Healthcare Trust of America, Inc.
Q1 2021 Earnings Call Transcript

Published: 7 May 2021

[Operator:]

Good afternoon, and welcome to the Healthcare Trust of America First Quarter 2021 Earnings Conference Call. . I would now like to turn the conference over to David Gershenson, Chief Accounting Officer. Please go ahead.

[David Gershenson:]

Thank you, and welcome to Healthcare Trust of America's First Quarter 2021 Earnings Call. We filed our earnings release and our financial supplement yesterday after the close. These documents can be found on the Investor Relations section of our website or with the SEC. Please note, this call is being webcast and will be available for replay for the next 90 days. We'll be happy to take your questions at the conclusion of our prepared remarks.

[Scott Peters:]

Thank you, David, and good morning, and thank you, everyone, for joining us today for Healthcare Trust of America's First Quarter 2021 Earnings Conference Call. Joining me on the call today is Robert Milligan, our Chief Financial Officer. Over the last year, the medical office sector has lived up to its reputation as a steady, independent asset class. Occupancy and cash collections have remained strong. Tenant utilization and performance in our key markets are returning to near pre-COVID levels. Health care systems are rebounding from the temporary shutdowns in March and April of 2020, and patient visits are returning to normal given health care's need based demand. However, the sector was not immune from pandemic. Small practices and more secondary markets have certainly struggled more than most, while larger providers and health care systems consolidated and put expansion plans on hold and were subsidized by the relief packages passed by Congress. It has also accelerated additional change that were taking place, including the implementation of telemedicine, the move to lower cost outpatient locations, continued provider consolidations into what we feel is a significant population trend towards increased growth in our key markets. Compared to most other sectors, these impacts have been relatively minimal and in fact, will be positive over the longer term. Given the amount of health care service demand that is expected in the population as the population ages and the country accelerates investment into health care. However, without doubt, there continues a cautious and integrated approach that providers continue to take in their business plans as it relates to the longer lasting impacts of the pandemic.

[Robert Milligan:]

Thanks, Scott. From a financial perspective in the first quarter, we grew our normalized FFO by almost 5% to $0.44 per share, another record high for HTA. Had recurring CapEx of $10.9 million, which was less than 10% of NOI. As a result, our normalized FAD for the period was also a record at $88.8 million. Note that we do expect these capital expenditures to tick up the remainder of the year as we increase our leasing and start to complete more of our move-in ready space. We also collected more than 99% of our contractually due first quarter rents and our rent deferrals continue to be repaid on time and on schedule, with less than $2 million remaining outstanding currently. We generated same-store growth of 1.6%, driven by 1.9% growth in base rent, which was helped by year-over-year comparison of bad debt that was a result of our tenant recovery. Our expenses were up 2.9%, primarily result as of weather in our key markets, including Texas in March. We had G&A of $10.6 million, continuing our efficient overhead. We ramped up our investment activity, closing on $30 million of acquisitions, as Scott noted, but also getting an additional $150 million under exclusive contract at yields over 5.5%. We anticipate that these will close prior to quarter end. We also funded $17 million of development, leaving us with approximately $50 million to complete our in-process developments that will add to earnings in 2021. As of today, our developments in Miami and Bakersfield are substantially complete, pending tenant build-out with our Dallas MOB located on the Medical City Heart and Spine campus, on track for completion in the third quarter.

[Scott Peters:]

Thank you, Robert, and we'll open it up for questions.

[Operator:]

. And our first question comes from Vikram Malhotra of Morgan Stanley.

[Vikram Malhotra:]

Maybe just first on the acquisition pipeline. I think the first quarter, what we saw universally from multiple companies that there was a bit of a push out into the second quarter, but the pipeline still look pretty strong. So maybe just give us a bit more color, what did you see in the first quarter that may have caused this? And what sort of opportunities are you focused on in the second quarter, both individual one-off properties, but maybe portfolios as well?

