Q3 2020 Healthcare Trust Of America Inc Earnings Call
Good day and welcome to the Healthcare Trust of America third quarter 2020 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After todays presentation, there will be an opportunity to ask questions to ask a quite.
And you May Press Star then one on a touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded.
I would like now to turn the conference over to Scott Peterson. Please go ahead.
Thank you and welcome to healthcare Trust of America's third quarter 2020 earnings call, We filed our earnings release and our financial supplement yesterday after the close.
And it can be found on the Investor Relations section of our website or with the FCC receptor.
Please note this call is being webcast and will be available for replay for the next 90 days well be happy to take your questions at the conclusion of our prepared remarks.
During the course of the call we will make forward looking statements.
These forward looking statements are based on the current beliefs of management and information currently available to us our actual results will be affected by known and unknown risks trends uncertainties and factors that are beyond our control worked all he predict.
Although we believe that our assumptions are reasonable they are not guarantees of future performance. Therefore, our actual future results could materially differ from our current expectations.
Do you feel the script on potential risks please refer to <unk> SEC filings, which can be found in the Investor Relations section of our web site <unk>.
I will turn the call over to Scott Petersen, Chairman and CEO of Healthcare Trust of America Scott.
Thank you good morning, and thank you for joining us today for Health Care Trust as America's third quarter 2020 earnings Conference call. Joining me on the call today is Robert Milligan, Our Chief Financial Officer.
As we sit here today and its difficult business, social and economic environment. It continues to be impacted by COVID-19, I'm happy to report that H.T.A. <unk>.
I've been able to continue to improve our enterprise and deliver strong financial performance for shareholders.
The third quarter, we achieved record very strong cash flow.
Hi retention.
And rental growth rate.
Investment grade balance sheet.
Cash liquidity positions 80 acre 2021 and for the coming years.
This level of performance and insight into our business gave us the confidence to raise our dividend for the seventh consecutive year and has resulted in H.T. a dividend growing more than 11% that's 2014.
This continues to demonstrate the consistency and strong performance of our company and the strength of our underlying business model.
I would like to take a moment. Thank our 300 plus employees dedication patients in focus has allowed H.T.H. performance, it's hard to know with such strong financial results and performance in our asset management and leasing platforms.
Your reference work in the field and in our remote work environment during the last eight months ago.
Has allowed each day to keep our buildings open.
And operational for our candidates and their patients.
In many aspects training H.T.A. into a more cost effective company.
As I've said before I believe the medical office sector. It's one of the best areas, the real state in which to invest.
We are fortunate that our real estate is core critical to the delivery of health care.
Where demand is resilient and will continue to grow regardless of market environment political climate.
It also provides us with strong credit tenants, including leading healthcare systems.
And physician groups.
From a healthcare perspective, the performance of outpatient providers continues to rebound from the low sales marketing in many cases bargains are even higher in pre cobot, that's providers work from backlog to care that was deferred in the second quarter.
Although the pandemic continue were up in certain markets.
The majority of providers are much better prepared for their environment and they were just 60 to 90 days ago.
Well, there certainly cautious concerning the order months ahead we.
We have seen most of our kinda back to refocus our care delivery with the concentration of efficiency and convenience for patients.
[laughter] H.D.A., that's been a very strong position we have the best in class operating team that is running a high quality portfolio Medical office buildings are located in key markets throughout the United States.
Our portfolio is bought it over 7 billion invested.
It's over 25 million square feet.
We're also investing in a strong mix of property locations on campus.
The street from campus and a core community locations.
Its best reflects the trends in health care and have recently been accelerate mainly.
Namely the move of care to locations that are close to the patients more convenient and better able to accommodate increasing levels of care that is shifting to the medical office building.
Recent review of market data and patient surveys continues to support our investment thesis.
Investments in both on campus and community core location, well produced a strong rent growth and high levels of retention over.
Over the next decade.
Our portfolio is also diversified geographically, but no one market accounting for more than 10% of rent and no single tenant accounted for more than 4.2%.
Our tenants consist primarily of leading healthcare providers in our markets.
It's almost 75% of our rent coming from health systems universities, and large national health care from [noise].
