our equity trading that implied cap rates in the low fives debt in a low 3% range and acquisition opportunities yielding over 6%. Once we had in our platform synergies. We will continue to be very active in our pursuit of these opportunities and raise the capital as we.
We go to preserve our balance sheet strength.
In addition to the acquisition opportunities that yield immediate earnings. We're also seeing attractive development and redevelopment opportunities that 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 accelerating 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 in 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 nine and half years, we use the proceeds to repay or 21, and 22 senior notes as well as pay down our revolver.
While these repayments resulted in a onetime 21 million dollar debt extinguishment cost that allowed us to lock in our interest rates for long term and eliminate any potential refinancing risk will also pushing out or near term maturities.
In addition, we also re hedged our floating rate term loans fixing our labor a 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 or accretion to these additional acquisitions and it will allow.
Just a slightly lower leverage will still being accretive to our earnings in 2020.
We will also continue dispose of non core assets to balance out our acquisition opportunities as a result of these activities, we're maintaining our 2019 normalized FFO guidance, while increasing our same store outlook range for the year to between 2.4% in 2.8%.
And the increase in our acquisition guidance to $375 million to $425 million with that I will now turn it back over to Scott. Thank you Robert and we'll open up for questions.
We will now begin the question and answer session to ask your question you May Press Star then one on your Touchtone phone.
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Our first question comes from John Kim.
Capital market.
Thank you.
Got you mentioned on the redevelopment projects that you expect 10% to 12% return.
Can you just elaborate is that a cash on cash development yield or is that more of an.
I'll, let Robert going talk through that I think we said eight to 12, but yes, John we're really looking for 8% to 12% returns on that and that's that's a cash on cash return on that.
And your current project or you just modernizing and then.
Thanks.
The space or are you adding.
With a little bit of both but.
George do you have it is just really modernizing the existing space.
Taking some master lease spaces that were a much larger allowing for some smaller spaces and moving well. 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.
Amanda pointed out.
Pre.
Leasing that was expiring in 2021 2022 of folks have come forward and look for extensions to.
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 20 418 to 24 months, a really putting in place where we think there's a long term rent escalators for 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.
Okay and my second question is on your Git portfolio occupancy, which.
You attributed to.
Improving your tenant quality and also due to exploration.
I'm wondering how much is left as far as the kinetic mall tenant improvement.
Concerned and I'm looking forward, you have about tenants and 11%.
Firing per year.
So are we going to.
Noticeable improvement in occupancy.
And your future.
I'll pick that from a top level.
We are I think we're very fortunate actually in 2019, we've been able to this quarter get active and our acquisitions fill in our markets, which we purposely.
Okay.
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 were providing now to the to the majority of the buildings.
I think that we see from where we look at right now continued occupancy gains from here I.
I think that we've taken a specific management decision process of as you've talked about first question Redeveloping. Some space I think every portfolio in America has some space that has been 15 2030 years old and has been.
Maintained or occupied by the original tenet you need to go forward and.
Change that space out improve.
Let's get the correct escalators in place and we really took 2019 to try to go through that process and I think where 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 710 year leases all at Robert adding.
Yes, I think promote from a role perspective, we're pretty comfortable that we're working and this quarter in the last couple quarters on a couple of specific scenarios, that's going to continue to happen, but we don't see that is material reduction in our occupancy I think you've seen has come down a little bit here I think you'll see us look to.
Regain that in the first half next year, certainly looking to grow by the end of 2020.
So is it fair to assume that you expect an improvement in same store NOI growth as well.
Well I think the from a leased rate perspective, I think that always kind of follows.
And Hawaii follows the leased rate and the occupancy after that so I think you'll you'll see us look to get into next year and the 2% to 3% range of then as occupancy increases and you'll see the NOI growth kind of follow suit up to that.
Great. Thank you.
Our next question comes from Chad Vanacore Stifel.
Hey, good morning.
Ron for Chad.
First question I had I just wanted to touch on the acquisition pipeline and the pace of acquisitions.