[Scott Peters:]

Well, thank you, and I'd like to say thank you, everyone, for joining our call, of course. I think the acquisition activity for us, not only the -- what we've seen as opportunities in the first quarter, but what we see coming up here this quarter and the rest of the year is very opportunistic for us. It looks to me, and it has the feel that in our markets, given our opportunities with one-off assets or in some cases, we've got a couple opportunities with 2 or 3, we can get back to what we thought we were going to see in 2020 coming out of 2019. We did 2 -- we were focused on 3 things when we came out of 2019 moving into 2020. One was earnings growth. We had talked a lot about our earnings growth, and we've done that here in 2020, 2021. Second, we were talking about acquisitions, where we wanted to get more active, and we had shown the activity in the fourth quarter. I think you're going to see that from us moving forward. I think we've been very patient in the last 12 months where others perhaps have grown in order to show some activity. We felt it was prudent to find the right time, focus on our portfolio, move through the hurdles that the last 12 months have presented and then utilize our cash, utilize our acquisitions to make sure that they're accretive. So you will be seeing from us, as Robert's pointed out and we've talked about, more acquisitions next 3 quarters accretive drive -- continued drive to the bottom line in earnings. We've also seen and you didn't ask, but we've seen an acceleration in our development opportunities. And those are things that we're going to be, I think, very excited to talk to people about when we get to NAREIT in June because we've been working on those. And once we get some confirmation on what we've gotten, I think we will be very -- it will be very interesting to see what we've done in the construction -- in the development side of our business.

[Vikram Malhotra:]

That makes sense. There's also maybe some, I should say, debate, but just some questions over the relative performance of on-campus versus other off-campus settings, whether it's adjacent or truly off-campus and whether that -- if there's a big difference or not. And I know, Scott, you've obviously talked about core community quite a bit over the last few years. So I'm just wondering, with your own portfolio, you can clearly see the occupancy, but just from a rent growth and NOI perspective, what's your experience been with the different buckets?

[Scott Peters:]

[Operator:]

Next question comes from Rich Anderson of SMBC.

[Rich Anderson:]

Scott, you said you didn't want to be as aggressive in the last 12 months to buy stuff whereas others were perhaps more active than you guys for the past 12 months. But you guys, HTA, I should say, made your name perhaps in 2008, 2009 when you were buying stuff before when no one else could in a very depressed marketplace. So I'm wondering why you feel that way this time around in this cycle? Why it wasn't a good time to be a buyer to the degree, maybe you will be in the future over the last year or so?

[Scott Peters:]

Rich, it's continued to amaze me the dichotomy between cap rates, potential interest rate raises and just the overall economy. I think this time around was so unique in the fact that the government has put through such a large stimulus packages that we didn't see that in the last in 2008, 2009, that really wasn't a tool that was used in a huge degree. I think that's the difference in this particular event. We didn't see the type of opportunities that you would theoretically think that you might see. If things shut down for 3 months, if businesses slow down, you would have thought that there would have been more opportunity. I think that, in fact, people didn't react. They reacted to what they were seeing and being able to utilize. And so we didn't see those types of opportunities. I think what we're seeing now, Rich, is we're seeing the opportunities in our markets. We like the markets that we're in. We like Texas, we like Florida. We like Arizona a lot more than we did before. We like some of the North Carolina, South Carolina. We like some of these markets that we've had success in. We've recently put on to our website 3 of our major campuses. We did a virtual tour that shows the application of what we see as we built out our new building in Raleigh at WakeMed. We've just remodeled and done our Mission, which we've now shown to folks. I think if people get a chance to take a look at those, they should because that's sort of what we're trying to build throughout our markets as that continuity. And so we'd like to add to those markets. And so I think now it's a good time to -- we focused on earnings. It's dropping to the bottom line. We have an opportunity to continue to grow, and we can do it on an accretive basis in the markets we like.

[Rich Anderson:]

Very good. And then on the potential East Texas exit, you described that as noncore. But when you bought it 10 years ago, it was probably thought to be core. And I'm wondering if that's just the typical cadence of how the business works for you guys, where noncore is perhaps defined to some degree by time or is it not -- I mean, obviously, market conditions and everything else weigh into that. But is that kind of an or at least a way to think about when core becomes noncore, just the passage of time and whether or not you're willing to invest in it because of how you feel about the marketplace?

