Q4 2019 Earnings Call
[music].
Greetings and welcome to physicians Realty Trust's fourth quarter.
Around 2019 earnings conference call at this time, all participants are in the listen only mode. A question and answer session will follow the formal presentation.
Hey, much require operator assistance during the conference. Please press Star zero on your telephone keypad. Please note. This conference call is being recorded.
It is now my pleasure to turn the conference over to your host Mr. badly page Senior Vice President General Counsel. Thank you you may begin.
Thank you good morning, and welcome to the physicians Realty Trust's fourth for 2019 earnings conference call and webcast.
With me today, or John Thomas Chief Executive Officer.
Tyler Chief Financial Officer, Deeni, Taylor, Chief Investment Officer.
Hi, Executive Vice President asset management.
See sheep accounting it administrative officer worried backer senior Vice President controller, and Dan Cline, Deputy Chief Investment Officer.
During this call John Thomas will provide a summary of the company's activities or performance for the fourth quarter of 2019 and year to date.
Well hurt as well as our strategic focus for 2020.
Got pilot will review our financial results for the fourth quarter of 2019, and our <unk> guidance for 2020.
I will provide a summary of our operations for the fourth quarter of 2019 point.
Following that will open the call for questions.
Today's call will contain forward looking statements is defined by the private Securities Litigation Reform Act of 1995.
Based on the current beliefs of management and information currently available to us our actual results will be affected by known and unknown risks trends certainties factors that maybe beyond our control or ability to predict.
Although we believe our assumptions are reasonable for both our forward looking statements are not guarantees of future performance. Our 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 to turn the call over to the company CEO John Thomas.
Brad Thank you for joining us. This morning Physicians Realty Trust ended 2019, with a healthy portfolio strong balance sheet and a pipeline poised for 2020 grow.
At the beginning of 2019, we announced the guidance, that's completing 200 to 400 million of new investments and off market outpatient medical office facilities.
Ended the year with 452 million in new investments, which is 95% leased.
These investments included our first in California, it's rather than an innovative strategic joint venture with Kayne Anderson real estate in India already health care, the largest private non hospital affiliated inmobi owner in the United States.
We also launched our first ground up development with two projects under construction at the end of the year.
The average for sure yield on all of these investments, which just over 6% near the top end of our guidance.
We made these accretive investments without sacrificing tenet or asset quality.
83% of our new consolidated assets or at least to investment grade health systems and their subsidiaries.
These investments include our five new medical office facilities in California, located adjacent to John Muir Health Walnut Creek Medical Center.
Part of that direct transaction, John Deere help rated one by Moodys Internet, a new long term lease for 100% of that space.
[noise] during 2019, we expanded our relationship with a sanction the second largest health system in U.S.
Financing the development of by 48000 square foot outpatient care center for their health system Ministry in Pensacola, Florida.
Our financing it was an option to purchase at the facility, which is expected to be completed fully occupied during 2020.
Our investment also include an ownership interest in three medical office facilities on essentially saying that sounds health system flagship campus in Birmingham, Alabama through our participation in the recapitalization of a 59 building portfolio with Kayne Anderson and NBR health care.
Which included the contribution by us of two of our medical office facilities at market value plus $17 million in cash.
This portfolio contains approximately 3 million square feet, 92%. It's on campus are affiliated with the health system and its 92% leased.
We now manage approximately 500000 feet on that same batson's campus in Birmingham, which recently announced the joint affiliation with you may be health system. The state's highly regarded medical education specialist treatment and research organization further strengthening same benson's opportunities for growth and success in that market.
Common spirit, our largest tenant and the largest health system in the United States continues to excel in their health care Ministry efforts and remains a strong dock partner.
Working directly with their leadership team, we transitioned all of our little base, Kentucky, one leases so the university of noble help.
This alignment occurred in connection with universities acquisition of common spirits hospitals in law.
The commitment of the University of level and the Commonwealth, Kentucky to continue the mission education and research based on these hospitals and facilities is further evidence of the resilience of our investments.
We're excited to welcome any health system class, while also reducing our overall tenant concentration with common spared affiliated hospitals for 19.2% harboring around revenue on January one.
To 16.5% at the end of the year.
Docs investing better strategy is driven by management team that knows health care nearly seven years, we've embraced the outpatient health care setting to create a lower total cost and more convenient patient experience.
2019, we continue to see momentum in the growth in scope of services delivered in these top the facilities.
Locations were high quality providers offer outpatient medical services.
Clinical science is evolving rapidly to move care out of the hospital and outpatient settings, improving the quality of care and lowering the cost of that care.
Hi, convenience and costs will continue to drive more patients to health system affiliated providers in our outpatient medical office facilities.
