Healthpeak Properties, Inc. Q4 FY2020 Earnings Call

Greetings and welcome to Physicians Realty Trust Fourth Quarter 2020 Year End 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. I'd now like to turn the conference over to your host, Brad Page.

Thank you. Good morning and welcome to the Physicians Realty Trust fourth 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 of Asset Management; John Lucey, Chief Accounting and Administrative Officer; Laurie Becker, Senior Vice President, Controller; and Dan Klein, Deputy Chief Investment Officer; and Amy Hall, Senior Vice President, Leasing & Physician Strategy. During this call, John Thomas will provide a summary of the company's activities and performance for the fourth quarter of 2020 and year-to-date as well as our strategic focus for 2021. Jeff Theiler will review our financial results for the fourth quarter of 2020. Then Mark Theine will provide a summary of our operations for the fourth 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. And thank you for joining us this morning. Before we discuss 2020 and the fourth quarter, we want to commend our team in Texas that has answered the call to keep our buildings open and operating during last week's historic winter weather. We had four buildings with frozen pipes and water damage and we've been working around the clock to get the buildings back in operation. As of this morning, three of those buildings are operational with tenants actively using their leased space. We anticipate the final small building not yet open to be opened within the week. All of our buildings are insured for events like this, and any deductible costs will ultimately be recoverable from the tenants. With all of these challenges, 2020 turned out to be a very successful year for Physicians Realty Trust. From the onset of the pandemic through December 31st, 2020, we collected cash equal to over 90% of all rent and other charges due from our tenants, culminating in the collection of 99.6% of rent due in the fourth quarter. The single deferral granted during the year representing about 0.5% of total billing since April is in payback and is being paid timely by that tenant. We ended the year with the lowest outstanding accounts receivable balance we've ever had as a percentage of revenue, and an occupancy rate of 96%, the highest of all public owners of medical office facilities. Our portfolio's resiliency is directly attributable to our focus on the clinical and financial quality of our healthcare provider tenants with more than 61% of our rentable square feet leased directly to investment-grade quality tenants. We also believe our pure play focused strategy on medical office facilities, with a balance between off-campus and on-campus locations was instrumental to our success and critical to the success of our providers. As COVID swamped hospitals across the country, the providers located in our medical office facilities, especially those off the campus of a hospital remained open and available to care for non-COVID patients. While the equity market was volatile, we ended the year with the best total shareholder return of any public REIT with a significant medical office portfolio. With that said, our total shareholder returns including dividends were flat for the year, and that is always disappointing. We've worked hard since the formation of our company in 2013 to build an enterprise and portfolio resistant to economic weakness, and the events of 2020 stress tested our team and assets. The portfolio performed, frankly as expected, but not without meaningful time and attention from our property management teams and the excellent work of our hospital and physician partners. Nevertheless, we continue to focus on delivering reliable growing cash flow to our investors to drive exceptional shareholder returns. Accretive acquisitions are a key component of this growth and we're excited about the investments made during the fourth quarter. For the fourth quarter, DOC completed $208 million of investments. These investments include four off-campus properties anchored by investment-grade health systems, expanding our relationship with Hartford Healthcare, and the Ohio State Wexner Medical Centre, and establishing a new relationship with the Lehigh Valley Health Network. As expected, we also executed our option to purchase the brand new Sacred Heart Summit MLB and Ambulatory Surgery Centre in Pensacola, Florida, that was developed with DOC's participation in the form of a $29 million construction loan. For the full year, we completed $275 million of new investments at an average first-year yield of 6.5%. In addition, we announced the formation of a new joint venture with the Davis Group, with whom we have partnered since 2014. The strategic venture currently includes eight assets and will focus on the acquisition of both new and value-add assets that we will source and manage together with Mark Davis and his team in Minneapolis St. Paul. We're excited to add a strategic option to our investment platform that will provide more opportunities to deliver value to our shareholders. Finally, our investments included the funding of a $54 million portfolio of mezzanine loans with Landmark Healthcare Facilities as part of a recapitalization of their ownership in nine medical office buildings. These facilities are primarily leased to and anchored by leading non-profit healthcare systems in nine markets, totaling 1.1 million square feet and 94% occupied. 73% of the rentable space in these buildings is leased to investment-grade tenants. Our loans include REITs offer, REITs, and other features which we expect to lead to future investment opportunities with Landmark. As we enter a new government, we expect the Biden Harris administration to pursue the expansion of Medicaid coverage in states that have not already done so. We believe the policies of this administration will accelerate the move of care out of the inpatient setting, expand telehealth coverage, and incentivize hospitals and physicians to bend the cost curve while caring for more people. Our investment philosophy has anticipated these trends, and we believe our portfolio is well-positioned to benefit as specialty care moves away from the hospital to the more efficient outpatient setting. While DOC itself received no direct government assistance during the pandemic, our tenants obtained more than $7 billion in various forms of CARES Act support, PPP loans, and CMS advanced payments. We can comfortably say we do not believe our tenants require any further support to pay their rent. This has been true for most of 2020 as our tenants have been open and caring for patients routinely since May. Our dedicated credit department has monitored our tenants throughout the pandemic and the visibility we have on 92% of our tenants' financial performance continues to provide us with unmatched insight into our portfolio stability and a tremendous competitive advantage. With the distribution of vaccines in early 2021 and the expectation of returning to normal, we will continue to invest in better with a focus on accretive acquisitions, internal growth, and a steadfast commitment to ESG. We're off to a great start for new investments for 2021 with commitments and contracts totaling more than $150 million, plus development financings of $20 million so far. Once completed and stabilized, these development projects will exceed $60 million in investment opportunity. With that start, we anticipate $400 million to $600 million of new investments this year, subject, of course, to capital market conditions. Jeff will now review our financial results, and Mark Theine will share our operating results, including our ESG accomplishments for 2020. We will then be happy to take your questions.