You guys had stated that the back half weighted and.
Here, we stand today with you guys closing a significant amount of deals and increasing that for 2019. So.
Should we be thinking about the.
Going forward and just what had changed in the environment from the first half till now.
Well.
Obviously, we've always put shareholder value first and that means.
Creative acquisitions.
We've also said from from for many years now that we we'd like to key market concept and so we've been focused on the right timing as a company we found that Tibet. The second half of this year, we've started seeing opportunities it really fit in our portfolio as Robert pointed out in his in his remarks.
We see that that 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 you heard our first call is as we talked about the beginning of the year.
We have now been third year from the do transaction. We've certainly continue to grow earnings as we talked about with that portfolio. We've integrated throughout the portfolio and our focus is really shareholder value continuing to invest in our markets and and really taking advantage and have 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 market than we like.
All right and just the 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 do a lot of deals in the 25 million range. It seems like.
You know you're kind of in that 5.6% to 575% yield.
Is that correct.
Well, we certainly like to the five and a half to six and a half again. We've also look at some some assets that are 100% occupied we bottom assets here recently 85, 90% occupied being able to bring our leasing expertise in our management team to in that market to bear on the asset.
We are larger portfolios is certainly here recently sort in the last three quarters in 2019, maybe the end of 2018 highly sought after by a multitude of different investors and in some folks have pay very very well, we would consider very high prices for the not as quality of assets as you would like to see.
I would like that you would like to to acquire our focus has been not on buying something in looking at the first year in Hawaii course, we do that but we want to make sure that we see consistent escalators consistent occupancy.
Five to seven year pathway that says that this asset is going to continue to drive in Hawaii at the asset not be flat or or potentially face issues, where they are they over market. We've seen some assets, we've seen some portfolios where.
I personally have felt that the rents in place or over market and that when come roll over time, there may be some issues and when that happens we pass.
Got it thanks for the color and then or leasing Ics are releasing spreads have done really strong over the last year. They did decelerate a little bit to 2.7% in the quarter.
That sort of the run rate, we should think of going forward for that matter.
Well I think we've 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 win with the renewals that are pits. Amanda mentioned that were in the process of and as we rolled over the larger amount of the portfolio takes a lot.
Longer, especially when you're dealing with healthcare systems are dealing with larger physician groups.
I don't know 2020, I think that if I wouldn't say 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 could 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 and medical office is such a safe space, but it is not immune to to the influences of the general economic.
Environment. So I would say that this has been a very good year for the MLP space.
All right Great and then just last question for me looking at the same property cash NOI guidance I understand that you guys tighten that range to Florida to eight implying 2.6% the midpoint, but year to date, you've done 2.7% so is that.
You know slight downward revision at the midpoint due to the lower occupancy or how should we think about that.
I'll, let Robert answer, Yes, I don't think Theres any real change and outlook for US I think when we said started the year, we thought we'd be two to three I think we continue to think two three is the right range for any given quarter, depending on rollover and whatnot.
Thats, taking place and so it's just largely a reflection.
Of where we are today.
Alright, great. Thanks for taking my questions.
Our next question comes from Nick Joseph with Citi.
Thanks, maybe following up on those questions.
And what are you see in terms of the buyer pool cap rates between portfolio deals one off properties.
Well, we've always built except for the do transaction, we built last 12 years through one off acquisitions.
We were fortunate to be able to define our markets and.
Early on try to get some depth in the markets in this market knowledge, our leasing folks have been with us.
Primarily 5678 years and they get relationships within the market.
Our acquisitions as we've always been active so we like frankly, the one off deals because you can do 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 have bought one off assets.
And we can continue to articulate our game plan and our strategy I think we can be successful I.
I wouldn't expect us to be in the on for larger portfolios. Just because there is that capital out there that seems to be extremely aggressive and.
I think where 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.
Thanks, you have to quantify what would you say, it's about 50 75 basis point spread between where you can execute on the one off versus where you've seen some of these portfolios trade.
