Q4 2021 Healthcare Realty Trust Inc Earnings Call
[music].
Good morning, and welcome to the Healthcare Realty Trust fourth quarter financial results Conference call, all participants will be in listen only mode.
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I'd like to turn the conference over to Karen Smith. Please go ahead.
Thank you for joining us today for healthcare Realty's fourth quarter 2021 earnings conference call.
Joining me on the call today are Todd Meredith, Rob Hull and Kris Douglas.
A reminder, that except for the historical information contained within the matters discussed in 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 31st 2021.
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 at that site.
Normalized F F F F.
All per share normalized <unk> per share funds available for distribution or Fad net 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 fourth quarter ended December 31, 2021 the.
The company's earnings press release supplemental information and Form 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 and thank you everyone for joining us for our fourth quarter 2021 earnings call.
This morning, we reported normalized <unk> per share growth of 4% for 'twenty one over 'twenty.
This solid growth was driven in part by our investment momentum, including record acquisitions of $756 million in 'twenty one.
These results were further compounded by the stability of our annual escalators high tenant retention and robust cash leasing spreads.
Based on the strength of our 'twenty one results and are confident outlook for 'twenty two our board of directors authorized a 2.5% increase to our dividend.
We have communicated our goal to grow the dividend for some time and we are pleased to report this progress.
Going forward, our ability to generate long term sustainable dividend growth is bolstered by the quality of our portfolio and inherent strength of our platform both the internal growth engine and our external investment model.
Our targeted investment approach delivered superior capital deployment opportunities in 'twenty one.
Cap rates for many portfolios priced below 5% last year, but did not line up well enough with our criteria and market preferences.
In contrast, we acquired 44 movies in our target markets at an average cap rate of five 3%.
With these investments we increased density in our existing markets, adding to clusters in high growth Msas like Denver, Nashville, San Antonio and Atlanta.
It's worth noting the progress we've made in just the last three years.
At the end of 2018, we had just two markets, where we owned over 1 million square feet, Dallas and Seattle.
Today, we have five markets with over 1 million square feet, including the additions of Nashville, Denver and Los Angeles.
We also supplement our densification approach by selectively entering new target markets.
San Diego is a burgeoning success story for us building on a nearby Los Angeles portfolio.
We entered the San Diego market in 2019 with two of them are via acquisitions, and we purchased two more in 'twenty, one, bringing us to $180 million invested in four properties today.
Our market focused investment strategy naturally increases our local knowledge and leads to follow on investments.
But most importantly, it translates to improved operational efficiency and leasing velocity.
In terms of operational performance the fourth quarter showed signs of momentum.
Our build out times for new tenants stabilized in the fourth quarter.
This coupled with inherent demand for our from our tenants led to a 40 basis point sequential increase in occupancy.
In 'twenty, two we expect occupancy gains to steadily improve same store growth NOI growth with the potential to exceed our embedded rent escalators of just under 3%.
As it relates to inflation, we have a strong track record of pushing rents in markets, where rising replacement costs and supply constraints and naval outsize rent revenue.
In 'twenty, one and two thirds of our cash leasing spreads were between three and 4% and over a fifth exceeded 4%.
Our market focus and the density of our clusters strengthens our pricing power.
And although health care providers face many challenges, they're doing well financially.
Health care providers continue to report strong earnings is improving payer mix more than offset inflationary pressures, including labor and supply cost.
As cost control remains a focus for hospitals the shift to outpatient becomes even more critical as they look to defend and grow their market share.
We see this firsthand and we're engaged in more development and redevelopment conversations than ever before.
2021 was a remarkable year for healthcare Realty. Our success reflects the quality of our team and their collective efforts to make HR it clear choice for health care providers.
Looking at 'twenty, two and beyond the quality of our portfolio combined with the strength of our platform will drive attractive <unk> per share growth and enable us to sustainably increase our dividend.
I'll now turn it over to Rob to provide more detail on our investment activity Rob.
Thanks, Todd and thanks, everyone for joining us today.
21 was a record year for investment activity and healthcare Realty.
38 separate transactions, we acquired 44 buildings totaling $2 1 million square feet for $756 million at a blended cap rate of five 3%.
All of these acquisitions were in our target markets with nearly 75% of them expanding our cluster.
Property clusters generate leasing and operational benefits that overtime drive incremental growth beyond our going in cap rates and spur future acquisition and development activity.
