Q4 2020 Physicians Realty Trust Earnings Call

[music].

Greetings and welcome to the Physicians Realty Trust fourth quarter 2020, and year end earnings conference call. At this time, all participants are in a listen only mode.

And the answer session will follow the formal presentation, if anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded I would now like to turn the conference over to your host Brad page.

Thank you.

Morning, and welcome to the Physicians Realty Trust fourth quarter 2020 earnings conference call and webcast.

Joining me today are John Thomas Chief Executive Officer, Jeff Theiler, Chief Financial Officer.

Taylor Chief Investment Officer, Mark sign Executive Vice President asset management, John Lucey, Chief accounting and administrative officer.

Laurie Becker senior Vice President Controller, and Klein, Deputy Chief Investment Officer, and Amy Hall, Senior Vice President leasing and physician strategy.

During this call John Thomas will provide a summary of the company's activities and performance for the fourth quarter of 2020 and year to date as well as our strategic focus for 2021.

Jeff Theiler will review our financial results for the fourth quarter of 2020.

Mark final provide a summary of our operations for the fourth quarter of 'twenty, one following that well open the call for questions.

Today's call will contain forward looking statements as defined by the private Securities Litigation Reform Act of $19 95.

Based on the current belief from management and information currently available to us.

The results will be affected by known and unknown risks trends uncertainties and factors that are beyond our control or ability to predict.

Although we believe our assumptions are reasonable our forward looking statements are not guarantees of future performance and our actual results could differ materially from our current expectations and those anticipated or implied in such forward looking statements.

For a more detailed description of potential risks and other important factors that could cause actual results to differ from those contained in any forward looking statements.

Please refer to our filings with the Securities and Exchange Commission.

With that I would now like to turn the call over to the company's CEO John Thomas John.

Thank you Brad and thank you for joining us this morning.

Before we discuss 'twenty 'twenty in the fourth quarter, we want to commend our team in Texas.

It has answered the call to keep our buildings open and operating during last weeks historic winter weather.

We had four buildings with frozen pipes and water damage and we've been working around the clock to get the buildings back in operation.

As of this morning, three of those buildings are operational with tenants actively using their leased space.

We anticipate the final small building not yet open to be opened within the week.

All of our buildings are insured for events like this and they deductible cost will be ultimately recoverable from the tenants.

With all of his challenges Twenty-twenty turned out to be a very successful year for physicians Realty Trust from.

From the onset of the pandemic through December 31st 2020, we collected cash equal to over 90% of all rent and other charges due from our tenants, culminating in the collection of 99.6% rent due in the fourth quarter.

The single deferral granted during the year, representing about 0.5 per cent of total billings since April is didn't payback and it's being paid timely by that tenant.

We ended the year with the lowest outstanding accounts receivable balance we've ever had as a percentage of revenue and an occupancy rate of 96% the highest of all public owners of medical office facilities.

Our portfolio's resiliency is directly attributable to our focus on the clinical and financial quality of our health care provider tenants with more than 61 per cent of our rentable square feet leased directly to investment grade quality tenants.

We also believe our pure play focus strategy on medical office facilities with a balance between the off campus and on campus locations was instrumental to our success and critical to the success of our providers.

As COVID-19 swapped hospitals across the country.

It is located in our medical office facilities, especially those off the campus of a hospital remained open and available to care for non COVID-19 patients.

Well the equity market was volatile we ended the year with the best total shareholder return of any public REIT with a significant medical office portfolio.

With that said, our total shareholder returns, including dividends were flat for the year and that is always disappointing.

We've worked hard since the formation of our company in 2013 to build an enterprise and portfolio resistant to economic weakness and the events of 'twenty 'twenty stress tested our team and asset there.

The portfolio performed frankly as expected, but not without meaningful time and attention from our property management teams and the excellent work of our hospital and physician partners.

Nevertheless, we continue to focus on delivering reliable growing cash flow to our investors to drive exceptional shareholder returns.

Accretive acquisitions are a key component of this growth and we're excited about the investments made during the fourth quarter.

For the fourth quarter <unk> completed $208 million of investments. These investments include four off campus properties anchored by investment grade health systems, expanding our relationship with Hartford Health care, and the Ohio State Wexner Medical Center.

And establishing a new relationship with Lehigh Valley Health network.

As expected, we also executed our option to purchase the brand new Sacred Heart Summit M O B and ambulatory surgery Center in Pensacola, Florida that was developed with docs participation in the form of page $29 million construction loan.

For the full year, we completed 275 million of new investments at an average first year yield of 6.5 per cent.

In addition, we announced the formation of a new joint venture with the Davis group.

