Earnings Call: Q4 2020

Feb 11, 2021

day, and welcome to the Healthcare Realty Trust 4th Quarter Financial Results Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Todd Meredith, CEO. Please go ahead. Thank you, Grant. With me on the call today are Carla Baca, Bethany Mancini, Rob Hull and Chris Douglas. Carla, if you would start with the disclaimer. 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 ks filed with the SEC for the year ended December 31, 2020. 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, FFO per share, normalized FFO per share, funds available for distribution, FADs, 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 Q4 ended December 31, 2020. The company's earnings press release, supplemental information and Form 10 ks are available on the company's website. Thank you, Carla. First, I want to take a moment to recognize the hard work and dedication of our employees and our tenants over the last year. As you know, many of our buildings are key locations in the fight against COVID-nineteen. Front line staff at these properties continue to risk their well-being and they deserve our thanks. It has been a privilege providing space where doctors and nurses can treat patients. Looking ahead, we are optimistic the vaccine rollout will continue to improve morale and safety. Shifting to Healthcare Realty's performance, 2020 was a challenging but successful year. In the backdrop of a pandemic, steady internal growth and accelerating external volume generated per share growth of about 3% for FFO and over 4% for FAD. Our portfolio quality was validated by stable operating metrics during a volatile year. Despite being below our initial expectations, we are pleased with 2% same store NOI growth given the challenges of 2020. As we move into 'twenty one, outpatient volumes are stabilizing and our leasing team reports a healthy level of new inquiries and property tours. Providers are reengaging in expansion plans that were put on hold during the pandemic. As these trends take hold, we expect occupancy to improve and NOI growth to rebound to our historical average of around 3%. Complementing our stable operational performance, investment activity was robust in 2020, thanks to our experienced team and a proactive sourcing model. In a year where many marketed deals and investors were sidelined, we demonstrated our ability to ramp up acquisition volume. In total, we acquired $547,000,000 of high quality accretive MOBs. This equates to about 10% of the company's enterprise value and will contribute meaningfully to bottom line growth in 'twenty one. Going forward, we see the ability to keep up a similar pace without sacrificing quality. Rather than rely on the flow of marketed deals, we use a targeted relationship based sourcing model. We focus on properties that complement our existing assets where we can leverage our local market knowledge and reputation. This process often involves years of pursuing properties that are not for sale. These efforts have paid off increasingly. We completed 2 dozen transactions in 12 markets last year, including one new market, San Diego. The majority of these properties were sourced through direct dialogue with sellers instead of widely marketed offerings. Our ability to sustain a higher acquisition pace is bolstered by our newly formed venture with teachers. This vehicle expands our strike zone incrementally and is reflected in the composition of our first four JV acquisitions, which includes 2 off campus properties and 2 on campus properties, one being value add and the other, Ultracore. Taken as a whole, internal operations and external investment potential have never been better. We see this we saw this HR posted another year of positive FFO and FAD per share growth. Based on reliable internal growth, meaningful external growth, low leverage and flexible capital options, the Healthcare Realty Board declared a dividend increase for the first time in many years. Restarting dividend growth marks a new beginning for Healthcare Realty. With a bright outlook for solid performance in 'twenty one and the years ahead, we see a clear path to keep lowering the dividend payout ratio even as we grow the dividend. Now, I'll turn it over to Bethany. Thank you, Todd. I'd like to provide an overview of the current state of healthcare and government health policy. Hospitals and physicians continue to prove their resilience in contending with the impact of COVID. They are hopeful that with better treatment and an increasing number of vaccinations, healthcare services will see a more normalized operating environment in the coming months. For hospitals in 2020, service volumes fell primarily among lower acuity underinsured patients, particularly in emergency departments, while a higher level of acute admissions resulted in net revenue growth for most companies for the year. As COVID cases moderate, hospitals' patient volume, acuity and revenue will likely return to more consistent growth patterns. For physicians, outpatient visits are approaching pre COVID levels. After the spike in telemedicine during the height of the pandemic, the majority of care going forward is expected to be done in person. The advantage of telemedicine is naturally constrained to lower acuity services. It will likely remain a tool for efficiency, including some services that previously went unreimbursed. A few other notable points we've learned from COVID over the past year. 1st, the vast majority of elective outpatient 2nd, the pandemic revealed the importance of our tenants having strong rent coverage. This underpins the stability of medical office even in rare instances when health services are disrupted. Physicians are working through the pent up need for outpatient care that was delayed in 2020 and the underlying trend of rising demand for outpatient services remains intact. And 3rd, the hospital ecosystem is critical to the well-being of our society, made evident by the extent the federal government will go to sustain hospitals and physicians and safeguard people's access to healthcare services. Federal health policy provided a meaningful support to healthcare providers in 2020. Through