Good morning. Welcome to the Healthcare Realty first quarter earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Todd Meredith, President and CEO. Please go ahead.
Thank you, Austin. Joining me on the call today are Kris Douglas, Robert Hull, Bethany Mancini, and Carla Baca. After Ms. Baca reads the disclaimer, I'll provide some initial comments, followed by Ms. Mancini with an update on healthcare policy and trends. Mr. Hull will discuss investment activity. Kris Douglas will cover financial and operating results. Carla?
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 the Form 10-K filed with the SEC for the year ended December 31st, 2017, 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 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 quarter ended March 31st, 2018.
The company's earnings press release supplemental information Forms 10-Q and 10-K are available on the company's website.
Thank you, Carla. We are pleased to report steady performance for the company in the first quarter as we continue to execute our low-risk strategy centered on internal growth. Overall, same-store NOI performance was strong in the mid 3% range on a trailing 12-month basis, led by the multi-tenant properties at 4%. The company's solid growth is propelled by contractual rent bumps that have continually improved at the multi-tenant properties, enhanced by robust cash leasing spreads and consistently high tenant retention. These positive operating fundamentals are the results of a carefully crafted portfolio of hospital-centric properties in strong markets aligned with leading health systems and a purposeful shift towards multi-tenant MOBs over the last decade. Notably higher growth from our multi-tenant compared to our single-tenant properties clearly illustrates the benefit of this strategy. With medical office now comprising 90% of NOI, this shift is essentially behind us.
The process of selling single-tenant assets, many non-MOBs, and reinvesting in safer multi-tenant MOBs at lower yields has restrained FFO growth over the last few years. Even so, we've been fortunate to be able to reduce leverage and improve dividend coverage on a FAD basis. Looking ahead, with a well-refined portfolio, we see a clear path to bottom-line growth and an increasingly well-covered dividend while keeping leverage low. With the current dislocation between public and private valuations, internal performance has become an increasingly critical component of growth for REITs. I'm pleased we've been steadily recycling assets over the past few years, even when external growth seemed to be the focus of most. We remain committed to the ongoing effort of pruning the portfolio to capture value, improve growth, and reduce risk.
The solid internal growth generated by the company is made possible by booming demand for the outpatient services of our tenants. Trends towards lower-cost settings continue unabated, with hospitals now generating more than 50% of their revenue from outpatient care. Despite some headline misperceptions, inpatient hospital care isn't going anywhere. Outpatient care is simply becoming a larger portion of a growing top line for many health systems. That growth is not evenly distributed among hospitals. Many rural hospitals are facing stagnant population trends and declining inpatient revenue growth, as opposed to systems in more urban markets where favorable demographics are accelerating inpatient revenue, expanding margins, and strengthening credit ratings. When investing in MOBs, selecting the right health system and campus is crucial and can be the difference between robust NOI growth and anemic performance.
Healthcare Realty's investment discipline has resulted in 82% of its properties being associated with investment-grade-rated health systems. Many of these stronger health systems are gaining market share by advancing the hub and spoke model to channel higher acuity inpatient care to urban hospital campuses and lower acuity care to decentralized outpatient facilities and urgent care centers located throughout communities. Having over 25 years of experience, we've seen the full range of leasing outcomes across the hub and spoke model, and we place far greater value at the campus hub rather than less strategic off-campus locations that have proven more temporal. 87% of Healthcare Realty's medical office buildings are located both in top 50 MSAs and on or adjacent to hospital campuses. Accordingly, our tenancy is weighted heavily toward higher acuity physician specialists and hospital outpatient departments that value on-campus locations.
Medical office fundamentals are a relative bright spot in the healthcare REIT sector. In this period of discovering a new equilibrium between public and private markets, many are understandably frustrated with recent stock price performance. In the long run, companies with low leverage like Healthcare Realty, that benefit from rising secular demand, high barriers to entry, and shorter-term leases with strong pricing power will likely outperform. Bethany?
The political landscape for healthcare policy has remained relatively quiet since the passage of the Republicans' landmark tax legislation and long-awaited two-year spending bill, surprisingly supportive of federal health spending measures. The Trump administration continues to work to lower insurance costs with proposals that reverse some of the Affordable Care Act's directives, although opinions differ as to their anticipated effectiveness. Congress also chose not to reinstate ACA cost-sharing reduction payments to health insurers this year and eliminated the individual insurance mandate in 2019. These changes are not expected to have a material impact, and attention has shifted to the diverging approaches that red and blue states are taking to bolster their insurance exchange markets. We will likely see a patchwork of laws with differences in affordability of insurance across 50 states.
