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Healthcare Trust of America Inc (HTA)
Q2Â 2020 Earnings Call
Aug 7, 2020, 1:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, and welcome to the Healthcare Trust of America's Second Quarter 2020 Earnings Conference Call. [Operator Instructions]
I would now like to turn the conference over to David Gershenson, Chief Accounting Officer. Please go ahead.
David Gershenson -- Chief Accounting Officer
Thank you, and welcome to Healthcare Trust of America's Second Quarter 2020 Earnings Call. We filed our earnings release and our financial supplement yesterday after the close. These documents can be found on the Investor Relations section of our website or with the SEC. Please note, this call is being webcast and will be available for replay for the next 90 days. We will be happy to take your questions at the conclusion of our prepared remarks. During the course of the call, we will make forward-looking statements. These forward-looking statements are based on the current beliefs of management and information currently available to us. Our actual results will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance. Therefore, our actual future results could materially differ from our current expectations. For a detailed description of potential risks, please refer to our SEC filings, which can be found in the Investor Relations section of our website. I will now turn the call over to Scott Peters, Chairman and CEO of Healthcare Trust of America. Scott?
Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President
Thank you, and good morning. And thank you for joining us today for Healthcare Trust of America's Second Quarter 2020 Earnings Conference Call. Joining me on the call today is Robert Milligan, our Chief Financial Officer. As we sit here today, the COVID-19 pandemic continues to hit our community and impact many aspects of the economy, with no near-term end insight or ultimate impacts determined. Fortunately for us, we operate within a healthcare sector and with healthcare providers that are improving their resiliency and operating capacity. As I said before, I believe the medical office sector is one of the best areas of real estate in which to invest. This is especially true today. Individuals continue to require access to medical services regardless of economic conditions. From a business perspective, HTA sits in a very strong position. We have a best-in-class operating team that is running a high-quality portfolio of medical office buildings that are located in key markets throughout the United States.
Our portfolio is broad-based with over $7 billion invested across almost 25 million square feet. It is also diversified with no one market accounting for more than 10% of rent and no single-tenant accounting for more than 4.2%. Our tenants consist primarily of leading healthcare providers in our markets with almost 75% of our rent coming from healthcare systems, universities and large national healthcare providers, and 60% of our rent comes from credit-rated tenants. We have a fortress balance sheet, leverage of 5.1 times debt to EBITDA, over $1 billion of liquidity and almost no debt maturities coming due in the next two years. This is a direct result of our long-term conservative disciplined management philosophy and focused actions that we have taken over the last 12 to 24 months. As importantly, our healthcare tenants have rebounded significantly from the early impact with the pandemic and shutdowns. Providers have adjusted their business models to the new normal and have seen patient levels largely return. In our portfolio, our property management team has done a great job keeping all of our buildings opening and running throughout this period. We have also seen almost all of our clinical offices reopen and return to their previous office schedules. Although the COVID pandemic continues to flare up in certain markets, the majority of providers are much better prepared today to operate than they were just four months ago. Their tone and outlook is certainly cautious and focused on efficiency.
We continue to work and reach out to our tenants on a daily and weekly basis. As a leader in this unique space, our operating results are truly solid. Our second quarter collections were strong, with HTA collecting 98% of our contractually scheduled rents, including 3% of rents subject to deferral agreements or approximately $6 million. Half of those were made to leading healthcare systems with whom we agreed to defer rent as a sign of our long-term partnership philosophy. Our collections in July and August are consistent with these levels and demonstrate the high quality of our portfolio and our continued strong tenant base. In addition to deferrals, we are also working with our tenants to achieve scenarios where we both can achieve our goals by signing renewals and extensions for the future, while providing free rent today as a component of our standard lease term. In the second quarter, we signed approximately 1.2 million square feet of renewals, with almost 500,000 square feet of early renewals, which allowed us to extend term at very attractive rates for HTA.