[Scott Peters:]

Robert, I'll let you handle that.

[Robert Milligan:]

Yes. I think, first of all, Rich, just a slight correction to that. It's East, really rural Tennessee kind of focused around Bristol and some other areas like that. And I think what's changed in our philosophy, going back 6, 7, 8 years now, has really been a focus on more major markets with much greater population growth, really with the focus on areas that are going to benefit from the continued expansion of the knowledge worker and the knowledge economy and things like that also happen to be attractive from a lower cost of living perspective. So I think for us, it's much more of a transition out of assets, great assets. They're located next to good health systems, and they're steady. I think that was core for us when we were first up and growing. I think now as we're looking at where we're going to be over the next 5, 10 years, it really is much more focused on major markets where we can really deploy all of our platform capabilities and continue to grow. So I think as you see us continue to recycle out of assets, they're going to be out of smaller, more rural markets where we can't get as much of economies of scale and growth into more of our major markets where we think there's going to be a lot of growth that we can really leverage going forward.

[Rich Anderson:]

Okay. And then last question, real quick 1 for you, Robert, is a return to 2% to 3% same-store NOI growth. Was that all just the Texas weather issue in the first quarter? Or was there more to it than that?

[Robert Milligan:]

Well, I think we've said, as you look at kind of a couple of things in that. I think, first of all, from an occupancy perspective, I think year-over-year, we're certainly going to be down the most in the first quarter. I think we knew that going into it. And so when we set our range, we expected our first quarter to be at the low end of the range. We did have a couple of other things pop up. I do think kind of the weather in East Texas kind of obviously caught everybody surprised and that did impact us a little bit. I think everybody else pointed out to continued parking revenue being down and things like that. So I think there was a couple of one-off things. But it was definitely also related to the occupancy in the first quarter as the most difficult comps year-over-year. And I think as we look towards the rest of the year, with the new leasing activity certainly picking up, us being able to drive that to actual getting people in the buildings, I think that's where we see it coming back.

[Rich Anderson:]

When did parking trough last year?

[Robert Milligan:]

I think parking is not nearly as big of a component of our income as it is for a number of other people. But I think it's certainly what we've seen -- we do have a couple garages throughout our campuses. And it really did tend to trough second quarter I think that was definitely the lowest point when you had people not being able to come in for elective surgeries. People are broadly staying away, and I think we've seen that kind of gradually come back over time since then.

[Operator:]

The next question comes from Juan Sanabria of BMO Capital Markets.

[Juan Sanabria:]

Just hoping to talk a little bit about the disposition side, the sales in Eastern Tennessee. And if I look at your supplemental, it seems like 6% or thereabouts of your ABR outside of the top 75 markets. So from a go-forward perspective, should we expect that most of the dispositions would kind of happen in that bucket? And you know what that 6.2% is pro forma for first quarter sales?

[Robert Milligan:]

Yes. I think as we look at the dispositions where we're looking to sell-out of, I think you're largely going to see it come from that bucket. Or top 75 markets where we can -- we only have 1 or 2 assets, and it is just not worth spending the time to really invest deeply into knowing all the submarkets, having a good handle and good relationship with all the leading providers in health care systems in the market. So I think that's definitely going to be where you see it moving from there. I think as we look at the sales, though, they tend to be in the most part, going to be $5 million, $10 million, $20 million sales kind of one at a time as we look to move through and then recycle those assets into key markets. So I think as we look at our disposition and recycling activity, this portfolio is probably the largest that you could see us make for a little bit of time. If we do have anything bigger than that, I think you'll see us look to redeploy it pretty immediately. So as we transition through our dispositions, I think you'll see a pretty readily or investments that we are ready to redeploy into.

[Juan Sanabria:]

Okay. That makes sense. And then on the development/redevelopment front, you gave a great color on future expected contributions as those come online on an annual basis. But just curious what's included in 2021 guidance? And related, any change of what tenants are looking for on the new developed space as a result of COVID more spaces or changes in space you see as a result of telemedicine or what have you?

