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Healthcare Realty Trust (NYSE:HR)
Q2 2019 Earnings Call
Jul 31, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Healthcare Realty Trust Second Quarter Financial Results Conference Call.[Operator Instructions]

I would now like to turn the conference over to Todd Meredith, CEO . Please go ahead.

Todd J. Meredith -- President, CEO & Director

Thank you. Joining me on the call today are Bethany Mancini, Rob Hull, and Chris Douglas. After the disclaimer, I'll provide a few opening remarks, Ms. Mancini will cover healthcare trends, Mr. Hall will discuss recent investment activity; and Mr Douglas, who will review operational and financial results before we move to Q&A. Bethany?

Bethany A. Mancini -- Corporate Communications

Thank you. 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 our Form 10-K filed with the SEC for the year ended December 31, 2018,

and then subsequently filed Form 10-Q. These forward-looking statements represent the company's judgment as of the date of this call. The company disclaims any obligation to update this forward-looking material. The matters discussed in this call may also contain certain non-GAAP financial measures, such as funds from operations, FFO, normalized FFO, FFO per share, normalized FFO per share, funds available for distribution, FAD, net operating income, 19:50 NOI, EBITDA, and adjusted EBITDA. The reconciliation of these measures to the most comparable GAAP financial measures may be found in the company's earnings press release for the second quarter, ended June 30, 2019. The company's earnings press release supplemental information Forms 10-Q and 10-K are available on the company's website.

Todd J. Meredith -- President, CEO & Director

Thank you, Bethany. We are pleased to report another quarter of steady results and increasing momentum on multiple fronts. Specifically, I'll focus on three key topics. First, the strength of our acquisition activity year-to-date; second, how we are proactively sourcing attractive investments; and third, how we see organic and external growth translating to FFO on a per share basis.

Starting with external growth, our acquisition pace is up notably, and we are pleased to report nearly $200 million of completed acquisitions at mid-year. We see continued momentum, and we've increased our guidance for the year. We've been pleased to see a consistent flow of attractive properties. Sellers and brokers have gained confidence aided by fewer portfolios of scale consuming everyone's attention; 20 public and private buyers low interest rates, and stable cap rates.

At the same time healthcare Realty's cost of capital is strengthened and afforded us the ability to invest more accretively. We are capitalizing on attractive market conditions to unearth more investments using our proactive sourcing process. This involves the practice of deeply embedding ourselves in targeted high-growth markets, using a team based approach we gather local intelligence, systematically collect and analyze market data, and identify desirable properties, and potential developments that are not available to the broader market.

This quarter, three of the properties we acquired were in the Seattle area, and the result of using our market expertise and three years of patiently working our local connections. We are also seeing increasing benefits from the company's solid reputation in the MOB space. Healthcare Realty is known for completing transactions smoothly, following through reliably, and taking great care of our properties and tenant.

Over time, our reputation has spread among and expanding network of brokers, sellers, physicians and health systems, and it leads to repeat business. This credibility has been years in the making and is yielding a marked difference in our ability to source more quality accretive investments. As an example, two of our long time health system partners recently reached out regarding potential development projects, with positive traction on these and other developments in our embedded pipeline, we expect a couple of starts in the second half of 2019.

The combination of our reputation, our proactive sourcing process, and favorable market conditions, is yielding a higher pace of investments. While we certainly evaluate marketed deals. We're not simply waiting around for offering memorandums in RFPs. We are using our deep market knowledge, our local connections, and shoe leather to insert internally source, and directly negotiate many investments.

Shifting to organic growth, our strong second quarter results reflect the benefits of steadily refining our portfolio toward more on-campus, multi-tenant medical office buildings in better markets with top health system. Discipline around these characteristics has led to superior contractual rent increases, cash leasing spreads, and tenant retention. And has enabled us to generate same-store NOI growth of 3% or higher at the top end of expectations for the sector. While we will always refine the portfolio to improve internal growth and reduce risk.

Going forward, we see less impact on our bottom line growth. We'll need to reduce leverage, less rotation out of lower quality and non-MOB properties, fewer leases with unfavorable purchase options and minimal need to reduce our exposure to off-campus, or single-tenant properties. With these structural changes largely behind us, we see a clear path for organic and external growth to flow straight through to FFO per share giving us a bright outlook for 2020 and the years ahead.

Bethany?

Bethany A. Mancini -- Corporate Communications

The political environment has certainly brought some theater to the healthcare sector since the beginning of the year, although actual health policy is expected to remain stable for the next 18 months leading up to the next election. Many anticipate a moderate democratic presidential candidate will rise from the pack following months of heated rhetoric and sharp debate. But time will tell. Health insurance companies and hospital industry groups favor a bipartisan more centrist leaning approach, away from the total government takeover of health insurance, and more toward incremental expansion of coverage. With Congress expected to remain divided a tempered approach remains the most likely course.

Turning to the status of current healthcare legislation, the Affordable Care Act remains under scrutiny in the fifth Circuit Court of Appeals. Many expect the law will remain in place whether in whole or in part. Republicans cannot afford to face an election having overturned health coverage expansion, with no replacement to cover those previously insured by the ACA, and without hope of passing major legislation in such a partisan Congress.

It is not surprising that legal experts on both sides of the aisle agree the ACA should stand at least for now. Political debate will continue to intensify throughout the election season, but market sentiments should increasingly reflect reality as candidates proposals are vetted for their economic and political feasibility. Healthcare stocks have been recovering from their mid April lows and investor focus is returning to earnings and fundamentals.

In recent quarters, hospital companies have reported renewed admissions growth, a positive signal for the direction of the sector. In general, the reimbursement and pricing environment for healthcare providers, has been fairly stable this year. As disruptive as ACA was at the time, the healthcare sector has adapted well and is moving forward.

