Q4 2021 Physicians Realty Trust Earnings Call
Greetings and welcome to the Physicians Realty Trust fourth quarter, and 2021 year end earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder.
This conference is being recorded it is now my pleasure to introduce your host Bradley page Senior Vice President General Counsel. Thank you Sir you may begin.
Thank you Jessie good morning, and welcome to the Physicians Realty Trust fourth quarter 2021, and year end earnings Conference call. Joining me today are John Thomas Chief Executive Officer, Jeff Theiler, Chief Financial Officer, <unk>, Taylor, Chief Investment Officer, Mark sign Executive Vice President asset.
Management.
John Lucey, Chief accounting and administrative officer, Laurie Becker Senior Vice President controller.
Anne Klein, Deputy Chief Investment Officer, and Amy Hall, Senior Vice President leasing and physician strategy.
During this call John Thomas will provide a summary of the company's activities and performance for the fourth quarter of 2021 and year to date as well as our strategic focus for 2022 jump.
Jeff Theiler will review our financial results from the fourth quarter of 2021 and year end and Mark sign will provide a summary of our operations for the fourth quarter of 2021 following that we will open the call for questions.
Today's call will contain forward looking statements as defined by the private Securities Litigation Reform Act of 1995 that are based on the current beliefs of management and information currently available to us our actual results will be affected by known and unknown risks trends uncertainties and factors that are beyond our control or ability to.
Predict although we believe our assumptions are reasonable our forward looking statements are not guarantees of future performance our actual.
Actual results could differ materially from our current expectations and those anticipated or implied in such forward looking statements.
For a more detailed description of potential risks and other important factors that could cause actual results to differ from those contained in 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 thanks, everyone for joining us for our on time and scheduled earnings call.
This royalty trust had an outstanding 2021, and we enter 2022 very excited about our internal and external growth prospects.
Our confidence comes from the continued performance of the Doc portfolio in the face of a challenging operating environment.
Despite the emergence of the Delta and then omicron Covid variance and the highest inflationary environment in recent memory, our health care provider tenants demonstrated their financial resiliency throughout the year delivering 99, 9% rent collections in 2021.
The strong collections resulted in less than $100000 of bad debt expense for the year on total rent and Cam revenues of over $437 million.
This operational strength combined with our 95% leased rate and unmatched exposure to investment grade quality tenants left us well positioned to deliver full year same store NOI growth of 2.5% across our entire portfolio of medical office facilities.
We see internal growth momentum accelerating with the portfolio, averaging 2.9% same store growth in the fourth quarter all.
All without the benefit of a repositioning basket.
Mark Don Mark Dukes, Amy Hall, and our entire team did an incredible job managing our portfolio generating these best in asset class results.
It was one of the most stable and reliable real estate asset classes over the last decade, and specifically over the last year, it's not surprising that medical office space continues to attract capital from new investors.
These compressed cap rates not only increase the underlying value of the Doc portfolio, but also make our longstanding health system and developer partnerships, even more important as we work to source attractive investment opportunities.
In 2021 we leverage these relationships to complete $1 billion of gross investments in an average first year cash yield of 4.9%, increasing our portfolio footprint by 11%. These.
These investments are highlighted by our acquisition of the $750 million landmark portfolio in December which is the largest transaction we've completed in the history of the company.
Most importantly, the acquisition adds 10, new health system relationships to our portfolio, providing ample opportunity for future growth.
In addition to landmark we completed 258 million of other investments all of which we are excited about them and all off market.
These deals include our seventh and eighth transactions with honor health, a premier investment grade health system, serving the rapidly growing Phoenix MSA.
We our IRR focused long term investors nurturing our relationships and providing best in class service to health care providers, earning more business.
Capital allocation for the long term.
It couldn't have accomplished these results without the exceptional financial leadership and balance sheet management of Jeff Theiler and his team.
Jeff shared the details, but an upgrade to our investment grade credit rating is a pretty good starting point, there and I once in 100 year pandemic.
In addition, we ended the year with leverage at 5.8.
Times debt to EBITDA and are well positioned in a rising interest rate environment with 80% of our outstanding debt locked it fixed.
Interest rates.
Transitioning their docs ESG platform. We ended 2021 with 10, new buildings, earning IRA certified sustainable property designations, recognizing docs commitment to resource efficiency and environmental initiatives at each of these properties.
Approximately 19% of our portfolio square footage is now certified with Iron certification requires each property to meet baseline requirements and earn necessary points across energy water help recycling and purchasing commitments.
We also received a 2021 energy star partner of the year Award from the Environmental Protection Agency and the department of energy and recognition of our commitment to environmental transparency and accountability.
