Q1 2021 Healthcare Realty Trust Inc Earnings Call
Good day and welcome to the Healthcare Realty Trust first quarter financial results Conference call.
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I would now like to turn the call for diabetes, Carla Baca, Associate Vice President Investor Relations and corporate responsibility. Please go ahead.
Thank you for joining us today for healthcare Realty's first quarter 2021 earnings conference call. Joining me on the call today are Todd Meredith, Bethany Mancini, Rob Hull and Kris Douglas.
A reminder, that except for the historical information contained within the matters discussed in this call may contain forward looking statements that involve estimates assumptions risks and uncertainties.
These risk of more specifically discussed in the form 10-K filed with the SEC for the year ended December 31st 2020 day.
These forward looking statements represent the company's judgment as of the date of this call. The company disclaims any obligation to update the forward looking material.
The matters discussed in this call may also contain certain non-GAAP financial measures such as funds from operations SSO normalized F. F. L. S. F of per share normalized <unk> per share funds available for distribution Fad net operating income NOI EBITDA and adjusted EBITDA of.
Reconciliation of these measures to the most comparable GAAP financial measures maybe found in the company's.
Our earnings press release for the quarter ended March 31st 2021.
The company's earnings press release supplemental information and forms 10-Q, and 10-K are available on the company's web site for them.
Now I'll turn the call over to our Chief Executive Officer, Todd Meredith Todd.
Thank you Carla.
Thank you for everyone for joining us today.
We are very encouraged to see outpatient volumes getting back to pre pandemic levels.
This will drive our internal growth toward our long term growth profile.
When we add our accelerated pace of external growth. We are building positive momentum in <unk> and fad per share.
Foot traffic and patient flow and healthcare realty's facilities is fast approaching normal patterns now at about 95% of pre pandemic levels.
Some disparity still exist between markets for example, the Bay area. The several months behind Nashville, where providers have been back to normal for a while.
We've seen a notice noticeable uptick in traffic and just the last two months, which is correlating with vaccination level.
The most vulnerable groups, the 65, plus cohort as well vaccinated and consumes the most healthcare per capita.
83% of these folks have received at least one dose and will be fully vaccinated in a matter of weeks.
These folks are increasingly comfortable going to the doctor's office.
And vaccination levels steadily rise in patient volumes normalize optimistic providers are re engaging and plans for growth.
We expect this to translate to the two more leasing momentum in the coming quarters.
We see several positive indicators that will improve same store NOI.
From 2% today toward our long term growth rate of 3%.
We are raising rents steadily and retaining our tenants at very high levels.
And we're seeing strong underlying demand for space at our properties.
All mlps are poised to do well in the short term as patient volumes return to normal.
Longer term the common denominator for success is aging demographics.
Three keys to our ability to outperform for.
Choosing the best markets.
Emerging our local relationships and aligning with the best providers.
Our core business is on and around hospital campuses, where performance is consistently strong.
What's new is that we're also finding some attractive operating off campus opportunities.
Typically these buildings are in close proximity to our hospital clusters.
Our teams are plugged into the local relationships that help us identify the off campus buildings in high demand from providers.
The <unk> sector is highly competitive with plenty of capital chasing a limited supply.
Highly desirable properties around hospital campuses are difficult to source, especially at scale.
For the long history of steady rich pricing.
For these properties, we have an edge over the competition due to our long standing credibility and network of relationships.
This helps us invest in more than our share of hospital centric properties.
Looking ahead, we see the bulk of our investment allocations going to these properties around the hospital campus.
We will also invest selectively in higher yielding off campus properties, where the higher allocation going to our joint venture in order to balance of our risk and return on capital.
Okay Realty is off to a robust acquisition pace in 2021.
Providers actively reengage and growth plans, we expect to initiate multiple development starts this year.
The strong external growth together with accelerating internal performance is translating to attractive SSO and fad per share momentum.
Now I'll turn it over to Bethany.
Thanks Todd.
I'd like to provide an overview of the current state of healthcare and government health policy.
Fewer low acuity ER visit still.
Still year over year same store revenue has remained strong on average up 10% from higher acuity services and insured patient MC.
Steve result of been similar for not for profit hospitals, which make up the majority of our health system relationship.
Health systems continue to focus on strategies to lower costs preserve and even expand inpatient capacity and increased services an outpatient settings.
On the physicians office side other than the select few market slower to reopen our tenants are seeing positive patient flow and strong demand for services.
With an increase the number of vaccinations, particularly among the 65 or older.
The physician practices are looking past COVID-19 recovery toward growth.
On average the 65 plus population visits a physician office two five times more each year than those under 45 years old.
As a percentage of the total population the cohort is expected to increase from nearly 16% today to over 19% by 2028 underlying demographic growth is clearly in place to support the longterm value of MOV.
The regulatory and legislative landscape remains relatively benign for healthcare provider's the buying the administration's agenda is focused on expanding health insurance coverage through adjustments to the HCA I'll also supporting healthcare provider's through ongoing COVID-19 relief.
The most recent 1.9 trillion dollar COVID-19 relief Bill increased HVA subsidies and lowered premiums for at least the next two years.
Incentives to close the low income insurance coverage GAAP are expected to increase the number of people eligible under the HCA by three 6 million.
And the signal of positive direction for providers compensated care.
There is strong political support to make these benefits permanent and to offset healthcare funding the expires down the road.
Conventional wisdom still hold that it is very difficult to take away of benefit once provided true or now as Congress continues to sure of healthcare providers in the wake of COVID-19.
Other items potentially on the legislative agenda.
Two of President of items campaign, hallmarks, where a public insurance option that would allow people to buy into Medicare and the reduction in the age of Medicare eligibility two 816.
The political balance and Congress will keep large scale policy proposals more limited in scope for possible legislation in the near term.
Expansion of government funded health insurance.
Should be measured and incremental of positive for healthcare Provider's.
