This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk04: Greetings. Welcome to Physicians' Reality Trust Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Bradley Page, SVP, General Counsel. Thank you. You may begin.
spk01: Thank you. Good morning and welcome to the Physicians Realty Trust second quarter 2021 earnings conference call and webcast. Joining me today are John Thomas, Chief Executive Officer, Jeff Tyler, Chief Financial Officer, Demi Taylor, Chief Investment Officer, Mark Thine, Executive Vice President, Asset Management, John Lucey, Chief Accounting and Administrative Officer, and Lori Becker, Senior Vice President, Controller. During this call, John Thomas will provide a summary of the company's activities and performance for the second quarter of 2021 and year to date, as well as our strategic focus for the remainder of 2021. Jeff Tyler will review our financial results for the second quarter of 2021. Then Mark Thine will provide a summary of our operations for the second quarter of 2021. Following that, we will open the call for questions. Today's call will contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. 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, and those anticipated are implied in such forward-looking statements. For more detailed description of potential risks and other important factors that could cause actual results to differ from those contained in any forward-looking statements, please refer to our filings with the Securities and Exchange Commission. With that, I would now like to turn the call over to the company's CEO, John Thomas. John?
spk08: Thank you, Brad, and thank you for joining us this morning. Our portfolio of best-in-class medical office facilities continue to perform exceptionally during the second quarter, delivering the predictable growth and operating outcomes that medical office investors have come to expect. This includes the collection of over 99% of all cash rents due during the quarter, supported by patient volumes that remain resilient despite the recent spikes in the Delta variant. Along with this operational performance, we continue to have confidence in our external growth pipeline. Since our last call, we have made additional progress on our acquisitions and have high-quality medical office building targets in various stages of negotiations. Substantially, all of this pipeline is off-market in direct negotiations with existing health systems and developer and owner clients. So while our investments will be back in weighted this year, we remain very confident in our guidance of 400 to 600 million of investment activity for 2021. Our loan pipeline continues to grow as well, including the newly announced mezzanine loan in Brooklyn Park, Minnesota. Doc's real estate loan book totaled 176 million in outstanding principal at quarter end, and it's secured by real estate valued at over $1 billion. In addition to the attractive 8% average coupon, our loan portfolio represents a source of future growth through embedded ROPA rights and purchase options. Within this loan book are five projects under development with an expected market value of over $200 million upon completion, including one loan-to-own transaction. Our pipeline for development financing opportunities continues to grow. We expect to secure many of these new opportunities by year-end, supporting our growth in 2022 and 2023. We are also evaluating the opportunity to use the robust medical office market to dispose of some non-core facilities at a profit. This pruning can both enhance the quality of the portfolio and also provide an additional source of funding for the growth this year. Our Chief Financial Officer, Jeff Tyler, will review our financial results and balance sheet in a few minutes, but I wanted to recognize Jeff and Mike Farina for leading us in the achievement of our long overdue upgraded credit ratings with both S&P and Moody's. We've already seen the benefits of these well-deserved upgrades to our cost of capital, amplifying our opportunity for outsized accretive growth going forward. The trends in favor of medical office have proven to be very predictable and reliable, driving a consistent and growing rental income stream for the benefit of our shareholders. Public investors in healthcare real estate can count on medical office to remain open, occupied, and busy. Medical office does not need to recover. As an asset class, it has only impacted temporarily in spring 2020, and Doc has maintained close to 96% occupancy throughout the pandemic. We remain focused on growing our funds available for distribution each year, and we'll continue to manage our organization to achieve that result annually. Jeff will now review our financial results, and then Mark Thine will share our operating results. Jeff?
