Healthcare Realty Trust, Inc. (NYSE:HR) Q1 2018 Earnings Conference Call May 4, 2018 10:00 AM ET
Bethany Mancini - Associate Vice President, Corporate
Carla Baca - Director of Corporate Communications
James Douglas - EVP & CFO
Robert Hull - EVP of Investments
Todd Meredith - President, CEO & Director
Jordan Sadler - KeyBanc Capital Markets
Seth Canetto - Stifel
Rich Anderson - Mizuho Securities
John Kim - BMO Capital Markets
Michael Knott - Green Street Advisors
Omotayo Okusany - Jefferies
Mike Miller - JPMorgan
Good morning, and welcome to the Healthcare Realty First Quarter Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Todd Meredith, President and CEO.
Thank you, Austin. Joining me on the call today are Kris Douglas, Rob Hull, Bethany Mancini and Carla Baca. After Ms. Baca reads the disclaimer, I'll provide some initial comments, followed by Ms. Mancini with an update on healthcare policy and trends, then Mr. Hull will discuss investment activity and Kris Douglas will cover financial and operating results. Carla?
Thank you. Except for the historical information contained within, the matters discussed in this call may contain forward-looking statements that involve estimates, assumptions, risks and uncertainties. These risks are more specifically discussed in the Form 10-K filed with the SEC for the year ended December 31, 2017, and in subsequently filed Form 10-Q. These forward-looking statements represent the company's judgment as of the date of this call. The company disclaims any obligation to update this forward-looking material. The matters discussed in this call may also contain certain non-GAAP financial measures such as funds from operations, FFO, normalized FFO, FFO per share, normalized FFO per share, funds available for distribution, FAD, net operating income, NOI, EBITDA and adjusted EBITDA.
A reconciliation of these measures to the most comparable GAAP financial measures may be found in the company's earnings press release for the quarter ended March 31, 2018. The company's earnings press release, supplemental information, Forms 10-Q and 10-K are available on the company's website.
Thank you, Carla. We are pleased to report steady performance for the company in the first quarter as we continue to execute a low risk strategy centered on internal growth. Overall, same-store NOI performance was strong in the mid-3% range on a trailing 12-month basis led by the multi-tenant properties at 4%. The company's solid growth is propelled by contractual rent bumps that have continually improved at the multi-tenant price, enhanced by robust cash leasing spreads and consistently high tenant retention.
These positive operating fundamentals are the results of the carefully crafted portfolio of hospital-centric properties and strong markets, aligned with leading health systems and a purposeful shift towards multi-tenant MOBs over the last decade. Notably, higher growth from our multi-tenant compared to our single tenant properties clearly illustrates the benefit of this strategy.
With medical office now comprising 90% of NOI, this shift is essentially behind us. The process of selling single-tenant assets, mini non- MOBs and reinvesting in safer multi-tenant MOBs at lower yields has restrained FFO growth over the last few years. Even so, we've been fortunate to be able to reduce leverage and improve dividend coverage on a FAD basis. Looking ahead, with a well-refined portfolio, we see a clear path to bottom line growth and an increasingly well-covered dividend, while keeping leverage low.
With the current dislocation between public and private valuations, internal performance has become an increasingly critical component for growth for REITs. I'm pleased we've been steadily recycling assets over the past few years even when external growth seemed to be the focus of most.
We remain committed to the ongoing effort of pruning the portfolio to capture value, improved growth and reduce risk. The solid internal growth generated by the company is made possible by booming demand for the outpatient services of our tenants.
Trends towards lower cost settings continue unabated with hospitals now generating more than 50% of their revenue from outpatient care. Despite some headline misperceptions, inpatient hospital care isn't going anywhere. Outpatient care is simply becoming a larger portion of a growing top line for many health systems, but that growth is not evenly distributed among hospitals. Many rural hospitals are facing stagnate population trends and declining inpatient revenue growth. As opposed to systems in more urban markets, where favorable demographics are accelerating inpatient revenue, expanding margins and strengthening credit ratings.
When investing in MOBs, selecting the right health system and campus is crucial and to be the difference between robust NOI growth and anemic performance. Healthcare realities' investment discipline has resulted in 82% of its properties being associated with investment-grade rated health systems.
Many of the stronger health systems are gaining market share by advancing the hub and spoke model to channel higher acuity and patient care to urban hospital campuses and lower acuity care to decentralized outpatient facilities and urgent care centers located throughout communities.
Having over 25 years of experience, we've seen the full range of leasing outcomes across the hub and spoke model. And we placed far greater value at the campus hub rather than less strategic off-campus locations that have proven more temporal.
