Earnings Call: Q3 2019

Nov 5, 2019

Good day, and welcome to the Healthcare Realty Trust Third Quarter Financial Results Conference Call and Webcast. All participants will be in listen only mode. Please note that this call is being recorded. I would now like to turn the conference over to Todd Meredith, CEO. Please go ahead. Thank you, Lexi. Joining me on the call today are Carla Vaca, Bethany Mancini, Rob Hull and Chris Douglas. First, I'd like to make a few comments about David Emory, our Founder, who passed away on September 30. This last week, my colleagues and I enjoyed a wonderful celebration of David's life with his family and friends. David was truly a visionary, a force of nature. He inspired everyone around him with his intellectual curiosity, his intuition and his infectious charm and perpetual optimism. David had a remarkable degree of confidence in his abilities, yet he was acutely wary of hubris. He was a wise mentor, always leading by example. David was a Renaissance man pursuing many interests, personal and professional with great success and style. And he shared his achievements generously with family, friends and colleagues. We will miss him dearly, above all, for his genuine and loyal friendship. David was a wonderful human being who loved helping others succeed. When it comes to the healthcare REIT sector, David was a true pioneer. He had the vision to start the 1st MOB focused REIT in the early 90s. Today, we have a great company built on a strong foundation, thanks to David's vision and leadership. The Board appropriately bestowed upon David the title of Chairman Emeritus. His contribution to the sector and to Healthcare Realty will not be forgotten. Over the past few years, David did a masterful job transitioning leadership of Healthcare Realty and he was especially pleased with where the company is headed today. Now for the quarterly results. Carla, if you'd go ahead with the disclaimer, please. Thank you. 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 our Form 10 ks filed with the SEC for the year ended December 31, 2018, and in subsequently filed Form 10 Qs. 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 Q3 ended September 30, 2019. The company's earnings press release, supplemental information, Forms 10Q and 10 ks are available on the company's website. Thank you, Carla. I'll begin by touching on 3 key topics for the quarter. First, the strength of Healthcare Realty's operations second, our increasing acquisition volume and our ability to source new investments third, and most importantly, how we see organic and external growth translating to FFO on a per share basis. In the Q3, Healthcare Realty generated steady performance on strong operating results across the portfolio. Our largest driver in place contractual rent increases edged higher. This was boosted by renewals in the quarter, which had bumps above 3%. Our ability to generate healthy cash leasing spreads continues to correlate high tenant retention, a testament to the demand for our prime locations where price is not the primary determinant of value. Expense growth is also well contained, expanding margins and translating to same store NOI growth above 3%. We see stability in the portfolio's internal growth in the years ahead, given the fundamental strength of our property locations, their alignment with leading health systems and their critical role in current healthcare delivery trends. We are also bolstering the strength of our internal growth profile with selective acquisitions. Year to date, we've acquired 14 MOBs for more than $300,000,000 elevating our 2019 acquisition volume well above our historical pace. What differentiates us is the way we pursue investments. We like to avoid bidding wars and paying premiums for widely marketed offerings. So far this year, we've directly sourced 2 thirds of our acquisitions through relationships with owners and brokers. And what is really impressive, we've seen this exceed 75% where we've gained scale in key markets over time, such as Seattle. Our knowledge of targeted markets and deep network of relationships allows us to buy more of what we want rather than bidding on what is for sale. With the success of our sourcing efforts, we expect to sustain a healthy pace of acquisitions going forward. We increased our acquisition guidance a second time for 2019 and we see a strong pipeline looking ahead to next year. We also improved our growth profile by selectively disposing of properties. While dispositions can be counterproductive initially, a disciplined amount of pruning is necessary to maintain a high performance portfolio over the long run. Fortunately, looking into 2020, the costly rotation out of non MOBs and smaller markets will be largely behind us. We have moderated our disposition guidance for 2019. And looking ahead, we expect a slower pace of dispositions at better cap rates. Much like acquisitions, our pace of development is also building momentum. This quarter, we began a redevelopment in Memphis, which includes the acquisition and redevelopment of an existing MOB. Baptist Memorial, a market leading health system with whom we've enjoyed a long standing working relationship, called us when they needed a reliable partner to develop a strategic outpost for surgery and outpatient services. We expect a couple of developments and redevelopments to emerge from our embedded pipeline in the coming quarters. The company's accelerated investment pace, fewer dispositions and steady organic performance is generating FFO growth per share in the second half of twenty nineteen. We expect more improvement in FFO per share in 2020 and matched with disciplined capital spending, we see incremental progress on dividend coverage as well. Relative to other property types in the healthcare sector, outpatient real estate continues to offer a compelling combination of steady returns and low risk. We remain steadfast in our commitment to owning and operating quality medical office buildings and using our experience and refined strategy to deliver steady growth in FFO per share and create long term value for shareholders. Now I'll turn it over to Ms. Mancini for a closer look at healthcare trends. Bethany? Thank you. The 2020 presidential and the race for the Democratic nomination continue to dominate headlines and once again have brought health insurance policy to the forefront of politics. The array of Democratic candidates covers a wide range of platforms calling for various forms of