Thank you, John. In the fourth quarter of 2020, the company generated normalized funds from operations of $56.7 million. Normalized FFO per share was $0.26 versus $0.27 in the same quarter of last year due to reduced leverage. Our normalized funds available for distribution were $53.0 million, an increase of 14% over the comparable quarter of last year. Our FAD per share was $0.25. Our full-year FAD was $208.5 million or $0.99 per share, which was an increase of 6.1% over the prior year. We are highly focused on this metric as it is the most standardized and comparable way to measure our company's performance versus our direct peers. We will continue to focus on growing our FAD per share at an outsized rate for our shareholders. The foundation of the company remains our $5 billion pure play medical office portfolio, which is 61% leased to investment-grade quality tenants, the highest percentage of any public medical office portfolio. Consequently, the DOC portfolio has been one of the best-performing portfolios among all REITs, healthcare, and otherwise during the pandemic. We collected 99.6% of our rent in the fourth quarter and over 99% for the full year. We have just $1.3 million remaining to be paid back in the one COVID deferral granted, as the first few payments were already made in January and February of this year. We expect the entire balance to be repaid by June 2021. We intentionally reduced leverage throughout 2020, issuing 19.3 million shares at an average price of $19.06, generating net proceeds of $364 million. As a result, we ended the year with a comfortable leverage of 5.1 times debt to EBITDA, including our pro-rata share of JV debt, which puts us in an excellent financial position going into 2021. We have only $166 million drawn on our $850 million revolving line of credit, providing us with ample liquidity for investments. We generally expect to target leverage of 5.25 times debt to EBITDA on an enterprise basis in 2021. As mentioned on recent earnings calls, we unintentionally slowed down the acquisition pace during the first half of 2020. However, as we saw our portfolio easily weather the worst of the pandemic, we pivoted back towards growth and completed $208 million of new investments in the fourth quarter. The investments we made were at an average per-share cash yield of 6.7% and would have generated an additional $2.1 million of cash NOI. We are pleased with the scope of fourth quarter's investment activity and we have enough visibility on our current pipeline that we can comfortably project 2021 investment activity of $400 million to $600 million at an average cap rate between 5% to 6%, subject to suitable capital market conditions. We will continue to focus on properties that have proven to be successful, high-quality assets with market-leading investment-grade health system tenants. Our same-store portfolio, which does not exclude our repositioning assets, generated growth of 1.5%. Our quarterly G&A totaled $8.2 million, a sequential decrease of 2% as COVID impacts continue to reduce our overall expense load. We ended the year at $33.8 million in G&A, which was at the low end of our guidance range. Looking ahead to 2021, we expect G&A costs to increase as we resume normal levels of travel and acquisition activity, resulting in projected G&A costs between $36 million to $38 million for the year. Recurring CapEx also normalized to a range of $25 million to $27 million in 2021 as we look to add capital back into our portfolio in a thoughtful and efficient manner. I will now turn the call over to Mark to walk through our portfolio statistics.