In 2020 , one we completed our inaugural Graysby application grasp as a mission driven industry led organization, providing standardized and validated ESG data to financial markets.
In our first year submission to grasp we earned a score of 70 Fad. This score outperformed the international average of 73. In addition, we received the Green Star designation awarded to participants achieving scores of 50, plus on grassroots measurement of the management and performance sections.
We look forward to sharing the full results of our environmental impact in our ESG report after third party data verification is completed in quarter two.
2021 represents the final year of our inaugural three year environmental goals cycle based on our pre pandemic 2018 baselines.
Social accomplished much in 2021 included 695 hours of paid volunteer time off and company organized activities to give back individually and corporately to the communities we serve.
<unk> also provided more than $400000 in philanthropic fund raising and in kind donations to community and health care provider organizations benefiting their research and mission initiatives, surpassing our 2021 goal of $350000.
We are thrilled and humbled to earn recognition as the 2021 modern health care Best places to work based on anonymous team member Survey results Dock was the highest rated health care real estate provider among the honorees.
Prestigious nationwide ranking as the gold standard in the health care industry for recognizing workplaces that empower employees to provide patients and customers the best care products and services.
We're proud to enhance the company's governance through updates to our management team and board of trustees with two outstanding individuals since 2016, the daily operations of our asset and property management team they've been led by Mark Dukes, when he joined US from Duke Realty after overseeing their health care portfolio asset management team, while working directly with Daney Taylor.
2021 mark was sworn in to serve as chair and Chief elected Officer. The building owners Management Association International the highest honor in property management commercial real estate.
In recognition of his leadership and talents. He has earned a promotion to senior Vice president of asset management.
Our board is also looking to the future and starting the process for succession planning and we're very excited to add Eva life's Booker a senior partner at the prestigious Mcguire Woods law firm, who has been elected to the board effective March one 2022.
In addition to Avis wealth of legal and business experience. We're excited about her leadership in D. E N I efforts at Mcguire Woods, and helping us meet and exceed our hiring and career development goals for our team.
Looking to 2022, we're proud to be starting the year from a position of strength.
Our segments have unlike other segments of the health care real estate and the growth we experienced in 2020 , one as organic rather than a recovery of pre pandemic NOI in our portfolio remains insulated from direct exposure to high labor cost.
Really our health care system clients are stronger than they've ever been.
We're pleased to offer them a stable real estate platform as they work to expand their outpatient delivery capabilities to benefit their patients.
On the acquisition front, we will pursue accretive investments that also makes sense my long term IRR standpoint appropriately considering the potential for continued inflation in a rising rate environment.
We're fortunate that the long term thesis of medical office remains more compelling than ever and our health system health system clients have a growing appetite for new outpatient care facilities and strong demographic markets.
We are actively involved in discussions with multiple partner for financing New medical office developments anchored by high quality health systems and providers to be started during 2022, which should convert to ownership and long term rental income streams in 2023 and 2024.
It yields well in excess of current acquisition yields.
Our development pipeline, we expect to invest $250 million to $500 million in 2022 due to our relationship focus and strength in off market acquisitions, we anticipate first year yields on these acquisitions and developments drained from 5.25% to 6%.
In conclusion physicians Realty Trust as enter 2022 with a strong stable and proven portfolio. Our management team is well rounded with multiple years of collaborative progress working together with a rock solid commitment to our culture continues to earn recognition and awards.
We have an eight year track record of disciplined investments in management and we expect another year of measured investments in this volatile capital market that will benefit our shareholders for years to come Jeff.
Thank you John in the fourth quarter of 2021, the company generated normalized funds from operations of $58 million or 26 per share our normalized funds available for distribution were $55 million, an increase of three 6% over the comparable quarter of last year and our fad per share was 24 cents.
Looking back over the year, our portfolio performed well through all the COVID-19 variance with no material negative impacts.
Accounts receivable remains at low levels and the same store NOI growth came in on target at two 5% for the year.
The portfolio was significantly upgraded in 2020 , one through both acquisitions and dispositions.
With over $1 billion of investments last year headlined by the landmark portfolio the quality of our tenant base is second to none.
Certainly investors are focused on growth more than stability lately, but this carefully curated group of tenants will perform well in all environments and we expect to be able to increase the portfolio's growth over time as we catch up to the rapid rise we've seen in market rents over the past year.
Conversely on the disposition side, we finally took the long awaited step of selling our L tax in the fourth quarter.
As it turns out despite some negative headlines we endured with the assets the investment itself the sound and delivered a 9% Unlevered IRR.
We had some significant mezzanine loan repayments in the fourth quarter as well, including $54 million for the landmark transaction, which was used to help fund the portfolio purchase.