Our renewal rates remain strong at over 4.5% with retention of almost 90% as tenants opted to stay in place while operating through this period. For the year, we have now renewed more than half of our 2020 expirations, an extremely positive and significant action despite the effects of the pandemic. Our new leasing for the second quarter was 139,000 square feet, and we continue to see a modest uptick in activity in the third quarter. Our total portfolio occupancy and lease percentage remained relatively flat, which we view as strong in this environment. This performance allowed us to maintain normalized earnings of $0.42 per share for the period despite taking a higher level of bad debt reserves out of an abundance of caution that Robert will discuss a little later. As we review our financial condition weekly, our goal is to make all decisions based upon a long-term view and entails ensuring that we are extremely conservative in our financial and asset management and leasing decisions, making and recognizing that the economic and operating environment that we find ourselves in and that our tenants find themselves in may persist for quite some time and that caution and patience is critical.
As a company, we have viewed the market disruption and taking prudent actions as appropriate, especially as it related to conserving cash and planning for the long-term stability and growth for HTA. First, we temporarily stepped back from the acquisition market to better understand the overall dynamics of the marketplace. We expect to return to the acquisition market in the third quarter and the remainder of 2020 as we see transaction activity return in our key markets where we are most focused. These acquisitions allow us to utilize our asset management and leasing teams and continue to build critical mass in HTA throughout the country. Second, we draw down on our credit facility, reserving cash as we evaluated the financial markets as our confidence in the markets and our tenants have increased. As we have acquired confidence in our cash flows, we repaid the majority of this by the end of the quarter. While we look forward to the rest of 2020 and into 2021, we remain cautiously optimistic. We do see opportunities to grow our portfolio, increase shareholder value and gain additional operating advantages in our key markets.
From an occupancy perspective and on a near-term basis, we expect our portfolio to remain relatively flat. We will also continue to monitor with 2% to 3% of tenants, we have slowed their rent collections, and we will remain conservative in our approach and patience in the process. Finally, I'd like to highlight our participation in this year's GRESB reporting. This follows up on our inaugural sustainability report that we filed earlier this year and highlight our commitment to ESG.
I will now turn the call over to Robert, who will go through some numbers in greater detail.
Robert A. Milligan -- Chief Financial Officer, Treasurer and Secretary
Thanks, Scott. From an operational perspective, we have moved quickly and efficiently to embrace the new normal. Our teams have embraced their new remote work environment and have greatly increased the use of the online and digital tools that we have in place. Leasing and marketing is increasingly using virtual tours and online marketing, supplement calls and virtual meetings with systems and brokers. Property management is realigning to increase remote monitoring to ensure our properties are running efficiently. Our facilities team continues to remain on-site in servicing the building, but they're adjusting hours and service times. In short, I believe we are embracing the change and seeing more opportunities where we can use our technology and tools from our in-house platform as an advantage that can set us apart from our peers.
From a financial perspective, our balance sheet continues to be in great shape as we work through the pandemic. As of the end of the quarter, we had total liquidity of approximately $1.1 billion, including approximately $278 million of equity we raised on a forward basis in the fourth quarter of last year at pricing above $29 per share. Including the impact of this equity, our leverage is only 5.1 times. From a cash obligation perspective, we have limited near-term debt maturities with only $6 million coming due before our revolver matures in June of 2022. And we also have only $121 million of capital required to complete our developments and redevelopments that are over 70% preleased on average.
Turning to our earnings. Our NAREIT-defined FFO for the period was $0.40 per share, which was flat to the prior year and includes the impact of $4.7 million of bad debt reserves that we took this quarter, specifically related to three outstanding legal judgments that we have been awarded, but have yet to collect. These judgments relate to prior period events. And while we will continue to pursue collection and they ultimately prevail, the impact of the COVID-19 pandemic on the court systems and the economy may make the timing and clarity around ultimate collections difficult to predict. Excluding this charge, which we have identified as a normalizing item, our normalized FFO per share was $0.42, up 2.5% year-over-year and flat with the first quarter. Our same-store growth for the period was 0.6%, which reflects our known decline in same-store occupancy and lease rate, offset by the impact of strong rent growth and margin expansion from increased use of our platform. Our same-store results was also negatively impacted by two other items in the quarter. First, the impact of free rent from early renewals, which is part of our strategic effort to work with tenants during the pandemic, which totaled $1.2 million or almost one full point of same-store growth.
