Healthcare Realty Trust Incorporated (HR) CEO Todd Meredith on Q4 2021 Results - Earnings Call Transcript

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Healthcare Realty Trust Incorporated (NYSE:HR) Q4 2021 Earnings Conference Call February 22, 2022 12:00 PM ET

Company Participants

Kara Smith - Investor Relations, Manager

Todd Meredith - President and Chief Executive Officer

Robert Hull - Executive Vice President, Investments

Kris Douglas - Executive Vice President and Chief Financial Officer

Conference Call Participants

Juan Sanabria - BMO Capital Markets

Jordan Sadler - KeyBanc Capital Markets

Nick Joseph - Citi

Richard Anderson - SMBC Nikko

Tayo Okusanya - Credit Suisse

Mike Mueller - JPMorgan

Operator

Good morning, and welcome to the Healthcare Realty Trust Fourth Quarter Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Kara Smith. Please go ahead.

Kara Smith

Thank you for joining us today for Healthcare Realty's fourth quarter 2021 earnings conference call.

Joining me on the call today are Todd Meredith; Rob Hull; and Kris Douglas. A reminder that 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 a Form 10-K filed with the SEC for the year ended December 31, 2021. 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, or 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 fourth quarter ended December 31, 2021. The company's earnings press release, supplemental information, and Form 10-K are available on the company's website.

I'll now turn the call over to our Chief Executive Officer, Todd Meredith.

Todd Meredith

Thank you, Kara and thank you for joining us for our fourth quarter 2021 earnings call. This morning we reported normalized FFO per share growth of 4% for 2021 over 2020. This solid growth was driven in part by our investment momentum, including record acquisitions of $756 million in 2021. These results were further compounded by the stability of our annual escalators, high tenant retention and robust cash leasing spreads.

Based on the strength of our 2021 results and our competent outlook for 2022, our Board of Directors authorized a 2.5% increase to our dividend. We have communicated our goal to grow the dividend for some time, and we are pleased to report this progress. Going forward, our ability to generate long-term sustainable dividend growth is bolstered by the quality of our portfolio and inherent strength of our platform, both the internal growth engine and our external investment model.

Our targeted investment approach delivered superior capital deployment opportunities in 2021. Cap rates for many portfolios priced below 5% last year, but did not line up well enough with our criteria and market preferences. In contrast, we acquired 44 MOBs in our target markets at an average cap rate of 5.3%. With these investments, we increased density in our existing markets, adding to clusters and high growth MSAs like Denver, Nashville, San Antonio, and Atlanta. It's worth noting the progress we've made in just the last three years. At the end of 2018, we had just two markets where we owned over 1 million square feet, Dallas and Seattle. Today, we have five markets with over 1 million square feet, including the additions of Nashville, Denver, and Los Angeles.

We also supplement our densification approach by selectively entering new target at markets. San Diego is a burgeoning success story for us, building on our nearby Los Angeles portfolio. We entered the San Diego market in 2019 with two MOB acquisitions, and we purchased two more in 2021, bringing us to $180 million invested in four properties today.

Our market focused investment strategy, natural increases our local knowledge and leads to follow on investments. But most importantly, it translates to improved operational efficiency and leasing velocity.

In terms of operational performance, the fourth quarter showed signs of momentum. Our build out times for new tenants stabilized in the fourth quarter. This coupled with inherent demand from our tenants led to a 40 basis point sequential increase in occupancy. In 2022, we expect occupancy gains to steadily improve same-store growth, NOI growth with the potential to exceed our embedded rent escalators of just under 3%.

As it relates to inflation, we have a strong track record of pushing rents in markets where rising replacement cost and supply constraints enable outsize rent growth. In 2021, two-thirds of our cash leasing spreads were between 3% and 4%, and over a fifth exceeded 4%. Our market focus and the density of our clusters strengthens our pricing power. And although, healthcare providers have faced many challenges, they're doing well financially. Healthcare providers continue to report strong earnings as improving payor mix more than offset inflationary pressures, including labor and supply cost. As cost control remains a focus for hospitals, the shift to outpatient becomes even more critical as they look to defend and grow their market share. We see this first hand and we are engaged in more development and development conversations than ever before.

