Earnings Call: Q2 2019

Jul 31, 2019

investments using our proactive sourcing process. This involves the practice of deeply embedding ourselves in targeted high growth markets. Using a team based approach, we gather local intelligence, systematically collect and analyze market data and identify desirable properties and potential developments that are not available to the broader market. This quarter, 3 of the properties we acquired were in the Seattle area and a result of using our market expertise and 3 years of patiently working our local connections. We are also seeing increasing benefits from the company's solid reputation the MOB space. Healthcare Realty is known for completing transactions smoothly, following through reliably and taking great care of our properties and tenants. Over time, our reputation has spread among an expanding network of brokers, sellers, physicians and health systems, and it leads to repeat business. This credibility has been years in the making and is yielding a marked difference in our ability to source more quality accretive investments. As an example, 2 of our long time health system partners recently reached out regarding potential development projects. With positive traction on these and other developments in our embedded pipeline, we expect a couple of starts in the second half of twenty nineteen. The combination of our reputation, our proactive sourcing process and favorable market conditions is yielding a higher pace of investments. While we certainly evaluate marketed deals, we're not simply waiting around for offering memorandums and RFPs. We are using our deep market knowledge, our local connections and shoe leather to insert internally source and directly negotiate many investments. Shifting to organic growth, our strong second quarter results reflect the benefits of steadily refining our portfolio toward more on campus multi tenant medical office buildings in better markets with top health systems. Discipline around these characteristics has led to superior contractual rent increases, cash leasing spreads and tenant retention and has enabled us to generate same store NOI growth of 3% or higher at the top end of expectations for the sector. While we will always refine the portfolio to improve internal growth and reduce risk, going forward we see less impact on our bottom line growth. Little need to reduce leverage, less rotation out of lower quality and non MOB properties, fewer leases with unfavorable purchase options and minimal need to reduce our exposure to off campus or single tenant properties. With these structural changes largely behind us, we see a clear path for organic and external growth to flow straight through to FFO per share, giving us a bright outlook for 2020 and the years ahead. Bethany? The political environment has certainly brought some theater to the healthcare sector since the beginning of the year, although actual health policy is expected to remain stable for the next 18 months leading up to the next election. Many anticipate a moderate Democratic presidential candidate will rise from the pack following months of heated rhetoric and sharp debate, but time will tell. Health insurance companies and hospital industry groups favor a bipartisan, more centrist leaning approach away from the total government takeover of health insurance and more toward incremental expansion of coverage. With Congress expected to remain divided, a tempered approach remains the most likely course. Turning to the status of current healthcare legislation, the Affordable Care Act remains under scrutiny in the 5th Circuit Court of Appeals. Many expect the law will remain in place whether in whole or in part. Republicans cannot afford to face an election having overturned health coverage expansion with no replacement to cover those previously insured by the ACA and without hope of passing major legislation in such a partisan Congress. It is not surprising that legal experts on both sides of the aisle agree the ACA should stand at least for now. Political debate will continue to intensify throughout the election season, but market sentiment should increasingly reflect reality as candidates proposals are vetted for their economic and political feasibility. Healthcare stocks have been recovering from their mid April lows and investor focus is returning to earnings and fundamentals. In recent quarters, hospital companies have reported renewed admissions growth, a positive signal for the direction of the sector. In general, the reimbursement and pricing environment for healthcare providers has been fairly stable this year. As disruptive as the ACA was at the time, the healthcare sector has adapted well and is moving forward. Government funded health insurance has remained relatively level, representing 41% of total healthcare spending today, compared to 39% in 2010 even before the implementation of the ACA. Given the stability and reimbursement mix and accelerating demographic need for healthcare, demand for real estate is now more promising than ever. Health systems continue to pursue strategies for enhancing market share, focused on expanding their revenue base. Both inpatient and outpatient services are being targeted for consolidation, expansion, new construction and employment growth. Health systems are looking to gain the correct balance of efficiency and acuity, cost savings and revenue growth. High acuity inpatient services are being centralized at market hubs and centers of excellence. While at the margin, health systems are moving less intensive services toward lower cost outpatient settings, both on and off campus, with care being organized along a continuum of acuity that generally increases with proximity to the hospital campus. In our view, on campus locations of outpatient facilities remain the most integrated and low risk investments strategic to the mission of the health system. Longer term outpatient delivery represents 1 of the most effective, proven and politically feasible means to lower spending growth and improve