increases in Medicare and Medicaid rates, forgivable loans for payroll and rent and the ongoing distribution of CARES Act relief funds. CMS regulatory updates to Medicare policy in 2021 increased payment rates across the board. The agency also included 11 new services that will be eligible for Medicare coverage in ambulatory surgery centers. In addition, CMS will phase out over 3 years their inpatient only list, which will allow providers to decide the best location, inpatient or outpatient, in which to deliver services. We expect health systems to continue to ramp up plans to use a network of MOBs and ASCs to lower costs and improve profit margins, while focusing higher acuity care in hospital settings. Looking ahead, the outlook is fairly positive for government health policy. After a busy and contentious election season, the narrow Democrat majority in both houses is expected to yield more incremental expansion of health coverage. Legislation that can pass on a simple majority under the budget reconciliation process will likely include expansion of ACA subsidies and possibly Medicaid benefits as well. Democrats' more sweeping initiatives such as Medicare for All have minimal chance of garnering the necessary 60 votes in the Senate. Hospitals and physicians should benefit from a stable commercial payer mix, a rise in the total insured population and continued support for positive rate increases in government health spending. We view any legislative or regulatory effort to lower health care costs as an advantage to outpatient settings and the development of more outpatient facilities. Healthcare Realty is positioned to benefit from these trends, combined with the backdrop of strong underlying healthcare demand and a renewed outlook for our tenants beyond COVID. Now, I will turn the call over to Rob. Thank you, Bethany. Now I will summarize Healthcare Realty's 2020 investment activity and provide our outlook for the coming year. Healthcare Realty capped off the year with a strong quarter of investing. We acquired 16 properties for $337,000,000 including 4 properties purchased for $126,000,000 under the newly established joint venture with Teachers. For the year, our volume of $547,000,000 was more than double the previous 5 year average. This is especially noteworthy given the challenges created by the pandemic. Much of our recent success comes from directly sourcing deals in markets where we already have a presence. When our investment in an area grows, so does our reputation and network. This leads to more opportunities. Last year, we acquired 29 properties in 24 transactions. 27 of these are in existing markets and nearly 3 quarters were acquired through our direct sourcing process. A great example of this process is on the north side of Atlanta. In 2017, we purchased 3 buildings on a hospital campus, totaling almost a quarter 1000000 Square Feet. Since then, we have fostered strong relationships with the health system, area building owners and influential local brokers. This past year, these relationships generated 2 acquisitions adjacent to the campus, totaling 113,000 Square Feet. We also have line of sight on several additional acquisitions, and we are talking to the hospital and local physicians about new development opportunities. Over time, we see a clear path to double the size of our cluster around this hospital to over 600,000 square feet. Increasing our scale in tight clusters drives leasing activity by keeping us in the flow of transactions. Across Los Angeles, we signed over 60 leases last year. Recently, our leasing team learned of an existing tenant in 1 of our Orange County buildings that wanted to expand into another nearby submarket, where we have recently purchased a few properties. We showed them several options, a mix of our on adjacent and off campus buildings that represent different price points. We've agreed on terms with the tenant and we expect them to execute a lease by the end of this month. As we start the year, these sourcing efforts continue to drive robust acquisition volume. To date, we have purchased 3 buildings for a total of $40,000,000 1 MOB in San Diego is located adjacent to Scripps Mercy Hospital and is fully tenanted by UC San Diego Health. The other 2 are in Dallas on a Baylor Scott and White campus where we own 2 other MOBs. Beyond these investments, we have a growing pipeline of acquisitions with several properties closing by quarter end. Given this visibility, we are setting initial 2021 guidance at $300,000,000 to $500,000,000 and we expect cap rates to average 5% to 5.8%, consistent with 2020. Shifting to development, our activity is centered on leveraging relationships with health systems and local developers to source new projects. This partnership approach taps into local expertise to facilitate strong leasing momentum and mitigate risk. In the Q4, we started the $17,000,000 redevelopment of our Landry MOB on Baylor Scott and White's Downtown Dallas campus. The project's largest tenant, Cowboys Fit, is associated with the Dallas Cowboys organization and has an agreement with the hospital to offer wellness services to its downtown employees. The affiliation will serve as a catalyst for rebranding the building as a primary destination for health and wellness in the community. In Memphis, the $30,000,000 redevelopment of an MOB anchored by Baptist continues to progress steadily. Demand for this property remains solid, with leased square footage increasing to 97%. 1 of the largest tenants, Ortho South, is set to move in later this month. We expect occupancy to stabilize towards the end of this year. Conversations with our hospital partners point to a shift back to growth and expansion. Over the next several quarters, we anticipate a few development starts. 