Q1 2021 Healthcare Trust Of America Inc Earnings Call
[music].
Good afternoon, and welcome to the Healthcare Trust of America for first quarter, 2020 One earnings conference call.
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I'd now like to turn the conference over to David Gershon Chief.
Chief Accounting Officer. Please go ahead.
Thank you and welcome to healthcare Trust of America's first quarter 2021 earnings call, We filed our earnings release and our financial supplement yesterday. After the close these documents can be found on the Investor Relations section of our website or with the SEC.
Note. This call is being webcast and will be available for replay for the next 90 days, we'll be happy to take your questions at the conclusion of our prepared remarks.
During the course of the call we will make forward looking statements. These forward looking statements are based on the current beliefs of management and information currently available to us our actual results will be affected by known and unknown risks trends uncertainties and factors that are beyond our control or ability to predict although we believe that our assumptions are reasonable they are not guarantees of future performance there.
Our actual future results could materially differ from our current expectations for a detailed description on potential risks. Please refer to our SEC filings, which can be found in the Investor Relations section of our website I will now turn the call over to Scott Peters, Chairman and CEO of Healthcare Trust of America Scott.
Thank you David and good morning, and thank everyone for joining us today for healthcare Trust of America's first quarter 2021 earnings Conference call. Joining me on the call today is Robert Milligan, Our Chief Financial Officer.
Over the last year, the medical office sector. He's lived up to its reputation as a steady independent asset class occupancy and cash collections have remained strong.
Tenant utilization and performance in our key markets are returning to near pre COVID-19 levels healthcare systems are rebounding from the temporary shutdowns in March and April of 2020, and patient visits are returning to normal given health care's need based demand. However, the sector was not immune from pandemic small practices.
Sure.
Secondary market, certainly struggled more than most well larger providers and healthcare systems consolidated and put expansion plans on hold and were subsidized by the relief package is passed by Congress.
It has also accelerated of digital change that were taking place, including the implementation of Tele medicine, the move to lower cost outpatient locations.
Continued provider consolidations and do what we feel is a significant population trend towards increased growth in our key markets.
Compared to most other sectors. These impacts have been relatively minimal and in fact will be positive ways of longer term.
Given the amount of healthcare service demand that is expected in population as the population ages and the country accelerates investment into health care.
However, without doubt there continues a cautious and integrated approach that providers continue to take in their business plans as it relates to the longer lasting impact of the pandemic.
The good news for this sector is that we are seeing activity levels on key growth metrics coming back, which bodes well for expectations for occupancy.
Acquisitions and developments as we progress throughout the year.
H D a.
Reactors of the pandemic by focusing on the long term.
Going into 2020, we had already positioned our company as a leader in this space with a focus on key markets and an integrated operating team that can take advantage of opportunities as the sector evolves and grows.
Over the last year, we have taken additional steps to ensure we are positioned from the ensuing rebound.
First we focus on our healthcare relationships working with them through their difficult times through rent deferrals early renewals and asset purchases.
Second we positioned our portfolio for the inevitable rebound and focus on outpatient growth limiting our long term commitments that would require either below market rents.
Abnormal concessions or to tenants with business models or lease structures that are unlikely to succeed as we pivot and anticipate the oncoming new economic business cycle.
Third we have remained disciplined in our investments.
If the private market has continued to pursue them obese. We have remained committed to our underwriting discipline focused on markets and assets that should perform over the next 10 to 15 years.
Finally, we have preserved our capital and balance sheet, ending the first quarter with over 400 million of long term capital.
A balance sheet that can finance longer term growth.
Even with this long term focus our first quarter performance has remained extremely strong.
Highlighted by record earnings of <unk> 44 per diluted share an increase of four 8% compared to the first quarter 2020 and up on a sequential basis.
Normalized <unk> of $88 8 million, an increase of more of almost 15% from the prior year fully supporting our dividend HDA has raised its dividend seven years in a row.
Rent growth of three 1% on almost half of million square feet of renewals.
An increase of new leasing activity with over 200000 square feet of new leases signed the highest level. We've had since 2017 and driven by properties in our development and redevelopment pools Act.
Acquisitions of $30 million in our key markets at yields approaching 6%.
Further as of today, we have more than $160 million of additional investments either closed or under exclusive contract and expect to close in the second quarter at yields in our targeted range of 5% to 6%.
$110 million of development is on track to be delivered in 2021.
Like line of potential new development opportunities in the pre leasing stage it would get us back to our $100 million to $200 million of annual announcements by the third quarter. This is a significant change trust as we find new and innovative ways to grow our portfolio accretively kind of long term.
Finally, our balance sheet with more than $1 3 billion in liquidity and leverage of just five four times incorporating forward equity we have previously raised.
While we did not close on any dispositions. We've also we have also entered into the agreement to sell out of our non core markets at.
At attractive pricing and invest in longer term growth opportunities in our key markets.
As a result of this performance we were able to tighten our earnings guidance range for the year.
As we look ahead towards the rest of 2021.