Government funded health insurance has remained relatively level, representing 41% of total healthcare spending today, compared to 39% in 2010 even before the implementation of the ACA. Given the stability and reimbursement mix, and accelerating demographic need for healthcare, demand for real estate is now more promising than ever. Health systems continue to pursue strategies for enhancing market share focused on expanding their revenue base. Both inpatient and outpatient services are being targeted for consolidation, expansion, new construction, and employment growth.

Health systems are looking to gain the correct balance of efficiency in acuity, cost savings, and revenue growth. High acuity inpatient services are being centralized that market hubs and centers of excellence. At the margin health systems are moving less intensive services toward lower cost outpatient settings, both on and off-campus with care being organized along a continuum of acuity, that generally increases with proximity to the hospital campus.

In our view, on campus locations of outpatient facilities remain the most integrated, and low risk investment strategic to the mission of the health system. Longer term, outpatient delivery represents one of the most effective proven and politically feasible name, to lower spending growth, and improved providers profit margins. Regardless of political outcome, outpatient settings will only become more critical to hospitals. As carrying for the aging population efficiently, becomes increasingly paramount. Rob?

Robert E. Hull -- EVP of Investments

Investment activity this year continues to outpace our expectations coming into 2019. Year-to-date, we have closed $195 million in acquisitions with an average cap rate of 5.5%. Cap rates have remained consistent in the low to mid-fives for higher quality on campus MOBs.

With investor interest in medical office remaining high and a stable interest rate environment, we don't foresee a large move in either direction for cap rates. This quarter we acquired five properties for $102 million, which includes the $28 million Atlanta purchase in April, that we discussed on our last call. These acquisitions are especially attractive, because they increase our local market share and complement our existing footprint by building on our leasing teams extensive knowledge, and leveraging our property management resources.

In Seattle, we purchased two properties for $50 million. They are around the corner from two fully occupied buildings we own on UW medicines Northwest Hospital campus, and Seattle's growing Northgate submarket. These investments highlight the experience and teamwork found across our company. Our leasing team wanted more product in Northgate, and our acquisitions group drawing from internal market data, and our ongoing contact with local property owners delivered with these two buildings.

The buildings are ideally located with direct access to Interstate 5, a new light rail stop in a massive Simon Properties redevelopment. They sit between the North West hospital campus and it's large, comprehensive outpatient center, which are less than a mile apart. We now own four properties totaling over 250,000 square feet around this growing hospital. And one of the properties could accommodate an infill development of up 100,000 square feet with a structured parking garage.

Our other two acquisitions during the quarter in Tacoma and Fort Worth total 119,000 square feet for a combined investment of $25 million. Both buildings are adjacent to hospital campuses where we have acquired or developed properties giving us additional scale. And each hospital has recently undergone an expansion whereas planning to expand in the near future, pointing to increasing demand for medical space around each campus. With nearly $200 million in acquisitions closed year-to-date and another $75 million in advanced discussions, we are increasing our acquisition guidance. Our new range is $225 million to $325 million. We are optimistic about our ability to achieve the upper end of this higher range given our strong start to the year and robust pipeline.

Now moving to development, we completed the $12 million redevelopment of our MOB on Atrium Health University Campus in Charlotte, adding 40,000 square feet to the building. Most importantly, the first two tenants totaling 32,000 square feet took occupancy in early June. And in Seattle a 151,000 square foot MOB on UW medicines Valley Medical Center campus is nearing completion. A lease with a 30,000 square foot surgery center is expected to commence in the fourth quarter.

As current leases in both developments take occupancy over the next four quarters, we expect NOI from these properties to ramp to 782,000 per quarter. Among prospective developments, we are making progress on a few projects source from our embedded pipeline. In Colorado, we recently conducted a design and programing meeting for the hospital for the development of a 60,000 square foot on campus MOB with a budget of $19 million.

The MOB will be home to the hospitals newly established Comprehensive Cancer Center. In Texas, we signed our second letter of intent for space in a to be developed 120,000 square foot on campus MOB having a budget of $36 million. And in Tennessee, we are in advanced discussions with the hospital to purchase and redevelop a 110,000 square foot building currently owned by the hospital. As part of the $26 million redevelopment, the hospital and related providers will execute leases for approximately 80% of the building. Each of these developments, is expected to yield 100 to 200 basis points above where these similar buildings with trade today as a stabilized acquisition. And as the properties come online and lease up, they represent significant FFO contribution and value creation. We expect a couple of these to start this year.

I am pleased with our accretive acquisitions so far this year, adding properties with a high propensity for sustainable long-term growth. Our team is continually building a solid pipeline of investment prospects both development and acquisitions, and position us well for the second half of the year. Chris?

Christopher Douglas -- Executive Vice President and Chief Financial Officer

This quarter's robust internal growth was complemented by the heightened pace of year-to-date acquisition activity. These positive trends are evident in our second quarter same-store, and overall financial results. Specifically, normalized FFO of $51.2 million or $0.40 per share increased $2.5 million over the first quarter. This increase was primarily the result of a $1.9 million sequential increase, and NOI for year-to-date acquisitions. We expect these recent acquisitions to generate the same, 3% plus NOI growth as our same-store assets.

A level that continues to differentiate our portfolio. The trailing 12 months same-store NOI increased 3.6% this quarter, with a 3.8% increase in the multi-tenant asset, a testament to our deliberate focus on owning high growth properties. In our experience, investments generating the best performance, our multi-tenant MOBs affiliated with top health systems, and growing submarkets. And this now has shaped the composition of our portfolio.

