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Healthcare Trust of America Inc (HTA)
Q3Â 2020 Earnings Call
Nov 4, 2020, 12:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, and welcome to the Healthcare Trust of America Third Quarter 2020 Earnings Conference Call. [Operator Instructions]
I would like now to turn the conference over to Scott Peters. Please go ahead.
David Gershenson -- Chief Accounting Officer
Thank you and welcome to Healthcare Trust of America's third quarter 2020 earnings call. We filed our earnings release and our financial supplement yesterday after the close. These documents can be found on the Investor Relations section of our website, or with the SEC. Please note this call is being webcast and will be available for replay for the next 90 days. We'll be happy to take your questions at the conclusion of our prepared remarks.
During the course of the call, we will make forward-looking statements. These forward-looking statements are based on the current beliefs of management and information currently available to us. Our actual results will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict.
Although, we believe that our assumptions are reasonable, they are not guarantees of future performance. Therefore, our actual future results could materially differ from our current expectations. For a detailed description on potential risks, please refer to our SEC filings, which can be found in the Investor Relations section of our website.
I'll now turn the call over to Scott Peters, Chairman and CEO of Healthcare Trust of America. Scott?
Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President
Thank you. Good morning and thank you for joining us today for Healthcare Trust of America's third quarter 2020 earnings conference call. Joining me on the call today is Robert Milligan, our Chief Financial Officer.
As we sit here today in this difficult business, social and economic environment that continues to be impacted by COVID-19, I'm happy to report that HTA has been able to continue to improve our enterprise value and deliver strong financial performance for shareholders.
In the third quarter, we achieved record earnings, strong cash flow, high retention and rental growth rate, investment grade balance sheet, cash liquidity that positions HTA for 2021 and for the coming years. This level of performance and insight into our business gave us the confidence to raise our dividend for the seventh consecutive year. And has resulted in HTA's dividend growing more than 11% since 2014. This continues to demonstrate the consistency and strong performance of our Company and the strength of our underlying business model.
I would like to take a moment to thank our 300-plus employees, whose dedication, patience, and focus has allowed HTA to perform at this high level with such strong financial results and performance in our asset management and leasing platforms. Their efforts, both in the field and in our remote work environment during the last eight months has allowed HTA to keep our buildings open and operational for our tenants and their patients in many aspects turning HTA into a more cost-effective Company.
As I said before, I believe the medical office sector is one of the best areas of real estate in which to invest. We are fortunate that our real estate is core critical to the delivery of healthcare, where demand is resilient and will continue to grow regardless of market environment or political climate, it also provides us with strong credit tenants, including leading healthcare systems and physician groups.
From a healthcare perspective, the performance of outpatient providers continues to rebound from the lows of March and April. In many cases, volumes are even higher than pre-COVID as providers work through backlogs of care that was deferred in the second quarter.
Although the pandemic continues to flare up in certain markets, the majority of providers are much better prepared for their environment than they were just 60 to 90 days ago. While they are certainly cautious concerning the winter months ahead, we have seen most of our tenants move back to a focus on care delivery with a concentration on efficiency and convenience for patients. From a business perspective, HTA sits in a very strong position. We have a best-in-class operating team that is running a high-quality portfolio of medical office buildings that are located in key markets throughout the United States. Our portfolio is broad, with over $7 billion invested across over 25 million square feet.
We've also invested in a strong mix of property locations, on-campus, across the streets from campus and in core community locations. This best reflects the trends in healthcare that have recently been accelerating. Mainly the move of care to locations that are close to the patients, more convenient and better able to accommodate increasing levels of care that is shifting to the medical office building. Recent review of market data and patient surveys continues to support our investment thesis. The investments in both on-campus and community core locations will produce the strong rent growth and high levels of retention over the next decade.
Our portfolio is also diversified geographically, with no one market accounting for more than 10% of rent and no single tenant accounting for more than 4.2%. Our tenants consist primarily of leading healthcare providers in our markets, with almost 75% of our rent coming from health systems, universities and large national healthcare providers. And 60% of our rents come from credit-rated tenants.