providers' profit margin. Regardless of political outcomes, outpatient settings will only become more critical to hospitals as caring for the aging population efficiently becomes increasingly paramount. Rob? Investment activity this year continues to outpace our expectations coming into 2019. Year to date, we have closed $195,000,000 in acquisitions with an average cap rate of 5.5%. Cap rates have remained consistent in the low to mid fives for higher quality on campus MOBs. With investor interest in medical office remaining high and a stable interest rate environment, we don't foresee a large move in either direction for cap rates. This quarter, we acquired 5 properties for $102,000,000 which includes the $28,000,000 Atlanta purchase in April that we discussed on our last call. These acquisitions are especially attractive because they increase our local market share and complement our existing footprint by building on our leasing team's extensive knowledge and leveraging our property management resources. In Seattle, we purchased 2 properties for $50,000,000 They are around the corner from 2 fully occupied buildings we own on UW Medicine's Northwest Hospital Campus in Seattle's growing Northgate submarket. These investments highlight the experience and teamwork found across our company. Our leasing team wanted more product in Northgate and our acquisitions group drawing from internal market data and our ongoing contact with local property owners delivered with these two buildings. The buildings are ideally located with direct access to Interstate 5 and near a new light rail stop and a massive Simon Properties redevelopment. They sit between the Northwest Hospital Campus and its large comprehensive outpatient center, which are less than a mile apart. We now own 4 properties totaling over 250,000 square feet around this growing hospital. And one of the properties could accommodate an infill development of up to 100,000 square feet with a structured parking garage. Our other two acquisitions during the quarter in Tacoma and Fort Worth totaled 119,000 square feet for a combined investment of $25,000,000 Both buildings are adjacent to hospital campuses where we have acquired or developed properties, giving us additional scale. And each hospital has recently undergone an expansion or is planning to expand in the near future, pointing to increasing demand for medical space around each campus. With nearly $200,000,000 in acquisitions closed year to date and another $75,000,000 in advanced discussions, we are increasing our acquisition guidance. Our new range is 2.25 to $325,000,000 We are optimistic about our ability to achieve the upper end of this higher range given our strong start to the year and robust pipeline. Now moving to development. We completed the $12,000,000 redevelopment of our MOB on Atrium Health University Campus in Charlotte, adding 40,000 square feet to the building. Most importantly, the first two tenants totaling 32,000 square feet took occupancy in early June. And in Seattle, a 151,000 square foot MOB on UW Medicine's Valley Medical Center campus is nearing completion. A lease with a 30,000 square foot surgery center is expected to commence in the Q4. As current leases in both developments take occupancy over the next 4 quarters, we expect NOI from these properties to ramp to $782,000 per quarter. Among prospective developments, we are making progress on a few projects sourced from our embedded pipeline. In Colorado, we recently conducted design and programming meeting with the hospital for the development of a 60,000 square foot on campus MOB with a budget of $19,000,000 The MOB will be home to the hospital's newly established comprehensive cancer center. In Texas, we signed our second letter of intent for space in a to be developed 120,000 square foot on campus MOB having a budget of 36,000,000 dollars And in Tennessee, we are in advanced discussions with the hospital to purchase and redevelop a 110,000 square foot building currently owned by the hospital. As part of the $26,000,000 redevelopment, the hospital and related providers will execute leases for approximately 80% of the building. Each of these developments is expected to yield 100 to 200 basis points above where these similar buildings would trade today as a stabilized acquisition. And as the properties come online and lease up, they represent significant FFO contribution and value creation. We expect a couple of these to start this year. I am pleased with our accretive acquisition so far this year, adding properties with a high propensity for sustainable long term growth. Our team is continually building a solid pipeline of investment prospects, both development and acquisitions that position us well for the second half of the year. Chris? This quarter's robust internal growth was complemented by the heightened pace of year to date acquisition activity. These positive trends are evident in our 2nd quarter same store and overall financial results. Specifically, normalized FFO of $51,200,000 or $0.40 per share increased $2,500,000 over the Q1. This increase was primarily the result of a $1,900,000 sequential increase in NOI for year to date acquisitions. We expect these recent acquisitions to generate the same 3% plus NOI growth as our same store assets, a level that continues to differentiate our portfolio. The trailing 12 month same store NOI increased 3 point 6% this quarter with a 3.8% increase in the multi tenant assets, a testament to our deliberate focus on owning high growth properties. In our experience, investments generating the best performance are multi tenant MOBs affiliated with top health systems and growing submarkets. And this knowledge has shaped the composition of our portfolio. Our 3.8% multi tenant increase was driven by 3.1% growth in revenue per occupied square foot versus 1.7% growth in operating expenses. The lower than historical expense growth was principally the result of a 1.5% decrease in utility expenses due to milder weather. It is worth noting that we typically