Q2 2021 Physicians Realty Trust Earnings Call
Greetings and welcome to the Physicians Realty Trust second quarter 2021 earnings conference call. At this time, all participants are in a listen only mode.
Western and the answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star Zero and your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to Bradley Page SVP General Counsel and thank you you may begin.
Thank you good morning, and welcome to the Physicians Realty Trust second quarter 2021 earnings Conference call and webcast. Joining me today are John Thomas Chief Executive Officer, Jeff Theiler, Chief Financial Officer, <unk>, Taylor, Chief Investment Officer, Mark <unk> Executive Vice President of.
Asset management, John Lucey, Chief accounting, and administrative officer, and Laurie Becker Senior Vice President controller.
During this call John Thomas will provide a summary of the company's activities of the performance for the second quarter of 2021 and year to date as well as our strategic focus for the remainder of 2021, Jeff Theiler will review our financial results for the second quarter of 2021, and Mark time will provide a summary of our operations for the second quarter of.
2021.
Following the path, we will open the open the call for questions.
Today's call will contain forward looking statements as defined by the private Securities Litigation Reform Act of $19.95. They 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 of our <unk>.
<unk> to predict although we believe our assumptions are reasonable our forward looking statements are not guarantees of future performance of our actual results could differ materially from our current expectations and those anticipated or implied and such forward looking statements from.
And for more detailed description of the potential risks and other important factors that could cause actual results to differ from those contained and any forward looking statements. Please refer to our filings with the Securities and Exchange Commission.
With that I would now like to turn the call over to the company's CEO John Thomas John.
Thank you Brad and thank you for joining us this morning, our portfolio of best in class Medical office facilities continued to perform exceptionally during the second quarter delivering the predictable growth and operating outcomes that medical office investors have come to expect the.
This includes the collection of over 99% of all cash rents due during the quarter supported by the patient volumes that remain resilient. Despite the recent spikes and the Delta variant.
Along with this operating operational performance, we continue to have confidence and our external growth pipeline since our last call. We have made additional progress on our acquisitions and have high quality medical office building targets and various stages of negotiations.
Essentially all of this pipeline is off market and direct negotiations with existing health systems and developer and owner of clients.
So while our investments will be backend weighted this year, we remain very confident and our guidance of $400 million to $600 million of investment activity for 2021.
Our loan pipeline continues to grow as well and putting the newly announced mezzanine loan and Brooklyn Park, Minnesota.
<unk> real estate loan book totaled a 176 million and outstanding principal at quarter end and of secured by real estate valued at over $1 billion.
In addition to the attractive 8% average coupon and our loan portfolio represents a source of future growth through embedded ROFO rights and purchase options.
Within the loan book, our 5 projects under development with an ex expected market value of over $200 million upon completion and cleaning 1 loan to own transaction.
Our pipeline for development financing opportunities continues to grow we expect to secure of many of these new opportunities by year and supporting our growth in 2020, 2 and 2023.
We are also evaluating the opportunity to use the robust medical office market to dispose of some non core facilities at a profit.
This parent and can both enhance the quality of the portfolio and also provide an additional source of funding for the growth this year.
Our Chief Financial Officer, Jeff Theiler will review, our financial results and balance sheet and a few minutes, but I wanted to recognize Jeff and Mike freeing up the leading us and the achievement of our long overdue upgraded credit ratings with both S&P and Moody's we've.
And we've already seen the benefits of these well deserved upgrades to our cost of capital amplifying our opportunity for outsized accretive growth going forward.
The trends in favor of medical office have proven to be very predictable and reliable driving of consistent and growing rental income stream for the benefit of our shareholders.
Public investors and health care real estate can count on medical office to remain open and occupied and busy.
Medical office does not need to recover as an asset class. It is only impacted temporarily in the spring 2020, and Doc has maintained close to 96% occupancy throughout the pandemic.
We remain focused on growing our funds available for distribution and each year and we will continue to manage our organization to achieve that result annually.
Jeff will now review our financial results and then Mark then will share our operating results Jeff.
