Good morning, and welcome to the Healthcare Realty Trust fourth quarter financial results 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 your question, you may Press Star, then one on your touchtone phone. To withdraw your question, please press Star, then two. Please note this event is being recorded. I'd now like to turn the conference over to Kara Smith. Please go ahead.
Thank you for joining us today for Healthcare Realty's fourth quarter 2021 earnings conference call. Joining me on the call today are Todd Meredith, Rob Hull, and Kris Douglas. A reminder that, except for the historical information contained within, the matters discussed in this call may contain forward-looking statements that involve estimates, assumptions, risks, and uncertainties. These risks are more specifically discussed in a Form 10-K filed with the SEC for the year ended 31st December 2021. These forward-looking statements represent the company's judgment as of the date of this call. The company disclaims any obligation to update this forward-looking material. The matters discussed in this call may also contain certain non-GAAP financial measures, such as funds from operations, FFO, normalized FFO per share, normalized FFO per share, funds available for distribution or FAD, net operating income, NOI, EBITDA, and adjusted EBITDA.
A reconciliation of these measures to the most comparable GAAP financial measures may be found in the company's earnings press release for the fourth quarter ended 31st December 2021. The company's earnings press release, supplemental information, and Form 10-K are available on the company's website. I'll now turn the call over to our Chief Executive Officer, Todd Meredith.
Thank you, Kara, and thank you everyone for joining us for our fourth quarter 2021 earnings call. This morning, we reported Normalized FFO per share growth of 4% for 2021 over 2020. This solid growth was driven in part by our investment momentum, including record acquisitions of $756 million in 2021. These results were further compounded by the stability of our annual escalators, high tenant retention, and robust cash leasing spreads. Based on the strength of our 2021 results and our confident outlook for 2022, our board of directors authorized a 2.5% increase to our dividend. We have communicated our goal to grow the dividend for some time, and we are pleased to report this progress.
Going forward, our ability to generate long-term sustainable dividend growth is bolstered by the quality of our portfolio and inherent strength of our platform, both the internal growth engine and our external investment model. Our targeted investment approach delivered superior capital deployment opportunities in 2021. Cap rates for many portfolios priced below 5% last year, but did not line up well enough with our criteria and market preferences. In contrast, we acquired 44 MOBs in our target markets at an average cap rate of 5.3%. With these investments, we increased density in our existing markets, adding to clusters in high growth MSAs like Denver, Nashville, San Antonio, and Atlanta. It's worth noting the progress we've made in just the last three years. At the end of 2018, we had just two markets where we owned over 1 million sq ft: Dallas and Seattle.
Today, we have five markets with over 1 million sq ft, including the additions of Nashville, Denver, and Los Angeles. We also supplement our densification approach by selectively entering new target markets. San Diego is a burgeoning success story for us, building on our nearby Los Angeles portfolio. We entered the San Diego market in 2019 with two MOB acquisitions, and we purchased two more in 2021, bringing us to $180 million invested in four properties today. Our market-focused investment strategy naturally increases our local knowledge and leads to follow-on investments. Most importantly, it translates to improved operational efficiency and leasing velocity. In terms of operational performance, the fourth quarter showed signs of momentum. Our build-out times for new tenants stabilized in the fourth quarter.
This, coupled with inherent demand from our tenants, led to a 40 basis point sequential increase in occupancy. In 2022, we expect occupancy gains to steadily improve same-store NOI growth, with the potential to exceed our embedded rent escalators of just under 3%. As it relates to inflation, we have a strong track record of pushing rents in markets where rising replacement costs and supply constraints enable outsized rent growth. In 2021, two-thirds of our cash leasing spreads were between 3% and 4%, and over a fifth exceeded 4%. Our market focus and the density of our clusters strengthens our pricing power. Although healthcare providers have faced many challenges, they're doing well financially. Healthcare providers continue to report strong earnings as improving payer mix more than offsets inflationary pressures, including labor and supply costs.
