Q3 2019 Earnings Call
Good day and welcome to the Healthcare Realty Trust third quarter financial results conference call and webcast.
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I'd now like to turn the conference over to Mr., Todd Meritas CEO . Please go ahead.
Thank you Lexi.
Joining me on the call today, our Carla Baca, Bethany Mansanti, Rob Hall and Christopoulos.
First I'd like to make a few comments about David Emery, our founder who passed away on September Thirtyth.
Just last week my colleagues and I enjoyed a wonderful wonderful celebration of David's life with his family and friends.
David was truly a visionary horse of nature inspired everyone around him with his intellectual curiosity.
Intuition and his infectious charm and perpetual optimism.
David had a remarkable degree of confidence in his abilities that he was acutely wary of hubris.
It was a wise mentor always leading by example.
David was a Renaissance man pursuing many interests personal and professional with great success and style.
And he shared his achievements generously with family friends and colleagues.
We will miss him dearly.
Level for is genuine and oil friendship.
Even with a wonderful human being who loved helping others succeed.
When it comes to the health care REIT sector, David with a true pioneer Yes division to start the first Inmobi focus read in the early nineties.
Today, we have a great company help on a strong foundation, thanks to David's vision and leadership.
The board appropriately bestowed upon David the title of Chairman Emeritus.
His contribution to the sector and to healthcare Realty will not be forgotten.
Over the past few years, David did a masterful job transitioning leadership of healthcare Realty and he was especially pleased with where the company has had it today.
Now on a quarterly results Carla if you go ahead with the disclaimer. Please.
Thank you.
Except for historical information contained within the matters discussed in this call may contain forward looking statement that involve estimates assumptions risks and uncertainties. These risk and more specifically discussed in our Form 10-K filed with the FCC for the year ended December 31, 2018, and then subsequently.
Filed Form 10-Q .
These forward looking statements represent the company's judgment as of the date of this call. The company disclaims any obligation to update this forward looking material.
The matters discussed in this call may also contain certain non-GAAP financial measures such as funds from operation FFO normalized FFO AFFO per share normalized AFFO per share funds available for distribution said net operating income annualized EBITDA and adjusted EBITDA.
A reconciliation of these measures to the most comparable GAAP financial measures may be found in the company's earnings press release for the third quarter ended Septemberthirty 2018.
Company's earnings press release supplemental information forms 10-Q in 10-K are available on the company's website.
Thank you Carla.
I'll begin by touching on three key topics for the quarter first the strength of healthcare Realty's operations.
Second our increasing acquisition volume and our ability to source new investments.
Third and most importantly, how we see organic and external growth translating to AFFO on a per share basis.
In the third quarter healthcare Realty generated steady performance on strong operating results across the portfolio.
Our largest driver in place contractual rent increases edged higher this was boosted by renewals in the quarter, which had comps above 3%.
Our ability to generate healthy cash leasing spreads continues to correlate with high tenant retention.
A testament to the demand for our prime locations, where price is not the primary determinant of value value.
Expense growth is also welcome contained.
Expanding margins and translating to same store NOI growth above 3%.
We see stability in the portfolios internal growth in the years ahead.
Given the fundamental strength of our property locations, there alignment with leading health systems and their critical role and current healthcare delivery trends.
We're also bolstering the strength of our internal growth profile with selective acquisitions.
Year to date, we've acquired 14 MBS for more than $300 million elevating our 2019 acquisition volume well above our historical pace.
What differentiates us is the way we pursue investments.
We'd like to avoid bidding wars and paying premiums for widely marketed offerings.
So far this year weve directly sourced two thirds of our acquisitions through relationships with owners and brokers.
And what is really impressive we've seen this exceed 75%, where we gain scale in key markets over time, such as Seattle.
Our knowledge of targeted markets and deep network of relationships allows us to buy more of what we want rather than bidding on what is for sale.
With the success of our sourcing efforts, we expect to sustain a healthy pace of acquisitions going forward.
We increased our acquisition guidance the second time for 2019, and we see a strong pipeline looking ahead to next year.
We also improve our growth profile by selectively disposing of properties.
While dispositions can be counterproductive initially a disciplined amount of printing is necessary to maintain a high performance portfolio over the long run.
Fortunately looking into 2020.
Costly rotation out of non him of these in smaller markets will be largely behind us.
We have moderated our disposition guidance for 2019, and looking ahead, we expect a slower pace of dispositions at better cap rates.
Much like acquisitions, our pace of development has also building momentum.
This quarter, we began a redevelopment in Memphis, which includes the acquisition and redevelopment of an existing MLP.
Baptist Memorial a market, leading health system, with whom we've enjoyed a longstanding working relationship called us when they needed a reliable partner to develop a strategic outpost for surgery and outpatient services.
We expect a couple of developments and redevelopments to emerge from our embedded pipeline in the coming quarters.
The company has accelerated investment pace fewer dispositions and steady organic performance is generating FFO growth per share in the second half of 2019.
We expect more improvement in AFFO per share in 2020.
And matched with disciplined capital spending we see incremental progress on dividend coverage as well.
Okay.
Relative to other property types in the healthcare sector, how patient real estate continues to offer compelling combination of steady returns and low risk.
