Healthcare Realty Trust Inc Q4 FY2021 Earnings Call

Good morning, and welcome to the Healthcare Realty Trust Fourth Quarter Financial Results Conference Call. All participants will be in a listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Kara Smith. Please go ahead.

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, 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.

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 confident 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 the 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 align 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 in 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 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 naturally 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 costs and supply constraints enable outsized 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 strengthen 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 costs. 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 firsthand, 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.

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 prospective 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 complementary 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 a 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. Dispositions 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% leased 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% preleased with notable additional leasing activity and is part of 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 to date and over $300 million under contract or 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.

Thanks, Rob. Improving same-store performance and an increased acquisition pace throughout 2021 generated reliably strong results. Normalized FFO per share increased 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 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 a marginal benefit to NOI growth from these appeals. Embedded portfolio growth drivers remain strong, which is a 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. 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 have 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 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.

We will now begin the question-and-answer session. Our first question today comes from Juan Sanabria with BMO Capital Markets. Please go ahead.

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.

Regarding the pipeline, if you look at the upcoming structure, we are maintaining a similar distribution as in previous years, around 75% to 25%. I expect that trend to continue this year. As for the joint venture, since its inception, we have generally leaned more towards off-campus opportunities, and that will be reflected in the joint venture activities just as in the past.

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 since we formed the JV in 2020.

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?

Yes, we have agreed on a forward strategy for the joint venture, which is flexible and serves as a target. To date, we have consistently met or exceeded this target, and we are about 15 months into it. So far, everything is going well, and we believe there is potential for growth as we increase our capacity and pipeline.

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 maturing?

We are generally aiming to initiate between $75 million and $125 million in new projects each year. As we ramp up these starts, you will begin to see our spending align with this trend. We're having numerous positive discussions with health systems, making us hopeful for a few project launches this year that will help us achieve a more consistent spending level. As we have mentioned previously, our primary development opportunities come from our embedded pipeline, which we manage through our relationships, land holdings, and properties we own, including our current expansion in Tacoma by 25,000 square feet due to demand. You can expect us to continue developing in this way, rather than pursuing RFPs aggressively.

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.

Yeah. We provide some detail on that, and our components of expected FFO on the last page of our supplemental page, page 29. You can see some more detail there. There is a note 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. As a result of that, we are seeing about a $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. Those are kind of the major drivers that you see based off of that guidance for G&A for next year.

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

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

Thanks and good morning. I wanted to check in on the releasing spreads you are observing and the conversations you're having with tenants in light of the recent inflation spike, particularly following the 7.5% CPI increase in January. What discussions are you having with tenants as you negotiate new leases? Are you considering pushing them towards higher rates to counteract inflation, especially regarding renewal rates? Any insights on those conversations or related escalators would be appreciated. Thank you.

Yes, Jordan, this is Kris. You are correct that we are witnessing an increase in inflation rates. However, we believe it's important to consider this over a multi-year perspective. Inflation is decreasing from a high of 7%, moving down from low levels seen in 2020. When we examine the trend over two to three years, inflation appears to be stabilizing around 3% to 4%. During that same period, we have experienced benefits, and this is something that people recognize about medical office buildings: they provide consistency across economic cycles. Unlike other sectors, we did not experience a significant downturn, so we are not anticipating a dramatic rebound. Within that two to three year span, while inflation is averaging three to four percent, our cash leasing spreads have been in line with that range, and we've also seen slight increases in our rent adjustments. This reflects the steady demand for medical office space. If inflation continues to rise and affects replacement costs, we believe it will support further increases in our rental rates.

Okay. To follow up on the G&A, Kris, we have the $3.5 million of additional expense you mentioned due to the structural changes. Will that expense decrease over time? Should we consider 2023 as having a $3.5 million deduction compared to 2022 due to the overlap or doubling?

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. It's a balance with what the amortization, because we have five-year amortization of all of our old equity incentive programs. As those amortizations 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. We will see a decline. It won't be the same $3.5 million increase that we are seeing this year. It's not a dollar for dollar reduction of the old plan burning off against the consistent $3.5 million per year moving forward.

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 moving forward because you're not going to have two plans in place, right?

No, you don't, but that's what I'm saying. It really goes to that amortization. It's going to be by year, depending on. 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. 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.

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

Yes, I'm still thinking and discussing 2021.

Well, technically, I guess you are talking 2021 today.

Yeah.

Thanks guys.

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

Thanks. I have a similar question regarding inflation. Have you noticed any changes in buyer interest or underwriting for deals due to inflation expectations or the interest rate outlook? Have you observed any differences in the past few months compared to most of last year?