[Robert Milligan:]

Well, I'll answer your first question, and I'll let Scott kind of talk about any changes to the space. But I think from our expectation on the redevelopment front, we're really not expecting any cash NOI to be coming in from those redevelopment properties, at least the ones in Houston and Denver until the fourth quarter. So once we get to that point, in time, it's going to be relatively minimal, and it's going to become much more of a 2022 story. But I think the good part about those and why we wanted to highlight them is that we are seeing the leasing activity, we're seeing the repositioning of what we've been able to do take hold. On those 2 assets, get them leased, we think there are going to be positive contributors to earnings going forward. We just wrapped up kind of the full redevelopment of a couple of the Mission assets that we have a simple real estate and just a great part of Orange County there. And now that COVID is opening up there, I think this is the opportunity where we should start to see some good traction in leasing that up, and I think as we see that. Again, it's going to be a little bit in 2021, but it's going to be much more of an impact in 2022.

[Scott Peters:]

And I'll answer the second question. We -- it gets back to our development opportunities that we're seeing and that we're having discussions about right now. We're fortunate, we're working with a couple folks that I think are going to be at least, we believe, are partners or potential tenants that are really looking forward. The assets that are under consideration are something that is forward-looking, adapting to what they see in the future. I think that's the exciting part about. We started our development division almost 4 years ago, 5 years ago, we did it in earnest when we did the Duke transaction, and we've slowly finished those assets and brought them online. And as we've talked about, we've now incurred our own initiative would be the best word. We've generated our own narrative with health care systems with some of the universities that are starting to go down the path. And the biggest advantage that we have had recently is the fact that we are a large dedicated MOB. We have the capital capacities. We are dedicated to the particular task that's being discussed and so I think that has brought us the ability to really be at the cutting-edge of this. And the same thing in redevelopment. We're looking at assets, not simply to redevelop. We're also not looking at leasing as saying, simply to lease-up a space, get it behind you and be satisfied for 3 or 5 years. We want space. We want tenants, we want assets that are primed for the next 10, 15 years or at least certainly as we move forward in this new economic cycle that we're going to experience and so we're taking a lot of time. And I think Amanda, who heads up our leasing and asset management, Brock. We're doing a lot of careful thought processes as we go through our leases and as we go through our redevelopment process.

[Operator:]

The next question comes from Nick Joseph of Citi.

[Nicholas Joseph:]

You talked about the occupancy impact in the first quarter. But just given the leasing environment and the forward pipeline, how do you see the recovery playing out sequentially from here?

[Scott Peters:]

We're fortunate we've had the most activity that we have seen, as we mentioned in our script. And the key -- I think there's a multitude of things that are playing out right now. I go back to the fact that you want to make sure that what you're doing in 2021 is working in 2023 and 2024. I still think that we're starting a cycle. We want to focus on really strong tenants. We want to focus on relationships that are going to expand in assets. And we want to reposition our assets if needed, out of space that is not going to be functionable or long term, and probably the next 3 or 4 years because I do think there's going to be a big cycle come 2025, 2026 for space needs and how tenants have adapted and so forth. So we feel good. Again, we're in some really nice markets if you look at our geographic locations. And I go back to Houston, Dallas, Tampa, Orlando, Miami, we've got some really nice locations that we are seeing a lot of activity on it. And I think that's our opportunity. Our opportunity, as Robert described, is to take our current occupancy and build on it, as we've talked about the last 1 year, 1.5 years. We're now through COVID, hopefully. And so we now need to just add that increase in occupancy to the bottom line. We're in a great position. We just hit our best quarter again from an earnings perspective. We've got capital, we've got opportunities for acquisitions. We're seeing the development side of our business take hold. And now we have the opportunity to do some very good leasing without any urgency of being quarter-to-quarter or month-to-month responsive. We've seen some very aggressive, I mean, very aggressive leasing deals in the marketplaces in some locations. That you look at it and say, I don't know why. There must be a reason inherently that they're just trying to occupy space because the economics didn't work in. We don't want to compete with those. We, frankly we want to make sure that our earnings continues to grow over the next 2, 3, 4, 5 years, not flat. We don't want to be flat in this marketplace.

