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Physicians Realty Trust
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Greetings and welcome to the Physicians Realty Trust Fourth Quarter 2021 Year End 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. It is now my pleasure to introduce your host, Bradley Page, Senior Vice President, General Counsel. Thank you, sir, you may begin.
Thank you, Jesse. Good morning and welcome to the Physicians Realty Trust fourth quarter 2021 and year--end earnings conference call. Joining me today are John Thomas, Chief Executive Officer; Jeff Tyler, Chief Financial Officer; Deeni Taylor, Chief Investment Officer; Mark Theine, Executive Vice President, Asset Management; John Lucey, Chief Accounting and Administrative Officer; Lori Becker, Senior Vice President and Controller; Dan Klein, Deputy Chief Investment Officer; and Amy Hall, Senior Vice President, Leasing and Physician Strategy. During this call, John Thomas will provide a summary of the company's activities and performance for the fourth quarter of 2021 and year-to-date, as well as our strategic focus for 2022. Jeff Tyler will review our financial results for the fourth quarter of 2021and year-end, and Mark Theine will provide a summary of our operations for the four quarter of 2021. 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 the 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 and other important factors that could cause actual results to differ from those contained in any forward-looking statements, 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. John?
Thank you, Brad. And thanks everyone for joining us for our on time as scheduled earnings call. Physicians Realty Trust had an outstanding 2021 and we enter 2022 very excited about our internal and external growth prospects. Our confidence comes from the continued performance of the DOC portfolio in the face of a challenging operating environment, despite the emergence of the Delta and then Omicron, COVID variants and the highest inflationary environment in recent memory, our healthcare provider tenants demonstrated their financial resiliency throughout the year, delivering 99.9% rent collections in 2021. The strong collections resulted in less than $100,000 of bad debt expense for the year on total rent and camp revenues of over $437 million. This operational strength combined with our 95% leased rate and unmatched exposure to investment grade quality tenants left us well-positioned to deliver full year same-store NOI growth of 2.5% across our entire portfolio of medical office facilities. We see internal growth momentum accelerating with the portfolio averaging 2.9% same-store growth in the fourth quarter, all without the benefit of a repositioning basket. Mark Theine, Mark Dukes, Amy Hall and our entire team did an incredible job managing our portfolio, generating these best-in-asset class results. It’s one of the most stable and reliable real estate asset classes over the last decade, and specifically over the last year it's not surprising that medical office space continues to attract capital for new investors. These compressed cap rates not only increase the underlying value of the DOC portfolio, but also make our long standing health system and developer partnerships even more important as we work to source attractive investment opportunities. In 2021, we leverage these relationships to complete $1 billion of gross investments in an average first year cash yield of 4.9% increasing our portfolio footprint by 11%. These investments are highlighted by our acquisition of the $750 million Landmark Portfolio in December, which is the largest transaction we’ve completed in the history of the company. Most importantly, the acquisition adds 10 new health system relationships to our portfolio, providing ample opportunity for future growth. In addition to Landmark, we completed $258 million of other investments, all of which we are excited about and all off market. These deals include our seventh and eighth transactions with HonorHealth, a premier investment grade health system, serving the rapidly growing Phoenix, MSA. We are IRR focused long-term investors, nurturing relationships and providing best-in-class service to healthcare providers earning more business. That's capital allocation for the long-term. We couldn't have accomplished these results without the exceptional financial leadership and balance sheet management of Jeff Theiler and his team. I will let Jeff share the details, but an upgrade to our investment-grade credit rating is a pretty good starting point there in once in 100-year pandemic. In addition, we ended the year with leverage of 5.8 times debt to EBITDA and are well positioned in a rising interest rate environment with 80% of our outstanding debt locked at fixed interest rates. Transitioning to DOC's ESG platform, we ended 2021 with 10 new buildings earned IREM Certified Sustainable Property designations, recognizing DOC’s commitment to resource efficiency and environmental initiatives in each of these properties. Approximately 19% of our portfolio square footage is now certified with IREM. Certification