Q3 2021 Healthcare Realty Trust Inc Earnings Call
[music].
Good afternoon, and welcome to the Healthcare Realty Trust third quarter financial results Conference call all participants will be in love So normally mode.
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After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your touch telephone withdraw. Your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Kara Smith Investor Relations. Please go ahead.
Thank you for joining yesterday for healthcare Realty's third quarter 2021 earnings conference call.
Joining me on the call today are Todd Meredith.
Rob.
And Kristen.
A reminder, that except for historical information contained within the matters discussed in this call may contain forward looking statements 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 2020.
These forward looking statements represent the company's judgment as of the date of this call. The company disclaims any obligation to update this forward looking material.
The matters discussed in this call may also contain certain non-GAAP financial measures such as funds from operations.
Normalized <unk> per.
For sure.
So per share funds available for distribution Fad.
Operating income NOI EBITDA and adjusted EBITDA are.
A reconciliation of these measures to the most comparable GAAP financial measures maybe found in the company's earnings press release for the third quarter ended September 30th 2021.
The company's earnings press release supplemental information and 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 third quarter earnings call.
Yesterday, we reported quarterly <unk> per share growth of six 4%.
This gross growth was largely driven by over $800 million of acquisitions over the past 12 months.
Just as important we're seeing operational improvements.
Across the portfolio.
Health care providers in our buildings are incredibly busy as outpatient utilization normalizes.
So not surprisingly our leasing activity is up too and momentum is building.
In the near term like everyone, we're working through supply chain issues.
As build out time frames for new tenants stabilize and these tenants take occupancy we expect our same store NOI growth to return to our historical 3% range.
The MLP sector has proven resiliency is attracting more capital.
Like many real estate asset classes, maybe valuations are trending higher.
Cap rates into the fours are now common for large portfolios and certain individual assets with bonds like characteristics.
In contrast, so far this year, we've acquired 26 high quality, mostly multi tenant properties for $481 million at a five 3% cap rate.
We've been able to acquire these properties asset by asset at meaningfully higher initial returns through our direct sourcing model.
And beyond initial pricing our targeted acquisition approach and operational platform deliver superior same store growth over time.
We're buying these properties and clusters within our existing markets, where population growth is meaningfully above the norm.
These are dense supply constrained markets places like Los Angeles, Dallas, Denver, and San Diego.
We continue to acquire stabilized properties that are on an adjacent to campus.
As we build scale within a sub market, our local knowledge and relationships lead to more investments and allow us to safely expand our strike zone.
This extends our range to include ultra core on campus value add and nearby off campus properties.
And we use our cluster strategy and our JV partnership to balance risk and return across the city.
Years of diligent refinement and execution allowed us to build the highest quality growth oriented and mob portfolio.
Combined with our proven operating platform. This creates an attractive long term return profile.
And looking to the future, we're keeping our foot on the gas pedal.
After achieving record acquisition volumes in 2019 and 2020, we're on pace to exceed these levels in 'twenty one.
We've increased our guidance again due to the strength of our pipeline and see the ability to sustain annual investment volumes of more than 10% of enterprise value in the years ahead.
With an aging population driving continued growth in health care utilization, our strategy and ability to execute is poised to deliver strong <unk> growth.
Like we're doing this year consistently and a long term basis.
The compounding effect of this level of growth and safety over many quarters and years is very compelling.
Before I turn the call over I want to mentioned, we recently published our third annual corporate responsibility report, which is available on our website.
We're proud of the numerous ESG goals and milestones we've achieved.
<unk> our grids participation.
I want to thank Carla Baca, and our sustainability committee for leading these important initiatives and we look forward to making further strides in the years ahead.
I'll now turn the call over to Bethany for an update on health care trends.
Thanks Todd.
The health care sector continues to ramp up operations positive momentum across the board, both inpatient and outpatient signals and move towards growth.
Laid routine care and treatment for chronic conditions are adding to high demand undeterred by the delta surge in the third quarter.
Hospitals are seeing wage pressures the cost controls are proving effective reimbursement has been positive and patient volumes are strong.
Physician offices are also performing on track with consistent growth in outpatient visits and surgeries.
