Q2 2019 Earnings Call
Good day, ladies and gentlemen, and welcome to the Healthcare Trust of America second quarter 2019 earnings Conference call.
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After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note. This event is being recorded.
I would now like to turn the conference over to Caroline Shadow. Please go ahead.
Thank you and welcome to healthcare Trust of America's second quarter 2019 earnings call yesterday after market close we filed our it's really hard.
These documents can be found on the Investor Relations section of our website performance. Cathy. Please note. This call is being webcast will be available for replay for the next day really happy to take your questions at the conclusion of our prepared remarks.
During the course of the call we will make forward looking statements. These forward looking statements are based on the current beliefs of management and information currently available to all our actual results will not will be affected by known and unknown risks trends uncertainties and factors that are beyond our control our ability to predict.
Although we believe that our assumptions are reasonable they are not guarantees of future performance. Therefore, our actual control future results could materially differ from our current expectations for a detailed description of our potential risks. Please refer to our IP filings, which can be found on the Investor Relations section of our website I will now turn the call over to Scott here, Chairman and CEO of Healthcare Trust America Scott.
Good morning, and thank you for joining us today for healthcare Trust of Americas second quarter earnings Conference call.
Joining me on the call today are Robert Milligan, our Chief Financial Officer, and Amanda Houghton, Our executive Vice President of asset management.
As we start the second half of the year H.T.A. remains well positioned as a leader in medical office buildings with an irreplaceable portfolio a unique full service operating platform and accretive external opportunities in our key markets.
Including both one off acquisitions and increasing opportunities predevelopment.
Combined with our fortress investment grade balance sheet management believes we're extremely well positioned to deliver growth and shareholder returns over the next three to five years.
We have talked for years about our view of the overwhelming trends in health care. They reflect they moved to an integrated outpatient experience. This delivery will take place in three settings. One on campus, where we have that we are the largest owner of applebee's in the country to off campus in the community locations were all leading healthcare providers are focusing and three in academic University health care system locations, where academic healthcare combinations are critical.
Our portfolio composition reflects these trends and the critical nature of this real estate, where the best assets in each location demonstrate high levels of tenant retention and rental growth opportunities.
Our portfolio and investment strategy has reflected these key trends in HTS targeted key fast growing markets, which we believe will outperform the rest of the country. Our targeted market approach also allows us to create size and scale in markets with 15 markets with over 500000 square feet and nine markets with approximately a million or more square feet.
This scale allows us to effectively create a deeper and more strategic local operating platform with relationships and operating capabilities.
This market focus is a key tenet of our growth strategy going forward.
Use our platform to generate strong same store growth and then invest in these areas, where we can add additional value and accretion through operations.
We believe this is the key to long term value for all of our shareholders.
The recent ebbs and flows in the public markets has allowed Ht aid to demonstrate our disciplined capital allocation capital markets execution and strategy focusing on patient pragmatic decision, making reflecting a long term disciplined accretive growth strategy. We are investing in acquisitions that allow us to expand our key markets on an accretive basis, while also focusing on development with our key relationships.
Turning to our operational performance in the second quarter, we achieved strong results same store growth of 2.9% driven by rental revenue growth of 2.5% and margin expansion from increased utilization of our property management platform.
Solid leasing performance with total leasing of over 1.9 million square feet for the year and 800000 square feet in quarter, two including 205000 square feet of new leasing.
Our cash releasing spreads from renewals for the year, our 4.7%, including 3.6% in this quarter.
Our retention has remained high at 83%.
Acquisitions of $111 million year to date have an average cap rate of over 5.5%. These are all well located and will be used in our existing key markets in which we can add our operating platform to drive additional value for shareholders.
Although the acquisition markets remain very competitive for larger deals we are focusing on one off opportunities that fit in our portfolio, but which we can acquire at accretive yields.
Development is gaining traction we have several new opportunities that are additive to our portfolio and we'll demonstrate our capabilities to drive value. We also moved forward on our existing deals breaking ground on our 125000 square foot development in Raleigh, North Carolina.
And look forward to helping wakeman improve the patient delivery on their campus when it is completed.
Our investment grade balance sheet remained strong with leverage of 30% of total capitalization and 5.7 times debt to EBITDA.
Our debt maturities remain limited over the near term however, given the volatility in the capital markets. We took the opportunity to raise over $50 million of our equity on our ATM at a price close to $29.
We did this on a forward basis, so that we can take it down and balance that with our acquisitions as we pursue the opportunities that we see in the markets.
However, it gives us the backstop to continue to pursue good opportunities in our markets regardless of the current capital markets.
From a capital allocation perspective, we remain very active and disciplined focused on identifying opportunities that meet our acquisition criteria.
One located within our key gateway markets to quality real estate that will generate same store growth the 2% to 3% consistently over the long term and three being creative to our cost of capital. We continue to be amazed at some of the competitiveness in our sector, but believe there are still good opportunities if we remain patient fragmented and diligent.
As a result of our acquisition pace, we now expect our 2019 normalized FFO per share to come in between $1.63 and $1.65 for the full year.
This would equate to $1.65 to $1.67 factoring out the 2.2 cents per share impact from the recent accounting rule changes.
Our midpoint of the range remains consistent as we continue to diligently execute our strategic plan.
We continue to believe this is a great space and that HD, a the best decision company to execute.
In all aspects over the long term.
As we have also demonstrated in our most recent results I will now turn the call over to Amanda.
Thanks, Scott and 2019, our team continues to be focused on delivering high quality operating and leasing performance that bring value to tenants and shareholders alike.
Our scale in our key markets has enabled us to build out a team of close to 200 property management building management construction and leasing professionals spread across 23 offices.
