Q2 2021 Healthcare Realty Trust Inc Earnings Call
Good morning, and welcome to the Healthcare Realty Trust second quarter financial results Conference call, all participants will be in listen only mode.
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Please note. This event is being reported I would now like to turn the conference over to Karen Smith. Please go ahead.
Thank you for joining us today for healthcare Realty's second quarter 2021 earnings conference call.
Joining me on the call today are Todd Meredith.
And even the NCD, Rob Hull and Kris Douglas.
A reminder, that except for the historical information contained within the matters discussed on this call may contain forward looking statements that involve estimates assumptions risks and uncertainties.
These risks are more specifically discussed in our form 10-K filed with the SEC for the year ended December 31, 'twenty 'twenty the.
Forward looking statements represent the company's judgment as of the day of this call. The company disclaims any obligation to update the forward looking material.
The matters discussed on this call may also contain certain non-GAAP financial measures such as funds from operations.
The normalized F F O F F O per share normalized <unk> per share funds available for distribution Fad net operating net operating income NOI EBITDA and adjusted EBITDA. A reconciliation of these measures to the most comparable GAAP financial measures maybe found in the car.
Company's earnings press release for the second quarter ended June 30th 'twenty 'twenty 1.
The company's earnings press release supplemental information on forms 10-Q, and 10-K are available on the company's website.
I'll now turn the call over to our Chief Executive Officer, Todd Meredith.
Thank you Kara.
Good morning, everyone and thank you for joining us for our second quarter earnings call.
Today, I'll discuss current healthcare utilization trends, our second quarter results and our external growth momentum.
And I'll describe how our strategy to deliver steady growth quarter after quarter.
And I'll close by touching on a few of our internal initiatives.
First we're pleased to see that most providers are back to normal in terms of utilization.
Healthcare providers, who have proven their ability to operate throughout the pandemic.
Patients of returned to their doctors and we're hearing from our tenants the outpatient procedures are back to or above pre pandemic levels.
Even more encouraging physicians and health systems are telling us their businesses are growing and they need more space to meet demand.
This underscores our view the healthcare utilization is poised to continue growing on a consistent annual basis propelled by age and demographics.
Turning to our results we reported same store NOI growth of 2.9% for the second quarter, which puts us back in line with our historical average of about 3%.
Looking ahead, we're well positioned to sustain the steady levels of internal growth.
We continue to see the benefits of operating in dense markets with high barriers to entry.
This insulates us from new supply and facilitates steady rent growth.
As rents rise, we are well positioned to benefit from shorter lease terms, which gives us the ability to increase rents more often.
With respect to external growth were truly firing on all cylinders.
Year to date, we've acquired 21 properties for over $400 million.
We're well on our way to meet or exceed our 2020 acquisition volume, which was our best year ever.
And we're confident in our ability to continue this momentum.
Today, we're seeing aggregators sell portfolios comprised of lower quality, often isolated assets at premium cap rates.
This is driving relative cap rate compression, especially on the portfolios.
What makes us different is that we're sourcing individual quality assets at attractive prices and better markets and building on our strategic clusters.
Our ability to smoothly integrate properties into our existing operations reflects the value of our platform.
Another source of value creation of our development pipeline, which includes over $1 billion of embedded growth opportunities.
As an example here in Nashville, we're starting in on campus redevelopment project involving of property, we've owned for over 15 years.
The place of the existing building, we're constructing of larger LEED certified medical office building at the center of the Ascension Saint Thomas Midtown campus.
The strengthens our relationship with St Thomas and builds on our cluster of nearly 1 million square feet in Nashville.
Our strategy is straightforward, we focus on markets with strong demographic trends and partner with leading health systems.
In today's competitive environment, our local market knowledge and industry relationships help us source, new investments and attract new tenants.
Our cluster strategy amplifies these benefits.
And we gain scale and efficiency as we lease and manage more and more properties in close proximity.
In terms of location, we target properties on an adjacent to campus complemented with nearby off campus facilities, where we can drive incremental returns.