In 2022, we will look to redeploy dollars into these high yielding loans when possible as they provide our investors with a solid risk adjusted return while also increasing our potential future acquisition pipeline.
As well as deploying dollars into development opportunities and acquisitions anchored by high quality health systems.
Turning to the balance sheet, we hit a milestone in 2020 , one without credit upgrades from Moody's and S&P.
We took advantage of this and the low rates in the fourth quarter to issue $500 million of 10 year bonds at 265% interest rate effectively pushing out all significant debt until after 2025, we also reduced the leverage that resulted from the landmark deal by issuing $133 million of equity on the ATM.
At an average price of $18 54, bringing our consolidated leverage down to 566 times debt to EBITDA.
So we are in a comfortable position in terms of the balance sheet as we enter the new year. However, we are certainly mindful of the cost of capital increases we're looking at on both the debt and equity side.
As J P mentioned, we intend to be deliberate about finding better returns and utilizing structures such as mezzanine investments as well as funding loan to owns and developments, we will not however move down the quality curve as we continue to build out our core portfolio.
Faced with these challenges we are anticipating between $250 million to $500 million of investments for the year, but expect them to average out at an initial yield in the mid 5% range.
The rest of the year's guidance includes G&A of 40 to 42 million and capital expenditures of 29 to 31 million as we manage and care for our significantly expanded portfolio.
I'll now turn the call over to Mark to walk through some of our operational statistics in more detail Mark.
Thanks, Jeff.
The Doc portfolio produced strong operators operating results during the fourth quarter supporting our commitment to deliver stable and growing investor returns.
This commitment to high quality growth is reinforced through our acquisition of the landmark portfolio, which improves our already great asset base and nearly every key quality metric.
I'm pleased to share that the integration of these new assets to our portfolio has been near seamless and I'll come that would not be possible without the excellent efforts of our best in class team of property managers and accountants will.
We look forward to growing relationships with our 10, new health system partners for years to come.
Our in house leasing team has also been productive completing $1 2 million square feet of total leasing activity during 2021 at an 80% retention rate and positive one 6% renewal spreads.
For the fourth quarter, specifically, we completed 389000 square feet of leasing with a strong 79% retention rate.
Not included in these numbers is an additional 42000 square feet of new leases executed in the quarter, which are currently in construction and will commence rent payments over the next several quarters.
We've been especially pleased with our ability to exhibit pricing power without expanding concessions in this inflationary environment.
Last year, but in the last two quarters, especially the leasing team has been focused on balancing tenant retention and leasing spreads while pushing on the contractual rent escalators higher than the portfolio average of two 4%.
They were successful in this mission with over 85% of our leasing activity executed in 2020 , one containing an average rent increase of two 5% or greater.
Looking ahead to 2022, 4% of docs portfolio totaling 565000 square feet scheduled to renew with a current average rental rates of $24 89 per square foot.
These explorations include several specialty surgery center in orthopedics spaces, where we remain confident in our ability to release a favorable leasing terms.
We are also encouraged by.
Our ability to re let vacant space given the strong demand, we're seeing for class a outpatient facilities.
Our pricing power is backstopped by construction costs that are up more than 20% above pre pandemic levels limiting alternatives for tenants, who may choose to seek space elsewhere.
These factors have turned our expiring leases into an excellent opportunity to demonstrate the superior quality of our portfolio. We're optimistic the tenant retention will remain high in the year ahead, and then we'll be able to achieve renewal spreads in excess of the usual, 2% to 3% average that the medical office sector has historically seen.
Moving to our same store NOI growth, our 246 property same store mob portfolio generated cash NOI growth of two 9% for the fourth quarter.
Despite the inflationary environment operating expenses were actually down four 7% against last year as a result of several real estate tax and insurance expenses that were challenged and refunded at year end in.
In total operating expenses were down 1.5 million year over year, leading to a $1 $1 million decrease in operating expense recoveries from tenants under our triple net lease structure.
Our capex investments for the quarter totaled $7 5 million or eight 9% of cash NOI.
For the full year, we invested $25 5 million in recurring capital investments near the low end of our $25 million to $27 million guidance that we offered at the start of last year.
In 2022, we expect our full year recurring capex to remain around 8% to 9% of NOI in total between 29 and $31 million.
Within our 2021 capex investments, we invested approximately $5 6 million in ESG related projects to improve energy management systems upgrade each ASC mechanicals and its all more efficient and longer lasting led lighting.
Overall these investments not only make our buildings more efficient, but also improve our margins on commentary of costs and reduce operating expenses for our health care partners.