2021 was a remarkable year for Healthcare Realty. Our success reflects the quality of our team and their collective efforts to make HR a clear choice for healthcare providers. Looking at 2022 and beyond, the quality of our portfolio, combined with the strength of our platform will drive attractive FFO per share growth and enable us to sustainably increase our dividend.

I'll now turn it over to Rob to provide more detail on our investment activity. Rob?

Robert Hull

Thanks Todd, and thanks everyone for joining us today. 2021 was a record year for investment activity at Healthcare Realty. In 38 separate transactions, we acquired 44 buildings totaling 2.1 million square feet for $756 million at a blended cap rate of 5.3%. All of these acquisitions were in our target markets, with nearly 75% of them expanding a cluster. Property clusters generate leasing and operational benefits that over time drive incremental growth beyond our going in cap rates and spur future acquisition and development activity. Our work is the product of our team's intentional focus on identifying buildings we want to own through data-driven market research, deep industry relationships and local market knowledge. Further, about 60% of these purchases were directly sourced through longstanding relationships formed by our team.

Notably in Denver, we acquired eight MOBs totaling 510,000 square feet. We now have 20 properties totaling 1.3 million square feet in this fast growing market, which is now the fifth largest in our portfolio. We are able to offer perspective tenants, an expanded mix of varying price points with on adjacent and off-campus buildings.

Our fourth quarter activity of 298 million pushed us well past the $700 million high end of our full year guidance. We targeted each acquisition because of its location in a fast growing market with an opportunity to build scale alongside a leading healthcare provider. Two-thirds of these acquisitions expanded existing clusters.

As an example, in Nashville, we acquired four buildings and a three-acre land parcel for future development for $106 million. Two of these buildings represented our initial investment adjacent to two separate hospital campuses where we see a path to add nearby complimentary buildings over time.

The other two were recently built and sit strategically off-campus between two Ascension Saint Thomas hospitals. In this corridor, we now own eight buildings and are developing a ninth that together will total over 1 million square feet. In San Antonio, we acquired five properties for $57 million through our joint venture with Teachers. Four of these buildings are adjacent to tenant health, north central Baptist Hospital. And within a mile of 120,000 square foot MOB we developed and own adjacent to ACAS Methodist Stone Oak Hospital. We now own 260,000 square feet in this cluster and almost 700,000 square feet in San Antonio overall.

Depositions remain an attractive source of funds for reinvestment. We selectively sell properties to continually refine our portfolio, particularly in markets or clusters, where we no longer see a clear path for future growth. For the year, property sales totaled $188 million at a blended cap rate of 4.9%.

Our development team remains active. We are nearing completion of a $34 million redevelopment in Memphis where we are 99% occupied and our $12 million, 100% lease building expansion in Tacoma is scheduled for completion at the end of this year. At our Nashville redevelopment, demolition work continues and vertical construction is expected to commence later this summer. This redevelopment is 50% prelease with notable additional leasing activity and is part of the over 1 million square feet in the Nashville corridor I mentioned earlier.

Looking ahead, we are finalizing terms with the leading system in Texas for an on-campus development that we expect to commence later this year. Once completed, this will be our second building on this campus and the fourth in this cluster for a total of 350,000 square feet. We are also engaged with two other health systems in Georgia and North Carolina regarding several projects as each system looks to build market share by continuing to invest in outpatient services.

We have been intentional in growing our investment volumes over the past three years, building our pipeline, expanding our team and refining our processes. This culminated in last year's acquisition volumes of over $750 million. Our investments team continues to assemble a robust pipeline as we start 2022, with one acquisition completed the date and over 300 million under contractor LOI that is expected to close in the first half of the year. Our acquisition guidance of $500 million to $750 million represents our current expectations for 2022 as we continue to grow our pipeline.

Now, I'll turn it over to Kris.