We remain steadfast in our commitment to owning and operating quality medical office buildings and using our experience in refined strategy to deliver steady growth in FFO per share and create long term value for shareholders.
Now I'll turn it over to mismatched seaney for a closer look at healthcare trends Bethany.
Thank you.
2020 presidential election, and the race for the Democratic nomination continue to dominate headline and once again have brought health insurance policy to the forefront politic.
The array of Democratic candidates covers a wide range of platform, calling for various forms of increased government timing of health insurance.
Whether to current policy enter the seeing a public option, Brian or Medicare for all.
While polling suggest voters are attracted to such ideas support of Medicare for all dropped significantly when faced with the high cost and the need for greater taxation and elimination of private plan.
On single payer public health insurance.
Political rhetoric of the day, however, does not signal a change in the direction of rising healthcare demand clinical delivery trends or relatively stable reimbursement rate.
In addition, the overall course health policy legislation in Congress is not expected to change in the near term.
With the divided house and Senate.
Current legislative efforts are centered on lowering the cost to consumer a pharmaceutical and surprise out of network billing.
Along with finding hospital payments for uninsured patients.
Even with some bipartisanship on these issues strong rabin by drug companies and hospital and ongoing political debate.
We'll likely keeping the new health policy at day until after the presidential election, and a new Congress convenes in 2021.
We do expect a decision in the courts soon.
Outcome of the Texas behaves arcade understanding of the lower court ruling last December which declared the FDA unconstitutional.
It is likely the since circuit judges will issue a stay in the case keeping the law in place until an eventual Supreme Court hearing, possibly not until 2020 or beyond.
Several states are working on their own legislation to provide helps activities and public insurance option, but our contending with the high cost of such plan.
These efforts span multiple layers and branches of government and are evidence of the politically sensitive nature of healthcare and the value the nation places on supporting access to quality medical care.
Population is aging and demand for health care services continues to expand.
Yes, the difficulty in curbing the growth of health care spending is acute.
And the need for lower cost of care essential.
Outpatient services are becoming increasingly critical to meeting the nation's demand for quality healthcare at a lower cost.
And the push toward delivering outpatient care and its most efficient setting.
Is being accelerated on multiple fronts, most recently by commercial insurers as well as providers.
As of November 1st.
I did healthcare is shifting more of its medical spending to outpatient facilities.
And we'll no longer cover certain planned outpatient surgeries delivered in hospital I must pre determined to be medically necessary in most states.
Instead, the insurer will require outpatient surgery to be done in medical office and ambulatory facilities.
Okay and health system.
To increase leverage with insurers and capture market share will continue to align with physician groups to offer services across the continuum of care in the most efficient and profitable setting.
We expect healthcare Realty's medical office facilities and tenant.
In our relationships with health systems will continue to benefit from these primary drivers and deeply embedded macro trend.
Will ensure the growth in outpatient facilities for years to come.
Now I will turn it over to Rob Hall, Rob.
Thank you pass any.
I'm going to give you an update on investment activity and our outlook for the balance of the year.
Acquisition volume, so far this year $316 million.
At the high end of healthcare Realty's historical levels.
We have experienced notable success and our ability to source higher volume to one and two building transactions.
We have been expanding and developing our investments team and related processes to execute on this growing number of opportunities.
Combined with the competitive cost of capital. These efforts have secured 14 properties through 12 separate transactions this year.
During the third quarter, we acquired four buildings totaling 175000 square feet for $79 million.
In Los Angeles, we purchase to him obese for $61 million.
The buildings are located next to Huntington Hospital 625 bed facility in Pasadena.
These properties are well positioned for strong NOI growth.
What really sets. These buildings apart is a diverse roster of specialists, such as cardiology and women's health.
Who value the proximity to the hospital in densely populated area.
In Houston, we acquired an on campus Inmobi located in the fast growing sugar land submarket for $14 million.
This acquisition expands our portfolio in the fifth largest market in the country over 620000 square feet.
It also adds a third high quality relationship in the market Houston Methodist.
In Oklahoma City, we purchase and MLB adjacent to a leading health system campus and immediately next or building, we purchased last year.
Where we recently increased occupancy to nearly 100%.
The new building is currently 76% occupied and produces a 6.3% cap rate.
We expect to yield to increase into high sixs by boosting occupancy to around 90%.
Already in the fourth quarter, we are off to a strong acquisition pace.
We bought two additional properties in October .
In Raleigh, we made our first investment in the market, a 57000 square foot MMP for $22 million.
Bill. This building is in a rapidly growing area and as adjacent to market, leading wegmans North hospital.
Also in the fourth quarter, we purchased a property and Dallas adjacent to Baylor Scott Unwinds Plano Hospital.
$20 million.
This building is anchored by Baylor USPI surgery Center.
Leveraging our relationship with the house the hospital, we also executed the lease with Baylor outpatient rehab joint venture.
This lease was signed at closing and we expect to build out of the suite to begin soon.
The property expands our presence on the campus, where we already own and 174000 square foot.
Maybe we developed in 2004.
With year to date acquisitions totaling $316 million and a robust pipeline.
We are moving up acquisition guidance for the year to $350 million to $400 million.
Moving to development, we placed one project into Preconstruction this quarter and have one or two starch expected in the coming quarters.