HCA is focused entirely on continuing to position our company because of long term and positioning the portfolio for the economic implications and effects that may present themselves in the upcoming years.
As we have illustrated in the last 12 months, we will focus on growing our earnings maximize our investment of capital protecting our portfolio of value and creating long term enterprise value based on strong underlying fundamentals.
This includes a focus on our occupancy and rent levels of investments in our key markets dispositions in our non key markets and utilization of our long term capital, while still maintaining our balance sheet for long term growth I will now turn the call over to Robert.
Thanks, Scott from a financial perspective in the first quarter, we grew our normalized <unk> by almost 5% of 44 per share another record high for HCA head of recurring Capex of $10 9 million, which was less than 10% of NOI as a result of our normalized <unk> for the period was also a record at $88 8 million.
Note that we do expect these capital expenditures to pick up the remainder of the year as we increase our lease even start to complete more of our moving ready space.
We also collected more than 99% of our contractually due what first quarter rents in our rent deferrals continue to be repaid on time and unscheduled of less than $2 million remaining outstanding currently.
We generated same store growth of one six driven by one 9% growth in base rent, which was helped by year over year comparison of bad debt as a result of our tenant recovery. Our expenses were up two 9% primarily a result of weather in our key markets, including Texas in March.
We had G&A of $10 6 million continuing our efficient overhead.
We ramped up our investment activity closing on $30 million of acquisitions as Scott noted, but also get an additional $150 million under exclusive contracts at yields of over five 5% we.
We anticipate that these will close prior to quarter end.
We also funded $17 million of development, leaving us with approximately $50 million to complete our in process developments that will add to earnings in 2021 as of today, our developments in Miami in Bakersfield or substantially complete any tenant build out with our Dallas Amobi located under medical city Heartened spine campus on track for completion.
Third quarter. These are expected to start adding to our earnings profile.
Q3, and upon full stabilization will out of four pennies per share on an annual basis to our current run rate.
Importantly, we're also completing several redevelopment projects, including our mission Viejo redevelopment and significant repositioning and assets in Denver and Houston. These will start driving occupancy and rent growth in the third quarter with the ramp up of mission over the coming quarters when fully stabilized. We expect these three projects could add from two to three pennies per share.
On an annualized basis.
On the disposition front, we announced that we've entered into an agreement to sell out of our rural East, Tennessee portfolio for $67 million very attractive pricing that will lock in double digit Unlevered annual return since our original investments more than 10 years ago.
Well this is subject to final closing, we have a hard money deposit and have classified it as held for sale on our balance sheet.
The current market environment, we will continue to evaluate opportunities to sell non core assets to fund investments in our key markets.
From a capital availability perspective, we ended the quarter with close to $300 million of dry powder from available cash and our Undrawn forward equity book.
The closing of our dispositions, we will have over $350 million of capital available to close on all of our investment activity and continue to remain active as we find interesting deals to pursue.
Our balance sheet remains strong with leverage of just five four times, incorporating the forward equity and $1 3 billion of liquidity coming from long term capital.
As a result of this performance were able to update and raise our earnings guidance for 2021% to $1 73 to $1 79 per share, which incorporates our view that same store for the year, we will come back to a range of 2% to 3% acquisitions, continuing at $300 million to $600 million also selling between 67% of $100 million of of assets and funding there.
Remainder with already raised capital, which will keep our leverage between five five and six times.
I'll now turn it back over to Scott.
Thank you Robert and we will open it up for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
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At this time, we will pause momentarily to assemble our roster.
And our first question comes from Vikram Malhotra of Morgan Stanley. Please go ahead.
Hi.
Afternoon, Thanks for taking the question.
Maybe just first.
On the acquisition pipeline.
I think the first quarter of what we saw universally from multiple companies that there was a bit of a push out.
Into the second quarter, but the pipeline still look pretty strong. So maybe just give us a bit more color. What did you see in the first quarter that may have caused this and why.
What sort of opportunity, though you're focused on in the second quarter both individually.
One off properties, but maybe portfolios as well.
Well.
Thank you and I'd like to say, thank you everyone for joining our call of course, I think the acquisition activity for us.
Not only.
We've seen as opportunities in the first quarter, but what we see coming up here this quarter and the rest of the year is very opportunistic for us it looks to me and.
It has to feel that in our markets given our opportunities with one off assets or in some cases, we've got a couple of.
Opportunities with two or three.
We can get back to what we thought we were going to see in 2020 coming out of 2019.
We did we were focused on three things when we came out of 2019 moving into 2021 was earnings growth. We had talked a lot about our earnings growth and we've done that here in 2000 22021.
Secondly, you were talking about acquisitions, where we wanted to get more active and we had shown the activity in the fourth quarter.
Youre going to see that from US moving forward I think we've been very patient in the last 12 months, where others perhaps.
We have grown in order to show some activity we felt it was prudent to find.
Find the right time focus on our portfolio.
Move through the hurdles that the last 12 months of presented and then utilize our cash and utilize our acquisitions to make sure that they are accretive. So you will be seeing from us as Robert pointed out and.