We're able to further enhance our yields by engaging in targeted development projects and utilizing our joint venture partnership, which widens our opportunity set.
The strategy has paid off in contrast to many other REIT, whose results were hard hit during the volatility of the last 18 months, we've delivered growth in <unk> per share each quarter.
Over the long term our strategy creates value for shareholders through the steady compounding of cash flows.
Before I hand, the call over to Bethany, Let me take a few moments to highlight some recent initiatives, we believe the depth and breadth of our team as well as the long tenure of our leadership as the driver of our success.
I'm pleased to announce that we recently promoted Julie Wilson to exactly executive Vice President of operations.
He has been with us for over 20 years and this this promotion highlights for leadership in the growth of our platform in that time period.
Julie now has over side of our portfolio operations as well as marketing technology and ESG groups.
And with respect to ESG, we continue to dedicate resources to this important effort.
Our ESG program will now be led full time by Carla Baca.
This year, we completed our second grasp the survey and later this year, we will release, our third corporate responsibility report.
And finally as you may have heard on the introduction. We're pleased to welcome care of Smith, who brings years of REIT Investor Relations experience and will lead these efforts for healthcare Realty going forward.
I'll turn the call over to Bethany now for an update on healthcare policy and recent trends.
Thank you Todd.
Health systems are reporting strong momentum and elective care and patient utilization across the board.
<unk> from better than expected in the second quarter from the public Hospital company.
1 of the main drivers for the recovery and growth outlook outpatient volume.
Physicians have been able to ramp up of patient visit and surgery more quickly than hospital in most market.
N G M. A reported positive average growth in physician compensation for 2020, that's on.
1 of strength and then the shutdown of routine care and elective surgery.
Ambulatory outpatient setting have also experienced strong employment growth throughout the recovery.
In 2021 physician offices continue to be a bright spot for job gains in the healthcare sector, which bodes well for medical office space demand.
Physicians are expanding into larger practice groups to lower administrative costs increased market share and utilized external capital to fund growth.
Healthcare providers are also benefiting from the public health policy environment. The continues to support positive reimbursement.
And expanded health insurance coverage.
More than 2 million people getting insurance through the exchange marketplaces.
The special enrollment period after Congress increase the availability of subsidies last year.
Congress of focus now on extending the 2 year expansion of 8 T. A subsidy and exchange eligibility and the upcoming budget an infrastructure bill.
The legislative agenda should provide a stable backdrop for providers as they meet great greater patient demand and pursue growth initiatives.
On the regulatory side CMS is pursuing several avenues to lower healthcare costs.
President Biden issued an executive order in July mandating, the FTC to increased scrutiny of hospital consolidation and anti competitive practices among providers.
CMS also continues to implement regulations on price transparency.
Requiring a list of hospitals prices to be published of the most common servicing.
It remains to be seen if consumer friendly disclosures will change patient behavior when choosing their care.
But these efforts to lower cost growth and ensure competition should accelerate incentives for healthcare delivery in outpatient setting.
The correlation of health policy Hospital regulation and outpatient trend is continuing to advance the nation's demand for medical office facility.
The opportunities that lie ahead position HRS portfolio and external growth prospects well within the rising tide of healthcare services.
Now I will turn the call over to Rob to give us an update on investment activity.
Thank you Bethany.
Investor demand for <unk> has accelerated.
Highlighted by the resilience of the asset class over the last 18 months.
As a result cap rates have continued to trend lower.
We have also seen an uptick in the number of portfolios on the market as the MLB aggregators seek to capitalize on this demand and attractive pricing.
And our view most of these portfolios of disparate assets of richly priced at 50 to 100 basis points over similar quality individual properties.
In contrast, our strategy is to curate a high quality portfolio clustered in dense growing markets by targeting the properties we want.
We have been busy on the acquisition front.
We closed on 14 buildings for $336 million since the end of March.
These acquisitions had a blended initial cap rate of 5.2%.
With another 30 basis points of embedded upside through lease up.
3 quarters of these acquisitions are located directly on campus and all are located in existing markets.
The average 10 mile population density around these assets is over 900000.