2 of these opportunities, 1 in Nashville and 1 in Seattle, are on campuses where we already have a presence and control the development sites. As we move into 2021, I am pleased with the pace of acquisitions and the prospects for increased development activity. Our team's ability to grow critical relationships and scale in specific markets will produce sustainable quality growth. With lower disposition levels at better average cap rates than last year, our outlook for accretion from net investment activity is bright. Now, I will turn it over to Chris. Thanks, Rob. I will take a few minutes to highlight operating and financial results for the year. The stability of our quality medical office portfolio and accelerating investment volume drove solid per share growth in 2020. We are pleased to produce this growth in a year full of challenges. Normalized FFO per share increased 2.9% over 2019. We are well positioned for continued earnings growth moving into 2021, given 60% of the $547,000,000 of 20 20 acquisitions occurred in the 4th quarter. Rent and deferral collections were once again strong. We received 99% of rent and granted no new COVID-nineteen deferrals in the Q4. As of year end, we have collected $7,100,000 of the $7,200,000 of total COVID deferrals granted, indicating that most of our tenants' businesses have rebounded. Our key revenue drivers continue to be noteworthy amidst the pandemic. Multi tenant in place contractual escalators increased to 2.91%, while cash leasing spreads of 4.1% for the year remained at the upper end of our expected range. The level and consistency of these metrics demonstrates the unique desirability of our MOBs. Same store NOI growth of 2% was muted by 2 COVID-nineteen related items. 1st, parking income, which makes up less than 2% of revenue, was down 17% for the year. Excluding parking, same store NOI increased 2.6%. In 2021, we expect parking income to recover through the back half of the year. NOI was also impacted by 50 basis point reduction in average occupancy in 2020. The signs for occupancy improvement moving forward are positive. Occupancy leveled off sequentially in the 4th quarter and tour volumes are running at pre pandemic levels. This is notable given the increase in COVID-nineteen cases, hospitalizations and restrictions across the country during the Q4. The path to the backside of the pandemic may cause new leasing momentum to fluctuate and vary by market. But most importantly, our team is engaged with more health systems and providers about expansion needs. As a result, we are optimistic about the overall trajectory of occupancy for 2021. Turning to the balance sheet. Net debt to EBITDA was 5.2 times at the end of the 4th quarter, well within our target range. This ratio increased sequentially, primarily due to $337,000,000 of acquisitions in the 4th quarter. We were able to reinvest the cash from the July Mercy dispositions and then some into higher growth MOBs. Our healthy balance sheet was fortified in the quarter through refinancing, debt maturity extensions, equity issuance and JV formation. We currently have $56,000,000 of forward equity available and nearly full capacity under our $700,000,000 revolver. This provides us optionality for funding future investments while maintaining target leverage. As expected, the slowdown in new leasing activity earlier in 2020 led to lower spending on tenant improvements. This lower capital spend, combined with FFO growth, drove a 400 basis point improvement in the FAB payout ratio to 91%. This includes about $3,000,000 spent in the 4th quarter on vacant suite make ready capital, which we project will propel leasing moving forward. Excluding this capital, the FAB payout ratio would have been under 90% for the year. With occupancy poised to increase, spending on maintenance CapEx is also expected to grow. However, when combined with our stable internal growth and a robust pipeline of accretive investments, we foresee continued improvement in the fab payout ratio into the mid-80s in the coming years. An improving payout ratio, coupled with accelerating per share growth and a balanced capital structure, contributed to our decision to increase the dividend. The strength of our portfolio and the need driven demand of the medical office business bolsters our ability to grow earnings and the dividend for the years ahead. Grant, we're now ready to open the line for questions. Our first question comes from Jordan Sadler with KeyBanc Capital. Please go ahead. Hi, thank you. First, I'd just like to run through maybe what leverage looks like, Chris, on a pro form a basis, given sort of the timing of the acquisitions in the Q4? I think maybe it's a little bit overstated given that you didn't have the full contribution of NOI. Am I looking at that right? No, we actually when we Is it pro form a? Yes, it's already pro form a. So we take into account the timing adjustments already when we make that calculation. Okay. The increase from last quarter really had to do with the fact that we were sitting on so much cash last quarter waiting to redeploy it. And so as a result, it was frankly a little bit lower than what the pro form a long term expectation was then. But we're right in the range, frankly, in the bottom half of the range of what our long term target is. That's a 5.2. Now, so how should we be thinking about the funding plan for 2021 to sort of support the acquisition guide and the development guidance? Yes, it will be we'll continue to work to match fund our acquisitions and we'll be working to maintain that leverage in that 5% to 5.5% range that we're talking about. We have over $55,000,000 of equity available under the forward ATM already. We also have full availability under our line of credit. And then of course, we have the optionality that comes through the JV, which we did use to fund some of the acquisitions last year. So we have a lot of options in terms of sourcing capital, but our plan is to maintain that leverage in the low fives. Perfect. And then the driver beyond sort of in place escalators, it sounds like I'm pointing to NOI growth next year. Is it parking income that's sort of driving some incremental uplift there versus the 2020 actual? Yes. Against 2020, I think that that's correct. We were long term, we've been running high 2s plus or minus 3%. This year, we were lower for the parking income as well as some reductions in occupancy. So even if parking doesn't rebound to 2019 levels, even if it stabilizes here through the 1st few quarters and hopefully starts to see some rebound through the back