Thanks Jeff. Since inception, DOC has been dedicated to building a best-in-class relationship-driven operating platform that utilizes local market expertise and scale to drive tenant retention, cost efficiencies, and profitable growth for shareholders. We have executed consistently on this plan, expanding our in-house property management function into most of our largest markets, while leveraging the local market expertise of facility partners where best. This frontline team helped keep our facilities open, clean, and available for patient care throughout the pandemic. We are encouraged by the positive signs of recovery due to the vaccine and are grateful for our asset management, property management, and engineering teams who have demonstrated extraordinary resilience in the face of the pandemic, as well as the recent severe weather in the Southern United States. This team has earned a 95.9% positive tenant satisfaction rating in our work order system throughout the pandemic and extreme weather. Our portfolio's resiliency is a direct reflection on the clinical and financial quality of our healthcare provider partners. Our portfolio, known for its industry-leading 96% occupancy, also achieved industry-leading rent in CAM cash collection of 99.6% in Q4 2020. Under the leadership of Joey Williams and Ann Gurka, our accounts receivable team worked closely with asset management throughout the year to collect 99.1% of contractual rents and CAM for the period from April through December 2020. Continuing the trend, we have collected 99.3% of January 2021 contractual rents, on track to meet or exceed the fourth quarter collection rate. February-to-date collection results are also strong and consistent with previous months. We have received no new requests for rent deferral. Again, these results are a direct reflection of the quality of our healthcare partners, the quality of our facilities, and the reason we view medical office buildings as the most resilient asset class in real estate. Our leasing team had a productive year despite the challenges of social distancing and virtual meetings, with a positive absorption that totaled 16,200 square feet for the year. Overall, we completed 962,000 square feet of leasing activity in 2020, with a 77% retention rate and positive 2.04% cash leasing spreads on our consolidated portfolio. Currently, the average annual rent increase in our portfolio is 2.4%, and over two-thirds of all leases executed in 2020 contain an average rent increase of 2.5% or greater. In the fourth quarter specifically, we completed 185,000 square feet of leasing activity with positive 3.0% leasing spreads. The retention rate for the quarter was 53%, a number significantly below DOC's typically reported rate, but was the result of a large physician practice we deliberately did not renew and immediately entered into a new 10-year lease the very next day with an existing investment-grade health system partner. While this was a non-renewal by definition, the net absorption was not impacted and we upgraded the portfolio by expanding our relationship with an existing investment-grade rated hospital system partner for the long term. Q4 retention would have been 68% if we exclude this transaction. Finally, our in-house leasing team continues to do an excellent job attracting and renewing tenants at strong rental rates with under-market rent concessions. In the fourth quarter, rent concessions for lease renewals, including TI and leasing commissions totaled $1.21 per square foot per year and $5.08 per square foot per year for new leases. For the full year, our TI leasing commissions and free rent concessions totaled 8.3% of annual net rent and are significantly below our peers who are investing 15% to 20% of annual net rent to attract and retain tenants. Looking ahead to 2021, 4.1% of our leases are scheduled to expire with an average rental rate of $21.61 per square foot. We expect high retention as hospitals and providers are reengaging on lease discussions and expansion plans that were put on hold during the pandemic, and we are optimistic about continuing our strong leasing momentum in 2021. Our same-store MLB portfolio, which again does not exclude repositioning assets, generated cash NOI growth of 1.5% for the fourth quarter of 2020. The NOI growth was driven primarily by a year-over-year 1.7% increase in base rental revenue. Operating expenses were up 9.1% but offset by a 10.4% increase in operating expense recovery revenue, demonstrating the insulated nature of our triple net leases. Year-over-year, operating expenses were up $2.7 million overall, primarily due to a $1.6 million increase in real estate taxes and a $0.7 million increase in general maintenance and janitorial services attributable to COVID-19. Lastly, lower parking revenue had a 23 basis point impact on our Q4 same-store NOI growth. Specifically, paid parking receipts improved to 78% of normal during the fourth quarter, which compares favorably to 49% of normal levels experienced during the second quarter. Turning to our CapEx investments, we pivoted quickly and efficiently in 2020 to prioritize projects and team safety. In 2020, we invested $19 million in recurring capital investments, in line with our previously revised CapEx guidance. In 2021, we expect our full year recurring CapEx investments to return to normalized levels between $25 million and $27 million. As part of our capital investments in 2020, we invested approximately $3.2 million in ESG-related projects to improve energy management systems, upgrade HVAC mechanicals, and install more efficient and longer-lasting LED lighting. Overall, these projects make our buildings more efficient and improve our margins on common area costs, while also reducing operating expenses for our healthcare partners, in turn reducing the total occupancy costs for our provider partners will ultimately provide the potential for growth and rental rates at renewal. As a result of ESG projects like these, DOC has reduced its energy, water, carbon, and waste footprints again in 2020 and we look forward to sharing these results in our second annual ESG report in June. In recognition of our ESG efforts, we are proud to share that DOC earned 10 new IREM Certified Sustainable Property, CSP designations in 2020, reinforcing the ongoing commitment to expanding our environmental, social, and governance practices. The IREM CSP is a sustainability certification program that recognizes exceptional real estate management, which improves Green Building Performance. In total, DOC has earned 18 CSP designations since 2019. To conclude, by adhering to our core values represented by care, we remained disciplined operationally and financially in 2020 to deliver safer healthcare facilities for our providers and their patients, as well as safer results for our shareholders. With that, I'll turn the call back over to John.