For the nation, healthcare spending is on the rise and is projected to increase 5.5% annually over the next 10 years, a faster pace than projected annual growth in GDP, driven largely by the increase in the 65-plus aged population that is expected to grow 3.2% annually over the same time period. Inpatient hospital discharges have been roughly flat for short-term acute care hospitals, down 0.4% for the past 10 years, while inpatient revenue has actually increased, up 6.2%, indicative of an underlying shift in hospital services to higher acuity care. In today's post-ACA environment, with pressure on hospitals to improve quality measures and efficiency, especially for low acuity population management type care, it is not surprising that inpatient volumes would be flat. More and more marginal services are being moved out of the acute care hospital and pushed toward lower cost outpatient settings.
The impact of this shift, though, is highly dependent on the hospital location and market demographics. For critical access rural hospitals, inpatient discharges have declined considerably, a negative 4.3%, and with slower revenue growth. This has raised questions among investors concerning the fundamental importance of all inpatient healthcare delivery and its impact on physicians, especially when linked to headlines related to specific hospital company initiatives dealing with top-heavy administrative costs and widely spread networks of small urgent care centers. However, as inpatient volume has waned, inpatient revenue per discharge has actually increased across the board, up 6.6% for short-term acute care hospitals. Modernization, collaboration, upgraded private services, higher acuity needs, and better technology are all playing a role in demand for inpatient services and expansion of hospital campuses.
As technology advances to allow more procedures to be done in outpatient settings, new technologies are also being developed and implemented in acute care settings. Where market demographics are positive, there is considerable new construction of inpatient hospitals. In 2018, 287 acute care hospital projects are slated for completion, valued at $20.8 billion, up from $10.4 billion in 2014, with a rising annual trend. Unequivocally, inpatient care and the acute care hospital remain relevant to the 32% of the $3.3 trillion industry that represents hospital-related services and the 20% that is physician office services. As real estate investors with keen interest in location, we believe Healthcare Realty is better off investing next to top hospitals with proven demand for both inpatient and outpatient care. Rob.
During the first quarter, Healthcare Realty evaluated a steady flow of prospective investments and remained disciplined, choosing not to make any acquisitions. With the current relationship between market asset pricing and the company's implied cap rate, we will fund future acquisitions with proceeds from planned dispositions. We have no plans to increase leverage or issue equity to purchase assets at levels below our implied cap rate. Published cap rates for quality MOBs have remained unchanged in the low to mid-fives. However, the majority of these transactions were priced before stocks for public REITs adjusted. There are several sizable deals currently in the market. While likely not a fit for us, sellers and their brokers appear to be expecting similar pricing levels. Once closed, these transactions should serve as better indicators for current pricing.
Dispositions during the first part of the year included the sale of seven properties at the end of April, subject to a fixed-price purchase option for $46.2 million. For the remainder of the year, we expect to sell an additional $30 million to $80 million in assets at a blended cap rate range of 7%-9.75%. This broad range of cap rates includes the expected sale of five skilled nursing facilities for $9.5 million, with a targeted close in June. We moved these properties into assets held for sale in the first quarter. Excluding these assets, our expected cap rate range for dispositions for the remainder of the year is 5.5%-7%. Proceeds from these sales will be redeployed into medical office buildings that will generate faster-growing, more stable cash flows.
On the acquisition front, we currently have five properties under contract for $70.5 million at a blended first-year yield of 5.8%, roughly equal to our implied cap rate, with individual deals priced from the low fives to over 6%. These properties, totaling 370,000 sq ft, are 90% occupied on average and located in Seattle, Denver, and Oklahoma City. All five properties are located in existing Healthcare Realty markets, and four of the five assets are on or adjacent to campuses where we already have a presence. For 2018, we reduced acquisition guidance to $75 million to $125 million, in line with expected dispositions for the year. Turning to development and redevelopment. Our pipeline remains active with a solid mix of opportunities expected to start in the next 12 to 24 months. Our efforts remain focused on existing relationships and provider-driven demand, where we are likely to achieve higher risk-adjusted returns.
We are targeting 1 to 2 new development or redevelopment starts this year, with stabilized cap rates ranging from 100 to 150 basis points above acquisition cap rates. With a predictable stream of capital from dispositions, we remain positioned to take advantage of prospective investments that reflect our long-standing disciplined approach. Kris?
