Q3 2019 Earnings Call
Greetings and welcome to Physicians Realty Trust third quarter 2019 earnings Conference call. At this time, all participants are any listen only mode. A question answer session will follow the formal presentation. If anyone should require operators. This in turn the conference. Please press star there on the telephone keypad. Please note. This conference is being recorded I will now turn.
Corporate your host Robbie page Senior Vice President General Counsel, Mr. Page you may begin.
Thank you.
Good morning, welcome to the Physicians Realty Trust third quarter 2019 earnings conference call with webcast.
Today, our John Thomas Chief Executive Officer, Jeff Tyler Chief Financial Officer.
Me Taylor Chief investment Officer.
Fine Executive Vice President asset management, John Lucey, Chief accounting and administrative officer laureate back or senior Vice President controller, and Dan Cline Deputy Chief Investment Officer.
During this call Dr. Thomas will provide a summary of the company's activity. Some performance for the third quarter of 2019 in year to date, that's all of our strategic focus for the remainder of 2019.
Following John do you need Taylor will provide our thought spot market.
Fine and investment in growth opportunities for 2020.
Jumped Tyler will review our financial results for the third quarter 2019, our thoughts for the remainder of the year.
Mark I will conclude with a summary of our operations for the third quarter of 2019.
Following that we will open the call for questions.
Today's call will contain forward looking statement as defined by the private Securities Litigation Reform Act of 1995.
They are based on the current beliefs of management information currently available to us our actual results will be affected by known and unknown risks trends uncertainties factors that are beyond our control or ability to predict predict.
Although we believe our assumptions are reasonable or forward looking statements are not guarantees of future performance.
Actual results could differ materially from our current expectations and those anticipated are applied in such forward looking statements for more detailed description of potential risks and other important factors that could cause actual results to differ from those contained in any forward looking statements. Please refer to our filings with the Securities and Exchange Commission.
With that I would now like turn the call over to the company's CEO John Thomas John . Thank you Brad. Good morning. Thank you for joining us today slaughtered Brad page I'm here with Jeff Tyler or Chief Financial Officer, Deeni, Taylor, our Chief investment officer, and Mark sign or.
Executive Vice President for asset management.
We lost a true icon in our business recently, David Emery was a good friends actually a landlord in my prior life and in many ways a metric I.
I will miss him and we just want our friends in national and his family to know we're thinking of them.
We'd like to begin this discussion by telling you how much we appreciate our clients our team and our investors. This quarter proved once again, the superior nature of medical office facilities.
Dockets position better than ever to source journeys for investment for our fast network of client relationships and we are ready to grow and grow smartly.
Clients include the largest healthcare organizations in United States, and many of the leading physicians and physician organizations and their specialty.
Our team includes the mini professionals that recently voted physicians Realty Trust the best place to work in the walkie for the fourth year in a row.
Our team also includes many professionals dedicated to our mission and values, along with our facility management partners and developers as well as bankers capital markets professionals real estate brokers.
And yes, even lawyers trued up a serve our clients every day to provide high quality care and access to care and outpatient health care facilities.
Many of which are recognized this the newest and best facility to their caught in the United States.
We are only six years old but on four facilities. There were awarded the national development of the year for the year they were belt.
Our team also includes those who went before us to help build our company from scratch.
Especially our founder John Sweet.
Our investors include many the largest asset managers in the world as well as dedicated redone doctors and more and more generalist.
Our investors, including many of you representing the buys our primary investors.
We appreciate your participation in this call today.
At the time and effort to evaluate our performance our financial reporting our veracity and transparency on behalf of investors have been trusted us with billions of dollars.
We wouldn't be here without your.
We wouldn't be successful for our investors without thank you.
The third quarter of 2019, when its expected some might suggest we exceeded expectations, but not mine.
We have high expectations of ourselves and we work hard everyday for our clients our team and our investors.
We believe that hard work and the cure we show to our clients. It's one of the primary reasons why wouldnt providers have a choice they choose dr. manage and grow their outpatient care medical office facilities.
Our best in class operating platform performed remarkably well this quarter, our best in class and business development team delivered a creative accretive and long term investments for us with existing and new investment grade providers, who deliver high quality care in the communities in their communities everyday.
Finally, our leadership enhanced and strengthened our already strong balance sheet.
We are better position for growth today than ever before.
We have every opportunity to accept that our growth going forward.
We began this quarter with one of we began this quarter.
Past quarter with one operator, reorganizing what else are transitioning to a new operating platform further partnering with the superior operator platform and one health system selling its assets to University health system.
All these efforts have been completed and dock helped facilitate all of them and they proactive in active way helped make their providers better and better position to care for their patients all while protecting and benefiting our investors.