60% have already come from credit rated channel.
Our operations in building continued to be run with personnel on the ground in our key markets. While we have certainly taken steps to protect our employee and buildings. During this time, we have maintained the local presence that keeps our kinda talk reading and able to work with us to achieve the best possible outcomes as a result of this position.
We saw our operating performance not only return to more normal levels in quarter. Three we also achieved record high in earnings both normalized FFO per share.
80, but also on total leasing and every country and tenant releasing spreads.
Our cash collections in the period and made strong with total cash receipt exceeding our rents still [laughter].
Included over 99% collected or deferred on our third quarter period charters and additional rents paid towards balances they were past due at 630.
We have ended up deferring $11 million in revenue year to date.
The majority of those starting to give money paid in September we.
We have collected over 30% of the rents deferred out to the end of September without any push for collection on our side.
Our leasing remains active with over one point million square feet of leases signed in the period, it's about 2.4% of our total portfolio and Arbitron and our tenant retention was strong at almost 90%.
Further our renewal rates on this level of leasing was a record for HTS and over 7%. Oh. This did include two larger leases that we rolled up over 10% the remainder of our portfolio still moved up almost 3% consistent with our trends over the last six quarters.
For the year, we have now entered into 3.3 million square feet of leases or 13% of our total portfolio with releasing spread that over 5%.
It's a great what should on the quality of our assets and a critical location.
Health care provider cats.
On the development side, we completed the first development, we took from start to finish completing our 125000 square foot Carrie and we'll be awake meds carry campus in Raleigh, North Carolina.
Our remaining three projects continue on track with additional delivery in quarter, one to quarter three of 2021.
Our balance sheet continues to be extremely with leverage of 5.1 times debt to EBITDA 1.5 billion of liquidity and most almost no debt maturities coming due in the next three years.
Our acquisition activity remain quite in the period clothing on just one of them will be in Salt Lake City. However, we're seeing more opportunities that meet our criteria.
Things to pick up as we head into 2021.
While the overall environment remains challenging H.D. I guess continued to execute living.
Delivering record financial performance in the third quarter, while also taking action to position us for continued growth into 2021.
I will now turn the call over to walk discuss our operational performance in greater detail.
Thanks, Scott from an operational perspective, 2020 is certainly presented new challenges for our company. However, we have met them head on and believe that our teams have done a tremendous job adapting and balancing property performance with safety for tenants vendors and T.
Rob this entire period, our teams have continued to service or tenants in our buildings, keeping an open and operational for health care providers and you just need or patients. This.
This has been critical as we've seen the majority of our tenant major flows returned to near Grieco bid levels.
As Scott mentioned in the third quarter, we effectively collected all of our rent our total cash collected exceeded our charters and total well collection of contractually due third quarter rents was over 99%.
Tobey its continued this trend Brenda.
And deferrals were limited to 2% of rent within the period with almost all of those being agreed to in the second.
Even though these deferrals began in September and will continue over the next six to 12 months to.
To date, we have collected more than one third of total deferrals well ahead of schedule.
On the leasing front, our total leasing remains strong at over 1.1 million square feet of leases signed within the period, releasing spreads increased a strong 7.4% and tenant retention of the same property portfolio was 89% by G.L.A. for the third quarter.
Importantly, this level of renewals did not include any of the early renewals that we specifically targeted in the second quarter during the death of the initial shutdowns.
Our new leasing is consistent with what we're seeing in 2019, signing over 155000 square feet of new leases.
Overall leasing orders have increased nearly 50% over the second quarter and new leasing volumes have begun to normalize although still below our expectations at the beginning of the year. This trend is encouraging as we get into yearend and the started 2021.
All of this has allowed us to continue to see steady levels of warm or.
Our cash NOI growth during the period was 2.5% excluding the impact of the free rent from our second quarter early renewals when factoring. Those then we were still positive at 0.5%.
As mentioned previously our early renewal free rent burn off in Q3, and we would expect our fourth quarter same store NOI growth to return to our historical levels of 2% to 3%.
From an earnings perspective, our normalized AFFO for the period was a record high for each year at 43 cents per share up both year over year and sequentially.
With this quarter our year to date earnings are now up almost 5% versus the prior year.