As expected, the acquisitions completed in the fourth quarter of 2017 provided an incremental $2.1 million of NOI in the first quarter. Normalized FFO for the quarter was $49 million, a $2.2 million increase over the fourth quarter of 2017, and Normalized FFO per share increased $0.02 to $0.40 per share. Over the past five years, one of our primary initiatives has been rotating into safer, multi-tenant, on-campus MOBs and out of slower-growing, higher-risk properties. The result has been a transformation of the portfolio. 90% of NOI now comes from MOBs, compared to 78% in 2012. 84% of NOI comes from multi-tenant facilities versus 70% five years ago, and 87% of the properties are located on or adjacent to campus, up from 78% in 2012.
As evidence of the benefit of this shift, total same-store NOI for the trailing 12 months increased 3.5%, primarily driven by the 4% increase in multi-tenant NOI, compared to a 1% increase in single-tenant NOI. Although a high-quality, on-campus, multi-tenant MOB portfolio requires a bit more ongoing capital investment, our experience shows that higher contractual escalators, stronger tenant retention, and propensity for larger cash leasing spreads more than pays for the incremental capital and generates better risk-adjusted returns. This is demonstrated by the fact that over the last five years, even with the cap rate rotation between our acquisitions and dispositions, we've been able to drive down our FAD dividend payout ratio from approximately 115% in 2012 to 94% in the first quarter, while at the same time reducing debt to EBITDA from nearly seven times to under five times.
Moving forward, we will continue to focus on maximizing our key drivers of revenue growth, in-place contractual increases, and cash leasing spreads. By owning desirable multi-tenant properties in leading markets with high tenant retention and shorter lease terms, we have greater opportunity to consistently improve these metrics, leading to higher and more stable internal growth. In the first quarter, average in-place contractual rent increases continued to make steady improvement at 2.81%, compared to 2.67% eight quarters ago. Future contractual increases for leases executed in the quarter were 3.1%, well above the in-place average, pointing to higher growth in quarters ahead. Cash leasing spreads were 5.2%, with 85% of the leases having spreads of 3% or greater. These revenue drivers helped multi-tenant same-store revenue per occupied square foot increase 2.9%, which, combined with 40 basis points of increased average occupancy, resulted in 3.3% revenue growth on a trailing 12-month basis.
This revenue growth, paired with expenses at 2.4%, generated operating leverage, producing the multi-tenant NOI growth of 4%. With the strong underlying performance of our uniquely structured multi-tenant portfolio, our focus will remain on internal rather than external growth and maintaining our healthy, conservative balance sheet. Investment volume will be measured primarily redeploying disposition proceeds, with no plans to lever up to fund acquisitions. Todd?
Thank you, Kris. Austin, that concludes our prepared remarks. We're now ready to begin the question and answer period.
All right. Thank you. At this time, if you would like to ask a question, please press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Our first question will come from Jordan Sadler with KeyBanc Capital Markets. Please go ahead.
Thank you. Good morning.
Morning.
First question. Morning. Wanted to touch base on the dispositions, and the updated guide. It seems, as you guys pointed out, Rob talked about where the market is today, and having the cost of capital rise from the low levels it was at some point last year for the public REITs. It's interesting that the pricing sounds like it's going to be similar for the stuff that's about to trade. One, Rob, I was just interested if you could maybe characterize or offer some color regarding the type of product that's out there, and then the types of buyers who are out there today.
Yeah. Jordan, we really haven't seen a lot of transactions close this quarter that meaningful transactions. There are some out there that are sizable portfolios and a few sizable one-off deals that are out there, but we haven't seen any of those be priced at this point. Most of the data that you see out there are on assets and deals that were priced before the downturn in the public REIT stock prices. At this point, we've got a limited data set, and we don't see any evidence of cap rates rising, but we think it's too early to tell, and we think that the assets that are out there being marketed right now will provide a good indicator of where we are and where we're headed.
Just in volume, just to give you a broad number, Jordan, I would say a billion and a half of maybe five or six portfolios that we are hearing about, as Rob described in his remarks. It's a mix of on and off campus, some really nice assets that could be really low cap rates, but then a little bit at the other extreme too. It should be telling at least directionally where things are after the public stock price adjustments.
The other question I had, which was a follow-up, I thought you were suggesting that pricing might look remarkably similar to what transpired last year, when the REITs were engaged, including yourselves. I guess what I'm curious is, given sort of the movement of the stock price, you obviously upped the disposition guidance, but what's your appetite to increase that further, assuming the appetite in the private market keeps cap rates at the lows or near the lows we saw last year?
I think we certainly are continually working on a subset of properties that are potential disposition candidates. I think that would certainly have to take into consideration what the opportunities are out there to redeploy that capital. If we find the right opportunities to invest capital from dispositions in assets that have that substantial long-term growth profile that we're looking for and the quality type assets that we're looking for, then we would certainly take that opportunity. Right now, we think that the levels that we've communicated are achievable, and we think that given the type of product that we see out there that fits our profile, we can turn around and redeploy that capital into those assets.
