Healthpeak Properties Inc (DOC) 2020 Q4 法說會逐字稿

Greetings, and welcome to Physicians Realty Trust Fourth Quarter 2020 and Year-end Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Brad Page.

Thank you. Good morning, and welcome to the Physicians Realty Trust Fourth Quarter 2020 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; Laurie Becker, Senior Vice President, 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 2020 and year-to-date as well as our strategic focus for 2021. Jeff Theiler will review our financial results for the fourth quarter of 2020. And Mark Theine will provide a summary of our operations for the fourth quarter of 2020. 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. Before we discuss 2020 and the fourth quarter, we want to commend our team in Texas that has answered the call to keep our buildings open and operating during last week's historic winter weather. We had 4 buildings with frozen pipes and water damage, and we've been working around the clock to get the buildings back in operation. As of this morning, 3 of those buildings are operational with tenants actively using their leased space.

We anticipate the final small building, not yet open, to be open within the week. All of our buildings are insured for events like this and any deductible costs will be ultimately recoverable from the tenants. With all of its challenges, 2020 turned out to be a very successful year for Physicians Realty Trust. From the onset of the pandemic through December 31, 2020, we collected cash equal to over 90% of all rent and other charges due from our tenants, culminating in the collection of 99.6% of rent due in the fourth quarter. The single deferral granted during the year, representing about 0.5% of total billings since April is in payback and is being paid timely by that tenant. We ended the year with the lowest outstanding accounts receivable balance we have ever had as a percentage of revenue and an occupancy rate of 96%, the highest of all public owners of medical office facilities.

Our portfolio's resiliency is directly attributable to our focus on the clinical and financial quality of our health care provider tenants with more than 61% of our rentable square feet leased directly to investment-grade quality tenants. We also believe our pure-play focused strategy on medical office facilities, with a balance between off-campus and on-campus locations was instrumental to our success and critical to the success of our providers. As COVID swamped hospitals across the country, the providers located in our medical office facilities, especially those off the campus of a hospital, remained open and available to care for non-COVID patients.

While the equity market was volatile, we ended the year with the best total shareholder return of any public REIT with a significant medical office portfolio. With that said, our total shareholder returns, including dividends, were flat for the year, and that is always disappointing. We've worked hard since the formation of our company in 2013 to build an enterprise and portfolio resistant to economic weakness. And the events of 2020 stress-tested our team and assets. The portfolio performed, frankly, as expected, but not without meaningful time and attention from our property management teams and the excellent work of our hospital and physician partners.

Nevertheless, we continue to focus on delivering reliable growing cash flow to our investors to drive exceptional shareholder returns. Accretive acquisitions are a key component of this growth, and we're excited about the investments made during the fourth quarter. For the fourth quarter, DOC completed $208 million of investments. These investments include 4 off-campus properties anchored by investment-grade health systems, expanding our relationship with Hartford Healthcare and the Ohio State Wexner Medical Center and establishing a new relationship with Lehigh Valley Health network.

As expected, we also executed our option to purchase the brand-new Sacred Heart Summit MOB and ambulatory surgery center in Pensacola, Florida, that was developed with DOC's participation in the form of a $29 million construction loan. For the full year, we completed $275 million of new investments at an average first year yield of 6.5%. In addition, we announced the formation of a new joint venture with the Davis Group, who we have partnered with since 2014. The strategic venture currently includes 8 assets and will focus on the acquisition of both new and value-add assets that will source -- that we will source and manage together with Mark Davis and his team in Minneapolis, St. Paul. We're excited to add a strategic option to our investment platform that will provide more opportunities to deliver value to our shareholders.

Finally, our investments included the funding of a $54 million portfolio of mezzanine loans with Landmark Healthcare Facilities as part of a recapitalization of their ownership in 9 medical office buildings. These facilities are primarily leased to and anchored by leading nonprofit health care systems in 9 markets totaling 1.1 million square feet and are 94% occupied, 73% of the rentable space in these buildings is leased to investment-grade tenants.

Our loans include Rights of First Offer rights and other features, which we expect to lead to future investment opportunities with Landmark. As we enter a new government, we expect the Biden-Harris administration to pursue the expansion of Medicaid coverage in states that have not already done so. We believe the policies of this administration will accelerate the move of care out of the inpatient setting, expand telehealth coverage and incentivize hospitals and physicians to bend the cost curve while caring for more people. Our investment philosophy has anticipated these trends, and we believe our portfolio is well positioned to benefit as specialty care moves away from the hospital into the more efficient outpatient setting.

