Q2 2020 Healthcare Realty Trust Inc Earnings Call
Good day and welcome to the healthcare Realty Trust's second quarter financial results Conference call. All participants will be in listen only mode should you need assistance. Please signal conference specialist bypassing the Starkey followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded I would now.
I'd like to turn the conference over to Todd Meredith. Please go ahead Sir.
Thank you Chad.
Joining me on the call. This morning, our Carla Baca, Stephanie Man Feeney, Rob, Paul and Chris Douglas and.
That's pocket if you could now read the disclaimer.
Except for historical information contained with all the matters discussed in this call may contain forward looking statement that involve estimates assumptions risks and uncertainties.
These risks and more specifically disgusting form 10-K filed with the activities for the year ended December 31st 2019.
And then subsequently filed filed form 10-Q.
These forward looking statements represent the company's judgment as of today. This call the company disclaims any obligation to update this forward looking material.
The matters discussed in this call may also contain certain non-GAAP financial measures such as funds from operation. So well myself. So I thought, though pershare normalized FFO per share funds available for distribution that net operating income and ally EBITDA and adjusted EBITDA.
A reconciliation of these measures to the most comparable GAAP financial measure maybe found in the Companys earnings press release for the second quarter ended June Thirtyth 2020.
The company's earnings press release supplemental information forms 10-Q in 10-K available on the company's website.
[music].
Thank you Carlos.
First I'd like to offer our best wishes to everyone. As we approach five months since it started depend on it.
We were encouraged by the positive signs of recovery and health care space and grateful for those who work tirelessly throughout this pandemic, including our tenants and partners.
They have demonstrated extraordinary resilience well beyond what we anticipated.
We expect we will continue to contend with kind of at 19 as it ebbs and flows.
What's encouraging is the progress a better treatments and promising vaccine developments.
During a pfizer astrazeneca and many others are reporting positive results from fast track clinical trials.
Many expect to successful vaccine in 2020.
Widespread availability next year.
Public health officials are also taking a much more targeted approach to addressing hot spots, which is allowing health care services to remain open.
Across the country, we are seeing positions ramp up their volumes quickly now approaching pretended levels.
They are experiencing heightened demand for delayed care.
Providers are balancing the delivery of much needed care safety precautions and they have gained valuable experience in treating their covered patients.
As a result, we're not seeing the use of lengthy or widespread bans on elective procedures.
Several publicly traded national health care companies, including H.C.A. surgery partners and tenants have recently reported steady improvements in volumes throughout May June and July.
Likewise, we have seen tenant utilization our buildings rebound to nearly 90% pre cabot levels.
It does vary geographically somewhat from a low of 75% in Washington, D.C. to 100% here in Nashville.
And at work order requests are now running at pre covenant levels.
And leasing momentum has also rebounded tours with respect prospective tenants, which dip below 50% of typical volumes in April our now running well above average.
Rent collection stands at 97% for the second quarter as well as July.
New deferral requests have fallen to nearly zero in the last 30 days.
And over half of deferrals granted during the second quarter were repaid early which is very encouraging.
Forgivable PPP loans kicked in as designed for payroll rent and utilities.
Healthcare sector received more than 12% of all PPP lives of which the biggest recipients where physician offices at more than $8.4 billion.
HR is operating results for the second quarter were steady despite the impact of cobot.
Strong cash leasing spreads high tenant retention and stable contractual rent bumps.
Were positive signs of the resiliency of our tenants and the stability of our portfolio.
With tours being well off pace in April and May occupancy could be marginally softer and the second half of the year.
But with a sharp recovery in June and July we expect occupancy to strengthen going into 21.
As a result same store NOI growth will likely be closer to 2% in 2020 and bounce back toward 3% next year.
External growth is still on pace for a solid 2020. The pipeline is strong even after we took extra time to underwrite the financial health of tenants.
We've increased the top end of our acquisition guidance to be in line with our volume last year and well ahead of harvest our historical average.
We have plenty of funding capacity from the Mercy dispositions cash on hand forward equity and full availability on our line of credit.
We are poised to take advantage of a sizable and growing pipeline.
The pandemic has underscored the critical nature of health care services, even an uncertain times.
It has shown that hospitals are the hub essential care, including high acuity outpatient services, which drive the stability of our cash flows.
Despite the pandemic, we still expect to produce positive FFO per share growth in 2020.
Rising secular demand strong balance sheet, and a robust pipeline position us well to grow safely in the years ahead.
Now I'll turn it over to mismatched seaney for some additional commentary on health care trends that money.
Thank you.
The healthcare sector continues to prove its resilience and significant U.S. population and economy.
After five months and experience with Cobot 19 hospitals and physicians are now better equipped.
Protocols in place an adequate ppt to serve koby patient.
At the same time providers are managing higher demand from the delay scheduled care.
Second quarter employment growth numbers are showing coated unprecedented impact on jobs in April and may with promising signs of recovery in the healthcare sector from late May into June and continued positive momentum heading into the third quarter.
Notably the pace of recovery in the ambulatory sector.
Looting physician offices had double that of the broader economy.