Of hospitals and physicians look to move beyond COVID-19, they will benefit from steady commercial payer mix of rise and the total insured population and support for positive Medicare rate increases in 2022.
Insurance payers, both private and public continue to promote healthcare delivery an outpatient setting.
We view any legislative of regulatory efforts to lower healthcare costs.
As an advantage to outpatient care and the development of more outpatient facility.
The value of physician offices and hospitals has been underscored in the last 12 months.
With ageing demographics their services will be more critical as they meet rising demand in the years ahead.
Health care royalties longstanding relationships with many of the nation's leading providers will bolster opportunities for growth.
Now I will turn the call over to Rob.
Thank you Bethany and good morning, everyone.
I will summarize helped for royalties first quarter of investment activity and our outlook for the remainder of the year.
We're off to a solid start investing this year.
Our relationships with health systems property owners and brokers often give us access for deals before they become widely marketed.
And as we deliberately build scale and target market. We are often viewed as the preferred buyer for buildings.
These advantages have enabled us to maintain a robust the acquisition page at attractive cap right levels.
This is especially noteworthy is more buyers of move back into the market and pricing remains of competitive.
So far this year, we of purchase 10 buildings for $129 million, including for purchase through our joint venture the teachers for $67 million.
All 10 buildings are located in our core markets, including the San Diego.
Dallas Atlanta D C in Denver.
And what I really like as of the majority of these add to our existing clusters.
As an example, and Orange County, we acquired our fourth property around the campus of Saddleback Hospital, which is part of memorial care.
We now have a sizable portfolio around the hospital of on adjacent and off campus properties, which places of at the center of deal flow.
Recently, the practice from another submarket had of need to expand into this area.
We were able to show them of range of locations price points, an interior of finished levels.
Having multiple product types was instrumental in keeping them exclusively engaged with us throughout their decision making process.
Another example is in Atlanta, we.
We acquired two properties around well stars hospital in Douglasville, where we already owned two buildings.
Are expanding relationship of the hospital gives us insight into its future plans and potential demand for these for buildings.
Cap rates for the eastern acquisitions average five 5% with the low of for 5% of high just over 7%.
The low as the value add opportunity within within the existing cluster.
And the highs and off campus property.
Both of these buildings for purchase through our joint venture with teachers.
For some additional color around cap rates, we included the page and our investor presentation that lays out cap rate range is by region for the $1 billion of acquisitions, we've completed over the last couple of years.
What you'll see is that we have been able to expand our footprint beyond the campus and generate incrementally higher returns.
Or off campus acquisitions have been it spreads of 40 of 90 basis points above on campus properties, depending on geographic location.
Our acquisition pace shows no sign of slowing as we continue to grow our pipeline.
Currently we have properties under contract for LOI totaling over $150 million that we expect to close near the end of the second quarter.
With the strength of our year to date of acquisitions, we're raising our guidance range by $50 million at the midpoint with an upper end of $550 million.
We also took advantage of of strong pricing environment to sell three properties for $34 million at of combined cap rate of for 8%.
These buildings were not in line with our strategy to build out clusters of properties around leading hospitals.
We reinvested the proceeds accretively into Mov's with superior long term growth prospects.
Looking at redevelopment and March our first new tenant took occupancy.
At our project in Memphis, This 29000 square foot Orthopedic group will drive volume to the surgery center in the building.
The surgery Center is currently being renovated and expanded to accommodate more volume.
This property is well on its way to stabilization early next year at of projected yield over 75%.
In April we started the redevelopment in Seattle that includes expanding one of our existing buildings by 23000 square feet.
This 100% lease project has the budget of $12 million and an estimated stabilized yield 6%.
We expect tenants to move in and start paying rent by the middle of of next year.
Looking ahead, we have a couple of more developments expected to start this year.
Or developments create financial value with targeted yields from 100 to 200 basis points above comparable stabilized assets.
Additionally day foster deeper relationships with hospitals and providers as we work closely with him to plan for their outpatient growth.
In summary, or acquisition and development strategies are paying off I.
I look forward to carrying this momentum into the quarters ahead.
Now I will turn it over to Chris.
Thank you Rob.
The positive momentum we saw of late last year continued into 21.
First quarter of year over year <unk> per share grew to 6%.
What's noteworthy does that is that in each of the pandemic impacted quarters of the last year, we have positive <unk> per share growth.
This was possible due to the underlying revenue growth drivers of our portfolio as well as accelerating external investments.
And the first quarter sequential SFO increased $1.7 million.
This was driven by a $3.1 million increase from the full quarter contribution of the $337 million of fourthquarter acquisitions.
This contribution was offset by $1.3 million increase in G&A nine.
$900000 of which is related to first quarter only items.
We see current same store NOI of 2% turning back to or even above our long term average of approximately 3% as the impact from the pandemic dissipates.
Where we really saw COVID-19 effects in the last year was the loss of parking income in octopus too occupancy during the second and third quarters.
This was partially offset by lower operating expenses.
The timing of the rebound to prepare the MC levels for these items will fluctuate and vary by market.
However, with vaccinations, becoming more widespread.
And the number of of leasing tours, increasing we say path to accelerated growth in the quarters ahead.
The growth potential embedded in our existing leases remains solid.
The average in place contractual increase for our portfolio is 286%.
For leases renewed in the first quarter of the average cash leashing spread was for 4% and the average future contractual increase will be 298%.
Our ability to achieve this level of performance is tied to targeting markets, where population growth runs well above national averages and drives our expectation for future internal growth.
Solid operating fundamentals and a strong pipeline of accretive investments will ensure the ongoing strength of our fab payout ratio, which was 88, 7% of over the last 12 months.
It is worth noting <unk> per share grew 8% over the prior 12 months.
This drove the improvement in our payout ratio, even as we increase the dividend in March.
And the first quarter maintenance Capex decrease to eight $4 million down from of seasonal high of $21.1 million in the fourth quarter of 2020.