Jeff will talk about financial impact of these transitions in a few minutes, but the bottom line is our life care eltek facilities have a new operators and valued our facilities and our leases so much as we do and assumed our leases as is.
Surgical partners, the owner of more than 300 surgery centers and surgical hospitals, United States with our assistance and encouragement became majority owner of the foundation, San Antonio Surgical hospital, along with outstanding positions in that community.
And that tenant signed a new tenure lease without.
We have sold the foundation El Paso surgical hospitals.
Lastly, at the request a common spared.
Our largest national client and the largest health system, United States, we help them to fill take to sell their local hospitals to the university local health.
Preserving and enhancing those incredibly important providers in that community.
Actively engaged in medical education about future providers as well as research and high quality medical care.
You're welcome the University of mobile Health, who has assumed all of our Louisville, Kentucky when leases and we look forward to growing our relationship with outstanding University system and community.
As I've mentioned, we are well poised for growth.
To provide an update on our pipeline and opting for growth.
We continue to see and execute on high quality off market transactions.
During this past quarter Damian Josh Richmond completed one of the most complex transition we've made transactions we've made adding job your health system in Walnut Creek, California to the Doctor.
Do you will share more about that transaction as well as our development and acquisition pipeline.
Jeff Toddler, we'll share our financial results and an update on our very strong balance sheet and Mark band then share our third quarter operating performance, including the results for our client satisfaction surveys.
Adopting continues to outperform and customer service leasing and capital maintenance of our of our facilities with a growing focus on sustainability on the environment.
This quarter, we experienced an earthquake floods hurricanes and our facilities and response teams all performed well with minimal interrupt into service.
C.
Thanks, John as you noted we've been working on a unique acquisition and during third quarter. We completed the transaction, which represents our continued ability to develop positive hospital relationships and sourced off market opportunities.
Approximately a year ago, we began working with the seller or five medical office buildings totaling 93000 square feet that are 100% laced he did hobbies or across the street from John Your Hospital and Walnut Creek, California.
Part of the East Bay area of San Francisco.
Most of the tenants are independent physician practices in these buildings.
For this transaction the seller I wanted to partially received.
Oh P units, along with cash at closing, we weren't able to purchase the inmobi for 34.6 million with about 50% funded with our LPU units. The first year Unlevered yield on this good investment is 6.1%.
Also due to the strategic location of these buildings across the street from the hospital.
I wanted to work with dock on the future tenancy other medical space at closing John Your hospital, which is a Moody's 81 credit health facility executed a 10 year absolute net master lease for all 93000 square feet with 2.5% annual increases.
Ultimately, we were able to acquire five medical office buildings off market at a very attractive price and develop a long term new relationship with a hospital in California, which adds another state docs Matt.
For the remainder of 2019 and into 2020, our pipeline for acquisitions and new developments is strong we are close to finalizing contracts for more than 50 million at new acquisitions in 2019 and are excited about the new relationships. These transactions will have with investment grade health systems all of these aquas.
Okay acquisitions are contingent upon typical closing conditions as we look back on transactions. We have closed in 2019 and those we are finalizing the vast majority are off market. We believe the pipeline for 2020 will continue to be strong as dock excels in our relationships with physicians health systems.
And sellers of medical office assets.
I'll turn now the John Jeff.
Thank you Danny.
Third quarter of 2019, the company generated funds from operations and $51.2 million or 27 cents per share our normalized funds from operations were also $51.2 million.27 per share.
Our normalized funds available for distribution were $47.7 million for 25 cents per share.
Showed strong earnings growth this quarter and resolve the situations that were distracting from the strong strong performance of our core MLB business.
Starting with the life care bankruptcy resolution.
Our conviction that the strong cash flows from our three elteks, which regenerating around three times EBITDARM coverage would insulate us from the negative impact of the life care corporate bankruptcy was proven correct, our new operator assumed control the assets on September Thirtyth under the same leaves we had in place with absolutely no modifications.
In addition, the operators paying us all economic damages incurred during the bankruptcy process, including legal and late fees and monthly installments over the next year.
We booked at $1.1 million back rent and fees this quarter, which reverses out all previous charges taken.
Our new tenant has an excellent long term track record in this industry and clean balance sheet. So we expect strong performance going forward. Once there is some operating history will begin to report EBITDARM coverage is again in the supplement.
For El Paso Surgical hospital previously affiliated with Foundation healthcare.
Those of sales agreement with the doctors in the facility for $32 million.
As a requirement for the sale, we collected $2 million, the background, which loop, which will be booked as revenue in the fourth quarter.
$32 million sale price consists of 4.4 million of cash from the buyer with dock, providing seller financing for the remainder under alone not to exceed 24 months, yielding about 12% per year with fees and interest.
