Healthpeak Properties, Inc. Q2 FY2020 Earnings Call

Greetings, and welcome to Physicians Realty Trust Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Bradley Page, Senior Vice President, General Counsel. Thank you. You may begin.

Thank you. Good morning, and welcome to the Physicians Realty Trust second quarter 2020 earnings conference call and webcast. Joining me today are John Thomas, Chief Executive Officer; Jeff Theiler, Chief Financial Officer; Deeni Taylor, Chief Investment Officer; Mark Theine, Executive Vice President, Asset Management; John Lucey, Chief Accounting and Administrative Officer; Laurie Becker, Senior Vice President, Controller; and Dan Klein, Deputy Chief Investment Officer. During this call, John Thomas will provide a summary of the company's activities and performance for the second quarter of 2020 and year-to-date as well as our strategic focus for the remainder of 2020. Jeff Theiler will review our financial results for the second quarter of 2020 and our thoughts for the remainder of the year. Mark Theine will provide a summary of our operations for the first quarter of 2020. Following that, we will open the call for questions. Today's call will contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. They are based on the current beliefs of management and information currently available to us. Our actual results will be affected by known and unknown risks, trends, uncertainties, and factors that are beyond our control or ability to predict. Although we believe our assumptions are reasonable, our forward-looking statements are not guarantees of future performance. Our actual results could differ materially from our current expectations and those anticipated or implied in such forward-looking statements. For a more detailed description of potential risks and other important factors that could cause actual results to differ from those contained in any forward-looking statements, please refer to our filings with the Securities and Exchange Commission. With that, I would now like to turn the call over to the company's CEO, John Thomas. John?

Thank you, Brad. Thank you for joining us this morning. Like all of us, Physicians Realty Trust entered the second quarter of 2020 facing a global pandemic that threatened the physical and financial well-being of our families and clients. The pandemic has tested and unfortunately continues to test all of us in many ways. We are proud to report that the DOC team and our health system clients have endured the pandemic remarkably well and continue to serve our shareholders, teammates, and the communities we all serve with resilience and perseverance. As a health care real estate organization, the most important financial metric of performance during this time is rent collection. And as of August 3, we have collected 98% of cash billings for rent and operating expenses billed for the second quarter. We've also collected 97% of July cash billings, and August is off to a better start than any of the last four months. We continue to work with our tenants who represent the unpaid remaining accounts receivable and expect over time to collect a higher percentage of those remaining amounts. We are pleased to report the largest single tenant, representing 50% of the outstanding second quarter accounts receivable balance, is back in our offices providing health care services and has started paying rent again as of August 1. They are committed to getting caught up, and we will work with them to get these accounts receivable resolved as soon as possible while they serve their patients. We ended the second quarter with perhaps the strongest balance sheet we have ever had. Jeff Theiler, our Executive Vice President and Chief Financial Officer, will review our operating profit and loss and balance sheet statistics in a few minutes. We are proud to report the highest quarterly earnings generally that we've ever had. We also ended the second quarter consistent with our perpetual high occupancy and leasing. Mark Theine, our Executive Vice President for Asset Management, will share more details about our operating performance in a few minutes. Mark and his team have done an outstanding job of keeping our buildings open and occupied and more importantly, clean and inviting to providers and our patients seeking health care services. All of our buildings are open and actively serving patients, even if many of our markets have seen spikes in new COVID-19 cases. While we didn't make any significant investments in the second quarter, we continue to build our pipeline and seek new opportunities for investment later this year and in 2021. The investment market is active, and consistent with the reliability and strength of medical office real estate, pricing for new investments appears to be consistent with pre-pandemic pricing. In May, we commissioned a consumer survey in five of our largest markets, seeking information from consumers about their preferences when seeking health care services. Over 76% of those surveyed indicated they would rather see a physician in a medical office facility, a mile or more away from a hospital. In fact, 22% of those surveys said they would delay seeking emergency care in a hospital setting out of concern that they would be exposed to COVID-19. These findings are consistent with our long-held interpretation of the data that consumers want convenient access to outpatient care services away from hospitals and when to go to the hospital campus when absolutely necessary. Our rent collections during quarter two are also consistent with these findings, as the providers located in our off-campus medical office facilities, anchored by a health system, were the most current and consistent with the rent payments during quarter two. We are very proud of our entire portfolio. But last month, DOC was honored by the international Building Owners and Managers Association, or BOMA, which awarded the Baylor Scott & White Charles A. Sammons Cancer Center the outstanding building of the year for medical office facilities worldwide. This attribute to property management and operational excellence, and we honor Michelle Morris, Susan Leinweaver, Mark Dukes, and Mark Theine for their leadership in earning this award, but more importantly, what they do every day for our providers and their patients who need access to our buildings to deliver world-class health care. Physicians Realty Trust also completed another milestone in quarter two with the release of our first annual Environmental, social and governance or ESG report, published on our website. Our Board of Trustees and team are committed to an ongoing process to be transparent regarding our ESG successes as well as areas where we can continue to improve. We want to be held accountable by our shareholders and the partners we serve. As part of our culture, we have also formalized and enhanced our ambitious goals and efforts toward achieving success in diversity equity and inclusion. We are determined to be leaders not only in Corporate America, but in our society as well. Sadly, recent events have once again shown us where we are deficient as a society and caused all of us to evaluate what we have or haven't done and how we can do better in our organization, in our country, and everywhere. DOC has always been committed to diversity and inclusiveness, but we haven't done enough. Our culture is committed to leadership and success in achieving our goals and more. Success will make DOC and the communities we serve better for our shareholders, team, our providers, and their patients. Jeff will now discuss our financial results. Mark will then share our operating results. And then we'll be happy to take your questions.