increased government funding of health insurance, whether through current policy under the ACA, a public option buy in or Medicare for all. While polling suggests voters are attracted to such ideas, support of Medicare for all drops significantly when faced with the high cost and the need for greater taxation and elimination of private plans to fund single payer public health insurance. Political rhetoric of the day, however, does not signal a change in the direction of rising healthcare demand, clinical delivery trends or relatively stable reimbursement rates. In addition, the overall course of health policy legislation in Congress is not expected to change in the near term with a divided House and Senate. Current legislative efforts centered on lowering the cost to consumers of pharmaceuticals and surprise out of network billings, along with funding hospital payments for uninsured patients. Even with some bipartisanship on these issues, strong lobbying by drug companies and hospitals and ongoing political debate will likely keep any new health policy at bay until after the presidential election and a new Congress convenes in 2021. We do expect a decision in the court soon on the outcome of the Texas VA Zar case and the standing of the lower court ruling December, which declared the ACA unconstitutional. It is likely the 5th Circuit judges will issue a stay in the case, keeping the law in place until an eventual Supreme Court hearing, possibly not until 2020 or beyond. Several states are working on their own legislation to provide health subsidies and public insurance options, but are contending with the high cost of such plans. These efforts span multiple layers and branches of government and are evidence of the politically sensitive nature of healthcare and the value the nation places on supporting access to quality medical care. The population is aging and demand for healthcare services continues to expand. Thus, the difficulty in curbing the growth of healthcare spending is acute and the need for lower cost of care essential. Outpatient services are becoming increasingly critical to meeting the nation's demand for quality healthcare at a lower cost, and the push toward delivering outpatient care in its most efficient setting is being accelerated on multiple fronts, most recently by commercial insurers as well as providers. As of November 1, UnitedHealthcare is shifting more of its medical spending to outpatient facilities and will no longer cover certain planned outpatient surgeries delivered in hospitals unless predetermined to be medically necessary in most states. Instead, the insurer will require outpatient surgery to be done in medical office and ambulatory facilities. And health systems, to increase leverage with insurers and capture market share, we'll continue to align with physician groups to offer services across the continuum of care in the most efficient and profitable setting. We expect Healthcare Realty's medical office facilities and tenants and our relationships with health systems will continue to benefit from these primary drivers and deeply embedded macro trends that will ensure the growth in outpatient facilities for years to come. Now, I will turn it over to Rob Hull. Rob? Thank you, Bethany. Now I'm going to give you an update on investment activity and our outlook for the balance of the year. Acquisition volume so far this year of $316,000,000 is at the high end of Healthcare Realty's historical levels. We have experienced notable success in our ability to source higher volume through 1 and 2 building transactions. We have been expanding and developing our investments team and related processes to execute on this growing number of opportunities. Combined with the competitive cost of capital, these efforts have secured 14 properties through 12 separate transactions this year. During the Q3, we acquired 4 buildings totaling 175,000 Square Feet for $79,000,000 In Los Angeles, we purchased 2 MOBs for $61,000,000 The buildings are located next to Huntington Hospital, a 625 bed facility in Pasadena. These properties are well positioned for strong NOI growth. What really sets these buildings apart is a diverse roster of specialists, such as cardiology and women's health, who value the proximity to the hospital in this densely populated area. In Houston, we acquired an on campus MOB located in the fast growing Sugar Land submarket for $14,000,000 This acquisition expands our portfolio in the 5th largest market in the country to over 620,000 square feet. It also adds a third high quality relationship in the market with Houston Methodist. In Oklahoma City, we purchased an MOB adjacent to a leading health system campus immediately next to a building we purchased last year, where we recently increased occupancy to nearly 100%. The new building is currently 76% occupied and produces a 6.3% cap rate. We expect the yield to increase into the high 6s by boosting occupancy to around 90%. Already in the Q4, we are off to a strong acquisition base. We bought 2 additional properties in October. In Raleigh, we made our first investment in the market, a 57,000 square foot MOB for $22,000,000 The building is in a rapidly growing area and is adjacent to market leading WakeMed's North Hospital. Also in the Q4, we purchased a property in Dallas adjacent to Baylor Scott and White's Plano Hospital for $20,000,000 This building is anchored by Baylor USPI Surgery Center. Leveraging our relationship with the hospital, we also executed a lease with the Baylor outpatient rehab joint venture. This lease was signed at closing, and we expect to build out of the suite to begin soon. The property expands our presence on the campus, where we already own a 174,000 square foot MOB we developed in 2004. With year to date acquisitions totaling $316,000,000 and a robust pipeline, we are moving up acquisition guidance for the year to $350,000,000 to $400,000,000 Moving to development. We placed 1 project into pre construction this quarter and have 1 or 2 starts expected in the coming quarters. In Memphis, we commenced pre construction activity for the redevelopment of a 111,000 Square Foot MOB. Baptist Memorial, looking to secure a leading orthopedic practice as a joint venture partner in a surgery center, needed a developer that could move quickly. What is important here is that the hospital reached out to us given our long standing relationship and development experience. The redevelopment has a total budget of $28,000,000 with an