This environment and the exponentially increasing the quality of procedures performed outside of a hospital fuels our opportunity for growth for years to calm.
As a leader in the healthcare really read industry, we strive to maintain and growing portfolio of exceptional real estate that provides unmatched value to our tenants and strong returns to our shareholders.
Since our company's inception, we maintained a firm commitment to E G principles.
As a healthy investment decision at critical component of our portfolio with our scale in 2019, we invested approximately 3.5 million an energy management and building system upgrades produced our carbon footprint and make our facilities better for the patients physicians and other providers we serve.
These investments also have a direct green return on investment as well.
Later this year will publish our inaugural yes, you report online presenting our social commitments to the communities, we serve as well as our best practices and governance diversity and inclusion.
As part of our efforts we've adopted the Iram standard for certified sustainable property management.
We burned iron certification on eight of our facilities and recognizing those assets for their sustainability features and outcomes.
We will be certifying more buildings in the future.
2019 was a very positive year, and we expect 2020 to be even better as we see the opting for growth. We believe we can source make new accretive investments and outpatient medical office facilities. This year.
I'll now turn the call over to Jeff Tyler, Our Chief Financial Officer to review our financial results and then marked on will share the results of Testings outstanding performance Jeff.
Thank you John in the fourth quarter of 2019, the company generated normalized funds from operations of $52 million or 27 cents per share leading to a total of $190.6 million or 99 cents per share for the full year of 2019.
Our fourth quarter funds available for distribution were $46.4 million and $178.4 million for the full year.
2019 was a year of transition as we started to take advantage of higher equity prices and lower debt costs to resume growing the company.
Importantly, we continue to rely on the unmatched relationships or amend our management team has built over their careers to source all of our 2019 acquisitions off market delivering yields beyond those that can be found at an option.
We believe a disadvantage which will enable the company to continue to grow its earnings at an above average pace accruing value to our shareholders.
Our $452 million of investments for the year were weighted toward the off campus assets with specialized space and how system tenants, which has been a focus point of the company since inception.
This is the area, which we have long believed and which all public MLB owners of now acknowledged verbally and by their own investment activity is the future of this industry.
Our medical office building acquisitions, and 2019 were acquired at an average cap rate of 6.0% and 83% of the space was occupied by investment grade rated health systems.
In the fourth quarter, we invested $274.3 million at an average cap rate of 6.1%.
Of particular note in the fourth quarter acquisition pool was a 12.3% minority stake in the 1.1 billion dollar joint venture with MB Realty and a foreign investor.
This is not an option deal, but one where we were sought out as a partner by the sponsor and foreign investor, enabling us to pay a fair cap rate for the JV interest.
The ancillary benefits of this deal or even better for our shareholders as we're able to fund a portion of our interest in the joint venture by contributing to assets at a sub 5% cap rate valuation, resulting in a 22 point $22.9 million gain and 31% Unlevered IR are on the sale.
Contributed assets are part of the key cluster of buildings in the Birmingham area now controlled by the joint venture with management services at each of the assets to be assumed by dock, increasing our expected return on the JV investment to an unlevered yield of 5.7% and a levered yield of 9.2%.
We believe that this joint venture will not only generate above average returns for all involved but will allow us to leverage our southeastern property management capabilities to source additional deals and put us in the driver seat to the extent that this joint venture decides to monetize into the public sphere someday.
As we look out into 2020, our pipeline is robust if our cost of capital remains at current levels are better we'd expect to acquire between 400 million to $700 million of assets, we are well over that amount in our current shadow pipeline and feel comfortable that we can convert on a sizable number of these out of these opportunities.
We would expect cap rates to range between five and a quarter and six and a quarter and we're committed to finding the majority of our deals that better pricing and we could get by winning an option for by paying portfolio Aggregators significant premiums for their work.
We also are likely to continue to invest in mezzanine loans were purchase options to seed future investment opportunities as well as pre leased development projects and partnerships with third party development firms.
Turning to operations are MLB portfolio had same store growth for the year that was predictably volatile, but averaged out to a strong 3.1%.
The fourth quarter same store growth was 2.5% and was generated by contractual escalators and some savings on expenses that mark will discuss in more detail.
On a long term basis, we continue to expect that are Moby portfolio same store growth will average between 2% to 3%.
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We've been funding our projected acquisition pipeline appropriately by issuing $30.2 million in stock on our ATM program in Q4, and an additional $136.0 million following year end.
Our leverage ticked up in the fourth quarter to 6.0 on a consolidated debt to EBITDA. However, the stock issuance completed in the first quarter bring that number back down to 5.5 times.