half of the year, we won't see the same negative impact. It's about 50 basis points to 60 basis points of drag on NOI growth in 2020 related to parking. So that will go away. And then hopefully through the back half of the year as we do start to rebound to pre pandemic levels, it actually starts to give a boost to overall NOI growth. Our next question will come from Juan Sanbrillo with BMO Capital Markets. Please go ahead. Hi. Thanks for the time. Just hoping you could speak a little bit to the acquisition pipeline, the split between on and adjacent and off campus, and if the guidance range includes the net assumed amount for the TIAA joint venture? Yes. I think I'll answer your last question first. The guidance does include the TIA joint venture investments and where we're looking at it. I would say that really when it comes to that, I mean, it was targeted at a certain amount of investment through that joint venture. But it's too early to tell what from the pipeline is going to move in there at this time. So it's still early, but that is included in our guidance. In terms of the off campus properties, I mean, we're still largely focused on on and adjacent assets. That will be the bulk of the investing that we do. And you look at our pipeline, it is heavily weighted towards the on and adjacent assets. Where you see us investing in some off campus properties will be typically where we're building out these clusters that I mentioned, where we have a presence in that market or submarket already, significant presence, and we see an opportunity to pick up an asset where we can benefit from a higher potentially higher cap rate, but yet maybe mitigating some of that risk that we see in the off campus space because we are so plugged into the market and wanting to take advantage of the leasing bonds and the lease flow that we see from day in and day out. Great. And then maybe you could just talk a little bit to on the Jordan's question about the plan funding plan for the forward equity, any color you can give us around the expected timing of the execution on that? And if you could just give us a sense of what that costs you, the forward equity structure versus the more traditional ATM? Yes. On that, we'll use that to match find as acquisitions build. And so I could see the $56,000,000 being used a lot for the Q1 acquisitions depending on the timing and potentially moving into some of the Q2 as well. And then in terms of the overall cost, we're doing that under the ATM, so it's very cost effective and the execution cost is the same. There is some carry cost, but that carry cost of the interest that you have is pretty similar to what it will cost us under the line, so very, very cost effective. You also have the dividend cost associated with that given that they are forward contracts. But overall, you're able to lock in your equity costs at times you feel that the pricing matches up with where you're seeing your acquisitions. So you're able to kind of match fund and lock in that accretive spread for those investments. So it's been a nice source of capital for us in 2020 and expect it to be in 2021 as well. Thank you. Our next question will come from Nick Joseph with Citi. Please go ahead. Thanks. You mentioned the development starts and the conversations with tenants. So I'm wondering through those conversations, are you sensing any changes to space or needs kind of versus pre COVID development specs? No, we have not. I mean, these conversations that have sort of increased here recently picked up from where we left off really pre COVID. And we continue to have a dialogue with these health partners through COVID about these projects, but they've really turned their attention to it now. And we aren't seeing any significant changes in the space planning or their needs as a result of COVID. Thanks. And then just on the dividend, is it fair to assume that going forward that this will be revisited and maybe trend with cash flow changes? Nick, this is Todd. I think as you've seen, this has really been a multiyear path, steady improvement on the payout ratio. And clearly, that's the number one priority is to keep moving that in the right direction. Mid-80s is certainly where we'd like to get to. So it will be a year by year evaluation. I think your question goes to the longer term picture. And certainly, we're aware of a couple of different ideas there where you're looking at inflation, you're looking at our cash flow growth, you're looking at competitors' relative returns. So we're aware of all that. I think over the longer term, certainly, we see this as a first step, and we will revisit that as we sort of approach the marker of the mid-80s and, as you said, start to look at those other factors such as cash flow growth. So we're certainly viewing this as a first step and pleased to be doing that and see it growing longer term at a little higher rate than we are now for sure. Thanks. Our next question comes from Rich Anderson with SMBC. Please go ahead. Thanks. Good morning, team. So I wanted to ask about the mindset towards acquisitions and specifically the acceleration in your activity. You guys have been doing medical office for a long time. I'm wondering what happened to the environment that got you more jazzed up than in the past about starting to pull the trigger on assets? Is it cost to capital related? Is it just a consequence of past efforts that you described about reaching out to relationships? Or is there something in the marketplace that's caught your eyes that we want to be a much longer medical office now than perhaps we felt 5 or 10 years ago? Yes, Rich, good question. I would say it's a couple of things. You certainly see us evolve our strategy over time. I think if you go back and you've been around watching us for a while, we were much more relying on marketed deals, number 1. But number 2, waiting for those bigger portfolios and not huge, but maybe $100,000,000 $150,000,000 portfolios from health systems to really sort of help our volumes and then sort of waiting for the one off on campus building. And as you know, those have not proven to be fast and furious each year. So it's been a very patient