Health care providers are meeting pent up demand for elected to care and the resurgence of strong utilization trends returning to more normalized level quickly.
HRC tenants on average operating near full capacity.
They are better prepared to provide ongoing outpatient care even in the event of the local search.
Telemedicine served a critical role in April and May for many provider the thing of its restrictions and higher reimbursement help sustain patient care and physician practice revenues during the height of dependent.
And the shutdown of non emergent care.
Since then physician offices and most of our markets have returned to theme a majority of patients in person.
The Trump administration issued an executive order earlier this week to review and continue Medicare coverage Tele health services.
After which CMS proposed to permanently allow Medicare providers to use tele health for evaluation and management services.
Along with visits for some mental health related care.
Depending on reimbursement and technology and security requirements. We proceed telemedicine, allowing our attendance to improve their efficiency in providing lower acuity services.
It could spur greater access of rural communities to urban care centers and support providers in general as they meet rising demand for high acuity care from an aging population.
CMS remained active on the regulatory Brent in pursuing several Medicare cost saving initiatives.
These include hospital pricing transparency.
Site neutral payments for off campus hospital based outpatient care.
And the addition of newly covered services in outpatient setting.
These initiatives incentivized care and lower cost setting.
Typically in medical office building and ambulatory surgery centers.
As we approach the presidential election, we can expect heated public debate over another round of federal stimulus and cobot 19 relief for health care providers.
We believe the sector is positioned well even absent additional legislation to continue to meet the demands of responding to kobin and deliver the underlying growth in health care services, our population will need in the quarters to come.
The result in the election for both the presidency in Congress could impact the nation's mix of health insurance coverage and expansion of Medicare and Medicaid.
Regardless of the election result, we expect the shift of health care delivery will continue toward lower cost outpatient setting.
Now I will turn it over to Rob poll for an overview of investment activity Rob.
Thank you Bethany.
Healthcare realty's investment activity during the quarter and be characterized as two distinct periods.
Defense at the outset and back to offense by the end of the core.
We started on defense by shoring up liquidity with an agreement to sell to single tenant net lease properties to St. Louis space Mercy for $244 million.
Were $633 per square foot.
What's also important is that this transaction represents a meaningful shift out of slower growing properties in smaller markets and into attractive growing m. essays.
Yes, again opportunities for future investment.
Additionally, we took a deeper dive and due diligence for acquisitions.
Rather than terminating contracts and risk, losing solid deals because it's kind of in 19.
For example, we doubled the length of inspection periods to monitor the health and stability of these properties.
We also conducted extensive tenant interviews over multiple billing cycles.
And we analyze rent collection and deferral requests that buildings under contract.
Compared it to our own portfolio.
And in fact up really well.
These critical steps allowed us to shift to offence as we approach the third quarter.
In July we closed on foreign movies for $83 million.
One property marks our first acquisition.
In the San Diego market.
Market, where we have identified substantial opportunity for future investment.
Another in Los Angeles.
Benefit from the hospitals recent affiliation with double a minus rate at Cedars Sinai health system.
Which will provide an infusion of capital to increase hospital services in this dense market.
The last two located in Atlanta and Seattle.
Represents additional investment in attractive growth markets on campuses, where we own multiple properties.
All through the quarter, our team continue to use their deep industry relationships to source deals.
And bill the pipeline.
Even as the volume of marketed transactions declined.
We now have 10 buildings under six separate contracts or letters of intent for an additional $163 million.
These targeted acquisitions are located in six markets, where we already have where we already are invested.
We expect to close these deals by year end and along with properties closed in July.
Fully reinvest the $244 million of Mercy proceeds.
Our renewed confidence to proceed with closings and a growing pipeline are driving the increase in our acquisition guidance up to 300 to 375 million for the year.
We expect our average cap rate to remain between five and 5.8%.
The outlook for acquisitions remains positive.
As health care providers continue to experience meaningful improvement in patient visits and procedures.
And our Inmobi rent rolls are holding up allowing sellers to return to the market.
Although a few buyers are temporarily on the sidelines cap rates are steady as investor demand is wide and deep for the stable cash flows from enemies.
While several sizable portfolios are available we haven't found and compelling enough to deviate from our targeted process of investing in one or two buildings at a time.
On the development front, we're making steady progress on a $30 million redevelopment project in Memphis.
During the course of the pandemic several tenants expanded their space requirements, including the surgery Center and a large orthopedic tenet.
As a result, the lease percentage has moved up to 94%.
During the first quarter of 2021, we expect exterior improvements to be completed and the buildings anchor tenants take occupancy.
The remainder of the suites will take occupancy throughout the second and third quarters of 2021.
The pandemic has delayed some development discussions.
But hospitals are not abandoning long term expansion plans.
For example in July leading health system in Tacoma announced at 300 million dollar investment and a new bet tower.
And next week here in Nashville, Saint Thomas will break ground on its 300 billion dollar expansion.
We are planning redevelopments at both of these campuses.
And we expect to start these projects, saying.
I'm pleased with our team's ability to build a solid investment pipeline during these times.