Our operations and buildings continue to be run with personnel on the ground in our key markets. While we have certainly taken steps to protect our employees and buildings during this time, we have maintained a local presence that keeps our tenants operating and able to work with us to achieve the best possible outcomes. As a result of this positioning, we saw our operating performance not only returned to more normal levels in quarter 3 but also achieved record high in earnings both normalized FFO per share and FAD, but also on total leasing and retention and tenant releasing spreads.
Our cash collections in the period remained strong with total cash receipt exceeding our rents filled. This included over 99% rents collected or deferred on our third quarter period charges. And additional rents paid toward balances that were past due at 6/30 [Phonetic]. We have ended up differing $11 million in rents year-to-date with the majority of those starting to be repaid in September. We have collected over 30% of the rents deferred as of the end of September, without any push for collection on our side.
Our leasing remains active with over 1.1 million square feet of leases signed in the period. This amounts to over 4% of our total portfolio and our -- and our tenant retention was strong at almost 90%. Further our renewal rates on this level of leasing was a record for HTA at over 7%, while this did include two larger leases that we rolled up over 10%, the remainder of our portfolio still rolled up almost 3%, consistent with our trends over the last six quarters.
For the year, we have now entered into 3.3 million square feet of leases or 13% of our total portfolio with releasing spreads at over 5%. This is a great reflection on the quality of our assets and a critical location for our healthcare provider tenants. On the development side, we completed the first development we took from start to finish, completing our 125,000 square foot Cary MOB on WakeMed's Cary campus in Raleigh, North Carolina. Our remaining three projects continue on track with additional delivery in quarter 1 to quarter 3 of 2021.
Our balance sheet continues to be a strength with leverage of 5.1 times debt to EBITDA, $1.5 billion of liquidity and almost no debt maturities coming due in the next three years. Our acquisition activity remain quite in the period, closing on just one MOB in Salt Lake City. However, we are seeing more opportunities that meet our criteria and expect things to pick up as we head into 2021. While the overall environment remains challenging, HTA has continued to execute delivering record financial performance in the third quarter, while also taking actions that position us for continued growth into 2021.
I will now turn the call over to Robert to discuss our operational performance in greater detail.
Robert A. Milligan -- Chief Financial Officer, Treasurer and Secretary
Thanks, Scott. From an operational perspective, 2020 has certainly presented new challenges for our Company. However, we have met them head-on and believe that our teams have done a tremendous job adapting and balancing property performance with safety for tenants, vendors and teams. Throughout this entire period, our teams have continued to service our tenants in our buildings, keeping them open and operational for our healthcare providers who continue to see their patients. This has been critical, as we have seen the majority of our tenant patient flows returned to near pre-COVID levels. As Scott mentioned in the third quarter, we effectively collected all of our rent. Our total cash collected exceeded our charges in total while the collection of contractually due third quarter rents was over 99%. October has continued this trend.
Rent deferrals were limited to 2% of rent within the period, with almost all of those being agreed to in the second quarter. Repayment of these deferrals began in September and will continue over the next six to 12 months. To date, we have collected more than one-third of total deferrals well ahead of schedule.
On the leasing front, our total leasing remains strong at over 1.1 million square of leases signed within the period. Re-leasing spreads increased to a strong 7.4% and tenant retention of the same property portfolio was 89% by GLA for the third quarter. Importantly, this level of renewals did not include any of the early renewals that we specifically targeted in the second quarter during the depth of the initial shutdowns.
Our new leasing is consistent with what we're seeing in 2019, signing over 155,000 square feet of new leases. Overall, leasing tours have increased nearly 50% over the second quarter and new leasing volumes have begun to normalize, while still below our expectations at the beginning of the year, this trend is encouraging as we get into year end and the start of 2021. All of this has allowed us to continue to see steady levels of performance. Our cash NOI growth during the period was 2.5% excluding the impact of the free rent from our second quarter early renewals. When factoring those in, we were still positive at 0.5%.
