Q2 2020 Healthcare Trust Of America Inc Earnings Call
Good day and welcome to the whole Churchill's of America's second quarter 2020 earnings Conference call.
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Thank you and welcome to healthcare Trust of America's second quarter 2020 earnings call.
<unk> earnings release Airfare supplement yesterday after the close.
These documents can be found on the Investor Relations section of our website or with the I think seek. Please note. This call is being webcast and will be available for replay for the next 90 days.
I'm happy to take your questions at the conclusion of our prepared remarks.
During the course the call will make forward looking statements.
These forward looking statements are based on the current beliefs of management information currently available to us.
Our actual results will be affected by known and unknown risks.
Friends uncertainties in factors that are beyond our control or ability to predict.
Although we believe that are assumptions are reasonable they are not guarantees of future performance.
Therefore, our actual future results could materially differ from our current expectations.
For a detailed description of potential risks. Please refer to as he sees filings, which can be found in the investor relations sections of our web site.
I'll now turn the call over to Scott Petersen, Chairman and CEO of Health Care Trust of America Scott.
Thank you. Good morning, Thank you for joining us today for health care Chester America's second quarter 2020 earnings Conference call.
Joining me on the call today is Robert Milligan, our Chief Financial Officer.
As we sit here today, the cobot Nike endemic beginning in our community impact many aspects of economy.
No near term ended cycle ultimate impacts determined.
Fortunately for US, we operate with any health care sector and with health care providers.
They're resiliency and operating capacity.
That said before I believe the medical office sector. It's one of the best area to real estate, which doing best wishes, especially true today.
Individuals continue to require access the medical services, regardless of economic conditions.
Hi, My business perspective, H.T.H. any very strong position.
We have a best in class operating team that is running a high quality portfolio a medical office buildings that are located in key markets throughout the United States.
Our portfolio was broad based with over 7 billion invested across almost 25 million square feet.
It is also diversified with no one market accounting for more than 10% or branch no single tenant accounting for more than 4.2%.
Our tenants consist primarily of leading health care providers in our markets with almost 75% of our rent coming from healthcare systems University and large national health care providers.
60% of our rate comes from credit rated tenants.
We have the fortress balance sheet leverage a 5.1 times debt to EBITDA over 1 billion of liquidity and almost no debt maturities coming due in the next two years.
This is a direct result of our long term conservative disciplined management philosophy and focused actions that we've taken over the last 12 to 24 months.
As importantly, our health care tenants have rebounded significantly from the early impact was a pandemic in checkouts providers have adjusted their business models to the new normal and asking patients levels largely return.
Our portfolio our property management team has done a great job keeping all of our buildings opening running throughout this period.
We have also seen almost all of our clinical opposite reopened and returned to their previous office schedules.
Although the cobot pandemic continues to flare up in certain markets.
The majority of providers a much better pair today to operate.
Then they were just four months ago, there Tony now look, it's certainly cautious and focused on efficiency.
We continue to work in reach outdoor tenants on a daily and weekly basis.
As a leader in this unique space our operating results are two than solid.
Our second quarter collections were strong with H.T.A. collecting 98% about contractually scheduled rents, including 3% a rent subject to deferral agreements for approximately 6 million.
Those were major leading healthcare systems, with whom we agreed to defer rent as a sign of our long term partnership philosophy.
Our collections in July and August or consisting with deep level and demonstrate the high quality of our portfolio and our continued strong tenant base.
In addition to deferrals, we're also working with our tenants to achieve scenarios, where we both can achieve our goals by signing renewals and extensions to the future while providing free rent today is a component of our standard lease term.
The second quarter, we signed approximately 1.2 million square feet of renewals with almost 500000 square feet early renewals, which allowed us to extend term at very attractive wage rates yet.
Our renewal rates remain strong and were four and a half for said, it's retention of almost 90% as tenants opted to stay in place while operating through this period for the year, we have now renewed more than half of our 2020 exploration and extremely positive in significant action. Despite the effects of the pandemic.
Our new leasing for the second quarter was 130 <unk>.
Thousand square feet, and we continue to see a modest uptick in activity in the third quarter.
Our total portfolio occupancy and lease percentage remained relatively flat, which we view is strong in this environment.
This performance allowed us to making normalized earnings of 42 cents per share. So the period, despite taking a higher level of bad debt reserves out of an abundance of caution that Robert will discuss a little later.
As we review our financial condition weekly our goal is to make all decisions based on long term view then it kills ensuring that we are extremely conservative in our financial asset management and leasing decisions, making in recognizing that the <unk> economic and operating environment that we find ourselves again and that our tenets find themselves you may proceed.