This allows us to bring the power of a national company to a very local health care provider community.
It has also helped us generate strong local knowledge relationships and capabilities that have resulted in high levels of same store growth sector, leading operating efficiencies strong leasing and retention and also great opportunities for acquisition and now development.
Our second quarter results show continued performance our same store growth came in at 2.9% driven by a 2.5% based revenue growth and 30 basis points of rental margin expansion our quarter ending same store leased rate was down slightly over last year to 92.1%, while our occupancy was 91.1%.
In the period, we signed over 800000 square feet of leases.
This included 205000 square feet of new leases.
And almost 600000 square feet of renewal, our total tenant retention was 83%, while our releasing spreads remained strong.
For the year, we have now leased over 1.9 million square feet or just under 10% of our portfolio and have maintained strong performance with full year re leasing spread of 4.7% and 85% retention.
Our annual escalators for leases signed in the period was 2.8% continuing our trend of increasing escalators up closer to 3% as we continue to roll our leases.
Well, our T.I.s remained steady at around $1.50 per square foot per year of term for renewal and around $4 per square foot per year of term for new leases.
As we look to the remainder of 2019 expiration, we still have approximately 7% of our lease square feet expiring, including management tenants and expect our current leasing momentum to continue and should achieve between 75, and 85% retention with releasing spreads of between 1.5% to 4% and annual escalators of approximately 3% on the expense front. We continue to show the benefit of our economies of scale and ability to perform services using our internal engineering platform, which leads to a direct reduction in cost and much more technical focus on our building operations, leading to better utility performance as we roll programs out to our properties.
These benefits are currently being offset by significant increase in our property taxes, primarily in Texas.
While we continue to appeal these assessments and believe favorable outcomes are likely those appeals do take time and we won't know certain the results until later in the year.
I will now turn the call over to Robert to discuss the financials.
Thanks, Amanda from a financial perspective, we continue to execute our strategic strategic plan of growing our operating performance investing accretively and maintaining a strong and low leverage balance sheet that positions us for continued growth through the ebbs and flows of the capital markets highlighted by low leverage 30% debt to total capital and 5.7 times debt to EBITDA, approximately $1 billion or liquidity and limited near term debt maturities.
Turning to the specific financial results second quarter normalized FFO per diluted share was 41 cents up 5% from first quarter as we continue to grow our operating portfolio and started to deploy the capital raise in last year's Greenville sale note that this includes the impact of topic, 842, and which almost $1 million of direct leasing costs were capitalized in the year ago period.
Funds from distribution.
Was $73.1 million, which includes $13.4 million of recurring capital expenditures were approximately 11% of the NOI.
With our earnings growth picking up as a result of deployment of capital our board of directors yesterday increase our dividend by almost two pennies per year, allowing us to maintain our payout ratio between 80% to 90% of normalized fad on a run rate basis.
Same store cash NOI was 2.9% compared to the second quarter 2018. This growth was driven by rental revenue of 2.5% and margin expansion of 30 basis points. This continues to reflect our ability to grow revenue, while also growing our efficiency long term.
Gen eight for the quarter was $10.1 million with the increase driven primarily by the expensing of internal leasing costs.
We continue to expect Virgin a run rate to be between 10, 11 and $11 million the rest of the year.
As a reminder, from our last call our financials for 2019 continue to be impacted from the new topic 842 lease role changes the impact largely relates to the expensing of direct leasing cost in 2019 as well as the addition of certain right to use assets and liabilities related to our ground lease obligations on the balance sheet.
In addition, there were two other changes that impact the comparability of our statements between periods had no impact on total earnings.
The most significant of this was related to the accounting for single tenant buildings in which tenants directly pay property taxes under topic. A 42, we will no longer recognize either the revenue or expense related with these payments and the second quarter 2018, we recognized approximately $3.6 million of revenue and expense related to these payments.
In addition, the rule change now also requires bad debt to move from expense to reduction in revenue and second quarter 2018. This amount was immaterial.
From a capital allocation perspective, we continue to see investment opportunities of a one off nature that fit both our market and quality criteria and are accretive to our cost of capital. They are focused on our key markets and allow us to add an incremental 25 to 50 basis points of platform synergies on top of our stated cap rates in the second quarter, we close on acquisitions of approximately $74 million at an average cap rate of over 5.5%. These acquisitions were highlighted by the $40 million purchase of the Streeterville Center in downtown Chicago on on campus MLB directly across the street from Northwestern Memorial Hospital, and the $20 million purchase a two medical office buildings in Charlotte.
These acquisitions bring our scale in the Charlotte market to over 400000 square feet and will allow us to internalize our property management and building services in this area an important building block for our long term growth there.
So subsequent to quarter end, we closed on an $18 million medical office building in a suburb of Washington, DC. This brings our year to date acquisition since to over $111 million, just under half way to our target of $250 million for the year, while we do expect to reach our stated target our investments will be more back loaded.
Towards the back half of the year.
As a result of these activities we've tightened our 2019 earnings guidance, while keeping the midpoint unchanged. We continue to expect same store cash NOI growth of 2% to 3% for the year and slightly lower than that on a GAAP basis, given the impact of straight line rent.
However, the timing of acquisitions, we expect our normalized AFFO to range from $1.63 to $1.65 per share with momentum and earnings building in the second half of the year I will now turn it back over to Scott.
Thanks, Robert and we will open it up for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad. If you are using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question has been addressed and Youd like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
The first question will come from Chad Vanacore of Stifel.
Hey, good good afternoon, and good morning.
Morning.
All right. So just thinking about same store NOI growth.