expected stabilized yield of 7.6%, including the $9,000,000 acquisition of the existing MOB from the health system. We will have lease commitments representing 81% of the building, including the surgery center, orthopedic group and several hospital practices. Occupancy is now 37%. The balance of the remaining leases are expected to take possession early in the Q1 of 2021. We also continue to make steady progress on additional future development projects in Washington, Colorado, Texas and Tennessee, sourced from our embedded pipeline and existing health system relationships. Each development we are pursuing is expected to yield 6% to 7.5% at stabilization, representing significant FFO contribution and value creation. Looking at dispositions, we have closed on $29,000,000 in sales so far this year. We are reducing disposition guidance to $50,000,000 to $75,000,000 at cap rates from 6 point 5 percent to 8%. The reduction is due to a few MOB dispositions originally targeted for sale in 2019, shifting into our plans for next year. Going forward, we expect disposition volume will remain at this lower range, consisting primarily of MOBs, which will produce more favorable sales cap rates. Most recently, we sold 3 buildings for a total of $16,000,000 including an inpatient rehab facility for $14,000,000 I am pleased with the pickup in net investment volume for the year and the bright outlook for 2020. Now, I will turn it over to Chris to discuss financial and operational performance for the quarter. Thanks, Rob. The 3rd quarter showcased the same positive themes as the first half of the year, including a healthy acquisition pace and sustained internal growth. This translated year over year to a 3.2% increase in FFO per share to $0.40 Sequentially, FFO increased $500,000 over the 2nd quarter. This was primarily as a result of a $1,000,000 increase in NOI from net investment activity. The higher NOI was partially offset by a $500,000 increase in costs, mainly related to interest expense. As is typical in the Q3, seasonal utilities were up $1,400,000 sequentially over the 2nd quarter. However, this expense increase was completely offset by rental rate escalations and operating expense reimbursements. In the Q4, we typically experienced a $600,000 to $800,000 increase in sequential NOI due primarily to the reversal of the 3rd quarter seasonal utilities. For the trailing 12 months, same store NOI increased 3.3%, driven by 3.6% increase in NOI from the multi tenant properties and a 1.8% increase from single tenant. The performance of our multi tenant properties continues to be reliably strong. Revenue per average occupied square foot increased 3%, while expenses were up just 1.8%, largely due to a 3% decrease in utilities. This reduction came from a combination of the mild winter we discussed earlier this year, as well as energy management investments. Our ongoing ability to drive multi tenant revenue growth is due in no small part to our persistent efforts to maximize in place contractual increases and cash leasing spreads. In the Q3, future contractual increases for the leases executed in the quarter were once again strong at 3.06%, while cash leasing spreads averaged 3.3%, highlighting our pricing power, especially with the outsized volume of renewals and 90% tenant retention this quarter. Not to be overlooked, average in place contractual rent increases have improved 13 basis points over the last 8 quarters, up to 2.93%. Achieving this in just 2 years is noteworthy and has compounding power when applied over our 12,000,000 square foot same store portfolio. It represents not only the value of our leasing team's concerted efforts, but also the benefits of owning quality, high demand properties. Turning to the single tenant portion of our same store portfolio. The 1.8% growth in NOI was as expected, With nearly 30% of our rent escalators being non annual, quarterly NOI growth will fluctuate around the in place average of 2.12%, depending on the timing of the non annual increases. The next non annual increase, which happens to be the largest at over 20% of single tenant base rent, is scheduled to occur in October 2020. Until that time, single tenant NOI growth will run below the in place average. At the single tenant property level, we sold an inpatient rehab facility in Erie, Pennsylvania, as Rob mentioned. This leaves us with one remaining IRF on a 400 bed tenant hospital campus in Los Angeles, where we also own 5 medical office buildings. We just completed a 5 year renewal for this inpatient rehab facility at a 7.6% cash rent increase with no TI. The FAD payout ratio was 91% for the Q3 year to date, as capital expenditures and second generation TI have been running at the low end of expectations. We expect maintenance CapEx will be higher in the 4th quarter and the full year 2019 fab payout ratio to be at or below 95%. This is a reduction of approximately 5 percentage points over full year 2018, and we expect additional improvement in 2020. Our balance sheet is healthy with debt to EBITDA of 5.2 times at quarter end. We raised $72,000,000 of equity during the quarter through the ATM, which was used to fund the $79,000,000 of acquisitions in the quarter. Since the end of the quarter, we've issued an additional $78,000,000 of equity to fund a growing pipeline of accretive investments, including 2 properties acquired in late October for $42,000,000 As we approach the end of the year, performance and momentum across the portfolio are strong. Driven by internal growth, a solid balance sheet and a rich pipeline of pre funded investments, we expect the FFO per share growth we saw in the Q3 to continue in the Q4 2020. Operator, we're now ready to open the line for questions. Thank you. We will now begin the question and answer session. Your first question comes from Chad Vanacore with Stifel. Please go ahead. Hey, good morning, all. Good morning. All right. So you've stepped up acquisition guidance then reduced dispositions. Has anything changed in the competitive landscape for acquisitions that you see either asking prices or competition No, Chad. I mean, I think what you're seeing from our team is and it goes back to sourcing process that we've we discussed on the last call and discussed today. I mean, you're seeing the benefits of us going into a market and identifying properties that we want to own, and then our team forming relationships with those building owners, brokers and other groups in that marketplace that are giving us the