Kris Douglas

Thanks Rob. Improving same-store performance and an increased acquisition pace throughout 2021 generated reliably strong results. Normalize FFO per share increase 4% for the full year and 5.4% for the quarter. Looking forward, we expect earnings momentum to continue, which supported the dividend increase that was announced last week.

Fourth quarter same-store NOI grew 2.7%, excluding the deferral reserves that were repaid in 2020. Our full year same-store NOI was 2.3%. This includes the impact of a 30 basis point decrease in average occupancy, which has a two for one [ph] basis point impact on our same-store NOI growth. Sequentially, our occupancy rebounded in the fourth quarter with a 40 basis point increase in period end in same-store occupancy. This absorption will benefit us moving into 2022 and allow our same-store NOI growth to return to levels at or above our contractual escalators of approximately 3%.

Operating expenses increased 1.6% this quarter. This was below our historical average as a result of successful property tax appeals in Colorado. When normalizing for these tax refunds, operating expenses increased 2.4%, which was in line with our full year operating expense growth. The property tax refunds were credited to our tenant's expense reimbursement, so there was only marginal benefit to NOI growth from these appeals.

Embedded portfolio growth drivers remain strong, which is positive signal for future growth. Same-store cash leasing spreads were 3.6% for the full year, well above our in-place contractual escalators of 2.93%. The consistency of our cash leasing spreads and rent bumps over the past two years shows the resiliency of our asset class and benefits of our high-quality portfolio in major growth markets. And as we look ahead, we see rising demand for outpatient space to serve the aging population, balanced with a consistent, but reliably low supply of new construction. This backdrop supports the steady internal growth investors who've come to expect and appreciate from MOBs.

Regarding our balance sheet and liquidity, we continue to maintain a flexible capital structure to accretively fund our external invest investments. During the quarter, we settled $90 million of forward equity, sold $74 million of properties and generated $40 million of proceeds from our joint venture. We ended the year with debt to EBITDA within our guidance range at 5.4 times.

The FAD payout ratio for 2021 was 88.1%, below the 90% target we had identified at the beginning of the year. We expect our portfolio to deliver consistent growth in the years ahead, which will drive long-term improvement in our payout ratio. With this backdrop, our Board approved a 2.5% dividend increase last week.

Looking ahead, the visible internal growth drivers in our portfolio combined with our flexible balance sheet, attractive investment pipeline and consistency of demand for outpatient care will generate meaningful per share growth in 2022 and beyond.

Operator, we're now ready to open the line for questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. [Operator Instructions]

Our first question today comes from Juan Sanabria with BMO Capital Markets. Please go ahead.

Juan Sanabria

Hi. Good morning. Thanks for the time. I just wanted to start with the investor pipeline. If you could just give us a little color on the split between on and off and how much is maybe thought of related to the TIAA joint venture. And if those numbers, the five to 750 are gross or not.

Kris Douglas

Yeah. Related to the pipeline, I mean, I think if you look at you're running -- kind going forward, looking at similar waitings as we've you've seen us do over the past several years you kind of in that 75, 25 range. And I think that you'll continue to see that let's do that this year -- excuse me. And related to the joint venture, I think that, as we've done -- since we started that generally been a little more heavily weighted towards off-campus. Some more of that will be done in the joint venture as we've done in the past.

Todd Meredith

And the acquisition volume is gross when we talk about the $756 million for 2021. So that's how we have been consistently reporting it in, since we formed the JV in 2020.

Juan Sanabria

Okay. How much would you expect to do via the joint venture, like $200 million-ish plus or minus, is that fair to assume that?

Todd Meredith

Yes. That's certainly how we really agreed to a go forward strategy in that joint venture. Obviously, it's flexible. That's just a target. And so far, we've been at or above target on average, but we're -- what 15 months or so into that, so far so good. But we think it could be that, and I think it could certainly expand as we continue to expand our appetite and our pipeline.