Just for quite some time and it caution in patients it's critical.
As a company, we have you to market disruption and taking prudent actions as appropriate, especially as it related to conserving cash and planning for the long term stability and growth rates GA.
First we temporarily stepped back from the acquisition market to better understand the overall dynamics of the marketplace. We expect to return to be acquisition marketing third quarter and the remainder of 2020 as we see transaction activity return in our key markets, where we are most focused you.
These acquisitions allow us to utilize our asset management leasing teams and continue to build critical mass in H.T.A. throughout the country.
Second we draw down on our credit facility preserving cash as we evaluated the financial markets as our confidence in the markets and our tenants have increased as we have acquired confidence in our cash flows we repaid the majority this by the end of quarter.
Well, we look forward to the rest of 2020 and into 2021, we remain cautiously optimistic we do see opportunities to grow our portfolio increased shareholder value and gain additional operating advantages in our key markets.
Well not couldn't see perspective and in the near term basis, we expect our portfolio to remain relatively flat.
We will also continued I'm honored with 2% to 3% of candidates.
One of their rent collection, and <unk> and we will remain conservative approach and patients in the process. Finally, I'd like to highlight our participation in this year G.R.E.S. be reporting this follows up on our inaugural sustainability report that we filed early this year and highlights our commitment to me to E. S. Cheap.
We'll now turn the call over to Robert you go through some numbers in greater detail.
Thanks, Scott from an operational perspective, we have moved quickly and efficiently to embrace the new normal our teams have embraced the new remote work environment and greatly increased use of the online and digital tools that we have in place leasing and marketing is increasingly using virtual tours in online marketing supplement calls and virtual needs with systems and brokers.
Property management is realigning to increase remote monitoring to ensure apartments are running efficiently. Our facilities seems continues to remain on site and surface into building their justine hours of service times and short I believe we're embracing the change in seen more opportunities, where we can use of technology and tools from our in house platform has an advantage.
Second set us apart from our peers.
From a financial perspective, our balance sheet continues to be in great shape as we work through the pandemic as of the ended the quarter. We had total liquidity of approximately 1.1 billion, including approximately $278 million of equity we raised on afford basis in the fourth quarter of last year, a pricing above $29 per share, including the impact of this equity or leverage is only by.
0.1 times.
Cash obligation perspective, we have limited near term debt maturities with only $6 million coming due before revolver matures in June of 2022, and we also have only $121 million of capital required to complete our development and redevelopment that are over 70% pre leased on average.
Turning to our earnings our name redefined AFFO for the period was 40 cents per share, which was flat to the prior year and includes the impact of $4.7 million a bad debt reserves that we took this quarter specifically related to three outstanding legal judgments that we have been awarded but have yet to collect the judgments relate to air period event.
And while we will continue to pursue collection and they ultimately prevail the impact to the cover 19th endemic on the court system and the economy, they make the timing and clarity around ultimate collections difficult to predict.
Excluding this charge we have identified as a normalizing item our normalized AFFO per share was 42 cents up 2.5% year over year and flat with the first quarter.
Our same store growth for the period of the 0.6%, which reflects our no decline in same store occupancy and lease rate offset by the impact of strong rent growth and margin expansion from increased use of our platform.
Our same store results was also negatively impacted by two other items in the quarter first the impact of free rent from early renewals, which is part of our strategic effort to work with tenants during the pandemic, which totaled $1.2 million were almost one full point of same store growth.
In addition, we also increased our reserves for bad debt from continuing tenants, but almost zero point $9 million from the prior period. This primarily relates to tenants who have been in goods sandy, but a falling behind over the last 90 days well, we're optimistic that many of these tenants resumed pain based on our conversations with them we thought it prudent.
We increased our reserves during that period.
Cash collections in the second quarter continued to remain strong as we had collected or entered into deferral agreements on over 98% of our rents to quickie normal cash on approximately 95%.
Our rents in July and August remain consistent with these shrunk levels.
In total we have now agreed to approximately nine and a half million dollars or deferrals, including $6.5 million that were taken at the second quarter.
Are these approximately 50% of these a gun to hospital system partners, who reached out really in the pandemic with the remainder to physician groups practicing but on campus at all with the mixes specialties and primary care.
These are scheduled to be repaid starting in September and should be made over the next six to 12 months depending on the times.
Given this level of cash collections, we have continued to invest in our buildings and complete our development is the scheduled our recurring capex for the quarter was 15.6 million, which equated to 13% of in Hawaii.
