Healthpeak Properties Inc (DOC) 2021 Q2 法說會逐字稿

Greetings. Welcome to Physicians Realty Trust Second Quarter 2021 Earnings Conference Call. (Operator Instructions) Please note, this conference is being recorded.

I will now turn the conference over to Bradley Page, SVP, General Counsel. Thank you. You may begin.

Thank you. Good morning, and welcome to the Physicians Realty Trust Second Quarter 2021 Earnings Conference Call and webcast. Joining me today are John Thomas, Chief Executive Officer; Jeff Theiler, Chief Financial Officer; Deeni Taylor, Chief Investment Officer; Mark Theine, Executive Vice President, Asset Management; John Lucey, Chief Accounting and Administrative Officer; and Laurie Becker, Senior Vice President, Controller.

During this call, John Thomas will provide a summary of the company's activities and performance for the second quarter of 2021 and year-to-date as well as our strategic focus for the remainder of 2021. Jeff Theiler will review our financial results for the second quarter of 2021. Then Mark Theine will provide a summary of our operations for the second 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 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 a 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 thank you for joining us this morning. Our portfolio of best-in-class medical office facilities continued to perform exceptionally during the second quarter, delivering the predictable growth and operating outcomes that medical office investors have come to expect. This includes the collection of over 99% of all cash rents due during the quarter, supported by patient volumes that remain resilient despite the recent spikes in the delta variant.

Along with this operating -- operational performance, we continue to have confidence in our external growth pipeline. Since our last call, we have made additional progress on our acquisitions and have high-quality medical office building targets in various stages of negotiations. Substantially all of this pipeline is off-market in direct negotiations with existing health systems and developer and owner clients. So while our investments will be back-end weighted this year, we remain very confident in our guidance of $400 million to $600 million of investment activities for 2021.

Our loan pipeline continues to grow as well, including the newly announced mezzanine loan in Brooklyn Park, Minnesota. DOC's real estate loan book totaled $176 million in outstanding principal at quarter end and is secured by real estate valued at over $1 billion. In addition to the attractive 8% average coupon, our loan portfolio represents a source of future growth through embedded ROFR rights and purchase options.

Within this loan book, our 5 projects under development with an expected market value of over $200 million upon completion, including one loan to own transaction. Our pipeline for development financing opportunities continues to grow. We expect to secure many of these new opportunities by yearend, supporting our growth in 2022 and 2023.

We are also evaluating the opportunity to use the robust medical office market to dispose of some noncore facilities at a profit. This pruning can both enhance the quality of the portfolio and also provide an additional source of funding for the growth this year.

Our Chief Financial Officer, Jeff Theiler, will review our financial results and balance sheet in a few minutes, but I wanted to recognize Jeff and Mark's arena for leading us in the achievement of our long overdue upgraded credit ratings with both S&P and Moody's. We've already seen the benefits of these well-deserved upgrades to our cost of capital, amplifying our opportunity for outsized accretive growth going forward.

The trends in favor of medical office have proven to be very predictable and reliable, driving a consistent and growing rental income stream for the benefit of our shareholders. Public investors in health care real estate can count on medical office to remain open, occupied and busy. Medical office does not need to recover. As an asset class, it is only impacted temporarily in spring 2020, and DOC has maintained close to 96% occupancy throughout the pandemic.

We remain focused on growing our funds available for distribution each year, and we'll continue to manage our organization to achieve that result annually.

Jeff will now review our financial results, and then Mark Theine will share our operating results. Jeff?

Thank you, John. In the second 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 $0.25.

Our operating portfolio has continued to perform well in the second quarter. Our same-store portfolio had consistent occupancy year-over-year and generated NOI growth of 2.4%, right in line with the fixed escalators and consistent with our expectations. The one deferment we granted in the midst of the pandemic last year has been fully paid back, including $200,000 of associated late fees.

Through this quarter and to the present time, we are seeing very little negative impact with our tenants from COVID at this point despite the emergence of the delta variant. We are optimistic that our portfolio will continue to perform and be resilient in the current environment.

Turning to the balance sheet. We've been recognized by 2 major rating agencies over the past few months for portfolio and balance sheet improvements that have been years in the making. We were upgraded to BBB flat by S&P on May 13 and upgraded to Baa2 by Moody's on July 1. These upgrades have a significant impact on our cost of capital and improve our ability to compete for the highest quality buildings.