We've talked about more acquisitions.
Next three quarters of accretive.
<unk> continued drive to the bottom line and earnings. We've also seen and you didn't ask but we've seen an acceleration in our development opportunities and those are things that we're going to be I think very excited to talk to people about when we get to NAREIT <unk>.
June because we've been working on those and once we get some.
Confirmation on what we've gotten.
I think we will be very it'll be very interesting to see what we've done in the construction and the development side of our business.
That makes sense. Thanks in terms of the color.
There's also maybe some.
I shouldn't say of debate, but just some questions over.
The relative performance of on campus versus other.
Off campus settings, whether its adjacent or truly off campus.
And whether that is if there's a big difference or not and I know Scott you, obviously talked about growth community quite a bit over the last few years. So I'm just wondering with your own portfolio.
We can clearly see the occupancy, but just from a net rent growth and NOI perspective, what's your experience been with the different buckets.
I think it's changed on us.
We've talked and it had been a long time and you were one of the first folks to come out with an analysis I remember might've been four of five years of co now with on Capex in off campus and so forth and I think we're seeing of continued move to off campus it's cost effective.
A way to get into the community for healthcare systems and they are grouping there there.
Buildings are grouping the square feet together, so they can get the synergies whether it's healthcare system large physician group and we continue to see that.
What we're seeing right now and this is kind of a.
Follow up on our discussion about what markets, we like I think it's going to be more critical.
Whether it's I think off campus and on campus to become much smaller and cap rates and I think that their performance continues to become more similar.
But I think it's the markets that you're in I think we're going through three things right now.
Youre going to play out one.
We're gonna start of new economic cycle.
And I know from the last 789 years, we've been one cycle with lower interest rates lower inflation lower construction costs.
Lower employment costs, and I think thats now going to start to turn the corner.
I don't know how many folks actually remember 10 years ago 15, 20 years of Calvin.
<unk> been fortunate enough to be around that long.
We're focused on.
<unk> markets those markets are going to have inflows of population and I think this is what the pandemic has also accelerated which is a movement to locations not everyone's going to move back towards full time, not everyone's going to need to move more back to work in the office full time until of choice of location from a city person.
Spectrum of state perspective, lower taxes, I think thats going to be something that you talked about and actually we've seen it in Arizona, Arizona has never seen such of population increase over the last 12 months in its history and the numbers that I was talking.
About with someone in that.
And the state government just amazed me at the amount of folks that they say are coming in and kind of going to stay. So we're looking for those locations, we like where we're at we like our cities.
We like the mix, which we non campus and off campus.
And I think the cap rates continue to compress and it still.
It's more about making sure that you have a good lease parameters. Good lease term in the next 10 years, because you are already seeing higher construction costs, you're already seeing a lack of.
Supply chain, and some instances and so rents youre going to need to move up to keep to keep pace with that we want to be in the cycle. We don't want to get into that we don't want to be off the cycle and I think thats one of the things that we look very very hard at over the last six months.
Great. Thanks, so much.
The next question comes from Rich Anderson of S. M. D. C. Please go ahead.
Hey, good morning out there guys.
Good morning, Scott you said.
You didn't want to be as aggressive the last 12 months to buy stuff, whereas others were perhaps more more active than you guys for the past 12 months, but you guys H T E. I should say made your name.
Perhaps in 2008 2009, when you were buying stuff before.
Or when no one else could and.
And of a very depressed marketplace. So I'm wondering why you feel that way. This time around in this cycle why it wasn't a good time to be of buyer.
To the degree of maybe you will be in the future of the last last year or so.
Rich it's continue to amaze me the dichotomy between cap rates potential interest rate.
Races, and just the overall economy.
This time around was so unique in the fact that the government has put through such a large stimulus packages that we didn't see that in the last.
2008 2009.
That really wasn't a tool that was used in a in a huge degree I think that's the difference in this in this particular area is that we didn't see the.
The type of of opportunities that you would see.
Theoretically think that you might see.
<unk> shut down for three months of.
Business is slow down.
You would you would have thought there would have been more.
Opportunity I think that in fact.
People.
It didn't.
Didn't react they reacted to what what they were seeing and being able to utilize and so we didn't see those types of opportunities I think what we're seeing now reaches.
We're seeing the opportunities in our markets, we like the markets that we're in we like Texas, we like Florida.
We like Arizona, a lot more than we did before we like some of the North Carolina, South Carolina, we like some of these markets that we've had success in we've recently put onto our website three of our major campuses. We did a virtual tour that shows the.
The application of what we see as we built out our our new building.
In Raleigh at Wakemed, we've just remodeled and done our mission, which we've now shown the folks I think if people get a chance to take a look at aerospace should because that's sort of what we're trying to build throughout throughout our markets at that continuity and so we'd like to add to those markets and so I think now is a good time to.
Focused on earnings it's dropping to the bottom line, we have an opportunity to continue to grow and we can do it on an accretive basis in the markets we like.
Very good and then on the potential East, Texas exit.