Thank you John and the second quarter of 2020, 1 the company generated normalized funds from operations of $58 million or 26 per share our normalized funds available for distribution were $55 million and increase of 3.6% over the comparable quarter of last year and our fad per share was 25.
And.
Our operating portfolio has continued to perform well and the second quarter. Our same store portfolio had consistent occupancy year over year and generated NOI growth of 2.4% right in line with the fixed escalators and consistent with our expectations.
The 1 the permit we granted in the midst of the pandemic last year has been fully paid back including $200000 of associated late fees.
Through this quarter and to the present time, we are seeing very little negative impact with our tenants from Covid and at this point. Despite the emergence of the Delta there and we're optimistic that our portfolio will continue to perform and be resilient and the current environment.
Turning to the balance sheet, we've been recognized by 2 major rating agencies over the past few months for portfolio and balance sheet improvements that have been years and the making.
We were upgraded to triple B flat by S&P on may 13th and upgraded to be double a 2 by Moody's on July 1.
These upgrades have a significant impact on our cost of capital and improve our ability to compete for the highest quality buildings.
And their rating evaluations both agencies recognize the high quality of our pure play mob portfolio and its superior performance. During the pandemic. They also noted our disciplined capital strategy and best in class tenant mix, specifically are 63% concentration of investment grade tenants, 93% exposure to net.
And significantly significantly lower proportion of near term lease expirations relative to the sector.
We remain highly disciplined with our capital strategy raising $83 million on the ATM and the second quarter and an average price of $18.39.
As we continue to pre fund our acquisition pipeline.
As a consequence, we currently sit and an excellent financial position with consolidated debt to EBITDA of 4.5 times and and outstanding revolving credit facility balance of $70 million to $72 million, leaving $778 million of availability.
This pre funding has placed us in the position to successfully execute on our substantial pipeline and the back half of the year.
We are still confident and the acquisition guidance, we laid out at the beginning of the year of 400, the $600 million of new investments and expect to execute on those investments prior to the end of the year.
As we discussed last quarter of the pipeline is full of the types of buildings that are in our sweet spot high quality of movies with strong investment grade tenancy from leading health systems.
J T has talked about the progress on the pipeline and well perhaps that progress has been slower than we were anticipating it has been steady and we remain on track.
Turning to other relevant portfolio of metrics, our second quarter G&A came in at $9.1 million and recurring Capex was $5.7 million per the quarter, our full year guidance for those metrics remain unchanged at $36 million to $38 million per G&A and $25 million to $27 million for Capex.
I'll now turn the call over to Mark to walk through some of our portfolio is just statistics in more detail arc. Thanks, Jeff quarterback.
Quarter by quarter, and <unk> continued to improve their reputation for stability with the occupancy collections and leasing trends that remained strong regardless of market factors.
The steady internal growth delivered by our asset management platform is the result of superior tenant satisfaction strong, 2.4% built in rent and rent escalators and and industry, leading 96% lease rate.
Our leasing and Capex teams continued to deliver value during the quarter with an impressive tenant retention of 87% positive cash re leasing spreads of 2.7% and low capex investments the totaled just 7% of cash NOI.
The operations team also continued to execute on the plan to expand our in house property management platform laying the groundwork for further cost efficiencies across the portfolio that will deliver long term value for shareholders. Specifically, we recently welcomed Mercedes Marquez and Nicole Bradley to the Doc family as we expand our management efforts.
And Phoenix, Arizona, and Birmingham, Alabama.
From a performance perspective are MLB same store NOI growth and the second quarter was 2.4%. The NOI growth was driven primarily by the year over year of 2.4% increase and base rental revenue.
Operating expenses were up 6.2% and offset by 7.0% increase and operating expense recovery revenue.
Year over year operating expenses were up $1.9 million overall, primarily due to a zero point of $5 million increase and utilities and the zero point $4 million increase and insurance cost.
Same store occupancy remained steady at 95, 4% year over year as our leasing team continues to execute consistently with strong retention.