While DOC itself received no direct government assistance during the pandemic, our tenants obtained more than $7 billion in various forms of CARES Act support, PPP loans and CMS advanced payments. We can comfortably say we do not believe our tenants require any further support to pay their rent. This has been true for most of the 2020 as our tenants have been open and caring for patients routinely since May. Our dedicated credit department has monitored our tenants throughout the pandemic and the visibility we have on 92% of our tenants' financial performance continue to provide us with unmatched insight in our portfolio stability and a tremendous competitive advantage.

With the distribution of vaccines in early 2021 and the expectation of returning to normal, we will continue to invest in better with a focus on accretive acquisitions, internal growth and a steadfast commitment to ESG. We're off to a great start of new investments for 2021, with commitments and contracts totaling more than $150 million plus development financings of $20 million so far. Once completed and stabilized, these development projects will exceed $60 million in investment opportunity. With that start, we anticipate $400 million to $600 million of new investments this year, subject, of course, to capital market conditions.

Jeff will now review our financial results, and Mark Theine will share our operating results, including our ESG accomplishments for 2020. We will then be happy to take your questions. Jeff?

Thank you, John. In the fourth quarter of 2020 the company generated normalized funds from operations of $56.7 million. Normalized FFO per share was $0.26 versus $0.27 in the same quarter of last year due to reduced leverage. Our normalized funds available for distribution were $53 million, an increase of 14% over the comparable quarter of last year. Our FAD per share was $0.25. Our full year FAD was $208.5 million or $0.99 per share, which was an increase of 6.1% over the prior year. We are highly focused on this metric as it is the most standardized and comparable way to measure our company's performance versus our direct peers, and we will continue to focus on growing our FAD per share at an outsized rate for our shareholders.

The foundation of the company remains our $5 billion pure-play medical office portfolio, which is 61% leased to investment-grade quality tenants, the highest percentage of any public medical office portfolio. Consequently, the DOC portfolio has been one of the best-performing portfolios among all REITs, health care and otherwise during the pandemic. We collected 99.6% of our rents in the fourth quarter and over 99% for the full year. We have just $1.3 million remaining to be paid back in the one COVID deferral granted as the first 2 payments were already made in January and February of this year. We expect the entire balance to be repaid by June 2021.

We intentionally reduced leverage throughout 2020, issuing 19.3 million shares at an average price of $19.06, generating net proceeds of $364 million. As a result, we ended the year with a comfortable leverage of 5.1x debt to EBITDA, including our pro rata share of JV debt, which puts us in an excellent financial position going into 2021. We have only $166 million drawn on our $850 million revolving line of credit, providing us with ample liquidity for investments, and we generally expect a target leverage of 5.25x debt-to-EBITDA on an enterprise basis in 2021.

As mentioned on recent earning calls, we had intentionally slowed down the acquisition pace during the first half of 2020. However, as we saw our portfolio easily weather the worst of the pandemic, we pivoted back towards growth and completed $208 million of new investments in the fourth quarter. The investments we made were at an average first year cash yield of 6.7% and has had significant underlying IG credit. If all of our investment and disposition activity had taken place at the beginning of the quarter, it would have generated an additional $2.1 million of cash NOI.

We are pleased with the scope of the fourth quarter's investment activity, and we have enough visibility on our current pipeline that we can comfortably project 2021 investment activity of $400 million to $600 million at an average cap rate between 5% to 6%, subject to suitable capital market conditions. We will continue to focus on the properties that have proven to be successful, high-quality assets with market-leading investment-grade health system tenants.

Our same-store portfolio, which does not exclude our repositioning assets, generated growth of 1.5%. Our quarterly G&A totaled $8.2 million, a sequential decrease of 2% as COVID impacts continued to reduce our overall expense load. We ended the year at $33.8 million of G&A, which was at the low end of our guidance range. Looking ahead to 2021, we expect G&A costs to increase as we resume normal levels of travel and acquisition activity, resulting in projected G&A costs of between $36 million to $38 million for the year. Recurring CapEx should also normalize to a range of $25 million to $27 million in 2021 as we look to add capital back into our portfolio in a thoughtful and efficient manner.