experience a seasonal uptick in 3rd quarter utility expenses by as much as $1,500,000 over the 2nd quarter. Longer term, we expect operating expenses to increase in the 2% to 2.5% range, still providing positive operating leverage. A major factor in our ability to optimize our portfolio and drive revenue growth over time is our emphasis on in place contractual increases and cash leasing spreads. Currently, the weighted average annual increase for all multi tenant same store leases is 2.91%, which is well above what we see for most other MOB portfolios. For leases commencing in the quarter, the weighted average future annual increase is 3.2%. And notably, the weighted average cash leasing spread was 5%, which benefited from 90% of the leases having a spread of 3% or greater. These positive drivers, along with tenant retention of 87% signal sustainable growth in the years ahead. Achieving these levels of internal performance is not an accident. It is the outcome of decades of experience managing, leasing and investing in medical office buildings. As 2019 progresses, we look forward to making additional investments that complement the quality and growth potential of our existing portfolio. And with solid FAD coverage, comfortable leverage and a wide variety of available capital options, including expected dispositions, we're well positioned to fund the growing acquisition and development pipelines Rob discussed. We see our strong internal performance combined with the increasing acquisitions and flexible balance sheet leading to improving FFO per share growth through the remainder of 2019 and into 2020. Thank you, Chris. Operator, we are now ready to move to the question and answer period. We will now begin the question and answer session. The first question comes from Nick Joseph with Citi. Please go ahead. Hey, this is Michael Griffin on for Nick. Rob, you mentioned a strong transaction market that you've been seeing recently on the acquisition side with the cap rate. How does this change your disposition strategy going forward selling into that strength? I think our disposition strategy this year has been that you've got a guidance giving guidance of selling $75,000,000 to $125,000,000 at average cap rate between 6% and 7.25% or 7.5%. I think over the past few years, you've seen us sell around $100,000,000 to $125,000,000 in assets, which has really been the refinement of the portfolio that Todd mentioned. I think that going forward, we're largely finished with that refinement. You'll see us do more maintenance selling going forward, so that pipeline or that those levels will probably come down to $50,000,000 to $75,000,000 per year. Got you. And then, one thing on markets, you mentioned a number of acquisitions in the Seattle area this quarter. Are there any markets in particular that might appeal as compared to others that you're looking at? I think we continue to look in markets where we already have a presence. I mean, as Todd mentioned, our sort of internal process sourcing process continues to benefit us. And areas like Denver and Seattle, Dallas, I mean, the acquisition this quarter where we already have a presence, we think that those are right markets for us going forward and we'll continue to look in those areas. Got you. That's it for me. Thanks. Thank you. The next question comes from Vikram Malhotra with Morgan Stanley. Please go ahead. Thanks for taking the question. You referenced, I guess, on the margin, you're starting to see more services, some types of services being pushed to non hospital locations, whether that's on the campus or off the campus. Just curious does sort of this trend, even though it's slow, does this trend change your appetite for off campus acquisitions as you look forward? Vikram, thanks for the question. No, I would say for us, you'll still see us probably allocating certainly more and an of a deeper understanding of what is in that building, how committed is the health system to it, and then really, most importantly, how strong is that real estate that is off campus? Is it just a suburban office building with some medical tenants in it that could be difficult to release someday? Or is it something that really stands out on its own and we see the ability to generate strong rent spreads, contractual bumps that are more in line with our portfolio? So it's I think just by nature of our criteria, you're going to see less off campus. However, we're open to it. And I think obviously the key is paying the right price for that. And for us that's been a little tight, that spread's been a little tight and we'd love to see opportunities if we see them where it's a better spread, we will look at those. Frankly, the portfolio we have of off campus properties is a very, very nice portfolio with a very strong in place growth rate and ability to push rents. So it's we're certainly open to it, but we still lean towards the on campus, the safety and growth of that. Okay. And the impairment charge of real estate this quarter, can you provide a little more color on what that was? Yes, Vikram. That's a building that we've had and held for sale for a couple of years now. It was previously an LTAC that was operated by LifeCare. We are now under contract with a new buyer who's going to buy and redevelop the property as a drug and alcohol rehab facility. So we expect to close later here in Q3. And it's been Vikram, it's been vacant for a while. So the actual outcome of that is a positive because we've had some carrying cost to it. So selling that is clearly accretive for us. And just curious on even though so it's under contract, can you give us some sort of range on pricing or some sort of metric per foot sort of what I know it's empty, but just to get a sense of given the that techs don't really sell that often, just curious on pricing. Is there any color you can give? Yes, the price on that is a little over $3,000,000 $3,000,000 $3,500,000 can't remember the exact price. But it does reflect the significant capital that the new operator is going to invest in