Our 3.8% multi-tenant increase was driven by 3.1% growth, and revenue per occupied square foot versus 1.7% growth in operating expenses. The lower than historical expense growth was principally the result of a 1.5% decrease in utility expenses due to milder weather. It is worth noting that we typically experienced a seasonal uptick in the third quarter utility expenses by as much as $1.5 million over the second quarter. Longer-term, we expect operating expenses to increase in the 2% to 2.5% range, still providing positive operating leverage.

The major factor in our ability to optimize our portfolio and drive revenue growth over time is our emphasis on in place contractual increases and cash leasing spreads. Currently, the weighted average annual increase for all multi-tenant same-store leases is point 2.91%, which is well above what we see for most other MOB portfolios.

For leases commencing in the quarter, the weighted average future annual increase is 3.2% and notably the weighted average cash leasing spread was 5% which benefited from 90% of the leases having a spread of 3% or greater. These positive drivers along with tenant retention of 87% signal sustainable growth in the years ahead. Achieving these levels of internal performance is not an accident. It's the outcome of decades of experience managing, leasing, and investing in medical office buildings.

As 2019 progresses, we look forward to making additional investments that complement the quality and growth potential of our existing portfolio. And with solid back coverage, comfortable leverage, and a wide variety of available capital options including expected dispositions, we are well positioned to fund the growing acquisition and development pipelines, Rob discussed.

We see our strong internal performance combined with the increasing acquisitions and flexible balance sheet leading to improving FFO per share growth through the remainder of 2019 and in 2020.

Todd J. Meredith -- President, CEO & Director

Thank you, Chris. Operator, we are now ready to move to the question-and-answer period.

Questions and Answers:

Operator

[Operator Instructions] The first question comes from Nick Joseph with Citi. Please go ahead.

Michael Griffin -- Citi -- Equity Research Senior Associate

Hey, this is Michael Griffin on for Nick. Rob, you mentioned the strong transaction market that you've been seeing recently on the acquisition side with the cap rate. How does this change your disposition strategy going forward selling into that strength?

Robert E. Hull -- EVP of Investments

I think our our disposition strategy this year has been that you've got a guidance -- giving guidance of selling $75 and $125 million sort of the average cap rate between 6% and 7% in the quarter or 7.5%. I think over the past few years, you've seen us sell around $100 million to $125 million in assets, which is really been the refinement of the portfolio that Todd mentioned. I think that going forward, we're largely finished with that refining and you'll see us do more maintenance selling going forward so that pipeline or that -- those levels will probably come down to $50 million to $75 million per year.

Michael Griffin -- Citi -- Equity Research Senior Associate

Got you. And then one thing on markets. You mentioned a number of acquisitions in the Seattle area, this quarter. Are there any markets in particular that might appeal as compared to others that you're looking at?

Robert E. Hull -- EVP of Investments

I think we continue to look in markets where we already have a presence. I mean, as Todd mentioned, our sort of internal process -- sourcing processes continue to benefit us in areas like Denver and Seattle. Dallas, we made an acquisitions this quarter where we already have a presence. We think that those are right markets for us going forward, and will continue to look in those areas.

Michael Griffin -- Citi -- Equity Research Senior Associate

Got you. That's it for me. Thanks.

Robert E. Hull -- EVP of Investments

Thank you.

Operator

The next question comes from Vikram Malhotra with Morgan Stanley. Please go ahead.

Vikram Malhotra` -- Morgan Stanley -- Analyst

Thanks for taking the question. You referenced, I guess on the margin, you're starting to see more services, some types of services being pushed to non-hospital locations, whether that's on the campus or off the campus. Just curious to sort of this trend even though it's slower, does trend change your appetite for off-campus acquisitions as you look forward?

Robert E. Hull -- EVP of Investments

Vikram, thanks for the question. No, I would say for us, you will still see us probably allocating certainly more and consistently to on or adjacent to campus. But to your point, we certainly think the off-campus locations are valid. I think for us, it's more of an under -- a deeper understanding of what is in that building, how committed is the health system to it. And then really most importantly, how strong is that real estate that is off-campus.

Is it just a suburban office building with some medical tenents in it that could be difficult to release day, or is it something that really stands out on its own and we see the ability to generate strong rent spreads, contractual bumps, that are more in line with our portfolio. So it's -- I think just by nature of our criteria, you're going to see less off-campus.

However, we're open to it and I think obviously the key is paying the right price for that. And for us, that's been a little tight. That spread has been a little tight, and we'd love to see it -- opportunities if we see them where it's a better spread, we will look at those. And frankly the portfolio we have, of off-campus properties is a very, very nice portfolio with a very strong in place growth rate and ability to push rents. So it's, we're certainly open to it, but we still lean toward the on-campus, the safety and growth of that.

Vikram Malhotra` -- Morgan Stanley -- Analyst

Okay. And then the impairment charge of real estate this quarter, can you provide little more color on what that was?

Robert E. Hull -- EVP of Investments

Yes. Vikram, that's a building that we've had and held for sale for for a couple of years now. It's was previously an LTAC that was operated by LifeCare. We are now under contract with a new buyer. He is going to buy and redevelop the property as a drug and alcohol rehab facility. So we expect that to close later here in the third quarter. And it's been -- Vikram, it's been vacant for a while so, the actual outcome of that is a positive, because we have had some carrying cost to it. So selling that is clearly accretive for us.

Vikram Malhotra` -- Morgan Stanley -- Analyst

And just curious on per -- on even though -- so it's under contract. Can you give us some sort of range on pricing or some sort of metric per foot sort of what -- you know, it's empty, but just to get a sense of, given the -- that tax on relief sale that often, just curious on pricing. Any color you can give?