As mentioned previously, our early renewal free rent burned off in Q3 and we would expect our fourth quarter same store NOI growth to return to our historical levels of 2% to 3%. From an earnings perspective, our normalized FFO for the period was a record high for HTA at $0.43 per share, up both year-over-year and sequentially.
With this quarter, our year-to-date earnings are now at almost 5% versus the prior year. Our only normalizing item in the period was the add-back of the $27.7 million charge related to the early retirement of debt that accompanying our new bond issuance. Our bad debt charges were limited during the quarter and totaled much less than the 0.5% of revenue, normal levels that we anticipate to see going forward.
Our recurring capex for the quarter was $11.8 million, which was less than 10% of NOI. As a result, our normalized FAD for the period was also a record at $82 million as recurring capital expenditures came in below the 10% threshold. As a result of this and our outlook going into 2021, our Board elected to increase our dividend to $0.32 effective in October. Scott mentioned this is the seventh year in a row we have increased our dividend. A hallmark of cash flow growth and performance that sets us apart from our peers, not just within the healthcare REIT space but within the MOB peer set as well. To us, this is the true indicator of quality and performance.
From a balance sheet perspective, we continue to take steps to position ourselves for the future by extending maturities, increasing liquidity and lowering interest costs. In this quarter, we raised $800 million of senior unsecured notes at a coupon of just 2%. We used the proceeds to repay our revolver, repay our $300 million in notes due 2023 and to raise cash which we can use for investment purposes. This simultaneously pushes out our nearest bond maturity out to 2026, while also lowering our average interest cost by almost 20 basis points.
Our leverage remains strong at 5.1 times when incorporating the $278 million we have in forward equity. Between the $200 million of cash on the balance sheet and our forward equity, we have almost $500 million of dry powder, excluding our revolver, that was raised at long-term cost of capital in the mid to high-4% range. Including our revolver, we have approximately $1.5 billion of total liquidity. This capital will allow us to invest very accretively as we return to the acquisition market.
Our primary use of this capital within the quarter was to finance the continued progress on our development pipeline. This was highlighted by the completion of our Class A medical office building in Cary, North Carolina. This building was 70% leased at completion and is a great asset and a great market with a great health system partner. As MOB replaced older Class B MOBs that we had on-site at incremental costs of $44 million, on which we expect to achieve yields of over 7.5% upon full lease up. Including the cost of our old MOBs that we took down, our stabilized yield will come in closer to 6.5% to 7%. Our remaining MOBs continue to be on track to be delivered between the first quarter and the third quarter of next year with incremental investments of approximately $100 million.
We have remained quiet on the acquisition front. However, our pipeline is building and we have the capital raise to make our investments very accretive as we move into 2021. As we continue to operate our business and return to making investments, we will finance our business in a manner that maintains low leverage and significant liquidity.
Finally, we intend to issue full earnings guidance for 2021 when we report our fourth quarter earnings in February. While we did not formally reinstate guidance for 2020, I can say that we anticipate our earnings for fourth quarter to look very consistent with what we've been able to perform in the third quarter, only with our same-store growth coming back to our historical levels with 2% to 3% as the free rent associated with the early renewals will not continue in the fourth quarter.
With that, I'll now turn it back to Scott.
Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President
Thank you, Robert. And we'll open it up for questions.
Questions and Answers:
Operator
We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Nick Joseph of Citi. Please go ahead.
Nick Joseph -- Citi -- Analyst
Thanks. I was hoping you could provide additional color on the acquisition pipeline today both in terms of the size and also the timing of the execution and what sort of yields you're targeting.
Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President
We have a pipeline that I think is very interesting. We're starting to see what we've seen in the past, which is opportunities in our markets. And I think that's the primary thing that HTA has been about certainly for the last five or six or seven years, building size and depth in markets and we're seeing opportunities and, more importantly, we're seeing opportunities as we due diligence. We feel comfortable with the dynamics regarding the asset.