In their rating evaluations, both agencies recognize the high quality of our pure-play MOB portfolio and its superior performance during the pandemic. They also noted our disciplined capital strategy and best-in-class tenant mix, specifically, our 63% concentration of investment-grade tenants, 93% exposure to net leases and significantly lower proportion of near-term lease expirations relative to the sector.

We remain highly disciplined with our capital strategy, raising $83 million on the ATM in the second quarter at an average price of $18.39 as we continue to prefund our acquisition pipeline. As a consequence, we currently sit in an excellent financial position with consolidated debt-to-EBITDA of 4.5x and an outstanding revolving credit facility balance of $72 million, leaving $778 million of availability. This prefunding has placed us in a position to successfully execute on our substantial pipeline in the back half of the year.

We are still confident in the acquisition guidance we laid out at the beginning of the year of $400 million to $600 million of new investments and expect to execute on those investments prior to the end of the year. As we discussed last quarter, the pipeline is full of the types of buildings that are in our sweet spot, high-quality MOBs with strong investment-grade tenancy from leading health systems.

JT has talked about the progress on this pipeline, and while perhaps that progress has been slower than we were anticipating, it has been steady, and we remain on track.

Turning to other relevant portfolio metrics. Our second quarter G&A came in at $9.1 million, and recurring CapEx was $5.7 million for the quarter. Our full year guidance for those metrics remain unchanged at $36 million to $38 million for G&A and $25 million to $27 million for CapEx.

I will now turn the call over to Mark to walk through some of our portfolio statistics in more detail. Mark?

Thanks, Jeff. Quarter-by-quarter, MOBs continued to improve their reputation for stability with occupancy, collections and leasing trends that remain strong regardless of market factors. The steady internal growth delivered by our asset management platform is the result of superior tenant satisfaction, strong 2.4% built-in rent escalators and an industry-leading 96% lease rate.

Our leasing and CapEx teams continued to deliver value during the quarter with an impressive tenant retention of 87%, positive cash re-leasing spreads of 2.7% and low CapEx investments that totaled just 7% of cash NOI.

The operations team also continued to execute on the plan to expand our in-house property management platform, laying the groundwork for further cost efficiencies across the portfolio that will deliver long-term value for shareholders. Specifically, we recently welcomed Mercedes Marquez and Nicole Bradley to the DOC family as we expand our management efforts in Phoenix, Arizona and Birmingham, Alabama.

From a performance perspective, our MOB same-store NOI growth in the second quarter was 2.4%. The NOI growth was driven primarily by a year-over-year 2.4% increase in base rental revenue. Operating expenses were up 6.2% and offset by 7.0% increase in operating expense recovery revenue.

Year-over-year, operating expenses were up $1.9 million overall, primarily due to a $0.5 million increase in utilities and a $0.4 million increase in insurance cost. Same-store occupancy remained steady at 95.4% year-over-year as our leasing team continues to execute consistently with strong retention.

On a consolidated basis, we completed a total of 395,000 square feet of leasing activity during the quarter, the second highest quarterly volume in the history of the company. Tenant retention was 87% across 353,000 square feet of lease renewals with cash renewal spreads of positive 2.7%. Notably, these results were achieved with limited leasing costs, totaling $1.68 per square foot per year across the full volume of leasing activity, a figure that is much more efficient than the industry averages.

Our successful net effective rent outcomes are driven by our deep understanding of our primary markets and constant evaluation of the local leasing trends.

Turning to our capital investments for the quarter. We once again proactively managed recurring CapEx to $5.7 million or 7% of cash NOI. Year-to-date, DOC has invested $11.3 million in recurring capital projects. While committed leasing TIs were low on a per square foot basis, we do expect capital expenditures to tick up during the second half of the year due to increased leasing volumes. As a result, we still expect to fall within the $25 million to $27 million full year guidance previously announced.

Embedded within all capital investments made by DOC is a strong commitment to materials and practices that enhance the patient experience and our ESG efforts. Our second annual interactive ESG report was released in June and highlights the exceptional progress toward our 3-year goals to improve the portfolio's overall carbon footprint, energy, water, waste usage by 10% compared to our 2018 base year.