opportunity to buy these buildings that are not necessarily being marketed. And so in many cases, you're not competing with a broad group of folks. And so it's allowing us to bring some nice assets into the portfolio. I think in terms of pricing, I think pricing we're continuing to see stable pricing. I think there has been some deals out there that have dipped below 5% here recently, and I think those were deals that were more marketed deals. And so I think what we're looking at is still in that range of around 5.5%. So we expect to see that continue. All right. And then just on the flip side, your dispositions get pushed off into 2020. Is there anything going on there that is delaying your sale of those properties? Do you just feel more comfortable keeping them a little bit longer? No, it's really just timing general, sort of specific to those sales. I mean, there's nothing in particular that's causing us to hang on to them longer, but it's just taking a little longer to close the transaction. We do expect those to be part of our disposition plan for next year, dollars 50,000,000 to 75,000,000 dollars and those are largely MOBs that are in that lower cap rate range of $5,500,000 to $6,500,000 percent. All right. And then just to bring this full circle, can you describe any of the key differences between what you are buying today and then what you are selling? I think that what we're buying today is in good growing markets aligned with leading health systems in those markets, multi tenanted on campus buildings or adjacent to campuses. In contrast to what we're selling, typically those are in smaller markets, perhaps they're markets that aren't growing and we don't see the growth potential in those markets that we do in some of these other markets. So it's largely really assets that don't fit the strategic long term plan of the organization versus those assets we're buying or have a higher propensity for growth and really fit our long term goals. All right. I'll leave it there. Thanks. Thank you. Your next question comes from Nick Joseph with Citi. Please go ahead. Thanks. I'm wondering if you can walk through the sales process for the IRF that was sold in the Q3. Obviously, the cap rate was probably a little higher than expected. So any color there? Yes. That process was a purchase option, a fair market value purchase option that was driven by an appraisal process. And it was different than what you typically see when you have appraisal processes in those types of agreements. This one took the average of 3 appraisals, one submitted by the buyer, one submitted by the seller and then a third average. And oftentimes, you'll see the appraisal that's furthest away from the other 2 be thrown out and the other 2 be average. In this case, all three were averaged. That was the way it was written into the agreement. And that incented the buyer to submit a low valuation, in this case, a valuation of 0, which was on the verge of absurd. And there was also there are some utilities that served the building that were provided by a third party that detracted from the value in the appraisal process as well. How many other assets have similar fair market purchase options in the portfolio? We don't have any that are similar to that process. That was just a one off? Yes. Thank you. Thank you. Your next question comes from Jordan Sadler with KeyBanc Capital Markets. Please go ahead. Thank you. Good morning. First, I just want to offer sincerest condolences on the passing of David to the team. And then in terms of my question, what's causing sort of the continued increase in the activity and the acquisition activity year to date, the sort of 3rd consecutive bump up. I've noticed a little bit of a mix in the shift away from on campus. I don't know if I'm overly reading into the 100 basis points uptick in the asset ownership mix here year to date. Any insights would be appreciated. Well, Jordan, thanks first for your comments and thanks for your nice comments in your note as well. We saw that and appreciate it. I would say for us, it really goes to the volume question. It goes to the sourcing process. And that's a multiyear effort. As Rob said, we've been expanding our investment team with some young professionals. They've been getting their legs under them, helping out our senior folks really attack these markets in a proactive way as Rob described. So I think we're just seeing the fruits of that, number 1. But to your question about distance from campus, I think there you have a little bit of a unique situation where earlier, I guess last quarter, we bought a couple of properties that were just beyond our own definition of adjacent to campus. I think they were 0.27. 0.3 maybe. 0.3 miles from campus. So when you get into Seattle or a dense market like that, sometimes there are certainly some attractive properties that may be just outside that definition. So pretty subtle difference there. No big change in strategy. We certainly are open to assets that are away from campus, more materially away. But as you know, we have it's not that we won't invest occasionally in some off campus assets that really align with health systems and we think are really have strong real estate characteristics. We just want to tilt towards campus on or adjacent. So no material change, but certainly a willingness to look at assets that make sense even if they're a little outside the range. So fair to sort of characterize it as a little bit of a greater opening in terms of casting a little bit of a wider net to certain properties or is that overstating it even? It's probably overstating a little. I will say in a market like Seattle, where we have such a strong presence and we know that market really well, we have a lot of folks locally on the ground operating there, including one of our leaders of our leasing team, about half the country that she leads and has been with us for 20 years. And so we just have a lot of resources there that know that market well. It's clearly a dense market. So you might see it in situations like that. Los Angeles might be another market where we've had scale and would something like that. But it's probably not too much to read into that. Okay. And then on the same store NOI trajectory, I know you guys look at it on trailing 12, sort of a better indicator, but I'm trying to look at this quarter to see if there's anything to perceive in terms of what's going to happen going forward. And I noticed sort of the year over year decel in