[noise] maintenance Capex spending will fluctuate quarter to quarter. However, we expect to maintain a trailing 12 month bad payout ratio below 90%.
Net debt to EBITDA was five three times at the end of the first quarter. This is right in the middle of our target range of five to five five times.
Net acquisitions of $69 million in the first quarter were primarily funded through $63 million of net proceeds from the settlement of forward equity.
Looking ahead, we have multiple sources of capital to fund over $150 million in our near term acquisition pipeline.
Our funding options include up to $127 million of proceeds for yet to be settled for equity.
More planned dispositions and joint venture capital along with nearly full capacity under our revolver.
As we reflect on the pandemic hurdles over the last year. We are pleased with the stable performance of our portfolio and encouraged for the future we.
We see the most significant impacts of COVID-19 of on our portfolio fading with widespread vaccinations and foot traffic at our properties increasing.
Underlying solid growth of our revenue drivers, including healthy escalators and casually soon spreads are poised to drive same store growth to 3% or more.
Improving internal growth and a robust pipeline of accretive investments will accelerate per share earnings growth in the quarters ahead.
Sarah.
Now ready to open the line for questions.
Thank you.
We will now begin the question and answer the question.
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Our first question comes from one Santa Maria.
BMO capital markets. Please go ahead.
Good morning.
I was just hoping you could give a little bit more.
Contacts with regards to the benefit from parking to same store.
The way to quantify kind of how much you're generating today versus what the the normalized pre corporate levels were.
Yeah right now we are running about 80% of what first quarter of 2020 parking income was so we do see that is.
A benefit to us in the coming periods as we start to see that.
Rebound back to back to more normal levels and that ended up being that was impacted the same store results by called about 50 60 basis points.
Great and then I was hoping.
The more of a conceptual question, but the local cost of you guys been able to generate what impact of debt have to margins as you as you benefit from.
Local know Howard maybe.
The lower personnel by asset.
Or is that not really a driver.
The margins and it's more of just local knowhow.
Just curious on what you're seeing of what that means for for March of the same store NOI growth.
Yes, I would agree with sort of where you were headed there which is that we really see it as more of a revenue driver benefit of leasing benefit and of momentum benefit rather than just an expense savings benefit clearly there can be some of that expense savings as you scale up but what we also find if you look at probably are.
Premier example, and we show this in our Investor presentation in Seattle.
We're very spread out there across a lot of different clusters across a pretty big region in the Puget sound and so you don't just centralized with one office and send everybody out at the high level of service a lot of folks in the buildings that we own. So we don't want to cut customer service due to the the high traffic and our buildings and so for.
So really to us of the benefit of being in the flow of the leasing discussions that are going on whether it's with brokers are directly with hospitals or physician tenants. So it's much more of a a revenue peace and driver and accelerating revenue.
An expense savings.
Thanks for and maybe just one last quick for what do you expect the the development.
Deliveries to kind of average is that ramps up going forward.
When you say the development delivery interest the volume the volume.
Yes, I think as we move forward, we're looking at starting.
Anywhere from two to three projects of year and that's generally on the volume side of that's the only going to be in that $50 million to $100 million a year and starts that we're targeting.
And right now we're at 60, we could probably easily pushed towards the upper end that would be underway by the end of the year, if not exceeded but on average I think for odds right over time and two or three projects that are active in or getting started each year.
Thank you guys. Thank you.
Our next question comes from Nick Joseph with City. Please go ahead.
Thanks, you talked about the geographic differences that you're seeing but I'm wondering if you're seeing a differences across different specialties or practices of volumes returning our patient clothes.
Not tremendous certainly you see the specialist clearly are getting very much back to normal.
I think it is much more of geographic than it is necessarily buy specialty there are some extreme examples as you as you might point out or.
Might point out that the.
Some of the cognitive.
Counselling psychology psychiatry, some of those things certainly behavioral health there are some things that can lend themselves much more.
To not getting back to normal and can be somewhat handled and the more virtual telehealth manner.
But most of what what is in our buildings, we're seeing back to normal most of the special is certainly even the ones that we saw impacted pretty significantly like Dennis and dermatologist all of that is very much back to normal.
That's helpful. When you think about I guess of Lisi non of geographic basis.
Are you seeing differences bare just given.
Given the what's happening.
Kind of from of volume perspective of that we can throw in the leasing market at all.
I would say a little bit certainly the emerging signs of more growth as all of us touched on would be much more concentrated in some of your places that are a little more have been bit back to normal longer whether that's here in Nashville are in Texas.
North Carolina of different places like that where Rob same is very active I would say that does correlate somewhat with markets that have been much more.
Open sooner and so as of a place like the Bay area is definitely going to look a little sleep year on that front.
Southern California's of very different story, though I'd say, that's Rob. The gave an example that was an Orange county, and we've seen tremendous engagement there and momentum. So it is very specific too.
Particular markets.
Thank you.
Thank you.
Our next question comes from neck Mueller COVID-19 discussion of bone. Please go ahead.
Hi, there this is josh per on the the neck. So.
So maybe you could you guys just talk about what you're seeing in terms of leasing activity leasing bonds were pretty strong this quarter releasing spreads the retention rates for both of the high end of guidance. So any color that you could provide on lease expectations for the rest of the you'll be helpful.
Yeah, that's true.
The right first quarter was strong in terms of of our.
Leasing metrics, specifically to our cash leasing spreads there were a little bit above what our guidance range of three to for for the year, but really that has to do with just where the ultimate mix comes out we ended up with.
It was about 3%.
Of the leases that had negative spreads so having a very small number in that bucket certainly let your higher end.
Renewals per.
<unk> through to the average.
But if you look at it it's still the vast majority of the renewals we're in the the 3% to 4% range and.
And that's still what we what we expect for the year.
<unk> in terms of of absorption. We did have positive portfolio absorption of approved flat on a on a same store basis.