Thank you, John. In the second quarter of 2020, the company generated normalized funds from operations of $56.6 million, which was an increase of 42% over the comparable quarter last year. Normalized FFO per share was $0.27 versus $0.21 in the same quarter of last year. And our normalized funds available for distribution were $0.25 per share or $53.1 million, an increase of 26% over the comparable quarter of last year. We are pleased to have continued our strong operational performance despite the ongoing COVID pandemic, and strive to be as transparent as possible during this time, by publishing monthly updates since the pandemic began to accelerate in March. Our resilient cash flow is due to both our high-quality investment grade tenant base as well as the collaboration between our dedicated credit department and asset management teams, which has enabled us to analyze the financial necessity of each individual rent relief request and then identify the right action to take on a case-by-case basis. This has led to consistently high rent collections, as John noted in his prepared remarks. On the investment side, we had a fairly light quarter, as we try to determine where pricing will settle out, as investors weigh reduced economic activity against historically low interest rates. We invested $23.7 million, primarily consisting of construction funding for our existing pipeline as well as a $13 million mezzanine loan for the development of a building in Columbus, Ohio. In order to keep the company's foundation strong, we improved our balance sheet by raising $99.1 million in the second quarter on the ATM at an average price of $18.07 per share. This brought our second quarter consolidated debt-to-EBITDA ratio down to 4.6 times, which puts us in a comfortable position to navigate this period of uncertainty. At the end of the quarter, we had $70 million drawn on our revolving credit facility, which translates to additional capacity under the line of $780 million. As a reminder, we have no material term debt coming due until 2023 and minimal lease expirations and CapEx obligations over the next several years. So we believe we are in an excellent position in terms of liquidity. Finally, we have just under $5 million of cash on the balance sheet as of today, which is a normal amount for us to keep on hand to fund near-term operations. We don't currently feel we need to stockpile cash based on our current portfolio performance, but we'll of course keep a careful eye on this as the pandemic continues to evolve and adjust if necessary. To wrap up on operations for the second quarter, we generated MOB same-store NOI growth of 1.4%. Our G&A came in slightly under budget at $8.2 million, as COVID impacts have generally lessened our expense level. At this point in the year, we are trending to the bottom end of our stated full year 2020 G&A guidance range of $33.5 million to $35.5 million. Recurring capital expenditures came in at $4.8 million, which were also lower than budgeted at the beginning of the year. And we remain on track to meet our 2020 recurring CapEx target of $17 million to $19 million that we presented on last quarter's earnings call. I will now turn the call over to Mark to walk through our portfolio statistics in more detail.