As a result, or if they need for the quarter increased year over year to 77, an app.
Resulting in a 19% payout ratio.
We also invested approximately $15 million under development, which remain on schedule with the delivery of her first new read just about our first new development in Raleigh scheduled for later this month, we're excited to see these projects come to fruition and are in active discussions on several more.
This includes direct conversations with health systems, as well as opportunities to joint venture with local developer developers are key markets.
On the acquisition front, we remain cautious in the second quarter waiting to see how the markets reacted as their movies have continued to perform well, we're seeing more deals come to the market that fit our criteria and pricing we're slowly reengaging in these investments. Following the ended the quarter. We have now entered into an exclusive agreements to acquire or 65, and a half million dollars of acquisition.
Subject to customary diligence, we are actively pursuing several additional opportunities as well.
As we continue to operate her business in return to making investments will financer business in a manner that maintains low leverage and significant liquidity.
One final reminder, we have historically announced or dividends along with better quarterly earnings with the payment following up to two months later.
With the first quarter earnings, we announced that we would be moving our dividend announcement to reduce this gap.
Such we anticipate announcing our third quarter dividend in mid September.
Yes, it with the practice of many of our peers I will now turn it back over to Scott.
Thank you Robert and I will open it up for questions.
Thank you well one I'll begin my question answer session.
You asked the question in My Press Star then one on your touched on so.
If you're using the speaker phone. We asked can you. Please go ahead sudden for person machines, which are your question. Please press Star then too.
Today's first question comes from two Ocean shore note with Mizuho. Please go ahead.
Hi, This is a that silverberg on for Tycho. Good morning. Thank you for taking my question. My first question is just curious about the potential for a rebound in same store NOI.
The third quarter I said, it looks like it may still be weighed down by free rents in concessions.
Hi, Robert once you get that.
Yeah, I think as as we tried to outline you know one of the strategies that we certainly have taken throughout this throughout the pandemic in a response was looking very.
Really looking how we can work with our health system partners that are out there as as they were going through things you know one of the opportunities that we saw was to really re enter into some of these agreements take the opportunity work with them to extend some contracts I extend some leases at very favorable rates H.T. able giving them free rent upfront. So.
You know, we think it's very prudent and really pays off from an NPV perspective. So we did about a half a million square feet of that in the quarter.
The impact to that certainly though is that we took a million too from a free rent perspective, the same store growth in the second quarter and that will be $2.4 million going back to the third quarter.
We take that.
We do expect $2.4 million to be an impact to the third quarter. You know at this point in time, though we also.
Do you believe you know, we don't anticipate any significant additions to our bad debt reserves and in fact, we collect our way through those who might actually see some reduction in them. So.
I think our outlook for same store growth and certainly being the probably the zero to 1% range next quarter, which would equate to 2% to 3% range.
Excluding the impact of those early renewals, which again, we think is really good for the business long term, even if it has a short term impact to this one metric.
Got you that that's very helpful and just one more for me could you guys provide a in your latest thoughts or commentary regarding the outlook, a future government support and relief with somebody else and going.
Uncertainty in Washington, right now.
Well, Yeah, I think one of the good thing that we've seen is that when we mentioned in our script is that our tenets of really responded here over the last couple of months to the environment that they found themselves and I think they prepare themselves to to be practices. It ebbs and flows okay.
The next three six even 12 months and where they're all open they're all practicing and as.
They're getting patients back we talk patients back we talk early on that hospitals or or certainly utilizing their marketing arms and reaching out to a patients yeah.
Trying to relieve any anxiety that they have about coming back and getting I'm getting the services that they need so as we go forward I think that that support that government support will be would be greatly appreciated I'm sure by some tenants, it's not all but I think you know it would be lot less needed.
As we move forward and I think that that's the best part about what I can see about you know in our sector with medical office buildings with positions with health care systems, you know as we move into 2021, Kelly if there is a.
Issue on liquidity within the economy government pulls back on subsidies I think we will continue to outperform from a rent collection perspective, and also frankly outperform from the underlying beat for the services that are.
Our tenants provide and that's just a big time key as we see the next 12 months.
Got you are very helpful. Thank you guys.
Our next question today comes from Nick Joseph at Citi. Please go ahead.
Thanks, I'm curious can you talk about the releasing conversation this especially on the early releasing side in terms of how they came about was that the tenants coming to you or you proactive reaching out and.
How did you think about staggering the expiration of those recently signed renewals.
Well, yeah, our process was and if you look back in I think we've gone through five months now in March April.