game. So what you've seen us evolve over time is how can we go be more proactive in these markets, complement those on campus assets we have and build up around them. And so we've kind of slowly evolved into that and found that adjacent if you can have on and adjacent, it's a very powerful combination. You can still work very closely with the hospital and take advantage of that. But waiting just for the hospital to sell is a long game. They're great when you get them, but we kind of have figured out how you fill in around that. And as Rob said, we're now even looking at some off campus selectively that can complement that as well. So it's that from a strategic standpoint. I think the other very true reality is we know it's important to have a relevant and meaningful amount of acquisitions that will drive an interesting level and an attractive level for shareholders of earnings growth. And so it's all part of that mosaic. But I would say the key we want to focus on is making sure the quality stays high. And that is encouraging to us that we're seeing the ability to generate great returns, all these operational metrics performing very well at this higher volume. So we are very encouraged with the idea of being longer on MOB overall right now. Would you say that the hospital industry comes out of COVID weaker than it was going in? And if that or maybe the opposite, I'd leave that to you. But if that's informing you at all about your future endeavors from Yes. I wouldn't say that we see it as coming out weaker. I think like any storm that you go through, you come out and there's a period of reflection and recovery and so forth. And if anything, I think this particular COVID pandemic has underscored how critical and important hospitals are. I think there was this sort of concept that, oh, hospital, I've even heard an investor say, aren't hospitals a dying breed? Well, I think we all know that's not the case now. It's evolving. It's changing constantly. There's new technologies that increase the acuity that can be done in a hospital. And obviously, there's acuity shift into the outpatient setting over time as well. But I think if anything, we think it was there to stay. And we've always said you got to pick your points, you got to pick your partners well, pick your markets well. So that I think continues to be true and will any stress test will hurt the ones that weren't prepared. So it's all the more important that we are sharpshooters in that effort. But we think the hospital business will continue to be super strong, and we still lean towards that on an adjacent investment thesis. Our next question will come from Okusanya with Mizuho. Please go ahead. Hi, yes. Good afternoon. Congrats on the quarter and the encouraging outlook to 2021. The JV, could you talk a little bit again the deals you did in the quarter, exactly how you determined what was better suited for the JV versus what was better balance sheet? And kind of going forward, if that kind of is going to be the mantra in determining what goes where with your O2 acquisition pipeline? Yes. I think first, we're going to evaluate every opportunity and see if it's a fit for the JV that we're looking at. The 4 that we closed on in the 4th quarter, I think it was a good representation of really our intention for the JV and that was to, hey, we're going to expand our ability to invest in our volumes. The JV gave us an opportunity to maybe participate in some more off campus properties, where we can benefit from the higher cap rate, but share in some of the added risk that we see. And I think that was what was evident in the weighting of the off campus properties that we put into JV. You can see that on Page 19 of our supplemental, where the JV we point out is 30% of those properties are off campus. I also think it represents some value add property where we see we can view us sharing in some of the load of carrying empty space. And so we can share some of that load with our JV partner and carrying that un leased space. So we view that as an opportunity for the JV and one of those properties represents that. And then finally, ultra core deals, where pricing is at a premium. And I think there, the JV helps us with our economics. And I think that's represented by the for the JV going forward. But again, we are going to evaluate every opportunity and determine kind of 1 by 1 whether it's a fit. Okay. That's helpful. And then just another quick one for me. Tenants improvements and leasing costs were a little bit elevated this quarter versus, say, last quarter. Again, leasing velocity starting to come back up a little bit, but still kind of down at least versus last quarter. I mean, like TI's LC's higher in an effort to kind of start to really kind of generate leasing activity and occupancy or was this kind of something unique to 1 or 2 leases in the quarter? Yes, Tayo. I wouldn't say that it was driven by trying to drive additional occupancy. Obviously, we're always looking to do that. And if we need to spend some additional capital, we will consider it. I think as you look at it, it's really the fact that those TI commitments will vary quarter to quarter depending on the space that's being used and the requirements of the tenant. You're right that it was up a little bit this quarter, but frankly, this was not the highest quarter of the year. I believe 2nd quarter was even a little bit higher than that. So we did add some disclosure to our capital commitments page about TI and leasing cost percentage of net rent. And that takes into account trying to show a little bit that it also depends on what market you're in and where what the rental rates are. But over the last 5 quarters alone, TI commitments have ranged from over 40% to as low as almost 20%. So there's a sizable standard deviation each quarter. But long term, we think it should average around 30%, a little over 30%, which is what we've seen over the last few years. So I wouldn't read too much into it other than just the variability that's going to kind of take place from quarter to quarter. Great. Thank you. Our next question comes from Rich Anderson with SMBC. Please go ahead. Hey, thanks. Sorry, I think