One of our feelings is that there is going to be somewhat of a moderate shift potentially in how healthcare systems and physicians use their space. And so, we want to make sure that not only we are buying assets that are occupied today but that we have opportunities to see expansion from the primary tenants in the building and also the ability to see that rents move up as they expire as leases term out. So we're going to see more activity as we move through the end of this year. And frankly we expect to be able to be back to where we thought we were in beginning of 2020 where we felt that we had a great opportunity to use our balance sheet for acquisitions and for accretive growth.
Nick Joseph -- Citi -- Analyst
Thanks. If you think about it from a dollar volume perspective, what does the pipeline look like over the next 12 months?
Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President
Yeah. I go back to where we -- I think that we're seeing ourselves as we get into 2021 back to the opportunities and back to the underlying fundamentals that we find attractive back to those numbers that we were seeing in the beginning of 2020. We were hoping as we move through 2020 that we would build on the acquisitions that we did in 2019. As you mentioned, we thought that somewhere between $400 million and $500 million was something that we felt very comfortable with. So that's how we are looking at 2021 as would be expected.
Nick Joseph -- Citi -- Analyst
Thank you.
Operator
Our next question comes from Juan Sanabria with Bank of Montreal. Please go ahead.
Juan Sanabria -- Bank of Montreal -- Analyst
Hi. Thanks for the time. Just wanted to follow-up on Nick's question with regards to cap rates. Have you seen any compression in yields for the assets you're targeting for high-quality assets in general, given how stable they performed and what base rates have gone? Or do you think cap rates have kind of held firm to flat [Phonetic] from improved profit levels?
Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President
Well, I think initially, yeah, Juan, I would say we're still initially in that period. Cap rates in medical office has performed extremely well. Given the uncertainty even today, the next three, six months, 12 months, I think MOBs continue to perform -- outperform other asset classes in the real estate side. So, cap rates have stayed consistent. And so, I would expect them to stay about where they were. I think that that's what we're expecting and we're OK with that because I think that we can get the yields with our asset management program utilization of how we bring assets into our portfolio. We can get that 25 to 50 basis points in addition like we've always done.
So, we're very comfortable with where we see the cap rates right now and we're also comfortable with the opportunities that we're seeing in our markets. Many of these by the way are -- you're seeing more off-market transactions than we would have seen 12 or 24 months ago. Sellers are being pretty particular in some cases about who they're talking to and wanting to ensure that they get a transaction that closes in a way that they're familiar with getting closings done.
Juan Sanabria -- Bank of Montreal -- Analyst
Thanks. And just one follow-up. Scott, I think you mentioned in your prepared remarks that you're looking at -- for the acquisition pipeline, kind of use of the space and the ability to expand. I guess, as a result of COVID, do you see how space is used changing out [Indecipherable] more space per physician or maybe a negative or positive impact. Just curious on your thoughts on telehealth and just the outputs of the coronavirus that have been for medical office use? Well, I think, I'll take that three questions there. And I think the telehealth is positive for the space. We have a society and generally a population that is underserviced from a healthcare perspective, we've always had that and that continues. So the more opportunity for physicians or healthcare systems to reach out and make it more efficient, more effective for people to see their doctors. I think that improves the likelihood that they come into the MOB or they come in to see that healthcare system more often. Second, we're seeing expansion. I mean, if you've looked at our renewals. I think that is the one thing that is just outstanding. We had lease spreads that we're extremely positive but we renewed a lot of space. And we did it with healthcare systems, we did it with large physician groups, we had expansion where we were surprised that folks were taking more space. And we've worked very hard on relationships with the major tenants in our portfolio. And I think it's paid off and I think that's a huge compliment to Amanda Houghton and the leasing team. And it's a huge compliment to our property managers and the engineers who, during that eight, nine months of uncertainty, reached out to tenants, made them feel comfortable, we kept our buildings open. And so that infrastructure that we have really paid off at a difficult time. And I think this third quarter results has hit on all cylinders. So we like good tenants, we like tenants with credit, we like large physician groups and we'd like to be able to accommodate them when they expand. And I do think there'll be some changes in the use of space, maybe less administration -- administrative space. I think there'll be some folks that continue the work from home environment. So what we're looking for is not administrative space in the medical office building. We are looking for space with physicians, healthcare systems that see patients on a daily basis, that keeps the workflow and keeps their revenues moving. Thank you very much.
