Q2 2019 Earnings Call

Greetings and welcome to the Physicians Realty Trust second quarter 2000, <unk> earnings call. At this time all participants are in listen only mode. A brief 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 Jennifer Battle, Vice President Associate General Counsel. Please go ahead.

Thank you good morning, and welcome to the Physicians Realty Trust second quarter 2016 earnings Conference call.

With me today are Jon Kimmins, Chief Executive Officer, Jeff Theiler, Chief Financial Officer.

Taylor Chief investment Officer Mark.

Executive Vice President.

John .

Chief accounting and administrative officer, Lori Hirsch Senior Vice President controller and data Cline Deputy Chief.

During this call John Thomas will provide a summary of the company's activities like before.

Corridor Dolphin in 19 and year to date.

As well as our strategic focus for the remainder of 2090.

Tyler will review our financial results for the second quarter of 2000.

And our thoughts for the remainder of 2090.

Mark I will provide a summary of our operation.

Quarter 2090.

Following that we will open the call for questions.

Todays call will contain forward looking statements by the private Securities Litigation Reform Act 1999.

They are based on the current beliefs of management and information currently available to us.

Our actual results will be affected by known and unknown risks trends uncertainties and factors that are beyond our control or ability to predict.

Although we believe our assumptions are reasonable our forward looking statements are not guarantees of future performance.

Our actual results could differ materially from our current expectations.

Repeated or implied in such forward looking statements.

For a more detailed description.

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 Jennifer good morning, Thank you for joining US today, we have physicians Realty Trust celebrated the sixth anniversary of our initial public offering on July nine.

We appreciate all of you have been with us from the beginning those who joined our mission along the way.

We invested.

This past quarter quarter of results from operations reflects our original commitment to you our stakeholders clients team and the results. We can achieve when we follow that simple philosophy.

We started this company with a focus on the future of health care and the evidence is clear and compelling.

More and more the healthcare dollar in the U.S. is being spent on care in the outpatient medical office sector every day.

By investing in medical office buildings, particularly those affiliated with market, leading health systems and providers.

Providing high levels of customer service and attention to detail.

By providing a caring approach to everything we do.

We delivered 3.5% same store NOI growth this past quarter across all of our medical office facilities.

We just completed our annual customer service customer satisfaction survey and our results across the board or outstanding.

Worksite and his team are delivering everyday working hard to exceed our client expectations.

What health systems have the choice to choose their land work time and time again physicians Realty Trust rises to the top of the forces.

We will continue our relentless effort on growing our already best in class Medical office portfolio anchored by health care systems and providers that are focused on the future not the path of health care delivery.

The futures in the outpatient setting conveniently located for providers patients their loved ones and the services and the technology they need to be helped.

Our strategic mission has been to utilize our long term relationships with industry, leading health systems to grow and manage we sincerely an objective. We believe is the best portfolio Medical office properties in the United States.

We continue to be medical office at the most resilient class a real estate in the market.

And our portfolio of them obese, representing 95% of all of our real estate assets.

Delivered outstanding results during the quarter.

Since our last report Weve also made strategic investments to continue our return to growth in high quality accretive assets.

Consistent with our strategy. We are excited about the expansion of our existing relationships with Ascension community health networks in Indianapolis.

Texas Health resources.

And U.S. oncology through our recent investments.

We anticipate more opportunities with each of these leading health care organizations, we understand that we have to earn that business every day that is the dock what.

Our pipeline is also strong and expenses, we are under contract to close to finalizing contracts more than 75 million of new investments and look forward to sharing more about these facilities and the associated with health systems. Upon completion of these acquisitions.

All the acquisitions are contingent upon typical closing conditions, but it's close we will be adding new investment grade health systems. Another state farm out and new opportunities for repeat business with health care providers. You know you will know and appreciate having in our portfolio.

Were also under letter of intent or active discussion with a number of other owners health systems for both modernization and development opportunities. We are humbled by our existing health system relationships that physicians.

Who serve as references for us what these opportunities.