Patient trends remain a bright spot in this sector.
Physician office employment with steady in September even amid economic uncertainty and higher demand for labor.
Physician groups are looking to expand their presence and service line, both within their markets and regionally.
Strength should continue to support healthcare realty's internal growth and demand for MLB space.
Overall healthcare providers continue to prove the resiliency.
Government reimbursement has been a boost to margins since 2020.
Temporary increases in Medicare rates due to Covid relief will sunset at the end of 2021.
With strong performance this year, even in the declining pandemic volume.
The need for marginal federal relief is reduced.
Congress is signals support for health care providers.
<unk> continues to look for ways to extend higher HVA subsidy.
Subsidies and Medicaid coverage.
More certainty and health insurance coverage for the future is a positive sign for patient demand and providers plans for Greg.
If we have learned anything over the past two years. It is the necessity of our nation's health care system. We are pleased with the strength of HRS Hospital partners and physician tenants and the steady performance of our MLB.
Now I will turn the call over to Rob for an update on our investment activity.
Thanks, Stephanie.
Acquisition momentum continues to build.
Year to date, we have invested $481 million across 26 properties in 21 separate transactions all within our existing markets.
For the year, we have moved our guidance up to $700 million at the high end.
We are curating, a high quality mob portfolio.
Not simply chasing volume for the sake of volume.
This starts with our data driven market research.
Vast network of industry relationships and deep local market knowledge.
For us recognizing quality begins by identifying fast growing markets, where we can build scale alongside leading healthcare providers.
We determined the buildings, we want to own whether for sale or not and leverage our relationships to gain access and ultimately acquire these properties.
Beyond the acquisition volume owning multiple buildings in clusters provides opportunities over time to enhance operational and leasing performance.
To highlight the advantages of our process. It is worth contrasting our $481 million of activity with the widely marketed portfolios.
So far this year, we have evaluated 10 widely marketed.
MLB portfolios above a $100 million.
Representing over $3 billion of real estate.
Our acquisitions have superior demographics, when compared to these portfolios.
There are three data points.
First population growth around our acquisitions averaged five 4%.
This is nearly double that of the marketed portfolios and the national average.
Second our population density of 841000 was 50% greater than the marketed deals.
And third our median household income of $94000 is 40% higher than both of these portfolios and the national average.
In addition to superior demographics are real estate fundamentals are better.
78% of our acquisitions were on or adjacent to campus versus 35% for these marketed deals.
It's also worth noting that 100% of our acquisitions were in our existing markets.
Not only are we in great markets that we know well, but were also directly partnered with leading health systems.
In short with the blended cap rate of approximately 30 basis points higher than the average for these portfolios, we are buying better real estate at better valuations.
In the third quarter, we acquired 10 properties for a total of $165 million.
Two of these properties were in Raleigh part of the fast growing Tech driven research triangle.
A market, we entered just 18 months ago.
Six buildings were in Colorado market, we've been investing in since 2008.
We now own 28 buildings totaling over $1 8 million square feet in this state.
Mostly concentrated in Denver, and Colorado Springs.
Looking ahead, we will finish the year with a strong fourth quarter.
We have over $250 million under contract or LOI.
All in our existing markets at an average cap rate in the low fives.
Yeah.
Driven by the strength of the market dispositions remain on accretive source of capital to fund acquisitions.
Year to date, we have completed $128 million in sales at an average cap rate for one.
We expect to sell a few more buildings this.
This year in markets, where we don't see a path to add significant square footage and drive long term growth.
We are increasing the upper end of our disposition guidance to $200 million.
Development activity remains on track and focused around our target markets.
We have $100 million of development currently underway in Nashville, Seattle and Dallas.
Our projects are primarily sourced from our embedded pipeline of over $1 billion.
We are having meaningful discussions with several existing health system partners in Georgia, North Carolina and Texas.
A strong sign that providers continue to look ahead and plan for growth.
As we look to 2022, our investment pipeline is as large as it's ever been.
It is constantly being replenished through sourcing efforts and our target markets.
We have grown our team and refined our process to sustained higher levels of activity.