Thank you, Mark. As Mark mentioned, we've made great progress toward our ESG goals and we're especially committed to energy and water conservation and exceeding IREM certification of our buildings. We are blessed to have great leadership in our organization from the Board down to several of our Executives leading us on the DE&I journey as well. We are not satisfied with our progress there, but we are determined to make a difference inside and outside of our organization for equity across each of our communities. We're also excited to recognize Amy Hall and her promotion to Senior Vice President of Leasing & Physician Strategy. Amy has been with us since 2016, leading our Leasing team and is responsible for more than 4 million square feet of leasing activity since she joined. She has done a fantastic job. We look forward to her leadership for years to come. Finally, 13 properties across our portfolio are being used for vaccination sites, and we are accommodating our health system partners and others in this important community. We expect more and more vaccines to be made available to the community providers in our business. We will now respond to your questions. Omar?

At this time, we will be conducting a question-and-answer session. Our first question is from Nick Joseph with Citigroup. Please state your question.

Thank you. Maybe just starting with the Davis Joint Venture, can you talk about what was attractive about doing that, the ultimate size of where that JV could go? And then how you think about acquired assets either through JV or on the balance sheet?

Yes, great question Nick and good morning. So Mark Davis and his team have been partners with us since 2014. They've really developed and sourced a number of great opportunities for us every year, and we have some new development projects getting started with them now. So that joint venture really evolved out of a strategy where we find buildings off market; they find buildings off market, some kind of fit our long-term strategy and some may require some value-add or lease up or just not ready for our long-term strategic purpose. It's truly a way to have two pockets of ownership, so the REIT when it's directly optimistic or idealistic for us and then with Mark for those where we need to combine to purchase. It just gives us another tool in the toolbox. We have two joint ventures in place right now. We have the other PMAK joint venture with Remedy that has been very successful and has really another strategic alignment and purpose. So good source of capital, good partners to work with and provides us, really maximizes the opportunities for us going forward for the REIT in particular.

Thanks. And then just on the 2021 growth, how do you think about funding that either through dispositions or additional equity issuance? And then how does that play into leverage levels of where you expect to be at the end of this year?

Hey, Nick. This is Jeff. So as we talked about in the prepared remarks, our target leverage is about 5.25 times. Obviously, we're a little bit under that right now. So we've got a little bit of dry powder to the extent we need to utilize that. But we would primarily think about funding the acquisitions through debt and equity issuance. We've been doing some opportunistic dispositions, but we don't have a big disposition pipeline for 2021. So I don't think it's going to be that meaningful in terms of funding; it will be mainly through capital markets activity.

Thank you.

Thanks, good morning.

Hi, Jordan.

I wanted to discuss the acquisition pipeline, which saw significant acceleration in the fourth quarter. There are also some promising leads for 2021. The guidance of 500 suggests that the pace from the fourth quarter could continue. Can you share what you're observing regarding these opportunities and their characteristics?