This loan secured by the property and guarantees from the operating entity.
Finally, the other material item on the credit Watch list was the San Antonio Surgical Hospital. There was also previously run by Foundation.
That is now leads to a newly formed JV comprised of the existing doctors and USPI at rental rates that are nearly identical to yield. Please.
The team put in a lot of work to get successful resolutions on these minor issues and we're excited to focus again on the strong prospects that we see for the company going forward.
Along those lines based on successful resolution to the foundation of life care assets, we no longer see any material dispositions happening in the near term nor do we have any material redevelopment plans for any assets going forward.
Our expectation is therefore, a return to growth and we assume the pipeline swell as Denny just discussed so the opportunity in front of us looks promising.
Year to date, we have completed $257 million of investments and development commitments.
We remain on track to meet our guidance of 200 to 400 million in 2019 and look to exceed that in 2020, assuming similar capital market conditions to the ones. We're in today.
Overall cap rates on these acquisitions will likely range for the mid 5% range below 6% range and we will continue to target relationship deals and the specialized off campus medical office buildings that we think are fairly priced and most likely to retain value.
We're not including any large portfolios in this forecasting estimate as those tend to attract bidders that will pay prices. We think are unlikely to generate adequate returns for our shareholders.
This competitive dynamic change.
Our acquisition numbers could be higher.
Our balance sheet remains in great shape. We're currently Levered at 5.6 times debt to EBITDA, we issued $52.1 million on the ATM in the last quarter at an average price and 17 41 deploying those proceeds into investments that are immediately accretive to our shareholders, while improving the overall quality of the portfolio.
We are right in the middle of our target leverage range at this point.
Good opportunity to grow the portfolio with a nice balance of debt and equity.
Finally, a quick mentioned about DNA.
A little higher this quarter 8.1 million because of a slight increase in our bonus accrual we expect to stay in the target range 31 to 33 million for the year as predicted at the beginning at the outside of this year.
We remain focused on keeping our management costs low.
Last year at unit growth was abnormally elevated and what we aren't ready to provide specific 2020 guidance investors should be expecting a minimal increase that most virgina next year as we focus on levering our cash flow the benefit of our shareholders.
Ill now turn the call over to Mark to walk through some of our operating statistics in more detail Mark.
The third quarter was one of the best operating quarters in the history of the company as demonstrated by our robust MLB same store NOI growth excellent leasing progress.
Improved tightening credit at several facilities and record breaking tenants satisfaction survey results.
Our better than expected third quarter results represent a further continuation of our focused execution of our relationship based approach to real estate.
The Inmobi same store growth momentum, we established in the first half the year continued into the third quarter with cash NOI growing 3.3%, excluding termination fees, bringing our year to date and will be same store NOI growth to 3.3% as well.
This strong organic growth was driven by a 2.7% increase in base rental revenue from contractual annual rent Escalations and improved same store occupancy to 95.6% from 95.3%.
Operating expenses for the same store portfolio increased 6.4% in the quarter, primarily due to real estate taxes and were offset by a 9% increase in operating expense recoveries, demonstrating the insulated nature of our long term triple net leases, which generate strong predictable returns.
A major factor in our ability to drive revenue growth overtime is our leasing teams acute focus on tenant retention in place contractual rent increases in cash re leasing spreads.
Currently the weighted average annual increase for our portfolio is 2.3%, but so far this year, 86% of all lease renewal have contained in average rent increase of 2.5% or greater.
For leases commencing this quarter the average weighted annual increase was 2.7% and our cash releasing spreads were 1.2%.
These positive drivers along with strong tenant retention of 82% and positive 1200 square feet of net absorption signal sustainable growth in the years ahead.
During the remainder of 2019, just 1% of docs portfolio is scheduled to renew with an average rental rate of $23.46 per square foot and our team has strong leasing momentum in Atlanta, Houston and Phoenix to fill current vacancies.
We're also excited to welcome the University of Loulo Docs portfolio as our third largest tenant and look forward to the opportunity to grow with them in our global medical office buildings, where we have approximately 35000 square feet of space available for lease.
Although our portfolio as an industry, leading 96% leased we see areas of opportunity for our exceptional asset management team and leasing teams to collaborate on tenant retention.
New leasing to deliver bottom line results.
Our asset management teams keen focus on operational excellence and outstanding customer service can also be seen this quarter in the result of our 2019 Kingsley associate dependent satisfaction survey.
This year, we surveyed nearly 450 tenants representing 3.5 million square feet.
Physicians Realty Trust's received an industry, leading 78% response rate.
Typical response rates for these surveys are between 45 and 55% so 78% demonstrates the exceptional relationship between our asset management team and our healthcare partners.