Jordan, I would also say, if you look at the last three years, we've averaged about $125 million of dispositions, which is certainly elevated relative to our long history of probably more $50 million-$75 million. We've been on that path, and I think Rob's point is we're still on that path. It's partly, as you said, because there's a really low cap rate environment, or has been, and all evidence suggests it might stay there. We certainly don't know for sure. It's a good time to be doing that. As Rob said, it's balancing that with redeployment.
Okay. Then just following up on the redeployment side. The acquisitions that are under contract are $70 million or so. I think you said five eight cap. Can you parse that a little bit? It seems like the markets are a little bit varied.
Yeah. One of those assets is a small asset that's adjacent to another building that we own. It's down in the low fives. A couple of the assets are adjacent to a campus that we're already invested in and slightly over six. It's a range of about 100 basis points.
Okay. Thank you.
Thanks, Jordan.
Our next question comes from Chad Vanacore with Stifel. Please go ahead.
Hey, good morning. It's Seth Canetto on for Chad.
Hey, Seth.
Hey, just building off of the disposition question. I know you guys have increased sort of the cash yield range for the dispositions, and I understand you're selling some skilled nursing facilities. Can you just tell us why the contract under the previous deal was terminated?
Yeah. The previous buyer couldn't get comfortable with the underlying operations of the property. These properties are located in rural Michigan, and have experienced, similar to the remainder of the SNF industry, they've experienced some downturn in occupancy, and the previous buyer just couldn't get comfortable with the underlying operations.
One thing I would add to that is the previous buyer was a smaller operator, and so they were having to bring in some outside equity capital for their acquisition, and that's really where they had some difficulty. The buyer that we're under contract with right now is the second-largest operator of skilled nursing facilities in Michigan. We've done some transactions with them before, several years ago. We're feeling good about being able to move forward with them.
When you look at acquisitions, you guys bought in Seattle, Denver, and Oklahoma, where you already have a presence. Is that really the strategy for the remainder of the year, just continue to tack on where you have existing properties?
Yeah. That's our primary strategy, where we're in the market and are comfortable with the market and know the market. We see good opportunities to add to the portfolios in those markets and drive the growth in those particular markets. Yes.
All right. You mentioned the dividend coverage. What level are you guys comfortable with taking that down to, and thoughts on increasing the dividend going forward?
Sure. Yeah, I mentioned obviously, we've improved that. Kris went through the stats on that. If you look back five years, it's a pretty significant move. For the last three years, 2017 and back, we were sort of in the mid-90s, if you will, on a FAD basis, and certainly that's a much-improved level. I think for 2018, we certainly see something similar. Really, I think it comes down to the end of 2018 here, and then as we look into 2019, kind of seeing where that might go. We haven't pegged a certain level. We're not climbing on any particular date here.
I think what we're trying to say is we're comfortable with where we're at now compared to where we've been, and we see the portfolio shift beginning to come to a conclusion and more into a maintenance mode on that side, less impact on FFO growth, which should put us in a position to improve that coverage going forward. Obviously, start to have discussions as we roll into 2019 about what does it look like going into 2019, and how good can that coverage be.
All right. Thanks for taking my questions.
Thank you.
Our next question is from Rich Anderson with Mizuho Securities. Please go ahead.
Hey, good morning, everybody.
Good morning.
Couple questions here. Did you get the cap rate on the purchase option, the $46 million end of April?
13.3.
13.3.
Okay. All right. Recognizing this kind of shift from a focus on from external to internal growth, could you come up with sort of a growth profile of a company that would come from that? In other words, you mentioned FFO growth was kind of restrained over the years as you got to this point of the portfolio. Do you think you're a I'm not going to marry you to any given quarter, but do you think you're a 100 or 200 basis point better growth profile now that you have achieved this objective, or is that too much or too little?
Certainly. I think so. I think in simple math, you're right, we won't go to specific numbers, but in broad terms, our view is that the single-tenant side of the business and even non-MOB side has been more in that 2% range. Certainly what we've been striving to achieve with the multi-tenant strategy and being on-campus in better markets, has really been hitting 3, but not only 3, being able to move beyond 3, since all the metrics that Kris went through describing that model. Really kind of living above 3. I think you're right, it's sort of that 100, 150 basis points. That's just sort of the steady state, assuming you don't have any challenges.
