Q4 2020 Healthcare Realty Trust Inc Earnings Call
[music].
Good day and welcome to the Healthcare Realty Trust fourth quarter financial results Conference call, all participants will be on muscle only mode.
So do you need a system placement low conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on you touched on so.
Well, let's draw your question. Please press Star then two.
Please note this event is being recorded.
I would now like to turn the conference over to Todd Meredith CEO. Please go ahead.
Thank you grant.
With me on the call today are Carla Baca, Bethany Mancini, Rob Hull and Kris Douglas Carla.
Carla if you would start with the disclaimer.
Except for the historical information contained within the matters discussed on this call may contain forward looking statements that involve estimates assumptions risks.
And then certain piece.
We're asking more specifically discussed in our form 10-K filed with the SEC for the year ended December 31st 2020.
These 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 on this call may also contain certain non-GAAP financial measures that's it.
On the operations SSO revenue.
That's S. L. F S. Other per share normalized <unk> per share funds available for distribution Fad net operating income.
EBITDA and adjusted EBITDA.
A reconciliation of these measures to the most comparable GAAP financial measures maybe found in the company's earnings press release for the fourth quarter ended December 31st 2020.
The company's earnings press release supplemental information important 10-K are available on the company's website.
Okay.
Thank you Carla.
First I want to take a moment to recognize the hard work and dedication of our employees and our tenants over the last year.
As you know many of our buildings are key locations in the fight against COVID-19.
Frontline staff at these properties continue to risk their wellbeing and they deserve our thanks.
It's been a privilege, providing space, where doctors and nurses can treat patients.
Looking ahead, we are optimistic the vaccine rollout will continue to improve morale and safety.
Shifting to healthcare Realty's performance 2020 was a challenging but successful year in.
In the backdrop of a pandemic steady internal growth and accelerating external volume generated per share growth of about 3% per SSO and over 4% for fad.
Our portfolio quality was validated by staple stable operating metrics during a volatile year.
Despite being below our initial expectations. We are pleased with 2% same store NOI growth given the challenges from 2020.
As we move into 'twenty, one outpatient volumes are stabilizing and our leasing team reports a healthy level of new inquiries and property tours.
Providers are re engaging and expansion plans that were put on hold during the pandemic.
As these trends take hold we expect occupancy to improve and NOI growth to rebound to our historical average of around 3%.
Complementing our stable operational performance investment activity was robust in 2020, thanks to our experienced team and a proactive sourcing model.
In a year, where many marketed deals and investors were sidelined.
We demonstrated our ability to ramp up acquisition volume.
In total we acquired $547 million of high quality accretive mlps.
This equates to about 10 per cent of the Companys enterprise value and will contribute meaningfully to bottom line growth in 'twenty one.
Going forward, we see the ability to keep up a similar pace without sacrificing quality.
Rather than rely on the flow of marketed deals we use a targeted relationship based sourcing model.
We focus on properties that complement our existing assets, where we can leverage our local market knowledge and reputation.
This process often involves years pursuing properties that are not for sale.
Efforts have paid off increasingly.
We completed two dozen transactions in 12 markets last year, including one new market San Diego.
The majority of these properties were sourced through direct dialogue with sellers instead of wider widely marketed offerings.
Our ability to sustain a higher acquisition pace is bolstered by our newly formed venture with teachers.
This vehicle expands our strike zone incrementally and it's reflected in the composition of our first four J D acquisitions.
Which includes two off campus properties and two on campus properties, one being value add and the other ultra core.
Taken as a whole internal operations and external investment potential have never been better.
We see this we saw this translate to strong bottom line results in 'twenty, and we expect more to come.
In a year, where many companies have struggled HR posted another year of positive SFO and F. A D per share growth.
Based on reliable internal growth meaningful external growth low leverage and flexible capital options.
Care Realty Board declared a dividend increase for the first time in many years.
Restarting dividend growth marks a new beginning for healthcare Realty.
With a bright outlook for solid performance in 'twenty, one and the years ahead, we see a clear path to keep lowering the dividend payout ratio, even as we grow the dividend.
Now I'll turn it over to Bethany.
Thank you Todd.
I'd like to provide an overview of the current state of healthcare and government health policy.
Hospitals and physicians continue to prove their resilience.
And contending with the impact of Covid.
We are hopeful that with better treatment and an increasing number of vaccinations healthcare services will see a more normalized operating environment in the coming from.
For hospitals in 2020 service volume sell primarily among lower acuity under insured patients, particularly emergency department.
Well on higher level of acute admissions.
Resulted in net revenue growth from both companies for the year.
As Covid cases moderate hospital patient volume acuity and revenue will likely return to more consistent growth pattern.
For physicians.
Outpatient visits are approaching pre COVID-19 levels.
After the spike in telemedicine during the height of the pandemic. The majority of care going forward is expected to be done in person.
The advantage of telemedicine is naturally constrained to lower acuity services, Inc.
It will likely remain a tool for efficiency.
<unk> some services that previously went on <unk>.
Reimbursed.
Okay.
A few other notable point, we've learned from Covid over the past year.
First the vast majority of elective outpatient care is essential.
Just schedule.
If delayed too long it could become critical care.
Second the pandemic revealed the importance of our tenants having strong rent coverage.