In addition, we also increased our reserves for bad debt from continuing tenants by almost $0.9 million from the prior period. This primarily relates to tenants who have been in good standing, but have fallen behind over the last 90 days. While we are optimistic that many of these tenants will resume paying based on our conversations with them, we thought it prudent to increase our reserves during the period. Excluding these two impacts, our same-store growth would have been over 2.5%. Our cash collections in the second quarter continued to remain strong as we have collected or entered into deferral agreements on over 98% of our rents due, collecting normal cash on approximately 95% of our rents. Our rents in July and August remain consistent with these strong levels. In total, we have now agreed to approximately $9.5 million of deferrals, including $6.5 million that were taken in the second quarter. Of these, approximately 50% of these have gone to hospital system partners who reached out early in the pandemic, with the remainder to physician groups practicing both on-campus and off with the mix of specialties and primary care. These are scheduled to be repaid starting in September and should be made over the next six to 12 months depending on the tenants. Given this level of cash collections, we have continued to invest in our buildings and complete our developments as scheduled. Our recurring capex for the quarter was $15.6 million, which equated to 13% of NOI. As a result, our FAD for the quarter increased year-over-year to $77.5 million, resulting in a 90% payout ratio. We also invested approximately $15 million in our developments, which remain on schedule with the delivery of our first new development in Raleigh, scheduled for later this month. We are excited to see these projects come to fruition and are in active discussions on several more. This includes direct conversations with health systems as well as opportunities to joint venture with local developers in our key markets.
On the acquisition front, we remain cautious in the second quarter, waiting to see how the markets reacted. As MOBs have continued to perform well, we have seen more deals come to the market that fit our criteria and pricing. We are slowly reengaging in these investments. Following the end of the quarter, we have now entered into exclusive agreements to acquire over $65.5 million of acquisitions, subject to customary diligence. We are actively pursuing several additional opportunities as well. As we continue to operate our business and return to making investments, we will finance our business in a manner that maintains low leverage and significant liquidity. One final reminder, we have historically announced our dividend alongside our quarterly earnings, with the payment following up to two months later. With our first quarter earnings, we announced that we would be moving our dividend announcement to reduce this gap. As such, we anticipate announcing our third quarter dividend in mid-September, consistent with the practice of many of our peers.
I will now turn it back over to Scott.
Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President
Thank you, Robert, and I will open it up for questions.
Questions and Answers:
Operator
[Operator Instructions] Today's first question comes from Tayo Okusanya with Mizuho. Please go ahead.
Zachary D. Silverberg -- Mizuho Securities USA -- Analyst
This is Zach Silverberg on for Tayo. My first question is, just curious about the potential for a rebound in same-store NOI in the third quarter as it looks like it may still be weighed down by free rents and concessions.
Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President
All right. Robert, why don't you take that?
Robert A. Milligan -- Chief Financial Officer, Treasurer and Secretary
Yes. I think as we tried to outline, one of the strategies that we certainly have taken throughout this throughout the pandemic and our response was looking very really looking how we can work with our health system partners that are out there as they were going through things. One of the opportunities that we saw was to really reenter into some of these agreements, take the opportunity to work with them to extend some contracts, extend some leases at very favorable rates to HTA while giving them free rent upfront. So we think it's very prudent and really pays off from an NPV perspective. So we did about 0.5 million square feet of that in the quarter. The impact to that, certainly, though, is that we took $1.2 million from a free rent perspective, the same-store growth in the second quarter. And that will be $2.4 million impact to the third quarter as we take that. So we do expect the $2.4 million to be an impact to the third quarter. At this point in time though, we also do believe we don't anticipate any significant additions to our bad debt reserves. And in fact, if we collect our way through those, we might actually see some reduction in them. So I think our outlook for same-store growth would certainly be in the probably the 0% to 1% range next quarter, which would equate to 2% to 3% range excluding the impact of those early renewals, which, again, we think is really good for the business long term, even if it has a short-term impact to this one metric.
Zachary D. Silverberg -- Mizuho Securities USA -- Analyst
Got you. That's very helpful. And just one more for me. Could you guys provide any of your latest thoughts or commentary regarding the outlook of future government support and relief with some of the ongoing uncertainty in Washington right now?
Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President
Well, I think one of the good things that we've seen is that and we mentioned in our script, is that our tenants have really responded here over the last couple of months to the environment that they found themselves in. I think they prepared themselves to be in practice, ebbs and flows over the next three, six, even 12 months. And they're all open. They're all practicing. And they're getting patients back. We talked patients back. We talked early on that hospitals are certainly utilizing their marketing arms and reaching out to patients, trying to relieve any anxiety that they have about coming back and getting the services that they need. So as we go forward, I think that support that government support would be greatly appreciated, I'm sure, by some tenants, if not all. But I think it would be a lot less needed as we move forward. And I think that, that's the best part about what I can see about in our sector with medical office buildings with physicians, with healthcare systems. As we move into 2021, if there is an issue on liquidity within the economy, if the government pulls back on subsidies, I think we will continue to outperform from a rent collection perspective and also, frankly, outperform from the underlying need for the services that our tenants provide, and that's just a big time key as we see the next 12 months.
Operator
Our next question today comes from Nick Joseph with Citi. Please go ahead.
Nicholas Gregory Joseph -- Citigroup Inc. -- Analyst
Curious, if you can talk about the releasing conversations, especially on the early releasing side in terms of how they came about. Was that the tenants coming to you? Were you proactive reaching out? And then how did you think about staggering the expiration of those recently signed renewals?
Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President
Well, our process was, and if you look back and I think we've gone through five months now, March, April, June, we reached out to tenants. I think early on, there was certainly a high degree of stress. I think healthcare systems had some stress. I know that physician groups, even large physician groups had stress. And so we reached out to our tenants. I know that Robert, Amanda, Brock, our Senior Vice President of Operations, we took a very aggressive and active approach and made contact. And so we wanted to help. I mean, this is a time period where you really want to have a long-term brand stability. You want to have you want to come through this as a company with a strong balance sheet, strong reputation, and you get that by working with tenants. And so I think from one to 10, we were certainly on a nine or 10. We reached out to tenants. We didn't wait for them to call us. We reached out to healthcare systems. And in our deferral, we've deferred $9 million, but it's been to healthcare systems that have relationships with us in large markets with more than one or two or three assets that have leases that were still three or four years left. And it was an opportunity to do what we would have done over the next three years. We would have reached out to these folks. We would have worked with them to do a standard lease. And in this particular case, we got to do it at a time when it was beneficial for both of us. I know that there's some folks that might say, well, did we use utilize free rent in order to help tenants at a particular point in time? I think it helped some stability. It gave them some time to move through the process that we just talked about, which is getting back to elective surgeries, getting back their practices back to operating. But it certainly was in no case in any way an opportunity or a stop gap for them not to pay rent. We went through the underwriting process. We went through the diligence. As Robert points out in our supplement, these are very strong relationships from a credit perspective that we helped out. I think it pays off long term. We've been at this 14 years now. We'd like to be at this in another 20, 30 years and the healthcare sector has changed a lot. But this change that we're going through now, you build a brand and you build a brand through healthcare system relationships to physicians and through your employees doing that. So we reached out, and I think it was certainly a part of our management style to do that.
Nicholas Gregory Joseph -- Citigroup Inc. -- Analyst
And then just on the expiration of those newly signed leases, were you able to stagger them out?
Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President
We again responded to what we thought was in the best case. We could have utilized probably and said we're going to stagger this out. We went ahead and let people let these healthcare systems, let these tenants utilize the free rent when they needed it. It's finding to say, well, we'll be a partner, we'll help you out. But we're not going to help you out when you need it, we'll only help you out when we need it. And so we did, we took it for the next couple of quarters. But in 2021, it's going to be a tremendous benefit. We're already halfway through our renewals in 2020. Our renewals in 2021 and 2022 are down because of the renewal efforts that we've done. We've extended relationships with key partners in key markets and so if we take, as you mentioned, a hit on same-store growth for this quarter, maybe a little bit next quarter. I think long term, it's going to be a tremendous benefit. And we've extended $50 million in value from contractual lease perspective. And that's just generating shareholder value. And we did it, in most cases, without utilizing brokers. We did it in a standard TI format, and we did it certainly with the standard free rent with a difficult term. So it was just a win-win. And I think it was a tremendous opportunity. And I remember in 2009 and 2010, that was a key moment in our company's history. And frankly, I think this is another key moment in our trajectory over the next 10 or 15 years. And what we've done will pay huge dividends. It gave us a chance with our size, with our key markets, with the ability that we've done with our asset management team to truly reach out to individuals and work with those relationships.
