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Physicians Realty Trust (DOC)
Q4Â 2019 Earnings Call
Feb 26, 2020, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Greetings and welcome to Physicians Realty Trust Fourth Quarter and Year End 2019 Earnings Conference Call.
[Operator Instructions]
Please note this conference call is being recorded. It is now my pleasure to turn the conference over to your host, Mr. Bradley Page, Senior Vice President, General Counsel. Thank you. You may begin.
Bradley D. Page -- Senior Vice President, General Counsel
Thank you. Good morning and welcome to the Physicians Realty Trust fourth 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 fourth quarter of 2019 and year-to-date, as well as our strategic focus for 2020. Jeff Theiler will review our financial results for the fourth quarter of 2019 and our thoughts and guidance for 2020. Mark Theine will provide a summary of our operations for the fourth 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 may be 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 T. Thomas -- President & Chief Executive Officer
Thank you, Brad. And thank you for joining us this morning.
Physicians Realty Trust ended 2019 with a healthy portfolio, a strong balance sheet and a pipeline poised for 2020 growth. At the beginning of 2019, we announced guidance of completing $200 million to $400 million of new investments in off-market outpatient medical office facilities. We ended the year with $452 million in new investments, which is 95% leased. These investments included our first in California, as well as an innovative strategic joint venture with Kayne Anderson Real Estate and MBRE Healthcare, the largest private non-hospital affiliated MOB owner in the United States. We also launched our first ground up developments with two projects under construction at the end of the year. The average first year yield on all of these investments was just over 6%, near the top end of our guidance.
We made these accretive investments without sacrificing tenant or asset quality. 83% of our new consolidated assets are leased to investment grade health systems and their subsidiaries. These investments include our five new medical office facilities in California, located adjacent to John Muir Health, Walnut Creek Medical Center. As part of that transaction, John Muir Health, rated A1 by Moody's, entered into a new long-term lease for 100% of that space. During 2019, we expanded our relationship with Ascension, the second largest health system in the US, by financing the development of 48,000 square foot outpatient care center for their health system ministry in Pensacola, Florida. Our financing includes an option to purchase the facility, which is expected to be completed and fully occupied during 2020.
Our investments also include an ownership interest in three medical office facilities on Ascension St. Vincent's Health System flagship campus in Birmingham, Alabama through our participation in the recapitalization over 59-building portfolio with Kayne Anderson and MBRE Healthcare, which included the contribution by us of two of our medical office facilities at market value plus $17 million in cash. This portfolio contains approximately 3 million square feet, 92% is on campus or affiliated with a health system, and is 92% leased. We now manage approximately 500,000 square feet on the St. Vincent's campus in Birmingham, which recently announced a joint affiliation with UAB Health System, the state's highly regarded medical education, specialized treatment and research organization, further strengthening St. Vincent's opportunities for growth and success in that market.
CommonSpirit, our largest tenant and the largest health system in the United States, continues to excel in their healthcare ministry efforts and remains a strong DOC partner. Working directly with their leadership team, we transitioned all of our Louisville-based KentuckyOne leases to the University of Louisville Health. This alignment occurred in connection with the University's acquisition of CommonSpirit's hospitals in Louisville. The commitment of the University of Louisville and the Commonwealth of Kentucky to continue the mission, education and research based in these hospitals and facilities is further evidence of the resilience of our investments.
We're excited to welcome a new health system client while also reducing our overall tenant concentration CommonSpirit-affiliated hospitals from 19.2% of our annual rental revenue on January 1, to 16.5% at the end of the year. DOC's invest in better strategy is driven by a management team that knows healthcare. For nearly seven years, we've embraced the outpatient healthcare setting to create a lower total cost and more convenient patient experience. In 2019, we continued to see momentum in the growth in scope of services delivered in these types of facilities and locations where high-quality providers offer outpatient medical services.
Clinical science is evolving rapidly to move care out of the hospital and into outpatient settings, improving the quality of care and lowering the cost of that care. Science, convenience and cost will continue to drive more patients to health system affiliated providers in our outpatient medical office facilities. This environment and the exponential increase in the quantity of procedures performed outside of the hospital fuels our opportunity for growth for years to come. As a leader in the healthcare REIT industry, we strive to maintain and grow a portfolio of exceptional real estate that provides unmatched value to our tenants and strong returns to our shareholders. Since our company's inception, we've maintained a firm commitment to ESG principles as a healthy investment decision and a critical component of our portfolio.
With our scale, in 2019, we invested approximately $3.5 million in energy management and building system upgrades to reduce our carbon footprint and make our facilities better for the patients, physicians and other providers we serve. These investments also have a direct green return on investment as well. Later this year, we will publish our inaugural ESG report online presenting our social commitments to the communities we serve, as well as our best practices in governance, diversity and inclusion. As part of our efforts, we have adopted the IREM standard for Certified Sustainable Property management. We earned IREM certification on eight of our facilities, and recognizing those assets for their sustainability features and outcomes. We will be certifying more buildings in the future.
2019 was a very positive year and we expect 2020 to be even better. As we see the opportunity for growth, we believe we can source and make new accretive investments in outpatient medical office facilities this year. I'll now turn the call over to Jeff Theiler, our Chief Financial Officer, to review our financial results. And then Mark Theine will share the results of his team's outstanding performance. Jeff?
Jeffrey N. Theiler -- Executive Vice President, Chief Financial Officer
Thank you, John.