Their hard work will lead to time linked to the timely reinvestment of proceeds generated from recent sales and positions us well for accretive growth in 2021.
Now I will turn it over to Chris to discuss financial and operational performance for the quarter.
Thanks, Rob.
Second quarter performance was strong as coven related revenue impacts were offset by operating expense controls Andrew DNA reductions.
Normalized FFO per share of 42 cents was an increase of 5% over the same period a year ago.
Before diving into the specific operating metrics for the quarter I will touch on rent collection and deferrals.
We saw significant sequential improvements in May June and July.
It was the result of a swift rebound and patient volumes. Following the end of government mandated shutdowns early in the quarter.
We collected over 99% of second quarter rent, including 2% deferrals.
These deferrals are to be pay back in the second half of the year.
For July deferrals were less than $100000 over above our over 40 million in monthly rent.
In addition over half of deferrals granted in the second quarter were repaid early signaling how our tenants are getting back to business.
Scheduled rent deferral payments for July are tracking well and 88%.
While this is promising it is early in the process. So we took a $730000 bad debt reserve, representing 25% of outstanding deferrals at quarter end.
We will continue to monitor and analyze collections through the balance of the year and adjust reserves accordingly.
Now shifting to operating performance.
Trailing 12 month same store NOI grew 1.9%.
She was impacted by Lockdowns in the quarter and three main ways.
First there was an 800000 dollar sequential reduction and transient parking income.
Parking volumes return to approximately 80% of pre pandemic levels by the end of June.
Second $673000 of the total rent deferral reserve was in the same store portfolio.
And third and most notable was a benefit of $1 million from a reduction in net operating expenses due to lower building traffic in the quarter.
The primary reductions were a maintenance and utilities, which each decline over a half a million dollars compared to the previous year.
As utilization and foot traffic has rebounded in June in July we expect operating expenses to return to more customary third quarter levels.
Putting typical seasonal utilities.
But for these three impacts trailing 12 month same store growth would've been approximately 20 basis points higher.
No I growth in future periods should be reliably strong given the multi tenant leasing metrics this quarter, including retention of 84.6% average in place contractual increases of 2.89% and cash leasing spreads a 4.5%.
In the quarter, we had 179000 square feet of new leases take occupancy led by gains at several reposition and development properties.
This level of new leasing exceeded our historical average of approximately 100000 square feet per quarter.
Looking forward given a slowdown in leasing Georgia early in the second quarter due to local restrictions, we could see leasing drop below our historical average in the second half of the year.
Our same store guidance reflects the potential for this impact.
Moving into 2021, we expect leasing to increase as tours have already rebounded to pre coded 19 levels and demand for outpatient space continues to strengthen.
Now shifting to liquidity and leverage.
Our bad dividend payout ratio was 84% for the quarter and 93% for the trailing 12 months.
We expect full year 2020 to be in the low nineties.
And net debt to EBITDA improved to 5.1 times, including the issuance of $33 million of equity through the ATM.
In addition, we entered into forward equity contracts for an additional $74 million.
These proceeds can be drawn at our election over the next 12 months.
We don't expect to draw any of the forward equity proceeds until 21, given the substantial liquidity available to fund our growing investment pipeline.
Our liquidity includes $44 million of cash at quarter end.
And $244 million from the Mercy dispositions, which closed last week.
Our investment in the Mercy properties resulted in an unlevered ire our of 11.5%.
While the reinvestment and multi tenant am obese and major MSC days will improve the diversification and growth profile of our portfolio.
For example, contractual escalators for the mercy assets have been running 1.7%.
Which is more than 100 basis points below our existing portfolio and our acquisition pipeline.
The cap rate rotation upon reinvestment will result in a little more than three cents of annual dilution.
The timing of the reinvestment through the third and fourth quarters will bring forward all of the three plus sense into 2020.
However, even with this dilution and the covered 19 impacts discussed earlier, we anticipate positive FFO per share growth in 2020.
And we are positioned well for continued FFO per share growth in 21 and beyond.
Todd.
Thank you Chris.
Operator, Chuck we will be ready to open it up to.
Question and answer period.
Thank you we will now be getting the question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys withdraw. Your question. Please press Star then to at this time, we'll pause momentarily to assemble our roster.
And our first question will come from Nick Joseph with Citi. Please go ahead.
Thank you I appreciate the color on the acquisition pipeline, what's the typical hit rate on assets that are in negotiation.
Yeah, I think if you look at the.
The pipeline hundred 63 million that we're looking at right now it's there.
They are in within our range that we've given the five to five a probably down in the low to mid fives is were on average says they're going to be.
Are you I guess I get Nick or carried us on the hundred yeah. The 120 in negotiation I mean would you expect to close on 100% of those are well, what's typically the fallout from for that bucket.
Potential acquisitions.
Yes, I mean, I think if you think about the 120, we've said that there are some in there that we think might close by the end of the year and then and then moving into early next and I would say the cap rates and those buildings are in a similar range to what we have under contract pipeline and certainly if early and we're in discussions with sellers UBS.