Nicholas Gregory Joseph -- Citigroup Inc. -- Analyst
And then just on bad debt, and I recognize you gave us all the building blocks, so people can make their own adjustments. But just wanted to get the rationale behind adding back to your normalized FFO number because you could make the argument that bad debt is somewhat kind of in the course of the normal business. So just want to get your thoughts on adding back to core FFO.
Robert A. Milligan -- Chief Financial Officer, Treasurer and Secretary
Yes. And I think, Nick, that's a good question. And you can see really our thought process in how we bifurcated our treatment of the bad debt. The bad debt that was essentially related to long tenants that have been out of our buildings for some time. And we're just in the collections litigation process, as we discussed. Those were all prior period type write-offs. They're recognized income, in many cases, actually prior to, say, 2018, if you will. And so the treatment for us on those was certainly one where that's not a recurring business, wasn't in our run rate in Q1 certainly. And so we decided that was appropriate to treat as normalizing to get investors a good view of run rate. The $900,000 that we took as a reserve incremental reserve related to ongoing tenants or tenants that were in the building really since the beginning of the year. We kept those in our earnings. We've kept those in our same-store. We thought that was the appropriate treatment for that. So you can really see our thought process in how we bifurcated between the 2.
Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President
And just to add on that bad debt, we won we were the prevailing party. There is collateral. There are opportunities for us to go and pursue it. We will pursue it. And there is the opportunity, and we have, frankly, the expectation that in the coming quarters, whether it's the end of this year or next year, we'll have the opportunity to talk about the collection of that of those monies. But right now, in this environment and this economic uncertainty, we wanted to make sure that we looked at things in the most cautious and practical and prudent manner and do it once and not do it over the next three or four quarters. And we don't want HTA to continue to every quarter on discuss one more thing, one more thing, one more thing. So we thought we'd look at it this way and go ahead and address it this quarter.
Nicholas Gregory Joseph -- Citigroup Inc. -- Analyst
Thank you.
Operator
Our next question today comes from Connor Siversky with Berenberg. Please go ahead.
Connor Serge Siversky -- Joh. Berenberg, Gossler & Co. -- Analyst
First one on ESG, high-level question. I'm just wondering what the next steps are here. I mean, do you foresee maybe engaging in the capex outlay at some point, improve some of the buildings, maybe from the MEP perspective? Or would initial push here be more geared toward the corporate structure?
Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President
Well, there's a couple of things, and I'll just jump in here with a couple before I get to Robert. But one of the things that we're going to do, we take this so seriously. In today's environment, when I look at it over my last 32 years, I think, this process is a company, this process internally is a process of recognizing the social implications of everything that's going on and making sure that HTA is progressive and aggressive in making sure that we are on top of in the forefront in this particular category. So we will be taking steps over the next two years the next year, next two years. One of the things are that we're going to make this an actual oversight by the by Board Committee. We think that this is important as a Risk Committee. We think it's important as anything else. And so we'll actually have the management team will be will have oversight from a committee from the Board so that we do have this will be a performance objective too that we're measured on. So I'll get let Robert get into some of the details. But from a big picture perspective, HTA is very, very serious about this process.
Robert A. Milligan -- Chief Financial Officer, Treasurer and Secretary
And I think, Connor, as we look specifically more at the energy utilization and corresponding investments in our buildings, this has actually been a part of kind of our DNA for quite some time, really ever since we took our things in-house in our platform. We've had our internal engineers and facilities folks that have really focused on that. That really accelerated, I'd say, two or three years ago as we got quite a bit larger. We hired a couple of personnel who are actually dedicated solely to the facility performance on facility operations on the national scale, really looking across the board at appropriate projects to do. So we've been making investments from an energy perspective, EMS perspective, just building operational perspective of how do we run those better to save utilities really with a big focus on that over the last couple of years. And I think that's something that you've heard us talk about. As we put in our sustainability report to start the year, we've seen the real impact of our energy usage going down, as we've moved our way through our EMS implementation, as we've worked our way through getting more and more of our buildings on our centralized building automation systems. So I think it's something we've done, and you're going to continue to see it, but I wouldn't expect a big outsized investment in new energy systems. It's just going to continue, just like we've done over the last couple of years with hopefully, the same results.