Who we have partnered with us since 2014, the strategic venture currently includes eight assets and will focus on the acquisition of both new and value add assets that will source that we will source and manage together with Mark Davis and his team in Minneapolis St. Paul.

We're excited to add a strategic option to our investment platform that will provide more opportunities to deliver value to our shareholders.

Finally, our investments included the funding of a $54 million portfolio of mezzanine loans with landmark health care facilities as part of a recapitalization of their ownership and nine medical office buildings.

These facilities are primarily leased to an anchored by leading nonprofit health care systems in nine markets totaling 1.1 million square feet and a 94% occupied.

73 per cent of the rentable space in these buildings is leased to investment grade tenants.

Our loans include rights of first offer rights and other features which we expect to lead to future investment opportunities with landmark.

As we enter a new government, we expect the Biden Harris administration to pursue the expansion of Medicaid coverage in states that have not already done so.

We believe the policies of this administration will accelerate the move of care out of the inpatient setting.

Expand telehealth coverage and incentivize hospitals and physicians to bend the cost curve, while caring for more people.

Our investment philosophy as anticipated these trends and we believe our portfolio is well positioned to benefit of specialty care moves away from the hospital and to be more efficient outpatient setting.

While Doc itself receive no direct government assistance during the pandemic, our tenants obtained more than $7 billion in various forms of cares Act support P. P P loans and CMS advanced payments.

We can comfortably say, we do not believe our tenants require any further support to pay their rent. This.

This has been true for most of the 'twenty 'twenty as our tenants had been open in caring for patients routinely since may.

Our dedicated credit Department has monitor our tenants throughout the pandemic.

And the visibility we have on 92 per cent of our tenants' financial performance continue to provide us with unmatched inside in our portfolio stability and a tremendous.

This competitive advantage.

But the distribution of vaccines in early 'twenty and 'twenty, one and the expectation of returning to normal we will continue to invest in better with a focus on accretive acquisitions internal growth and a steadfast commitment to it.

S G.

We're off to a great start on new investments for 'twenty, 'twenty, one with commitments and contracts totaling more than $150 million plus.

Plus development financings of $20 million so far.

Once completed and stabilized these development projects will exceed $60 million in investment opportunity.

With that start we anticipate 400 to 600 million of new investments this year.

Subject of course to capital market conditions.

Jeff will now review, our financial results and Mark will share our operating results, including our ESG accomplishments for 2020.

We will then be happy to take your questions Jeff.

Thank you John in the fourth quarter of 2020, the company generated normalized funds from operations of $56 $7 million.

Normalized <unk> per share was 26 cents versus <unk> 27 from the same quarter of last year due to reduced leverage our normalized funds available for distribution was $53.0 million, an increase of 14% over the comparable quarter of last year and our fad per share was 25 cents or full year Fad was.

$208 $5 million or <unk> 99 per share, which was an increase of six 1% over the prior year. We are highly focused on this metric as it is the most standardized and comparable way to measure our company's performance versus our direct peers and we will continue to focus on growing our fad per share at an outsized rate for our shareholder.

Yeah.

The foundation of the company remains our $5 billion of pure play medical office portfolio, which is 61% leased to investment grade quality tenants the highest percentage of any public medical office portfolio.

Frequently the Doc portfolio has been one of the best performing portfolios, among all rates health care and otherwise during the pandemic.

We collected $99 six per cent of our rent in the fourth quarter and over 99 per cent for the full year.

We have just $1.3 million remaining to be paid back in the one COVID-19 deferrals granted as the first two payments were already made in January and February of this year, we expect the entire balance will be repaid by June 2021.

We intentionally reduce leverage throughout 2020 issuing $19 3 million shares at an average price of $19 six and generating net proceeds of $364 million. As a result, we ended the year with a comfortable leverage of five one times debt to EBITDA, including our pro rata share of JV debt, which puts.

And an excellent financial position going into 'twenty and 'twenty one.

We have only $166 million drawn on our $850 million revolving line of credit.

Riding us with ample liquidity for investments and we generally expect a target leverage of five to five times debt to EBITDA on an enterprise basis in 'twenty and 'twenty one.

As mentioned on recent earnings calls, we had intentionally slowed down the acquisition pace during the first half of 'twenty 'twenty. However, as we saw saw our portfolio easily whether the worst of the pandemic, we pivoted back towards growth and completed $208 million of new investments in the fourth quarter.

The investments we've made were at an average first year cash yield of $6 seven per cent and has had significant underlying IGT credit.

If all of our investment and disposition activity had taken place at the beginning of the quarter. It would have generated an additional $2 $1 million of cash NOI.

