Q3 2020 Healthcare Realty Trust Inc Earnings Call
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[noise] care Realty Trust third quarter financial results Conference call.
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I would now like to turn the conference over to Todd Meredith CEO. Please go ahead.
Thank you Debbie.
Joining me on the call today, or Carla Baca, Bethany Mancini, Kris Douglas and Rob Pole.
Karla if you could first read the disclaimer.
Yeah for the historical information contained within the matters discussed in this call may contain forward looking statements that involve estimates assumptions risks and uncertainties.
These risks are more specifically discussed in a form 10-K filed with the FCC for the year ended December 31st 2019, and in subsequently filed form 10-Q.
Forward looking statements represent the company's judgment as of the date of this call. The company disclaims any obligation to update this forward looking material.
The matters discussed in this call may also contain certain non-GAAP financial measures such as funds from operation as of the normalized EPS, though.
FFO per share normalized AFFO per share.
That's available for distribution bad net operating income and a wide EBITDA and adjusted EBITDA.
Reconciliation of these measures to the most comparable GAAP financial measure maybe found in the company's earnings press release for the third quarter ended September Thirtyth 2020, the company's earnings press release supplemental information forms 10-Q, and 10-K are available on the company's website at.
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Thank you Carla.
We are pleased to report positive results for the third quarter.
My opening comments this morning will focus on three things.
First the business for our tenants has rebounded quickly.
Second our properties are performing well.
And finally, how we're accelerating the pace of acquisitions.
We are encouraged to see health systems, frontline health care professionals and patients adapting to the demands of cobot, while addressing much needed routine care and surgical cases.
This is evident in the activity levels that are buildings, including foot traffic patient visits and parking.
Which of all rebounded to 90% or better and are steadily improving.
The country is seeing a rise in koby cases in certain markets, but we expect our facilities to remain open an elective procedures to continue.
Public health officials and providers are better equipped and have more experience experience managing inpatient capacity then back in the spring.
They have gained valuable understanding of effective therapies and the availability of vaccines is on the horizon.
Our tenants are now operating at productive and sustainable levels.
The credit their resilience to the critical need for specialty outpatient services.
Requests for rent deferrals tapered off months ago and.
And rent collections have returned to normal.
We have seen property tours pickup, notably, which bodes well for absorption in future periods.
While there may be bumps along the way, we expect our portfolio to perform well and steadily improve in the quarters ahead.
These positive trends have encouraged us to shift the office.
You're capitalizing on a sizable and growing pipeline and Weve increased acquisition guidance substantially for a second time this year.
Wrapping up our investment pace has come about organically.
Our experienced team has worked proactively in our target markets to source more properties.
We are extending our reach deeper in these markets amassing them obese and tight clusters.
Concentrated scale can help spread costs, but the primary benefit is leveraging our local market intelligence to capture more leasing volume on better terms.
We continue to have a strong preference for on campus multi tenant and movies, but.
But we also see the ability to create value by investing.
In more adjacent and off campus properties that complement our hospital centric portfolio.
These strategies are enabling us to elevate our acquisition pace on a consistent basis, yet maintain discipline and quality.
The common link is our relentless focus on dense high growth markets and aligning with the strongest providers.
We could not possibly anticipated COVID-19, but many of our target markets, such as Nashville, Raleigh, Denver, where Atlanta are benefiting from the trend of migration from some of the larger cities.
Through the course of the pandemic the medical office business has proven essential.
Looking ahead, our portfolio is optimized to produce above average internal growth, while exhibiting the hallmark low risk attributes of the inmobi sector.
And our efforts to sustain a higher level of complimentary acquisitions are translating the more AFFO per share and better dividend coverage.
Over the long term a steady rise in demand for outpatient services will ensure our ability to generate attractive growth and solid risk adjusted returns for shareholders.
Now I will turn it over to Bethany for additional information on health care policy and recent trends that's me.
With an uncertain backdrop of macroeconomic and political factors health care providers have proven quite resilient in 2020 provide.
Providers are focused on meeting strong demand for health services and much needed delayed care.
Higher acuity inpatient volume in surgeries have ramped up quickly for hospital well.
Well, they're lower acuity service lines are expected to normalize in the months to come.
It's cobiz continues despite we expect providers to be able to treat patient.
Without shutting down other scheduled care.
Hospitals now have adequate staffing PPD.
Better coordination of inpatient bed capacity.
Well, it's more use of outpatient facility.
Health care providers could also potentially benefit from additional federal system.
Whether through a fifth economic stimulus bill or with the remaining funds previously alluded to them under the care of that.
[laughter] positioned all considered HR as tenants have returned to 90% or more of normal volume on average they.
They have seen a heavy shift back to in person care, even as higher Medicare reimbursement remains in place for telemedicine visit.
Physician office hiring in September outpaced every other health care sub sector.
Having 18200 jobs.
This is more than three times, the average monthly hiring for physician offices pre cobot.
After several months of steady hiring physician offices are now 97%.
Pre coded staffing level a sign of strong patient demand is.
Is this in revenue growth and a positive outlook for the coming months.
Tuesday's election, one decided will have implications for the direction of health policy over the next four years.
Several swings dates remain under contention that Republicans are likely to hold the majority in the Senate.
Former Vice President Biden prevails in the presidency with the split Congress, we expect status quo for health care at least until the next mid term election.
A more progressive agenda and health policy.
Such as a public insurance option would likely be difficult to pass, which should keep legislation incremental in scope.
At year end.
Which positions us well to sustain meaningful FFO per share growth in 2021.