As cost control remains a focus for hospitals, the shift to outpatient becomes even more critical as they look to defend and grow their market share. We see this firsthand, and we're engaged in more development and redevelopment conversations than ever before. 2021 was a remarkable year for Healthcare Realty. Our success reflects the quality of our team and their collective efforts to make HR the clear choice for healthcare providers. Looking at 2022 and beyond, the quality of our portfolio, combined with the strength of our platform, will drive attractive FFO per share growth and enable us to sustainably increase our dividend. I'll now turn it over to Rob to provide more detail on our investment activity. Rob?
Thanks, Todd, and thanks everyone for joining us today. 2021 was a record year for investment activity at Healthcare Realty. In 38 separate transactions, we acquired 44 buildings totaling 2.1 million sq ft for $756 million at a blended cap rate of 5.3%. All of these acquisitions were in our target markets, with nearly 75% of them expanding a cluster. Property clusters generate leasing and operational benefits that over time drive incremental growth beyond our going and cap rates and spur future acquisition and development activity. Our work is the product of our team's intentional focus on identifying buildings we want to own through data-driven market research, deep industry relationships, and local market knowledge. Further, about 60% of these purchases were directly sourced through long-standing relationships formed by our team.
Notably, in Denver, we acquired eight MOBs totaling 510,000 sq ft. We now have 20 properties totaling 1.3 million sq ft in this fast-growing market, which is now the 5th largest in our portfolio. We are able to offer prospective tenants an expanded mix of varying price points with on, adjacent, and off-campus buildings. Our fourth quarter activity of $298 million pushed us well past the $700 million high end of our full year guidance. We targeted each acquisition because of its location in a fast-growing market with an opportunity to build scale alongside a leading healthcare provider. Two-thirds of these acquisitions expanded existing clusters. As an example, in Nashville, we acquired four buildings and a three acre land parcel for future development for $106 million.
Two of these buildings represented our initial investment adjacent to two separate hospital campuses, where we see a path to add nearby complementary buildings over time. The other two were recently built and sit strategically off campus between two Ascension Saint Thomas hospitals. In this corridor, we now own eight buildings and are developing a ninth that together will total over 1 million sq ft. In San Antonio, we acquired five properties for $57 million through our joint venture with TIAA. Four of these buildings are adjacent to Tenet Healthcare North Central Baptist Hospital and within a mile of a 120,000 sq ft MOB we developed and own adjacent to HCA Healthcare's Methodist Stone Oak Hospital. We now own 260,000 sq ft in this cluster and almost 700,000 sq ft in San Antonio overall.
Dispositions remain an attractive source of funds for reinvestment. We selectively sell properties to continually refine our portfolio, particularly in markets or clusters where we no longer see a clear path for future growth. For the year, property sales totaled $188 million at a blended cap rate of 4.9%. Our development team remains active. We are nearing completion of a $34 million redevelopment in Memphis, where we are 99% occupied, and our $12 million 100% leased building expansion in Tacoma is scheduled for completion at the end of this year. At our Nashville redevelopment, demolition work continues and vertical construction is expected to commence later this summer. This redevelopment is 50% pre-leased with notable additional leasing activity and is part of the over 1 million sq ft in the Nashville corridor I mentioned earlier.
Looking ahead, we are finalizing terms with the leading health system in Texas for an on-campus development that we expect to commence later this year. Once completed, this will be our second building on this campus and the fourth in this cluster for a total of 350,000 sq ft. We are also engaged with two other health systems in Georgia and North Carolina regarding several projects as each system looks to build market share by continuing to invest in outpatient services. We have been intentional in growing our investment volumes over the past three years, building our pipeline, expanding our team, and refining our processes. This culminated in last year's acquisition volumes of over $750 million.
Our investments team continues to assemble a robust pipeline as we start 2022 with one acquisition completed to date and over $300 million under contract or LOI that is expected to close in the first half of the year. Our acquisition guidance of $500 million-$750 million represents our current expectations for 2022 as we continue to grow our pipeline. Now I'll turn it over to Chris.
