Welcome to the Healthcare Realty Trust fourth quarter 2019 financial results conference call and webcast. All participants will be in listen-only mode. If you need assistance, please signal a conference specialist by pressing the star key, followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star, then two. Please note the event's being recorded. I'd now like to turn the conference over to Mr. Todd Meredith, CEO. Please go ahead.
Thank you, Nick. Joining me on the call today are Carla Baca, Bethany Mancini, Robert Hull, and Chris Douglas. Ms. Carla Baca, if you could read 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 the Form 10-K filed with the SEC for the year ended December 31st, 2019. 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, 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 December 31st, 2019.
The company's earnings press release, supplemental information, Forms 10-Q and 10-K are available on the company's website. Todd Meredith?
Thank you, Carla Baca. I will focus on three key topics today. First, the increased momentum of FFO per share growth in 2019. Second, Healthcare Realty Trust key building blocks for growth, including a higher level of net investment. Third, our positive outlook for 2020. Healthcare Realty reported strong results for the fourth quarter and full year 2019. Normalized FFO per share grew from $1.57 in 2018 to $1.60 per share in 2019. Momentum increased throughout the year, built on solid fundamentals of sustainable internal and external growth. Our portfolio again performed well with same-store NOI growing right in line with expectations, around 3%. Most importantly, our focus is on driving steady revenue growth with contractual rent increases, tenant retention, and cash leasing spreads. We also contained expenses quite well, which accelerated NOI for the multi-tenant properties.
2019 external growth was led by robust acquisition volume approaching $400 million, nearly double our historical pace. Equally important, we sold far fewer properties than in recent years. It's worth noting we sold some of our last post-acute properties in 2019, along with a handful of MOBs at more indicative cap rates. Following a period of costly dispositions and reducing leverage, Healthcare Realty Trust portfolio and balance sheet are in great shape. While the environment for medical office investment remains competitive, our confidence to invest at an attractive pace is based on our established relationships, financial strength, and access to accretive capital. A key part of our strategy is to avoid bidding wars and portfolio premiums as often as possible. In 2019, we sourced nearly 70% of our acquisitions, working directly with owners and brokers before the properties were widely marketed.
We rely on our deep relationships to buy what we target rather than what is listed for sale. A great example is the MOB we recently acquired in Orange County, a property we've been pursuing for years through direct dialogue with the owner and the help of a local broker. We're also using our MOB experience and operational expertise to help our health system partners meet their expanding real estate needs. Hospitals and physicians are increasingly providing outpatient services across a range of settings to achieve market share and revenue growth while balancing value and efficiency, critical in today's healthcare environment. As an example, we're working with Baptist Memorial Health Care in Memphis to redevelop a 111,000 sq ft property into a strategic hub within their outpatient network. This off-campus property will include a surgery center, a large orthopedic clinic, a lung practice, and other complementary services.
Outpatient expansions like these are happening across the country and correlate with favorable national trends. In 2019, more than two-thirds of all new healthcare jobs were in the ambulatory and outpatient sector. What's most gratifying to us is seeing these trends initiated throughout our well-established network of health system relationships. As another example, in Nashville, we're working with St. Thomas, part of Ascension, to redevelop one of our smaller existing properties into a state-of-the-art 100,000 square foot MOB tied directly into their new women's hospital and the creation of a new front entrance to the campus. Looking ahead to 2020, the pipeline for acquisitions is strong. Moving forward, we are planning for fewer dispositions at better cap rates. We expect a couple of developments to begin soon.
Higher, more consistent net investment volume, steady same-store growth, and disciplined capital spending are the key building blocks we will use to grow FFO per share and improve dividend coverage in 2020 and the years ahead. Now I'd like to turn it over to Bethany Mancini for an update on healthcare trends.
2019 was an active year for the Trump administration's regulatory agenda and congressional attempts to address certain healthcare costs. The legal standing of the ACA was challenged in the appellate court, and in the end, health policy finished the year relatively status quo. Congress specifically addressed two voter-friendly healthcare initiatives. One, the rise in pharmaceutical prices, and the other, a bipartisan bill to limit patient costs for out-of-network medical care. Both efforts failed to gain traction with party line division over the issue of market intervention and price controls amid intense industry lobbying from insurers, providers, and pharmaceutical companies. These initiatives are already beginning to resurface in 2020. Both sides in Congress would like a voter-friendly win on healthcare in an election year, but a partisan standoff could again stalemate any real movement on legislation if neither side is willing to compromise and concede a political win to the other.