I will now turn the call over to Mark to walk through our portfolio statistics. Mark?

Thanks, Jeff. Since inception, DOC has been dedicated to building a best-in-class relationship-driven operating platform that utilizes local market expertise and scale to drive tenant retention, cost efficiencies and profitable growth for shareholders. We have executed consistently on this plan, expanding our in-house property management function into most of our largest markets, while leveraging the local market expertise of facility partners where best. This frontline team helped keep our facilities open, clean and available for patient care throughout the pandemic. We are encouraged by the positive signs of the recovery due to the vaccine and are grateful for our asset management, property management and engineering teams who have demonstrated extraordinary resilience in the face of the pandemic as well as the recent severe weather in the Southern United States.

This team has earned a 95.9% positive tenant satisfaction rating in our work order system throughout the pandemic and extreme weather. Our portfolio's resiliency is a direct reflection on the clinical and financial quality of our health care provider partners. Our portfolio, known for its industry-leading 96% occupancy, also achieved industry-leading rent and CAM cash collections of 99.6% in Q4 2020. Under the leadership of Joey Williams and Ann Gurka, our Accounts Receivable team worked closely with asset management throughout the year to collect 99.1% of contractual rent in CAM for the period from April through December 2020. Continuing the trend, we have collected 99.3% of January 2021 contractual rents, on track to meet or exceed the fourth quarter collection rate. February to-date's collection results are also strong and consistent with previous months. We have received no new request for rent deferral. Again, these results are a direct reflection on the quality of our health care partners, the quality of our facilities and the reason we view medical office buildings as the most resilient asset class in real estate.

Our leasing team had a productive year despite the challenges of social distancing and virtual meetings with a positive absorption that totaled 16,200 square feet for the year. Overall, we completed 962,000 square feet of leasing activity in 2020, with a 77% retention rate and positive 2.04% cash leasing spreads on our consolidated portfolio. Currently, the average annual rent increase in our portfolio is 2.4%, and over 2/3 of all leases executed in 2020 contained an average rent increase of 2.5% or greater.

In the fourth quarter specifically, we completed 185,000 square feet of leasing activity with positive 3.0% leasing spreads. The retention rate for the quarter was 53%, a number significantly below DOC's typically reported rate, but was in fact the result of a large physician practice we deliberately did not renew and immediately entered into a new 10-year lease, the very next day with an existing investment-grade health system partner. While this was a nonrenewal by definition, the net absorption was not impacted, and we upgraded the portfolio by expanding a relationship with an existing investment-grade rated hospital system partner for the long term. Q4 retention would have been 68% if we exclude this transaction.

Finally, our in-house leasing team continues to do an excellent job attracting and renewing tenants at strong rental rates with under-market rent concessions. In the fourth quarter, rent concessions for lease renewals, including TI and leasing commissions, totaled $1.21 per square foot per year and $5.08 per square foot per year for new leases. For the full year, our TI, leasing commissions and free rent concessions totaled 8.3% of annual net rent and are significantly below our peers who are investing 15% to 20% of annual net rents to attract and retain tenants.

Looking ahead to 2021, 4.1% of our leases are scheduled to expire, with an average rental rate of $21.61 per square foot. We expect high retention as hospitals and providers are reengaging on lease discussions and expansion plans that were put on hold during the pandemic, and we are optimistic about continuing our strong leasing momentum in 2021. Our same-store MOB portfolio, which, again, does not exclude repositioning assets, generated cash NOI growth of 1.5% for the fourth quarter of 2020. The NOI growth was driven primarily by a year-over-year 1.7% increase in base rental revenue. Operating expenses were up 9.1% and offset by a 10.4% increase in operating expense recovery revenue, demonstrating the insulated nature of our triple-net leases.

Year-over-year, operating expenses were up $2.7 million overall, primarily due to a $1.6 million increase in real estate taxes and a $0.7 million increase in general maintenance and janitorial services attributable to COVID-19. Lastly, lower parking revenue had a 23 basis point impact on our Q4 same-store NOI growth. Specifically, paid parking receipts improved to 78% of normal during the fourth quarter, which compares favorably to 49% of normal levels experienced during the second quarter.