And Memphis, we commenced preconstruction activities for the redevelopment of a 111000 square foot MLP.
Baptist Memorial looking to secure a leading orthopedic practice as a joint venture partner and a surgery center needed to develop developer that can move quickly.
What is important here is at the hospital reached out to us given our longstanding relationship and development experience.
Redevelopment has a total budget of $28 million with an expected stabilized yield of 7.6%.
Including the $9 million acquisition, the existing Annabi from the health system.
We will have lease commitments, representing 81% of the building.
Including the surgery Center.
Orthopedic group and several hospital practices.
Occupancy is now 37%.
The balance on the remaining leases are expected to take possession early in the first quarter 2021.
We also continued to make steady progress on additional future development projects in Washington, Colorado, Texas, Tennessee.
Sourced from our embedded pipeline and existing health system relationships.
Each development, we are pursuing is expected to yield 6% to 7.5% at stabilization.
Representing significant FFO contribution and value creation.
Looking at dispositions, we have closed on $29 million in sales so far this year.
We are reducing disposition guidance to 50 to 75 million.
Cap rates from 6.5% to 8%.
The reduction is due to a few of the dispositions originally targeted for sale in 2019 shifting into our plans for next year.
Going forward, we expect disposition volume will remain at this lower range.
Consisting primarily of MBS, which will produce more favorable sales cap rates.
Most recently, we've sold three buildings for a total of $16 million, including an inpatient rehab facility for $14 million.
I am pleased with the pickup in net investment volume for the year and the bright outlook for 2020.
Now I'll turn it over to Chris to discuss financial and operational performance for the quarter.
Thanks, Rob.
The third quarter showcase the same positive themes. The first after the year, putting a healthy acquisition pace and sustained internal growth.
This translated year over year to a 3.2% increase and FFO per share to 40 cents.
Sequentially FFO increased $500000 over the second quarter.
This was primarily as a result of a $1 million increase in July from net investment activity.
The higher in July was partially offset by $500000 increasing costs, mainly related to interest expense.
As is typical and the third quarter seasonally utilities were up $1.4 million sequentially over the second quarter.
However, this expense increase was completely offset by rental rate escalations and operating expense reimbursements.
Hum.
In the fourth quarter, we typically experience a 600 to 800000 dollar increase in sequential and July due primarily to the reversal of the third quarter seasonally utilities.
For the trailing 12 months same store NOI increased 3.3% driven by 3.6% increase and then a lot from the multi tenant properties and a 1.8% increase from single tenant.
The performance of our multi tenant properties continues to be reliably strong.
Revenue per average occupied square foot increased 3%.
While expenses were up just 1.8% largely due to a 3% decrease and utilities.
This reduction came from a combination of the mild winter we discussed earlier this year as well as energy management investments.
Our ongoing ability to drive Multitenant revenue growth is due in no small part to our persistent efforts to maximize in place contractual increases and cash leasing spreads.
In the third quarter future contractual increases for the leases executed in the quarter were once again strong at 3.06%.
While cash leasing spreads averaged 3.3% highlighting our pricing power, especially with the outsized volume of renewals and 90% tenant retention this quarter.
Not to be overlooked average in place contractual rent increases have improved 13 basis points over the last eight quarters.
Up to 2.93%.
Achieving this just two years is noteworthy and has compounding power when applied over our 12 million square foot same store portfolio.
It represents not only the value of our leasing teams concerted efforts, but also the benefits of owning quality high demand properties.
Turning to the single tenant portion of our same store portfolio.
The 1.8% growth in Hawaii was as expected.
With nearly 30% of our rent escalators being non annual quarterly NOI growth will fluctuate around the emplaced average of 2.12% depending on the timing of the non annual increases.
The next non annual increase which happens to be the largest it over 20% of single tenant base rent.
Scheduled to occur in October 2020.
Until that time single tenant in NOI growth will run below the in place average.
At the single tenant property level, we sold an inpatient rehab facility in Erie, Pennsylvania, as Rob mentioned.
This leaves us with one remaining or on a 400 bed tenant hospital campus in Los Angeles, where we also five medical office buildings.
We just completed a five year renewal for this inpatient rehab facility at a 7.6% cash rent increase with no tea.
The Fad payout ratio was 91% for the third quarter and year to date.
Capital expenditures and second generation T. I had been running at the low end of expectations.
Expect maintenance Capex will be higher in the fourth quarter and the full year 2019, fad payout ratio to be at or below 95%.
This is a reduction of approximately five percentage points over full year 2018, and we expect additional improvement in 2020.
Our balance sheet is healthy with debt to EBITDA of 5.2 times at quarter end.
We raised $72 million of equity during the quarter through the ATM.
Which was used to fund the $79 million of acquisitions in the quarter.
Since the ended the quarter, we've issued an additional $78 million of equity to fund a growing pipeline of accretive investments.
Including two properties acquired in late October for $42 million.
As we approach the ended the year performance and momentum across the portfolio are strong.
Driven by internal growth, a solid balance sheet and a rich pipeline of Prefunded investments, we expect FFO per share growth. We saw in the third quarter to continue in the fourth quarter and 2020.
Operator, we're now ready to open the line for questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on you touched on fine.
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Your first question comes from Chad Bennett Cool with Stifel. Please go ahead.
Okay.