On the regulatory front, the Trump administration and CMS remain quite active. CMS issued rulings last year requiring hospitals to list standard prices beginning in 2021, and this year's site-neutral Medicare payment rates will apply to clinic visits in all off-campus hospital outpatient departments. These rulings, among others, are being challenged and stalled in the courts. CMS admittedly is adhering to an aggressive regulatory approach in spite of the certain opposition and legal roadblock. The administration acknowledges partly bringing these issues to light through the regulatory process in the hope of eventually influencing legislation. On the judicial side, the ACA remains under scrutiny in the Texas v. Azar case. The Federal Appeals Court remanded the case back to the district court to consider its severability from the now-defunct individual mandate. The Supreme Court is expected to ultimately rule on this case, most likely not before 2021.
Moving past the political realm, hospital fundamentals appear strong, with positive reimbursement rates and commercial price increases in 2020, and signs of stable admissions and revenue growth. With pressure to lower costs, health systems are focused less on their number of admissions and more on improving margins by treating patients in efficient care settings. Health systems are expanding outpatient facilities across markets and focusing their hospital campuses on higher acuity inpatient and outpatient care. The AHA's 2020 Hospital Stats report confirms these trends. Hospitals saw a decrease in their outpatient visits by 0.9% in 2018, specifically in the number of ER visits, which are moving in part to lower-cost settings, more convenient to patients. Other areas of hospital outpatient utilization were stable or up slightly from the prior year, with higher acuity leading to an increase in total outpatient revenues, up 4.5%.
We continue to see among Healthcare Realty Trust tenants and health system partners in sizable, fast-growing markets that outpatient care is on the rise across the spectrum of service settings. Outpatient facilities represent one of the few proven strategies to remove unnecessary costs from the healthcare system. While CMS insurers and providers continue to explore value-based care and quality incentive payments, most reimbursement rates are still largely fee-for-service and volume driven. Accordingly, outpatient care is expected to remain one of the most critical and attractive strategies for health systems and providers to meet rising demand, lower costs, and enhance profit margins. Healthcare Realty will continue to selectively invest in outpatient facilities that are well located and aligned with strong health systems, positioned relevant to current healthcare trends, and with the potential for long-term growth. Now I'll turn it over to Robert Hull for an overview of investment activity. Robert Hull?
Thank you, Bethany Mancini . I'm going to summarize Healthcare Realty Trust 2019 investment activity and provide our outlook for the coming year. Healthcare Realty finished 2019 with strong acquisition volume. Annual net investment activity was more than seven times that of 2018, well above our historical pace. Increased acquisition volume was driven by our internal sourcing process, targeting well-located buildings with the greatest potential for growth. To summarize the year, we acquired 18 properties in 16 separate transactions for $381 million at a blended cap rate of 5.5%, and we're very accretive at our cost of capital. What I really like about these properties is about one-third establish new relationships or are in new markets that will further our growth in the coming years. Each property on and off campus is important to our health partners as they shift the delivery of care into the most appropriate setting.
Also during the year, we funded $29 million at several developments, including Charlotte, Seattle, and Memphis. We sold 10 MOBs for $28 million at a combined cap rate of 5.5% and disposed of our last skilled nursing facility and two independent inpatient rehab facilities. Dispositions for 2019 totaled $55 million, about half of our recent average annual sales volume. Now I'll give you an overview of our acquisitions in the quarter. We purchased six properties for a total of $107 million. Included are two MOBs I mentioned on last quarter's call. One in Raleigh was purchased for $22 million, is adjacent to WakeMed's North Hospital, and is our first building in the market. The other, a $20 million investment anchored by an ASC, is located in Dallas, adjacent to Baylor Scott & White's Plano Hospital.
Additionally, we acquired three MOBs in Seattle, bringing total square footage in the market to 1.4 million sq ft. The first of these was a $23 million MOB with the primary tenant being EvergreenHealth, a new relationship for Healthcare Realty. The building is conveniently located in a dense area with direct access to Interstate 405 and just three-tenths of a mile from Evergreen's 318-bed main hospital. Second was an MOB we purchased for $10 million adjacent to CommonSpirit's Highline Medical Center. We now own nearly 2/3 of the MOB space around this hospital, giving us flexibility to accommodate tenant expansions and best serve our healthcare partners. Last in Seattle was an off-campus MOB we purchased for $24 million, anchored by Overlake and UW Medicine, two of our longstanding relationships. Each system is offering services at this location integral to increasing its market share and serving the rapidly growing population.