Our ability to grow FFO admits pandemic related challenges is a testament to our portfolio strength.
As expected, we experienced sequential quarterly impacts from the typical third quarter seasonal utility expenses as well as the mercy dispositions.
These were partially offset by nearly 50% increase and parking income over second quarter.
In addition, we benefited from a million dollar sequential swing in coated rent deferral reserves, including a $300000 release from the reserve in the third quarter.
The deferral reserve was reduced given that we collected over 96% of scheduled deferred rent payments and there were no material new deferrals granted.
Further and most importantly.
Third quarter rent collections were 99% back to pre pandemic levels.
Remaining deferrals are scheduled to be repaid by year end.
Turning to operating performance same.
Same store NOI was driven by 2.4% growth over the third quarter of 2019 for the multi tenant properties.
Same store multi tenant and why growth was enhanced by operating leverage created from quarterly year over year revenue growth of 1.6% and operating expense growth of just 0.5%.
Building utilization has rebounded from second quarter lows, but is still running below pre pandemic levels.
Shifting to the balance sheet net debt to EBITDA was 4.8 times at the end of the third quarter below our target range of five to five and a half times, mainly due to the $183 million of cash on hand at September Thirtyth.
After we fully reinvest this cash in the fourth quarter debt to EBITDA will be in the low fives.
We took a number of steps to maintain our conservative and flexible balance sheet.
In October we entered into forward equity contracts under our ATM, bringing total available capital from forward equity to over $112 million.
Also we issued $300 million of senior notes due 2031 with a coupon of 2.05%.
And call it our 3.75% senior notes due 2023.
This refinancing extended our average debt maturity to almost seven years and lowered the blended interest rate by over 30 basis points.
We now have no material debt maturities until 2024 and no senior notes expiring until 2025.
As we look back on the first three quarters of 2020, we are pleased with the resiliency of our tenants and portfolio.
Our market selection and asset quality have generated steady internal growth through challenging times.
Strong internal revenue drivers indicate this organic growth will continue.
In addition, we are well positioned to fund our growing acquisition pipeline with numerous capital sources available.
In summary, strong internal growth.
Accretive acquisitions, and low leverage positions us well for accelerating FFO per share growth.
Now I'll turn it over to Rob for an overview of investment activity.
Rob.
Thanks, Chris.
Healthcare Realty is confidently moving forward with additional investments.
This confidence is supported by the resilient cash flows and strong rent collections from quality medical office buildings.
As the pandemic unfolded a number of marketed deals were pulled and many investors hit the pause button.
In contrast, we remained active assembling a robust pipeline sourcing one or two buildings at a time.
Over three quarters of our pipeline. This year has been directly sourced from building owners and relationships we've cultivated over many years.
Our focus has been primarily centered on creating concentrations of buildings around leading hospitals, serving dense growing populations.
Over 95% of our purchases in the last three years have been in markets, where we were already invested.
With the balance located in a couple of target markets, where we see a clear path to invest in more buildings.
Since July healthcare Realty has acquired seven some of these for $117 million.
These properties illustrate our focus on forming property clusters around leading hospitals.
These clusters position us well to leverage local leasing knowledge and provide a diverse mix of options to tenants with varying space needs.
Local expertise also helps us identify and underwrite additional investments in the market.
A recent example is a multi tenant inmobi purchased in Los Angeles.
The building is 100% leased and located adjacent to Huntington Hospital.
This growing 503 bed hospital signed a definitive agreement to affiliate Cedars Sinai.
This is our third acquisition in the last year around this campus and we have gained line of sight on additional prospects adjacent to the hospital.
Another in Colorado Springs is an off campus Inmobi next to a building we acquired in March of this year.
The investment gives us control over to property complex that provides a convenient destination for medical services, along a growing commercial and residential corridor.
These properties serve as an attractive alternative for tenants that don't require an on campus presence.
And they are located a short distance from three other buildings, we own on two leading hospital campuses.
And in Houston, we purchase and Inmobi adjacent to Memorial Hermann 397 bed hospital in the woodlands.
The building is located around the corner from our four other movies adjacent to this hospitals.
It is also near a competing hospital, where we own two on campus properties.
This acquisition expands our portfolio to seven on an adjacent buildings in the immediate area that totaled 440000 square feet.
The average cap rate for our recent acquisitions is 5.8%.
And we expect to end the year around 5.5%.
This aligns with broader market with the broader market, where pricing for core and core plus and movies has remained steady in the 5% to 6% range.
Supported by a diverse group of well capitalized buyers.
We have recently seen an uptick in marketed deals as sellers return after taking a wait and see approach during the early period of the pandemic.
A couple of larger portfolios are on the market that don't measure up for us.
These particular portfolios do not align well enough with our preferences.
A greater on campus mix.
Robust rent growth potential and overlap with our target markets.
Looking ahead, we have perspective acquisitions totaling $276 million under contract and another $105 million under letter of intent.
While some of these may close in early 2021, we fully expect to have the mercy proceeds and more invested by year end.
We are raising guidance well above our top end from last quarter.
2020 guidance is now $400 million to $475 million.
Okay.
As we approach the end of a solid year of investing we remain confident that our team can continue building a robust pipeline that will deliver a strong start to 2021.
And contribute to meaningful growth in FFO per share.
Operator, we're now ready to open the call for questions.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
The first question comes from John Santa Maria with BMO. Please go ahead.
Okay.
Hi, good Sauflon here. Thanks for the time just on the investment pipeline.