It underpins the stability of medical office, even in rare instances when health services are disrupted.
Physicians are working through the pent up need for outpatient care that was delayed in 2020.
And the underlying trend of rising demand for outpatient services remains intact.
And third the hospital ecosystem is critical to the wellbeing of our society made.
It made evident by the extent the federal government will go to sustain hospitals and physician and safeguard people's access to healthcare services.
Federal Health policy, you provided a meaningful support to healthcare providers in 2020.
Through increases in Medicare and Medicaid rate.
Forgivable loans per payroll and rent.
Ongoing distribution of cares Act relief fund.
CMS regulatory update to Medicare policy in 2021.
Increased payment rate.
Across the board.
The agency also included 11, new services that will be eligible for Medicare coverage and ambulatory surgery Center.
In addition, CMS will phase out over three years their inpatient only list.
It will allow providers to decide the best location inpatient or outpatient in which to deliver services.
We expect health systems to continue to ramp up plan to use a network of mlps and asking to lower cost and improved profit margins.
While focusing on higher acuity care in hospital setting.
Looking ahead the outlook is fairly positive for government health policy.
After a busy and contentious election season, the narrow Democrat majority in both houses is expected to yield more incremental expansion of health coverage.
Legislation that can pass on a simple majority under this.
Budget reconciliation process will likely include expansion of HVA subsidies, and possibly Medicaid benefit as well.
Democrats more sweeping initiatives such as Medicare for all has minimal chance of garnering the necessary 60 votes in the Senate.
Hospitals, and physicians should benefit from a stable commercial payer mix of rides in the total insured population and continued support for positive rate increases in government spending.
We view any legislative or regulatory effort to lower healthcare costs as an advantage to outpatient settings and the development more outpatient facilities.
Healthcare Realty is positioned to benefit from these trends.
Combined with the backdrop of strong underlying healthcare demand.
And a renewed outlook for our tenants beyond COVID-19.
Now I will turn the call over to Rob.
Thank you Bethany.
Now I will summarize healthcare Realty is 2020 investment activity and provide our outlook for the coming year.
Healthcare Realty capped off the year with a strong quarter of investing.
We acquired 16 properties for $337 million, including four properties purchased for $126 million under the newly established joint venture with teachers.
For the year, our volume of $547 million was more than double the previous five year average.
This is especially noteworthy given the challenges created by the pandemic.
Much of our recent success comes from directly sourcing deals in markets, where we already have a presence.
When our investment in an area grows so does our reputation and network.
This leads to more opportunities.
Last year, we acquired 29 properties in 24 transactions.
27 of these are in existing markets and nearly three quarters were acquired through our direct sourcing process.
A great example of this process is on the north side of Atlanta.
In 2017, we purchased three buildings on a hospital campus totaling almost a quarter million square feet.
Since then we have fostered strong relationships with the health system.
They're building owners and influential local brokers.
This past year. These relationships generated two acquisitions adjacent to the campus totaling 113000 square feet.
We also have line of sight on several additional acquisitions.
And we are talking to the hospital and local physicians about new development opportunities.
Over time, we see a clear path to double the size of our cluster around this hospital to over 600000 square feet.
Okay.
Increasing our scale and tight clusters drives leasing activity by keeping us in the flow of transactions.
Across Los Angeles, we signed over 60 leases last year.
Recently, our leasing team learned of an existing tenant in one of our Orange County buildings that wanted to expand into another nearby sub market, where we have recently purchased a few properties.
We showed them several options a mix of our on adjacent and off campus buildings that represent different price points.
We've we've agreed on terms with the tenant and we expect them to execute on leased by the end of this month.
As we start the year. These sourcing efforts continue to drive robust acquisition volume.
To date, we have purchased three buildings for a total of $40 million.
One of them will be in San Diego is located adjacent to Scripps Mercy Hospital and is fully tenanted by UC San Diego Health.
The other two are in Dallas on a Baylor Scott and White campus, where are we on two other mlps.
Beyond these investments we have a growing pipeline of acquisitions with several properties closing by quarter end.
Given this visibility we're setting initial 'twenty 'twenty, one guidance at $3 million to $500 million.
And we expect cap rates to average five to five 8% consistent with 2020.
Shifting to development our activity is centered on leveraging relationships with health systems and local developers to source new projects.
This partnership approach taps into local expertise to facilitate strong leasing momentum and mitigate risk.
In the fourth quarter, we started the $17 million redevelopment of our Landry Amobi on Baylor, Scott and wipes downtown Dallas campus.
The project's largest tenant cowboys fit.
Is associated with the Dallas Cowboys organization and has an agreement with the hospital to offer wellness services to its downtown employees.
The affiliation will serve as a catalyst for rebranding the building as a primary destination for health and wellness and the community community.
In Memphis, the $30 million redevelopment of an M O be anchored by Baptist continues to progress steadily.
Demand for this property remains solid.
With lease square footage increasing to 97%.
One of the largest tenants ortho south is set to move in later this month.
We expect the occupancy to stabilize towards the end of this year.
Conversations with our hospital partners point to a shift back to growth and expansion.
Over the next several quarters, we anticipate a few development starts.
Two of these opportunities one in Nashville, and one in Seattle.