requires each property to meet baseline requirements and earn necessary points across energy, water, health, recycling and purchasing commitments. We also received the 2021 ENERGY STAR Partner of the Year Award from the Environmental Protection Agency and the Department of Energy in recognition of our commitments to environmental transparency and accountability. In 2021, we completed our inaugural GRESB application. GRESB is a mission-driven, industry-led organization providing standardized and validated ESG data to financial markets. In our first year submission to GRESB, we earn a score of 75. This score outperform the international average of 73. In addition, we received a Green Star designation awarded to participants achieving scores of 50 plus on GRESB’s measurement of the management and performance sections. We look forward to sharing the full results of our environmental impact in our ESG report after third-party data verification is completed in quarter two. 2021 represents the final year of our inaugural three-year environmental goals cycle based on our pre-pandemic 2018 baselines. Social accomplishments in 2021 included 695 hours of paid volunteer time off and company organized activities to give back individually and corporately to the communities we serve. DOC also provided more than $400,000 in philanthropic, fundraising and in kind donations to community and healthcare provider organizations benefiting their research and mission initiatives, surpassing our 2021 goal of $350,000. We are thrilled and humbled to earned recognition as a 2021 modern healthcare best places to work. Based on anonymous team member survey results, DOC was the highest rated healthcare real estate provider among the honorees. This prestigious nationwide ranking is the gold standard in the healthcare industry for recognizing workplaces that empower employees to provide patients and customers the best care of products and services. We are proud to enhance the company's governance through updates to our management team and Board of Trustees with two outstanding individuals. Since 2016, the daily operations of our asset and property management team have been led by Mark Dukes when he joined us from Duke Realty, after overseeing their health care portfolio asset management team while working directly with Deeni Taylor. 2021, Mark was sworn into service chair and Chief Elected Officer of the Building Owners Management Association International, the highest honor in property management and commercial real estate. In recognition of his leadership and talents, he's earned a promotion to Senior Vice President of Asset Management. Our Board is also looking to the future and starting the process for succession planning. And we're very excited to add Ava Lias-Booker, a senior partner at the prestigious McGuireWoods law firm who's been elected to the Board, effective March 1st, 2022. In addition to Ava's wealth of legal and business experience, we're excited about her leadership in DE&I efforts at McGuireWoods and helping us meet and exceed our hiring and career development goals for our team. Looking to 2022, we're proud to be starting the year from a position of strength. Unlike our segments of -- unlike other segments of the healthcare real estate, the growth we experienced in 2021 is organic rather than a recovery of pre-pandemic NOI, and our portfolio remains insulated from direct exposure to high labor cost. Similarly, our healthcare system plans are stronger than they've ever been. We're pleased to offer them a stable real estate platform as they work to expand their outpatient delivery capabilities to benefit their patients. On the acquisition front, we will pursue accretive investments that also makes sense from a long-term IRR standpoint, appropriately considering the potential for continued inflation in a rising rate environment. We're fortunate that the long-term thesis of medical office remains more compelling than ever and health system clients have a growing appetite for new outpatient care facilities and strong demographic markets. We are actively involved in discussions with multiple partners for financing new medical office developments anchored by high quality health systems and providers to be started during 2022, which should convert to ownership and long-term rental income streams in 2023 and 2024. It yields well in excess of current acquisition yields. Including our development pipeline, we expect to invest $250 million to $500 million in 2022 due to our relationship focus and strength in off-market acquisitions, we anticipate first year yields on these acquisitions and developments to range from 5.25% to 6%. In conclusion, Physicians Realty Trust has entered 2022 with a strong, stable, and proven portfolio. Our management team is well rounded with multiple years of collaborative progress, working together with a rock solid commitment to our culture that continues to earn recognition and awards. We have an eight-year track record of discipline investments in management and we expect another year of measured investments in this volatile capital market that will benefit our shareholders for years to come. Jeff?