Our ability to consistently execute has set us apart and we are better positioned than ever before for accelerated accretive external growth.
Now I'll turn it over to Chris for a review of our financial results.
Thanks, Rob.
Strong third quarter results demonstrate how our steady operating performance and healthy acquisition volume contribute to meaningful <unk> per share growth.
Year to date <unk> per share is up three 5% and for the quarter. It was up six 4%.
While many have experienced extreme earnings volatility over the last couple of years, we have reported reliably positive quarterly <unk> per share growth.
Exactly what our quality mob platform is built to deliver.
Our same store NOI growth has been between 2% and 3% throughout the challenges of the last 18 months.
Currently our same store NOI is running at approximately 2%.
This even includes the impact of a 50 basis point decline in average occupancy.
This drop was due to a pause in activity in the summer of 2020 and ongoing delays in build out timelines.
We saw the buildout timelines and occupancy stabilized sequentially.
The stabilizing occupancy will allow our same store NOI to trend back towards our in place contractual escalators of two 9% over the next several quarters.
What is really encouraging is that our leasing team is reporting strong interest from new and existing tenants for more space.
Our ability to drive consistent internal performance is supported by our embedded portfolio of growth drivers.
This quarter cash leasing spreads were 3%.
Our in place contractual escalators were 291% and for leases commencing in the quarter. Our bumps were also at 3%.
These built in increases compounded annually and fuel our earnings growth engine.
This quarter, we added new disclosure to help better communicate the escalators across our portfolio.
We're now breaking out the in place rent increases for acquisitions.
Typically acquisitions have lower escalators than our portfolio average.
What is important is that this provides a very attractive opportunity to improve the growth profile of these assets.
As leases roll, we expect to improve these escalators.
Our success in doing so provides meaningful incremental value over and above day, one cap rate accretion.
Regarding our balance sheet and liquidity, we continue to benefit from access to multiple sources of capital to Accretively fund our external growth.
We have $116 million of forward equity contracts to be settled over the next 12 months and.
And with low leverage our debt ratings were recently affirmed by Fitch and S&P.
Beyond the public markets, we have a unique source of long term capital through our joint venture with teachers.
Over the last 12 months, we invested almost $250 million with this partnership and there are significant capacity for more.
With respect to our dividend coverage, our fad payout ratio was 87% year to date, a 98% on a trailing 12 month basis.
Maintenance Capex is typically seasonally higher in the fourth quarter, but even so we're on track to end the year with the fad payout ratio below 90%.
As we look ahead to next year, we are encouraged by strong demand for outpatient care across our markets and a robust investment pipeline.
This will drive improving internal growth and accelerating acquisition volume with a margin of safety unique to medical office.
Our flexible balance sheet and multiple sources of capital position us well to translate this into continued attractive <unk> per share growth.
Operator, we're now ready to open the line for questions.
We will now begin the question and answer session.
Okay.
Yes, good question.
Because I'm getting a little feedback from your line I will reread the instructions.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
Using a speakerphone please pick up your handset before pressing the keys.
Your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Okay.
Our first question today comes from Juan Sanabria with BMO capital markets. Please go ahead.
Hi, good morning, Thanks for the time, just curious on your comments about.
Cap rates moving lower in set kind of into the fours.
So.
Are the deals that you've been signing recently indicative of kind of old pricing that is his tightened since.
Or is or are the cap rates are quoting somehow.
King.
Benefiting from your.
Our strategy of being building local presences in the kind of the operating platform just trying to get a sense of the disconnect or is it purely that the one off deals or are not as sought after and there's not as much competition and thats, where you can find that that kind of value add opportunity.
One.
Certainly more of the latter of what you just said I think clearly we've been pointing out for some time that there is there has been a while for a while substantial portfolio premiums being paid.
It's just the sort of the sought after nature of getting scale and M. A b.
A lot of private capital a lot of folks chasing it so when those portfolios come of scale you see a lot of fever around that.
And so cap rates come down we're also seeing as I mentioned in my prepared remarks in some certain individual assets, where you see these bond like characteristics Super long lease term our view is that doesn't fit our portfolio as well. It may complement a cluster occasionally we may look at those but generally speaking those are slower growth vehicles and.