We are pleased with the scope of the fourth quarter of investment activity and we have enough visibility at our current pipeline that we can comfortably project 'twenty 'twenty, one investment activity of $400 million to $600 million at an average cap rate between 5% to 6% subject to suitable capital market conditions.

We will continue to focus on the properties that have proven to be successful high quality assets with market, leading investment grade health systems.

Our same store portfolio, which does not include our repositioning assets generated growth of one five per cent a quarterly G&A totaled $8 $2 million a sequential decrease of 2% that's COVID-19 impacts continue to reduce our overall expense load.

We ended the year at $33 $8 million of G&A, which was at the low end of our guidance range.

Looking ahead to 'twenty and 'twenty, one we expect G&A costs to increase as we resume normal levels of travel and acquisition activity, resulting in projected G&A costs between $36 million to $38 million per the year occur.

Recurring Capex should also normalize to a range of $25 million to $27 million in 'twenty and 'twenty, one as we look to add capital back into our portfolio and a thoughtful and efficient manner I will now turn the call over to Mark to walk through our portfolio statistics Mark.

Thanks, Jeff since.

Since inception, <unk> has been dedicated to building a best in class relationship driven operating platform that utilizes local market expertise and scale to drive tenant retention cost efficiencies and profitable growth for shareholders.

We've executed consistently on this plan expanding our in house property management function into most of our largest markets, while leveraging the local market expertise of facility partners where best.

This frontline team helped keep our facilities open clean and available for patient care throughout the pandemic.

We are encouraged by the positive signs of the recovery due to the vaccine and are grateful for our asset management property management and engineering teams.

Who have demonstrated extraordinary resilience in the face of the pandemic as well as the recent severe weather in the southern United States.

This team has earned a 95, 9% positive tenant satisfaction rating in our work order system throughout the pandemic and extreme weather.

Our portfolio's resiliency is a direct reflection on the clinical and financial quality of our health care provider partners.

Our portfolio known for its industry, leading 96 per cent of occupancy.

Also achieved industry, leading rent and Cam cash collections of 99, 6% in Q4 2020.

Under the leadership of Joey Williams, and Ann Gurka, our accounts receivable team works closely with asset management throughout the year to collect $99 one per cent of contractual rent and Cam for the period from April through December 'twenty 'twenty.

Continuing the trend we have collected 99, 3% of January 'twenty 'twenty, one contractual rents on track to meet or exceed the fourth quarter collection rate.

February to date collection results are also strong and consistent with previous months.

We have received no new requests for rent deferral.

Again. These results are a direct reflection on the quality of our health care partners the quality of our facilities and the reason we view medical office buildings as the most resilient asset class and real estate.

Our leasing team had a productive year, despite the challenges of social distancing and virtual meetings with a positive absorption that totaled 16200 square feet for the year.

Overall, we completed 962000 square feet of leasing activity in 2020.

With a 77 per cent retention rate and positive 2.04 per cent cash leasing spreads on our consolidated portfolio.

Currently the average annual rent increase in our portfolio is 2.4 per cent and over two thirds of all leases executed in 2020 contains an average rent increase of 2.5 per cent or greater.

In the fourth quarter, specifically, we completed 185000 square feet of leasing activity with positive 3.0 per cent leasing spreads.

The retention rate for the quarter was 53 per cent.

Number significantly below docs typically reported rate, but was in fact, the result of a large physician practice, we deliberately did not renew and immediately entered into a new 10 year lease the very next day with an existing investment grade health system partner.

Well this was a non renewal by definition the net.

Net absorption was not impacted and we upgraded the portfolio by expanding our relationship with an existing investment grade rated hospital system partner for the long term.

Q4 retention would have been 68 per cent if we exclude this transaction.

Finally, our in house leasing team continues to do an excellent job attracting in renewing tenants at strong rental rates with under market rent concessions.

In the fourth quarter rent concessions for lease renewals, including Ti and leasing commissions totaled $1.21 per square foot per year and $5.08 per square foot per year for new leases.

For the full year, our Ti leasing commissions and free rent concessions totaled $8 three per cent of annual net rent and are significantly below our peers, who are investing 15 to 20 per cent of annual net rents to attract and retain tenants.

Looking ahead to 'twenty 'twenty, one $4 one per cent of our leases are scheduled to expire with an average rental rate of $21.61 per square foot.

We expect high retention as hospitals and providers are re engaging on lease discussions and expansion plans that were put on hold during the pandemic and we are optimistic about continuing our strong leasing momentum in 'twenty and 'twenty one.

Our same store MLB portfolio, which again does not exclude repositioning assets generated cash NOI growth of 1.5 per cent for the fourth quarter 2020.

The NOI growth was driven primarily by a year over year 1.7 per cent increase in base rental revenue.