In the fourth quarter of 2019, the company generated normalized funds from operations of $52 million or $0.27 per share, leading to a total of $190.6 million or $0.99 per share for the full year of 2019. Our fourth quarter funds available for distribution were $46.4 million and $178.4 million for the full year. 2019 was a year of transition, as we started to take advantage of higher equity prices and lower debt costs to resume growing the company. Importantly, we continue to rely on the unmatched relationships our management team has built over their careers to source all of our 2019 acquisitions off market, delivering yields beyond those that can be found at option. We believe it's this advantage, which will enable the company to continue to grow its earnings at an above average pace accruing value to our shareholders.
Our $452 million of investments for the year were weighted toward the off-campus assets with specialized space and health system tenants, which has been a focus point of the company since inception. This is the area, which we have long believed and which all public MOB owners have now acknowledged verbally and by their own investment activity, is the future of this industry. Our medical office building acquisitions in 2019 were acquired at an average cap rate of 6%, and 83% of the space was occupied by investment grade rated health systems. In the fourth quarter, we invested $274.3 million at an average cap rate of 6.1%. Of particular note in the fourth quarter acquisition pool was 12.3% minority stake in the $1.1 billion joint venture with MB Realty and a foreign investor. This is not an option deal, but one where we were sought out as a partner by the sponsor and foreign investor, enabling us to pay a fair cap rate for the JV interest. The ancillary benefits of this deal are even better for our shareholders as we were able to fund a portion of our interest in the joint venture by contributing two assets at a sub-5% cap rate valuation, resulting in $22.9 million gain and 31% unlevered IRR on the sale.
The contributed assets are part of the key cluster of buildings in the Birmingham area now controlled by the joint venture with management services at each of the assets to be assumed by DOC, increasing our expected return on the JV investment to an unlevered yield of 5.7% and a levered yield of 9.2%. We believe that this joint venture will not only generate above average returns for all involved, but will allow us to leverage our southeastern property management capabilities to source additional deals and put us in the driver seat, to the extent that this joint venture decides to monetize into the public sphere someday.
As we look out into 2020, our pipeline is robust. If our cost of capital remains at current levels or better, we would expect to acquire between $400 million to $700 million of assets. We have well over that amount in our current shadow pipeline and feel comfortable that we can convert on a sizable number of these opportunities. We would expect cap rates to range between 5.25% and 6.25%, and we are committed to finding the majority of our deals at better pricing than we could get by winning an option or by paying portfolio aggregators significant premiums for their work. We also are likely to continue to invest in mezzanine loans for purchase options to seed future investment opportunities, as well as pre-leased development projects and partnerships with third-party development firms.
Turning to operations. Our MOB portfolio had same-store growth for the year that was predictably volatile, but averaged out to a strong 3.1%. The fourth quarter same-store growth was 2.5% and was generated by contractual escalators and some savings on expenses that Mark will discuss in more detail. On a long-term basis, we continue to expect that our MOB portfolio same-store growth will average between 2% to 3%. We've been funding our projected acquisition pipeline appropriately by issuing $30.2 million of stock in our ATM program in Q4 and an additional $136.0 million following year-end. Our leverage ticked up in the fourth quarter to 6.0 on a consolidated debt-to-EBITDA. However, the stock issuance completed in the first quarter would bring that number back down to 5.5 times. We are roughly at our target leverage range and will fund our 2020 acquisitions with an appropriate mix of debt and equity.
As we look forward into 2020 and the relevant data points, I already mentioned the $400 million to $700 million of acquisitions at 5.25% to 6.25% cap rates. We expect MOB Same-Store NOI growth of 2% to 3%. And finally, our G&A is estimated to range from $33.5 million to $35.5 million. We are roughly at our target leverage levels at this point and see a good opportunity to grow the portfolio with a nice balance of debt and equity.
I will now turn the call over to Mark to walk through some of our operating statistics in more detail. Mark?
Mark D. Theine -- Executive Vice President, Asset Management
Thanks, Jeff.
2019 proved to be the best year in the history of the company from an operating perspective, demonstrated by four key metrics. First, robust MOB Same-Store NOI growth that averaged 3.1% during the year. Second, strong leasing activity resulting in 80% full-year tenant retention. Third, the continued expansion of our in-house property management platform by 2.3 million square feet in markets with strong geographic concentration. And fourth, well managed capex totaling 6.9% of portfolio NOI for the year, as we enter 2020 poised for accretive growth with the portfolio that leads the industry at 95.9% leased. This metric includes 58.3% leased directly to investment grade quality tenants and their subsidiaries, which we believe is more than any other publicly traded portfolio in healthcare real estate.
Our 2019 acquisitions were 83% leased to investment grade tenants and their subsidiaries, highlighting DOC's continued focus on investing in long-term quality MOBs with market-leading healthcare provider partners and strong NOI growth potential. We believe these investments such as our five-property portfolio in Walnut Creek, California, will provide outstanding returns for years to come and represents the standard for exceptional quality for acquisitions in the future.
