Healthcare Trust of America, Inc. Class A

Good afternoon and welcome to the Healthcare Trust of America first quarter 2021 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's 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 David Gershon, Chief Accounting Officer. Please go ahead.

Thank you, and welcome to Healthcare Trust of America's first quarter 2021 earnings call. We filed our earnings release in our financial supplement yesterday after the close. These documents can be found on the investor relations section of our website or with the SEC. Please note this call is being webcast and will be available for replay for the next 90 days. We will be 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 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 that our assumptions are reasonable, they are not guarantees of future performance. Therefore, our actual future results could materially differ from our current expectations. For a detailed description on potential risks, please refer to our SEC filings, which can be found in the investor relations section of our website. I will now turn the call over to Scott Peters, Chairman and CEO of Healthcare Trust of America. Scott?

Thank you, David, and good morning, and thank you, everyone, for joining us today for Healthcare Trust of America's first quarter 2021 earnings conference call. Joining me on the call today is Robert Milligan, our true financial officer. Over the last year, the medical office sector has lived up to its reputation as a steady, independable asset class. Occupancy and cash collections have remained strong. Tenant utilization and performance in our key markets are returning to near pre-COVID levels. Healthcare systems are rebounding from the temporary shutdowns in March and April of 2020, and patient visits are returning to normal given healthcare's need-based demand. However, the sector was not immune from the pandemic. Small practices and more secondary markets have certainly struggled more than most, while larger providers and healthcare systems consolidated and put expansion plans on hold and were subsidized by the relief packages passed by Congress. It has also accelerated additional change that were taking place, including the implementation of telemedicine, the move to lower-cost outpatient locations, continued provider consolidations, and to what we feel is a significant population trend towards increased growth in our key markets. Compared to most other sectors, these impacts have been relatively minimal and, in fact, will be positive over the longer term, given the amount of health care service demand that is expected as the population ages and the country accelerates investment into health care. However, without doubt, there continues a cautious and integrated approach that providers continue to take in their business plans as it relates to the longer-lasting impact of the pandemic. The good news for the sector is that we are seeing activity levels on key growth metrics coming back, which bodes well for expectations for occupancy, acquisitions, and developments as we progress throughout the year. For HTA, we have reacted to the pandemic by focusing on the long-term. Going into 2020, we had already positioned our company as a leader in the space, with a focus on key markets and an integrated operating team that can take advantage of opportunities as the sector evolves and grows. Over the last year, we have taken additional steps to ensure we are positioned for an ensuing rebound. First, we focused on our healthcare relationships. working with them through their difficult times through rent deferrals, early renewals, and asset purchases. Second, we positioned our portfolio for the inevitable rebound and focus on outpatient growth, limiting our long-term commitments that would require either below-market rents, abnormal concessions, or to tenants with business models or lease structures that are unlikely to succeed as we pivot and anticipate the oncoming new economic business cycle. Third, we have remained disciplined in our investments. As the private market has continued to pursue MOVs, we have remained committed to our underwriting discipline, focused on markets and assets that should perform over the next 10 to 15 years. Finally, we have preserved our capital and balance sheet, ending the first quarter with over 400 million of long-term capital and a balance sheet that can finance longer-term growth. Even with this long-term focus, our first quarter performed has remained extremely strong, highlighted by record earnings of $0.44 per diluted share, an increase of 4.8% compared to the first quarter 2020, and up on a sequential basis. Normalized FAD of $88.8 million, an increase of almost 15% from the prior year, fully supporting our dividend. HDA has raised its dividend seven years in a row. rent growth of 3.1% on almost half a million square feet of renewals, an increase in new leasing activity with over 200,000 square feet of new leases signed, the highest level we've had since 2017, and driven by properties in our development and redevelopment pools. Acquisitions of $30 million in our key markets at yields approaching 6%. Further, as of today, we have more than $160 million of additional investments either closed or under exclusive contract and expect to close in the second quarter at yields in our targeted range of 5.5% to 6%. 110 million of developments on track to be delivered in 2021 with a pipeline of potential new development opportunities in the pre-leasing stage that would get us back to our 100 to 200 million of annual announcements by the third quarter. This is a significant change for us as we find new and innovative ways to grow our portfolio accretively to the long term. Finally, a balance sheet with more than $1.3 billion in liquidity and leverage of just 5.4 times, incorporating forward equity we have previously raised. While we did not close on any dispositions, we have also entered into the agreement to sell out of our non-core markets at attractive pricing and invest in longer-term growth opportunities in our key markets. As a result of this performance, we were able to tighten our earnings guidance range for the year. As we look ahead towards the rest of 2021, HTA is focused entirely on continuing to position our company for the long term and positioning the portfolio for the economic implications and effects that may present themselves in the upcoming years. As we have illustrated in the last 12 months, we will focus on growing our earnings maximizing our investment capital, protecting our portfolio value, and creating long-term enterprise value based on strong underlying fundamentals. This includes a focus on our occupancy and rent levels, investments in our key markets, dispositions in our non-key markets, and utilization of our long-term capital while still maintaining our balance sheet for long-term growth. I will now turn the call over to Robert.