We also earned a company record score in overall management management satisfaction of 4.5 out of a possible 5.0, and 92% attendants surveyed gay positive indicators as of their future lease renewal intentions.
Thanks to a team effort focused on long term value creation and growth we had another solid quarter that validates the quality of our portfolio and our earnings.
Looking ahead in 2020, we will continue to grow our integrated management leasing platform and are well positioned to drive operational excellence consistent same store growth in our MLB portfolio and support near term growth through new acquisitions.
Our management structure, it's scalable and we'll continue to benefit from concentration as we invest in top quality properties and portfolios in the future with that I'll turn the call back over to John .
Thank you Mark we now look forward to your questions.
Later.
At this time, we will be conducting a question answer session. If you would like to ask your question. Please press star one under telephone keypad, a confirmation total NK. Your line is in the question Q you May press star to if you'd like to remove your question from the Q4 participants using speaker equipment. It may be necessary to pick up your has that before pressing the star.
One moment, please while we both questions.
Our first question. Our first question is from Jordan Sadler Keybanc capital markets. Please proceed with your question.
Thanks, and good morning.
Yes.
I wanted to dig in on shell rich the cap rate Denny you offered up the six one.
To what extent was that facilitated by the new lease with the health system. There is there a meaningful uptick in rent versus in place on that renewal.
No. It's a reflection of what we paid for the assets.
Directly.
Okay.
And toward that.
Hey, good above market.
No.
Said the leases help us with the hospital was set at local market.
No the cap rate cap rate Jan.
So I got it if it's a fantastic with very accretive right.
Just a function that relationship Instructure ultimately you would point to is sort of the driver that cap rate exactly yes.
Okay, and the escalators I think you said were too.
No there are two and a half two and a half okay I got that around all right great.
The.
Quick question regarding the disposition.
Outlook I think Jeff you mentioned that you currently no longer expect to have much in terms of additional dispose is I get that right. Yes. That's right Jordan, we were really pleased with the resolutions that we've had on many of the assets that we were expecting to sell.
So as we sit here, we feel comfortable with the tenants in the credits we don't think there's a near term needs to sell these asset.
Okay.
So that basically take the elteks off the table in terms of being for sale Foundation, San Antonio off the table and the non core movies that.
Previously sort ahead teed up yes, that's right Jordan and.
We sell them at the right price the to the right buyer, but there were not actively looking to sell them at this point and.
Again, we've got a very small percentage of our medical office buildings that.
Kind of are not long term keepers and.
So again in time overtime, we sell those but right now we're not actively looking do so.
Okay last one just on the.
Sequential change and then NOI looking into for Q, Jeff I heard.
The 1.1 million that was booked in Threeq, you I think and then I heard the 2 million.
Related to.
El Paso, I think yes, that's exactly right Jordan. So those are well get the 2 million next quarter and obviously, we won't get the the 1.1 eltek payment again in the fourth quarter. So those are both GAAP numbers that were booked in the topline yep.
Okay.
Yes, it was booked and will be booked right.
And was there anything else related to life care like in terms of a true up and inter reversal related straight line or anything like that or is that is everything else sorta recurring.
Yes, so the only.
The only other thing that was different between Threeq you in Twoq you as we got 800 of rent, which represented two months of payments that that'll be flat going into the fourth quarter. So there's no other kind of onetime changes going into the fourth quarter.
But that 800 was to cues Ren that was a catch up.
Yes exactly right.
So you have to back that out.
Is that where you Sam or you see the run rate is fine.
The run rate is fine as long as you just back out the $1 million payment that we got as okay catch up Brent.
Alright, thanks, guys.
Thanks.
Our next question is from John Kim BMO capital markets. Please proceed with your question.
Thank you.
You did a fair amount of.
Investment activity by a loan by loan structure.
Can you comment and how big you want this to be part of your acquisition, which is going forward.
John It's great question.
We'd be loans, primarily as a strategic option in our in our tool, but that just matches with the situation. So kind of think about those like we do the which is 100 200 million a year new opportunities, but we're not actively looking for loans as loans were we're looking for medical office facilities to invest in long term. So just.
Little uptick this quarter because of a unique situation that present itself and.
Ultimately hope that turn that into ownership.
Okay.
Jeff mentioned in your prepared remarks, no redevelopment plan and I know thats not a huge part of your your business but.
Is that because it really focused on growing near term FFO or do you not see a lot of redevelopment opportunities in your portfolio now I mean, it's the latter.
Remember the portfolios relatively news, though right and we've acquired a lot of this over the last I guess all that over the last six years or so so.
We don't see any buildings that need material rehab or redevelopment.
I, just I, just mentioned that because some others do.
Yes.
