Healthcare Trust of America, Inc. (HTA) CEO Scott Peters on Q1 2020 Results - Earnings Call Transcript

Healthcare Trust Of America, Inc. (HTA) Q1 2020 Earnings Conference Call May 6, 2020 3:00 PM ET

Company Participants

Caroline Chiodo - SVP, Acquisitions & Development

Scott Peters - Founder, Chairman, President & CEO

Robert Milligan - CFO, Secretary & Treasurer

Conference Call Participants

Piljung Kim - BMO Capital Markets

Nicholas Joseph - Citigroup

Connor Siversky - Berenberg

Lukas Hartwich - Green Street Advisors

Richard Anderson - SMBC

Todd Stender - Wells Fargo Securities

Michael Mueller - JPMorgan Chase & Co.

Daniel Bernstein - Capital One Securities

Vikram Malhotra - Morgan Stanley

Operator

Good day, and welcome to the Healthcare Trust of America First Quarter 2020 Earnings Conference Call. [Operator Instructions].

At this time, I'd like to turn the conference over to Caroline Chiodo, Senior Vice President, Acquisitions and Development. Please go ahead.

Caroline Chiodo

Thank you, and welcome to the Healthcare Trust of America's First Quarter 2020 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 will be happy to take your questions at the conclusion of our prepared remarks.

During the course of the call, we will make forward-looking statements. These forward-looking statements 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 that our assumptions are reasonable, they are not guarantees of future performance. Therefore, our actual future results could materially differ from our current expectations. For a detailed description on potential risks, please refer to our SEC filings, which can be found on the Investor Relations section of our website.

I will now turn the call over to Scott Peters, Chairman and CEO of Healthcare Trust of America. Scott?

Scott Peters

Good morning, and thank you for joining us today for Healthcare Trust of America's First Quarter 2020 Earnings Conference Call. Joining me on the call today is Robert Milligan, our Chief Financial Officer.

Before we discuss the specifics of our business and our outlook, I would like to acknowledge the significant impact that the COVID-19 pandemic has had on our communities, our health care partners and our employees. It has touched each one of us in different ways. However, I am proud to be associated with our health care provider tenants and our employees who have adapted to the circumstances and rallied to meet the challenging events.

From a business perspective, HTA sits in a very strong position. We have a great leasing and property management team, operating in a high-quality portfolio of medical office buildings in key markets throughout the United States. Our portfolio is broad, with over $7 billion invested across almost 25 million square feet. It is also diversified with no 1 market accounting for more than 10% of rent and no single tenant accounted for more than 4.1%. Our tenants consist primarily of leading health care providers in our markets, with almost 75% of our rent coming from health care systems, universities and large national health care providers, and 62% of our rent comes from credit-rated tenants.

We have a fortress balance sheet, leverage of 5.1x debt to EBITDA, over $1 billion of liquidity and almost no debt maturities coming due in the next 2 years. This is a direct result of our long-term conservative, disciplined management philosophy and focused actions that we have taken over the last 12 months.

As we look at today's economic environment, health care services are driven by need-based demand, and we believe that they will be among the most resilient sectors coming out of this period and as the economy moves forward. Although our tenants have had their operations disrupted over the last 2 months, they are also seeing very strong demand from patients whose issues and requirements have not gone away while people have sheltered in place. Further, increasing access to physicians is a top priority for many states, where they are almost uniformly included as a phase 1 priority in reopenings. And whereas of today, over 80% of our tenants are in states that have announced the scheduled return of elective surgeries.

As a leader in this unique space, we are confident in our tenants and have worked with them to meet the unique demands during this unprecedented time, recognizing that an ability to assist with short-term liquidity can pay many dividends down the road. We're also able to do this because the vast majority of our tenants can weather this storm with limited disruptions.

Our April collections were 98% of our scheduled rents. And the amount of rent deferrals under discussion as of today totals just under 10% of rent for the next 90 days. While this may increase somewhat from here, we believe this level of short-term cash flow disruptions currently at approximately $20 million to be very manageable, especially as we see a path to our tenants to return to some level of normal operating capacity over the upcoming months. Our collections for May are consistent with these expectations.

In addition to deferrals, we are also working with our tenants to achieve scenarios where we both can achieve our goals by signing extensions for the future, while providing free rent today. We anticipate we could early renew as much as 500,000 to 1 million square feet in the second quarter as a result. Our property management teams are also working with our tenants to ensure our buildings are ready as they return to full-time scheduling of patients and surgeries. In many cases, our tenants have a backlog of patients who they have pushed out and are looking to work over time to get them all in. We are currently working with them to ensure we extend our building hours and have maintenance and janitorial teams that are prepared for increased traffic.