Business like life has challenges.

One of our influence will and successful thought leaders successful by every possible measure how most of us not to be defined bird challenges, but the owner challenges addressed them, but more importantly be defined by our success.

Our success is far outweigh our challenges ratio is not even close.

We own our challenges and no one we believe it's better than solving them. Then we are our relationships knowledge of health care and engagement with providers. We believe gives us every opportunity to own at breast challenges in our portfolio better than anymore.

No wonder that no one has more sense of urgency than we do when albeit rarely a health care provider has an issue with their business.

In this context, we are committed to transparency and integrity.

Despite encouraging him to answer with respect to each of life care about mixed smelter, though.

We determined it was appropriate to elect a conservative application of the leasing we adopted accounting standard see a 42.

To reduce cash and noncash straight line revenues for the quarter.

As a result of the chapter 11 reorganization falling by life care and 2019 challenges at the Foundation El Paso Hospital.

Well I've got a reorganization process is coming to conclusion, well the new owner for tenet, which has agreed to assume our master lease.

And we are negotiating the terms of the sale of the foundation El Paso Hospital as well.

We're not quite at the goal line there, but we do have other options if necessary.

All four facilities remain open in serving their communities.

And then no don't merchant prayers are with the people of El Paso.

Looking forward, we continue to believe we will have a very good opportunity to invest 200 to 400 million of new investments in 2019.

With a portion of these investments being new development starts that will have rent commencing in 2012.

The dog story is consistent growth and better and better providers and their affiliated medical office locations.

All right our assets are 96% occupied our stability and there will be an opportunity for relationships are bingo growth.

We believe it is second to none.

We own or challenges, but more importantly, we should celebrate our success.

Quarter, two 2019 was very successful and our future is bright.

Jeff will now share our two this quarter to 2019 financial highlights.

Forward to your questions Jeff.

Thank you John in the second quarter of 2019, the company generated funds from operations of $40.0 million or 21 cents per share.

Normalized funds from operations were also $40.0 million.21 per share.

Normalized funds available for distribution or $42.1 million or 22 cents per share in line with the previous quarter.

I'll spend a little more time than usual discussing these earnings because of the impact of the relatively new accounting guidance could change in a S. C 842, which we adopted at the beginning of the year.

Under these guidelines straight line rent receivables must be written off in their entirety muscle lessor has a high degree of confidence that they will collect substantially all of the rent over the remaining term of the lease.

With our life care tenant in a bankruptcy process, which by definition introduces some degree of uncertainty.

We couldn't be confident that we will because we would collect substantially all future rent. Despite the fact that the cash flow generated by our facilities.

Highly profitable under the current lease structure.

Therefore, we wrote off $3.5 million of straight line rent receivables, reducing FFO by 1.8 cents per share.

Most recent update on the life care bankruptcy process is that yesterday, the stalking horse bidder won the auction and it tends to honor our leases without modification.

However, until the sale process actually closes which is projected to be near the end of the year.

We will only recognize the cash rent that we had been collecting steadily since June 1st.

After the closing we will likely recognize the straight line rent receivable as revenue.

Similarly, we have been negotiating a sales agreement with the physician group that has been delinquent on their rent El Paso Hospital previously run by Foundation Health care.

This agreement would require as a condition of the sale of the tenant repay the six months past due right before we close.

However, because of the length of the delinquency and rental payments under the new guidance, we decided we couldn't be certain that the deal would close and that we would collect substantially all of the rent. So we elected to write it off.

Should the deal closed as planned we would then recapture the six months of rental revenue and the straight line rents receivable would be netted out as a gain on sales.

We are in agreement with our auditors on the above treatments and we believe we are in compliance with SD 842.

However, as seen in this quarter the new standard can greatly increase the volatility of earnings results on a temporary basis. This is all a brave new world of accounting, So I'm happy to answer any additional questions on this after the prepared remarks.

Moving along to investments, we completed $57 million of acquisitions, and new development commitments in the quarter and closed on another $47 million of investments subsequent to quarter end.

