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Physicians Realty Trust (NYSE:DOC)
Q3 2019 Earnings Call
Nov 6, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to Physicians Realty Trust Third Quarter 2019 Earnings Conference Call. [Operator Instructions].

I will now turn the conference over to your host, Bradley Paige, Senior Vice President, General Counsel. Mr. Page, you may begin.

Bradley Paige -- SVP, General Counsel

Thank you, Oliver. Good morning and welcome to the Physicians Realty Trust third quarter 2019 earnings conference call and webcast. With me today are John Thomas, Chief Executive Officer; Jeff Theiler, Chief Financial Officer; Deeni Taylor, Chief Investment Officer; Mark Theine, Executive Vice President Asset Management; John Lucey, Chief Accounting and Administrative Officer; Laurie Becker, Senior Vice President Controller; and Dan Klein, Deputy Chief Investment Officer. During this call, John Thomas will provide a summary of the company's activities and performance for the third quarter of 2019 and year-to-date, as well as our strategic focus for the remainder of 2019. Following John, Deeni Taylor will provide our thoughts about the market, our pipeline and investment in growth opportunities for 2020. Jeff Theiler will review our financial results for the third quarter of 2019 and our thoughts for the remainder of the year. Mark Theine will conclude with a summary of our operations for the third quarter of 2019. Following that, we will open the call for questions.

Today's call will contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. They are based on the current beliefs of management and information currently available to us. Our actual results will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe our assumptions are reasonable, our forward-looking statements are not guarantees of future performance. Our actual results could differ materially from our current expectations and those anticipated or implied in such forward-looking statements. For a more detailed description of potential risks and other important factors that could cause actual results to differ from those contained in any forward-looking statements, please refer to our filings with the Securities and Exchange Commission.

With that, I would now like to turn the call over to the company's CEO, John Thomas. John?

John Thomas -- Chief Executive Officer

Thank you, Brad. Good morning and thank you for joining us today. Along with Brad Page, I'm here with Jeff Theiler, our Chief Financial Officer; Deeni Taylor, our Chief Investment Officer; and Mark Theine, our Executive Vice President for Asset Management.

We lost a true icon in our business recently. David Emery was a good friend, actually a landlord in my prior life and in many ways a mentor. I will miss him, and we just want our friends in Nashville and his family to know we are thinking of them.

We would like to begin this discussion by telling you how much we appreciate our clients, our team and investors. This quarter proved once again the superior nature of medical office facilities, and DOC is positioned better than ever to source opportunities for investment through our vast network of clients and relationships, and we are ready to grow and grow smartly. Our clients include the largest healthcare organizations in the United States and many of the leading physicians and physician organizations in their specialty. Our team includes the many professionals that recently voted Physicians Realty Trust The Best Place to Work in Milwaukee for the fourth year in a row.

Our team also includes many professionals dedicated to our mission and values, along with our facility management partners and developers, as well as bankers, capital markets professionals, real estate brokers, and yes, even lawyers who help us serve our clients every day to provide high-quality care and access to care in outpatient healthcare facilities, many of which are recognized as the newest and best facilities of their kind in the United States. We are only six years old, but on four facilitates, they were the National Development of the Year for the year they were built. Our team also includes those who went before us who helped build our company from scratch, especially our founder, John Sweet. Our investors include many of the largest asset managers in the world, as well as dedicated REIT investors and more and more generalists. Our investors include many of you, who represent and devise our primary investors. We appreciate your participation in this call today to commit the time and effort to evaluate our performance, our financial reporting, our veracity and transparency, on behalf of investors who have entrusted us with billions of dollars. We wouldn't be here without you. We wouldn't be successful for our investors without you. Thank you.

The third quarter of 2019 went as expected. Some might suggest we exceeded expectations, but not mine. We have high expectations of ourselves and we work hard every day for our clients, our team and our investors. We believe that hard work and the care we show to our clients is one of the primary reasons why when providers have a choice, they choose DOC to own, manage and grow their outpatient care medical office facilities. Our best-in-class operating platform performed remarkably well this quarter. Our best-in-class business development team delivered creative, accretive and long-term investments for us with existing and new investment grade providers, who deliver high-quality care in their communities every day.