The projected growth of 5.4% is nearly double the U S average.
These assets also illustrate our cluster strategy and the depth of our existing health system relationships.
As an example, we acquired 5 buildings associated with Centura health, the leading system in Colorado that we have worked with for over a decade.
We now have over a million square feet with Sentara and expect to add more over time.
The year to date, we have completed $412 million of acquisitions, adding $1.1 million square feet to our portfolio.
Given the strength of our activity year to date and a robust pipeline, we are raising our acquisitions guidance.
The increased range is now $500 million to $600 million.
In this competitive environment. We are also taking advantage of the strong pricing to recycle capital into investments with better long term growth prospects.
We have closed on approximately $115 million of sales of year to date.
We are raising our disposition guidance to $115 million to $175 million for the year.
And our development pipeline, we see increased momentum as hospitals expand their outpatient programs and Nashville, we kicked off the development that is highly integrated with Ascension Saint Thomas of Midtown Hospital.
For building, a 106000 square foot LEED certified amobi with the subterranean parking garage.
And it will also include a new shared front entrance with the women's services tower of this leading hospital.
Our budget is $44 million and construction will take approximately 2 years.
At completion, we will have almost 450000 square feet on this campus and nearly $1 million in the dense healthcare corridor of Nashville.
What's important is developments like the strength in our provider relationships and are an attractive avenue to create value.
The target development yields of 100 to 200 basis points above comparable stabilized assets.
In closing our focus on relationships and clusters means that the investments we are making today will lead to more investments tomorrow.
With our increased acquisitions guidance, we are on pace to deliver robust accretive net investment activity for the year.
Now I'll turn it over to Chris for a review of our financial results.
Thanks, Rob.
Our second quarter results reflect the steady growth of our M O be focused business.
Normalized <unk> per share was <unk> 43.
Up a penny from a year ago.
This is driven from them from the contribution of the $500 million and net acquisitions completed over the past 12 months, along with meaningful same store growth.
Second quarter same store NOI increased 2.9%, which is in line with our long term outlook.
Trailing 12 month same store NOI growth was 2.3% up from 2% in the first quarter.
The year over year second quarter NOI growth benefited from a few key items.
First the for 9% increase in expenses appears to be above normal. However, keep in mind, we're coming off of quarantine impacted Lowe's from last year.
On a compound annual growth rate basis from the second quarter 2019 expenses grew just under 1%. This.
This is below our long term expectation of 2 to 2.5 per cent.
Second parking income is essentially back to pre pandemic levels.
The rebound generated year over year growth of 45% and parking income for the quarter.
Yeah.
Finally, the $700000 reserve for Covid rent deferrals booked in the second quarter last year is boosting year over year the year over year comparison.
As a reminder, we reversed the majority of the reserves in the third and fourth quarter of 2020 as the deferrals were repaid.
When you're updating your models. Please keep in mind that this reversal together with normalizing expenses will dampen year over year growth in the next 2 quarters.
But the real takeaway is the consistent embedded growth in our portfolio.
The portfolio average in place contractual rent increase is approaching 2.9%.
For our second quarter lease renewals the average cash leasing spread was 2.8%.
Year to date cash leasing spreads of averaged 3.8%, which is at the high end of our 3% to 4% target range.
For leases commencing in the second quarter, our average future contractual increase is 3.1% 20 basis points higher than our in place average. This reflects our pricing power derived from our quality portfolio and attractive markets.
With respect to occupancy we are still catching up from last summer.
And like most of the real estate sector, we're working through the impact of delays in permitting and construction.
On average we have seen build out time lines increased by approximately 30%.
In some high growth markets like Dallas, permitting timelines have more than doubled as.
As a result, our same store average occupancy was down 50 basis points year over year.
While these delays may persist in the short run we are optimistic about our ability to drive improvements in occupancy moving into next year.
Tours and interest are strong across our portfolio as physicians seek space for their expansions and over the long term the projected growth in outpatient care will drive the need for more medical office real estate.
Regarding our balance sheet and liquidity net debt to EBITDA was 5.1 times down from 5.3 times in the first quarter.