That can fluctuate from quarter to quarter, but as we've been talking about the or some positive signs of things.
Proving across the country that we think.
Can can help drive of.
Absorption as we look to the back half of the the year and then to in the next year and then just overall you also for US talk about the just the the the backdraft drop behind.
The whole sector with the ageing demographics and the need for additional space, we think is going to be of benefit the.
Leasing not just in the in the year ahead, but in the in the years ahead.
Got it that's helpful. I think the juice given update on the current acquisition pipeline in terms of activity in pricing, maybe you could just talk about what drove the increasing acquisition disposition guidance and then the better pricing of dispositions.
Yeah, I would say on the on the pipeline, we certainly started off of the year.
Some strong investment activity Ken buildings under the $29 million that are kind of blend cap rate of five 5%. We do have a continuing to bill building, our pipeline and I think it really.
Stems from our from our process of what we're how we're building that pipeline, we have very much for going into.
Targeted markets and we have around 30 markets that we are intently focused on you can see an opportunity to grow in our team is they're building these relationships, giving the new building owners and for that create some visibility for us in terms of of what we see.
Out in the future and so.
Given given the the strength of that pipeline and the mentioned of $150 million that we have under contract for LOI that we think is kind of close around the end of this next quarter.
At that volume in that activity level of given us confidence debt.
We're going to we're going to get to the upper end of that that new range of of given given the investors.
Investors.
On the on the physician side.
And I think this quarter of you saw sell a few properties.
At low cap rates for.
Of the cap right there was for 8% selling into the.
The strength of of the pricing market those were properties that the.
That didn't fit in with our cluster strategy are longtime customer strategy and so we took the opportunity to to recycle those assets and those dollars and put them into accretive MLB.
Transactions and you'll see us continue to do that this year and we've got some some opportunities to to realize some some nice value from some of our.
Properties, and I will rotate that into accretive MOV transactions.
Okay. Thanks.
Our next question comes from Jordan, Sadly with Keybanc capital My again. Please go ahead.
Thanks, Rob.
The follow up on the.
From the dispose maybe you can kind of just walk us through.
The rationale or the to the clothes. This quarter of you had a couple of more T. The out by some of the queue couple of bigger ones in Virginia et cetera.
But.
The Valley Presbyterian.
Or Piedmont in Atlanta, what was sort of the rash Gal around these couple of sales, yes, I would say at the the valley.
Sales unit that was our campus fit.
We had two properties there and when we look at that that hospital, we didn't see a lot of additional opportunity to build out properties in and around that campus.
And the the buyer of that property.
The attendant was the.
It was an owner in the building and.
Part of part of the ownership group and they made an offer.
Very aggressive cap right and so we wanted to take advantage of that and and fell to that group and rotate that into.
An area and some assets, where we saw potential for growth and to build out clusters down the road the.
The other asset was was an off campus asset and of similar similar theme.
We didn't see an opportunity to build out in that immediate area a cluster of of of properties over the long term. So we took the took.
The opportunity to to sell in the the strength of this pricing marketing and deploy those.
Elsewhere.
Okay.
And in terms of the stuff that's teeter.
I did see one larger assets it seems like it held for sale.
62 million yes.
Yeah. The one in the line in Virginia, you are talking about that one is an on campus building, but it's interesting that it has some.
The capacity to actually convert a portion of that building too impatient and so the hospital head approached us of their interest in buying.
That assets.
To help them with some expansion of.
<unk>, they're looking out on the inpatient side.
And so we were able to agree on a on a price at a favourable cap right I think it's a sub sub for cap right on that one so good.
Opportunity to Accretively dispose and reinvest reimburse debt capital.
Okay that makes sense and then Chris just out.
Just curious.
Oh side sequentially.
You commented on.
<unk>.
A full quarters contribution from all of the acquisition that closed the quarterback kind of.
The head with one of our headwinds of pointed out with 900000 of DNA that is not going to continue with the was there anything else.
So is that with the headwind in the quarter aside from sort of the elevated G&A.
Okay cause I would've thought FFL would of been sort of pressured a little bit higher.
Based on the sort of the underwriting and some of the metric Super guys and provided.
I mean that really is the pain main item with that G&A, we've talked about that each year, we kind of have that in the first quarter of that seasonal only so.
If you would have had that the.
Would of started pushing on of rounded basis the ear.
<unk> growth back up.
Call it in other penny or so.
So that is certainly the main items. Obviously, we've talked about that are same store is growing a little slower than frankly, what it has been historically.
Because of the COVID-19 issues that we experienced last year.
So as we see that rebounding that will provide some additional lift for us.
On on overall growth, but the.
We just as we look at it I think things are lining up very well, especially as we look towards the back half of the year and moving into next year of of.
Very strong.
Per share growth on <unk> and and fed.
Do you out of curiosity less important but just for sake of the metric in any pointed to it.
[noise] the gap same store NOI growth year over year.
I don't know the exact number off the top of my head, but you can see inside of our supplemental we do lay out the.
The straight line rent.
So the the math wouldn't be that difficult to kind of yeah.
I will follow up with the high regard to actually get there because you guys provide provide the line items for for revenue in an expense for the acquisition redevelopment of disposition. The line items. So it's a little bit, but I'll follow up with you on that one of us.
On the.
Share settled in the quarter in terms of the equity.
Can you give us timing on that was that late in the quarter or early.
It would've been.
It was.
I remember the exact timing, but I think it was late February early March.
Okay.
Thank you.
Ex Jordan.
Our next question comes from Brooklyn.
Morgan Stanley Scott.
No. Thanks for taking the question.
Just wanted to maybe get some some of your new address thoughts on.
How big the opportunity set.
Is for leaving aside the pure all on campus for I hope the royalty just the the off campus adjacent other nominees nature. This how big the opportunity set for you is.
And maybe over time, where you think that goes in terms of a percentage of the portfolio I asked just given obviously the broader talk about hospitals incrementally looking to take pieces of there.