somehow Scott Peters keeps rerouting restarting my Wi Fi router. But anyway, we'll get through it. So I asked the question about the hospital But again, sharpshooting, as you know, we like to say we're focused on is important. And we think though long term, it's a very positive outlook for hospitals. And the pandemic underscored how important they are. We'll get you a copy of the transcript. I'm sure you can get it, but we elaborate a little more. You lost it again. Our next question will come from Daniel Bernstein with Capital One. Please go ahead. Hi. I'm actually having router problems too. So I'm going to blame whatever is going on Rich for my problems here. Let's see. I wanted to ask just a little bit more about the cash leasing spreads. They were strong in the quarter, but a little bit thinner than previous quarters. So any particular items or leases skewing that? No. Nothing worth pointing out there, Dan. It was I think it's 2.8 for the quarter, 4.1 for the year. So for the year, it was a little above our 3 to 4 typical range and for the quarter, we're a little bit below. But if you look at we always so you're always looking at the average, but it's really got to kind of pull things apart and look at the distribution and we've laid that out each quarter, but you still see the majority of our spreads over 50% were in that 3% to 4% range. And so long term, that's still what we are guiding to and what our expectation is. But just the variability between leases in any particular quarter can skew that a little above or a little below, but that's we're very pleased that in 2020, when you look at the full year, we were at the upper end, slightly above the upper end of that range. Okay. And then just following up on Tayo's questions on what you're putting into the JV. Would you consider putting development into the JV, maybe taking a little bit of the development risk off as well? Or especially in light of some of your comments that maybe development might accelerate. So is the JV a source of capital there? Yes, Dan. We would consider development inside of the JV. And again, we treat it like we do the acquisitions. Each one is going to be different. And if there's an opportunity that we see that fits within what we're trying to accomplish, then we would certainly offer that up to our JV partner. Next question comes from Connor Seversky with Berenberg. Please go ahead. Hey, everybody. Thanks for having me. Short one on 18% of rents expiring this year. I'm just wondering how we could judge the timing on renewals or re leasing to incorporate the spreads you provided in guidance? Yes, I would actually point out that that level of expirations is at the low end of what we've seen for the last few years. And so, we think it's very manageable and we still expect our range of 3% to 4% on the cash leasing spreads to maintain. I don't have the by quarter expiration schedule at hand, but I don't recall anything that sticks out as being an unusual quarter. It won't be exactly even, but I don't recall off the top of my head a particular quarter that's significantly outsized, but happy to follow-up with you on that. Okay, that helps. Thanks. And then one more, a little more abstract on one of Rich Anderson's points. Just some of these changing dynamics within the healthcare industry, maybe further shifts procedures to the outpatient environment, providers finding some cost savings there as well. I mean, I'm wondering if this makes certain maybe secondary markets seem a bit more attractive where the MOB infrastructure may not be as built out as it is in some of the primary markets. I would say, certainly, there's a lot of secondary markets that can be very attractive in that regard. I think for us, it's a balance. Certainly, COVID is suggesting that maybe some secondary markets might be interesting. I mean, we actually invested in a number of properties recently in Greensboro, North Carolina. It's not far down the road from the Raleigh Durham area, Chapel Hill. It's a great area. We just invested in Gainesville, Georgia, which is really part of the broader Atlanta area, but it's a little further out and we think markets like that can be very attractive. So I think you're right, it supports that theme. When you get detached from a large MSA, I think probably not as much our focus because you just you don't have that density that we might be looking for. But some of those markets I just mentioned are some of the fastest growing areas. So I think there is a thesis to that. But I also say that our top markets tend to be very attractive, even the larger denser ones. So just moving a little further afield in each of those and adding to our number of submarkets is certainly, in our view, something we'll be looking at. Thanks. That's all for me. Our next question will come from Vikram Malhotra with Morgan Stanley. Please go ahead. Thanks for taking the question. Just wanted to go back to sort of the external growth side of things. I know you've emphasized on and adjacent. Just want to get your latest thoughts on sort of maybe widening that a little bit given your cost of capital and maybe just some changing trends you alluded to more off campus there and is that somewhat I know you had sort of indicated that a couple of quarters ago, but just wondering how the mix is over the next year? Yes. I think, Vikram, I think if you look at, again, the off campus, we're certainly the portfolio currently is 88 percent on and adjacent, 12% off. I think our kind of feeling is that we're comfortable with about 15% of the portfolio being represented by the off campus products. But I think that where you'll really see us get more comfortable with that is going back to this clustering strategy. I think we have really found that whenever we when we're invested in a submarket and we have on an adjacent product, we find that there's some opportunity there to take advantage of the higher cap rates that we can find with some of the off campus product, but yet mitigate some of the risk that we see because we know the market so well and we are in the leasing flow. And we are able to offer a variety of product offerings to potential tenants, pricing