Turning to our CapEx investments. We pivoted quickly and efficiently in 2020 to prioritize projects and team safety. In 2020, we invested $19 million in recurring capital investments, in line with our previously revised CapEx guidance. In 2021, we expect our full year recurring CapEx investments to return to normalized levels between $25 million and $27 million. As part of our capital investments in 2020, we invested approximately $3.2 million in ESG-related projects to improve energy management systems, upgrade HVAC mechanicals and install more efficient and longer-lasting LED lighting. Overall, these projects make our buildings more efficient and improve our margins on common area costs while also reducing operating expenses for our health care partners.

In turn, reducing the total occupancy cost for our provider partners will ultimately provide the potential for growth in rental rates at renewal. As a result of ESG projects like these, DOC has reduced its energy, water, carbon and waste footprints again in 2020, and we look forward to sharing these results in our second annual ESG report in June.

In recognition of our ESG efforts, we are proud to share that DOC earns 10 new IREM Certified Sustainable Property, CSP, designations in 2020, reinforcing the ongoing commitment to expanding our environmental, social and governance practices. The IREM CSP is a sustainability certification program that recognizes exceptional real estate management, which improves green building performance. In total, DOC has earned 18 CSP designations since 2019.

To conclude, by adhering to our core values represented by care, we remain disciplined operationally and financially in 2020 to deliver safer health care facilities for our providers and their patients as well as safer results for our shareholders.

With that, I'll turn the call back over to John.

Thank you, Mark. As Mark mentioned, we have made great progress toward our ESG goals, and we are especially committed to energy and water conservation and exceeding IREM certification of our buildings. We are blessed with great leadership in our organization from the Board-down to several of our executives, leading us on the DE&I journey as well. We are not satisfied with our progress there, but we are determined to make a difference inside and outside of our organization for equity across each of our communities.

We're also excited to recognize Amy Hall and her promotion to Senior Vice President of Leasing and Physician Strategy. Amy has been with us since 2016, leading our leasing team, and is responsible for more than 4 million square feet of leasing activity since she joined. She has done a fantastic job, and we look forward to her leadership for years to come.

Finally, 13 properties across our portfolio are being used for vaccination sites, and we are accommodating our health system partners and others in this important community. We expect more as more vaccine is made available to the community providers in our buildings. We will now respond to your questions. Omar?

(Operator Instructions) And our first question is from Nick Joseph with Citigroup.

Maybe just starting with the Davis joint venture. Can you talk about what was attractive about doing that, the ultimate size of where that JV could go? And then how you think about acquiring assets either through a JV or on the balance sheet?

Yes. Great question, Nick. So Mark Davis and his team have been partners with us for, really since 2014, and it really developed and sourced a number of great opportunities for us every year, and we have some new development projects getting started with them now. So that joint venture really evolved out of a kind of a strategy where we find buildings off-market, they find buildings off-market. Some kind of fit our long-term strategy, and some may require some value-add or lease-up or just not ready for kind of our long-term strategic purpose. So it's really a way to kind of have 2 pockets of ownership. So the REIT, when it's directly opportunistic or idealistic for us and then with Mark for those where we need to kind of combine the purchase, it just gives us another tool in the toolbox. And we have 2 joint ventures in place right now. We have the other PMAK joint venture with Remedy that has been very successful and has really another strategic kind of alignment and purpose. So good source of capital, good partners to work with and provides us, really maximizes the opportunities for us going forward for the REITs in particular.

And then just on the 2021 growth, how do you think about funding that, either through dispositions or additional equity issuance? And then how does that play into leverage levels of where you expect to be at the end of this year?

Nick, this is Jeff. So as we talked about in the prepared remarks, target leverage is about 5.25x. Obviously, we're a little bit under that right now. So we've got a little bit of dry powder to the extent we need to utilize that. But we would primarily think about funding the acquisitions through debt and equity issuance. We have -- we've been doing some opportunistic dispositions, but we don't have a big disposition pipeline for 2021. So I don't think it's going to be that meaningful in terms of funding. It will be mainly through capital markets activity.

And our next question is from Jordan Sadler with KeyBanc Capital Markets.