On campuses, where we already have a presence and control the development sites.
As we move into 2021, I am pleased with the pace of acquisitions and the prospects for increased development activity.
Our team's ability to grow critical relationships and scale in specific markets will produce sustainable quality growth.
With lower disposition levels that better average cap rates than last year, our outlook for accretion from net investment activity is bright.
Now I will turn it over to Chris.
Thanks, Rob.
I'll take a few minutes to highlight operating and financial results for the year.
The stability of our quality medical office portfolio and accelerating a massive investment volume drove solid per share growth in 2020.
We're pleased to produce this growth in a year full of challenges.
Normalized <unk> per share increased two 9% over 2019.
We're well positioned for continued earnings growth moving into 'twenty, one given 60% of the $547 million of 2020 acquisitions occurred in the fourth quarter.
Rent and deferral collections were once again strong.
We received 99% of rent and granted no new COVID-19 deferrals in the fourth quarter.
As of year end, we have collected $7 $1 million of the $7 2 million of total Covid deferrals granted.
Indicating that most of our test businesses have rebounded.
Our key revenue drivers continue to be noteworthy amidst the pandemic.
Multi tenant in place contractual escalators increased to 2.91% while cash leasing spreads of four 1% per the year remained at the upper end of our expected range.
The level and consistency of these metrics demonstrates the unique desirability of RM obese.
Same store NOI growth of 2% was muted by two COVID-19 related items first parking income, which makes up less than 2% of revenue was down 17% for the year.
Excluding parking same store NOI increased two 6%.
In 2021, we expect parking income to recover through the back half of the year.
NOI was also impacted by 50 basis point reduction in average occupancy in 2020.
The signs for occupancy improvement moving forward are positive.
Occupancy leveled off sequentially in the fourth quarter and tour volumes are running at pre pandemic levels.
This is notable given the increase in COVID-19 cases, hospitalizations and restrictions across the country during the fourth quarter.
The path to the back side of the pandemic may cause new leasing momentum to fluctuate and vary by market.
But most importantly, our team is engaged with more health systems and providers about expansion needs.
As a result, we are optimistic about the overall trajectory of occupancy for 'twenty one.
Turning to the balance sheet net.
Net debt to EBITDA was five two times at the end of the fourth quarter well within our target range.
This ratio increased sequentially, primarily due to $337 million of acquisitions in the fourth quarter.
We were able to reinvest the cash from the July Mercy dispositions, and then some into higher growth M obese.
Our healthy balance sheet with four to five in the quarter through refinancing debt maturity extensions equity issuance and JV formation.
We currently have $56 million afford equity available and nearly full capacity under our $700 million revolver.
This provides us optionality for funding future investments, while maintaining target leverage.
As expected the slowdown in new leasing activity earlier in 2020 led to lower spending on tenant improvements.
This lower capital spend combined with <unk> growth drove a 400 basis point improvement in the fad payout ratio to 91%.
This includes about $3 million spent in the fourth quarter on vacant sweep make ready capital, which we project will propel leasing moving forward.
Excluding this capital the Fad payout ratio would have been under 90 per cent for the year.
With occupancy poised to increase spending on maintenance Capex is also expected to grow however.
However, when combined with our stable internal growth and a robust pipeline of accretive investments. We foresee continued improvement in the fad payout ratio into the mid eighties in the coming years.
And improving payout ratio, coupled with accelerating per share growth and a balanced capital structure contributed to our decision to increase the dividend.
The strength of our portfolio and the need driven demand of the medical office business bolsters, our ability to grow earnings and the dividend for the years ahead.
Grant, we're now ready to open the line for questions.
Okay.
We will now begin the question and answer session to ask a question in there tough Star then one on your Touchtone phone you are using a speaker phone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Jordan Saddler with Keybanc capital. Please go ahead.
Hi, Thank you first I'd just like to run through.
Maybe what leverage looks like Chris on a on a pro forma basis, given sort of the timing of the acquisitions in the fourth quarter I think maybe it's a little bit overstated given.
Given that you didn't have the full contribution of NOI and <unk>.
Looking at that rate.
No we actually when we can.
On a pro is it pro forma.
Yeah, it's already pro forma so we take into account the timing adjustments already when we when we make that calculation.
The increase from last quarter really had to do with the fact that we were sitting on so much cash last quarter waiting to redeploy it and so as a result, it was frankly, a little bit lower than what the pro forma long term expectation was then.
But we're right in the range frankly, the you know on the bottom half of the range of what our long term target is.
The five two now.
So how should we be thinking about the funding plan for 2021 to sort of support.
The acquisition guidance.
The development guidance.
Yeah, it'll be well, we'll continue to work to match fund our acquisitions and will be working to maintain that that leverage in that five to five and a half range that we're talking about we have.
Over $55 million of.
Equity available under the forward.
On a T M already we also have full availability under our line of credit and then of course, we have the optionality that comes through the JV, which we did used to fund some of the acquisitions last year.
So we have a lot of a lot of options in terms of sourcing capital, but are on our plan is to maintain that leverage in the in the low fives.
Perfect and then the driver beyond sort of our in place escalators it sounded like.
Pointing to hit your NOI growth next year.
Is it parking income.
That's sort of driving some incremental uplift there.