Thanks, Scott. From a financial perspective, in the first quarter, we grew our normalized FFO by almost 5% to $0.44 per share, another record high for HTA. Had a recurring CapEx of $10.9 million, which was less than 10% of NOI. As a result, our normalized FAD for the period was also a record at $88.8 million. Note that we do expect these capital expenditures to tick up the remainder of the year as we increase our leasing and start to complete more of our movement-ready space. We also collected more than 99% of our contractually due first quarter rents, and our rent deferrals continue to be repaid on time and on schedule, with less than $2 million remaining outstanding currently. We generated same-store growth of 1.6, driven by 1.9% growth in base rent, which was helped by year-over-year comparison of bad debt as a result of our tenant recovery. Our expenses were up 2.9%, primarily a result of weather in our key markets, including Texas in March. We had G&A of $10.6 million, continuing our efficient overhead. We ramped up our investment activity, closing on 30 million of acquisitions, as Scott noted, but also getting an additional 150 million under exclusive contract at yields over 5.5%. We anticipate that these will close prior to quarter end. We also funded $17 million of development, leaving us with approximately 50 million to complete our in-process developments that will add to earnings in 2021. As of today, our developments in Miami and Bakersfield are substantially complete, pending tenant build-out, with our Dallas MOB, located on the Medical City Heart and Spine Campus, on track for completion in the third quarter. These are expected to start adding to our earnings profile in Q3, and upon full stabilization, we'll add up to four pennies per share on an annual basis to our current run rate. Importantly, we are also completing several redevelopment projects, including our Mission Viejo redevelopment and significant repositionings in assets in Denver and Houston. These will start driving occupancy and rent growth in the third quarter, with a ramp-up of admission over the coming quarters. When fully stabilized, we expect these three projects could add from two to three pennies for earnings on an annualized basis. On the disposition front, we announced that we've entered into an agreement to sell out of our rural East Tennessee portfolio for over 67 million dollars. very attractive pricing that will lock in double-digit, unlevered annual returns since our original investments more than 10 years ago. While this is subject to final closing, we have a hard money deposit and have classified it as held for sale on our balance sheet. Given the current market environment, we will continue to evaluate opportunities to sell non-core assets to fund investments in our key markets. From a capital availability perspective, we ended the quarter with close to $300 million of dry powder from available cash in our undrawn foreign equity. With the closing of our dispositions, we'll have over $350 million of capital available to close on all of our investment activity and continue to remain active as we find interesting deals to pursue. Our balance sheet remains strong with leverage of just 5.4 times incorporating the forward equity and $1.3 billion of liquidity coming from long-term capital. As a result of this performance, we're able to update and raise our earnings guidance for 2021 to $1.73 to $1.79 per share. which incorporates our view that same store for the year will come back to our range of 2% to 3%, acquisitions continuing at $300 to $600 million, while also selling between $67 and $100 million of assets and funding the remainder with already raised capital, which will keep our leverage between 5.5 and 6 times. I will now turn it back over to Scott.

Thank you, Robert, and we'll open it up for questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. In the interest of time, we ask that you please limit yourself to one question and one follow-up. If you have further questions, you may re-enter the question queue. At this time, we will pause momentarily to assemble our roster. And our first question comes from Vikram Mahotra of Morgan Stanley. Please go ahead.

Hi. Good afternoon. Thanks for taking the question. You know, maybe just first on, you know, the acquisition pipeline, you know, I think the first quarter, what we saw universally from, you know, multiple companies that there was a bit of a push out into the second quarter, but the pipelines still look pretty strong. So maybe just Give us a bit more color. What did you see in the first quarter that may have caused this? And what sort of opportunities are you focused on in the second quarter, both individual one-off properties, but maybe portfolios as well?

Well, thank you. And I'd like to say thank you everyone for joining our call, of course. I think the acquisition activity for us, not only what we've seen as opportunities in the first quarter, But what we see coming up here this quarter and the rest of the year is very opportunistic for us. It looks to me, and it has to feel, that in our markets, given our opportunities with one-off assets or, in some cases, we've got a couple opportunities with two or three, we can get back to what we thought we were going to see in 2020 coming out of 2019. We were focused on three things when we came out of 2019 moving into 2020. One was earnings growth. We had talked a lot about our earnings growth and we've done that here in 2020, 2021. Second, we were talking about acquisitions where we wanted to get more active and we had shown the activity in the fourth quarter. I think you're going to see that from us moving forward. I think we've been very patient in the last 12 months where others perhaps have grown in order to show some activity, we felt it was prudent to find the right time, focus on our portfolio, you know, move through the hurdles that the last 12 months have presented, and then, you know, utilize our cash, utilize our acquisitions to make sure that they're creative. So you will be seeing from us, as Robert's pointed out and we've talked about, more acquisitions, next three quarters, accretive, a drive, continued drive to the bottom line in earnings. We've also seen, and you didn't ask, but we've seen an acceleration in our development opportunities, and those are things that we're going to be, I think, very excited to talk to people about when we get to NAREIT in June because we've been working on those, and once we get some confirmation on what we've gotten I think it'll be very interesting to see what we've done in the development side of our business.