In recognition of these efforts we were proud to share that Doc has earned an additional 10, new IRA them certified sustainable property designations in 2020 , one reinforcing our commitment.
Two expanding our ESG practices.
Total doctors earn 28 iron CSP designations since 2019.
We're making significant improvements on all fronts related to ESG and look forward to sharing these results in our third annual ESG report in June .
To conclude 2021 was an outstanding year in which we grew the portfolio from $5 billion in real estate investments to nearly 6 billion by year end and our off market acquisition showcase our relationships will continue to power the future of dock, we've built a high quality portfolio that is operating well with an exceptional.
Asset management and leasing team that has and will continue to deliver bottom line results.
Before turning the call back over to John I would also like to say a special congratulations to Mark Dukes on his promotion to SVP asset management.
<unk> is not only a true leader Doc, but also within the commercial real estate industry, Congratulations Mark John .
Thank you Martin Jesse will now be happy to take questions.
Thank you, ladies and gentlemen, if you would like to ask a question at this time. Please press star one on your telephone keypad. The confirmation tone will indicate that your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Our first question is coming from the line of Juan Sanabria with BMO capital markets. Please proceed with your question.
Good morning team just wanted to start on the investment side.
Could you talk a little bit about.
The Optionality you have about converting some of your proper mezz loans into either development or otherwise into acquisitions in 'twenty two.
How much if any is assumes inc.
Got it and in part as part of that how are you thinking about joint ventures.
Expand into JV joint venture in the first quarter as a tool to put capital to work into 'twenty two.
Yeah, one is J T. Thanks for the question. So we look at Mezz, primarily as a as a means to an end. So most mezz loans, we're making are with the anticipation of converting that to full ownership either through the development structure or through an acquisition or potentially through a JV structure.
So it's been a great tool for US landmark is a perfect example, where we.
To recap the portfolio two years ago, and had $50 million of high yielding mezz, but had rights.
Short and long term rights to acquire the portfolio and just frankly, just happened quicker than we expected. So it's a great tool for us and we expect to continue to use it those cycle in and out you know usually on a 12 to 18 months cycles, so with to work kind of constantly evaluating when and where to place. Those so doesn't always convert to ownership, but that's the primary use for that that methodology.
[noise] alone Downs.
Provide us an opportunity to get.
Even more attractive yields on on development, but are also well.
Managing.
Cost inflationary costs with the with the provider in those construction.
Processes.
Is there anything assumed for any of those loans to carry into two simple ownership in 'twenty two as part of your acquisition guidance.
What should we could have some convert this year, we have some mezz on.
Development projects that we funded last year that have now C O and are.
Currently operating with rent.
Commencement, so we'll work through that process with the developers and those couple of situations. So yeah, it's part of that $250 million to $500 million part of it assumes some of the mezz converse to ownership.
Okay, and then just on the.
Sure.
Kind of cash flow growth.
It sounded like you've got some good lease rates it seems like it's higher than the occupied rate maybe theres some.
Delays with some of them fit out costs.
I guess I wanted to check if that's accurate and then to see.
Hum.
How are you guys are thinking about that.
That growth going forward, you can kind of get stated that you expect it to accelerate is that driven by just greater renewal spreads or increases in the annual bumps as the portfolio.
Turns and Youre able to get higher annual renewals or annual bumps right.
Yeah, I wanted to it's really a combination of both I mean, you know the.
Good news is the quality of our earnings is stronger than ever in the strength of our portfolio is stronger than ever.
You know what the downside first time really in my career, where Walter is not as advantageous as historically it has been so we don't have a lot rolling this year, but where we do have leases rolling you know we have 300 buildings and we have some vacant a small amount of vacant space, but some vacant space, but we see.
Inflation hitting those rents construction cost.
Which would be the competition for for the rents.
Creasing, you know pretty significantly so we do expect you know a higher than average.
Re leasing spreads this year in new leasing spreads of absorptions because of that you know the first year of a really big lease roll for US is 2026, and that's the 10th year anniversary of the.
The common spirit acquisition that we did so we manage that oh really quarter by quarter, and evaluating you know when and where to.
The address those leases and stretch those leases and working with common spirit for their space needs.
We did that transaction all the rents were set at market rates at that time in those individual markets.
And frankly, we see those as below market in those markets right now generally overall and so we see a big opportunity in 2026, working with them at an appropriate rate, but at the same time, we think there's good potential for no better than average releasing spreads across that portfolio.
Thanks, John Times lifetime. Thank you.
[laughter].
I'll be here before you know it.
Thank you. Our next question is coming from Rich Hill with Morgan Stanley . Please proceed with your question.
Hey, good morning, guys and thanks for that.