and location wise. And so we think there's a real benefit to having some of that in the portfolio, but just kind of managing it with having a larger kind of presence inside of a submarket. Okay. That makes sense. And then just any you've obviously done a great job getting the portfolio where it is and being able to grow the dividend again. I know you gave a target payout ratio. But just given when you sort of have that 80 ish percentage or a little over that, any change in thoughts on where longer term leverage could be for the company? Yes. As of now, Vikram, we've been very comfortable with the 5% to 5.5% range. We don't anticipate changing that materially. And we'll always kind of watch that and consider depending on what's going on in the market, whether that we should make some adjustments. But at this point, we don't have any expectations of adjusting our leverage targets. Okay, great. And then I might have missed this, because I jumped on late, but just given the new administration, are there any maybe medium to longer term potential changes in kind of healthcare regulation or policy that you may be watching that may influence kind of where and when you invest? Sure. I wouldn't say there's anything imminent. Bethany's remarks covered a lot of this. And I think the takeaway is that it's fairly benign for now and encouraging, pretty bright outlook. So we're not overly concerned. I think the things we're watching naturally are what you might expect, which is expansion of the ACA, some subsidies. But all of that is generally good because it's an increase in access and coverage, and that's generally good for providers. Obviously, we'll be looking at more detailed things as rates of reimbursement and so forth. But generally, all that looks pretty good. So we think right now, it's a pretty favorable outlook. And with this administration, I think there's some positives, but anything dramatic should be fairly in check. So we'll see as that evolves, but we're encouraged. Okay. Thank you. Thank you. Our next question will come from Michael Gorman with BTIG. Please go ahead. Yes, thanks. Good afternoon. Just wanted to touch on the multi tenant portfolio. You all did a great job navigating the pandemic. And Chris, you gave some positive sounding commentary on the direction of the portfolio. But I'm just trying to juxtapose the guidance for 2021, it's kind of like the 5th or 6th year we've been in that 87.5% to 88.5%. And I'm just wondering what you see on the horizon that maybe breaks allows multi tenant to break higher and maybe what the long term potential is in that portfolio from an occupancy perspective? Yes, Mike. We have been kind of in that level and it has to do with buildings that you may be selling or buildings that you're buying, buildings that have come in from development that we're still doing a little bit of lease up. So, you've got a lot of things over time that adjusting on that. As you look at our guidance for this year, one of the things you have to take into account is that we did the portfolio held up well, but we did see a reduction in average occupancy of about 50 basis points. And it was and really that occurred through the second and third quarter started leveling out in the 4th. So as you start looking at 2020, excuse me 2021, we're having to kind of rebound off of that to get back to get that average back up equal to where it was for last year. So, there's a bit of work that has to happen from that. And then I think you're looking forward into 2022 and beyond, where you can start to push that up higher into the high 80s, hopefully approaching 90%. But it has to do with kind of the mix of properties and where you're willing to take risk. We talked about what we did buy through the JV more of a lower occupied value add acquisition. We're doing a little bit of that right now inside of our on the balance sheet over in Dallas where we have a couple of properties a couple of properties on a campus where we already own some assets. And so that may bring down your average, but we think that that's a great opportunity to value. And so over time, yes, we do expect it to grow, but it will be balanced in terms of what we're bringing in and maybe what we're selling. We have sold some higher occupied buildings, some of our single tenant net that are 100%, just because we thought we kind of effectively maximized the value on that. So there's always the ins and outs that are going on, but we do think given the trends that are going on long term for outpatient and the population and the need for healthcare, there certainly is opportunity for occupancy growth and the value that comes from that. That's helpful. And then maybe just on a technical aspect there, if you look at kind of that 12%, is there any of that that's not available for lease because maybe it's tied up in an option for a health system or an existing tenant? Or would all of that be technically available for lease? Pretty much all of it is going to be available. Not so I mean, there are some instances where someone may have a roper on some space, but generally you are not just agreeing to hold that space for them without some type of guarantee and lease arrangement in place for that. So the majority of that is leasable. We do have some space that in some buildings that frankly we kind of put in, in our underwriting that may have some static vacancy in them given the location of it, maybe it's in a lower level or because it's the way that it's configured around other suites. So I don't want to mislead you there. There is some of that, but I wouldn't say it's material. I think that we do have the ability to lease a lot of that space. And you've heard us talk about it's finding a lot of times, it's finding the right tenant for the right size space. It's the Swiss cheese effect that you've heard us discuss. And so as you get higher up in those occupancies, when you start getting to that 90 plus percent, it can reduce the potential of who you're able to fit into that space, but then that's also an opportunity to increase your rents because of the scarcity of that space. So you're balancing a bit of that. But that's why for a multi