That makes sense. Thanks for the color. There's also maybe some, I shouldn't say debate, but just some questions over the relative performance of on-campus versus other off-campus settings, whether it's adjacent or truly off-campus, and whether that if there's a big difference or not. And I know, Scott, you've obviously talked about core community quite a bit over the last few years. So I'm just wondering, with your own portfolio, you can clearly see the occupancy, but just from a rent growth and NOI perspective, what's your experience been with the different buckets?

You know, I think it's changed on us. You know, we've talked, and it's been a long time, and you were one of the first folks to come out with an analysis, I remember, might have been four or five years ago now, with on-campus and off-campus and so forth. And I think we're seeing a continued move to off-campus. It's cost-effective. It's a way to get into the community for healthcare systems. And, you know, they are grouping their buildings or grouping the square feet together so they can get the synergies, whether it's a healthcare system, large physician group. And we continue to see that. But what we're seeing right now, and this is kind of a, follow up on our discussion about what markets we like. I think it's going to be more critical whether it's I think off campus and on campus become much smaller in cap rates and I think that their performance continues to become more similar but I think it's the markets that you're in. I think we're going through three things right now that I think are going to play out. One, we're going to start a new economic cycle and I know for the last seven, eight, nine years, we've been in one cycle with lower interest rates, lower inflation, lower construction costs, lower employment costs, and I think that's now going to start to turn the corner. I don't know how many folks actually remember 10 years ago, 15, 20 years ago, but I've been fortunate enough to be around that long. So we're focused on good markets. Those markets are going to have inflows of population. And I think this is what the pandemic has also accelerated, which is a movement to locations. Not everyone's going to move back to work full-time. Not everyone's going to need to move back to work in the office full-time. And so a choice of location from a city perspective, a state perspective, lower taxes, I think that's going to be something that you talked about. And actually, we've seen it in Arizona. Arizona has never seen such a population increase over the last 12 months in its history. And the numbers that I was talking about with someone in the state government just amazed me at the amount of folks that they say are coming in and are going to stay. So we're looking for those locations. We like where we're at. We like our cities. And we like the mix between on-campus and off-campus. And I think the cap rates continue to compress, and it's still – it's more about making sure that you have good lease parameters, good lease term in the next 10 years because you're already seeing higher construction costs. You're already seeing a lack of supply chain in some instances. And so rents are going to need to move up to keep pace with that. We want to be in the cycle. We don't want to be off the cycle. And I think that's one of the things that we've looked very, very hard at over the last six months.

Great, thanks so much.

The next question comes from Rich Anderson of SMBC. Please go ahead.

Hey, good morning out there, guys. Good morning. Scott, you said you didn't want to be as aggressive the last 12 months to buy stuff, whereas others were perhaps more active than you guys for the past 12 months. But you guys, HTA, I should say, made your name perhaps in 2008, 2009 when you were buying stuff before or when no one else could in a very depressed marketplace. So I'm wondering why you feel that way this time around in this cycle, why it wasn't a good time to be a buyer to the degree maybe you will be in the future the last year or so.

You know, Rich, it's continued to amaze me the dichotomy between cap rates, potential interest rate raises, and just the overall economy. You know, I think this time around was so unique in the fact that the government has put through such large stimulus packages that, you know, we didn't see that in the last 2008, 2009. You know, that really wasn't a tool that was used in a huge degree. I think that's the difference in this particular event. We didn't see the type of opportunities that you would theoretically think that you might see. If things shut down for three months, if businesses slow down, you would have thought that there would have been more opportunity. I think that, in fact, people... didn't react. They reacted to what they were seeing and being able to utilize. And so we didn't see those types of opportunities. I think what we're seeing now, Rich, is we're seeing the opportunities in our markets. We like the markets that we're in. We like Texas. We like Florida. We like Arizona a lot more than we did before. We like some of the North Carolina, South Carolina. We like some of these markets that We've had success in, you know, we've recently put onto our website three of our major campuses. We did a virtual tour that shows the application of what we see as we built out our new building in Raleigh at Wake Med. We've just remodeled and done our mission, which we've now shown to folks. I think if people get a chance to take a look at those, they should, because that's sort of what we're trying to build throughout our markets is that continuity. And so we'd like to add to those markets. And so I think now is a good time to, you know, we've focused on earnings. It's dropping to the bottom line. We have an opportunity to continue to grow and we can do it on a creative basis in the markets we like.

Very good. And then on the potential East Texas exit, you described that as non-core, but when you bought it 10 years ago, it was probably thought to be core and, And I'm wondering if that's just the typical, you know, cadence of how the business works for you guys where, you know, non-core is perhaps defined to some degree by time or is it not, you know, I mean, obviously market conditions and everything else play into that. But is that kind of at least a way to think about what when core becomes non-core just the passage of time and whether or not you're willing to invest in it because of how you feel about the marketplace?