Our work is the product of our team's intentional focus on identifying buildings, we want to through data driven market research deep industry relationships and local market knowledge.
Further about 60% of these purchases were directly sourced through long standing relationships formed by our team.
Notably in Denver, we acquired eight M obese totaling 510000 square feet.
We now have 20 properties totaling one 3 million square feet in this fast growing market, which is now the fifth largest in our portfolio.
We are able to offer prospective tenants an expanded mix of varying price points with on adjacent and off campus buildings.
Our fourth quarter activity of $298 million pushed us well past the $700 million high end of our full year guidance.
We targeted each acquisition because of its location in a fast growing market with an opportunity to build scale alongside a leading health care provider.
Two thirds of these acquisitions expanded existing clusters.
As an example in Nashville, we acquired four buildings and a three acre land parcel for future development for $106 million.
Two of these buildings, representing our initial investment adjacent to two separate hospital campuses, where we see a path to add nearby complementary buildings overtime.
Yeah.
The other two were recently built and sit strategically off campus between two Ascension Saint Thomas Hospital.
In this corridor, we now own eight buildings and are developing a night that together will total over 1 million square feet.
In San Antonio, we acquired five properties for $57 million through our joint venture with teachers.
Four of these buildings are adjacent to tenant health North Central Baptist Hospital, and within a mile of a 120000 square foot MLB, we developed an own adjacent to Hca's Methodist Sterno Hospital.
We now own 260000 square feet in this cluster and almost 700000 square feet in San Antonio overall.
Dispositions remain an attractive source of funds for reinvestment.
We selectively sell properties to continually refine our portfolio, particularly in markets or clusters, where we no longer see a clear path for future growth.
For the year property sales totaled $188 million at a blended cap rate of four 9%.
Yeah.
Our development team remains active we are nearing completion of a $34 million redevelopment in Memphis.
Where we are 99% occupied and.
And our $12 million, 100% leased building expansion in Tacoma is scheduled for completion at the end of this year.
At our Nashville redevelopment demolition work continues and vertical construction is expected to commence later this summer.
This redevelopment is 50% pre lease with notable additional leasing activity and as part of the over 1 million square feet in the Nashville Corridor I mentioned earlier.
Looking ahead, we are finalizing terms with a leading health system in Texas.
For an on campus development that we expect to commence later this year.
Once completed this will be our second building on this campus and the fourth in this cluster for a total of 350000 square feet.
We all we are also engaged with two other health systems in Georgia, and North Carolina regarding several projects as each system looks to build market share by continuing to invest in outpatient services.
Yeah.
We've been intentional in growing our investment volumes over the past three years building our pipeline.
Expanding our team and refining our processes there.
This culminated in last year's acquisition volumes of over $750 million.
Our investments team continues to assemble a robust pipeline as we start 2022.
With one acquisition completed to date and over $300 million under contract or LOI that is expected to close in the first half of the year.
Our acquisition guidance of $500 million to $750 million represents our current expectations for 2022 as.
As we continue to grow our pipeline.
Now I'll turn it over to Chris.
Yeah.
Thanks, Rob.
Improving same store performance and an increased acquisition pace throughout 2021 generated reliably strong results.
Normalized <unk> per share increased 4% for the full year and five 4% for the quarter.
Looking forward, we expect earnings momentum to continue which supported the dividend increase that was announced last week.
Fourth quarter same store NOI grew two 7%, excluding the deferral reserves that were repaid in 2020.
Our full year same store NOI was two 3% this.
This includes the impact of a 30 basis point decrease in average occupancy, which has a two for one basis point impact on our same store NOI growth.
Sequentially, our occupancy rebounded in the fourth quarter with a 40 basis point increase in period in same store occupancy.
This absorption will benefit us moving into 2022 and allow our same store NOI growth to return to levels at or above our contractual escalators of approximately 3%.
Operating expenses increased one 6% this quarter. This was below our historical average as a result of successful property tax appeals in Colorado.
When normalizing for these tax refunds operating expenses increased two 4%, which was in line with our full year operating expense growth.
The property tax refunds were credited towards tenant expense reimbursement. So there was only marginal benefit to NOI growth from these appeals.
Yeah.
Embedded portfolio of growth drivers remain strong, which is a positive signal for future growth.
Same store cash leasing spreads were three 6% for the full year well above our in place contractual escalators of 293%.