Thanks, Rob. Improving same-store performance and an increased acquisition pace throughout 2021 generated reliably strong results. Normalized FFO per share increased 4% for the full year and 5.4% for the quarter.
Looking forward, we expect earnings momentum to continue, which supported the dividend increase that was announced last week. Fourth quarter same-store NOI grew 2.7%, excluding the deferral reserves that were repaid in 2020. Our full year same store NOI was 2.3%. This includes the impact of a 30 basis point decrease in average occupancy, which has a 2-for-1 basis point impact on our same store NOI growth. Sequentially, our occupancy rebounded in the fourth quarter with a 40 basis point increase in period end same store occupancy. This absorption will benefit us moving into 2022 and allow our same store NOI growth to return to levels at or above our contractual escalators of approximately 3%. Operating expenses increased 1.6% this quarter. This was below our historical average as a result of successful property tax appeals in Colorado.
When normalizing for these tax refunds, operating expenses increased 2.4%, which was in line with our full-year operating expense growth. The property tax refunds were credited to our tenant's expense reimbursement, so there was only marginal benefit to NOI growth from these appeals. Embedded portfolio growth drivers remain strong, which is a positive signal for future growth. Same store cash leasing spreads were 3.6% for the full year, well above our in-place contractual escalators of 2.93%. The consistency of our cash leasing spreads and rent bumps over the past two years shows the resiliency of our asset class and benefits of our high quality portfolio in major growth markets. As we look ahead, we see rising demand for outpatient space to serve the aging population balanced with a consistent but reliably low supply of new construction.
This backdrop supports the steady internal growth investors have come to expect and appreciate from MOBs. Regarding our balance sheet and liquidity, we continue to maintain a flexible capital structure to accretively fund our external investments. During the quarter, we settled $90 million of forward equity, sold $74 million of properties, and generated $40 million of proceeds from our joint venture. We ended the year with Debt-to-EBITDA within our guidance range at 5.4x . The FAD payout ratio for 2021 was 88.1%, below the 90% target we had identified at the beginning of the year. We expect our portfolio to deliver consistent growth in the years ahead, which will drive long-term improvement in our payout ratio. With this backdrop, our board approved a 2.5% dividend increase last week.
Looking ahead, the visible internal growth drivers in our portfolio, combined with our flexible balance sheet, attractive investment pipeline, and consistency of demand for outpatient care, will generate meaningful per share growth in 2022 and beyond. Operator, we're now ready to open the line for questions.
We will now begin the question-and-answer session. To ask your question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question today comes from Juan Sanabria with BMO Capital Markets. Please go ahead.
Hi, good morning. Thanks for the time. I just wanted to start with the investment pipeline. If you could just give us a little color on the split between on and off, and how much is maybe thought of related to the TIAA joint venture, and if those numbers, the $5-$750, are gross or not?
Yeah. Related to the pipeline, I mean, I think if you look at, you know, we're running kind of going forward, looking at, you know, similar weightings as you've seen us do over the past, you know, several years and kind of in that 75-25 range. I think that you'll continue to see us do that this year. Excuse me. Related to the joint venture, I think that, you know, as we've done since we started, that generally been a little more heavily weighted towards off-campus. Some more of that will be done in the joint venture as we've done in the past.
The acquisition volume is gross when we talk about $756 million for 2021. That's how we have been consistently reporting it, you know, since we formed the JV in 2020.
Okay. How much would you expect to do via the joint venture? Like $200 million-ish, plus or minus? Is that fair to assume?
Yes. That's certainly how we really agreed to a go-forward strategy in that joint venture. Obviously, it's flexible. That's just a target. So far we've been at or above target, on average. We're 15 months or so into that. So far so good. We think it could be that, and I think it could certainly expand as we continue to expand our appetite and our pipeline.