During the second quarter, we funded $223 million of investments with $66 million of dispositions.
$38 million from our joint venture partner partner as well as the settlement of $116 million of forward equity contracts.
As we look ahead, we have ample liquidity to fund our growing pipeline of acquisitions.
We have $150 million of forward equity contracts remaining to be settled in addition to cash and other liquidity sources.
The year to date Fad payout ratio is 85% with moderate maintenance capex in the first half of the year.
We expect maintenance Capex to increase as we move to the back half, but the payout ratio to remain below 90% for the year.
The events of the past 18 months more than proved the resilience of our portfolio we.
We believe the strong underlying demand drivers for outpatient care will help drive internal and external growth.
These tailwind when combined with low leverage and access to multiple sources of capital we will continue to drive compounding per share growth.
Operator, we're now ready to open the line for questions.
We will now begin the question and answer session to ask the question in the press Star then 1 on your Touchtone phone.
Youre using a speakerphone please pick up your handset before pressing on the queue.
Withdraw your question. Please press Star then 2 at this time, we will pause momentarily to assemble our roster.
The first question comes from Nick <unk> with Scotiabank. Please go ahead.
Thanks, Hi, everyone I was hoping to hear just a little bit more in terms of the transaction market and you know the decision to increase.
Guidance on the acquisition side.
Yeah, maybe you can just talk a little bit more about some of the opportunities you're seeing why are you know why why you're a good increase that guidance.
Yes, sure I think if you kind of goes back to.
Really last year, when we continue to.
To benefit.
From our team being out in the continuing to build our pipeline I'm really if you look at kind of going back to the way we source.
Property is really relationship driven more.
Focusing on our filling out our clusters and so continues.
To build that last year and as we came into this year really saw some momentum.
With the closing on those properties and as we put that in the first part of this year and if you look at our pipeline. It's now it's approaching the targeted pipeline that we're working on its target of approaching $1 billion. So.
We see some some momentum there and we're getting a lot of traction and so that.
That level of confidence has sort of risen through the year of through the through the year as we've been able to execute on these and so I think youll see us.
Close on properties that look much more like what we've already closed this year.
You know primarily on an adjacent properties bill.
Building on our clusters in the existing markets that we're already in and that we know and have good relationships there.
Okay Perfect and then just the just a follow up question is on the on the disposition activity.
I know you I think you also lowered your yield expectation on that and year to date that the yield has been lower on dispositions then the acquisitions.
But some of those dispositions year to day war not fully leased assets. So I'm, just trying to understand a little bit more.
In terms of that what sort.
Second the accretive benefit of right now of where you're investing.
Versus where you're selling how much of the disposition cap rates, though are being affected by.
Not selling fully leased buildings.
Stabilized buildings.
Yeah I mean.
I think it's the combination of the strong pricing environment, certainly work for taking advantage of that.
But but the you're right. They were on buildings that we didn't see an opportunity to to build out the clusters and some cases.
Where there was an opportunity for growth and so some of those properties, although they were struggling on occupancy wise.
On the buyers were local individuals who saw an opportunity and so we were able to achieve the nice cap rate on some assets, where we didn't see a lot of growth going forward. So I made the decision to roll out of them.
Alright, great. Thank you I appreciate it.
Our next question comes from Jordan Saddler with Keybanc capital markets. Please go ahead.
Hey, This is Arthur Porto on for Jordan 2 questions from me.
The elevated pace of investment.
Sustainable on the long term or is this more sort of short term in nature, maybe for the next year.
Also we noticed that the same store portfolio continues to see some negative net absorption. So you could provide some color on this trend that'd be appreciated. Thanks.
Sure Arthur on on the acquisition pace.
As Rob described I would say the pipeline has continued to expand and our view is it is sustainable.
If you look back of or 2 or 3 years, maybe 3 or 4 years, you'll see that it's been building and that's been a process of expanding the pipeline and as Rob described really focusing on building out of our clusters and so we just see a lot of depth. There. It's a very targeted approach in the markets that we that we're in today that we want to expand upon but also targeting some new.