The color on prepared remarks, and some of the commentary from a from a follow up to one I didn't want to just follow up on the acquisition guidance and maybe push a little bit more on the range. It sounded like the range was driven in large part by cost of capital, but maybe you could give us a little bit more.
Insight as to what would drive you to the top into the range and if theres any sort of scenarios that could maybe surprised to the upside.
Even above the high end of the range. So really it's just a question of like what assumptions are are driving that high end and the low end of the range.
The high end of the range is primarily driven by a mezz financing and loan down developments and so we see that as you know is.
Frankly market for high quality assets that where we're financing part or all of the.
The construction cost for those projects and then once these leases commence.
As rates and so that's where the Hyatt drives the high end of that range could be even even more attractive.
The low end of the range is driven by you know best in class.
Medical office acquisition in primarily off market.
Best in class assets in an open auction process trade in the mid fours steel.
You know in the private market and.
So again, we think we can we can drive best in class asset acquisition acquisition pricing still in the <unk>.
Five and a quarter plus range. So it's really a combination of both.
Got it that's helpful. So if I can maybe come back to the Mezz financing for a second I recognize why how and why that that can be a big driver of acquisitions, but are you seeing increased competition from a variety of our blender sources.
To provide mez financing in and is there any scenario where that becomes less of a lever where than where it's been in the past.
I don't think I don't see a scenario, where it becomes less theres more development.
The planning planning going on right now and in process than than we've seen in years.
Driven by you.
You know kind of delays in construction projects during the early part of the pandemic to a need for more outpatient space is recognized by the by the health systems. During the pandemic. So we're not out of competing in the open mezz market for Mezz paper, it's just us as lender as construction lenders.
Primary senior secured lenders are looking to work with their clients to finance new construction projects frankly, we get you know kind of leads and introductions that way, but also our development partners, where we continue to do repeat business with Mark Davis being a perfect example in Minneapolis.
He sees it as a as an attractive part of his capital stack and in the end. It's it's a it's a financing tool for us and for them the health system and the developer there.
It keeps rents as you know it was lowest possible in these new buildings and you know in high inflationary markets. So it's a combination of those that worked really well for us it works really well for keeping rents.
At at market as market is increasing in those markets.
Got it that's helpful. Just one more question from me.
Inflation, obviously is on everyone's mind right now.
If I put on.
My My cross sector hat there are some landlords that are thinking about and are trying to change their lease structures to be a little bit more inflation protected.
CPI look backs that catch up have you had any discussions about that is that is that anything that you would consider basically a question of you know would you change the structure of your lease terms.
To maybe provide more inflationary hedges than might be in place right now yes.
Beginning in 2017 that became our standard.
Our approach to leasing new leases or or in <unk>.
Renewals and sort of a standard.
Kind of terms include a CPI with a 3% floor.
It has been effective so about 10% of our portfolio has a CPI adjustment annually and you know again the floor is usually get negotiated in exchange for some kind of cap so the.
Those range from 2% to 4% with a CPI adjustment so about 10% of the portfolio has had in place.
Again, we have we have long walls, we have 2% to 3% Rolling every year and so that's you know it will take time to come.
Bert that across the rest of the portfolio, but starting to have an impact.
Got it. Thank you guys I appreciate it.
Yeah.
Thank you. Our next question is coming from the line of Jordan Saddler with Keybanc capital markets. Please proceed with your question.
Good morning.
Just to follow up on that last answer.
The answer Jay.
Mike just on the.
Standard lease.
3% floor with CPI.
CPI.
Is there are there typically cap on the new leases.
Yeah, Jordan J T. So again, it just depends upon kind of the counterparty and and what's important to them. So.
Some have caps almost they all have floors. So.
Sometimes the floor goes from 3% down to 2% you know in this inflationary market. That's something we may continue to move up and.
There will be an important part of the negotiation but.
That's the that's the long term conversion that we've started in 2017.
Okay and then.
You know when you're in your prepared remarks, you did and you spoke to it a little bit.
And the Q&A here.
But you referenced.
Accelerating internal growth can you maybe.
Speak to that a little bit more debt.
Look forward more of a function of.
They're pushing through a little bit better rate or the better leasing spreads you mentioned here or is there also.
Are there other opportunities either as a function of them.
So some amount of redevelopment or occupancy uplift in certain aspects of the portfolio.
Or were you referring.
Yeah, Hey, John this is mark.
So as it relates to you know really driving our internal growth. It comes in two ways. One is the revenue are increasing as J T was just talking about with a strong focus on our leasing spreads and our annual escalators are annual escalators today or two 4%. If we look at the leases that did have a CPI adjustment last year in <unk>.
