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Physicians Realty Trust
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Greetings, and welcome to the Physicians Realty Trust Second Quarter 2018 Earnings Conference Call. At this time all participants are in a listen-only mode, a question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Bradley Page, SVP, General Counsel. Please go ahead.
Thank you. Good afternoon and welcome to the Physicians Realty Trust second quarter 2018 earnings conference call and webcast. With me today are John Thomas, Chief Executive Officer; Jeff Theiler, Chief Financial Officer; Deeni Taylor, Chief Investment Officer; John Lucey, Chief Accounting and Administrative Officer; Mark Theine, Senior Vice President, Asset and Investment Management; and Daniel Klein, Deputy Chief Investment Officer.
During this call, John Thomas will provide a summary of the company’s activity during the second quarter of 2018 and year-to-date as well as our strategic focus. Jeff Theiler will review the financial results for the second quarter of 2018 and our thoughts for the remainder of the year. Mark Theine will provide a summary of our operations for the second quarter of 2018. Following that, we will open the call for questions.
Today’s call will contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. They are based on the current beliefs of management and information currently available to us. Our actual results will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe our assumptions are reasonable, our forward-looking statements are not guarantees of future performance. Our actual results could differ materially from our current expectations and those anticipated or implied in such forward-looking statements. For more detailed description of potential risks, please refer to our filings with the Securities and Exchange Commission.
With that, I would now like to turn the call over to the company’s CEO, John Thomas.
Thank you, Brad. On July 19, Physicians Realty Trust celebrated our fifth anniversary as a public company. Like our five-year track record of success, our team in relationships delivered outstanding results during the second quarter of 2018. Consistent with our plans for 2018 announced earlier this year, we have had an acute focus on improving the overall quality of our real estate assets, operating results and relationships. So far this year, we've accomplished all three while also improving our balance sheet.
Year-to-date, we have completed $236.4 million of dispositions at favorable valuations while reinvesting $170.1 million of those proceeds to expand existing relationships in newer, higher-quality facilities leased to strong credit tenants while also reducing debt with the balance of the proceeds. We will continue to be selective in deploying capital in this market, but remain very optimistic about our ability to continue to execute and grow in the years to come. We believe we have the best overall portfolio of medical office facilities in the United States, approaching 97% occupancy, almost 90% on campus or affiliated with a health system, and over half of our rentable square feet is leased directly to an investment-grade credit health system.
We look for a continuation of this strategy and execution during the second half of 2018, with the potential for more dispositions, selective investments and an eagle's eye focus on operating performance. Consistent with our mission and vision, our ultimate goal is to help medical providers, patients and clients and shareholders realize better health care, better communities and better returns. We do this by offering broader and deeper health care expertise than any other REIT by tracking solutions that benefit all parties and by consistently executing for our long-standing industry relationships to source and sustain the highest-quality properties and tenants in the industry. We are investing in better across our team, our assets and our future.
Recently, the Wall Street Journal and other media outlets reported on the sale of a very high-quality medical office facility in Houston, Texas at a record price. We continue to see a premium bid on medical office assets, especially from private buyers, as in the case of the Houston MOB. And there seems to be no shortage of cash available to invest in the space. We've had the opportunity to pay up more and more of these private investors, but haven't found a suitable opportunity to do so.
We do not have to invest or grow for growth's sake and do not see any benefit changing asset classes in order to achieve higher yields. We have best of the long term and while ebbs and flows and government policy can favor one health care asset class over a better in the short term, the short and long-term trends of health care policy and demographic demands continue to support our thesis and strategy that we should invest in facilities that host outpatient care providers, especially providers with high market share who provide carrier locations that attract patients who live and work in favorable locations.
For the latest data available, the annual U.S. health care spend was $3.2 trillion, 26% of that spend or $840 billion was spent on outpatient services, with commercial insurance being the largest payer for these services. For at least the 10th year in a row, outpatient business for Medicare beneficiary increased while inpatient business declined, and those trends continue to grow in opposite directions.
As a comparison, carry nursing facilities was only about 5% of the annual spend, with government payers, particularly Medicaid, being the largest payer. We will certainly need inpatient facilities and nursing facilities in the future, but more significant growth in care and demand is outpatient services, especially specialized care like ambulatory surgery.
Medicare recently proposed enhancements to the payment rates for outpatient surgery as part of their policy to continue to encourage more outpatient services in lieu of more expensive inpatient care and surgery. Health systems continue to shift here to the outpatient setting and off-campus. Off-campus project starts are expected to be 73% of the total 2018 MOB construction, above the four- year average of 15% off-campus.