On the consolidated basis, we completed a total of 395000 square feet of leasing activity during the quarter, the second highest quarterly volume and the history of the company tenant.
Tenant retention was 87% across 353000 square feet of lease renewals with cash renewal spreads of positive 2.7%.
Notably these results were achieved with limited leasing costs totaling $1.68 per square foot per year across the full volume of leasing activity of figure that is much more efficient than industry averages.
Our successful net effective rent outcomes are driven by our deep understanding of our primary markets and constant evaluation of the local leasing trends.
Turning to our capital investments for the quarter, we once again and proactively manage recurring capex to $5.7 million or 7% of cash NOI.
Year to date, Dockers invested $11.3 million and recurring capital projects.
While committed leasing tis were low on a per square foot basis, we do expect capital expenditures the tick up during the second half of the year due to increased leasing volumes.
As a result, we still expect the fall within the $25 million to $27 million full year guidance previously announced.
Embedded within all capital investments made by Doc is the strong commitment to materials and practices that enhance the patient experience and our ESG efforts.
Our second annual Interactive ESG report was released in June and highlight the exceptional progress toward our 3 year goals to improve the portfolio's overall carbon footprint energy water and waste usage by 10% compared to our 2018 base here.
In 2020 stock invested and twenty-nine sustainability, driven capital expenditure projects totaling $4.2 million generating approximately $7.7 million and operating expense savings over the next 10 years.
Additionally, we exceeded our teams social goals by raising our day donating over $350000 for worthy causes across the country and providing over 515 volunteer hours of service to charitable organizations.
And the 8 years since our IPO, we've not only built 1 of the best health care real estate portfolios and the country, but we have also assembled the best health care real estate team.
Our efforts directly translate into care for tenants evidenced in our 2020, 1 Kingsley associate tenant satisfaction survey results.
And this year, we surveyed nearly 365 tenants representing nearly $3.4 million square feet.
Physicians Realty Trust received and industry, leading 76% response rate.
In addition, despite the ongoing COVID-19 pandemic, we earned the highest scores and the history of the company, including and overall management satisfaction score of 4535 points of euro, beating the national benchmark.
Going forward, we expect continued successes from our growing operating platform, resulting in enhanced local market knowledge and repeat investment opportunities with existing partners profitable operating efficiencies and continued tenant retention with that I'll now turn the call back to John Thank.
Thank you Mark. Thank you Jeff will now take your questions.
Thank you.
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Our first question is from Ron said Brad.
And with BMO capital markets. Please proceed.
Thanks, guys are only my wife coffee, Iran, but that's fine.
And just on the acquisition pipeline.
Hoping you guys can and give us a little bit more color on the expectations for the second half I think last quarter, you talked about visibility.
$200 million of opportunities, maybe how those evolved and and kind of pricing expectations.
Yeah, Great question on the.
The pipeline and just continue to bill we're very very confident about the full year number is 400, and 600 million and we've got a line of side too and a pipeline that's at least that big right now so it's a you.
And a collection of high quality medical office building, some that were under construction and the first half of the year and just kind of moving to C O and and.
We'll move to.
Rent commencement here.
This quarter and so it's really we're really excited about it and so hopefully we're able to share a lot more with the next call.
And and the pricing is still kind of that mid fives to 6%.
Yeah of 5% to 6% and the higher quality newer buildings are going to be at the low end of that range, but the development pipeline, which continues to grow and that's.
And where we achieve those higher returns.
Okay, and then you just curious on what you guys think about the importance of scale and and maybe the opportunity for public M&A given.
Potential cost synergies or or further.
The improvements to the cost of capital post your credit rating upgrade.
Or.
If the if you prefer to kind of just onesies and Twosies and don't really like the prospect of a bigger portfolio transactions or just kind of your general thoughts on that subject matter.
Yeah, 1 I'm sorry, we had a brief disruption here the.
I think I got the gist of your question the.
Our execution strategy from the beginning has been dragged negotiated off market transactions, primarily through health system relationship of physician relationships and.
And health care real estate developers and that's what that's what we're focused on our strategy and execution there and again, we've got a high quality pipeline, we will be able to share a lot more about what the next earnings call.