Juan Sanabria

Okay. And then just on the development pipeline, seems like you guys have good momentum there. You've got $25 million of land on the balance sheet. How big should we think of ground up development being kind of on an annual basis either spend, or completions over time? Is that strategy matures?

Kris Douglas

Yeah. I'd say that generally we're looking to start between $75 million and $125 million of new projects year in and year out. I think as we build up that -- those starts and you'll start to see our spend trend in that direct. We're having a number of positive conversations with health systems. So, we're optimistic that you will see a couple of starts this year. That'll move us towards that consistent level of spend. And as we've said before, our embedded pipeline is really where we draw most of our developments from. Those are opportunities that we control through either relationships or current land holdings that, or buildings that we own, expansions of buildings like we're doing in Tacoma right now, we're expanding the building by 25,000 feet based on demand. So, I think you can continue to see us develop in that manner, not necessarily going out and chasing RFPs.

Juan Sanabria

Okay. And just one last quick modeling one, if you don't mind. Any color you can provide on G&A expectations for 2022? I'm not sure if there's any pop given the return of travel, hopefully as COVID here fades or not.

Todd Meredith

Yeah. We provide some detail on that. And our components of expected FFO on the last page of our supplemental page, page 29. And so, you can see some more detail there. But there -- and I will point out there is a note, item of note on the G&A on that page that we did adjust the incentive comp program, stock based comp, and moved from a kind of backward looking restricted stock program to a forward looking RSU program that is more consistent in the industry. And as result of that, we are seeing about $3.5 million increase in G&A this year, just from kind of moving from a backward looking to a forward looking program. But that, and then also we have some expectation of increase in incentive comp as we see performance and same-store NOI and leasing continue to pick up. But those are kind of the major drivers that you see based off of that guidance for G&A for next year.

Juan Sanabria

Apologies I overlook at, but thanks for the color. Thank you guys.

Operator

Our next question comes from Jordan Sadler with KeyBanc Capital Markets. Please go ahead.

Jordan Sadler

Thanks and good morning. I just wanted to circle up on sort of -- the releasing spreads that you're seeing and maybe just the dialogue that you're having with tenants amidst sort of the spike in inflation that we've seen really that sort of, obviously, in the back gap of last year, but obviously, with the 7.5% prints in CPI in January, what's that dialogue like with the tenant when you're seeing sort inflation spike at that level, and then you're sort of negotiating new leases, are you trying to push tenants toward that higher rate to offset the inflation, at least on renewal rates or, maybe any sort of dialogue that you're having as it relates to even escalators, would be helpful. Thank you.

Kris Douglas

Yeah. Jordan, this Kris. As we look at it, you're right. That the prints that you're starting to see right now on inflation are going up. But we think we kind look at it over a little bit of a multiyear timeframe, because inflation's coming off of 7%, but it's with some lows that came -- going back to 2020. But if you look over two or three years, inflation's kind of running 3% to 4% and if you look over that same timeframe, we were -- we benefited and that's one of the things I think people appreciate of MOBs is the consistency kind of throughout the cycles. And so, we didn't see the drop that you saw in other sectors. And so, we're not really having to look for that same rebound. And so, if you look over that same two to three-year period, where inflation's got to run three to four, we are -- our cash leasing spreads have been running in that same range and we've seen some marginal increase in our rent bumps over that timeframe as well.

So, I think that that kind of speaks a little bit to the consistent demand for medical office. But over time is, if inflation runs through and it does start to increase replacement cost, we do think that that provides a backdrop for continued uplift in terms of our rental rates.

Jordan Sadler

Okay. And then just to follow up on the G&A, maybe for you, Kris as well, we have the $3.5 million of incremental expense you framed up as a result of the change in the structure here. Is that going to burn off? Is that the number we should look at 2023 as sort of $3.5 million deduct versus 2022 that because -- that's sort of the overlap or doubling?