Technology improvements, lower occupancy cost and the requirement for more medical services within the community setting continue to prompt more off-campus development. The 400 projects completed in 2017, 64% were affiliated with hospital systems were on hospital campus, up from 57% in 2016. Health care providers self-develop 69% of the projects completed in 2017, indicative of a trend where providers have ready access to sites and capital for development.
CHI, HonorHealth, Northside Hospital and many of our physician group clients have this model and strategy with a long-term plan to monetize the asset with DOC, and we believe more and more providers will continue to do so. In addition to these tailwinds for our core business, we are pleased the report continued progress with the Trios medical office building in Kennewick, Washington. Regional carrier has regulatory and court approval to complete the acquisition of the Trios Hospital, which includes the lease for 100% of the medical office building we own attached to that hospital. We expect ramp to commence immediately upon closing, which we believe to be imminent. As you may have heard, Regional Care and their sponsor, Apollo, have announced Regional Care is combining with LifePoint and taking LifePoint private in a $5.6 billion transaction.
According to their public announcement, if they close, the combination of these two companies will create an even stronger health care provider with pro forma 2017 revenues of more than $8 billion as well as 7,000 affiliated physicians, approximately 50,000 employees and more than 12,000 licensed beds. Following the close of that transaction, LifePoint will operate a diversified portfolio of health care assets, including 84 nonurban hospitals in 30 sites. We look forward to working with Regional Care and moving forward with the Trios transition.
In conclusion, we have spent the past five years building a great company and appreciate your support. We have evolved as we have grown with an intense focus on our health system and large physician groups, but we remain dedicated to investing in the future of health care delivery, outpatient medical office facilities.
Our underlying business is outstanding, and we believe the investor community will benefit long term by long-term investments in our asset class and in particular, our organization. Jeff will now discuss our financial results. Jeff?
Thank you, John. In the second quarter of 2018, the company generated funds from operations of $51.9 million or $0.28 per share. Our normalized funds from operations were also $51.9 million and $0.28 per share. Our normalized funds available for distribution were $43.4 million or $0.23 per share. This is our second quarter of demonstrating the strength in our investment activity and keeping our focus on dispositions as we seek to maximize the return to our investors in this difficult market environment.
We closed on our previously announced acquisition of a $7 million 231,000 square foot HMG Medical Plaza in Tennessee, which is expected to produce an unlevered cash yield of 6.0%. Having closed on the HMG deal in the beginning of the quarter, it would have generated an extra $28,000 of NOI. Aside from the single acquisition, our portfolio strategy was to take advantage of the strong MOB market by selling a variety of our noncore assets to private buyers. The assets we sold were selected primarily based on relative tenant strength, geography, asset size and core value to the occupying tenants. We closed our first significant disposition, a 15-building $91 million portfolio at the end of the quarter. Subsequent to quarter-end, we sold another 17-building portfolio for $127 million.
Since the start of our disposition program in December of 2017, we've sold a total of 35 assets for proceeds of $223 million, resulting in a combined gain on sale of nearly $13 million. The blended cap rate on the combined sales is 7.0%. These were older and smaller assets on average, supposed dispositions the weighted average of our portfolio dropped by half a year, and the average size of the buildings in our portfolio increased by about 3,000 feet.
There remains a potential for a few additional asset sales this year as we still have six assets slated for disposition as well as our LTACHs, which we would always consider selling at the right price. However, we currently don't expect to continue our dispositions at the same pace as we did this second quarter.
Looking forward, on the acquisition side. We have one additional asset expected to close in the third quarter that has been in negotiations since the beginning of the year, and we continue to review multiple potential opportunities from our health system partners. Importantly, if the current capital market environment remains static, we would expect any proceeds for investments to come from recycled capital or additional debt as opposed to equity proceeds.
As John noted, we expect to start receiving rent imminently on our repositioned asset in Kennewick, Washington that is now by leased by RCCH. Once back online, that asset is expected to generate about $700,000 of GAAP NOI per quarter. We issued no stock in the ATM this quarter and paid down our line-of-credit by $8 million.
Our balance sheet metrics remain strong, with debt to firm value of 34% and net debt-to-EBITDA of 5.5 times. We are extremely well positioned in the rising rate environment we have been experiencing so far in 2018 as aside from our revolving line of credit, 99% of our debt is at a fixed interest rate or is completely hedged with no significant maturities until 2023.