multi tenant, but also as you called out the single tenant side. As we look forward, will this sort of lowered rate be more of a steady state or should it bump back up and what would be the drivers? Yes, good question. Kind of 2 pieces to that. I'll break it into the single tenant and the multi tenant. On the single tenant, as I mentioned in my prepared remarks, we have seen the timing of our non annual escalators is running through. And so we have over 25%, almost 30% of our properties that have not had an increase in the last 24 months. And so that it's not because they don't have them, it's just because the timing of them. And so we did see the lower growth as a result of that this quarter and that will continue until the next non annual escalator occurs in October of 2020. So you should expect to see that in a single tenant. On the multi tenant, as you mentioned, we do believe that trailing 12 month is a better signal as to the performance of the business, and that was 3.3% this quarter. Quarterly results can have a lot of noise due to fluctuations in individual line items, which is actually what did occur this quarter. We had an unfavorable comparison to Q3 2018 due to $600,000 of expense reimbursement true ups in that period. So excluding that $600,000 revenue per average occupied square foot as well as total revenue would have been greater than 3%, which is more in line with our expectations. So moving forward on a trailing 12 month basis, we still expect in the multi tenant NOI growth to be that plus or minus 3%. But as pointed out, there will be fluctuations quarter to quarter all the time. Okay. And then I guess within that same sort of framework, just expenses, anything you're seeing on the expense front as you look forward, Chris, that sort of would knock you off sort of this low 1.8% trajectory you've seen over the last 12 months? Yes. We have been benefiting from the expenses as we've talked about this year that are running below our historical average. We say long term, we expect it to be more in that 2% to 2.5% range. Right now, we're running about 1.8% and a lot of that has to do with utilities that are running negative 3%, which is great when you can get it. Part of that was due to the milder winter that we had in the Q1, which really resulted in on a quarter over quarter basis basically flat overall expense growth. So we're not going to predict and project what the weather is going to be for the next year, but we are certainly benefiting from that. We are continuing to see pressure on property taxes, But I would say that that's there's nothing different there from what we see historically, especially as you're buying additional assets, you're developing assets that a lot of times there will be a catch up in the assessed value. So property taxes run well above the average, 4 plus percent, but with some cost controls in other places, we do feel like long term we can continue to control expenses more in that 2% to 2.5% range. Great. Thank you. Thank you. Your next question comes from John Kim with BMO Capital Markets. Please go ahead. Thank you. Good morning. On the acquisitions that you acquired during the quarter, which were I think primarily adjacent, Can you comment on the pricing differential you're seeing right now between adjacent and on campus acquisitions? And is it fair to assume that on these acquisitions you acquired the C Simple Intrep with no purchase option? Yes, John, I think when it comes to your question about on versus adjacent, really not seeing much difference in pricing there, if any. I mean, it's our definition of adjacent is within a quarter mile. And so that's in most cases across the street from the hospital. So just not seeing a lot of price difference there. And then in terms of fee simple versus ground lease, I think it's a mix. I think everyone this quarter. Everyone this quarter was fee, sorry. Everyone this quarter was fee. So we didn't have any that we bought on ground leases. Yes. The one that was in October in Dallas that is a ground lease, but it was it's not with the hospital. It's just it's a dense area and the developer who put it together ended up ground leasing the land from someone who's owned it for some time. It's just economic and there's no purchase option. Got it. Okay. And then Todd, you mentioned a strong pipeline of acquisitions for next year. Any way you can quantify that at all and how that relates to the $350,000,000 to $400,000,000 that you plan for this year? Sure. It's clearly early to really call out what the range would be for 2020. But as Rob suggested and I did as well, we certainly see a strong momentum building going into 2020. And we'll clearly have more color on that as we get to the next quarterly report. But all that to say, we certainly see an ability to continue at this level that you're seeing now. It's subject to a number of things as you can imagine. I mean, one of the things we just talked about was the sourcing efforts and that is clearly different than just bidding on what's for sale. We like that. It does give us a little more predictability, but it's also a lot more lead time and work to generate that pipeline. So because of the back work we've done on that, again, some of these deals we bought this past quarter and even into the Q4 are the result of years of digging, digging in a market with a broker, with building owners. So it takes a while, but we're encouraged by what we see and we think this level, whether it's that exact level of this year, but something on this order of magnitude is certainly something we see being able to move towards in 2020. Okay. And then I had a couple of questions on your Memphis redevelopment. It looks like the asset will be 37% occupied during the redevelopment phase. Can you provide some color on what work is being done on this project? And also Yes. So that sorry, go ahead. I was going to say, the 7.6% stabilized yield, what occupancy does that assume? Yes. So just I'll answer both of those questions. First on the 7.6%, that is a stabilized occupancy in the low 90% range. As far as what's being done, the building is currently it currently exists today. There's a surgery center inside of the building. We are redeveloping the building in the sense that most of the areas inside of the building will be touched. Some existing tenants will be moving around. The surgery center will be expanded. There will be some additional parking added to it. The hospital has some existing uses there now, but they'll