I think where the fundamentals of it all come down to is we've just seen more challenges in the outcomes at the end of leases and so forth with single-tenant facilities, especially off-campus, compared to multi-tenant. When you add that in, it even becomes a bigger difference. Just the steady growth state, to your point, I think you're right. 100, 150 basis points.
I was thinking more along the lines, not so much the transition from single to multi, but from not buying expensive assets or buying expensive assets less and funding them with.
External
position proceeds.
Yeah. I think for us, having operated where we have for quite a while, which is focused on the highest quality assets, you end up driving those prices down in the market to almost to your cost of capital, so very little spread. I think for us, we don't see shifting from more external growth to less external growth as being a tremendous difference in our growth profile. I guess, does that answer your question?
Yes, it does. That's good. Gotcha. On the topic of CapEx, that's kind of taken on a little bit of an extra focal point from investors, including ourselves. Do you think the issue of CapEx with medical office is something that is changing, or do you think there's kind of an education process going on to people like us and investors just following the space? Or is the business requiring more CapEx, I guess is the question?
Our view is no, and I think it is a function of what you hit on there, which is disclosure's gotten better, and we're a part of that. Certainly, if you go back five years, our disclosure wasn't as good as it is now. That's improved, which is good, but to your point, more disclosure isn't necessarily a change. I think the other exacerbation of that issue is that we've been shifting from single-tenant to multi-tenant. Clearly, the more of that we have, the more you live in the multi-tenant world, which is higher because you have that lease roll, number one, but you also have the obligation as the landlord to maintain the buildings, which is often less of an obligation and almost no obligation in many cases with the single-tenant assets.
Yeah. I think the only thing I would add to that, Rich, is I do think it's an education. If you actually go back, we've been talking about it for probably close to 10 years, of what you should expect related to TI on renewals and new leases. We've been saying it's in that kind of 4%-5% range for new and $1-$2 per square foot per lease year for renewals. If you actually just carry that through to NOI, that's where you start getting into the levels that we're talking about. I don't think that given the fact that there wasn't much lease roll, a lot of companies were in an acquisition, external growth focus, and didn't have a whole lot of leases that were turning.
There wasn't a lot of focus on that. People didn't take those rough metrics and run it through to calculate what the percentage of NOI is. Like I said, I don't think it's a change, it's just people are starting to understand it better.
Okay. You're exposing my own ADT, I guess. Last question, bigger picture. We've been hearing this theory of insurers and pharmacies getting together and pushing covered people into their facilities and away from facilities like those that you own. For example, like a relatively minor condition, like we use the idea of pink eye, where would you go? Would you go to your doctor, or would you use Aetna or something and go to CVS? I'm curious, how much do you think that that's disrupting the business? Understanding you guys are in the more higher acuity world of medical office. I'm just curious if you feel like that that's disrupting the business generally, and same question on urgent care and how that's growing as well in the various communities. Just a big-picture view, if you could.
Sure. Yeah, there's certainly a lot going on. A lot of headlines around it, and it is fairly disruptive in terms of perception and maybe certainly in reality. I think, as you pointed out, we're very focused on the higher acuity side of it. If you look at our mix of specialists, relative to the weighting of specialists across all physicians in the U.S., we're underweight primary care and heavily overweight specialists. The things you're describing, we don't feel has a material impact on us. We certainly haven't seen it. We're doing 500, 600 lease transactions a year. Obviously see the pulse of that all the time, every day. We're just not seeing it. We do have some primary care in our buildings, but it usually is not just basic primary care.
It probably is a multi-specialty group that has that, the primary care plus a lot of different specialists. It's a good referral mix with the specialists in the building. We just aren't seeing it in our buildings, but it's absolutely an issue, I think, if you're focused off campus, because there are alternatives like that. I think the other side of that is there's such a bulge of the baby boomer group just coming into that 65-plus age, that we kind of need all these outlets for addressing the lowest acuity items. It's the old thing of, if you go to the ER to deal with your pink eye, you're really causing some problems with the system. It's good that that can then be treated in a minute clinic or an urgent care, as you said.
I think it's all part of a necessary process of trying to gear up the system to handle just the onslaught of utilization that will come with the aging population.
As a way of expanding the horizons, do you notice at all if insurers are starting to take a look at assets of your ilk and getting into more acuity situations, or is that just too soon to call?
I think it's too soon. Certainly, some insurers have gotten into the physician business. It generally does tend to be primary care. We haven't seen it be disruptive in our universe.
I guess the one example I can think of on that is actually all the way to the hospital side. If you look at what's going on in Pittsburgh at this point.