[Nicholas Joseph:]

Appreciate that. And then just back to same-store guidance, obviously, you maintained it. And Robert, you walked through some of the noise in the first quarter. But are your expectations still that you should end up around the midpoint? Or is it trending more towards the low end just given what's happened in 1Q?

[Robert Milligan:]

Well, Nick, I think, certainly, as we mentioned, as you always anticipated that our first quarter would be lower than what our expectation would be for the rest of the year, whether it was from just year-over-year comps and then just from a build in, in potential occupancy from there. So I think our view is that it was slightly lower than what we expected in the first quarter given the handful of items we discussed. And I think the rest of it still comes down to our execution on leasing and getting people in the building. If all that activity that we're seeing really translates to sign leases quickly, I think we feel good about the midpoint of the range. Certainly, I think it takes a little bit longer to get them signed and moved in. I think that's kind of the noise and the uncertainty that we're working with right now.

[Operator:]

Your next question comes from Daniel Bernstein of Capital One.

[Daniel Bernstein:]

You guys are talking about a new cycle in the long term. So I was trying to maybe if you could put it together in terms of -- you look at construction costs, the move from inpatient to outpatient, which I think is going to continue to accelerate for many specialties. What's kind of the peak occupancy you think your portfolio can get to? Is there a change in the frictional occupancy for the MOB industry?

[Scott Peters:]

Well, we've given that -- I think everyone is giving that thought. We, once again -- there was an earlier question about 2008, 2009 time period, 2010. I go back to the fact that you really don't know, and I say this because, again, the government assistance that has been given in this economic downturn is just unparalleled. I mean it's I'm not sure that folks can actually contemplate how much help and how much liquidity has been pushed through the system. And so we've had -- what does that really mean as we get into 2022? What does that really mean is that assistance isn't there any longer. And how does that impact systems or tenants, physician groups, how does that affect secondary markets or assets that may not be as prominent in their thought process any longer. We've -- that's the process we're going through, and we're going through it in detail because I don't know that you can see that right now. It's sort of like the housing market, right? You don't really know what's going on there. But you're saying, okay, that's what it is. It is what it is. So I think it's still back to -- we feel comfortable in our goal and what we're looking at our leasing teams for and our conversations is that we want to get to that 92%, 93% occupancy. I think that, that's just given our portfolio, and that's not looking at the overall market, that's not looking at different states or different locations. That's looking at the assets we own. And I think that's where we've started. Okay, let's do an inventory of what we have, let's do an inventory of the relationships we have in the markets, with the assets, with the physicians and then let's reposition our assets and let's make sure that we've got the right tenant mix and the right tenants that are in those buildings. As I said, there's been many tenants and are starting to see this now, I think, that are getting the impact of COVID. They are getting the impact of a downturn for 12 months. And they're looking for just basically, in some cases, the most cost-effective space they can find. In some locations, that's not our building. We're not the lowest place go. We want to get value. I feel that we need to value our portfolio. We've got a great cost basis, having bought when we bought, where we bought and now what we need to do, as we've talked about, is get the value for it as we go forward. So for HTA, we're looking in that 92%, 93% range. For this sector, I think that it's going to depend upon markets, and it's going to depend upon the question earlier, which is what is your mix between off-campus and on campus. I think it's going to be a much more articulate than it is a general statement.

[Daniel Bernstein:]

And then 1 quick question, follow-up on construction costs and TI. Should we be building in or thinking about higher TI costs, not just more leasing, but from the construction and initially, at least, is that -- how are tenants reacting to increased build out costs?

[Scott Peters:]

Well, I'll start first, and I'll let Robert finish. I think you can. I think that you're going to start seeing higher cost throughout the economy. And we've seen it. And I think that, that's something that, that's going to come. I think it's just started, and I think we're going to see it and starting to see narrative in -- from general economy folks who are now recognizing it. I know that when we're looking to hire folks, it's a very tough market and the cost compensation structure is different than it was 16 months ago. So that's going to come through. Tenants, tenants don't want to come out of pocket. I would say that the general statement that I've seen is they're willing to amortize additional costs within their lease structure, they're willing to put in the needs that they want to stay there longer term. But tenants aren't saying, "Gee whiz, I want to come out of my own pocket and put in dollars." And so those are the kind of the trends that we're seeing. And frankly, I think they -- they're expected. So Robert, do you want to add anything?