Todd J. Meredith -- President, CEO & Director

Yeah, the price on that is all over $3 million, $3.5 million compared to the exact price. But it does reflect the significant capital that the new operator is going to invest in the building. And we considered and does it make sense for us to invest that capital ourselves and released the facility to them. But given the fact that that's not where our focus is, we decided it was best to go ahead and take those proceeds, and let the best invest that additional capital into the facility to redevelop it.

Vikram Malhotra` -- Morgan Stanley -- Analyst

Okay. That makes sense. And then just last bigger picture question,.I think yesterday or day before ,the CMS sort of came out and sort of encouraged more hospital price transparency. And this has been in the news for a couple of months now. Just curious, if you have any thoughts on what that does longer term to hospitals?

Robert E. Hull -- EVP of Investments

Sure. I think it's obviously early we've all just been watching those headlines in some of the administration's comments and moves on that. I think you saw a little bit of that play out in the pharmaceutical side, where it was pushed into the advertising side and that's that's already been pulled back by the courts. So I think that's a signal that this is probably got a long way to go through the legislative and even the court system. So long-term certainly, I think maybe there is a good outcome that can be beneficial broadly to helping at least provide some clarity on what we're all purchasing in the healthcare system. I think the real difficulty is a lot of us, most people, have some form of insurance and they're not necessarily directly exposed to the full cost. So they don't even know what to expect when you're shopping, especially for the bigger ticket items. I mean it's one thing for the small items.

So it's -- I think there is a lot of risk for unintended consequences and a lot of confusion, and a long road to the court. So it's -- to your point, it's a big picture question, it's long term. I think you're going to see hospitals and providers push back pretty hard here to help get more clarity around how it actually is implemented.

Vikram Malhotra` -- Morgan Stanley -- Analyst

Great, thank you.

Christopher Douglas -- Executive Vice President and Chief Financial Officer

Sure.

Operator

The next question comes from Chad Vanacore with Stifel. Please go ahead.

Chad Vanacore -- Stifel -- Analyst

All right. Thanks, good morning. So you've done about $13 million of dispositions versus the 75 to 120 debt targeted. How should we think about the timing of those dispositions?

Todd J. Meredith -- President, CEO & Director

Yeah, I mean, I think we've -- looking at the pipeline where there's obviously going to be back ended this year and I think we started out the year saying that they would be -- dispositions would be largely back ended. We've got a handful of those that should close here to late third quarter, early fourth with a few more about half of it from the closing toward the latter part of the year. So working with different sellers and timing on these dispositions can sometimes fluctuates. So, but that's the -- right now that's the timeframe we're looking to at.

Chad Vanacore -- Stifel -- Analyst

All right. Then thinking about the flip side of that, which would be acquisitions. In your guidance range, that would imply acquisitions and dispositions about even out, but you seem to be a lot more positive on the higher end of acquisitions, so how should we think about that?

Todd J. Meredith -- President, CEO & Director

Yeah, I think just looking through the end of the year, I mean, I think those acquisitions will be spread throughout the end of the third and in the fourth quarter. So those are $75 million that I mentioned, those have cap rates in the mid-five range. So I think just timing wise that will be spread through the remainder of the year pretty evenly.

Chad Vanacore -- Stifel -- Analyst

All right. And just thinking about financing on that side, how do we think about the target leverage at end of the year and any additional equity issuance in the works, just given that you've upped your acquisition guidance?

Christopher Douglas -- Executive Vice President and Chief Financial Officer

Chad as you pointed out, and at the midpoint, we are pretty evenly distributed between acquisitions and dispositions through the remainder of the year. So not a ton of additional capital that is needed. If we are able to view a little bit to the upside on acquisitions. We do have plenty of options to be able to raise additional capital, and we did renew and expand our credit facility with a new seven year term loan this last quarter. So we have availability there. The ATM is obviously always an option as well if we are seeing more volume and then other sources of capital are always on the table as well.

Chad Vanacore -- Stifel -- Analyst

All right. And just one more from me. So the first half TIs and capex running below the midpoint of your outlook. Should we be thinking about a $1 million or $2 million sequential pickup, or maybe something to last for the full year?

Christopher Douglas -- Executive Vice President and Chief Financial Officer

You're right that so far for the year we are running below the midpoint on our maintenance capex items. We do anticipate that for the full year, we still feel good about our guidance ranges, and expect those to come in depending on the category somewhere in the middle of those -- the ranges we've laid out, which would indicate a little bit of a pickup here in the third, and the fourth quarter. But overall with the ranges we've outlined, it's still points to to solid FAD coverage in the mid '90s, which is a nice pick up compared to what we saw in 2018. We're running closer to 100%.

Chad Vanacore -- Stifel -- Analyst

Chris, where would most of that spend to be go into?

Christopher Douglas -- Executive Vice President and Chief Financial Officer

I mean we lay it out, between the three different categories, and we give specific guidance on each of those in terms of the leasing commissions, as well as the second-gen TI, and the building capex. Off of memory, I think if we're on the low end of anything right now it's more in the second-gen TI. But on all of these capex -- maintenance capex side, as we say, it really fluctuates quarter-to-quarter just with when the actual money you spent on the bills arrive. But nothing in particular out of the ordinary on any of the three categories.

Chad Vanacore -- Stifel -- Analyst

Okay. I was thinking more or less across the portfolio or any specific properties taking excess capex.

Christopher Douglas -- Executive Vice President and Chief Financial Officer

No, it's pretty even with where our leasing is going on and which is pretty spread out across the portfolio. We had, I think it was 18 different markets in the second quarter that we had renewals on. I think year-to-date, we're in 24 different market. So it's pretty, pretty spread out across the country.