spk07: Thank you, John. In the second quarter of 2021, the company generated normalized funds from operations of $58 million, or 26 cents per share. Our normalized funds available for distribution were $55 million, an increase of 3.6% over the comparable quarter of last year, and our fad per share was 25 cents. Our operating portfolio has continued to perform well in the second quarter. Our same-store portfolio had consistent occupancy year-over-year, and generated NOI growth of 2.4%, right in line with the fixed escalators and consistent with our expectations. The one deferment we granted in the midst of the pandemic last year has been fully paid back, including $200,000 of associated late fees. Through this quarter and to the present time, we are seeing very little negative impact with our tenants from COVID at this point, despite the emergence of the Delta variant. We are optimistic that our portfolio will continue to perform and be resilient in the current environment. Turning to the balance sheet, we've been recognized by two major rating agencies over the past few months for portfolio and balance sheet improvements that have been years in the making. We were upgraded to BBB flat by S&P on May 13th and upgraded to BAA2 by Moody's on July 1st. These upgrades have a significant impact on our cost of capital and improve our ability to compete for the highest quality buildings. In their rating evaluations, Both agencies recognize the high quality of our PurePlay MOB portfolio and its superior performance during the pandemic. They also noted our disciplined capital strategy and best-in-class tenant mix, specifically our 63% concentration of investment-grade tenants, 93% exposure to net leases, and significantly lower proportion of near-term lease expirations relative to the sector. We remain highly disciplined with our capital strategy raising $83 million on the ATM in the second quarter at an average price of $18.39 as we continue to pre-fund our acquisition pipeline. As a consequence, we currently sit in an excellent financial position with consolidated debt to EBITDA of 4.5 times and an outstanding revolving credit facility balance of $72 million, leaving $778 million of availability. This pre-funding has placed us in a position to successfully execute on our substantial pipeline in the back half of the year. We are still confident in the acquisition guidance we laid out at the beginning of the year of $400 to $600 million of new investments and expect to execute on those investments prior to the end of the year. As we discussed last quarter, the pipeline is full of the types of buildings that are in our sweet spot, high-quality MOVs with strong investment-grade tenancy from leading health systems. JT has talked about the progress on this pipeline, And while perhaps that progress has been slower than we were anticipating, it has been steady, and we remain on track. Turning to other relevant portfolio metrics, our second quarter G&A came in at $9.1 million, and recurring CapEx was $5.7 million for the quarter. Our full-year guidance for those metrics remain unchanged at $36 to $38 million for G&A and $25 to $27 million for CapEx. I will now turn the call over to Mark to walk through some of our portfolio statistics in more detail. Mark?
spk06: Thanks, Jeff. Quarter by quarter, MOBs continue to prove their reputation for stability with occupancy, collections, and leasing trends that remain strong regardless of market factors. The steady internal growth delivered by our asset management platform is the result of superior tenant satisfaction, strong 2.4% built-in rent escalators, and an industry-leading 96% lease rate. Our leasing and CapEx teams continued to deliver value during the quarter, with an impressive tenant retention of 87%, positive cash releasing spreads of 2.7%, and low CapEx investments that totaled just 7% of cash NOI. The operations team also continued to execute on the plan to expand our in-house property management platform. laying the groundwork for further cost efficiencies across the portfolio that will deliver long-term value for shareholders. Specifically, we recently welcomed Mercedes Marquez and Nicole Bradley to the Dock family as we expand our management efforts in Phoenix, Arizona and Birmingham, Alabama. From a performance perspective, our MLB same-store NOI growth in the second quarter was 2.4%. The NOI growth was driven primarily by a year-over-year 2.4% increase in base rental revenue. Operating expenses were up 6.2% and offset by 7.0% increase in operating expense recovery revenue. Year-over-year, operating expenses were up $1.9 million overall, primarily due to a $0.5 million increase in utilities and a $0.4 million increase in insurance costs. Same-store occupancy remained steady at 95.4% year-over-year, as our leasing team continued to execute consistently with strong retention. On a consolidated basis, we completed a total of 395,000 square feet of leasing activity during the quarter, the second highest quarterly volume in the history of the company. Tenant retention was 87% across 353,000 square feet of lease renewals, with cash renewal spreads of positive 2.7%. Notably, these results were achieved with limited leasing costs, totaling $1.68 per square foot per year across the full volume of leasing activity, a figure that is much more efficient than industry averages. Our