[Robert Milligan:]

Yes. No, I think just the particulars, is you're right, Dan, is that I think TI cost in some markets are up 20%, 25%, I think, from a build-out perspective and I think it certainly looks. As we're looking at development and construction costs, I think we're looking in markets where, frankly, it's an expansion of the population. So health systems and providers just need the space to be built for them to go in there, probably a little less price-sensitive and can absorb the construction cost there. I think in markets where it's more of a market share type game, as we're looking at our renewal discussions, we've got people saying, well, maybe I'm just going to go build a new building. And as they look at the expected price that they got a year ago and now what they're seeing now, I think it redoes some of that math for tenants that are in place where they are. So I think it's very much a market-specific analysis that we're doing on that, but it certainly is -- we certainly are seeing it go up quite a bit.

[Operator:]

Next question comes from Todd Stender of Wells Fargo.

[Todd Stender:]

Just looking at recent deal flow for you guys. With the backdrop of getting same-store NOI growth back to that 3% ballpark, can you share just some of the annual growth expectations in your underwriting on Q1 acquisitions as well as the stuff in Q2?

[Scott Peters:]

Robert, you want to talk on that?

[Robert Milligan:]

I think the -- you mean from an annual growth perspective on the acquisitions, I think what we're seeing, we're certainly expecting that it's going to average out 2.5%, 3.5% annual growth from the assets that we're buying. I think we've been very particular about where we're buying, what's in place, what the opportunity is for us to add on top of that. So I think our acquisitions -- we're fully anticipating that they're going to support that 2.5% to 3%, 3.5% type run rate that we've historically targeted.

[Todd Stender:]

And what's in place now? Are these third-party operated and managed? And maybe where some of the opportunities that you're seeing, whether it's lease-up space or the rents are below market?

[Robert Milligan:]

I think it's a little bit of both. I think there's kind of 3 things that we see when we're looking at our opportunities. I think one, when we're looking at the acquisitions, it's a matter of where are the -- a, what's the market? And what do we think the market rent growth is going to be as we're looking at it. I think the second thing that we're looking at certainly is where are the rents relative to market and the long-term outlook there. And I think the third thing certainly is any available occupancy that we have. We bought some assets, certainly, in markets that are kind of high 80s, low 90% occupancy that we think we can push up and see some potential growth on top of that. So then the last thing that we do look that you pointed out, Todd, is just the ability to put things on our platform from a removal of third-party management. That's almost always the case when we're buying assets, they almost always have a third-party manager that we can replace. And then look at the impact of the economies of scale that we have in the market and how that will flow through. So I think that's typically what we're seeing the upside from.

[Todd Stender:]

All right. Just last 1 from me and for Robert for you. From a modeling perspective, how are you thinking about the timing of settling your forward shares? Is that going to coincide with these second quarter investments?

[Robert Milligan:]

I think there's going to be a part of that gets settled in the second quarter. When we look at just the straight math on that, we've got, call it, $150 million of acquisitions kind of under contract or investments that we expect we'll be able to close. We've got $67 million of dispositions. Second quarter, we always get a little bit of a pickup in working capital. First quarter is when a preponderance of our property tax payments are actually made. So we have a use of working capital in the first quarter. All that to say, I think the math comes out to about $50 million, plus or minus, issuance of equity to kind of fund that gap. And so that's how we're looking at it. Now as we buy things as we get net investments, we're going to use our equity to go ahead and close on them.

[Operator:]

The next question comes from Omotayo Okusanya of Mizuho.

[Omotayo Okusanya:]

Congrats on the record quarter and the guidance increase. It's always nice to see. I wanted to stick on the acquisitions front and kind of your acquisitions guidance going forward. Can you just talk a little bit on the nature of the pipeline? Is it kind of more -- do you expect kind of to see more on-campus versus off-campus activity? And specifically, any potential opportunities to go into new markets?