Operating expenses were up 9.1 per cent and offset by a $10 four per cent increase in operating expense recovery revenue demonstrating the insulated nature of our triple net leases.

Year over year operating expenses were up $2.7 million overall.

Primarily due to a $1.6 million increase in real estate taxes, and a zero point $7 million increase and general maintenance and janitorial services attributable to COVID-19.

Lastly.

Lower parking revenue had a 23 basis point impact on our Q4 same store NOI growth.

Specifically paid parking receipts improved to 78 per cent of normal during the fourth quarter.

Which compares favorably to 49% of normal levels experienced during the second quarter.

Turning to our Capex investments, we pivoted quickly and efficiently in 2020 to prioritize projects and team safety.

In 2020, we invested $19 million in recurring capital investments in line with our previously revised Capex guidance.

In 'twenty and 'twenty, one we expect our full year recurring capex investments to return to normalized levels between 25 and $27 million.

As part of our capital investments in 2020, we invested approximately $3 2 million in ESG related projects to improve energy management systems upgrade H B C mechanicals and install more efficient and longer lasting led lighting.

Overall these projects make our buildings more efficient and improve our margins on common area cost, while also reducing operating expenses for our health care partners.

In turn reducing the total occupancy cost for our provider partners will ultimately provide the potential for growth in rental rates at renewal.

As a result of ESG projects like these.

Stock has reduced its energy water carbon and waste footprints again in 2020, and we look forward to sharing these results in our second annual ESG report in June.

In recognition of our ESG efforts, we are proud to share the docker and 10, new IRA them certified sustainable property C. S. P designations in 'twenty 'twenty reinforcing the ongoing commitment to expanding our environmental social and governance practices.

I'm from C. S. P is the sustainability certification program that recognizes exceptional real estate management, which improves green building performance.

In total dockers earned 18 CSP designations since 2019.

To conclude.

By adhering to our core values represented by care, we remain discipline operationally and financially in 'twenty and 'twenty to deliver safer health care facilities for our providers and their patients as well as safer results for our shareholders with that I'll turn the call back over to John.

Thank you Mark as Mark mentioned, we have made great progress toward our ESG goals, and we are especially committed to energy and water conservation and exceeding Iran certification of our buildings.

We were blessed with great leadership, and our organization from the board down to several of our executives leading us on the D. E N I journey as well we are not satisfied with our progress there, but we are determined to make a difference inside and outside of our organization for equity across each of our communities.

We're also excited to recognize Amy Hall, and her promotion to senior Vice President of leasing and physician strategy. Amy has been with US since 2016, leading our leasing team and is responsible for more than 4 million square feet of leasing activity since she joined.

She's done a fantastic job and we look forward to her leadership for years to come.

Finally, 13 properties across our portfolio are being used for vaccination sites and are and we are accommodating our health system partners and others in this important community.

We expect more and more vaccine is made available to the community providers in our buildings we.

We will now respond to your questions Omar.

At this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.

Confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue.

From participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.

And our first question is from Nick Joseph with Citigroup. Please state your question.

Thank you maybe just starting with the Avis joint venture can you talk about what was attractive about doing that.

From a size of where that JV could go and then how you think about acquiring assets either through a JV or on the balance sheet.

Yeah, Great question, Derrick and good morning. So the you know the Mark Davis and his team had been partners with us for a really since 2014, and they've really developed and sourced a number of great opportunities for us every year and we have some some new development projects are getting started with them now so that they are joint venture really evolve.

That above kind of a strategy, where you know where we find buildings off market day, five buildings golf market, some kind of fit our long term strategy in some way.

Require some some value add or lease up or just not ready for.

Kind of our long term strategic purpose, so truly a way to kind of have two pockets of of ownership said. The REIT are you know when it's directly.

I'm optimistic idealistic for US and then you know with Mark for for those where we need to kind of combine the purchase it just gives us another tool in the toolbox.

We have two joint ventures are in place right now we have the other thematic joint venture.

With remedy that has been very successful and has it really another strategic kind of alignment and purpose. So good source of capital good partners to work with and provides us really maximizes the opportunities for us going forward for the REIT in particular.

Thanks, and then just on the 2021 growth how do you think about funding that either through dispositions or additional equity issuance and then how does that play into leverage levels of where you expect to be at the end of this year.

Hey, Nick this is Jeff so as we as we talked about in the prepared remarks, our target leverage is about 5.25 times.

Obviously, we're a little bit under that right now so we've got a little bit of dry powder to the extent, we need a need to utilize that but we would primarily think about funding the acquisitions through debt and equity issuance. We have you know we've been doing.