87% of health care reality's medical office buildings are located both in top 50 MSAs and on or adjacent to hospital campuses. Accordingly, our tenancy is weighted heavily towards higher acuity physician specialists and hospital outpatient departments that value on campus locations.
Medical office fundamentals are relative bright spots in health care REIT sector. In this period of discovering a new equilibrium between public and private markets, many are understandably frustrated with recent stock price performance.
In the long run, companies with low leverage like healthcare reality could benefit from rising secular demand, high barriers to entry and shorter-term leases with strong pricing power will likely outperform. Bethany?
The political landscape for health care policy has remained relatively quiet since the passage of the republicans landmark tax legislation and long-awaited 2-year spending bill, surprisingly supportive of federal health-spending measures. The Trump administration continues to work to lower insurance costs with proposals that reverse some of the Affordable Care Act directives, although opinions differs as to their anticipated effectiveness.
Congress also chose not to reinstate ACA cost sharing reduction payments to health insurers this year and eliminated the individual insurance mandate in 2019. These changes are not expected to have a material impact and attention has shifted to the diverging approaches that red and blue states are taking to bolster their insurance exchange market.
We will likely see a patchwork of loss with differences in affordability of insurance across 50 states. For the nation, healthcare spending is on the rise and is projected to increase 5.5% annually over the next 10 years. A faster pace than projected annual growth in GDP, driven largely by the increase in the 65-plus age population that is expected to grow 3.2% annually over the same time period. Inpatient hospital discharges have been roughly flat for short-term, acute care hospitals, down 0.4% for the past 10 years, while inpatient revenue has actually increased up 6.2%, indicative of an underlying shift in hospital services to higher acuity care.
In today's post-ACA environment with pressure on hospitals to improve quality measures and efficiency, especially for low acuity population management-type care, it is not surprising that inpatient volumes will be flat. More and more marginal services are being moved out of the acute care hospital and pushed towards lower cost outpatient setting.
The impact of this shift though is highly dependent on the hospital location and market demographic. For critical access rural hospitals inpatient discharges have declined considerably, a negative 4.3% and with slower revenue growth. This has raised questions among investors concerning the fundamental importance of all inpatient health care delivery and its impact on physicians, especially when linked to headlines related to specific hospital company initiatives dealing with top-heavy administrative cost and widely spread networks of small urgent care centers.
However, as inpatient volume has waned, inpatient revenue per discharge has actually increased across the board, up 6.6% for short-term acute care hospital. Modernization, collaboration, upgraded private services, higher acuity needs and better technology are all playing a role in demand for inpatient services and expansion of hospital campuses.
As technology advances to allow more procedures to be done in outpatient settings, new technologies are also being developed and implemented in acute care setting. And where market demographics are positive, there is considerable new construction of inpatient hospital. In 2018, 287 acute care hospital projects are slated for completion valued at $20.8 billion, up from $10.4 billion in 2014 with a rising annual trend.
Unequivocally, inpatient care and the acute care hospital remain relevant to the 32% of the $3.3 trillion industry that represents hospital-related services and the 20% that is physician office services. As real estate investors with keen interest in location, we believe health care reality is better off investing next to top hospitals with proven demand for both inpatient and outpatient care. Rob?
During the first quarter, health care reality evaluated a steady flow of perspective investments and remained disciplined choosing not to make any acquisitions. With the current relationship between market asset pricing and the company's implied cap rate, we will fund future acquisitions with proceeds from planned dispositions. We have no plans to increase leverage or issue equity to purchase assets at levels below our implied cap rate.
Published cap rates for quality MOBs have remained unchanged in the low to mid-5s. However, the majority of these transactions were priced before stocks for public REITs adjusting. There are several sizable deals currently in the market while not - likely not a fit for us. Sellers and their brokers appear to be expecting similar pricing levels.
Once closed, these transaction should service better indicators for current pricing. Dispositions during the first part of the year included the sale of 7 properties at the end of April, subject to a fixed price purchase option for $46.2 million.
For the remainder of the year, we expect to sell an additional $30 million to $80 million in assets at a blended cap rate range of 7% to 9.75%. This broad range of cap rates includes the expected sale of 5 skilled nursing facilities for $9.5 million with a targeted close in June. We moved these properties into assets held for sale in the first quarter.
Excluding these assets, our expected cap rate range for dispositions for the remainder of the year is 5.5% to 7%. Proceeds from these sales will be redeployed in the medical office buildings that will generate faster growth and more stable cash flows. On the acquisition front, we currently have 5 properties under contract for $70.5 million at a blended first year yield of 5.8%, roughly equal to our implied cap rate with individual deals priced from the low 5s to over 6%.