Looking at the quarter, our 238 properties same-store MOB portfolio representing 84% of quarterly cash NOI, generated year-over-year cash NOI growth of 2.5%. This strong NOI growth was driven by a year-over-year 1.9% increase in base rental revenue and 7.8% reduction in operating expenses. The reduction in operating expenses is primarily attributable to $2.5 million decrease in real estate taxes from favorable real estate tax challenges at the Baylor Cancer Center in Dallas and CenterPoint MOB in Atlanta. Year-over-year MOB Same-Store occupancy was down 30 basis points or approximately 35,000 square feet, largely due to one general office lease, which expired on September 30, 2019 and did not renew in our MeadowView MOB in Kingsport, Tennessee. This decline in occupancy had a negative 25 basis point impact on our overall same-store NOI growth, and we feel confident in our ability to release the space at MeadowView to the anchor medical tenant already in the building or the market-dominant healthcare system in the region.
Over the long term, we continue to expect our same-store portfolio to drive 2% to 3% NOI growth, as our in-place average rent escalator is now 2.4%. Turning to leasing activity for the quarter, our leasing team delivered solid results in Q4, completing 388,000 square feet of leasing activity with flat MOB releasing spreads and the positive 83% retention rate. Included in this quarter's releasing spreads as 17,400 square feet surgery center containing significant Amortize TI, which is reset the market rental rates. MOB releasing spreads would have been a positive 5.3% if this lease were excluded. During the quarter, TI -- or lease renewals was extremely low at $0.69 per square foot per year and $2.64 per square foot per year for new leases.
Overall, we invested $6.2 million in recurring capital investment and leasing commissions in Q4, or just 8.4% of the portfolio's NOI. This low investment in capital expenditures relative to our peers is primarily driven by our low lease expiration schedule and is a key differentiator for DOC that enables us to return more cash to our shareholders. In 2020, we anticipate recurring capex to be $24 million to $26 million for the full year, or approximately $6 million per quarter. Consistent with our plans announced in the beginning of 2019, we successfully executed on the expansion of our in-house property management platform. Over the last 12 months, we have transitioned property management services for 36 facilities totaling 2.3 million square feet. These markets include Nebraska, Washington, Texas and most recently Birmingham, Alabama, a market in which we have welcomed Kendra Risse to the DOC family.
Internalizing property management not only strengthens our healthcare provider relationships, improves tenant retention and enhances market knowledge, but in the case of Birmingham, it also increased our investment cap rate by 50 basis points. We believe that tenant retention starts with property management the day the lease is signed and we are committed to showing our hospital and physician partners through our actions that we genuinely care about enhancing the patient and physician experience. This level of care is evident in several prestigious awards earned by DOC this quarter, including two TOBY awards from the Building Owners and Management Association, or BOMA, and eight commercial sustainable property designations earned from the Institute of Real Estate Management, known as IREM.
We are incredibly proud to share that the Baylor Cancer Center in Dallas and Towne Lake MOB in Atlanta won The Outstanding Building of the Year, or TOBY, award in their local BOMA markets. The TOBY awards are the most prestigious awards of their kind in commercial real estate, recognizing excellence in building operations. The judging process includes a peer review of all facets of building operations including energy management, tenant retention, community involvement, emergency preparedness and security. Congratulations to our Dallas property management team including Michelle Morris, Susan Leinweaver and Jolene Wilson, as well as our Atlanta office including Mark Dukes, Tosha Clay and each of our management partners at RTG.
Similarly, we are proud to have been recognized for our firm commitment to the principles of ESG excellence through the recent achievement of eight IREM Certified Sustainable Property designations across our portfolio. This highly regarded designation was created to assess and recognize operational excellence and commitment to industry-leading sustainability practices. These properties are independently audited by IREM to verify reduction in energy, water and waste usage. To showcase these assets and the rest of DOC's nationwide portfolio, DOC will soon launch an innovative new corporate website to improve the user experience for investors, healthcare partners and potential tenants.
As we begin 2020, we built a high quality portfolio that is operating well and an exceptional asset management and leasing team that will continue to deliver bottom line results. Our commitment to relationships and service excellence for our healthcare partners is the trademark of the DOC difference and what ultimately drives tenant retention, cost efficiencies and a profitable consistent growth for our shareholders.
With that, I'll turn the call back over to John.
John T. Thomas -- President & Chief Executive Officer
Thank you, Mark. And I look forward to your questions.
Questions and Answers:
Operator
[Operator Instructions]
Your first question comes from Chad Vanacore with Stifel. Please proceed with your question.
Chad Vanacore -- Stifel -- Analyst
All right, thanks. So it looks like you're picking up the pace of acquisitions fairly substantially from 2019 and 2020. So what's changed about this market? And who are the primary sellers that you expect in 2020? Has that changed at all?
John T. Thomas -- President & Chief Executive Officer
Chad, it's JT. I think the fourth quarter pipeline started building up beginning with the improvement in our cost of capital. It gave us the freedom to get more aggressive out in the market, but I think every one of our transactions in 2019 was off-market. And most of our pipeline right now is kind of one-off off-market transactions with either developers or directly with providers in the markets that they -- where they're located. There is always rumors about portfolios coming out, but right now we're very focused on the -- the onesie-twosie transactions will be very accretive and we can price in that range that Jeff described.
Chad Vanacore -- Stifel -- Analyst
JT, you also mentioned a little more off-campus. How are you viewing that versus on campus?
John T. Thomas -- President & Chief Executive Officer
We continue to -- it tends to not exclude on campus, but most of our pipeline continue to be focused on off-campus where, again, they tend to be newer buildings, they tend to be better served by physicians and the providers are there and more convenient for the patient. So you'll continue to see that being a focus of our investment efforts. From time to time, we'll have a final get on campus building that we like with the health system we want to work with.