For the first quarter.
First quarter and second quarter through the upper end of the 2% to 3% range you laid out there.
How should we be thinking about second half should we assume that that moderates because you're expecting some expense growth later in the year.
Help us get to do an expectation there.
Our expectation is has been 2% to 3% same store growth I think our anticipation is that we will continue to be in certainly in that range. I think it just reflects a little bit of conservatism on our part as we've been running towards the high end of the range early in the year.
What would have to happen for you to actually hit the low end of that range at this point.
I think as as we're looking out certainly over the next two quarters.
You would have to see some some on anticipated actions at this point in time.
Okay.
And then just thinking about the total portfolio leased rate that dropped a bit in twoq.
It's 20 basis points sequentially and it looks like that was from some off campus buildings you have any additional color that you could provide there.
Yes, I think.
When you look at the occupancy remained stable on a year over year basis, and our our leased rate as largely a factor of just the normal transition process. There are a couple of assets that were transitioning from.
Lower quality tendency for higher quality tenancy.
And that just takes a little bit of time, so I don't think it's anything inherent with the portfolio.
All right. So they theres not any building with any any kind of major occupancy hole in it right now.
No.
Okay.
And then just thinking about the expense. It seems like you had mentioned property taxes seems like Thats whats driving expenses higher there.
Is that a trend that we should expect going forward.
Property taxes keep rising across the board how should we think about that.
You know I think property taxes have raised.
Manny talked about Texas, but I think it's from MLB perspective, it's certainly one of the larger concerns that tenants have I think it's one of the concerns that we have as we look at acquisitions.
When we underwrite opportunities.
We are fortunate pit.
We've been fortunate or unfortunate, but fortunately, we get to pass through the majority of the property tax increases, but ultimately that comes into play when it.
When they see what their costs are and what their rent component is so one of the one of the opportunities that you see right now in in.
In AG and development as you know one of the discussions at that folks are having when you talk about development is are you a longtime holder of this asset so that we can get some stability in our property taxes I think some of the recent portfolios that have been sold one of the things that one would look at one of this if you are looking at the larger transactions is how is that going to come through and how's that going to play through over the next 18 months because there has been some what I would consider to be extremely high value placed on what.
What were assets that were bought quite some time ago that much different values. So I think it's going to be an interesting.
Aspect of what everyone will be talking about or or certainly if they're not talking about it it will show up in <unk>.
Leasing it will show up in rents and it will show up in what's pass through the tenants on renewals.
Got it.
Alright, thanks for that Scott and I will hop back in the queue.
The next question will come from Vikram Malhotra of Morgan Stanley .
Hi, Thanks for taking the question.
Maybe just first on acquisition you referenced sort of.
Maybe originally Youre, you werent that werent that big acquisitions to be backend weighted now they are as giving the dispositions are more backend weighted as well.
Can you sort of talk about.
Given how competitive the market is in the pricing, we're seeing what set of markets or deals is that sort of precluding you from.
And any recent instances for example, we've heard from several broker there was a deal.
With Duke apparently which went from a very low cap rate did you look at that deal and so can you give us a sense of like when you're talking about being disciplined what are you sort of staying away from.
Well.
I think that first off acquisitions right now remind me a lot of what you saw perhaps back in 2008, and 2009, I think valuation relative to the underlying long term performance of assets is something that if you've been around 20 or 30 years when might start to question, whether or not the performance is going to actually be there. We just talked about property taxes. An example of a pass through we've seen portfolios that three four or five years ago were acquired at eight or nine.
Cap rates going out for sub fives, they would do transaction that that transpired I understand it went on sub five with a long term lease with little bumps and off campus I think it's always about you get your value when you buy something and I think over we look at this is not a quarter to quarter to quarter business. We don't even look at this as a year to year business. We look at this as a five to 10 year business and we look at returns based upon five or seven years and.
Weve HKG looked at a five year period of time compared against our peers. We performed extremely well. So I think when you are looking at acquisitions right now they might be even more important to look at the shareholder value that you're getting.
By investing those dollars it seems like some folks or it seems like you can just buy anything and get rewarded but than we've seen in the ebbs and flows of cycles that some of that stuff that spot ends up spun off.
Ends up not performing as well or it ends up being written off and we don't want to be in that situation. We really want to be diligent we want to be disciplined we want to continue to do what we've done for the last 12 years and to perform in an extremely.
Stable and consistent manner and to add to our platform because we now have development and development is a arm that we have not had in the first 11 years and that will be that will enable us to give a little more.
Opportunity to our growth.
Okay that makes sense and that's.
I agree with you on that on the discipline aspect.
That's going to hit that target and more important for the farmer.
Just on rent spread you've now we've now seen maybe four or five quarters, the consistent rent spreads being above kind of 3% I remember in our previous conversations you've talked about it being difficult to push rents sustainably us spread sustainably above call it two and half three.
Is there something unique about the what's expiring in terms of markets or is this sort of a a conscious effort just given where the portfolio is there are you just pushing in certain markets and certain types of assets and what which what should we expect going forward spreads for the balance of the year.
Well I think there's one or two or three things that have happened.
Many of our leases are or some of the leases that we've gotten good rent spreads on have had have been in place for a while so we've been able to.
Take that five or seven year lease and move it up and push the rent spreads.
To accommodate the needs of the outpatient location for the healthcare system or for the physician group and Thats been a very favorable outcome.
Number two we have consciously tried to move our our rent spreads up over the last couple of years, we've talked about that you want to make it a balance of both the tenant and the landlord.
I want to do continued business because this is a relationship business and I think as we move forward over the next several years.
The MLP sector and whole healthcare sector is going to come down to.