You described the non core but when you bought it.
10 years ago, it was probably thought to be core.
And I'm wondering if that's just the typical cadence of how the business works for you guys, where you know.
Non core is perhaps defined to some degree by by time or or is it not.
Obviously market conditions, and everything else weigh into that but but.
Is it is that of a kind of in all of at least a way to think about what when core becomes non core just the passage of time and whether or not you're willing to invest in it because of how you feel about the marketplace.
Sure.
Robert I'll, let you handle that.
I think first of all rich.
Just slight correction to that its east really rural Tennessee kind of focused around Bristol and some other areas like that.
I think what what's changed in our philosophy going back 678 years now has really been of focus on more major markets with much greater population growth are really with a focus on.
Areas that are going to benefit from the continued expansion of the knowledge worker and the knowledge economy and things like that.
It also happened to be attractive from a book.
Lower cost of living perspective, so I think for us it's much more of a transition out of assets great. Great assets. They are located next to good health systems and their steady I think that was core for us when we were first up and growing.
I think now as we're looking at where we're going to be over the next 510 years. It really is much more focused on major markets, where we can really deploy all of our platform capabilities and continue to grow so I think as you.
You see us continue to recycle out of assets, they're going to be out of smaller more rural markets, where we can't get of as much of our economies of scale and growth into more of our major markets, where we think theres going to be a lot of growth that we can really leverage going forward. Okay. And then the last question real quick one for you Robert is returned.
The 2% to 3% same store NOI growth.
It was that all just the Texas weather issue in the first quarter of are there more to it the net well.
Well I think we've we've said as you look at kind of a couple of things in that I think first of all.
From a occupancy perspective, I think year over year, we're certainly going to be down the most in the first quarter I think we knew that going into it and so when we set our range we expected our first quarter to be at the low end of the range of we do have a couple of other things pop up I do think kind of the weather in east, Texas kind of.
Obviously caught everybody surprised.
And that did impact us a little bit I think everybody else pointed out to two continued parking revenue being down and things like that so I think it was a couple of one off things, but it was definitely also related to the occupancy in the first quarter as the most difficult comps year over year.
And I think as we look towards the rest of the year with the new leasing activity is certainly picking up.
US being able to drive that to actual getting people in the buildings.
That's what we see of coming back when did parking trough last year.
I think parking is not nearly as big of a component of our income as it has for a number of other people, but I think it's certainly what we've seen we do have a couple of garages throughout our campuses.
And it really did tend to trough second quarter I think that was definitely the lowest point when you add people not being able to come in for elective surgeries people were broadly staying away and I think we've seen that kind of gradually come back over time since then okay.
Okay, great. Thanks, Thanks, guys.
The next question comes from Juan Sanabria of BMO capital markets. Please go ahead.
Hi, just hoping you could talk a little bit about the disposition side.
The sales of <unk>.
Stern, Tennessee, and if I look at your stuff.
Supplemental seems like 6% or thereabouts of your ABR outside of the top 75 markets. So.
From a go forward perspective.
Should we expect that most of the dispositions would what kind of happened in that bucket of.
What that six 2% of.
Pro forma for first quarter sales.
Yes, I think as we look at the dispositions, where we're looking to sell out of I think you're largely going to see it come from that bucket.
We're top 75 markets, where we can only we only have one or two assets and it is just not worth spending the time to really invest deeply into.
Knowing all of the Submarkets, having a good sort of handle and good relationship with all of the leading providers.
In healthcare systems of the market. So I think that's definitely going to be where you see of moving from there.
I think as we look at the sales, though they tend to be in the most part going to be 510 $20 million sales kind of one at a time as we look to move through and then recycle.
Assets into key markets. So I think as we look at our disposition of recycling activity.
This part of this portfolio is probably the largest.
That you could see us make for a little bit of time.
If we do have of anything bigger than that I think youll see us look to redeploy it pretty immediately so you know as we transition through our dispositions I think youll see a pretty ready readily.
Or investments that we are ready to redeploy into.
Okay that makes sense.
And then on the development slash redevelopment front.
You gave a great color on future expected contributions of does come online on an annual basis, but just curious.
What what's included in 2021 guidance.
And related if any change of what tenants are looking for on the new developed day.
As a result of COVID-19 more states.
Or changes in its basis as a result of telemedicine or what have you.
Well I'll answer your first question, then I'll, let Scott kind of talk about any changes to this space, but I think.
From our expectation on the redevelopment front.
We're really not expecting any any cash NOI to be coming in from those redevelopment properties that we used the ones in Houston and Denver until until the fourth quarter. So once we get to that point in time, its going to be relatively minimal and it's going to become much more of of 2022 story, but I think the good part about those and why we wanted to highlight of.
Is that we are seeing the leasing activity, we are seeing the repositioning of what we've been able to do take hold.
All of those two assets get them leased we think theyre going to be positive contributors to earnings.
Going forward we.
Wrapped up kind of the full redevelopment of a couple of emission assets that we have a few simple of real estate and just a great part of.