Connor Serge Siversky -- Joh. Berenberg, Gossler & Co. -- Analyst
All right. That's very helpful. And then looking at some of the construction data through the end of July, it looks like starts continue to outpace completions in some major markets. I'm wondering how the HTA team is maybe looking at increased supply growth that may emerge in the next several years or if you seek to have a part of those development opportunities?
Robert A. Milligan -- Chief Financial Officer, Treasurer and Secretary
Well, I think our view is there is going to be continued growth, especially in those markets where the it was already attractive, you were starting to see population growth come in. In some ways, the reaction to the pandemic might accelerate those trends. I think there certainly will be some opportunities for development in certain high-growth markets that we see like Raleigh, Durham in the Carolinas, kind of in the southeast. Areas that, long term, we expect to continue to see growth. Some of those developments are going to be direct with health systems or directly done by HTA. Some of those will be done through a joint venture opportunity with some local developers who might have land. We see opportunities to partner with them. They bring something very strong to the table. We bring very strong long-term ownership and relationship with health systems, and we expect to see some opportunities with that. We just have signed one of those agreements up this week. So we do see that as another avenue and opportunity for developing growth going forward.
Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President
I think one of the benefits and again, we've talked about going into this year, we talked about our development process and getting our infrastructure in place from the Duke transaction. We've done that. We kept the team in place. We've just completed our WakeMed MOB that got completed this week. We're still moving forward with our Forest Park, which is 90% preleased and with HCA. And so we have opportunities, and we're taking advantage of those. We've added, as Robert said, a couple of JV opportunities in markets that we like and with folks that we see an opportunity. So I think the development if you look at the actual dollar amount of development that we're doing, we stand up very strongly with our peers, and in fact, I think, a little stronger. And so I think that continues. I think we've got a good spot in the development standpoint. But we like our markets, and we like certain MOBs, and we have a certain criteria that we function under.
Connor Serge Siversky -- Joh. Berenberg, Gossler & Co. -- Analyst
Okay. And then last one for me, really fast on those leasing concessions. I think the total was $3.6 million just so I'm clear here, that remaining $2.5 million or $2.4 million should show through into Q3, right?
Robert A. Milligan -- Chief Financial Officer, Treasurer and Secretary
That's correct. Yes. That will be seen in Q3, and then we'll return to a more normal level of things certainly in Q4 and on into 2021.
Connor Serge Siversky -- Joh. Berenberg, Gossler & Co. -- Analyst
Okay, that's all from me. Enjoy the weekend.
Operator
Our next question today comes from Todd Stender with Wells Fargo Please go ahead.
Todd Jakobsen Stender -- Wells Fargo Securities -- Analyst
Just building off that last question with the free rent. Is there an equivalent number, I guess, in terms of capex saved, if you look at it this way? Just seeing if the capex saved that you don't have to spend by pulling these leases forward exceeds that free rent given, if there's a way to look at that.
Robert A. Milligan -- Chief Financial Officer, Treasurer and Secretary
Yes, Todd, that is actually a really good way to look at it. The TI that we actually did with these early renewals was very minimal. And if at all, it was pushed way out into the future. So we certainly saw roughly very similar dynamic at play for the $3.6 million of free rent, we easily saved at least $2 million of capital that we're not going to have to spend on that right now. So it's between $2 million to $4 million and that capital if we gave it, was actually very far it was out in the future of five years and thereabouts. So we do see the net effect of savings on that being very attractive. And I think the other thing on that is these are very attractive releasing spreads. I think we certainly put out some of our strongest releasing spreads in the quarter that we did, probably one of our highest amounts of renewal leasing in our company history. So when we're looking at renewing 1.2 million square feet in total, we've already renewed 1.8 million square feet for the year now. The early renewals were attractive, good rates, very strong from an NPV perspective, but we're also making great traction on just working through the rest of the renewals and keeping the people in place at good rates despite the environment that we're through. So I think we looked at it and said, let's just not punt off on decisions that if we could punt them off three months, we decided to take the decision now, take action. We think doing that at this time is certainly beneficial from a long-term relational perspective as well.