the building. And we considered, does it make sense for us to invest that capital ourselves and re lease the facility to them? But given the fact that that's not where our focus is, we decided it was best to go ahead and take those proceeds and let them invest that additional capital into the facility to redevelop it. Okay. That makes sense. And then just last bigger picture question. I think yesterday or day before, the CMS sort of came out and sort of encouraged more hospital price transparency, and this has been in the news for a couple of months now. Just curious if you have any thoughts on what that does longer term to hospitals? Sure. I think it's obviously early. We've all just been watching those headlines and some of the administration's comments and moves on that. I think you saw a little bit of that play out in the pharmaceutical side where it was pushed into the advertising side and that's already been pulled back by the courts. So I think that's a signal that this has probably got a long way to go through the legislative and even the court system. So long term, certainly, I think maybe there's a good outcome that can be beneficial broadly to helping at least provide some clarity on what we're all purchasing in the health care system. I think the real difficulty is a lot of us, most people have some form of insurance and they're not necessarily directly exposed to the full cost. So they don't even know what to expect when you're shopping, especially for the bigger ticket items. I mean, it's one thing for the small items. So it's I think there's a lot of risk for hospitals and providers push back pretty hard here to help get more clarity around how it actually is implemented. Great. Thank you. Sure. The next question comes from Chad Vanacore with Stifel. Please go ahead. So you've done about $13,000,000 of dispositions versus the $75,000,000 to $120,000,000 that's targeted. How should we think about the timing of those dispositions? Yes, I mean, I think we looking at the pipeline, those are obviously going to be back ended this year. I think we started out the year saying that, that they would be dispositions would be largely back ended. We've got a handful of those that should close here late Q3, early 4th with a few more, about half of it probably closing towards the latter part of the year. So working with different sellers and timing can on these dispositions can sometimes fluctuate. So but that's the right now that's the timeframe we're looking at. All right. Then thinking about the flip side of that, which would be acquisitions. In your guidance range, that would imply acquisitions and dispositions about even out, but you seem to be a little more positive on the higher end of acquisitions. So how should we think about that? Yes. I think just looking through the end of the year, I mean, I think those acquisitions will be spread throughout the end of the third and into the 4th quarter. So those are $75,000,000 that I mentioned, those have cap rates in the mid-five range. So I think just timing wise, it will be spread through the remainder of the year pretty evenly. All right. And just thinking about financing on that side, how do we think about target leverage at the end of the year and any additional equity issuance in the works just given that you've upped your acquisition guidance? Chad, as you pointed out, and at the midpoint, we are pretty evenly distributed between acquisitions and dispositions through the remainder of the year. So not a ton of additional capital that is needed. If we are able to view a little bit to the upside on acquisitions, we do have plenty of options to be able to raise additional capital. We did renew and expand our credit facility with a new 7 year term loan this last quarter. So we have availability there. The ATM is obviously always an option as well if we are seeing more volume. And then other sources of capital are always on the table as well. All right. And just one more for me. Looking at first half, TIs and CapEx running below the midpoint of your outlook, should we be thinking about a $1,000,000 to $2,000,000 sequential pickup or maybe something less for the full year? You're right that so far for the year, we are running kind of below the midpoint on our maintenance CapEx items. We do anticipate that for the full year, we still feel good about our guidance ranges and expect those to come in depending on the category, somewhere in the middle of those of the ranges we've laid out, which would indicate a little bit of a pickup here in the 3rd and the Q4. But overall, with the ranges we've outlined, it still points to solid FAD coverage in the mid-90s, which is a nice pickup compared to what we saw in 2018 when we're running closer to 100%. Chris, where would most of that spend be going to? I mean, we lay it out kind of between the 3 different categories and we give specific guidance on each of those in terms of the leasing commissions as well as the 2nd gen TI and the building CapEx. Off of memory, I think if we're on the low end of anything right now, it's more on the 2nd gen TI. But on all these CapEx maintenance CapEx items, we say it really fluctuates quarter to quarter just with when the actual money is spent when the bills arrive. But nothing in particular out of the ordinary on any of the 3 categories. I was thinking more or less across the portfolio or any specific properties taking excess CapEx? No. It's pretty even with where our leasing is going on and which is pretty spread out across the portfolio. We had, I think it was 18 different markets in the second quarter that we did that we had renewals on. I think year to date, we're in 24 markets. So it's pretty spread out across the country. All right. Good catching up. And I'll hop back in the queue. Thank you. The next question comes from Jordan Sadler with KeyBanc Capital Markets. Please go ahead. Good morning. Good morning. I wanted to just sort of back it up a little bit more macro. We've talked about this before and I know you guys presented on Page 16 of