Hi, good morning ill.
Morning.
All right. So you have stepped up acquisition guidance then reduce dispositions.
Has anything changed in a competitive landscape for acquisitions that you see either asking prices or competition from alternative buyers.
No Chatham and I think I think what you're seeing from from from our team is.
And it goes back to sourcing process that we've we discussed on last call and discuss today I mean, you're seeing the benefits of.
Thus going into a market and identifying properties that we want to own.
And then our team forming relationships with those building owners brokers and other other groups in that marketplace that are giving us the opportunity to buy.
These buildings.
That are not necessarily been marketing so in many cases you're not.
You're not competing with a broad group of folks and.
So it is allowing us to to bring some nice assets into the.
And then a portfolio I think in terms of pricing I think pricing is we're continuing to see stable pricing I think there has been some some some deals out there that if have dipped below five here recently and I think those were.
Deals that were more marketed deals and so I think we're looking at is still in that.
Range of around five and a half so when we expect that see that continue.
All right and then just on the flip side.
Yes disposition.
Get pushed off into.
2020.
Is there anything going on there that that is delaying your sale those properties or do you just feel more comfortable keeping them a little bit longer.
No. It's really just just timing general.
In sort of specific to those sales I mean, there's nothing in particular, that's causing us to hang onto them longer but didnt, just taking a longer term to close the transaction we do expect.
Those to be part of our dis disposition plan for next year 50 to 75 million.
And those are largely ammo fees that dinner and that lower cap rate range of five and six ahead.
Alright, and then just to bring this full circle can you describe any of the key differences between what you're buying today and then what you're selling.
I think that what we're buying today is.
Good growing markets align with leading health systems in those markets multi tenanted on campus buildings or Jason.
Campuses.
In contrast to what we're selling typically those are in smaller markets, perhaps there.
Markets and aren't growing and we don't see the growth potential in those markets that we do some of these other markets. So it's largely really.
Assets that don't fit the strategic long term.
Plan on the organization.
Versus those assets were buying or have a higher propensity for growth and that really fit our long term goals.
All right I'll leave it there thanks.
Thank you.
Your next question comes from Nick Joseph with Citi. Please go ahead.
Thanks, So wondering if you can walk through the sales process for the first sold in the third quarter. Obviously, the cap rate was probably a little higher than expected so any color there.
Yes that that process it was a purchase option.
Fair market value purchase option that was driven by an appraisal process and it was.
It was different than what you typically see.
When you have appraisal props processes and those types of agreements.
This one took the average.
Three appraisals one submitted by the buyer one submitted by the seller and then a third average and oftentimes you'll see though.
The appraisal that's farthest away.
From the other to be thrown out and the other to be average in this case all three were averaged.
It was written into the agreement and.
That incentive the buyer to submit a.
Low valuation in this case evaluation zero, which was.
On the on the on the on the verge of absurd and.
Yes, there was also.
There is some utilities that serve the building that were provided by third party that.
Hi, good from them.
The value in the appraisal process as well.
Thanks, how many other assets at similar fair market purchase options in the portfolio.
We don't have any that are that are similar to that process.
I was just a one off.
Yes.
Thank you.
Thanks Keith.
Your next question comes from Jordan Sadler with Keybanc capital markets. Please go ahead.
Thank you. Good morning, first I just wanted to offer a sincere condolences on with passing of David.
To the team.
And then in terms of my question.
What's what's causing sort of the continued increase in any activity in the acquisition activity year to date, the sort of third consecutive.
Jump up I've noticed a little bit.
Of the mix and the shift away from on campus I don't know from overly reading into the 100 basis points uptake in the asset ownership mix here year to date any any insight should be appreciate it.
Well Jordan Thanks for your comments and thanks for your nice comments in your note as well we saw that appreciate it.
I would say for us it really goes to the volume question. It goes to the sourcing process and Thats a multiyear effort as Rob said, we've been expanding.
Our investment team with some young professionals they have been getting there theres their legs under them, helping out our senior folks really attack. These markets in a proactive way as Rob described so I think we're just seeing the fruits of that number one.
But to your question about distance from campus I think there you have a little bit of a unique situation where earlier I guess last quarter. We bought a couple of properties that were just beyond our own definition of adjacent to campus. I think they were 0.27 0.3, maybe quite three miles from campus. So when you get into Seattle or.
Dense market like that sometimes there are certainly some attractive properties that may be just outside that definition, so pretty subtle difference there.
No big change in strategy. We certainly are open to assets that are away from campus more materially away.
But as you know we have a history of being careful around that so it's not that we won't invest occasionally in some off campus assets that that really align with health systems and we think are really have strong real estate characteristics. We just want to tilt towards campus.
On or adjacent so no material change, but certainly.
Willingness to look at assets that make sense, even after a little outside the range.
So is it fair to sort of characterize it as a little bit of.
A greater opening in terms of casting a little bit of a wider net to certain properties or is that.
Overstating it even.
It's probably overstating a little I will say in a market like Seattle, where we have such a strong presence and we know that market really well, we have a lot of folks locally on the ground operating their.
Including one of our leaders of our leasing team how about half the country that she leads and has been whether it's for 20 years and so we just have a lot of resources there that now that market well, it's clearly a dense dense market. So you might see it in situations like that Los Angeles might be another market, where we've had scale.