Overall occupancy in our portfolio remain the same as last quarter at 96.6%, with 52% of that space leased to investment-grade-rated health systems or their subsidiaries. Our same-store portfolio occupancy increased by 30 basis points, and we had same-store cash NOI growth of 3.3%.
As predicted, on the last earnings call, G&A expense normalized back down to $7.1 million, and we remain comfortable with our G&A guidance for the full year of $27 million to $29 million. I'll now turn the call over to Mark and to walk through some of the operating statistics. Mark?
Thanks, Jeff. We're pleased to report another successful quarter of operating performance as we continue to manage our properties efficiently and profitably. As we celebrate the five-year anniversary of Physicians Realty Trust this quarter, we are proud to report a robust same-store growth performance and our best-ever tenant satisfaction survey results.
DOC's relationship-centric approach to asset management continues to enhance the value of our portfolio, resulting in higher revenue for the quarter and strong internal growth. As Jeff mentioned, our portfolio is an industry-leading 96.6% leased and delivered strong 3.3% same-store NOI growth. The Company’s substantial same-store growth is propelled by a 3% increase in rental revenues, resulting from contractual rent increases and a 30 basis point improvement in the same-store occupancy from 95.6% to 95.9%.
The 207-property same-store portfolio operated efficiently as well, was just a 2.3% increase in operating expenses year-over-year. Our asset management team's keen focus on the operational excellence and the outstanding customer service is supported by the results of our 2018 Kingsley Associates Tenant Satisfaction survey. This year, we surveyed nearly 250 tenants, representing five million square feet or about 40% of the portfolio.
Physicians Realty Trust received an industry-leading 77% response rate. Typical response rates for these surveys are between 45% and 55%, so 77% demonstrates the exceptional relationship between our asset management team and our health care partners. We also earned a company record score in overall satisfaction of 4.4 out of a possible 5.0, and an overwhelming 97% of tenants surveyed gave positive indicators as to their future lease renewal intentions.
Our asset and property management teams should also be particularly proud of the year-over-year scoring improvement in our Catholic Health Initiatives portfolio acquired in 2016. These properties were surveyed immediately following the 2016 acquisition and were resurveyed for the first time this year. The overall management satisfaction scores improved by over 10%, illustrating the value of DOC ownership and property management.
During the quarter, we saw a strong leasing momentum, and our team continues to excel at producing outstanding results by using our responsive nimble approval process as a competitive advantage. In the quarter, we completed over 290,000 square feet of leasing activity, including 58,000 of new leases and 233,000 square feet of lease renewals. These numbers include several early lease renewals initially scheduled for 2019.
The average lease term for new deals executed in the quarter was 9.1 years, and the average lease term for lease renewals signed in the quarter was 8.8 years. Notably, net absorption for the quarter was essentially flat, with tenant retention being approximately 80%. New leases for the quarter contained an average rent escalator of 2.7%, while renewed leases contained an average annual rent escalator of 2.9%.
The strength of our portfolio and excellent work of Amy Hall and our leasing team has allowed us to achieve 3% annual rent increases and nearly 40% of all of the 2018 leasing activity on a square footage basis. Rent concessions for the quarter remained low, with minimal free rents and TI allowances of approximately $1.68 per square foot, per year for lease renewals. And $1.98 per square foot per year for new leases.
In total, we invested $6.2 million in capital expenditure or approximately 8% of the portfolio's cash NOI. And as a result of a few large tenant improvements that were completed in the quarter in conjunction with long-term lease extensions. When compared to our peers, these relative low capital expenditure investments are driven by our tenant relationships and the desirability of our medical office facilities, ultimately delivering significant cash flow directly to FAD.
Looking ahead to the remainder of 2018, DOC has 42 leases totaling 148,000 square feet scheduled to renew representing approximately 1.1% of the portfolio. The average rent per square foot for those leases scheduled to renew is $20.83, in line with national averages for medical office building rental rates.
In close, we've worked hard over the last five years to invest in better as the preferred health care real estate owner for hospitals and health care providers, creating lasting value for our partners and shareholders. Our operation team continues to outperform, and the fundamentals of our portfolio remains solid. We are investing the time wisely to deepen our health care partner relationships, enhance operational efficiencies, increase management revenue, proven non-core assets and ultimately focus on driving internal growth.
With that, I'll now turn the call to John.