We reached out to tenants I think really on there was certainly a heightened degree of stress I think health care systems had some stress I know that physician groups, even large physician groups had stress and so we reached out to our tenets I know that Robert Amanda block.
Our our senior Vice President of operations, you know, we took a very aggressive in an active approach it and make contact and so we wanted to help I mean this is a a time time period, where you really want to have a long term brand stability you want to have.
You want to come through this is a company with a strong.
Balance sheet strong reputation and can you get that by working with tenants and so I think from one to 10, we were certainly I'm dying or Ted we reached out to tenets, we didn't wait for them to call less we reached out to health care systems and in our deferral and we've deferred $9 million, but it's been their health care systems that have no relation.
Chips with us in large markets were.
More than one or two or three assets that have leases that were still three or four years left it. It was an opportunity to do what we would've done over the next three years Oh, we would have reached out to these folks we would have worked with them to to do a standard leasing and its particular case, we got to do it at the time, what it was beneficial for both of us.
I know that there you know there's some folks it might say what did we use utilize free rent in order to help tenants.
Particular point, Todd I think it helps some stability it gave them sometimes to move through the process that we just talked about which is getting back to an elective surgeries getting back there their practice is back to operating.
But it certainly wasn't no case in any way.
Great opportunity or a stop gap for them not to pay rent we went through the underwriting process, we went through the diligence.
Robert points out in our supplement these are very strong relationships from a credit perspective that we thought that we helped out I think it pays off long term we've been at this 14 years now we'd like to get this is another.
2030 years and health care.
Sector has changed a lot, but this change it we're going through now you build a brand and you build a brand to health care system relationships to physicians.
Through your employees doing that so we reached out and I think it was certainly a part of our.
Management style to do that.
Thanks, and just on the the expiration.
There was no we signed leases were able to stagger them out.
You know, we again responded to what we thought was once in the best case, we could oh utilize probably.
We're going to stagger the South we went ahead and let people let let these health care systems, let these tenants utilize the free rent when they need to find.
Fine again, he decided well will be a partner will help you out, but we're not going to help you out when you need it will only help you out when we need it. So we did we took it for the next couple of quarters, but you don't 2021, it's going to be a tremendous benefit we're already halfway through our renewals in 2020, our renewals in 2021 and 2022 are down because.
In the renewal efforts that we've done we've expanded relationships with key partners in key markets and so you know if we take as you've mentioned took a hit on same store growth for this quarter, maybe a little bit next quarter I think long term, it's going to be a tremendous benefit it and we've extended $50 million and value contractual lease perspective, and that's just.
Generating shareholder value and we did it wouldn't in most cases without you know I think brokers, we did a in a scanner T.I. format and we did it certainly the standard free rent typical term. So it was just a win win and I think it was a tremendous opportunity and I remember in 2009 2010 that was.
A key moment and in our company's history.
Frankly, I think this is another key moment in our Oh trajectory over the next 10 or 15 years and what we've done okay huge dividends. It gave us a chance with our size with our key markets or with the ability that we've done with our.
Asset management team to a truly to reach out to individuals and and work with those relationships.
Thanks, one just on bad debt.
And I could give us all the building blocks. So people can make their on adjustment, but just wanted to get the rationale behind adding back.
I'll take your normalized FFO number on because you could make the argument. The fact that is somewhat I'm kind of in the course of the normal business. So just wanted your thoughts on adding back the court. So thanks.
Yes, and I think you know Nick that's that's a good question and you can see you know really our thought process and how we bifurcated art or treatment of the bad debt.
The the bad debt that was essentially related to long tenants that have been out of our buildings for some time and we're just in the collections litigation process. As we discussed those were all prior period type write offs rather recognized income in many cases actually prior to say 2018, if you will.
And so you know the treatment for us on those with certainly one where that's not a recurring business wasn't in our run rate in Q1, certainly in so we we decided that was appropriate to treat as normalizing to get investors a good view a run rate.
The $900000 that we took his reserve incremental reserves related to ongoing tenants or tenants that were in the building really since the beginning of the year. We kept those in our earnings we've kept those in our same store.
We we thought that was the appropriate treatment for that so you can really see our our thought process and how we bifurcated.
During the two in it and just add on on that bad debt. We won we were the prevailing carty Oh, there is clatter oil.
Our opportunities for us to go and pursue it we will pursue it and there was a you don't see opportunity and we have frankly, the expectation that you know in the coming quarters, whether it's the ended this year or next year, we'll have.
The opportunity to talk about the collection that will have those moneys, but right now in this environment it.