These five acquisitions totaled almost $99 million at a blended cap rate of 5.7%. This excludes the purchase of a building in Memphis related to a redevelopment, which is expected to stabilize at a 7.6% yield. Looking ahead, we expect acquisition volumes for 2020 to remain robust. So far this year, we have purchased an 87,000 sq ft MOB in Los Angeles for $42 million. The building is adjacent to MemorialCare's 252-bed Saddleback Medical Center. The real opportunity here is that leasing discussions are underway that would take occupancy from 80% to over 90% and would increase the yield to over 6%. Beyond this investment, we have several properties we expect to close by the end of this quarter and a solid pipeline of directly sourced and targeted acquisitions.
We are setting initial guidance for 2020 at $250 million- $350 million, 70% greater than our initial guidance at this time last year, and which reflects the strength and current visibility of our pipeline. We expect cap rates to average 5%-5.8%, consistent with 2019. Dispositions for 2020 are expected to be generally in line with last year's reduced sales volume at lower average cap rates and with non-MOB sales largely behind us. We expect $25 million- $75 million of dispositions this year at an average cap rate of 5.5%-6.5%. Regarding development activity, our embedded pipeline continues to produce a steady source of investment. We commenced construction at our Memphis redevelopment that I introduced last quarter, and we are already in discussions with several tenants to expand their space. The redevelopment is 85% pre-leased and is anchored by a surgery center.
In Seattle, our first tenant, an ASC, took occupancy this month at our 151,000 sq ft on-campus development. More importantly, quarterly NOI is projected to be over $600,000 once all signed leases take occupancy in the third quarter. We are also talking to several prospective tenants about taking space in the building, including additional hospital services and a third-party women's health practice. Looking ahead, for 2020, we expect to start two to three more developments in Tennessee, North Carolina, Washington, or Texas, driven by an expansion of services from our healthcare partners. As an example, Ascension Saint Thomas Hospital in Nashville has announced an expansion plan of over $300 million on its 683-bed midtown campus. Included will be a new women's hospital, a related surgical addition, and an inpatient rehab facility.
With Healthcare Realty Trust's prior redevelopment on this campus fully leased, we are in discussions with the hospital to replace and expand another building we own at the front door to the new women's hospital. The 100,000 sq ft MOB redevelopment has a budget of $40 million. As we move into 2020, I am pleased with the pace of acquisition and development activity produced by our internal sourcing process and our team's ability to foster key relationships. Together with lower disposition levels at better cap rates than in years past, our outlook for the year's net investment activity is bright. Now, I will turn it over to Christopher Douglas to discuss financial and operational performance for the quarter and full year.
Thanks, Robert Hull. The fourth quarter, much like the year itself, was defined by the continued strong performance of our same-store properties, complemented by an increased acquisition pace. Combined, those factors resulted in a normalized FFO per share increase for 2019 of 1.7%. Growth accelerated in the second half of the year, with fourth quarter FFO per share increasing 4% year-over-year to $0.41. Sequentially, FFO was $3.1 million higher than the third quarter of 2019, primarily due to a $1.2 million contribution from net investment activity and an $800,000 reversal of third quarter seasonal utilities. The remaining increase was split between higher leasing activity, lower G&A, and lower interest expense. On the operations front, trailing 12 months same-store NOI increased 2.9%, led by the reliably strong growth of our same-store multi-tenant properties at 3.2% and single tenant net lease properties at 1.8%.
Single tenant NOI growth is consistent with our expectations, given that nearly 30% of the leases have non-annual escalators that have not had an increase in the past 24 months. NOI growth will remain at this level for the first three quarters of 2020 and increase in the fourth quarter with the next non-annual rent increase occurring in October. We anticipate occupancy within the single tenant portfolio to remain at 100%. There is only one lease expiration this year, an 83,000 sq ft on-campus MOB in Des Moines, and renewal discussions with the tenant indicate a favorable outcome. The solid growth from our same-store multi-tenant properties was due to a combination of reliable revenue growth and prudent expense management. Revenue per occupied square foot increased 2.6%, while operating expenses grew just 1.5%. Lower than average expense growth was primarily the result of a 3% reduction in utility expenses.
In addition, successful tax appeals resulted in a historically low 1.3% increase in real estate taxes during the year. We continue to proactively manage all line items and expect overall expenses to increase in 2020 within our long-term expectation of 2%-2.5%. Internal revenue growth indicators are strong, as evidenced by the following key performance metrics from the quarter. Cash leasing spreads averaged 4.2%, tenant retention was 86.6%, the average in-place contractual increase was 2.9%, and for the leases executed in the quarter, future contractual increases are 3.16%. These metrics point to the viability of ongoing internal growth. Shifting to capital and the balance sheet. The fourth quarter saw an increase in maintenance CapEx as expected. Even with the higher spend in the quarter, total CapEx for the year was $1 million less than in 2018.