The consistency of our cash leasing spreads and rent bumps over the past two years shows the resiliency of our asset class and benefits of our high quality portfolio and major growth markets.
And as we look ahead, we see rising demand for outpatient space to serve the aging population balanced with a consistent reliable low supply of new construction.
This backdrop supports the steady internal growth investors have come to expect and appreciate from M. Obese.
Regarding our balance sheet and liquidity, we continue to maintain a flexible capital structure to Accretively fund, our external investor investments.
During the quarter, we settled $90 million of forward equity.
$74 million of properties and generated 40 million of proceeds from our joint venture.
We ended the year with debt to EBITDA within our guidance range at five four times.
The Fad payout ratio for 'twenty, one was 80 $88, 1% below the 90% target we had identified at the beginning of the year.
We expect our portfolio to deliver consistent growth in the years ahead, which will drive long term improvement in our payout ratio.
With this backdrop, our board approved a two 5% dividend increase last week.
Looking ahead, the visible internal growth drivers in our portfolio combined with our flexible balance sheet attractive investment pipeline and consistency of demand for outpatient care will generate meaningful per share growth in 2022 and beyond.
Operator, we're now ready to open the line for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone you are using a speakerphone. Please pick up your handset before pressing the keys and withdraw 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 I just wanted to start with.
The investment pipeline.
If you could just give us a little color on the split between on and off.
And how much is maybe sort of.
Related to the TIAA.
Joint venture and if those numbers that five to 760 of our growths or not.
Yeah related to the pipeline I mean, I think if you look at the running.
Kind of going forward looking at similar weightings as we've you've seen us do over the past several years and kind of in that 70 525 range.
And.
I think that you'll continue to see that let's do that this year excuse me and.
It related to the joint venture I think that as we've done.
Since we started that generally been a little more heavily weighted towards off campus. Some more of that will be done in the joint venture as we've done in the past and the acquisition volume is growth when we talk about the $756 million for 'twenty. One. So that's how we have been consistently reporting it in.
We formed the JV.
2020.
Okay. How much would you expect to do via the joint venture for $200 million ish, plus or minus is that fair to assume that.
Yes, that's that's certainly how we release agreed to our go forward strategy in that joint venture obviously, its flexible thats just a target.
So far we've been at or above target.
On average but.
What 15 months or so into into that so far so good but we think it could be that and I think it could certainly expand as we continue to expand our our appetite and our pipeline.
Okay, and then just on the development pipeline. It seems like you guys have good momentum there you've got $25 million of land on the balance sheet.
How big should we think of.
Ground up development being kind of on an annual basis either spender.
Our completions over time is that.
Strategy matures.
Yeah, I'd say that.
Generally we're looking to start.
Between 75, and $125 million of new projects, you're in and you're out.
As we build up that those starts and you'll start to see our spend trend in that direction, we're having a number of positive conversations with with.
With health systems. So we're optimistic that what you will see a couple of starts this year that will move us towards that that consistent level of spend and as we've.
As we've said before our embedded pipeline is really where we draw most of our developments from those or opportunities that that we control.
And through the relationships our current land holdings that are buildings that we own expansions.
Expansions are buildings like we're doing in Tacoma right now we are expanding the building by 25000 feet based on demand. So I think you can continue to see us.
Develop and that man or not.
Necessarily going out and chasing rfps.
And just one last quick modeling ones. If you don't mind any any color you can provide on G&A expectations for 'twenty two.
Not sure if theres any pop given the return of travel hopefully as corporate share gains or not.
Yeah, we provide some detail on that at our components of expected <unk> on the last page of our supplemental page page 29.
And so you can see some more detail there, but I will point out there is a note item of note on the G&A on that page that we did adjust the incentive comp program.
Stock based comp.
And mood from a kind of a backward looking restricted stock program to afford booking are su program that is more consistent in the industry and as a result of that we are seeing about a $3 $5 million increase and.
G&A this year just from kind of moving from from a backward looking to a forward looking program, but that and then also you know we have some expectation of increase in incentive comp as we see.
Performance in same store NOI and leasing continued to pick up but those are kind of the major drivers that you see based off of that guidance for G&A for next year.
Apologies everybody looked at but thanks for the color. Thank you guys.
That's one.
Yeah.
Our next question comes from Jordan Saddler with Keybanc capital markets. Please go ahead.
Yeah.