I just wanted to get a clarification of how the prospects that you're looking for maybe different mix between on and off campus versus your current portfolio, maybe sounded like you're a little bit more.
At Oracle wanting to take on more offs or adjacent.
Sets in and if so if you could comment on the relative pricing differential from a cap rate perspective on on versus off.
Yes, I think if you look at our.
Our.
Acquisitions that we've made this year there have been more adjacent properties most of them have been adjacent there's been a few off campus properties in there I think when it comes to the and I think if you look at the pipeline for the remainder of the year, we a similar mix of on an adjacent largely on Jason.
And a few off campus sprinkled in there I think when you look at the pricing difference there's.
Typically.
Are you seeing them.
Depending on the market you can see anywhere from a 50 to 75 basis point pricing difference between those.
In some cases it could be.
Slightly higher than that but generally it's in that 50 to 75 to 70.
75 basis point range.
Okay and that is really good fast.
Sorry, John I guess I would I would say that that's sort of the on versus off and then adjacent it's going to skew closer to the on.
The on cap rates, so not as much of a difference there closer yard at the hospital, it's almost kind of a linear line.
Distance to hospital, but it can vary by market as Rob said.
Great. Thanks, and then you kind of alluded to it in for 21 in your acquisition. You said you had a multitude of kind of capital sources. So how should we think about how you feel about your cost of capital relative to cap rates today your willingness to your equity fund or would you what would you be more likely to fund VIII.
Capital recycling as you move forward in 21, assuming status quo here in your cost of capital today.
Yeah, Yeah first right now we do have the cash proceeds to redeploy so we will start there.
Yes blended we're.
Working to keep our leverage in the low fives, where we are where we will be once we redeployed. This this cash and so we are looking at it from.
Kind of that that blended whack basis.
And.
Right now that is certainly accretive for us based off of where we were able to to purchase assets in the market in that that kind of mid fives range.
And so we will continue to define what the mix of debt and and equity.
We are well positioned on the equity front with the forward.
ATM proceeds that we have have lined up so far this year, we have $112 million.
Available.
Through that that forward equity right now so that will be used once we go through our our cash.
That we that we have on the balance sheet.
To find the current pipeline, so well positioned but we also have certainly have have access to.
The other forms of capital outside of that as well.
Great. Thank you.
The next question comes from Jordan Sadler with Keybanc. Please go ahead.
Thanks, Good morning, just a follow up on sort of the.
Last question regarding the pipeline of potential acquisitions the.
Under contract and the under ally is the mix is there a heavily skewed as well.
Toward the off campus.
No I think the mix is heavily skewed in the under contract the mix is skewed towards on an adjacent.
Not not much not much off.
On the ended Jason Okay. If you look at the if you think about the definition of our adjacent.
Jason it's within a quarter mile No I thought I thought I follow that I'm, just I mean, it looks like a lot of that I mean, a lot of what you guys and Don I caught a nuance I think in your prepared remarks, Todd where you said you have a strong preference for on campus.
Yes, and then well these.
I noticed that's kind of that piece of the mix is kind of going down.
Just kind of curious are you still able to source.
Those on campus transaction, specifically or is it really more of this adjacent.
Yes, I think I think yes, we are still able to source on campus I think what you've been.
Well from what Youve seen weve over the past three years Weve.
Acquisitions have been 95% of our acquisitions have been in target markets, where we where we already have a presence. If you if you look even closer.
About 70% of those.
Have been around campuses, where either on or adjacent to campus, where we already have a presence. So I think what you're saying is our.
I was having success in building out these clusters are tight clusters around campuses, where we want to to build out our presence and so.
Where where we where you've seen a number of prop of acquisitions that we've made here recently.
As adjacent those those are part of our strategy of building now smaller portfolios around campuses, where we want to be so I think.
It's it's we can still get at the on campus properties is just.
Our work in the way we source properties through these direct relationships and local knowledge.
Where we're going out and buying one and two at a time oftentimes it comes with buying one property to enter that that.
That submarket and then building upon that and so thats really where the strength of our ports.
Portfolio.
Pipeline building comes in is that we're constantly buying properties around campuses, where we want to be and we've identified an opportunity to build out significant square footage.
Okay.
That's helpful.
I I know there is.
There is quite a bit.
The narrative obviously surrounding shorter.
Work from home for traditional work additional locations or traditional office space in office users obviously.
Versus you know your primary tenancy.
Is this kind of how do you think about this in underwriting.
Rob when you when you're.
Looking at even adjacent staff around these hospitals in the infill locations do you think they'll be potentially more product available for sale as a result of those states.
You see some of these other landlords are hurting.
Yeah, I think I think that when you look at.
Our underwriting and when we're underwriting the adjacent buildings as well as the on I mean, there is still a there is still a significant demand for for tenants to be located on or around the campus we've seen.
Our statistics show that even.
Even during the pandemic, where we had this.
Falloff in foot traffic and some of the on campus.
Traffic that that was really caused by these restrictions around elective surgeries and inpatient services, that's largely rebounded and I think that shows up in our statistics and so we think that theres going to be continued demand for tenants and space around not only on but adjacent to the campus is.
As they serve these higher acuity services that will still need.
To be located in and around the hospital.
And I might add to that.
Yes, Todd go ahead, Chris well I was probably the same comment I I think you're on to something in one on one hand that you're right. If somebody has a local investor regional has a portfolio and they're struggling and retailers are struggling in some other sector for the reasons you cited economic generally.