These properties totaling 370,000 square feet are 90% occupied on average and located in Seattle, Denver and Oklahoma City. All 5 properties are located in existing healthcare realty markets and 4 of the 5 assets are on or adjacent to campuses where we already have a present.
For 2018, we reduced acquisition guidance to $75 million to $125 million in line with expected dispositions for the year. Turning to development and redevelopment. Our pipeline remains active with the solid mix of opportunities expected to start in the next 12 to 24 months.
Our efforts remain focused on existing relationships and provider-driven demand where we are likely to achieve higher risk-adjusted returns. We are targeting 1 to 2 new development or redevelopment starts this year, with stabilized cap rates ranging from 100 to 150 basis points above acquisition cap rates. With a predictable stream of capital from dispositions, we remained positioned to take advantage of prospective investments and reflect our long-standing disciplined approach. Kris?
As expected, the acquisitions completed in the fourth quarter of 2017 provided an incremental $2.1 million of NOI in the first quarter. Normalized FFO for the quarter was $49 million, a $2.2 million increase over the fourth quarter of 2017. The normalized FFO per share increased $0.02 to $0.40 per share.
Over the past 5 years, one of our primary initiatives has been rotating into safer, multi-tenant, on-campus MOBs and out of slower growing higher risk properties. The result has been a transformation of the portfolio, 90% of NOI now comes from MOBs compared to 78% in 2012. 84% of NOI comes from multi-tenant facilities versus 70% 5 years ago and 87% of the properties are located on or adjacent to campus, up from 78% in 2012.
As evidence of the benefit of this shift, total same-store NOI for the trailing 12 months increased 3.5%, primarily driven by the 4% increase in multi-tenant NOI compared to a 1% increase in single tenant NOI.
Although a high quality on-campus, multi-tenant MOB portfolio requires a bit more ongoing capital investment, our experience shows that higher contractual escalators, stronger tenant retention and propensity for larger cash leasing spreads more than pays for the incremental capital and generates better risk-adjusted returns.
This is demonstrated by the fact that over the last 5 years even with the cap rate rotation between our acquisitions and dispositions, we've been able to drive down our FAD dividend payout ratio from approximately 115% in 2012 to 94% in the first quarter while at the same time reducing debt-to-EBITDA from nearly 7 times to under 5 times.
Moving forward, we will continue to focus on maximizing our key drivers of revenue growth and place contractual increases and cash leasing spreads. By owning desirable, multi-tenant properties in leading markets with high tenant retention and shorter lease terms, we have greater opportunity to consistently improve these metrics, leading to higher and more stable internal growth.
In the first quarter, average in place contractual rent increases continued to make steady improvement at 2.81% compared to 2.67% 8 quarters ago. Future contractual increases for leases executed in the quarter were 3.1%, well above the in-place average pointing to higher growth in quarters ahead. Cash leasing spreads were 5.2% with 85% of the leases having spreads of 3% or greater.
These revenue drivers helped multi-tenant same-store revenue per occupied square-foot increased 2.9%, which combined with 40 basis points of increased average occupancy resulted in 3.3% revenue growth on a trailing 12-month basis. This revenue growth paired with expenses at 2.4% generate operating leverage producing the multi-tenant NOI growth of 4%.
With the strong underlying performance of our uniquely structured multi-tenant portfolio, our focus will remain on internal rather than external growth and maintaining our healthy conservative balance sheet. Investment volume will be measured primarily, redeploying disposition proceeds with no plans to lever up to fund acquisitions. Todd?
Thank you Kris. Austin, that concludes our prepared remarks. We are now ready to begin the question-and-answer period.
[Operator Instructions] And our first question will come from Jordan Sadler with KeyBanc Capital Markets.
First question, wanted to touch base on the dispositions in the updated guide. It seems, as you guys pointed out, Rob, talked about where the market is today and having the cost to capital rise from the low levels it was at, at some point last year for the public REITs. It's interesting that pricing sounds like it's going to be - sounds like similar to the (inaudible) about the trade. So one, Rob, I was just interested if you could maybe characterize or offer some color regarding the type of product that's out there? And then the types of buyers who are out there today?
Yes. Jordan. We really haven't seen a lot of transactions close this quarter that - meaningful transactions. There are some out there that are sizable portfolios and few sizable one-off deals that are out there. But we haven't seen any of those be priced at this point. Most of the data that you see out there are on assets and deals that were priced before the downturn in the public REIT stock prices. So at this point, we got a limited data set, and we don't see any evidence of cap rates rising, but we think it's too early to tell. And we think that the assets that are out there being marketed right now will provide a good indicator of where we are and where we are headed.