I wanted to touch base on the acquisition pipeline. A bunch obviously came through a nice acceleration in the fourth quarter. And then some early leads on 2021. But the guidance of $500 million suggests that the 4Q pace could potentially continue. Can you maybe talk about what you're seeing and where these opportunities come from, what they look like, maybe just some characteristics?

Yes. Thanks, Jordan. So this is John. The pipeline is -- we're really excited about it. The near-term items that we, again, have identified our existing relationships, repeat customers, repeat health systems. More and more health systems are really self-developing, building their own buildings. And so kind of maximizing the opportunity where they're constructing those on their nickel and then kind of pre selling them to us and for long-term partnership and hold. So very attractive. And that's been -- most of the investments we made in the fourth quarter and in our near-term pipeline are just that. So not trading with another institutional owner, but dealing directly with the health system themselves. Got some good opportunities in the development pipeline, as I talked about a minute ago with Mark Davis and others. And that was very successful for us last year as that getting better yields, but getting fantastic product, again, for the long-term hold for the REIT. So there are some portfolios, small portfolios out there trading. It's kind of trading and retrading and retrading. And again, we see everything. We looked at those, but nothing of any bulk has been that attractive to us. So we'll grow primarily through the one-off off-market relationships.

And on the development opportunities, is that maybe 20%, 25% of what you're looking at?

That's probably about right. And so we -- kind of the gross value of what's kind of in -- under construction or kind of in documentation right now is kind of in that $60 million to $80 million range. So again, $100 million of gross value product a year is kind of a simple goal, but we'll do more if we can find it.

Okay. And then lastly, just on the mezz with Landmark. Can you just maybe give us a little bit more color on that? Maybe LTV and sort of -- I think the term is reasonably short. It's sort of a 2- to 4-year type deal. But just sort of any other color there would be helpful.

Yes. So these -- again, we've had a long-term relationship with Landmark and the ownership there and have had opportunities with them as well in the past. This is one of the best portfolios of medical office buildings that he has explored selling for the last 2 or 3 years, but it's one of the best portfolios that's been around for the last 5 years, if you will, probably the best since the deal. And at the end of the day, he wasn't quite ready to sell, but he wanted to recap, Landmark did. And again, we use mezz as a tool for long-term ownership. So we can't -- he still has control on when that happens and -- but we are -- we'll be first at the door through the mezz. So plus or minus 10% to the kind of LTV, but it's a very valuable portfolio and getting more valuable.

So the 54% represents the 10% of that capitalization?

That's about right.

Okay. One for Mark, just on the OpEx, if I could. I noticed -- I heard a little bit of description around taxes and COVID expenses. But the 3.5% increase sequentially, Mark, is that 4Q pace going to be sustained through next year? Or is that -- we're going to see some moderation?

Yes. Jordan, thanks for the question on same-store there. As I mentioned in the prepared remarks, and you just alluded to, the majority of the increase in operating expenses, both year-over-year and sequentially, was real estate taxes. There's 3 or 4 properties that were reassessed and bumped up in Q4. So we think that's kind of limited to that quarter and won't be reflective going forward. But again, while operating expenses were up -- our recoveries were also, really showing the insulated nature of our triple-net portfolio.

Okay. And so was that sort of an accrual for the full-year 2020 to sort of catch-up on those 3 to 4 properties…

Yes, that's right -- exactly.

And our next question is from Juan Sanabria with BMO Capital Markets.

Just hoping to piggyback on Nick's question on the Davis Group joint venture. John, maybe if you could speak a little bit too about the differences in the strategy between the on-balance sheet and the fund. I don't want to put words in your mouth, but maybe it kind of like the joint venture with the Davis Group would be more noncore or [redebt] type opportunities? Just a little bit more clarity on that.

Yes. I think that's a simple way to think about it. And again, it's their to park assets, that are not quite ready for our ownership, maybe kind of through lease-up or there's no development in there today, but potentially for a development project as well. Or it may be an asset that's, again, just not part of our today long-term focus and strategy. So it's -- again, think of it as a place to park assets that, again, kind of the idea evolved out of a seller who had multiple assets. We wanted 1. And a couple were great tenant, great credit, but just were small or didn't really fit our long-term goals. So we kind of [part 2] in the Davis run with Mark Davis, and we got 1 outright for ourselves. So it's really just a strategic tool. We like to be responsive to our health systems. And when they want to monetize buildings, they don't want to deal with 3 or 4 sellers or buyers, they want to deal with us. And so again, we view it as a very strategic tool for place to park assets and/or participate in the value creation that we see in other portfolios out there that trade.