And would see something like that but it's probably not too much to read into that okay. And then on the same store NOI trajectory.
I know you guys will get on trailing 12.
Sort of a better indicator, but I'm trying to look at this quarter to see if there's anything to perceive in terms of what's going to happen going forward I noticed.
For the year over year.
The sale.
You know in multi tenant, but also as you called out the single tenant side.
As we look forward will this.
It should have lowered rates be more of a.
Steady state or should it bumped back up and what would be the drivers.
Yes, good question.
Two pieces to that I'll break it into the single tenant and the multi tenant.
On the single tenant.
Mentioned in my prepared remarks.
We have seen the timing of are not annual escalators is running through and so we have over 25% almost 30% of our properties that have not had an increase in the last 24 months and so that it's not because they don't have them as just because the timing of them and so if you we did.
CD.
The lower growth as a result of that this quarter and that will continue until the next not annual escalator occurs in October 2020. So you should you should expect to to see that in a single tenant.
On the multi tenant is you mentioned, we do believe that trailing 12 month is a better signal as to the performance of the business.
And that was 3.3% this quarter.
Quarterly results could have lot of noise due to fluctuations in individual line items.
Which is actually what did occur this quarter, we had an unfavorable comparison.
Third quarter 2018, due to $600000 of expense reimbursement true ups in that period.
So excluding that $600000 revenue per average occupied square foot as well as total revenue.
I would have been greater than 3%, which is more in line with our expectation. So moving forward on a trailing 12 month basis, we still expect.
Multitenant into high growth to be that plus or minus.
3%, but is pointed out that there will be fluctuations.
Quarter to quarter.
All the time.
Okay, and then I guess within that same sorta.
Framework, just expenses anything you're seeing on the expense front as you as you look forward.
Chris.
That's sort of would knock you off sort of this low 1.8% trajectory you've seen over the last 12 months.
Yes, we have been benefiting from the expenses we've talked about this year that are running below our historical average we say long term, we expected to be more in that two 2.5% range.
Right now we're running about one eight and a lot of that has to do with.
Utilities that are running negative 3%.
Just great when you can get it part of that was due to the milder winter.
That we had in in the first quarter, which really resulted in on a quarter over quarter basis basically flat overall.
Expense growth, so we're not going to.
Prediction project, what the weather's going to be for the for the next year, but we are certainly benefiting.
From that we are continuing.
To see pressure on property taxes, but I would say that thats.
There is nothing different there from what we see historically, especially as you're buying.
Additional assets.
Or developing assets that lot of types, there will be a catch up in the assess value so property taxes run well above the average four plus percent.
But with some cost cost controls and other places we do feel like long term we continue to.
To control expenses more in that 2% to 2.5% range.
Great. Thank you.
Thank you Sir your next question comes from John Kim with BMO Capital markets. Please go ahead.
Thank you good morning.
The acquisitions that you acquired during the quarter, which were I think primarily Jason.
Can you comment on the pricing differential you are you seeing right now between adjacent and on campus.
Acquisition.
And is it fair to assume that on these acquisitions you acquired the fee simple and trips with no purchase option.
Yes, John I think when it comes your question about on versus adjacent really not seeing much difference in pricing there if any I mean, that's our definition of Jason is.
Within a quarter mile and so thats.
Most cases across the street from the hospital, so just not seen a lot of price difference there.
And then in terms of fee simple versus.
Ground lease I think it's it's a mix it's a mix. Thanks, everyone. This quarter everyone. This quarter was.
Sorry.
Everyone. This quarter was fee so.
Didnt have any than we bought on around is the one that was in October .
Yes in Dallas that is it's a ground lease but it was not with the hospital.
Just to dense area and the developer who put it together and it up ground leasing.
The land from someone who's on it for some time at its just economic and there's no purchase options.
Got it Okay, and then Todd you mentioned, a strong pipeline of acquisitions for next year anyway, you can quantify that it on how that relates to.
350 to 400 million that you plan for this year.
Sure. It's clearly early to really call out what the range would be.
For 2020, but as Rob suggested and I did as well, we certainly see a strong momentum building going into 2020.
And we'll clearly have more color on that as we get to the next quarterly report, but all that to say, we certainly see an ability to continue at this level that you're seeing now.
It's subject to a number of things as you can imagine in one of the things. We just talked about was the sourcing efforts and that is clearly different than just bidding on what's for sale. We like that it does give us a little more predictability, but it's also a lot more lead time and work to generate that pipeline. So because of the back work we've done on.
That was again some of these deals we bought this this past quarter and even into the fourth quarter are the result of years of digging digging in a market with a broker with building owners. So it takes a while but we're encouraged by what we see and we think this this level, whether it's that exact level of this year, but something on this order of magnitude.
Certainly something we see being able to move towards in 2020.
Okay, and then I had a couple questions on your.
This redevelopment it looks like the asset will be 37% occupied during the we did on the phase.
Can you provide some color on what work is being done on this project.
And also so that.
Yeah, Sorry go ahead, I wouldn't say at 7.6% stabilized occupancy does that assume.
Yes, so just I'll answer both of those questions.
First on the on the 7.6, so that is a stabilized occupancy in them in the low nineties.