As a company, we have viewed the market disruption and taken prudent actions as appropriate, especially as it relates to conservative cash and planning for the long-term stability of HTA. First, we have temporarily stepped back from the acquisition market to better understand the overall dynamics of the marketplace. Second, we have drawn down on our credit facility, reserving cash as we evaluate the financial markets.

Despite the pandemic taking hold in March, our first quarter portfolio performance was on track, led by 2.7% same-store NOI growth, signed 238,000 square feet of new leasing, 85% of retention and 2.7% re-leasing spreads. Our occupancy rates were up 10 basis points on a sequential basis.

As we look at our portfolio moving forward, we expect our occupancy to remain relatively flat as health care providers are focused on simply maintaining their practices in this new environment. Existing tenants have become more inclined to stay in place at this time, which is good for retention. New leasing is still getting done. However, it is more challenging, and the pace has slowed from our expectations earlier in the year. As a result of these moving pieces, we are pulling our full year earnings guidance as we assess the full impact of these short-term actions.

I would now like to turn the call over to Robert, who will go through the numbers in greater detail.

Robert Milligan

Thanks, Scott. Touching briefly on our first quarter, our performance was strong as we had originally laid out in our guidance. Our normalized FFO per share increased 5% year-over-year to $0.42, and our same-store growth was up 2.7%, driven by revenue growth of 1.5% and rental margin growth of almost 1 point as we brought more services under our in-house platform.

Our recurring capital for the quarter was $16.3 million, which equated to 13% of NOI. As a result, our FAD for the quarter increased to $79.7 million, resulting in an 88% payout ratio.

Our balance sheet is in great shape as we work through this pandemic. As of the end of the quarter, we had total liquidity of approximately $1.1 billion, including approximately $278 million of equity we raised on a forward basis in the fourth quarter at pricing above $29 per share. Including the impact of this equity, our leverage was only 5.1x.

From a cash obligation perspective, we have very limited near-term maturities, only $6 million coming due before our revolver matures in June of 2022. We also have only $133 million of capital required to complete our developments and redevelopments, all of which are over 70% pre-leased on average.

As we continue to operate our business and return to making investments, we will continue to finance our business in a manner that maintains low leverage and significant liquidity.

Subsequent to quarter end, we drew down on the remainder of our $1 billion revolver to ensure the availability of liquidity, while the financial markets were responding to the pandemic. We did this out of an abundance of caution given past experiences. However, given current trends and outlooks, we do anticipate repaying at least a portion of this borrowing by the end of the quarter.

Looking at April now, we continue to see the results of the normally defensive need-based demand and significant rent coverage inherent in MOBs. Our buildings are well tenanted, with 73% of our tenant rent coming from larger tenants, including 60% from health systems and 13% from large or national tenants such as Optum Healthcare. Only 27% of our rents come from smaller local health care providers, who tend to be extremely profitable but have more limited access to working capital. Over 62% of our tenants are credit-rated, with over 47% investment grade. For this month, we collected over 98% of our normal monthly contractual rent obligations.

As the impact of lower patient volumes and restrictions on elective surgeries started hitting our tenants' practices, we did begin receiving requests from our tenants for rent deferrals. At first, it came primarily from smaller local physician practices, but has also grown to include many not-for-profit investment-grade health systems who have focused much of their liquidity on preparing for COVID treatments. As of today, we currently have deferral requests totaling approximately 10% of our rents over the next 90 days. We are confident in this amount, especially as we see the return of elective surgeries and patient volumes to our tenants.

From an accounting perspective, we anticipate taking a conservative approach in the second quarter and may incur some onetime expenses related to these deferrals. However, we are highly confident in the ability for these rents to be paid back over time and anticipate returning to run rate earnings in the third or fourth quarter.

I will now turn it back to Scott.

Scott Peters

Thank you, Robert, and we will open up for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question today will come from John Kim of BMO Capital Markets.

Piljung Kim

I was wondering if you could just clarify your definition of how you calculated the April rent collected. So for instance, if there was $100 million of rent that was due, you got $98 million that was paid?

Scott Peters

Yes. Rob, go ahead.

Robert Milligan

Yes. John, this is Robert. Yes, the way we looked at this as our calculation is we took the total contractual amount that was due. In total, we have about a little over $180 million of revenue a quarter. So that's about a little over $60 million a month. And we compare that to our total collections for the month, which was in kind of the $59 million area to that. So it was a pretty straightforward calculation.

Piljung Kim

And Robert, you mentioned in your prepared remarks, there was some onetime expenses associated with the rent collected. I was wondering if you could clarify what that is and the amount.

Robert Milligan

No, I think when we were talking about onetime expenses, I think as we're looking at our quarter and things going forward, I think we anticipate there's a little bit of elevated expenses that we're seeing in there, certainly the key properties open to keep our people on-site in order to keep the janitorial service certainly being higher. I think more of the commentary is around slightly higher expenses that we wouldn't necessarily have if it wasn't for certainly the COVID pandemic.