This brings our year to date investment activity, it's $139 million.

Looking at the acquisition pipeline, which is weighted towards the back half of the year, we feel comfortable that we can meet the guidance, we laid out the $200 million to $400 million of investments assuming favorable capital market conditions.

On the disposition side, we sold two smaller non core assets for a total disposition prices 12, and a half million dollars, which was a 6.4% cap rate.

These assets generated a gain on sale of $3 million and an unlevered IR of 12%.

We've made some adjustments to our same store disclosure to segregate out the entirety of our L. tuck in hospital assets in order to focus on M. obese, which account for 97% of the NOI this quarter.

This also served to separate out the volatility associated with the accounting adjustments previously mentioned that will occur that will occur over the next several quarters.

Do you ever be same store pool grew cash NOI at 3.5% year over year.

Notably this is inclusive of every single MTB asset we have owned during the timeframe as we have no assets in our repositioning bucket.

We've also removed the slated for disposition categorization.

We still intend to sell those assets as demonstrated by the El Paso purchase and sale agreement, we are negotiating but because of the uncertainty over how quickly we can find the best value for these assets.

We will now reserve categorization solely for assets that could be designated as held for sale from an accounting standpoint.

Our overall portfolio continues to perform well it was 96% leased at the end of the quarter with 53% of that space tenanted by investment grade health systems and their subsidiaries.

We utilize the ATM in the first two weeks of April to provide capital for acquisitions racing $17.9 million of net proceeds at an average price of $18.66.

Our net debt to adjusted EBITDA for the quarter is 6.5 times, but normalized for the accounting write offs would be 5.7 times.

Net debt to gross assets was 33%.

Finally as predicted on the last earnings call. Our DNA has moved down from the seasonal peak in the first quarter and is consistent with our guidance for the year of $31 million to $33 million.

I will now turn the call over to Mark to walk through some of our operating statistics in more detail Mark.

Thanks, Joe.

The first half of 2019 has been active and productive and managing our portfolio.

Our team remains dedicated to superior customer service, the retention and recruitment of high quality professionals and operating efficiencies to benefit both our healthcare partners and our shareholders.

Beyond the 3.5% MLB portfolio same store NOI growth that John and Jeff mentioned three key highlights in the second quarter include.

Improved portfolio occupancy to 96% from 95.4% as a result of 75000 square feet of net absorption.

Driven by the commencement of the lease up the El Paso Specialty hospital.

Two continued expansion and profitability of our best in class property management platform, where we now manage directly 56% of our medical office buildings, representing 55% of our in Hawaii.

And three well managed capex investments totaling a mere 6.4% of cash NOI delivering enhanced cash flow to FMT.

As we enter the second half of 2019 docs portfolio is an industry, leading 96% occupied including 53% lead directly to investment grade tenants, which we believe is more than any other publicly traded portfolio in healthcare real estate.

Hi portfolio occupancy not only provides our shareholders with reliable cash flow and strong earnings growth potential. But also then that's the healthcare systems and provide our clients who trust us with their facilities.

Even further ducks extensive healthcare relationships cement, our ability to attract and leased space. The complimentary physicians, helping our partners achieved their clinical and business goals, all while increasing access to quality care for everyone.

In Q2 2019, our leasing team completed 242000 square feet of leasing activity, including 127000 square feet of lease renewals.

Total retention was 76% well our leasing spreads were positive 1.8%.

Approximately 93% of our lease renewals this quarter contained an average annual rent escalator of 2.5% or greater as we continue to build our internal organic growth strategy.

During the remainder of 2019, just 1.5% of docs portfolio is scheduled to renew with an average rental rate of $23.94 per square foot.

And our team a strong leasing momentum in Atlanta, Houston, and Phoenix to fill current vacancies.

Consistent with our plans announced earlier this year, we continue to expand our in house property management platform.