<unk> economic uncertainty, we wanted to make sure that we've looked at things and the most cautious and practical and prudent manner and do it wants to not do it over the next three or four quarters and we don't want you to continue to every quarter.
Discuss one more thing one more thing one more thing so we thought we'd look at it. This way Yeah go ahead to address it this quarter.
Thank you.
Our next question comes from controversy with Burke. Please go ahead.
Hi, everybody. Thank you very much rather being happy Friday.
First one on MSG high level question Im just wondering what the next steps are here I mean, do you foresee maybe engaging in a capex outlay at some point improve some of the buildings maybe from the any perspective or would the initial push here be more geared towards the corporate structure.
Well, here's a couple of things and I'll just jump in here with a couple of before I get to Robert but one of the things that we're gonna do we take this so seriously.
Today's environment.
What kind of go for my last 32 years I think.
This process is a company this process internally.
The process, so recognizing that social implications and everything that's going on and making sure that H.T. age is progressive in and aggressive making sure that we are on top of and for this particular category.
So we will be taking taking steps over the next two years. It next year. That's two years one of things are that we're going to make this an actual oversight by the by Board Committee, how should we think that that's as important as a risk committee, we think it's important.
Anything else itself will actually have the management team will be well have oversight from a committee from the board. So that we do have you know this will be a performance objected to them and when measured on so I'll get let Robert getting some details but from a from a bit pick your perspective on H.T.. He's very very serious about this process.
And I think you know Connor.
As we look specifically more at the energy utilization and you know correspond to you.
Investments and our buildings. This is actually been a part of kind of our DNA for quite some time really ever since we took or things in house and our platform. You know we've had our internal engineers and facilities folks have really focused on that.
That really accelerated I'd say, two or three years ago as we got quite a bit larger we hired a couple of personnel who were actually dedicated solely to the facility performance, which facility operations on the national scale really looking across the board it appropriate projects to do so we've been making investments.
From a energy perspective, Dms perspective, just building.
Operational perspective of how do we run those better to save utilities really with a big focus on that that over the last couple of years I think that's something that you've heard us talk about.
As we put in our sustainability for important to start the year, we've seen a real impact of our energy usage going down.
As we need or ways, where are you in essence implementation as we've worked and weights are getting more and more of our buildings on our centralized building automation system. So.
I think it's something we've done and you're you're going to continue to see it but I wouldn't expect the you know a big outsized investment in new energy systems. It's just going to continue just like we've done over the last couple of years with with hopefully the same results.
[music].
Hi, Thanks for that that's very helpful. And then I'm looking at some of the construction data through the end of July it looks like starts continue to outpace completions and some major markets I'm wondering how the H.T. team is maybe looking at increase supply growth that may emerge in the next several years or if you seek to have a part of those development opportunities.
Well you know I think our view is is there is going to be continued growth, especially in those markets. You know for there. It was already attracted you are starting to see population growth come in in some ways you know the reaction to the pandemic.
Might accelerate those those trends you know I think there there certainly will be some opportunities for development.
Certain certain high growth markets that we see like Raleigh Durham, a in the Carolinas kind of in the southeast no areas that.
Long term would you expect to continue to see growth. Some of those developments are going to be a direct with health systems are directly done by age GA. Some of those will will will be done.
The joint venture opportunity.
With some local developers who might have land you know, we see opportunities to partner with them. They bring something very strongly table. We bring you a very strong long term ownership in relationship with health systems.
And we expect to see some opportunities with that we just are stuff sign one of those agreements up the suite. So we do see that's another avenue and opportunity for developing growth going forward. You know I think what are the benefits and again, we talked about going into two this year, we talked about our development process and getting that getting our he.
Sure in place or from the two transaction we've done that.
Team in place you know, we've just completed dark Oh wait Mad MLP that they've got completed this week, we're still moving forward with our Forest Park, which is 90% a pre leased and where they see a so we have opportunities. We're taking advantage of those we've added as Robert said, a couple of JP opportunity.
These end markets that and we like and folks that we see opportunities. So I think the development. If you look at the actual dollar amount at spell them. What they were doing we stand up very strongly with our Pearson back I think a little stronger and so I think that continues I think we've got it could spot a in the development of Stan.
Point that we like our markets and we like certain animal feeds and we have a certain criteria that we that we know that we function under.
Okay. Thanks for that again, and then last one from me really fast on those leasing concessions I think the total was 3.6 million or just some clear here that remaining two and a half for 2.4 should drove show through into Q3 right.