Piljung Kim

Okay. And then final question. Can you just provide some more commentary on what you think pent-up demand is for patients coming back to their physicians? And how you came up with a 6 to 12 month payback term for the tenants that have rent deferred?

Scott Peters

Sure. I think we've talked to most of our top 200, 250 tenants. And if there's any good thing that's come out of this pandemic, it has allowed us being dedicated to the MOB space, to focus both senior management time and our leasing folks' time and, to some extent, our senior property management time to contacting and reaching out to our tenants. We've done that mostly with the larger health care systems, it's been the senior folks with the local tenants. It's been the property managers who had long-term relationships or it's been some of the leasing folks who put people into the space.

The comments from the health care systems are that there is a backlog. They have been planning when they reengage and start with the elective surgeries that they will need extended hours. And that's one of the things that we've focused our engineers on, we focused our infrastructure on is to assisting these health care systems, the larger physician groups and establish themselves and getting ready to move forward. I think one of the things that they've talked about, which I think is completely understandable and, in fact, will persist for some time as we've been told that a lot of the focus from the hospitals, from the physician groups is on making patients more comfortable coming back to and receiving elective treatments. They have put plans together. They're reaching out. They're putting a conscious effort into that aspect of the demand. I think the demand is there. I think it will recover relatively quickly. I just think the health care systems, the physicians, we, ourselves, in maintaining the assets need to be very cognizant of the fact that patients need that comfort level when they come to the buildings and when they come to the physician groups.

Operator

Our next question today will come from Nick Joseph of Citi.

Nicholas Joseph

You mentioned stepping back from the transaction market given the uncertainty. But what would you need to see to actually get back in and do deals, assuming that there are assets trading?

Scott Peters

Well, we're in a very fortunate position. I think what we've talked about with our rent commitment or our expectations with cash flow, I think we are comfortable with what we see now given something that's unforeseen. So that puts us in, I think, a very strong position that not many others may be experiencing. We have some capital that we can draw upon in a forward equity, a position that we put in place. So we have capital that, before the pandemic, we were moving forward with and looking to be what we thought was replicate what we did in the latter half of last year. I think the transactions right now are still being predicated on information or perception that existed 45 days ago or 60 days ago. I think the MOB space is going to hold up very well. And so the thing that we need to do as a management team and work with our investment committee on is making sure that we not only buy something today that is priced correctly, but also that the performance of that asset is going to be consistent with the expectations over the next 3, 5, 7 years.

That's, I think, more complicated today than it was 60 days ago. Not all physician -- not all assets are going to perform the same. I think not all cash flows are going to be consistent under the same pathology of being collectible. So we have done a very good job, I think, of our portfolio, our receipts, working with our health care partners, trying to be what I consider to be a business partner in a time of stress. And that, I think, will lead us to some opportunities on the acquisition front down the road. Is it 60 days? Is it 90 days? I think it will depend upon, for us, making sure that it's a good acquisition. It's in our market. It falls into our leasing team. It falls into our property management. It is a strong acquisition accretive from a 3, 5, 7 year prospect, not just buying something based upon, "Okay, it's out there and it can be bought." So we're actively still evaluating the market, and Caroline is talking to folks on a daily basis. So it's just a process here to really figure out where the market is over the next 30, 60 days.

Nicholas Joseph

That's very helpful. And then just maybe on development and redevelopment. You mentioned the committed spend for projects already underway. But how do you think about any new starts, call it, over the next 6 to 12 months?

Scott Peters

We're, again, fortunate. We, I think, we're in a place with about $125 million of construction capital that was in place. We have 3 projects that we -- when we sat back 4 weeks ago, we immediately reached out and talked with the tenants of the health care systems to reconfirm their commitment for taking the space. For example, our -- we have 1 coming due in July in Raleigh with WakeMed, and that's on schedule, on time. So we're going to continue with our development because all 4 opportunities came back and said that it was pre-leased. They had the demand. They had the physicians. They had the occupancy and so, therefore, they wanted us to continue. And we, of course, want to continue. So that's the good news. And frankly, it's a positive for us because we can continue through this process to get it done.

On new development, it's going to be interesting to see. I think redevelopment is going to be probably more focused from health care systems. As we talked about, we've had 500,000 to 1 million square feet at health care systems. And we have talked about extending for -- extended turn without commissions, which is something that's very beneficial to us. And in some cases, with different Pi dollars that normally would be talked about. So I think we're going to be very strategic and look at how best to utilize capital in this particular time that goes on over the next, I think, it's 6 months. I think there are a lot of health care systems that we've talked to, as you would expect, are overwhelmed. They're trying to get through their 30, 60, 90 days. They are trying to figure out how to deal with the very next year or 2 years. And what we want to be is receptive to working with them in a good business format, and we have the capacity to do that. So we will be entertaining opportunities. But again, we want to make very, very disciplined decisions on capital.