your deck in terms of the overall tenant diversity. And I'm just curious to touch on this topic again of how you guys are positioning your portfolio visavisort of the growth in telehealth, urgent care, physicians and the like and just the general decline in the population, maybe say millennials, who have a primary care physician these days. So you guys are, I think, 16% square footage overall total would be primary care. Care. Can you just remind us how you're thinking about it? Yes. I mean, obviously, the utilization of health care is heavily skewed to age and increasing with age. So it wouldn't be surprising obviously to see that the younger aged category or cohort wouldn't be using as much. And then as you point out, things change and technology changes. As much as all these technology inventions and ideas and applications are very interesting and helpful, I think really it's important to remember you're not necessarily solving everything through those. There are ways to enhance the experience, the follow-up, the maintenance of things. And so it usually still involves again, younger folks may go to the doctor one time a year, if that, especially in that cohort you're talking about and so we think that I'm not really focused on sort of age and acuity of health. I'm focused on you and I have primary care physicians because that's how we were raised. I'm talking about the guys who are in our offices who are 10 years younger than us don't have primary care physicians. And I'm more thinking about how are you thinking about that as you're underwriting new deals and you're looking at your existing portfolio? So I mean, I obviously get that there is an acuity of health that comes with age. I appreciate that. Well, and but also remember the setting in the episode of using urgent care relates to people who have very few incidences or emergency type issues. When you start having more regular things, you go see subspecialists. They're not sitting at the urgent care's office. If you've got an allergy issue, an ENT issue or cardiology issue, if you have cancer, those aren't solved in the urgent care setting. Not to say that things don't evolve, but you have a coordinator of care, and that's an important part of the process is having a coordinator care that then arranges your care with these subspecialists. So frankly, that's again why we look more on campus than off. When you get off campus, you do have a little more vulnerability to that because simply urgent cares with new changes like you're talking about in behaviors and practices can challenge that. But when you are dealing with these more complex issues, whether it's age related or you have it congenitally from a young age, you have a much more complicated situation that has nothing to do with urgent care. So I do think it matters in terms of the setting and the age or the acuity of things. And I know everybody wants to fast forward into disruptiveness, but everybody has a tight grip on that because it's interesting to talk about. But the reality is people are not suddenly getting less sick and less acute issues. We're actually seeing more of that and then the aging on top of that is more and it's a whole ecosystem. And I think for us it's a much safer investment on the whole to link yourself to those high acuity settings. Most of our new developments that we're talking about, most of our acquisitions have complicated cancer services. They have linear accelerators, surgery centers. I would say orthopedic, more joints being done in these surgery centers that are on and off campus. Those are the kind of things we're seeing drive our usage. And we think for the next 10, 15, 20 years with all the aging demographics pushing that, it's not going to be as much about the millennial piece. And then by that time, that group is changing, having children, having doctors, primary care doctors and falling into those patterns. Yes, it may change a little, but we don't think that is what's driving utilization. Pardon me, Mr. Sadler, are you there? Sorry about that. Yes, I was muted. Thank you. We missed the question. We missed the follow-up. So you think there's a lot of noise about sort of telehealth and No, no, no. I don't want to be just yes, we're not dismissive of it. We really are not. I mean, it's a very important piece of it. And we have several board members who we talk with regularly who are health system executive CEOs. And dealing with that, it's very real and it's an important piece of it, but it's not a substitution necessarily, it's a complement to what's going on. And then obviously, I mean, one of the key things about telemedicine is if you have these high end specialists, there's fewer of them. It's hard to pull them to smaller communities or outlying communities. So you create that hub near hospitals and then they can serve a broader population set that are not in these urban settings, maybe near the academic medical center or the large community hospitals. So it's important. I think it's just we tend to be so much closer to the hub rather than taking the risk out there that would be jeopardized by that change. I guess, putting it in dollars and cents, do you see or would you change your return expectations or have different return expectations going in, I. E. Pay a higher price for a higher acuity tenancy or a specialist tenancy versus something that had a higher mix of internal medicine or family practices? I think it already is embedded in the market. I think that's absolutely how the market is working. So when we're buying some properties that are in the low to mid fives as Rob described the market, that generally is the case or the developments we're pursuing, that generally is the case. And if you go to something that's much more, as you said, primary care based, out in the market, not near a hub or a dense area around a hospital, then you see a difference in cap rates. The exact spread is debatable depending on the content within the tenancy as well as the real estate market dynamics. But that is definitely embedded