Scale is obviously very important as we've grown as Mark mentioned and we've expanded our property and our internal property management team.
The team and a couple of markets.
And where we have had some significant growth opportunities and so again scale and our and our core markets.
<unk> continues to drive a lot of synergy value and it grows more and it provides more opportunities. So you know the public market M&A or large portfolio transactions and we certainly look at everything but we're focused on our core strategy and.
And you know.
Approaching 6 billion and assets, we've got pretty good scale already.
Thank you guys.
Yep, Thanks Mark.
Our next question is from Nick Joseph with Citigroup. Please proceed.
Thanks.
And you look at your acquisition pipeline, obviously, a lot of it is back end loaded this year.
Is that.
And kind of unique to this year or is that representative of what you are and what your acquisition pipeline should also look like heading into 2022.
Yeah and it is it is unique for this year. It just it's just the circumstances of how the pipeline built and the at the end of last year, and he and we'd like to be a little more spread out and and I think historically there was a time, where we were closing the building of week. So.
It's just the uniqueness of this year the.
And I think there were.
Some sellers from health systems at the end of last year, the Werent really thinking about monetizing, but with the expecting changes and tax laws and kind of changing and the.
Political environment things like that where we're seeing more opportunities can be bought the kind of bubbled up and the first quarter that we've been negotiating through and again expect to execute on this quarter and the last quarter. So I think it's just unique to this year, but.
And that's been.
Frankly, it's been pretty exciting force.
Thanks, and then just back to the broader transaction market, you mentioned cap rates, maybe 5% to 6% how have you seen portfolios trade relative to the individual assets and then what is the buyer pool of look like.
Yeah, the buyer pool has gotten bigger private equity continues to.
And our quote unquote private equity if you will as it continues to raise a lot of capital continues to and.
The explore both individual assets and the portfolios have been floating around and we havent seen anything.
I mean.
Of course, we look at everything Thats marketed but most of our substantially all of our transaction volume this year will be off market and.
Not portfolio of based transactions, but theres, a theres a premium out there for the portfolios, we've seen traded and leased based on the quoted the cap rates those the ones that of.
The $3 million to $500 million portfolios of the floater ground.
And I think I think we're hearing 5 and a quarter kind of cap rates.
Jeff on some of those on assets that are probably high fives to 6.
But if bought and an individual basis, so a lot of capital chasing the the assets as we said we expect to dispose of the Opportunistically a few of our assets that just don't fit our strategic.
The 4 pillar going forward, but they are tracking and a nice high price.
Thank you.
Our next question is from Joy, the Jordan Saddler with Keybanc capital markets. Please proceed.
And good morning, guys.
Hey, John.
So I wanted to follow up on that last piece of J P. You mentioned, the dispositions, which I feel like we've kind of had the you guys of bad debt and on again off again.
The view towards dispose of a little bit and it sounds like you're mentioning them again, which makes me feel like you're a bit closer maybe the when you had been in the past the selling some stuff can you maybe offer a little bit more color.
And then surrounding the sales.
Yeah.
We think our portfolios.
Prune some things a couple of years ago out of the portfolio. We think the portfolio's outstanding of our 275 buildings, we love all of our children and so but the.
There's just a couple of I'd say small circumstances, where.
Either of portfolio might trade and our assets are complementary to that or.
We're always kind of exploring the opportunity to sell the L tags and things like that so it's just opportunistic and things of that of bubbled up but I do we do expect to close on a handful of dispositions this year and will use that capital to underwrite physicians.
The volume wise are we looking at like a 100 million total or some kind of smaller.
Okay.
The loser.
And we dropped the line.
And you guys hear me.
And they are still connected.
The technical difficulty of Oh, okay.
It might be muted.
Hey, Jordan, we lost per minute, sorry about that I got on the type of people quite a lot of things and you got.
Yes, and your question was.
You said of 100 million net and that my response to that was that would be on the high end.
It's a it's a handful of dispositions.
Okay. Okay.