Finally, our leadership enhanced and strengthened our already strong balance sheet. We are better positioned for growth today than ever before and we have every opportunity to accelerate our growth going forward. We began this past quarter with one operator reorganizing, one operator transitioning to a new operating platform, one operator partnering with a superior operating platform, and one health system selling its assets to a university health system. All these efforts have been completed and DOC helped facilitate all of them in a proactive and active way to help make their providers better and better positioned to care for their patients, all while protecting and benefiting our investors.

Jeff will talk about the financial impact of these transitions in a few minutes, but the bottom line is our LifeCare LTAC facilities have a new operator who valued our facilities and our leases so much as we do, and assumed our leases as-is. United Surgical Partners, the owner of more than 300 surgery centers and surgical hospitals in the United States, with our assistance and encouragement, became majority owner of the Foundation San Antonio Surgical Hospital along with outstanding physicians in that community, and that tenant signed a new, 10-year lease with DOC. We have sold the Foundation El Paso Surgical Hospital. Lastly, at the request of CommonSpirit, our largest national client and the largest health system in the United States, we helped them facilitate the sale of their Louisville hospitals to the University of Louisville Health, preserving and enhancing those incredibly important providers in that community who are actively engaged in the medical education of our future providers, as well as research and high-quality medical care. We welcome the University of Louisville Health, who has assumed all of our Louisville KentuckyOne leases, and we look forward to growing our relationship with its outstanding university system and community.

As I've mentioned, we are well poised for growth. I've asked Deeni to provide an update on our pipeline and aptitude for growth. We continue to see and execute on high-quality, off-market transactions. During this past quarter, Deeni and Josh Richmond completed one of the most complex transactions we've made, adding John Muir Health System in Walnut Creek, California to the DOC family. Deeni will share more about that transaction, as well as our development and acquisition pipelines; Jeff Theiler will share our financial results and an update on our very strong balance sheet; and Mark Theine will then share our third quarter operating performance, including the results of our client satisfaction surveys. The DOC team continues to outperform in customer service, leasing and capital maintenance of our facilities, with a growing focus on sustainability and the environment. This quarter, we experienced an earthquake, floods, hurricanes, and our facilities and response teams all performed well with minimal interruption to service.

Deeni?

Deeni Taylor -- EVP, Chief Investment Officer

Thanks, John. As you noted, we've been working on a unique acquisition, and during third quarter, we completed the transaction, which represents our continued ability to develop positive hospital relationships and source off-market opportunities.

Approximately a year ago, we began working with a seller of five medical office buildings, totaling 93,000 square feet, that are 100% leased. These MOBs are across the street from John Muir Hospital in Walnut Creek, California, part of the East Bay area of San Francisco. Most of the tenants are independent physician practices in these buildings. For this transaction, the seller wanted to partially receive DOC OPU units along with cash at closing. We were able to purchase the MOBs for $34.6 million with about 50% funded with our OPU units. The first-year unlevered yield on this good investment is 6.1%. Also due to the strategic location of these buildings across the street from the hospital, the hospital wanted to work with DOC on the future tenancy of the medical space. At closing, John Muir Hospital, which is a Moody's A-1 credit health facility, executed a 10-year absolute net master lease for all 93,000 square feet with 2.5% annual increases. Ultimately, we were able to acquire five medical office buildings off market at a very attractive price, and develop a long-term, new relationship with a hospital in California, which adds another state to DOC's map. For the remainder of 2019 and into 2020, our pipeline for acquisitions and new developments is strong. We are close to finalizing contracts for more than $50 million in new acquisitions in 2019, and are excited about the new relationships these transactions will have with investment grade health systems. All of these acquisitions are contingent upon typical closing conditions. As we look back on transactions we have closed in 2019 and those we are finalizing, the vast majority are off market. We believe the pipeline for 2020 will continue to be strong as DOC excels in our relationships with physicians, health systems and sellers of medical office assets.

I'll turn it now to Jeff.

Jeffrey Theiler -- Chief Financial Officer

Thank you, Deeni. In the third quarter of 2019, the company generated funds from operations of $51.2 million or $0.27 per share. Our normalized funds from operations were also $51.2 million and $0.27 per share. Our normalized funds available for distribution were $47.7 million or $0.25 per share. DOC showed strong earnings growth this quarter, and resolved the situations that were distracting from the strong performance of our core MOB business, starting with the LifeCare bankruptcy resolution. Our conviction that the strong cash flows from our three LTACs, which were generating around 3x EBITDAR coverage, would insulate us from the negative impacts of the LifeCare corporate bankruptcy was proven correct. Our new operator assumed control of the assets on September 30 on the same lease we had in place with absolutely no modifications. In addition, the operator is saving us economic damages incurred during the bankruptcy process, including legal and late fees, in monthly installments over the next year. We booked at $1.1 million of back rent and fees this quarter, which reverses out all previous charges taken. Our new tenant has an excellent long-term track record in this industry and clean balance sheet, so we expect strong performance going forward. Once there is some operating history, we will begin to report EBITDAR coverages again in the supplement.