We're roughly at our target leverage range and will fund, our 2020 acquisitions with an appropriate mix of debt and equity.
As we look forward its 2020 in the relevant data points I already mentioned, the 400 $700 million of acquisitions at five at quarter to six and acquire cap rates.
We expect that would be same store NOI growth of 2% to 3%.
Finally, our DNA is estimated to range from 33.5 million to $35.5 million.
We're roughly at our target leverage levels at this point and see a good opportunity to grow the portfolio and a nice balance of debt and equity I will now turn the call over to Mark to walk through some of our operating statistics in more detail Mark.
Thanks, Jeff.
2019 proved to be the best year in the history of the company from an operating perspective demonstrated by four key metrics.
First robust MLB same store NOI growth averaged 3.1% during the year.
Second strong leasing activity, resulting an 80% 80% full year tenant retention.
Third the continued expansion of our in house property management platform by 2.3 million square feet in markets with strong geographic concentration and fourth well manage capex totaling 6.9% a portfolio and NOI for the year.
As we enter 2020 points for accretive growth with a portfolio that leads the industry at 95.
0.9% leased.
This metric includes 58.3% leased directly to investment grade quality tenants and their subsidiaries, which we believe is more than any other publicly traded portfolio in healthcare real estate.
Our 2019 acquisitions were 83% leased to investment grade tenants and their subsidiaries highlighting docs continued focus on investing in long term quality mobiuss with market, leading healthcare provider partners and strong NOI growth potential.
We believe these investments.
Such as our five property portfolio in Walnut Creek, California will provide outstanding returns for years to come and represent the standard for exceptional quality for acquisitions in the future.
Looking at the quarter, our 238 properties same store MLB portfolio, representing 84% of quarterly cash NOI.
Generated year over year cash NOI growth of 2.5%.
This strong NOI growth was driven by a year over year, 1.9% increase in base rental revenue.
And is 7.8% reduction in operating expenses.
The reduction in operating expenses is primarily attributable to a 2.5 million dollar decrease in real estate taxes from favorable real estate tax challenges at the being their cancer center in Dallas and Centerpoint MLB in Atlanta.
Year over year MLB same store occupancy was down 30 basis points or approximately 35000 square feet largely due to one general office lease which expired on September Thirtyth 2019, and did not renew in our middle view on will be in Kingsport, Tennessee.
This decline in occupancy had a negative 25 basis point impact on our overall same store NOI growth and we feel confident in our ability to release the space the metal view to the anchor medical tenant already in the building or the market dominant healthcare system in the region.
Over the long term, we continue to expect our same store portfolio to drive, 2% to 3% and NOI growth as our in place average rent escalator is now 2.4%.
Turning to leasing activity for the quarter, our leasing team delivered solid results in Q4, completing 388000 square feet, a leasing activity was flat and we'll be releasing spreads and the positive 83% retention rate.
Included in this quarter's releasing spreads as a 17400 square foot surgery center containing significant amortize tea.
Which has reset the market rental rates.
And we'll be releasing spreads would have been positive 5.3%. If this lease were excluded.
During the quarter T.I. from lease renewals was extremely low at 69 cents per square foot per year end $2.64 per square foot per year for new leases.
Overall, we invested 6.2 million in recurring capital investment and leasing commissions in Q4, or just 8.4% the portfolios and NOI.
This low investment and capital expenditures relative to our peers is primarily driven by our low lease expiration schedule and is a key differentiator for dock that enables us to return more cash to our shareholders.
In 2020, we anticipate recurring capex to be 24 to 26 million for the full year or approximately $6 million per quarter.
Consistent with our plans announced in the beginning of 2019, we successfully executed on the expansion of our in house property management platform.
Over the last 12 months, we have transition property management services for 36 facilities totaling 2.3 million square feet.
These markets, including Nebraska, Washington, Texas, and most recently, Birmingham, Alabama market in which we have welcomed kendra receipts to the dock family.
Internalizing property management, not only strengthens our healthcare provider relationships improves tenant relations improves tenant retention and enhances mark and knowledge, but in the case of Birmingham. It also increased our investment cap rate by 50 basis points.
We believe the tenant retention starts with property management the day, the leases signed and we're committed to showing our hospital and physician partners through our actions that we genuinely care about enhancing the patient and physician experience.
This level of care is evident in several prestigious awards earned by Dr. This quarter, including two Toby awards from the building owners and management Association or BOMA and eight commercial sustainable property designations earned from the Institute a real estate management known as Iraq.
We're incredibly proud to share that the Baylor cancer Center in Dallas, and Tom Lake MLB and Atlanta, one the outstanding building of the year or Toby award in their local BOMA markets.