Yes, just in volume. Just to give you a broad number, Jordan. I would say $1 billion, $1.5 billion of maybe 5 or 6 portfolios that we are hearing about, as Rob described in his remarks. So it's - it should be - it's a mix of on and off campus. Some really nice assets that could be really low cap rates, but then little bit at the other extreme too. So it should be telling at least directionally where things are after the public stock price adjustments.
The other question I had, which is a follow-up. I thought you were suggesting that the pricing might look remarkably similar to what transpired last year when the REITs were engaged, including yourselves. But I guess, what I'm curious is given the sort of the movement in stock price, you obviously update disposition guidance, but would you - what's your appetite to increase that further assuming the appetite in the private market keeps cap rate at the lows or near the lows we saw last year?
I think we certainly or continually working on a subset of properties that are potential disposition candidates. I think that would certainly have to take into consideration what the opportunities are out there to redeploy that capital. And if we find the right opportunities to invest capital from dispositions in the assets that have substantial long-term growth profile that we're looking for and the quality type assets that you're looking for then we will certainly take that opportunity. Right now, we think that the levels that we have communicated are achievable. And we think that given the type of product that we see out there that fits our profile, we can turn around and redeploy that capital into those assets.
And Jordan, I would also say. If you look at the last 3 years, we've averaged about $125 million of dispositions, which is certainly elevated relative to our long history of probably more $50 million, $75 million. So we've been on that path and I think Rob's point is, we're still on that path. And it's partly, as you said because there is really low cap rate environment or has been and all evidence suggests it might stay there. We certainly don't know for sure, but it's a good time to be doing that. And as Rob said, it's just balancing that with redeployment.
Okay and then just following up on the redeployment side, the acquisitions that are in the contract of $70 million or so. Can you - I think you said 5.8% cap - can you parse that a little bit? It seems that the market are little bit varied?
Yes. One of the assets is small asset, that's adjacent to another building that we own. It is down in the low 5s. A couple of the assets are adjacent to a campus that we're already invested in and it's slightly over 6. So it's a range of about 100 basis points.
Our next question comes from Chad Vanacore with Stifel.
It's Seth Canetto on for Chad. Just building off of the disposition question. I know you guys have increased sort of the cash yield range for the dispositions. And I understand, you're selling some skilled nursing facilities? Can you just tell us why the contract under the previous deal was terminated?
Yes. The previous buyer couldn't get comfortable with the NOI and operations of the property. These properties are located in rural Michigan and have experienced similar to the remainder of the SNF industry. They experienced some downturn in occupancy, and the previous buyer just couldn't get comfortable with the underlying operations.
One thing, I would add to that is the previous buyer was a smaller operator. And so they were having to bring in some outside equity capital for their acquisition and that's really where they had some difficulty. The buyer that we're under contract with right now is the second largest operator of skilled nursing facilities in Michigan. We've done some transactions with them before several years ago. So we are feeling good about being able to move forward with them.
All right. Great. Thanks for the color there. And then when you look at acquisitions, you guys bought in Seattle, Denver and Oklahoma where you already have a presence. Is that really the strategy for the remainder of the year, just continue to tack on where you have existing properties?
Yes. that's our primary strategy where we're in the market and you're comfortable with the market and know the market. We see good opportunities to add to the portfolios in those markets and drive the growth in those particular markets. So yes.
All right. And then you mentioned that there were dividend coverage. What level are you guys comfortable with taking a downturn and thoughts on increasing the dividend going forward?
Sure. Yes. I mentioned, obviously, we've improved that. Kris, went through the stats on that. If you look back 5 years, it's a pretty significant move. For the last 3 years, from '17 and back, we were sort of in the mid-90s, if you will, on a FAD basis. And certainly, that's a much improved level. And I think for '18, we certainly see something similar. So really, I think it comes down to the end of '18 here. And then as we look into '19 kind of seeing where that might go, we don't - we haven't pegged a certain level. We are not planning on any particular date here. I think what we're trying to say is we're comfortable with where we are at now compared to where we've been. And we see the portfolio shift beginning to come to a conclusion and more into a maintenance mode on that side, less impact on FFO growth, which should put us in a position to improve that coverage going forward and obviously start to have discussions as we roll into '19 about what does it look like going into '19 and how good can that coverage be.
And our next question is from Rich Anderson with Mizuho Securities.
Couple of questions here. So did you give the cap rate on the purchase option the $46 million end of April, just for modeling purpose?
Unidentified Company Representative
It's 13 3 [[ph]
Okay. All right. And then recognizing this kind of shift from focus on external to internal growth. Could you come up with sort of a growth profile of the company that would come from that. In other words, you mentioned FFO growth was kind of restrained over the years as you got to this point of the portfolio. Do you think, you are - I am not going to marry you to any given quarter. But do you think you are 100 or 200 basis points better good profile now you have achieved this objective or is that too much or too little?