For our El Paso Surgical Hospital previously affiliated with Foundation Health Care, we have closed on a sales agreement with the doctors in the facility for $32 million. As a requirement for this sale, we collected $2 million of back rent, which will be booked as revenue in the fourth quarter. The $32 million sale price consists of $4.4 million of cash from the buyer with DOC providing seller financing for the remainder under a loan not to exceed 24 months, yielding about 12% per year with fees and interest. This loan is secured by the property and guarantees from the operating entity.

Finally, the other material item on the credit watch list was the San Antonio Surgical Hospital that was also previously run by Foundation. This outfit is now leased to a newly formed JV, comprised of the existing doctors and USDI at rental rates that are nearly identical to the old lease. The team put in a lot of work to get successful resolutions on these minor issues, and we are excited to focus again on the strong prospects that we see for the company going forward. Along those lines, based on successful resolutions of the Foundation of LifeCare assets, we no longer see any materials dispositions happening in the near term, nor do we have any material redevelopment plans for any assets going forward. Our expectation is therefore a return to growth, and we assume the pipeline swell, as Deeni just discussed. So the opportunity in front of us looks promising.

Year-to-date, we have completed $257 million of investments and development commitments. We remain on track to meet our guidance of $200 million to $400 million in 2019 and look to exceed that in 2020, assuming similar capital market conditions to the ones we are in today. Overall cap rates on these acquisitions will likely range from the mid-5% range to the low 6% range. We will continue to target relationship deals and the specialized off-campus medical office buildings that we think are fairly priced and most likely to retain value. We are not including any large portfolios in this forecasting estimate, as those tend to attract bidders that will pay prices we think are unlikely to generate adequate returns for our shareholders. Should this competitive dynamic change, our acquisition numbers could be higher.

Our balance sheet remains in great shape, as we are currently levered at 5.6x debt to EBITDA, we issued $52.1 million on the ATM in the quarter at an average price of $17.41, deploying those proceeds into investments that are immediately accretive to our shareholders, while improving the overall quality of the portfolio. We are right in the middle of our target leverage range at this point and see a good opportunity to grow the portfolio with a nice balance of debt and equity. Finally, a quick mention about G&A. We are a little higher this quarter at $8.1 million because of a slight increase in our bonus accrual, but we expect to stay in the target range of $31 million to $33 million for the year, as predicated at the outset of this year. We remain focused on keeping our management costs low. Last year, our G&A growth was abnormally elevated, and while we aren't ready to provide specific 2020 guidance, investors should be expected a minimal increase at most for G&A next year as we focus on levering our cash flow to the benefit of our shareholders.

I will now turn the call over to Mark to walk through some of our operating statistics in more detail. Mark?

Mark Theine -- EVP, Asset Management

Thanks, Jeff. The third quarter was one of the best operating quarters in the history of the company, as demonstrated by our robust MOB same-store NOI growth, excellent leasing progress, improved tenant credit at several facilities and record-breaking tenant satisfaction survey results. Our better than expected third quarter results represent a further continuation of our focused execution of our relationship-based approach to real estate.

The MOB same-store growth momentum we established in the first half of the year continued into the third quarter with cash NOI growing 3.3% excluding termination fees bringing our year-to-date MOB same-store NOI growth to 3.3% as well. This strong organic NOI growth was driven by a 2.7% increase in base rental revenue from contractual annual rent escalations and improved same-store occupancy to 95.6% from 95.3%. Operating expenses for the same-store portfolio increased 6.4% in the quarter, primarily due to real estate taxes, and were offset by a 9% increase in operating expense recovery, demonstrating the insulated nature of our long-term triple net leases, which generate strong, predictable returns.