Or even the work from home trend I think you're right. They are looking at some liquidity from an area like Inmobi, where the value has been preserved and doing well, but on the other hand theres going to be is probably a similar amount of people are saying I want to hang on to that if I can't because it's doing really well and then there's a lot of other demand from institutional capital to to move into the MLP.
So it's a balance but I do think you are right. It probably lends itself to a little more availability at the margin and I think you've seen us certainly benefit from that and I think it will we'll continue to be the case for a while.
Oh, Jordan this is Chris.
I'll add one thing actually back to your previous question about the on versus adjacent you know as we look at that as Rob mentioned, our definition is pretty tight at a quarter mile and if you look at a lot of campuses frankly walking across the campus could be more than a quarter of a mile and so we we look at those pretty close to interchangeably.
And if we look at our performance across our on properties versus our adjacent properties. There. They are very very similar so I wouldn't read too much into.
A slight shift in one quarter or even one year of adjacency versus on there. They are very very similar.
That's helpful. And then just Chris well I Love you a clarification just I looked at the same store portfolio page that you guys provided helpful. Can you just shed a little bit of light on the three assets that were moving out.
I'm reposition the 443000 square feet.
Yes, we had a a couple of assets things that are moving around we have some that were sold we have a couple that they've got moved into to reposition one of those is one that we have have talked about.
Before that is the fitness center down in Dallas.
That we are in the process of Reconfiguring that fitness center was over 100000 square feet.
Currently we are the new fitness center is going to be about half that and we're going to be.
Spending dollars to upgrade the building and convert the remainder of that that space into.
And in the clinical space.
Another one we had a had a general office building and.
In Dallas as well that we had a tenant that hit.
Good had moved out multi floor tenants.
We are backfilling with.
With multi tenant floors, we actually already had a new a new 10000 square foot tenant that is taking some space in there. So we're already in that process, but there is just going to be some some transition that goes on as we are repositioning those.
Those assets.
So that's that's kind of the the main.
The main culprits in terms of the shift in the overall square footage, but that one building in or the fitness center is it's over 200000 square feet and so it makes up the predominance of the change in the square footage that you noted.
Okay. Thank you.
The next question comes from Vikram Malhotra with Morgan Stanley. Please go ahead.
Hi, Thanks for taking the questions.
I know you mentioned, we shouldn't read into you know too much into kind of the onward rejects and Brett I guess, it's also one of the few or maybe one of the first time.
Actually outlined kind of growing the bi so to see by looking at adjacent and more so off like you mentioned, so I'm just maybe just higher level. If you could give us a sense of what's the impetus for this change you can hit slightly on the margin.
And then and then related to that how would your underwriting may be different for when you look at off campus versus what you've traditionally looked at in terms of tenants or bomb solar.
And any other metric you may be looking at.
Yeah, Vikram I think it's a good question and I think certainly we would agree it's obvious where we are doing a little more Jason and it's really not so much new we've actually been doing it for a while I think what you're seeing is our ability to accelerate that trend and it's really a stacking up nicely this year.
Sure and we're continuing to add those on campus buildings, but what you're seeing a lot of this years, our ability as Rob described over 70% of these assets or where we're we're developing that cluster again that tight ring quarter mile around the campus and either adding to the cluster of adjacent to or our ideal scenario is we have ajay.
We have on and then as we as we build sort of what I would call the network effect among the tenants and the leasing and the knowledge that we have from being in that flow. All the sudden we have a sense of what are the right competitive buildings, where we see ourselves competing the most weather.
Whether thats on adjacent or off and so what we often we get in the flow of that information, whether it's through brokers or directly ourselves and the dialog with the hospital and the providers and suddenly you realize that one building down the street a mile which is off campus by our definition is really a strong building and competing well we like that let's go look at that let's go.
See if we can get a hold of that building and so you develop that knowledge the longer you're in a market and the more critical mass you build and then obviously the flip side of that is you get some more benefit just from a cost standpoint, but our view is really it's a revenue enhancing play rather than just a cost because there is a limit to the cost benefits. So our view is just building out.
Sort of that cluster strategy and the network effect and it's it's it's anchoring it always with some line of sight down the road of getting on campus and really tethering yourself to the strength of that local submarket that cluster effect.
Yeah, Yeah, that's a that's actually where I was going with you know you mentioned plasticizers I was trying to get a sense of what you hope it to kind of enhance in terms of bumps or your rent spreads or then even up from a cost perspective, maybe the overall margin in that specific market. So I'm wondering if you have any.
You know any anecdotes so experiences to share where you do have clusters, you know kind of how some of those metrics man started to flatten out or what the goals are if you don't.
Yeah, I think it's early to give you. This concrete example of it does X or Y exactly but what we're really seeing I mean, several places you know from just all over the place Memphis Nashville, Denver, All these different places where we own these on an adjacent or we see.
If we don't own those in some cases, where these tenants might be going and where that demand builds and so it gives us that insight, but I think the core of it is what you said, it's it's getting to a stronger absorption trends. That's a way we see to building that absorption that positive absorption and then translating that to sustaining sort of the three to four.
Percent cash leasing spreads potentially more than that in any given period, but over the long run we think that it's a very compelling way to generate those those spreads and again, it's not a new concept we've been doing it for a while and now we're trying to really aggressively move more that direction and so you're seeing it help us sort of accelerate DLT and elevate.
The pace of our acquisitions and frankly, we think it's very sustainable I mean, we have a strong pipeline going into the next year, Rob mentioned the group of properties under a lie.
And even some of the ones under contract that may not close they'll close in the first quarter. So we'd be off to a great start next year to kind of keep up a pace at least as strong as this year.