Thanks, and good morning, I just want to.
Circle up on sort of the re leasing spreads that you were seeing them or maybe just the dialogue that you're having with tenants.
It's sort of the spike in inflation that we've seen.
It really it started obviously in the back half of last year, but obviously with the seven 5% in January what's what's that dialogue like with the tenants when you see sort of inflation spike at that level, and then you're sort of negotiating new leases.
Are you trying to push tenants.
Toward that higher rate to offset.
<unk> at least on.
Renewal rates or maybe two.
The dialogue that you're having as it relates to.
Escalators that'd be helpful. Thank you.
Yes, Jordan this is Chris.
As we look at it you're right that that the you know the prints that youre starting to see right now in inflation or are going up.
But we think we kind of look at it over a little bit of a multi year timeframe.
Cause.
Inflation is coming off of 7%, but it's worth some lows that came you know going back to going back to 'twenty, but if you look over two or three years inflation is kind of running 3% to 4% and if you look over that same timeframe.
We were we benefited and that's one of the things I think people appreciate a M. A b's is the consistency throughout the cycles and so we didn't see the drop that you saw and in other sectors and so we're not really having to look for that same rebound and so if you look over that same tier three year period.
Our inflation its got run three to four we are our cash leasing spreads have been running in that same range and we've seen some some marginal increase in our and Ah rent bumps over that timeframe as well. So I think that that kind of speaks a little bit too to the consistent demand for.
For medical office, but you know over over time is if inflation runs through and it does start to increase for replacement cost.
We do think that that provides a backdrop for continued.
Uplift in terms of our of our rental rates.
Okay, and then just to follow up on the DNA, maybe for you Chris as well.
Yeah.
Three and a half million dollar of incremental expense you framed up as it were.
No.
The change in infrastructure, it's here.
Is that going to burn off is that the number we should look look at 2023 and sort of a three and a half million dollars deduct.
Versus 2022.
That's because that's sort of the overlap of Dublin.
No it doesn't quite match up like that it really has to do with what's burning off and whats coming on and so really what you end up this year is a little bit of a double up as you ended the old program at the end of last year and so it's a it's a balance with what the amortization because we have five year amortization of all of our.
Our oldest equity incentive programs and so as those amortization burn off it will be the net against that three and a half will be kind of the run rate that you will see each year for our our issues and so we will see a decline.
You know it won't be the same $3 million increase that we're seeing this year, but it's not a dollar for dollar.
Reduction of the old plan burning off against that kind of that consistent $3 5 million per year moving forward.
So how much so how much is in the number in 2022 for the old plan how about that.
Because I'm trying to tell us how much G&A should fall going forward, because youre not going to have.
Two plans in place right now.
But that's why I'm, saying, it really goes to that amortization and so it's gonna be by year, depending on it. So you kind of have to go back and look at five years ago Windows Awards were given what were the size of them compared to the performance and so what's amortization that will build off you know off the top of my head you know what what will burn off at the end of next.
Year is somewhere between one and a half and $2 million.
But happy to follow up and get more more precise on that.
You mean, you mean this year right burning off at the end of 'twenty, Yes, yes, yes, yes.
Yes, it's still I'm still thinking and talking to 'twenty one.
[laughter] well technically I guess you are talking 21, yeah.
Thanks, guys.
Thanks Jordan.
Okay.
Our next question comes from Nick Joseph with Citi. Please go ahead.
Thanks.
Maybe some more question on print books, just in terms of.
Are you seeing any change to a buyer interest or underwriting for deals either given inflation expectations or the rate outlook, if you've seen anything change over the past few months relative to where it was for most of last year.
No I would say Nick generally not I think it will be.
Sector itself is enjoying obviously a lot of demand a lot of capital.
I think certainly some people may take that and say, we can underwrite a little more aggressively just because of the lift and certainly I think our view is as we described we see some potential for occupancy pick up in 'twenty, two but but also continued strength in our cash leasing spreads. So all those things help and I think that just bolsters the demand for them.
And I think it's important what Chris said.
People that come into this space have to have that perspective that hey, we didn't drop in 'twenty and therefore, this is about maintaining that strength rather than going through the cycles of downtown up 10 and that kind of thing.
For us one of the one of the trends that we've seen just watching our cash leasing spreads as a as a sort of indicator.