Certainly, I think so. I think in simple math and you're right and we won't sort of specific numbers. But in broad terms, our view is that single tenant side of the business and even non-MOB side has been more in that 2% range. And certainly, what we've been striving to achieve with the multi-tenant strategy and being on campus in better markets is really been hitting 3%, but not only 3%, being able to move beyond 3%. It's all the metrics that Kris went through describing that model. But really kind of living above 3% is sort of what we - so I think you're right, it sort of that 100 to 150 basis points. And that's just sort of the steady state assuming you don't have any challenges. I think the fundaments of it all come down to is we're just seeing more challenges in the outcomes at the end of leases and so forth with single tenant facilities, especially, off campus compared to multi-tenant. And so when you add that in it even becomes a bigger difference but just a steady growth state, to your point, I think, you're right, 100 and 150 basis points.
I was thinking more on the long lines, not so much the transition from multi - from single to multi, but from not buying expensive assets or buying expensive assets less and funding them with disposition proceeds.
Yes. I think for us having operated where we have for quite a while, which is focused on the highest quality assets, you end up driving those prices down in the market to almost to your cost to capital, so very little spread. So I think for us we don't see shifting from more external growth to less external growth is being a tremendous difference in our growth profile. I guess, does that answer your question.
Yes. It does. That's good. Got you. On the top of the CapEx, that's kind of taken on a little bit of an extra focal point from investors, including ourselves. Do you think the issue of CapEx of medical office is something that is changing? Or do you think there is kind of an education process going on to people like us and investors just following this space? Or is the business requiring more CapEx, I guess, is the question?
Our view is no. And I think it is a function of what you hit on there, which is disclosures gotten better, and we are a part of that. And certainly, if you go back 5 years, our disclosure wasn't as good as it is now. So that's improved, which is good. But to your point, more disclosure isn't necessarily a change. I think the other exacerbation of that issue is that, we've been shifting from single tenant to multi-tenant. So clearly, the more of that we have the more you live in the multi-tenant world, which is higher because you have that lease role number one, but you also have the obligation as a landlord to maintain the buildings, which is often less of an obligation and almost no obligation in many cases with the single tenant assets.
Yes. I think only thing I would add to that, Rich, is I do think it's an education. Because if you actually go back and we've been talking about it for probably close to 10 years of what you should expect related to TI on renewals and new leases. And we've been saying it's in that kind of 4% to 5% range for new and $1 to $2 per square foot per lease year for renewals. And if you actually just kind of carry that through to NOI, that's where you start getting into the levels that we're talking about. But I don't think that - given the fact that there wasn't much lease role a lot of companies were in kind of an acquisition external growth focus and didn't have a whole lot of leases that were turning. There wasn't a lot of focus on that and people didn't take those rough metrics and run it through to calculate what the percentage of NOI is. So I just don't think it's a change. It's just people are starting to understand it better.
So you're exposing my own [ADT], I guess. And then last question, bigger picture. We've been kind of hearing this theory of insurers and pharmacies getting together and pushing covered people into their facilities and away from facilities like those that you own. Look for example, like a relatively minor condition like the idea of pink eye where would you go? Would you go to doctor? Would you kind of take - use Advil or something and go to CVS? And I'm curious, how much do you think that's disrupting the business, understanding you guys are in the more higher acuity world of medical office. I'm just curious if you feel like that's disrupting the business generally? And same question on urgent care and how that's kind of growing as well in this various communities, just a big picture view if you could?
Yes. There is certainly a lot going on, and lot of headlines around it. And it is fairly disruptive in terms of perception and maybe certainly in reality I think as you pointed out. We are very focused on the higher acuity side of it. If you look at our mix of specialists relative to the sort of the waiting of specialist across all physicians in the U.S., we're underweight primary care and heavily overweight specialist. So the things you're describing we don't feel has a material impact. We certainly haven't seen it. We're doing 500, 600 lease transactions a year and obviously see the pulse of that all the time, every day. So we're just not seeing it. We do have some primary care in our buildings, but usually, it's not just basic primary care. It probably is a multispeciality group that has that. The primary care plus a lot of different specialists. So and it's a good referral mix with the specialist in the building. So we just aren't seeing it in our buildings, but it's absolutely an issue. I think if you're focused off campus because there are alternatives like that. I think the other side of that is, there is such a bulge sort of the baby boomer group just coming into that 65-plus age that we kind of need all this outlets for addressing the lowest acuity items. They all - it's the old thing, if you go to the ER to deal with your pinkeye, you're really causing some problems with the system. So it's good that that can then be treated in a miniclinic or an urgent care, as you said. So I think it's all part of a necessary process of trying to kind of gear up the system to handle just the onslaught of utilization that will come with the aging population.