So John 96% leased though to redevelop something we got to move people out of a built in and so that's really not in our and our DNA, but at the same time, we have good strategically located real estate that that overtime and eventually.
Present redevelopment further enhancement opportunities and.
We would expect to do that overtime. This.
96% leased we got up we're going to five place to move people to redevelopment.
Okay.
My final question is on your lease expirations next year, it's a modest amounts and the expiring base rate is.
About 5% below the rest of your portfolio.
Can you give an estimate as to what the mark to market will be next year on we leased from those assets.
Yes sure John This is mark so as you mentioned next year, we've got 3.1% of the portfolio Rolling So very low turnover in our portfolio.
About.
20, 144 per square foot. So as you mentioned, 5% below kind of this year.
It certainly will be market dependent, but our leasing team has done a great job.
Pushing rents are weekend, and our leasing spreads and getting higher contractual escalators. So far this year as I mentioned, the 86% of at least two and half present.
Escalators or more so hopefully we continue to push rents work hard to do that in 2020.
And 5% of good estimate for the Mark to market.
Certainly market dependent but.
Just continue to kind of grow up 2% to 3% in markets, where we can we'll try and push that more.
Got it okay. Thank you very much.
Thanks, John .
Our next question is from Tayo Okusanya Mizuho. Please proceed with your question.
Hi, Good morning, everyone I just wanted to follow up on Jordan's question again for kind of major pieces of transitions that were happening with life care. The 2000 additional leases audits a foundation hospital, then also Louisville University of really will help.
Yes shrine to understanding that a bit better of what.
To me Q numbers.
And whats to potential pick up or falloff in Fourq you associated with these transitions.
Okay.
So it's kind of walk through in terms of cash on life care, you added 200 about $2 million reversal, which represented getting an extra two months of rent payment plus the 1 million dollar back rent payments that we got that with all three Q.
But that that was all threeq, you're right that was audience.
Yes, sorry, that's all on Threeq, you exactly and then for the foundation El Paso assets.
Remember back in Twoq, we took a 1 million that we took a $2 million charge, but 1 million of that was related to Q1. So you get an extra pick up there and then they also made a $500000 rent payment in the quarter.
So that was the difference between Threeq you into Q and then we'll also remember there's a lot of.
Pass assets, but be El Paso specialty hospital, the tenant that they started paying rent in threeq you too so that was.
Just under an extra million dollars there.
So those are kind of those are the adjustments from Threeq to Twoq you and then as you go into Fourq, you I talked about with Jordan.
You are going to get that extra $2 million.
Payment from the foundation El Paso sale.
And then that will be recognized as rental revenue.
The repayment of background.
Okay. So that shows up in the fourth Q numbers okay.
The the life care, although you do your booking the 1.1 million of fact brands as revenue in Threeq few.
Thank you and getting this back kind of as a monthly payments over the next 12 months, how do we kind of think about the 10% interest on that kind of receivable as that additional interest income to you guys for the next year as well.
It is if it is but it's not a not a huge material number.
Gotcha, Okay. That's helpful.
From that perspective.
Then the cash same store NOI of 3.2% again, that's excellent brilliant number.
When we start thinking about 2020 under sustainability.
That number even if it's not one of three three it's kind of unusually high I think again, how do we kind of think about a world, where you're kind of putting up numbers on a sustainable basis similar to the appear as of two an app to me.
Hi, Mark.
Next year in 2020, we continue to.
Anticipate the same kind of same store NOI growth in that 2% to 3% there.
Portfolio is doing really well fully occupied most of our same store is going to be driven by can check contractual rental increases as I mentioned those are 2.3% in the portfolio today, So where we can we can execute on some new leasing hopefully we can bump that up a little bit, but we continue to see it to be pretty stable.
Gotcha. Okay. That's helpful. Then last one if you had indulge me again the loan investments again its guys. It's interesting to me that again with the loan investments you kind of getting kind of 6% type rates on that and then when you take a fee simple position that cap rates of six one so again with the low in Japan.
Hi up in the capital stack play kind of getting a similar type of return or yield does that kind of influence you thinking about doing mode billings versus trying to own things out right in the fee simple structure or not really.
Hey, Diarists JT and welcome back we've missed your bank yet been hit that absolute congratulations on your position congratulations on the world six that hey, you're almost there may be almost there. So those they don't know more people to climb out everything you've done the oral sex and tiles has just done it so.
Like I said before the loans, it's a great question because we.
Actually we get better yield and 6% on most of our loans and it's it's always a strategic tool for us and just matching up to the situation and creativity. So the uptick this quarter was a with a unique situation, where we have the opportunity to.
Provide alone.
The purchase of up a building that.