And then low 90% range.
As far as what's being done the building is currently currently exist today. There is there's a surgery center inside of the building.
We are re developing.
Well into the in the sense that.
Most of the areas inside of the building will be will be touched tenants. Some existing tenants will be moving around the surgery center will be expanded.
There will be some additional parking added to it.
The hospital has some existing uses there now, but there will be bringing some additional uses so it's really a comprehensive redevelopment of the asset.
Even though the asset is is in place today.
37% occupancy represents tenants that are there today and will will remain in place.
Until such time as well.
Either move them inside of the building or the new lease takes effect after the redevelopment at the property.
How big do you think your redevelopment program can be seems like there's a lot of.
On campus older vintage movies out there.
Sure I mean, there's certainly there's certainly opportunity out there, we're finding I think that.
Working with these health systems, we've we've done a number of redevelopment over the past.
Years, I think if you go to our our embedded pipeline, we do think that there's some opportunity there.
And do you expect to see.
No one or two of those every year that we're working on.
Those come from having relationships with the hospital.
They often times.
Get into a situation, where they need somebody to move quickly.
They worked with you before they know that you can.
Produce and oftentimes you the call like we did here so.
I think there's some good opportunity there.
Great. Thank you.
Thank you.
Your next question comes from Rich Anderson with NBC. Please go ahead.
Thanks, Good morning, and I'd like to also second condolences to to David.
He made me a better analysts better person very genuine approach to people or whoever you interface with and.
On the height of his role as CEO . He was always want to showed me respect whether there was agreement or disagreement or maybe.
Is blowing smoke up but at least I felt that way.
And I.
I did get a chance to E mail in before you estimate assume that he did read it and my condolences to everybody on the call.
But now.
And one good thing is my vocabulary is improves I'll never say the words just regardless.
Got it.
And I'll have conversations, but I will not con for sake.
Very good.
All right. So now digitally move onto the business the talking about medical office, which kind of feels wrong, but we've got to do it got a move on.
So are you seeing more in a way of PE investing in your space do you have to capital flowing a lot of the elephant hunting has now gone as everyone. Suggesting is there is there are different types of capital flowing in this space that you see.
There is not I mean, it's not palpable in terms of the short term I do think if you look back over a multiyear period, certainly that's true and you're seeing more private equity.
Developed funds, whether its private non traded Reits under a new model, but you've seen a number of very credible large private equity groups develop an MLP program they might partner with different smaller operators developers investors and you've been seeing that for awhile. So it's really not new but you're right I think the pace of that is.
Very high and some of them are doing quite a nice job really tackling the one and two building.
Approach, so it's not without competition and certainly I would say as we describe our sourcing process. We're not trying to suggest there is no competition, there's theres always competition, even when you're talking with an owner.
About doing a deal outside of a market process, they're aware and their savvy and they often will have.
Either themselves or brokers that can do market checks. So there's plenty of that but I think it's again, just developing deeper relationships and getting access to add to the deals that we say in the markets we want to be in.
Really I don't see the level of competition any more heightened than it's been in a long time, it's just different players.
And yet the public markets will tend to move a bit more move around a bit more and have different cost of capital in shorter time periods, but we've seen continued rising pressure with private equity over some time and and I wouldn't say has risen in the last year, so anymore than what we've seen in the last three or four years.
Okay.
The underlying business as described on this call and medical office generally is is good I mean, it's getting and perhaps getting better.
And so I don't know that theres much in a way of.
Kind of criticism of what you guys are doing.
Market increasingly fickle, its and its approach to any company is important to you as well, though in terms of capital raising.
Do you.
You guys have underperformed this year not a bad year in absolute terms, but still underperformed as investors are kind of seeking alpha elsewhere, perhaps.
Feel some sort of need to change your stripes a little bit.
And are you doing that I guess on this call with the sort of lower dispositions higher acquisition more development redevelopment so on.
I'm wondering if the perception of the stock market is an important partner for you to finance your business.
Is influencing how you go about.
The World of medical office, and if you were a private company would you be going about things differently.
Well Theres no doubt the cost of capital is important and for US that's the public equity markets the bond market.
So we have other sources to bank debt Theres always joint venture capital and so forth than we've looked at all those and we consider all those.
I think for us if we were.
Clearly if you were private you would have at this or different set of circumstances and you may or may not depending on who your backers would be had a little different objective, but I think for us where we're at today rich is really accumulation of all of the work we've been doing to really clean up the portfolio over the last several years really try to.
Focus on Inmobi, you've seen a lot of inpatient rehab sales over the last few years and really trying to streamline and get focused on the best MLB. So so not only the non in movies, but some of the weaker markets weaker health systems and trying to refine the portfolio. So for us the acceleration I would call. It now in the business model and the ability to not.
Have as many dispositions and have higher degree of acquisitions.
I think really just a cumulative effect and absolutely. It's an important ingredient to have a great cost of capital and if we don't have that it obviously can impact the pace of our external growth, but we know kind of underneath all that the best thing. We can do is have a really strong portfolio.
That generates as consistent results.
Around that 3% level that Chris walk through so that's that's our main focus and then how do we add to that and we try to take advantage of that at times, where where all the stars aligned and we can put capital to work very creatively. So it's I think it's more just cumulative effect to the rather than a change in stripes.
