Healthcare Trust of America, Inc. Class A

Hello all and a warm welcome to Healthcare Trust of America's third quarter 2021 earnings call. My name is Lydia and I'm your operator today. If you'd like to ask a question at the end of the presentation, you may do so by pressing star followed by one on your telephone keypad. It's my pleasure to now hand you over to our host, David Gershenson, Chief Accounting Officer. Please go ahead when you're ready.

Thank you and welcome to Healthcare Trust of America's third quarter 2021 earnings call. We followed our earnings release in our financial supplement earlier this morning. 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'll be happy to take your questions at the conclusion of our prepared remarks. During the course of the call, we'll 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 can 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 Brad Blair, Chairman of Healthcare Trusts of America. Brad? Brad?

Good morning, and thank you for joining us for Healthcare Trust of America's third quarter earnings conference call. Joining me today is Peter Foss, our interim chief executive officer, Robert Milligan, our chief financial officer, and Amanda Houghton, our executive vice president of asset management. Before we get into discussing another strong quarter for HTA, I wanted to provide some additional insight to the HTA board priorities and actions, which have certainly accelerated since July. First, we announced the preliminary conclusion of the company's previously disclosed investigation into allegations reported through its whistleblower hotline. As outlined in yesterday's SEC filing, the audit committee and the company investigated allegations stemming from the whistleblower reports the company received in July 2021. The allegations included claims related to the whistleblower policy and potential retaliation, as well as the company's policies related to personal expense management around corporate cards and corporate aircraft use. Given the seriousness of the claims and the potential impact to those involved, the board undertook a very thorough and extensive investigation that utilized independent counsel to come to an objective conclusion of fact. Counsel for the audit committee worked closely with counsel for the company to conduct the investigation which involved collection and review of a significant number of documents and interviews of numerous witnesses. The investigation concluded this week and found that the former CEO engaged in conduct that was either in violation of or inconsistent with various company policies as it relates to the whistleblower policy, personal expense reimbursements, and personal use of the company aircraft. The financial impact of the inappropriate expenses that were specifically identified in these preliminary findings would not result in any material impact to the company or cause any financial restatements. As a result of these findings, the board and the audit committee have begun a process with the assistance of counsel to address the results of the investigation. The board and the audit committee also intend to enhance the company's policies and procedures regarding personal expenses and aircraft usage, the whistleblower policy, and disclosure controls and procedures. We are encouraged that HTA's commitment to empowering employees to raise legitimate concerns, coupled with the board's seriousness in addressing allegations of inappropriate behavior, has served a greater purpose of ensuring accountability across the organization. As it relates to Scott, our former CEO, declined to be interviewed for the investigation. He resigned of his own volition without any reason. This occurred at a time when the Board was just beginning its investigation process. Since then, the Board has elected to limit any dialogue and has turned its focus exclusively to moving the business forward. We will not make any further comments or statements related to his resignation and respect his privacy at this time. The company continues its search for a permanent CEO. As announced in September, the search is being led by a leading executive search firm and an independent search committee consisting of three independent board members. We believe the search for a permanent CEO to be a critical component in the board's overall evaluation of the strategic alternatives. Lastly, the board regularly reviews the company's strategic plan, priorities, and opportunities in order to enhance shareholder value. As such, we have been reviewing and continue to review the company's strategic plan as it continues to evolve amongst viable alternatives. As previously disclosed, we engaged advisors, including JP Morgan, to assist us in fulfilling our commitment to act in the best interest of HTA shareholders. With their help, we are actively evaluating a number of alternatives, including among others, a corporate sale or merger, joint ventures, and partnerships or asset sales. During the board's evaluation, HTA will continue to adapt its strategic plan and position the company as portfolio for growth, success, and value creation as we will continue to discuss on this earnings call. I want to stress that there can be no assurance that any transaction will result from the strategic review process, and we do not intend to disclose developments relating to this process unless and until the board has approved a specific agreement or transaction or has terminated its review. We continue to execute and position HTA as portfolio for growth, success, and value creation. That said, the purpose of this call is to discuss our financial results. As a board, we have split the chairman and CEO roles so that the board can focus on the strategic alternatives while Peter is focused on running the business with his capable team. To this end, we will be unable to answer any questions on our strategic evaluations, and we ask that you keep your questions focused on the company's current performance. With that, I'd like now to turn the call over to Peter.