And then.
Along the same lines the.
The leverage really with the use of the ATM Jeff.
Good job Youre I think about as low as we've seen and a while at 4.5 times net debt to EBITDA at the he quoted.
So sort of appetite for continued and sort of use that to get the leverage lower ahead of.
Sort of the backend weighted acquisitions it would be my question and then.
Any insight and additional ATM and that's been issued post quarter end.
Yeah, and a good questions Jordan.
Like you said, we've been pretty proactive about funding the acquisition pipeline and the first 2 quarters of the year.
So really we're at a point right now where we can execute on that on that acquisition guidance and not raise additional equity. So I think we're and we're in a really good spot I mean look we're always opportunistic about about how we fund our deals and.
It's dependent on what we see coming down the line.
And the far future as well so we'll take it day by day, but as the.
As a need we don't have any need for additional equity.
Okay.
Oh.
Administrative 1 page F G and the late fees and collections total book in <unk> that won't repeat.
Yeah, Yeah, just 200002.
200, okay.
Thank you.
Okay.
Our next question is from Amanda Sweitzer.
From Baird. Please proceed.
Hey, good morning, guys.
And up on your comments on the increased Capex and the increase of weakened by any of the fact your back half of lease maturity is actually the comparable to what you experienced in the first half.
And so are you expecting to be able to build the occupancy over the remainder of the year and what's the outlook for leasing vacant space at all.
Yes. Thanks, Amanda this is mark.
And as mentioned in the back half of the year, we've got about 2% of our ABR coming up for renewal and the second half of 2021.
And that's about 91 leases.
And an average of about $23 per square foot. So we feel really good about where the market rental rates are and especially a lot of the local market trends.
And being able to push some of those rents and some of the escalators upon lease renewal.
And then what we are seeing a lot of right now is the request for Capex and Ti and some early lease renewals. So we accelerated the few leases this quarter extended early and I think it's a nice termed the hospital leases and extended them into the future of the solid rent bumps. So we expect solid leasing activity to continue there.
That's helpful and then and used.
And more companies start to kind of to solidify the returned to all of its plan can you provide that day and how you're thinking about your health system administration pendants today and then.
And as tenants, giving you of any update about how they're thinking of that that Gulf War and speak loud.
Yes, I think.
We have a small amount of it.
Well the administrative space with the health system, but it's at least for multiple years. So we're having that dialogue I think health systems are again with this delta variant it's kind of.
Slowed down some of their internal thinking while they focus on the hospitals that are full and and again shifting patients to the outpatient care facilities like we own.
So we don't have any good color yet other than sit.
Systems are trying to rationalize and make that decision and we've had conversations about.
Either selling those building sublease and those billings or keeping them.
And so while they figure out those plans maybe in the fourth quarter, so sorry to be so big but it's we don't have a lot of that space.
No that makes sense I appreciate the time.
Yep.
Our next question is from the ground.
With Morgan Stanley. Please proceed.
Thanks for taking the questions good morning.
I guess, maybe just on that last point around health system are figuring things out given given COVID-19 and maybe the street's surgeon can.
Can you just give us any color on conversations you may have had or expect to have on either of sort of sale leasebacks or just even more directly on health systems looking at that whole off campus close the pit close to a resident of close to consumers in terms of pushing care out there.
Yeah. So.
Obviously big believers in that long term strategy by health systems to <unk>.
Outpatient care facilities and new markets.
That's exactly like the Brooklyn Park development, we're financing and the projects. We're developing this year are almost all of our financing the development of this year almost all the <unk>.
Xactly and that kind of description and ambulatory surgery center anchored health system and employed physicians and outpatient care diagnostics things like that.
Our portfolio does include a nice balance or mix of on campus.
Assets that are the health system and this and our.
And our pipeline are monetizing to.
The raise capital from their balance sheets and at the same time coordinating discussion around.
New developments with the same health systems. So it's a good mix, where you know and haven't seen.
And a real change in the long term trends of.
Of the <unk>.
Spanning on campus newer assets and at the same time planning flags and new demographics and for growth.