Chad Vanacore -- Stifel -- Analyst
All right. And then commensurate with your improved outlook for 2020 as far as investments go, you tapped the ATM a fair amount in the first quarter. Can we assume that there is a sizable deal locked in that maybe we might see in the second quarter?
John T. Thomas -- President & Chief Executive Officer
Yeah. Chad, I think we tapped the ATM in conjunction with our acquisition volume. So we generally try to match fund deals when we can. And we'll kind of continue to have that strategy through 2020.
Chad Vanacore -- Stifel -- Analyst
All right. Fair enough. Then you guys also inked [Phonetic] two JV transactions this quarter. Can talk about what you felt was attractive, particularly about these transactions? And then should we expect more in types of -- in terms of these types of deals?
John T. Thomas -- President & Chief Executive Officer
Yeah, I think we have the opportunity -- the one building that we did in Delaware was a long-standing private investor that we've done business with since the beginning of the company. So we tend to find one or two transactions a year, to work on with them and it provides a good opportunity for future growth in a building that we'd like to own completely ourselves at some point in time. The MB -- Kayne Anderson JV was very exciting to us, primarily because of the scale and the opportunity to partner with them. They're high quality investors in this space. There's -- foreign investor that they brought along as well, is a good source of future capital for all of us. But more importantly as we've described, this is a very strategic investment where we own some building from one campus, they own this portfolio, included some other buildings on the same campus, and we're able to combine the efforts there, and I think increase the value for everybody concerned.
So I think it's just another good tool in the toolbox from a capital perspective, but in this particular case, a very strategic alliance that we think will provide some opportunity for future growth.
Chad Vanacore -- Stifel -- Analyst
All right. I'll leave it there. Thanks.
John T. Thomas -- President & Chief Executive Officer
Thanks, Chad.
Operator
Our next question comes from Jordan Sadler with KeyBanc. Please proceed with your question.
Jordan Sadler -- KeyBanc Capital Markets Inc. -- Analyst
Thanks. Good morning. I wanted to follow up on some of Chad's questions. In terms of the pick up -- in terms of the volume that you're expecting for 2020, is this the culmination of a lot of off-market sourcing work that you've been doing? And just sort of what gives you the confidence in putting $400 million to $700 million number out there today versus kind of where we've been in the last year or two?
John T. Thomas -- President & Chief Executive Officer
Yeah. We've got two or three consistent sources of opportunities. One is the existing health system relationships, and we're constantly in conversations with them around the country and various markets. Two is the developer relationships we have, that have been consistently bringing us business again since the beginning of the company. And we see the pipelines that they have and the portfolios that they've developed. In some cases, with our mezzanine financing, which provides some kind of ROFR option or an option to acquire those buildings once they're completed. So we see a lot of those maturing this year. And then otherwise, we just -- like I said with the increase in improvement in our cost of capital, Deeni and Dan, and Mark Theine his team have just been out locating new opportunities for us and the pipelines blossom as well, as a result.
Jordan Sadler -- KeyBanc Capital Markets Inc. -- Analyst
Okay. In terms of how this might line up this year, would just sort of a ratable assumption make sense throughout the year?
John T. Thomas -- President & Chief Executive Officer
Yeah, I think -- at this point, I think that's easy way to model. It's quite, Jordan, it seems like -- yeah, that would make sense.
Jordan Sadler -- KeyBanc Capital Markets Inc. -- Analyst
Okay. And then coming back to the PMAK JV, the wording in the language in the press release, and John, you referenced that again on the call, but you've assumed strategically important property management of a synergistic portion of the buildings. Can you sort of translate?
John T. Thomas -- President & Chief Executive Officer
Yeah. Very simply, that's the Birmingham campus, St. Vincent's in Birmingham. So very strong -- it's part of the Ascension system. Very strong hospital, just aligned with UAB, which actually is the largest market share in that community. So strong academic environment. So there are six total billings on that campus, five of them are now in the JV, and the other one provides some flexibility to maybe redevelop that with the hospital in the future. So just really good opportunity for us, short term and long term, and for the JV.
Jordan Sadler -- KeyBanc Capital Markets Inc. -- Analyst
You own two, they won three?
John T. Thomas -- President & Chief Executive Officer
We own three, they own three. We put five of them in the JV together. The other one is outside the JV as we look to perhaps reposition or redevelop that one in the future, just to provide some flexibility.
Jordan Sadler -- KeyBanc Capital Markets Inc. -- Analyst
Okay, that's helpful. And then what was the catalyst for the JV from your partners perspective, what were they looking for? And how did you end up in the mix here?
John T. Thomas -- President & Chief Executive Officer
Yeah. So they were looking to recap the entire portfolio and invited us to evaluate that opportunity with them. In the end, this is a strategic initiative for us, kind of created the impetus and the opportunity, but also just the potential future capital opportunities with them. And then again their model is to either sell or recap periodically, and we'll be at the front of the line when that that occurred with this entire portfolio. But again, our primary interest right now is the strategic management that we incorporated into the JV structure.
Jordan Sadler -- KeyBanc Capital Markets Inc. -- Analyst
So where are we in the process, or where are they in the process in terms of the recap of the portfolio? Is this step one?