Kris Douglas

No, it doesn't quite match up like that. It really has to do with what's burning off and what's coming on. And so really what you end up this year is a little bit of a double up as you ended the old program at the end of last year. And so, it's a balance with what the amortization, because we have five-year amortization of all of our old equity incentive programs. And so is those amortization burn off? It will be the net against that $3.5 million will be kind of the run rate that you'll see each year for our RSU. And so, we will see a decline. It won't be the same $3.5 million increase that we are seeing this year. But it's not a dollar for dollar reduction of the old plan burning off against the kind of that consistent $3.5 million per year moving forward.

Jordan Sadler

So, how much is in the number in 2022 for the old plan? How about that? Because I'm trying to figure out how much G&A should fall going forward because you're not going to have two plans in place, right?

Kris Douglas

No, you don't, but that's what I'm saying. It really goes to that amortization. And so, it's going to be by year, depending on. So you kind of have to go back and look at five years ago when those awards were given, what were the size of them compared to the performance. And so what's amortization that we'll build off. Off the top of my head, what will burn off at the end of next year is, somewhere between $1.5 million and $2 million. But happy to follow up and get more precise on that offline.

Jordan Sadler

And you mean this year, right? Burning off at the end of 2022?

Kris Douglas

Yes. Yeah. Yeah. Still -- I'm still thinking and talking 2021.

Jordan Sadler

Well, technically I guess you are talking 2021 today.

Kris Douglas

Yeah.

Jordan Sadler

Right. Thanks guys.

Todd Meredith

Thanks Jordan.

Operator

Our next question comes from Nick Joseph with Citi. Please go ahead.

Nick Joseph

Thanks. Maybe similar question on inflation, but just in terms of -- if you're seeing any change to a buyer interest or underwriting for deals either given inflation expectations or the rate outlook, if you've seen anything change over the past few months relative to where it was for most of last year.

Todd Meredith

No, I would say Nick, generally not. I think MOB -- the sector itself is enjoying obviously a lot of demand, a lot of capital. I think certainly some people may take that and say, we can underwrite a little more aggressively just because of the lift. And certainly, I think our view is, as we described, we see some potential for occupancy pickup in 2022, but also continued strength in our cash leasing spread. So all those things help and I think that just bolsters the demand for MOB and I think it's important what Kris said, that people that come into this space have to have that perspective that, Hey, we didn't drop in 2020. And therefore, this is about maintaining that strength rather than going through the cycles of down 10 up 10 and that kind of thing.

For us, one of the trends that we've seen, just watching our cash leasing spreads as a sort of indicator, is looking at all the markets. So, if you kind of look across about 30 markets where year-to-year, we have renewal activity that would give you cash leasing spread data. We're really seeing nice strength of those that are markets where we have above 4% average cash leasing spreads for the year. That's holding steady and growing a little bit. Even above seven, if you use that, just thinking about kind of current inflation numbers, that strength is starting to build.

And then conversely, I think just as important if you can see this in our cash leasing spread data in our supplemental, where we break it down, those that are negative cash leasing spreads, we really only had one market out of 30 that had an average cash leasing spread. That was negative was a pretty small amount of square footage. But just looking at sort of these indicators so we're seeing that strength -- that's an improvement over the last five years where we've had a few more markets. So you saw, I think over only 4% of our leases had negative cash leasing spreads in all of all of 2021. So really positive strength there. And you're seeing a lot more go to that middle of 3% to 4% average cash leasing spreads.

So, a lot of positive trends that I think really lead to potential strength. And Nashville -- we were looking at this -- Nashville's a great example. In the last five years, the average cash leasing spread of each year has not been less than 6%. So that's where you really see market dynamics, constrained supply, rising replacement cost, really driving the opportunity to use your pricing power and really move to market costs and replacement costs. This -- we obviously don't want to get into any kind of price gouging kind of thinking, we want to just work with what the real costs are that we're all facing. And I think that really will cause the lift naturally along with supply constraint.

Nick Joseph

Thanks. I appreciate that. And then, maybe just on off operations, I think you mentioned five markets with over 1 million square feet and the benefits associated with that, is 1 million kind of the magic number or where do you start to see those benefits of scale from a MSA?