Some new markets. So we're making progress there I think we see it as sort of of sustained effort to try to push towards a a pace of approaching 10% of enterprise value each year, and obviously it may ebb and flow of little bit from there, but youre seeing of close level for close to that level last year, certainly driving towards that this year and that's our plan going forward.
On.
On the on the occupancy Chris you on yeah on the occupancy and absorption it really plays into what we've seen as it relates to delays and build out.
Which is which has increased over the last year and that's tied to the extended permitting times as well as some of some delays in construction of new materials and such.
But that's you know that's not a permanent issue, we view that as temporary and it does appear to be leveling out and hopefully we will start to reverse.
But the underlying demand for space, including tours that we're seeing remained strong and positive so.
We look out into the future into late.
Late this year moving into next year.
We have optimism on absorption and overall occupancy.
Great. Thanks, guys.
The next question comes from next Joseph of Citi. Please go ahead.
Thanks, guys.
Touched on the current portfolio of premiums that youre seeing in the market.
As you look at different opportunities and I'm sure you look at everything.
Obviously, the accretion is important what are the.
Key strategic consideration.
Yeah.
Yeah, that's I mean, clearly the focus whether it's an individual asset or it's a.
Smaller portfolio or a much larger portfolio and there is all of that available today.
It's very market driven obviously, we're very focused and disciplined about pricing, but strategic.
Strategically we're very focused on how does this work with our portfolio are these the markets. We're in and can can expand our strategy and our clusters or is it.
And the new markets that we want to be and obviously not every portfolio can be perfect. But you know you saw of several years ago jump on the medicine only portfolio in Atlanta that was of a market that we really wanted to get into it and they had really high quality of property. So it made sense for us and we were a bit more aggressive there. So it's very market driven and then and then the next layer of being.
You know the character of the relationship with the health systems, the whether they're market, leading strong health systems, and then obviously the strength the strength of the assets themselves.
Thanks, That's helpful. And then you should think about.
Kind of the current company in the current enterprise value. How do you think about the ability the scale. If you were to get larger.
What are the kind of considerations there thats always the from cost of capital.
Or anything else just given the current size versus kind of the.
And thank you to answer the part of it of course.
The only.
Sure.
The us theres 2 sides of that right. There's the there's the portfolio side the operational side that I was just touching on where we can build upon that scale on the efficiencies as well as market knowledge sourcing leasing that comes from getting larger in markets and having more markets that you could do that and so all of that can be positive with scale as it relates.
To sort of the balance sheet capital clearly there are some efficiencies as you can scale up we've seen that in our lifecycle is that's improved I would say, we certainly benefit from being a relatively super safe asset class and I think we've got a long track record there.
And I would say as you look at whether it's credit spreads or.
Equity multiples I think we have enjoyed some pretty attractive feature.
Features there in terms of cost of capital. So we don't see a disadvantage but as.
As we grow and scale I think that will certainly continue the benefits.
Thank you.
Thanks.
The next question comes from Vikram Malhotra with Morgan Stanley. Please go ahead.
Thanks for taking the question.
Maybe just.
First just quick numbers.
There was an impairment I think in the quarter could you just remind us what that was.
Yeah Vikram. This is Chris that's related to the redevelopment that Rob talked about here in Nashville, we're gonna be tearing down.
On existing building that we've gone for a while to make room for the for the larger new new property.
And so we went ahead and took that impairment this quarter and in preparation for that demo happening later this year.
Okay, Great and then just as you are now.
Focusing on the knee was call. It next 12 months I know I remember a while ago you were trying to push for higher in place contractual increases.
I'm just wondering in the post Covid environment is there anything different youre seeing from your tenants or what youre trying to achieve in terms of either.
Rent bumps are lease lands or anything like that in anything related to just maybe a change in the in the structure of the leases.
No I wouldn't say that are you seeing any material changes you know even if you saw this quarter. Our contractual average is running just below a 2.9% for the portfolio and what the future contractual increases for the leases that the.