John T. Thomas -- President & Chief Executive Officer
Yeah, it was done at the end of the year. So this is just our first disclosure about it.
Jordan Sadler -- KeyBanc Capital Markets Inc. -- Analyst
So they did it basically at year-end. But -- is this meaning, have they fully recapped the portfolio now? Because you're coming in, you're putting in $17 million of cash, you will take 12.3% interest. But -- I don't know. I guess my question is, where they looking to more fully recap it in terms of refinancing existing debt, or be taken out of more equity, etc. or is it kind of enough [Phonetic] for now?
John T. Thomas -- President & Chief Executive Officer
Yeah, Jordan, it's total recap of the portfolio. And they brought in, again, a are very high quality European investor as part of the transaction. It was fully done at the end of the year, and we were just part of the process.
Jordan Sadler -- KeyBanc Capital Markets Inc. -- Analyst
Okay. And is there additional opportunity for you to take an incremental stake here? Is this sort of just a long-term position in this JV?
John T. Thomas -- President & Chief Executive Officer
Yeah. Kind of everything's on the table, Jordan. That's, near term, not our focus.
Jordan Sadler -- KeyBanc Capital Markets Inc. -- Analyst
Okay. What are the escalators on the JV?
John T. Thomas -- President & Chief Executive Officer
They tend to be 2.5%. Yeah, 59 buildings. So it's building-by-building, but they range in that 2.5% to 3%, kind of consistent with the rest of our portfolio.
Jordan Sadler -- KeyBanc Capital Markets Inc. -- Analyst
Okay. One last one. [Speech Overlap]
John T. Thomas -- President & Chief Executive Officer
I got to say, it's just the high-quality tenant base with Northwestern and with Baylor, and other Ascension facilities. So it's again a very nice portfolio, a very nice opportunity for us to potentially grow in the future with these investors and also with -- indirectly.
Jordan Sadler -- KeyBanc Capital Markets Inc. -- Analyst
Okay. And then for Jeff, I'm looking at the $0.27 in the quarter. You've given us some guidance for next year. Trying to think how this lines up, but was the $0.27 a pure $0.27? Were there any one-time items related to either the origination of the loans in the quarter, or any of the JV transactions? Just trying to see if there were any fees in there that need to come out before we go forward.
Jeffrey N. Theiler -- Executive Vice President, Chief Financial Officer
No. No fees in terms of loan origination or JV activity. I think the only thing to be aware of as we did get that -- the $2 million of rent payment from Foundation El Paso, which was a one-time items since we sold that building. We have some of that coming back in the terms of -- in the form of seller financing that we'll earn interest on. But that's a one-time item.
Jordan Sadler -- KeyBanc Capital Markets Inc. -- Analyst
There is $2 million from Foundation in the quarter.
Jeffrey N. Theiler -- Executive Vice President, Chief Financial Officer
Right, exactly.
Jordan Sadler -- KeyBanc Capital Markets Inc. -- Analyst
That goes away next quarter. Okay. Well, it doesn't go away, but you pick up less in terms of the rent there with the loan.
Jeffrey N. Theiler -- Executive Vice President, Chief Financial Officer
Exactly.
Jordan Sadler -- KeyBanc Capital Markets Inc. -- Analyst
Got you. Okay, thank you.
Operator
Our next question comes from Drew Babin with Baird. Please proceed with your question.
Alex -- R.W. Baird & Co. -- Analyst
Good morning. This is Alex [Phonetic] on for Drew. Curious if you guys are expecting to sell any assets, looking forward? And the path for 2020 today? And along that same line, are there more opportunities for sub-5% cap rate sales similar to kind of the strong pricing you guys saw with the Birmingham JV kind of a contribution? Just kind of curious what you guys are seeing on that side, as you guys look forward with your capital needs.
John T. Thomas -- President & Chief Executive Officer
We think a lot of our assets are worth that, and particularly any kind of portfolio range, but that's again not really our focus. As far as dispositions this year, we really haven't scheduled anything. At some point, once the LTACHs are stabilized with the new operator there, we would like to sell those. It's not going to be huge source of capital and it won't -- in almost by definition, it will be dilutive. But it's not a huge number. Won't be that meaningful.
Alex -- R.W. Baird & Co. -- Analyst
Understood. And then just one follow-up question on the PMAK JV. Can you speak a little more to the portfolio itself, the locations outside of the Birmingham campus, average age, other dynamics, any mark to market opportunities that are just kind of critical to you guys' underwriting as you approached it? It looks like a really strong partnership. But just kind of looking more with the -- looking at more what the portfolio looks like on an asset-by-asset level would be kind of helpful.
John T. Thomas -- President & Chief Executive Officer
Yeah. Deeni is going to walk through some of the stats, and we'll answer any more questions you've got about it.
D. Deeni Taylor -- Executive Vice President, Chief Investment Officer
Yeah. This is Deeni. As JT has already said, there were 59 assets in there. About 40% of the square footage is in the Southeast, 30% in the Southwest and about 20% in the Midwest, of almost 3 million square feet. If you look at the top 50 MSAs, about 86% of the portfolio is in those regions of the US. 92% was either on campus or affiliated. And then almost 65% of the square footage was with investment grade tenants. So that gives you a little bit of flavor on it. And we will manage about 25% of that total square footage that's in the portfolio.