Of what.
Orange County.
And now that COVID-19 is opening up there you know I think this is the opportunity where we should start to see some good traction in leasing that up and I think as we see that again, it's going to be a little bit in 2021, but it's going to be much more of an impact in 2022.
And I'll answer the second question.
Gets back to our development opportunities that we're seeing and we're having discussions about right now.
We're fortunate we're working with a couple of folks that I think are going to be.
We believe our.
Partners are or.
Potential tenants.
<unk>.
Looking forward the.
Assets that are under consideration are something that is it is.
Overlooking adapting to what they see in the future.
Hey, that's the exciting part about we started our development division of almost four years ago five years ago, We did it in earnest when we hit the Duke transaction and we've slowly finished.
Those assets and brought them online and as we've talked about we now incurred our own initiative would be the best word we generated our own narrative.
With healthcare systems with some of the universities that are that are starting to go down the path and the.
Biggest advantage that.
We have had recently is the fact that we are a large dedicated MLP. We have the capital capacity. We are dedicated to the particular cash that's being discussed.
And so I think that has brought us.
The ability to really be at the cutting edge of this and the same thing in redevelopment, we're looking at assets not simply to redevelop we're not we're also not looking at leasing as saying simply lease up a space get.
Get it behind you and be satisfied for three years or five years.
On base, we want tenants, we want assets that are price.
<unk> for the next 10 to 15 years or at least certainly as we move forward in this new economic cycle that we're going to experience and so we're taking a lot of time and I think of Amanda who heads up our leasing and asset management Brock.
Doing a lot of of.
Careful thought processes as we go through our our leases as we go through our redevelopment process.
I appreciate it thank you.
The next question comes from Nick Joseph of Citi. Please go ahead.
Thanks.
Talked about the occupancy impact from the first quarter, but just given the leasing environment and the forward pipeline, how do you see the recovery playing out sequentially from here.
Yes.
We're fortunate we've had the most activity in.
We have seen as we mentioned in our script.
And the key I think theres, a multitude of things that are playing out right now.
Go back to the fact that.
You want to make sure that what you're doing in 2021 is working in 2023 and 2024.
I still think that we're starting of cycle, we want to focus on really strong tenants. We want to focus on relationships that are going to expand in assets and we want to reposition our assets if needed out of space that is not going to be.
Functionable or.
Our long term net more than probably the next three or four years, because I do think theres going to be of a big cycle come 2025, 2026 per space needs and how tenants are adapted and so forth. So we feel good again, we're in some really nice markets. If you look at our our geographic locations.
I go back to Houston Dallas cash.
Orlando Miami.
We've got some really nice locations that we are seeing a lot of activity on and I think that's the.
That's our opportunity our opportunity as Robert described is to take our current occupancy.
And build on it as we've talked about the last.
A year year and a half.
We're now through COVID-19, hopefully and so we now need to add AD that increase in occupancy to the bottomline.
We're in a great position, we just had our best quarter again.
From an earnings perspective, we've got capital, we've got opportunities for acquisitions, where season of development side of our business take hold and now we have the opportunity to do some very good leasing without any urgency of being.
Quarter to quarter or month to month responsive we've seen some very aggressive I mean very aggressive leasing deals in the marketplaces in some locations that you look at it and say I don't I don't know why they.
They must be of reason inherently that theyre, just trying to occupy space because the economics didn't work.
We don't want to compete with Delek, we frankly, we want to make sure that our earnings continues to grow.
Over the next 2345 years not flat, we don't want to be flat.
In this marketplace.
Thanks, I appreciate that and then just.
Back to same store guidance, obviously, you maintained it and.
And Robert you walked through some of the noise in the first quarter.
But of your expectation still of that that you should end up around the midpoint or trending more towards the low end just given what's happened in <unk>.
Well, Nick I think certainly.
As we mentioned, we'd always anticipated that our first quarter wood would be lower than what our expectation would be for the rest of the year of whether it was from just year over year.
Comps.
And then just from a build and potential occupancy from there so.
Our view is.
That it was slightly lower than what we expected in the first quarter given the handful of items, we discussed and I think the rest of it still comes down to our execution on leasing and getting people in the building.
If all of that activity that we're seeing really translates.
Two signed leases quickly I think we feel good about the midpoint of the range certainly I think of it takes a little bit longer to get them signed and we've been I think thats kind of the noise of the uncertainty that we're working with right now.
Thank you.
The next question comes from Daniel Bernstein of capital One. Please go ahead.
Hi.
Good afternoon.
You guys are talking about.
New cycle and the long term so I was trying to.
So maybe if you could put it together in terms of you look at construction costs.
Move from inpatient to outpatient, which I think is going to continue to accelerate from any specialties.
What's kind of the peak occupancy you think your portfolio can hit can get to.
No change in the frictional occupancy.
The <unk> industry.
Well, we've given that I think everyone is giving that thought.
Once again.
There was an earlier question about Q.
2008, 2009 time period of 2010.
I'd go back of the fact that you really.