Thank you, John. In the fourth quarter of 2021, the company generated normalized funds from operations of $58 million, or $0.26 per share. Our normalized funds available for distribution were $55 million, an increase of 3.6% over the comparable quarter of last year, and our FAD per share was $0.24. Looking back over the year, our portfolio performed well through all the COVID variants with no material negative impacts. Accounts receivable remains at low levels and the same-store NOI growth came in on target at 2.5% for the year. The quality of the portfolio was significantly upgraded in 2021 through both acquisitions and dispositions. With over $1 billion of investments last year, headlined by the landmark portfolio, the quality of our tenant base is second to none. Certainly, investors have focused on growth more than stability lately, but this carefully curated group of tenants will perform well in all environments. And we expect to be able to increase the portfolio's growth over time as we catch up to the rapid rise we've seen in market rents over the past year. Conversely, on the disposition side, we finally took the long awaited step of selling our LTeX in the fourth quarter. As it turns out, despite some negative headlines we entered with the assets, the investment itself the sound and delivered a 9% unlevered IRR. We had some significant mezzanine loan repayments in the fourth quarter as well, including $54 million for the Landmark transaction, which was used to help fund the portfolio purchase. In 2022, we will look to redeploy dollars into these high yielding loans when possible, as they provide our investors with a solid risk adjusted return, while also increasing our potential future acquisition pipeline. As well as deploying dollars into development opportunities and acquisitions anchored by high quality health systems. Turning to the balance sheet, we hit a milestone in 2021, with our credit upgrades from Moody's and S&P, we took advantage of this, and the low rates in the fourth quarter to issue $500 million of 10 year bonds at 2.625% interest rate, effectively pushing out all significant debt until after 2025. We also reduce the leverage that resulted from the landmark deal by issuing $133 million of equity on the ATM at an average price of 1,854, bringing our consolidated leverage down to 5.66 times debt to EBITDA. So we are in a comfortable position in terms of the balance sheet, as we enter the New Year. However, we are certainly mindful of the cost of capital increases we are looking at on both the debt and equity side. As JT mentioned, we intend to be deliberate about finding better returns and utilizing structures such as mezzanine investments, as well as funding loans to owns and developments. We will not however, move down the quality curve as we continue to build out our core portfolio. Faced with these challenges, we are anticipating between $250 million to $500 million of investments for the year, but expect them to average out at an initial yield in the mid 5% range. The rest of the years guidance, includes G&A of $40 million to $42 million and capital expenditures of $29 million to $31 million as we manage and care for our significantly expanded portfolio. I will now turn the call over to Mark to walk through some of our operational statistics in more detail. Mark?
Thanks, Jeff. The DOC portfolio produced strong operating results during the fourth quarter, supporting our commitment to deliver stable and growing investor returns. This commitment to high quality growth is reinforced through our acquisition of the Landmark portfolio, which improves our already great asset base in nearly every key quality metric. I'm pleased to share that the integration of these new assets to our portfolio has been near seamless, and outcome that would not be possible without the excellent efforts of our best in class team of property managers and accountants. We look forward to growing relationships with our 10 new health system partners for years to come. Our in-house leasing team has also been productive, completing 1.2 million square feet of total leasing activity during 2021 at an 80% retention rate, and positive 1.6% renewal spreads. For the fourth quarter specifically, we completed 389,000 square feet of leasing with a strong 79% retention rate. Not included in these numbers is an additional 42,000 square feet of new leases executed in the quarter, which are currently in construction, and will commence rent payments over the next several quarters. We've been especially pleased with our ability to exhibit pricing power, without expanding concessions in this inflationary environment last year, but in the last two quarters especially, the leasing team has been focused on balancing tenant retention and leasing spreads, while pushing on the contractual rent escalators higher than the portfolio average of 2.4%. They were successful in this mission, with over 85% of our leasing activity executed in 2021, containing an average rent increase of 2.5% or greater. Looking ahead to 2022, 4% of DOC's portfolio totaling 565,000 square feet is scheduled to renew with a current average rental rate of $24.89 per square foot. These explorations include several specialty surgery center and orthopedic spaces, where we remain confident in our ability to release at favorable leasing terms. We are also encouraged by our ability to re-let vacant space, given the strong demand we're seeing for Class A outpatient facilities. Our pricing power is backstopped by construction costs that are up more than 20% above pre-pandemic levels, limiting alternatives for tenants who may choose to seek space elsewhere. These factors have turned our expiring leases into an excellent opportunity to demonstrate the superior quality of our portfolio. We're optimistic that tenant retention will remain high in the year ahead, and that we'll be able to achieve renewal spreads in excess of the usual 2% to 3% average that the medical office sector has historically seen. Moving to our same-store NOI growth, our 246 property same-store MOB portfolio generated cash NOI growth of 2.9% for the fourth quarter. Despite the inflationary environment, operating expenses were actually down 4.7% against last year as a result of several real estate tax and insurance expenses that were challenged and refunded at year end. In total, operating expenses were down 1.5 million year-over-year, leading to a $1.1 million decrease in operating expense recoveries from tenants under our triple-net lease structure. Our CapEx investments for the quarter totaled 7.5 million, or 8.9% of cash NOI. For the full year, we invested $25.5 million in recurring capital investments, near the low end of our $25 million to $27 million guidance that we offered at the start of last year. In 2022, we expect our full year recurring CapEx to remain around 8% to 9% of NOI in total between $29 million and $31 million. Within our 2021 CapEx investments, we invested approximately $5.6 million in ESG related projects to improve energy management systems. Upgrade HVAC mechanicals, and install more efficient and longer lasting LED lighting. Overall, these investments not only make our buildings more efficient, but also improve our margins on common area costs and reduce operating expenses for our healthcare partners. In recognition of these efforts, we are proud to share that DOC has earned an additional 10 new IREM Certified Sustainable Property designations in 2021, reinforcing our commitment to expanding our ESG practices. In total DOC has earned 28 IREM CSP designations since 2019. We're making significant improvements on all fronts related to ESG and look forward to sharing these results in our third annual ESG report in June. To conclude, 2021 was an outstanding year, in which we grew the portfolio from $5 billion in real estate investments to nearly $6 billion by year end. And our off market acquisitions showcase how relationships will continue to power the future of DOC. We've built a high quality portfolio that is operating well, with an exceptional asset management and leasing team that has and will continue to deliver bottom line results. Before turning the call back over to John, I would also like to say a special congratulations to Mark Dukes on his promotion to SVP, Asset Management. Mark is not only a true leader at DOC, but also within the commercial real estate industry. Congratulations, Mark. John?