Our only normalizing item in the period was the add back of the $27.7 million charge related to the early retirement of debt that accompanied our new bond issuance.
Our bad debt charges were limited during the quarter and totaled much less than the 0.5% of revenue normal levels that we anticipate to see going forward.
Our recurring Capex for the quarter was $11.8 million, which was less than 10% of in Hawaii.
As a result, our normalized EPS would be for the period was also a record at $82 million as recurring capital expenditures came in.
Below the 10% threshold.
As a result of this and our outlook going into 2021, our board elected to increase our dividends of 32 cents effective in October Scott mentioned this is the seventh year in a row, we have increased our dividend a hallmark of cash flow growth in proportion performance that sets us apart from our peers not just within the health care REIT space within the I hope you be peer set as well.
To us this is the true indicator of quality quality and performance.
She perspective, we continue to take steps to position ourselves for the future like extending maturities, increasing liquidity and lower interest cost.
And this quarter, we raised $800 million of senior unsecured notes at a coupon of just 2%.
We used the proceeds to repay our revolver repair $300 million notes due 2023.
These cash, which we can use for investment purposes.
Simultaneously pushes out our nearest bond maturity out to 2026, while also lowering our average interest cost by almost 20 basis points.
Our leverage remains strong.
5.1 times when incorporating the 270.
Others, we haven't forward equity.
Between the $200 million of cash on the balance sheet and our forward equity we have almost $500 million of dry powder, excluding our revolver that was raised at long term cost of capital in the mid to high 4% range, including our revolver, we have approximately one and a half billion dollars of total liquid this.
This capital will allow us to invest very accretively as we return to the acquisition market.
The primary use of this capital within the quarter was to finance the continued progress on our development pipeline.
This was highlighted by the completion of our class a medical office building and Cary North Carolina is building a 70% leased a completion and is a great asset and a great market with a great health system partner.
That's ever be replaced older class B and movies that we had onsite incremental costs of $44 million on which we expect to achieve yields of over 7.5% upon police up they.
Including the cost of our older movies that we took down our stabilized yield will come in closer to 6.5 to seven.
Our remaining automobiles continued to be on track to be delivered between the first quarter in the third quarter of next year with incremental investments of approximately $100 million.
We have remained quite on the acquisition front. However, our pipeline is building and we have the capital raise to make her investments very accretive as we move into 2021.
As we continue to operate our business and are trying to make an investment we will finance our <unk> business in a manner that maintains low leverage and cigna.
Liquidity.
Finally, we intend to issue full earnings guidance for 2021, when we report our fourth quarter earnings in February well.
While we did not formally reinstate guidance for 2020, I can say that we anticipate our earnings for fourth quarter look very consistent with what we've been able to perform in the third quarter, along with our same store growth coming back to our historical levels would be the 3% as the free rent associated with the early renewals will not continue [laughter].
That I will now turn it back to school.
Thank you Robert and I will open it up for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then too.
Please limit your inquiries to one question and one follow up so that everyone may have an opportunity to ask a question.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Nick Joseph with Citi. Please go ahead.
Thanks, I was hoping you could provide additional color on the acquisition pipeline today. Both in terms of this size and also the timing of any execution and what sort of yields you're targeting.
[noise] Oh, you know, we we we have a pipeline that I think is very interesting we're starting to see.
What we've seen in the past, which is you know opportunities in our markets.
I think that's the primary thing that H.T. a bit about certainly for the last five or six or seven years Bill.
Building, a size and depth in markets and we're seeing opportunities and more importantly, we're seeing opportunities, though as we due diligence we feel comfortable with the dynamics regarding the asset one of our feelings is that there is going to be somewhat of a.
Moderate shift potentially how health care systems and physicians use their their.
Their space and so we want to make sure that there's not only.
Buying assets that are occupied today, but you know that we have opportunities to see expansion from the primary tenants in there in the building and also the ability to see that rents move up as they expire as leases term out so we're going to see more activity.
As we move through the end of this year and and frankly, we expect to be able to be back to where we thought we were in beginning of 2020, where we felt that we had a great opportunity to use our balance sheet for acquisitions and for accretive growth.