Yes. Thanks, Jordan. So this is John. The pipeline is, we're really excited about the near-term items that we, again, have identified are existing relationships, repeat customers, repeat health systems, more and more health systems are really self-developing, building their own buildings. So, we’re maximizing the opportunity where they're constructing those on their own, and then kind of pre-selling them to us for long-term partnership and hold, so it’s very attractive. Most of the investments we made in the fourth quarter and in our near-term pipeline are just that. Not trading with another institutional owner, but dealing directly with the health system themselves. We've got some good opportunities in the development pipeline, as I talked about a minute ago with Mark Davis and others. That was very successful for us last year as it gets better yields, but getting fantastic product, again, for the long-term hold for the REIT. There are some portfolios, small portfolios out there trading, it's kind of trading and re-trading and re-trading. We see everything, we looked at those, but nothing of any bulk has been that attractive to us. So we'll grow primarily through the one-off of market relationships.

On the development opportunities, is that maybe 20% to 25% of what you're looking at?

That's probably about right. The gross value of what is currently under construction or in documentation is in the net range of 60 to 80 million. So achieving a gross value product of 100 million a year is a straightforward goal, but we'll aim for more if opportunities arise.

Okay. And then lastly, just on the mezzanine with the landmark, can you just maybe give us a little bit more color on that maybe LTV and the sort of I think the term is reasonably short, it's a sort of two to four-year type deal. But just sort of any other color there will be helpful?

We have had a long-standing relationship with Landmark and have previously explored opportunities with them. This portfolio of medical office buildings is among the best available for sale in the last few years, likely the best we’ve seen over the past five years. Recently, the owner wasn't ready to sell and preferred to recapitalize the Landmark deal. We utilize mezzanine financing as a strategy for long-term ownership, which allows him to maintain control over the timing of that sale. However, we will be the first to engage through mezzanine financing. The loan-to-value ratio is estimated to be within 10%, and this portfolio is incredibly valuable and continues to appreciate.

So the 54 represents about 10% of the capitalization.

That's about right.

Okay. One for Mark just on the OpEx, if I could. I noticed I heard a little bit of description around taxes and COVID expenses, but the 3.5% increase sequentially. Mark is that 4Q pace going to be sustained through next year? Is that we're going to see some moderation?

Yes. Good morning, Jordan. Thanks for the question. As I mentioned in the prepared remarks, the majority of the increase in operating expenses both year-over-year and sequentially was real estate taxes. There are three or four properties that were reassessed and bumped up in Q4. We think that's kind of limited to that quarter and won't be reflected going forward. But again, while operating expenses were up, our recoveries were also really showing the insulated nature of our triple net portfolio.

Okay. And so it was that sort of an accrual for the full year 2020 sort of catch-up on those three to four properties.

Yes. That's right.

Thank you. Appreciate it.

Thanks, Jordan.

And our next question is from Juan Sanabria with BMO Capital Markets.

Hi. Good morning, and thanks for the time. Just hoping to piggyback on Nick's question on the Davis Group Joint Venture. John, maybe if you could speak a little bit too about the differences in strategy between on-balance sheet and the fund. I don't want to put words in your mouth, but maybe it's sounded like the joint venture with the Davis Group would be more non-core or reject type opportunities, just a little bit more clarity on that?

Yes, I think that's a simple way to think about it. It's there to park assets that are not quite ready for our ownership, maybe kind of through lease up or there's no development in there today, but potentially for a development project as well. Or it may be an asset that's just not part of our today long-term focus and strategy. It's again, think of it as a place to park assets that, again, the idea evolved out of a seller who had multiple assets, we wanted one, and a couple were great tenant, great credit, but just were smaller, didn't really fit our long-term goal. So we kind of parked too in the Davis one with Mark Davis and we got one outright for ourselves. It's really just a strategic tool. We like to be responsive to our health systems. When they want to monetize buildings, they don't want to deal with three or four buyers; they want to deal with us. Again, we view it as a very strategic tool, a place to park assets, and/or participate in the value creation that we see in other portfolios.

And is there a target size for that joint venture?

I don't think it's going to be a significant joint venture, but it's currently around 100 million, and I can see it doubling over the next few years. However, it's just one tool in our arsenal.

Okay. And then maybe just on the same store portfolio. Any expectations on how NOI growth should trend in 2021? That would be helpful; just you give some of the other piece parts, any color that would be helpful?

Hey, Mark Theine here. Let me go back to 2019 theme store. We started at 3.1% there, and then in 2020, this quarter we're at 1.5%. So, this year is a little bit lower than our typical range of 2% to 3%. I believe a good target for 2021 would be in that 2% to 3% range as we keep focusing on tenant retention and increasing leasing spreads where possible. So, 2% to 3% for 2021.

Thank you.

Thanks.