As a result, the FAD payout ratio improved 500 basis points to 95%. Looking forward to 2020, the midpoint of our maintenance CapEx guidance is $60 million. This is 4.9% above 2019 actual and compares favorably when considering portfolio square footage is up approximately 6% in 2020. We raised $103 million of equity during the quarter through the ATM, which was used to fund the $149 million of acquisitions closed during the quarter and last month. Including the January acquisition, debt to EBITDA would've been 5x, which is at the low end of our target leverage. As a reminder, our line balance will reduce at the end of this month when we draw down our $150 million seven-year term loan. Our flexible balance sheet, improving payout ratio, and availability of capital positions us well to fund our growth opportunities.
Looking ahead, our compounding internal growth coupled with increased net investment activity will drive FFO per share growth. Operator, we're now ready to open the line for questions.
We'll now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you'd like to withdraw your question, please press star then two. This time we'll pause momentarily to assemble our roster. First question comes from Nick Joseph of Citi. Please go ahead.
Thanks. You mentioned the portfolio cap rate premium versus relationship-driven deals. I'm wondering if you can put some numbers around that in terms of what you're seeing in terms of portfolio deals today versus the guidance that you provided for 2020.
I think in terms of portfolio deals, I think that you're only seeing 50 to, in some cases, 100 basis point premium on portfolio deals related in regards to what we're seeing transactions that are being produced by our internal sourcing process and through direct relationships that we have.
Given that premium, is there an opportunity to put together a portfolio and sell into that strength?
Certainly, if we felt like we needed to, I think we could certainly see that coming together. I think our view would be, it really just comes down to, as we talked about, we really see our portfolio being in great shape and probably don't see a super large portfolio or need to put together a large portfolio to sell. Certainly, I think if we did that, we could certainly drive those kind of premiums, like, as Robert Hull said, other sellers have been doing. For us, we're really viewing this more as a maintenance level activity now that the portfolio's in such great shape.
Thanks. Just maybe on guidance, appreciate all the line items that you provide, but what are your thoughts of not providing FFO and Normalized FFO guidance?
I think our view is philosophically, we really like to have folks have the building blocks and put that together and understand all the pieces. Not that we couldn't do that along with FFO guidance. I think probably the biggest issue is keeping the focus on those pieces, and if we saw that folks were having a difficult time using those pieces to put together their own estimates, or it was materially a wide range of estimates or materially off our own expectations, I think we would certainly put more emphasis on that, but I think we're more comfortable with the pieces and think it seems to be working pretty well with those that follow us and put together their estimates like yourself.
Sounds good. Thanks.
Thank you.
Our next question comes from Jordan Sadler, KeyBanc Capital Markets. Please go ahead.
Thanks. I just wanted to sort of continue on the investment prospects. I think, Robert Hull, you mentioned that the outlook for investment activity is bright, and you've obviously had a lot of success in 2019. Can you talk to what's driving this? Is this sourcing process just continuing to evolve? Is it sort of this adjacency that seems to be unfolding in terms of new investments relative to existing investments that's driving it? What's sort of the key driver, if you will, and what keeps you so optimistic.
Sure. I think you hit it. The key driver, sort of the leading concept there is really the effort to source these acquisitions through our own direct channels and relationships. We've really just seen that pipeline build through that effort, I would say, over the last couple of years, and you've heard us picking up our discussion about that in the last several quarters. We're really just building that confidence from sort of the reach we have with our team, the depth in market reach, very targeted in certain markets that we want to build in and go into some new markets. Then, obviously expanding with our health system relationships and partners there. It's really putting those pieces together, the strength and experience, the depth of our team has really been translating.
Certainly, you know, we're trying to really target using our cost of capital where it makes sense accretively, and obviously, that helps, and you saw a big contrast in that 2018 versus 2019. I would say primarily, it's really that internal sourcing effort.
Is your focus, and I think we've talked about this also in the past, is there sort of like a little bit of an increased appetite for off-campus?
Generally-
How is that factoring into the sort of underwriting at this point?
Sure
It seems like more of these assets seem to be adjacent or off-campus as opposed to on.