A major factor in our ability to drive revenue growth over time is our leasing team's acute focus on tenant retention, in-place contractual rent increases and cash releasing spreads. Currently, the weighted average annual increase for our portfolio is 2.3%, but so far this year, 86% of all lease renewals have contained an average rent increase of 2.5% or greater. For leases commencing this quarter, the average weighted annual increase was 2.7% and our cash releasing spreads were 1.2%. These positive drivers, along with strong tenant retention of 82% and positive 1,200 square feet of net absorption, signal sustainable growth in the years ahead. During the remainder of 2019, just 1% of DOC's portfolio is scheduled to renew with an average rental rate of $23.46 per square foot. And our team has strong leasing momentum in Atlanta, Houston and Phoenix to fill current vacancies. We are also excited to welcome the University of Louisville to DOC's portfolio as our third-largest tenant, and look forward to the opportunity to grow with them in our Louisville medical office building, where we have 35,000 square feet of space available for lease.

Although our portfolio is an industry-leading 96% leased, we see areas of opportunity for our exceptional asset management team and leasing teams to collaborate on tenant retention and new leasing to deliver bottom line results. Our asset management team's keen focus on operational excellence and outstanding customer service can also be seen this quarter in the results of our 2019 Kingsley Associates tenant satisfaction survey. This year, we surveyed nearly 450 tenants representing 3.5 million square feet. Physicians Realty Trust received an industry-leading 78% response rate. Typical response rates for these surveys are between 45% and 55%, so 78% demonstrated the exceptional relationship between our asset management team and our healthcare partners. We also earned a company record score in overall management satisfaction of 4.5 out of a possible 5.0, and 92% of tenant surveys gave positive indicators as to their future lease renewal intentions.

Thanks to a team effort focused on long-term value creation and growth, we had another solid quarter that validates the quality of our portfolio and our earnings. Looking ahead in 2020, we will continue to grow our integrated management and leasing platform, and are well-positioned to drive operational excellence, consistent same-store growth in our MOB portfolio and support near-term growth through new acquisitions. Our management structure is scalable and will continue to benefit from concentration as we invest in top-quality properties and portfolios in the future.

With that, I'll turn the call back over to John.

John Thomas -- Chief Executive Officer

Thank you, Mark. We now look forward to your questions. Operator?

Questions and Answers:

Operator

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Jordan Sadler, KeyBanc Capital Markets. Please proceed with your question.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

I wanted to dig in on Shell Ridge, the cap rate. You offered up the 6.1%. To what extent was that facilitated by the new lease with the health system there? Was there a meaningful uptick in rent versus in place on that renewal?

Jeffrey Theiler -- Chief Financial Officer

No. It's a reflection of what we paid for the assets directly. Jordan, that...

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

It seems like above market.

Jeffrey Theiler -- Chief Financial Officer

No. It was -- the lease itself with the hospital was set at local market rates. But the...

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

No, the cap rates, yes.

Jeffrey Theiler -- Chief Financial Officer

I got it. It's a fantastic -- it's very accretive. Right.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

And it's just a function of the relationship and structure ultimately you would point to as sort of the driver of that cap rate?

Jeffrey Theiler -- Chief Financial Officer

Exactly. Yes.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

And the escalators I think you said were 2?

Jeffrey Theiler -- Chief Financial Officer

No, they were 2.5.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

2.5. Okay. I got that wrong. All right. Great. I had a question regarding the disposition outlook. I think, Jeff, you mentioned that you currently no longer expect to have much in terms of additional disposes. Did I get that right?

Jeffrey Theiler -- Chief Financial Officer

Yes. That's right, Jordan. We're really pleased with the resolutions that we've had on many of the assets that we were expecting to sell. So as we sit here and we feel comfortable with the tenants and the credits, we don't think there's a near-term need to sale these assets.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

So that basically takes the LTACs off the table in terms of being for sale? Foundation San Antonio off the table? And the non-core MOBs that previously you sort of had teed up?

Jeffrey Theiler -- Chief Financial Officer

Yes. That's right, Jordan. And we'd sell them at the right price to the right buyer, but we're not actively looking to sell them at this point. And again, we've got a very small percentage of our medical office buildings that kind of were not long-term keepers. So again, over time we might sell those. But right now, we're not actively looking to do so.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Okay. And last one just on the sequential change in NOI looking into 4Q. Jeff, I heard the $1.1 million that was booked in 3Q I think, and then I heard the $2 million related to El Paso I think.

Jeffrey Theiler -- Chief Financial Officer

Yes, that's exactly right, Jordan. Those are -- yes, we'll get the $2 million next quarter and obviously we won't get the $1.1 LTAC payment again in the fourth quarter.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

And those are both GAAP numbers that were booked in the top line?