In 2020, DOC invested in 29 sustainability driven capital expenditure projects totaling $4.2 million, generating approximately $7.7 million in operating expense savings over the next 10 years. Additionally, we exceeded our team's social goals by raising or donating over $350,000 for worthy causes across the country and providing over 515 volunteer hours of service to charitable organizations.

In the 8 years since our IPO, we have not only built one of the best health care real estate portfolios in the country, but we have also assembled the best health care real estate team. Our efforts directly translate into care for tenants, evidenced in our 2021 Kingsley Associates tenant satisfaction survey results. This year, we surveyed nearly 365 tenants, representing nearly 3.4 million square feet.

Physicians Realty Trust received an industry-leading 76% response rate. In addition, despite the ongoing COVID-19 pandemic, we earned the highest scores in the history of the company, including an overall management satisfaction score of 4.53 out of 5.0, beating the national benchmark.

Going forward, we expect continued successes from our growing operating platform, resulting in enhanced local market knowledge, repeat investment opportunities with existing partners, profitable operating efficiencies and continued tenant retention.

With that, I will now turn the call back to John.

Thank you, Mark. Thank you, Jeff. We'll now take your questions.

(Operator Instructions) Our first question is from Ron Sanabria with BMO Capital Markets.

Just on the acquisition pipeline. Hoping you guys can give us a little bit more color on the expectations for the second half. I think last quarter, you talked about visibility on $200 million of opportunities, maybe how those have evolved and kind of pricing expectations?

Yes, great question, Juan. The pipeline has just continued to build. We're very confident about, again, the full year numbers, $400 million to $600 million. And we've got line of sight to a pipeline that's at least that big right now. So it's a collection of high-quality medical office buildings, some that were under construction in the first half of the year and just kind of moving to [CO], and we'll move to rent commencement here this quarter. And so it's really -- we're really excited about it. So hopefully, we'll able to share a lot more with the next call.

And the pricing is still kind of that mid-5% to 6%?

Yes, 5% to 6%. I mean again, the higher quality, newer buildings are going to be at the low end of that range, but the development pipeline, which continues to grow is where we achieve those higher returns.

Okay. And then you -- just curious on what you guys think about the importance of scale and maybe the opportunity for public M&A given potential cost synergies or further improvements to the cost of capital post your credit rating upgrade. Or if the -- if you prefer to kind of just 1G, 2Gs and don't really like the prospect of bigger portfolio transactions? Or just kind of your general thoughts on that subject matter?

Yes, Juan, sorry, we had a brief disruption here. The -- I think I got the gist of your question. The -- our execution strategy from the beginning has been direct negotiated off-market transactions, primarily through health system relationships, physician relationships and health care real estate developers. And that's what we're focused on our strategy and execution there.

And again, we've got a high quality pipeline. We'll be able to share a lot more about with the next earnings call. Scale is obviously very important. As we've grown, as Mark mentioned, we've expanded our property -- our internal property management team in a couple of markets where we have had some significant growth opportunities. And so again, scale in our core markets continues to drive a lot of synergy value. And it grows more -- it provides more opportunities. So public market M&A or large portfolio transactions, we certainly look at everything, but we're focused on our core strategy. And we're approaching $6 billion in assets. We've got pretty good scale already.

Our next question is from Nick Joseph with Citigroup.

As you look at your acquisition pipeline, obviously a lot of it is backend loaded this year. Is that kind of unique to this year? Or is that representative of what your acquisition pipeline should also look like heading into 2022?

Yes. I mean it is unique for this year. It's just the circumstances of how the pipeline built at the end of last year. Again, we'd like to be a little more spread out and I think historically there was a time where we were closing a building a week. So it's just the innings of this year, but I think there were some sellers, some health systems at the end of last year that weren't really thinking about monetizing.

But with expecting changes in tax laws, kind of changing in the political environment, things like that, we're seeing more opportunities kind of evolve that kind of bubbled up in the first quarter that we've been negotiating through and again, expect to execute on this quarter and the last quarter. So I think it's just unique to this year, but frankly, has been pretty exciting for us.

And then just back to the broader transaction market, you mentioned cap rates maybe 5% to 6%. How have you seen portfolios trade relative to individual assets? And then what does the buyer pool look like?