Okay. Just on the development pipeline, seems like you guys have good momentum there. You've got $25 million of land on the balance sheet. How big should we think of ground up development fee kind of on an annual basis, either spend or completions over time as that strategy matures.
Yeah. I'd say that, you know, generally we're looking to start between $75 million and $125 million of new projects year in and year out. I think as we build up those starts, you know, you'll start to see our spend trend in that direction. We're having a number of positive conversations with health systems. We're optimistic that you will see a couple of starts this year that'll move us towards that consistent level of spend. You know, as we've said before, our embedded pipeline is really where we draw most of our developments from. Those are opportunities that we control through either relationships or current land holdings or buildings that we own, expansions of buildings like we're doing in Tacoma right now.
We're expanding the building by 25,000 sq ft based on demand. I think you can continue to see us develop in that manner, not necessarily going out and chasing RFPs.
Just one last quick modeling one, if you don't mind. Any color you can provide on G&A expectations for 2022? I'm not sure if there's any pop given the return of travel, hopefully as COVID here fades or not.
Yeah. We provide some detail on that in our components of expected FFO on the last page of our supplemental page 29.
Awesome.
You can see some more detail there. There is an item of note on the G&A on that page that we did adjust the incentive comp program, stock-based comp, and moved from a kind of backward-looking restricted stock program to a forward-looking RSU program that is more consistent in the industry. As a result of that, we are seeing about a $3.5 million increase in G&A this year just from kind of moving from a backward-looking to a forward-looking program. That and then also, you know, we have some expectation of increase in incentive comp as we see performance in same store NOI and leasing continue to pick up.
Those are kind of the major drivers that you see based off of that guidance for G&A for next year.
Apologies there. We've looked at, but thanks for the color. Thank you, guys.
Twine.
Our next question comes from Jordan Sadler with KeyBanc Capital Markets. Please go ahead.
Thanks, good morning. I just wanted to circle up on sort of, you know, the releasing spreads that you're seeing and maybe just the dialogue that you're having with tenants, you know, amidst sort of the spike in inflation that we've seen, you know, really that started obviously in the back half of last year, but, you know, obviously with the 7.5% print in CPI in January. What's that dialogue like with the tenant when you're seeing sort of inflation spike at that level, and then you're sort of negotiating, you know, new leases? Are you trying to push tenants toward that higher rate to offset the inflation, at least on, you know, renewal rates?
You know, maybe any sort of dialogue that you're having as it relates to, you know, even escalators would be helpful. Thank you.
Yeah. Yeah, Jordan, this is Chris. As we look at it, you're right that the prints that you're starting to see right now on inflation are going up. But we think we kind of look at it over a little bit of a multiyear timeframe, 'cause you know, inflation's coming off of 7%, but it's with some lows that came, you know, going back to 2020. But if you look over, you know, two or three years, inflation's kind of running 3%-4%. If you look over that same timeframe, you know, we benefited, and that's one of the things I think people appreciate of MOB is the consistency kind of throughout the cycles.
We didn't see the drop that you saw in other sectors, and we're not really having to look for that same rebound. If you look over that same 2- 3year period, where inflation's kind of run 3%-4%, our cash leasing spreads have been running in that same range, and we've seen some marginal increase in our rent bumps over that timeframe as well. I think that kind of speaks a little bit to the consistent demand for medical office.
You know, over time, you know, if inflation runs through and it does start to increase replacement cost, we do think that provides a backdrop for you know continued you know uplift in terms of our rental rates.
Okay. Then just to follow up on the G&A, maybe for you, Chris, as well, we'll have the $3.5 million of incremental expense you framed up as a result of the change in the structure here. Is that going to burn off? Is that the number we should look at 2023 as sort of a $3.5 million dollar deduct versus 2022? 'Cause that's sort of the overlap or doubling.