Opportunistic dispositions, but we don't have a big disposition pipeline for 'twenty and 'twenty. One so I don't think it's going to be that meaningful in terms of funding it will be mainly through capital markets activity.

Thank you.

And our next question is from Jordan Saddler with Keybanc capital markets.

Uh huh.

Good morning.

Wanted to touch base I wanted to touch base on the acquisition pipeline.

A bunch, obviously came through nice acceleration in the fourth quarter.

And then some early leads on a 2021, but the guidance at 500.

Just at the <unk> pace.

Could potentially continue you may be talk about what you're seeing in and where these opportunities come from what they look like maybe there's some characteristics.

Thanks, Jordan this is John.

And the pipeline is a we're really excited about the near term items that we again have identified.

Our existing relationships leap day customers repeat health systems more.

More and more health systems are really self developing building their own buildings and so we're kind of maximizing the opportunity were there.

Constructing those on their nickel and then kind of pre selling them to us for a long term partnership in whole so very attractive and that's that's been you know most of the.

Investments, we made in the fourth quarter, and then our near term pipeline or just that so not not trading with another institutional owner, but dealing directly with the health system themselves.

Got some good opportunities in the development pipeline as I talked about a minute ago with what Mark Davis and others and you know that that was very successful for US last year was as you know that I'm getting.

Getting better yields, but getting fantastic product you know again for the long term hold for the REIT.

There are some portfolios small portfolios out there trading you know it's kind of.

Trading and retraining and re trading and we and again, we see everything we looked at those but nothing of any bulk has been that attractive to us.

So we'll grow primarily through the one off market relationships.

And on the development opportunities is that maybe 2025 per cent of what Youre looking at.

Oh, that's probably about right and so.

Kind of the gross value of what's going on in under construction are kind of in documentation right. Now as you know kind of a net $60 million to $80 million range. So again 100.

Millions of gross value product a year is kind of a simple goal, but you know we'll do more if we can find it.

Okay.

Okay, and then lastly, just on.

The mezz.

With landmark can you just maybe give us a little bit more color on that maybe L. T V and sorta.

I think the term is.

Reasonably short stays true to.

Two to four year type deal.

But just sort of any other color there would be helpful.

Yeah. So these are again, we've had a long term relationship with landmark and the ownership there.

I have had opportunities with them as well in the past.

This is this is one of the best portfolios of medical office buildings that.

He has explored selling for the last two or three years, but it's one of the best portfolios. It's been around for the last five years, if you will probably the best since that day.

And the end of the day, he wasn't quite ready to to sell but he wanted to recap our landmark dead end.

You know again, we use mezz as a tool for long term ownership so.

We can't yet he still has control on when that happens and but we're you know, we'll we'll be first of the door through the mez, so plus or minus 10% to the kind of LTV, but it's it's a very valuable portfolio and getting more valuable.

So the 54 represents about 10 per cent of the capitalization.

That's about right okay.

Okay.

One for Mark just on the Opex, if I could I noticed you know I I heard a little bit of description around taxes from COVID-19 expenses, but the three 5% increase sequentially.

Mark is that you know.

For Q page gonna be sustained through next year is that we're going to see some moderation.

Yes, good morning, Jordan. Thanks for the question on same store there.

As mentioned in the prepared remarks, and you just alluded to the majority of the increase in operating expenses, both year over year and sequentially was real estate taxes.

Three or four properties that.

Were reassessed and bumped up in Q4, so we think that's kind of limited to that quarter and won't be reflected going forward.

But again, a well operating expenses were up our recoveries were also really showing the insulated nature of our triple net portfolio.

Okay, and so it was that sort of an accrual for the full year 2020 sort of catch up.

On those three to four properties.

Yeah, that's right.

Okay exactly thank you.

I appreciate it thanks George.

Okay.

Yes.

And our next question is from one center with BMO capital markets.

Hi.

Good morning, and thanks for the time, just hoping to piggy back.

On Nick's question on the Davis group joint venture.

John maybe if you could speak a little bit too about the differences in strategy between the on balance sheet in the funds.

I don't want to put words in your mouth, but maybe it's kind of like the joint venture with Davis group would be more.

Non core or Readouts type opportunities that just a little bit more clarity on that.

Yeah, I think that's a simple way to think about it and again, it's it's it's there to park assets that are not quite ready for our ownership maybe through lease up or there's no development in there today, but potentially for a development project as well or it may be an asset. That's again, just not part of our two day long term focus and strategy. So again.

And think of it as a place to park assets that again.

The idea evolved out of a seller who had multiple assets. We wanted one and a couple were great tenant great credit, but just you know were smaller and didn't really fit our long term goal.