Commenced this quarter were about 20 basis points higher so.
So we have been able to incrementally.
To grow those escalators and that's.
That's our expectation.
But you know, it's a little bit here at a time kind of the grind higher.
But but we feel very confident about what we've been able to achieve and expect to continue to do so on a moving forward.
Okay, Great and then just last 1 can you remind us the.
You know between sort of the on balance sheet acquisition than in the JV sort of how your how instead of the decision making is in terms of what property fits in each bucket.
And specifically what are the of the fee.
Fees that you get on the JV.
Sure.
As I mentioned in my remarks, Vikram, we certainly see the JV is a way to widen our opportunity set and obviously still very much down the center in terms of M of bees, but as we build out these clusters that enables us to take on some different characteristics of profiles of investments, where we can take something that maybe is.
The somewhat value add little lower occupancy and you've seen us do some of that Rob described some of that in the acquisitions recently and we can lease that up. So it may be look you know maybe of lower cap rate on the front end, but it's got a higher stabilized cap rate.
As it matures and so we can do that in the JV very accretively and even enhance that as you said with some additional compensation for the work there and then maybe on the other end of the scale is looking also at some more off campus and you've seen us put most of the off campus assets we purchased in.
In the JV as well so it's a way for us to sort of widen the opportunity set but then balance of the cost of capital and the risk that's in that and then on the fee structure, obviously, we're not going to give anything specific there.
But as you would expect various types of fees related to the value that we deliver with the JV partner.
Okay. Okay. Thanks, so much.
Yes.
Yes.
The next question comes from.
Some of that Breo with BMO capital markets. Please go ahead.
Alright, thanks for the Todd just curious on the.
The occupancy recovery, maybe getting pushed out because of.
Delays or what have you on the build outs or permitting if there is a kind of of leased versus occupied.
A number of spread you can provide.
To give us some visibility on on when that occupancy will boost or to what level on.
And more broadly how you're thinking about kind of the the target occupancy given the demand you're seeing and kind of expect sort of retentions.
Ross the portfolio.
Yes, I think the yes, it's kind of a multi point answer on that specifically related to the the.
Executed leases that have yet to take occupancy it's slow over 200000 square feet right now, which is about 30% higher than what it has historically you always have a hell of a portion of that so that his has grown.
Basically in tandem with the the amount of time that is taken to.
To complete the permitting and build outs.
So it is that's leveling off and hopefully starting to move back towards.
More historical levels, we do think that that is the that's where we're seeing some opportunity in the short run as it relates to stable.
The stabilizing and hopefully improving our occupancy.
Over the long run.
We've said that day.
There's going to be a portion of occupancy.
Because in our portfolio of that might be different than others because of our focus on multi tenant versus single tenant.
And as a result, you just end up with churn in some kind.
Kind of natural friction.
But our hope and our goal is to continue to drive occupancy.
No up into the the higher hiring the the eighties approaching 90%.
But the.
But you know, we don't expect with with the portfolio and the multi tenant that it's going to be 95% plus we just don't think that that's a we don't think that thats.
Realistic based off of the the.
The type of portfolio, we have but we also think that that the.
The advantages that you get from a multi tenant portfolio and the growth that you have in that in the embedded escalators the.
Tenant retention and renewals.
Certainly provide value that.
The the that overcomes that last incremental piece of differential on occupancy.
Thanks, and then just the follow up on cap rates of our acquisition yields you mentioned compressing spreads for some of lower quality assets, though.
Maybe just if you could put some guideposts about where do you think pricing is today more broadly for the market.
For kind of the.
The lower quality stuff. However, you want to frame that on versus off for primary versus secondary markets relative to.
Kind of your share your focus.
And what you think that's for sure.
Sure Yeah, I think cap rates have.
You just take a look at what we've done so far this year.
Averaging 5.3 and obviously there is the.
The range there of cap rates that we've we've.
Acquired buildings at but I think you know really the we think about it as you know if you think about if you go back several quarters, you can phase 5 and a half was the sort of our.
1 of our <unk>.
Targeted quality asset, that's probably moved down into the low end to the low fives.