The told me awards are the most prestigious awards of their kind in commercial real estate recognizing excellence in building operations.
The judging process includes a pure review of all facets of building operations, including energy management tenant retention community involvement emergency preparedness insecurity.
Congratulations to our Dallas property management team, including Shell Morris, Susan Lineweaver, and Jolene Wilson as well as our Atlanta office, including Mark do pastor clay and each of our management partners at RPG.
Similarly, we are proud to have been recognized for our firm commitment to the principles of S.G. excellence through the recent achievement of eight Iram certified sustainable property designations across our portfolio.
This highly regarded designation was created to assess and recognize operational excellence and commitment to industry, leading sustainability practices.
These properties are independently audited by I room to verify reduction in energy water and waste usage.
To showcase these assets and the rest of docs nationwide portfolio.
It will soon launch and innovative new corporate website to improve the user experience for investors healthcare partners and potential tenants.
As we begin 2020, we've built a high quality portfolio that is operating well and an exceptional asset management and leasing team that will continue to deliver bottom line results.
Our commitment to relationships and service excellence for our healthcare partners is the trademark of the dock difference and what ultimately drives tenant retention cost efficiencies and a profitable consistent growth for our shareholders with that I'll turn the call back over to John. Thank you Mark Mallon part of your questions.
At this time will be conducting a question and answer session. We'd like to ask a question. Please press star one on your telephone keypad a confirmation tomo indicate your line is in the question in queue. 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 handset.
Before pressing the star keys, one moment, please why we poll for questions.
My first question comes from Chad Vanacore with Stifel. Please proceed with your question.
All right. Thanks.
So it looks like you're picking up the pace of acquisitions fairly substantially from 29 units 2020. So whats change about this market then who were the primary sellers that you're expecting 2020 has that changed at all.
Chad is J.T. I think the.
I think the the fourth quarter pipeline started building up again with the and the improvement in.
Our cost of capital I gave us the freedom.
To get more aggressive out in the market, but I think every one of our transactions in 2019 was off market.
And.
Most of our pipeline right now kind of one off off market transactions with either developers are directly with providers.
In the markets at the where they're located so.
Yeah there is.
There's always rumors about portfolios coming out but right now we're very focused on though.
The one due to the transactions can be very accretive and we can price in that range that the Jeff described.
Good day, you also mentioned a little more off campus how're, you doing that versus on campus.
We continue to.
It tends to.
Not exclude on campus, but most of our pipeline acting to be folks on off campus, where again they tend to be newer buildings its into b.
Better served by physicians and providers are there more convenient for the patients. So you'll continue to see that being a focus of our investment efforts from time to time hub fine and get on campus building that we we like what the health system, we want to work with.
Alright, and then you know commensurate with your your improved outlook for 2020 as far as investments go you tapped the ATM a fair amount in the first quarter can we assume that there was a sizeable deal locked in that maybe we might see in the second quarter.
Yes, Chad I mean, I think we Ah we tapped the ATM in conjunction with our acquisition volume. So we generally try to match fund deals when we can.
And well what kind of continue to have that tragic your 2020.
Alright fair enough.
You guys also Inc. Q JV transaction this quarter can talk about what you thought with attractive, particularly about these transactions and then it should we expect more and types of in terms of these types of deals.
I think we had the opportunity this as they.
One building.
We did in Delaware was longstanding private investor that we've done business with since the beginning of the company. So we tend to find one or two transactions and year to to work on with them and.
It provides a good opportunity for future growth that I'm in a building that we'd like to Kong completely ourselves at some point in time.
The MB Kayne Anderson JV was very exciting to us primarily because of that.
Scale and the opportunity to partner with them.
They are high quality investors in the space Theres foreign investor that they brought along as well as a good source of future capital for for all of Us, but more importantly, as we've described this various strategic investment where we own some buildings on one campus.
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Portfolio included some other buildings on the same campus, we're able to combine the efforts are there and.
Thank you increased the value for everybody concerned so the only thing. It's just another good told the toll box from a capital perspective, but this particular case, a very strategic alliance that we think will provide some opportunity for future growth.
All right I leave it there thanks.
Thanks, Jeff.
Our next question comes from Jordan Sadler with Keybanc. Please proceed with your question.
Thanks, Good morning wanted to.
Follow up on so much adds questions.
In terms of.
The pickup in terms of the volume that you're expecting for 2020 is this the culmination of a lot of off market sourcing work that you've been doing and just sort of what gives you the confidence in putting up 400 to 700 number out there today versus kind of where we've been no last year.
Yeah.
Yeah, we got two or three consistent sources of opportunities one of the existing health system relationships and we're constantly in conversation with them around the mark around the country and their various markets.