Operator

Our next question today will come from Connor Siversky of Berenberg.

Connor Siversky

Quick follow-on to Nick's question earlier just in terms of your markets. I mean how do you look at your current target markets in the current environment? And then are there any MSAs that would seem particularly attractive at this stage, perhaps due to lower relative unemployment or higher median income? Any color you can provide as to how you're looking at market positioning in the future would be appreciated.

Scott Peters

Well, I mean, we looked at our markets. And as I said, we've gone through a really exhausting, diligent, concentrated process with looking at our tenants. And every particular conversation we've had as far as rent deferment or term extension has pretty much been a one-on-one conversation, case-by-case. We like our markets. I think the performance that you're seeing from our portfolio is going to indicate that the relationships that we've established and the market size and the depth of where we're at is going to do -- perform extremely well over this period of the uncertainty that we have certainly for the rest of this year. So from a market perspective, I'm very happy, and I think our management team is very happy with where we're at.

And we'd like to add, frankly. When we continue to expand and acquire assets, it will be in those markets that have performed. It will be with those health care systems. It will be with credit that's appropriate because you never really stress or you never really test credit until times of difficulty. And this certainly, I think, earmarked the most difficult time from a credit perspective. And as the numbers we have reported, frankly, we've been very optimistic about the prospects of the markets we're in.

Connor Siversky

Okay. And then on the development pipeline, correct me if I'm wrong here, but on the surface, it seems like these projects are still in process. I mean have there been any delays in development? Or any commentary that would suggest your GCs are running into issues, sourcing, equipment and supplies?

Scott Peters

No. This is another instance of where, over the last 4 to 5 weeks, we've, in most markets, except 2 or 3, we have continued to have our TIs, we've continued to have construction, we've continued to have that development move forward. So we have not yet been notified of any difficulties from a construction perspective, whether it be from a supply perspective or a scheduling perspective.

Connor Siversky

Okay. And last one for me on lease expirations. It looks like you covered about 40% of 2020 expiring leasable area in the first quarter. I mean, how are the conversations progressing with the remainder?

Scott Peters

Robert, do you want to talk about that?

Robert Milligan

Yes. I think as kind of Scott outlined earlier in some of the commentary, I think we're seeing certainly a lot of interest from tenants to stay where they are. When we were coming into this year, I think, we had very high expectations for what we could do from a new leasing perspective. And I think as certainly the COVID pandemic hit, I think, certainly, the focus of most providers and tenants have been how do we stay in place, now is not the time we want to be moving around, patients when they come back want to know where they are and where they're going to be. So I think the conversations we're having right now are -- have been very, very good. And so I think our level -- our expectation for retention certainly is for the rest of the year to be in the 80% plus type range, probably a little bit more optimistic on that than we were when we started the year.

Scott Peters

And I would add to the fact that we have seen extensions with certain tenants in regards to certain leases that, I would say, 6 months ago that we would probably would have said there's some uncertainty about this lease extension or that person expires in 2021, later 2022, and that conversation hasn't started yet. We've reached out to all folks in the next 2 years who had leases coming due, and we've been working with them on extensions. And frankly, we're seeing a much more favorable response to retention than we have had even the high retention and OPs we've had in the past, we're seeing that even better today. Again, based on the uncertainty, people just want certainty right now in a world of uncertainty.

Operator

Our next question today will come from Lukas Hartwich of Green Street Advisors.

Lukas Hartwich

The language in the press release kind of makes it sound like the dividend may be under review. Can you just provide some updated thoughts there?

Scott Peters

Given the standard answer, the answer, of course, is that the dividend is always looked out on a quarter-to-quarter basis by our Board and specifically by our investment committee. The move of our dividend to -- closer to our earnings release, they were simply a move to make it more compatible so that the visibility for all aspects of our business is something that we can present and evaluate at the time. As you can see that the amounts that we've talked about today from a rent collection perspective and where we are from a liquidity perspective, we feel very good about that. And so it was more a move of simply getting something more aligned. We had kind of been an outlier in the past by announcing our dividend a couple of months ahead of time. And so this is a good opportunity to just put something more in line from a consistency basis among most REITs.

Lukas Hartwich

Great. And then you provided some really helpful disclosure on rent deferrals. I'm just curious if rent abatements are part of the conversation with tenants today.