And one thing I might add to that Victor Victor I might add to that is you know over the last five plus years, you have seen us selling some off campus buildings I would say those are ones that though didn't fit with this kind of cluster idea.
But at the same time, we always said, we weren't going to 100% on or adjacent we said there's been some good good properties that we that we owned in and kind of fit. This this characteristic that the Todd is talking about so right now were call. It 10, 15% that is off campus and so if you see us buying somewhere in that range.
It will probably stay in a similar.
Similar range to what we currently have in terms of the overall mix. So I would say, it's all it's all marginal and it's not a it's not a overall.
Major shift in terms of what you've seen out of our out of our portfolio, but we do think it it can certainly be additive for us.
Okay Fair enough and then just one last one you've done a great job sort of in getting to be out now that you're hoping to be 90% Arden or I'm. Just wondering kind of if you have a beta talk you can share when investors might you know think about or see a dividend increase.
Sure. So so clearly as you pointed out we've made some progress and I think as Chris outlined we should be you know, 90% or better for the calendar year 2020. Some of that is clearly attributable to little bit of the leasing.
Slowdown we saw off of off the back of tours slowing down in the second quarter. So that's helped us a little this year. So we don't want to get too ahead of ourselves on that but you know even if we spend a little more next year to make up for that it's obviously for the right reasons, it's getting occupancy an absorption up so are we.
But we still are optimistic about next year and our goal is really to drive comfortably into the Eightys and really see line you know a direct line of sight and ability to drive into the mid Eightys, but I think you know the good news is it's not if it's when and I think as we put together our assessment 21, our forecast internally, we will be very focused on that.
So it's I wouldn't I wouldn't suggest it's imminent, but it is certainly in our planning thoughts and we hope to be there sooner rather than later, but I think we've got to take a hard look at how the leasing and the payout looks for 21.
Great. Thanks, so much thank.
Thank you.
The next question comes from Nick Joseph with Citi. Please go ahead.
Thanks, you gave some details around tour activity. So I'm just curious how you think about that as a leading indicator.
For ultimately leasing and kind of what the what the typical relationship is between that activity and ultimately signed it.
Yes, Chris I'll take that we we certainly track our leasing and then kind of conversion ratios and.
We did see a drop off as we had talked about in the in the second quarter rebounded very nicely in the third quarter. When you average those two.
Together, it's pretty pretty similar to what we saw over the first quarter.
That's what's kind of giving us some of this optimism as well as what we are hearing just on the ground from our leasing people have discussions with with provide.
Providers as well as with hospital systems that are looking to move forward.
With with various clinical plans.
So we'll continue to track that that.
That tour activity as we move into fourth quarter, there is a bit of a lag there in terms of tour.
You know initial tour converting into into into occupancy, but we are.
We're pleased with how well it has rebounded in the third quarter.
And that's a that's that's providing a lot of optimism that you're that you're hearing for us going going into next year.
Thanks for that just from your tenants do you have a sense of how much pent up demand is still kind of on satisfied from from previous lock down or are we back to generally normal course of business. It has most of its.
Positions.
Hi, I I would say, it's it's not quite back to normal I think they are still working through it.
You know, we probably experienced it in your own lives if you're trying to get a doctor's appointment. It's it's still a usually a pretty good delay right now.
So I think there's still pent up demand I don't think its you know.
Terribly high such that you know its going to take forever to work through it but I do think you still are seeing some of that and and you know there that I think the biggest bottleneck is just kind of being very safe and everybody's practices and making sure you don't crowd waiting rooms, and kinda overwhelm the system. So I think everybody is doing their best it sort of keep keepitsafe.
And and do the appropriate volume right now so I think it will continue to benefit it will be a grind here.
We said, we're about 90% plus varies from from 80% to 100% across the market. So I would see that as a you know just grinding higher and until we really see I think we're all sort of looking for some of the trends to improve probably into the spring and obviously the vaccines will be I think the real the real moment when I think you'll.
We've worked through most of that and get back to sort of a run rate, that's 100% or better where we work together.
Thank you.
Sure.
The next question comes from Rich Anderson with S.M.B.C. Please go ahead.
Okay. So just quickly on the Mercy, just but I was just position I was that cap rate kind of in the realm of normal like 5.5% and just curious if you're making any money on that deployment trade or if that's more about a longer term.
Kinda growth thesis.
Deploying those proceeds.
Yeah, no that was that was a higher cap rate. It was it was seven and a half Gatorade and yeah. It was it was really about.
The higher rates that we had there and some smaller markets and the single tenant risk.
So we did have some some dilution that was associated with that but we think from long term value. It's still a good trade for US yeah, I'm, sorry, I remember that now apologize I'm on the.
On the adjacent sort of theme that we're talking about here is anything about that I understand the clusters and you know you can own you move away from the center of a hub of a circle you naturally would go off campus, but is there anything also about that that is a sign of the times people, maybe don't want to be so close or.
Or even connected to a hospital because of the environment or is that not playing a role at all in in sort of the how the market and you're behaving in the marketplace from an acquisition standpoint.
No not at all I mean, we absolutely want to want to do the on campus I think I think what you've seen from US is that we we kind of strategically pick which markets number one that we want to go into as Rob said over 95% of those have been the ones were already in and then we go down and drill down say well what hospitals, we want to be around we've done.
That well and then now what we're doing as we as you heard as we've said and you've mentioned we're building that out by the adjacent see and again, that's a very tight circles. So it's there's no change that we want to be on campus, we absolutely do and frankly, our portfolio, which is heavily on campus. As you know we we have not seen any concerns there it's not like we're seeing different foot traffic.