Let them have some lease up opportunity and then again hopefully we don't have any any rider option, but we expect once that building is complete leased to.
Hopefully have the opportunity to convert that loan into.
Into a long term ownership position so.
Again, we do it again in the same bucket as we do development. So 100 200 made up of loans at a higher in the capital stack higher yielding and certainly have the opportunity in two anymore.
The right situation present themselves, but it's not something we actively looking for.
Gotcha. Thank you very much thanks, Tom Thanks.
Our next question is from Vikram Malhotra Morgan Stanley . Please proceed with your question.
Thanks for taking the question.
So just maybe bigger picture.
Talked about.
No more needs no more need for disposition, so arguably you're now back and kind of net acquisition net growth mode. So I'm just looking for some guide posts and a sense of kind of the strategy going forward last two years you you consciously made an effort to kind of move up the quality spectrum, so looking for sort of.
Types of assets markets, maybe because the range of cap rates that you're focused on and.
Do you still intend is is the goal is to continue to improve or are you sort of happy with the portfolio here.
Hey become thanks for the question the.
I think I think the the smart growth going forward is continuing focus on high quality health system anchored facilities.
We've always liked off campus.
We need to see those as.
That's probably the better value options, while getting the same kind of credit quality and.
Construction.
For the long term that we're looking for but again, whatever our relationships that present themselves whether their own camps are off campus, but.
Thing, we're not going up we're going to continue the growth up the quality scale, but also just just pure growth with the health system relationships.
Substantially.
Substantially all of our investments this year and in our near term pipeline our relationship off market opportunities. So that usually presents a better.
Better cap rate the better yield and then.
Those are off comps opportunities continue to bring better yields than on campus. So that'll be our focus going forward.
The dispositions that will be more kind of strategic and.
And the gift from time to time.
Nothing is needed, but just as we have the opportunity to prove the portfolio and prune will prove but no real plants.
Okay and is mid five to six sort of a good.
Please go to a number in terms of what cap rates you would be targeting yes actually is yes. This market I think thats fair.
Okay. That's helpful and then just second.
So some of your does have.
Have have partnerships with some of the health systems from a development perspective, some have been sort of focused on.
Larger portfolio. So there's two questions. One if you can if you can talk about how you're thinking about partnerships with health systems that.
Over time may lead to a more sort of a steady external growth and then second if you can just gives a sense of any any big portfolios out there in the market.
Yes, so we view all of our health system clients is relationships as partners, we have repeat business with.
Virtually all of our top 20 tenant relationships.
I think we're in 12 different markets with common spirit, the largest health system in the country and continue to have opportunities.
For new development and acquisition with them from time to time so.
I think I think all of our Oliver health systems like to be repeat business with us that's as Mark commented on our customer service.
Satisfaction surveys that the return rating in of itself as a reflection of March team.
How much attention to detail how much attention, we pay to those relationships and taking care of them. So.
Those are routine and those partnerships come and all kinds of form so.
The.
I'm sorry portfolio.
Hello.
The big Big portfolios exactly so.
Several portfolios out there trading things to me it seems to our peers. It looks best we can tell that.
Theres, one buyer particular that buying the portfolios and.
Our bidding everybody for that for those portfolios, which is which is fine.
We continue to have smart growth one building at a time.
Thank you.
Our next question is from Joo Bhavan.
Robert W. Baird and company. Please proceed with your question.
Hey, good morning.
Andrew.
And on the third one investment at the Fort worth demo rebuilding can you talk at all about kind of anchored tenant expectations would that building lease generally kind of how confident you are that.
Yeah, we substantially for relatively soon and.
Extend those tenants are rated.
That's helpful as well as hopefully, hoping you'd get a little color on that yes. Great question drew it is substantially leased to to investment grade tenants today.
And then 250 yards about major health system, that's an existing tenant relationships. So it's an outstanding building.
Like I said it is a unique set of circumstances, where we.
Provided alone.
To the owner that building.
Long term, we have no rights to it in the long term, we hope to have an ownership position in the though.
Okay appreciate that color there and on just one more for me on the foundation El Paso property sale.
Obviously, that's a pretty large refinancing the.
The buyer on is getting from you and I guess.
What confidence do you have I mean, obviously you have confidence there was there anything you can talk speak to in terms of their ability to how many people on that payment with interest over time.
Yes, I can comment on kind of their resources to do that and how comfortable you are there.
Yes, it's a great question.
Obviously, we'd like to.
Had them find third party financing, but they're they're part of the ownership of the and the majority ownership of both the Opco and and the propco their private private equity backed new organization with a couple of other facilities.
I think in Texas exclusively but looking to grow so we have every expectation of.
Certainly have incentives aligned.