<unk> 2020 actual.
Yeah. So against 2020 as I think that that's correct. We were you know long term, we have been running high to high twos.
Plus or minus 3%. This year, we were were lower for the parking income as well as from reductions in occupancy. So you know, even if parking doesn't rebound to 2019 levels.
Levels, you know, even if it stabilizes here through the first few quarters and hopefully starts to see some rebound through the back half of the year, we won't see the same on negative impact is about 50 to 60 basis points of.
Drag on on NOI growth in 'twenty related to parking so that will go away and then hopefully through the back half of the year as we do short to rebound to pre pandemic levels that actually starts to.
To give a boost to overall NOI growth.
Okay. Thanks, so you're on the floor.
Our next question will come from one share in Korea with BMO capital markets. Please.
Please go ahead hi.
Hi, Thanks for the time, just hoping you could speak a little bit to the acquisition pipeline.
The split between on.
And Jason in off campus and if the the guidance range includes the net.
Net assumed amounts of debt TIAA joint venture.
Yeah, I think I'll answer your last question question first the guidance does.
<unk>.
The CIA join.
Joint venture investments and we were looking at I would say that debt really when it comes to that we've targeted a certain amount of of of investments through that joint venture but.
It's too early to tell what from the pipeline is going to move in there at this time, so it's still early but.
It is included in our guidance in terms of the the off campus properties.
Properties I mean, we're still.
Largely.
Focused on on an adjacent assets that will be the bulk of the investing that we do in the if you look at our pipeline. It is heavily weighted towards the on an adjacent assets.
Where you see us investing in and some off campus properties will be typically where we're building out these clusters that I mentioned.
We have a presence.
And that market or Submarket already significant presence and we see an opportunity to pick up on asset where we can benefit.
From a from a higher cap potentially higher cap rate, but yet maybe mitigating some of that risk debt.
That we see on the off campus space, because we are so plugged into the market and wanting to take advantage of the of the of the leasing volumes on the lease flow debt that we see from day in day out.
Great and then maybe you could just talk a little bit too.
On the on the Jordan's.
And about the plan the funding plan for the forward equity any color you can give us around the expected timing of the execution on that and maybe if you could just give us a sense of what that costs you before equity structure versus the more traditional ATM.
Yeah on the.
Well, we will use that to match fund as acquisitions build in.
So I.
I could see the the $56 million being being used a lot for the first quarter acquisitions, depending on the timing and potentially moving into some of the second quarter.
As well.
And then in <unk>.
The overall cost we're doing that under the ATM. So it's very cost effective and the execution cost is the same there is some carry cost but that that carry cost of the interest that you have is pretty similar to what a what it will cost us on the under the line so very very.
Cost effective you also have the dividend cost associated with that given that they are for contracts, but overall, you're able to to lock in your equity cost.
At times that you feel that the pricing matches up with where you are seeing your your acquisitions, so you're able to.
Kind of match fund and lock in that that accretive spread.
Spread for those investments so it's been.
It's been a nice source of capital force in 'twenty and expect it to be in 'twenty, one as well.
Thank you.
Our next question will come from Nick Joseph from Citi. Please go ahead.
Thanks, You mentioned the development starts from the conversations with tenants so I'm wondering.
Those conversations are you sensing any change as to the space or needs.
Is it versus pre Covid.
Development specs.
No.
We have not I mean.
Or are these conversations that have.
Sort of.
Increase here recently picked up from where we left off really pre.
Pre COVID-19 and we continue to have dialogue with the vs.
These health partners through Covid about these projects, but they have really turned their attention to it now and.
And we arent seeing any significant changes in the space planning or their needs as a result of COVID-19.
Okay, and then just on the dividend.
Is it fair to assume that going forward that this will be repetitive maybe trend with cash flow changes.
Nick This is Todd.
Think as you've seen this has really been a multi year path steady improvement on the payout ratio and clearly that's the number one priority is to keep moving that in the right direction mid Eighty's is certainly where we'd like to get to so it'll be a year by year evaluation.
I think your question goes to the longer term picture and certainly we're aware of a couple of different.
Ideas, there, where youre looking at inflation, you're looking at our cash flow growth Youre looking at competitors.
Relative returns. So we're aware of all bad I think over over the longer term certainly we see this as a first step and we will revisit that as we sort of approached the marker of the mid eighties and as you said start to look at those other factors such as Scott cash flow growth. So we're we're certainly.
Viewing this as a first step and I'm pleased to be doing that and.
So you see it growing longer term at a little higher rate than we are now for sure.
Thanks.
Our next question comes from Rich Anderson with <unk>. Please go ahead.
Thanks, Good morning team. So I wanted to ask about the mindset towards acquisitions and specifically.
The acceleration.
In your.
And your activity.
Guys have been doing medical office for a long time.
I'm wondering what happened to the environment that got you suggest more jazzed up then you know in the past about starting to pull the trigger on on assets is it cost of capital related is it just a consequence of past efforts that you described about reaching out to relationships or is there something in the marketplaces caught your eyes. So we grew up we want to be much.
Longer medical office now than perhaps we felt five or 10 years ago.
Yes rich.