Levels and activity levels.
Certainly didn't see it play out in the deferral situation in the second quarter differently on versus adjacent versus off. So it's it's it's very much a concerted effort to sort of develop these clusters and and Rob talked about 70% of what we're doing is in the same cluster will then the 30% that is not in the same clusters. That's us trying to find the next cluster.
Maybe we get.
Single on campus building somewhere in a new submarket or maybe we get to an adjacent one and then immediately what our team is doing is saying who are we talk with our leasing people who are we competing with and therefore, what buildings would we want to own in that Submarket. So it's it's just frankly, it's it's more likely you're going to get to the adjacent first because the hospitals often only on campus.
If they're not already owned by some other institutional.
Institutional buyer like us and so you can get a foothold oftentimes adjacent.
Initially and then you can usually build on that more but getting that on campus is sort of priming yourself to get in position to be the best buyer of the on campus. If you don't already on it.
Okay and then.
Let me think about this a little bit differently than if perhaps.
Perhaps there is a bit more attention being drawn by medical office in this environment for all the reasons you probably be a little list pretty quickly and that includes.
Distance off campus, where people may be you know it theres some consistency to the idea of being close to a home people might feel safer and whatnot and all that I don't know how long that will last but is this an environment, where you can actually sell more of what you do own off campus.
Environments more sort of accommodating.
That or is there really no movement, there either to speak of.
Well I would say as Chris pointed out earlier, we have probably historically sold a fair bit of our off campus and it was really going through in identifying which ones, we want to own long term versus not.
And so we kind of whittle that down to a lot of the off campus, we have which is again, yes, it's fairly small percentage.
Those are the places where we want to continue to invest and develop clusters in those markets. So I would say, we're not looking at taking advantage of that trade now on the margins may we do that here are there for sure.
But I would say generally we're very comfortable with the off that we have and I would say you will see that off campus for us tick up a little because as Chris said I mean, we're almost 90 10 on an adjacent versus off and so I could see that drifting to 80, 580% on an adjacent but you know we're comfortable there as long as it fits strategically.
Luckily, it's it's the right demographics it kind of plays into our clusters. So we're very comfortable with that mix, yeah, and Todd I would just add to that this Rob I would just add to that point about clusters.
If you're if you're investing in Austin generally going to see us where we already have a significant on or adjacent president. So its really complimentary to that clustering effects is it's not going to not going anywhere we're going in is starting to cluster with within off truly off campus building. Yeah got you last one perhaps for Chris if you're you're four.
<unk> 0.8 times debt to EBITDA lower than your target.
When you go into 2021, and you said I think five and a half ish type of range, how much does that feed growth in other words by levering up a little bit in 2021.
I'm, assuming you know low interest rates and all the rest you got a lot of accretion from the next incremental acquisition. If its funded entirely with debt. So I'm curious you know how to how much does that move the needle when you're talking about material AFFO growth next year.
Yeah rich.
I think the way to think about that is you kind of really have to pro forma for the cash that you have on the balance sheet. So it was kind of I was trying to highlight in my prepared remarks. So yes. We are four eight today, but if you take our $183 million of cash and redeploy that in the mid fives.
That debt to EBITDA ends up going back into the into the low fives.
A low five times on a debt to EBITDA basis, and so we're we're really already in our target range of five to five and a half.
And so I wouldn't anticipate a meaningful shift.
In in leverage.
Moving forward.
I will point out that we did see some benefit to earnings from the refinancing that we did back.
Back in October with the new bond issuance.
You know, new new 10, plus year to the half year.
Bond issuance is just over 2%, which brought down our blended.
Interest rate by 30 basis points. So we are seeing some benefit on that but I would say, we're not looking to try to accelerate.
Earnings moving forward by by Levering up we we plan to keep that that leverage there in the in the low fives, which is frankly kind of where it is today once the cash is redeployed gotcha. Okay.
Very much at all.
The next question comes from Lukas Hartwich with Green Street Advisors. Please go ahead.
Well John here on for really good. Thank you guys for the time and congrats on the on the quarter just I guess, a two parter for me I just wanted to get a better understanding of the supply outlook, particularly around your cluster markets.
And where you see kind of a lack of supply coming on what's what's your desire there to kind of stepping on the development side to fill that need.
Yes, I think on the supply side I think if you when we evaluate.
Markets, certainly starting with our target markets and then as Todd said going in and identifying a campus that we want to.
To locate around.
Certainly supply.
Becomes a driving factor and really with the way that we source buildings were going out and and identifying the buildings that we want to own and.
Figuring out who owns those buildings and then engaging in a dialog with either building owners are local local brokers there that can help us.
Again, the form those relationships and so that that certainly drives our.
Some of the identification of these these clustered markets and if we don't feel like there's a substantial enough opportunity to get enough buildings. Then then we'll certainly.
You move on to the next to the market next market that we've identified.
And certainly as it relates to development. So sure if there's if it's a tight market.
Oftentimes we're in the clusters, we have a we formed a.
Nice relationship with the hospital and that's really what's been driving our our development efforts of late.
Certainly want to develop properties inside of those clusters, when we see that the opportunity, but those are going to be largely driven by the hospital, there and their needs and their growth and so we have certain situations.
There, where we've where we've done that our current building that we have under development are we finished this year valley that was a situation where we were already on campus and had an opportunity to develop an additional building there through our relationship with the hospital. So certainly something that we will continue to to evaluate and while we are building out these clusters.
And have actually have a couple of opportunities that we've been working on.