Yeah
with UPMC and up in that market where you've had the vertical integration across insurers all the way to the inpatient side. So there's a lot that's unfolding in that market right now as populations are kind of getting divvied up between the two large hospital operators and insurance companies. I think that will be, if you're looking for a place to follow how that works and the impact, I would point you to Pittsburgh.
I wouldn't think it would be a bad thing if insurers got interested in your property type, but that's just me.
Yeah, if it's the way Kris is describing that
Yeah
that's probably not a bad thing from a credit standpoint, from a capital and growth standpoint.
Right. Great. Thanks, guys.
Thank you.
Our next question comes from John Kim with BMO Capital Markets. Please go ahead.
Thanks. Good morning. Can I just ask what you see currently in the market as far as the cap rate differential between on and off-campus MOBs of similar quality?
Yeah. I think if you go back and look over the past several quarters, it's been trending in that 40 to 50 basis points. It's ticked up slightly, I think, over the last couple of quarters of last year. It's probably generally in that 50 basis point range right now.
Given your cost of capital and the challenging environment to acquire on-campus, and I'm coupling that with Todd's opening remarks where I think, Todd, you said hospitals are generating more than half the revenue from outpatient care, and I imagine a lot of that is not off-campus. Would you selectively acquire more off-campus assets if they're directly affiliated?
There's just so many reasons for real estate reasons we have moved away from that. It's not to say we'll go to zero on that. I think you're right. There are compelling situations where a health system may have a significant off-campus presence. Our view on that is just we're going to have more stringent underwriting criteria for that. We're going to want to be in the early generation, preferably the first generation, whether it's development or buying something that just was developed. Even then, you're going to have different criteria that you're going to want longer lease terms, a better understanding of what the asset could look like or what might happen at the end of the lease term, the probability of renewal.
A different approach than we would take on-campus, where we're more comfortable with shorter lease terms, the ability to push rents, just all the barriers to entry that come with that. On the margin, we're not moving towards that, to your point, just because there's this slight differential. Relative to our cost of capital, I think we're willing to be more patient than that and use dispositions to buy what we think is a better long-term value of on-campus assets.
Okay. Following up on Rich's question on CapEx and TIs, this quarter was 21% of rent. I appreciate your disclosure on that. Was there anything specific about this quarter, why it was higher? Was it like a different type of tenant moving in, or a special requirement from a health system? Just wondering if you can comment on that.
I think you kind of have to look at the mix of new leases versus renewal leases. When we look across that, we did have, I guess, one noteworthy thing to mention on the new leases that drove it a little bit higher than what we typically see, where we did sign a fairly large non-medical space, and gave some additional TI as a result of that. It was a new lease, and for that non-medical tenant, it ended up being a little over $6 per square foot per lease year. That's what drove our average over the $5. If you excluded that lease and look at just more of our medical office space like we typically have, that was $4.70 per square foot per lease year, which is more in line. On the renewals, it was in line with what our expectation is.
Nothing else that I think is noteworthy.
When you say non-medical, is that a traditional office tenant or?
Yes, it's a traditional office tenant.
I see. Okay. Thank you.
Thanks, John.
Our next question is from Michael Knott with Green Street Advisors. Please go ahead.
Hey, guys. Just wanted to touch on the 1Q same-store NOI growth a little bit, the 1.9%. Just curious if that was in line with what you expected for this particular quarter, maybe a little bit disappointing or not. Obviously, you kept your full-year guidance unchanged, so this question is really just sort of nuance and incremental at the margin.
I agree. I think it is kind of in the nuance and incremental. I'll walk you through a couple of pieces on that. First, as we talk about, we think that the best metric when you're trying to think about trends is trailing 12 months. When you look at our guidance, that's what we provide. For the quarter, on a trailing 12 months, our total was at 3.5, and multi-tenant was at four, which are both kind of right at the midpoint of what our guidance range is. Quarterly, the 1.9, which is a quarterly figure, that's going to have a lot more fluctuation in it, which is to be expected, especially on the multi-tenant side with the operating portfolio, given there's a lot more variables that are moving around on you.
Getting into specifics on the 1.9, for the quarterly growth, single-tenant grew at a little over 2%, which is in line with our in-place escalators, so no real surprise there on the single-tenant. On the multi-tenant, I think the way to look at it is really kind of dissecting it kind of the way we go through the revenue model. I think we've gone through that with you in our It's on page 25 of our investor presentation. Kind of just breaking it down into the various pieces. Multi-tenant revenue increased on a year-over-year basis, 2.4%. That included 30 basis points of occupancy decline on a year-over-year basis. Occupancy moves up or down have approximately one-for-one impact on revenue growth. The 30 basis point decline in occupancy reduces revenue growth by approximately the same 30 basis points.