And is there a target size for that joint venture?

I don't think it's going to be a huge joint venture, but it's $100 million or so now and kind of -- you can see it doubling over the next few years. But I don't -- it's -- again, it's just one tool in the toolbox.

Okay. And then maybe just on the same-store portfolio. Any expectations on how NOI growth should trend in '21? That would be helpful. Just you've given some of the other piece parts. So any color there would be helpful.

Juan, Mark Theine here. So 20 -- let me go back to 2019 same store. We started at 3.1% there. And then 2020, this quarter, we're at 1.5%. So this year is a little bit lower than where we typically are 2% to 3%. But I think that's really a good place to look at 2021, to be in that 2% to 3% range as we continue to focus on tenant retention and bumping leasing spreads where we can. So 2% to 3% for 2021.

And our next question is from Amanda Sweitzer with Baird.

Quickly following up on the Davis JV. Do you have any defined purchase option for the remaining 51% as some of those properties stabilize?

Great question. I'm really enjoying all this attention on the Davis. So they're great partners, and we're really proud of that. The answer is yes. We have purchase rights going forward on -- in that -- through that relationship. So again, it's a -- we're a minority partner. They spend their time and ever create the upside value. And again, we'll have the opportunity to participate in that upside value for ourselves or otherwise.

That's helpful. And then on the parking revenue, I appreciated the 4Q update, but how much of a drag was parking revenue on full year 2020 growth? And how are you thinking about that recovery in 2021 in the context of your 2% to 3% same-store growth expectation?

Yes. Thanks, Amanda. This is Mark again. So as I mentioned, the same-store impact from parking was 23 basis points in Q4. And we've rebounded to about roughly 80% of our normal levels. There's still a few valet services, the buildings that are closed due to COVID. And as those reopen, hopefully here in the upcoming months, we'll pick up a little bit of that extra margin from the valet services. But paid parking is doing well, and volumes are up at the building. So what we're missing yet is just kind of that incremental margin from valet services.

Okay. And then do you have the number of how it impacted full year 2020 growth?

I don't know if I have that number on the full-year basis, but I imagine it to be pretty close to the same.

Okay. That's helpful. And then finally for me, kind of as you think about the supply outlook over the next several years, are you seeing more office owners that are looking to convert to medical office, just given kind of the uncertain demand outlook for traditional office properties today?

Yes, it's a great question. In 2009-2010 you saw a lot of suburban office go vacant or not occupied in that recession. And that became pretty competitive or at least provided opportunities for conversion but it also competed with medical office building. If you think about this environment, it's really the downtown CBD office building if it -- might not be fully reoccupied after work from home and move to the suburbs from those kind of office environment. So I think it's a very different dynamic. You don't see CBD office buildings converting to medical or really competing with medical office buildings. So in the suburbs, again, if there was vacancy, those are always opportunities to convert those buildings to medical, but it relates to the office demand is moving to the suburbs. So long-winded way of saying, I think there might be some opportunities, but when you think about the CBDs that are vacant or low occupancy, those are not typical medical office buildings in this environment.

And our next question is from Omotayo Okusanya with Mizuho.

Yes. Back to the cash same-store NOI for fourth quarter. I mean with the increase in real estate capital, don't you just pass that along? So I guess I'm still struggling with why it just wasn't passed along such that the same-store number was better? Or is it just a timing issue and it'll be passed along in the next few quarters?

No, you're exactly right. The real estate taxes are passed along as part of a triple net expense. So the primary drivers of our same-store growth are the annual rent bumps. We're 96% leased, highest in the industry, and we've got strong rent bumps. So that's pretty much going to be the driver of our same-store going forward. We're going to see a significant increase in property taxes as these states and localities try to recover revenue and going to be more litigious than ever, but that's one of the really strong components of our portfolio, is the high occupancy. So -- which those taxes do pass-through. We work hard challenging those, making sure they're the right amount and the appropriate amounts to the best we can locale. But ultimately, they pass-through and our high occupancy portfolio really -- it's really a premium to us.