I think it I think thats, a good general statement, but I would I actually think that.
If you look at the quality of the asset 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 okay. What's it going to do in year 234, and five and how much capital do you have to put in the assets in our rents over market when they.
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 or and bought assets and the whole key in 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 or divest of things which are diluted.
That's helpful. Thanks.
And then you've been using the forward ATM to match fund the external growth.
How do you think about the timing and execution of both issue in the equity and then ultimately settle in that.
It is very good deals are in the pipeline and ultimately closing than spending the cash.
Well I think from a will answer that reverse or I think from a settlement perspective, you know one of the reasons we use it on a forward bases. So that we can take the cash when we actually closed the transactions. We've we've had a philosophy along the way since we came public in 2012 that we will really look to us and answer or acquisitions at.
The time, we closed them or as close.
They are about to do that summer forward four 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.
Items indicates that another $150 million to $200 million and we'll look to take down most of that equity by the end of the period.
Thanks.
Our next question comes from high El Nio with Mizuho.
Yes. Good morning, you guys in Phoenix, Congrats on a solid quarter.
Thank you.
My question has to do.
More around development and redevelopment.
Development perspective.
Kind of recall a year ago, you guys talking about expectations have seen increased demand.
From.
From a.
You know from from physicians and I was also from a.
In a hospital systems and you kind of put out a number back then.
You know, hoping to kind of C 100 million ASU anywhere from zero to 100 million and development starts and.
As you kind of just announced 90 million Carlyn just talked about a number of 100 to 200 million.
Hopefully as a new target I'm just kind of curious is is it fair to kind of see you are seeing more activity from the hospital systems and that you need time to do see development as being a bigger part of the growth engine over the next few years.
I'll do a Robert just and I'll take the last question first and then get to the second.
I do I do think that H.T.A. needs to be a needs to have development as a.
A fair part of its growth I don't want it to be overleveraged, I don't want it to be under leveraged, but I think that $100 million to $200 million is where we looked at and and we've 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.
To fight the interference that came with the Duke acquisition and you know, it's a tough environment I mean, it's the when you're going after development deal.
It's sort of like football game, there's there's there's 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 with H.T.A. Its development team the management team the leasing.
Relationship, we have with that particular opportunity and so yes. It is something that when we bought Duke I Didnt frankly appreciate the opportunity that it presented.
But certainly now that I've seen the integration between development leasing acquisitions.
And relationships with healthcare systems in physicians I think it was very very fortunate that we were able to do the do 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 you about where we are I'd like to see improve and increase and from management perspective, where certainly focused on that.
Gotcha, and then under read to have side also could you talk a little bit about kind of opportunities you're looking at in your portfolio how much a redev.
You think you could be doing on an annualized basis, a more importantly, as a result of redev, maybe any kind of impact it could have on near term and Hawaii as you kind of.
MTL spaces to get them redone.
All right, let Robert handle that yes, I think is as we look at redevelopment. We typically I think as we go through a portfolio, we probably have three or four assets a year.
We can look at as going through this process of admission VA whos.
Really down the middle of the fairway for what we'd be looking to do over this is a great peaceable asset and probably one of those high demand areas in the country at least in our portfolio.
And we've got the ability to take a 19 seventys vintage building.
It is largely been occupied by the hospital the entire time take what would be $25 renewals at a campus that's closer to the 35 to $40 net rents and so what is as we look at that.
Put in a 100 $125 a foot is pretty attractive returns cash on cash so 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 it's one or two pennies a year.
But I think thats been really how we've been running it over the last couple of years anyways. That's just makes it more of a formalized program, where the incremental capital really makes a big difference.
Just to kind of conclude what Robert we're saying when we did the Greenville transaction last year.
We took the proceeds we thought it was a great transaction for shareholders.
We held on the proceeds didn't match them as quickly as perhaps.
Time, very competitive environment, we didnt want to overpay for per per assets. One of our focus is as we came into 2019 moving to 2020 2021 is continued earnings growth. Our focus is not to take properties out of out of.