successful net effect of rent outcomes are driven by our deep understanding of our primary markets and constant evaluation of the local leasing trends. Turning to our capital investments for the quarter, we once again proactively manage recurring CapEx to $5.7 million or 7% of cash NOI. Year to date, DOC has invested $11.3 million in recurring capital projects. While committed leasing TIs were low on a per square foot basis, we do expect capital expenditures to tick up during the second half of the year due to increased leasing volumes. As a result, we still expect to fall within the $25 to $27 million full year guidance previously announced. Embedded within all capital investments made by DOC, is a strong commitment to materials and practices that enhance the patient experience and our ESG efforts. Our second annual interactive ESG report was released in June and highlights the exceptional progress toward our three-year goal to improve the portfolio's overall carbon footprint, energy, water, waste usage by 10% compared to our 2018 base year. In 2020, Doc invested in 29 sustainability-driven capital expenditure projects totaling $4.2 million, generating approximately $7.7 million in operating expense savings over the next 10 years. Additionally, we exceeded our team's social goals by raising or donating over $350,000 for worthy causes across the country and providing over 515 volunteer hours of service to charitable organizations. In the eight years since our IPO, We have not only built one of the best healthcare real estate portfolios in the country, but we have also assembled the best healthcare real estate team. Our efforts directly translate into care for tenants, evident in our 2021 Kingsley Associate Tenant Satisfaction Survey results. This year, we surveyed nearly 365 tenants, representing nearly 3.4 million square feet. Physicians Realty Trust received an industry-leading 76% response rate. In addition, despite the ongoing COVID-19 pandemic, we earned the highest scores in the history of the company, including an overall management satisfaction score of 4.53 out of 5.0, beating the national benchmark. Going forward, we expect continued successes from our growing operating platform, resulting in enhanced local market knowledge, repeat investment opportunities with existing partners, profitable operating efficiencies, and continued tenant retention. With that, I'll now turn the call back to John. Thank you, Mark. Thank you, Jeff.
spk08: We'll now take your questions.
spk04: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Ron Sambrea with BMO Capital Markets. Please proceed.
spk09: Thanks, guys. Only my wife calls me Ron, but that's fine. Just on the acquisition pipeline, hoping you guys can give us a little bit more color on the expectations for the second half. I think last quarter you talked about visibility on $200 million of opportunities, maybe how those have evolved and kind of pricing expectations?
spk08: Yeah, great question, Warren. The pipeline has just continued to build. We're very confident about, again, the full year numbers, $400 to $600 million, and we've got line of sight to a pipeline that's at least that big right now. So it's a a collection of high-quality medical office buildings, some that were under construction in the first half of the year, just kind of moving to CO, and we'll move to rent commencement here this quarter. And so we're really excited about it. So hopefully we'll just share a lot more with the next call.
spk09: And the pricing is still kind of at mid-5% to 6%?
spk08: Yeah, 5% to 6%. I mean, again, the higher quality, newer buildings are going to be at the low end of that range. But the development pipeline, which continues to grow, you know, is where we achieve those higher returns.
spk03: Okay.
spk09: And then just curious on what you guys think about the importance of scale and maybe the opportunity for public M&A given potential cost synergies or further improvements to the cost of capital post your credit rating upgrade. Or if you prefer to kind of just onesies, twosies, and don't really like the prospect of a bigger portfolio, transactions are just kind of your general thoughts on that subject matter.
spk08: Yeah, Juan, sorry, we had a brief disruption here. I think I got to just your question. You know, our execution strategy from the beginning has been, you know, direct negotiated off-market transactions, you know, primarily through health system relationships, physician relationships, and healthcare real estate developers. And that's what, you know, that's what we're focused on our strategy and execution there. And again, we've got a high quality pipeline. We'll be able to share a lot more about what the next earnings call. You know, scale is obviously very important. As we've grown, as Mark mentioned, we've expanded our property, our internal property management, you know, team in a couple of markets where we have had some significant growth opportunities. And so again, scale and our, in our core markets, you know, continues to drive a lot of synergy value, and it grows more, and it provides more opportunities. So, you know, public market M&A or large portfolio, you know, transactions, you know, we certainly look at everything, but we're focused on our core strategy, and, you know, we're approaching $6 billion in assets. We've got a pretty good scale already.