But is there a timing difference where you kind of get hit first and then maybe the path to it is later on? So that means thing are artificially depressed this quarter? Like I'm just trying to understand that a little bit.

Yes. It's part timing and part, again, the little bit of vacancy we have, that we have to absorb that, but it's mostly timing.

Yes. Okay. That's helpful. Then I just wanted to focus on the regulatory situation a little bit. Again, the idea of Biden administration really heavily focused on the expansion of ACA. And this idea of, again, being able to kind of get health care close to where you live and things like that, driving more [flow] to outpatient facilities. Does that -- how does that influence your assets that you're targeting from an acquisition perspective going forward? Do you start to get more interest in all the off-campus stuff again that may still be kind of close to big population centers? Or I'm just kind of curious how that influences how you think about your acquisition outlook?

Yes. We've always thought off-campus was the more important assets long term, while on-campus continue to be very important to the overall health care system. But the cost at consumers want to be closer to home, physicians and other providers want to be closer to their homes and in off-campus locations, and there's -- and COVID has shown why the inpatient facilities need to be preserved for high acuity patients and everything else needs to be in an outpatient setting. And if there's no real reason for that building to be next to a hospital, then why isn't it closer to my home, closer to my schools, closer to my workplace. And so again, 2020 just proved up the thesis that we've had since the beginning of the company. And again, the spread of the ACA, the support of the ACA, the spread of perhaps buy-in options in those states that haven't expanded the ACA and funded by this administration in this congress, again, will further drive more care out of that inpatient setting to the outpatient setting. So I don't think it changes our strategy at all. I think it just reinforces what we've been doing since -- for the last 7.5 years. And that proved out last year, and it will be certainly supported by this administration and this congress.

Got you. And then one more for me, if you don't mind. Your comment about your operators and tenants not needing additional government aid is appreciated. Just curious, with the current aid that they have received those, like if PPP has to get paid back by a certain, say, date, if the Medicare advances need to kind of get paid back by a certain date, is there still a need though for those dates to get pushed back to give the operators a little bit more runway to recover? Or if it were suddenly due 6 months from now or whatever the timing is, you feel fairly confident that your operators don't face a cash crunch?

Yes. All the systems are actually sitting there with a booked counter-liability, if you will. So we see that as part of the, kind of the overall P&L of the providers in our buildings. So the Congress in a bipartisan way has been pushing back those payment obligations and really the CMS advance payments already, and it lowered the interest rates, already stretched out the term. So it's not going to be a 6-month call, using your example, any surprise about when that's required to be paid back. In fact, there's some bipartisan support to just turn those Medicare advanced payments into grants. And so again, we see it as just like any other liability on their P&L and really evaluating the entire P&L, the entire balance sheet as part of both our credit underwriting for new investments but also our credit monitoring that Jeff and [Ku] and his team do. And we're up to 92% transparency ACROSS our portfolio, so we get a real good insight into that. So there's not going to be any short-term impact on paying those back. And there's going to be plenty of government -- the government is going to provide plenty of time and particularly with how long it takes to get the vaccines out and things like that.

And our next question is from Jason Idoine with RBC Capital Markets.

Looking at the Landmark mezz deal. I know you noted the underlying assets are strong, but I was wondering if you could touch on the amount that are on or off campus? And then provide any color on what the potential cap rate would be on a purchase down the road?

Yes. All but 1 are on campus. Again, they're all fairly new, kind of 10 years or younger, but they're fantastic assets. The cap rate on the -- there are no purchase, direct purchase options. The seller still has the ownership timing and flexibility of when and if he's ready to sell those buildings. These would be -- and I'd like to say they're going to be real cheap, but this would be the best portfolio, our best buildings out in the market of anything we're seeing today. So it would be the low end of the cap rate range, the high end of value.

Got it. Okay. And then you -- I know you noted that there are some smaller portfolios that you've looked at on the market today. I was wondering if you could touch on just what you aren't seeing in those portfolios that you would be looking at that would make you pull the trigger?