That fit that fit.
Fit that criteria so.
Yes. The next couple of months will probably begin be coming out with a couple of new developments.
Thank you.
Yeah.
The next question comes from Jon Petersen with Jefferies. Please go ahead.
Great. Thank you guys.
A few kind of kobin related questions on sort of on.
On T.I.s or they were a little bit lower this quarter, but it is actually just wondering whether you know.
Could you talk about renewals or new leases with some of your.
With some of your tenants if there's if they have a reconfiguration needs.
Social distancing or tele health or anything like that that would.
Necessitate T.I.s to go higher going forward.
Yeah, you know on T.I.s, we kind of look at it based off of spend as well as his commitment and our spend is down but that frankly is because the volume is down a little bit as we talked about because of the the slowdown in tours that we saw earlier. This year. If you look at our commitments there frankly kind of right.
In the range of what we historically expect we say renewals kind of dollar 50 to $2 more.
More in that four to $5 for new leases. So we're we're pretty close to that right now so we're not seeing a meaningful share.
Shift werent.
We're monitoring what what may occur with with any changes for coated in terms of space needs, we're not seeing people as of yet, making a material shift and.
The way they are using that space.
I think there's a lot of discussion around that and are there things that that could be done.
And probably also depends on the specific of the of the location people are getting much better of using online.
Check and so you don't have to have as many people in a waiting room and being able to turn.
The exam rooms, and cleaning and such and so.
We'll be on the lookout for that but we have not seen anything as of yet that.
That would make us make us change our our typical expectations of what our leasing T.I. commitments would be.
Okay. That's helpful. And then yesterday, we had the unfortunate milestone of 100000, new cases Im just curious if you're having discussions with your neighboring health systems on creating additional capacity for them or if there's kind of been plans in place or whatnot for another for another spike in overcapacity at your neighboring hospitals.
You know it really has not returned.
Return to anything like what we saw in the spring, which is good news. The bad News is you know there are specific places we know that are spiking. It doesn't seem as though it's currently happening in our markets to material degree. So it really hasn't led to sort of that return to discussion about.
More.
Dressing these issues and some more dramatic fashion or or just a helpful way, we haven't even had a lot of that so I would say right now we're not seeing it. The good news is we've all we all went through this in the spring and even sort of a second surge and in July and a couple of markets. So I think everybody feels a little better reading a little a little easier about our ability to.
Sort of react and handle that well and I'd say our ability I mean, it's really the hospitals in us lending a hand with whatever we can do so we feel good about it we were even having a discussion with a couple of our board members, who lead health systems in different markets and.
And they feel a way better than they did back in the spring about an ability to handle. These these spikes so very encouraging what we're hearing obviously.
It's hard to know going into the winter, but.
Yeah, so far so good.
If I could just one more kind of Kobe unrelated question, if we get a vaccine I would assume there's going to be a very high volume of people that are going to be seeking yeah, I guess to get to vaccine afraid to be administered does that create any opportunities or anything.
For you guys any short term.
Yes, I guess demand for for administering the vaccine.
I think it certainly will lend itself to more demand for these fairly low acuity visits to people going to get the vaccines that there you know what their kids, it's pediatricians office or more likely internal medicine family practice type offices.
We'll see I mean, obviously not none of US has great insight into exactly how this is all going to work but.
But I think it will be good and it will hopefully lead to people being more competent to to kind of return to normal activities. So it clearly will be a benefit but nothing specific at this point.
Okay all right. Thank you.
The next question is from Daniel Bernstein with capital one. Please go ahead.
Hi.
Good morning, I think you kind of answered this in the last.
Last set of questions but.
Yeah have you seen any difference in.
[music].
I guess the demand for the size of.
Of your tenants I mean are your tenants looking for any additional space or expansions.
A lot of confidence in your ability to incur.
Increase occupancy over the next 12 months just from lease but I'm wondering if.
Tenant you're actually asking for more space as well.
I would say generally yes, I mean, we are definitely seeing a fair amount of expansion talk.
You know its proportionate I think it's similar to the positive signs for for more new leasing.
And absorption so we definitely see that I wouldn't say, it's you know a 10 x. type of consideration, but we are very encouraged by that and you know one place that we've seen a lot of that going on is this redevelopment and Memphis.
It is really just kind of grown through expansion and a big driver of that one part its hospital building out there they're outpatient practices there, but also a orthopedic surgery center that is really ramping up so very encouraging signs I would say on on some of that higher acuity demand.
You know and we think that will translate to some more expansions, but but in proportion just generally more demand.
Okay, but not I guess, which like not related to co that you're not looking for more space because they need.
Right well, it's more Jenny just volume yeah, it's not back to volume of 12 healthcare needed. Okay. Yes volume of help understand we need bigger waiting rooms, or anything like that right alright.
And then just I don't know if you could talk a little bit to the sellers not by name but.
Characteristic the sellers of the assets that you are looking to buy from I mean or are you or is it hospitals monetizing assets or is it just private landlords.
I guess trying to just get a flavor for whether we might see some more hospital monetizations here, whether people are reallocating capital somehow or again, yes versus just private private sellers looking to capitalize on the the cap rates that are out there and we allocate someplace else within their portfolios.
Yeah, I mean, I think Thats right I think it's primarily private private building owners.
They are looking to sell that you know, we've we've talked to over the years about hospital monetizations and waited for the the way become but we're just not we're just not seeing that.
We had the mercy.
Assets that we sold out with hospital that the purchase those last quarter I think there's been.