spk09: Thank you, guys. Yep. Thanks, Rob.
spk04: Our next question is from Nick Joseph with Citigroup. Please proceed. Thanks.
spk10: As you look at your acquisition pipeline, obviously a lot of it is back-end loaded this year. Is that kind of unique to this year, or is that representative of what your acquisition pipeline should also look like heading into 2022?
spk08: Yeah, I mean, it is unique for this year. It's just the circumstances of how the pipeline built at the end of last year. Again, we'd like to be a little more spread out. And I think historically, you know, there was a time where we were closing the building a week. So it's just the uniqueness of this year. And I think there were some sellers, some health systems, you know, at the end of last year that weren't really thinking about monetizing But with, you know, expecting changes in tax laws, you know, kind of changing in the, you know, political environment, things like that, you know, we're seeing more opportunities, you know, kind of evolve that, you know, kind of bubbled up in the first quarter, you know, that we've been negotiating through and, again, expect to execute on, you know, this quarter and the last quarter. So I think it's just unique to this year. But, you know, frankly, it's been pretty exciting for us.
spk10: Thanks. And then just back to the broader transaction market, you mentioned cap rates maybe 5% to 6%. You know, How have you seen portfolios trade relative to individual assets? And then what does the buyer pool look like?
spk08: Yeah, the buyer pool has gotten bigger. Private equity continues to quote unquote private equity, if you will. It continues to raise a lot of capital, continues to explore both individual assets and the portfolios have been floating around. We haven't seen anything. I mean, of course, we look at everything that's marketed, but most of our substantially all of our transaction volume this year will be off-market and, you know, not portfolio-based transactions. But there's a premium out there for the portfolios we've seen traded, at least based on the quoted, you know, cap rates. Those, you know, the ones that have, you know, the $300 million to $500 million portfolios that have floated around, you know, I think we're hearing five and a quarter, you know, kind of cap rates, five and a half on some of those, on assets that, you know, are probably high fives to six, you know, if bought on an individual basis. A lot of capital chasing the assets. As we said, we expect to dispose of, you know, opportunistically a few of our assets that just don't fit our strategic portfolio going forward, but they're attracting a nice high price.
spk10: Thank you.
spk04: Our next question is from Jordan Sadler with KeyBank Capital Markets. Please proceed.
spk11: Good morning, guys. Good morning. So I want to follow up on that last piece, JT. You mentioned dispositions, which I feel like, you know, we've kind of had a, you guys have had an on-again, off-again view towards dispos a little bit, and it sounds like you're mentioning them again, which makes me feel like you're a bit closer maybe than you have been in the past to selling some stuff. Can you maybe offer a little bit more color surrounding the sales? Sure.
spk08: Yeah, you know, we think our portfolios, you know, we pruned some things a couple of years ago out of the portfolio. We think, you know, our portfolio is outstanding. So, of our 275 buildings, you know, we love all our children. So, but there's just a couple of, I'd say, small circumstances where, you know, either a portfolio might trade and our assets are complementary to that or, you know, we're always, you know, kind of out exploring the opportunity to sell the LTACs, things like that. So, It's just opportunistic and things that have bubbled up. But we do expect to close on a handful of dispositions this year. And we'll use that capital to fund our acquisitions.
spk11: Volume-wise, are we looking at like $100 million total or something smaller? Did I lose you? We dropped the line. Can you guys hear me?
spk03: They are still connected. I do not know what the technical difficulty is.
spk11: It might be muted.
spk08: Hey, Jordan, we lost you for a minute. Sorry about that.
spk11: Do you want me to repeat the question?
spk08: Yeah, your question was, you said $100 million, and my response to that was that would be on the high end. It's a handful of dispositions.