Operator
Our next question comes from Rich Anderson with SMBC. Please go ahead.
Rich Anderson -- SMBC -- Analyst
Hey, thanks. Good morning out there. So, Robert, what was the nature of the early renewal and the free rent? Was there something outlier-ish about that and why wouldn't that be a sort of a recurring theme elsewhere in your portfolio from time to time when you're sort of lock somebody down with free rent?
Robert A. Milligan -- Chief Financial Officer, Treasurer and Secretary
Yeah. No. [Indecipherable] Rich. And I think this early renewal was everything that we talked about in the second quarter. We're in kind of the early days of the COVID pandemic as we were looking at the best way for us to approach working with our health system tenants. One of the ideas that we came up was certainly, hey, if there is a win-win opportunity that's out there were health system that's uncertain certainly up in the Northeast, we had the ability to extend leases and get them free rent. We view that as really a kind of a winning situation for both of us. So, we did about 0.5 million square feet in the second quarter as we've talked about that, there's really spread free rent 1.2 million in the second quarter and 2.4 million in the third quarter. Again, those 0.5 million square feet of early renewals. I'd say, 83% with health systems and it really allowed us to lock in net effective rates that were about 18% higher than the rest of the world we're doing. So we moved forward with that.
And I think from a normalization period, I think it's really just abnormal because it falls out of our normal routine, where we look to renew leases with our tenants six to 12 months upon before expiration. So this is really just well outside of that. It was in direct response to how we wanted to deal with COVID with our health systems and it's something that really just stopped in the second quarter.
Rich Anderson -- SMBC -- Analyst
Okay. So no recurrence really expected for going forward at this point?
Robert A. Milligan -- Chief Financial Officer, Treasurer and Secretary
No, not from an outsized approach to dealing with the health systems or anything like that.
Rich Anderson -- SMBC -- Analyst
Okay. And then...
Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President
Rich, I think -- Rich, let me just answer. I think your question refers to same-store growth. As you've seen, without being free rent that we went out to work with our healthcare systems waiting, which has showed such strong results here in the third quarter, we don't see that unusual need going forward. We'll be back to that 2% to 3% same-store growth on, I think, a very consistent basis as we've done over the years.
Rich Anderson -- SMBC -- Analyst
Yeah. I'm not so worried about the optics of same-store as much as -- is it, you could [Phonetic] bottom line number that you're producing from an earnings perspective, but I appreciate that. And it helps for the modeling perspective. Another kind of modeling question, again, back perhaps to Robert, what is the timing on the forward takedown?
Robert A. Milligan -- Chief Financial Officer, Treasurer and Secretary
Well, so the timing of forward takedown is, we've actually been able to work with our banks that we initially did the trades with to get some flexibility. So, I think we've got the flexibility now to take our forward equity down through June 30th of 2021. And so, our tenant intention will be to really balance it out as we look to close on acquisitions. But we closed deals, we'll take the equity to make sure our leverage still stays within our typical range of 5 to 6 times at the takedown.
Rich Anderson -- SMBC -- Analyst
Great. That's all I have. Thanks.
Operator
Our next question comes from Connor Siversky with Berenberg. Please go ahead.
Connor Siversky -- Berenberg -- Analyst
Hey, everybody. Thanks for having me on the call. So, on the Raleigh projects, we were getting in the finish line. So I'm just wondering any sort of color related to the lease-up of the rest of the available space there? And then, what the kind of appetite there is in the Raleigh market for MOB space at the moment?
Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President
Go head, Robert.