Okay. That's helpful.
And then maybe Jeff if you can just remind us and this environment, where there's still inflation concerns.
Whether it's on the labor and materials taxes.
Can you remind us again, just the the overall structure of kind of the preponderance of leases, how how the Fox who was the work.
Yes, Vikram this is mark.
Jeff mentioned in his prepared remarks, the our portfolio is very well insulated from rising operating expenses due to the triple net structure.
93% of our portfolio is triple net.
And then really all about 2% and some protection against inflation of operating expenses of 1 of them or modified gross leases, which also have of cap.
Paid for by the tenant so.
First of all of that and our same store results with you now.
Slight increase in operating expenses, but nearly all of it was recovered through a recovery structures and the portfolio.
Got it okay. That's the that's helpful. And then I just wanted to go back to the disposition Com and Ah you know that to me and and I guess like leverage obviously of the group. So you can oh.
Look the use of balance sheet, but just given where the you know maybe some of what your private fears of doing which seems like they're there.
And the market to sell more given pricing what would make you want the kind of really move that disposition number higher.
Really.
Not bad from that I'd like I said these are opportunistic.
The sales if you will and we've talked for years about selling the <unk>. If we can get and appropriate price may continue to perform very well and this and the COVID-19 environment and thats kind of what they're used for.
So their EBITDA and EBITDAR has been stronger than the Nir, So theres a potential good opportunity and sell those this year. The other is again, it's a very small handful of buildings and <unk>.
Unique situations that.
We're <unk> the opportunity to sell and pricing has been excellent and we're ready to move those out and we've really the portfolios and fantastic shape of 96% occupied and.
And there's not a lot in the portfolio 1 of them that we want to even consider selling.
Great. Okay. Thanks, so much.
Our next question is from Michael Carroll with RBC capital markets. Please proceed.
Yeah. Thanks, J T on the investment pipeline I mean, it sounds like that the size of the pipeline is equals the amount of deals that you want to close and the second half of the year. I mean do you have those deals under contract right now and you just need to close on those I mean, how does that work out.
Yes.
A good portion of them are under contract and just moving to work down.
Down the the normal closing process with those transactions.
Others are under exclusive kind of signed letters of intent and all the economics and deal terms of worked out and just working through the documentation and closing process will slower in part because of of.
And the travel restrictions and frankly the demand.
And the construction and other things and.
And going around the country, but we remain very confident about not only getting those transactions close but continue to work through negotiations on several other things of our pipeline.
Okay, and how many of those deals and the second half of the year reflect the development projects and do you work out those deals during the time of those projects begin and the construction as soon as the occupancy or the leases commence and that's when you're you close those deals or how does that work out.
Yes.
It varies a little bit the loan downs, essentially workout or refinance the.
Construction of all from our balance sheet, the 100% occupied investment grade credit quality tenants and then the loan stays in place for typically for a year for tax reasons, but it stays in place for 1 year and then the collapses into ownership you'll see 1 of the investments. We made this year was the demand.
Cancer Center, which is exactly the process.
And on our books for a couple of years first as alone and now converted to the younger ship.
Some of the development financing is where we just are part of the capital stack and typically that happens when the building is pre leased to some high percentage, but not fully leased and.
And the developer has their own capital and gets their own construction loan we provide some capital and then we have a roper debt.
Triggered again, usually with rent commencement.
And then maybe per year after that for tax reasons. So it just varies but as we said or I said and my comments.
Assets under construction on our books today would be valued at about $200 million. Once we convert those to ownership. So that'll happen most of the it'll happen in 2000 and what's under construction today will.
And burn over in 2022, some of that could could blend into 2023 projects, we start and the fourth quarter of this year and we're working through.
The most likely probably of 'twenty early 2020.3 conversion to full ownership.
The pipelines growing and it's been an interesting year for health systems, moving board of projects that Didnt do that the didn't start last year, but.
Proceeded with this year.
Okay, and then your investment targets does that reflect the amount of capital you're going to deploy out. This year does that reflect the amount of capital you're going to commit to deploy including those those development projects that will bleed into 'twenty, 2 and 'twenty 3.