Over the past 12 months, we have transitioned property management services at 31 facilities totaling nearly 2 million square feet in Kentucky, Ohio, and most recently, Nebraska, Washington State and the Dallas, Texas market.

During Q3 2019, we anticipate completing the in house management transact transition of the Houston, Texas market, which includes four facilities totaling nearly 293000 square feet.

As a result of this growth we are proud to welcome to the dock family Jesse Ramsey Leslie Taylor, Scott Hedrick, Terry Smith, and Jenny dominant.

All are impressive individuals tasked with delivering the dock difference every day, which is the outstanding customer service and diligent care health care providers expect from docs.

In the six years since our IPO, which again, we celebrate on July 19th that not only built one of the best health care real estate portfolios in the country, but we've also assembled the best health care real estate team.

Going forward, we expect continued success from our asset and property management platform.

Resulting in enhanced local market knowledge repeat investment opportunities with existing partners profitable operating efficiencies and continued tenant retention.

During the second quarter, our construction and project management team also generated outstanding shareholder value by prioritizing capital in second generation tenant improvements and facility upgrades totaling $4.3 million or just 6.4% of the portfolios NOI.

This conservative approach to Capex investment compares favorably to our peers and is driven by our well diversified lease expiration schedule tenant relationships and the desirability of our medical office portfolio.

Right concessions in the second quarter remain low with Ti allowances and leasing concessions of approximately $1.72 cents per square foot per year for lease renewals and $3 or nine cents per square foot per year for new leases.

Lastly, as announced in July we would like to congratulate Mark dues.

Docs VP of asset management on his election as Vice chair of the building owners and managers Association also known as boldly international.

Mark will serve as an officer for four years, ultimately, becoming the organization's chairman in 2021.

Well known as a recognized leader in educating and informing and informing commercial real estate owners managers and advocates at the federal and local levels.

We are proud of marks achievements as a real estate professional and excited for the exposure the disposition will generate for physicians Realty Trust and the medical office sector in general.

Together with all of the dock members of the team we have created an incredible culture of excellence and outstanding portfolio and then just a second successful strategies to maximize long term per share cash flow returns to our shareholders.

With that I will turn the call back to John .

Thank you Mark.

Please take your questions.

Thank you we will now be conducting a question and answer session.

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Our first question comes from Jordan Sadler with Keybanc capital markets. Please go ahead.

Good morning.

Wanted to touch base on the pipeline.

So I think you are running a little bit behind.

Pace, maybe relative to sort of the midpoint of guidance.

Not much but kind of curious how you think think things will shape up.

In the back half of this year relative to what you're seeing and maybe you could sort of provide some color around.

What the activity in the marketplace looks like.

Yes, Jordan. Thanks, a lot this is John the.

You know the market, there's a lot of buzz and several portfolios floating around the market, there's been a pretty pretty steady supply of.

On market opportunities you know, we really are focused primarily on off market and relationship.

Opportunities and hopefully directly working directly with healthcare providers. So.

The I mentioned in my comments, we've got some exciting assets under contract or as I said, we're going to add a new state and a new health system.

Investment grade and we're very excited about that.

Perhaps repeat business opportunities with.

And feel very confident about.

At least the midpoint of that guidance if not more were also a finalist in a couple of.

[noise] development RFP is working with some best in class developers with those health systems, we feel very good about it.

Can you elaborate a little bit on the on the stuff that's under contract in terms of maybe sizing cap rate.

Quality the system.

Our system is a superior there.

The assets and the sizing I think it's around the 75 million dollar number that I've.

As I mentioned.

And fully leased.

Yep rates.

Around 6%.

Okay.

And then could you maybe speak to the Ascension.

Development or the the sacred heart.

Development rather that.

[noise] is taking place in Pensacola, the interest rate.

Front look.

A little bit on the lower side relative to what we'd expect for sort of a development loan could you maybe just speak to the mechanics and.

Sure to.

You know is that a 4.75% funding for the entire facility or.

How does it how does this work.

Yes, it's pretty simple.

100%.

Pre leased.