21 of those leases grew at three 3%.
You know the other important point to note is on the expense side that our leases are triple net structure. So we're protected against a lot of those inflationary pressures.
Pressures on the operating expense side so as.
As we saw this quarter, our operating expenses are actually down as a result of some great work by the asset management team to challenge property taxes to renegotiate some insurance rates.
And so we're really looking on ways to continue to invest our capex dollars into the properties, where we can lower operating expenses for our for our partners and then also for ourselves.
Where we can save on the expense side. So we're using a combination of a you know trying to increase rents and grow revenue while also keeping a great control on our operating expenses.
Okay and then.
I feel like the pipeline, yet which is amazing.
But can you maybe speak to what you guys are seeing on the investment pipeline.
The $2 50 to 500 guide and a lot of progress last year.
You see in.
No.
This year versus last year or is it picking up just maybe characterize it for me.
Yeah, Jordan J T. We've got we've got a nice pipeline you know or you know kind of typical model as you know onesie twosies transactions with existing relationships.
Our relationships either.
Developers or owners or health systems physicians themselves. So we've got a nice pipeline I think we'll have a good strong start to the year to report with first quarter first quarter earnings, but its onesie Twosies theres some.
There are some larger portfolios floating around the market there was one really big portfolio.
More or less in the market. So we evaluate everything so it's I think I don't think we'll I think we'll have a I think the.
Opportunities as.
Our exceeds the guidance, we're providing and the capital markets improve you know I think we can we can grow even stronger.
We feel good about the.
The guidance, we've given on the development side, we have.
Seeing and negotiated with more development opportunities than we ever have and again these are all.
Either 100% or highly pre leased opportunities somewhere who will do the loan down, which where we'll deploy more capital in summer mezzanine, where we'll provide you know less but at a higher rate.
Okay, and then on the on the larger portfolios.
You know I assume pricing is it still very competitive and more aggressive there.
Is that sort of fair or is there a way to get bigger deals done. So these days.
Yeah, it's hard to it's hard to pull off a portfolio in an off market manner like we did last year so pricing there.
A lot of buyers out there is still a lot of private capital looking to get into this space. So pricing is still still very strong.
I don't expect that.
Again on the portfolios that are being actively marketed I don't have great expectation that.
We will be interested in either the.
Quality of the portfolio or the pricing of the portfolio, but you know again, we evaluate everything.
Okay. Thanks, guys.
Thanks George.
Thank you. Our next question is coming from David Toti with Colliers International. Please proceed with your question.
Great. Thank you.
I just had a quick question for you Jeff realm.
Relative to the changes that you are expecting the cost of capital that might impact your acquisition appetite.
How are you underwriting those specific changes in what are you expecting in terms of.
Sort of inflation in the cost of capital.
Yeah. Thanks, David So certainly as we look at all of these acquisitions, where we evaluate everything on a long term IRR basis, and so we factor into that you know kind of what our what our cost of debt is on a long term basis. So you know, where we think we could issue a call. It a 10 year bond today.
We also look at our cost of equity are generally on a yield basis, plus an expected kind of inflation rate on that.
So you know we we use those two factors and then compare the.
Compare the potential acquisitions against that weighted average cost of capital. So when we're looking at you know interest rate increases I mean, we're typically looking at you know what's projected by the fed and the expectations around those short term interest rates as well when we look at market.
You know market rent increases certainly that's increased in our mind as we look over a 10 year period from where it was a few years ago. So we do increase the market rates and inflation.
Bit from where it used to be.
Okay and then just.
Follow up question to that which is.
Do you expect the cap rates will remain sticky and lag for some time, but let's assume that you have capital increases capital cost increases.
Will that begin to compress some spreads potentially a until the market catches up in terms of expectations for yield.
Yeah, it'll be interesting with the cap rates, because certainly you do have some increasing.
Cost of capital for all buyers, but then you also have.
Rents that are going to become more and more below market. So you'd expect to see the.
The ability to increase the.
The rents under these assets over a long period of time more than you used to be able to so there'll be some offsetting factors. There you know right now we've kind of expect cap rates to remain about where they are you know, we'll just have to watch and see what happens, but we don't see any drastic moves in cap rates coming anytime soon.
Great. That's helpful. Thank you.
Thank you. Our next question is from the line of Nick Joseph with Citi. Please proceed with your question.
Thank you yeah. How are you thinking of funding the net external growth in 2022, and then where does that put leverage at the end of the year.
Hi, Thanks, Jeff So certainly.
Our leverage we ended the year at a pretty good rate on an enterprise basis were five eight times debt to EBITDA. You know obviously in 2021, we have de Levered are ahead of the landmark transaction in the fourth quarter, we issued $133 million on the ATM just to bring that expected leverage down from.