Robert A. Milligan -- Chief Financial Officer, Treasurer and Secretary
Yeah. I think, as we look at all the markets that we're currently invested in going into pre-COVID, I think we looked at many of the markets in the Southeast as really top targets for us. When you've got the combination of a strong population growth, really strong economic growth, really driven by in-migration as well as kind of growing areas around that make universities. I think that's really been strengthened during the whole kind of COVID pandemic.
I think if you look at where people continue to want to move throughout this, Raleigh Durham is going to continue to be a very strong market for kind of in-migration of that. So as we looked at the opportunity here, this is a market that continues to grow, continues to expand, our experience in Raleigh has essentially been anything we have free and open, we can fill typically within six to 12 months. So we're seeing a lot of activity now, now that we're able to deliver it, really now that we're kind of through the initial shocks of the [Indecipherable] of the pandemic. We are seeing pretty good leasing traction there now.
Connor Siversky -- Berenberg -- Analyst
All right. Thanks for that. And then, after completing this project going through the process, I mean, what's the appetite on your end to engage in further development opportunities and maybe build-to-suit projects along the way?
Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President
Well, we have always felt that this was a great opportunity for us to go from beginning to end. We have a great relationship with WakeMed. And we're dealing, we've got our project going at Forest Park and we're seeing some opportunities that we are frankly are going to pursue from the development side.And so, we're excited about it. And frankly, I think 2021 would be a much more active year for us as we initially get started on some things that we're looking at now.
Connor Siversky -- Berenberg -- Analyst
All right. Great. That's all from me. Thank you.
Operator
Our next question comes from Todd Stender with Wells Fargo. Please go ahead.
Todd Stender -- Wells Fargo Securities -- Analyst
Hi. Thanks. Just getting back to the same-store NOI. As you're going to return to you may be at the high end of your 2% to 3% range, what do you think gets you there? When I look at rent coverage for MOBs, it's certainly well above all other healthcare property types. So, is it a matter of pushing rate more? What do you think issued back to that high-end?
Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President
Todd, I think it's a combination of the synergy within the asset, we're talking, has there a question yet, but some of the materials that you've seen and read about here recently show that certainly the community core locations are seeing strong rent growth and strong occupancy, as Robert just mentioned. There is migration to certain locations as healthcare systems see the need to be able to access the demographics within locations.
And so, I think it goes back to assets. Everybody talked about having a high-quality portfolio and unfortunately not every asset is high-quality, but -- and we think we have great market. So I think that we're seeing the benefit of a lot of hard work we've done in the last couple of years and I think we're going to move. I think our leasing team has the relationships and the demand for the space is there. So, we feel pretty good about the higher end or the mid-to-higher end of the 2% to 3%. But we've always pinned down that path. I don't see anything that probably disrupts that at this particular time.
Todd Stender -- Wells Fargo Securities -- Analyst
Thanks, Scott. And maybe just kind of staying on that theme when you look at your lease renewals, the releasing spreads have been very strong. But it doesn't seem like you've had the spend the TIs to get there. Maybe just kind of comment on how recent lease negotiations have gone.
Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President
Robert, I'll let you handle that.
Robert A. Milligan -- Chief Financial Officer, Treasurer and Secretary
Yeah. Todd, I think it's been really an interesting year as we've come into that. I think as we've looked at our total leasing that we've been able to accomplish, we have completed over 3.3 million square feet or at least more than 13% of our portfolio this year. And if you look at the releasing spreads across all of that, we're still up more than 5%. So, I think it's really been kind of project -- as we've looked, it's been across multiple assets -- multiple markets. I think it's been really a combination of both on-campus and off-campus. I think, as we've looked at the different performance, we functionally hasn't seen a real difference between the on and off-campus performance there. But I think as we continue to look at the TIs, I think there's certainly been a little bit more of a shift this year of how this is going to be [Phonetic] placed. How do they stay bit [Phonetic] longer. How do they modernize the space? So just by a function of doing more renewals, we've been able to keep our TIs, and just -- it's certainly something that we remain very disciplined as we look at all of our different deals.
Todd Stender -- Wells Fargo Securities -- Analyst
Thank you.
Operator
Our next question comes from Daniel Bernstein with Capital One. Please go ahead.