Right. If you look at 2019, about 70% were on or adjacent, and 30% were just outside that. I would say it was a bit of a unique year in that regard, in that we had quite a cluster of assets that, as you just pointed out, sort of lived between this quarter mile and a third of a mile. That's obviously not going very far out on the risk curve. I would say it's also been in very dense markets like Seattle. That's been, Robert Hull walked through some of those, and some of those are just outside that quarter-mile definition. We're sort of living by our own tight definition of that, and so you're picking up on that. Not really an intention to move away from campus. However, we're certainly willing to look off-campus. You've heard several of us talk about the shifting of outpatient.
Obviously, it's shifting to outpatient from the hospital, but a lot of that's on campus, but we're also willing to work with our health system partners if that means going off campus. You've often heard us talk about reservation about off-campus. Really, that issue is just understanding the real estate value and then making sure any additional risk we see, that there's some additional return related to that. Really, there was only one building in our whole activity set for 2019 that was materially away from a hospital. I think it was about three and a half miles. It was also in the Seattle area, as Robert Hull described it. I think the yield was just over 6% and reflected that additional perceived risk that we have of being off campus.
Okay.
I would just add to that in that one building, we had two systems that we have deep relationships with. That was the driving force as well.
That's helpful. Just on the cap rate on sort of deals expected for 2020, that low end 5%, where do you see the market headed right now, Robert Hull? Obviously, cost of capital has kind of come back and you've got some support. Is there a greater level of availability at that price point, or is pricing sort of getting a little bit more aggressive relative to last year? How would you characterize that?
Jordan Sadler, I'd say that if you look at 2019, we averaged about 5.5% on our cap rates. It's early this year. We've seen that so far, the deals that we're looking at and that we're pursuing, the cap rates have been consistent with that. I think it's a little early to tell at this point. We aren't seeing much movement in cap rates, but kind of going back to the way we source deals and our kind of internal sourcing process versus chasing marketed deals, we may be a little insulated from that. For us right now, it seems to be somewhat consistent with last year, but continue to keep our eye on that.
Jordan Sadler, I would say to the point about marketed deals or the large portfolios that were mentioned earlier, I think that's where you tend to see that come out and people follow that trend more. I think, as Robert Hull said, it's early, and if we do see some larger transactions later this year, I think those will be the ones to watch to see if those bigger portfolios drive lower on cap rates, as you say. It kind of makes sense. There's obviously a lower cost of capital, and especially in the debt markets, for a lot of potential bidders. You could see that. Our view, as Robert Hull said, is we're probably a little insulated from that based on our internal sourcing focus.
Okay. Just lastly, I guess, Christopher Douglas, you mentioned that CapEx is expected to increase in the fourth quarter. I don't know if I missed this, just specifically as it relates to leasing costs on renewals, I think they were up to 23% of cash NOI in the quarter. TIs were up to $3.15 per square foot per year. Was there a particular lease or two that sort of drove this spike? Maybe just offer a little bit of color.
Yeah. I'll hit a couple of points there. I guess first on the commitments that, yes, you are correct. It was a bit higher and it is related to one specific lease. It was a little over $3 in total. We have one lease that made up about 70,000 sq ft that was significantly higher than the average, up closer to $4.50. That was due to the fact that it was multiple suites associated with this tenant. As part of the renewal, we made the determination to consolidate and move a lot of the space across contiguous space, which is going to be more efficient for them, but it also opens up for us the ability to have larger blocks of space to drive occupancy and future growth in the periods ahead. It was a strategic decision to do that.
We also did have an almost 10% cash leasing spread on that renewal, and we were able to increase the in-place contractual escalators from 2.5% to 3%. An example of maintenance CapEx decisions that have good investments and good returns associated with them. That was in the commitments, and part of those dollars are going to run through your spend in this quarter, some of it last quarter, and some of it will be in future quarters. As we will talk about regularly, you will see actual spend fluctuate from quarter to quarter. It's just not as consistent as you would see in earnings.
Overall, the spend for the year on total maintenance CapEx at $57 million is down $1 million from last year and was within our expectations and consistent with the FAD payout ratio of 95% that we had indicated we expected for the year when we talked on our last call.
How big did you say that one lease was?
It was 70,000 sq ft, so it was about 20% of the overall renewal volume in the quarter.
Okay. Thank you.
Our next question comes from Chad Vanacore of Stifel. Please go ahead.
Hi, good morning. This is Tao on for Chad Vanacore . My first question is a follow-on question on the acquisition guidance. Looks like your acquisition for 2020 guidance is still solid, but it's lower compared to the 2019 deals that you guys completed. Is it just a matter of being conservative, or are you guys seeing more increased competition in your targeted price point for the assets? Or are you seeing any change in pricing? I think while talking in their call, they used the word frenzy and hinted that large portfolio cap rates are being compressed. How should we think about the market in general and also the cadence of the acquisitions throughout the year?