We had discussed that expected drop in occupancy this quarter on the call last quarter. We view that as temporary and expect occupancy to rebound through the balance of the year.
The second piece on revenue that I would talk about is that we did have a little bit of a tick up in some free rent this quarter with some new longer-term leases that were signed, including that non-medical lease that I mentioned earlier, that was a little over 10 years in term. Excluding the free rent, the revenue growth would've been approximately 40 basis points higher. Overall free rent is still within a range of what we expect. We had about 2.25 days of free rent in the first quarter, but that's up from 1.75 days in the fourth quarter. That's just the incremental change there. Around two days is normal for us, so no concern.
When you combine the occupancy change and the rent concession, revenue growth would've been a little over 3%, excluding those two items, which is in line with our in-place contractual escalators and cash leasing spreads, so what you should expect. On the expenses, our multi-tenant expenses were 3.2% up on a year-over-year basis, and that was primarily due to higher utility costs and snow removal compared to the year prior. Excluding those items, operating expenses were more in line with our trailing 12 months, a little below 2.5%. All in all, nothing real concerning, just a typical fluctuation and variation that goes on in any particular quarter. We still expect trailing 12 months multi-tenant NOI through the remainder of the year to stay in our guidance range of 3%-4.5%.
Okay. Thanks for that detailed response. Just on the cap rates on the things that are in the market right now, and I think you guys said, you expected those maybe in the 5.5-6 range. Just curious, should we take away that, if there were higher quality portfolios in the market similar to what traded last year, let's say, that five or slightly below five would be off the table now, given that the REITs have had a repriced cost of capital since then? Or do you feel like the private market, private buyer demand would still be sufficient to drive cap rates, to keep them where they're at? I couldn't quite tell from your comments what you think about where the private market is today.
I think why you're having some of that hesitation is because that's where we are. We certainly haven't seen any transactions of size or of note or of meaning, as Rob indicated, that we can point to tell you, here's what the private market's doing now, post public REITs being a little sidelined. We don't have any great data to say that. All we're hearing is that these transactions coming, the sellers and the brokers have high expectations, which, not surprising at all. I think we really kind of have to watch what's coming and see how it prices. There's certainly a lot of private capital out there. There's no doubt. I think the real question becomes, if you look back at last year, the public REITs were advantaged and were clearly driving a lot of that pricing.
The privates were there, but to my knowledge, they weren't as aggressive. Although, at the end of the year, you saw a couple aggressive moves on some below five cap rate levels. It will just kind of depend on how deep that is. I don't know that we're stuck here. I think private buyers recognize the publics are backing off a little, so maybe they don't have to be as aggressive. I think we just got to watch what plays out here. We just don't have great data yet to answer that.
Agreed. Thanks for the commentary. One more quick one, if I may. The skilled nursing sale, obviously the implied cap rate on that is very high and points to, I presume, a very low coverage that must have deteriorated over time. Just curious, I assume there's no other SNFs in the portfolio at this point, and then in your non-MOB bucket, would there be any analogous sort of very low coverage-type assets that we should all be aware of as we're thinking about what that bucket is worth?
To answer your specific question on the SNFs, yes, the operations had declined. I think Rob mentioned that earlier, which is I think what people are seeing across the industry. We do have one other SNF remaining. It's small. It's about $850,000 in NOI annually. It's performing better than the properties in Michigan were, around a one times coverage. We have had some discussions with the operator about potentially purchasing that asset. We would not expect, if we did sell it, to be anywhere close to the cap rate that we're looking at on these Michigan assets. I do think that that is one asset that we may not own long term. Beyond that, as Todd pointed out, we just don't have much else that's kind of non-MOB. We have a couple surgical facilities, specialty surgical facilities, and we kind of view those differently.
Those, I think, are more likely to be long-term holds for us. We went through, last year, a sale of a lot of the IRFs. We have three IRFs remaining. A couple of those are in places where we own some additional properties, so there's some strategic sense for holding those. There's one that's standalone. It's located next to a hospital. I could see maybe long term that that's something that we may not own long term. That's probably the majority of it from a non-MOB perspective.
Yeah. Thanks, guys.
Thanks, Michael.
Our next question is from Tayo Okusanya with Jefferies. Please go ahead.
Hi. Yes, good morning, gentlemen. On the development front, the one to two development starts you want to do a year, could you just give us a sense of what progress you're making, in regards to conversations with your tenants or even potentially new tenants around that?