Thank you, Mark. Jesse will now be happy to take questions.
Thank you. [Operator Instructions] Our first question is coming from the line of Juan Sanabria with BMO Capital Markets. Please proceed with your question.
Good morning team. Just wanted to start on the investments side. Could you talk a little bit about some potential optionality you have about converting some of your preferred mezz loans into an either developments or otherwise into acquisitions in 2022? And how much if any is assumed in guidance in part -- as part of that how you're thinking about joint ventures, you expanded the Davis Joint Venture in the first quarter as a tool to put capital to work into 2022?
Yes, Juan, it’s JT. Thanks for the question. So we look at mezz primarily as a means to an end. So most mezz loans we're making are with the anticipation of converting that to full ownership either through the development structure or through an acquisition or potentially through a JV structure. So it's been a great tool for us. Landmark is a perfect example where we can recap the portfolio two years ago had $50 million of high yielding mezz but had REITs, short and long-term REITs to acquire the portfolio, and just frankly just happened quicker than we expected. So it's a great tool for us. We expect to continue to use it those cycle in and out, usually on a 12 to 18 month cycle. So we're kind of constantly evaluating when and where to place those. So didn't always convert to ownership, but that's the primary use for that, that methodology. Alone downs provide us an opportunity to get even more attractive yields on development, but also well kind of managing rent costs, inflationary costs with the provider in those construction processes.
Is there anything assumed for any of those loans to turn into the simple ownership in 2022 as part of your acquisition guidance?
We should -- we could have some convert this year. We have some mezz on development projects that we funded last year that I'm now CEO and are currently operating with. We're at commencement, so we'll work through that process with the developers in those couple of situations. So yes, as part of that 250 million to 500 million part of it assumes some of them as conversed ownership.
Okay. And then just on the core, kind of cash flow growth. It sounded like you've got some the leased rates seems like it's higher than the occupied rate, maybe there's some delays with some of the setup costs. I guess I wanted to check if that's accurate, and then to see how you guys are thinking about that growth going forward, you kind of mentioned that you expect it to accelerate. Is that driven by just greater renewal spreads or increases in the annual bumps is the portfolio turns in, and you're able to get higher with annual renewals or annual bump sorry?
Yes. I wanted to it's really a combination of both. I mean, the good news is the quality of earnings is stronger than ever and the strength of our portfolio was stronger than ever with the downside first time in really my career were while is not as advantageous as historically it has been. So we don't have a lot rolling this year, but where we do have leases rolling. We have 300 buildings and we have some vacant -- a small amount of vacant space, but some vacant space. But we see inflation hitting those rents, construction costs, which would be the competition for the rents, increasing pretty significantly. So we do expect higher than average releasing spreads this year and new leasing spreads absorptions, because of that. The first year of a really big lease roll for us is 2026 and that's the 10th year anniversary of the CommonSpirit acquisition that we did. So we manage that really quarter-by-quarter and evaluating when and where to address those leases and stretch those leases and working with CommonSpirit for their space needs. When we did that transaction, all the rents were set at the market rates at that time in those individual markets, and frankly, we see those as below market in those markets right now, generally overall, and so, you know, see a big opportunity in 2026, working with them at an appropriate rate, but at the same time, we think there's good potential for better than average releasing spreads across that portfolio.
Thanks, John. Time flies. Thank you.
I’ll be here before you know it.