Yeah, I think if you look at, again, the cap rates we did last year, they're in that mid-fives range. Early in the year, we see that being consistent with what we did last year. I think as you refer to the guidance, we have a solid pipeline of opportunities. We're off to a strong start. We've closed on a $42 million deal already. We have a good number of additional deals that are under contract or LOI. I think what you'll find with our pipeline is that a majority of it is internally sourced deals through relationships that we have. Those buildings are not often for sale. We spend a lot of time working with owners and brokers on those deals.
As we look out for the year, the predictability of what we can close early in the year is only so visible as you look towards the end of the year. As we go through the year, that becomes more and more confident, and we have more and more confidence in that. It's really about kind of setting the initial guidance that was significantly above where we were last year, but setting that guidance with some reasonable amount of confidence in what we can get closed based on that pipeline that's internally sourced.
Also, you've lowered the cash NOI growth outlook to 2.3%-3.2% in 2020. That's a little bit lower compared to 2019 because you realized 2.9%. I'm just wondering, what are the primary driver of that lower guidance? Looks like the midpoint of occupancy outlook is a little bit higher than 2019, but maybe rate is a little bit softer. What is also in the kind of the expense outlook?
Yeah. First off, I would say the short answer is it has a lot to do with comps and comparability with some great results that we saw in the last year that will fall into the prior periods that will create some changes in terms of your comparability year-over-year. As you're looking out through the year, we expect the same-store NOI to come in similar to where, if not above, where we came in this year, 3% +, up close to the top end of the range. Because of those comparability issues in some of the previous periods, it will create a little bit slower momentum in the first half of the year.
You can see that if you look at the quarterly NOI year-over-year growth, and specifically if you look at the first quarter of 2019 and fourth quarter of 2018, both of those periods had 4%+ year-over-year NOI growth. Those will now end up in the prior period comp that we will be comparing off of moving forward. As those move out of the comparable period, you're going to get back to the 3%+ that we have historically been reporting. If you look to the underlying growth metrics that really drive revenue in terms of cash leasing spreads, tenant retention, contractual escalators, all of those are staying in the 3% range on the growth that we've historically seen, and that's what gives you the confidence and insight as to the expectations of long-term growth.
Overall, you kind of look at it and say quarter to quarter, you could see growth anywhere between 2% and 4% on a quarterly basis with a midpoint around 3%. It'll moderate a bit when you look on a trailing 12-month basis. Maybe more in that two and a half to three and a half range. Still overall, we're looking at right at ±3% growth long-term.
Okay, lastly from me, you have close to 20% of your lease set to expire in 2020. Are there any large leases that we should be aware of?
In any year, you're always going to have a certain amount of leases rolling. I'll say last year, we actually had more than 20%, so we're down a little bit, but ± 20% is what we would generally expect. We do have a fitness center in Dallas that we have talked about on previous calls that we are in the process of working with the hospital as they're looking to transition operations to a new operator. They're probably going to take about half of the 100-plus thousand sq ft.
We are working on backfilling the rest of that space, as well as the potential redevelopment of the entire building to capitalize on the momentum that's coming from the new fitness center, as well as a 300,000 sq ft new administrative building that the hospital is completing directly next door, which is creating a lot of vibrancy in that area. That will be occurring this year. We also have a general office tenant in a building also in Dallas that's about 60,000 sq ft that in the back half of the year, we don't expect to renew. We're already in the process of working on backfilling that space and have a 10,000 sq ft user that has already signed up to take a portion of that.
There'll be maybe a little bit of timing as we backfill, but it's in a great area of Dallas right near the NorthPark Center, right on the expressway there, and we've had tremendous leasing success in a couple of buildings we own right there. Feel good about it, but that is a larger expiration for us given that our average tenant size is about 4,000 sq ft.
Thanks for the additional details. Thanks for taking my call.
Thank you.
Next question comes from Connor Siversky at Berenberg. Please go ahead.
Morning, everybody, thanks for having me. Just a couple questions on dispositions. I'm seeing the purchase option schedule in the 10-K. Can you provide any kind of color on the timing or execution of these contracts?
Yeah. In the K, what that lays out are any options that are available. There are a portion that are available today. That does not mean they've been exercised. None of them have been exercised. They've been available for quite some time. I can't remember off the top of my head, there's a footnote on there. I think it's been 10-15 years that these, on average, have been available and have not been exercised. They're basically perpetually open, but we don't have any expectation that they're going to be exercised at this time.