Okay.
And then perhaps the market is.
Taking note of your single tenant.
Growth that came in on a lower end of things for the reasons you described.
Is there is there a view that that.
That portfolio as a percentage of the total should be.
Meaningfully lower than it is and if so.
Could it ever be a zero number.
It's a 10% today than alliance less on square feet, but it's about 10% of NOI. So our view is that sort of reached a natural level that makes sense could it be a little less than 10% sure could it be a little more thats fine too I think we like where it is plus or minus and it really as a practical.
The thing that if you look at the actual assets in our single tenant portfolio. There actually it's a really a strong strong single tenant portfolio a good bit of it being on campus as well and really strong health system. So we we think it's a good balance and frankly the relationships we have with health systems can often lead to a situation like that where we might invest.
And on campus single tenant facility, maybe even off campus single tenant.
But but I think 10%, it's probably about right and not some objective of ours to get to zero.
Okay. That's all I got and as I, then closing as I said, David that email it will always be Emory board so carry on.
That's right. Thank you for your comment on that and I can assure you. His family was was receiving a lot of emails and reading has emails to him and those final data. So I'm sure. He saw it and appreciate that thanks rich great Yep. Thanks.
Thank you.
Your next question comes from Daniel Bernstein with capital one. Please go ahead.
Hi, good morning.
Also as well and.
And just say that rich missed.
Fungibility.
So.
Well I feel like we're hearing from from Dave.
Then last week, we had a nice celebration here at the office as well for colleagues and past alumni of healthcare Realty and we put on one of our Whiteboards. All these various quotes that you guys have brought up and many more so we had a lot of fun with it and he was very memorable in that way I appreciate that.
And it won't doesn't create.
I wanted to ask when we talk to your facilities about a month ago.
We talk some about.
The pricing power that you're now seeing.
And your ammo be releasing spreads have been very strong.
Long term, we had some concerns for the inmobi industry about.
Potentially increasing pricing power from.
Pushback from hospital systems as they emerge as they get larger.
And though is if you could talk a little bit more on the call about the pricing power you are seeing.
About the experiences you're having with the hospital systems right now and.
Sustainability of cash releasing spreads that we're seeing in your portfolio.
Okay.
Dan as Chris I'll start on that we feel.
Very positive about how we've been performing and outlook moving forward one of the things that we do each quarter is is break down the distribution of our cash leasing spreads and.
You're just trying to think of the right analogy, maybe its basketball, you're not going to hit 100% of your free throws.
But.
Having tinder plus percent that you did you end up with negatives I think thats still still pretty strong so youre going to experience that at any particular period, but the majority of what is.
Is occurring each quarter is still in that 3% to 4%.
And that's what we've been.
Putting up for several years and what we continue to to look at and and we think that that's.
Reasonable and sustainable based off of our history, but then also if you look at it from the pricing power really goes to what your replacement cost us and in a lot of these.
Locations is we toured.
And DC.
Just not a lot of available land and so.
Your competition would be somebody putting up some new new construction and in new construction costs, and especially with land cost and some of these dense areas our experiences those those are growing at.
Call it 5% plus so we think there.
Is good sustainability to continue to.
To be able to increased rents and that that 3% to 4% range.
Yes, that's really helpful.
The other question involves occupancy has been pretty stable in the upper eightys, particularly the multi tenant.
Yes, given your comments earlier in the call about insurance carrier starting to require morry outpatient use purchase in hospital.
What's the right stabilized occupancy for a multi tenant portfolio can we see that rise over the next.
Three 510 years from upper Eightys and below 90 source or some.
Other kind of structural impediments, there maybe you want to keep.
Some vacancy open for existing tenants to expand just just trying to understand if theres some upside in your occupancy is well story.
Maybe over a longer period of time.
Sure Dan I would say, yes, we had been in sort of the high Eightys, if you will especially on the multi tenant.
The portfolio and we would say that 90% is certainly achievable over time, but what we've seen over a long period of history is annual absorption being more in the 20 530 35 basis point range and so for us on a practical level, we don't expect that to suddenly.
The happen one year, it's not as though the spaces in a block in a convenient block somewhere where we can leased at all to one or two hospitals, even by market and and just solve that it's obviously a complex.
Challenge to try to can.
Moved these tenants around if thats the case.
And consolidate some space so thats an effort, we're always going through and trying to accommodate folks but it.
It's an ongoing effort I think the other side of that is even just for aside from the leasing side is just portfolio management and always as I mentioned being proactive about selling assets that might be chronically living at 60, 70% occupancy and we just don't see any near term upside in occupancy or or growing the rate so for us it.
A combination of those things, but achieving around 90% is probably the practical level on the Multitenant side and then your mix with single tenant is what what creates the blend and I think when you really pull back a lot of other people's data. They don't often provide the detailed but if you back into it a lot of the multi tenant the portfolios do live around that high 80 90 per.
With that level, so it seems to be a fairly industry wide phenomenon and part of it also is.
Short term leases and some constant expansion contraction in moving around does lead to a natural level. It's a smaller average tenant size. So there's just more of that frictional vacancy if you will.
Okay. Okay, and then one last question on the redevelopment is there any significant disruption.
That we should we expect coming in are you go into lead those assets in the same store.