Thanks, So if you think about it from a dollar volume perspective.
Does the pipeline look like over the next 12 months.
[noise], Yeah, I go back to where we are.
I think that we're seeing ourselves as we get into 2021 back to the opportunities and back to the underlying fundamentals that we find attractive back to those numbers that we were seeing and beginning of 2020. We we were hoping as we move through 2020 that we would build on the acquisitions that we did in 2019 as you.
I mentioned, we thought.
Somewhere between 400, and 500 million with something that we felt very comfortable with so that's how we are looking at 2021 s. as would be expected.
Thank you.
Our next question comes from Juan Sanabria with Bank of Montreal. Please go ahead.
Hi, Thanks for the time.
Just wanted to follow up on Nick's question with regards to cap rate.
Have you seen any compression in yields for the assets retirement, even for high quality assets in general given how stable. They perform their work base rates have gone or or do you think cap rates have kind of held for sale or flat.
Flat from current corporate levels.
Well I think initially now or not.
Let's say, we're still initially in that period, but cap rates and medical office is performed extremely well.
Given the uncertainty even today you know the next three six months 12 months I think applebee's continue to perform outperform other asset classes in the real estate side. So cap rates have stayed consistent and.
So I would expect them to stay about where they were I think that that's what we're expecting and we're okay with that because I think that we can get the yield with our asset management program utilization, how we bring assets into our.
Into our portfolio, we can get that 25 to 50 basis points. In addition, like we've always done so we're very comfortable with where we see the cap rates right now and we're also comfortable with the opportunities that we're seeing in our in our markets. Many of those by the way or you're seeing more off market transactions than we would have seen.
In 12 or 24 months ago sellers.
Sellers are are are being pretty particular in some cases about.
Who they're talking to and wanting to ensure that they get a transaction closes.
And in a way that they're familiar with with getting closings.
Thanks, and just one follow Scott I think you mentioned in your prepared remarks you.
You're looking at and pretty acquisition pipeline.
Currently used to this space and the ability to expand.
Just as a result of Covidien you see.
See how spaces use changing whether that be more stages per per position.
Or maybe a negative or positive effect just curious on your thoughts on tele health.
And.
Just the the opposite of the Corona virus and other means for medical offices.
Well I think I'll take you got three questions there and I think the Tele health. This is positive for the space, we have a society and generally a population that is under serviced from a healthcare perspective, we've always had that.
And that continues and so the more opportunity for physicians or health care systems to reach out and make it more efficient.
More effective for people to see their doctors I think that that improves the likelihood that that they come into the MLP and that or they come in to see that that health care system more often second we're seeing expansion I mean, if you looked at our renewal I think that is the one thing that I'll just outstanding how we had.
Lease spreads that were extremely positive, but we renewed a lot of space.
And we did it with health care systems, we did it with large physician groups. We had expansion where we were surprised that folks were taking more space and we've worked very hard.
On relationships with the major tenants in our portfolio and I think it's paid off I think that's a huge complement to Amanda Houghton and the leasing team and it's a huge compliment to our property managers and the engineers, who during that eight nine months was one search reached out to tenants made them feel comfortable we kept our buildings open and so.
That infrastructure that we have really paid off at a difficult time that I think this third quarter results has.
He has hit on all cylinders. So we like we like good tenets, we like tenants with credit we like large physician groups and we'd like to be a little common to accommodate them when they expand and I do think there'll be some changes in the use of space.
Maybe less administration.
Minutes traded space I think there will be some folks that good continued their work from home environment. So what we're looking for it's not administrative space in a medical office building, we're looking for space with physicians healthcare systems that you know that C patients on a daily basis that keeps the work flow and keep pace.
Record smoking.
Thank you very much.
Our next question comes from Rich Anderson with S.M.D.C. Please go ahead, hey, thanks, Good morning out there so I'm Robert <unk>, what was the the the nature of this of the the early renewal and the free rent was there something outlier.
Rush about that.
And why wouldn't that be a sort of a recurring theme. Some you know elsewhere in your portfolio from time to time, when you're when you're Oh sort of lock somebody down with a free rent.