Todd Meredith

Yeah. It's a good question, and we break it down further. I think Rob referred to a cluster in San Antonio that broke through 250, that's certainly a nice mark. And then he mentioned a corridor here in Nashville. That's I think we'll stretch that to about three miles rather than our two-mile, cluster definition over 1 million feet. I think 500,000 is clearly a break point that we look for. We're in about 12 markets with over 500,000 feet. So that's very strong as well. That represents probably nearly 70% of our NOI, which is very strong. So, we certainly -- as you've heard all the comments, we're always looking to densify, get that operational efficiency, get the leasing flow stronger. And then we see it kind of generating repeat investment and development opportunity, acquisition and development. So we do see a lot of benefits through that. So, you'll see us continue to drive that for sure.

Nick Joseph

Thank you.

Operator

Our next question comes from Rich Anderson with SMBC Nikko. Please go ahead.

Richard Anderson

Hey, thanks. Good morning out there. So, I just want to understand a little bit better on the inflation side. Are you -- is there a point that the market is kind of adjusting naturally to the inflation pressures that you're not explicitly using inflation as a strategy to reprice your rents? Is that the way to think about it? Like you're just taking what the market's given you, or are you using it as a negotiating tool at the risk of avoiding a gouging scenario as you described?

Todd Meredith

Well, I think you certainly use all the things that are at play and inflation is clearly front and center for everyone and you feel it in supply costs, replacement costs. So, it's not just sort of flagrantly using it to gouge, but it's just saying, Hey, these are -- I mean, we're a lot of times we're building out designing, building out a suite for a tenant and those costs are just up. So they see that that cost increase. But clearly we're pushing on those rents where we think it makes sense, but it's a balance between retaining tenants, attracting tenants, really watching where market rents can be.

So, it's a balance as you know, and obviously we work with sort of a different dynamic in the MOB business where you're working with these independent groups who also have very strong ties and productive relationships with the hospital that you're associated with. So, again, there's -- if you start pushing beyond the reasonable level, it can backfire on you. So, it's navigating that, but using the real rise in cost pressures to your advantage.

Richard Anderson

Market in any places like do you -- are you able to get above market or are you kind of just follow the market?

Todd Meredith

We think generally follow the market. And we say that because if you look at the majority of our cash leasing spreads tend to be 3% to 4%. And we think that's very much in line, as Kris said of a little bit longer view of where inflation has been, especially when you talk about replacement costs, building costs, that easily runs 4% on average over an extended time period.

Kris Douglas

And Rich, I might add there, as you think about the inflation, you kind of have to break it into the different buckets of where it may be showing up. So inside of our operating expenses, for the year we were at almost 2.5%, which kind of at the higher end of our historical average, and we'll have to watch what happens this year, but it could trend up a bit from there, but we have -- 90% of our leases have some type of pass through of operating expenses. And so, that is getting -- is getting passed through and picked up by the tenant. And that's beyond what we're talking about in terms of base rent and cash leasing spreads.

And then a second piece is we are looking at releasing and frankly probably more acute with new leases is that we're typically providing an allowance for the TI to the tenant. And many, many times -- almost most of the times the tenants end up coming out of pocket for TI costs over and above our allowance. And so, there is inflation in terms of the construction cost for the build out, the tenant may already be absorbing that, but not being reflected inside of our rents. Now, if we're being asked to take on more of that TI, we certainly will be looked for commensurate term for that. We run everything on an IRR basis. And so, that's where you could see some rent increases. But -- so, I guess just wanted to kind of point out there that there's multiple places that it may show up. And may not all be flowing through, as you look at cash leasing spreads.

Richard Anderson

Are you at all temp it to intertwine CPI into escalators going forward? Or is that just too shortsighted? You think things will settle down. It's better to have primarily a fixed bump sort of structure.

Todd Meredith

We think because of our portfolio in multi-tenant nature much shorter lease terms, operating nature of our portfolio, the fixed bumps work better. You get more opportunities more quickly obviously to do -- to reset those through the cash leasing spread. But I think anytime we're talking about something that would be sizable leases, single tenant, or otherwise that are 10 years plus, I think that starts to become a real discussion. And then, of course, you get into the floor and the cap discussion beyond that. So, I think for the vast majority of what we do, we're comfortable with fixed on the shorter term lease role that we have.