principle, I think, in the market for everyone, not just us. Okay. And then just lastly for Rob, because this is the Q2 in a row, he's been able to raise guidance on acquisitions and now it seems like you're optimistic around the high end of the range even, which is good. Do you see the potential to be having a similar conversation 90 days from now, Rob? I mean, is the pipeline, I heard, robust. Is that good? Yes. I mean, I think our pipeline is robust as I described. And I think we're in a favorable cost of capital environment right now that is affording us stability to make those acquisitions at an accretive level. So I think as that continues, I think that we have the opportunity to target the high end of that range. Yes, I think that's the caution for us is just that obviously a year ago we had a very different capital market environment. So there's certain things we can control and certain things we cannot. But I think what we're trying to certainly relay is that right now with the cost of capital where it is to strengthen that, but combined with our sourcing efforts plus what's coming to market, we really like the pace of what we're seeing. But we do have to be careful obviously because things can change fairly quickly. And just lastly, you guys you provide the cash yields. How would I you've done 5.5% cash yields on the 185 acquired to date. How would I think about that from a GAAP perspective? I don't have that number at my I wouldn't have that number at my fingertips. You have average escalators maybe? Yes. I was going to say, you can look at the average escalators of 2.91%, and I think we ended up I can get you the exact weighted average lease term and so you can do the math and calculate it. Our renewals were 53 months. So you can use the escalator and in that WALT as well as the cash leasing spread to come up with the GAAP yield. It's for the acquisitions, I would say, we this is a generalization, but 20, 25 basis points is probably realistic given what Chris just described. So we tend to obviously focus on the cash yields, but we certainly at least are aware of what the GAAP yield might be. Helpful. Thank you, guys. Sure. The next question comes from Rich Anderson of SMBC. Please go ahead. Hey, thanks. Good morning. So I think it was Chris that said the acquisitions are producing similar same store NOI growth to the rest of the portfolio. Did I hear that correctly? Yes. And the bumps are a little bit below what we have on average right now. 2.8. 2.8 versus 2.91, but we think that long term they should be able to generate the same level of growth. That's not the question. I just want to make sure I heard that right. The question is, if you're buying at a healthy pace now, what's benefiting the portfolio except for the fact that you're getting larger? I would think that when you acquire, you would want to be additive not only to the size of the company, but to the growth profile of the company. How would you respond to that question? Well, to Chris' point, the average escalators on the acquisitions are just fairly different than the in place. So when you look at that relative to expense controls, we think we can get very similar growth at NOI level just starting out. Obviously, there's accretion and spread from actually buying the assets, but not just to get larger. What we're looking for, to your point, is how to accrete to that same store growth profile. So putting that together with putting that together our acquisitions with the existing assets we have, we think we can combine that and accelerate. And as Rob went through, I think pretty much 1 by 1 on the acquisitions, these each of these buildings that we're looking at are increasing our scale, leveraging our resources, leasing and management in that same market. And so basically, you're able to then capture some incremental growth as you are describing that's beneficial beyond just saying, hey, we're bigger. Okay. Have you given any additional new thought to providing bottom line FFO guidance. I know you give all these components and stuff, but you just sort of take us right to the 1 inch yard line or whatever. You're doing this all this work and yet it kind of exists in a little bit of an information vacuum because you don't really see it in how it impacts your bottom line number. It's not a hard business to estimate going forward given its kind of consistency. I'm just curious, I know you've been asked this question probably a 1000 times, but maybe this 1,000 and one time you'll say, yes, we're going to continue to we're going to start to do guidance. What are your thoughts on that as of today? We're not there. We understand the point. I think what was important when we started many years ago providing all the details was that we did have some pretty wide interpretations, if you will, of our remarks and so forth, and we didn't have all those details in the guidance that we now have. And so you've seen everybody, I think, become much more in line with what our own expectations are and we've tried to communicate that and help folks walk through the business. But I think the important thing is by providing all those pieces we're getting people focused like yourself and investors on the actual business rather than talking about the odds of the game in the press conference. We'd rather talk about the actual plays and players on the field. And again, I know most people have a different view of that. But our view is we're not uncomfortable with where all the estimates are. And if we see a material issue there, I think it would raise that question further. But we're okay with what we see there. Okay. And then last question. I think Bethany went through the political environment and the ACA and all that. I know you're ramping up acquisitions, but you're doing it in front of a presidential election. I'm wondering, if there is sort of an implied risk in the timing of all this, because if Trump gets reelected, perhaps that's bad at the margin for the business of hospitals and healthcare and whatnot. So I'm just curious