There are some that sometimes may fall out or take longer to close on but we have a good line of sight on those and are optimistic about the opportunities there.
I would add to that maybe Nick it's a little hard obviously give you a one percentage probability, but it's a range, but I think it's not 50 50, if that helps you, it's probably not 100% as Rob just said, but maybe it's it's a 70, 80% at least and.
And the nice thing is I mean, those are ones that are pretty far along in discussions theres clearly a lot of other things not in that number that are a little further out there maybe not as highly probable. So ah yes, I think it's that number is a strong number.
Just in general if you think about productivity going into 21.
Thanks, that's helpful and you mentioned the portfolios on the market today, what would make you more interested is it pricing is it something specific about mix of assets within knows that would be more interested in executing on those.
Yeah, I'd say that.
Rather than pricing just the markets in the systems that there are associated with the strength of those markets the opportunities for growth.
It's really a key piece.
We look at and I would also say that fee.
The on adjacent make up versus versus the golf makeup.
Typically what you see is.
Theres a number of property in a few properties and they really like but then there's other properties in there that you really don't like and I think thats, where these portfolios that are out there that kind of fall into now.
And Nick I think as we look we've looked at portfolios over the years. We also recognize you know you can't always find the perfect portfolio by definition and so it really comes down to is there at high enough proportion of what Rob described as attractive assets that would be worse.
Taking on a few of those things that we don't like as much and so we've we've always struggled with that we obviously think our portfolio reflects a lot of the quality metrics were looking for and we want to improve the average, but it's 70, 80% of the assets really fit then I think it makes some sense and.
The medicine only transaction the Atlanta transaction three years ago. It's a great example of that.
Yeah, we we certainly looked at the do transaction Harden competed for that so I'd throw that in there, but some others like CNL and others, we couldn't get there.
Thank you.
Our next question will come from Sarah Tan with JP Morgan. Please go ahead.
Hi, I'm I'm on my mind.
One question could you talk about acquisition landscape in large part right Okay Mike.
I'm, sorry, I Didnt hear the company and if your question can you repeat that.
Hi.
Got you acquisition landscape.
Sure I would say that pricing for acquisitions has remained steady.
The cash flows and MPS has held up remarkably well during this period and I think that's a testament to the security and robot rebel reliability of the asset class.
And so you're saying you know continued demand for the product. There has has been a few buyers there that are temporarily on the sidelines, but we see plenty of capital continuing to participate in the space instead because of that we just haven't seen any any meaningful movement in cap rates.
The other thing Rob I might add to that would be you've even seen really since cobot. A couple of transactions by welltower that are very supportive of that that you've seen cap rate sort of right in the mid fives for those portfolios. So I think that sort of underscores that.
That five and a half range for typical.
These and portfolios is very consistent over the last really couple of years and then you know occasionally you see deviations from that more when you get down to specific assets that may drive it towards five or less or the other way for lower quality assets.
Yes.
Our next question will come from Vikram Malhotra with Morgan Stanley. Please go ahead.
Thanks for taking my question just first one.
I had a nice.
In under Fad payout and you highlighted where you think for incentive and up towards year end I'm, just wondering how sustainable that level. It was there any capex kind of bump we should expect next year or do you think this never this sort of sustainable going forward.
[noise] Vikram that obviously, you Chris I'll touch on maybe you jump in but.
Remember, we're all social distancing so were.
We aren't as easily able to.
Not talk over each other which I apologize Chris but.
I would say on the dividend you're exactly right become a Chris mentioned low ninetys for this year and certainly we're trying to steadily improved that so we do hope to maintain that level, if not improve it each year.
But you know as Chris also talked about we've got a lot of leasing strengthening as we go into later part of this year and into next year. So we do expect that what probably benefited us frankly in the second quarter and maybe even in the third would be a little less spending on T.I.
Because of the slowdown and leasing we see that probably picking right back up later in the year and into next year. So it's a little early to tell exactly where we'll be for 21, but we like the direction generally where we're headed and we'll certainly have a better sense of that as we start putting our plans together for 21 later this year.
Okay, Great and then Todd is sorry go I think Todd's right I was going I would add to that is just the idea that where we are in terms of our capital other than T.I. I don't see any any major shifts there.
But if we don't see the continued improvement that we had been seeing the last several years it would be tied to that.
Tied to absorption and new leasing, which is which is great for.
For a long term in terms of earnings and such but but could slow the momentum.
Temporarily in terms of continued driving that payout ratio lower but long term were certainly move and then in the right direction.
Okay, Great and then just.
You know on the new bit more color on the pipeline I know in the boss you've alluded to potentially looking a bit more it off campus I'm just wondering to cultivate our there you know how is that thought process change maybe give us into the pipeline mix between on and off and also just to go but are there any other markets you're thinking about in terms of new investments or pardon.
Management.
Rob you want to touch on maybe the current pipeline and and what that might look like on versus off and then I can add to it.
Yeah, I think that.
When you look at the at the current pipeline. The majority of it is is in on it on an adjacent but there are few assets in there that that kind of fall into the on campus category by our definition and I think those are kind of similar what you've heard to say in the past deck from about strong markets.