Scott Peters

Well, this is -- there's three types of discussions, and I would say 97% of the discussions that we have had have been extremely positive. And I -- that's something that 5 weeks ago what I would have said, my goodness, that's my biggest and greatest fear is that folks were going to be unreasonable or that there was going to be a complete calendar objective from both -- from a tenant and from the landlord. That has not been the case. We have, in fact, as I said, 97%, 98% of the folks we have talked to who have asked or who wanted to talk about rent, it's been different. And in most cases, it's been what we just need 1 month, we need 2 months, and in fact, we'll pay it back over the next 6 to 12 months.

There's a couple, I mean, there's always a few who just, frankly, think that there needs to be abatement and it's not going to be paid back. What we want to do is we want to work with folks where rational. We want to be reasonable. We want it to be in a win-win situation. But we haven't had discussions, and we don't have discussions about simple rent abatement.

The good news is that most of the physicians and most of the health care systems and most of the tenants have ongoing businesses. And they want to stay, they want to get back in place and they want to recover their business. And so the conversation is more about how do we do that? How do we work together? And right now, the conversation is a lot about how do we keep the buildings open, how do we extend hours, can you make sure that the janitorial is working and we want to make sure that the patients who are returning to feel comfortable when they get to the buildings. And so that is the majority of the conversation now.

Lukas Hartwich

Great. And then last one for me. Do you think the current environment will accelerate the trends of larger health systems consolidating smaller independent practices?

Scott Peters

Well, we've always talked about small practice. And I think that the conversation that we have had with small physician, 1 or 2 or 3 physician offices, I mean, they are very frustrated. And you can imagine not being able to work and being out of -- being staying at home and not being able to do what they do. And I think a couple of things coming from that. Number one, I think that if this comes back and if the country goes through this process for the next 6, 12, 18 months, the physicians and the health care systems will be much better prepared from a PP&E perspective. I think the governors and the states recognize that health care is not something that can be put on hold and it doesn't stay at home. It's something that continues.

And so I think that's the good news. The good news is that, looking forward, I think we are, from a physician health care system perspective, they are going to be able to access what they do more productively and have less of an impact regardless of perhaps how the pandemic plays out. So we're looking -- we're happy about that. And I think that that's how we're looking at is working with those tenants and having them move forward.

Operator

Our next question will come from Rich Anderson of SMBC.

Richard Anderson

Well, team and I hope everyone is doing okay over there.

Scott Peters

Well, we are. It's very hot in Phoenix. I guess it's harder when you're quarantined.

Richard Anderson

Dry heat, though. So I just want to get back to that 90% question that John asked at the beginning here. It sounds like a very typical month in a month of April that was anything but typical. A month that was shroud of concern through the entirety of the month. So I'm curious, maybe just to sort of dig into it, was there anything in that $98 million that kind of includes the presumption of payment for deferral plans that got done in April? And if the answer to that is no, or did you kind of approach your tenants and say, look, just pay your April rent and then we'll talk starting in May about a deferral plan, so you kind of wanted to kind of flip the switch instead of like a dimmer switch to all this. Is that kind of the way you approach it? I'm just curious, $98 million kind of read to me is particularly high.

Scott Peters

Well, Rich, I think we were surprised. I mean if you would have said at the beginning of April, and as we talk to our Board and had calls internally, we really didn't know what to expect. I mean, we are, of course, hoping for the best. But until we started reaching out to folks until we started seeing the daily receipts, which we track, we weren't really sure what we were going to see. The $98 million is actually $98 million, and it wasn't something that Robert or I or Amanda or any of the management team, frankly, were able to -- we didn't contribute to that in much of any other way other than reaching out, talking to folks, seeing where they were at, reaching out to the people who were looking for opportunities, for deferment or extend leases going forward. I think May, as we have stated, May is on track with our expectations, and we track that daily. And so that is, again, something that is a very strong positive for us.

So I don't know that we have been trying to make deals in any way whatsoever from a payment perspective. We've had, in fact, people who have reached out to us and said, "Would you be open to a discussion about a deferment or an extension of term?" And they've called back 2 or 3 days later, and called Robert and said, "Look, we don't need it. We appreciate the conversation. And in fact, that was something that really sit out for us, but we don't need it. We're good. We've got our funds from either the government or from other sources, and we're good." So that's where we stand right now. But it is a fluid process, Rich. I think every day we wake up, it's an interesting day. But that's how we've seen it so far. And Robert, do you want to add anything?

Robert Milligan

Yes. Just from a kind of typical expectations from adjusted numbers perspective. I think, certainly, our outlook with, call it, the 10% deferrals that are -- we've either approved or in discussion in total. I think our outlook is we'll have 90% collection, 88% collection, somewhere in that range for May, June and into July. But no, I think one of the other thing that just from a color perspective is the level of local physician payments was certainly much slower to start the month, and then we actually saw a number of them get funded through the PPP program. And so they ended up kind of pushing any discussions of deferrals out, to Scott's commentary.