Yeah, Tayo. We are in constant dialogue with prospective tenants and primarily the hospitals that those developments, the campuses that those developments would be on. We get into conversations about capital cycles and timing. Those are progressing. Several of them are moving quicker than others. One that we're working on, I think we mentioned last time, with our partner, Medistar. It's moving along and having meaningful discussions with physician tenants and the hospital itself. I'd say they're in various stages, but we feel good about getting one to two of those started this year.
Yeah. Is pre-leasing the main determinant of when you could kick off one of these things?
I think it varies. It's not just pre-leasing, but when you're working on a hospital campus, you've got other things going on. One of the developments that we're working on right now, there's a planned expansion for the hospital. In working with the leadership of the hospital, they're prioritizing things and that expansion over the development. How that moves along, and the pace it moves along certainly fluctuates. It's not just pre-leasing, it's what else is going on in the campus and what kind of priority is the hospital making it.
Gotcha. Then on the acquisition front, I do remember last year there were a couple of big deals floating around. Most of the REITs did not seem inclined to get involved, but in the end, everyone kind of bought something. This time around, at this point in the year too, there are a couple of larger transactions. Again, everyone's talking about not getting involved, but I just wonder that, could that mindset change and what would change it?
I think, obviously the big question, Tayo, would be cost of capital. I think that's the big driver for us and certainly what colors all the comments you've heard from us about where we view it. Clearly our implied cap rate is up, kind of, as Rob said, in that five-eight range, which kind of falls with what we're under contract to buy. We're not in a position or don't think it's prudent at this point to go chasing something that might trade in the low fives. Again, I think it's early to say that we're finding this equilibrium here. We don't know exactly what these transactions, how they'll price and how the private players will tackle it. I think we have to kind of be patient here and watch and see how it plays out.
Certainly, where we are today, we're not gonna be chasing things in the low fives.
If you did have the cost of capital, though, would any of those portfolios have, are they the kind of quality profile that you would be attracted to?
Yeah, I would say no. I think we've looked at them. We've certainly looked at them, while there's a few assets in there that we certainly think are attractive, on the whole, they're not portfolios that we would be interested in.
Okay. Last one from me. Given the strong institutional demand or interest in the MOB space, if cost of capital continues to be an issue, what are thoughts around doing a potential JV to bring in a capital partner?
Sure. Last year, I think, got those kind of discussions going, as you pointed out, Tayo, with all the big transactions, Duke included. There was a lot of that conversation going on, and we found it to be productive, getting to know some folks, and what their sources of capital might look like, what those structures might look like. I think, like everybody, we sort of weigh the complexity of adding the JV concept with the value that you can bring to shareholders from that. I think it's something that if we find ourselves continuing down this road of this difference between public and private valuation, it's certainly something we would look at. I think we would just be careful to try to keep it as we always have, keep it simple, and make sure it's the right kind of alignment if we did it.
We're not actively saying we're getting ready to do that. It's just something we would consider if this situation just extends. If we're talking a year from now in the same situation, it's probably more interesting to us.
Okay, great. Thank you.
Sure.
If you would like to ask a question, please press star then one. Our next question comes from Mike Mueller with JPMorgan. Please go ahead.
Hi. You kind of touched on this topic a few different ways, but when I look at page 13 in the sup and you see the MOB NOI at about 90%, I guess the single tenant of that portion is about 16%. How should we be thinking about, is this the level that the mix kind of stays at over the next several years? Are we gonna see that mix continue to change in the MOB portion go above 90, the single tenant portion go down? How does that all play into, Todd, what it seems like at the beginning of the call, you were calling for earnings to start inflecting and the growth rate to picking up. Could this get in the way of that if it does change?
Yeah, I think you heard Kris talk a little bit about, clearly we have the skilled nursing facilities going out long-term. We're not holders of the last one, the small one that he mentioned, and maybe another IRF. I think the point of my remarks was to say, as you're pointing out, we've kind of reached an efficient level here, and I think incrementally, the activity of what we sell versus what we buy will continue to allow that to drift up, but I don't think it's wholesale like it has been over the last five to 10 years. That's what I think will help create less pressure on the FFO line, if you will. Again, it will drift up because what we buy is gonna be more of the multi-tenant MOBs, and what we sell will tend to be non-MOBs or single tenant off-campus properties.
Less significant changes, I guess I would say. I think you're right, it should take some pressure off.
Got it. Okay. That was it. Thank you.
Thanks, Mike.
This concludes our question and answer session. I would like to turn the conference back over to Todd Meredith for any closing remarks.
All right. Thank you everyone for joining this morning. We'll be around for follow-up questions if you have any, and we hope everybody has a great day. Thank you.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.