Thanks, Jeff. Our mission to provide better health care through real estate has never been more important. Today, 100% of our facilities are open for care and the majority have returned to near pre-COVID patient volumes. While COVID-19 has continued to change our world, health care workers have heroically continued to offer compassionate care and keep pace with those changes. Similarly, our asset and property management teams have quickly adopted the change and collaborated with our health care partners to implement policies and procedures for social distancing, use of PPE, visitor screening, and enhanced cleaning protocols. From an operational perspective, the second quarter can be summarized by strong collection, retention, and execution. DOC's outperformance in terms of rent collection and occupancy compared to our peers further demonstrates the high-quality nature of our health care partners and the intrinsic value of our real estate investments. Notably, the off-campus affiliated segment of our portfolio has had the strongest performance in terms of both total percentage collected and pace of collections. This data demonstrates the strength and resilience of these properties, ultimately reaffirming DOC’s investment philosophy that the delivery of health care is shifting away from the big box hospitals reserved for the sickest patients to safe and clean facilities in convenient outpatient locations. Moving to strong retention, we completed a total of 179,000 square feet of leasing activity during the second quarter, highlighted by a 76% tenant retention rate, 2.8% renewal leasing spreads, and positive portfolio net absorption of 15,000 square feet. As part of these lease renewals, we have opportunistically executed a limited number of extensions, providing tenants with free rent in lieu of property improvements in exchange for long-term commitments to their suite. While these leases only total about 25,000 square feet, it is these types of mutually beneficial transactions that create exceptional long-term shareholder value. We expect MOB retention in general to remain strong for the remainder of the year as providers focus on safely increasing patient volumes while maintaining safe social distancing. Tours for new leasing have also returned, primarily with existing tenants looking to expand in hospital systems who continue to plan for outpatient growth. We are actively working with our health care partners on their outpatient strategies, adding 42,000 square feet of net absorption through the first half of 2020 across our 96% leased portfolio. Expirations remain limited for the next five years with less than 9% of the portfolio expiring in any year through 2025. This combination of high occupancy and low turnover results in stable, predictable cash flow and lower tenant improvements and leasing commissions, all leading to more funds available for distribution. This quarter, we proactively managed our recurring CapEx investment to 6.1% of cash NOI or $4.8 million and expect to fall within the $17 million to $19 million full year CapEx guidance previously announced. Our second quarter performance demonstrates not only our unique portfolio but our ability to remain focused even while prioritizing the health and safety of our team members and those we serve. Finishing with strong execution, I am extremely proud of our team's commitment to operational excellence, which was recognized by BOMA International, who selected the Baylor Scott & White Charles A. Sammons Cancer Center as the outstanding building of the year. To be very clear, this award is not an architectural design award, but rather the organization's highest worldwide honor to recognize excellence in property management operations, policies, community involvement, and ESG efforts as judged by an independent panel of real estate experts. These same property management practices and expectations are evident across all stock-managed properties and highlight another reason why hospital executives routinely select DOC as their long-term real estate partners. As we celebrate the seventh anniversary of DOC this summer, we self-manage six of our top 10 largest markets and continue to grow our award-winning property management platform. In terms of portfolio execution for the quarter, our MOB same-store portfolio generated cash NOI growth of 1.4%. A decrease in parking revenue in April and May had a 50 basis point impact on our same-store NOI growth, which would have been about 2% without the lower paid parking volume. Same-store occupancy continues to reflect a 21,000 square foot suite available for lease that was discussed last quarter. The remainder of the portfolio continues to grow according to the annual rent escalations as expected, which averaged 2.4% across the portfolio. To conclude, 2020 has clearly been a trying period for many types of real estate due to both the economic slowdown and physical distancing requirements of the pandemic. Fortunately, for Physicians Realty Trust, we have long-term leases, minimal lease expirations over the next few years, and strong liquidity to invest opportunistically. Today, we reaffirm our sincere gratitude and appreciation for all health care workers fighting this deadly disease and to our hospital system partners as we work together to provide a safe environment for health care delivery during this challenging time. With that, I'll turn the call back over to John.

Thank you, Jeff and Mark. As noted briefly already despite the spike of new cases in many of our markets, most notably Phoenix, Texas, and Atlanta, all of our facilities are open and operating including our outpatient surgical facilities. With increased access to personal protective equipment such as masks and gowns, renewed restrictions on elective or scheduled surgeries and procedures have been limited almost entirely to inpatient facilities providing inpatient care for COVID-19 patients. With stockpiling of PPE by all providers now, we continue to hear from our providers that they can serve non-COVID outpatients in our medical facilities while the hospitals focus necessarily on COVID and other emergent care. We're now happy to address your questions. Jessie?