Portfolio, a pull them out just want to understand how.
Coming quarters, if you.
Add up how we should think about that.
I would say its case by case, the one that we're talking that we've talked about here in Memphis This quarter.
Clearly as a new asset to US we were under contract have actually purchased it.
So that clearly is not going to be in same store for awhile, but an asset that has already in same store more often than not it will stay in there, but it just depends on the scope and magnitude of it if occupancy is going to fall to below 50, or 60% that may be a candidate for saying, we're going to call that a redevelopment the scope of the day.
Dollars would matter as well so its case by case, we've we've done it where we've kept that in same store. If we think that makes sense and we've also.
Collectively taking it out and we'll be very clear about where that lives and describe that when it if we do that but I don't think in the end one or two as Rob mentioned, a year would have a material impact will just be careful to describe that clearly to investors and analysts.
Okay sounds good and.
Before to catching up could you guys next week.
Thanks, Dan.
Thank.
Your next question comes from Todd Stender with Wells Fargo.
Please go ahead.
Hi, Thanks, Yes, just wanted to second and third everyone's comments regarding David He was really scholar obviously in a gentleman and will be missed so.
Jay is FIM and you guys all all our best.
Thank you Todd.
Alright, just shifting to I guess, the redevelop and you guys highlighted the Memphis property.
For redevelopment and I saw it in your supplemental it looks to be a new acquisitions, but I didn't see it on your new deal list I just wanted to hear a little more detail on that.
Yes, that's correct, it's not on our new acquisition list, yet and we really thought about that said, while we don't want to necessarily double count those dollars. We havent closed on the acquisition yet we're under contract and you'll see that obviously in the fourth quarter. So we don't expect necessarily that thats part of the the.
Positioned guidance, it's obviously not a huge purchase at $9 million. So.
Again that would be case by case that one has more material dollars that will spend after the fact, so we felt like that made more sense to be put into the redevelopment side, rather than the acquisition side and that and the purchase price $9 million is in the budget to 20 million dollar budget. So its accounted for in that that budget to for Sean.
Got it okay.
And just what the equity activity lately tapping the ATM, it's been a good low cost for you guys, but.
Broader theme of of maybe raising the dividend or getting to that point.
Chris you kind of highlighted that the payout ratio is declining.
But how you guys thinking about that.
Your balance sheets in good shape.
Probably teeing up the opportunities maybe for debt going into next year.
So I know kind of a few inputs there, but I guess broadly speaking hey, guys thinking about the dividend.
Sure the as Chris described it we obviously, we're closer to 100% in 2018 and it looks like we'll be at 95% or better as Chris described for this year and we would certainly like to see that same level of progress more or less and going into 2020.
I think for US the key is it makes sense to be well into the eightys before we would really move the dividend.
But the nice thing as we're moving that direction and it we can start having those conversations I think it's a bit early to to put a bright line on it but we're moving into right direction, whether that takes 2020 or into 2021, where we have a direct site on that we are moving in the right direction and it will just be a function obviously of how.
Everything plays out for us the volume of acquisitions, the internal growth all those things, but with a pretty strong outlook on those I think we expect strong progress as both Chris and I mentioned in 2020, and we'll certainly have.
More news to report on how we see that when we get to the end of 2020 and whether it makes sense for ended Eightys and can begin to point that direction.
Well I think I'll add on the debt is we're certainly always looking at all of our options in terms of raising capital debt being one of those.
I don't want to make sure we're maintaining a conservative balance sheet to be able to take advantage of opportunities right now were.
In the lower end of our debt to EBITDA range at five too.
We feel comfortable there would like to stay in that range.
We do have the.
Seven year term loan that we completed earlier this year that hassinger.
Delayed draw.
Embedded in that that we've been taking advantage of so.
We expect to to draw down on that commitment in the first quarter, which will relieve the the line of credit. So we feel very good about our our debt position at this point.
How much more to drawn that Chris.
So 150 million.
Okay, great. Thank you.
Thanks, Keith Your next question comes from Tayo Okusanya with Mizuho Hi, Please go ahead.
Yes. Good morning, I, just wanted to add my thoughts to condolences about David.
As a young pulp in this industry 15 years ago. It was just really good to me in regards to getting full understanding of the end would be space and I'm sure it will be missed and condolences.
Do you guys and as well as to his family.
Thank you.
We appreciate it.
In regards to my question is most of them have been asked but I just kind of quick one about the acquisition pursuit costs. This this quarter.
Again, just kind of curious was a lot this little bit elevated with a lot of that just again the same old looking at a high eight volume of deals or was there actually like a big portfolio type transaction, you maybe have been picking up that didnt.
That being come your way so to speak.
No I'd say it's.
It's up a little bit firms from second quarter, but it's just the overall accumulation of all the transactions as Rob mentioned, we've done 12 separate transactions this year.
I was just the accumulation across that nothing.
Out of ordinary to talk about.
Okay, Great appreciate that thank you.
Next time.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Mr. Meredith for any closing remarks.
Thank you everybody for joining us on the call. This morning, and we appreciate everybody's kind remarks about David you will be greatly missed.
And we look forward to see an everybody next week out in California, and re world and will be around today anybody has any follow up with us with additional questions have a great day.
Thank you.
France has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.