Thanks very much, Brad. Before Amanda and Robert present our specific roles for the quarter, I'd like to provide you some of my initial observations as I approach 100 days as the company's interim CEO. And believe me, it's gone by very quickly. and with a lot of great events. As you'd expect, I've spent a significant amount of my time focused on people, our team, shareholders, our key tenants, and health system relationships. And I can report to you that our people are excited about the potential of this great company to turn the page and deliver significant value in ways that we haven't before. I've been fortunate in my career to be associated with some great growth businesses. helping to grow GE Plastics from less than a billion to over seven billion in sales over a 15-year period, and turning the Olympics for GE into a billion-dollar revenue source for the GE businesses. We, in those adventures, used both scale, size, and capabilities to accelerate growth. That's exactly the positioning of HTA, a franchise that has size, scale, and capabilities that's ready to be unleashed. In the past few months, I've spent my time getting to know our team. In my time as an independent board director, you know, we frequently interacted. However, there was no replacement, there is no replacement for the daily interaction as a CEO. I've been very impressed with our team's expertise, sophistication, and when it comes to operating our assets and their command of the inherent complexities in the MOB sector, there's nobody better. Well, we have a strong team. We've added exceptional talent to our company in roles that can help us accelerate our growth and profitability in leasing and investments and operations. We're also focused on adding infrastructure to assist in our growth, investments in HR and technology and market analytics that will help us scale and add value to our larger customers while also helping us to operate as an efficient team with a relentless focus on delivering value. In this quarter alone, we've made great strides in growing and improving our HR team while also making significant investments in market and healthcare analytics, adding staff and capabilities that will make us faster and help us be more insightful. We can do that without adding significant costs by working on our structure and developing our people. Investments that will pale relative to growth they will produce on the top line. During the past few months, I've also spent time touring our portfolio and meeting with many healthcare leaders. As I tour these markets, it's apparent the quality of our assets in the communities we play and our healthcare provider tenants are the best. Our strategy has been clear to establish critical scale and gateway markets with dense patient bases, with assets and an operating platform that can create value for top healthcare providers. In my time working with GE Healthcare and running various healthcare foundations, I've worked closely with many leading healthcare providers across the country. As I call on these leaders with members of the HTA team, they're excited about the opportunities to work with each other and move their businesses forward. On top of all this, our team has continued to execute in the third quarter without missing a beat. And despite all the noise that surrounded us, In the quarter alone, we executed leases for 670,000 square feet of space, 227,000 square feet of which represented new leases, the highest levels of new leasing in over four years. This allowed us to increase our same store lease rate by 0.4%, and for the 450,000 square feet of leases that were renewed in the quarter, our re-leasing spreads were an impressive 2.9%. We also closed on over $130 million of acquisitions, and move forward on our development pipeline with more than 300,000 square feet of LOIs currently outstanding in our development pipeline assets. This shows that our team remains focused while moving things forward. In summary, my first 100 days as interim CEO have further confirmed my views of the company, which were formed over my six years as an independent director. It's clear to me that as a result of our people, platform, and portfolio, HTA is uniquely positioned to deliver value to our tenants and our stakeholders. Let me restate that you have my commitment to continue the development and growth of this HTA franchise that Scott and this team, great team, have created. Now I'd like to turn it over to Amanda to discuss the quarterly performance and specific leasing activity.

Thank you, Peter. Our operating performance remains strong in the third quarter. highlighted by same-store NOI growth of 2.5%. This meaningful portfolio growth was led by strong performance from both our leasing and operations teams. Our new leasing, total 227,000 square feet, was one of the highest levels since 2017, driven by growth in markets like North Haven, Dallas, and Charlotte. Our teams have seen a notable pickup in new leasing activity and increased willingness of health systems and physician partners to invest long term in our assets as reflected in the increasing level of term for new leases over seven years for the last two quarters. In addition to new leases, we had over 400,000 square feet of renewals that resulted in 83% retention for the same store portfolio and rent growth of 2.9%. Year to date, leasing activity has totaled over 2 million square feet with nearly 600,000 square feet coming in the form of new leases. Our annual escalators for new leases signed in the third quarter were 2.7%, reaching 2.8% on a year-to-date basis, continuing our trend of increasing escalators to approximately 3% as we manage lease expirations in our portfolio. As a result, our lease rate increased on a sequential basis by 30 basis points for our same-store pool. Despite inflationary pressures, expenses in our same-store portfolio this quarter increased only 1.2% year-over-year, This minimal increase is a testament to our operating team's ability to efficiently operate our assets and the benefits of having a skilled platform like ours in order to deliver cost savings to our tenants. I'll now turn the call over to Robert.