Ah business.
Of their operations and moving more into the community to off campus settings more procedures being reimbursed for that so I just wanted to get your how much of this is.
You are building towards.
The slightly different not completely but somewhat different healthcare delivery model of verses. This isn't the opportunity set that you find sort of accretive and maybe it's a bit of both but with any any of their thoughts would be helpful.
Sure Vikram I.
I think it is a bit of both.
We probably have a slightly different view than maybe sort of this prevailing binary of you that there is a fixed the bucket of services on a campus and if anything the cats than the bucket smaller on campus. We don't really subscribed to that we think that bucket is always growing the acuity levels of growing the volumes of growing I mean, the amount of inpatient.
And we see that sort of counters the narrative that hospitals are somehow shrinking.
Just don't see it.
And so we're seeing and we're seeing more demand and more on campus <unk> being billed and a lot of what Ross working on and stuff right around the hospital campuses. So we think it all the.
Growing sector. So we'll continue to invest in both aggressively but there's no doubt and we've always said, it's a very real trend that things have been moving also off campus as well in overtime acuity in the off campus setting can improve too and it is and as you just pointed out of there is going to be more and more of that can be done and those off campus setting. So we like.
We like the odds of all of it we think what's really important though is learning how do you navigate that and balance of the risk of the return that I think that's what you've heard of US expressed today that that we're finding our own way to get better returns with Australia and have more risk of us variability by looking at things that have the.
Strategic alignment with our clusters also ex an extension of relationships that we have being in dense or larger markets. All of those things that help mitigate sort of the risk of just small rural off campus buildings that can that can go dark on you. So it's there is no hard and fast number I think Rob maybe mentioned that we've got an R. J.
We're doing more off campus there I think the JV to date is roughly 40% off campus. So that the very different picture than than the balance sheet, which is high eighties on campus and around the campus. So our view is there's not a hard and fast number we still as I mentioned.
Are are allocating the bulk of things to the campus model, but we are opening up and I think it does increase the addressable market for us which is very encouraging so.
That makes sense man.
Given given the sort of can you talk about just competition from maybe a way of from your tradition of appears that has the the playing same changed in any way over the last two six months of the recovery of picked up have you seen new players come in and maybe just give us the latest thoughts on with pricing is.
Yeah, I would say that that's the right I mean, we have seen.
Really buyers debt that maybe were sitting on the sidelines last year, they've they've moved back into the the mode of of competing for for product certainly on the on the market of deal side.
Oftentimes they say, it's a lot of the same names, but we really think about it from the standpoint of of the capital that's behind the same names in many cases and so we are seeing.
Quite a bit of capital move into the space and and the.
They're chasing chasing opportunities just like we are in so you are saying the level of little <unk> little cat for a compression mostly on the.
On the portfolio side, where these guys are trying to get in and make a make a big big move.
On the on the what were toenail ultra core side, you're seeing a little bit of it as well so.
So.
Cap right certainly.
Moving a bit but we've been able to through our process that we've been able to find the right deals for us and accretive cap right levels, and and makes sense of them and a lot of those are being born out by relationships that we've established previously repeat sellers repeat.
Folks of redeem repeat business with they know that we can we can and it will close on the transaction. They know the whole underwriter properly and they are getting a share price and so.
Really fun and that that's paying office and we're we're out there in this competitive environment.
Got it that makes sense and then just one last one on the referenced obviously, the the developments overtime and you're moving the pipeline.
Given sort of all of the cost pressures.
Across various materials and I'm just wondering as you think about underwriting here or there are certain.
Area of of your focused on our markets you're focused on where you may feel you have a little bit more pricing power from the underwriting standpoint, the just trying to figure out the underwriting in light of where the cost of construction is going.
Yeah, I think that's that's certainly an observation and it's the right observation I mean, you're seeing your scene simple escalation in construction prices from various things and the income materials and labor in some cases and really of as we look at development.
We've always said we're focused on this embedded pipeline that we have we have internally we share that with with you over the over.
Over the years, and that's where we see our our pipeline the.
The kind of built in feeding our development efforts and so there yeah, you're right. We're focused in markets, where we feel like rent growth has been strong rent levels for strong where they have been able to keep up with some of the escalating construction prices hospital systems are growing aggressively and so they have a need for additional space and.
They've built in the the price of Escalations and the cost of the construct into their end of the business plans places like Seattle, where we just started this redevelopment.
Here in Nashville.
<unk>.
We're working on the development opportunity that we have the kickoff of this year.
Rent is the rents here have been very strong and so that's how we're spending our time, it's really driven by our hospital relationships and of need and and focusing on that targeted yield of under the 200 basis points above.
We're seeing stabilized assets.
Great. Thanks, so much.
Okay from.
Our next question comes from Connor.
The bears Berenbaum. Please go ahead.
Hey, everybody thanks for having the.
Just a follow up on the development pipeline you mentioned the multiple starts so I'm wondering if these are all built the suit projects and then can you provide any color as to what the facilities plan specializations or whether it's dermatology oncology something like that.
Yeah, I mean I think.
Certainly.
The are developments are being driven by but growth initiatives of the hospital. Instead of just for an example, we're working on a on the development here in Nashville, with the health system, and it's going to be on the campus.
Hospital is growing.
They are enhancing their women services on the campus and that's going to be a big part of this.
Of this.
Building. They are also growing there there cardiology service lines and so.
The other buildings in and around the campus or.
Total and they need to grow in any of the grow that service line. So there's dialogue with him about about putting more cardiac services in the the building. So it's it's it's mostly specialty.
Physicians service lines that that that are certainly growing higher acuity service lines.
That need to be.
On campus of around campus and that's what we're seeing and that's really what's driving.
The bulk of our.
Our development efforts.
Okay, and then just a bit more on some of these cost pressures that Vikram had mentioned so.
Have any decisions or has anything been signed related to the leases and these development projects or with those rates be.