And our next question is from Amanda Sweitzer with Baird.

Thanks. Good morning, guys. Quickly following up on the Davis JV, do you have any defined purchase options for the remaining 51%? As some of those properties stabilized?

Great question. I'm really enjoying all this attention on the Davis. They're great, they're great partners, and we're really proud of that. The answer is yes, we have purchase rights going forward through that relationship. So again, we're a minority partner, they spend their time and effort to create the upside value. We'll have the opportunity to participate in that upside value for ourselves or otherwise.

That's helpful. And then on the parking revenue, I appreciated the 4Q update. But how much of a drag was parking revenue on full year 2020 growth? And how are you thinking about that recovery in 2021? In the context of your 2% to 3%, same store growth expectation?

Yes. Thanks, Amanda, this Mark again. As I mentioned, the same store impact from parking was 23 basis points in Q4. We've rebounded to about roughly 80% of our normal levels; there are still a few valet services of buildings that are closed due to COVID. As those reopen, hopefully here, in the upcoming months, we’ll pick up a little bit of that extra margin from the valet services. But paid parking is doing well. Volumes are up at the building. So what we're missing is kind of that incremental margin from valet services.

Okay. And then do you have the number of how it impacted full year 2020 growth?

I don't know if I have a number on the full year basis, but I imagine it'd be pretty close to the same.

Okay. That's helpful. And then finally for me, kind of as you think about the supply outlook over the next several years, are you seeing more office owners that are looking to convert to medical office, just given kind of the uncertain demand outlook for traditional office properties today?

Yes, that's a great question. You know, in 2009, 2010, you saw a lot of suburban office go vacant or not occupied in that recession. That provided opportunities for conversion, but it also competed with medical office buildings. Think about this environment; it's really the downtown CBD office buildings that might not get fully re-occupied after work from home and a move to suburbs. I think it's a very different dynamic; you won't see CBD office buildings converting to medical, or really competing with medical office buildings. So, in the suburbs, again, if there was vacancy, those are always opportunities to convert those buildings to medical, but you realize the office demand is moving to the suburbs. Long-winded way of saying, I think there might be some opportunities, but when you think about the CBDs that are vacant or low occupancy, those are not typically medical office buildings in this environment.

Great. Thanks for the time.

Yes.

And our next question is from Omotayo Okusanya with Mizuho.

Yes, good morning, everyone. Back to the cash same-store NOI for the fourth quarter. I mean, with the increase in real estate taxes, don't you get passed that along? I'm still struggling with why just wasn’t passed along such that the same store number was better? Or is it just a timing issue and will be passed along in the next few quarters?

You're exactly right, the real estate taxes are passed along as part of a triple net expense. The primary drivers of our same-store growth are the annual rent bumps, 96% leased highest in the industry, and we've got strong rent bumps. That's pretty much going to be the driver of our same store growth going forward.

Tayo, we're going to see a significant increase in property taxes as states and localities try to recover revenue, and you're going to be more litigious than ever. That's one of the really strong components of our portfolio is the high occupancy, so which packs of taxes do pass through. We work hard, challenging those, making sure the right amount and appropriate amounts are the best we can, like hell, but ultimately, they pass through in our high occupancy portfolio, it's really a premium job to us.

But is there a timing difference where you kind of get sick first, and then maybe the past week leading on to the same store artificially depress this quarter? Like, I'm just trying to understand that a little bit?

Yes, it's part timing and part again, the little bit of vacancy we have is, we have to absorb that, but it's mostly timing.

Okay. That's helpful. Then just wanted to focus on the regulatory situation a little bit. The idea of Biden administration, we have been focused on the expansion of ACA. And this idea of being able to kind of get healthcare close to where you live, and driving more flow to outpatient facilities. How does that influence your assets that you're targeting from an acquisition perspective going forward? Do you start to get more interested in all the off-campus stuff again that may still be kind of close to big population centers? Just curious how that influences how you think about your acquisition outlook?

Yes, Tayo. We've always thought off-campus was the more important assets long-term while on-campus continues to be very important to the overall health care system. The cost, consumers want to be closer to home. Physicians and other providers want to be closer to their homes and in off-campus locations, as COVID has shown why the inpatient facilities need to be preserved for high acuity patients, and everything else needs to be in an outpatient setting. If there's no real reason for that building to be next to a hospital, then why isn't it closer to my home, closer to my schools, closer to my workplace. Again, 2020 just proved up the thesis we've had since the beginning of the company. The spread of the ACA, support of the ACA, the spread of perhaps buying options in those states that haven't expanded the ACA, and funded by this administration in this Congress will further drive more care out of the inpatient setting to the outpatient setting. I don't think it changes our strategy at all; I think it just reinforces what we've been doing for the last seven and a half years, and that proved out last year, and it'll be certainly supported by this administration in this Congress.