And as a way to expanding the horizons, do you notice at all if insurers are starting to take a look at assets of your ilk and getting into more acuity situations or is that just too soon to call?
I think it's too soon. I mean, certainly some insurers have gotten into the physician business, but it generally does tend to be primary care. We haven't seen it to be disruptive in our universe.
I guess, one example I can think of that is actually all the way to the hospital side. And if you look at what's going on in Pittsburgh at this point, with UPMC and - up in that market where you had the vertical integration across insurers all the way to the inpatient side. And so there's a lot that's unfolding in that market right now as populations are kind of getting divvied up between the 2 large hospital operators and insurance companies. But I think that will be if you're looking for a place to kind of follow how that works in the impact, I would point you to Pittsburgh.
I wouldn't think it would be a bad thing if insurers got interested in your property type, but that's just me.
A - Todd Meredith
It's the way Kris is describing that's probably not a bad thing from a credit standpoint, from a capital and growth standpoint.
Your next question comes from John Kim with BMO Capital Markets.
Can I just ask what do you see currently in the market as far as the cap rate differential between on and off-campus MOBs of similar quality?
Yes. I think if you go back and look over the past several quarters, it's been trending in that 40 to 50 basis points. It has picked up slightly I think over the last couple of quarters of last year. So it is probably generating that 50 basis points range right now.
So given your cost to capital and the challenging environment to acquire on campus. And I'm coupling that with Todd's opening remarks where I think Todd has said hospitals are generating more than half of the revenue from outpatient care, I'd imagine a lot of that is not on campus. Would you selectively acquire more off-campus assets if they are directly affiliated?
There is just so many reasons for real estate reasons, we have moved away from that. It's not to say we'll go to 0 on that. I think you're right, there are compelling situations where health system may have a significant off campus presence. Our view on that is just we are going to have more stringent underwriting criteria for that. We are going to be - we are going to want to be in early generation preferably the first generation whether it's development or buying something that's just was developed. But even then, you're going to have different criteria that you're going want longer lease terms, better understanding of what the asset could look like or what it might happen at the end of the lease term, the probably of renewal. A different approach then we would take on campus where we are more comfortable with, shorter lease terms, the ability to push rents, just all the barriers to entry that come to that. So on the margin, we're not moving towards that to your point just because there is this slight differential. And relative to our cost to capital, I think we're willing to be more patient in that and use dispositions to buy what we think is a better long-term value of on-campus assets.
Okay. And then, following up on Richard's question on CapEx and TIs. I mean, this quarter it was 21% of rents. And I appreciate your disclosure on that. But was there anything specific about this quarter why it was higher? Because was it like a different type of tenant moving in or a special requirement from health system? I was just wondering if you can count on that.
I think you kind of have to look at the mix of new leases versus renewal leases, but - and when we look across that it was - did have, I guess, one noteworthy thing to mention on the new leases that drove it a little bit higher than what we typically see, where we did sign a fairly large nonmedical space and gave some additional TI as a result of that. It was a new lease for that nonmedical tenant. It ended being over $6 per square foot per lease year and that's what drove our average over the $5 dollars. So if you excluded that lease and look at just more of a medical office space we typically have, that was $4.70 per square foot per lease year, which is more in line, but then on the renewal, it was in line with what our expectation is. So nothing else that I think is noteworthy.
And when you see a nonmedical, is that a traditional office tenant or?
Yes. It is a traditional office tenant.
The next question is from Michael Knott with Green Street Advisors.
Just wanted to touch on the 1Q same store NOI growth got a little bit, the 1.9%. Just curious if that was in line with what you expected for this particular quarter, maybe a little bit disappointing or not. Obviously, you kept your full year guidance unchanged, so question is really just sort of nuance and incremental at the margin?