Thanks, Samantha. over 3% compared to 2020. Our normalized FAD was $78 million, and year-to-date normalized FAD is at 4% from 2020 to $248 million. Our G&A remained consistent at $10.8 million, less than 10% of NOI. This includes approximately half a million dollars of costs related to our whistleblower investigation, with costs for our new CEO chairman compensation being offset by the limited the midpoint in the tax. From a balance sheet perspective, we ended the quarter with $1.2 billion of liquidity and net debt to EBITDA of 5.8 times, including the impact of unsettled forward equity agreements totaling $218 million. In October, we refinanced our $1.3 billion on a secure credit facility, resulting in a reduction in our borrowing costs and an additional four years of term, including an extension option. In terms of acquisition activity, we closed on four previously announced MLB acquisitions in the quarter, totaling $135 million at anticipated in-place year-one yields of 5.7%. These acquisitions increased densification in our key markets and brought our year-to-date investment activity to $188 million. We have an additional $159 million of acquisitions under contract or exclusive letters of intent that we expect to close prior to year-end, including the $69 million of loan funding commitments to project From a development perspective, in the third quarter we completed core and shell construction on time in our development projects in Dallas, with cash rents expected to commence before the end of the year. In addition, we have a development pipeline end, we made a strategic investment in Pivotal Analytics, an Austin Health partner and an innovative company that is applying the tremendous data and insights that can come from the billions of health insurance claims completed on an annual basis to the physical world, with an ultimate goal of improving the decision-making process for healthcare providers around strategic office locations, the impact of referral patterns, and also best efforts around service line implementations. While relatively small from a monetary basis at $6 million, this investment in their Series A provides us with a preferred position to grow and utilize the tools being developed by this innovative company. That way we can leverage in a way that we can leverage as we execute our strategic plan. Outside the specific numbers in the quarter, we believe HD is very well positioned to accelerate our earnings as we head into 2022. This is in part related to several steps that we are intently focused on from a strategic perspective. including investing in our talent and infrastructure. As Peter noted, we'll always operate with focus and efficiency. However, we believe that growing the overall capabilities of our team will provide tremendous returns and drive growth within our portfolio and on an external basis. This includes a focus on training focused on markets and data analytics to drive performance. We already have great teams on the ground, but are supplementing that with a greater focus on analytics to drive the depth and intelligence that's needed to really outperform in ways that improve our capital allocation decision making, improving leasing performance, and adding value for our customers. Our investment in Pivotal is just one effort that we have undertaken to better position our teams. Third, by aligning capital sources with the reality of the MLB marketplace. Simply put, the public To remain competitive, we must diversify our capital sources in ways that enable us to execute on the unique opportunities that we see as the leader in this space. From a practical perspective, this should drive upside growth in the following ways. First, through occupancy upside. Our occupancy was 88% as of September 30th. We believe our realistic run rate occupancy for our portfolio is closer to the 92% to 93% range, which is consistent with the broader MOV market and which we have achieved prior to COVID. Achieving this occupancy gain would result in almost 1 million square feet of absorption and could result in 16 to 20 million in incremental annual NOI. We believe this to be achievable given that some of our highest growth markets currently contain meaningful amounts of occupancy upside, including Houston and Dallas and Charlotte and Phoenix. These four markets, each with strong underlying operating fundamentals, account for nearly to win pre-lease projects. However, these are extremely competitive, driving the pricing down. The real opportunity is using our market intelligence from both the tenant and local market relationships and our balance sheet flexibility to proactively identify key areas of growth for healthcare providers and creatively structure medical office opportunities for which providers will compete. Third area is by pursuing joint ventures. cost private capital. In a space that has seen several regional operators raise billion-dollar funds, we believe we're uniquely positioned as the best-in-class operator where many can and should want to partner over the long term. Fourth area is through asset sales. In addition to the JVs, we'll be utilizing this competitive market to sell assets that no longer fit our strategic plans. These are great assets, just happen to be located in non-core markets. or assets for which we believe we've maximized value. Assets that we can sell at great pricing and redeploy into other opportunities for the benefit of shareholders. In short, HC has a number of opportunities on which to execute to drive performance in the short to medium term. With that, I will now turn it over to Peter to wrap it up.