Is looking at all the markets. So if you kind of look across about 30 markets where year to year. We have renewal activity that would give you cash leasing spread data, we're really seeing nice strength of those that are markets, where we have above 4% average cash leasing spreads for the year.
Holding steady and growing a little bit.
Even above seven if you use that just thinking about kind of current inflation numbers.
You know that that strength is starting to build and then Conversely, I think just as important and if you can see this in our cash leasing spread data in our supplemental where we break it down those that are negative cash leasing spreads. We really only had one market out of 30 that had an average cash leasing spread that was negative as a pretty <unk>.
Mall amount of square footage, but just looking at sort of these indicators. So we're seeing that strength, that's an improvement over the last five years. We've had a few more markets. So you saw I think over only 4% of our leases.
<unk> had negative cash leasing spreads in all of all of 'twenty. One so really positive strength, there and youre seeing a lot more go to that middle of three to four average cash leasing spreads. So a lot of positive trends that I think really lead to potential for strength in Nashville, We were looking at this Nashville is a great example, in the last five years the <unk>.
Average cash leasing spread of each year has not been less than 6%. So that's where you really see market dynamics constrained supply.
Rising replacement costs are really driving the opportunity to to use your pricing power and really move to market cost and replacement cost.
We obviously don't want to get into any kind of price gouging kind of.
Thinking we want to just work with what the real costs are that we're all facing and I think that really what caused the lift naturally along with supply constrained.
Thanks, I appreciate that and then maybe just on operations I think you'd mentioned five markets with over 1 million square feet and the benefits associated with that is 1 billion kind of the magic number where do you start to see those benefits of scale.
Yeah in the MSA.
It's a good question and if we break it down further I think Rob referred to a cluster in San Antonio that broke through $2 50, that's certainly a nice Mark and then he mentioned the corridor here in Nashville.
I think we'll stretch that to about three miles rather than our two mile cluster definition.
A million feet I think 500000 is clearly a breakpoint that we look for where in about 12 markets with over 500000 feet. So that's very strong as well that represents probably nearly 70% of our NOI, which is which is very strong. So we certainly as you've heard all you know all the comments were.
Always looking to densify get that operational efficiency get the leasing flow.
Stronger and then we see it kind of generating repeat investment and development opportunity acquisition and development. So we do see a lot of benefits through that.
So you'll see us continue to drive that for sure.
Thank you.
Our next question comes from Rich Anderson with <unk>. Please go ahead, hey, thanks.
Good morning.
So I just want to understand a little bit better on the inflation side.
Is there a point that.
The market is kind of adjusting naturally to the inflation pressures that youre not.
Literally using inflation as a strategy to reprice your rents.
Is that the way to think about it like you're you're just taking what the market's giving you or or or using it as a negotiating tool at the risk of.
Avoiding of gouging.
Scenarios you described.
Well I think he's certainly use all the things that are at play and inflation is clearly front and center for everyone and you feel it in supply cost replacement cost so.
It's not just sort of flagrantly using it to gouge, but it's just saying hey these.
A lot of times, we are building out designing building out a suite for Tennant and those costs are just up so they see that that cost increase.
But clearly we're always pushing pushing on those rents, where we think it makes sense, but it's a balance between retaining tenants attracting tenants.
So really watching where market rents can be so it's a it's a balance as you know and obviously, we work with sort of a different dynamic in the <unk> business, where you youre working with these independent groups, who also have very strong ties and productive relationships with the hospital that you associated with so again.
If you start pushing beyond the reasonable level. It can backfire on you. So it's navigating through that but using the real rise in cost pressures to to your advantage.
And any places like do you are you able to get above market or are you kind of just follow the market.
We think generally followed the market and we say that because if you look at the majority of our cash leasing spreads tend to be 3% to 4% and we think that's very much in line as Chris said, a little bit longer view of where inflation has been especially when you talk about replacement cost building costs.
Easily runs 4% on average over an extended time period.
Rich I might add there as you think about the inflation, you've kind of had to break it into the different buckets of where it may be showing up so inside of our operating expenses for the year. We were at a at almost two 5%, which kind of at the higher end of our historical average and we'll have to watch what happens this year, but it could trend up a bit from there but.
We have 90% of our leases have some type of pass through of operating expenses and so that is getting is getting pass through and picked up by the tenant.
And thats beyond what we're talking about in terms of of base rent and cash leasing spreads.
And then the second piece is we are looking at.