Maybe as Chris just described not places, where we can enhance the growth profile of those assets. So our view is our platform and our approach going asset by asset in our markets.
Does give us an advantage of not paying those extra premiums and I think as Rob pointed out the.
Deals under contract or LOI are at very similar cap rates to what you've seen us do a year to date. So I think those are very current fresh cap rates.
Okay. Okay, and then just curious on your comments about.
Delays in.
I guess sitting out the space. So when do you think we'll start to see occupancy tick back up in <unk>.
And the confidence that the issues were.
Regards to labor availability won't get worse before they get better.
Yeah.
You're right we have seen.
Some some extended timelines and our build outs, we talked about that a little bit last last quarter.
And its extended from pre pandemic levels by call it about 30%.
The positive was that this quarter kind.
It kind of stabilized so we werent seeing does those timelines extend so even with just the stabilization that will help us in terms of occupancy to be able to stabilize and hopefully start to rebound.
Over the next several quarters into into next year, and then if they can start to it.
The build out timelines can start to shorten than that.
You know that.
That just helps in terms of being able to speed up.
The positive absorption.
One of the things that we've looked at that I think is interesting is.
Our amount of lease but on occupied space has also expanded.
In concert with what's been happening with the with the longer build outs and so.
It's also about 30% longer than our larger than what we were seeing before the.
For the last 18 months.
So if you look back and said that if our occupancy if our lease but unoccupied space was the same.
As it was in first quarter of 'twenty occupancy this quarter would have been 20 would have been 40 basis points higher.
Just because of that difference in that lease, but unoccupied space, which would have a meaningful difference in occupancy as well as.
As our same store NOI growth.
But.
Oh, let's say stabilization is good.
And we think that will allow us going next year to start to see that same store NOI trend back up in line with our contractual escalators in the high twos.
<unk> three.
And then if we can can can see any benefits that will just.
Speed that up and also provide.
Some incremental additional growth.
Thank you very much.
Our next question comes from Jordan Saddler with Keybanc capital markets. Please go ahead.
Thanks, Hey, I just wanted to clarify that last point on sort of the leased but not occupied and maybe compressing we're watching that trend.
Trend normalize what sort of the timeframe.
So that 40 basis points, if you will to come online.
Yes, I guess the way I'm looking at it right now Jordan is just the fact of it stabilizing and it's not it's not growing so it's kind of staying in that 30% higher than what we saw before that in and of itself provides a benefit because youre not losing ground, so youre not losing occupancy.
That in and of itself will provide some uplift to be able to see that.
Over the next several quarters, the NOI rebound closer to our to our escalators.
And we're at this point, we're not going to we're not going to pick a date and tell you when we expect those.
Build out timelines too to rebound to normal but.
When that does happen that just will be incremental improvement over over and above the benefit we're already seeing from the just the stabilization.
Okay, and just specifically what.
How would you characterize.
What's driving that.
Those delays.
Is it you don't have material because I think you mentioned supply chain and I was taken back a little bit because I wasn't looking or thinking would be.
Supply supply chain issues.
<unk> had necessarily within the medical office space.
And then.
Just kind of curious what you're seeing.
The detail around what may be causing these issues, yes, it's a combination of things a portion of it is permitting.
So it's getting longer too to get through the permitting depending on the local municipality.
Especially in high growth growth markets, like Dallas, or a Nashville, Denver those types of areas. So that's one issue.
As it relates to the <unk>.
Apply chain it really has to do with the build out of the space in the materials.
And frankly, it's not it's not consistent across the board on every project of what you see in some areas we're seeing pay.
Paint.
Could be more difficult to source.
HVAC equipment.
Frankly, it kind of differs depending on the on the project we are doing things.
<unk> of what we can to try to.
Offset some of those delays.
Trying to buy some if we know we have a kind of consistent.
Back to the paint it.
Mentioning if we know that we have a consistent color scheme that we use when.
When we find them.
Supplies of that going ahead and make sure we have that on hand, I think everybody is adjusting to the timelines and trying to get better about ordering things ahead of time, so that it doesn't create a backlog.