In incentivize them to find third party financing sooner than later, so we have every expectation of that in the meantime, we got a very large payment upfront plus the background.
So we think we think that featured right there with physicians that.
We have realized with there are.
We're very excited about this new partner that they brought in managed.
Management, that's all going well.
Great appreciate the color. Thank you.
Our next question is from Chad Vanacore Stifel. Please proceed with your question.
Hi, Good morning, this and how it show up for Chad. So my first question just a follow up on the El Paso sale supervise seller financing on the transaction is it your expectation that a bio will pay off the along the next year also.
Yes, I mean, I would guess that this is Jeff sorry, because of the interest rates and fees associated with it we're certainly trying to incentivize the buyer to pay out loud.
Earlier, rather than later.
Yeah, generally it's going to take about a year of history to to get seller financing to get to get additional financing to pay off the seller financing so.
You know sometime between one and two years is when we would expect that loan to be better.
Got it my second question is on the same store pool is life care or pursuing there this quarter. If so what are you seeing pack.
Yes, so the same store number is our MLP portfolio.
Which is in the in that portfolio is about 91% of our square feet and 86% of our NOI.
Well, we break out separately is the hospital and Elteks. If we included though does the full portfolio or same store would have been 4.9% for the quarter.
So outstanding results.
Year over year there.
Okay.
'cause do you did 1.6 in the first quarter 3.5 in the second quarter 3.3 in the third quarter. So obviously you are trending towards the high end up to 2% to 3% range, where do you think you end up for the full year and I think I heard you mentioned that you maintained a 2% to 3% arrange for next year.
Given the strong like contractual rent increase you just mentioned do you kind of expect a flat to slightly improving occupancy for next year.
Yes, I think the.
The result of being higher for the year. The 3.3 is.
As a direct result, the great team or leasing teams done to fill some of the vacancies and they've got improved occupancy in the same store portfolio.
And then again continue to push annual rent escalators.
So full year year to date, we're at 3.3% and we're going be at the top end to that.
3% for the full year and next year, we'll continue to see stable same store growth in the 2% to 3% range.
Okay. That's it for me. Thank you. Thank you.
Our next question is from Nick Joseph Citi. Please proceed with your question.
Thanks, how large was the buyer pool for the foundation El Paso assets and could you update.
Buyer seller financing.
Im sorry, you said, how large was the buyer pool that would you asked yes.
How many how many bit did you get on the foundation El Paso ask guys I'm wondering if any or how many of those big did not require seller financing. Yes. So it was not actively marketed in a process that physicians.
Until they brought in this new.
This new management company in new equity into the into the partnership the physicians owns 80 plus percent at the facility and so we've been working with the positions both identify and frankly recruiting and bringing in additional capital, but more importantly management into the opera Opco, we're working with them at the same time to facilitate a real estate transaction.
And again to get to get that all the incentives aligned economically.
And the Opco in the press go and then and then ultimately for us to move it out so.
I'm talking about the buyer pool, the buyer pool with the physicians and helping them identify capital partner again, both the better operate managing growth of the Opco.
Of the provider, but the same time the opportunity to align incentives and by the propco. So.
Again, if they.
One of the same buyer coming into both the outcome on the propco.
Bank financing, probably been easier to finance and identify on.
The sale to us, but at the same time.
Stabilized operating better than ever that we had we had other buyers.
Potential buyers to come in and by both the Opco propco, but again the physicians over there.
Yeah Ben.
Worked hard to.
To pay rent and we're all along and still are on financial guarantees to.
We just couldn't work through that situation.
We think it's a great resulted in like said as Jeff mentioned.
I have every incentive to get bank financing assumes that can in the meantime, we got a very large cash payment upfront to chemists secure our position.
Thanks, that's helpful that you talked about the competitive acquisition environment, how different is the level of competition on the loans.
Again, yes, great question on the loans.
For us is not something we're out there are actively shopping for loans is just a matter of.
Tend to off market relationship nature of our of our business and strategy from time to time, we come across opportunities where.
For various circumstances, just a pure.
Ownership or acquisition.
Match up the.
Particular situation and we get creative and and do alone. So.
I can't answer the question about what the market size and breadth and opportunity as we can't it's just one of those capital tools in our toolbox to make good accretive investments.
Ultimately our goal is to own the buildings, we have long zone.
Other than foundational pass through the sale, but.
Those are we can get up if we get a better return on an asset that.
Traded at a low five cap rate and we can get a 6% or better return in a secured position.
That's not bad option.
Thanks.
Yes.
Our next question is from Michael Carroll RBC capital markets. Please proceed with your question.
Yeah. Thanks, I jumped on late so sorry to someone already assets, but have you guys talked about the and the credit behind the load on the El Paso sale. I mean, do you have any credit enhancements like personal guarantees or anything like that.