So while it's certainly -- the number looks very typical, I think the flow of cash payments throughout the month was a little bit different. But it really did have a lot to do with the timing of some of the local physicians starting to see PPP funding and kind of flipping some of those conversations from a deferral to, okay, I've got funding now for the next two months. And if I have line of sight into elective surgeries and things like that, after that, we can put these discussions on hold. So...

Richard Anderson

Okay. All right. So the equivalent number next month for this month might be 90% or something like in that range and see how it goes from there.

Robert Milligan

That's right. Yes, that's our expectation given the deferrals and whatnot.

Scott Peters

And we've gone through it in detail, Rich. And again, things change. You can't predict the future. But just -- we've taken the time to go through this.

Richard Anderson

Yes, sure. Okay. So question number two, you use this language over the next 90 days. I think Robert, maybe it was you, Robert, that said -- or maybe it was you, Scott, that said $20 million is the 10%. Is that the dollar value of the 10% over the next 90 days?

Robert Milligan

Yes, that's right. Again, we have about $185 million, $180 million, $185 million of revenue on any given quarter. And so 10% of that is kind of in that $20 million range.

Richard Anderson

Okay, okay, okay. So that's $20 million per month. Got you.

Robert Milligan

No, no, not per month. That's $20 million in total. Yes. So when we're looking at it, a number of them, as we've had discussions, say, with specific tenants, we say, "Hey, we'll do this for you for two months." And then they feel good about getting back on track and paying. So we're trying to capture the totality of what we've granted in that.

Richard Anderson

Okay. All right. And now I'm also a bit surprised, maybe I shouldn't be, of the involvement of health systems into the process of deferrals. Is that coming off as a bit of a surprise to you? I can understand the physician groups, but those tenancies haven't been part of the discussions. Other REITs that have reported this sort of information. Any comment on that?

Scott Peters

Yes. We sat back about five weeks ago when it started and then we got back about three weeks, four weeks ago. We talked internally. We talked with our Board, we talked with our investment committee. And we have, as Robert pointed out, 75% of our rents was -- 61% was investment-grade or rated tenants. And we wanted to be responsive. This is not an issue of getting paid. We will get paid, and we feel very confident and they feel very confident. This was just basically a discussion that if they were short something, if they wanted to do a couple of months and take the time to get their feet underneath them, and this is something we could help them with. And again, it was only 5%. And then one is something and if we would have demanded that they pay us, I think they would have paid us. I don't think that's a good business perspective.

HTA is in -- this is the largest owner of MOBs for the long term. And this was an opportunity for us where we could generate enhanced enterprise value for our shareholders. And so I think the good business decision with a win-win was something we did. And I think it will pay tremendous dividends in the future, and I think shareholders will reap the rewards. And I know that, from an infrastructure perspective, it will make it easier for us to deal with those folks. They are going to be key players in health care. These health care systems are going to be the major players in health care going forward. So that's sort of the business of philosophy that we took and -- when we reached out to folks.

Richard Anderson

Okay. Good relationship management, of course, makes total sense. And then last question, for Robert, maybe you. How much of your antenna's up in terms of bad debt? I know there was a little chitchat here and there about rent abatements. But when you think about the collectibility, as this thing kind of goes further out, whether it's a cash situation or a noncash situation, I'm curious how much bad debt write-offs could become a part of the process.

Robert Milligan

Well, I think from an overall collectibility perspective, at this point, we certainly anticipate all the deferrals and whatnot are going to be very much collectible, especially given kind of the return of elective surgeries in patients in the physician offices and whatnot. From an underlying bad debt scenario, we review this on a monthly basis with our tenants. And certainly, there are certain tenants that don't pay us. So we take bad debt on a quarterly basis. And that's just a normal and regular thing.

I think as we shift to certainly the second quarter and going forward, I think from an accounting policy perspective, we're always very conservative in our view of what we reserve and what we have outstanding. And so I think as you get into an environment that's a little bit more economically volatile, I think, there is going to be heightened sensitivity about do we take a reserve on this? What's the appropriate amount of what we do? So just from a charge perspective, I think we'll certainly take a conservative approach as we look at it. But if it's from an amount or anything like that, I think it's too early for us to tell. But it is certainly something that we will be taking a conservative look at...

Scott Peters

Consistent with...

Robert Milligan

And we expect everybody else to do that.

Scott Peters

And Rich, I would say, as part of the process as we've gone through this case-by-case basis, even on the small physician side, we've looked at that, we've tried or not tried, but we've also, as part of a deferment. If we've been short on collateral or we've been short on a personal guarantee, that's a win-win for both of us. This is a two-sided equation. So we have also taken the opportunity through what I would consider to be to upgrade or to increase our collateral where appropriate. And so we've not just arbitrarily deferred or rent and not taking a look at that underlying ability to collect.