Thank you. Our next question is coming from Rich Hill with Morgan Stanley. Please proceed with your question.
Hey, good morning, guys, and thanks for the color on prepared remarks and some of the commentary from fall to one. I did want to just follow-up on the acquisition guidance and maybe push a little bit more on the range. It sounds like the range was driven in large part by cost of capital. But maybe you could give us a little bit more insight as to what would drive you to the top end of the range. And if there's any scenarios that could maybe surprise to the upside, even above the high end of the range. So really, it's just a question of like, what assumptions are driving that high-end and low-end of the range?
Yeah. The high end of the range is primarily driven by mezz financing and loan developments. And so we see that as frankly market for high quality assets that we're financing part or all of the construction costs for those projects, and then once leases commence at those rates, and so that's where you can drives the high end of that range could be even more attractive. The low end of the range is driven by best-in-class medical office acquisition and primarily off market, best-in-class assets and an open auction process, trade in the mid fours still, in the private market. And so, again, we think we can drive best-in-class asset acquisition pricing still in the 5.25 plus range, so it's really a combination of both.
Got it. That's helpful. So if I can maybe come back to the mezz financing for a second, I recognize why -- how and why that can be a big driver of acquisitions, but are you seeing increased competition from a variety of lender sources to provide mezz financing and is there any scenario where that becomes less of a lever than where it's been in the past?
I don't see a scenario where it becomes less there's more development, planning going on right now and in process then we've seen in years, driven by delays in construction projects during the early part of the pandemic to a need for more outpatient space as recognized by the other health systems during the pandemic. So we're not out competing in the open mezz market for mezz paper, it's just, it’s lender is construction lenders, primary senior secured lenders are looking to work with their clients to finance new construction projects. Frankly, we get, kind of, leads and introductions that way, but also our development partners where we continue to do repeat business with Mark Davis being a perfect example in Minneapolis. He sees it as an attractive part of his capital stack. And in the end, it's a financing tool for us and for the health system and the developer that keeps rents as low as possible in these new buildings and in high inflationary market. So, it's a combination of those that worked really well for us, it worked really well for keeping rents at market as market is increasing in those markets.
Got it. That's helpful. Just one more question for me. Inflation obviously, is on everyone's mind right now. If I put on my cross-sector hat, there are some landlords that are thinking about or trying to change their lease structures to be a little bit more inflation-protected including CPI lookbacks that catch-up. Have you had any discussions about that? Is that anything that you would consider? Basically a question of would you change the structure of your lease terms to maybe provide more inflationary hedges than might be in place right now?
Yes, beginning of 2017, that became our standard approach to leasing new leases or in renewals as our standard kind of terms include CPI with a 3% floor that has been effective. So, about 10% of our portfolio has a CPI adjustment annually and again, the floors usually getting negotiated in exchange for some kind of cap. So, those range from 2% to 4% with a CPI adjustment. So, about 10% of the portfolio has that in place. Again, we have we have long waltz, we have 2% to 3% rolling every year and so that's -- it's kind of -- will take time to convert that across the rest of the portfolio, but starting to have an impact.
Got it. Thank you guys. Appreciate it.
Thank you. Our next question is coming from a line of Jordan Sadler with KeyBanc Capital Markets. Please proceed with your question.
Good morning. Wanted to follow-up on that last answer JT, if you wouldn't mind just on the new standard lease, you said 3% for -- with CPI, is there -- are there typically kept on the new leases?
Jordan, JT. So, again, it just depends upon kind of the counterparty and what's important to them. So, some had caps, almost -- they all have floors. So, sometimes the floor goes from 3% down to 2%. In this inflationary market, that’s something we may continue to move up and be an important part of the negotiation, but that's the long-term conversion that we've started in 2017.
And then in your prepared remarks, you did -- you spoke to it a little bit and in the Q&A here, but you referenced accelerating internal growth. Can you maybe speak to that a little bit more? Is that, as you look forward, more a function of pushing through a little bit better rate or the better leasing spreads you mentioned here, or is there also -- are there other opportunities either as a function of some amount of redevelopment or occupancy uplift in certain aspects of portfolio. What you were referring to?