Yes, the buyer pool has gotten bigger. Private equity continues to -- "private equity" if you will, it continues to raise a lot of capital, continues to explore both individual assets and the portfolios have been floating around. We haven't seen anything -- I mean, of course, we look at everything that's marketed, but most of our -- substantially all of our transaction volume this year will be off-market and not portfolio-based transactions. But there's a premium out there for the portfolios we've seen traded, at least based on the quoted cap rates, those -- the ones that have the $300 million to $500 million portfolios that have floated around, I think we're hearing 5.25% kind of cap rates, 5%, 5.5% on some of those on assets that are probably high 5%s to 6%, bought on an individual basis.

So a lot of capital chasing the assets, as we said, we expect to dispose of opportunistically a few of our assets that just don't fit our strategic portfolio going forward, but they're tracking a nice high price.

Our next question is from Jordan Sadler with KeyBanc Capital Markets.

So I want to follow up on that last piece, JT, you mentioned dispositions, which I feel like we've kind of had a -- you guys have had an on-again, off-again view towards dispose a little bit. And it sounds like you're mentioning them again, which makes me feel like you're a bit closer maybe than you had been in the past to selling some stuff. Can you maybe offer a little bit more color surrounding the sales?

Yes. We think our portfolio is -- we pruned some things a couple of years ago out of the portfolio. We think our portfolio is outstanding. So of our 275 buildings, we love all our children. So -- but the -- there's just a couple of, I'd say, small circumstances where either portfolio might trade and our assets are complementary to that, or we're always kind of exploring the opportunity to sell the LTACHs, things like that. So it's just opportunistic in things that have bubbled up. But I do -- we do expect to close on a handful of distributions this year. And we use that capital to fund our acquisitions.

Volume-wise, are we looking at like a $100 million total or something smaller? Did I lose you? Have we dropped the line? Can you guys hear me?

They are still connected. I do not know what the technical difficulty is.

Okay. They might be muted.

Hey Jordan, we lost for a minute. Sorry about that.

You want me to repeat the question or you got it.

Yes, your question was, you said $100 million. And my response to that was that would be on the high end. It's a handful of dispositions.

Okay. And then along the same lines, the leverage really with the use of the ATM, Jeff, good job. You -- I think about as low as we've seen in a while at 4.5x net debt-to-EBITDA, I think you quoted. So sort of appetite to continue to sort of use that to get the leverage lower ahead of sort of the backend-weighted acquisitions would be my question? And then any insight on additional ATM that's been issued post quarter end?

Yes, good questions, Jordan. Like you said, we've been pretty proactive about funding the acquisition pipeline in the first 2 quarters of the year. So really we're at a point right now where we could execute on that acquisition guidance and not raise additional equity. So I think we're in a really good spot. I mean look, we're always opportunistic about how we fund our deals, and it's dependent on what we see coming down the line in the far future as well. So we'll take it day-by-day, but as a need, we don't have any need for additional equity.

Okay. Administrative one for you, Jeff. The late fees and collections total booked in 2Q, that won't repeat?

Yes. Yes, just $200,000. That's right.

$200,000. Okay.

Our next question is from Amanda Sweitzer from Baird.

Following up on your comments on increased CapEx and the increased leasing volume you expect, your back half lease maturities actually look comparable to what you experienced in the first half. So are you expecting to be able to build occupancy over the remainder of the year? And what's the outlook for leasing vacant space today?

Yes. Thanks, Amanda. This is Mark. As you just mentioned, the back half of the year, we've got about 2% of our ABR coming up for renewal in the second half of 2021. It's about 91 leases and an average of about $23 per square foot. So we feel really good about where the market rental rates are, especially a lot of the local market trends, being able to push some of those rents and some of the escalators upon lease renewal. And then what we're seeing a lot of right now is request for CapEx and TI and some early lease renewals.

So we accelerated a few leases this quarter, extended early. And I think it's a nice term to hospital leases and extended them into the future with solid rent bumps. So we expect solid leasing activity to continue there.

That's helpful. And then as you've seen more companies start to kind of solidify the return to office plans, can you provide an update on how you're thinking about your health system administration tenants today? Have those tenants given you any update about how they're thinking about their go-forward space needs?

Yes. I think we have a small amount of, if you will, administrative space with health systems, but it's at least for multiple years. So we're having that dialogue. I think health systems are -- again, with this delta variant, it's kind of slowed down some of their internal thinking while they focus on the hospitals that are full and again, shifting patients to the outpatient care facilities like we own.