And I think that for them.
For the lower quality stuff that you mentioned, maybe that was in the <unk>.
6 plus range Theres, probably been a similar type move.
I think when you see of real differences in the portfolios.
Those are pricing.
It seem to be pricing down on the low fives for for assets that probably.
Need to be in the high the high.
The high fives low sixes. So so youre just seeing that net premium on the portfolio is play out for assets that probably don't know more on a cap rate at that level.
Got it thank you very much.
The next question comes from Rich Anderson with Smbs day. Please go ahead.
Hey, good morning folks.
So.
First for you you said because of the reversal of the deferrals in the back half of last year that we should expect a dampening year over year of growth.
I guess youre talking about the same store.
It should be.
Are you talking relative to the 2.9% that you produced this quarter or im trying to get an idea of where.
Where the second half will land relative to your guidance of 2% to 3%, Yes, I think that's exactly what we're pointing to rich is that to 9 which is great and that is what we would say we expect long term and consistent with what you are seeing in our in our contractual escalators as well as with our cash leasing spreads.
You are going to have a few of these kind of comparison of items that.
King.
Create some noise and so it maybe closer to the 2% range, but but still within our guidance range that we provided for the year of that 2% to 3%, but long term going back to that.
Back to that 3% tied to the underlying embedded growth and the escalators.
Okay got you. Thanks.
And then early on on the call I think it was Todd that you said.
We can get a growing rents quicker with shorter term leases or are you actually looking to go shorter term to get at your rents and then the second part of that question is youre kind of getting 3% bumps and you're getting cash releasing spreads in that range too. So how are you really getting more when it's sort of similar level of growth whether it's on.
Bump or a release.
Yes for over time, I mean, the answer to your first question would be for not targeting necessarily shorter term leases than we have now it's just more of a relative comment to other sectors and so forth and even peers in the space and I think again that goes back to Chris's comment about our multi tenant focus a little different than than single tenant which tends to be.
Longer.
But our point is that the that's a benefit when you feel this pressure of rising costs inflation whatever makes the the materials everything that's gone on the competition. So I think our view is we're well positioned as a result of that as Chris said, we always expect rent bumps to be sort of in that average 3% roughly it's been dry.
The higher towards that.
With with the more recent deals going a little higher than that but those cash leasing spreads for us historically have been a little higher and we just see the density of that to be increasing in this environment.
We're not talking about double digit, but we could easily see a quarter kind of moving a little higher here in the every now and then above even the 4% level, but again long term 3 to 4 is really where we expect things to be so so I'm kind.
We're running right at 2.9 right now on escalators and long term 3 to 4 on on spreads and you know year to date. We're at 3.8 so we are seeing that we're seeing some call. It 100 basis points 100 basis points improvement on spreads right now versus the bumps.
Okay, Great and then last question for me a little bit high pace of the.
The hypothetical.
The events of the recent events at HCA great portfolio.
Suggesting that they are selling but that's certainly something people are talking about.
You know high quality portfolio, perhaps but a lot more off campus than you would like so how would you handle something like that I assume you would take a look if again hypothetically became available but is it just too hard to pencil because of your strategy relative to theirs.
Yeah, Rich, obviously, we're all sort of.
Kind of shocked by the the drama and the low drama space of medical office. So its 48 hours old and it's still to play out but you know we're not going to speculate on that I mean, obviously, we do look at everything as you mentioned you know us from years back we've looked at everything whether it's you know from 1 asset up to M&A deals we've always looked if it's.
Relevant in our space. So you know we're going to look at everything, but we have no idea of what's going to play out in and we're not going to speculate.
Yeah, Okay fair enough Scott I'd ask anyway for sure. Thanks, everyone.
Thanks Rich.
The next question comes from Daniel Bernstein with capital 1. Please go ahead.
Hi, good morning.
I guess I got 2 questions against 1 of if you could provide any nuance on the the leasing demand in terms of what time type of.
The physician specialties or are more on demand and others.
Cynthia.
This particular type of spaces.