be bringing some additional uses. So it's really a comprehensive redevelopment of the asset, even though the asset is in place today. The 37% occupancy represents tenants that are there today and will remain in place until such time as we either move them inside of the building or the new lease takes effect after the redevelopment of the property. How big do you think your redevelopment program can be? It seems like there's a lot of on campus older vintage MOBs out there. Sure. I mean, there's certainly opportunity out there. We're finding, I think that working with these health systems, we've done a number of redevelopments over the past few years. I think if you go to our embedded pipeline, we do think that there's some opportunity there. And you expect to see 1 or 2 of those every year that we're working on. And those come from having relationships with the They've worked with you before. They know that you can, They've worked with you before, they know that you can produce and oftentimes you get the call like we did here. So I think there's some good opportunity there. Great. Thank you. Thank you. Your next question comes from Rich Anderson with SMBC. Please go ahead. Thanks. Good morning. And I'd like to also second condolences to David. He made me a better analyst, better person, very genuine approach to people, whoever he interfaced with. And in the height of his role as CEO, he was always the one who showed me respect whether there was agreement or disagreement or maybe he's blowing smoke up, but at least I felt that way. And I did get a chance to email him before he passed. I'm going to assume that he did read it and my condolences to everybody on the call. But now, and one good thing is my vocabulary has improved, so I'll never say the word just irregardless, orientated and I'll have conversations, but I will not conversate. Very good. All right. So now let's rigidly move on to the business of talking about medical office, which kind of feels wrong, but we've got to do it and got to move on. So are you seeing more in the way of PE investing in your space? Do you have capital flowing? A lot of the elephant hunting is now gone as everyone is suggesting. Is there different types of capital flowing into the space that you see? There's not I mean, it's not palpable in terms of the short term. I do think if you look back over a multiyear period, certainly that's true and you're seeing more private equity develop funds, whether it's private non traded REITs under a new model. But you've seen a number of very credible large private equity groups develop an MOB program. They might partner with different smaller operators, developers, investors, and you've been seeing that for a while. So it's really not new, but you're right, I think the pace of that is very high. And some of them are doing quite a nice job of really tackling the 1 and 2 building approach. So it's not without competition. And certainly, I would say, as we describe our sourcing process, we're not trying to suggest there's no competition. There's always competition even when you're talking with an owner about doing a deal outside of a marketed process. They're aware and they're savvy and they often will have either themselves or brokers that can do market checks. So there's plenty of that, but I think it's again just developing deeper relationships and getting access to the deals that we see in the markets we want to be in. Really, I don't see the level of competition any more heightened than it's been in a long time. It's just different players. And the public markets will tend to move a bit more move around a bit more and have different cost of capital in shorter time periods. But we've seen continued rising pressure with private equity over some time and I wouldn't say it has risen in the last year or so any more than what we've seen in the last 3 or 4 years. Okay. The underlying business as described on this call in medical office generally is good. I mean, it's getting and perhaps getting better. And so I don't know that there's much in the way of kind of criticism of what you guys are doing. Stock market increasingly fickle in its approach to any company is important to you as well though in terms of capital raising. Do you you guys have underperformed this year, not a bad year in absolute terms, but still underperformed as investors are kind of seeking alphas elsewhere perhaps. Do you feel some sort of need to change your stripes a little bit? And are you doing that, I guess, on this call with sort of lower dispositions, higher acquisitions, more development, redevelopment and so on? I'm wondering if the perception of the stock market is an important partner for you to finance your business is influencing how you go about the world of medical office? And if you were a private company, would you be going about things differently? Well, there's no doubt the cost of capital is important. And for us, that's the public equity markets, the bond market. Obviously, we have other sources too, bank debt. There's always joint venture capital and so forth. And we've looked at all those and we consider all those. I think for us, if we were clearly, if you were private, you would have a different set of circumstances. And you may or may not, depending on who your backers would be, have a little different objective. But I think for us, where we're at today, Rich, is really accumulation of all of the work we've been doing to really clean up the portfolio over the last several years, really try to focus on MOB. You've seen a lot of the inpatient rehab sales over the last few years and really trying to streamline and get focused on the best MOBs. So not only the non MOBs, but some of the weaker markets, weaker health systems and trying to refine the portfolio. So for us, the acceleration, I would call it now in the business model and the ability to not have as many dispositions and have a higher degree of acquisitions, I think really just a cumulative effect. And absolutely, it's an important ingredient to have a great cost of capital. And if we don't have that, it obviously can impact the pace of our external growth. But we know kind of underneath all that, the best thing we can do is have a really strong portfolio that generates those consistent results around that 3% level that Chris walked through. So that's our main focus and then how do we add to that. And we try to take advantage of that at times where all the stars align and we can put capital to work