No, I would say generally not. I think the sector itself is seeing a lot of demand and capital. Some people might interpret that as a reason to underwrite more aggressively due to the lift. Our perspective is that we anticipate some potential for occupancy improvement in 2022, along with continued strength in our cash leasing spreads. All of these factors enhance the demand for the sector. It's crucial to understand, as Kris mentioned, that new entrants into this space should recognize that we didn't decline in 2020. Therefore, our focus is on maintaining that strength rather than experiencing the ups and downs of the market. One trend we've noticed, particularly through our cash leasing spreads, is consistent strength across about 30 markets with year-to-year renewal activity, showing above 4% average cash leasing spreads. This metric is both steady and slightly increasing, even reaching above 7% when considering current inflation rates. Conversely, it's worth noting, based on our cash leasing spread data, that we only encountered one market out of 30 with a negative cash leasing spread, which accounted for a small amount of square footage. This indicates an improvement compared to the last five years, with only about 4% of our leases showing negative cash leasing spreads in 2021. Strong trends are emerging, pushing more leases into the 3% to 4% average cash leasing spread range. Nashville serves as an excellent example; over the past five years, the average cash leasing spread has consistently been above 6%. This reflects market dynamics, constrained supply, and rising replacement costs, all of which empower us to leverage our pricing power effectively while remaining conscious of genuine costs without resorting to price gouging. This naturally contributes to the upward lift alongside supply constraints.

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?

That's a great question, and we can break it down further. Rob pointed out a cluster in San Antonio that surpassed 250, which is an impressive milestone. He also mentioned a corridor in Nashville that we plan to expand to about three miles instead of our usual two-mile definition for over 1 million square feet. We consider 500,000 square feet as a key threshold we aim for, and we currently operate in around 12 markets with over 500,000 square feet, which is very strong. This portion contributes nearly 70% of our net operating income, which is significant. As you've heard in our comments, we are always looking to increase density and improve operational efficiency to enhance leasing activity. We expect this to lead to repeated investment opportunities in both acquisition and development. Therefore, we anticipate many benefits from this approach, and you will see us continue to pursue these strategies.

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

Hey, thanks. Good morning. I would like to understand a bit more about how inflation is affecting your strategy. Is the market naturally adjusting to inflation pressures so that you aren't explicitly using it to reprice your rents? Should I think of it as you simply taking what the market offers, or are you leveraging it as a negotiating tool while trying to avoid price gouging?

I think it's important to consider all the factors involved, and inflation is certainly at the forefront for everyone. It affects supply and replacement costs. We're not using it as an excuse to increase prices excessively, but rather recognizing that when we design and build out a space for a tenant, those costs have risen. So, tenants are aware of these increased expenses. We're definitely adjusting rents where it seems appropriate, but we have to balance that with retaining and attracting tenants while closely monitoring market rents. It's a careful balance, especially in the Medical Office Building sector, where we often collaborate with independent groups that have strong connections to the associated hospitals. If we push rents too high, it could have negative consequences. Therefore, we are trying to navigate these challenges while leveraging the genuine rise in cost pressures to our benefit.

Are you managing to achieve rent levels above the market, or are you mostly keeping pace with market trends?

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%. 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.

And Rich, I want to emphasize that when considering inflation, it's important to separate it into different categories of impact. This past year, our operating expenses were nearly 2.5%, which is at the higher end of our historical average. We'll need to monitor how this develops this year, as it may increase slightly. However, I want to note that 90% of our leases include some mechanism for passing through operating expenses, which the tenants will cover. This is separate from what we discuss regarding base rent and cash leasing spreads. Additionally, we are considering re-leasing, particularly with new leases, where we usually offer an allowance for tenant improvements (TI). Frequently, tenants end up paying out of pocket for TI costs that exceed our allowance. There is inflation related to construction costs for the build-out, and tenants may already be absorbing these costs without it being reflected in our rental agreements. If we're asked to cover more of these TI expenses, we will definitely seek a corresponding adjustment in the lease terms. We operate with an internal rate of return perspective, which is where you might see some rent increases. Overall, I wanted to highlight that there are several areas where inflation may manifest that might not be immediately visible when analyzing cash leasing spreads.

Are you at all tempted 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.

We believe that due to our multi-tenant portfolio's shorter lease terms and operational nature, fixed bumps are more effective. They allow for quicker opportunities to reset through cash leasing spreads. However, for larger leases, particularly those with single tenants or those exceeding ten years, we start to have more significant discussions, especially regarding floor and cap considerations. For the majority of our operations, we are comfortable with fixed bumps on the shorter-term leases we handle.