Our first question comes from Daniel Bernstein with Capital One. Please go ahead with your question.

Good morning. So when I look at the June collections presentation versus the May, it's pretty clear that the non-investment grade collections have caught up with the investment grade. So I don't know if there's something specific that happened between the last presentation and now, but what caused that catch-up? Was it federal funding or the opening of elective surgeries? Just trying to understand that pickup in the collections on the non-investment-grade side which really made a difference in your reporting in the numbers versus I think estimates?

Yes, Dan. I don't have anything very specific to share. Most of our properties are investment-grade or located on the campus of an investment-grade hospital. Some of the smaller tenants took a bit longer to secure their PPP loans and Medicare Advance Funding. However, as of now for April, we have nearly no accounts receivable and for the entire quarter, it's over 98%. All our facilities are operational and consistently paying their rent.

Okay. And then I guess the other question is there has been some stress at the hospitals. Are you seeing any additional opportunities in terms of monetizations that might be popping up out there? Or maybe on the development side as well as hospitals probably could use some REIT funding?

Yes. I think that's something we'll see in time. There have been some hospitals out there marketing at least the idea of monetizing some buildings. I don't think there's been a lot of trades from that perspective. But what we are seeing is some new development opportunities that are starting to gestate and kind of in the market testing the funding levels at this point. So we'll see more of that we think in 2021, but we do have that expectation.

Our next question comes from the line of Nick Joseph with Citigroup. Please proceed with your question.

This is Michael Griffin on for Nick. JT, you mentioned in your prepared remarks building up the deal pipeline. Any sense of the size for the back half of the year and into 2021? And then do you see yourself preferring more of the acquisition route or continuing on the mezz loan funding side or kind of a combination?

Yes. Thanks for the question. I think it will be a combination. Activity is picking up obviously; an improved cost of capital certainly helps in that perspective and the consistency or I guess maybe the lack of volatility that we've seen over the last few weeks and would hope to continue to see from the results we just reported. But we've got both acquisitions, development, and some mezzanine financing opportunities in the pipeline. And as we just talked about looking for some health system monetization opportunities in 2021.

Thanks. And just on your current tenant makeup, you've got about 35% single tenant and roughly 55% to 60% multi-tenant. Do you like this mix? Would you prefer more or less exposure to one?

Yes. I think the mix has served us well. Some of the single-tenant facilities were the ones that had the busiest schedules in May and June. But again, back to a normal environment, I think it's a good mix for us. And it also kind of staggers out our lease roll as well. So we don't have a fixed percentage in mind. I think we look at all opportunities that we pursue with our existing and future health care system clients. And a lot of the single-tenant buildings in our portfolio are 100% leased to health system investment-grade tenants. So we feel really good about those.

Okay. That’s it for me. Thanks for your time.

Thank you. Our next question comes from the line of Vikram Mahotra with Morgan Stanley. Please proceed with your question.

Thanks for taking my questions. Maybe just one first a somewhat longer-term question. You obviously saw a big merger in the telehealth space a few days ago. Obviously, reported utilization of telehealth has gone up pretty dramatically over the last few months. Just wondering any updated thoughts on either anecdotes from your tenants or just yourself on kind of how telehealth may impact MOBs positively or negatively?

Thank you for the question. There has been a significant positive shift in telehealth. Many of our clients report that it has become an additional source of revenue, and they are finally being compensated for it. Telehealth enhances efficiency, particularly for our surgeons and oncology specialists who can conduct brief post-surgical check-ins with patients without requiring them to visit the office. During busy months like May and June, many surgeons also found time to do telehealth consultations from their vacation homes in July. Overall, it seems to be beneficial for everyone involved. While our portfolio includes some primary care and internal medicine, we have very minimal offerings in behavioral health. Most of our facilities focus on procedures that typically require the physical presence of both the patient and the doctor. We view this as a long-term opportunity and see potential for adapting our existing spaces to accommodate more telehealth services in the office.

Okay, great. Just a quick question regarding renewals and new leases. Have there been any changes in what tenants or potential tenants are requesting regarding lease structure adjustments? Are you looking for additional information or considering modifications to the lease structure? I know your rent collection has been strong, but I'm curious if there are any shifts in thinking about lease structure due to COVID.