Robert, I'll let you handle that.

Yeah. I think, first of all, Rich, just a slight correction to that. It's East, really rural Tennessee, kind of focused around Bristol and some other areas like that. And I think what's changed in our philosophy going back six, seven, eight years now has really been a focus on more major markets with, you know, much greater population growth, really with the focus on, you know, areas that are going to benefit from the continued expansion of the knowledge worker and the knowledge economy and things like that. Also happen to be, you know, attractive from a lower cost of living perspective. So I think for us it's much more of a transition out of assets, you know, great assets, they're located next to, you know, good health systems and they're steady. I think that was core for us when we were first up and growing. I think now as we're looking at where we're going to be over the next five, ten years, it really is much more focused on major markets where we can really deploy all of our platform capabilities and continue to grow. So I think as you see us continue to recycle out of assets, they're going to be out of smaller, more rural markets where we can't get as much of economies of scale and growth into more of our major markets where we think there's going to be a lot of growth that we can really leverage going forward.

Okay. And then the last question, real quick one for you, Robert, is a return to 2% to 3% same-store and OI growth. Was that all just the Texas weather issue in the first quarter, or was there more to it than that?

Well, I think we've said, as you look at a couple things in that, I think, first of all, You know, from an occupancy perspective, I think year over year, we're certainly going to be down the most in the first quarter. I think we knew that going into it. And so when we set our range, we expected our first quarter to be at the low end of the range. But we did have a couple other things pop up. I do think kind of the weather in East Texas kind of obviously caught everybody's surprise. And that did impact us a little bit. I think everybody else pointed out to continued parking revenue being down and things like that. So I think it was a couple one-off things. but it was definitely also related to the occupancy in the first quarter as the most difficult comps year over year. And I think as we look towards the rest of the year, with the new leasing activities certainly picking up, us being able to drive that to actual getting people in the buildings, I think that's where we see it coming back. When did parking trough last year? I think parking is not nearly as big of a component of our income. as it is for a number of other people, but I think it's certainly what we've seen. We do have a couple garages throughout our campuses, and it really did tend to trough second quarter. I think that was definitely the lowest point when you had people not being able to come in for elective surgeries. People were broadly staying away, and I think we've seen that kind of gradually come back over time since then.

Okay, great.

Thanks.

Thanks, guys.

The next question comes from Juan Santabria of BMO Capital Markets. Please go ahead.

Hi. Just hoping to talk a little bit about the disposition side, the sales in eastern Tennessee. And if I look at your supplemental, it seems like 6% or thereabouts of your ABR outside of the top 75 markets. So from a go-forward perspective, Should we expect that most of the dispositions would kind of happen in that bucket? And do you know what that 6.3% is pro forma for first quarter sales?

Yeah, I think as we look at the dispositions where we're looking to sell out of, I think you're largely going to see it come from that bucket. or top 75 markets where we only have one or two assets and it's just not worth spending the time to really invest deeply into knowing all the submarkets, having a good handle and a good relationship with all the leading providers in healthcare systems in the market. So I think that's definitely going to be where you see it moving from there. I think as we look at the sales, though, they tend to be In the most part, going to be $5, $10, $20 million sales kind of one at a time as we look to move through and then recycle those assets into key markets. So I think as we look at our disposition and recycling activity, this portfolio is probably the largest that you could see us make for a little bit of time. If we do have anything bigger than that, I think you'll see us look to redeploy it pretty immediately. So, you know, as we transition through our dispositions, I think you'll see a pretty ready, readily or investment that we are ready to redeploy into.

Okay, that makes sense. And then on the development slash redevelopment front. gave a great color on future expected contributions as those come online on an annual basis. But just curious what's included in 2021 guidance and related, any change in what tenants are looking for on the new developed space as a result of COVID, more space, or changes in space use as a result of telemedicine or what have you?

Well, I'll answer your first question, then I'll let Scott, you know, kind of talk about any changes to this space. But I think, you know, from our expectation on the redevelopment front, you know, we're really not expecting any cash in a Y to be coming in for those redevelopment properties, at least the ones in Houston and Denver until the fourth quarter. So, you know, once we get to that point in time, it's going to be relatively minimal and it's going to become much more of a 2022 story. But I think the good part about those and why we wanted to highlight them is that we are seeing the leasing activity. You know, we're seeing the repositioning of what we've been able to do take hold on those two assets, get them leased. You know, we think they're going to be positive contributors to earning going forward. You know, we just wrapped up kind of the full redevelopment of a couple of the mission assets that we have, you know, fee simple real estate and just a great part of, you know, Orange County. uh, there. And now that COVID is opening up there, you know, I think this is the opportunity where we should start to see some good traction and leasing that up. And I think as, as, as we see that, uh, again, it's going to be a little bit in 2021, but it's going to be much more of an impact in 2022.