Richard Anderson

Last question for me. Disposition guidance is $100 million or so, you started the conversation off talking about portfolio deals and portfolio premiums in terms of cap rates. I'm curious if -- do you have anything in your portfolio that boy, if you could sell, a big chunk of it all at once and get a substantially lower cap rate out of that, assuming you had a -- kind of a use of proceeds immediately thereafter, is that something that you kind of have keeping warm on the sideline in case it's needed or, are you kind of doing the one off asset by asset model like you are in the acquisition side?

Todd Meredith

I think that we're continuing on with the kind of asset by asset. I mean, we're selectively optimizing the portfolio where we can, looking at markets, where we want to be and grow and those that we don't want to be in -- looking that there's a good opportunity and the strength of this market to exit that market or even a cluster. We're taking advantage of that. And then turning and using it as a good source of funds for the pipeline that we have. We have a strong pipeline. And looking at that as another way to translate that into accretive transaction.

Kris Douglas

Rich, I would also add that I wouldn't say there's enough in our portfolio that would really garner that amount of scale where you've seen some of these portfolios in the hundreds of millions, half a billion or more. We just don't have that, that we're looking to rotate out of. It's more what Rob said, it's more targeted. And so, I think if we were to do something from a capital recycling rotation, accretive capital raise standpoint, the JVs always an option for that. We looked at that early on with the JV of doing a seed portfolio. We can always do that, but at this point that's not really the plan.

Richard Anderson

Okay. Great. Thanks guys.

Todd Meredith

Thanks Rich.

Operator

Our next question will come from Tayo Okusanya with Credit Suisse. Please go ahead.

Tayo Okusanya

Hi, afternoon everyone. My question is more around again the backdrop of the story in the MOB space again is kind of -- we're kind of in the middle of the aging baby boomers, which should drive demand for MOBs. But then take a look at 2022 guidance. Again, there really isn't any real growth in your same-store occupancy 2022 versus 2021. There really isn't any real growth in kind of development outlook for 2022 versus 2021. So, I'm just kind of curious against that backdrop, why we don't see some acceleration in either of those two trends.

Todd Meredith

Yeah. Tayo, I'll speak to the occupancy. When we give our occupancy guidance, all that's on a trailing 12-month basis. And so, it's kind of a trough to peak issue that you're running through throughout the year, given that we kind of bottomed out there in the third quarter of 2021 in terms of our occupancy. So, we are certainly expecting sequential absorption and absorption throughout the year. But when you kind of run that through the trailing 12 months, that's kind of the phenomenon that, that runs through to the guidance. But we certainly expect to be driving absorption.

And maybe another place to see that in our guide -- our components of expected FFO page in our supplemental is the same-store guidance. The upside of that range currently is three and a quarter. And clearly that from our view is upside from occupancy adding to the fundamentals of the portfolio. So, certainly, we have occupancy in our sites and expect -- you heard us talk about some pickup in the fourth quarter and continued optimism about that in 2022. So that's certainly in our view.

And then I think on the development side, development is one of these long-term plant, the seeds, you're farming the field and it takes a long time, but as I mentioned, and I think Rob added to, we've got more conversations than ever, and it's more than just conversations. We've got several very active things that we'll be adding. You've seen us just in the last couple quarters add a couple things to get our current active pipeline over $100 million. We think that will grow this year for sure. And keeping a very steady pace perfectly every year is always a challenge, but we're very optimistic about it. So, we -- I would say on both fronts, we're much more positive than maybe you've picked up so far.

Tayo Okusanya

Gotcha. I guess maybe providing that data on a trailing three-month basis going forward would also kind of be helpful just for us to kind of see that progression. But again, I think another follow up question I do have is again, the same-store cash NOI guidance of 2.25 to 3.25. What would result in the lower end of that guidance range? Like where you be closer to two versus higher versus closer to three?