No, it doesn't quite match up like that. It really has to do with what's burning off and what's coming on. Really what you end up this year is a little bit of a double up as you end the old program at the end of last year. It's a balance with what the amortization, 'cause we have five-year amortization of all of our old equity incentive programs. As those amortizations burn off, it will be the net against that 3/1/2. That 3/1/2 Will be kind of the run rate that you will see each year for our RSUs. We will see a decline, you know, it won't be the same $3.5 million increase that we're seeing this year.
It's not a dollar-for-dollar reduction of the old plan burning off against the kind of that consistent $3.5 million per year moving forward. It can take
How much is in the number in 2022 for the old plan? How about that? Because I'm trying to figure out how much G&A should fall going forward because you're not gonna have two plans in place, right?
No, you don't. That's what I'm saying. It really goes to that amortization, and so it's gonna be by year, depending on you kind of have to go back and look at five years ago when those awards were given, what were the size of them compared to the performance, and so what's the amortization that we'll build off. You know, off the top of my head, you know, what will burn off at the end of next year is somewhere between $1.5 million-$2 million. You know, happy to follow up and get more precise on that, offline.
You mean this year, right? Burning off at the end of 2022.
Yes. Yep. I'm still thinking and talking 2021.
Well, technically, I guess you are talking 2021, correct?
Yeah.
All right. Thanks, guys.
Thanks, Jordan.
Our next question comes from Nick Joseph with Citi. Please go ahead.
Thanks. You know, maybe a similar question on inflation, but just in terms of if you're seeing any change to buyer interest or underwriting for deals, either given inflation expectations or the rate outlook, if you've seen anything change over the past few months relative to where it was for most of last year.
No, I would say, Nick, generally not. I think, you know, MOB, the sector itself is enjoying, you know, obviously a lot of demand, a lot of capital. I think certainly some people may take that and say, we can underwrite a little more aggressively just because of the lift. Certainly, I think our view is, as we described, we see some potential for occupancy pickup in 2022, but also continued strength in our cash leasing spread. All those things help, and I think that just bolsters the demand for MOB.
I think it's important what Chris said, that people that come into this space have to have that perspective that, hey, we didn't drop in 20, and therefore, this is about maintaining that strength rather than, you know, going through the cycles of down 10, up 10, and that kind of thing. For us, you know, one of the trends that we've seen, you know, just watching our cash leasing spreads as a sort of indicator is looking at all the markets. If you kind of look across about 30 markets where year-to-year we have renewal activity that would give you cash leasing spread data, we're really seeing nice strength of those that are markets where we have above 4% average cash leasing spreads for the year. You know, that's holding steady and growing a little bit.
Even above seven, if you use that, just thinking about kind of current inflation numbers, you know, that strength is starting to build. Conversely, I think just as important, and if you can see this in our cash leasing spread data in our supplemental where we break it down, those that are negative cash leasing spreads, we really only had one market out of 30 that had an average cash leasing spread that was negative. It was a pretty small amount of square footage, but, you know, just looking at sort of these indicators. We're seeing that strength. That's an improvement over the last five years, where we've had a few more markets. You saw, I think, over only 4% of our leases had negative cash leasing spreads in all of 2021.
Really positive strength there, and you're seeing a lot more go to that middle of 3-4 average cash leasing spreads. A lot of positive trends that I think really lead to potential for strength. You know, Nashville, we were looking at this, Nashville is a great example. In the last five years, the average cash leasing spread of each year has not been less than 6%. That's where you really see market dynamics, constrained supply, rising replacement cost really driving the opportunity to use your pricing power and really move to market cost and replacement cost. You know, this. We obviously don't wanna get into any kind of price gouging kind of thinking.
We wanna just work with, you know, what the real costs are that we're all facing, and I think that really will cause the lift naturally, along with supply constraint.
Thanks. I appreciate that. Maybe just on operations. I think you mentioned five markets with over 1 million sq ft and the benefits associated with that. Is 1 million kind of the magic number? Or where do you start to see those benefits of scale from?