Yeah and.
Mike It's Jeff it'll it'll reflect obviously the amount of acquisitions, we complete and then the amount of development that we're committed to for the year.
Okay, Great and then just last 1 Jeff could you remind us what the long term leverage targets is that still a mid 5 net debt to EBITDA number has that changed.
No that's right, Mike So 5 and a quarters are kind of long term debt target. Obviously, that's a conservative number so there can be some flex around that.
But that is the in general our long term target.
Okay, great. Thank you.
Thanks.
As a reminder of the star 1 on your telephone keypad, if he would like to ask the question. Our next question is from Daniel Bernstein with capital 1. Please proceed.
Hi, good morning.
And Dan.
Hey, just wanted to dig into a little bit of about the benefits of the increasing internal management and <unk>.
Maybe kind of the strategic direction of that as it related to ESG.
And are you.
And just signaling maybe that you guys are are looking a little bit more away from triple net to a more gross lease type of assets.
And then maybe and journey way to quantify kind of the benefits.
Or what benefits you've seen as you grow that management side of the business.
I'll give mark a second to think about the direct financial formation, but it's really again and part of our long term strategy of Dan of.
And again, when we have of health system and we.
We always have a lot of repeat business with at least that's our goal with the health systems that we work with and so once we get the scale and you can internalize that management again, there's a financial benefit of that kind.
Every time you add another building, but you don't have to add in and out of the property management team.
And just the direct correlation there so.
It is like and the Phoenix, Mark and the Birmingham Mark that we've just continued to grow and those 2 markets and just had the opportunity to hire a couple of outstanding people to put on the team and then directly manage those buildings and those markets are ourselves some scales pretty pretty natural the Columbus, Ohio has been a fantastic example for.
And.
And once we internalize the management not only and we're getting 1.
The return from that the financial return from that and it's also leading to more opportunities in those markets and just kind of builds upon itself. So it's.
It's not a sign of moving away from Triple net leases.
Again, we're focused on again kind of minimal and minimizing the risk maximizing the.
The synergy value of internalizing management, and managing the buildings better and at a lower cost and thus hopefully moving more of the total cost of occupancy to triple net rent to us not just expenses.
Yes, I'd add to that.
He said it all starts with the relationship and the hospital relationships the local market knowledge the ability to expand our acquisition opportunities with hospital partners across the country, then secondly, the financial impact.
Starts of economies of scale from just having more properties and the market and being able to lower operating expenses for our health care partners and the buildings.
Again, most of our expenses are insulated by the triple net leases, but we look the benefit upon lease renewal from from the total occupancy cost that we can show of the tenants and.
And the management fee itself.
We added about 20 to 30 basis points onto a cap rate and the acquisition if we internally manage their so their as J D said theres a direct impact from the management fees associated.
With internalizing property management, so we've really grown a great team around the country and.
And look forward to leveraging the economies of scale and the team as we grow the portfolio and the future.
Alright.
And what portion of the portfolio is now internally managed.
7 of our of our largest markets are of our top 10 largest markets are all internalized.
And we asset manage everything and the portfolio of course, but theres a few markets, where we partner with hospital systems, who have of real estate team directly.
And we treat them exactly like part of our partner or a development partner that has lifelong relationships and market. We work hand in hand with them almost as if they're part of the Doc team, but the <unk>.
<unk> not.
Not internally managed though.
Some of our top 10 largest markets today.
Okay.
And I appreciate it that's all I have thanks.
Thank you Dan.
This does conclude our question and answer session and I would like to turn the conference back over to management for closing remarks.
Yeah. Thank you again for joining US today, we really appreciate the questions of dialogue and please follow up with Jeff you got any other and Mike any other questions. We do encourage you all to get vaccinated, we were starting to move back into the office ourselves and.
So stay safe and we hope to see everyone at the conferences this fall and thank you.
Thank you. This does conclude today's conference you may disconnect your lines at this time and.
Thank you for your participation.
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