Alex -- R.W. Baird & Co. -- Analyst
That's really helpful color. And then just one more question. JT, you referenced kind of being first in line down the road, if a sale or something was dramatically changed. Is there anything contractual there? Is it more just a strong partnership that you guys will continue to lean on down the road?
John T. Thomas -- President & Chief Executive Officer
Yeah, we have some contractual rights, but it's primarily -- these are health systems that have their own ROFRs on the assets as well, and they're existing clients of ours. As you all know, we've been very fortunate and humbled by health systems bringing us ROFR -- rights of first refusals that they have from time to time to acquire assets. So again, I wouldn't expect it to be anything other than the net market pricing, but again, by having the relationships that we already have with again both the investors, but also the health systems, we'd expect to be in the front of the line for those assets that we'd like to own long term.
Alex -- R.W. Baird & Co. -- Analyst
Understood. Thanks for taking my question.
John T. Thomas -- President & Chief Executive Officer
Yeah. Thank you.
Operator
Our next question comes from Nick Joseph with Citigroup. Please proceed with your question.
Nick Joseph -- Citi -- Analyst
Thanks. What does guidance assume in terms of funding the external growth in 2020 both in terms of the equity and debt issuance?
Jeffrey N. Theiler -- Executive Vice President, Chief Financial Officer
Hey Nick, it's Jeff. So like I said, we're were largely a target leverage right now. We tend to think of target leverage at least in terms of funding as roughly 65% equity, 35% debt. So for modeling purposes, you could probably put that in there. In terms of long-term debt -- in terms of debt composition, assuming that we fund in that manner, probably, at some point in the year, we'll have accumulated enough on our line of credit, where it makes sense to do a long-term debt offering. So those are usually around $300 million. Right now, our long-term cost of debt is dropping every day, but probably 2.9% right now, somewhere around there, give or take 10 basis points. So that's our funding plan for the year.
Nick Joseph -- Citi -- Analyst
Thanks. That's helpful. And then just on same-store expectations of 2% to 3%, could you break that down between revenue and expenses? And then what sort of occupancy changes you're expecting this year?
Mark D. Theine -- Executive Vice President, Asset Management
Hey Nick, this is Mark Theine. As we said in the prepared remarks, our expectation for the year is 2% to 3% same-store NOI growth for the MOB portfolio. That's primarily going to be driven on the revenue side through our contractual annual rent bumps, which are now averaging 2.4%. Again, most of our portfolio is triple-net leased. So where we do get some operating expense savings, a lot of that's passed back through the tenants, and we try and recapture those in our releasing spreads. So we'll continue to try and drive the top line through rent bumps and maintain that occupancy. As I mentioned, we had one -- a little bit of a dip this quarter in our occupancy. But I think that's just a timing thing. We feel confident that we can get that released shortly.
Nick Joseph -- Citi -- Analyst
Thanks.
Mark D. Theine -- Executive Vice President, Asset Management
Thanks, Nick.
Operator
Our next question comes from Michael Carroll with RBC Capital Markets. Please proceed with your question.
Jason -- RBC Capital Markets -- Analyst
Yeah. Good morning, guys. This is Jason [Phonetic] on for Mike. I'm wondering what portion of the acquisition range is development and how that breakout looks moving forward as you think about acquisitions?
John T. Thomas -- President & Chief Executive Officer
Yeah, great question. So we're targeting and we think this is a reasonable amount, somewhere between $50 million and $100 million of new starts per year. We got just over the -- end of that last year -- just around $60 million of new starts last year that will come online this year. And so we're targeting at least that much or similar amount for this year. And these are health system investment grade credit, 100% pre-leased kind of opportunities that we're looking at. And we're working on a few right now that would be second half of the year starts. So that's kind of -- we think that's a reasonable range based on our balance sheet, but also just a couple of one-off kind of off-market relationship-driven development transactions that we'd like to pursue.
Jason -- RBC Capital Markets -- Analyst
Okay, great. And then I'm also wondering if you guys could give a brief rundown of what the fee structure of the JV is like?
John T. Thomas -- President & Chief Executive Officer
Pretty traditional structure between asset management and property management fees. Most of that's coming out of the tenants through the CAM charges as well. So nothing exotic, nothing unusual.
Jason -- RBC Capital Markets -- Analyst
Okay. Thanks.
John T. Thomas -- President & Chief Executive Officer
Thank you.
Operator
Our next question comes from Omotayo Okusanya with Mizuho. Please proceed with your question.
Omotayo Okusanya -- Mizuho -- Analyst
Yes, good morning, everyone. That's a very strong acquisition outlook out there. Congratulations. I wanted to focus on two things. First of all, the in-house property management. Could you let us know just how much of your properties actually are being managed in-house today? What kind of opportunity there is to bring the rest in-house in regards to opex savings? And also, I'm assuming with the acquisitions that you do make, if you do end up with them on your in-house system, you do get some type of bump from that. So how does that kind of build into your acquisition cap rates?
Mark D. Theine -- Executive Vice President, Asset Management
Good morning, Omotayo. This is Mark Theine. So I'm really proud of the progress we made in 2019 transitioning several of the markets to the DOC property management platform. Today, we manage directly about 60% of the portfolio and the remainder of which is single-tenant buildings where the tenant does it directly, or we've got a very strategic management partner in certain markets where they just have really strong existing relationships. And it'd be hard to replicate those for our future acquisition opportunities, just market knowledge. So, we don't plan to bring some of those markets in-house. And then looking forward, as the portfolio continues to grow through acquisitions, we think that there'll be many more opportunities to bring in-house management. And the nice thing there is that we'll kind of get this cliff of management fees as well where we'll hit a tipping point of bringing in-house the market from existing properties, as well as the management fees from the new acquisitions.