Daniel Bernstein -- Capital One -- Analyst
Actually, my question was on the TIs and leasing as well. So I'll just quickly ask, have you seen any difference in the make-up of buyers and sellers within the MOB space, given the how well the fundamentals have held up and really just trying to gauge where there is new competition out there for assets when I think about the long-term prospects for you to buy assets?
Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President
I think there is still the same non-public buyers out there. I do think that they have not gone away, they've had capital, they continue to look for strong yielding longer-term type of returns that they can get in the MOB side. And we've seen a little bit of pull back from some of the public players, which you would expect. They've got -- they're dealing with other issues and so forth and some cases are selling MOBs.
So it's a pretty good environment. If you look -- if you look at the environment a year and a half, two years ago to the environment today, it's a pretty nice time to be looking for medical office. And as we've mentioned, we've got strong relationships within our markets and that's going to I think pay off just like the renewals that we articulated on in the third quarter. It's got paid off. So we're pretty positive about our opportunities vis-a-vis competition.
Daniel Bernstein -- Capital One -- Analyst
Okay. That's all I had. Thank you.
Operator
Our next question comes from Omotayo Okusanya with Mizuho. Please go ahead.
Omotayo Okusanya -- Mizuho -- Analyst
Hi. Yes, good morning, everyone. Quick question, I mean with COVID cases rising, hospitalization is rising, just kind of curious what you're hearing from hospital systems at this point in regards to kind of first wave of COVID, is there any risk that they're starting to put off elective surgeries like what is generally the hospital systems thinking at this point, especially in states where hospitalization is all rising?
Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President
Well, we haven't gotten much feedback. As I mentioned, we've seen some activity in our leasing, probably a little more activity than we did last quarter, which is good. It seems that healthcare systems are moving forward on some expansion and they have put some leases on hold moving from the second to third quarter. We think we see opportunities in that. I think healthcare systems put themselves in a much better place in order to handle the process that goes on. So we haven't had any -- what we would call disruption in any of our major markets or any of the healthcare system relationships that have come to our attention.
Omotayo Okusanya -- Mizuho -- Analyst
Thank you.
Operator
Our next question comes from Lukas Hartwich with Green Street Advisors. Please go ahead.
Lukas Hartwich -- Green Street Advisors -- Analyst
Thanks. Good morning. I was just looking at the market enterprise at least for medical office, and that down 15% to 20% versus pre-COVID level and yet private market values don't seem to have moved as much. I mean can you talk about operated earlier, and how they haven't moved on that, but I'm just curious, what do you think is driving that gap there?
Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President
Robert, you want to give that a thought?
Robert A. Milligan -- Chief Financial Officer, Treasurer and Secretary
Lukas, I think that's -- I think that's the real question that we have certainly for you guys and other investors, because I think and certainly as we look across the private market, I think medical office has really -- has been a real standout as far as performance, certainly rent collections have been high, leases continue to get signed, not just for short-term, but for long-term and the demand is increasing as you look at those characteristics for how underlying fundamentals look for the next, not just 12 months, but certainly for the next three to five years.
And so I think that there is certainly a disconnect that is really can only be explained probably just buy more of a short term focus of trading between asset versus really the long term intrinsic value of the assets that we certainly in.
Lukas Hartwich -- Green Street Advisors -- Analyst
That's helpful. And then I just have a quick follow up. The yield on the Cary development looks like it increased a bit, can you talk about that?
Robert A. Milligan -- Chief Financial Officer, Treasurer and Secretary
Well, Lukas, I think we wanted to make clear, this is a little bit of a different type of a development, because it was really a redevelopment, where we had 40,000 square feet of existing Class B and it is on the side -- in our supplement, we have about $45 million of incremental construction costs to complete, that frankly excludes the existing kind of land cost that we had embedded in them. So just to provide greater clarity on the NOI, we expect to generate off of that. We do expect the yield on the incremental construction to be in the 7.5% to 8% range once fully leased up [Phonetic]. Whereas really our previous guidance have been in the mid-6% as incorporated the existing buildings that we ended up [Indecipherable].