Yeah.
within a MSA?
Yeah, it's a good question. You know, and if we break it down further, I think Rob referred to a cluster in San Antonio that broke through 250. That's certainly a nice mark. He mentioned the corridor here in Nashville that's, I think we'll stretch that to about three miles rather than our two mile cluster definition, over 1 million feet. I think 500,000 is clearly a break point that we look for. We're in about 12 markets with over 500,000 feet, so that's very strong as well. That represents probably nearly 70% of our NOI, which is very strong.
We certainly, as you've heard all, you know, all the comments, we're always looking to densify, get that operational efficiency, get the leasing flow, stronger, and then we see it kind of generating repeat investment and development opportunity, acquisition and development. We do see a lot of benefits through that. You'll see us continue to drive that for sure.
Thank you.
Our next question comes from Richard Anderson with SMBC Nikko. Please go ahead.
Hey, thanks. Good morning, out there. So I just wanna understand a little bit better on the inflation side. Is there a point that the market is kind of adjusting naturally to the inflation pressures that you're not explicitly using inflation as a strategy to reprice your rents? Is that the way to think about it? Like you're just taking what the market's giving you or are you using it as a negotiating tool at the risk of, you know, avoiding a gouging scenario as you described?
Well, I think you certainly use, you know, all the things that are at play, and inflation is clearly front and center for everyone, and you feel it in supply costs, you know, replacement costs. It's not, you know, just sort of flagrantly using it to gouge, but it's just saying, "Hey, these are..." I mean, a lot of times we're building out, designing, building out a suite for a tenant, and those costs are just up, so they see that cost increase. But clearly, we're always, you know, pushing on those rents where we think it makes sense, but it's a balance between retaining tenants, attracting tenants, you know, really watching where market rents can be.
It's a balance, as you know, and obviously we work with sort of a different dynamic in the MOB business where you're working with these independent groups who also have very strong ties and productive relationships with the hospital that you're associated with. Again, you know, if you start pushing beyond the reasonable level, you know, it can backfire on you. It's navigating through that, but using the real rise in cost pressures to your advantage. For some-
Do you think you're above the market in any places? Like, are you able to get above market or you kind of just follow the market?
We think we generally follow the market, and we say that because if you look at the majority of our cash leasing spreads tend to be 3%-4%, and we think that's very much in line, as Chris said, of a little bit longer view of where inflation has been, especially when you talk about replacement costs, building costs. You know, that easily runs 4% on average over an extended time period.
Rich, I might add there, as you think about the inflation, you kind of have to break it into the different buckets of where it may be showing up. Inside of our operating expenses, you know, for the year, we were at almost 2.5%, which is kind of at the higher end of our historical average. You know, we'll have to watch what happens this year, but it could trend up, you know, a bit from there. We have 90% of our leases have some type of pass-through of operating expenses. That is getting passed through and picked up by the tenant, and that's beyond what we're talking about in terms of base rent and cash leasing spreads.
A second piece is we are looking at re-leasing and frankly, probably more acute with new leases, is that we're typically providing an allowance for the TI to the tenant. Many times, I'd say almost most of the times, the tenants end up coming out of pocket for TI costs over and above our allowance. If there is inflation in terms of the construction costs for the build-out, the tenant may already be absorbing that, but not being reflected inside of our rents. Now, you know, if we're being asked to take on more of that TI, we certainly will be looking, you know, for a commensurate return for that.
We run everything on an IRR basis, and so that's where you could see some rent increases. I guess just wanted to kind of point out there that there's multiple places that it may show up, and may not all be, you know, flowing through as you look at cash leasing spreads.
Are you at all tempted to intertwine CPI into escalators going forward, or is that just too short-sighted and you think things will settle down? It's better to have primarily a fixed bump sort of structure.