Thank you, Mark. Devon, now we will take questions.
[Operator Instructions] Our first question comes from the line of Jordan Sadler with KeyBanc Capital Markets. Please proceed with your question.
Thank you, and good afternoon. Wanted to see if we could talk a little bit about the investment marketplace and what the opportunity looks like on the investment front today.
Yeah, thanks Jordan. There is a fairly large portfolio that's expected to hit the market soon. It'd be fairly widely marketed. We have plenty of market opportunities that we're exploring, but in this capital market, we're being very selective. And we have one acquisition pending with an existing client, but the opportunities are there. But as I said in my comments, the private bid is really strong for the high-quality assets and hard to compete with.
So, for the time being we will continue to see you guys buy a little, sell a little here and there until either the private market bid goes away. And then pricing sort of normalizes or was up a little bit or was down a little bit?
Yes. As I said, we don't have to grow for growth's sake. We're just being very selective in this capital market. Balance sheet's in great shape, so right opportunities will deploy capital, if we can find assets at the right price. But the private bid is still strong. It's reflected in Houston. And again, we'll be very selective.
Any update on sort of potential joint ventures or thoughts surrounding may be forming a fund or an alternative vehicle?
Yes, there’s – I mean, there are plenty of parties interested in doing something like that. I think our friends at California announced something like that today. I think there's a lot of interest in private capital pairing up with public, high-quality operators with relationships like we have. So I think that's something that is possible later this year. But again, still the underlying assets got to fit our long-term strategy.
Okay. And then Trios, I didn't catch, Jeff, if you mentioned the NOI per quarter. That will come online? What was that number?
About 700,000 a quarter of GAAP.
700,000? That's GAAP?
Yes.
Okay. And do you know what cash looks like?
Yes, I think its 583 just under 600.
And then what are the terms of escalation on that lease?
They're modest for the first couple of years, Jordan, and then they move aggressively as we get that lease back to market rates out there. So it was part of essentially a blend-and-extend to help that up, we'll get back on speed and excited about RegionalCare and again their bigger operation that they expect to have a LifePoint. University of Washington is also in there. So it's on the road to recovery. It will take a couple of years to fully recover on the reps.
Okay. And I guess, lastly, on the portfolio trimming side, it sounds like – it still sounds like the LTACHs are potentially for sale. As the bid there pretty firm in the private market? Or is it – is the bid as spread too wide to close something like that?
We haven't had a bar hit our [indiscernible]. So we’re just exploring it.
Okay, thank you.
Thanks Jordan.
Thanks Jordan.
Our next question comes from the line of Vikram Malhotra with Morgan Stanley. Please proceed with your question.
Hi, thanks for taking the question. Just curious on the asset sales, is this sort of a result of you relooking at the portfolio. I remember, maybe two NAREITs ago, you had hired someone to relook at credit and portfolio quality. So can you give us a better sense of like what are you actually selling and do the sales include the Foundation assets?
Yes, so Vikram. This is John. Yes, I mean, a part of our analysis is long-term credit quality. These were noncore, smaller assets that, again, we bought at favorable cap rates at the beginning of the company and just had the opportunity to kind of trim the portfolio and look for better uses of that capital going forward.
Okay. And are the Foundation assets still held-for-sale or were they included in this?
Yes, I apologize. They were not included. We're still exploring different options with those assets, primarily with the physicians that operate out of those hospitals. They continue to do well, both in San Antonio and El Paso. And we think we'll have more news to share there, but they are still held-for-sale and not included in the dispositions yet.
Okay, that makes sense. And then Jeff, maybe just from a leverage perspective, utilizing some of the proceeds to bring down debt. Where – can you kind of maybe walk us through latest thoughts, what’s your target maybe year-end and maybe the next few quarters? And would you also look to use some of those proceeds that is most of it or the rest of it just to recycle into other assets higher-quality assets?
I think that’s right, Vikram. I think we feel pretty good at where we are from a leverage perspective, particularly after these sales. But we would expect to be recycling these proceeds into additional acquisitions through the rest of the year. I can't imagine we'd really lever up that much, maybe temporarily if we saw something and it was a mismatch of timing. But like I said, I think we've kind of reached the maximum velocity of dispositions for this year for sure.
As John mentioned, there might be something, somewhere down the road on the assets that we had held for – slated for disposition. But we wouldn't expect to be selling a bunch more of assets this year. And anything we do sell, we'd likely recycle into new health system-anchored assets just to help continue our relationships with those tenants.