That are markets, where we already have.
Investment.
And you know that think Thats, where if we are going to go off campus. That's where you think we will we will do that kind of investing markets. I mean are familiar with and investing it off campus assets that are sort of part of the provider care provider network and then when itself that that relationship.
I would add Rob that that in terms of just thinking differently post cobot or are now we're still in kind of it but as we look ahead I don't see that we would make a tremendous change in the markets that we're going after I think the ones. We've been working on building our presence and still look very attractive to us even with whats.
Going on now.
Obviously like everyone, we're going to be watching all the trends were not heavily exposed to certain markets in the northeast New York Boston.
Great cities, obviously, but there are some some bigger trend how does that make up.
Overtime with with office demand and so forth.
Less about health care, there, but I would say, we really like some of the tech.
Job.
Concentration that we see in a lot of the markets. We've been focused on I mean, two of the markets than Weve added you kind of asked that question about adding markets. We just added San Diego is Rob pointed out in the last year, we've been adding a bit in Raleigh that Raleigh, Durham area, which we like as well.
But but merely 90% of what we've been doing 80, 90% of of the activity in the last few years has been very focused on our top 15 markets. So it's a lot of activity in the same markets. We've been building scale in and then occasionally reaching out like I mentioned to San Diego Raleigh, Some others like that there's probably brought four or five other markets. We.
Certainly look at and see some depth then but it's it's our we're definitely lean towards the markets were currently invested in.
Great. Thank you.
Thank you Vic.
Our next question will come from Jordan Sadler, what keep Keybanc capital markets. Please go ahead.
Thank you.
First I just want to follow up on.
Yes.
The pipeline that's here from overly reading into his time group.
Dan Good bye.
You mentioned the margin growing pipeline.
There potentially more behind this or are there.
A handful of larger deal.
No I'm noticing.
Taking the leverage on a pro forma basis.
Low and I know, it's a challenging environments or does make sense, but I'm guessing pro forma leverage with the forward equity and selling versus say closer to four times. This correctly can work so kind of curious what your.
Teed up for.
Yes, I would say on the on the pipeline Jordan.
You know our team is.
As always building and adding to our pipeline I mean, we we take the approach Uh huh.
I think if you look at what we've closed on this year about 80% of that is what we would consider offer lightly marketed deal. So our team has out there constantly developing those relationships. We've identified buildings that we want to own and we have dialogue with the sellers or brokers in those markets that that we.
Trust and and you are constantly trying to get those sellers to the table. So we we think that behind what we've laid out here certainly there's there's more opportunity that we're working on I think thats, where we see the growth in the pipeline coming in setting us up well for for 2021. So.
I think thats why we have the confidence that we do because we see the dialogue that our team has having with these new sellers that are there sort of behind what we've laid out here.
And Jordan I would add to that I do think I mean, I think maybe what's in your question too is sort of we preparing for something bigger I think it's more about I mean in some ways, yes, but it's not a complete change of stripes for us I think it very much sticking to what Rob just described really going after and targeting what we want rather than.
You know waiting on the marketed deals that said of course, we look at the market the deals and if they measure up we certainly go after them and it's not we certainly are encouraged that.
We would like to go after some some deals if we can in this situation, where we seem to be able to as you said have the capital the resources, but again, we're going to probably stick to as you would know us to do stick to the quality side of things, but we're encouraged by the productivity and the effectiveness that Rob described to sustain.
Gaining a higher level of acquisition I think thats, the key and really drive recognizing the importance of prudent growth through external growth. In addition to our internal growth to kind of work that algorithm of that type of growth per share.
It is the mix and I know I think there is just you spoke to a question.
Similar game, but the mix going to screw continue skewed toward the adjacent type assets.
I certainly think we will we will skew towards on an adjacent versus off but again, we're okay with off I think Rob touched on that we are okay with that I would say today, we said closer to almost 90% on an adjacent.
We have done a fair bit of adjacent as you kind of point out and sometimes you know what you find is those are the ones that you can go in and target and get.
You know really get those assets more regularly and the on campus, it's tough because you're waiting for those hospitals to let that go typically so.
We really like the dynamic though of on an on an adjacent and and I could see the off fluctuating I think we maybe last year hit around 25%.
Off so we're okay with that it's still going to skew that way towards on on an adjacent though.
Okay, and then lastly make.
In progress on the cap rates.
Got the cash cap rate kind of Q, you mentioned the escalators on mercy.
Can you give me the gap cap rate on that this position on one or I'm, just curious what the escalators in GAAP cap rates look on the acquisitions as well.
Yes on one mercy, the GAAP and cash we're pretty close to the same because were about the midpoint of the of the lease term.
So there is there kind of right on top of each other.
In terms of the new acquisitions that were that we're looking at the escalators as I mentioned or are pretty similar to what our existing portfolio is caught.
Two eight to two nine range.
In terms of escalators and.
It varies on the impact of to gap.
Based off of the term that is inside of our acquisitions, but but in general we typically say the gap adds about 25 to 50 basis points.
To the to the cap rate on a GAAP basis.