Jeffrey Theiler -- Chief Financial Officer

Yes. It was booked and will be booked, right?

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

And was there anything else related to life care in terms of a true up or a reversal related to straight line or anything like that? Or is everything else sort of recurring?

Jeffrey Theiler -- Chief Financial Officer

Yes, the only other thing that was different between 3Q and 2Q was we got $800,000 of rent, which represented two months of payments, but that will be flat going into the fourth quarter. So there's no other kind of one-time changes going into the fourth quarter.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

But that $800,000 was 2Q's rent that was a catch-up?

Jeffrey Theiler -- Chief Financial Officer

Yes, exactly. Right.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

So you have to back that out? Is that what you're saying? Or either run rate is fine?

Jeffrey Theiler -- Chief Financial Officer

The run rate's as long as you just back out the $1 million payment that we got as catch-up rent.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

All right. Thanks, guys.

Jeffrey Theiler -- Chief Financial Officer

Thanks, Jordan.

Operator

Our next question is from John Kim, BMO Capital Markets. Please proceed with your question.

John Kim -- BMO Capital Markets -- Analyst

Thank you. You did a fair amount of investment activity via loan structure. Can you comment on how big you want this to be as part of your acquisitions going forward?

Jeffrey Theiler -- Chief Financial Officer

John, that's a great question. We view loans primarily as a strategic option in our toolbox that just matches with the situation. So kind of think about those like we do development, which is $100 million to $200 million a year of new opportunities, but we're not actively looking for loans as loans. We're looking for medical office facilities to invest in long term. So just a little uptick this quarter because of a unique situation that presented itself and we ultimately hope to turn them into ownership.

John Kim -- BMO Capital Markets -- Analyst

Jeff mentioned in your prepared remarks no redevelopment plans, and I know that's not a huge part of your business. But is that because you're focused on growing your term FFO or do you not see a lot of redevelopment opportunities in your portfolio?

Jeffrey Theiler -- Chief Financial Officer

No. I mean it's the latter. Remember the portfolio is relatively new still, right? And we've acquired a lot of this over the last -- I guess all of it over the last six years or so. So we don't see any buildings that need material rehab or redevelopment. So I just mentioned because some others do.

John Thomas -- Chief Executive Officer

But John, we're 96% leased so t redevelop stuff, then we got to move people out of a building. And so that's really not in our DNA. But at the same time, we have good strategically located real estate that over time and eventually present redevelopment or enhancement opportunities, and we would expect to do that over time. But it's -- again, at 96% leased, we got to find places to move people to redevelop them.

John Kim -- BMO Capital Markets -- Analyst

Okay. And then my final question is on your lease expirations next year. It's a modest amount and the expiring base rate is about 5% below the rest of your portfolio. Can you give an estimate as to what the mark to market will be next year on releasing of those assets?

Mark Theine -- EVP, Asset Management

Yes. Sure, John. This is Mark Theine. So as you mentioned, next year we got 3.1% of the portfolio rolling, so very low turnover in our portfolio. It's about $21.44 per square foot, so as you mentioned, 5% below kind of this year. It certainly will be market dependent, but our leasing team has done a great job pushing rents where we can on our leasing spreads and getting higher contractual escalators. So far this year, as I mentioned, 86% of our leases have 2.5% escalators or more. So hopefully we can continue to push rents and we'll work hard to do that in 2020.

John Kim -- BMO Capital Markets -- Analyst

Is 5% a good estimate for the mark to market?

Mark Theine -- EVP, Asset Management

It's certainly market dependent, but rents will continue to kind of grow up 2% to 3% and in markets where we can, we'll try and push that more.

John Kim -- BMO Capital Markets -- Analyst

Got it. Okay. Thank you very much.

Mark Theine -- EVP, Asset Management

Yep. Thanks, John.

Operator

Our next question is from Tayo Okusanya, Mizuho. Please proceed with your question.

Tayo Okusanya -- Mizuho -- Analyst

Yes. Good morning, everyone. I just wanted to follow up on Jordan's question again: the four kind of major pieces of transition that were happening with LifeCare, the two Foundation leases, other two Foundation hospitals and also University of Louisville Health. I'm trying to understand a little bit better of what's in 3Q numbers and what's the potential pickup or fall off in 4Q associated with these transitions.