Got it. So is the current average is a good run rate? And you don't anticipate any more, any major disposition activity for the rest of the year?
That’s correct.
Got it. Okay, thank you.
Thanks Vikram.
Our next question comes from the line of Kevin Speight with Bank of America. Please proceed with your question.
Good afternoon.
Hi, Kevin.
I just had a question pertaining to your thoughts on the recent CMS outpatient rule. I guess, in regards to your grandfathered assets your on-campus assets than just off-campus assets?
Yes. So the rule – two or three different things, one is the really some enhancements to the ambulatory surgery center rates for non-HOPD facility, that’s something the ASC industry has been fighting for years. So that's positive, those – for particularly physician joint venture to ASCs like many of ours are with ESPR and FCA and others so a very positive move in that direction.
On the outpatient rates for HOPD off-campus, so the 603 assets, really no change – unanticipated change there with respect to the grandfathering. I think they do make it probably clear about the scope of that grandfathering, which it covers the services that are being provided at the time that the grandfathering went into effect, which is November 2015.
So again, no surprise that clarification. But consistent with that policy inside of service neutrality, they do continue to pay back future locations. And the difference between the physician rate and the HOPD rate for those off-campus facilities. But as I noted in my opening comments, the vast majority of new hospital-led outpatient care facilities are being developed off-campus. And so those services and those rates are being taken into account as part of their analysis of where they want to place those locations. And we continue to see a positive trend. But our 603 assets, we continue to be very positive about.
Okay, that sounds good. Thanks.
Yes.
Our next question comes from the line of John Kim with BMO Capital Markets. Please proceed with your question.
Thank you. Looking at your most recent presentation, you spent some time talking about the momentum in off-campus MOBs. And I'm wondering if you're seeing more opportunities that are acceptable to you from a risk-reward perspective as far as acquisitions?
The answer is yes, John, because again, most of that is being led by health systems, trying to plant new flags in strong demographic locations and providing more outpatients, more complicated services in those buildings. So the vast majority of our physicians are specialists and providing specialized services in those buildings and not primary care, which is going to see a lot of competition from them, the CVS – Aetna/CVS merger Optum, which employs, I think more primary care physicians than anybody in the country now.
So we see – we continue to see great opportunities and again primarily with our developer friends out working with the health system so Mark Davis in Minneapolis and Minnesota and other location and Jim Bremner, both have nice development pipelines with health systems. And many of those projects are off-campus or near campus.
As part of this, are you seeing opportunities as far as conversion of retail space into MOBs?
A lot of people exploring that and interested in it because of the – at least, the perceived decline in some of the mall space and retail space and kind of empty boxes that evolved over the last couple of years. But don’t see as a huge opportunity we see this as a selective opportunity from time to time.
John, I think you mentioned in your prepared remarks about the joint venture opportunities and pursuing, I think, some acquisitions, I just wanted to clarify that was the case. And also, as part of this conversation, are you also contemplating, contributing or selling assets into a joint venture?
John, I’d say all of the above, I mean but we’re not – we have not executed any joint venture we would talk about it if we had. I think there are opportunity to do so is there, and we think it conversations with high-quality capital partners who are looking for a high-quality operator like us to pair up with. So at least one large portfolio coming to market. I would suspect there’s going to be a lots of private capital pursuing that. And we know it well, they’ve relationships with health systems involved. And we’ll evaluate it. But the underlying investments got to make sense to us for both the short and long-term and that will be the driver, not just doing a joint venture for joint venture’s sake.
Fair enough. And last question for me is you may have already covered this, but what were the annual escalators on rents in place today and the leasing spreads on leases executed?
Yes, the average escalator – I’m sorry, John, this is my Mark Theine. The average escalator built into our portfolio today is 2.3% on average. And in the quarter, our leasing spreads were negative 5% as a result of 142,000 square foot lease that reset back to market out of our 230,000 square feet of lease renewals. And without that one lease, the leasing spreads were positive 1.6%. But the large nature of that one lease recent to market pulled us down in the quarter.
Okay. Thanks for the color. Thank you.
Our next question comes from the line of Michael Carroll with RBC Capital Markets. Please proceed with your question.
Yes. I just want to talk a little bit about the disposition that you could complete in the future. And Jeff, I believe you made a comment, and correct me if I’m wrong, that the sales in the future could relate to health systems to improve those relationships to those health systems want to buy your assets? Or how should we think about that?