Production, so to speak simply too 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.
Excellent.
I'm liking.
Your comments about better internal and external growth on its good to kind of see that's starting to happen. So congratulations.
Thank you.
Our next question comes from Connors servers ski bearing Burke.
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.
Could we expect these elevated levels to go forward or maybe a reversion to historical me.
You know as I think was as we look at or capital in our tie it certainly does fall or from a leasing perspective.
So second generation T.I.s was a little bit was a little bit higher I think it comes down slightly.
From where we were in third quarter I think is important remember third quarter is almost always our highest capital period, just from a weather perspective, and one of whatever reason in 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, 12% to 13% of at a wide range. So third quarter is certainly elevate elevated above where we see that played out over the long term.
Okay. Thanks for that and then maybe one more for me in terms of these development starts 100 million to 200 million year over year do you do you see that as a as the top of your capacity or if not what kind of limiting factors do you guys run into two that would increase that.
Level.
Well I think that the capacity.
From a from an internal perspective and from a organizational.
As is not a limit I think that we are staffed and have the ability and we've really got put together what we what we think now is a very solid team. We've made presentations we've been through the fire so to speak of of the exchange between information and so forth. So it's not a capacity issue I do think though.
And 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 lease to our philosophy is it needs to be 70, 80% preleased it needs to be leased with credit and needs to be something that when it's built they move in and so you don't have that.
Our risk so to speak of.
Well Gee Whiz, we hope we're going to find the tenants.
So we want to keep a balanced as far as our mix as a company right now for our size in 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 we're not.
Going to go after them all.
I can have all the relationships that some other folks having 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 to 18 to 24 months. If we continue to do that hundred to $200 million I think that will be a very good.
Starting point of as this process continues in the medical office sector of either redevelopment of space, It's there or new development from healthcare systems for particular new assets.
Alright, great. That's all from me. Thank you.
Our next question comes from Todd Stender with Wells Fargo.
Thanks, just back to the capital sources.
I guess with the 6 million shares that you're going to I guess, you've gotten the proceeds or you are about to.
Through the forward ATM.
Essentially on the incremental acquisitions, you've announced but you also had guided for some dispositions to occur in Q4 is are those still although sales still happening.
I think as we look at or dispositions. We certainly do have several several properties that were in the process of disposing I think we've been out in the market with those.
And we do have offers on on the table in 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 change our expectation on that but it could be anywhere from.
Probably 10 million up to the full 75 million, we had guided to its just a matter of how it goes through the process that said I think as we look at our disposition program and how we will utilize dispositions largely go to fund incremental acquisitions.
So as we look to dispose properties will look to have incremental acquisitions on on top of them to quickly recycle the capital really outside of kind of the one off markets that we find ourselves then.
And put them into the markets that are more core for each day long term.
Thanks, Robert just sticking with you.
Do you need more capital over the near term you're the ATM that you sold to 6 million shares I gather the share price was up 29. Your stocks 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.
I think as we look at our balance sheets 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 fund things as you point out.
So anytime from here balance sheets and of 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.
Look to to come back for equity or dispositions as appropriate 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 were seeing right now in our markets, which is also appropriate but we want.
To be very very conscious of earnings growth.
Match funding and and me being very.
Very conscious of generating shareholder value.
That's helpful. And then just switching gears back to the mission Viejo redevelopment project I'm, just sort of just for clarification I think you mentioned that some of the.
Leases are expiring in the 2021.
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 a and they did when we start to see some of those 8% to 12% returns. Thanks.
Yes, no mission Viejo, the tenants actually largely moved out.
In the middle of this third quarter on that so that was reflective of a bit of our overall occupancy decline.
A significant portion of that so we should see that start to release. The thing is Amanda noted in her comments, we should see it start to lease up we will complete most of the modernization by the second quarter 2020, and see at lease up by the end of the years is our expectation we were very excited about that that asset.
Great location as you know being from the West coast and actually being in that area.