Our acquisitions.
Okay. Thanks for clarifying.
Our next question will come from Lukas Hartwich Heart Rich with Green Street Advisors. Please go ahead.
Hi, Thanks, everyone for your time. This morning. This is John on current Lucas just a quick one for me.
Just looking at the improvements in your expectations for the cash re leasing spreads on the multi tenant side.
You know what's behind.
That optimism, mostly the year to date trends are pretty favorable and just wondering if there's actually some opportunity for some outside there as well. Thank you very much.
Yeah, if you really look at the change in our guidance on.
On the cash leasing spreads we did change at this quarter compared to last but that really was just kind of bringing it back more in line with what we had seen prieto of it.
Last quarter, we were taking we didn't want to be overly aggressive.
Having a a lot of of leasing data in the midst of what was going on and so we had taking.
Had taken down our expectations, but is is we worked releases during the quarter and continued our discussions.
Things have really shown.
Great.
Resilience and so.
Our expectations is that our cash leasing spreads will be able to kind of maintain what we had been seen previously.
Which long term, we say we expect.
Three to four.
And so were.
So far we're seeing that those types of metrics are holding up well.
[music].
And our next question will come from Rich Anderson with MBC. Please go ahead.
Thanks, everybody good morning.
So one thing we are not talking about is.
The risk going forward of reinfection and certainly in many states that you traffic and we're seeing some uptick but don't know talk of sort of a reversal.
Elective surgery shutdowns and whatnot.
Can you can you discuss that a little bit about how how you're seeing that play out I mean, even though availability or states are allowing.
For elective surgeries are people really jumping in and doing it and there are risks that a month or so from now we could be having another conversation about shutting it down.
Rich I, it's a very good question and I think we all sort of have that.
Unease coming into the fall.
Collectively that things can change and we had the flu season coming and things get worse typically in the winter. So very good question I do think we don't want to be glib about the optimism because it's a long road here and.
Maybe the toughest time ahead of US. The good news is I think as I think Bethany pointed out and I pointed out and we've all seen theres just been a lot of improvement on treatments and how to deal with this and so I think we all feared obviously in the front end that hospitals would just be totally overwhelmed and obviously that was tested in a couple of places, including New York.
And I think the good news as we came out on the better end of what we all feared and so.
You are seeing it as you said in hot spots Houston went through it and you're seeing different places.
And the good news is they seem to be handling it and it's not creating these long lengthy shutdowns you did see in Texas, the governor trying to push some some again policies there, but it really actually was a bit of a carve out for AMC and some of the outpatient surgeries. It was more about protecting that inpatient capacity. So I do think your.
On to see a little bit of that we do have to bridge for that.
In terms of hot spots I don't think its nationwide shut it all down the way. It was early on its going to be much more targeted and.
I mean, I'm no expert anymore than anybody on the phone, but as we watch this move around the country, it's kind of.
It's the hotspot. Its these fires that kind of come up and then burn out and I hope that continues to.
Be quelled.
And contained but I think it's very encouraging what we're seeing and even though we might experience. Some some issues I think we're encouraged I mean, the public companies that report their surgery numbers have been really incredible.
So I don't think Theres, a big hesitation to come back and do it it'll just be a matter of you know the public health officials continue to sort of treat this in a targeted way rather than a blanket way and and we think that will be the case.
Okay.
My second question.
Last question is what is your perspective of how the hospital industry.
Looks like after this is all done I mean would you say the hospital business nothing medical office business per se, but the hospital business is weekend vial. This in the sense that we kind of went in.
Over hospital.
To begin with and and maybe this fast tracks, some consolidation or closings that probably or maybe what has happened eventually.
I'm just wondering if you think.
Sort of picking your.
Sure.
Your relationships, becoming even more important in the aftermath because cost the hospital industry overall is probably a notch weaker because everything that happens.
Yeah, I think it's a.
Fair, a fair assessment and good commentary, we were having a discussion with our board earlier this week about that with several health system leaders, there on our board and and and I think it's what you said you're going to its the classic problem that these crises just like the financial crisis caused.
The strong are going to get stronger the week are going to get weaker and there's different dynamics to that but in the hospital, where that's very true and you're seeing NHC, a do extremely well coming through this and I think they they do a good job of figuring it out and and there's a lot of not for profit systems that are leaders in their markets I do think the strength and.
Scale matters.
Larger systems versus small independent system, obviously more more urban versus suburban versus rural is going to be a huge trend I know that the trend of moving into the city's everybody's question, a little bit, but I still think those strong.
Population growth centers are going to be where you're going to see the success and so I do think you are correct that picking the right partners will matter more being a sharp shooter. We'll we'll continue to be critical for success and I think that's something we've been honing ever since we sort of found that trend to be true from the financial crisis, even before so it it's true I do.
Thank you are right hospitals, probably taken.
Clearly, taking a hit and were helped a lot by the cares Act.
CMS in general, but I do think we are encouraged that the strong wins I mean this is the demand need based business you know this isn't just.
Selling.