Hey Jordan, this is Mark. Yes, so as it relates to really driving our internal growth, it comes in two ways. One is the revenue increasing, as JT was just talking about with a strong focus on our leasing spreads in our annual escalators. Our annual escalators today are 2.4%. If we look at the leases that did have a CPI adjustment last year in 2021, those leases grew at 3.3%. You know, the other important point to note is on the expense side that our leases are triple net structure, so we're protected against a lot of those inflationary pressures on the operating expense side. So as we saw this quarter, our operating expenses are actually down as a result of some great work but the asset management team to challenge property taxes to renegotiate some insurance rates. And so we're really looking on ways to continue to invest our CapEx dollars into the properties, where we can lower operating expenses for our partners and then also for ourselves, where we can, you know, save on the expense side, so we're using a combination of, you know, trying to increase rents and grow revenue while also keeping great control on our operating expenses.
Okay. And then, I feel like when you hit the pipeline rate, which is amazing three questioners and but can you maybe speak to what you guys are seeing on the investment pipeline? You got the 250 to 500 guide and a lot of progress last year. Are you seeing that this year versus last year or is it picking up just maybe characterize it for me?
Yes, Jordan, its JT. We've got a nice pipeline. Our – kind of typical model is, you know, onesie, twosie transactions with existing relationships either developers or owners or health systems, physicians themselves, so kind of nice pipeline. I think we'll have a good strong start to the year to report with first quarter – first quarter earnings, but it's onesie, twosie. There's some – there's some larger portfolios floating around the market. There's one really big portfolio or less than the market, so we evaluate everything. So it's – I think – I don't think we'll – I think we'll have I think the opportunities is far exceeds the guidance we're providing and the capital markets improve, I think we can grow even stronger. We feel good about the guidance we've given. On the development side, we have – we've seen and negotiated with more development opportunities than we ever have. And again, these are all either 100% or higher pre-leased opportunities. Somewhere we'll do the loan down which where we'll deploy more capital in somewhere mezzanine, where we'll provide less but at a higher rate.
Okay. And then on the larger portfolios. You know, I assume pricing is still very competitive and more aggressive there. Is that sort of fair or is there a way to get a bigger deals done going there?
It's hard to it's hard to pull off a portfolio in an off market manner like we did last year. So pricing, there's a lot of buyers out there, still a lot of private capital looking to get into the space, so pricing is still – still very strong. I don't expect, given the portfolio's that are kind of being actively marketed. I don't have great expectation that we will be interested in either the quality of the portfolio or the pricing of the portfolio but you know, again, we evaluate everything.
Okay. Thanks, guys.
Yes. Thanks, Jordan.
Thank you. Our next question is coming from David Toti with Colliers International. Please proceed with your question.
Great. Thank you. I just had a quick question for you, Jeff. Relative to the changes that you're expecting in the cost of capital that might impact your acquisition appetite, how are you underwriting those specific changes? And what are you expecting in terms of, sort of inflation in the cost of capital?
Yeah. Thanks, David. So, certainly, as we look at all these acquisitions, where we evaluate everything on a long term IRR basis and so we factor into that, kind of what our – what our cost of debt is on a long-term basis. So, where we think we could issue called a 10 year bond today. We also look at our cost of equity, generally, on a – an apple yield basis, plus an expected kind of inflation rate on that. So, we use those two factors and then compare – compare the potential acquisitions against that weighted average cost of capital. So when we're looking at, interest rate increases, and we're typically looking at what's projected by the Fed and the expectations around those short term interest rates as well. When we look at market, market rent increases? Certainly, that's increased in our mind as we look over a 10 year period, from where it was a few years ago. So we do increase the market raise inflation, a bit from where it used to be.
Okay. Then just one follow-up question to that, which is, do you expect cap rates will remain sticky and lag for some time – let's assume that you have capital increases – capital cost increases? Well, that begins to compress some spreads potentially, until the market catches up in terms of expectations for yield?
Yeah. It'll be interesting with the cap rates, because certainly you do have some increasing, cost of capital for all buyers. But then you also have rents that are going to become more and more below market. So you'd expect to see the ability to increase the – the rents under these assets over a long period of time, more than you used to be able to. So, there'll be some offsetting factors there, right now, we'd kind of expect cap rates to remain about where they are. We'll just have to watch and see what happens, but we don't see any drastic moves and cap rates coming anytime soon.
Okay. That's helpful. Thank you.
Thank you. Our next question is from the line of Nick Joseph with Citi. Please proceed with your question.
Thank you. How are you thinking of funding the net external growth in 2022? And then where does that put leverage at the end of the year?