And I've kind of part two in the in the Davis fun with Mark Davis, and we got one outright for ourselves. So it's really just a strategic tool.

We like to be responsive to our health systems, and you know when they want to monetize buildings. They don't want to deal with three or four sellers or buyers they want to deal with us and so again, we view it as a very strategic tool for us.

Place to park assets and or participate in the value creation.

That we see in other portfolios out there that's right.

Yeah.

And is there a target size for that joint venture.

I don't I don't think it's gonna be a huge.

He is joint venture, but you know, it's it's 100 million or so now.

You can see a doubling over the next few years, but I don't it's again, it's just it's just one tool in the <unk>.

Toy box.

Okay, and then maybe just.

The same store portfolio.

Any expectations on how NOI growth should trend in 'twenty one.

That would.

It'd be helpful. Just given some of the other piece parts.

Color there would be helpful.

Hey, Mark John here, So I'm, sorry, 'twenty, let me go back to two.

2019 same store, we started at a three 1% there and then 'twenty 'twenty.

This quarter, we're at one 5%. So this year is a little bit lower than our than where we typically are 2% to 3%, but I think that that's really a good place to look at 'twenty and 'twenty one to be in that two to three per cent range as we continue to focus on.

Tenant retention and bumping.

Thing spreads, where we can so two to three per cent for 2021.

Okay.

Thank you.

Thanks, John.

And our next question is from Amanda Sweitzer with Baird.

Thanks, Good morning, guys.

Quickly following up on that day, that's J D. Do you have any that's fine purchase option for the remaining 51 per Sanchez some of those properties stabilize.

[laughter] Great question, I'm really enjoying all this attention on the day and so they're great great partners and we're really proud of that day.

The answer is yeah, we have we have purchase rights going forward.

And that through that relationship so.

Again, it's it's it's it's a where we're a minority partner they they spend their time at ever create the upside value in and again, we will have the opportunity to participate net upside value.

For ourselves or otherwise.

That's helpful and then on the parking revenue now I appreciate it the force you update but how much of a drag with parking revenue line full year 'twenty 'twenty growth and how are you thinking about that recovery in 2021 in the context of your 2% to 3% same store growth expectation.

Yes. Thanks, Amanda this is mark again so.

As I mentioned the same store impact from parking was 23 basis points in Q4, and we've rebounded.

About roughly 80% of our normal levels, there's still a few valet services of buildings that are that are closed due to COVID-19 and you know as those reopen.

Fully here in the upcoming months, we will pick up a little bit of that extra margin from the valet services, but paid parking is doing well and volumes are up at the building. So what we're missing yeah, there's just kind of that incremental margin from valleys surfaces.

Okay, and then do you have a number of how it impacted full year 'twenty 'twenty graph.

I don't know if I have that number on a full year basis, but I imagine it would be pretty close to it the same.

Okay. That's helpful. And then finally from me kind of as you think about the supply outlook over the next several years are you seeing more office owners that are looking to convert to medical office, just given kind of the uncertain demand outlook for traditional office property Tonight.

Yeah. That's a great question you know in 2009 2010, you saw a lot of suburban office go vacant or not are not occupied.

And that recession, and that became pretty competitive or at least provided opportunities for conversion, but it also competed with medical office building.

Think about this environment is truly the downtown CBD office buildings that are might.

It might not get fully reoccupied after work from home and our move to the suburbs from those.

Those kind of office environment. So.

I think you know I think it's a very different dynamic you won't you don't see CBD office buildings converting the medical or are you not really competing with medical office buildings in the suburbs.

Again, if there was if there is vacancy those are always opportunities to convert those buildings to medical but it relates to the office demand is moving to the suburbs. So long winded way of saying you know I think there might be some opportunities but.

When you think about the CBD is that are you know them.

Bacon or low occupancy those are not typical medical office buildings in this environment.

Great. Thanks for the time.

Yes.

And our next question is from Tayo Okusanya with Mizuho.

Hi, Yes, good morning, everyone G.

The cash same store NOI for the fourth quarter.

With the increase in real estate taxes. Once you get to just pass that along so I guess I'm still struggling with.

Why it just wasn't passed along such that they are the same store number was better or is it just a timing issue and it will be passed along you know in the next few quarters.

Yeah, no you're exactly right. The real estate taxes are passed along as part of a triple net expense. So you know the primary drivers of our same store growth or the annual rent bumps from 96% leased the highest in the industry and we've got.

Rent bumps so that's.

That's pretty much going to be the driver of our same store going forward.

That's what we're going to Steve we're going to see a significant increase in property taxes at these states and localities trying to recover revenue and.

We're going to be more litigious than ever but that's one of the really strong components of our portfolio is the high occupancy so that which.