very accretively. So it's I think it's more just a cumulative effect rather than a change in stripes. Okay. And then perhaps the market is taking note of your single tenant growth that came in on the lower end of things for the reasons you described. Is there a view that, that portfolio as a percentage of the total should be meaningfully lower than it is? And if so, could it ever be a zero number? It's at 10% today of NOI. It's less on square feet, but it's about 10% of NOI. So our view is that sort of reached a natural level that makes sense. Could it be a little less than 10%? Sure. Could it be a little more? That's fine too. I think we like where it is, plus or minus. And it really is a practical thing that if you look at the actual assets in our single tenant portfolio, they're actually it's really a strong, strong single tenant portfolio, a good bit of it being on campus as well and with really strong health systems. So we think it's a good balance. And frankly, the relationships we have with health systems can often lead to a situation like that, where we might invest in an on campus single tenant facility, maybe even off campus single tenant. But I think 10% is probably about right and not some objective of ours to get to 0. Okay. That's all I got. And as I and in closing, as I said to David in that email, it will always be the Emery board. So carry on. That's right. Well, thank you for your comments on that. And I can assure you his family was receiving a lot of emails and reading his emails to him in those final days. So I'm sure he saw it and appreciated that. Thanks, Rich. Great. Yes, thanks. Thank you. Your next question comes from Daniel Bernstein with Capital One. Please go ahead. Hi, good morning. I offer my condolences as well and just say that Rich missed low fungibility is a word it? Dan, last week, we had a nice celebration here at the office as well for colleagues and past alumni of Healthcare Realty. And we put on one of our whiteboards all these various quotes that you guys have brought up and many more. So we had a lot of fun with it and he was very memorable in that way. Appreciate that. Yes. No, it won't listen greatly. So I wanted to ask, when we toured your facilities about a month ago, we talked some about the pricing power that you're now seeing at your MOBs, the releasing spreads have been very strong. Long term, we had some concerns for the MOB industry about potentially increasing pricing power from or pushback from hospital systems as they merge, as they get larger. And I don't know if you could talk a little bit more on the call about the pricing power you are seeing about the experiences you're having with the hospital systems right now and just sustainability of the cash releasing spreads that we're seeing in your portfolio? Dan, this is Chris. I'll start on that. We feel very positive about how we've been performing and the outlook moving forward. One of the things that we do each quarter is break down the distribution of our cash leasing spreads. And you're I was trying to think of the right analogy, maybe it's basketball, you're not going to hit 100 of your free throws, but having 10% or plus that you end up with negatives, I think that's still pretty strong. So you're going to experience that in any particular period. But the majority of what is occurring each quarter is still on that 3% to 4%, and that's what we've been putting out for several years and what we continue to look at. And we think that that's reasonable and sustainable based off of our history, but then also if you look at it from the pricing power really goes to what your replacement cost is. And in a lot of these locations, as we toured in D. C, there's just not a lot of available land. And so your competition would be somebody putting up some new construction and new construction costs and especially with land costs in some of these dense areas, our experience is those are growing at, call it, 5% plus. So we think that there is good sustainability to continue to be able to increase rents in that 3% to 4% range. That's really helpful. The other question involves occupancy. It's been pretty stable in the upper 80s, particularly in the multi tenant. Given your comments earlier in the call about insurance carriers starting to require more outpatient use versus in hospital. What's the right stabilized occupancy for a multi tenant portfolio? Can we see that rise over the next 3, 5, 10 years from upper 80s into low 90s? Or is there some other kind of structural impediment there? Maybe you want to keep some vacancy open for existing tenants to expand. Just trying to understand if there's some upside in your occupancy as well as the rates maybe over a longer period of time? Sure, Dan. I would say we have been in sort of the high 80s, if you will, especially on the multi tenant MOB portfolio. And we would say that 90% is certainly achievable over time. But what we've seen over a long period of history is annual absorption being more in the 25, 30, 35 basis point range. And so for us on a practical level, we don't expect that to suddenly happen 1 year. It's not as though the space is in a block, in a convenient block somewhere where we can lease it all to 1 or 2 hospitals even by market and just solve that. It's obviously a complex challenge to try to move these tenants around if that's the case and consolidate some space. So that's an effort we're always going through and trying to accommodate folks. But it's an ongoing effort. I think the other side of that is even just aside from the leasing side is just portfolio management and always, as I mentioned, being proactive about selling assets that might be chronically living at 60%, 70% occupancy, and we just don't see any near term upside in occupancy or growing the rates. So for us, it's a combination of those things, but achieving around 90% is probably the practical level on the multi tenant side. And then your mix with single tenant is what creates the blend. And I think when you really pull back a lot of other people's data, they don't often provide the detail. But if you back into it, a lot of the multi tenant MOB portfolios do live around that high 80s, 90% level. So it seems to be a fairly industry wide phenomenon. And part of it also is shorter term leases and some constant expansion contraction and moving around does lead to a natural level. And it's a smaller average tenant size. So there's just more of that frictional vacancy, if you will. Okay. And then one