Certain groups of.
Of companies, having certain types of relationships and those relationships are going to need to be valued. So I don't think you can go out and and force.
Tenet out into a outsized.
Rent bump simply because you might have a more monetary leverage point.
Particular point in time, we also aren't giving away a lot of T.I.s I mean, thats another way to get rent spreads is to give outsized tea season and incentives to get those.
Move people into space ours have been very consistent over the last two or three years now third I do think that as we move forward and I think that you're going to see continued.
Pressure on rent spreads I think rent spread to pin a very.
Very I don't know if it's the pinnacle I don't know if it's the sixth seventh or eighth inning of being able to push rents, but as healthcare systems get more more sophisticated as a company as Reits get more.
More more size in markets, I think theres going to be the opportunity or there's going to be the process of putting rent spreads where they meet in the middle So I think the rent spreads going to.
Is it two to three probably I think more than that would be a aberration or particular circumstances as we move forward I think that that if you can get two and a half three I think you've got a very strong portfolio for shareholders.
Okay, and then maybe just a broader macro question for you Scott I know you've sort of been one of the unique.
Ill add a unique view from many in terms of you were probably in the few calling for rates coming down.
So what's your outlook what are you bake into the model overall in terms of kind of where we are in the cycle and rates over the next six months.
Well I.
I think we're pretty much where we are.
Rates have come down they they were supposed to be up a couple of hundred basis points.
If we remember what it was a year ago when when people were looking at that we've had some conversation with folks at said will you guys been buying much last year and I think the reason we didn't buy much because we really were listening and viewing where.
The pundits stock. The tenure is going to go we wanted to see if as in past real estate cycles that cap rates.
Correspondingly went up.
At those times and we have seen that that has not happened.
Even as the tenure has come down from 125 basis points from three and a quarter cap rates in the MLP sector has haven't really moved.
It's a very strong asset class. So our expectation really is that what we're seeing right now.
We're seeing an economy that is that's theoretically as good as it can be and we're seeing.
Weakness from a fed that needs to be to feel that there is some underlying weakness so I am not looking certainly for anything drastically change.
For the next six 912 months.
Thank you.
The next question will come from Nick Joseph of Citi.
Thanks.
Three deliveries settings.
Okay.
Percy Health systems.
What are you seeing the best risk adjusted opportunity currently.
About the right balance longer term between three studies.
I'll work backwards on that.
I think university academic settings that we started talking about that or I didn't I think on my first conference call six years ago and that was really the first time that I think it was mentioned.
On conference calls and now it's a very highly sought after combination of utilization I think that continues obviously healthcare is.
Data to battle, our healthcare issues as a country, we're going to continue to work on the combination between universities and hospitals and and so forth. So we like that asset class, but now that that is becoming a very sought after asset class.
Off campus I continue to take the approach.
Thanks.
The push off campus too.
Critical.
Core critical off campus locations, we will continue.
Insurance is going to require.
Physicians healthcare systems.
Access to the easy dislocations and also to be able to service. The most amount of patients as quickly and efficiently as possible. So it's really a natural evolution.
From the on campus. So, but then again on campus is still next to the hospital, it's still irreplaceable and it has it has its fundamental use it tends to have higher ti costs and it tends to have far more restrictions from ground leases, because thats, where hospitals have when they have properties located around the hospital, we like our mix probably in being the size that we are probably is going to be 62020.
I would say if we're fortunate enough to to get the academic University concentration up a little bit we would we would do that.
And we will continue to look and add into.
The core community locations that we find now our development platform Weve got three or four opportunities that are all going to be on campus.
Fortunately couple of them will be fee simple in a couple of moaned.
So that will add to the mix and so I think we'll continue to be the acquirer of good assets located in strong.
Our cities you know the ones that we like because I think again.
As this continues down the path of evolution there is five.
There's five six competitors, who are looking for MBS.
There are markets and there is markets, where each of us are trying to get a foothold in there's markets where each of us are trying to get relationships with the healthcare systems.
Not not necessarily relationships that are solely ours are solely but certainly where we have enough square feet, where we have enough of a of a working relationship that were considered when when folks are looking to release or to build buildings or to move other locations to other other locations that we have so thats going to be continued to be in that 15% to 25 markets that we we like and we will concentrate in.
Thanks, So just maybe on the on the returns you're seeing right. Now are there is there any dislocation across those three and anyone that screening better today.
I think that the I think the off campus has come down a lot more than than one would expect that go back to the transaction that was just referenced here that was the do transaction, which was which was off campus and sub five and good asset I mean, we were there we like the asset and.
We were just not able or prepare to.
Go to the go to the price that.
Nor are we selected to go down there so.
But thats, an example of where I look and say that's a.
Asset that will over time do extremely well, but the returns are going to be 2% same store growth there going to be consistent and you bought it at the cap rate and you're going to put certain leverage on it and so your returns are going to be pretty much in a in a very fine tune box.
Versus a multi tenanted, where you can see some rent growth you can push rents spreads and you can hopefully get a little more.
Opportunity to get higher yield.
Thanks, and then you did forward ATM equity how do you think about capital needs for the remainder of the year.
Your acquisition pipeline and current leverage.
Well, we're in a really good position.
I think we're halfway through our acquisition target and we're pretty comfortable with that we're being selective I would hope that people listening to this call don't don't take away, our $111 million and say that that was a limitation based on opportunities or even limited be based upon competition.
We've seen opportunities weve been very selective we passed on several that.
Frankly, we could have.
Had.
But I do we didn't like the quality of the asset long term, so we're confident or pretty confident about our acquisition process and our cash our balance sheet is well positioned.