[Scott Peters:]

Well, I think what we're seeing is a blend. I think you'll see from us -- the off-campus comes with functionally leasehold free. So we're still looking -- the first advantage you get is if you can get without any ground lease we look at those opportunities and especially given the fact that we're seeing the compression and the synergies between the off-campus and the on campus. So I think you'll see the blend, it's about 60-40. It's probably going to be 60-40 as we continue down the path. I think, Robert, you want to give some more color on that?

[Robert Milligan:]

Yes. I mean I think that's just more where we're seeing good assets. I think in all the discussion of on-campus versus off-campus and studies in rent growth, I think our biggest takeaway has been that there's really good assets in both places. I think there's certainly great on-campus assets with good health systems that are going to continue to grow and continue to have long-term demand. That's great. There's just also more growth and more opportunities in off-campus locations now, too, as the location of care continues to shift into those locations. So I think we see good real estate opportunities in both. And I think that's what the studies that we've seen have really supported, not so much that, oh, my gosh! this is better than -- off-campus is better than on or that on-campus has got to be better than off. I think it's that medical office is great. I mean there's a tremendous amount of growth in the amount of outpatient care that's going to be delivered. It's got to be in good locations. And if you own that real estate, that's the opportunity to own assets that produce that kind of steady, long-term growth that we've come to expect. So I think from our outlook, we become a little bit agnostic. I think our view is just that there's really good real estate, both locations, and it's tended to be 60-40 as we've looked at the individual characteristics. And I think we'll see that ebb and flow based on what we buy. But long term, that's probably where our portfolio is going to end up.

[Scott Peters:]

And I would just like to say on that question, I have the fact that we've added a new dynamic to our underwriting, both from an acquisition perspective and also from a disposition perspective, is we're starting to analyze not just -- it used to be location, location, location and real estate was a very hands-on sort of specific decision. We started to look more from a data perspective. We want to see and when we look at acquisitions now, we're looking to see trends in the market. We're looking to -- we're getting data compiled that says, it's a geographic trend towards the asset is the utilization of the medical outpatient experience is that something that's going to grow? What's the mix of the physicians in that location or in that small geographic location? Is it over 1 particular -- overstaffed in 1 particular area or another. That's something, I think, again, as we move forward, you want to be in the right locations, and it's the right cities, the right parts of cities, the right growth patterns in those cities, in those communities. And there's so much data out there right now that we're starting to put much more emphasis on the underwriting of looking forward, not looking back. And so off-campus is part of that analysis.

[Operator:]

The next question comes from Lukas Hartwich of Green Street.

[Unidentified Analyst:]

This is John on for Lucas. Just a quick 1 for me. Just as you look at your portfolio and in particular, the non-MOB assets, how are you thinking about those over the longer term, especially if you look to find sources of capital and potential dispositions? Any views on that would be much appreciated.

[Scott Peters:]

Robert, go ahead.

[Robert Milligan:]

Yes. John , I think we continue to look at those. I think our view has always been noncore assets are our secondary markets that we don't see as much opportunity on or assets that just don't fit our focus going forward. So I think as we look at the hospitals that we have, we've certainly seen a bid on it. So I think that could be an opportunity for us to look to exit those at the right point in time. I think as we look at our portfolio, it is such a small portion of it that we have in it. So we've tended to focus elsewhere, and it's continued to shrink as a percentage of our portfolio as we continue to grow. But there certainly are ones that you will see us sell at the right point in time.

[Operator:]

Next question comes from Michael Gorman of BTIG.

[Michael Gorman:]

Scott, if we can just step back a little bit more strategically, I mean, you've talked about being at the potentially at the start of a new cycle. Obviously, as you also highlighted, a lot of liquidity in the system that could be cycling in or out. We have potential tax consequences and changes coming in the next legislative session. So I guess, as you compare it to '08, '09, I'm trying to think ahead, do you think that there could be some disruption or some opportunities as a result of this going forward that we actually haven't seen the disruption in the property markets yet that you could take advantage of?