Yes. Mike, this is John. I think what Jeff was saying as we had the opportunity to recycle some capital into our existing health system relationships was the point he was making there. So we’ve talked about kind of 5% in the portfolio in any given year. Again, just kind of looking for assets that are no longer kind of be in our long-term expectations or not core or in markets that we pare back in. So again, we could sell more this year. There’s a good bid. We got some assets that would be attractive to potential buyers. But I think it’s – that really depends upon if we find the right opportunity to redeploy that capital. Again, as Jeff said, with existing relationships primarily.
Okay. That makes sense. And then with the sales that you completed so far to date, I guess, the one – the excluded the Foundation assets. What drove that yield higher? Was it just the asset quality was lower than the rest of the portfolio?
Yes. Mike, that’s exactly right. I mean, these are the assets when we went through our portfolio and tried to look for assets that were non-core kind of reposition, these were the ones that we came up with. So that drove the cap rate higher. We’d expect, if we did that exercise again and did another portfolio like this, we’d expect better pricing on any kind of second portfolio that we do.
Okay. And then related to the Trios lease, I guess, John, you kind of indicated that’s going to step up pretty aggressively a few years down the road. I mean, how does that lease really work? Is it the aggressive step up? Will it really get you back close to the old rent? Or is it just above-average bump?
Above-average bump. And over time, it gets us back to the market rent there. So it would eventually get back to the overhead, but it’ll take a few years. And there are several options for extension in the lease that reset it at market at the time. So again, short-term, it’s significantly less than our original lease, but we’ll get back to market soon enough.
Okay. And then last question related to the LTACHs. I mean, how have those been performing? I know it’s stepped up a tiny bit this past period. Are those trending in the right direction? Or is it going to be bouncing around these high coverage ratios going forward?
LifeCare is trending very much in the right direction. They’ve made several investments in the home health business and others that really strengthening their overall balance sheet. They’re going through refinancing of their credit facilities right now. Their EBITDA is picking up. So LifeCare as an organization is performing well. It’s still very tight coverages at the asset level. Again, we’ve got three assets and a master lease, and then we have the LifeCare balance sheet behind the entire lease.
So we've got to good credit there. The coverages are much higher than we would like, but with extremely high coverage in Plano and kind of average coverage in Fort Worth, and we have had some recent positive developments with LifeCare has been making in Pittsburgh. So again, just not a core asset for us, we would sell them at the right price, but also don't feel pressured to sell them.
Okay, great. Thank you.
Our next question comes from the line of Chad Vanacore with Stifel. Please proceed with your question.
Hey there, I've got a couple of quick ones. So on LifePoint, RCCH, Apollo taking over Trios, when do you expect that rate collection to commence? And do you think you could potentially collect any back rent through the bankruptcy process?
No back rent. We do have the potential for some of the rent that was part of the unsecured creditor pool, which we are a part of. And we also as part of the transaction received the land originally that was on a ground lease. So as part of our renegotiation of the lease with Regional Care took or will take control and ownership of the land for fee interest. So we’re positive about that. That was an exchange, again, for the short-term rent concessions that they build over time. We think it's imminent. And so as soon as they close there, the rent commences and they owe us the rent.
So third quarter, fourth quarter, some timing before the end of the year?
3:00 o’clock, 4:00 o’clock.
Alright, I can't pin you down on that one. Alright.
They’ve got regulatory approval. They've announced it. It's just a matter – I mean, kind of all the paperwork is done. So it literally – it could be 3:00 or 4:00, but it's imminent. It could be tomorrow. We can't predict exactly, but it's imminent.
Okay. And then just on the potential dispositions, you've gotten over $200 million dispositions this year that was sort of your target. So you got around half a dozen held for sale. How should we think about what you want to do with the rest of the year above that?
Their guidance was 230 to 300, I think, that probably big guidance. But again, it's really dependent upon again both pricing, but also use of proceeds. So we're in pretty good shape right now from that perspective.
Alright, thanks for taking the questions.
Our next question comes from Tayo Okusanya with Jefferies. Please proceed with your question.
Yes, good afternoon. I just wanted to go back to the quarterly results. Again, congrats on the such strong results. The 3.3% same-store NOI, again you talked about the increase in the rent bumps being 3% during the quarter. But you said for your overall portfolio, it's 2.3%. Could you just talk about the quarter versus the overall portfolio what was kind of unique there?