You know I guess it would have been just over six times debt to EBITDA to the 5.8.
You know as we think about the acquisition pipeline in 2022, I'd say, we're largely in you know kind of a pay as you go type mode.
And so we're certainly comfortable from a risk standpoint, with the leverage as it stands today.
But I would expect that it's going to you know directionally over a longer period of time trend down.
And we're certainly going to be conscious of where our current cost of equity is as we look to execute on this pipeline.
And that's a big part of the reason you know we're looking at these.
Different different acquisition structures like the mezzanine loans and the loan to own so that we can find appropriate yields based on our cost of capital.
Thanks, and then just for the five in the quarter, the 6% cap rate assumption is that cash or GAAP.
Always cat always cash okay. So what would your I don't know how to call yet.
Alright, so maybe 25 to 50 basis points higher on a GAAP basis historically.
Yeah Yeah.
Great. Thank you.
Thank you. The next question is coming from the line of Michael Carroll with RBC. Please proceed with your question.
Yeah. Thanks, I just want to talk about the acquisition cap rate range I mean, what's driving that range higher is it that mezzanine type investments N V.
The loan to own development commitments is that why that that cap rates in the mid to high five type target range.
That's right Mike.
We are seeing and we are in negotiations on more development projects right now than we are acquisitions and so you know we have a nice blend of both but.
Those those the development projects are going to either through mez or through a loan down structure are going to be much closer to six or more.
Then then less so we see a real opportunity both for high quality.
Long term assets to put into the into the REIT and a much more attractive price than than acquisitions.
Great and then Jeff just back to the leverage questions I know leveraged a little bit higher than normal today, and you kind of highlighted this but given the stability of your portfolio. I mean, I don't think it's really a concern I mean are you willing to complete these investments and push leverage a little bit higher or is that kind of like a cat, but you don't really want to be much higher than you are right now.
Yeah, Mike.
We're capped exactly where we are now I mean, you know certainly we want to be.
A little bit more cautious about leverage when we're up to five eight times versus you know when we were kind of closer to five <unk>, but you know there is some short term flexibility there again, just because of the nature of the portfolio and how stable it's been through even kind of the biggest operational stresses over the past few years.
Okay, and then I guess J T related to the the board changes I believe in your prepared remarks, you kind of talked about succession planning.
Hey, did I hear that correctly, and what does that entail or what did you kind of planning right now on the succession side.
Yeah sure.
We don't have we don't have anybody from our original board or Carb Board. That's that's retired or established or are not standing for reelection this year.
But we're starting to look at.
You know in the next couple of years, what we're likely to have a you know two.
Two three board members can go kind of transition through retirement, so you know what.
We want to do is when we bring identified new great candidates to add to our board as it gets some overlap with that historical.
Allergan leadership, so we're gonna.
Spanned the board slightly for the next.
Probably look for one more candidate to add to the board eventually and then and then shrink it back down as we see some retirement so just a good transition to good succession planning there.
Okay, great. Thank you.
Yep.
Thank you. Our next question comes from Michael Gorman with BTG. Please proceed with your question.
Yeah. Thanks, Good morning, John I think maybe just I'm, a little bit of a bigger picture topic recently, there was some focus in your sector, but not your property type on the effect of private equity in the ecosystem and obviously the retail sector has been dealing with some negative effects from private equity investment over the years and I just wonder if you could share with us.
Your thoughts on private equities expansion in the health care space its acquisition of physician practices and how you think about private equity private equity within your own portfolio and when you kind of look at new assets for acquisition.
Yeah great.
Great question, and there's a lot of a lot of private equity on both sides of our of our business.
The real estate side.
Some of the larger smarter private equity firms that have gotten into real estate in a big way.
No, we're very disciplined but they're out there looking for Theyre always kind of a flood of capital looking to get into the medical office space. It's just sometimes it's onesie twosies, sometimes theyre in or in a in a big portfolio. So yeah, I think that's helping too.
Increase the AR or decreased cap rates generally just with the pressure of that cash.
Looking for them, you know high quality assets and then their yield expectations.
On the on the provider side, we're seeing a lot of different roll ups. If you will from private equity.
Across specialty type so it's.
United Healthcare is the largest employer physicians today.
Not private equity, but there's a but they are out acquiring kind of all kind of practices, but in the private equity world. There's an orthopedic theres a couple of orthopedic roll ups, there's a couple of ophthalmology roll ups.
Theres dermatology roll ups, Theres Gi roll ups, and it's kind of by specialty. So you know ideally where either side by side or were kind of talking to the physicians, who typically own. The buildings that are you know.