Building with Ascension or Sacred heart, which is part of the essential health system, So brand new building of the.

Local developer group that was pretty close near ready to to start construction, then you're going to spend some time with them.

And.

Really just kind of replace these capital structure that they were looking at and.

I guess, perhaps during the construction cycle, a little low but the back end yield in this project.

Early in 2020 or mid 20, so we're going to get very attractive yield on that investment.

The option to acquire its really the structure, but it's our intention to.

Please the funding construction loan and then.

The acquisition back in into the system.

Mitigate the risk of which we think is minimal.

Construction.

Okay are you, but you have a a fixed price.

Purchase.

Option at this point.

That's right.

Okay.

And then.

I guess just quickly on a life care and foundation El Paso can you maybe speak to the prospects.

On those sales.

You know.

I think your.

Looking to potentially get rid of life care assets. Once that's all settled I just curious if you sort of taking those to market or if youve.

Got any feel yet and then same thing on foundation.

Yeah. So I'm curious again the bankruptcy process is coming to conclusion the.

A stalking horse two different stalking horse bidders were identified during the.

The process, which has moved pretty quickly.

The bankruptcy Bollywood after our last earnings call.

Looks like vault pretty quickly after this one.

The.

Stalking horse bids were were finalized yesterday.

And.

The winning bidder for for our three assets are.

We've been in discussions with to understand their their operating plan our assets, particularly our Plano facility as generous still generating very high cash flow.

And the bidders.

By all accounts pretty excited to have the option to buy them in the same or our master lease as is.

Again to continue to use it.

Still finalizing the bankruptcy court process and then.

Moving towards closing so buyers that all their due diligence.

They will they will close very quickly to be conservative, we're assuming the end of the year, but hopefully sooner than that.

So a little bit outside our control, but we think it will be a positive result, assuming the bankruptcy court process concludes which should then that the buyer performs in the contract that took place.

On a foundation and yes stores and then you'd and then you'd look to sell those assets.

Yes, we do intend to sell those the stalking horse buyer for our assets are for the Opcos in our locations is also interested in the real estate and.

We wanted to get the bankruptcy Court Indians closing, there theyre closing behind us and Uh Huh.

Okay.

They will market them as well.

Secondly is the.

On foundation.

We are very close to a contract with the physician group. This there this kind of long overdue in all candor, but.

We really do feel where the the goal on goal line in that discussion and maybe sleep so pretty quickly.

We do have some others in them in the background there.

Oh pivot to if necessary, but we feel pretty confident we'll get that sell completed but.

Phil It's close it's not closed.

Great. Thanks, guys.

Yes.

Our next question comes from Alex Kuiper check with Robert W. Baird. Please go ahead.

Good morning, I was out on for drew first looking at the construction loans should we assume the sacred heart loan is backed by a sensients credit directly or is it more a standalone credit with the secret Health group itself.

Yes, I mean, the leases in place.

So indirectly the credits there, though the loan is guaranteed by the development group the development the development company.

Which is a number of high net worth individuals that are.

Okay got it thanks for that color on it.

Kind of pivoting there can you street speak to the strategic purpose of that Atlanta Medical condo deal are you guys happy owning some residential real estate or is there a long term plan here kind of what does it look like [laughter], yeah, sorry for the confusion, there's not residential real estate.

It's the.

The medical office building that was divided up into kind of a condominium structure wedding.

Built a number of years ago. So it's a it's an incredibly strategic location.

Kinda irreplaceable locations.

We're in discussions with all the condo owners has completed the first stage of the acquisition at this point.

The units we bought or.

Planes would fall.

Leases so its a.

It's a step by step structure, we can't we don't know when we'll complete the acquisition of all <unk>.

Or we will but that's our expectation.

Understood. That's that's really helpful. And then kind of lastly has there been any notable success on the appeals front I'm, just looking at taxes and because I mean, you guys really expect a tax growth to be a headwind kind of looking into the near and medium term just kind of looking for whats. Your guys is a feeling of the temperature in that realm.