<unk> on <unk>.
Supplies to to arrive.
But I think everybody is just trying to figure out how to how to how to work through it but it's really the combination of the.
This material supply chain as well as as well as the permitting.
And Jordan I wouldn't I wouldn't call. This out as something unique to medical office. I think these are the same things you are hearing across real estate across <unk>.
Individual issues, if you order a refrigerator right now for your house, it's going to take a lot longer. It's the same issues and its materials all the way from electronics down to paint as Chris said.
Yeah no it wasn't.
Some senior anything it was just him.
We're expecting to hear within Mlps have just.
It wasn't something I was thinking hasnt been material risk factor per se.
Okay.
That's helpful color and maybe talk about what have you. So.
You guys spent a ton of time over the last several years refining the portfolio really aggressively asset managing the portfolio and working to maximize the portfolio's growth.
And growth potential, especially as it related to escalators, but.
Also refining the quality of the asset base.
Can you maybe offer some insight around the current strategy in terms of the external growth piece of it and how the addition of these assets is accretive to the company's overall growth.
Yes, I think it's certainly youre right. It goes back to sort of refining the portfolio over the years really focusing in on the markets. We want to be in looking for those quality assets places, where we can build scale and have great relationships as Rob said alongside these health care providers. So we've done that for a long time and I think our view now.
Now as we're getting a lot of traction from our our reputation and our expertise in this space and all of the relationships that we have where we're finding more and more opportunities to expand that and so Seattle is the perfect example, we have a page in our investor presentation, where we talk about the benefits of scale in Seattle and it is certainly on the expense side, but I would say, it's even more.
More powerful on the leasing side and you've heard several of US talk about how we can not only have day, one accretion to your point, but then also.
Go in and create value through our platform, meaning we have the leasing expertise locally to continue to push and enhance those escalators as Chris said on the acquisitions, we make so if if we buy assets and they are at 2% escalators of two 5%. We can work through the lease role as that occurs over several.
Years, after we buy it and move that up towards the average we have in place. That's 291, so there's clear accretion benefits beyond the initial acquisition from that and then clearly beyond that you also build relationships with health care providers and so when we go off campus, where usually looking at.
Providers, whether it's hospital or doctor groups that are identifying locations they want to expand their business away from campus. So we can follow those quality providers and in many cases. It helps US also find some acquisitions that may have higher little higher return a little higher risk reward profile. As you know we've put a lot of that in the JV and kind of balance that risk.
So we view that is building out the whole strategy and enhancing growth and we see external growth always have but now more so than ever and a very focused way external growth, adding to the power of that internal growth that we've been building up.
That makes sense. Thank you.
Yeah.
Okay.
Our next question comes from Nick Joseph with Citi. Please go ahead.
Thanks.
Following up on the disposition. So you mentioned a handful maybe for the remainder of this year.
Beyond those asset sales in terms of assets that don't fit within the current strategy and portfolio.
Yes, I think that if you.
You look at what.
We're selling had planned to sell for the remainder of this year.
It's sort of fine tuning and continuing to fine tune the portfolio.
We have a handful of assets out there that are what we deem to be orphan assets are certainly candidates places, where we don't think we can continue to build scale and drive growth is tied to <unk>.
Described.
I think as we as we move into next year.
And look at opportunities for the dispositions it'll it'll be dissimilar to that things that we just don't see.
It's a good opportunity to grow and build out the clusters and benefit from the enhanced.
Enhanced scale within a market.
Okay, but that could be a source of capital for next year is external growth as well additional dispositions and that's all set.
Yes.
Certainly would view it that way I think if you look at where we are.
Cap rates, where we're selling today certainly taken advantage of the strength of the pricing in the market and.
Taking those dollars and rotated into assets, where we can grow meaningful clusters and drive long term growth. So thats are and will continue to be our strategy with dispositions going forward.
Thanks, and then maybe just following up on the on the same store growth I. Appreciate the commentary on kind of getting back to that long term run rate and <unk>.
The additional disclosure.
Like you maintained 2021 same store cash NOI guidance.