Don't know.
And I say this because again the government assistance that has been given and this economic downturn is just unparalleled.
I'm not sure of that folks can actually contemplate how much.
Health and how much liquidity has been pushed through the system.
And so.
We've had what does that really mean as we get into 2022, what does that really mean.
Assistance.
Isn't there any longer and how does that impact.
Systems or tenants physician groups.
How does that affect secondary markets or or assets.
It may not be as prominent in their thought process any longer.
That's the process, we're going through and we're going through it in detail because I don't know that you can see that right now it's sort of like the housing market right really know what's going on there.
But you're saying okay. That's that's what it is it is what it is.
I think it's still back to we feel comfortable and our goal and what we.
Looking at our leasing teams or in our conversations is that we want to get to that 90 293.
<unk> occupancy I think that Thats, just given our portfolio and thats not looking at the overall market that is not looking at it.
Different states are different locations thats looking at the assets we own.
And I think that's where we started.
Let's do an inventory of what we have let's do an inventory of the relationship we have in the market with the assets with the physicians and then let's reposition our assets.
Make sure that we've got the right tenant mix and the right tenants that are in those buildings.
I'd say theres been many tenants and youre starting to see this now I think that our.
Getting the impact of COVID-19, they are getting the impact of.
Of the downturn for 12 months and they are looking for just basically in some cases that most of it.
Cost effective space they can find.
And in some locations thats not our building.
We're not the of.
<unk> place to go we want to get value I feel that we need to value our portfolio, we've got a great cost basis, having.
Having bought when we bought where we thought.
Now what we need to do as we've talked about and get the value for it as we go forward. So.
For HCA, we're looking in that 90 293 range for the sector I think that it's going to depend upon market and it's kind of depend upon the question earlier, which is what is your mix between off campus and on campus I think it's going to be a much more articulate and is this a general statement.
Yes.
And then one quick question follow up on construction costs and Ti.
Yeah.
Yes.
Should we be building in or thinking about higher ti costs not just from more of what are you seeing book, but from the construction.
Initially at least is that.
Our tenants are reacting to increased build out cost.
Well I'll start first of all Robert finish I think you can I think that youre going to start seeing a higher cost throughout the economy and we've seen at hand.
I think that that's something that.
But that's going to come I think it has just started.
We're going to see it and you're starting to see narrative.
From General General economy folks, who are now recognizing it.
I know that when we're looking to hire folks.
The tough market and the cost compensation structure is different than it was 16 months ago. So that's going to come through our tenants tenants don't want to come out of pockets I would say that the general statement that I've seen is they are willing to to amortize additional costs within their lease structure, they're willing to.
To put in the <unk>.
The needs that they want to stay there longer term, but tenants arent, saying Gee whiz I want to come out of my own pocket and put in dollars and so.
Those of the kind of the trends that we're seeing.
Frankly, I think they are expected.
So Robert you want to add anything.
Yeah, No I think just the particulars as you're right. Dan is that I think ti cost and some markets are up 2025% I think from of Buildout perspective, and I think of it certainly looks as we're looking at development and construction costs I think we're looking at markets, where frankly, it's an expansion of the population so health systems and providers.
Need the space to be built for them to go in there probably a little less price sensitive and can absorb the construction costs. There I think of markets, where it's more of a market share type game was we're looking at our renewal discussions we've got people, saying well maybe I am just going to go build of new building and then as they look at the expected pre.
<unk> that they've got a year ago and now what they're seeing now I think of it re does some of that math for for tenants that are in place where they are so I think it's very much of a market specific.
The analysis that we're doing on that but it certainly is.
Certainly are seeing it go up quite a bit.
Okay.
Appreciate the time thank you.
Yeah.
The next question comes from Todd Stender of Wells Fargo. Please go ahead.
Hi, Thanks, just looking at recent deal flow for you guys with the backdrop of getting same store NOI growth back to that 3% ballpark.
Can you share just some of the annual growth expectations and your underwriting on our Q1 acquisitions as well as the stuff in Q2.
Robert you want to talk touch on Oh, well I think the you know the.
You mean from an annual.
Growth perspective.
Perspective on the acquisitions I think what we're seeing we're certainly expecting that it's going to average out two and a half three 5%.
Annual growth from the assets that we're buying you know I think we've been very particular about.
Where we're buying and what's in place of what the opportunity is for us to add on top of that so.
No I think our acquisitions were fully anticipating that they're going to support that two and a half to three to three 5% type run rate that we have historically targeted.
And what's in place now are these third party operated and managed.
And maybe where some of the opportunities that youre seeing whether its lease up space or the rents are below market.
I think it's a little bit of both I think theres kind of three things that we see when we're looking at our opportunities I think one when we're looking at the acquisitions its a matter of where are the.
What's the market and what do we think the market rent growth is going to be.
We're looking at it I think the second thing that we're looking at certainly is where are the rents relative to market and the long term outlook, there and I think the third thing certainly is.