Got you. And then one more for me, if you don't mind, your comment about your operators' sentiments not needing additional government aid is appreciated. Just curious with the current aid that they have to feed those, but PPE has to get paid back by a certain date. Is there still a need, though, for those dates to get pushed back to give the operators a little bit more runway to recover? Or if we suddenly do six months from now or whatever the timing is, do you feel fairly confident that your operators don't face a cash crunch?

All the systems have a booked counter liability, which is part of the overall profit and loss for the providers in our buildings. Congress has been delaying those payment obligations in a bipartisan manner, and the CMS advanced payments have already reduced interest rates and extended the repayment term. It will not be a six-month repayment period, and we are somewhat surprised by when this amount will need to be paid back. There is bipartisan support to consider converting those Medicare advance payments into grants. We view it like any other liability on their profit and loss statement, and assessing the overall profit and loss and balance sheet is a part of our credit evaluation for new investments and ongoing credit monitoring. We currently have 92% transparency across our portfolios, giving us good insight. There shouldn't be any short-term impact from these repayments, and the government can allow ample time, especially considering the time required for vaccine distribution and similar factors.

Got you. Thank you.

Thanks.

Our next question is for Jason with RBC Capital Markets.

Hey, guys, looking at the landmark mezz deal, I know you noted the underlying assets are strong, but I was wondering if you could touch on the amount that are on or off campus and then provide any color on what the potential cap rate would be on a purchase down the road?

Yes. All but one are on-campus; they're all relatively new, about 10 years or younger, but they are all excellent assets. The cap rate indicates there are no purchase options; the seller retains ownership control regarding when and if he is ready to sell these buildings. I would say they are not going to be very cheap, but they represent the best portfolio, our top buildings in the market at this time. Therefore, it would fall at the low end of the cap rate range and the high end of value.

Got it. Okay. And then I know you noted that there's some smaller portfolios that you've looked at on the market today, I was wondering if you could touch on just what you aren't seeing in those portfolios that you'd be looking at that would make you pull the trigger?

We concentrate our business development and pipeline on collaborating directly with physicians, hospitals, and the developers associated with them. This involves direct purchases with the healthcare systems and the physicians involved. While purchasing from other institutional owners is acceptable, it doesn’t foster a relationship with a health system like a direct relationship does. Our approach is to focus on this relationship. Typical factors we consider include rent increases, whether rents are market-based, the growth potential of the markets, and the size of the buildings and portfolios. We also assess how these align strategically with our current portfolio. Though the portfolios we’ve encountered are comprised of quality buildings, reputable owners, and solid providers, none have aligned with our specific criteria. Moreover, acquiring such portfolios generally comes at a premium, which raises questions about how that premium affects long-term internal rates of return.

Got it. Okay. And then, last one for me. I know in the prepared remarks, you guys mentioned the CapEx increase in 2021. I guess I'm wondering what type of CapEx projects were put on hold? How much of that 2021 increase is from projects that were delayed in 2020? And then I guess, going a little further, would we expect them to come down in 2022 as those catch-up projects are completed? Or how should we be thinking about that?

Yes, Jason, Mark here. Looking back a year ago, we initially put out CapEx guidance of $24 million to $26 million and then adjusted it early in 2020 during the onset of COVID-19 to $19 million. That was the midpoint of our revised guidance. We came in right in line with our guidance there. We did that really to prioritize the projects and safety of the team. There were a few supply delays in projects like elevators that we delayed into 2021. A little bit of that is a catch-up from 2020. Our CapEx investment has been 8% of NOI on average, well below our peers. The 2021 guidance includes some additional TI capital as leasing activity picks up, so a little bit rolling over into 2021, but 2022 probably going to be in line with that with that's $6 million a quarter.

Okay. Thanks, everyone.

Thank you, Tayo.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back over to CEO, John Thomas for closing remarks.

Thank you, Omar. And thanks everyone for joining us today. We've got a number of investment conferences coming up over the next few weeks and we look forward to digging into more details with you then. Thank you very much.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.