Another instance, I saw recently were hospital purchased some building so I don't I don't view them as is the large source of product now or in the near term.
Okay.
And then just going back to the Dion versus adjacent question do you see any.
Animal difference in occupancy or rate growth.
Between on campus and is adjacent property I'm, just trying to understand that if you I.
I know it might be an incremental shift, but if you shift at all to adjacent.
To the fundamentals of your growth rate.
Increases change at all.
No I would say you know I think Chris alluded to this we really see a very common pattern between on an adjacent yeah. There. There are some differences you know one thing we tend to see on campus and this is a good thing, but oftentimes you have a strong anchor occupancy not one lease, but a lot of leases with a hospital.
And they often times have a right to take or meet terms of third party leases as those come up whether it's a new lease or a renewal and so a lot of times. These hospitals will backfill or just take space as it becomes available and that's that's great for us but at the same time, you're losing a provider a third party provider that wants to be around that campus. So that's it.
Benefit we see with the Jason is that you get that synergy of Hey, we can own the building across the street and if we have multiple buildings, we can capture that tenant as they look to continue to be around that campus. So that's that's certainly a benefit we see in so we kind of see again, just you know slightly different behaviors, but very similar operating trends in.
Occupancy retention leasing spreads all those those metrics look very similar.
And these are few simple right.
Yeah, Hi, Graham will you start yeah, almost always you would see that be feasible.
Okay. That's.
Okay. Thank you very much.
Thanks, Dan.
The next question comes from on it on the Tiotwo Okusanya with Mizuho.
Please go ahead.
Hi, Yes. Good morning, you are actually the good afternoon, congrats on the solid quarter.
It looks like Youre kind of 21 and near term outlook is pretty solid as it pertains to external growth internal growth.
As well on of course potential dividend growth. So the question I have for the team is.
At this point, what kind of still keeps you worried or up at night is just kind of given you know there's a lot of positive indicators at this point.
Earnings outlook.
Sure you know one one thing that I think thats any touched on you know some of these things we cant none of us can control right, but it's these external factors and some of that is just at the capital markets, but you know that's that seems to be settling down positive right now and I think clearly the political environment and it's not.
There were particularly bad outcomes on the horizon in any of these outcomes. It was just that uncertainty lack of visibility those were some of the things that I think have been hanging on the capital markets, but also hanging over the health care world as well and I think now that we have this sort of insight that it probably is going to be a mix outcome. I think is bethany articulated it looks like.
It should be a much more pain.
Pain less volatile environment for at least two years, if not longer so I think theres, a pretty nice sigh of relief on everybody's part that you know, maybe we'll see a little less change here and and people can continue to get on with you know focusing on their business and growing and frankly recovering from coated I think.
It's still present, some uncertainty, but I think everybody feels more confident today than we did several months ago and and I think all those things combined give us that confidence on top of really just organically. What we're doing as you said the portfolio plus a really great amount of traction on building the pipeline for acquisitions and seeing that ability to keep it.
So were we are very optimistic about 21.
Okay. That's helpful. And then just you could indulge me if we go down do you see a rabbit hole for that a bit.
[laughter] Sandoz's Yume you know ends up lets go to screw it as kind of said it's unconstitutional the whole thing kind of get scrapped.
How do you guys think about what the potential impact could be to hospitals and hospital systems, which again are you a major client base.
Sure I think obviously you know this.
Suggested it it is a rabbit hole, it's speculation as Bethany kind of described in her remarks, we really do feel very confident that it will be determined as separable. There's just a lot of precedent on that obviously.
Obviously, we could be wrong, you know you never know where it could go.
Maybe back to the benefit of the split outcome between the administration and Congress.
Congress and the Senate and House I think you hopefully what that leads to is a more productive environment that says we have to get some things done that may show up in the form of the stimulus Bill It could show up in in the form of something that would sort of step in if that were to happen. If the FDA were struck down I think you would see a key.
Quick efforts you know from the administration, if its biden, obviously from the house, but even the Senate to say, we've got to do something to cover these lives and.
And sure that up so I, just think that it's so unlikely that it's probably not worth a whole lot of time on it but I don't even think that to a draconian outcome.
Gotcha, Okay. Thank you.
Thanks Sam.
The final question is there a tan with JP Morgan. Please go ahead.
Hi, good morning <unk>.
Just one question on my end.
I noticed that you know a quick question on I mean your own among other.
Great.
Clinician easy getting to that.
Hi, Yeah, it's I would say, it's really a tale is a is a story of the tails. A this quarter. So we did have a bit more that were on the negative but we also had a bit more that were on the positive.
So they kind of balance each other out and back to the performance that you've seen from us.
On the on the left tail there on the negative we did have one property that had a an.
An unusual renewal some unusual renewal option language that was a bit more favorable for the tenant which drove the higher proportion of that negative spread excluding that one property. You would have had 10% of the spreads would have been a would've been negative which is pretty consistent with our historical range in.
And what we have described this as a reasonable long term.
Expectation on that end, but as I mentioned that the good news is that.
We also had 31% that were greater than four this quarter. So so they did a bit cancel cancel each other out so.
I would say an anomaly and.
Not something that we would expect.
Long term and still very pleased with the with.
With the overall performance.
Okay.
Thanks Sarah.
This concludes our question and answer session I would like to turn the conference back over to Todd Meredith for any closing remarks.
Thank you Debbie we appreciate everybody tuning in this morning, and showing your interest and your questions and we will be available today for follow up or where any time and we look forward to virtually meeting a lot of you and they read everybody have a great day take care.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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