Good question I would say, it's a couple of things you certainly see us evolve our strategy over time I think if you go back and you've been around watching us for a while we were much more relying on marketed deals number one but number two waiting for those bigger portfolios and that's huge but you know maybe 100 100.
$50 million portfolios from health systems to really help our volumes and then sort of waiting for the one off on campus building and as you know.
Have not proven to be.
Fast and furious each year. So it's been a very patient game. So what you've seen us evolve over time is how can we go be more proactive in these markets complement those on campus assets, where we have and build up around them and so we've kind of slowly evolved into that and found that adjacent if.
If you can have on an adjacent it's a very powerful combination you can still work very closely with the hospital and take advantage of that but waiting just for the hospital to sell is a long game, they're great. When you get them, but we kind of figured out how you fill in.
Around that and as Rob said, we're now you've been looking at some off campus selectively that can complement that as well. So it's that from a strategic standpoint, I think the other.
Very true reality as we know it's important to have a relevant and meaningful amount of acquisitions that will drive a an interesting level and at an attractive level for shareholders of earnings growth and so it's all part of that mosaic, but I would say the key we want to focus on is making sure the quality stays high.
And that is encouraging to us that we're seeing the ability to generate great returns all of these operational metrics.
Performing very well.
At this higher volume. So we are very encouraged it's the idea of being longer on M. O. The overall right now.
Would you say that the hospital industry comes out of Covid.
Weaker than it was going in and if that or maybe the opposite.
Debt to you, but if that is informing you at all about your future endeavors from.
Yes, I wouldn't say that we see it as coming out weaker I think like any storm that you go through you come out and there's a period of reflection and recovery and so forth and if anything I think this this particular COVID-19.
Pandemic has underscored how critical and important hospitals are I think there was this sort of concept that Oh hospital I've, even heard an investors day arent hospitals, a dying breed well I think we all know that's not the case now.
It's evolving it's changing constantly there's new technologies that increase the acuity that can be done in a hospital and obviously theres acuity shift into the outpatient setting over time as well, but I think if anything we think it is there to stay and we've always said you got to pick your points you got to pick your partners well pick your market as well so that I think continues to be true and we will.
Any stress test will will hurt the ones that werent prepared so it's all the more important that we are sharp shooters in that effort, but we think the hospital.
We will continue to be super strong in and we still lean towards that debt on an adjacent investment thesis.
Our next question will come from Tayo.
Okay. So on yeah.
Mizuno. Please go ahead.
Hi, yes, good afternoon.
Congrats on the quarter on the encouraging outlook for 'twenty 'twenty one.
J D.
Could you talk a little bit again, the deals you did in the quarter exactly how you determine what was better suited for the JV versus what was better suited for the balance sheet and kind of going forward that kind of is going to be the mantra in Germany.
What goes where.
The acquisition pipeline.
Yes, I think I think first.
We're going to evaluate every every opportunity and see if it's a if it's a fit for the for the JV that we're looking at.
For the debt we closed on in the fourth quarter I think it was a good representation of really our intention for the JV and that was to you.
We're going to we're going to expand expand our ability to invest in our in our volumes.
On the JV gave us an opportunity to maybe participate in and some more off campus properties, where we can benefit from the higher cap rate, but share in some of the some of that.
Added risk that we see and I think that was what was evident in the weighting of the off campus.
Properties that we put into the JV you can see that on.
On page 19 of our supplemental where the JV, we point out that 30% of those properties are off campus.
I also think it.
It represents.
Some day.
You add property, where we see we can view us sharing in some of the the the load of carrying empty space and so we can share.
Some of that load with our JV partner and carrying that on lease space. So we view that as an opportunity for for for.
For the JV and we have one of those properties represents that and then finally ultra core deals where pricing is is at a premium and I think there the JV helps us with our economics and I think thats represented by the one per.
Property that we.
We placed into the JV in California. This past quarter. So I think it's a good mix of our intention for the from the JV going forward, but again, we are we're going to evaluate every opportunity in and determined kind of one by one whether it's a fit.
Okay. That's helpful. And then just another quick one from me tenant improvements and leasing costs a little bit elevated.
This quarter versus say last quarter.
Again leasing velocity, starting to come back up a little bit, but still kind of down.
Are these investments last quarter.
<unk> LTE higher than on the kind of.
Start to really kind of generating seeing activity and occupancy or.
Something unique to one or two leases in the quarter.
Yeah, Tayo I wouldn't wouldn't say that it was driven by trying to to drive additional occupancy. Obviously, we're always looking to do that and if we need to spend some additional capital we will consider it.
I think as you look at it it's really the fact that.
Ti commitments will vary quarter to quarter, depending on the space, that's being used and the requirements of the tenant you are right that it was up a little bit this quarter, but frankly. This was was not the highest quarter of the year I believe second quarter was even a little bit higher than that.
So we did add some disclosure to our to our capital commitments page about our Ti and leasing cost percentage of net rent and that takes into account trying to show a little bit debt. It also depends on what market, you're in and where what the rental rates are.
But you know over the last five quarters alone Ti commitments it range from over 40% to them as low as almost.
20%. So there is a sizable standard deviation each quarter.
But long term, we think it should average around around 30% a little over 30%, which is what we've what we've seen over the last few years. So I wouldn't I wouldn't read too much into it other than just the variability that that's going to kind of going to take place from from quarter to quarter.