Lukas Hartwich -- Green Street Advisors -- Analyst
Got it. Thank you.
Operator
[Operator Instructions] Our next question comes from Mike Mueller with J.P. Morgan. Please go ahead.
Mike Mueller -- J.P. Morgan -- Analyst
Yeah. Hi. Couple of questions, one, have your views evolved at all in terms of on-campus adjacent versus off-campus?
Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President
I'm sorry, could you repeat that?
Mike Mueller -- J.P. Morgan -- Analyst
Yeah. Have the views, the preferences toward being on-campus, has that evolved or changed at all to shift to more of -- being more comfortable away from the campus?
Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President
I think our philosophy has been all along that there is a underserviced frankly of medical office. And I think that back to earlier question, I think that the demand for medical office has been increased. I think COVID experience is going to bring -- bring about many complications from a health perspective, meaning that there'll be more need for physicians, more need to see specialists or just generally being wanting to be in better health. So I do think that that's going to generate that along with the application of telehealth is going to generate more need for a medical office.
Now I think what you're seeing and what we've talked about for three or four or five years is that there is a flattening in the United States from our medical office, where it's going to be served. It's very expensive and it's very congested in most high quality on-campus locations. Healthcare systems want to make it as functionally efficient and physician groups want to be as close to their demographics as they can be. So we always like community core, it's showing its results.
I think you've seen the largest compression of cap rates in community core locations and you've seen some extremely strong synergies from both same-store rent, but also from rent spreads in those locations. So we like our blend, we are the large -- we were a very large owner -- largest owner of on-campus. We think we need to be very selective where those campuses are and just as selective where those assets are that in community core. We like the blend and we'll continue to invest accordingly.
Mike Mueller -- J.P. Morgan -- Analyst
Okay. And then just if you're looking out three to five years or so, what do you think the average annual development spend you will be able to achieve is?
Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President
We've always guided, or we've always thought internally and talked externally about a company our size as we continue to manage our balance sheet, the way that we've always done it. We like that $200 million to $300 million a year, that's something that would be very consistent. It would be very accretive to our earnings. It would be something that investors could get comfortable with.
And on the other side of the equation, it's also a place where we can make sure that from a -- from a safety perspective, we don't put ourselves too far out in advance of anything, because what's really shown us here in the last eight months is that regardless of how good things can be in the economy or how people look at events, there is always something unexpected that comes along. And it drastically impacts the Company's ability to move forward.
We've been fortunate, while we don't think our share price is necessarily appreciative where it should be. We've had a very strong performance and what more importantly is that we continue to collect rents, our occupancy is solid, our leasing is good and we've been able to continue to protect our enterprise value. So we want to be cautious, but you'll see us be very consistent as we have been going forward both acquisitions and on development.
Mike Mueller -- J.P. Morgan -- Analyst
Got it. Okay. Thank you.
Operator
There are no further questions. So this concludes our question-and-answer session. I'd like to turn the conference back over to Scott Peters for any closing remarks.
Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President
I thank everybody for joining us on today's call. We very much appreciate the questions and the feedback and we look forward to see many of you and other investors at our NAREIT virtual conference that's coming up later this month. Thank you.
Operator
[Operator Closing Remarks]
Duration: 42 minutes
Call participants:
David Gershenson -- Chief Accounting Officer
Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President
Robert A. Milligan -- Chief Financial Officer, Treasurer and Secretary
Nick Joseph -- Citi -- Analyst
Juan Sanabria -- Bank of Montreal -- Analyst
Rich Anderson -- SMBC -- Analyst
Connor Siversky -- Berenberg -- Analyst
Todd Stender -- Wells Fargo Securities -- Analyst
Daniel Bernstein -- Capital One -- Analyst
Omotayo Okusanya -- Mizuho -- Analyst
Lukas Hartwich -- Green Street Advisors -- Analyst
Mike Mueller -- J.P. Morgan -- Analyst