And, you know, I'll answer the second question. I, you know, we gets back to our development opportunities that we're seeing and that we're having discussions about right now. Um, We're fortunate, we're working with a couple folks that I think are going to be, at least we believe, are partners or potential tenants that are really looking forward. The assets that are under consideration are something that is forward-looking, adapting to what they see in the future. I think that's the exciting part about, we started our development division almost four years ago, five years ago. We did it in earnest when we did the Duke transaction and we've slowly finished those assets and brought them online. And as we've talked about, we've now incurred our own initiative would be the best word. We've generated our own narrative with healthcare systems, with some of the universities that are starting to go down the path. And the biggest advantage that that we have had recently is the fact that we are a large, dedicated MLB. We have the capital capacities. We are dedicated to the particular task that's being discussed. And so I think that has brought us the ability to really be at the cutting edge of this. And the same thing in redevelopment. We're looking at assets not simply to redevelop. We're also not looking at leasing as saying simply lease up a space, get it behind you, and be satisfied for three or five years. We want space, we want tenants, we want assets that are primed for the next 10 to 15 years, or at least certainly as we move forward in this new economic cycle that we're going to experience. And so we're taking a lot of time, and I think Amanda, who heads up our leasing and asset management, Brock, we're doing a lot of of careful thought processes as we go through our leases and as we go through our redevelopment process.

Appreciate the time. Thank you.

The next question comes from Nick Joseph of Citi. Please go ahead.

Thanks. You talked about the occupancy impact in the first quarter, but just given the leasing environment and the forward pipeline, how do you see the recovery playing out sequentially from here?

We're fortunate we've had the most activity that we have seen, as we mentioned in our script. I think there's a multitude of things that are playing out right now. I go back to the fact that you want to make sure that what you're doing in 2021 is working in 2023 and 2024. I still think that we're starting a cycle. We want to focus on really strong tenants. We want to focus on relationships that are going to expand in assets. And we want to reposition our assets, if needed, out of space that is not going to be functional or long-term. And I mean that more than probably the next three or four years, because I do think there's going to be a big cycle come 2025, 2026 for space needs and how tenants have adapted and so forth. So we feel good. Again, we're in some really nice markets if you look at our geographic locations. And, you know, I go back to Houston, Dallas, Tampa, Orlando, Miami. You know, we've got some really nice locations that we are seeing a lot of activity on. And I think that's the That's our opportunity. Our opportunity, as Robert described, is to take our current occupancy and build on it, as we've talked about the last year, year and a half. We're now through COVID, hopefully, and so we now need to just add that increase in occupancy to the bottom line. We're in a great position. We just hit our best quarter again from an earnings perspective. We've got capital. We've got opportunities for acquisitions. We're seeing the development side of our business take hold, and now we have the opportunity to do some very good leasing without any urgency of being quarter-to-quarter or month-to-month responsive. We've seen some very aggressive, and I mean very aggressive, leasing deals in the marketplaces in some locations that you look at it and say, I don't know why. There must be a reason inherently that they're just trying to occupy space because the economics didn't work. We don't want to compete with those. Frankly, we want to make sure that our earnings continues to grow over the next two, three, four, five years, not flat. We don't want to be flat in this marketplace.

Thanks. Appreciate that. And then just back to same-store guidance. Obviously, you maintained it. And, Robert, you walked through some of the noise in the first quarter. But are your expectations still that you should end up around the midpoint, or is it trending more towards the low end, just given what's happened in 1Q?

Well, Nick, I think, you know, certainly, you know, as we mentioned, we always anticipated that our first quarter would be would be lower than what our expectation would be for the rest of the year, whether it was from just year-over-year comps and then just from a building and potential occupancy from there. So I think our view is that it was slightly lower than what we expected in the first quarter, given the handful of items we discussed. And I think the rest of it still comes down to our execution on leasing and getting people in the building. If all that activity that we're seeing really translates to sign leases quickly. You know, I think we feel good about, you know, the midpoint of the range. Certainly, I think if it takes a little bit longer to get them signed and moved in, you know, I think that's kind of the noise and the uncertainty that we're working with right now.

Thank you.

The next question comes from Daniel Bernstein of Capital One. Please go ahead.

Hi. Good afternoon. You know, you guys are talking about a new cycle and the long term. So I was trying to, you know, maybe if you could put it together in terms of, you know, you look at construction costs, the move from inpatient to outpatient, which I think is going to continue to accelerate for many specialties. You know, what's kind of the peak occupancy you think your portfolio can get to? You know, is there a change in the frictional occupancy for the MOB industry?