Reflective of the end project cost.
No I mean the development. We just started we have a signed lease for 100% of the building and the and the the Raiders of set.
And that's where when we go into these projects that that is what we're doing before we.
Before we commit to put in the show on the ground.
Okay, Okay other percent, but whatever the hospital driven service line or multiple service line usually are working out you are working hand in hand with your contractor you're not you're not just saying, let's get a lease and then we'll go figure out what it costs of it's a parallel process that you're constantly working at the same time, so you're you're keeping your construct.
And cost estimates live with your contractor working towards the contract just like you're doing with your lease for Ya.
Leases.
Okay. That's helpful of color and then.
One last piece of this do you foresee or is there any expectation maybe for delays and starts or.
Ongoing project schedules.
I mean, you certainly planning planning the development of it certainly has its ebbs and flows I mean as well as for patient right now we're on we're on target.
To start as we've laid out.
And complete as we've laid out in our in our schedules.
Certainly permitting and.
Getting a building permit in this day and age.
Certainly can be more challenging but.
We feel like if you hire of the right contractors and you have the right team in place you're going to you're going to get those pushed through and you're going to get it started.
Okay. That's all for me thank you.
Thank you.
Alright next question comes from the <unk>.
Okay Sanya.
Oh, Please go home.
Yeah, good afternoon, everyone.
Question, So as I'm sure you guys have seen the reset reverse the report out there that just kind of talking about.
Off campus with us on campus I am the answer to put in real data behind this.
The kind of drawing the conclusion that off campus affiliated of assets are back for the tract, well, if not better than on campus assets, but yet trade. It white of cap rates first of all I'm curious what you think about the data kind of given the historical argument that on campus you did better than off campus and second of all does it influence you.
You in regards to having more off campus assets on balance sheet.
Yes.
We certainly seen that report we've read it.
I think it's a good effort for them to try to to cover that type of information I think it's a little early for them to come out with the thesis that says.
We put a stamp on it off campus is just as good one thing you'll notice that is not in that data is NOI growth.
You'll notice also the only looked at three years and I think that's the benefit we have in some of our peers you heard of.
Healthy yesterday got into this all of that that they're doing the deeper dive over a longer timeframe. We've been doing that for a long time, we're doing the same thing and I think when you look over time and you have you go through cycles you factor in the fact that buildings can go dark if they're off campus, sometimes even if they are anchored.
Monthly cycles are.
Past the lease exploration occur so there's some real challenges to trying to do that on the third party basis. There's also a lot of data integrity issues that the.
Other mashing up lease range of all different varieties and types that don't really fully until the picture.
Again, I think I would applaud them for trying and I think there's something to glean from it but our experienced is a little different we think there is a difference between on and off performance. Another key difference that we saw on that report as they throw all of the adjacent properties into the off category will adjacent behaves a lot more like on and so you are lifting your off perform.
Months by burying the adjacent in there there's another issue. So there's a lot more nuance to it than that report suggests thanks, that's our job is to figure that out and and learn from what we have experienced over the years, what we see changing and put that to work.
Alright, better performance I think the key thing that we would say is of.
On the the ultra core properties that are on campus of right around the campus they tend to perform better higher growth and they tend to do it with less variability when you get off you just start opening up the performance issues and variability and so you have more risks and so that's why we put together some of our on versus off cap rates in our investor presentation, and you'll see as Rob said we've been.
We've been getting 40 to 90 basis points of spread on versus off and we think there's there's some rationale for it and so we're very careful in how we look at that risk.
Well, we'll certainly bring more as well like healthy mentioned to NAREIT to talk about as well on that topic.
Great. Thank you.
Next time.
Our next question comes from Rich Anderson with S. M. B C. Please go ahead.
Hey, good morning down there so.
On the off market commentaries, you made about the relationships and whatnot.
Is that a price situation, where you get a better cap rate exclusively or is there some sort of it's just easier you can almost customize things a little bit and you can have a little bit more flexibility on how to approach things and.
Is that like the trade off of maybe you don't get a special bargain, but you get more flexibility out of that is is that of federal way to think about off market.
Yeah, Rich I mean, I would certainly think that's it I mean I don't think we're we're sitting here, saying that we're getting discounts on acquisitions, because you are buying them off market to me. It's more about building that relationship with that cellar. We've had a number of deals that we've done recently that are that is repeat business and this is the same building.
Owner.
Told us something the AD in a different area and and they came straight to us and I think that is right you've built the relationship with them. They know you can close I know your reputation day no you know how to underwrite the property appropriately so that they feel like they're getting a a fair value and it becomes an easy process and so.
That's the.
That's sort of the real value comes in for for for US and doing off market is debt that we know we can kind of of.
Look and build that pipeline and see what it looks like further out rather than just waiting for the.
Marketed properties to hit the market and then reacting to this.
And maybe the the savings comes from it doesn't so it's hard to of a process. When you save money by chasing around maybe just sort of speculating but.
Think of the other thing and Rob mentioned earlier.
If you allow these properties to get pushed into a big portfolio, that's where you avoid the premium as well so by getting the these early and do these relationships just save them a lot of headache the seller.
But they again they want a fair price. It's my joke is always you know when you go knock on the house that you really you and your family of likes and always wanted to buy and you go knock on their door chances are they're not going to sell it to you for steel.
But the idea of here, we see is that there is premium and portfolio size and so you avoid that by building it the way we've been doing.
Well with me they wouldn't even open the front door, but that's another issue of at the gym.
[laughter].
When you talk about getting the.
Be able to push rinse and you're not seeing too much pushback do you have a comfort level of about retention going down do you have something in mind like okay, and the other trickle down a couple of percent or.
You see any indication of retention being impacted by pushing rest of that you'll you'll take your foot off the gas.
For us rich, we say that our expectation of the retention is kind of 75% of 90, frankly been running more and that kind of plus or minus 85 for for some time.