Hey Vikram, this is Mark Theine. So, we've had great leasing activity through the first half of the year. As you know our portfolio just in general doesn't have a lot of lease expirations. But as we approach those renewals, we have not seen much change in terms of term. Obviously, we continue to try and push rate 2% to 3%. We've maybe seen a little bit of increase in requests for some free rents at the beginning. But if we do that it's in lieu of tenant improvements, and a lot of times we're still getting the same term. So, we'll continue to push forward on the 69 leases we have left to renew this year, which is about 1.4% of the portfolio.

Hey Vikram sorry. I wanted to add one thing. This is Jeff. The other thing that we've really been pushing for obviously we've had great success with our credit analysis of the tenants. So, certainly as we look to new leasing and renewal leasing, we're always making sure that we have as much visibility as possible on those tenant financials, so we can continue to monitor them and make appropriate decisions based on how they're performing quarter-to-quarter.

Okay. Thanks so much.

Thank you. Our next question comes from Michael Carroll with RBC Capital Markets. Please proceed with your question.

Yes, thanks. I'm not sure if you asked, I got jumped on late. So, I'm sorry if you already addressed this in your prepared remarks but I know your rent collections have been pretty strong around 98% in the second quarter. Can you provide some color on the 2% of tenants that didn't pay rents? And how is the company treating that within your books? I mean have you increased bad debt? I mean, is there concerns around those specific operators?

Hey Mike thanks for the question. Yes, we did address that in the beginning, but I'm happy to do it again because it's very positive news. So, about 2% of accounts receivable we have left over for the first quarter. The biggest part of that, over half of it is one tenant, and they have finally gotten back into their office, are busy again, and have started paying rent again. So, we've already picked up some of that second quarter accounts receivable from them, and we expect to fully collect that and get that resolved with them pretty quickly. So, that's the vast majority of that number. And the balance, we still believe, is collectible. So, we have not really adjusted our historical bad debt numbers at this point.

Okay, great. JT, can you share some insights about your investment strategy moving forward? The balance sheet looks much stronger, and you're previously mentioned pipeline building. Do you anticipate some of that activity could increase in the near term, or do you think you will remain more cautious for the rest of the year due to the ongoing uncertainty with COVID?

Yes, we've been careful. We still have a solid pipeline in place. Pricing and market trades have remained consistent with pre-COVID levels, despite higher capital costs compared to earlier this year. So, we're proceeding cautiously. We're currently focusing on some development opportunities from 2021. I do expect we'll have some acquisitions this quarter and in the fourth quarter, but they will be modest as we let the market stabilize. The outstanding results from our portfolio and other medical office portfolios in public markets are attracting even more capital into our sector. Competition is strong, but we're concentrating on direct off-market opportunities as much as possible.

Great. Thank you.

Thank you. Our next question comes from Connor Siversky with Berenberg. Please proceed with your question.

This is Keegan on for Connor. Thanks for taking my questions, guys. So first off, we saw some pretty positive material through your ESG report, but we're kind of wondering how this is going to affect your CapEx flow in the near future related to your in-place portfolio. Do you see opportunities to increase energy efficiency in some of your existing assets? And if that's the case what kind of timeline are you seeing?

Yeah. So this is Mark again. Thanks for the question. So first thanks for recognizing the ESG report and all the good work that team has been doing there. We're really proud of the report that we put out this quarter. So, as part of that report we committed $3.5 million to CapEx investments. That number is within our $17 million to $19 million CapEx guidance for the year. So if you look at our numbers for the year at the midway point we've invested about $7.8 million. So in the back half of the year we're looking at about $6 million per quarter to be within that range, and we expect to hit that. So the CapEx team has done an exceptional job at really evaluating and prioritizing our CapEx projects. And as it relates to LED upgrades as you mentioned, we did three of those already in the last year with several more in the portfolio. I think one of the interesting things about our portfolio and our leases is that some of those costs are actually eligible to be passed through and amortized into our leases and our operating expenses. So, we'll continue to invest in our buildings making them better from an ESG perspective, as well as the patient environment. So we're on pace and doing a great job. So thanks again for recognizing the ESG report.