To the developer relationships, we have that have been consistently bringing us business again since the beginning of.
And we see them the pipelines that they have been the portfolio as a big developed in some cases with our mezzanine financing which provides.
Some kind of.
Real for option or an option to acquire those buildings wants their completed so we see a lot of those maturing this year and.
And then otherwise we'd just like I said with the increase in improving our cost of capital.
Deeni and Dan and markdown and his team have just been out locating new opportunities for us in the pipelines.
Lots on this as well.
As a result.
Okay.
In terms of how this might line up this year would just sort of a ratable assumption.
Makes sense throughout the year.
Yes.
Yep.
That's an easy way to model its client Jordan seems like.
Yes that would make sense.
Okay.
And then.
Coming back to the PMAG JV.
The wording in the language in the press release and John you've referenced that again.
But the you've assumed strategically important property management of a synergistic portion of the of the buildings can you sort of translate.
Yes, very simply that's the Birmingham campus same Benson and Birmingham So.
Very strong part of the sensing system very strong a hospital just aligned with what you may be which actually has the largest market share in that community. So strong academic environment. So.
There are six total billings in that campus five of them are now in this Jay in the JV and the other one provide some some flexibility to.
Maybe redevelop that with the hospital in the future. So just really good opportunity force short term and long term and Jay you own too you own too they own three.
We owned three they own three we've put five of them in the JV together. The other one is outside the JV as we as we look to pack, perhaps reposition or redevelop that one in the future just provide some flexibility.
Okay.
That's helpful and then.
What was.
The catalyst for the JV from your partners perspective, what where they're looking for.
No matter how did you end up in the mix here.
Yes, so there they were looking to recap the entire portfolio and.
Got it us too.
Valuate that opportunity with them and in the end this.
Strategic initiative for us.
Kind of created the the impetus in the opportunity, but also just the potential capital future capital opportunities with them and then.
Again, there there their model is to either sell a recap periodically and we'll be at the.
Front of a line when that that occurred with this entire portfolio, but again our primary interest right now is to the strategic management that we that we incorporated into the JV structure.
So where are we in the process or is where they in the process in terms of the recap of the portfolio. The dyslexic flip one done at the end of the year. So this is just our first disclosure about it.
So they did it basically at year end, but.
Is this meaning have the fully recap the portfolio now because I mean, you're coming in your you're putting in 17 million a cash.
You'll you'll take a 12.3% interest but.
I don't know I guess my question is where are they looking to more fully recap it.
In terms of refinancing existing dad or.
Be taken out of more equity et cetera, or yes, I never thought enough for now total.
Yes, John if I told a recap of the portfolio and they brought and again a.
Very high quality.
European Investor as part of the transaction.
Okay. It was fully done a year and we were just part of the process.
Okay.
Is there additional opportunity for you to take a incremental stake here is this sort of just a long term position in this JV.
Yes, I kind of everything's on the table Jordan, that's near term that are not our focus.
Okay, what and what are the escalators on the JV.
[noise] candidates to an average that yes, 59 building so that it's building by building, but that they range that to an at 3% kind of consistent with the rest of our portfolio.
Okay.
Hi.
Database with northwestern and.
Baylor other essentially facilities.
Again, very nice portfolio very nice opportunity for us to potentially grow in the future with with these investors and also with the indirectly.
Okay and then.
Jeff.
I'm looking at the 27 cents in the quarter.
You've given us some.
Guidance for next year or trying to think has lined up but it was at 27.
That's a pretty pure 27 cents, where there any onetime items related to either the.
The originations loans in the quarter or any of the JV transaction true just trying to see if there any fees in there that need to come out before we.
Go forward.
No no no fees in terms of.
Loan origination or JV.
Activity I think the only thing to be aware of is we did get that.
The $2 million of rent payment from foundation, El Paso, which has a onetime items since we solve that that building well you know we have some of that coming back in the terms in the form a seller financing that will earn interest on.
But that's that's a onetime item.
There is it to 2 million from foundation in the quarter.
Exactly yes that goes it goes away next quarter, Okay, well it doesn't go away, but you will you pick up less in terms of the rent.
Got it or the loan I've got you okay. Thank you.
Thanks.
Our next question comes from drew Babin with Baird. Please proceed with your question.
Hi, Good morning. This is Alex on for drew.
Yes, if you guys are expecting to selling assets kind of looking forward at the path for 2020 today.
And kind of along that same line are there more opportunities for sub five cap rate sales similar to kind of the strong pricing you guys saw with the Birmingham.
Thank you kind of contribution just kind of curious what you guys are seeing kind on that side as you guys look forward with your capital needs.
We thank a lot of our assets are worth, adding particularly in any kind of portfolio range, but thats again, not really our focus.