It re leasing and frankly, probably more acute with new leases is that where we're typically providing an allowance for the ti to the tenant.
And many.
Many many times, it's almost most of the times the tenants end up coming out of out of pocket for ti costs over and above our allowance and so if there is inflation in terms of the construction cost for the build out.
The the tenant may already be absorbing that but not being reflected inside of our inside of our rents now.
If we're being asked to take take on more of that that Ti.
We certainly will be looked at.
For a commensurate return for that we run everything on an IRR basis and so.
That's where you could see some some rent increases, but I guess just wanted to kind of point out there that there is there is multiple places that it may show up.
And it may not all be.
Flowing through as you look at cash leasing spreads are you at all tempted to intertwine CPI into escalators going forward or is that just.
Too shortsighted and you think things will settle down it's better to have primarily a fixed bump sort of structure.
We think because of our portfolio and multi tenant nature much shorter lease terms operating nature of our portfolio the fixed bumps.
Work better you get more opportunities more quickly obviously to reset those through the cash leasing spread but I think anytime we're talking about something that would be sizable leases single tenant or otherwise that are 10 years, plus I think that starts to become a real discussion and then of course you get into the the floor in the cap disk.
And beyond that so I think for the vast majority of what we do we are comfortable with fixed on the shorter term lease roll that we have.
Last question for me disposition guidance is 100 million or so you started the conversation off talking about portfolio deals and portfolio premiums.
Cap rates I'm curious if if.
Do you have anything in your portfolio that boy, if you could sell it you know a big chunk of it all at once and get it.
Subject.
Substantially lower cap rate out of that I'm, assuming you had a kind of a use of proceeds.
Immediately thereafter or is that something that you kind of have keeping them warm on the sideline in case, it's needed or are you kind of do on the one off.
Asset by asset model like you are on the acquisition side.
I think that we are.
Continuing on with the kind of asset by asset.
Selectively.
Optimizing the portfolio, where we can you know looking at markets.
Where we want to be and grow and those that we don't want to be looking at if there's a good opportunity and the strength of this market to exit that market or even a cluster.
We're taking advantage of that and then turn around and using it as a good source of funds for the pipeline that we have and we have a strong pipeline and I'm looking at that as another another way to to translate that into accretive transactions.
Rich I would also add that I wouldnt say theres enough in our portfolio that would really get garner that amount of scale, where you've seen some of these portfolios in the hundreds of millions half a billion or more we just don't have that that we're looking to rotate out of its more what what Rob said, it's more targeted and so I think if we were to do some.
Thing from a capital recycling rotation accretive capital raise standpoint, the JV is always an option for that we looked at that early on with the JV of doing a seed portfolio. We can always do that but but at this point that's not that's not really the plan.
Okay, great. Thanks, guys.
It's rich.
Our next question will come from Tayo Okusanya with credit Suisse. Please go ahead.
Hi, good.
Good afternoon, everyone.
My question was more around again, the you know the backdrop of the story in the MLP space again is kind of we're kind of in the middle of the year.
Aging baby Boomers, which should drive demand for <unk>.
But then taking a look at 2022 guidance again, there really isn't any real grew in your same store occupancy.
22 versus 21, there really isn't any real growth in kind of development.
The outlook for 'twenty two versus 21, so I'm just kind of curious against that backdrop, why we don't see some acceleration in either of those two trends.
Yeah, Tayo I'll speak to the to the occupancy when we give our occupancy guidance all of that is on a on a trailing 12 month basis.
And so it's kind of a.
Trough to peak.
Issue that youre running through throughout the year, given that we kind of bottomed bottomed out there in the third quarter.
<unk> of 'twenty, one in terms of our occupancy. So we are certainly expecting sequential absorption and absorption throughout the year, but when you when you kind of run that through the trailing 12 months. That's that's kind of the phenomenon that runs through the <unk>.
Through the guidance, but we certainly expect to be driving absorption and maybe another place to see that in our our.
As expected <unk> page in our supplemental is the same store guidance the upside of that range. Currently has three in a quarter and clearly that from our view is upside from occupancy adding to the fundamentals.
The portfolio. So certainly we have occupancy in our sights and expect you've heard us talk about some pickup in the fourth quarter and continued optimism optimism about that in 'twenty. Two so that's certainly in our view and then I think on the development side.
Development is one of these long term plant the seeds.