Jeffrey Theiler -- Chief Financial Officer

Okay. So I'll just kind of walk through. In terms of cash on LifeCare, you had about a $2 million reversal, which represented getting an extra two months of rent payment plus the $1 million back rent payment that we got.

Tayo Okusanya -- Mizuho -- Analyst

And that was all 3Q?

Jeffrey Theiler -- Chief Financial Officer

What's that?

Tayo Okusanya -- Mizuho -- Analyst

That was all 3Q, right? That was all in 3Q numbers?

Jeffrey Theiler -- Chief Financial Officer

Yes, sorry. That's all in 3Q. Exactly. And then for the Foundation El Paso asset, remember back in 2Q, we took a $2 million charge, but $1 million of that was related to Q1. So you get an extra pickup there. And then they also made a $500,000 rent payment in the quarter. So that was the difference between 3Q and 2Q. And then also remember there's a lot of El Paso assets, but the El Paso Specialty Hospital the tenant had, they started paying rent in 3Q too. So that was just under an extra $1 million there. So those are the adjustments from 3Q to 2Q, and then as you go into 4Q, I talked about it with Jordan, but you're going to get that extra $2 million of payment from the Foundation El Paso sale. And that will be recognized as rental revenue because it's a repayment of back rent.

Tayo Okusanya -- Mizuho -- Analyst

Okay. So that shows up in the 4Q numbers? Okay. The LifeCare -- although you're booking the $1.1 million of back rent as revenue in 3Q, since you're getting this back kind of as a monthly payment over the next 12 months, how do we kind of think about the 10% interest on that kind of receivable? Is that additional interest income to you guys for the next year as well?

Jeffrey Theiler -- Chief Financial Officer

It is, but it's not a huge...

Tayo Okusanya -- Mizuho -- Analyst

It's a non-material number?

Jeffrey Theiler -- Chief Financial Officer

Yes.

Tayo Okusanya -- Mizuho -- Analyst

Okay, got you. Okay, that's helpful from that perspective. Then the cash same-store NOI of 3.3%. Again, that's excellent, brilliant number. When we start thinking about 2020 and the sustainability of that number, even if it's not -- even if 3.3% is kind of unusually high. I think again, how do we think about a world where you're putting up numbers on a sustainable basis similar to your peers of 2.5% to 3%?

John Thomas -- Chief Executive Officer

Mark, next year in 2020, we continue to anticipate the same-store NOI growth in that 2% to 3% there. Portfolio is doing really well, fully occupied. Most of our same stores can be driven by contractual rental increases. As I mentioned, those are 2.3% in the portfolio today. So where we can execute on some new leasing, hopefully we can bump that up a little bit, but we continue to see it to be pretty stable.

Mark Theine -- EVP, Asset Management

Okay, that's helpful. Then last one, if you would indulge me. Again, the loan investments -- again, it's just interesting to me that again with the loan investments you're getting 6% type of rates on that. And then when you take a fee simple position it's cap rates of 6.1%. Again, with the loans you are high up in the capital stack but you're getting a similar type of return or yield. Does that influence you thinking about doing more loans versus trying to own things outright in a fee simple structure or not really?

Jeffrey Theiler -- Chief Financial Officer

Tyle, it's JT and welcome back. We've missed you. Like I said before the loans -- it's a great question because actually we get better yield than 6% on most of our loans. It's always a strategic tool for us and just matching up to the situation and creativity. So the uptake this quarter was a unique situation where we have the opportunity to provide a loan to purchase of a building that has some lease-up opportunity. And then again, hopefully, we don't have any righter option, but we expect once that building is completely leased, hopefully, have the opportunity to convert that loan into a long term ownership position. So again we do it in the same bucket as we do development. So $100 million to $200 million of loans that are high up in capital's deck, higher-yielding and certainly have the opportunity to do more if the right situations present themselves, but it's not something we actively go looking for.

Mark Theine -- EVP, Asset Management

Thank you very much.

Duration: 53 minutes

Call participants:

Bradley Paige -- SVP, General Counsel

John Thomas -- Chief Executive Officer

Deeni Taylor -- EVP, Chief Investment Officer

Jeffrey Theiler -- Chief Financial Officer

Mark Theine -- EVP, Asset Management

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

John Kim -- BMO Capital Markets -- Analyst

Tayo Okusanya -- Mizuho -- Analyst

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