Any available occupancy that we have we bought some assets certainly in markets that kind of high <unk> low 90% occupancy that we think we can push up and see some potential growth on top of that.
Within the last thing that we do look at that you pointed out of Todd as you know just the ability to put things on our platform from a removal of third party management, that's almost always the case when we're buying assets.
Almost always have of third party manager that we can replace it.
And then look at the impact of the economies of scale that we have of the market and how that will flow through so.
I think that's that's typically what we're seeing the upside from.
Alright. Thanks, just last one from me in for Robert for you.
From a modeling perspective, how you're thinking about timing.
Timing of settling your forward shares is that kind of coincide with these second quarter of investments.
I think theres going to be of part of that that gets settled in the second quarter. When you know when we look at just the straight math on that we've got call it $150 million of acquisitions kind of under contract or investments that we expect will be able to close we've got $67 million of dispositions second quarter, we always get a little bit of a.
A pickup in working capital first quarter's win per.
<unk> of our property tax payments are actually made so we are of use of working capital of the first quarter all of that to say you know I think the math comes out to about $50 million per.
Or minus.
Issuance of equity to kind of funds that GAAP and so that's how we're looking at it now.
Now is as we buy things as we get net investments were going to use our equity to go ahead and close on them.
Thanks Robert.
The next question comes from Tayo Okusanya of Mizuho. Please go ahead.
Hi, Yes, good afternoon, congrats on the day record quarter of the other guy.
And please always nice to see.
I wanted to stick on the acquisitions front.
And kind of your acquisitions guidance going forward can you just talk a little bit in the knee.
<unk> of the pipeline is it kind of more to read such kind of see more on campus versus off campus activity.
Specifically any potential opportunities to go into new markets.
<unk>.
Well I think what we're seeing is the blend I think youll see from us.
The off campus comes with functionally.
You know leasehold free so we are still looking the first advantage you get if you can get get without any ground lease.
We look at those opportunities and especially given the fact that we're seeing the compression and the synergies between the off campus in the on campus. So I think youll see the blend of about 60 40, its probably going to be 60 40, as we continue down the path.
I think Robert you want to give some more color on on on that.
I mean, I think that's just more where we're seeing good assets I think in all of the discussion of of on campus versus off campus in studies of rent growth.
Our biggest takeaway has been that there's really good assets both places.
There's certainly great on campus assets with good health systems.
That are going to continue to grow and continue to have long term demand thats great.
Also more growth and more opportunities in an off campus locations now to us.
So the location of care continues to shift into those locations. So I think we see good good real estate opportunities of both and I think that's what what the studies that we've seen of really supported not so much that that Oh. My gosh. This is better than off campus is better than honour that on campus has got to be.
Better than that off I think of size medical office is great I mean, theres a tremendous amount of growth in the amount of outpatient care of that's going to be delivered as Scott and good good locations and if you own that real estate.
That's the opportunity.
Two to own assets that produce that kind of <unk>.
Steady long term growth that we've come to expect so I think from our outlook, we become a little bit agnostic I think our view is just that theres really good real estate book locations and it's tended to be a 60 40 as we've looked at the individual characteristics.
I think we'll see that ebb and flow based on what we buy but long term, that's probably where our portfolio is going to end up.
And I would just like to say.
That question is the fact that we've added a new dynamic to our to our underwriting both from.
From an accurate from an acquisition perspective, and also from a disposition perspective as we're starting to analyze not just it used to be location location location, Inc, and <unk>.
Real estate was a very hands on sort of specific decision. We are starting to look more from a data perspective, we want to see and when we look at acquisitions now we're looking to see trends in the market. We're looking to we're getting data compiled it says.
Geographic trend towards the asset is the utilization of the.
Medical.
Outpatient experiences is that something that's going to grow.
What's the mix of the of the physicians in that location are in that that small geographic location is it over one particular overstaffed of one particular area or another.
It's something that I think again as we move forward you want to be in the right locations.
And it's.
Eight cities the right parts of the cities and rank growth.
Growth patterns in those cities and those communities and there's so much data out there right now that we're.
We're starting to.
Putting much more emphasis on the underwriting of looking forward not looking back and so off campuses is part of that analysis.
Thank you for that.
The next question comes from Lukas <unk> of Green Street. Please go ahead.
Hey, This is John answer Lucas just a quick one for me.
Just as you look at your portfolio and in particular, the non MLP assets. How are you thinking about those over the longer term.
Especially if you look to find sources of capital because of potential dispositions.
Any views on that would be much appreciated. Thank you.
Robert Go ahead John.
John I think we continue to look at those you know I think our view has always been non core assets.
Our secondary markets that we don't see as much opportunity on.
Or assets, just don't fit or our focus going forward. So I think as we look at the hospitals that we have.
We've certainly seen of bid on it so I think that could be an opportunity for us to look to.
Those at the right point in time, I think as we look at our portfolio of is such a small portion of it.
That we have in it so we've tended to focus elsewhere and it's continued to shrink as a percentage of our portfolio as we continue to grow but.
There certainly are ones that you will see us sell at the right right right point in time.