So Tayo, this is Mark. So in the quarter, we did 233,000 square foot of lease renewals. And where we have the chance lease renewals, we're pushing for 3% today. Our portfolio average is a little bit lower. I mean, some of the acquisitions that we've done have averaged between 2% and 3%. And so on a weighted average, the overall portfolio is at 2.3%, but we're working to move that up when we have the ability and chance to reset rents through lease renewal.
So I guess when we kind of think on a going-forward basis from a cash same-store NOI growth perspective, just for the rent bump piece of it, is that 3% number sustainable, or is it kind of more about 2.5% based on average portfolio growth?
I think closer to 2.5%. The portfolio average is much more meaningful and weighted more than a little bit lease renewals that we're doing each quarter. In the back half of the year, like I said, about 1% of the portfolio we’ll be renewing throughout the remainder of 2018.
Got you, okay. And then just to confirm with all the CMS proposals from – I'm sorry, from about a week ago, there's nothing in there that feel was kind of surprising to you positively or negatively. Will you see it having any huge impact? I mean, the ASC stuff sounds like little bit more positive on, but everything else kind of par for the course and you don't really expect that to real impact.
That's right. I think there were no surprises there. I mean, the slight positive surprise on the ASC adjustment, which is again the industry has been asking for years and trying to move toward more parity, which makes sense for the Medicare program and the commercial insurance to continue to encourage outpatient – this is an outpatient surgery in particular. So, I’d say slight positive surprise overall. and then no real surprise on the HOPD rule
Okay. And you don’t really expect the HOPD rule to kind of change and again, how many of these hospitals are thinking about moving into kind of – moving outside into, for that into the communities and typing all the off-campus locations?
Yes. We really know, because again, when they’re going off-campus, particularly looking, they’re going off-campus looking for commercially insured patients.
Right.
And though, and again, they still try to get those services out there and the commercial insurance will attract Medicare, it’s still a much of our reimbursement generally. So, we don’t see a big change there.
Okay, it makes sense. Again, congrats on the quarter.
Thank you, Chad.
Our next question comes from the line of Daniel Bernstein with Capital One. Please proceed with your question.
Dan, there?
Can you hear me?
Yes.
Yes. We can.
Yes. Hear me, okay.
Yes.
I’m just looking at the Kings Ford acquisition, which is large facility on-campus. And how are you thinking about or how is the market pricing, a secondary market on-campus may be good facility versus primary and then the same thing may be off-campus versus on-campus. Is there any change in the market in terms of how the spread between those types of assets, primary, secondary, on-campus, off-campus?
Yes. I mean I think on and off-campus is that continues to compress to similar credit, similar real estate. Again, as we said 73% new constructions is off-campus. And so those are going to be valuable, investment opportunities for us going forward. Kings Ford is a secondary market, I think this is reflected in a very attractive cap rate there, but a credit and a building that and that’s where we tried to hit our price. So, that is very attractive to us, on a risk adjusted basis, we think it’s outstanding.
Okay. And is that asset triple net lease multi-tenant, just wonder to understand a little bit about more of what attracted. It is a secondary market, but what attracted you to that property?
Yes. You can be the huge multi-special physician group. We already have a place with M&A in one of our legacy buildings. One of the first buildings that when you own this part of a public company and they have a great relationship with that group, and that helps systems get a – it’s next to the hospitals got a very unique two-state kind of structure and that’s involved and special legislation was created to keep it there or to create that organization. So, we think there’s a very positive group and overtime, we’ll look for other opportunities work with them.
Okay. And then I saw some comments earlier this week of KentuckyOne, I guess Blue Mountain and KentuckyOne, and that you expect the leases to, I guess, move out to take over those leases. are you expecting any kind of a leakage there on the rent side or perhaps some upside on the rent or explain to you make sure a kind of couple dollars of the basis here?
Sure. It’s a fair question; we expect they’re buying what they’ve entered into a lot of intent to buy the health system. We did 10-year leases with that local hospital system when we bought those assets and we expect those to carry over and their mission critical buildings on the campus of those hospitals. So, say, Blue Mountain and CHI, KentuckyOne performs very well and like it and they’re not – they’re not selling that part of KentuckyOne. So, we’ll provide more transparency there when Blue Mountain kind of completes that purchase. But we expect they need the volumes, they have aspiring changes. We don’t expect they need any and we continue to go forward with them.
All right. It sounds good. I’ll hop off. Thank you.
Our next question comes from the line of Drew Babin with Baird. Please proceed with your question.