That's correct, yes that will be seen in Q3, and then we'll return to more Rome normal level of things certainly in Q4 on into 2021.
Okay. That's all for me and whether we can.
Our next wasn't good it comes from Todd Stender with Wells Fargo. Please go ahead.
Oh I was just under your line is open.
All right Oh, sorry about that I'm, just not building off that last question with the free rent.
Is there an equivalent number I guess in terms of Capex saved if you look at it this way I'm, just saying if the capex saved.
But you don't have to spend by pulling these leases forward a exceeds that free rent given if there's a way to look at that.
Yes, what I said that is actually a really good way to look at it you know the Ti that we actually did with with these early renewals was very minimal and if it if at all it was pushed we out into the future. So we certainly saw a roughly very similar dynamic at play of you know for the 3.6 million of free rent, we easily saved at least.
$2 million a capital that we were not going have to spend on that right now so.
It's between $2 million to $4 million and that capital. If we gain it was actually very park was out in the future five years thereabout. So we we do see the net effect of savings on that being very attractive and I think the other thing on that is these are very attractive re leasing spreads no I think we certainly put out.
All of our strongest releasing spreads.
In the quarter that we did probably one of our highest amounts of renewal leasing in our company history. So you know when we're looking at renewing 1.2 million square feet in total we've already renewed 1.8 million square feet.
For the year now.
Early renewals were attractive.
Good rates very very strong from an NPV perspective, but we're also making great traction on just working through the rest of the renewals and keeping the people in place.
Good rates despite the environment that we're through so you know I think we looked at it and said, let's just not punt off on decisions.
That that you know if we could put them off three months now we decided to take the decision now take action. We think doing that at this time is certainly beneficial from a long term relational perspective as well.
Right. Thanks, Robert that's helpful. And then just looking at one or one of your projects in particular you.
You've got the carry a inmobi it moves from a redevelopment to what development any change in your return expectations for that and when does that a building begin to cash flow.
Well the carry one Todd is really from a redevelopment really what we did when we talked about it before it was some garden style medical office.
We took down.
Some of those some of those garden style of obese and put up your brand New five story 100, and honored and 25000 square foot Emma either.
So that's that does get completed this quarter, it's over 70% pre leased should start cash flowing.
Early fourth quarter.
Once the kind of its completely in the in the building. So we'll start to see the financial benefit that have that the fourth quarter.
Thank you.
Our next question today comes from Daniel Bernstein with capital one. Please go ahead.
Actually taught asked my question on the rents but.
Just on the free rent, but.
I just asked a little bit extra on that but did you get any additional rent bumps is well within the numbers ticket to get the early renewed early renewals.
Well you know the on the early renewals they were certainly all kind of consistent with the re leasing spreads that we reported a rent bumps on on most of them were 3%.
Well there about so you know strong I've been annual annual rent bumps no.
No. The escalators on those were all 3% that's what I was okay, we were able to or guns on those get them get get that done and we think yet so it really renewals like set at very attractive pricing.
[laughter] have you and maybe just a little bit early into the pandemic, but.
Have you been receiving any requests from.
Hi, tenants, where maybe hospital systems too.
Redevelop properties I guess to change the interior formats or or something you know something that's directly related to the pandemic that would would change how the interior the buildings operate and.
Do you expect to see some some significant capex programs, whether funded by you were essentially.
I guess filtering into the two due to the rent numbers.
To go ahead and make some actual architectural our internal changes to build.
No I I think there we'll see that I think we'll see health care systems I think we we've seen to some extent some modifications on some renewals where folks wanted to make a better more efficient.
Office lay out where they wanted to make something where they were combining space now that was part of the opportunities that we I'm allowed you know folks to do and we were frankly very cooperative in reaching out in doing that I think is this pandemic <unk> flows through into 2021, 2022, I think you'll see more health care systems.
I'm more larger physician groups look and say how can I maximize my space, how can I maximize my patient experience, what what do I need to do too.
Dissipate, another ebb and flow or another situation that that doesn't shutting down or doesn't put my patients and getting into places like inside. So I think this is an opportunity one of the things we felt when we went through their renewal process and reached out to folks with I'd much rather have a tenet healthcare systems.
Look I want to stay here will extend the Reis will work with you and now we'll continue to work with them and I think that that's an opportunity for a company that has a strong balance sheet. That's an opportunity. When you have a relationship with the health care system. I do you know I expect that that will be part of what our construction folks in our leasing folks talk with down there.
Well he is we get into 2021.
Okay, I guess a related question might be.
The trend for long time, but both at the reach and then just in terms of development has been larger and larger properties.