Is there anything in the fourth quarter that could get you up to that mid point or are things trending towards the low end at least for 2021.
For full year will probably be below that midpoint. There are as we talked about last quarter. There is a lot of comparability.
Issues quarter to quarter that are going on given the.
The unusual circumstances that occurred over the last.
Last 18 months related to parking and rent deferrals and some of those things for this quarter the rebound in parking and the reversal of some of our rent deferral reserves pretty much offset each other.
They provided a bit of a lift last quarter and so you have those things that are are bouncing around but the main piece that is driving right now that lower same store NOI as the occupancy that we talked about.
So our hope and expectation is that stabilizing and will start to rebound, but that will take several quarters to build back up to those.
More in line with the with the contractual escalators, but still within the 2% to 3% range, but as you pointed out probably.
Below the below the mid point.
Thank you.
Our next question comes from Rich Anderson with <unk>. Please go ahead.
Thanks.
Good morning down there.
So Chris I think you said tenant delays getting back to the same store conversation tenant delays started in the summer of 2020 did you did you did I hear you correctly, Yes, you had a couple of things then you just had such a pause in terms of leasing activity during the summer of 2020.
And so that did play through a bit of the.
The leasing momentum that was going on at that point once things did late last year start to kind of get back to normal in terms of tours in leasing velocity that was then compounded by the.
The delays in being able to convert those from least into occupancy because of the supply chain. So as you look at it on a kind of trailing 12 month basis, you've got the combination of both.
Both of those items.
Then why why were you able to produce.
In line, if not better same store growth in the first and second quarter of this year why didn't it play into those numbers.
And that was as we talked about.
Specifically last quarter. It has a lot to do with those comparability issues. It's the rebounding of the parking it's the offset for the quarter and year over year as you look at the.
The deferrals the repayment of the deferrals the reversal of some of the reserves that we took took going on so that's.
As we've talked about earlier in the year that creates some noise from a comparability issue, we still had some of that going on this quarter as well, but they but frankly, they just kind of offset each other.
Okay. So it's those those items and the impact of them in any one particular quarter is going to be what is creating some of the variability that youre seeing.
So if I if I'm hearing you right then if I take if I take out the variability from parking and rent deferral noise that this occupancy issue would have been.
Kind of present in the first and second quarter as well as in terms of the bottom line same store growth.
Yes, certainly and I look at it just goes back to the kind of the algorithm and the math. If you go our our growth from our contractual escalators as two nine and our cash leasing spreads or three three plus the underlying growth that youre seeing should be kind of plus or minus 3%.
All else equal and then occupancy for us given our our margin has about a two to one impact to year NOI. So if you are running.
The expectation is you should be running kind of high twos.
And then whatever you're changing your overall occupancy.
That is going to have a two to one impact to your NOI. So for this for this quarter, a 50 basis point drop in occupancy kind of moves you from the <unk> down to the twos.
So thats.
That's what you should expect and that's what I would expect to see from other other portfolios now like I said, the comparability issues that would.
Would make you see results that.
Might differ from from that algorithm and what you would expect okay.
Second question for whoever.
So.
I'm trying to triangulate you get let's just say you recover this 50 basis points of occupancy over the coming year.
And that obviously the factor in the same store calculation.
Of the cost to create that occupancy gain are capitalized and hence.
Not included in the same store calculation I'm, just trying to trying to I know thats, how its the business works, but I'm just I'm just curious you know.
What's hiding behind the scene a little bit in terms of the expense side of the same store calculation.
On the on the expense inside of your same store NOI, you're really not going to have much of an impact where youre going to see it is related to your maintenance capex.
And the Ti build that youre going to have there. So it's all it's all capitalized that's all all this capitalist yes, exactly the ti is going to be capitalized associated with that and that's one of the reasons you have seen.
With this longer timelines and build out we haven't spent the money as fast this year and so it's one of the reasons that.
We're trending on the low end, especially on our Ti spend.
Compared to what we expected at the beginning of the year.
And again I know this is how it works, but you know you kind of get the benefit of the revenue, but you don't.