We saw that Pat campus much like we saw Forest Park.
When we even though we didnt anticipate the the transition that Forest Park went through with HCV.
But we did think that this is a great campus has got long term value in and frankly is probably not better real estate in our portfolio.
The company wide. So we're excited about putting the dollars in there and then starting to see in 20 into 2020.
2021 started to see the benefits of the rent increases and the occupancy backup to 95%.
Alright, thanks, guys.
Our next question comes from Michael Mueller with JP Morgan.
Hi, I'm, most things have been answered, but just on the.
In the prior question. The modernization can you talk a little bit about what goes into modernizing a building as opposed to is it just.
Besides doing lobbies elevators, just changing the space around for different types of uses just what's what's the scope of what's going on there.
Well I think you just you just did did our answer.
It's obviously HPC its elevators one of the the lobbies.
Tenants when they walk into buildings now they want to have a nice.
Four or a.
What I would call Unlighted type experience, where they're not walking into something Thats 30, 40 years old I mean ceiling Heights are also part of the equation, making sure that the spaces.
Laid out so that the appropriate.
Tenets are an appropriate places I think thats, a big thing that the demand and her team is focused on is putting a tenants where they need to be for long term occupancy because some some need first floor space omni exposure, some don't and and we're putting that in our in our leasing plans and looking at how we.
Role this space out and again I look at this space now.
You remodel it you put some dollars into it you move the rents up you get occupancy and then you are 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.
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 building downplay expand the type of tenants and we can put and things like the spring blurring of the building or as Scott mentioned that the race ceiling heights or Gurney elevators 80 upgrade all those things that we're doing well now allow us to.
Lease dark space to it to whole different a tendency set so those are the kind of think that we're looking for.
Got it that's helpful. Thank you.
Our next question comes from Lukas Hartwich with Green Street Advisors.
Thanks, Good morning.
Just one for me I'm curious when you're talking to sellers, how often to opie units come into the conversation.
Well, if we had the opportunity on our acquisition invoicing and that was that was one of the reasons that we've always like that market and it was an opportunity to align ourselves with someone who had been in the market along time good asset good location.
And that was something that we really like that we did that on the on the east Coast, We did transaction in Connecticut.
Where folks took a lot of LP units and that was one of the reasons that we like that portfolio, so well and and frankly, it's performed very well and.
And knock on wood, they've done well with us.
So we like Hopi unit opportunities when we see them.
No.
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 have had property for for such a long time.
The they don't want to pay the taxes, they don't necessarily want to do at 10, 31, again, and so we have that conversation, but I would not say that we've seen or or at least I have not seen.
A tremendous amount of that over the last 18 months.
Great. Thank you.
Our next question comes from Daniel Bernstein with capital one.
Hi, good morning.
Now that you have you're doing redevelopments in your own portfolio and what are the value add opportunities you're seeing on the acquisition side.
Yes.
There's some limiting factor in terms of.
Approximately a three or how much you want to modernize.
Bring on and to bring on to the portfolio to modernize.
Or is this a matter price just trying to understand theres a lot of value add opportunities out there or.
There are some other limiting factors.
We as we meant as I mentioned earlier, we've we've acquired some assets with some occupancy upside.
That's very good for US number one is accretive what we pay for with existing and why but number two we get to bring our leasing teams and we get to bring some some increased and why I think thats part of ours, our focus on earnings growth.
Buying buildings that need a substantial amount of modernization probably is not something that we would we would do.
The tip 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 in our actually.
Hopefully have opportunities to do something like that there, but thats, where the healthcare system. Its with some buddy 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 of 15 to 20 that we like.
So.
Thats kind of where I would say that our focus is moderate is good.
Significant is probably not where we are.
That's all I had hoped would you.
Okay.
This concludes our question and answer session I would now like to turn the conference back over to Scott Peter's for any closing remarks.
Well, thank everybody for joining us and we'll look forward to seeing.
Testers that may read and again, thank you and any questions. Please call Robert or myself, and we'll get back to thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.