We will have a couple of.
Assets that we will dispose of at what we think are compelling prices and so we're in a real good position for the next six to nine months.
Thanks.
The next question will come from John Kim of BMO capital markets.
Thank you on the Streeterville Center acquisition.
You described.
Described it is on campus, but does it have your typical on campus characteristics, meaning.
Do you own the land that fee simple ownership and.
Western Memorial have any.
Control rights on leasing.
Well, you take that asset and it was a $40 million asset historic located right across from northwestern surgery.
I look at assets.
After you look as I look at him for 35 years, sometimes you walk in and see something say Holy Holy Cow that that is a great asset.
This great location.
It's very simple it's right across from northwestern it's got right now 104 tenants in it.
It's 100% occupied.
Northwestern wants to move larger spaces into that building, but.
Prior owner did not have the capital in order to accommodate that process.
Caroline was fortunate enough to meet the brother and sister and.
He was able to keep that that.
Failed process frankly, very constrained in fact, I lost 20 Bucks.
And said that that was going to go much wider and file farther.
To other people and it didnt.
So we were able to pretty much get that opportunity work with them and get it closed in a very timely efficient manner. It's a great asset I mean, thats an asset that.
If you can continue to buy assets like that.
You are going to have long term growth.
In inherently in your portfolio.
Just maybe a technicality, but you.
Described the square footage of 72000 square feet.
Costar has an 82000 I'm just wondering.
If you're aware of that difference and.
Why that might be the case.
Yes, no. It's 72000 square feet of rentable square feet in there I think theres a parking components in there that adds some extra square footage and some of the other.
Listings that might be out there.
Okay.
Scott you mentioned on the higher property taxes.
Sort of imply that.
Yeah. Your tenants are looking at that and it might impact right.
Can you provide some more color on that does that.
Does that impact the way that you could.
Increased the base rent going forward.
You need to offer higher JCI is is there a different amount that you could get reimbursed.
Well I think number one I think number one when we looked at we've looked at three or four acquisitions in different states and the first thing we're doing is looking at the impact.
The theoretical impact of a property tax increase in the pass through based on rent vis-a-vis the market value of rent.
In the building and also in competitive buildings, because fact is that if you've got four buildings in an area one trades and one trades for the cap rate and the other ones have been there for 5678 years, there's going to be a difference and that difference is going to get passed on to tenants every time they renew their lease.
So I think thats one of the things that we are very cognizant of when we underwrite an asset Peter because tenants.
They are not they are not.
Immune to Gee Whiz My Brent just went up two or three bucks or my can wind up two or three bucks and my rent went up 3% and now all of a sudden why did that happen. The only thing that happened was that you bought the building from somebody else and it really didn't impact me. So we are doing that and I do think that that is one of the things that.
As an underwriter you need to look at.
So should we should we be expecting lower rental growth and.
In Texas, Georgia markets like that.
Well I think Thats, an if you if you preference my my comment earlier.
I said that right now, we see rent spreads and rent spreads I think we're in a very.
Very nice place I mean.
Again over the last 12 years I don't remember rent spreads are being able to push rents spreads quite this easily as we have done but I think there are number of complicating factors coming coming around and when leases roll.
One of those complicating factors are going to be property taxes, because tenants, obviously have to pay them.
In the middle of their lease.
But when the lease rolls and adding back comes through.
That's when you're going to look and say, okay. What is the market value for my rental what is my rant and how does it compare to my competition. So I think we're going to see rent spreads.
Continually.
If you look at a period of time in that 2% to 3% range.
Going forward I don't think you'll see an outsized four plus.
And hopefully I don't think you'll see.
One.
Zero to one.
I think that historically you can get two to three and I think that will continue.
Okay, and then Robert on the last call you mentioned development start.
Your goal is to get its about 100 million a year are you on pace to do that.
19.
Yeah, you know I think we're pretty close on a couple of transactions that hopefully we're just waiting on a few signatures to get done and we'll be we'll be happy to get those announced and out there. So I think thats going to be a big driver as Scott mentioned, we are gaining traction in seen opportunities and so that is something that we are very close on it we do expect to be able to get to that end to that range. So, but we do expect to announce a couple of things and relative short order.
Okay. Thank you.
The next question will come from Rich Anderson of SMBC Nikko.
Thanks, Good morning out there.
So first question why did the same store pool go down by four assets I could understand why would gone up but not down if you could just provide color there.
Versus the first quarter.
Yes versus versus the first quarter I think we've got a couple assets that went into redevelopment.
We're anticipating some redevelopment projects that have been approved and will get announced out there.
As one of the one of the big things that Weve announced obviously is our big week Med project of which broke ground in construction and will have one or two more of those to announce here in the next next quarter or so.
Would your same store been change negatively or positively if they were still in there.
It really wouldn't have had much of an impact on those properties.
It's.
Something moving forward.
Okay.
Second question, Scott you mentioned.
You're not using extra capex to get your re leasing spreads.
But on the on the Retenant retention side, obviously, the last thing you want is for someone to leave most of the time, sometimes maybe you want to believe but usually you want people stay.
And your tenants know that.
I'm curious if.
If you're having to spend more capital to maintain that 80% plus retention rate.
And how those conversations are going.
In light of you know.
The environment that we're we're sitting in today.
The Capex has been pretty consistent I mean, we I don't think you've seen us move significantly on the T.I.s.
We have had a couple of leases where they've been bigger leases.
Where certain.
Healthcare systems.
But we've tried to stay very practical and consistent.
In our in our utilization of capital as it relates to leasing.
And to elaborate on I do think that you started to see especially on the larger renewals that were doing.