We think because of our portfolio and multi-tenant nature, you know, much shorter lease terms, operating nature of our portfolio, the fixed bumps work better. You get more opportunities more quickly, obviously, to reset those through the cash leasing spread. I think anytime we're talking about something that would be sizable leases, single tenant or otherwise, that are, you know, 10 years plus, I think that starts to become a real discussion. Then, of course, you get into the, you know, the floor and the cap discussion beyond that. I think for the vast majority of what we do, we're comfortable with fixed on the shorter-term lease roll that we have.
Okay. Really last question from me. You know, disposition guidance is $100 million or so. You started the conversation off talking about portfolio deals and you know, portfolio premiums in terms of cap rates. I'm curious. Do you have anything in your portfolio that you could sell it you know, a big chunk of it all at once and get a you know, a substantially lower cap rate out of that assuming you had a you know, kind of a use of proceeds immediately thereafter. Is that something that you kind of have keeping warm on the sideline in case it's needed, or are you kind of doing the one-off you know, asset by asset model like you are on the acquisition side?
I think that, you know, we're continuing on with the kind of asset by asset. I mean, we're, you know, selectively optimizing the portfolio where we can, you know, looking at markets, where we wanna be and grow and those that we don't want to be in. You know, looking if there's a good opportunity in the strength of this market to exit that market or even a cluster, we're taking advantage of that. Then turn around and using it as a good source of funds for the pipeline that we have. We have a strong pipeline and looking at that as another way to translate that into an accretive transaction.
Rich, I would also add that I wouldn't say there's enough in our portfolio that would really garner that amount of scale. You know, where you've seen some of these portfolios in the hundreds of millions, you know, half a billion or more, we just don't have that that we're looking to rotate out of. It's more what Rob said, it's more targeted. I think if we were to do something from a capital recycling rotation, accretive, capital raise standpoint, the JV is always an option for that. You know, we looked at that early on with the JV of doing a seed portfolio. We can always do that. At this point, that's not really, you know, the plan.
Okay, great. Thanks, guys.
Thanks, Rich.
Our next question will come from Omotayo Okusanya with Credit Suisse. Please go ahead.
Hi, yes. Good afternoon, everyone. My question is more around, again, the, you know, the backdrop of the story in the MOB space again is kind of, you know, we're kind of in the middle of the aging baby boomers, which should drive demand for MOBs. But then taking a look at 2022 guidance, again, there really isn't any real growth in your same-store occupancy, 2022 versus 2021. There really isn't any real growth in kind of development outlook for 2022 versus 2021. I'm just kind of curious against that backdrop why we don't see some acceleration in either of those two trends.
Yeah, Taya, I'll speak to the occupancy. You know, when we give our occupancy guidance, all that's on a trailing twelve-month basis. It's kind of a trough to peak issue that you're running through throughout the year, given that we kind of bottomed out there in the third quarter of 2021 in terms of our occupancy. We are certainly expecting sequential absorption throughout the year, but when you kind of run that through the trailing twelve months, that's kind of the phenomenon that runs through the guidance. We certainly expect to be driving absorption.
Maybe another place to see that in our components of expected FFO page in our supplemental is the same-store guidance. The upside of that range currently is 3.25, and clearly that from our view is upside from occupancy adding to the fundamentals of the portfolio. Certainly we have occupancy in our sights and expect you heard us talk about some pickup in the fourth quarter and continued optimism about that in 2022. That's certainly in our view. I think on the development side, you know, development is one of these long-term plant the seeds, you know, you're farming the field, and it takes a long time. As I mentioned, and I think Rob added to, we've got more conversations than ever, and it's more than just conversations.
We've got several very active things that we'll be adding. You've seen us just in the last couple quarters add a couple things to get our current active pipeline over $100 million. We think that will grow this year for sure. You know, keeping a very steady pace perfectly every year is always a challenge, but we're very optimistic about it. I would say on both fronts, we're much more positive than maybe you've picked up so far.