Great. Thank you.
Our next question comes from Rich Anderson with F. N B C. Please go ahead.
Hey, Thanks, sorry, I think somehow Scott Peters keeps rerouting restarting my Wi Fi router.
But I can't but anyway, we will get through it.
So I asked the question on the hospital industry and I didn't hear the answer did you get the question I apologize.
We did.
I think the short answer is we think the hospital business should do well coming out of this there may be a little recovery period.
And it may do a little sorting.
The weaker ones, but again sharp shooting as you know we like to say we're focused on is important and we think the long term, it's a very positive outlook for for hospitals and the pandemic underscored how important they are.
Well.
We'll get you a copy of the transcript I'm sure you can get it but we we elaborate a little more.
Oh he lost it again.
Hum.
Our next question will come from Daniel Bernstein with capital one. Please go ahead.
Hi.
I'm actually having router problems Tucson.
Okay.
Or what's going on on a rich from my problems here.
Yeah.
Let's see.
Wanted to ask just a little bit more about the the cash leasing spreads they were strong in the quarter.
But a little bit thinner than previous quarter share any particular items or at least is skewing that.
No I mean, nothing nothing worth pointing out.
There Dan.
I think it was two eight for the quarter of $4 one for the year. So for the year. It was a little above our three to four typical range from for the quarter were a little bit below.
But if you look at we always so you're always looking at the average, but it's really you got to kind of pull things apart and look at the distribution end.
We lay that out each quarter, but you still see the majority of our spreads over 50% were in that 3% to 4% range and so long term that's still what we are guiding to on what our expectation is.
But just the other.
Variability between leases in any particular quarter can skew that a little above a little below but that's where.
We're very pleased that in 2020, when you look at the full year, we were at the upper end slightly above the upper end.
That range.
Okay.
Then just following up on Tyler's questions on what you are putting into the JV.
Or would you consider.
Putting development to the JV, maybe taken a little bit of the development risk off as well.
Especially in light of some of your comments that maybe development might accelerate shows the JV a source of capital there.
Yes.
Dan we would consider.
Development inside of the JV and again, we treat it like like we do the acquisitions you know each one is going to be it's going to be different than.
If there is an opportunity that we see that fits within what were trying to accomplish then we would certainly.
We would certainly offer that up to arm our JV partner.
Okay.
That's all I had thanks.
Our next question comes from Connor Seversky Stenberg. Please go ahead.
Hey, everybody. Thanks for having me short one on 18% of rents expiring. This year I'm just wondering how we could judge the timing on renewals or re leasing to incorporate the spreads you provided in guidance.
Yeah, I would actually point out that level of.
Of explorations is at the low end of what we've seen for the last few years and so.
We think it's very very manageable and we still expect our a range of three to four on the on the cash leasing spreads to maintain.
I don't have it by quarter.
Exploration schedule at hand, but I don't recall anything that sticks out as being.
An unusual quarter it won't be exactly even but I don't recall off top my head, a particular quarter that significantly outsized, but happy to follow up with you on that.
Okay that helps thanks, and then one.
One more little more abstract on one of rich Anderson points are just some of these changing dynamics within the healthcare industry, either maybe further shifts in procedures to the outpatient environment providers findings from cost savings there as well I mean I'm wondering if this makes certain maybe secondary markets seem a bit more attractive or the MLP infrastructure may not be as built out as it is in some.
The primary markets.
Yeah.
I I would say certainly there's a lot of of secondary markets that can be very attractive in that regard I think for us it's a balance.
Certainly COVID-19 is suggesting that maybe some from secondary markets might be interesting I mean, we actually invested on a number of properties recently in Greensburg, Greensboro, North Carolina, it's not far down the road from from the Raleigh Durham area Chapel Hill, It's a great area.
We just invested in Gainesville, Georgia, which is really part of the broader Atlanta area, but it's a little further out and we think markets like that can be very attractive. So I think youre right. It supports that theme when you get detached from a large MSA I think probably not as much our focus because you just.
You don't have that density that we might be looking for but some of those markets. I just mentioned some of the fastest growing areas. So I think there is a thesis to that but I also say that our top markets tend to be very attractive, even though the larger denser ones. So.
Moving a little further afield in each of those and adding to our number of Submarkets has certainly.
In our view something we'll be looking at.
Thanks, Thats all from me.
Our next question will come from Vikram.
I'll hold true with Morgan Stanley. Please go.
Thanks for taking the question just wanted to go back to sort of the external growth side of things I know you've emphasized on an adjacent.
Just wanted to get your latest thoughts on sort of maybe widening debt a little bit given your cost of capital.
And maybe just some clean net changing trends you alluded to more off campus and.
Is that someone that I know you had sort of indicated that a couple of quarters growth, but just wondering how the mix is over the next year.
Yes, I think Vikram I think if you look at.
Again, the off campus, where certainly the portfolio currently has 88% on an adjacent and 12% off I think are kind.
Kind of feeling is that we're comfortable with about 15% of the portfolio being represented by the off campus.
Products.
But I think that debt, where you'll really see us get more comfortable that it's going back to this clustering strategy I think we have really found that whenever we.