Yeah, maybe surgery versus position space, that's that's kind of in that demand and then secondly.
The COVID-19 sped up the decision making process of hospitals in terms of there the real estate decisions, whether that's leasing or selling assets.
Always been a very slow process, but it sounds like.
Maybe that's picking up a little bit.
For 1 reason or in other thanks.
Yeah in terms of specialties I wouldn't say, there's anything to highlight there.
As you know we're more on an adjacent to campus, so youre going to see.
Higher acuity higher specialists inside of our buildings and so we're seeing growth.
And in those types of practices.
But nothing that I would say is worth noting.
In comparison of 1 specialty over another.
I'd say longer term the <unk>.
And has been certainly the highest specialties of orthopedics cardiology cancer.
Patrick's and then specialized surgery.
Things that fit into what Chris said near the campus demand.
On the on the second point about decision, making we certainly saw it slow down last year for all of the same reasons. We all had to sort of take inventory second quarter last year of of liquidity in all of the the other things that come with that that's certainly froze some decision, making and we are seeing that thought and it's been playing out over the last 2 or 3 quarters.
Which is great.
It certainly seems to be showing up in incremental growth plans at the hospital level. The 1 the development that that Rob described here in Nashville was in the making for many years I think some of you and maybe you Dan we're here years ago. When we did the property tour here in Nashville, and we were pointing at that building and instead it was going to come down.
And we will.
It will we're finally here so.
That's encouraging to see that the the long term plans didn't change coming out of Covid. So we are seeing it thought and come back it's going to be dependent upon the situation by health system and by market, but it's all very encouraging and I'd say the same for physician groups. The same thing starting to really get aggressive on growth plans. So we're very encouraged by what that will bring.
I appreciate it that's all I have thanks, Thanks, Dan.
Our next question will come from Mike Mueller with Jpmorgan. Please go ahead.
Yeah, Hi, I know you've had management changes in recent years and you're a relatively young team the.
But can you talk a little bit about what steps the board takes.
Takes too in terms of thinking about succession in case, there is an unexpected the archer.
Sure.
We certainly do that with the board.
Every year in fact, we just recently reviewed it again, so we definitely have that is the priority with the board and the whole management team, obviously, starting with me.
But even deeper than that so we do that regularly.
We certainly make sure that we have sort of unplanned and planned.
Candidates in place and I think that's the strength that I mentioned in my remarks that we have as a company that that our founder you know who the new well David Emery was very focused on that when he ran the board and the company and we continue to do that so it's a large priority here and I think we're very fortunate to have a lot of tenured people.
Out of expertise.
We're very confident in that plan.
Great.
That was it thank you.
Thanks, Mike.
Hey, Dennis you might ask the question that started the other 1 next.
The next question will come from Lukas <unk> with Green Street Advisors. Please go ahead.
Thanks.
There's a lot of noise on the inflation from.
Once the dust settle.
A sense of how replacement cost.
The change for medical office versus pre Covid level.
Obviously, we're like everyone. We're watching the data you know, obviously looking to see whether how temporary versus permanent it might be.
The 1 consistent thing you can say over the years as the construction costs have tend to tend to rise faster than the rents have and that's a positive generally speaking for your existing properties and rising rents.
We know this because rob's team and the development team are always trying to price out new developments and it's always a bit challenging on the numbers. So.
It works well when there's obviously demand that's much greater than the supply of space.
And so our view is that as you know it doesn't appear that it is going to be.
Completely outsized and therefore difficult to pencil any developments, but incrementally it's going to continue to be challenging and I'd say, that's obviously on the whole beneficial to our existing assets as we get off the clusters. We think that is of Great addition to the barriers to entry that you have in dense markets and then obviously add to that.
The fast rising costs, so 4 to 5 even 6% annual increases in construction costs.
It's been a pretty regular thing so I think that will continue to be the case and generally it's beneficial to us.
Great. That's it for me thank you.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Todd Meredith for any closing remarks.
Thank you everyone for joining us today, we look forward to seeing many of you at some upcoming conferences in September and have a great rest of your summer. Thanks.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.