Thanks, Robert, and thanks, Amanda. Before I open up for questions, I just want to make one more comment. First, I just want to say thanks to all the HTA folks for welcoming Brad and I into a pretty difficult situation, one we weren't expecting and they weren't expecting. But you folks have done a wonderful job, kept the focus. The results speak for themselves. I'd also like to thank Brad. He couldn't have a better partner than Brad. He's kept focused on his side of it and let me focus on the operations with Robert and Amanda and a great team. So I just say thanks to all of you for letting us continue in such a nice, fluid manner. With that, we'll open up the call for questions. Thank you.

Thank you, Peter. If you'd like to ask a question, please press star followed by 1 on your telephone keypad now. To withdraw your question, please press star followed by 2. And when preparing to ask your question, please ensure your device is unmuted locally. We kindly remind you to ask only one question. And if you have any follow-up questions, please register again by pressing star 1 to get back in the queue. Our first question today comes from Rich Anderson of SMBC. Rich, your line is open. Please go ahead.

Thanks. Good morning out there. So, you know, the comment we've made early that a permanent CEO is critical as you look around for strategic alternatives, and I'm trying to overlay that with the process. I know you're not going to talk about it, but that would imply that you're primarily looking at an entity-level type of deal. No CEO is going to come in if they're going to get bought by another REIT and be gone 10 minutes later. So I'm curious if that's the right way to think about it as an entity-level type of transaction, primarily perhaps through private equity channels. Any kind of color you can give on that would be interesting. Thanks.

This is Brad Rich. As we've announced, our search committee engaged Spencer Stewart to assist with the search for a new CEO. We continue to conduct that process in our best way. We intend to do that with this prospect that we will identify the appropriate person to lead HTA. We believe that the characteristics of HTA will give us the opportunity to interview a number of such people. We would not consider it as we're addressing just a standalone, but we want to make sure the company has continued to advance itself and be prepared in whatever event might come out of our process.

Okay. And if I could just ask a very quick follow-up. Same store was 2.5%. Occupancy was down 150 basis points. How would that possibly happen? Maybe that's for Amanda.

Yeah, you know, Rich, our, on a quarter, sequential quarter over quarter basis, we were up, we were up about 30 basis points, quarter over quarter, thanks to our 40 on the total portfolio. In the first quarter, you know, I think we had pretty low retention, but we still are getting our existing portfolio, the close to 90% that's occupied. We had the existing rent bumps in it. So while on a year-over-year basis we're down slightly with our existing escalators in place and the new leases that we're doing, favorable leasing terms of those, I think that's driving much of the revenue increase, which results in that NOI growth.

And, Rich, also keep in mind last year is when we had a number of kind of early renewals as part of our strategy of really working with health systems. to work through the COVID process. So I think in the prior year period, we had a number of leasing concessions, you know, free rent that was the result of early renewals that drove revenue down. So even though we had, you know, occupancy down on a year-over-year basis, the total amount of cash pay revenue was not nearly as impacted as it was on an occupancy basis. So that's really how you get to that math.

Okay, thanks.

Thank you. Our next question today comes from Nick Joseph of Citi. Nick, your line is open. Please go ahead.

Thank you. I just want to better understand what the strategic review process involves. Is the advisor actively soliciting bids and being proactive on outreach to potential bidders? Is there a data room set up? Just any more color on the mandate there?

I appreciate and understand the question. As we address in the board related matters in our prepared marks, we will have to limit our comments with respect to this process. We'll continue to be guided by JP Morgan in advising us in this process and that's about all I can tell you about the process details.

A process is pretty broad, right? I mean, is there, you know, I recognize on this call you're trying to stick to the current quarter results, but is there going to be another opportunity to expand on what exactly that mandate is?

Well, the mandate is to review all alternative options. And when we have such a conclusion as to one or none, we will certainly bring that to your attention. But at this stage, we can't comment any further about the details.

Thanks. And then just maybe on the whistleblower news that you guys filed yesterday, I mean, are there any continued investigations or complaints outstanding, or was that everything that was related to the whistleblower from three months ago?

The investigation of the facts has concluded, and as we've indicated in our press release, the board will be reviewing circumstances that need to be improved and or addressed in the final conclusion process.

Were there any other employees disciplined or terminated related to the whistleblower findings?

We're not at liberty to talk about those. Thank you.

Great. Thanks, Nick.