Chad Vanacore -- Stifel -- Analyst

All right. Good catching up and I'll hop back in the queue.

Christopher Douglas -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

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

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Good morning.

Christopher Douglas -- Executive Vice President and Chief Financial Officer

Morning.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Hi, I wanted to just sort of back it up a little bit more macro. We've talked about this before, and I know you guys presented on page 16 of your deck, in terms of the overall tenant diversity, and I'm just curious to touch on this topic again, of how you guys are positioning your portfolio vis-a-vis, sort of the growth in teller health, urgent care, physicians, and the like. And just the general decline in the population, maybe say millennials, who have a primary care physician these days. So you guys are, I think ,16% square footage overall total would be primary care. Can you just remind us how you're thinking about it?

Christopher Douglas -- Executive Vice President and Chief Financial Officer

Yeah, I mean obviously the utilization of healthcare is heavily skewed to age, and increasing with age. So it wouldn't be surprising obviously to see that the younger age category or cohort wouldn't be using as much. And then as you point out, things change and technology changes. As much, it is all these technology inventions, and ideas, and applications are very interesting and helpful, I think really it's important to remember, you're not necessarily solving everything through those. There are ways to enhance the experience, the follow-up, the maintenance of things. And so it usually still involves -- again younger folks may go to the doctor one time a year. If that -- especially in that cohort, you're talking about and so if they don't do that-- [Multiple Speakers]

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

I'm not really focused on sort of age and acuity of health, I'm focused on you and I have primary care physicians, because that's how we were raised. I'm talking about the guys who are in our offices, who are 10 years younger than us, don't have primary care physicians. And I'm more thinking about, how are you thinking about that as your underwriting, new deals and you're looking at your existing portfolio. So, I mean obviously get that there is an acuity of health that comes with age. I appreciate that.

Christopher Douglas -- Executive Vice President and Chief Financial Officer

Well, and -- but also remember the setting and the episode of using urgent care relates to people who have very few incidences or emergency -- emerging type issues. When you start having more regular things, you go see sub specialists. They're not sitting at the urgent cares office.

if you've got an allergy issue, an ENT issue or a cardiology issue, if you have cancer, those aren't solved in the urgent care setting. Not to say that things don't evolve, but you have a coordinator of care and that's an important part of the process, is having a coordinator of care that then arranges your care with these sub specialists. So frankly that's again why we look more on campus than off, when you get off campus you do have a little more vulnerability to that, because simply urgent cares with new changes like you're talking about in behaviors and practices can challenge that.

But when you are dealing with these more complex issues, whether it's age-related or you have it generally from a young age, you have a much more complicated situation that has nothing to do with urgent care. So I do think it matters in terms of the setting, and the age, or the acuity things. And I know everybody wants to pass forward into disruptiveness, but everybody has a tight grip on that because it's interesting to talk about. But the reality is, people are not suddenly getting less sick and less acute issues. We're actually seeing more of that and then the aging on top of that is more, and it's a whole ecosystem. And I think for us it's a much, much safer investment on the whole to link yourselves to those high acuity settings.

Most of our new developments that we're talking about, most of our acquisitions have complicated cancer services, they have linear accelerators surgery centers. I would say, orthopedic more joints being done in the surgery centers that are on and off-campus.

Those are the kind of things we're seeing drive our usage. And we think for the next 10, 15, 20 years with all the aging demographics pushing that it's not going to be as much about the millennial piece and then by that time, that group is changing having children, having doctors, primary care doctors and falling into those patterns. Yes it may change a little, but we don't think that is what's driving utilization.

Operator

Pardon me. Mr Sadler, are you there?

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Yes. Sorry about that. I was muted. Thank you.

Robert E. Hull -- EVP of Investments

We missed the question. We missed what you were talking about.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

So you think there is a lot of noise about sort of tell...[[Indecipherable]

Christopher Douglas -- Executive Vice President and Chief Financial Officer

[Speech Overlap] I know. I don't want to [Indecipherable] we're not dismissive of it, we really are not. I mean it's a very important piece of it and we have several board members, who we talk with regularly who are health system executive CEOs and dealing with that. It's very real, and it's an important piece of it. But it's not a substitution necessarily, it's a complement to what's going on.

And then obviously, I mean one of the key things about telemedicine is if you have these high-end specialists, there's fewer of them, it's hard to pull them to smaller communities or outlined communities, so you create that hub, hospitals, and then they can serve a broader population set, that are not in these urban settings, maybe near the academic medical center or the large community hospitals.

So it's important, I think it's just -- we tend to be so much closer to the hub rather than taking the risk out there that would be jeopardized by that change .

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

I guess, that's putting it in dollars and cents. Do you see or you -- would you change your return expectations or have different return expectations going in -- right you pay higher price for a higher acuity tenancy, or a specialist tenancy, versus something that had a higher mix of Internal Medicine or family practices?

Christopher Douglas -- Executive Vice President and Chief Financial Officer

I think it already is embedded in the market. I think that's absolutely how the market is working. So when we're buying some properties that are in the low-to-mid fives, as Rob described the market, that generally is the case. Or the developments we're pursuing. That generally is the case. And if you go to something that's much more as you said premium care based, out in the market, not near the hub or a dense area around the hospital.

Then you see a difference in cap rates. The exact spread is debatable depending on the content within the tenancy, as well as the real estate market dynamics. But that is definitely embedded principal I think in the market for everyone, not just us.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Okay. And then just lastly for Rob, because this is the second quarter in a row. He's been able to raise guidance on acquisitions and now it seems like you're optimistic around the high-end of the range even which is good. Do you see the potential to be having a similar conversation 90 days from now, Rob? I mean is the pipeline, I heard robust, Is that's good?