A push from the tenants to do longer term deals that they are putting money in matching the funds that were putting in they want to lock that that space and for a longer period of time, so even on a year to date basis were up over.
Eight years of term on average for renewals, which is pretty.
Very long for Us if you look at what we've done historically, so I think that the trend will continue to see but on a dollar per square foot basis were pretty consistent.
Okay.
Last question and perhaps you saw my note this morning, but.
The Duke deal.
And Scott you did mentioned that you do things with a five seven year time horizon, but since do you. You were you did 41 cents for the quarter before you did you complete the Duke transaction.
And today.
41 cents similar same store growth what is materially changed about the growth profile in the earnings power of the company since.
Since doing that transaction.
What can you point to that is better about the company just aside from just being bigger.
Well I think it starts from the core markets I think the size in our markets is just something that is it is uniformly distinctive from all of our peers.
We've got size, we have an operating platform.
That is able to take advantage of it I think the one thing that do platform. The transaction improved was that we can take a group of assets and we can underwrite them and we can move those assets to a yield that we underwrote and perform on.
We run into a little bit of a on acquisition external growth has always been the driver most region. So we've been very cautious over the last 18 months.
We havent had to sell off assets. If you you know we see ourselves right now and I did read your note.
We have not had to sell off assets at some of the big three have had to do over the last 24 months in order to get to a place where.
Now they have they are being looked at somewhat differently. We have not had to do that so our performance has been.
Consistent our acquisitions have been prudent from a.
Performance perspective.
And then third we've got a development site development side of the equation is just starting to take impacted allows us the ability to to have an integrated approach to our.
Our health care system approach. So we've really taken the company moved it in size kept the balance sheet extremely strong improved our positioning in every market. The 15 markets that were in gotten sized relevance and then we've added a development opportunity to it and all along we have continued to perform at that upper 2% same store growth cash NOI basis. So.
For merger perspective, or an acquisition perspective, I think we've been very consistent in that portfolio.
Did what we expected it to do.
Okay, but I mean, you often you make deals to improve the growth profile of the company do you see that using your five to seven year reference point do you see somehow kind of Duke transaction coming in to a more visible.
Component to the story in terms of the growth or or is it the other way where you kind of supported the consistency to this point where had you not done the deal maybe you wouldn't be doing the type of growth range that you're in today is that.
Maybe closer to the point.
No I think if you look at the do transaction it puts us in a strong position in every market that we're in.
Acquisitions, certainly are based upon your cost of capital.
And that that cost of capital is impacted everybody here in the last 18 months.
So I don't think that that is a we would be in that same boat, whether we had done the.
Transaction or hadn't done the transaction the development side, we would not have had a development side of the equation and we would not have had the size of our operating platform to continue to produce results going forward. So if you had your question is would we rather done it we're not done it I think unilaterally it puts us in a stronger position going forward over the next five years and if we hadn't done the transaction.
Okay and from a shirt out that's from a shareholder perspective.
Okay.
Thanks very much.
The next question will come from Karen Ford.
Jeeze Securities.
Hey, good morning.
Is there anything going on at the healthcare systems that you can point to that you think might be driving the accelerating development opportunities and are you seeing any signs that new supply is ramping in any of your markets.
Well, what we have seen is that the healthcare systems are very distinctive about what they want to build.
I think that that is a that is a long term.
Component of medical office buildings with healthcare systems and the other part of that is that the buildings that they want to build their occupied so or pre leased which is another strong component of.
This sector, what we're not seeing and we havent seen a spec building or or even developers wanting to go up and put something up and hoping to get.
Someone to locate in the building.
The MLP space.
Health care system physician space is becoming very.
Pragmatic in their thinking theyre processing, and where they want to be and so I don't see over development I do see opportunities, but it's pretty regulated because of the cautiousness and the inherent conservativeness of the healthcare system.
They take a long time to analyze it.
They want to make sure that they've got the right.
Outpatient mix in the building and then they turn around and they go through the prudent process of putting out an RFP and seeing whom comes in at a rate that they feel comfortable with so we are seeing that we're participating in all of them, but it isn't something that there is not 10 of them, there's three or four of them and.
The opportunity here is for.
Folks that do that to see which one can either have a relationship with the health care system or bring something to the table that allows.
Allows ht aid to get that opportunity.
Great. Thanks, and my other question is is there any update on the lease level and the timing of rent commencement at Forest Park from last time, we talked.
Yes, I think from an overall perspective Forest Park is now kind of north of 96% leased.
And with rent commencing.
Really starting in the second quarter and kind of sticks seller. It is a third and fourth quarter.
So from an investment perspective, we've seen that really come back and bounce back it's fee simple ownership with about 200000 square feet right now.
And we think theres the opportunity to us certainly expand that.
Great. Thank you.
The next question will come from Jonathan Hughes of Raymond James.
Hey, good afternoon.
Sticking kind of with development I was under the impression part of rationale for Duke a couple of years ago was it relationships that can lead to development opportunities, but you you earlier and just mentioned.
You are active in RFP Swiss systems to get the development mandate I mean has that changed or evolved over the past few years as Duke has been integrated and you know these health systems are incredibly cautious and judicious when it comes to.
Picking who they choose to develop what.
No you know I think there's certainly there Scott just mentioned I think health systems have been selective I don't think there is a.
There is a.
Myriad of developments going on out there.
I think as we've gone through the transition certainly there was a transition period.
Once we bought the Duke.
Before we go and platform.
Where there was a testing out period, but I think a couple of things have certainly come out for that I think first of all.
We finished the developments that we acquired when we bought the Duke team when we're talking about do cap rates and really our ability to grow the yields on that portfolio from five go five four at the end of the fourth quarter.