Operator

Our next question will come from Todd Stender of Wells Fargo.

Todd Stender

I hope you guys are okay.

Scott Peters

We are, and hope you are, too.

Todd Stender

All right. So I can see how tenant retention will be high over at least the near term, if not longer. But I would imagine that doctors don't have a sense right now of what maybe their operating are going to look like just with new procedures and protocols as they reopen. They probably have a sense of the backlog with elective surgeries, so maybe their top line looks okay, but operating expenses. So just seeing how confident you guys are and physician groups as they determine, and you guys determine, rental rates and annual escalators, at least over the near term.

Scott Peters

Right. Well, let's deal with the last one first. With the extensions that we're putting in place, with the new leasing we're signing, we're still getting the 3%. I don't think there's anything that we've looked at over the last 5 weeks that hasn't been consistent with the escalators and the rent expectation that we had prior to the pandemic. So as of now, I would say that we're consistent with, from a leasing perspective, both the underwriting, both the TI or free rent or whatever the situation may be from where we were before to after. I think that there's going to be an evaluation process. I think that's just a normal process of this. And it would be just unrealistic not to expect that something this severe that have happened doesn't have everyone kind of look and say, okay, how do I best operate? Is there additional expenses? What kind of space do I need?

I think it's going to be interesting to see with the new spacing requirements with the new -- making sure that patients are comfortable with coming into the office. It might need a little more space in some situations that physician groups need or want or expand to, or it might be I don't need quite as much space or so forth. So I do think that, that process is going to go forward over the next -- the rest of this year, frankly, and we'll just see how it plays out. And of course, try to do the best we can to adapt to however our assets need to from a leasing perspective.

Todd Stender

That's helpful. And usually, I'd just go right to Robert with this, but certainly start with Robert and maybe, Scott, if you have any comments. You've tapped the entire line of credit. But how long do you think you're going to budget for this in keeping that fully drawn? That's one. And what signs do you need to see to maybe be a little more comfortable in taking some of that cautionary move off the table?

Scott Peters

Well, Todd, that's not fair for Robert. So I'll answer that. This is Scott, since I'm probably the one that should take the responsibility for that, and do. This is my fourth experience given the events that are just unusual and completely unexpected. And we will -- we feel much more comfortable now. We wanted to see where the financial markets were. We wanted to make sure that our rents and our health care systems were stable and we could get a full grasp on what we were looking at. So we were cautious. We were very -- we took the action that we felt was going to make our shareholders for long term and put them in the best position. Going forward, we've already started to pay it back down. We feel very comfortable with our rent receipts. So you'll see that as we move forward here, get paid down to where it should be.

Operator

Our next question will come from Mike Mueller of JPMorgan.

Michael Mueller

Robert, I was curious for your FAD count that you put in the sup. How are you thinking about the treatment of deferred rents in that line item? Will they be stripped out to kind of bring you closer to cash in the spirit of the definition? Or do you make it a bit of an exception this time because it's a different situation?

Robert Milligan

Mike, I think that's going to be a conversation that we certainly work through as we go over the next quarter. I think our standard definition, which we've had in place for -- since we went public doesn't incorporate any kind of working capital considerations or anything like that, even though we do have some fluctuations quarter-by-quarter. So I think that's something that we're going to have -- I can't give you a clean answer on that yet. It's not in our standard definition, but it's certainly something that we'll have discussions with as there becomes a consensus throughout the REIT community.

Operator

Our next question will come from Daniel Bernstein of Capital One.

Daniel Bernstein

Again, I hope everybody is well. It seems so. I guess my question is, have you seen a difference in performance between on-campus and off-campus properties and especially in light of some, I guess, a little bit of a change in your portfolio more towards off-campus and maybe non-affiliated properties? So just trying to understand the difference in performance between on, off and maybe affiliated, nonaffiliated a little bit better.

Scott Peters

Well, I still think both assets have a tremendous place in the health care portfolio. I think this is really given off-campus or what we call community core, I think that's going to be even a stronger format of health care systems going forward, the ability to service patients under different situations. I know several of the health care systems we've talked to from an on-campus perspective, they were immediately -- they were very concerned and actually had to do things on MOBs because all the patients were coming on-campus to the hospital. And so it impacted, frankly, in some situations, in some cities of ours, our on-campus was more effective than our community core locations. But I think that that's going to be part of how the health care system unfolds, the access during situations like this, the access going forward for health care, I think it's going to be served in both locations. But I think on-campus is going to be something that health care systems evaluate.