So we don't have any good color yet other than systems are trying to rationalize and make that decision. We've had conversations about either selling those building, subleasing those buildings or keeping them in shape, while they figure out those plans maybe in the fourth quarter. So sorry to be so vague, but it's -- we don't have a lot of that space.

Our next question is from Vikram Malhotra with Morgan Stanley.

I guess maybe just on that last point around health systems, figuring things out, given even COVID and maybe its resurgence. Can you just give us any color on concessions you may have had or expect to have on either sort of say leasebacks, or just even more directly on health systems looking at that whole off-campus close to consumers in terms of pushing care out there?

Yes. So we're obviously big believers in that long-term strategy by health systems to plan outpatient care facilities in new markets. That's exactly like the Brooklyn Park development work financing and the projects we're developing this year are almost all -- or financing development of this year, almost all exactly that kind of description, ambulatory surgery center anchored, health system, employed physicians, outpatient care, diagnostics, things like that.

Our portfolio does include a nice balance or mix of on-campus assets that are the health system in this -- in our case in our pipeline are monetizing to raise capital for their balance sheets. And at the same time, coordinating discussion around new developments with those same health systems. So it's a good mix. We haven't seen a real change in the long-term trends of expanding on-campus newer assets and at the same time, planning flags in new demographics for growth.

Maybe, Jeff, if you can just remind us, in this environment where there's still inflation concerns, whether it's on labor, materials, taxes, can you remind us again just the overall structure, kind of the performance of leases, how the pass-throughs work?

Yes. Vikram, this is Mark. Actually, Jeff mentioned in his prepared remarks that our portfolio is very well insulated from rising operating expenses due to the triple-net structure. 93% of our portfolio is triple net. And then really all but 2% have some protection against inflation of operating expenses, some of them are modified gross leases, which also have a cap that's paid for by the tenants. So (inaudible) that in our same-store results with a slight increase in operating expenses, but nearly all of it was recovered through our recovery structures in the portfolio.

Got it. Okay. That's helpful. And then I just want to go back to the disposition comments that you made. And I guess, like leverage obviously is in a great place, so you can look to use the balance sheet. But just given where the -- maybe some of what your private peers are doing, which seems like they're in the market to sell more given pricing, what would make you want to kind of really move that disposition number higher?

Really not, Vikram. Like I said, these are opportunistic sales, if you will. And we've talked for years about selling the LTACH if we can get an appropriate price. They continue to perform very well in this -- in the COVID environment. I mean that's kind of what they're used for. So their EBITDA -- EBITDAR has been stronger than a year. So there's a potential good opportunity to sell those this year.

The others, again, it's a very small handful of buildings in unique situations that we've had the opportunity to sell. Pricing has been excellent, and we're ready to move those out. We've really -- the portfolio is in fantastic shape, 96% occupied. It's -- there's not a lot in the portfolio that we want to even consider selling.

Our next question is from Michael Carroll with RBC Capital Markets.

JT, on the investment pipeline, I mean, it sounds like that the size of that pipeline is -- equals the amount of deals that you want to close in the second half of the year. I mean do you have those deals under contract right now and you just need to close on those? I mean, how does that work out?

Yes. No, it's -- a good portion of them are under contract and just moving down the normal closing process with those transactions. Others are under exclusive kind of signed letters of intent, all the economics and deal terms are worked out just working through the documentation and closing process. Little slower in part because of travel restrictions and frankly the demand in construction and other things and going around the country. But we remain very confident about not only getting those transactions closed, but continue to work through negotiations on several other things in our pipeline.

Okay. And how many of those deals in the second half of the year reflect development projects? And do you work out those deals during the time of those projects being into construction as soon as occupancy or the leases commence, that's when your -- you close those deals? Or I guess, how does that work out?

Yes. It varies a little bit. The loan downs essentially work out where we finance the construction off of our balance sheet. They're 100% occupied investment-grade credit quality tenants. And then the loan stays in place for -- typically for a year for tax reasons, but stays in place for 1 year and then it collapses into ownership. You'll see one of the investments we made this year was the Denton Cancer Center, which is exactly the process. We -- it's been on our books for a couple of years, first as a loan and now it's converted to fee ownership. Some of the development financing is where we just are part of the capital stack and typically, that happens when the building is preleased to some high percentage, but not fully leased.