Robert E. Hull -- EVP of Investments

Yes, I think, I mean I think our pipeline is robust as I described, and I think we are in a favorable cost of capital environment right now that is affording us the ability to make those acquisitions in an accretive level. So, I think if that -- if that continues, I think that we have the opportunity to target the high-end of that range.

Christopher Douglas -- Executive Vice President and Chief Financial Officer

Yes, I think that's the caution for us is just that obviously a year ago, we had a very different capital market environment. So there are certain things we can control in certain things we cannot. But I think what we're trying to certainly relay is that, right now with the cost of capital where it is to strengthen that, but combined with our sourcing efforts plus what's coming to market, we really like the pace of what we're seeing. But we do have to be careful obviously because things can change fairly quickly.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

And just lastly, you guys you provided the cash yields, how would I -- you've done 5.5% cash yields on 1.85 acquired to date. How should I think about that from a GAAP perspective?

Christopher Douglas -- Executive Vice President and Chief Financial Officer

I don't have that number at my -- I wouldn't have that number at my fingertips.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

[Speech Overlap] You have average escalators maybe?

Christopher Douglas -- Executive Vice President and Chief Financial Officer

Yes, you can look at the average escalators of 2.91%. And I think we ended up, I can get you the exact weighted average lease term, and so you can do the math and calculate it. Our renewals or 53 months. So you could -- you can use the escalator and that Walt, as well as the cash leasing spread to come up with the GAAP yield.

Robert E. Hull -- EVP of Investments

For the acquisitions, I would say we -- this is a generalization but 25 basis points is probably realistic given what Chris just described, So we tend to obviously focus on the cash yields, but we certainly at least are aware of what the GAAP yield might be.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Helpful. Thank you, guys.

Operator

The next question comes from Rich Anderson of SMBC. Please go ahead.

Rich Anderson -- SMBC Nikko Securities Inc., Research Division -- Analyst

Hi, thanks, good morning.

Robert E. Hull -- EVP of Investments

Good morning.

Rich Anderson -- SMBC Nikko Securities Inc., Research Division -- Analyst

And so I think it was Chris. That said, the acquisitions are producing similar, same-store NOI growth to the rest of the portfolio. Did I hear that correctly?

Christopher Douglas -- Executive Vice President and Chief Financial Officer

Yes. And the bumps are a little bit below what we have on average right now.

Todd J. Meredith -- President, CEO & Director

2.8.

Christopher Douglas -- Executive Vice President and Chief Financial Officer

2.8, but we think that long term, they should be able to generate the same level of growth.

Rich Anderson -- SMBC Nikko Securities Inc., Research Division -- Analyst

That's not the question is, I'll make sure I heard that right. The question is if you're buying at a healthy pace now, what's benefiting the portfolio except for the fact that you're getting larger. I would think that when you acquire, you would want to be additive not only to the size of the company, but to the growth profile of the company. How would you respond to that question?

Todd J. Meredith -- President, CEO & Director

Well to Chris's point the average escalators on the acquisitions are just fairly different than the in place. So when you look at that relative to expense controls. We think we can get very similar growth NOI level just starting out. Obviously there is accretion and spread, from actually buying the assets, but not get larger. What we're looking forward to your point , is how to accrete to that same-store growth profile.

So putting that together with -- putting that together our acquisitions with the existing assets we have, we think we can combine that and accelerate. And as Rob went through I think pretty much one by one on the acquisitions, each of these buildings that we're looking at are increasing our scale, leveraging our resources, leasing, and management in that same market. And so basically you're able to then capture some incremental growth as you are describing. That's beneficial beyond just saying, hey, we're bigger

Rich Anderson -- SMBC Nikko Securities Inc., Research Division -- Analyst

Okay. Have you given any additional new thought to providing bottom line FFO guidance, I know you give give all these components and stuff, but you just sort of take us right to the one inch yard line or whatever. You're doing this -- all this work and yet it kind of exists in a little bit of information vacuum because you don't really see it in how it impacts your bottom line number. It's not a hard business to estimate going forward, given it's consistency. I'm just curious, I know you've been asked this question probably a 1,000 times but maybe this 1,001 time you'll say, yes, we're going to continue to -- we're going to start to do guidance. What are your thoughts on that as of today?

Todd J. Meredith -- President, CEO & Director

We're not there, we understand the point. I think what was important, when we started many years ago providing all the details was that we did have some pretty wide interpretations, if you will, of our remarks and so forth. And we didn't have all those details in the guidance that we now have. And so you've seen everybody,, I think become much more in line with what our own expectations are, and we've tried to communicate that and help folks walk through the business.

But I think the important thing is by providing all those pieces, we're getting people focused like yourself and investors on the actual business rather than talking about the odds of the game in the press conference, we'd rather talk about the actual plays and players on the field. And again I know most people have a different view of that, but our view is we're not uncomfortable with where all the the estimates are, and if we see a material issue there I think it would raise that question further, but we're OK with what we see there.

Rich Anderson -- SMBC Nikko Securities Inc., Research Division -- Analyst

Okay. And then last question, I think Bethany went through the political environment in the ACA and all that. I know you're ramping up acquisitions, but you're doing it in front of a Presidential Election. I'm wondering, if there is sort of an of an implied risk in the timing of all this, because if Trump gets reelected perhaps that's bad at the margin for the business of hospitals, and healthcare, and whatnot. So I'm just curious if you can comment on that and how that's working into your mindset?

Todd J. Meredith -- President, CEO & Director

All this, as Bethany said, is a lot of campaign theater right now. And not to belittle it, I think we have a long way to go to figure out which direction it will go and whether, as you said, one victor versus the other, will drive it strongly in one direction of the other. I think as Bethany tried to suggest, usually the more moderate incremental approach wins the day. And we think that's really more likely either direction.