Kris Douglas

Yeah. That would be -- if the occupancy didn't rebound as fast or if we did see an uptick in operating expenses, that's not really what we are expecting. And we do have the pass throughs that I talked about earlier that that can help to offset that. And it's really kind of going -- that's kind of where we are today and the expectation is coming off of kind of those numbers through the year of growing back up towards that top end, that's also kind of a trailing 12-month that we look at. So, you've got to get some of those historical comps out of your trailing 12-month to get up to the -- to the top end through the balance of the year.

Tayo Okusanya

Okay. That's helpful. And then last one for me, the route [ph] for lease renewals versus new leases is kind of -- is dramatically different. I mean, renewals about four years, new leases about six and a half years. I'm just kind of curious why there's such a big difference between the two.

Kris Douglas

Yeah. It really has a lot to do with the build out of the space. On a renewal there's minimal TI that's associated with that, hopefully just paint carpet, unless they're looking to do something a bit more substantial. But on a new lease there's going to be a substantial amount of TI. As I mentioned earlier, a lot of times the tenants are coming out of pocket for a portion of that. So, as they start looking at making that commitment and thinking about the amount of capital they're putting in place, and so the -- how long they're looking to kind of amortize that cost and that commitment to this new location, it just naturally ends up being a longer lease term.

Todd Meredith

And Tayo, so I would say -- we've said this for a long time, and I think if you pulled up our supplemental from five years ago, you'd see a very similar pattern. So, it's really behavioral. It's tenant behavior based on the elements that Kris just described. We're not out trying to push longer on the new versus renewal, but it just makes sense, given what's going on the build out the recouping of initial investment.

Tayo Okusanya

Gotcha. Okay. Sounds good.

Operator

Our next question comes from Mike Mueller with JPMorgan. Please go ahead.

Mike Mueller

Yeah. Hi. I guess, first, what are the attributes of the 11% or so of leases where you didn't get at least the 3% bump on them?

Kris Douglas

I would say it's just -- specifics of any specific deal. We like to say we keep up with market, but you also have to recognize the competitive dynamics of where you are in the lease. And so, it's one of those -- it's kind of like a batting average. You're not going to connect or hit the homerun every time, but we think that kind of what we've shown over the years with way we've refined the portfolio is that we've been able to increase the propensity of those positive cash leasing spreads, that's really helped us over time improve the average.

Todd Meredith

And Mike, maybe just to give you an example. I mentioned there was really only one market where we had negative cash leasing spreads in all of 2021, and that happened to be Miami. And you would look back -- if you look back at the prior four years, our cash leasing spreads on average were between or 44 and 86. So, it's not as though we're worried that Miami is suddenly in trouble. And it was a very small volume. It was actually the smallest volume of renewals that would have spreads in those five years. So sometimes it just, as Kris said, comes down to a small data set, a unique situation not a concern.

Mike Mueller

Got it. And then, Todd, your comment, I think the term you through out there was sustainable dividend increases. And I guess on a go forward basis, how should we think about dividend increases? Does the Board want this to be an annual occurrence or just periodically, but more regular than what it has been? How should we be thinking about that?

Todd Meredith

Sure. Last year was our initial increase in a long time, a little under 1% just to signal how important we think that is. And then this year, obviously getting more on a run rate level of growth. That's certainly a view that we want be reviewing that and doing that annually, recommending that to the Board and the Board certainly has that objective. But obviously, it's an evaluation every year. So, I would say absolutely a focus on that. But clearly also a goal of reducing the FAD payout ratio, which Kris talked about. So, it's a combination of all that, but certainly the objective is to make that annual.

Mike Mueller

Got it. Okay. Thank you.

Todd Meredith

Thanks Mike.

Operator

Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Todd Meredith for closing remarks.

Todd Meredith

Thank you everybody for joining us today. And we'll look forward to seeing many of you at some of the upcoming conferences here in the next month or two. Take care.

Operator

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

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