And typically on the new acquisitions, the management fee is adding 30 to 40 basis points to the overall cap rate of the acquisition.
Omotayo Okusanya -- Mizuho -- Analyst
Got it. So why you do give the guidance of 5.25% to 6.25%, does it include that 30 to 40 bps bump, or not?
John T. Thomas -- President & Chief Executive Officer
Not really, Omotayo. That's looking at just the market pricing for assets on a one-off basis. No, what Mark is really talking about is when we get to scale, there's a lot of economies of scale. So like Birmingham, again the strategic relationship we have there, that created enough scale for us to in-house all of the management there, which we previously didn't have. Columbus, Ohio is another market where we've had a lot of growth and gotten to a scale point where we can manage, but we have a lot more growth opportunities there, which again the economies of scale in the property management side are pretty accretive. So we don't factor that into the the pricing per se, but it is certainly attractive benefit at the in-house management. And as Mark said, there's couple of markets, three markets in particular, where we have a great management relationship. The Davis Group in Minnesota and Phoenix, and then RTG in Atlanta. We have others, but those three in particular are markets where the relationship with the hospitals among the kind of the two parties is so strong it's not some place we would target to in-house that management. It works well with being conducted today.
Omotayo Okusanya -- Mizuho -- Analyst
Okay, that's helpful. And then second question, my understanding is that for HOPDs, that the grandfathering rule under Section 603 has gone away. So everything is now site neutral. Could you talk about if that's changing the way the hospital systems are thinking about off-campus MOBs? And if you've seen any big changes in regards to cap rates between off and on campus MOB market?
John T. Thomas -- President & Chief Executive Officer
Well, I think there's more competition for the off-campus buildings today, just because of the evolution of people's thinking and understanding and targeting that more than they have in the past. Technically, the 603 grandfathering has not changed. CMS keeps ignoring it and the courts keep telling them on a year-by-year basis that they've got to follow the law. So, technically, that's not the direction -- Congress will have to change that. CMS can't do it unilaterally. Now they certainly can make it pain for the hospitals to recover those reimbursements and have so far. But that -- we haven't seen any real change in strategies. We've been working with one hospital that spent a great deal of money to get to -- to make sure they got a site within 200 yards of their hospital campus, but it's really more about they're doing a decant the hospital so they can reimprove it, if you will, or improve it from its historical real estate structure.
And so they wanted -- they need the new site to be closer to the hospital, so not that changing the reimbursement as they kind of decant the hospital, focus on outpatient care and then move forward in the other direction. Most of the new developments we're seeing are off-campus with these health systems. The two we're funding right now are off-campus.
Omotayo Okusanya -- Mizuho -- Analyst
Got you. Okay, thank you.
John T. Thomas -- President & Chief Executive Officer
Thanks, Omotayo.
Operator
Our next question comes from Daniel Bernstein with Capital One. Please proceed with your question.
Daniel Bernstein -- Capital One Securities -- Analyst
Good morning. I have a couple of follow-up question on the PMAK JV. Is the JV intended to be kind of just a static recapitalization, or are there actually any intentions to grow the joint venture? I wasn't quite clear on that.
John T. Thomas -- President & Chief Executive Officer
That's a great question, Dan. No, there are some opportunity to grow the joint venture. There is a couple of projects under development within inside the joint venture. And then there're some provisions around growth of the -- where our buildings are located -- where the JV's buildings are located to accrue to the benefit of the JV versus individual members of the joint venture. So there is some growth opportunities, but right now that's -- again the focus for us is around the assets we're managing.
Daniel Bernstein -- Capital One Securities -- Analyst
Okay. And if you do grow the JV, I assume your equity stake in the JV would just stay about the same, or is there an opportunity to increase the actual stake or the ownership within the JV?
John T. Thomas -- President & Chief Executive Officer
Yeah, it'd be case by case. Contract is that we'd have right to maintain our interest, but again it'd be case by case as to how those get funded.
Daniel Bernstein -- Capital One Securities -- Analyst
Okay. And then the other question is -- and this is really far off, but you have 2026 expirations -- I think it's 24% of ABR. Will expirations between now and then -- I just wanted to understand if there were any purchase options that are open or will come open that we should be thinking about in our modeling, say in the next 24 months? Just don't want to have any surprises that we're not modeling or thinking about.
John T. Thomas -- President & Chief Executive Officer
Yeah, we don't have any purchase options really across the portfolio outside F&B and really more about ROFR, right of first refusal, if we tried to sell a building. So nothing mature in the next 24 months, or the next 10 years really that I can think about. I think, 2026 is a daily focus of Mark and his team. And most of that is CHI affiliated hospitals. And so really anytime we're working with them on space planning or new space, or changes to those buildings that usually comes with a change in the lease term to get it out of the 2026 year. So we will continue to reduce the concentration of that year over time.
Daniel Bernstein -- Capital One Securities -- Analyst
Is there a single master lease, or is each property kind of have their own individual lease, but the expirations are the same date?
John T. Thomas -- President & Chief Executive Officer
It runs market by market. So there is essentially a master lease in each market. Each building has its own lease. It's essentially all under one tenant in that local market. And then again, those would all tie to a specific year.