Yes. I agree. I think, it is kind of in the nuance and incremental. I will kind of - I'll walk you through a couple of pieces on that. First, as we talk about, we think the best metric when you're trying to think about trends is trailing 12 month. And when you look at our guidance, that's what we provide. And for the quarter, on a trailing 12 month, our total was at 3.5 and multi-tenant was at 4, which were both kind of right at midpoint of what our guidance range is. Quarterly, the 1.9% which is a quarterly figure, that's going to have a lot more fluctuation in it, which is to be expected with - especially on the multi-tenant side with operating portfolio given there's a lot more variables that are moving around on you. So getting into specifics on the 1.9% for the quarterly growth, single tenant grew at little over 2%, which is in line with our in-place escalators. So no real surprise there on the single tenant. On the multi-tenant I think the way to look at it is really kind of dissecting it, kind of the way we go through the revenue model. I think we've gone through that with you in our - it's on page 25 of our investor presentation. But kind of just breaking it down into the various pieces. Multi-tenant revenue increased on a year-over-year basis 2.4%. That included 30 basis points of occupancy decline on a year-over-year basis. Occupancy moves up or down have approximately one-for-one impact on revenue growth. So the 30 basis point decline in occupancy reduces revenue growth by approximately the same 30 basis points. We had discussed the expected drop in occupancy this quarter on the call, last quarter. We view that as temporary and expect occupancy to rebound through the balance of the year. The second piece on, on revenue that I'll talk about is that we did have a little bit of a tick up in some free rent this quarter with some new longer-term leases that were signed, including that nonmedical lease that I mentioned earlier that was little over 10 years in term. So, excluding the free rent, the revenue growth would have been approximately 40 basis points higher. Overall, free rent is still within the range of what we expect. We had about 2.25 days of free rent in the first quarter, but that's up from 1.75 days in the fourth quarter. So that's just kind of the incremental change there. But around 2 days is normal for us. So no concern. But when you combine the occupancy change in the rent concession, revenue growth would have been little over 3%, excluding those 2 items, which is in line with our in-place contractual escalators and cash leasing spreads, which you should expect. On the expenses, our multi-tenant expenses were 3.2% up on a year-over-year basis and that was primarily due to higher utility costs and snow removal compared to the year prior. So excluding those items, operating expenses were more in line with our trailing 12 month little below 2.5%. So all in all, nothing real concerning. Just typical fluctuation and variation that goes on in any particular quarter. But we still expect trailing 12 months multi-tenant NOI through the remainder of the year to stay in our guidance range of 3% to 4.5%.
Okay. Thanks for the detailed response. Just on the cap rates on the things that are in the market right now, and I think you guys, you expected those maybe in the 5.5 to 6 range. So just curious, should we take away if that were higher quality portfolios in the market similar to what we traded last year. Let's say, the 5 or slightly below 5 would be off the table now given that the REITs have - had a repriced cost to capital since then? Or do you feel like the private market - private buyer demand would still be sufficient to drive cap rates to keep them where they are at. I couldn't quite tell from your comments. What do you think about where the private market is today?
I think our why you're having some that hesitation is because that's where we are. We certainly haven't seen any transactions of size or note or meaning as Rob indicated that we can point to tell you here is what the private market is doing now post public REITs being little sidelined. So we don't have any great data to say that. All we're hearing is that this transaction is coming, the sellers and the brokers have high expectations, which not surprising at all. So I think we really kind of have to watch what's coming and see how it prices. I mean there are certainly lot of private capital out there, there is no doubt. I think the real question becomes if you look back at last year, the public REITs were advantaged and we're clearly driving a lot of that pricing. But the privates were there, but to my knowledge they weren't as aggressive. Although at the end of the year, you saw little - couple of aggressive moves on some below 5 cap rate level. So it will just kind of depend on how deep that is. Or I don't know that we are stuck here. I think private buyers recognize the publics are backing off a little, so maybe they don't have to be as aggressive. So I think we just got to watch what plays out there, and we just don't have great data yet to answer that.
Agreed. Thanks for the commentary. One more quick one if I may. The skilled nursing sale, obviously, the implied cap rate on that is very high and points to, I presume, a very low coverage that must have deteriorated over time. Just curious - I assume there is no other SNFs in the portfolio at this point and then would there be any - now, I guess, in your non-MOB bucket, would there be any - now, I guess, sort of very low coverage type assets that we should all be aware of as we're thinking about what that bucket is worth?
To answer your specific question on the SNFs. Yes, the operations had declined. I think Rob mentioned that earlier, which is, I think, what people are seeing across the industry. We do have one other SNF remaining, it's small, it's about $850,000 in NOI annually. It's performing better than the properties in Michigan more around a onetime coverage. And we've had some discussions about - with the operator about potentially purchasing that asset. We would not expect if we did sell it to be anywhere close to the cap rate that we are looking at on this Michigan assets. But I do think that is one asset that we may not own long term. Beyond that, as Todd pointed out, we just don't have much else this kind of non-MOB. We have a couple of surgical facilities - specialty surgical facilities and we kind of view those differently. And those, I think, are more likely to be long-term holds for us. We went through last year sale of lot of the ERFs. We have 3 ERFs remaining, a couple of those are in places where we own some additional properties. So there is some strategic sense for holding those. There is one that standalone it's located next to a hospital. I could see maybe long term that something that we may not own long-term, but that's probably the majority of it from a non-MOB perspective.
And our next question is from Omotayo Okusany with Jefferies.