Yeah, No I appreciate that rich and I think this early renewal was everything that we talked about in the second quarter were in kind of the early days of the coven and that make you know as as we were looking at the best way for us to approach working with our health system tenants.
One of the ideas that we came up with certainly a if there is a win win opportunity. That's out there were you know health system. That's uncertain certainly up in the northeast you know we have the ability to extend leases and give them free rent, we view that as really a a kind of a win win situation for both of us. So.
Yeah, we've got about half a million square feet in the second quarter as we talked about that.
It was really spread free rent million two in the second quarter and $2.4 million in the third quarter again, those half a million square feet.
Early renewals, thanks, 83% with health systems, and it really allowed us to lock in net effective rates I worry about 18% higher than the rest of the words are doing drilling. So so we moved forward with that.
I think from a normalization period I think it's really just a abnormal because it falls out of our normal routine where we look to renew leases with.
With our tenants six to 12 months upon before expiration. So this really just fell outside of that it was in direct response to how we want to build was coping with our with our health systems.
Something that really just stop to the second quarter.
Okay. So so no recurrence really effective going forward at this point no not not from an outsized.
So to deal with us the health systems or anything like that Okay, and then you know Richard.
Let me just answer I think your question refers to you know same store growth.
Are you seeing even without the free rent that we went out and worked with our health care systems.
Which has showed such strong results here in the third third quarter.
We don't see that unusual need going forward, we'll be back to that 2% to 3% same store growth on that I think a very consistent basis.
As we've done over the years yeah.
Yeah, I'm not so worried about the optics of same store as much as you know is it the bottom line number that you're producing from an earnings perspective, but I appreciate that and help with the modeling perspective, another kind of modeling question.
Again back perhaps to Robert what are the timing.
On the forward take down.
[noise] well so so the chime in on the core it takes you back.
Been able to work with our banks that we initially did the trades with two to get some flexibility so.
I think we've got the flexibility now to take our forward equity down through June Thirtyth of 2021.
And so our change in pension will be to really balance it out as as we look to close on acquisitions.
As we close deals will take the equity to make sure leverage still stays within our typical range of five to six times.
Hi, John.
Great. That's all I have thanks.
Our next question comes from Conor suffer ski with Baron Burke. Please go ahead.
Hey, everybody. Thanks for having me on the call.
So on the Raleigh projects, we weren't getting the finish line. So I'm just wondering any any sort of color related to the lease up of the rest of the available space. There and then what the kind of appetite there is in the Raleigh market for for MLP space at the moment.
Go ahead, Robert Yes, you know I I think as we look at all the markets that were currently invested in.
Going into pre co. Good I think we looked at many of the markets in the southeast is really top targets for us when you've got the combination of a strong population growth.
Really strong.
Amit gross really driven by in migration as well as kind of growing areas around that makes universities I think thats really been strengthened during the whole kind of covert pandemic I think if you look at where people continue to want to new throughout this Raleigh Durham is going to continue to be a very strong market.
Or kind of in migration that so yes, as we looked at the opportunity here. This is a market that continues to grow continues to expand our experience in Raleigh has essentially been anything we have freed.
Can we can fill typically within six to 12 months. So we were seeing a lot of activity now now that we are able to deliver it really now that we're kind of through the initial shock so to speak of.
The pandemic, we're seeing pretty good pretty good leasing traction there now.
All right. Thanks for that and then you know after after completing this project going through the process I mean, what's the appetite on your end to engage in further development opportunities and maybe build to suit projects along the way.
Well you know we have always felt that this was a great opportunity for us to go from beginning to end.
Have a great relationship like Mad and where do you know we've got our Uh huh.
Project, calling it Forest Park, and we're seeing some opportunities where frankly, you're going to pursue from the development.
No. So we're excited about it and frankly I think 2021.
More much more active year for us as we initially.
Initially get started on some things that we're looking at now.
Okay, Great. That's all for me. Thank you.
Yes.
Our next question comes from Todd Stender with Wells Fargo. Please go ahead.
Hi, Thanks, just getting back to the same strategy.
If you're going to return to you maybe the high end of year, 2% to 3% range.
What do you think gets you there when I look at rent coverage for the movies, certainly well above all other healthcare property types. So is it a matter of pushing rate more what do you think gets you back to that high.