Part of that was completing those projects. The one time I think that was a big test many health systems look to sports and now we've seen new wins, we've met in Raleigh, North Carolina was the first big win 125000 square feet. We've got a couple more from that that are in very late stages, and we think are going to get announced and very kind of near term and thats going to show the acceleration of the opportunity for us.
Are there are there any programatic development agreements in discussion.
I think in our discussions with most of the healthcare systems most of them are open to.
If you given the best possible terms.
They like to call that a program that you go after.
And that you can can replicate as as you see fit.
As we have our discussions with our healthcare systems I think their strategic discussions and I think you know you're going to see them start to come out, but I think.
For us as we look to be selective where we invest our capital.
I think thats, how youre going to see us approach to development space as well.
Okay. All right. Thanks for that Robert and then maybe sticking with you just on the forward equity raise.
You do have a lot of liquidity at the extra growth outlook sounds like it's still pretty challenging and those proceeds raised.
Modestly below consensus any of the I guess Im just curious why do the forward equity raise.
And in the first place.
I think from our perspective.
As Scott mentioned, it's not for lack of opportunity.
That we were cautious and pragmatic certainly in the first half of the year.
There are opportunities, we're seeing them in our markets and I think you've seen us execute on them now.
And we will continue to see us execute on them as we look to the balance sheet.
It has been a volatile capital markets and we looked at the ability to really raise a small amount of equity at a price that we could make accretive investments again when we're looking at these one off acquisitions, we're buying them at.
Five and a half to sixs.
With the ability to that or property management platform on top of that so little bit of equity there keeps our balance sheet and in a good shape, it's accretive to the investments that we're making and allows us to continue to be more aggressive going forward.
Okay. So one more from me what steps can you take at this point to close the valuation gap relative to any of his year.
And now trading about 8% below consensus and I know you just some sales last year.
But I'm just curious what steps we can expect over the next 12 months to really try to close that gap.
Well I think that what our focus is on is what we've always focused on.
What are we were extremely.
Capable from a platform perspective of producing 2% to 3% same store cash growth.
I think thats very important as you go through quarter to quarter to quarter.
We keep our capital investment relative to that very consistent so that were not.
Disproportionately keeping away.
Any dollars.
Earnings I think Thats, one of the things that has to be looked at.
Does it drop to the bottom line and I think one of the things that we want to do and one of the things we have talked to folks about this year is continue to grow FFO on a consistent basis, and I think that by itself over quarter over quarter will continue to help us.
Close this gap that you that you mentioned.
I think just continuing to to do what we have done a strong balance sheet.
Very safe dividend strong same store growth and is consistent.
Adding development opportunities that are a little more accretive.
Being a very cost conscious disciplined utilized user of capital.
Yes.
Over the last five years, if you look at how the six of US has performed were up 14%. We've never had a negative period of time. The other folks have had negative periods of time. So you have to look at something I think over a longer period of time and I know shareholders today, they look at quarter to quarter, they might look at year to year.
They might look at the ebbs and flows of particular asset classes, we like him obese, we like the ability to see them continue to perform for the next five 710 years and our job really is to be consistent and by doing that I think that gap closes.
I think shareholders get the benefit of that.
That type of model.
All right that's it for me thanks for the time.
The next question will come from Daniel Bernstein of capital one.
Hello.
I'm going to ask about the internalization harlot.
Assets and hard goods could improve.
Yeah why growth they are the opportunities we have.
Improved growth in Charlotte and.
What other major metro areas in your portfolio are currently not internalize.
I think with the acquisition Dan what we've seen over time is anytime that we can bring assets from third party to internalize in them you we typically get.
20, 550 basis points incremental yield on that so.
That was the opportunity in Charlotte It was a new market for us. So we entered as part of the do transaction that would be some thought.
Assets around that to really build it out so from a same store growth there, that's where we see that that incremental.
30 basis points of yield.
Really with the ability then to have a local team that sees more opportunities as better relationships with health systems that should lead to move more investment opportunities down the road.
Are there other major markets that you are in that you'd like to internalize.
You know as I look at the portfolio that the only remaining.
Markets or properties that we we don't have in house.
Our either markets, where we don't have the scale it doesn't make sense to do it or in the case of Connecticut, and there's a couple of assets in Florida that we purchased from the developer where they've got a period of time that we've had.
Guaranteed them to be able to manage and our lease a property and as those.
Agreements come up we will certainly evaluate him for announcing so yes, there is additional opportunities there.
Okay.
And then.
The acquisition side and if you look at some of the.
The data that's out there, especially if you exclude some of the large acquisitions curious did earlier this year.
Acquisition volume screen them open spaces come down a little bit.
Is there any reason to think youre anticipating maybe cap cap rates will come up a little.
As a result of a little bit less volume of transactions or is that just.
An aberration that was caused by some of that market dislocation in December and this is really not been Oh, I'll fall off as any kind of acquisition volumes.
Or competition in this space.
Well my sense is that cap rates are being driven by by.
A couple of folks.
Who are very attracted to the MLP space and are buying things that are being blended with other things that hit or higher cap rates and therefore.
Being able to grow earnings he theoretically.
Over the next 234 years I mean, it's always fascinating to look back and see what what people say and then what what happened I remember RIDEA was supposed to be this great.
Same store growth engine.
Four or five years ago, and it was like seven 8% and boy did that happen.
So I think that we're seeing folks blend.
Acquisitions.
And we'll be these are still at a lower cap rate because of the consistency the quality.
The location all the things that we like about it.
And and then they are blending it so I think it will be as you're going to stay pretty much where they are.