In the same store calculation. It all comes down to the bottom line earnings so I'm not troubled by it but but the optics are what they are west last question Rich one thing I would point out there and it's almost the opposite.
<unk> is that you end up spending all of that capital upfront and it goes through your maintenance Capex.
Where you know the revenue youre going to get over the life of that lease and so.
You start to think about the impact to <unk> in terms of positive absorption.
There is a little bit of a headwind there but over the long term.
Positive earnings growth.
It was more than worth it.
100% agree.
We say people should be focusing on earnings and on same store for perhaps that very reason among others, but yeah, I guess I get that completely last question.
And maybe for Rob or whoever.
Acquisitions.
5% plus type cap rates dispositions close to four.
Are they being calculated the same way apples to apples because that spread seems pretty pretty wide, assuming you're selling.
Harrier stuff and buying better stuff of course.
Yes, I mean, I think in terms of the cap rates, it's certainly figured on them on a trailing NOI number.
And I would also say that many of those properties are some of those properties that we sold they are low occupancy properties.
They are not growing.
We don't see a lot of opportunity for growth in the marketplace and so there is some impact from from selling those.
Alright.
So dispositions on trailing 12 acquisitions on forward 12.
Generally speaking thats right because it's the dispositions are what you're taking out of your model for for example, and then obviously going forward what you project with those acquisitions. So that's about the only difference its price and NOI otherwise.
Yeah, Okay. Thanks, guys.
Yeah.
Our next question comes from caller Seversky with Bahrenburg. Please go ahead.
Well, thanks for having me on the call.
Wanted to zero in on second Gen. Ti so with the reiterated guidance range was 28% to $34 million I'm. Just wondering if you could comment on how this is trending into Q4 and wondering because just to get to that midpoint requires a pretty hefty spend for the fourth quarter, even relative to what we would typically a suit and seasonality.
Yes, I think youre right and it goes back to what we were just talking about with rich.
In terms of the second Gen Ti in particular.
With the with the longer timelines there.
That spend is coming in.
On the low end of the guidance range.
On the leasing commissions and the Capex, there going to be probably closer to the to the midpoint.
But yes, I think you're right.
That is reasonable and appropriate to assume that it will be.
At or below the midpoint.
But I would point out and you are right that there is typically a seasonally higher spend in the fourth quarter and we expect that to occur.
This year as well, but even with that our expectation is for to be able to generate.
Dividend Fad payout ratio, that's below 90%, which is how we are trending so far on a year to date.
Okay, and then are you seeing any kind of trends in terms of <unk> I mean are tenants looking for.
Anything new within these improvements relative to what you've seen in years past.
Not materially different.
Not at all I mean, certainly we see like everyone in real estate cost increases.
But not from a design standpoint that would materially change that just the typical pressures of construction costs.
But nothing that would materially change that cost level or the design I mean, it's we've been on the lookout for that ever since the pandemic started in and haven't really seen a material shift.
Okay that helps and then a bit of a <unk>.
Higher level question, just considering you're considering your operators segments.
Are you seeing or hearing any commentary that would suggest increased demand for assets that can facilitate certain specializations, whether thats oncology or cardio for example, compared to perhaps something in a lower acuity setting.
Different demand based on specialty I mean, I would say that concept has been in the market for a long time and clearly as we focus more heavily on and around campus. We tend to see a lot of that on the specialty side and if you look at our list and our presentation of our top specialties. The ones. You just cited are very high.
Because we are near campus, so youll see cardiology and oncology would be very strong and our on campus you can kind of see it we break it down on versus off.
But I wouldn't say, we're seeing a dramatic shift here at this point I mean, we continue to see a lot of that Congregating around campus I think brought more broadly speaking you see groups have gotten larger over time and they tend to have more and more locations and they want to be in really all the locations. They can be to cover the market and attract patients and.
Expand Bethany talked about that a little bit in her remarks.
So usually a group today wherever you might be.
They may be on campus and on multiple campuses around a market and then they have a whole lot of off campus sprinkled around as well. So it's really kind of everywhere not just one versus the other.
Okay makes sense. Thank you.
Our next question comes from.
John Pawlowski with Green Street Advisors. Please go ahead.