Last question for me. The disposition guidance is around $100 million. You began by discussing portfolio deals and premiums related to cap rates. I'm interested to know if you have any assets in your portfolio that, if sold as a large group, could yield a significantly lower cap rate, assuming you had immediate plans for the proceeds. Is that something you have in reserve for future needs, or are you primarily focused on selling individual assets as you do on the acquisition side?

We are continuing to manage our assets individually, selectively optimizing our portfolio. We're focused on identifying markets where we want to expand and those we wish to exit, especially when favorable opportunities arise. We are leveraging our position to generate funds for our pipeline, which remains strong. This approach also allows us to create beneficial transactions.

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. 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.

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

Good afternoon, everyone. My question focuses on the current situation in the MOB sector. We are in the midst of an aging baby boomer population, which should increase demand for MOBs. However, looking at the guidance for 2022, there appears to be no significant growth in same-store occupancy compared to 2021, and the development outlook seems similar. Given this context, I wonder why we aren't seeing an acceleration in either of these trends.

I will address the occupancy. Our occupancy guidance is based on a trailing 12-month period. The situation fluctuates from a low to high point throughout the year, especially since we hit the lowest point in the third quarter of 2021. We expect to see sequential absorption and growth over the year. This expectation shapes the guidance based on the trailing 12 months. We are focused on driving this absorption. You can also see this reflected in our components of expected FFO page in our supplemental materials, specifically in the same-store guidance, where the upside of the range is currently three and a quarter. From our perspective, this reflects an improvement in occupancy, enhancing the fundamentals of the portfolio. We are optimistic about occupancy and have noted some improvements in the fourth quarter, with continued positive expectations for 2022. On the development side, it's a long-term process, akin to nurturing a field which takes time. We currently have more discussions happening than ever, transitioning from talk to action. In the last couple of quarters, we've added a few projects, pushing our active pipeline over $100 million, and we anticipate this will grow this year. While maintaining a consistent pace annually is challenging, we remain very optimistic. Overall, we're more positive than perhaps has come across so far.

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'd be closer to two versus higher versus closer to three?

If the occupancy doesn't recover quickly or if we experience an increase in operating costs, that's not something we anticipate. We do have the pass-throughs I mentioned earlier, which can help mitigate that. Currently, that's the situation we're in, and we expect the numbers to improve throughout the year towards the higher end of our projections while considering the trailing 12-month data. It's important to adjust the historical comparisons within that trailing 12-month period to reach the higher end as we move through the year.

Okay. That's helpful. Lastly, I noticed that the duration for lease renewals is significantly shorter than for new leases. Renewals are around four years while new leases are approximately six and a half years. I'm curious about the reason for such a large difference between the two.

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 and carpet, unless they're looking to do something a bit more substantial. 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. As they start looking at making that commitment and thinking about the amount of capital they're putting in place, and how long they're looking to kind of amortize that cost and commitment to this new location, it just naturally ends up being a longer lease term.

And Tayo, I would say we've mentioned this for quite some time, and I believe if you looked at our supplemental from five years ago, you'd notice a very similar trend. It’s truly about tenant behavior based on the factors that Kris just outlined. We are not specifically trying to promote longer leases for new tenants compared to renewals, but it makes sense considering the build-out process and the recovery of initial investments.

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

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?

I would say it's just specifics of any deal. We like to keep up with the market, but you also have to recognize the competitive dynamics of where you are in the lease. It's similar to a batting average. You're not going to hit a home run every time, but we've shown over the years that by refining our portfolio, we have been able to increase the likelihood of positive cash leasing spreads, which has helped us improve our average over time.

And Mike, to give you an example, I mentioned there was only one market where we had negative cash leasing spreads in 2021, and that was Miami. Looking back at the prior four years, our cash leasing spreads averaged between 4% and 6%. We’re not worried that Miami is in trouble; it was a very small volume and the smallest volume of renewals over those five years. Sometimes, as Kris said, it just comes down to a small data set and a unique situation, so it's not a concern.

Got it. And then, Todd, your comment, I think the term you threw out there was sustainable dividend increases. 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?

Sure. Last year was our initial increase in a long time, a little under 1%, just to signal how important we think that is. This year, obviously getting more on a run rate level of growth. That's certainly a view that we want to 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. I would say absolutely a focus on that. But clearly also a goal of reducing the FAD payout ratio, which Kris talked about. It's a combination of all that, but certainly the objective is to make that annual.

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.

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

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