When we were investing in a sub market and we have on an adjacent product. We find that there is some opportunity there to take advantage of the other.
Higher cap rates that we can find with some of the off campus product, but yet mitigate.
Some of the risk that we see because we know the market's so well and we are in the in the leasing flow on where we are able to offer a variety of product.
<unk> to potential tenants pricing and location wise and so we think there's a real benefit to having some of that in the portfolio.
But just kind of managing it with.
Having a larger kind of presence inside of us kind of a sub market.
Okay that makes sense and then just.
And he get you you've obviously done a great job getting the portfolio, where it is and being able to growth given and again I know you gave a target payout ratio, but just given.
When you sort of have that <unk> percentage on a little over that any change in thought on where you no longer term leverage could be for the company.
Yes as of as of now Vikram, we've been very comfortable with the five to five and a half range.
We don't anticipate.
Changing that materially.
And we'll always will always kind of watch that and consider depend.
Depending on what's going on in the market, whether that we should make some adjustments, but at this point, we don't have any expectations of of <unk>.
Adjusting our leverage targets.
Okay, Great and then I might've missed this because I jumped on late but just given the new administration.
Are there any medium to medium to longer term potential changes in healthcare regulation or policy that you may be watching that may influence and where and when you invest.
Sure I wouldn't say, there's anything imminent Bethany remarks covered a lot of this and I think the takeaway is that it's it's fairly benign for now and an encouraging pretty bright outlook. So we're not overly concerned I think the things. We're watching naturally are what you might expect which is expansion of the ACA.
Some subsidies, but all of that is generally good because its an increase in access and coverage and that's generally good for providers and obviously, we'll be looking at more detailed things is.
Rates of reimbursement and so forth, but generally all of that looks pretty good. So we think right now it's a pretty favorable outlook and with this administration I think there are some positives, but anything dramatic should be fairly in check.
So we'll see as that evolves, but we're encouraged.
Great. Thank you.
Thank you.
Our next question will come from Michael Gorman with BTG. Please go ahead.
Yeah. Thanks, good afternoon.
Just wanted to touch on the multi tenant portfolio you all did a great job navigating the pandemic and Chris you gave some some positive sounding commentary on the direction of the portfolio, but I'm just trying to juxtapose.
The guidance for 2021, it's kind of like the fifth or sixth year, we've been in that 87, and a half day 88, and a half and I'm just wondering.
What you see on the horizon that may be breaks allows multi tenant to break higher and maybe what the long term potential is in that portfolio from an occupancy perspective.
Yes, Mike.
We have been kind of in that level and has to do with.
Buildings that you may be selling or buildings that you are buying buildings that have come in from from development that we're still doing a little bit of lease up so you've got a lot of things over time that are adjusting on that is.
If you look at our guidance for this year one of the things you have taken into account is that we did.
The portfolio held up well, but we did see a reduction in average occupancy of about 50 basis points and it was.
And you really that occurred through the second and third quarter start leveling out in the fourth so as you start looking at 2020.
Excuse me 2021, where we're having to kind of rebound off of that to get back to get that average back up equal to where it was.
For last year so.
There's a bit of work that has to happen from that and then I think youre looking forward into 'twenty 2022 and beyond.
Where you can start to push that up higher into the.
The high Eighty's, hopefully approaching approaching 90%, but it has to do with the kind of the mix of our properties and where you're willing to take risk.
We talked about we did buy through the JV more of our lower occupied value add.
Acquisition, we were doing a little bit that right now inside of R. R.
On the balance sheet over in Dallas, where we have a couple of properties couple of properties on a campus, where we already own some assets.
And so that may bring down your average, but we think that that's a great opportunity to create value.
So over time, yes, we do expect to.
Expect it to grow.
But it will be it will be balance in terms of what we're what we're bringing in and maybe what where we're selling we have sold some some higher occupied buildings you know some of our single tenant net debt of 100%.
And just because we thought we'd kind of effectively maximize the value on that so there is always the ins and outs that are going on but we do think given the.
The trends that are going on long term for outpatient and the population and the need for healthcare there certainly is opportunity for occupancy growth in the value that that comes from that.
That's helpful. And then maybe just on on a technical aspect. There. If you look at kind of that 12% is there any of that that's not available for lease because maybe it's tied up in an option for a health system or an existing tenant or or what would all of that would be technically available for lease.
Pretty much all of it is going to be available not too I mean, there are some instances where some someone.
Someone may have a a roper on some space.
But generally you are not just a green to hold that space to that for them.
Without some type of guarantee and lease arrangement in place are in place for that so.
The majority of that is is leasable.
We do have some some space that in some buildings that frankly, we kind of put in in our underwriting that may have some static vacancy and in them given the location of it maybe it's on a at a lower level or because it's the way it is.
Configured around other suites so.
Want to mislead you there there is some of that but I wouldn't say, it's a it's material I think that we do have the ability to to lease a lot of that space and we you've heard US talk about is finding a lot of times, it's finding the right tenant for the right size space. It's the Swiss cheese effect that you've heard us discuss in.
And so as you get higher up in those Occupancies when you start getting to that.
90 plus percent.
<unk>.
It can reduce the potential of who you are able to fit into that space. But then that's also an opportunity to.
Uh huh.