As far as dispositions this year, we really haven't scheduled anything yes, some point once the.
Ill tax or stabilized with the new operator, there we would like to sell down so it's not going to you source of capital and it won't.
And on almost by definition will be dilutive, but it's not a huge number won't be that that meaningful so.
Understood and then just one one follow up question on the PMAG JV can we speak a little more to the portfolio itself the locations outside of the Birmingham campus average age other dynamics, you know any mark Mark to market opportunities that were just kind of critical to your guys underwriting as you approached it looks like a really strong partnership, but just kind of looking more with the board looking at.
More with the portfolio looks like on an asset by asset level would be helpful.
Yes, he's going to walk through some of the stats and we'll answer any more questions you've got about it.
Yes.
Uh huh.
Yes, as JT Torii said, there were 59 assets in there that 40% of the square footage is in the southeast 30% in the southwest and about 20% in the Midwest.
Those 3 million square feet. If you look at the top 50, M. essays about 86% of the portfolio is in in those.
Regions of the U. S. 92% was either on campus are affiliated and.
And then almost 65% of the square footage was with investment grade tenants. So that gives you a little bit of.
Flavor on it and we will manage.
About 25% of that total square footage it's in the portfolio.
That's really helpful. Color then just one question Jay do you reference kind of being first in line down the road, if a sale or someone was dramatically changed is there anything contractual there are they more just a strong partnership that you guys will continue to lean on down the road.
Yes, we have some contractual rights, but it's primarily these are health systems that have their own ROE first on the assets as well on their existing clients of ours as you all know we've been.
We've been very fortunate and humbled by health systems, bringing us Roper operative right. The first refusal that they have from time to time to acquire assets.
Again, I wouldn't expected to be anything other than at market pricing, but again, we by having the relationships that we already have.
Again, both the investors, but also the health systems, we'd expect to be an independent aligned for those assets and we'd like to own long term.
Understood. Thanks for taking my questions.
Thank you.
Okay.
Our next question comes from Nick Joseph with Citigroup. Please proceed with your question.
Thanks.
Got you consume in terms of funded the external growth and plenty plenty.
In terms of equity and debt issuance.
Hey, Nick it's Jeff so.
I said, we're we're largely at target leverage right now we tend to think of target leverage at least in terms of funding is roughly 65% equity 35% debt. So for modeling purposes, you could probably but that in there.
In terms of long term debt in terms of debt composition, assuming that we find in that manner.
Probably at some point in the year well have accumulated enough on our line of credit where it makes sense to.
Do a long term debt offering so those are usually around $300 million are right now our long term cost of debt.
Stropp in everyday, but probably 2.9% right now somewhere around there give or take 10 basis points. So.
That's our funding plan for the year.
Thanks, That's helpful. And then just on same store expectations, the 2% to 3% to break that down between revenue and expenses and then what's sort of occupancy changes you're expecting this year.
And it doesn't mark.
As you said in prepared remarks are our expectation for the year is 2% to 3%.
Same store NOI growth for the MLP portfolio, that's primarily going to be driven.
On the revenue side through our contractual annual rent bumps.
Which are now averaging 2.4% again most of our portfolio as triple net leased so where we do get some operating expense savings a lot of that's passed back through the tenants and we try and recapture that in our re leasing spreads. So we'll continue to try and drive the topline through rent bumps and maintaining that occupancy as I mentioned, we had.
One a little bit of a dip this quarter in our occupancy, but I think thats just a timing thing we feel confident that would get that released shortly.
Thanks.
Thanks, Sir.
Our next question comes from Michael Carroll with RBC capital markets. Please proceed with your question.
Yeah, Good morning, guys.
On for Mike I'm wondering what portion of the acquisition ranges developments and how that breakout looks moving forward as you think about acquisitions.
Yes, great question. So we were kind of targeting and we think this is.
A reasonable amount of somewhere between 50, and 100 million of new starts per year we.
We got a just over the.
End of that last year, just around 60 million of new starts last year that will come online this year and so we're we're targeting at least that monitor similar amount for this year. So these are health system investment grade credit you know, 100% preleased kind of opportunities.
Now, we're looking at and we're working on a few right now that.
The second half of the or start so that's kind of the we think thats a reasonable range based on our balance sheet, but also just a couple of one off.
An off market relationship driven trend development transactions that we'd like to pursue.
Okay, Great and then I'm also wondering if you guys could give a brief rundown of what the fee structure of the JV is like.
Pretty traditional.
Structure between asset management.
And property management, the most of that's coming out of the tenants.
Through the Cam charges as well so nothing nothing exotic nothing unusual.