last question. On the redevelopments, is there any significant disruption that we should be expecting? And are you going to leave those assets in the same store portfolio or pull them out? Just want to understand how coming quarters as you ramp that up, how we should think about that? I would say it's case by case. The one that we're talking that we talked about here in Memphis this quarter, clearly is a new asset to us. We were under contract, haven't actually purchased it. So that clearly is not going to be in same store for a while. But an asset that is already in same store, more often than not, it will stay in there. But it just depends on the scope and magnitude of it. If occupancy is going to fall to below 50% or 60%, that may be a candidate for saying we're going to call that a redevelopment. And we've also selectively taken it out and we'll be able to And we've also selectively taken it out and we'll be very clear about where that lives and describe that when and if we do that. But I don't think in the end, 1 or 2, as Rob mentioned, a year would have a material impact. We'll just be careful to describe that clearly to investors and to analysts. Okay. Sounds good. And look forward to catching up with you guys next week at REIT World. Thanks, Dan. All right. Thank you. Your next question comes from Todd Stender with Wells Fargo. Please go ahead. Hi, thanks. Yes, just wanted to second and third everyone's comments regarding David. He was really a scholar, obviously, and a gentleman and will be missed. So to his family and you guys, all our best. Thank you, Todd. All right. Just shifting to, I guess, the redevelopment. You guys highlighted the Memphis property for redevelopment and I saw it in your supplemental. It looks to be a new acquisition, but I didn't see it on your new deal list. I just wanted to hear a little more detail on that one. Yes, that's correct. It's not on our new acquisition list yet, and we really thought about that and said, well, we don't want to necessarily double count those dollars. We haven't closed on the acquisition yet. We're under contract, and you'll see that obviously in the Q4. So we don't expect necessarily that that's part of the acquisition guidance. It's obviously not a huge purchase at $9,000,000 So again, that would be case by case. That one has more material dollars that we'll spend after the fact. So we felt like that made more sense to be put into the redevelopment side rather than the acquisition side. And the purchase price $9,000,000 is in the budget, the $28,000,000 budget. So it's accounted for in that budget that we're showing. Got it. Okay. And just with the equity activity lately tapping the ATM, it's been a good low cost for you guys. But on the broader theme of maybe raising the dividend or getting to that point, I know Chris you kind of highlighted that the payout ratio is declining. But how are you guys thinking about that? Your balance sheet is in good shape, probably teeing up the opportunity maybe for debt going into next year. So I know kind of a few inputs there, but I guess broadly speaking, how you guys think about the dividend? Sure. As Chris described it, we obviously were closer to 100% in 2018 and it looks like we'll be at 95% or better as Chris described for this year. And we would certainly like to see that same level progress more or less in going into 2020. I think for us, the key is it makes sense to be well into the 80s before we would really move the dividend. But the nice thing is we're moving that direction and we can start having those conversations. I think it's a bit early to put a bright line on it, but we're moving in the right direction whether that takes 2020 or into 2021 where we have a direct site on that, we are moving in the right direction. Strong outlook on those, I think we expect strong progress as both with a pretty strong outlook on those, I think we expect strong progress as both Chris and I mentioned in 2020. And we'll certainly have more news to report on how we see that when we get to the end of 2020 and whether it makes sense for into the 80s and can begin to point that direction. The only thing I'll add on the debt is we're certainly always looking at all of our advantage of opportunities. Right now, we're in the lower end, advantage of opportunities. Right now, we're in the lower end of our debt to EBITDA range at 5.2%. We feel comfortable there. We'd like to stay in that range. We do have the 7 year term loan that we completed earlier this year that has a delayed draw embedded in that, that we've been taking advantage of. So we expect to draw down on that commitment in the Q1, which will relieve the line of credit. So we feel very good about our debt position at this point. How much more to draw on that, Chris? It's 150,000,000 dollars Okay, great. Thank you. Thank you. Your next question comes from Tayo Okusanya with Mizuho. Please go ahead. Yes. Good morning. I just wanted to add my own thoughts to and condolences about David. When I was a young pup in this industry 15 years ago, he was just really good to me in regards to getting full understanding of the MOB space and I'm sure he will be missed and condolences to you guys and as well as to his family. Thank you, Tayo. We appreciate it. In regards to my questions, most of them have been asked, but I just had a quick one about the acquisition pursuit costs this quarter. Again, just kind of curious was a lot just a little bit elevated, was a lot of that just again the same old looking at a high volume of deals? Or was there actually like a big portfolio type transaction you maybe have been looking at that didn't come your way so to speak? No, I'd say it's up a little bit from Q2, but it's just the overall accumulation of all the transactions. As Rob mentioned, we've done 12 separate transactions this year. So it's just the accumulation across that, nothing out of the ordinary to talk about. Okay, great. Appreciate that. Thank you. Thank you. This concludes our question and answer session. I would like to turn the conference back over to Mr. Meredith for any closing remarks. Well, thank you everybody for joining us on the call this morning, and we appreciate everybody's kind remarks about David. He will be greatly missed. And we look forward to seeing everybody next week out in California at REIT World. And we'll be around today if anybody has any follow-up with us with additional questions. Have a great day. Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.