You know multi specialty type campuses that.
Something with Kobin that may make go away a little bit or get.
Maybe that trend reverses.
Just to help kind of control.
Some.
Changes to infection control, we're not everybody's one spot.
Just curious I I think that yeah, I think that there's going to be many many of those decisions that you know we saw that you know there's a push right now to move some of the.
Patient services from on campus to two out to two physician offices or off campus. That's something that was brought up at one of our peers yesterday I was a very very articulate presentation I think that helps the medical side of the equation I think it certainly helps H.T.A. because you know that we've always felt that the health care system.
The United States since to flatten out meeting that you know the most expensive needs to be most efficient space is going into the most utilized spacing and is this happens I think you're gonna see that you're going to see maybe some.
Smaller assets that are used.
Conjunction with other assets, but campuses are one way to to able to you know to separate some things and its going to be an interesting 234 or five years is health care systems move slowly if you remember.
The Affordable Care Act it took probably three or four years until health care system. Its deciding how they were going to respond what they were going to do.
But I can imagine that because that's gonna be a large component of.
What they plan to do and how they plan to utilize space as we see.
The next iteration of leases five to seven years from now.
Okay.
That's all I have I appreciate the comments thanks.
Our next question today comes from Rich Anderson with US NBC. Please go ahead.
Good morning out there.
Uh huh.
So.
These the search in cases, a in the south from the West I I think I saw Arizona is improving but still you know, it's it's a bit substantially higher than it.
I had been in <unk>, maybe a few months ago I.
Oh I wonder how that plays into your perspective on elective surgeries I know that they have largely been reopened are allowed but our people actually doing it even though there's an allowance to do it and and I'm wondering what you're thinking is about the dynamics of electrics elective surgery, considering all those sort of variable for the rest for sure.
Well you know we keep in a weekly contact as you can imagine it's almost daily contact with our asset management team as I mentioned earlier, we have engineers that it had been working gailey for the last five months and visiting assets working with tenants and well you know even in Phoenix market we have.
People are open there now they're metrics elective surgeries are going.
How much are we back to normal I think that new normal is maybe you get to 75% and you're almost consider that the normal.
And I think that you know people are sort of getting to the conclusion that they need to get out they need to visit their their physicians they need to take care that the medical maintenance for a better work that they may have pushed off over the last five months. It we're even seeing it in Florida. We have some we have assets in Florida, we have a whole no interest.
Structure, there and you know our assets are being visited and positions are opened in health care systems or are continuing to function and we have not gotten any response back from many of our property managers wrong or more folks. It has said that you know any of the hospitals that have have reached capacity. So it's a little you know.
A little the little bit disconnection, you hear this and you read this it but yet I can tell you that they rich I don't know one situation within our portfolio and I said, we have certainly weekly or daily calls, where we have seen the impact that what happened for four months ago everything to open that we have pretty much.
90, 596% and patients are busy in our assets and I think the volume which is the question I do think that the ball human right. That's yet to come back to 100% I think there's still anxiety and fear it depending upon your agent and that's the biggest thing that you know that folks are working through is how do we make sure.
The people feel comfortable feel safe and we can get efficiency out of our out of our operations.
Yeah, Rich I just had one of things of that is that from a volume perspective as well I think you are seeing a mix shift from hospital surgeries to outpatient surgery centers as well I think the fear of going into a hospital for you know for surgery is far greater than you know if you're going to have a procedure done going to an outpatient even on off.
Campus surgery center, the fear of cross infection as far lower there. So while you see total volumes still down somewhat although largely recovered the shift from hospital to outpatient.
Is really given you know the surgery centers and our buildings a boost which is why we're not seeing significant even significant declines there. So.
[noise] okay.
Scott.
Our all of US probably talked about this says we went through this.
[laughter], Dan for the past five months and I'm wondering.
What do you think be hospital industry it looks like.
In the aftermath of all this I mean I've said this if you look for.
Perhaps nowhere Oprah hospital in some areas the country I Wonder if you think that there is a retrenchment of a hospital industry.
After all this stuff done see compare notes some of what your peers set on that same topic.
Well I do think that you know health care systems have got or had a tremendous benefit of the stimulus Soc that it came through and I think it sure drastically needed in and you know this is Oh I don't want to put in say part of bandied are things, but I concur health care systems have gone through their class five months and frankly can get through the next three.
For months, and so forth and manage through I do think that this corner could take all health care systems were most health care systems, they're going to sit back and look at their cash flows are going to look at the most efficient ways to to be <unk>, not profitable, but certainly to maximize their their cash flows are patient mix there okay.