Daniel Bernstein

Okay. And then, I guess, the other question I had really about -- you talked about your physician groups or hospitals asking for extended hours. Is that based upon -- they are scheduling already for elective surgeries or just their assumption that there's pent-up demand? I'm just trying to understand if the surgeries are already being scheduled.

Scott Peters

Well, the few folks that we've talked to, they're starting to schedule surgeries. Because in many of the states that we are located in, the elective process is now open. So there was actually conversations about we need extended hours because we're actually planning to be open for an extra 4 to 5 hours in the evening for the next 2 or 3 months. So it is something that they're focused on. I mean they want as much revenue to service their patients as quickly as they can. So that's what they are trying to do, and we're certainly being receptive to that.

Daniel Bernstein

Okay. Maybe just there's been some chatter or concern about changes in behavior. Well, people actually go back and take the surgeries. But it sounds like the physicians themselves are thinking that they're going to have some pent-up demand that requires the extra hour. So that's really interesting.

Scott Peters

Yes. And I think it's a blend as we talked before. I think they recognize the fear that you just talked about. And they're going about their job of trying to make sure that they try to overcome from that fear so that those elective surgeries or those patients come back as soon as they can.

Daniel Bernstein

Okay. I guess my view is telehealth isn't that much of a threat to MOBs. I see it as complementary. But again, that is a concern I've heard from investors. Is that something you're looking at as a threat to the MOB demand? Or is that just not the right way to think about telehealth?

Scott Peters

Yes. I think telehealth has taken a couple of steps forward. I think that anytime they've given a situation like this, people have adapted and they utilize the telehealth as best they can. I don't think it replaces MOBs. In fact, I think as you said, I don't think it's going to be that significant. I hope, as we've always talked about things, is that the more folks that get access to health care in whatever form will then lead to more -- to them getting the care they need, which then would go back to seeing the physicians in person because that's the only way they can truly get a sense of what someone's condition is. So I think it's a progress, and I think it just flows into the health care system as we see it going forward.

Operator

Our next question today will come from Vikram Malhotra of Morgan Stanley.

Vikram Malhotra

Sorry if I missed this, but any particular concentration in the deferrals by specialty, meaning like primary care? Or any specific specialties you can call out?

Scott Peters

Robert, do you want to answer that?

Robert Milligan

Yes. We didn't -- we haven't really seen anything specific by specialty per se. I think as we've looked across the board, it's been interesting to see the deferrals of probably -- it's been about a 50-50 split actually between health systems and local physician practices for the most part. Many of them actually investment-grade, not-for-profit health systems that certainly are focused on treating COVID patients. They're spending a lot of capital on things like that. And so looked at it from a timing perspective and looked to us as partners, which we did.

And I think on the local physician side, I don't think we saw anything specific. Certainly, surgery centers were one that did stick out, that asked for us to work with them. But we looked at the underlying profitability. They're -- again, they're already rescheduling the surgeries. So we felt pretty good about the creditworthiness of that. But I don't think there's been anything from a specialty perspective that we've seen. It's been a mix of primary care and specialists kind of across the board.

Vikram Malhotra

Okay. And then just -- again, if I missed this, I apologize. But on -- I know right now, it's sort of maybe tough in any segment to kind of understand where pricing per foot or cap rates has are sort of trending. But I'm just curious if anecdotally, you haven't -- you've heard anything or you've seen anything that you can just give us a sense of where you think cap rates or per foot values are shaking out for MOBs?

Scott Peters

Well, we haven't really seen any data points that we've heard, and I will say that we haven't substantiated it. But we've heard some folks in the industry that some of the folks in the MOB side of the equation are still buying at cap rates that were pre-March. And my view is that there's a lot that goes into to the appropriate cap rate for an acquisition, and at this particular point in time, capital needs to be very, very disciplined in at use. And I would expect that there will be opportunities from a relationship perspective that we'll be able to be utilized to get what would be a little better cap rate than what you would normally have gotten pre-March. So I think this is a part where patients and prudent decision-making comes into long-term value. And that's what we're going to try to do.

And as you know, our investment committee looks at each one of our positions. So that's a process that we have from a discipline standpoint. And we're still active looking around. And if we see something or if we evaluate something that's going to get strong returns, be accretive to shareholders long term, we're very fortunate we're able to do that. But it's -- right now, it's a valuation point that we're probably in.

Operator

Ladies and gentlemen, at this time, we will conclude our question-and-answer session. I'd like to turn the conference back over to Scott Peters for closing remarks.

Scott Peters

Well, I'd like to thank everyone for questions and everyone for being on the call, and we look forward to talking to you at the next earnings call. And we will certainly update everyone or the market on anything that arises that changes any of our thoughts and processes that we've talked about. So thank you.

Operator

The conference has now concluded. We thank you for attending today's presentation, and you may now disconnect your lines.