Got you. Thank you.
The next question comes from Michael Gorman of BTG. Please go ahead.
Thank you Scott if we can just step back a little bit more strategically I mean, you've talked about being at the potentially at the start of a new cycle. Obviously as you also highlighted a lot of liquidity in the system that could be cycling in or out we have potential tax.
Consequences and changes coming in the next legislative session. So I guess as you compare it to eight or nine I'm trying to think of ahead do you think that there could be some.
Disruption or some some opportunities as a result of this going forward that we actually haven't seen the disruption in the property markets yet that you can take advantage of.
Yes.
It's interesting.
We haven't seen disruption, yet and I think historically.
If you are believers of things do.
Over time react in some traditional manner I do think there'll be a disruption.
I read an article of lag.
Last couple of days.
For the first time.
But there is some concern about an asset reset valuation.
As I read it it came out where folks are saying.
There is a possible possibility that if there is a reset from a valuation perspective.
So I do think that that's going to happen at some point I think it'll be.
If we could predict at all.
From a much better position. Thank you you have to prepare for it.
Our viewpoint.
Picture is strategically invest in those locations that are growing that have the business environment and that have lower.
Business impediment, meaning the taxes.
Yeah.
Those types of dynamics and then.
See how of.
That respond over time.
I do think that at some point youre going to have some sort of reaction to any of their interest rates or inflation.
Or or something thats going to give folks that are well positioned on opportunity.
We want to make sure that we always have that opportunity.
Great and then I guess to that end.
We both had the opportunity to be around for a while.
In the past year have you seen anything in the marketplace in terms of underwriting from other capital sources deals that you've competed on where it looked like it was six or seven where people are making unreasonable assumptions about forward cash flows or is it just theyre projecting.
The current status quo to continue out into the future.
I think that what we've seen I've seen some acquisitions or some transactions that I continue to look at and say Wow. That's.
Rich pricing.
Oh, I don't know that it's realistic underwriting and it's sort of like putting money out in order to say that they've had activity.
And.
We have resisted that and I think by.
Our investment Committee made up of my board as in with me the majority of them for.
The duration of our company and so we've been through a couple of cycles and we've tried to be disciplined and prepare ourselves for bulk of types I think we're just.
We're very fortunate that we are right now.
Our major markets that we're in the opportunities that we're seeing in from one off acquisitions.
Our unique we've not been in this position before because we were much smaller 10 years ago, we launched different.
How we were growing and the pressures that we had.
It's a good plan trust right now.
<unk> things of that five five to six get development in that six of six five.
Get our leasing up three or four points and continue to build on our earnings we don't need to do anything drastic we're not facing the hurdles that the other sectors are facing and thats something that we always have to remember we may not go up like other folks go up but we certainly haven't gone down we've been.
<unk>, both from a dividend perspective of NOI perspective, and <unk> perspective.
And so.
We were not in the sector Thats kind of go up and down unless you make that we can just have a very very steady growth.
As a company and that's what we're focused on.
Okay.
Great. Thanks, Scott.
Our next question comes from Nick <unk> of Scotiabank. Please go ahead.
Hey, there this is Josh Berman with Nick I was hoping you could just talk about what drove the sequential decrease of lease rate and occupancy. This quarter and then also if you could provide some color behind the decrease in retention to around 65% I think it's typically like 80% to 85% historically, so yeah that'd be helpful.
Yes.
Yeah, you want to.
Yeah, no I appreciate that.
What we saw this quarter from a retention perspective was frankly, some some move outs of a couple of tenants that.
We knew about it was it was planned kind of pre COVID-19. One instance of a group had bought their own building kind.
Pre COVID-19 and it was just a matter of getting everything kind of put it out.
Another instance of it was just consolidation of practices on there.
That drove most of the lower level of Retentions I think that's abnormal for us and it's certainly not a trend that we're expecting to see the rest of the year I think our outlook frankly for the year on retention is that it will be of 75% to 85% type range. When all of a set of done. So I think it's just a bit of a blip as far as that goes.
But from an occupancy perspective from a from a timing of those vacates, we got caught up a little bit with new leasing that would typically backfill that space and time and be able to allow us to maintain kind of pretty.
If not growing occupancy there.
Impacted by COVID-19.
Certain things took longer the activity in the second and third quarter last year that would typically result in a move in.
By the first quarter of this year was obviously impacted by that so it was it was slower.
New leasing activity.
Net impact of the occupancy as of known Vacates just came to came to bear in the first quarter, but the good news is as we talked about the new leasing activity now is very strong.
The new leases that we were actually able to sign the highest that we've seen in 12 quarters. So we see that trend reversing itself as we work herself our way through the year.
Great. Thanks.
This concludes our question and answer session I would now like to turn the conference back over to Scott Peters for any closing remarks.
Yes.
Well, thank you everyone for joining us and we will.
Look forward to all of them with any questions and simple set of NAREIT coming up soon in the next month or so so thank you Linda everybody have a good weekend.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
Okay.
[music].
Yes.