Gotcha. I guess maybe providing that data on a trailing three month basis going forward would also kind of be helpful just for us to kind of see that progression. Again, I think another follow-up question I do have is, again, the same-store cash NOI guidance of 2.25%-3.25%, what would result in the lower end of that guidance range? Like, will you be closer to two versus higher, but versus closer to three?
Yeah, that would be, you know, if the occupancy didn't rebound as fast or if we did see an uptick in operating expenses. You know, that's not really what we are expecting, and we do have the pass-throughs that I talked about earlier that can help to offset that. It's really kind of going. That's kind of where we are today and the expectation is coming off of kind of those numbers, you know, through the year, of growing back up towards that top end. That's also kind of a trailing twelve months that we look at.
You've gotta get some of those historical comps out of your trailing twelve months to get up to the, you know, to the top end through the balance of the year.
Okay, that's helpful. Last one from me. The WALT for lease renewals versus new leases is kind of dramatically different. I mean, renewal is about four years, new lease is about 6.5 years. I mean, I'm just kind of curious why there's such a big difference between the two.
Yeah, it really has a lot to do with the build-out of the space. You know, on a renewal, there's minimal TI that's associated with that. You know, hopefully just paint and carpet, you know, unless they're looking to do something a bit more substantial. But on a new lease, there's gonna be some substantial amount of TI, as I mentioned earlier, a lot of times the tenants are coming out of pocket for a portion of that. So as they start looking at making that commitment and thinking about the amount of capital they're putting in place, and so the you know how long they're looking to kinda amortize that cost and that commitment to this new location, it just naturally ends up being a longer lease term.
Ty, I would say we've said this for a long time, and I think if you pulled up our supplemental from five years ago, you'd see a very similar pattern.
Yep.
It's really behavioral. It's tenant behavior based on the elements that Chris just described. We're not out trying to, you know, push longer on the new versus renewal, but it just makes sense given what's going on, the build-out, the recouping of initial investment.
Gotcha. Okay. Sounds good.
Ty.
Our next question comes from Michael Mueller with J.P. Morgan. Please go ahead.
I guess first, what are the attributes of the 11% or so of leases where you didn't get at least the 3% bump on them?
I would say it's just, you know, specifics of any specific deal. You know, we like to say we keep up with market, but you also have to, you know, recognize the competitive dynamics of where you are in the lease. You know, it's one of those. It's kinda like a batting average. You know, you're not gonna connect or hit the home run every time. We think that kinda what we've shown over the years with the way we've refined the portfolio is that we've been able to increase the propensity of those positive, you know, cash leasing spreads that's really helped us over time improve the average.
Mike, maybe just to give you an example, I mentioned there was really only one market where we had negative cash leasing spreads in all of 2021, and that happened to be Miami. You would look back. If you look back at the prior four years, our cash leasing spreads on average were between 4.4 and 8.6. It's not as though we're worried that Miami is, you know, suddenly in trouble. It was a very small volume. It was actually the smallest volume of renewals that would have spreads in those five years. Sometimes it just, as Chris said, comes down to a small data set, a unique situation. Not a concern.
Got it. Todd, your comment, I think the term you threw out there was sustainable dividend increases. I guess on a go-forward basis, how should we think about dividend increases? Does the board want this to be an annual occurrence or just periodically but more regular than what it has been? How should we be thinking about that?
Sure. You know, last year was our initial increase in a long time, a little under 1%, just to signal how important we think that is. This year, obviously getting more on a run rate level of growth. That's certainly a view that we wanna be reviewing that and doing that annually, you know, recommending that to the board, and the board certainly has that objective. Obviously it's an evaluation every year. I would say absolutely a focus on that, but you know, clearly also a goal of reducing the FAD payout ratio, which Chris talked about. It's a combination of all that, but certainly the objective is to make that annual.
Got it. Okay. Thank you.
Thanks, Mike.
Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Todd Meredith for any closing remarks.
Thank you, everybody, for joining us today, and we'll look forward to seeing many of you at some of the upcoming conferences here in the next month or two. Take care.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.