spk11: Okay, okay. And then along the same lines, the leverage really with the use of the ATM, Jeff, you know, good job. You're, I think, about as low as we've seen you in a while at four and a half times. Isn't that what you quoted? So sort of appetite to continue to sort of use that to get the leverage lower ahead of... Sort of the backend-weighted acquisitions would be my question. And then, you know, any insight on additional ATM that's been issued post-quarter end?
spk07: Yeah, good questions, Jordan. You know, like you said, we've been pretty proactive about funding the acquisition pipeline in the first two quarters of the year. So, you know, really we're at a point right now where we could execute on that acquisition guidance and not raise additional equity. So I think we're in a really good spot. I mean, you know, look, we're always opportunistic about, you know, how we fund our deals, and, you know, it's dependent on what we see coming down the line, you know, in the far future as well. So we'll take it day by day, but, you know, as a need, we don't have any need for additional equity.
spk11: Okay. Oh, an administrative one for you, Jeff. The late fees and collections total book, in 2Q that won't repeat? Yeah, yeah, just $200,000. That's right. Okay. Thank you.
spk04: Our next question is from Amanda Schweitzler from Baird. Please proceed.
spk00: Thanks. Good morning, guys. Following up on your comments on increased capbacks and the increased leasing volume, you expect Your back half lease maturities actually look comparable to what you experienced in the first half. So are you expecting to be able to build occupancy over the remainder of the year? And what's the outlook for leasing vacant space today?
spk06: Yeah, thanks, Amanda. This is Mark. As you just mentioned, the back half of the year, we've got about 2% of our ABR coming up for renewal in the second half of 2021. It's about 91 leases and an average of about $23 per square foot. So we feel really good about where the market rental rates are, especially a lot of the local market trends, being able to push some of those rents and some of the escalators upon lease renewal. And then what we're seeing a lot of right now is requests for CapEx and TI and some early lease renewals. So we accelerated a few leases this quarter, extended early, adding some nice term to hospital leases and extended them into the future with solid rent bumps. So we expect solid leasing activity to continue there.
spk00: That's helpful. And then, have you seen more companies start to kind of solidify their return to office plans? Can you provide an update on how you're thinking about your health system administration tenants today? Have those tenants given you any update about how they're thinking about their go-forward space needs?
spk08: Yeah, I think, you know, we have a small amount of, you know, if you will, administrative space with health systems, but it's, you know, at least for multiple years. So, we're having that dialogue. I think health systems are, again, with this Delta variant, you know, it's kind of slow down some of their internal thinking while they focus on the hospitals that are full and again, shifting patients to the outpatient care facilities like we own. So we don't have any good color yet other than systems are trying to rationalize and make that decision. We've had conversations about either selling those buildings, subleasing those buildings or keeping them in shape while they figure out those plans, maybe in the fourth quarter. Sorry to be so vague, but we don't have a lot of that space.
spk00: No, that makes sense. I appreciate the time.
spk08: Yep.
spk04: Our next question is from Vikram Murata with Morgan Stanley. Please proceed.
spk02: Thanks for taking the questions. Good morning. I guess maybe just on that last point around health systems, figuring things out given COVID and maybe this resurgence, can you just give us any color on conversations you may have had or expect to have on either sort of say leasebacks or just even more directly on health systems, looking at that whole off-campus, close to consumers in terms of pushing care out there?
spk08: Yeah, so, you know, we're obviously big believers in that long-term, you know, strategy by health systems to, you know, plant outpatient care facilities in new markets. That's exactly like the Brooklyn Park development we're financing and the project we're developing this year are almost all, or financing the development of this year are almost all exactly that kind of description. Ambulatory surgery center anchored, health system, you know, employed physicians, outpatient care, diagnostics, things like that. Our portfolio does include a nice balance or mix of on-campus assets that are the health system, in our case, in our pipeline, are monetizing to raise capital for their balance sheets and at the same time coordinating discussion around new developments with those same health systems. So it's a good mix. We haven't seen a real change in the long-term trends of, you know, expanding on-campus newer assets and at the same time planting flags in new demographics and for growth.