Well, we've given that, you know, I think everyone is giving that thought. You know, we once again, you know, there was an earlier question about 2008, 2009 time period, 2010. You know, I go back to the fact that you really don't know, and I say this because, again, the government assistance that has been given in this economic downturn is just unparalleled. I mean, it's, you know, I'm not sure that folks can actually contemplate how much you know, help and how much liquidity has been pushed through the system. And so, you know, we've had, you know, what does that really mean as we get into 2022? What does that really mean as that assistance isn't there any longer? And how does that impact, you know, systems or tenants, physician groups? How does that affect secondary markets or assets that may not be as prominent in their thought process any longer? That's the process we're going through, and we're going through it in detail because I don't know that you can see that right now. It's sort of like the housing market, right? You don't really know what's going on there. But you're saying, okay, that's what it is. It is what it is. I think it's still back to we feel comfortable in our goal and what we're looking at our leasing teams for and our conversations is that we want to get to that 92%, 93% occupancy. I think that that's just given our portfolio, and that's not looking at the overall market. That's not looking at different states or different locations. That's looking at the assets we own, and I think that's where we've started. okay, let's do an inventory of what we have. Let's do an inventory of the relationships we have in the market with the assets, with the physicians, and then let's reposition our assets and let's make sure that we've got the right tenant mix and the right tenants that are in those buildings. As I said, there's been many tenants, and you're starting to see this now, I think, that are getting the impact of COVID. They are getting the impact of a downturn for 12 months in They're looking for just basically, in some cases, the most cost-effective space they can find. In some locations, that's not our building. We're not the lowest place to go. We want to get value. I feel that we need to value our portfolio. We've got a great cost basis, having bought when we bought, where we bought. Now what we need to do, as we've talked about, is get the value for it as we go forward. So for HTA, we're looking in that 92, 93 range. For the sector, I think that it's going to depend upon markets, and it's going to depend upon the question earlier, which is what is your mix between off-campus and on-campus? I think it's going to be much more articulate than is a general statement.

And then one quick question, follow-up on construction costs and TI. And, you know, should we be building in or thinking about higher TI costs, not just from more leasing, but from the construction? And, you know, initially at least, you know, is that how are tenants reacting to increased build-out costs?

Well, I'll start first and let Robert finish. I think you can. I think that you're going to start seeing a higher cost throughout the economy. And we've seen it. And I think that that's something that, you know, that that's going to come. I think it's just started. And I think we're going to see it. And you're starting to see narrative from general economy folks who are now recognizing it. I know that when we're looking to hire folks, it's a very tough market. And the cost compensation structure is different. than it was 16 months ago. So that's going to come through. Tenants don't want to come out of pocket. I would say that the general statement that I've seen is they're willing to amortize additional costs within their lease structure. They're willing to put in the needs that they want to stay there longer term. But tenants aren't saying, gee whiz, I want to come out of my own pocket and put in dollars and so forth. Those are the kind of the trends that we're seeing, and frankly, I think they're expected. So, Robert, you want to add anything?

Yeah, no, I think just the particulars is you're right, Dan, is that, you know, I think TI costs in some markets are up 20%, 25%, you know, I think from a build-out perspective, you know, and I think it certainly looks, you know, as we're looking at development and construction costs, I think we're looking in markets where, frankly, it's an expansion of the population, right? So health systems and providers just need the space to be built for them to go in there, you know, probably a little less price sensitive and can absorb the construction costs there. I think in markets where it's, you know, more of a market share type game, you know, as we're looking at our renewal discussions, you know, we've got people saying, well, maybe I'm just going to go build a new building. And as they look at, you know, the expected price that they got a year ago and now what they're seeing now, I think it redoes some of that math. for tenants that are in place where they are. So I think it's very much a market-specific analysis that we're doing on that, but we certainly are seeing it go up quite a bit.

Okay. I appreciate the time. Thank you.

The next question comes from Todd Sender of Wells Fargo. Please go ahead.

Hi, thanks. Just looking at recent deal flow for you guys. With the backdrop of getting Samster NOI growth back to that 3% ballpark, can you share just some of the annual growth expectations in your underwriting on Q1 acquisitions as well as the stuff in Q2?

Robert, you want to talk on that?

Oh, well, I think the – you mean from an annual – you know, growth perspective on the acquisitions. I think what we're seeing, you know, we're certainly expecting that it's going to average out, you know, 2.5%, 3.5% annual growth from the assets that we're buying. You know, I think we've been very particular about where we're buying, what's in place, what the opportunity is for us to add on top of that. So, no, I think our acquisitions, you know, we're fully anticipating that they're going to support that 2.5% to 3%, 3.5% type run rate that you know, we've historically targeted.

And what's in place now? Are these third party operated and managed? And maybe where some of the opportunities that you're seeing, whether it's lease up space or the rents are below market?

You know, I think it's a little bit of both. You know, I think there's kind of three things that we see when we're looking at our opportunities. I think one, when we're looking at the acquisitions, it's a matter of, you know, where are the, A, what's the market and what do we think the market rent growth is going to be? as we're looking at it. I think the second thing that we're looking at certainly is where are the rents relative to market and the long-term outlook there. And I think the third thing certainly is, you know, any available occupancy that we have. You know, we bought some assets certainly in markets that, you know, are kind of high 80s, low 90% occupancy that we think we can push up and see some potential growth on top of that. But then the last thing that we do look at that you pointed out, Todd, is, you know, just the ability to put things on our platform from, you know, removal of third-party management. You know, that's almost always the case when we're buying assets. They almost always have a third-party manager that we can replace and then look at, you know, the impact of the economies of scale that we have in the market and how that will flow through. So, you know, I think that's typically what we're seeing the upside from.