Yes, we work with Afirma and half from the beginning that the both in the underwriting and the acquisition.

But also post on them.

Tax Appeals really every asset gets scrubbed every year and we spent a lot of great successes.

In all candor with the rising values of medical office buildings.

Local tax assessors are running hard and.

And trying to increase assessments some of the.

You know some acquisitions.

Post some of these portfolio deals.

That's significant increases in property tax rates and.

So it's something we focus on hard everyday and our tenants.

It all pass through on our Triple net leases, but.

There's still a cost of occupancy to our tenants we work hard to mitigate that.

Got it thanks for the color. Thanks for taking my question guys.

Certain things.

Next question comes from Michael Carroll with RBC capital markets. Please go ahead.

Yeah. Thanks, I was hoping you could provide some more information on the foundations El Paso Hospital looked like they did not pay their June Ryan did you say if they paid their July and August rental payments.

Yes.

Thanks, Mike as Jay again the.

They didn't pay April and they've been paying rent since June 1st.

She is talking about.

This foundation is behind on rents.

Okay, and then is I guess did you say el paso's paying their rents currently in the plan would be for them to pay the entire back right once or if that sale completes.

No. They made partial payment for August , but that's part of the Finalization of that contract is too.

As to get rent started paying to get them to pay rent while they go complete the due diligence process and closing the sale at which point they will fail to 2019.

Okay, and then can you give us an update on the San Antonio facility is because I know that they were a little bit behind a rent to seems like they are in a little bit of a better position and you didnt do that write off for them. So what's the thought process around San Antonio.

Yes, San Antonio.

Hello.

Buyer for.

It's currently or is currently being managed by third party, there's a buyer.

Anticipating closing and we believe that will occur next week.

On 50% ownership of that facility with the doctors that are there as part of that we negotiate a new lease with them.

A new 10 year lease for both the hospital and then will be and we expect that to that buyers of well capitalized well known.

Operator so.

We think everything is stable there and they.

They got slightly behind in the course of 2019 with rent, but have been steadily catching up.

Pretty close.

Listen to my cut back or.

Okay, and then can you talk a little bit about the other assets that are slated for disposition I know that you I guess removed that category and are there supplement this time around.

I guess, how how big is that portfolio again and is that going to likely occur over the next 12 months or so.

Other than the other the hospitals, we've talked about selling foundation El Paso, and the life care hospitals, we're talking about a plus or minus 100 million.

Other assets and frankly, we have they're good assets we have a.

Buyer, that's kind of the process of evaluating those really just trying to match fund and with the use of proceeds so.

We'd expect some closings this still this year.

Okay, great. Thank you.

Yep.

Our next question comes from Nick Joseph with Citigroup. Please go ahead.

Thanks, just want digital revenue was up 3.8% in the quarter, but same store occupancy was actually down 40, bips. So I'm wondering what's the contractual rent increase for the Adobe portfolio overall, and then were there any other revenue or anything else that made the same store revenue growth that 3.8% in the quarter.

Yes, good morning, Nick This is mark.

So we're really proud of our same store results for the quarter again. This is a two two important things to keep in mind as Jeff mentioned in his prepared remarks. This is our core MLB portfolio and it does include the entire portfolio. So there is no held for sale bucket or repositioning bucket.

As you know our average annual rent bumps as about 2.3%.

And during the quarter, we celebrated the anniversary of the C.H.I. portfolio. So we had about 20% of our portfolio bump.

With those leases and in our same store portfolio, a 1% increase represents about $600000. So it's really not a huge dollar amount, but it makes a big difference the percentage.

So what's really driving the improvements in our same store this quarter, our two leases, which had free rent last year and are nothing full rent this year.

But again really proud of our of our same store core portfolio overall, all doing really well.

Look forward to continuing that next quarter.

Thanks, Wendy when do the free rent comps burn off where it will be more in line with the contractual rent increases.

They already have burned off.

Okay. So the third quarter same store number should be more in line with the occupancy plus the contractual rent increase change.