But equity firms are rolling up and kind of establishing new leases where the.
Body.
It kind of makes a long term commitment to the practice and location sometimes that happens after the private equity comes in sometimes it happens before so.
Where we are in active discussions with private equity firms. We don't we're not threatened by them, but at the same time, they do change typically change the capital structure of the practices in them.
And Newmar and sale leasebacks, we we'd like to know and understand our credit and you know what our collateral is behind those leases so having a big effect and something we're out in front of them in a big way.
And in most instances there where there's a physician owner they they are still looking to kind of split that structure between the practice in the real estate yes.
Yeah, I mean, you think about it you know a five cap as you know mulch.
A multiple of cash flow and then on the private equity firms, they're there they're look talking and then.
You know 10 to 15 times EBITDA. So that you know there's a balance between the two and where you can maximize value.
You know when you when you sell kind of both sides of the house, if you will the outflow in the propco.
Okay, great. Thanks, I appreciate the commentary Yep Pepsi Tomorrow.
Okay.
Thank you. Our next question comes from the line of Daniel Bernstein with capital. One. Please proceed with your question.
Hi, good morning.
Just a quick question.
I noticed the.
M O b the same store cash NOI, it's about 80% of the portfolio.
Non same store is about 1920, so I just want to kind of understand maybe the difference in performance between the two <unk> are the.
To subsets, there and maybe the drivers of that.
Non same store portfolio going forward I'm guessing on what the chunk of that is landmark, but just trying to understand.
Whether I should think about the total portfolio of potentially growing better or worst than that kind of same store number of two 9%.
Yeah, Dan This is mark good question.
And you're already kind of guess at its a the same store portfolio. If you look back last year's nearly the entire portfolio. This year in 2020 one as we had a significant growth in our investments of a $1 billion of new investments between the landmark and the honor health transactions.
Not yet owned for a full year represent the majority of the.
The non same store portfolio. So, it's primarily new acquisitions, there and obviously that'll that'll be headed the same store after a year of ownership.
And is there a difference in growth rates between the two two such there.
No we continue to like how should we think about the drivers of that are different.
Yeah and the.
The landmark and honor health portfolio.
We underwrote them on an IRR basis, but those have a historical leases with with 2% to 3% rent bumps and primarily triple net leased. So we expect that those will continue to be in line with the profile of the existing portfolio and our same store portfolio.
But that's all I had thanks.
Excellent.
Thank you. Our next question comes from the line of Tayo Okusanya with Credit Suisse. Please proceed with your question.
Yeah.
Good morning, everyone I Wonder if you go back to Jordan's question, I'm really trying to understand what the same store NOI.
Our outlook could look like going forward again, it sounds like again.
Getting better.
Mark to market in new leases you have the difference between the occupied versus lease.
Which again should kind of add some occupancy going forward.
So it just kind of getting it sounds like you're talking about very good strong pricing and then this quarter you put up a pretty good number of two 9%. So as we kind of think about 'twenty two and beyond.
I guess is it fair to kind of think of things still being kind of more very high end of kind of the historical 2%, 3% bogey that you know and you.
You know the MLP, you read that kind of measure up against.
So Thomas J T. I think I think again this is the first year and 20 years, where we've had.
We see more and more opportunity to press rents and increase those rents.
Again offset for us by 95% occupancy, which is I mean, there's just you can't get to a 100% and we'd like to get to 100% and Amy Hall, Mark that could get us to 100% if possible, but that's a stretch. So you know on the same store side, we've got 2.42, 0.5% kind of on average annual escalators, 10% of the portfolio.
Which I think would include almost all in would all fall into the same store that does have those CPI increases so we should get some uptick.
From that this year. So it's measured in 2022 and 2023 when landmark does roll into the same store pool.
Under wrote that and do have expectations that the first year yield will exceed 5%.
Because we think the rents the near term rent roll and renewals you know there was an opportunity to really push those rents and that piece of the portfolio. So it's incremental but overtime we.
Again, the quality of our cash flow and the strength of the ability to increase the quality of that cash flow is there.
Gotcha, Okay. That's helpful. Thank you.
Yeah.
Thank you. It appears we have no additional questions at this time, so I'd like to pass the floor back over to John Thomas for any additional concluding remarks.
Again, we thank you for joining us joining us. This morning, we had a great 2021, we have very high expectations for a very strong 2022, and we look forward to reporting back next quarter. Thank you for joining us today. Thank you Jessie.
Thank you ladies and gentlemen, this does conclude today's teleconference. Once again, we thank you for your participation and you may disconnect your lines at this time.
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