I think it'll be interesting to see how long this continues.
But as Robert said and as I've read reiterated.
We will continue to find those opportunities. They are one offs, they're not large transactions, but there are opportunities in the five and a half to six.
Cap rate range, where we can bring our platform to it we can get 2% to 3% escalators and we can continue to get.
The longer term yield from those assets not constrained yield or a declining yield.
Which is always interesting when someone buys something.
Okay.
That's all I had at this point I appreciate the comments thanks.
The next question will come from Lukas Hartwich of Green Street Advisors.
Thanks, just a couple for me most of my questions have been answered.
What happened to the redeemable non controlling interest on the GAAP balance sheet.
Yes, so that from that perspective, great question I'm glad you caught that Lucas.
Of what we had was we had a.
The joint venture on the specific property.
There were some of the sellers had the ability to convert that interest into.
Units or cash this is on a building we acquired back in 2010, great building on campus in Houston.
I think we bought it for like an eight and a half.
One of the first joint ventures that we did first of unit deal.
So at the end of the period, there was a put right on it as a couple of million dollars.
Although transaction and so that that went from being redeemable two it's going to be in mostly LP units with a little bit of cash.
Perfect and then I noticed there there wasn't a ton of development spending during the quarter. Our the timelines there is still on track.
Yes, you know the timelines when we look at those big projects that we have right now we've met and Kerry just kicked off from a groundbreaking that was.
End of April beginning of May.
So you will see that start to accelerate the other active one that we have accounted for we just got through the permitting process. There. So we should break ground there the back half of the year. So yes. Those are certainly on track right now.
Perfect. That's it for me thanks.
The next question will come from Todd Stender of Wells Fargo.
Hi, Thanks, and just going back to the ATM usage.
You got quite a bit of time before you have to actually tap it.
Which would suggest maybe you could use your Atlanta credits, which will be highly accretive for acquisitions for the rest of the year.
If my trying to thinking is right then maybe your earnings guidance what is maybe.
Ticked up a little bit, but it came down fractionally is there anything tucked in them I don't know maybe it's the redevelopment drag.
Maybe just provide some color on that whole context.
You know I think Todd like we mentioned most of this comes down to acquisition timing.
Really matching it up with equity taken equity at the time.
We do the acquisitions on that so I don't think we're going to necessarily try to play any games around that or anything like that but it was an opportunity to issue equity at a price that.
We can make accretive transactions on that and it gives us the confidence in the capital markets to move forward with those transactions that we see that we think are going to certainly add value and I think we would we as a general consensus would be users of that sooner than later.
From the equity Okay got it.
And I don't think that it wasn't something that we raised and thought we put away for 12 months.
Got it.
Or so back to your point about topline rent spreads are wider than usual. So top line came in really pretty high.
When you look at the tenant recoveries.
It's something that when I speak to investors they want to discount to some degree just because it's not that the core.
Business, but there is a lot of pricing power potentially tucked in there when it comes to passing through expenses can you just kind of flesh that out a little bit when it comes to the property taxes than anything else that's tucked in there.
Well you know I think Todd our view is that base rent is truly the driver of most of the growth. That's why we've we've consistently broken that out as a component of our same store and look to highlight that.
But I think what you said is right given the lease structures that we have as you see.
Potential cost increases we've got these additional ability to pass it on on certainly to the tenants.
Which minimizes the NOI hit that we might take so I think our focus on growing things is certainly how do we drive base revenue growth going forward through through rate.
Occupancy.
And then from a tenant recovery perspective, I think our focus all along has been how do we control expenses and decreased them and so when you look back over a four or five year trend, we've been essentially flat to down for expenses. So as you see any of these increases now.
Most of these tenants have enjoyed kind of low level expense growth, especially relative to certain of our peers.
And so what you're seeing now from an expense perspective is.
A catch up from a property tax perspective again, most of that pass through to the tenants.
Okay. Thanks for that and then going back to the Streeterville acquisition I think you highlighted theres a 104 tenants in there.
That seems like a lot, but maybe just get some good luck with that yes that and not a lot.
Are they are they taking up small footprints and does that change over time, just as we've talked to you guys and every other medical office building landlords that the hospital systems want to take bigger footprints.
Maybe just kind of speak to what the property it looks like now versus maybe what it will look like.
You know everybody has a vision when you buy something you should have a vision of a value and a vision of how how you're going to bring improved.
Performance and when we looked at that building. Our first thoughts were first of all great location and you go back location location location and then you go where it's located well is located northwestern which is obviously one of the top three or four.
Universities in the country from a healthcare perspective, then we did our interviews and it was clear to us that the tenant.
The owners more specifically trying to keep the building occupied.
And were using as little capital as possible in order to do that which is.
Understandable because they were just too to folks in eight inherited the property and.
They were living on a on a budget so our view and we looked around and talk to folks is that we'd like to slowly and it it has to be slowly because we've got real good paying tenant to pay top dollar with 3% escalators and.
So you just can't go in and kick them out but over time, we have been approached and we've already been approach where the university would like to take larger spaces. It will require capital. We are fortunate that we can do that and.
If you come back to that property seven years from now I think that property will have a completely different internal footprint and it will be motivated or it will be focused upon larger tenants larger spaces higher rents and.
Greater value.
Thank you.
And this concludes our question and answer session I would now like to turn the conference back over to Scott Peters for any closing remarks.
Well. Thank you. Thank you everybody for joining us for our conference call and we look forward to.
Reaching out and talking with any further questions. If anyone has any thank you.
Thank you Sir the conference is now concluded. Thank you all for attending today's presentation. You may now disconnect your lines have a great day.
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