That should be right.

Thanks, and then just in terms of the watch list you guys put out in early June I guess with four tenants.

And I know we've discussed most of them on the call but are there any other changes to the watch list either additions or yeah.

Anything coming off now.

Okay linked to sales we've talked about I think we'll eliminate every one of the issues on that watch list just this quarter or this year based on the timing of the lighter situation, but each of those have been though.

And address pretty.

Certainly this quarter.

Sure and any any new additions to the watch list.

[laughter] do that next question.

I'm going to beat that definition.

Thanks.

Thanks, Mike.

Our next question comes from John Kim with BMO capital markets. Please go ahead.

Thank you.

So your net debt to EBITDA of six and a half is kind of above where he held at historically.

Given the current dynamics in the market, where your cost of that is going lower arguably probably at all time lows.

Cost of equity is.

I guess, a little volatile right now.

How do you think about operating at higher leverage levels and Beekman near term.

Yeah, Hey, John it's Jeff So you're right. When you look at the headline debt to EBITDA is much higher than we typically operate.

But keep in mind that that's really impacted by a lot of these accounting adjustments.

Which we wont have next quarter and actually some of them will end up reversing over the next few quarters. So if you normalize that out you're kind of more at the five seven which is about in line, but you know the levers that we've had the last few quarters.

So we're probably right near our target leverage I think we'd go up a little bit.

But probably not too much more from here.

So you know whenever we look at these acquisitions or new investments, we look at it using an appropriate mix of debt and equity and make sure. It pencils out under those parameters and so we'll continue to do that and then well.

In terms of funding needs will you know like you said a concept that's coming down so that's that's getting more attractive.

And then we'll obviously look at our equity price and make determinations about whether to use equity capital as well.

But that's not how have your views changed at all I mean, the net debt to EBITDA, obviously does not.

Take into account cost of debt.

Or are there other metrics that you look to or have you.

No.

But are you more open to increasing leverage level.

Oh I see I see your question because the lower cost that would we run a higher debt to EBITDA.

You know I mean, it depends I mean the cost.

Moving pretty rapidly around here as the 10 year, you know drops by.

2020 cents or show 20 presents Wendy this will yield over the last.

It seems like a couple of weeks. So you know I think right now what kind of stick with our target of five to seven and if it looks like it's a sustained.

Moved down in cost that maybe that comes up a little bit.

But right now I think it's too early to make a determination because it's so volatile.

Okay, and then can we get an update on common spirit I guess during the quarter that got the credit ratings confirmed.

A triple B profitably in one.

Does that change your views.

As to more investments with a partner or do you want to eventually reduce concentration risk.

Yes, J.D. common spirit is.

Continue then integration of those two.

Large scale systems I think is starting to move pretty rapidly now is just the.

The people and teams and the other.

We think there are great client great tenant across the board, we really look at market by market is where whether we'd be comfortable with expanding that and some of their market that I do expect we would expand and we'll have the opportunity to do that because of our relationships there.

In other markets, it's probably TBD and then.

No from time to time, we still sell one or more of those assets or would sell some of those assets you know again market by market.

Depending on the situation, we're still waiting on the global market to.

Have some clarity on what's going to happen with the hospitals that they have there we fully expect our movies will be fine, but we may have a new.

Client relationship there to work with so.

Great organization, we think Bill you know the combined organization the plan they have going forward.

Well just to make them better and all of our assets, but at the same time, but it is truly market by market for us.

If I could just ask one more follow up on the condo unit acquisition.

You know I guess this is not an ideal ownership structures now are you.

You know basically comfortable that.

Theres, a high likelihood that you're going to be acquiring the entire building from the other owners.

Yes, Thats our plan. So it's in it's just takes one plus one brick at a time to kind of medium structures.

One unit at a time, but we're in discussions with substantially everybody.

Great Basin, it's worth worth it's worth the effort we are the dominant.

Thanks.

Next question comes from Chad that a car with Stifel. Please go ahead.

Hello.