[Scott Peters:]

Yes. I think it's interesting that we haven't seen disruption yet. And I think historically, if you're a believer that things do, over time, react in some traditional manner, I do think there will be a disruption. I saw -- I read an article in the last couple days that said for the first time that there's some concern about an asset reset valuation. It was -- I read that came out where folks are saying, there's a possibility that there's a reset from a valuation perspective. So I do think that, that's going to happen at some point. I think it will be -- if we were able predict it, we'd all be in a much better position. I think you have to prepare for it. Our viewpoint, big picture, is strategically invest in those locations that are growing, that have the business environment and that have lower business impediments, meaning the taxes and just those types of dynamics and then see how that responds over time. I do think that at some point, you're going to have some sort of reaction to either interest rates or inflation or something that's going to give folks that are well positioned an opportunity. And we want to make sure that we always have that opportunity.

[Michael Gorman:]

Great. And then, I guess, to that end, we've both had the opportunity to be around for a while. In the past year, have you seen anything in the marketplace in terms of underwriting from other capital sources, deals that you've competed on where it looked like '06, '07, where people are making unreasonable assumptions about forward cash flows? Or is it just they're projecting the current status quo to continue out into the future?

[Scott Peters:]

I think that what we have seen -- I've seen some acquisitions or some transactions that I continue to look at and say, wow, that's rich pricing. It's -- I don't know that it's realistic underwriting, and it's sort of like putting money out in order to say that they've had activity. And we have resisted that. And I think my investment committee made up and my Board is in with me, the majority of them for about the duration of our company. And so we've been through a couple cycles, and we've tried to be disciplined and prepare ourselves for both types. I think we're just -- we're very fortunate that we are right now the major markets that we're in, the opportunity that we're seeing in one-off acquisitions are unique. We've not been in this position before because we were much smaller 10 years ago. We were much different is how we were growing and the pressures that we had. So it's -- good blend for us right now is buy things in the 5.5% to 6%, get development in that 6%, 6.5%, get our leasing up 3 or 4 points and continue to build on our earnings. We don't need to do anything drastic. We're not facing the hurdles that the other sectors are facing. And that's something that we always have to remember. We may not go up like other folks go up, but we certainly haven't gone down. We've been consistent, both from a dividend perspective, NOI perspective and FFO perspective. And so we're not in the sector that's going to go up and down unless you make bad mistakes. We can just have a very, very steady growth as a company, and that's what we're focused on.

[Operator:]

Your next question comes from Nick Yulico of Scotiabank.

[Joshua Burr:]

This is Josh Burr on with Nick. I was hoping you could just talk about what drove the sequential decrease in lease rate in occupancy this quarter? And then also if you could provide some color behind the decrease in retention to around 65%. I think it's typically like 80%, 85% historically. So yes, that would be helpful.

[Scott Peters:]

Yes. Robert, do you want to...

[Robert Milligan:]

Yes. No, I appreciate that. I think what we saw this quarter from a retention perspective, was, frankly, some move outs of a couple tenants that we knew about, it was planned kind of pre-COVID. One instance, a group had bought their own building kind of pre-COVID. It was just a matter of getting everything kind of fitted out. Another instance, it was just a consolidation of practices on there that drove most of the lower level of retentions, I think that's abnormal for us, and that's certainly not a trend that we're expecting to see the rest of the year. I think our outlook, frankly, for the year on retention is that it will be 75% to 85% type range when all is said and done. So I think it's just a bit of a blip as far as that goes. But from an occupancy perspective, from a timing of those vacates, we got caught up a little bit with new leasing that would typically backfill that space in time and be able to allow us to maintain kind of pretty flat, if not growing, occupancy there. It was just impacted by COVID. Certain things took longer. The activity in the second and third quarter last year that would typically result in a move-in by the first quarter this year was obviously impacted by that. So it was slower new leasing activity that impacted the occupancy as some known vacates just came to bear in the first quarter. But the good news is, as we talked about, I mean, the new leasing activity now is very strong. The new leases that we were actually able to sign, the highest that we've seen in 12 quarters. So we see that trend reversing itself as we work ourselves our way through the year.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Scott Peters for any closing remarks.

[Scott Peters:]

Well, thank you, everyone, for joining us, and we look forward to following up with any questions and seeing folks at NAREIT here coming up soon in the next month or so. So thank you, and everybody, have a good weekend.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.