All right, thanks. Just last one from me and for Robert, for you. From a modeling perspective, how are you thinking about the timing of settling your forward shares? Is that going to coincide with these second quarter investments?

You know, I think there's going to be a part of that that gets settled in the second quarter. When we look at just the straight math on that, we've got, call it $150 million of acquisitions kind of under contract or investments that we We expect we'll be able to close. We've got $67 million of dispositions. Second quarter, we always get a little bit of a pickup in working capital. First quarter is when a preponderance of our property tax payments are actually made, so we have a use of working capital in the first quarter. All that to say, I think the math comes out to about $50 million plus or minus issuance of equity to kind of fund that gap, and so that's how we're looking at it. Now, as we buy things, as we get net investments, we're going to use our equity to go ahead and close on them.

Thanks, Robert.

The next question comes from Anoteo Okusana of Mizuho. Please go ahead.

Yes, good afternoon. Congrats on the record quarter and the guidance increase. Always nice to see you. I wanted to stick on the acquisitions front and kind of your acquisitions guidance going forward. Can you just talk a little bit about the nature of the pipeline? Is it kind of more, should we actually kind of see more on-campus versus off-campus activity and specifically any potential opportunities to go into new markets?

Well, I think what we're seeing is a blend. I think you'll see from us, you know, the off-campus comes with functionally, you know, leasehold free. So we're still looking, you know, the first advantage you get is if you can get without any ground lease, we look at those opportunities and especially given the fact that we're seeing the compression and the synergies between the off-campus and the on-campus. So I think you'll see the blend. It's about 60-40. It's probably going to be 60-40 as we continue down the path. You know, I think Robert, you want to give some more color on that?

Yeah, I mean, I think that's just more where we're seeing good assets. I think in all the discussion of on-campus versus off-campus and studies and rent growth, I think our biggest takeaway has been that there's really good assets both places. I think there's certainly great on-campus assets with good health systems that are going to continue to grow and continue to have long-term demand. That's great. There's just also more growth and more opportunities in off-campus locations now, too, as, you know, the location of care continues to shift into those locations. So, you know, I think we see good real estate opportunities in both, and I think that's what the studies that we've seen have really supported. Not so much that, oh, my gosh, this is better than, you know, off-campus is better than on or that on-campus has got to be you know, better than off, I think it's that medical office is great. I mean, there's a tremendous amount of growth in the amount of outpatient care that's going to be delivered. It's got to be in good locations. And if you own that real estate, you know, that's the opportunity to own assets that produce that kind of steady long-term growth that we've come to expect. So I think from our outlook, we've become a little bit agnostic I think our view is just that there's really good real estate both locations, and it's tended to be 60-40 as we've looked at the individual characteristics. And, you know, I think we'll see that ebb and flow based on what we buy. But long term, that's probably where our portfolio is going to end up.

And I would just like to say on that question, I have the fact that we've added a new dynamic to our underwriting, both from our from an acquisition perspective and also from a disposition perspective, is we're starting to analyze not just, it used to be location, location, location, and real estate was a very hands-on sort of specific decision. We started to look more from a data perspective. We want to see, and when we look at acquisitions now, we're looking to see trends in the market. We're getting data compiled that says, You know, is the geographic trend towards the asset? Is the utilization of the medical outpatient experiences, is that something that's going to grow? You know, what's the mix of the physicians in that location or in that small geographic location? You know, is it over one particular, you know, overstaffed in one particular area or another? That's something that I think, again, As we move forward, you want to be in the right locations. And it's, you know, the right cities, the right parts of cities, the right growth patterns in those cities, in those communities. And there's so much data out there right now that, you know, we're starting to put much more emphasis on, you know, the underwriting of looking forward, not looking back. And so off campus is part of that analysis. Thank you for that.

The next question comes from Lucas Hartwich of Green Street. Please go ahead.

Hey, this is John on for Lucas. Just a quick one for me. Just as you look at your portfolio and in particular the non-MOB assets, how are you thinking about those over the longer term? especially if you look to find sources of capital and potential dispositions. Any views on that would be much appreciated. Thank you.

Robert, go ahead.

John, I think we continue to look at those. I think our view has always been non-core assets are secondary markets that we don't see as much opportunity on or assets that just don't fit our our focus going forward. So I think as we look at the hospitals that we have, we've certainly seen a bid on it. So I think that could be an opportunity for us to look to exit those at the right point in time. I think as we look at our portfolio, it is such a small portion of it that we have in it. So we tended to focus elsewhere, and it's continued to shrink as a percentage of our portfolio as we continue to grow. But there certainly are ones that you will see us sell at the right right point in time.