tenant building, we say you shouldn't expect it to be 95 or 100. That's unusual. Very helpful. Thanks. Our next question will come from Todd Stender with Wells Fargo. Please go ahead. Thanks. It's been a while since we've seen a dividend increase, maybe even earlier than what we had modeled for. Was it the flurry of acquisitions and debt costs continue to decline? Maybe what pulled this decision forward, if it was pulled forward? Yes. I think, Todd, it wasn't necessarily a case of pulling it forward. I think it really is, as we've said for a while, that we wanted to see was this very clear path to move the payout ratio to where we needed it to be to really have a long term target of sort of the mid 80s and even be able to move lower than that. So it's really just that confidence. And you're right, there are certain performance attributes that happened in 'twenty and prior years, but also complemented by the acquisition volume, all of which certainly gets us that clear path towards a better payout ratio. And as Chris mentioned, we did spend a little extra capital in the Q4 to again advance the idea of this occupancy improvement that Chris just talked about. So just balancing all those factors and saying I think and I think the other important thing is to really signal to investors that it's an important priority to us. We know it's an important component of shareholder return. So we didn't want to wait till everything is just perfect and wait too long. So it's just balancing all of that together. Right. That's helpful. And then back to the cash releasing spreads. There's generally a portion of leases that get renewed where rents roll down. If I interpret that right, there was 11% worth less than 0%. Are those generally above market rents to begin with? Maybe just some context around how that goes negative in this environment? Yes. And you heard us say, you're right, that there's going to be a portion of that. You're not going to always be able to expect rents to grow in every situation. And long term, we say plus or minus 10% is about what you should expect and that's what you had this quarter at 11%. It can be a variety of things. It could be an asset that we may have bought. A lot of times we underwrite that we may have some roll down because the previous landlord may have amortized some additional TI into the rent. So you have the expectation that that's going to reset. You also have to take into account the competitive position and what's going on around you. The good news is generally we are in tight markets where the supply is constrained and so it doesn't negatively impact us. But that's not everywhere and that's not all the time. And so you have to be aware of what's going on, what your competitors are doing. And so you may for strategic reasons maybe you may need to have some roll down. But the good news is that as you look at our averages and that distribution, it's been manageable. It's at a level that the corpus, so to speak, of what we do in that 3% to 4% still is able to shine through. And those instances where you're able to get that 4% plus are able to offset those few instances where you do have to have some roll down. Got it. Thank you. Our last question will come from Lukas Hartwich with Green Street Advisors. Please go ahead. Thanks. On the external growth front for the guidance, the cap rate range is roughly in line with where the implied cap rate for HR has kind of trended over the last year or so. So I was just hoping you could walk through the thought process around setting that. Is there expectations that there will be share price appreciation and some lower implied cap rate? Just trying to think through that math. Sure. I think from our standpoint, Lucas, it's when you're the implied cap rate in NAV is a set of guideposts. And obviously, if you're extremely off, there's something going on there, either negative or positive. But I think when you're in a tight range around that, it certainly is very functional and we can make accretive investments, we can create value that drop to the bottom line and to the share price. Certainly, like anyone, we'd love the price to be higher. I think a lot of times that premium comes and goes depending on how massive of an opportunity there might be and if there's an inflection point. So MOBs are just known for being so steady. We're certainly seeing a pickup in our volume. I think that's encouraging. We hope that translates a bit to the momentum in the share price. And certainly, that's a virtuous cycle, if you can translate that. So that's our view. We're cognizant of it, but we look at FFO per share impact, FAD per share impact, not just NAV, but it certainly is in our way of thinking as well. That's helpful. Thanks. And then the single tenant same store NOI growth was pretty strong in the Q4 and it looks like guidance for 'twenty one is pretty healthy as well. Is there anything kind of big to point out on that front? Yes, it really has to do with one building that has a non annual increase, which that can change your average pretty significantly. That one building has a 7.5% increase every 3 years and that occurred in the Q4. And that specific asset actually makes up almost 40% of our single tenant, given the fact of our single tenant portfolio is just with a lot of the pruning and things that we've done has gotten much smaller. It's under 10% of our overall NOI. So even when you are seeing some higher growth and it really just has to do with the structure of the lease escalated or anything else. Escalate or anything else. But given the fact that it is such a small, it doesn't have a huge and outsized impact to the overall company NOI, but certainly, it's great when it does occur, which is what's going on right now. And that will play through all the way through the next year, given the fact that we look at our NOI on a trailing 12 month basis. Perfect. Thank you. 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, Grant, and thank you everybody for tuning in with us and being flexible on our time change. We hopefully made that more available to everyone. Everybody have a great day and we'll be around for any follow-up questions. Thank you.