spk02: Okay, that's helpful. Maybe, Jeff, if you can just remind us, you know, in this environment where there's still inflation concerns, whether it's on labor, materials, taxes, can you remind us again just the overall structure, kind of the preponderance of leases, how the pass-throughs work?
spk06: Yeah, Vikram, this is Mark. Actually, Jeff mentioned in his prepared remarks that our portfolio is very well insulated from rising operating expenses due to the triple net structure. 93% of our portfolio is triple net, and then really all but 2% have some protection against inflation of operating expenses. Some of them are modified gross leases, which also have a cap that's paid for by the tenants. We also saw that in our same store results with a slight increase in operating expenses, but nearly all of it was recovered through our recovery structures in the portfolio.
spk02: Got it. Okay. That's helpful. And then I just want to go back to the disposition comments that you made. And I guess like leverage obviously is a great place so you can look to use a balance sheet. But Just given where the, you know, maybe some of what your private peers are doing, which seems like they're in the market to sell more given pricing, what would make you want to kind of really move that disposition number higher?
spk08: Really, like I said, these are opportunistic sales, if you will. And, you know, we've talked for years about selling the LTACs if we can get an appropriate price. They continue to perform very well in the COVID environment. I mean, that's kind of what they're used for. So their EBITDA has been stronger than in years. So there's a potential good opportunity to sell those this year. The others, again, it's a very small handful of buildings in unique situations that we've had the opportunity to sell. Pricing has been excellent and we're ready to move those out. The portfolio is in fantastic shape. It's 96% occupied. There's not a lot in the portfolio that we want to even consider selling.
spk02: Great. Okay. Thanks so much.
spk04: Our next question is from Michael Carroll with RBC Capital Markets. Please proceed.
spk12: Yeah, thanks. JT, on the investment pipeline, I mean, it sounds like that the size of the pipeline equals the amount of deals that you want to close in the second half of the year. I mean, do you have those deals under contract right now and you just need to close on those? I mean, how does that work out?
spk08: Yeah, no, a good portion of them are under contract and just moving down the normal closing process with those transactions. Others are under exclusive kind of signed letters of intent. All the economics and deal terms are worked out, just working through the documentation and closing process. A little slower in part because of travel restrictions and, frankly, the demand in construction and those things and going around the country. But we remain very confident about not only getting those transactions closed, but continue to work through negotiations on several other things, our pipelines.
spk12: Okay, and how many of those deals in the second half of the year reflect development projects? And do you work out those deals during the time of those projects being under construction as soon as occupancy or the leases commence? That's when you close those deals? Or, Gus, how does that work out?
spk08: Yeah, it varies a little bit. The loan-to-owns essentially work out where we finance the construction off of our balance sheet. They're 100% occupied investment grade credits. quality tenants, and then the loan stays in place typically for a year for tax reasons, but stays in place for one year, and then it collapses into ownership. You'll see one of the investments we made this year was the Denton Cancer Center, which is exactly the process. It's been on our books for a couple of years, first as a loan, and now it's converted to fee ownership. Some of the development financing is where we just are part of the capital stack, and typically that happens when the building is you know, pre-leased to some high percentage, but not fully leased. And the developer has their own capital and, you know, gets their own construction loan. We provide some capital, and then we have a ROFR that is triggered, again, usually with rent commencement. And then maybe for a year after that with, you know, for tax reasons. So it just varies. But, you know, as we said, or I said in my comments, you know, the assets under construction, on our books today would be valued at about $200 million once we convert those to ownership. So that'll happen, most of that'll happen in 2020. What's under construction today will convert over in 2022. Some of that could blend into 2023. Projects we start in the fourth quarter of this year and we're working through, most likely probably early 2023 conversion to full ownership. But that pipeline is growing. It's been an interesting year for health systems, you know, moving forward with projects they didn't do, you know, that they didn't start last year but have proceeded with this year.
spk12: Okay. And then your investment targets, does that reflect the amount of capital you're going to deploy out this year, or does that reflect the amount of capital you're going to commit to deploy, including those development projects that will bleed into 22 and 23?