On the development front, the 1 to 2 development starts you want to do a year. Could you just give us a sense of what progress you're making with regards to conversations with your tenants and even potentially new tenants around that?
Yes. We are in constant dialogue with prospective tenants and primarily, the hospitals. Those developments - the campuses of those developments are beyond. We get in the conversations about capital cycles and timing. So those are progressing, several of them are moving quicker than others. One that we're working on, I think, we mentioned last time was our partner Meadows & Ohly. It's moving along and having meaningful discussions with physician tenants and the hospital itself. So I'd say, they're in various stages, but we feel good about getting 1 to 2 of those started this year.
Is pre-leasing the main determinate of when you could kick off one of these things?
I think it varies. It's not just pre-leasing, but it sort of when you're working on hospital campus, you got other things going on. One of the developments that we're working on right now, there is a planned expansion for the hospital. So in working with the leadership of the hospital they are prioritizing things in that expansion over the development. So how that moves along and the pace it movies along certainly fluctuates. So it's not just pre-leasing, it's what else is going on in the campus and what kind of priority is the hospital making it.
Got you. And then on the acquisition front, I do remember last year there were couple of big deals floating around. Most of the REITs did not seem inclined to get involved. But in the end, everyone kind of bought something. And this time around, at this point in the year, due to the couple of larger transactions - again, everyone is talking about not getting involved. But I just wonder that, could that mindset change? And what would change it?
I think - obviously the big question, Tayo, would be cost to capital. I think that's the big driver for us and certainly what colors all the comments you heard from us about where we view it. And clearly, our implied cap rate is up kind of as Rob said, in that 5.8% range, which kind of falls what we're under contracted by. But we're not in a position or don't think it's prudent at this point to go chasing something that might trade in the low 5s. And again, I think it's early to say that. We're finding this equilibrium here. We don't know exactly what these transactions - how they will price and how the private players will tackle it. So I think have to kind of be patient here and watch and see how it plays out. But certainly, where we are today, we're not getting be chasing things in the low 5s.
But if you did have the cost of capital though, would any of those portfolios have kind of quality profile that you would be attracted to?
Yes. I would say no. I mean, I think we've looked at them. We certainly looked at them. And while there is a few assets in there that we certainly think are attractive, on the whole they're not portfolios that we would be interested in.
And then last one from me. Given the strong institutional demand or interest in the MOB space, if cost of capital continues to be an issue, what are your thoughts around doing a potential JV towards bringing the capital partner?
Sure, last year, I think got those kind of discussions going, as you pointed out, Tayo, with all the big transactions. They concluded there with lot of that conversation going on and we found it to be productive getting to know some folks and what their sources of capital might look like, what those structures might look like. I think like everybody, we sort of weigh the complexity of adding the JV concept with the value that you can bring to shareholders from that. So I think it's something that, if we find ourselves continuing down this road of this difference between public and private valuation, it certainly something we would we look at. I think we would just be careful to - try to keep it, as we always have, keep it simple and make sure it's the right kind of alignment if we did it. We're not actively saying we're ready to do that. It's just something that we would consider if the situation just extends for - we're talking a year from now on the same situation, it's probably more interesting to us.
[Operator Instructions] Our next question comes from Mike Miller with JPMorgan.
You kind of touched on this topic in few different ways. But when I look at Page 13 in the sup in [CB] MOB, NOI at about 90% and I guess the single tenant of that portion is about 16%. How should we be thinking about - is this the level that those mix - that the mix kind of stays at over the next several years? Or we're going to see that mix continue to change in the MOB portion, go above 90, the single tenant portion go down? And how does that all play into, Todd? But it seems like at the beginning of the call, you were calling for earnings to start inflecting and with the growth rates picking up. So could this getting in the way of that if it does change?
Yes. I think you heard Kris talk a little bit about. Clearly, we have the skilled nursing facilities going out long term. We're not holders of the last one, the small one that he mentioned and maybe another ERF. But I think the point of my remarks was to say, as you're pointing out, we kind of reached an efficient level here. And I think incrementally the activity of what we sell versus what we buy will continue to allow that to drift up. But I don't think it's wholesale like it has been over the last 5 to 10 years. And so that's what I think will help create less pressure on the FFO line, if you will. So again, it will drift up because what we buy is going to be more of the multi-tenant MOBs and what we sell will tend to be non-MOBs or single tenant off campus properties. But less significant changes, I guess, I would say, and I think you're right, should take some pressure off.
And this concludes our question-and-answer session. I would like to turn the conference back over to Todd Meredith for any closing remarks.
Right thank you, everyone, for joining this morning. We will be around for follow-up questions, if you have any. And hope everybody has a great day. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.