Gotcha. Thank you.

The next question comes from Michael Gorman of BTIG. Please go ahead.

Thank you, Scott. If we could just step back a little bit more strategically. I mean, you've talked about being potentially at the start of a new cycle. Obviously, as you also highlighted, a lot of liquidity in the system that could be cycling in or out. We have potential tax consequences and changes coming in the next legislative session. So I guess as you compare it to 08 or 09, I'm trying to think ahead. Do you think that there could be some disruption or some opportunities as a result of this going forward that we actually haven't seen the disruption in the property markets yet that you could take advantage of?

You know, I think it's interesting that we haven't seen disruption yet. And I think historically, You know, if you're a believer that things do, over time, react in some traditional manner, I do think there will be a disruption. You know, I read an article the last couple days that said for the first time that, you know, that there's some concern about an asset reset valuation. I read it. It came out where folks are saying, you know, there's a possible possibility that there's a reset from a valuation perspective. So I do think that that's going to happen at some point. I think it'll be, you know, if we could predict it, we'd all be in a much better position. I think you have to prepare for it. Our viewpoint, big picture, is strategically invest in those locations that are growing, that have the business environment, and that have lower business impediments, meaning, you know, the taxes and just those types of dynamics, and then see how that responds over time. I do think that at some point you're going to have some sort of reaction to either interest rates or inflation or something that's going to give folks that are well-positioned an opportunity. And we want to make sure that we always have that opportunity.

Great. And then I guess to that end – You know, we've both had the opportunity to be around for a while. In the past year, have you seen anything in the marketplace in terms of underwriting from other capital sources, deals that you've competed on where it's looked like 06, 07, where people are making unreasonable assumptions about forward cash flows, or is it just they're projecting, you know, the current status quo to continue out into the future? Yeah.

I think that what we have seen, I've seen some acquisitions or some transactions that I continue to look at and say, wow, that's rich pricing. I don't know that it's realistic underwriting. And it's sort of like putting money out in order to say that they've had activity. And we have resisted that. I think my investment committee made up of my board is, been with me, the majority of them, for the duration of our company. And so we've been through a couple cycles, and we've tried to be disciplined and prepare ourselves for both types. I think we're just – we're very fortunate that we are right now – the major markets that we're in, the opportunity that we're seeing in one-off acquisitions are unique. We've not been in this position before because we're a much smaller – Ten years ago, we were much different in how we were growing and the pressures that we had. So it's a good blend for us right now. It's buy things in the five and a half to six, get development in that six, six and a half, get our leasing up three or four points, and continue to build on our earnings. We don't need to do anything drastic. We're not facing the hurdles that the other sectors are facing, and that's something that we always have to remember. We may not go up like other folks go up, but we certainly haven't gone down. You know, we've been consistent both from a dividend perspective, an NOI perspective, an FFO perspective, you know, and so we're not in the sector that's going to go up and down unless you make bad mistakes. You know, we can just have a very, very steady growth as a company, and that's what we're focused on.

Great. Thanks, Scott.

The next question comes from Nick Ulico of Scotiabank. Please go ahead.

Hey there, this is Josh Brown with Nick. I was hoping you'd just talk about what drove the sequential decrease in lease rate in occupancy this quarter, and then also if you could provide some color behind the decrease in retention to around 65%. I think it's typically like 80-85% historically, so yeah, that'd be helpful.

Yeah, no, I appreciate that. You know, I think what we saw this quarter from a retention perspective was frankly some move-outs of a couple tenants that we knew about. It was planned kind of pre-COVID. You know, one instance, a group had bought their own building kind of pre-COVID, and it was just a matter of getting everything kind of fitted out. Another instance, it was just a consolidation of practices on there that drove most of the lower level of retentions. I think that's abnormal for us, and it's certainly not a trend that we're expecting to see the rest of the year. I think our outlook, frankly, for the year on retention is that it will be 75% to 85% type range when all is said and done. So I think it's just a bit of a blip as far as that goes. But from an occupancy perspective, you know, from a timing of those vacates, You know, we got caught up a little bit with new leasing that would typically backfill that space and time and be able to allow us to maintain kind of pretty flat, if not growing occupancy there. That was just impacted by COVID. You know, certain things took longer. The activity in the second and third quarter last year that would typically result in a move-in. by the first quarter this year was obviously impacted by that. So it was slower new leasing activity that impacted the occupancy as some known vacates just came to bear in the first quarter. But the good news is, as we talked about, I mean, the new leasing activity now is very strong. You know, the new leases that we were actually able to sign, the highest that we've seen in 12 quarters. So we see that trend reversing itself as we work ourselves our way through the year.

Great. Thanks.

This concludes our question and answer session. I would like to turn the conference back over to Scott Peters for any closing remarks.

Well, thank you, everyone, for joining us, and we look forward to following up with any questions and seeing folks at NAROOT here coming up soon in the next month or so. So thank you, and everybody have a good weekend.

The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.