Okay. Thanks.
Thank you.
Our next question comes from Omotayo Okusanya with Mizuho. Please proceed with your question.
Hi.
Good morning, everyone.
That's a very strong acquisition outlook out there congratulations.
I Wonder if you focused on two things first of all the in house property management, we Didnt know just how many how much have you got to kinda like how much of your properties activity are being managed in house today.
What kind of opportunity there is to bring direct and house in regards to.
Kind of Opex savings on also the I'm, assuming with the acquisitions that you do make if they if you do end up with the ammonia and how system you do get some type of bump.
From that so how does that kind of.
Build into your acquisition cap rate.
Good morning, Tyler's Mark then.
So really proud of the progress we made in 2019.
Transitioning several the markets to the dock property management platform today, we managed directly by 60% of the portfolio and the remainder of which is a single tenant buildings, where the tenant does it directly or we've got a very strategic.
Management partner in certain markets, where they just have a really strong existing relationships and.
It'd be hard to replicate those for future.
Acquisition opportunities just market knowledge. So we don't plan to to bring some of those markets in house.
And then looking forward.
As the portfolio continues to grow through acquisitions.
I think that there'll be many more opportunities to bring in house management and the nice thing there that will kind of get this cliff of management fees as well, we will hit a tipping point of bringing in house of market from existing properties as wealth management fees from the new acquisitions.
And typically on the new acquisitions, the management fees, adding 30 to 40 basis points.
To that to the overall cap rate of the acquisition.
Got it so why do you do give the though the guidance up by about a quarter. This in a quarter does that does that include that 30 to 40, bips bump or no.
Really.
Looking at just the market pricing for assets on a one off base.
Our larger they're talking about when you get that when we get the scale. There's a lot of economies of scale select Birmingham again, the strategic relationship. We have there that that created an upscale for us to in the house all of the management, there, which we previously Didnt have Columbus, Ohio is another market, where we've had a lot of growth.
And gotten to a scale point, where we can manage where we have a lot more growth opportunities there, which again the economies of scale on the property management side are pretty pretty accretive. So we don't back to that end to the pricing per se, but it is certainly attractive benefit in house management and as Mark said Theres couple of markets three markets in particular, where.
We have a great management relationship.
The Davis group in Minnesota, and Phoenix, and then our TG in Atlanta, we have others, but those three in particular markets where.
The relationship and with the hospitals.
So that kind of that.
The two parties is so strong it's it's not some place we would target to an asset management works well with being conducted today.
Okay.
Helpful. Then second question my understanding is that for TD is that the grandfathering will under section six. So three has gone always everything is now site neutral you talk about if that's changing the way the hospital system, but thinking about.
Off campus ammo bees, I need to seen any big changes in regards to cap rates between the often on campus MLP market.
I think well I think there's more competition for the off campus buildings today, just because of the evolution of People's thinking and understanding and targeting that more than they have in the past.
You know technically the six or three grandfather has not changed CMS keeps ignoring yet and the courts keep telling them on a year by year basis that they've got to follow the law. So.
Technically that's not the direction Congress will have to change that CMS can't do it unilaterally now they they certainly can.
Maybe paying for the hospitals to to recover those reimbursements and and have so far but.
That.
We haven't seen any real change and strategies, we we've we've been working with one hospital that.
Spent a great deal of money to get to make sure. They got a site within 250 yards of other hospital campus, but it's really more about there they want a de cancer hospital. So they can.
Right.
The improvement if you will or improve it.
From a historical and a real estate structure, so they want it.
The new side to be closer to the hospital, so not changing the reimbursement as they kind of decamped to hospital folks on outpatient care and then move forward and the direction. Most of the new developments were seeing are off campus.
With these health systems. The two were funding or right now are off campus.
Gotcha, Okay. Thank you.
Thanks.
Our next question comes from Daniel Bernstein with capital One. Please proceed with your question.
Hi, good morning.
Couple of follow up question on the female JV.
It's the JV intended to be kind of just static recapitalization or are there going actually.
Any intentions to grow the joint venture.
I wasn't quite clear on that.
That's a great question Dan now there are some there's some opportunity to grow the joint venture. There's a couple of projects under development within inside the joint venture and then Theres some.
Provisions around growth of where where our buildings are located where where the JV is low buildings are located too.
Through to the benefit of the JV versus.
In the individual members of the joint venture so there's some growth opportunities, but right now thats again the focuses for US is around the the assets were managing.
Okay, and if you do grow the JV I assume you did the your equity stake in the JV would just stay about same.
Or is there an opportunity increased.
Actually the actual state ownership within Jamie.
Yes, maybe it'd be case by case, I mean contract that we that right to maintain our interest, but you're not going to be case by case as to how those get funded.