Hi, Nick. It's Jeff. So, certainly, our leverage we ended the year at a pretty good rate on an enterprise basis. We are 5.8 times debt to EBITDA. Obviously in 2021, we had delivered ahead of the Landmark transaction. In the fourth quarter, we issued $133 million on the ATM, just to bring that expected leverage down from I guess it would have been just over six times debt to EBITDA to the 5.8. As we think about the acquisition pipeline in 2022, I'd say, we're largely in you know, kind of a pay as you go type mode. And so we're certainly comfortable from a risk standpoint, with the leverage as it stands today. I'd expect that, it's going to, directionally over a longer period of time trend down. And we're certainly going to be conscious of, where our current cost of equity is, as we, look to execute on this pipeline. And that's a big part of the reason, we're looking at these, different – different acquisition structures like the – the mezzanine loans and the loan to own. So that we can find appropriate yields based on our cost of capital.
Thanks. And then just for the five in the quarter, the 6% cap rate assumption is that cash or GAAP?
Always cash.
Always cash.
Okay. And so what was that -- so maybe 25 to 50 basis points higher on a GAAP basis historically?
Easily. Yeah.
Thank you.
Thank you. The next question is coming from the line of Michael Carroll with RBC. Please proceed with your question.
Yeah, thanks. I just want to talk about the acquisition cap rate range. I mean, what's driving that range higher? Is it that Mezzanine type investments and the loan to own development commitments? Is that why that caprates in the mid to high 5 type target range?
That's right, Mike. We are seeing and we are in negotiations on more development projects right now than we are acquisitions. And so we have a nice blend of both. But those -- the development projects are going to either through Mez or through a loan down structure, are going to be much closer to 6 or more than less. So, we see a real opportunity both for high quality, long-term assets to put into the read and a much more attractive price than acquisitions.
Great. And then just back to the leverage question. I know leverage is a little bit higher than normal today, and you kind of highlight this, but given the stability of your portfolio, I don't think it's really a concern. Are you willing to complete these investments and push leverage a little bit higher, or is that kind of like a cap that you don't really want to be much higher than you are right now?
Yeah. Mike, I don't think we're capped exactly where we are now. Certainly, we want to be a little bit more cautious about leverage when we're up to 5.8 times versus when we're kind of closer to 5. But there's some short term flexibility there. Again, just because of the nature of the portfolio and how stable it's been through even kind of the biggest operational stresses over the past few years.
Okay. And then I guess related to the Board changes, I believe in your prepared remarks, you kind of talked about succession planning. Hey, did I hear that correctly? And what does that entail? What you are kind of planning right now on the succession side?
Yeah, sure. We don't have anybody from our original Board or current Board that's retired or established are not standing for re-election this year. But we're starting to look at in the next couple of years, we're likely to have two, three Board members kind of transition through retirement. So what we want to do is, when we bring identify new great candidates to add to our Board is get some overlap with that historical knowledge and leadership. So we're going to expand the Board slightly for the next probably look for one more candidate to add to the board eventually and then shrink it back down as we see some retirement. So just a good transition, a good succession planning there.
Okay, great. Thank you.
Thank you. Our next question comes from Michael Gorman with BTIG. Please proceed with your question.
Yeah, thanks. Good morning, John. I think maybe just on a little bit of a bigger picture topic recently there was some focus in your sector, but not your property type, on the effect of private equity in the ecosystem. And obviously the retail sector has been dealing with some negative effects from private equity investment over the years. And I just wonder if you could share with us your thoughts on private equity's expansion in the healthcare space. It's acquisition of physician practices and how you think about private equity within your own portfolio and when you kind of look at new assets for acquisition.
Yeah, great question. And there's a lot of private equity on both sides of our business. On the real estate side, some of the larger, smarter private equity firms that have gotten into real estate in a big way are very disciplined, but they're out there looking for they're always, kind of, a flood of capital looking to get into the medical office space. It's just -- kind of, sometimes its onesie-twosie, sometimes they're want to enter in a big portfolio. So, yes, I think that's helping to increase the -- or decrease cap rates generally, just with the pressure that cash looking for them high quality assets and then their yield expectations. On the on the provider side, we're seeing a lot of different roll ups, if you will, from private equity across specialty types. So its -- UnitedHealthcare is the largest employer of physicians today. Certainly, not private equity, but there's a -- and they're out acquiring kind of all kinds of practices. But in the private equity world, there's an orthopedic -- there's a couple of orthopedic roll ups. There's a couple of ophthalmology roll ups. There's dermatology roll ups, there's GI roll ups, and it's kind of by specialty. So, ideally, we're either side by side or we're kind of talking to the physicians who typically own the buildings that the private equity firms are rolling up. And kind of establishing new leases where the -- everybody kind of makes a long term commitment to the practice and location. Sometimes that happens after the private equity comes in, sometimes it happens before. So, we're in active discussions with private equity firms. We don't -- we're not threatened by them, but at the same time, they do change -- typically change the capital structure of the practices. And when we’re in sale leasebacks, we like to know and understand our credit and what our collateral is behind those leases. So, having a big impact and something we're out in front of in a big way.