Your farming the field and it takes a long time, but as I mentioned and I think Rob added two we've got more conversations than ever and it's more than just conversations we've got several very active things that we'll be adding you've seen us just in the last couple of quarters add a couple of things to get our current active pipeline over $100 million, we think that will grow.
This year for sure.
And keeping it very steady pace perfectly every year is always a challenge, but we're very optimistic about it. So I would say on both fronts were much more positive than maybe you picked up so far.
I guess, maybe providing that data on a trailing three month basis going forward would also.
Kind of be helpful. Just supposed to kind of see that progression.
But again I think another follow up question I do have is again that the same store cash NOI guidance of two five to three to five what would result in the lower end of that guidance range, where you'd be closer to two versus hyatt, but versus closer to three.
Yes that would be.
If the occupancy didn't rebound as fast or if we did see an uptick in.
And operating expenses.
That's not that's not really what we are expecting and we do have.
The pass throughs I talked about earlier that can help to offset that and it's really kind of go and that's kind of where we are today and the expectation is coming off of kind of those numbers.
Through the year of growing back up towards that top end and that's also kind of a trailing 12 months that we look at so you've got to get some of those.
Historical comps out.
Of your of your trailing 12 months to get up to the to.
To the top end through the balance of the year.
Okay. That's helpful and then last one for me.
The walls or lease renewals versus new leases is dramatically different I mean renewals is about four years, new leases about six and a half years I'm.
I'm just kind of curious why there's such a big difference between the two.
Yeah. It really has a lot to do with.
The build out of the space.
On a renewal there's there's minimal ti that's associated with that.
Hopefully just paint and carpet you know unless they are looking to do.
Something a bit more substantial but at a new lease there's going to be a substantial amount of ti as I mentioned earlier a lot of times. The tenants are coming out of pocket for a portion of that so as they start looking at making that commitment and thinking about the amount of capital they are putting in place.
And so the.
How long they are looking to kind of amortize that cost and that commitment to to this new location. It just naturally ends up being a a longer lease term.
And Tayo. So I would say we've said this for a long time and I think if you pulled up our supplemental from five years ago, you'd see a very similar pattern.
So it's really behavioral it's tenant behavior based on the elements that Chris just described we're not out trying to push longer on the new versus renewal, but it just makes sense given what's going on in the build out the recouping of initial investment.
Yes.
Gotcha Okay.
Good.
Okay.
Okay.
Our next question comes from Mike Mueller with Jpmorgan. Please go ahead.
Yes, hi.
First what are the attributes of the 11% or so leases, where you didn't get at least the three per cent bump on them.
I would say, it's just you know.
Specifics of any specific deal.
We like to say, we keep up with with market, but you also have to.
<unk> recognized the.
The competitive dynamics of where you are in the lease.
And so it's one of those is it's kind of all.
Like our batting average.
Youre not going to.
To connect or hit the hit the home run every time, but we think that kind of what we've shown over the years with whether we've refined the portfolio is that we've been able to increase the propensity of those positive.
Cash leasing spreads.
It's really helped us over time and improve the average.
And Mike maybe just to give you. An example, I mentioned there was really only one market, where we had negative cash leasing spreads and all of 'twenty, one and that happened to be Miami and you would look back if you look back at the prior four years, our cash leasing spreads on average were between four four and eight six so.
So it's not as though we're worried that Miami is suddenly in trouble and it was a very small volume is actually the smallest volume of renewals that would have spreads in those five years. So sometimes it just as Chris said comes down to a small dataset a unique situation.
Not not not a concern.
Got it and then your comment I think I think the term you threw out there was.
Sustainable dividend increases and I guess on a go forward basis, how should we think about dividend increases.
Because the board wants us to be an annual occurrence or just.
Periodically you put more regularly with them what it has been how should we be thinking about that.
Sure.
Year was our our initial.
The increase in a long time, a little under 1% just to signal how important we think that is and then this year, obviously getting more on a on a run rate level of growth. That's certainly a view that that we want to be reviewing that and doing that annually recommending recommending that to the board and the board certainly has that objective, but obviously isn't it.
Valuations every year, so I would say absolutely a focus on that.
But clearly also a goal of reducing the fad payout ratio, which krych, Chris talked about so it's a combination of all that but certainly the objective is to make that annual.
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'll look forward to seeing many of you at some of the upcoming conferences here in the next month or two take care.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.