Daniel Bernstein -- Capital One Securities -- Analyst
Okay. So it's not like all of them just go away. If somebody wanted to get out of their release, it's not like all of them go away, because it's each individual market?
John T. Thomas -- President & Chief Executive Officer
That's correct.
Daniel Bernstein -- Capital One Securities -- Analyst
The risk isn't what is perceived to be on paper?
John T. Thomas -- President & Chief Executive Officer
No. Like Louisville, when we moved all those leases to the University of Louisville Health, it's just wholesale [Indecipherable] on those leases and that's a supplementing transition.
Daniel Bernstein -- Capital One Securities -- Analyst
And I just want to go back to the question on JV opportunities in the future. Are you seeing more and more sellers are looking to do joint ventures versus straight up sales? Is it -- again this may have been one-off opportunity, but you did two in the quarter. So I'm just wondering whether JVs or something that kind of the flavor of the day that people want to do? Or is that really just these were just one-off opportunities?
John T. Thomas -- President & Chief Executive Officer
These are one-off. Like I said, the one single deal in Delaware is -- frankly, they just got to the building before we did and brought us the opportunity to co-invest with them. So it was part of the -- again, their long-term exit strategy would be ideally to us, as for us as well. The team Agus [Phonetic] was again for us much more focus on the strategic value of that relationship, but also -- again these are good high quality partners, the European investors, high quality investor, and organizations we would look to in the future in the right situation for deploying capital together again. So one-off situations. But there's a lot of capital out there as you all know chasing these assets. And so there's more opportunities with different rationales to partner with third parties, but we like our cost of capital right now. So that's not our first option, or first choice for deploying capital.
Daniel Bernstein -- Capital One Securities -- Analyst
Okay. I normally offer congrats on calls, but those were good JV transactions. So, congratulations, and I like seeing it.
John T. Thomas -- President & Chief Executive Officer
Thanks, Dan. We appreciate it.
Daniel Bernstein -- Capital One Securities -- Analyst
Okay. That's all I have. Thanks.
Operator
Our next question comes from John Kim with BMO Capital Markets. Please proceed with your question.
John Kim -- BMO Capital Markets -- Analyst
Thanks. On your shift to focus more investments on off-campus, I just wanted to clarify, are these going to be more off-campus affiliated with hospital systems? And the second part of that is, the shift -- is this mostly due to pricing? And are you seeing the cap rate differential between on and off-campus widening over the last few months?
John T. Thomas -- President & Chief Executive Officer
Yeah, John, I wouldn't describe it as a shift as much as it is. We've always had kind of a bias toward the off-campus. But anchored by a health system and/or large physician group and the multi-specialty or orthopedic group being biggest and best example across our portfolio. But I wouldn't call it a shift as much it is we're comfortable concentrating our efforts there. We think the pricing and the returns are better and it should be better on the off-campus buildings. And again, not to the exclusion of good on-campus buildings we buy from time to time.
John Kim -- BMO Capital Markets -- Analyst
Can you break out your -- composition of your acquisition guidance as far as -- I think you gave development already, but on-campus versus off, and versus ROFRs?
John T. Thomas -- President & Chief Executive Officer
We don't think about it that way. But again I'd say 60-40 off to on, and it could be 80-20 or 95-5. But we don't think about it like that. Right now, in our current pipeline -- near-term pipeline, it's almost all off-campus. So we'll see how the year plays out.
John Kim -- BMO Capital Markets -- Analyst
And final question is, can you remind us how you characterize adjacent to campus assets? Is that in your off-campus or on?
John T. Thomas -- President & Chief Executive Officer
Yeah. For us, on-campuses, we follow the 250-yard rule. Just keep it simple. And that again has a reimbursement differential. So it's a good way -- a good rule of thumb to follow and be consistent. So something outside of 250 yards but across the street would be adjacent.
John Kim -- BMO Capital Markets -- Analyst
Okay. Thank you.
John T. Thomas -- President & Chief Executive Officer
Yeah. Thanks, John.
Operator
We have reached the end of the question-and-answer session. At this time, I'd like to turn the call back over to John Thomas for closing comments.
John T. Thomas -- President & Chief Executive Officer
Again, we appreciate your interest this morning. We think 2019 was a great year. And we think 2020 is really setting up well to be outstanding year of growth and healthy portfolio for us. So we look forward to seeing you at various investor conferences in the near term, and happy to follow up. Thank you.
Operator
[Operator Closing Remarks]
Duration: 52 minutes
Call participants:
Bradley D. Page -- Senior Vice President, General Counsel
John T. Thomas -- President & Chief Executive Officer
Jeffrey N. Theiler -- Executive Vice President, Chief Financial Officer
Mark D. Theine -- Executive Vice President, Asset Management
D. Deeni Taylor -- Executive Vice President, Chief Investment Officer
Chad Vanacore -- Stifel -- Analyst
Jordan Sadler -- KeyBanc Capital Markets Inc. -- Analyst
Alex -- R.W. Baird & Co. -- Analyst
Nick Joseph -- Citi -- Analyst
Jason -- RBC Capital Markets -- Analyst
Omotayo Okusanya -- Mizuho -- Analyst
Daniel Bernstein -- Capital One Securities -- Analyst
John Kim -- BMO Capital Markets -- Analyst