Luxury items, it's very much need based and so there's a huge need for it in pace as I made my comments and remarks that I mean hospitals are proving.
But there is so critical and I think the acuity level at hospitals is only going to continue to climb and you're going to see acuity level. It outpatient climb, but on and off campus, it's a continuum and I think.
All those innovations will continue and it will be much little bit more of a winter versus loser at game and I think we're we're pretty well positioned to to follow that trend.
And as it related to that response, thanks, Todd that was great.
Do you think the long awaited monetization of hospital on medical office will will be.
More of a realistic outcome of this even for stronger hospitals that maybe are now taking on.
More market share need more technological advances and so on the is that something that we can finally say.
Well not not not to get religious but it's like testing our phase right and this theory [laughter] and it's just we got to keep the hope alive right. We just haven't seen it is the real answer.
It has all the making to suggest that would be possibly true.
We have a very contradicting data point here with the Mercy transaction that we just did little bit of specific situation, where they had a propensity to want to own their assets. So a little different but we've heard of a few other anecdotes just recently of some other hospitals doing similar things so.
You know hospital systems think strategically very differently. They don't focus I mean, as they should they focus on providing care and all the things they need to do to expand their business and succeed they're not sitting around thinking about cap rates for imobile, but I think there's going to be there are going to be some more of those it may be.
A little bit more from your stressed systems and so then weeding through that back to your earlier question figuring out is it work that is at the right systems to be with just a question for that.
Right.
Great. Thanks, very much thanks, thanks rich.
The next question will come from John Chen with BMO capital. Please go ahead.
Thanks, Good morning.
In your opening remarks.
You mentioned same store NOI trending back at 3%, which is certainly again recent trends of mentoring John but other MLB rates.
And just wondering.
If you could just discuss your confidence levels and that statements and if that's being driven by occupancy picking up or leasing spreads on on leases that you're negotiating that.
But I think the simple answer is and Chris always hits. This fits that our average contractual rent bump across multi tenant and single tenant is 2.83%.
2.9 for the multi tenant so that's that's the driver of of our same store growth and what Chris always walks through is okay. We grew the revenue at that level and then that you're right you advanced that ball, a little bit with cash leasing spreads, but that's a pretty small piece of the pie each quarter or year. So.
You do help that you do have a little bit of turnover as well that kind of parts that but the revenue model is more of a.
Hi, twos kind of number and then really it becomes what are your expense is doing and how much operating leverage do you have your margin and so that's the algorithm, we see that gets us they're pretty conservatively with it but it's really the big driver is our revenue model of our escalators and we continue to feel good about that the cash leasing spreads help with the March.
Absolutely.
And as Chris talked we're looking to try to drive absorption as we go into 21 and that will help also but even without a lot of.
Increased absorption you can see same store.
Why growth running around three.
And how does free rent impact this number because I imagine.
Your offering Murphy around are you having more recently.
Chris do you want to touch on that.
Yeah, I mean, obviously free rent will go into it if you have a larger percent percentage of it versus what you had before but I'll say generally no we're not adding a lot of free rent.
We really don't have much of any inside of our renewals. If we're if we're doing it at all it typically is inside of new leasing.
And so when you have that it with the new leasing and just kind of creates a little bit of delay before you see the revenue impact from that absorption.
But but overall no we've we've not seen.
A march expansion of free rent.
Okay, and then maybe I'll ask Nick Joseph question, a little differently I think you name. It you mentioned $150 million of acquisitions you had.
Under contract, a nice clothes $82 million post quarter.
Are you still on track to close that remaining $70 million, so aren't getting those deals fall apart.
Yes, we're still on track to close those I think we've got like I mentioned, we had 163 million.
That's either under contract or LOI, So, we faxing increase that under contract amount since since the last time.
And I think Rob to you said and we expect that we will close those two categories under contract and a lot by year end, which is what will help us get those mercy.
Those seeds reinvested by year end.
Right and the floor at Jason.
Acquisitions.
You mentioned are just a rated health systems are those health system that all tenants in the building require.
They have I would say that there are have.
Certainly have physicians that are utilizing the hospital.
Store.
I think there is one where the hospital.
Is not a tenant, but but all the others are arc Tenet hospital.
Great. Thank you.
Thanks, John.
Our next question will come from Todd Stender with Wells Fargo. Please go ahead.
Things are probably in order just to stick with that last thing about the assets under contract and maybe this is for Rob.
Can you speak to the condition of those buildings I know historically you guys are prepared to put some redevelopment dollars into them.
But in the context to maybe Todd when you were speaking to maybe T.I.s come down maybe just getting some broader thoughts about how you guys are allocating capital. Thanks.
Yeah, I would say that.
The assets that were under contract to purchase or no I mean, they're all in good condition I mean, we're not planning to invest a significant amount of capital.
And to any of them as as a redevelopment play if thats it thats answering your question.
It is thank you and then maybe for Todd did I hear that rate, maybe expectations of lower T.I.s coming down the road.
I think thats, a 2020 phenomenon, we're not necessarily suggesting that.
Looking into 21, we actually think it should rebound to sort of.
Historical levels and relationships.