And the developer has their own capital and gets their own construction loan. We provide some capital and then we have a ROFR that is triggered, again, usually with rent commencement. And then maybe for a year after that with -- for tax reasons. So it just varies.

But as we said, or I said in my comments, the assets under construction on our books today would be valued at about $200 million once we convert those to ownership. So that will happen -- mostly that will happen in 2020. What's under construction today will convert over in 2022, some of that could blend into 2023 projects we started in the fourth quarter this year, and we're working through most likely probably early 2023 conversion to full ownership. That pipeline is growing. It's been an interesting year for health systems moving forward to projects that didn't do -- they didn't start last year, but it proceeded with this year.

Okay. And then your investment targets, does that reflect the amount of capital you're going to deploy out this year? Or does that reflect the amount of capital you're going to commit to deploy, including those development projects that will bleed into '22 and '23?

Yes. It will -- hey Mike, it's Jeff. It will reflect, obviously, the amount of acquisitions we complete and then the amount of development that we're committed to for the year.

Okay. Great. And then just last one, Jeff, can you remind us what the long-term leverage target, is it still mid-5 net debt-to-EBITDA number? Has that changed?

No, that's right, Mike. So 5.25 is our kind of long-term debt target. Obviously, that's a conservative number. So there can be some flex around that, but that is the, in general, our long-term target.

(Operator Instructions) Our next question is from Daniel Bernstein with Capital One.

Just wanted to dig into a little bit about the benefits of the increasing internal management and maybe kind of the strategic direction of that. Is it related to ESG? Are -- is this a signal maybe that you guys are looking a little bit more away from triple net to more gross lease type of assets? And then maybe is there any way to quantify kind of benefits or what benefits you've seen as you grow that management side of the business?

Yes, I'll give Mark a second to think about the direct financial formation, but it's really, again, part of our long-term strategy, Dan, of, again, when we have a health system, and we always have a lot of repeat business with -- at least that's our goal with the health systems that we work with. And so once we get to scale and you can internalize that management. Again, there's a financial benefit of kind of every time you add another building, but you don't have to add another property management team, just the direct correlation there.

So is -- like in the Phoenix market, the Birmingham market, we just continue to grow in those 2 markets. And just had the opportunity to hire a couple of outstanding people to put on the team and then directly manage those buildings in those markets ourselves. So scale is pretty natural. Columbus, Ohio has been a fantastic example for us of how once we internalize the management, not only are we getting $1 return from that -- financial return from that.

It's also leading to more opportunities in those markets. They just kind of built upon itself. So it's not a sign of moving away from triple net leases. Again, we're focused on, again, kind of minimizing the risk, maximizing the synergy value of internalizing management and managing the buildings better and at a lower cost and thus, hopefully, moving more of the total cost of occupancy to triple net rent to us, not just expenses.

Yes. I'd add to that, as JT said, it all starts with the relationship, with the hospital relationships, the local market knowledge, the ability to expand our acquisition opportunities with hospital partners across the country. Then secondly, the financial impact starts with economies of scale from just having more properties in the market and being able to lower operating expenses for our health care partners in the buildings.

Again, most of our expenses are insulated by the triple net leases, but we look to benefit upon lease renewal from the total occupancy cost that we can show the tenants. And the management fee itself usually adds about 20 to 30 basis points on to a cap rate in an acquisition if we internally manage there. So as JT said, there's a direct impact from the management fees associated with internalizing property management. So we've really grown a great theme around the country and look forward to leveraging the economies of scale and the team as we grow the portfolio in the future.

All right. And what portion of the portfolio is now internally managed?

Yes. 7 of our largest markets are -- of our top 10 largest markets are all internalized. We have to manage everything in the portfolio, of course, but there's a few markets where we partner with hospital systems who have a real estate team directly, and we treat them exactly like part of our partner or a development partner that has lifelong relationships in the market. We work just hand-in-hand with them almost as if they're part of the DOC team, but technically it's not internally managed. So some of our top 10 largest markets today.

This does conclude our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

Yes. Thank you again for joining us today. We really appreciate the questions and dialogue, and please follow up with Jeff, you've got any other -- and Mike to any other questions. We do encourage you all to get vaccinated. We're starting to move back into the office ourselves. And to stay safe. We hope to see everyone at the conferences this fall. Thank you.

Thank you. This does conclude today's conference. You may disconnect your lines at this time. And thank you for your participation.