Good morning. This is Alex on for Drew. I’m just looking for a little extra clarity on the aspects, assets still slated for disposition; I’m assuming that that is not including all tax, nor the foundation assets.
It’s just the foundation assets.
And then one additional for it, yes.
And one additional one for it…
And then kind of it sounds like that’s a little up in the air. But I’m – when that all comes to fruition, would you guys anticipate any noticeable movement after all that – say, after the 17 portfolio asset sale on these six tier guys’ expiration schedule looking forward noticeable movement to the lease expiration schedule?
No, This wouldn’t really adjust for too much. Those sales wouldn’t matter too much.
Perfect. And this kind of – this question came up on a call earlier today, but kind of the balance between specialists and primary care physicians, do you guys look at that when underwriting and managing your tenant pool and just kind of curious what your couple are sensor on the matter?
Yes. We focus very much on the specialist, and I think less than 5% of physicians are primary care physicians generally. Orthopedic surgeons are double digits our largest single specialty those are usually paired up with ambulatory surgery center imaging kind of full service outpatient care facility. So very important to us. We spend a lot of time thinking about it. And in looking at kind of the future of healthcare, we think those continue to bode very well.
Perfect. Thanks for the time guys.
Thank you.
Our next question comes from the line of Eric Fleming with SunTrust Robinson Humphrey. Please proceed with your question.
Good afternoon guys. Question on, can give an update on kind of where things are in development opportunities in pipeline?
Eric, we have – our strategy has always been to partner with kind of regional developers our national developers have that they’ve held system relationships. So I mentioned this before. Mark Davis and Jim Bremner and then others that we partnered with got a pretty good pipeline. All health system anchored buildings that some, which we’ve supported with some capital, but with no developer risk. So CHI is exploring opportunities in some of their markets. And so those health system relationships really bode well. These would be 2019, 2020 delivery. So nothing imminent, and just continue to support those relationships take us.
Very good. Thanks.
Okay, thanks.
Our last question comes from the line of Jonathan Hughes with Raymond James. Please proceed with your question.
Hey, good afternoon. Happy to about cleanup. So not sure if this is a question for sure J.T. or Jeff, but you have made great progress on capital recycling so far faster than I was expecting this year, but if the market doesn’t reward you with a more accommodated cost of capital for growth and say six months or even longer term. What’s the next step would you look at more aggressive capital recycling in addition to what you’ve done this year and the six slated and maybe in the LTACHs? I realize that may create some dilution, but if that’s what’s needed to close the gap to demonstrate your private market value is that something you would entertain?
I think we’ll evaluate that and certainly plenty of opportunities to do that. And still have some other assets that again over the course of the couple years we’d like to prune just as a normal course. 97% occupancy about 14 million square feet very little leasehold. We expect cash flow to continue to grow, Jonathan. So again, at this point, we don’t have to go out there and deploy capital in the short term. And as we look at some of these development projects coming online in 2019 and 2020, we’ll continue to grow that way. But by no means do we think we need to make any major moves right now and be patient. We’ll work through this capital market cycle.
Okay. Fair enough. And then, I know, you just talked about development, and you mentioned it at the start of your commentary. I don’t you mentioned any spreads I know you don’t have any of your own development, but what are projects out there if seeing on a stabilize yield basis versus your acquisition stabilized cap rates?
The direct negotiated yields what health systems tend to be a little stronger in those that where there’s you know kind of a widespread RFP process get pretty tight, is kind of acquisition rates on those and 150 basis points from the other.
Okay. And then just one more question for Mark on leasing and sorry you might have touched on this earlier, but have you increased where you start discussions on lease spreads in escalators relative to say two or three years ago, as the strong demand for outpatient settings has just continued unabated?
Yes, between, mainly between just general inflationary pressures, construction costs, we’re – we just think it as a time and an opportunity to be more aggressive, both on rate and on annual increases. As Mark mentioned, 40% of the new leases this year have 3% increases. And I think we’ll continue to see our kind of 2.5% average kind of continue to lead that.
Okay. That’s it from me. Thanks for the time.
Thanks Jon.
Ladies and gentlemen we have reached the end of our question-and-answer session. And now I would like to turn the call back over to John Thomas, President and CEO for closing remarks.
As I said at the beginning we’re very excited about that the last five years I’m very optimistic about the future of the organization and continue to invest in our outpatient care facility. Thanks everybody for joining the call.
This concludes today’s teleconference. You may disconnect you lines at this time. Thank you for your participation.