All right. Thanks for the color there. And then to switch gears a little bit here. Obviously, you guys improved your leverage metrics pretty significantly. But in terms of net debt to EBITDA, are you comfortable where you're sitting at the moment? And if the acquisition market were to kind of loosen up again, what leverage range could we see through the end of this year and into 2021?

Hi, there. This is Jeff. Look, obviously we're in uncharted territory here with this pandemic. So we've been taking a very careful and conservative approach as JT talked about on the acquisition front and also on the capital side. So we're really looking at the environment month by month; we'll make adjustments as we see changes in the environment. But I think for right now, you can expect a pretty conservative capital structure and acquisition pace going forward.

All right. That's it for me. Thanks for your time guys.

Yep. Thank you.

Thank you. Your next question comes from Jordan Sadler with KeyBanc Capital Markets. Please proceed with your question.

Good morning, everybody. Wanted to follow up on that – on both the capital structure, Jeff, but then also on investments. So on the capital structure, it seems at these leverage levels and with this equity, I would argue that you're already in a pretty conservative capital structure position. But are you saying we could see it get more conservative, so potentially lower leverage here?

Jordan, look at this point in time it wouldn't – we don't think that would be the right thing. But like I said we want to monitor this month-to-month. So it's hard to make long-term projections right now. And so what we're doing is we're trying to be as conservative as we think reasonable for the environment, which right now, I think we're at that point. If things deteriorate, I mean certainly we could be more conservative on the capital front. If things get much better, we could get a little bit more aggressive on the acquisition front. So it's hard to make a long-term plan right now. So we're just trying to stay as safe as possible and as conservative as possible.

Okay. Makes sense. And then just in terms of investment. I'm kind of just curious on the perspective on whether or not there's an asset management opportunity available. I know that in terms of pricing, it's pretty similar to where it was pre-COVID but it suggests that there's still really an appetite in the market for these assets that you guys own. Is there an opportunity to sort of prune or monetize stuff you that are not your favorite children? And on the other side of things, where do you see if anywhere the opportunity in the market is there any dislocation?

Hey, Jordan, I think great question. The acquisitions we're working on again are kind of single buildings not portfolios not widely marketed opportunities but really direct negotiations with health systems or physicians that are tied to health systems and they own their buildings and are looking to monetize for various reasons. And then also development opportunities. I think hospitals have learned a lot over the last few months about kind of their infrastructure and their space needs and their kind of parking ratios, and parking the ability to keep patients segregated and things like that. So a lot of that learning is going into some new development plans on existing buildings we have, as well as some new buildings to be built. And most of those at least things we're looking at right now are kind of off-campus, health system, affiliated buildings. And as people want to spread out and kind of allocate their outpatient services to the most efficient locations. So that's the some of the learning and that's driving some of our kind of investment thesis in the near term. But monetizing or selling things, we have very little left in the portfolio that we were just kind of actively like to sell. It'd be a small dollar amount if we did. We would look at opportunities on a case-by-case basis. The one name that's been performing remarkably well in this quarter has been the LTACHs. And we've long said we'd like to sell those if we can get to the right pricing on those. In the meantime, they're paying the rent. They're high yielding. They're driving some good revenue and good profit for us.

So just as one last follow-up on the LTACHs since you raised it, I know there was a catch-up on the background Jeff sequentially. So I think that was booked into revenue this quarter. Can you just sequentially tell us what we should expect?

Yes, sure, Jordan. So you're right. There was an obviously the LTACHs they're cash basis. They repaid some back rent. They repaid some of the legal fees from the bankruptcy and real estate taxes from the bankruptcy. So there's about an additional $1.4 million of call it nonrecurring revenue this quarter from the LTACH.

And what about on the expense side nonrecurring expenses?

Nothing significant, nothing material.

Okay. Thank you, guys.

Thank you.

Thank you. Your next question comes from John Kim with BMO. Please proceed with your question.

Thank you, good morning. I was wondering if you could talk about the impact of any free rent on your cash same-store numbers. It wasn't really broken out this quarter. And if you think, it's going to have a more significant impact going forward? I think Mark mentioned that you're offering more free rent?

Yes, John. There's virtually none. There's been a very small amount of trading as part of lease renewal negotiations, which is pretty typical, either tenant improvements or free rent, with no modest or immaterial adjustments at all.