And in most instances, there were -- there's a physician owner. They are still looking to kind of split that structure between the practice and the real estate?
Yes. I mean, you think about it. A 5 cap is a multiple of cash flow, and then on the private equity firms, they're talking in 10 to 15 times EBITDA. So there's a balance between the two and where you can maximize value, when you sell kind of both sides of the house, if you will, the opco and the propco.
Okay, Great. Thanks. Appreciate the commentary.
Yes. Happy to, Mike.
Thank you. Our next question comes from a line of Daniel Bernstein with Capital One. Please proceed with your question.
Yeah. Hi. Good morning. Just a quick question. I noticed the MOB, the same-store cash NOI is about 80% of the portfolio. The non-same-store is about 19%, 20%. So I just want to kind of understand maybe the difference in performance between the two set -- the two subsets there, and maybe the drivers of that non-same-store portfolio going forward. I'm guessing a chunk of that’s landmark, but just trying to understand whether I think should about the total portfolio potentially growing better or worse than that kind of same-store number of 2.9%.
Yes, Dan. This is Mark. Good question. And you already, kind of, guessed, it's the same store portfolio. If you look back, last year is nearly, the entire portfolio this year in 2021 is, we had significant growth in our investments, $1 billion of new investments between the landmark and the HonorHealth transactions that we've not yet owned for a full year, represent the majority of the non-same-store portfolio. So it's primarily new acquisitions there and, obviously, that will be added to same-store after a year of ownership.
And is there a difference in growth rates between the two sets there?
Yes, if you continue to…
Okay. How should I think about the drivers that are different?
Yes. In the landmark and HonorHealth portfolios both, again, we underwrote them on an IRR basis, but those have historical leases with 2% to 3% rent bumps and, primarily triple net lease, so we expect that those will continue to be in line with the profile of the existing portfolio and in the same-store portfolio.
That's all I had. Thanks.
Excellent.
Thank you. Our next question comes from the line of Tayo Okusanya with Credit Suisse. Please proceed with your question.
Hi. Yes. Good morning, everyone. I wanted to go back to one Jordan’s question, really trying to understand what the same-store NOI outlook could look like going forward. Again, it sounds like again, you're getting better mark-to-market in new leases, you have the difference between the occupied versus lease, which again should kind of add some occupancy going forward. So just kind of it sounds like you're talking about very good strong pricing. And then this quarter, you put up a pretty good number of 2.9%. So as we kind of think about 2022 and beyond, I guess is it fair to kind of think of same-store being kind of more at the very high end of kind of this historical 2% to 3% bogeys, you know, the MOB to kind of measure up against.
Well, Tayo, it’s JT. I think, I think again, this the first year and in 20 years we've had, we see more and more opportunity to press rents and increase those rents, again, offset for us by 95% occupancy, which is I mean, there's just, you can't get to 100% and we'd like to get to 100% and Amy Hall and Mark Theine could get us to 100%, if possible, but that's it's a stretch. So, you know, on the same-store side, we've got 2.4%, 2.5% kind of on average annual escalators, 10% of the portfolio, which I think would include almost all and would all fall into the same-store that does have those CPI increases, so we should get some uptick from that this year. So it's measured in 2022. In 2023, when landmark does roll into the same store pool, we underwrote that and do have expectations that the first year yield will exceed 5% because we don't – the rents – the near-term rent roll and renewals, there's an opportunity to really push those rents, you know, and that piece of the portfolio, so it's incremental, but, you know, over time we, again, that the quality of our cash flow and the strength, the ability to increase that quality of that cash flows is there.
Got you. Okay, that's helpful. Thank you.
Thank you. It appears we have no additional questions at this time. So I'd like to pass the floor back over to John Thomas for any additional concluding remarks.
Again we thank you for joining us – joining us this morning. We had a great 2021. We have very high expectations for a very strong 2022. We look forward to reporting back next quarter. Thank you for joining us today. Thank you, Jesse.
Thank you. Ladies and gentlemen, this does conclude today's teleconference. Once again, we thank you for your participation and you may disconnect your lines at this time.