Sure.
So I think this is going to have an impact I think it'll be equivalent to the affordable care Act.
Where many health care systems. It was consolidation it was thought process.
You know how do we make a profitability out how do we make the right [noise] mix when we have locations that we build or or where we can it I think this is going to happen, but I don't think it happens tomorrow, just like Kelly I think tele health is going to be something that integrates itself to the health care a industry and it does it you know and accelerated path.
Oh, it might take a 10 years now might take five years. So this is a you know that anyone and things like <unk> and this is just everything will go back to the way. It was I don't think so rich I think they will be Oh, I knew I knew dynamics and I think you know smart management teams smart companies will certainly tried.
Gain as much information as they can adapt their they're management style and and so forth to to the future. That's one of the big reasons that we did our our outreach and that we work with our partners on August referral program, we could have easily taken approach I think.
Looking at hindsight, we could have very very fertile and we would have gotten collections from all the tenants.
But you know the opportunity comes wants and certainly came once in my lifetime, frankly to be able to reach out to somebody that you've done business with let's say you know what can we help you out.
Were strong company or a strong health care system or small physician group.
This is something we can do and we took that chance and an opportunity I think they'll pay dividends over the next 510 years.
Okay last question is.
Do you see any implication of you know and political or an election season.
Good for Theres, a biden win that you know what does that mean does that create clarity in the end like health care system, because you know you sort of stabilized.
Total care Act attacks.
Orders at the reverse Steve do you think it would be a negative.
To your business overall.
Well, you know you and kicking out politics completely I think it in the past to bring you've seen Democrat controlled or or focused.
Processes, you know periods of time, it's actually been fortuitous for health care system. It's been for two in score for move more more programs. They have more subsidies have more more emphasis on health care more emphasis from a national perspective. So.
No just like the Affordable Care Act actually was positive for crosses a company for that process and health care systems deciding to sell assets and so forth I think this if that occurs I think there wont be negative I would expect it would be positive as it rolls student process.
Yep.
All right. Thanks, guys.
Our next question today comes from what Youre with JP Morgan. Please go ahead.
Hi, I'm just wondering in terms of development does anything change with what you put into buildings to go on a go forward basis, because what we're going through today.
Oh, absolutely one of the nice things, we have a gentleman just stellar who's been with us for a while.
Fortunately for brings something to do folks with us, but we were in the process of building Oh development Forest Park.
And so we sat back and actually went down if you Havent you know they they're moving to some new touch free just simply sometimes Sri elevators to treat types of things and so we've gone through and and we've actually sat.
Sat down with our current development and that's you know are there things that we can move forward Gardner offensive can adapt to a more safety environment, you know and I think that's something that's going to progress.
It's been quick.
Anything that could happen to three months is kind of long term, but I do think that the type style components that are that are in buildings are calling to adapt to the future of what is the.
What does the future it looked like it certainly going to change and health care systems will be at the forefront of that and we as you know is and its owners of assets and developers, we need to freeze receptive to that.
Got it okay. It was a thank you.
Yeah.
Oh of course, it comes from Lukas Hartwich with Green Street Advisors. Please go ahead.
Thanks, I think another way to get clarity and all the free rent questions is looking at a net effective rent concept can you talk about that and how did that change net effective rent on the renewals compared to last four quarters of renewals.
Okay.
Yes, I think we'd consider that's that's that's a good question because you know we gave free rent, but you know T. I assume it's certainly the leasing commissions was significantly lower than.
That it would have been so.
The net effective rents on the early renewals, which I would estimate to be about 20% well the concessions were call it 20% lower.
And then they would have been if we had just on a normal course deals would that translate you know to net effective rents that were three four or 5% higher than they would be but traditionally.
Great and then on the new leases the T.I.s were a bit higher than they've been last few quarters is there anything that sit out there.
Well I think you know, we're where we are getting some of the the new leases done you know some of the new leases were around some of our redevelopment properties, where we were getting things done I think we've had pretty strong leasing for some of the redevelopment w. had that requires little bit T.I.s. So thats really the correlation.
From the reported T.I. per square foot on new leases relative to what they've been historically.
Thank you.
And ladies and gentlemen, who is the question answer session. However, during the conference back over to Scott Peterson for closing remarks.
Well I want to thank everybody for joining us and we appreciate the opportunity to talk about our second quarter and as mentioned, we're optimistic about third and fourth quarters. So thank you very much.
Thanks for joining today, everyone well take your over time in the presentation. You may now disconnect your lines another wonderful day.