Yes, I mean like the primary were secured by the property of of course, right, which is which is the biggest security also guarantees the operating entity.
But really we're getting $7 million and back paid ran and equity upfront, we still have a lead on the property. So we feel pretty good about the security of that alone and the positions have guarantees behind the opco lease.
Again, which they the new propco owner.
Benefits from ultimately, we have clarity through to that and they've invested.
New capital in the Opco system, much very stabilized situation again, we a lot of security.
Okay, and then can you update us on what is the actual disposition plan going forward and I know a few quarters ago, you're talking about how you wanted to have an ongoing capital recycling initiative kind of selling the bottom part of your portfolio.
Year to year I mean are you still plan on pursuing that.
Okay, Great question, Mike So.
And given the near term, we don't have any need to sell anything.
We will we always actively.
Evaluate opportunities for.
Pruning the portfolio, we just don't need to so as we currently sit here, we don't have any plans to sell anything.
Again, the all tax and.
The lower 2%, 1% of the portfolio again in time, we will sell but.
No no near term current plans to do so we'll actively manage improving the portfolio as opportunities present themselves.
Okay and then just last for me in can you talk a little bit of bounce the a the new health system that is coming into the San Antonio asset.
I guess, who is the health system and.
I guess did they I'm assuming that they you got to new lease with them I think kind of highlighted earlier in the type of credit behind that leaves now.
Yes, its United Surgical partners, which is a wholly owned subsidiary of tenant health care, which has other.
Hospitals in that market, so great Great management, Great capital base stay on 300 plus.
Facilities around the United States do great management, they've been in their working with the physicians for over a year and.
Helping to improve just the management operations of that and ultimately have the opportunity to invest in on a majority interest in that facility. So we expect nothing but great thing from them. So we thought it tenure lease with that entity with United sort of partners as a majority owner so very great.
Thank you.
As a reminder, if you'd like to ask a question. Please press star one under telephone keypad. Our next question is from Daniel Bernstein Capital. One. Please proceed with your question.
Okay.
Most everything has been answered.
I do my question on and Kentucky, One could talk one I guess is there any capex needs and those assets that.
You might be able to fund.
Yes, Dan.
Great question, So we for when we bought the.
Portfolio original portfolio from from CHF.
We spent or are we kind of budgeted about 30 $532 million and capex for all across the markets.
About a year later they.
There were going to.
Actively look for a new owner for the Kentucky, one assets and level. So while we have maintained them. We havent made major investments in their till we knew the new owner wasn't and stabilization. So we're very excited about the university level health, taking over and assuming all up 100% of those leases and now we can actively.
And the frankly the lease pipeline that has been sitting there just with physicians wanting to move in those buildings, but just waiting to see the new operator is and I think both day in the community and we are excited to.
To have the university level helped in there so.
As new opportunities present themselves will invest capex in those buildings to maintain them.
Ultimately to particularly redevelopment.
And that we have 93% occupancy looking to lease up 11%.
Okay and.
No no if you discussed earlier and off but.
Are there any redevelopment opportunities within the portfolio.
Yes that question was asked.
Okay.
The short answer is yes. The long answer is we're 96% occupied sort of read about any of our buildings at the move people out of the building and so that we have to do some do that strategically and but more importantly, we would do that.
In a.
Relationship way with the health systems to improve.
Proved buildings to meet their strategic needs. So.
Short answer is we really don't have any.
Redevelopment opportunities or our needs, but at the same time, we'll actively manage those buildings with the health systems to compete there.
Outpatient and off campus needs from time to.
Oh, it's because if we are you seeing any more requests.
For discussion about that.
In other words, you know there nothing imminent, but maybe you are seeing a pickup and into discussion from hospital systems wanting to redevelop obsolete assets or reposition obsolete assets for more outpatient or something like that yes. That's great question. So I would say, we havent bought any obsolete.
[laughter], but at the same time.
Some of this some of the owner some of the older buildings on the fell systems I would say, we're bringing them as many ideas as they're coming to us with request probably more.
Some specific situations, we have a couple of hospitals that are in opportunities and so we've had opportunities own investors.
Talking to us about working together to try to read redevelop or or.
Take advantage of vacant land near hospitals for various.
Development opportunities so.
It's a very active discussion great question.
It's not having any near term specific.
Building identified to redevelop.
Okay. That's all thank you, yes, great question.
This concludes the question answer session and that will now turn the floor back over to John Thomas for closing remarks.
Yes. Thank you again for joining us today is as I hope you can tell we're excited about the quarter in the future and create opportunities for growth going forward. We just look forward to seeing albeit at a rate and thanks for joining us today.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
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