Thank you.

So just one quick question going back to same store NOI, 3.5%, that's pretty well above that two and a half 3% target range, especially given escalators around 2.5%. The rest of the year, where is the delta is that a matter of change your same store pool or.

Could you really have a 100 basis points reduction in expenses.

Yes, Jim this is mark so the primary driver that is those same before is as two leases that had free rent last year.

But are now paying full rents and operating expenses so.

1% movement in our same stores and about 600000 there.

Alright, and then is it possible to talk about the bidder for the L. tax at this point.

Yeah. Thanks.

A little bit said give us it's a public process Chad. So there was a ton of information in the bankruptcy court filing if you want to go look clicking through that.

But it's a.

One of the original founders of life care.

Has reorganized the company has capital is.

Coming back to buy a handful of the assets.

All right Thats it for me.

Our next question comes from Daniel Bernstein with capital one. Please go ahead.

Hi, good morning.

So I wanted to ask or are there going to be any incremental cost near term for internalizing some of your management and Houston and other metro areas.

Well in Denmark.

So internal costs.

Not not really not many so we.

Our able to pass through many of the property administration and ER and salaries in our leases that are triple net.

And then areas, where we're not able to pass through salaries, you know theres quite a bit of opportunity in margin in the fees that we charge relative to the cost of providing those services. So net net.

Profitable opportunity for us to bring in house property management, but also just as important to maybe more importantly is the relationship that we're focused on with our hospital system partners, So getting a step closer to them and getting that local.

Market knowledge is really important to us.

Okay.

What percentage of the portfolio is internally managed at this point.

55%.

Okay. So there's there's plenty of runway to.

Bring things in house and improve operating efficiencies.

The way to think about.

That's right Dan.

Don't forget about a third of the portfolio is single tenant no management ball so.

5% is.

There are still some market opportunities, but not a lot of the growth okay.

I think you can stop me if I'm wrong do you guys still own Kentucky, one assets.

Okay.

Yeah I saw in the headlines there were some issues here with the Jewish scale of Jewish Hospital.

Perhaps could close in it and I know, it's a if it's still in your portfolio a very small portion of your portfolio, but I don't know if you could add some commentary on.

What is happening with those assets into Louisville area.

Yes, yes that process is no sedline simona ramp for two years and.

We continue to be in close dialogue with the.

Kentucky, one or more comments buried in particular.

Yeah, we feel very good about the.

New buyer for those hospitals and or the other hospital in town or have a strong interest in.

In our medical office buildings, there. So we don't expect any issues.

You know with our facilities.

Okay buildings that are closest to buildings that are closest to.

Jewish Medical center itself.

Our next to the two other leading hospitals in the community as well as the University local medical centers. There is a lot of them have bodies.

Its facilities and I'd say, that's worst case scenario and don't expect any.

Okay.

One more quick question I, just wanted to go back over the $200 million to $400 million.

Investment pipeline. If you go back over again, what is kind of the mix of development versus acquisition and.

You know are you seeing some some more leaning towards construction loan to own versus acquisition at this point given the cost of capital.

Yes so.

Again.

44 million of that what we've done to date. This year is due construction commitments. So.

That's better.

A third of the total.

I think that number it was a percentage will creep up towards the back end were as I said in a.

Kind of a final decision a couple of different health systems on.

In a new development opportunities that we would participate in finding those so.

Those can be bigger by the end of the year, but we don't aren't aware dosed in the development number won't be quite as big.

On the acquisition front as I said, we've got about 75 million under contract.

A couple of different locations.

That's predix I can make right now is two thirds will be acquisitions things to close this year, but there will be development starts.

Yes.

Either under construction or that we win by the end of the year.

No. That's all helpful. Thank you very much I'll hop off yes.

No further questions at this time I would like to turn the floor over to John Thomas for closing comments.

Again, thank you for joining us. This morning is a it's not and we're very excited about the success of the second quarter and look forward to a bright future.

This concludes today's conference. Thank you for your participation.