As a reminder, if you'd like to ask a question, please press star followed by 1 on your telephone keypad now. Please ask one question only, and if you have any follow-up questions, please register again by pressing star 1 to get back in the queue. Our next question comes from Juan Sanabria of BMO Capital Markets. Your line is open.

Hi. Just following up on Rich's question on the CEO search, Is it the intention to have somebody in the seat before the strategic review process is complete in whatever form that takes?

You know, we can't comment on any timelines on how and when that closes and gets completed, but we will rely on the search committee and Spencer Stewart to give us the Best outcome possible, and I can't, as I said, comment on any timelines.

Okay. Can you comment if you've received any unsolicited bids as of yet into the board for the company in one form or another?

Once again, I can't comment on that at this time. Okay.

Okay, and maybe just one last follow-up for me given the brevity of the answers. Just on joint ventures, can you talk about that as the sourcing for attractive capital and how far along you may or may not be with partners on discussions? And would that be focused on new assets for acquisitions where you come in as a minority partner perhaps or something where you contribute existing assets?

Yeah, Juan, this is Robert. And, you know, we can probably comment a little bit more about this. You know, it is one of the options that I think the board is looking at and, frankly, that we've been looking at for some time. You know, I think we look at the number of really high-quality capital sources that are out there that really would like to get a foothold in the medical office space as a real opportunity to get, you know, private capital that comes in that definitely has kind of different timing and different return requirements than what the public markets do for us right now. as something we can move forward with. Just over the past quarter, you've seen a couple really smaller regional operators announce kind of billion dollar funds and the ability to move forward with it. So I think as we look at it, it's an opportunity both to potentially sell assets into a joint venture with a seed portfolio and take those proceeds and reinvest them or do other things with them, as well as the opportunity to grow on a go-forward basis. I think from a timing perspective, obviously the board's looking at all sorts of options and we're preparing to go down that path and have a number of good conversations currently in the works and we're excited about what that opportunity could be for us. Thank you.

Thank you. Our next question is a follow-up from Rich Anderson of SMBC. Rich, your line is open again.

Thank you. Just one question, promise. When you think about cap rates in the marketplace, and let's say a one-off deal is a five cap, just to use a round number, what is your experience on portfolio premiums? And if you were to be a buyer or seller, what type of lower cap rate from a five would you be interested in?

in making a deal? That's a very specific question you're asking there, so we'll try to be a bit broader on that. I think in the marketplace, in the MOB space, you certainly have seen portfolio premiums take place. We've talked extensively as we're announcing our acquisitions we've been very much a buyer of single assets that typically gives 25 to 50 basis points more cap rates, at least in the current environment, on top of which we typically get another, call it 25 to 35 basis points of synergies from our property management platform. So I think when we look at the current marketplace over the last six to nine months, as you've seen with some of our peers and some of the other transactions, there's certainly a 25 to call it 50 basis points premium for portfolio assets. Sometimes even more than that is there's the ability to acquire a platform or to be able to partner with somebody and see that growth opportunity go forward from there.

Does that premium get bigger, much bigger as the portfolio gets bigger, or is 50 kind of the – the ceiling? Could it be much more than that if you're getting into a much larger type of transaction?

You know, I think that's probably a question that we haven't seen, you know, super large portfolio. I mean, I think the biggest one that we've seen was certainly by our good friends out of Milwaukee that they did up there. You know, I think it's a very high quality transaction and I think you certainly saw very competitive pricing around there, you know, relative to the individual assets. I think it's a little bit hard to to compare on it, but high-quality assets, as you can see, are very well-valued, especially when you get a good operating partner that can help you grow in the space. It's not just that. I think we've seen it, like I said, with the announcement of both acquisitions as well as announcement of joint ventures with really two to three other operators that we've seen just this quarter alone in this space. I think it's hard to project exactly what it is, but it's certainly in the 25 to 50 basis points for the deals we've seen, but truly large deals have been relatively infrequent in this space. Okay. Thanks very much. Appreciate it. Thanks, Rich.

Thank you. As a final reminder, if you'd like to ask a question, please press star followed by one on your telephone keypad now. We have no further questions in the queue, so I'll hand back to the management for closing remarks.

Great. Well, you know, I think we just want to thank everybody for joining us on the call today. And, you know, we look forward to having additional conversations next week as part of the virtual Mayree session and appreciate all your interest in HTA and the MLB space.

Thanks very much for your time. Thank you.

This concludes today's call. Thank you for joining us. You may now disconnect your lines.