Well I think it's a combination.
The synergy within the asset.
Are we talking hasn't been question, yet, but you know some of the materials that you've seen and read about here recently show that certainly the community core locations seeing strong.
Strong rent growth seen strong occupancy as Robert.
Just mentioned Theres migration to certain locations, it's health care system see them see that need to be able to access the demographics within location. So you know I think it goes back to assets.
Everybody talked about having a high quality portfolio.
Unfortunately no.
Not every asset high quality and we think we have great markets I think that we're seeing the benefit of a lot of hard work. We've done the last couple of years and I think we're going to move you know I think our leasing team has their relationships than we ever demand for that space is there. So we feel pretty good about the higher end or the mid to higher end to the 3% but weve.
Always been down that path and I don't see anything that it probably gets rough static at this particular time.
Thanks, Scott and maybe just kind of staying on that theme when you look at your lease renewals.
The releasing spreads have been very strong, but it doesn't seem like you had to spend the tea ice to get there maybe just kind of comment on how recent lease negotiations.
Hi, Robert I'll, let you handle that.
Yeah.
Todd I think it's been really an interesting year as we've come into that I think as we've looked at our total leasing that we've been able to accomplish we have completed over 3.3 million square feet or at least more than 13% of our portfolio. This year and if you look at the releasing spreads across all of that we're still up more.
5%, So I think it's really been kind of broad.
As as we've looked at it's been across multiple assets.
All markets I think it's been really a combination of both on campus and off campus.
I think as we've looked at the different performance, we functionally hasn't seen a real difference between the on and on and off campus.
With formats, there, but I think as we continue to look at the T.I.s I think there's certainly been a little bit more of a shift this year, how do you how do you think.
Ladies.
How do they stand for longer how do they modernize this space. So just a function of doing.
More renewals, we've been able to keep our T.I.s in check and that's certainly something that we remain very disciplined as we look at all of our different deals.
Thank you.
[laughter].
Our next question comes from Daniel Bernstein with capital one. Please go ahead.
Well actually my question was on the Ti and leasing as well.
So I'll just quickly ask have you seen any difference in the makeup of buyers and sellers within your MLP space given the how how well the fundamentals have held up.
I'm really just trying to gauge.
Well, there's new competition out there for assets.
When I think about the long term prospects for you to buy assets.
I think theres still the same.
Non public buyers out there I do think that if they have not gone away. The bad capital. They continue to look for you know strong yielding longer term type of returns.
They can get in the MLP side, we've seen a little bit a pullback from from some of the public players, which you would expect you know that they are dealing with other issues and so forth and in some cases are are selling your hobbies. So it's a pretty good environment.
Yeah, if you look at the environment, a year and a half two years ago the environment today.
It's a pretty nice time to be looking for medical office and as we've mentioned, we've got strong relationships within our markets and that's that you know I think pay off just like the renewals that we.
Articulated on the third quarter, He's got paid off so we're pretty positive about our opportunities a piece of the competition.
Okay. That's all I had thank you.
Our next question comes from Ono Tayo Okusanya with Mizuho. Please go ahead.
Oh, yes, good morning, everyone.
Quick question, I mean, with cold cases rising hospitalization.
Just kind of curious what you're hearing from hospital systems that the former.
In regards to kind of a suite of coal that is there any way that they thought they put up elections. So I mean like what is generally the hospitals thinking.
After planned assessment they were hospitalized.
Right.
Well, we haven't gotten much feedback we as Ive mentioned weve seen some activity in our leasing a probably a little more activity than we did last quarter, which is good.
The teams that health care systems are moving forward on some expansion in they had put some leases on hold.
Moving from the second to third quarter, we think we see opportunities in that.
You know I think health care systems put themselves in a much better place in order to handle that handle the process that goes on so we haven't had any.
What we would call disruption in any of our major markets or any of the health care system relationships that have come to our attention.
Thank you.
Our next question comes from Lukas Hartwich with Green Street Advisors. Please go ahead.
Hi, Good morning, I'm, just looking at a public market enterprise is for for medical office.
And that data.
15% to 20% retail level and.