Especially with the divided Congress I think it always ends up being more incremental than we all sort of see in the headlines or the debates. And so we really expect it to be much more reasonable. And as Bethany said the ACA was pretty disruptive. In hindsight, it didn't have a huge impact necessarily, because what it really is about is health insurance and how you pay for it. It doesn't change actual need for care, especially those critical services, those acute services, which we're focused on.

Rich Anderson -- SMBC Nikko Securities Inc., Research Division -- Analyst

Okay.

Todd J. Meredith -- President, CEO & Director

I think it obviously present some interesting things and we have to navigate that. But I think in general the trends are strong and it will be OK either way.

Rich Anderson -- SMBC Nikko Securities Inc., Research Division -- Analyst

Okay. I appreciate it. Thanks very much.

Todd J. Meredith -- President, CEO & Director

Sure. Thanks, Rich.

Operator

The next question comes from Michael Mueller of JP Morgan. Please go ahead.

Michael Mueller -- J.P. Morgan

Yeah, hi, on the three upcoming potential developments, you mentioned, I think you said the Tennessee One was going to have part -- it was going to be partially leased by system. Was the Colorado and Texas developments, where they going to be fully leased?

Robert E. Hull -- EVP of Investments

They will, at the outset, they will not be fully leased, it will certainly be a large hospital component to it. They will be well leased probably in that 50% to 60% range out of the gates.

Michael Mueller -- J.P. Morgan

Okay. And then, is it that similar for the Tennessee redevelopment?

Robert E. Hull -- EVP of Investments

Yeah, the Tennessee redevelopment will actually be probably up in the 80% leased range.

Christopher Douglas -- Executive Vice President and Chief Financial Officer

But it's also a hospital and then a joint venture with a physician group that comprise much of that 80%.

Michael Mueller -- J.P. Morgan

Got it. And if we're thinking about development say over -- development starts over the next three to five years, I mean, does it seem like this is a pretty good template to think up where you have, it's not 100% build-to-suit pure spec, but something with a heavy pre-leasing component?

Robert E. Hull -- EVP of Investments

Yes, I think if you, I mean, I think if you look at our before that I laid out, they're primarily coming from our embedded pipeline. So locations where we have control of the site, where we are in good dialog with the hospital aware of what's going on in the campus, and what their evolving needs are. So yeah, I think going forward over the next three to five years, you can see this type of development being more of what we do.

Michael Mueller -- J.P. Morgan

Okay. That was it. Thank you.

Todd J. Meredith -- President, CEO & Director

Thanks, Mike.

Operator

The next question comes from Todd Thinder with Wells Fargo. Please go ahead.

Todd Thinder -- Wells Fargo

Hi, thanks. And just looking at the front page of your press release, when you're looking at the average cash leasing spreads of 5%, you get a breakdown of the percentages of where those were. To get to 5%, does that suggest that 4% plus we're on larger renewals? How did you get to the 5%?

Christopher Douglas -- Executive Vice President and Chief Financial Officer

Yeah, no, it's pretty spread across all the leases, and so that's really on the percentage of square feet. So we had 37% of our square feet, and it was not a big concentration in any one particular lease or one -- even any one particular market. We had -- it was 16 of our 18 markets, this quarter had cash leasing spreads of 3% or greater.

So it's pretty wide and deep, the largest market that we had renewals this year was in DC, it was I think made up a little over 25% of the renewals for the quarter. It averaged about 6.5%, but it was not the highest market in terms of cash leasing spreads. So as I mentioned, pretty, pretty wide and deep, and that's been consistent with what we've seen for the year and even looking back into 2018.

But long term, we still look at the majority of the leases are coming in, in that 3% to 4% range. Like it did this quarter, it with 53% of them in that range. And so that's where we think the long-term expectation for cash leasing spreads should be.

Todd Thinder -- Wells Fargo

Would you characterize these leases to be, or have they were, I guess below market or really you have some pretty good pricing power here? How do you characterize, I guess maybe what happened in the quarter and what you're expecting for the rest of '19?

Todd J. Meredith -- President, CEO & Director

I would definitely say it's more the latter, the pricing power. Because our average lease term, and you see it on our leasing commitments each quarter. They run as Chris said I think this quarter 53 months, so call it 4.5, five years. We're not getting materially out of line with market necessarily, there are those opportunities here and there. And we've benefited sometimes from that.

But I would say generally speaking, it's an ability to just continue the momentum that you have, because of the pricing power with the competitive alternatives they are on is plentiful. And so you just have that ability to push. And clearly we're always looking at is -- what is the potential competition, what's the replacement costs. How are we relative to that. And we see plenty of room there across many of the markets as Chris described.

Todd Thinder -- Wells Fargo

All right, that's helpful. Thanks, Todd. And then when you're looking at, I guess, one of the acquisitions in the quarter, the Seattle one, the cap rate was pretty high on the 30,000 square foot property is 100% leased. Is the lease coming due soon? I mean it's still triple, I would say double A rated. What contributed to that pretty high yield?

Todd J. Meredith -- President, CEO & Director

Yeah, that was a property that was internally sourced directly negotiated with the buyer, or with the seller by our guys here, a good opportunity for us. It was a little unique. The primary lease in the building, with MultiCare the hospital system, which was largely -- the largest tenant in the building, had a termination option in it. That was a few years out. And with our relationship with MultiCare, we were able to go to them and eliminate that termination option and they actually extended the term.

So we created some value there.

Robert E. Hull -- EVP of Investments

10 years. So that they extended.