We really focus our business development and our pipeline around working directly with physicians and hospitals and the developers working with the physicians and hospitals that's truly a direct purchase with the tenants, the health systems that are involved, the physicians that are involved. Nothing wrong with buying from kind of from other institutional owners. But again, it's partly bad and it's partly -- you don't really get a health system relationship by buying a building owned by the third person who's owned the building. You have a health system relationship because you have a health system relationship. And that's -- it's really a preference in our targeting. Specific kind of stats would be the typical things you look at, [walt] increases or the rents market, are they in markets that are growing, how big are the buildings, the size of the portfolio and things like that, what are the strategic alignment with our current portfolio. So the portfolios that have traded have all been fine, fine building, fine owners and fine providers, but none have really met our criteria. And as a package, and then ultimately, you're paying a premium and how does that premium impact our IRR long-term from that. So mostly my math. A lot of it's about just the relationships involved.

Got it. Okay. And then last one for me. I know in the prepared remarks you guys mentioned the CapEx increase in 2021. I guess I'm wondering what type of CapEx projects were put on hold and how much of that 2021 increase is from projects that were delayed in 2020? And then, I guess, going a little further, would we expect it then to come down in 2022 as those catch up projects are completed? Or how should we be thinking about that?

Yes, Jason, Mark here. So looking back a year ago, we initially put out CapEx guidance of $24 million to $26 million and then adjusted it early in 2020 during the onset of COVID-19. And $19 million was the midpoint of our revised guidance. So we came in right in line with our guidance there. And we did that really to prioritize the projects and safety of the team. And there were a few supply delays in projects like elevators that we delayed into 2021. So a little bit of that is a catch-up from 2020. But our CapEx investment has been 8% of NOI kind of on average, well below our peers. And our 2021 guidance also includes some additional TI capital as leasing activity picks up. So a little bit rolling over into 2021, but 2022 probably going to be in line with that, with that $6 million a quarter or so.

And our next and the final question is from Vikram Malhotra with Morgan Stanley.

Most questions have been answered. Just maybe 2 quick follow-ons to some of the comments on growth. As you think about the pipeline from here, I'm just wondering, given sort of how off campus has held up, are you thinking about any new market sort of to enter and then potentially kind of some maybe to exit, just anything new on the horizon?

Yes. We don't have any exit plans, Vikram. And thanks for the question. We're really focused on growth. We've really kind of mature -- proven the portfolio over the last couple of years. And so it's -- we're really excited about what we've got. You see it with the performance in 99.6% cash collections in the fourth quarter. So the -- we're always going to have a bias if all other things being equal between the off-campus and on-campus, as you know. And -- but we've got some great on-campus assets in the pipeline. So again, it's how the situation matches up, what's the purpose of the building and what needs to be on a campus and if it's better served to be off the campus, then that will be our preference. But the -- we're seeing pretty good opportunities, like I said. But it's getting back to our old school, 1 building at a time, 2 buildings at a time and growing the portfolio accretively like that.

Great. And then just how the off-campus has sort of held up maybe even better than expectations. Can you just give us a little bit more color on what you're seeing on pricing, how things have changed maybe over the last year and sort of spread on campus? And I know, obviously, there are a lot of variances, but just your overall thoughts would be helpful.

Well, Vikram, I can't help myself but to say, we fully expect the off-campus to perform like they did last year. So -- but no, I think you're seeing more and more people attracted to off-campus because they see how much better they performed last year than many on-campus buildings. We're seeing that enthusiasm from other public buyers. And there's a small portfolio out there floating around. It's a very nice collection of mostly off-campus buildings. The -- and great health systems involved in those buildings. And kind of the rumor mill is 100 different buyers showed up to kind of underwrite their portfolio. So -- and pricing is ranging from 5% to 6% with all the portfolios that have been out there and trading. And again, a lot of off-campus buildings in those portfolios. So I think it's going to continue to compress, but we're still the favorite sign of the health systems, we believe.

Okay. And just your -- had your -- is your impression that kind of cap rates for the on-campus like you just described, off-campuses as you described versus on, has that narrowed even further from maybe what it was prepandemic?

Yes. I think it's probably narrow, but they're still going to be -- if there's an on-campus building, there's probably 150 buyers that show up. So there's still a large part of the capital pool that doesn't understand and appreciate the off-campus like they should, but that provides a good buying opportunity for us.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back over to CEO, John Thomas, for closing remarks.

Thank you, Omar. And thanks, everyone, for joining us today. We've got a number of investment conferences coming up for the next few weeks, and we look forward to digging into more details with you then. Thank you very much.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.