Okay. Thanks for that. On this acquisition in Los Angeles at the beginning of the year, any additional color you could provide on the building? Is it specialized for any specific function? Any details on the existing lease term as well?
On the building we acquired in L.A., it is adjacent to the Saddleback Hospital there. It's a sizable hospital, and it's a multi-tenant building, typical of what we would be pursuing. I would say it's not a special purpose asset by any means. Just more in line with the multi-tenant buildings that we like to purchase with good tenancy that is representative of the quality health system that's adjacent to it.
Got you. Thanks for that again. In terms of future CapEx expectations, are you guys seeing any developing regulations or maybe building code adjustments that would necessitate an increase in CapEx spend going forward?
It really goes jurisdiction by jurisdiction. We've had some of that in California, frankly, that we've been experiencing over the last three, four, five years. It's already inside of our spend in that area. Overall, across the country, we're not seeing anything that materially is changing our expectation on what our spend. We do expect, obviously, there's going to be inflationary pressures on capital, including TI and building CapEx. We think that with being able to continue to drive rent growth in that 3% plus range, that we are able to more than accommodate and get a return on the capital that is associated with all of our TI projects.
All right. Got you. Last one from me on that first investment in Raleigh. Any promising trends in that market that you see that could generate some continued interest investments there on your end?
Sure. Raleigh, as I mentioned, that's our first investment in that market. We think it's a strong market, good growth profile, good health systems, and we think there's some opportunity there in the market to make additional investments. We're excited about being in that market, and our team is continuing to form relationships and pursue opportunities there.
All right. Great. That's all from me. Thank you.
Next question comes from Jonathan Hughes, Raymond James. Please go ahead.
Hey, good morning. On the internally sourced deal pipeline and the better pricing there, why do these healthcare systems not market those properties and get a better price? It's certainly not for lack of interest or capital chasing MOBs. Do they like the certainty of sale and long-term ownership by selling to you, and that's it? Is there another piece of expertise or data analytics capabilities you bring to those systems whereby they're willing to forgo a higher price from another buyer?
Well, I would be careful to bifurcate this. We're really, as Robert Hull said, looking more at individual properties, buying them one by one. Frankly, most of them are not from health systems. We would tell you, year after year, that you just don't see a whole lot coming from health systems. Certainly, some do come from health systems occasionally. There is a big difference here, where you have a very fragmented owner base or list of sellers. We did 16 different transactions for 18 properties in 2019, so that gives you a sense of that. I think it's really just that issue that we're buying from individual owners, and you're right, if somebody had that portfolio of all those properties we bought in 2019 and package it together, maybe they could drive that larger portfolio pricing.
That's what Robert Hull was referring to, is when you look at some of the larger portfolios that transacted in 2019 and years past, our view is that there has been a portfolio premium paid for some of those larger portfolios. I'm really referring to sort of the $1 billion, close to $1 billion or more type size, where you can get those kind of premiums. I just think based on where we're focused with the internal sourcing, in individual transactions, it's not that we're not paying market prices. We are. We think we're paying indicative pricing for those assets. It's just you're not driving an additional portfolio premium beyond that.
I'd add to that, Jonathan Hughes, that where we have seen, obviously the value that we're bringing to the health systems is through development and the way we're doing development. A lot of the development we're doing now is in conjunction with the hospital. Generally, you get into some strategic decisions there about not only the development you're doing, but sometimes that will lead to.
To an acquisition opportunity. Maybe it's one or two buildings, but it's really coming from that interaction with the health system, and you sort of proving your value through your ability to develop and provide some services to them. A good example of that is what we're doing in Memphis on that redevelopment there. That's been an opportunity that we've worked hand-in-hand with the health system, and we're seeing a lot of benefit just from a relation standpoint because of that.
Okay. That's helpful. Of the, I think you said 16 transactions for what, 18 properties last year? How many of those 16 transactions were actually buying the real estate from a system?
Well, Memphis.
Memphis, yeah. The redevelopment property that I mentioned, that small Memphis transaction. Other than that, I don't think there were any that were purchased from the system.
Okay. Switching to kind of looking at the lease schedule this year, 20% of the multi-tenant leases roll. Is there potential for the cash leasing spreads there to go above 4% like last year in multi-tenant, or is that unlikely, given the, I think it's about 12% or vacancy or so in that portfolio?
It's going to move around from quarter to quarter and depend on just the mix that you are able to achieve. If you look at this year and what we've seen historically, we break down in our disclosure each quarter in our earnings release, the different ranges of the cash leasing spreads. You'll have a portion that will be negative. I think it's right around 10%. That's generally consistent with what we have seen historically, but then it really comes down to your average is going to depend on that total distribution. If you look at that distribution over time, the majority of it still runs in that 3%-4% range. We think that that's the appropriate way to look at the long term.