And that's kind of going to ebb and flow of by quarter and and.
Look at it we say, we're looking to grow 3% to 4%, but we have some we have some markets that we're doing better than that but then you have some markets that yeah. You have to you have to recognize what was going on in the market in the competition and you have some some rolled down the.
This year this quarter was was pretty minimal of that at 3%.
So you're just trying to build a portfolio of that gives you the opportunity.
The <unk>.
You can can hopefully over time.
Grow that.
The more consistent right in the stronger right now as we look we've had some people of assets like you know the street.
Three to four reasonable.
Compared to the inflation, so well, we really look at things from a kind of construction cost replacement value, which.
Has been growing north of that 3% to 4% for for some time and frankly right now with some of the questions. We can head on this call. There's some conserve could could that speed up moving forward and.
So we think that there's there's still plenty of room and we think.
We're still showing value to our tenants.
In terms of of making sure that we have have properties that.
Have the space they need that are maintained.
We certainly make sure that we are investing the capital of Ti as well as building Capex.
To be able to maintain the this level of growth that we think is sustainable long term.
Great stuff, thanks, all of whom yield the floor of thanks folks.
The rich.
Our next question comes from Todd Standard Irwin Wells Fargo. Please for.
Hi, Thanks, and thanks for sticking around Rob for you you highlighted the off campus property, you acquired I thinking here and cute too I don't know if the as the Colorado Springs one.
At a step.
Plus cap right.
If that's the redevelopment candidate.
What kind of cap right you think that would look like on of stabilized basis, just kind of narrowing down the value creation opportunity there.
Yeah, Todd I think I heard you say haven't of having a little bit of hard time hearing you of I think I heard you say of property that we saved the seven 7%.
Right that was actually in the deal in San Antonio and that was an interesting situation where are kind of our direct sourcing process really really paid off for us.
There that was.
The the seller of that property.
Was wanting a quick process and and assure the of clothes.
They wanted to remove really fast and the broken it was working that deal knew we were familiar with that market knew we could achieve that and came to us and they weren't.
As interested in maximizing value as they were just getting out of the property real quickly. So we we.
Just got through telling telling the rich in the morning, getting discounts that probably on that one we might of gotten the discount.
So what does the cap range compression expectation there if you are buying it of seven.
Is that is that market something in the fives that ambitious yeah, I would say in in the high fives is probably.
Of 65, I think taught it you were to take that out into a portfolio not that we're going to do this but.
Package it with some other nice properties and of portfolio, Yes, you would see compression of well into the probably the high fives and so yeah. There's a lot of value creation that can be out of there.
Great. Thank you.
Makes us.
Our next question comes from Mike smaller with.
J P. Morgan. Please go ahead.
Yes, hi.
I guess in terms of getting back up to the 3% same store NOI cake or what are the piano headwinds that you're facing today to get there because you're in place bumps are almost of the three rent spreads are are are fine is it the parking or a bad debts elevated many.
The way I mean, what's the drag today in the P&L yeah. The the main things that we've talked about.
It was really the parking.
Then operating expenses and.
And then occupancy changes so bad debt is back to minimal of any.
We collected basically all of our for rent.
So that's not not an issue.
But the the parking like I said, it's probably impacted on the revenue side 50, 60 basis points on an NOI, it's frankly, even a little bit more than that on a on of revenue of the revenue per average occupied we are the training below our average because of the.
Lower operating expenses.
The.
Right now we had negative operating expenses this last quarter.
Which is which is great, but that's unusual but the operating expense pass through on the other side.
Reduces that revenue growth now to an NOI.
To the NOI bottom line, that's still of is still of positive for us, but then we did experienced the loss of an occupancy and the second and third quarters of last year of which is rolling through the call at 50 60 basis points.
And so we always say that you get end up that's going to have a one to one impact on the revenue growth so that could bring down you're you're close to 3% revenue growth down to the into the mid twos and then as you take that to the NOI with our margin is kind of really of two the one. So you can have almost 100 basis point impact is.
It relates to the occupancy so as we see the parking coming back as we see the the operating expenses kind of more normalizing and we think the the occupancy is.
Hopefully at least.
Bottom of an out although it can move around each quarter and over the long term, we think can grow.
And your bill of all of that back together you get to see.
The.
That revenue model of them at NOI model the gets back to the long term averages of of 3%.
Frankly, even more if we're able to see some.
Some some of absorption.
Kind of and then.
I know you said the parking was off I think of it. Thank you. It was off 20 per cent year over year, but just thinking bigger picture. If you have a 100 bucks of revenues how many what portion of that comes from parking just to put parking the perspective versus everything else from the revenue side. Yes. It is very low of it I'll get the exact <unk>.
<unk> out for Ya, so less than two per year I was in the sales go about 2%.
Got it right, Okay the million dollars a quarter of 120 million of revenue a year ago.
Yeah.
Got it perfect. Okay that was it. Thank you. Thank you Mike.
Okay, and if you'd like to ask a question. Please press.
And one of our next question comes from Daniel Bernstein with capital line. Please go ahead.
Hi.
Just one quick quick question it seemed like both you and your peers.
Retention rates of really gone up in the first quarter or is it I didn't know if that was just kind of of luck of one off thing or if you're seeing an actual.
Trend due to maybe changes in and.
The.
The kind of movement or desire for the.
Staying in the buildings and expanding the buildings and just trying to understand if if there's a trend there and how that might.
How you think about that and how it might impact the occupancy in the T I's going for it.
And.
I wouldn't read too much in the one quarter it does move around Scott.
<unk>, we're comfortable 75 to 90 it has been running a little higher I don't think it's unusual given the pandemic that people are getting themselves back on their feet running at full capacity they've been focused on safety protocols and just running things back to normal so that makes line some of it but.