if you can comment on that and how that's working into your mindset? Well, all this, as Bethany said, is a lot of campaign theater right now. And not to belittle it, I think we have a long way to go to figure out which direction it will go and whether as you said, one victor versus the other will drive it strongly in one direction or the other. I think as Bethany tried to suggest, usually the more moderate incremental approach wins the day, And we think that's really more likely either direction. Especially with the divided Congress, I think it always ends up being more incremental than we all sort of see in the headlines or the debates. And so we really expect it to be much more reasonable. And as Bethany said, the ACA was pretty disruptive. In hindsight, It doesn't it didn't have a huge impact necessarily because what it really is about is health insurance and how you pay for it. It doesn't change actual need for care, especially those critical services, those acute services, which we're focused on. So I think it obviously presents some interesting things and we have to navigate that. But I think in general the trends are strong and it will be okay either way. Okay. I appreciate it. Thanks very much. Sure. Thanks, Rich. The next question comes from Michael Mueller of JPMorgan. Please go ahead. Yes, hi. On the 3 upcoming potential developments you mentioned, I think you said the Tennessee one was going to have part it was going to be partially leased by the system. Was there Colorado and Texas developments, were they going to be fully leased? They will at the outset, they will not be fully leased. There will certainly be a large hospital component to it. They will be well leased probably in that 50% to 60% range out of the case. Okay. And then is that similar for the Tennessee redevelopment? Yes, the Tennessee redevelopment will actually be probably up in the 80% lease range. Yes. But it's also hospital and then a joint venture with a physician group that comprise much of that, 80%. Got it. And if we're thinking about development, say, over the development starts over the next 3 to 5 years, I mean, does it seem like this is a pretty good template to think of where you have it's not 100% build to suit, not pure spec, but something with a heavy pre leasing component? Yes. I think if you look at our the 4 that I laid out, they're they're primarily coming from our embedded pipeline, so locations where we have control of the site, where we are in good dialogue with the hospital, aware of what's going on in the campus and what their evolving needs are. So yes, I think going forward over the next 3 to 5 years, you can see this type of development being more what we do. The next question comes from Todd Stender with Wells Fargo. Please go ahead. Hi, thanks. And just looking kind of at the front page of your press release, when you're looking at the average cash leasing spreads of 5%, you got a breakdown of the percentages of where those were. To get to 5%, does that suggest that that 4% plus were on larger renewals? How did you get to the 5%? Yes. No, it's pretty spread across all the leases, and so that's really on the percentage of square feet. So we had 37% of our square feet, and it was not a big concentration in any one particular lease or one even any one particular market. We had it was 16 of our 18 markets this quarter had cash leasing spreads of 3% or greater. So it's pretty wide and deep. The largest market that we had renewals this year was in D. C, which I think made up a little over 25% of the renewals for the quarter. It averaged about 6.5%, but it was not the highest market in terms of cash leasing spreads. So as I mentioned, pretty wide and deep and that's been consistent with what we've seen for the year and even looking back into 2018. But long term, we still look at the majority of the leases are coming in, in that 3% to 4% range like it did this quarter with 53% of them in that range. And so that's where we think the long term expectation for cash leasing spreads should be. Would you characterize these leases to be or have they were I guess below market or really you have some pretty good pricing power here. How do you characterize I guess maybe what happened in the quarter and what you're expecting for the rest of 2019? I would definitely say it's more the latter, the pricing power. Because our average lease term and you see it on our leasing commitments each quarter, they run, as Chris said, I think this quarter 53 months, so call it 4.5, 5 years. We're not getting materially out of line with market necessarily. There are those opportunities here and there, and we've benefited sometimes from that. But I would say, generally speaking, it's an ability to just continue the momentum that you have because of the pricing power or the competitive alternatives that aren't as plentiful. And so you just have that ability to push. And clearly, what we're always looking at is what is the potential competition, what's replacement cost, how are we relative to that. And we see plenty of room there across many of the markets as Chris described. All right. That's helpful. Thanks, Todd. And then when you're looking at, I guess, one of the acquisitions in the quarter, the Seattle one, the cap rate was pretty high on the 30,000 square foot property, it's 100% leased. Is the lease coming due soon? I mean it's still triple or AA rated. What contributed to that pretty high yield? Yes, that was a property that was internally sourced and directly negotiated with the buyer or with the seller by our guys here, a good opportunity for us. It was a little unique. The primary lease in the building with MultiCare, the hospital system, which was largely the largest tenant in the building, had a termination option in it, that was a few years out. And we with our relationship with MultiCare, we were able to go to them and eliminate that termination option and they actually extended the term. So we created some value there. For 10 years, that extended Yes. They extended term for 10 years. And