Those taxes do pass through we work hard challenging those making sure the right amount and appropriate amounts to the best we can locale, but.

Ultimately they pass through in our high high occupancy portfolio really.

It's really a premium store.

To us.

But is that timing difference, where you kind of get hit first and then maybe the past somebody's moving onto.

So maybe the same store.

Initially depressed this quarter like that I'm, just trying to understand a little bit.

It's part of it's part timing in part again, a little bit of vacancy. We have is that you know we have to absorb that but it's mostly Jeff.

Okay. That's helpful. And then I just wanted to focus on the regulatory situation a little bit.

The idea of buying the administration has been focused on the expansion of E E.

And this idea of.

And then being able to kind of get health care, you know close to where you live in and things like that and driving more flow to outpatient facilities does that how does that influence your assets that you are targeting from an acquisition perspective going forward do you start to get more.

More interest in it and all the off campus stuff again that may still be kind of close to population centers or I'm, just kind of curious how that influences. How you think about your acquisition outlook.

Tayo, we've always thought off campus.

It was the the more important assets long term while on campus.

We continue to be very important to the overall health care system, but the cost that consumers want to be closer to home physicians and other providers won't be closer to their homes and then in the off campus locations and theirs and Covid has shown why the inpatient facilities need to be preserved for high acuity patients and.

Everything else needs to be off the all in an outpatient setting and if there's no real reason for that building to be next to a hospital and why isn't it closer to my home closer to my schools looking to buy.

My workplace and so you know again with 'twenty 'twenty just proved up the pieces that we've had since the beginning of the company and again the you know the spread of the ICA the support of the HCA the spread of.

You know, perhaps buying options in those states that haven't.

We ended the ACI.

And funded by this administration and this Congress again will further drive more care out of the inpatient setting to the outpatient setting. So I don't think it changes our strategy at all I think it just reinforces what we've been doing since for the last seven and a half years and net proved out last year and it'll be certainly supported by this administration and this Congress.

Gotcha, and then one more from me if you don't mind.

Your comments about your operator tenants not needing additional.

Government aid is appreciated just curious with the current EBIT they have even though it's like you know.

If he has to get paid back by a certain date, if the Medicare that it doesn't get paid back flights a day.

Is there still a need built produce day get pushed back.

The operators a little bit more runway to recover or if we're suddenly do you know six months from now or whatever the timing is you feel fairly confident that you are the operators don't cash funds.

Yeah, you know all the all of the.

Systems are actually sitting there that book, it's counter liability. If you will so we see that as part of the.

You know kind of the overall P&L of the of the.

Their providers in our buildings, so did Congress and a bipartisan way has been pushing back those payment obligations and really the CMS advanced payments.

Already in it and lowered the interest rates you know already stretched out the terms. So it's not going to be a six month call and using your example.

Any surprises about when that's required to be paid back in fact.

There's some bipartisan support to just turn those Medicare advanced payments into grants and so you know again, we see it as just like any other liability on their P&L and really evaluating the entire P&L the entire balance sheet as part of both our credit underwriting for new investments, but also our credit monitoring that Jeff and his team do.

And we're up to 92 per cent transparency.

Across our portfolio. So we get a real good insight into that so there's not going to be any any short term impact on paying those bags and there's going to be plenty of government. The government can provide plenty of time and.

Particularly how long it takes to get the vaccines out and things like that.

Gotcha. Thank you.

Yes, Thanks Scott.

Yeah.

And our next question is from Jason to Edwin with RBC capital markets.

Hey, guys looking at the landmark Mezz deal I know you noted the underlying assets are strong, but I was wondering if you could touch on the amount that are on or off campus.

And then provide any color on what the potential cap rate would be on a purchase down the road.

Yeah, all but all but one are on campus.

Yeah, they're all.

Fairly new kind of 10 years or younger, but they're all they're fantastic assets.

The cap rate on the they're there no person direct purchase options. The seller still has the the ownership timing and flexibility when and if he is ready to sell those buildings.

These this these would be.

I'd like to say theyre going to be real cheap, but there this would be one of the best portfolio.

Our best billings out in the market.

We're seeing today, so it would be.

The low end of the cap rate range the high end of volume.

Got it Okay, and then I know you noted that there are some smaller portfolios that you bought that on the market today.

Wondering if you could touch on just what you arent seeing in those portfolios that you'd be looking at that would make you pull the trigger.

You know, we we really focus our business development and are in our pipeline around.

Working directly with physicians and hospitals and the developers working with physicians and hospitals that are truly a direct purchase with the tenants and the health systems interval all of the physicians that are involved.

There's nothing wrong with buying from kind of from from other institutional owners, but again, it's it's partly that and it's partly.