If you're able to do a little bit better on the 4%+ and moderate the negatives, then you can see results like we did this quarter. We think that the 3%-4% continues to be achievable, and is our expectation for 2020 as well.
Okay. Is the 88% occupancy for the multi-tenant MOB portfolio, is that peak structural occupancy? Can it ever get to a low 90% range?
Our view is with multi-tenant, it is certainly a lower number than you might see. Obviously, if you blend in a lot of single tenant. 88%-90% certainly is probably something over time that we see being able to achieve, but it's not just pure lease-up. Sometimes it's selling assets that may be, for whatever reason, stuck in the 70% and for a prolonged period, and we've made our efforts, and we can't seem to move it, so maybe it becomes a disposition. It just may be a matter of time. It really is a portfolio effect, and I would say that the example Christopher Douglas gave about the large tenant that we're strategically combining space to open up larger blocks, it takes those kind of long-term moves and investments in TI to really optimize that.
It's a slow, steady process of building from 88%, both from a portfolio construction standpoint, but also then within buildings. Our view is probably moving slowly towards 90% is where our focus is.
You're also going to have in that your development and how much space may be still left to lease up in a development once it's completed. That's another example of a good opportunity to drive income as well as occupancy over time.
Okay. That's helpful. Thanks for the time.
Thank you.
Our next question comes from Vikram Malhotra, Morgan Stanley. Please go ahead.
Good morning. This is Alina on for Vikram Malhotra . Thanks for taking my question. Just was curious what your expectations are for the FAD payout ratio in 2020 based on your current CapEx outlook.
Sure. If you look, obviously, as Christopher Douglas described, we moved from about just under 100% to 95%, going from 2018 to 2019. If you look at our midpoint or the range we have for CapEx, and all the growth drivers we have, we really do see ourselves driving towards 90. Hopefully, we can achieve most of that in 2020. Our view is we should see continued improvement in 2020, and obviously in the years beyond that. That's sort of the progress we're looking for, is driving that certainly towards 90.
Great. Just one last question. Any high-level thoughts of around how a more Medicare for All stance may impact MOB and some of your tenants?
I would say, generally speaking, we've talked about that. I think the key thing is the probabilities. There's a lot, a sequence of low probability events that have to occur. Spending a lot of time on it right now is probably, maybe not the best use, but I think the key takeaway is it's not going to change the fact that people need healthcare, that there will be demand. You have an aging population. Again, some of the incentives, if you make healthcare essentially no cost, no marginal cost for folks, setting taxes aside, no marginal cost at the incurrence of use, then you could actually see usage go up. It may cause some restructuring and some uncertainty around that. Certainly from the health insurance side, going from private to government. Certainly, we think MOBs will be necessary, doctors will be necessary, all those services.
Shifting to outpatient will become, if not the same urgency, more urgency around that. We continue to see benefits from that. Not to discount the turbulence that might happen in that transition. We still think there's strong fundamentals behind that.
Great. Thanks for taking my question.
Thank you.
Again, if you have a question, please press star then one. Our next question comes from Lukas Hartwich, Green Street Advisors. Please go ahead.
Thanks. Can you guys comment on the broader supply outlook for medical office?
I think if you look at the transactions that we've seen over the past five years has been above $10 billion that's traded out there. I think as you look at the developments and development pace that's out there, it's been pretty consistent at that 1%-2% of total MOB supply that's in the market. We see that continuing to click along at a pretty steady pace over the next few years, don't see a lot of meaningful change in big chunks of supply coming online. It's been pretty consistent.
Have you seen any increase in speculative development?
No. We have not seen any increase in speculative development.
Great. Thank you.
I would say, Lukas Hartwich, I think if you compared that to 10 years ago in that cycle, it's very different than back then. I think today you see far less of that. You see much more need for the hospital, the health system, the physicians to all be integrated and working together to generate a new building and demand for a new building. I think that complexity has, and obviously learning lessons from 10 years ago or 12 years ago. I think those combinations of things have tempered that, and certainly we're not seeing it.
That's helpful. Thank you.
This concludes our question and answer session. Now I'd like to turn the conference back over to Mr. Todd Meredith for any closing remarks.
Thank you, Nick. Thank you everybody for joining us on the call this morning. We'll be available for any follow-up questions if you have any, and we hope you all have a great day. Thank you.
Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.