Also we're seeing a lot of interest in expansion and so forth. So again that may help too and I think some people of asked maybe some of perception that rents are rising elsewhere construction costs are rising that helps a little bit of the edge too, but we're not suggesting in the next quarter is going to be the same or better I think we're still comfortable in a range of it will move around a little bit so.
I wouldn't read too much into it.
I think it's probably just in a range that we've been in 80 to 85 plus.
Plus.
Would that be the same answer for the wait it.
Length of term.
The balance is around a lot too but the.
Again any any change from.
Tenants in terms of of what they've been asking for in terms of length of term.
Especially with inflation going up I would say on a long term the long term basis I don't think we've seen a big a big difference I will say that that last year. While we are in the midst of of of the pandemic.
Trended down.
There were people that just weren't in a position to make of long term commitment and we were comfortable with that when we signed a little bit.
Probably a higher percentage of of short term deals and so as a result, you may have seen our average is trend down a little bit.
But now that we're getting back to the north.
Nor more normal environment.
I I don't think that that our expectations are much different than they were.
Over a year ago.
Okay.
Well I have I appreciate the caller. Thank you thanks Dan.
Our next question of the follow up from Jordan Adler with Keybanc capital market.
Thanks.
It's just passing through the supplement the little bit.
There is a.
Page 25, and you're when you're the same store reconciliations there was something of rent concessions.
Can you just remind me of.
That is exactly I saw that it sort of spiked up but I wasn't sure if the related to the increase leasing or if that was.
More of like a deferral or the basement what is that it.
It will be tied to.
Multiple things, but typically is going to be some type of free rent that is going to be related to.
Mostly new tenants, we don't really have any on renewals.
Think that the AD to dig into the specifics, but we did have a couple of tenants inside of our redevelopment that that started.
So those typically end up with a little bit of of free rent at the front end so that would be.
My guess is specifically why it is a little bit higher although it's still say it's still.
Not that meaningful to the overall revenue, but but but that's that's the reason that you're seeing a little bit higher this quarter then.
The previous.
There's no basement in there for anything like that.
No no nothing nothing like that this is really about some sort of free rent me for for attendant is specifically of new tenant, especially on redevelopment, where they may be still haven't filled out for the space or or moving from one though the to the next you're kind of help him out of there is they're moving.
Moving across the.
Buildings, but no it's not.
Not rid of the payments.
Okay. That's helpful and then.
As it relates to your lease the structure I know the.
I think the preponderance of releases or fixed.
But I know there's also of CPI.
Porsche as well so I was just kind of curious on.
On the upside we don't talk about this it that often but I know the statement sort of popped up here a little bit but is there is there a cap on CPI.
On the CPI escalator.
Generally no.
There's all kinds of of leases out there in the.
There are some that will have a of floor to cap of five.
But I would say generally they're more just tied to whatever CPI is.
Overall CPI is not a large percentage of of of our of our structure.
Under under 5% of our leases have a CPI based escalator.
<unk> typically more more fixed as you pointed out and historically.
Frankly have done better with our fixed running.
Running it closer to three then we're CPI has been.
And the people of questions like well of CPI starts ticking up it's not of risk said well. We also have a generally.
Pretty regular turn in our leases with about 20% that are are.
Up for renewal each year. So if we do start to see pressure on on cost across the board.
And construction costs and.
<unk> oriole costs or elsewhere, we think we have a very reasonable.
Amount of our leases that we can start to look to try to recapture that.
If that does start to occur.
Okay, and then the lastly, I think.
On the.
<unk> ventured deals.
I know.
The handful of these.
The.
Happened this quarter and you've got some more keyed up.
[noise] for next quarter.
Okay and I'm just curious.
What sort of it since you're having some examples here.
Deals that you've closed what's the sort of thinking of JV versus.
On balance sheet transaction like way of showing them versus whether you're not showing them and some.
Some of the deals look like straight up the middle.
HR deals and and I'm, just trying to figure out how we're supposed to tell what the differences.
I mean, I think if you look at what we've we did this quarter and really looked like what we did in the fourth quarter as well and the JV.
Had.
You had a you had an opportunity to really look for.
The more of of value at opportunity, where it was in the building that we purchase.
At some upside in terms of occupancy and so.
Opportunities like that where we think there might be some near term drag because of the the lower occupancy, but we see.
A nice upside those are opportunities, where where we're going to entertain those in the in the JV and we did we.
We are the one of the buildings that we bought this past quarter was for they are.
For building around the campus and and Orange County, and.
We've been we've been placing buildings.
And to the JV around that campus in there.
We see some real upside we seem simple absorption and.
And the other buildings and and so that's where you'll see us participate and share those to the JV. The other side is really from the off campus side.
Three buildings that we put in there this quarter off campus.
Properties, where we think that.
There is some some some additional risks and so we're putting out half the half the capital, but but getting that higher incremental return and so those are opportunities that for sharing and the the.
With the JV the stuff that's down the fairway you said I mean, yeah. The <unk>, the where we already have nice relationships on an adjacent.
For January keeping those on our balance sheet and we intend to.
As we said before we're not obligated to show them, a certain number of deals or certain types of deals affiliate are at our discretion and so you'll see us continue to do to.
To do that and I think that Todd pointed out the and.
And are subtle and I don't think it's page 19, where we're showing the breakdown of the JV I think 40% of the of.
The and the.
The properties that are in there now off campus as opposed to our own balance sheet porch portfolio of it.
Stand down around that 12% range. So I think that's that's really the way to think about it is when you get into the situations, where the cap rates of little Richard and we can make better sense of it.
Or maybe there's some upside it may have some near term drag and in the off campus.
Things.
Got it thank you.
Jordan.
This concludes our question and answer for that so I would like to turn the conference back over the top Meredith for any clothes.
Thank you Sarah and thank you for everybody for tuning in today will be available for follow up with you of any questions and we look forward to connecting with the most of you at NAREIT soon have a great day.
Okay.
The cockpit. This now concluded. Thank you for attending today's presentation, you may know debt.