Todd J. Meredith -- President, CEO & Director

They extended the term for 10 years. And so we created some value there. I think that was a benefit of us having two buildings on the adjacent campus. We've been on that campus for over 10 years, both of the buildings are well leased. We've worked with them well during that time frame, so I think that really benefited us there.

Todd Thinder -- Wells Fargo

All right, that's helpful. Thank you.

Operator

The next question comes from Daniel Bernstein with Capital One. Please go ahead.

Daniel Bernstein -- Capital One -- Analyst

Hi, good morning. So I guess just your retention rate, and I know it jumps around -- can jump around a lot quarter over quarter, even year-to-year. But if you go back two years ago, it was in the low '80s, sometimes in the '70s and the last two quarters, it's in the mid-upper '80s.

Are you seeing -- are you doing something different to retain tenants or the hospitals and tenants thinking differently about moving to other locations? Just trying to understand the trends there. And do you see that kind of high retention rate continuing? And it has relevance to the TI and capex. So just trying to get your thoughts there.

Christopher Douglas -- Executive Vice President and Chief Financial Officer

Yeah, good question. And we're not seeing a material change in terms of discussions with the hospitals. I think you may see a little bit of the improvement go to the mix in terms of our assets back to the point, that Todd made of some of the refinement that we've been making over the years, in terms of the mix of our assets that the markets, as well as the location on and off campus maybe benefiting us some.

We still give guidance of 75 to 90, but as you point out, we've been running more the mid to the upper end of that, we don't see that changing. But obviously in any particular quarter, it can fluctuate within that range. But it certainly does help as you pointed out on the capital side, because we were able to retain tenants the capital or the TI associated with that. It's substantially, it could be half of what you experience, looking to have to backfill that space.

Daniel Bernstein -- Capital One -- Analyst

All right. And one quickly in the quarter saying capex is going to be better than your forecast, but if retention rates continue to stay high, then that would be a possibility. Right?

Todd J. Meredith -- President, CEO & Director

Yes, it certainly does help. We -- as I pointed out earlier, we still feel comfortable with the ranges that we've given on all of our capex, including the second-gen TI, which takes into account the broader range on retention.

Daniel Bernstein -- Capital One -- Analyst

Okay. And then also another broad company question. You seem to be sourcing, a good number of transactions, both on the acquisition side and the investment side. Is there something you've changed in the last couple of years or even more recently in terms of trying to build relationships with the hospital systems, something strategically that you're doing different in terms of your sourcing? Just trying to understand this, does the long-term sustainability of maybe getting some more -- a higher acquisition or investment level than what you had in the last several years.

Todd J. Meredith -- President, CEO & Director

Sure. I think as Rob touched on and I did as well. Dan, I think it's come together in terms of that internal sourcing process that we've been working on for years. It's not new. I think we're just seeing the dividends pay off in terms of the ability to source those, but obviously it helps to have a more constructive capital markets environment and a very effective cost of capital.

So it definitely takes things we can control, but also some things we can't. But we have to be positioned to take advantage of. So that's really I think the confluence that has helped us. We obviously want to take advantage of that while we can. And it's interesting we've looked back to your point about new versus new trends. I would say we've actually probably been a little bit careful about talking about our ability to do this sourcing too much because you just don't have full control of the markets in terms of what comes to market, the cost of capital.

But looking back even 10 years, we've been pretty consistently been able to source acquisitions that are not just being marketed heavily. Whether that's very little marketing to a few handful of buyers, and we're in that small circle or it's truly things as Rob described this one into coma where we have our connections and works some sellers locally.

So we're seeing a consistent ability to add that value on top of just what's in the market and we're encouraged by what we're seeing in the landscape with sellers. The capital market environment, the interest rate environment. So it's, -- to us it feels fairly sustainable. But we have to -- we always have to match fund and carefully watch the capital markets.

Daniel Bernstein -- Capital One -- Analyst

Okay. I think what I was trying to get you, was, is there something that you've done differently in the last couple of years, three, five years, then you did to five years prior that -- that may be trendy in the right market environment. Something strategically that you've done different.

Todd J. Meredith -- President, CEO & Director

I would say, we've certainly put -- we've seen the success of it from years prior. And we've been just adding resources toward that effort. So as Rob describes Seattle, we're getting more and more out of that effort in Seattle, or at Denver, or at Dallas, and some other markets that we're looking at, and even some new markets.

So I think it's just steadily improving that process, refining it, getting more people embedded, coordination as Rob described, between our leasing property management, as well as our investments team. And it's just frankly gelling better, and I think we're applying more to it, and the markets are more conducive to that. So it's certainly helping pick up the pace. And we're encouraged by the accretion that can come from that, and then also the acceleration of internal growth that can come out of that as well.

Daniel Bernstein -- Capital One -- Analyst

Good. Sounds good. I appreciate the call.

Operator

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Todd Meredith, for any closing remarks.

Todd J. Meredith -- President, CEO & Director

Thank you everybody for listening this morning, and we will be around for follow-up, if anybody has additional questions. We hope everybody has a great day. Thank you.

Operator

[Operator Closing Remarks]

Duration: 61 minutes

Call participants:

Todd J. Meredith -- President, CEO & Director

Bethany A. Mancini -- Corporate Communications

Robert E. Hull -- EVP of Investments

Christopher Douglas -- Executive Vice President and Chief Financial Officer

Michael Griffin -- Citi -- Equity Research Senior Associate

Vikram Malhotra` -- Morgan Stanley -- Analyst

Chad Vanacore -- Stifel -- Analyst

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Rich Anderson -- SMBC Nikko Securities Inc., Research Division -- Analyst

Michael Mueller -- J.P. Morgan

Todd Thinder -- Wells Fargo

Daniel Bernstein -- Capital One -- Analyst

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