Yes, private market values don't seem to have moved as much when you talk about to operate there earlier and how they haven't moved all that much.
I'm just curious what do you think's driving that that gap.
Oh.
Robert you want to give that.
Look as I think that's I think that's the real question, though we have certainly for you guys and other investors because I think but certainly as we look across the private market I think medical office is really has been a real standout as far as performance certainly grant collections have been high.
Leases continue to get signed not just for short term, but for long term.
And the demand is increasing as you look at those characteristics or know how.
Our underlying fundamentals look for the next you know.
Not just 12 months and certainly for the next three to five years and so I think that there is certainly a disconnect that is really can only be explained probably just like more of a short term focused of trading between asset versus really the long term.
Transit value of the assets that we certainly.
Yes.
That's helpful. And then a quick follow up for you on the clinical development.
But talk about that.
Well you know it looks I think we wanted to make clear this was a little bit of a different type of a development because it was really a redevelopment, where we had 40000 square feet of existing class B visa.
On the site in our supplement we have about $45 million as incremental construction cost to complete their frankly excludes the existing kind of land cost that we had embedded in that so just to provide greater clarity on the Hawaii, we expect to generate off that we do expect the yield.
On the incremental constructed to be in the 7.5 to eight range. One boy fully we upped, whereas you know really our previous guidance of being in the mid Sixs incorporated the existing buildings that we ended up small.
Got it thank you.
As a reminder, if you have a question. Please press Star then one to be joined to the question queue. Our next question comes from Mike Muller with JP Morgan. Please go ahead.
Yes, Hi couple couple of questions. One have your views evolved at all in terms of on campus adjacent versus off campus.
I'm, sorry could you repeat that.
Yeah, and the views the preferences towards being on campus has that altered changed at all to shift more of.
Being more comfortable away from the campus.
Well I you know I think our philosophy has been all along that there is a underserved. It's frankly, a medic walk I think that back to my earlier question I think that the demand for medical office than increase I think the cobot experience is going to bring them bring about many complications from.
From a health perspective, meaning that there will be more need for additions more need to see.
Specialists or just generally being wanting to be in better health. So I do think that thats going to generate that along with the application of Tele health is going to generate more need for medical office now I think what you're seeing and what we've talked about for three or four or five years is that there's a flattening in the United States.
From our medical office.
Where where it's going to be served hi, it's very expensive and it's very congested in most high quality on campus locations healthcare systems want to make it is functionally efficient and and physician groups, who want to be as close to their their demographics. They can be so we always like community core it's showing it.
Results I think you've seen the largest.
Compression of cap rates community core locations and you've seen some extremely strong synergies from.
Both same store rent, but also from rent spreads in those locations. So we like our blend where the large very large owner largest owner on campus and.
We need to be very selective.
Where those campuses are just to selective where those assets are that in community core we like to blend and we'll continue to invest accordingly.
Got it Okay and then just you know if you're looking out three to five years or so what do you. What do you think the average annual development spend you'll be able to.
Achieve is.
We we've always guided or we've always thought internally and talked externally about you know.
Company our size, we continue to manage our balance sheet the way that we've always done.
We liked that 200 to 300 million here thats something that would be very consistent it would be very accretive to our earnings it would be something that investors could get comfortable with on the on the other side of the equation. It's also a place where we can make sure that from a from a.
Safety perspective, we don't put ourselves too far out faster than anything because what's really showing us here in the last eight months is that regardless of how good things can be and in the economy or or how people look at and advance there's always something unexpected that comes along and it had drastically impacts the companys ability to move.
We've been fortunate while we don't think our share price is necessary.
Appreciate it where it should be we've had a very strong performance, but more importantly is that we continue to collect rents our occupancy solid our leasing is good and we've been able to continue to protect our enterprise value. So we want to be cautious, but you'll see us be very consistent as we happen going forward both acquisitions.
And on development.
Got it okay. Thank you.
[noise] there are no further questions. So this concludes our question and answer session I'd like to turn the conference back over to Scott Peters for any closing remarks.
I, thank everybody for joining us on todays call. We very much appreciate the questions and the feedback and we look forward to see many of you and other investors at any rate virtual conference. That's coming up later this month. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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