Increase your rents because of the scarcity of that space youre balancing a bit of that but that's why for a multi tenant building. We say you shouldnt expect it to be you know 95 on 100.
It's unusual.
Very helpful. Thanks.
Our next question will come from Todd Stender with Wells Fargo. Please go.
Hi, Thanks.
It's been a while since we've seen a dividend increase maybe even earlier than what.
What we had modeled for was it the flurry of acquisitions and debt costs continue to decline maybe what pulled this decision forward. If it was pulled forward.
Yes, I think Todd it wasn't it wasn't necessarily a case of pulling it forward I think it really is as we've said for a while but what we wanted to see was this very clear path to move the payout ratio to where we needed it to be to.
You really have a long term target of sort of the mid eighties, and even be able to move lower than that so it's really just that confidence and you're right. There are certain performance attributes that happened in 'twenty in prior years, but also complemented by the acquisition volume all of which certainly gets us that.
That clear path towards a better payout ratio and as Chris mentioned, we did spend a little extra cash.
Capital in the fourth quarter two two again advance the idea of this occupancy improvement that Chris just talked about so.
Just balancing all those factors and saying I think.
I think the other important thing is to really signal to.
Two investors that it's an important priority to us we know it's an important component of shareholder return. So we didn't want to.
Wait until everything is just perfect and wait too long. So it's just balancing all of that.
Together.
All right that's helpful and then back to the cash releasing spreads.
There's generally a portion of leases that get renewed where rents rolled down if I interpret that right there was 11% worth less than zero.
Are those generally above market rents to begin with maybe.
Maybe just some context around how that goes negative in this environment.
Yeah, and you've heard us say youre right that theres going to be a portion of that you're not going to always be able to expect rents to grow in every situation and long term, we say plus or minus 10% is about what you should expect and that's what you had this quarter.
Or at 11%.
You know it can be a variety of things it could be on an asset that you that we may have bought a lot of times, we underwrite that we may have some roll down because the previous landlord may have amortized some additional ti into into the rent and so you have the expectation that that's going to re research.
Net you also have to take into account.
The competitive position and what's going on around you. The good the good news is generally we no were in.
Type markets, where the supply is constrained and so it doesn't it doesn't.
Negatively impact us but.
That's not everywhere and that's not all the time and so you have to be aware of what's going on what are your competitors are doing.
And so you may for strategic reasons, maybe.
You may need to have some some roll down but the good news is that as you look at our averages in that distribution.
It's been manageable, it's it's at a level that the.
The corporate so to speak of what we do in that three to four still is able to shine through in and.
In those instances, where you're able to get that 4% plus on.
We're able to to offset.
Those few instances, where you do do you have to have some roll down.
Got it thank you.
Our last question will come from Lukas Hartwig with Green Street Advisors. Please go ahead.
Thanks.
Yeah on the external growth front for the guidance.
The cap rate range is roughly in line with where the implied cap rate.
<unk> kind of trended over the last year or so so I was just hoping you could walk through the thought process around setting that.
Is there expectations debt.
There will be share price appreciation and some lower implied cap rate just trying to think through that math.
Yes.
Sure I think for from our standpoint, Lucas it's when you're.
The implied cap rate and then a V is a set of guideposts and obviously, if you're extremely off theres something on the on their either negative or positive, but I think when you're you're in a tight range around that it certainly is very functional and we can we can make accretive investments we can create value.
Dropped to the bottom line and to the share price.
Certainly like anyone would love the price to be higher.
I think a lot of times that premium comes and goes depending on how massive of an opportunity there might be and if there's an inflection point.
So it might be easier just known for being so steady.
We're certainly seeing a pickup in our volume I think that's encouraging we hope that translates a bit too to the momentum and the share price and certainly that's a virtuous cycle. If you can translate that so.
That's our view, where we're cognizant of it but we look at <unk> per share impact if a day per share impact not just <unk>, but it certainly isn't our our way of thinking as well.
That's helpful. Thanks, and then.
Single tenant same store NOI growth was pretty strong in the fourth quarter and it looks like guidance for 'twenty one's pretty healthy as well is there anything.
Kind of a big to point out on that front.
Yeah. It really has to do with with one building that has a non annual increase which debt.
That can change your average per.
Significantly that one building it has a seven 5% increase every three years and that occurred in the fourth quarter.
And that's the specific asset actually makes up almost 40% of our single tenant given the fact of our single tenant portfolio is just with a lot of the Permian things that we've done is.
Gotten much smaller it's under 10% of our of our overall NOI. So even when you are seeing some some higher growth and it's it really just has to do the structure of the lease escalators.
Escalator on anything else.
But given the fact of it is such a small it doesn't have a it didn't have a huge an outsized impact to the overall.
On a company.
But certainly.
It's great when it when it when it does occur which is what's our what's going on right now and that that will play through all the way through the next year given the fact that we look at our NOI on a trailing 12 month basis.
Perfect. Thank you.
Yeah.
This will conclude our question and answer session on we'd like to turn the conference back over to Todd Meredith for any closing remarks.
Thank you grant and thank you everybody for tuning in with Us and.
Being flexible on our time change, we hopefully made that more available to everyone everybody have a great day and we'll be around for any follow up questions. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.