so we created some value there. I think that was a benefit of us having 2 buildings on the adjacent campus. We've been on that campus for over 10 years. Both of the buildings are well leased. We've worked with them well during that timeframe. So I think that really benefited us there. All right. That's helpful. Thank you. The next question comes from Daniel Bernstein with Capital One. Please go ahead. Hi, good morning. So I noticed your retention rate and I know it jumps around it can jump around a lot quarter to quarter, even year to year. But you go back 2 years ago, it was in the low 80s, sometimes in the 70s. And the last two quarters, it's in the mid upper 80s. Are you seeing are you doing something different to retain tenants? Are the hospitals and tenants thinking differently about moving to other locations? Just trying to understand the trends there and you see that kind of high retention rate continuing. And it has relevance to the TI and CapEx. So just trying to get your thoughts there. Yes, good question. And we're not seeing a material change in terms of discussions with the hospitals. I think you may see a little bit of the improvement go to the mix in terms of our assets. Back to the point that Todd made of some of the refinement that we've been making over the years in terms of the mix of our assets that the markets as well as the location on and off campus may be benefiting us some. We still give guidance of $75,000,000 to $90,000,000 But as you point out, we've been running more at the mid- to the upper end of that. We don't see that changing. But obviously, in any particular quarter, it can fluctuate within that range. But it certainly does help, as you pointed out, on the capital side because you're able to retain tenants. The capital and the TI associated with that is substantially to be half of what you experienced looking to have to backfill that space. All right. I want to put you in a quarter saying CapEx is going to be better than you forecast, but if retention rates continue to stay high then that would be a possibility, right? Yes. It certainly does help. We as I pointed out earlier, we still feel comfortable with the ranges that we've given on all of our CapEx, including the 2nd gen TI, which takes into account the broader range on retention. Okay. And then kind of also another kind of broad company question. You seem to be sourcing a good number of transactions, both on the acquisition side and the investment side. Is there something you've changed in the last couple of years or even more recently in terms of trying to build relationships with the hospital systems, something strategically that you're doing different in terms of your sourcing. Just trying to understand this, the long term sustainability of maybe getting some more a higher acquisition or investment level than what you had in the last several years? Sure. I think as I think Rob touched on and I did as well, Dan, I think it's come together in terms of that internal sourcing process that we've been working on for years. It's not new. I think we're just seeing the dividends pay off in terms of ability to source those. But obviously, it helps to have a more constructive capital markets environment and a very effective cost of capital. So it definitely takes things we can control, but also some things we can't, but we have to be positioned to take advantage of. So that's really, I think, the confluence that has helped us. We obviously want to take advantage of that while we can. And it's interesting, we've looked back to your point about new versus new trends. I would say we've actually probably been a little bit careful about talking about our ability to do this sourcing too much because you just don't have full control of the markets in terms of what comes to market, the cost of capital. But looking back even 10 years, we've been pretty consistently been able to source acquisitions that are not just being marketed heavily, whether that's very little marketing to a few handful of buyers and we're in that small circle or it's truly things as Rob described, this one in Tacoma where we have our connections and work some sellers locally. So we're seeing a consistent ability to add that value on top of just what's in the market. And we're encouraged by what we're seeing in the landscape with sellers, the capital market environment, the interest rate environment. So it's to us it feels fairly sustainable, but we have to we always have to match fund and carefully watch the capital markets. Okay. I think what I was trying to get to was, is there something that you've done differently in the last couple of years, 3, 5 years than you did the 5 years prior that you know that maybe you know in the right market environment, you know something strategically that you've done different? I would say we've certainly put we've seen the success of it from years prior, and we've been just adding resources towards that effort. So as Rob described, Seattle, we're getting more and more out of that effort in Seattle or Denver or Dallas and some other markets that we're looking at and even some new markets. So I think it's just steadily improving that process, refining it, getting more people embedded, coordination as Rob described between our leasing, property management as well as our investments team. And it's just frankly gelling better and I think we're applying more to it and the markets are more conducive to that. So it's certainly helping pick up the pace and we're encouraged by the accretion that can come from that and then also the acceleration of internal growth that can come out of that as well. Okay, great. Sounds good. I appreciate the color. Thank This concludes our question and answer session. I would like to turn the conference back over to Todd Meredith for any closing remarks. Well, thank you everybody for listening this morning and we will be around for follow-up if anybody has additional questions. We hope everybody has a great day. Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.