You don't really get a health system relationship by buying a building owned by the third person who's on the building you have a health system relationship because you have a health system relationship and that's it's really a preference in our targeting.

No specific kind of stats would be you know the typical things you look at Walt increase from the rent market.

Are they in markets that are growing you know how big of the buildings are the size of the portfolio and things like that what are the strategic alignment with our current portfolio.

So the portfolios that have traded have all been fine line building spine owners and fun providers, but none of them none of them really met our criteria and Oh, Yeah, you know as a package and then ultimately you are paying a premium and how does that premium.

It impacts your IRR long term from that so.

Mostly my math.

Lot of its about just the relationships and ball.

Got it Okay, and then last one from me I know in the prepared remarks, you guys mentioned, the Capex increase in 'twenty and 'twenty, one I guess I'm wondering what type of Capex projects were put on hold and how much of the 2021 increase is from projects that were delayed in 2020.

And then I guess going a little further what it would we expect it to come down in 'twenty and 'twenty two as those catch up projects are completed or how should we be thinking about that.

Yeah, Jason Mark here. So you know looking back a year ago. We initially put out capex guidance of $24 million to $26 million and then adjusted it early in 2020.

During the onset of COVID-19, and a $19 million was the midpoint of our revised guidance. So we came in right in line with our guidance there and we did that really to prioritize the projects and safety of the team and there were a few supply delays in projects like elevators that we delayed into 2021.

So a little bit of that is a catch up from 2020.

But our Capex investment has been 8% of NOI kind of on average well below our peers and our 2021 guidance also includes some.

Some additional ti capital as leasing activity picks up so little bit rolling over into 'twenty 'twenty, one but 2022.

Gonna be in line with that with a <unk> 6 million a quarter or so.

Okay. Thanks, everyone.

Thank you.

Our next and final question is from Vikram Malhotra.

Malhotra with Morgan Stanley.

Thanks for taking the question I'm most question it would be non so just maybe too.

Two quick follow ons to some of the comments on growth. If you think about you know the.

Pipeline from here I'm, just wondering given sort of all off campus is headed up by you know thinking about any new markets to enter.

And then potentially kind of you know some maybe to exit just anything new on the horizon.

Yeah, we we don't have any exit plans vikram and thanks for the thanks for the question. We were really focused on growth. We've really you know kind of mature.

Pruning the portfolio of the last couple of years and so it's a we're really excited about what we've got and you see it with the performance from 99, 6% cash collections in the fourth quarter. So.

The.

We're always going to have a bias.

If all other things being equal between the off campus and on campus as you know and we've got some great on campus assets in the pipeline. So it's again it's.

How the situation matches up what's the purpose of the building and what needs to be.

On a campus and if it if it's better served to be off the campus then that'll be our preference but.

The.

We're seeing pretty good opportunities like I said, but it's coming back to our old school one building at a time two buildings at a time and growing the portfolio accretively like that.

Great and then just how the husk off campus has sort of held up maybe even better than expectations.

Can you just give us a little bit more color on what youre seeing on pricing how things have changed maybe over the last year and sort of spread the on campus and I know obviously there are a lot of variances, but just your overall thoughts would be helpful.

Well Vikram I can't help myself, but to say, we fully expect that the off campus to perform like they did last year.

But no I think you're seeing more and more people will attracted to off campus because they see you know how much better they performed last year than many on campus buildings.

We're seeing that enthusiasm from other public bars.

There's a small portfolio out there.

Floating around it's a very nice collection of mostly off campus buildings.

The and in Great Health systems involved in those in those buildings and John the rumor mill is 100 different buyer showed up to them to kind of underwrite their portfolio. So.

And pricing is ranging from five to six.

With all of the portfolios that have been out there in trading and again a lot of off campus buildings in those in those portfolios. So.

I think it's going to continue to to compress but.

We're still the the favorite son of the of the health systems, We believe.

Okay, and then in Europe Europe.

Is your impression that the kind of cap rates for the on campus like you just described are.

Off campus. Just you described buses on has that narrowed even further from maybe what it was pre pandemic.

Yeah, I think it's I think it's probably narrow, but they're still going to be.

Yep.

If theres an on campus building, there's probably 150 buyers who show up so theres still you know.

A large part of the capital pool that.

That doesn't understand and appreciate the off campus like they should but that's provides good buying opportunity for us.

Great. Thanks, so much.

Thank you Victor.

Yes.

Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back over to CEO, John Thomas for closing remarks. Thank you Omar and thanks, everyone for joining US today, we've got a number of investment conferences coming up for the next few weeks and we look forward to.

Digging into more details with you then thank you very much.

This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.