Can you comment on the acquisition environment as far as if you're seeing a lot more product being marketed today? As health systems potentially look to sell assets as a source of capital?

Yes. Currently, there is only one health system actively marketing a portfolio of medical office buildings, and to my knowledge, it hasn't been priced or traded yet. Most of the actively marketed portfolios in the acquisition market are trading at pre-COVID pricing, which has not been appealing to us. We have historically performed best by acquiring one or two buildings at a time in a strategic manner, and that remains our focus. The market is indeed picking up, with some transactions occurring, and we have several opportunities in our pipeline that we aim to finalize before the year's end, and possibly even before the quarter concludes. The influx of capital into the medical office building sector continues, driven by low interest rates, which is fueling a lot of activity.

And as far as what are your updated views on cap rates on off-campus affiliated versus on campus? And how that's trending?

We primarily use off-campus affiliated buildings, which should typically have values in the 7s and 8s range. However, we are currently seeing values in the 5.5 to low 6 range across our portfolio, and we don't differentiate between on-campus and off-campus. The off-campus affiliated buildings have been our best performers in terms of rent collection and activity levels. Although there was a slowdown in April due to PPE rationing, supplies have improved, allowing these facilities to be among the first to open. This is where care has been concentrated in states that are restricting inpatient services. According to CMS proposals for the next fiscal year, there is an increase in the number of outpatient procedures that can be covered under Medicare, with higher reimbursements serving as incentives. We are very optimistic about this trend, especially for off-campus affiliated buildings, and overall, all of our buildings are performing well.

Last one for me is, in June I don't think you had any rent deferral. I'm wondering if you had any in July or any change in deferral requests from your tenant?

No, we haven't done any deferrals. One significant tenant that we supported throughout the quarter has resumed paying their rent. They tend to catch up on their accounts receivable that accumulated in the second quarter. They are back in their space and quite active, and we expect to resolve matters with them over time. This situation accounts for a little over 1% of our accounts receivable balance for the quarter, and we are also working with a few other small tenants to help them catch up. We have not seen any increase in bad debt and there are no deferrals in place. We are reporting cash collections, which include cash bills and cash collected.

Got it. Thank you.

Thank you. Your next question comes from Michael Gorman with BTIG. Please proceed with your question.

Thanks. Good morning, guys. John, I just wanted to go back for a minute and kind of get a better sense for what's going on the ground with some of the practices. You mentioned last quarter they kind of backfilled the pipeline so that the surgical numbers could continue. We continue to see the national news about cancer diagnoses being down, different disease diagnosis rates are down. I'm just trying to triangulate the comments that maybe some of the physician flows are back to pre-COVID numbers with just other things that we're hearing out there. So I was wondering if you could just give a little bit more color on that and maybe what some of your practices are seeing in terms of like surgical pipeline numbers.

Yes, that's a great question, Mike. Regarding the surgical pipeline, earlier in May and June, we heard that many were extremely busy catching up from March and April, but they were uncertain about their schedules for July and August. Currently, they are all reporting very strong schedules for both July and August, and August is also fully booked. On the oncology front, those facilities consistently saw high activity and were not significantly restricted. We had to coordinate with tenants to ensure a clear pathway from cars to treatment areas, but they have remained busy. The diagnostic care in oncology and cardiology has been a significant concern for patients over time, yet we have not noticed a decrease in volume at our facilities. Our oncology facilities have always maintained consistent occupancy and rent. Hospitals are encouraging patients not to postpone heart care, cancer care, or routine diagnostics, and we are starting to see an increase in patients. I apologize for going on at length, but the long-term effects won't be clear until next year. We were operational on Saturdays, and while there is some inefficiency on the surgical side due to testing requirements before patients enter, we are working to facilitate that. This approach works well at our off-campus facilities where we have more parking space for such activities, making Saturday surgeries quite common.

Okay. Thanks. That’s very helpful. Appreciate it.

Yes.

Thank you. We have reached the end of our question-and-answer session. So I'd like to pass the floor back over to management for any additional closing comments.

Again we know it's a very busy day in the earnings world, but we really appreciate your time and attention today. I just hope all of you will stay safe. We're all wearing masks and checking our temperature coming into our buildings both as the best practice for our office but also for working with our health system clients and tenants to help bend this curve back down. So be safe and thanks for your time.

Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation, and you may disconnect your lines at this time.