Okay. Okay.
<unk>.
And then your other question is and this is really far off but you have a 2026 expirations at 24 things, 24% a baby are little expirations between now and then I just wanted to understand if there were any purchase options that are open or will come open.
That we should be thinking about are modeling say in the next 24 months just don't want to have any surprises.
That were not modeling you're thinking about.
Yes, we don't have any purchase options really across the portfolio.
Outside of FNB, and really more about Roper ride front suffer for fees on for tried to sell a building.
So nothing nothing mature in the next 24 months or next 10 year for that I can think about I think up.
2026 is the daily focus of Mark and his team and.
Most of that is Chr affiliated hospitals, and so you really anytime we're working with them on.
Space planning, our new space or changes to those buildings that usually comes with that a change in the lease term to get out of the 2026 year. So we will continue to reduce the concentration of that year over time.
Single Master lease or is each property kind of have their own their own individual lease, but the explorations at the same date.
Hi, good it drives market by market. So there's essentially ashley's in each market. Each building has its own lease, but it's essentially all under one tenant in that local market and then again those with all tied to specific gear.
Okay. So it's not like all of them just.
Go away if somebody wanted to if somebody wanted to get out of the release, it's not like all would go away because you'd see cheap each individual market.
That's correct.
Risk isn't it is what it per seat perceived to be on paper.
I'd like little when we moved.
All those leases to the University local health imaging system wholesale change at the right.
And with the landlord exceeding the name to 10 at all those leases and that this will supplement transactions.
And I just wanted to go back to the question on on JV opportunities in the future are you seeing.
More more sellers.
We're looking to do joint ventures versus straight up sales.
Again, this maybe been <unk> up one off opportunity.
But you did too in the quarter. So I'm, just wondering whether jvs or something that.
Kind of the flavor the day that people want to do or.
Sure you or is that really just.
These were just one off opportunities.
These are these are one off.
Like said the one single Dale and Delaware's is frankly, they just got to the building for we did and brought us the opportunity to co invest with them. So it was part of the again their long term exit strategy would be ideally to us as for us as well.
Payback as was.
You know again much for us much more folks on the strategic value that relationship. It also again. These are good high quality partners the European investors of high quality investor.
And organizations we.
I would look to in the future in the right situation for deploying capital together again so.
One off situation, but theres a lot of there's a lot of capital out there as you all know chasing these assets and so there's more opportunities with different.
Rationale to partner with third parties, but we like our cost of capital right now so thats not our first option our first choice for.
For deploying capital.
Okay, well I know not normally offer congrats on calls but those those.
We are good JV transaction so.
Hi, James Britton.
Are you seeing its okay. That's all I have thanks.
[laughter].
Our next question comes from John Kim with B M. BMO capital markets. Please proceed with your question.
Thanks on your shift to focus more investments on off campus.
I just wanted to clarify are these going to be more off campus affiliated with hospital system.
The second part of that is.
Shipped is this mostly due to pricing and are you seeing the cap rate differential between on and off campus whitening over the last few months.
Yes, John I wouldn't describe it as a shift as much as it is we've always said kind of a bias towards the off campus, but but anchored by health system and our large physician group and maybe the multi specialty or fourth be group being the biggest the best example across our portfolio, but I wouldn't call other shipped as much it is where we're comfortable kind of concentrating.
Our efforts there we think the.
The pricing and the returns or are better and should be better on the off campus buildings and again not to the exclusion of good on campus buildings, we filed from time to time.
[noise] can you break out your.
Composition of your acquisition guidance as far as.
I think you gave development variety, but on canvassers is off a and versus the ropers.
We went we don't think about it that way, but again I'd say 60 40.
Opt on and it could be 80, 20 or 95 top five it but we don't think about right like that right now in our current pipeline near term pipeline, it's almost all off campus.
So we'll see how did your plays out.
And final question can you remind us how you characterize adjacent to campus.
That does that in your off campus or on.
Yes, it fits for us on campus, we follow the 250 yard oldest keep it simple and that again, having I reimbursement differential. So it's a good way to forget rule of thumb to follow and be consistent.
So something outside of 250 yards, but across the street would be adjacent so.
Okay. Thank you.
Thanks, John.
We have reached the end of the question and answer session. At this time I'd like to turn the call back over to John Thomas for closing comments.
And we appreciate your your interest. This morning, we think 2019 was a great year and we think 2020 is really setting up well to be an outstanding year of growth and and healthy portfolio for us. So we look forward to send you at the various investor conferences in the near term and happy to follow up Thank you.
This concludes todays conference you may disconnect your lines at this time and we thank you for your participation.