spk07: Yeah, it'll, hey Mike, it's Jeff. It'll reflect obviously the amount of acquisitions we complete and then the amount of development that we're committed to for the year.
spk12: Okay, great. And then just last one, Jeff, can you remind us what the long-term leverage targets? Is it still a mid-five net debt to EBITDA number? Has that changed?
spk07: No, that's right, Mike. So five and a quarters are, you know, kind of long-term debt target. Obviously, that's a conservative number, so there can be some flex around that. But that is the, in general, our long-term target.
spk12: Okay, great. Thank you. Thanks.
spk04: As a reminder, it is star one on your telephone keypad if you would like to ask a question. Our next question is from Daniel Bernstein with Capital One. Please proceed.
spk05: Good morning. I just wanted to dig into a little bit about the benefits of the increasing internal management and maybe kind of the strategic direction of that. Is it related to ESG? You know, is this a signal maybe that you guys are looking a little bit more away from triple net to more gross lease type of assets? and then maybe is there any way to quantify kind of benefits or what benefits you've seen as you grow that management side of the business?
spk08: Yeah, I'll give Mark a second to think about the direct financial relation, but it's really, again, part of our long-term strategy, Dan, of, again, when we have a health system and, you know, we always have a lot of repeat business with, at least that's our goal with the health systems that we work with, and so Once we get to scale and you can internalize that management, again, there's a financial benefit of, you know, every time you add another building, but you don't have to add another property management team, you know, just the direct correlation there. So, you know, it's like in the Phoenix market and the Birmingham market, we just continue to grow in those two markets and just had the opportunity to hire a couple of outstanding people to put on the team and then directly manage those buildings in those markets ourselves. So scale's pretty natural. Columbus, Ohio has been a fantastic example for us of how once we internalize management, not only are we getting a dollar return from that, a financial return from that, it's also leading to more opportunities in those markets. It just kind of builds upon itself. So it's not a sign of moving away from triple net leases. Again, we're focused on Again, kind of minimizing the risk, maximizing the synergy value of internalizing management and managing the buildings better and at a lower cost, and thus hopefully moving more of the total cost of occupancy to triple net rent to us, not just expenses.
spk06: Yeah, to add to that, as JT said, it all starts with the relationship, the hospital relationships, the local market knowledge, the ability to expand our acquisition opportunities with hospital partners. across the country. Then, you know, secondly, the financial impact starts with economies of scale from just having more properties in the market and being able to lower operating expenses for our healthcare partners in the buildings. Again, most of our expenses are insulated by the triple net leases, but we look to benefit upon lease renewal from the total occupancy cost that we can show the tenants. And the management fee itself usually adds about 20 to 30 basis points onto a cap rate in an acquisition if we internally manage. So as JT said, there's a direct impact from the management fees associated with internalizing property management. So we've really grown a great team around the country and look forward to leveraging the economies of scale and the team as we grow the portfolio in the future.
spk05: All right. And what portion of the portfolio is now internally managed?
spk06: Yep. Seven of our largest markets, our top ten largest markets, are all internalized. We have to manage everything in the portfolio, of course, but there's a few markets where we partner with hospital systems who have a real estate team directly, and we treat them exactly like part of our partner or a development partner that has lifelong relationships in the market. We work just hand-in-hand with them, almost as if they're part of the doc team, but technically it's not internally managed, so. Some of our top 10 largest markets today. Okay.
spk05: I appreciate it. That's all I have. Thanks. Thank you, Dan.
spk04: This does conclude our question and answer session. I would like to turn the conference back over to management for closing remarks.
spk08: Yeah, thank you again for joining us today. We really appreciate the questions and dialogue. And please, you know, follow up with Jeff if you've got any other questions. We do encourage you all to get vaccinated. We're starting to move back into the office ourselves. So stay safe. We hope to see everyone at the conferences this fall. Thank you.
spk04: Thank you. This does conclude today's conference. You may disconnect your lines at this time. And thank you for your participation.
Disclaimer