And all that is what we've heard some others say too we had slower tours and new leasing activity with new perspective, net new tenants that create absorption, which is where you have higher T. I spend in the second quarter, especially April and even a little in May and therefore, you get this lag effect of when those tenants would normally.
Take occupancy and that's probably a third and fourth quarter phenomenon. So it's really a back half issue and even a little bit you saw it in the second quarter. So.
That's all we're saying and then back to sort of normalized levels and 21.
Okay, I would clarify that two of that's a little bit on the perspective leasing front what ties talking about.
And we don't know for sure where we're kind of run in different scenarios and so we're looking at one scenario that yes, we could see a little bit less absorption here in the next couple of quarters, and then rebounding, which could have an impact. But then also if you look at in terms of total spending you start looking at bad right now we are running.
At the low end and frankly, a little below the low end of our guidance range.
As it relates to second Jintai.
And so there's just timing that has always related to that so.
So that may pick up certainly we think we'll be in the range back to.
Actually near the midpoint of the range.
And so that's part of what what is playing into the guidance as it relates to just bad in my prepared remarks, I talked about right. Now we are are running significantly below.
Where we are on a on a trailing 12 month basis, but.
We do think that can pick up in the later half of the year in and what drives our view that are fad payout ratio will probably end up the year down in the in the low ninetys not in the low Eightys that you saw this quarter. So just wanted to clarify that point that's helpful. Because that's what I was going ultimately with this is seeing.
That said payout ratio decline and the spirit of seeing maybe some dividend growth at some point.
But maybe it doesnt shake out that low okay. That's helpful.
All right that's it for me thank you.
Thanks, Don.
The next question will come from Tayo Okusanya with Mizuho. Please go ahead.
Good morning, everyone. Congrats on the transaction so it makes perfect sense to me.
My focus is we on the outlook for the movies I think you mentioned in your comments earlier on that.
Hospitals in general in an assisted and we'll do you seem to be doing well, let me spend that's I think about each seeing results and some of the hospital operator, but a lot of that is also kind of due to the massive amount of grass they've kind of we see good its period as well.
You just kinda talk about how you're thinking about kind of in the world with annual grants or in a world what here.
You know with that source of government funding is decreased maybe in the next.
Act that that Congress than that.
Do you kind of see happens in that world I mean, specifically, we stuck it deferrals blowing up again, though.
Would you hopefully to decide that just trying to expand on that.
Well it's.
You know, it's all speculation obviously tie up but it's interesting I.
I think we saw the most extreme thing hopefully that will ever see.
In our lifetimes right, but maybe not.
Most of that.
Right right. So April was just absolutely extreme and clearly the government steps in and we just so we don't see that again, but I think we as I mentioned, we've learned a lot and I think we learned that hospitals.
Good or bad hospitals, and physicians, they really make a lot of money on the elective procedure side and surgeries and when that was shut down I mean, you're cutting off the most profitable segment of the business and.
Health care, it's a little cold to say that because obviously there are only doing there are only supposed be doing whats necessary, but it is necessary, there's kind of that need and so when you cut off that lifeblood, if you will.
It really hurts the system. So I think now if you go back to the discussions earlier, where it's more of a targeted approach and maybe you know for a short period in Houston. They they asked for some elective procedures to be to be.
Reduced and not even in all as sees but in hospitals. So I think you're going to see a more targeted approach rather than the sort of absolute month long or more shutdown. So.
It should therefore, it shouldn't be quite as financially difficult.
Is it going to be tough, yes, just like schools schools for a lot of us with kids and it's going to be tough as soon as they shut down the school for a week or two or something or even if you're lucky if they're open so theres going to be ebbs and flows as I mentioned in my remarks, but I think we're much better shape today than we were when we knew very little in March so.
I don't think it does dire as we could all fear, but you know it's never David Emery isn't always say, it's never as good or bad it may seem and thats, probably very appropriate here. It did it will be not easy, but I don't think it's going to be as bad as it was.
And it's not changing our outlook about hospitals and on campus Inmobi.
Well watch that just like everybody, but I think.
In my own experience personally if you've ever dealt with the family member or trend or loved one whatever it might be who's had a serious illness. You don't think twice about go into the hospital or go into that high acuity specialists that might be near the hospital when it gets real this that's what this is about the.
The light touch stuff and it's really cool that theres innovations that can do things.
And lower costs off campus settings, and that's fine that's a very real thing.
And not to say that trends not real but.
We think the dynamics of real estate and demand supply and demand our best where it's that high acuity sort of nucleus. If you will around the hospital and as Rich asked you know we got to watch that nucleus make sure. It's healthy hospitals that were working with so that's that's our focus.
Uh huh.
That's helpful. Thank you.
Thanks to.
This concludes our question and answer session I would like to turn the conference back over to Todd Meredith for any closing remarks. Please go ahead.
Thank you Chuck and thank you everybody for tuning in this morning, I know there were at least for earnings calls in the space. This morning. So we appreciate your time and attention and we will be available for follow up if anybody has any additional questions and we hope you have a great day.
Take care and be say thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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