Thanks for the time, maybe just one follow up question on that topic of kind of structural changes in tenant preferences.
Do you expect over the coming years any any shift in average lease term and your negotiations.
Not materially no. We certainly keep an eye on that keep an ear on that with our leasing team and all the feedback that they get.
Usually not pushing hard in one direction or the other we're comfortable with what we generally see out there which is typically either side of five years a lot of times the new tenant comes in once a longer lease because they may be spending some dollars and want to spread it out that is certainly true in the development area as well.
I would say generally speaking, we're not seeing a dramatic change and in lease terms for any of those reasons.
Okay second question.
Are you guys cash leasing spread distribution.
<unk> lessen your percent spread all the way up to greater than 4% spread could you just help me understand the type of markets and the type of product type within the markets that fall within this goes goalposts. So what type of properties are seeing cash leasing spreads decline and which ones are the outsized growth.
Areas.
We look at that every quarter, we track that by market and I will tell you.
You look for patterns and you usually find it as soon as you think you're onto something that something happened in Memphis versus Nashville. It reverses. So I would say we haven't seen a very discerning trend that suggests so we're just having the lower spreads here versus there I would say maybe at the extremes, we certainly see seen some geographic.
Concentrations of maybe at the high end.
We saw a fair bit in the D C.
Corridor that area in our portfolio for quite a long time.
In Hawaii, we saw some really strong as well, but I wouldn't say that.
There's a very clear pattern that Oh, it's really consistently poor here.
And if we do pick up on that it kind of feeds what Rob talked about which is hey, that's a little bit how we think about dispositions. If we start picking up on that we might it might inform how we think about our ability to grow and expand performance and the portfolio in a particular market. One thing I would add to that is not it's not the biggest streams of the.
Plus four versus the negatives, but just incrementally we do see slightly higher average.
Waiters and <unk>.
Cash leasing spreads for the smaller leases.
And which makes sense.
You end up with a small tenant close to campus is not is it may not have as much.
Pricing power as well as maybe a smaller percentage of their overall cost structure on the on the lease.
So we do see some some incremental.
Better spreads in those locations and that's one of the reasons that <unk>.
We like the multi tenant M obese, because you start getting up to your larger single tenant.
Frankly changes some of the dynamics in the lease negotiation.
Okay, Great I appreciate all the color thanks for that.
Okay.
The next question comes from Mike Mueller with Jpmorgan. Please go ahead.
Yes, Hi, I was wondering given the number of development inquiries you've been seeing why would you expect the annual spend on the development front to start to ramp up.
Yes, I think Mike I think that.
This year, we're at about $100 million that we're working on.
We most of that has come from our embedded pipeline, we've talked about that before where we control those opportunities have great relationships with the health systems, where we're developing and have the opportunity to develop and I think that's where you'll you'll continue to see US is live on the development side, we've kind of.
<unk> looked at that portfolio and think that over the next eight to 10 years. We can we can we can produce around that 100 $125 million of starts every year.
A new developments and we've got a number of conversations going on right now with with systems in North Carolina, Texas.
In Colorado in terms of new developments in and we think it's going to kind of continue to be at that level and $100 million range year in and you're out and quite.
Quite frankly, that's the level that we're comfortable with we think that.
Develop into to the spreads where we think we can develop a 100 to 200 basis points above where cap rates are today for stabilized assets. We think that provides some meaningful value and.
And also provides a service to our health system partners, where we can grow with them. So we like where we stand on the development side.
Certainly we have the opportunity to.
And then finally, we might but the great thing is is that.
By developing out of our embedded.
Embedded pipeline, we feel like the.
Sort of the traditional development risk is mitigated by we know the markets, where the health system. We know the demands in terms of space demands that are that are needed and so we think mitigates a lot of the traditional development.
Got it okay. Thank you.
Thanks, Mike.
Ladies and gentlemen, this will conclude our question and answer session I would like to turn the conference back over to Todd Meredith for any closing remarks.
Thank you everybody for joining us today and we appreciate your time and interest in healthcare Realty and we look forward to speaking with many of you next week at NAREIT.
Have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.