Todd Jakobsen Stender -- Wells Fargo Securities -- Analyst
All right. That's helpful. And then just looking at one of your projects, in particular, you've got to Cary MOB. It moves from a redevelopment to a development. Any change in your return expectations for that? And when does that building begin to cash flow?
Robert A. Milligan -- Chief Financial Officer, Treasurer and Secretary
Well, the Cary one, Todd, is really from a redevelopment, really what we did when we talked about it. Before, it was some garden-style medical office. We took down some of those garden-style MOBs and put up a brand-new 5-story, 125,000 square foot MOB there. So that does get completed this quarter. It's over 70% preleased, should start cash flowing in early fourth quarter once the tenant is completely in the building. So we'll start to see the financial benefit of that in the fourth quarter.
Todd Jakobsen Stender -- Wells Fargo Securities -- Analyst
Thank you.
Operator
Our next question today comes from Daniel Bernstein with Capital One. Please go ahead.
Daniel Marc Bernstein -- Capital One Securities, Inc. -- Analyst
Actually, Todd asked my question on the rents. But just on the free rent. But I'd just ask a little bit extra on that. Did you get any additional rent bumps as well within the numbers to get the early renewals?
Robert A. Milligan -- Chief Financial Officer, Treasurer and Secretary
Well, on the early renewals, they were certainly all kind of consistent with the releasing spreads that we reported. Rent bumps on most of them were 3% or thereabouts. So strong...
Daniel Marc Bernstein -- Capital One Securities, Inc. -- Analyst
Yes. I mean, annual rent bumps.
Robert A. Milligan -- Chief Financial Officer, Treasurer and Secretary
Yes. The escalators on those were all 3%. Yes. So we were able to put guns on those, get that done, and we think get early renewals, like I said, at very attractive pricing.
Daniel Marc Bernstein -- Capital One Securities, Inc. -- Analyst
Okay. Have you and maybe this is a little bit early into the pandemic, but have you been receiving any requests from tenants or maybe hospital systems to redevelop properties, I guess, to change the interior formats or something that's directly related to pandemic that would change how the interior of the buildings operate and do you expect to see some significant capex programs, whether funded by you or eventually, I guess, filtering into the right numbers to go ahead and make some actual architectural or internal changes to the buildings?
Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President
No, I think that we'll see that. I think we'll see healthcare systems I think we've seen, to some extent, some modifications on some renewals where folks wanted to make a better, more-efficient office layout where they wanted to make something where they were combining space. That was part of the opportunities that we allowed folks to do, and we were, frankly, very cooperative in reaching out and doing that. I think as this pandemic flows through into 2021, 2022, I think you'll see more healthcare systems, more larger physician groups look and say, how can I maximize my space, how can I maximize my patient experience, what do I need to do to anticipate another ebb and flow or another situation that doesn't shut me down or doesn't put my patients in a place of anxiety. So I think this is an opportunity. One of the things we felt when we went through the renewal process and reached out to folks was, I'd much rather have tenants, healthcare systems, say, look, I want to stay here. We'll extend the lease. We'll work with you, and we'll continue to work with them. And I think that, that's an opportunity for a company that has a strong balance sheet. It's an opportunity when you have a relationship with the healthcare system. I do I expect that, that will be part of what our construction folks and our leasing folks talk with down the road as we get into 2021.
Daniel Marc Bernstein -- Capital One Securities, Inc. -- Analyst
Okay. And I guess a related question might be, the trend for a long time, both at the REITs and then just in terms of development has been larger and larger properties, multi-specialty type campuses. Is that something with COVID that may go away a little bit or get maybe that trend reverses, just to help kind of control some changes to infection control where not everybody is in one spot? Just curious.
Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President
Yes, I think that there's going to be many of those decisions. We saw that there's a push right now to move some of the patient services from on-campus to out to physician offices or off-campus. I mean, that's something that was brought up by one of our peers yesterday. I thought it was a very, very articulate presentation. I think that helps the medical side of the equation. I think it certainly helps HTA because we've always felt that the healthcare system in the United States needs to flatten out, meaning that the most expensive it needs to be most-efficient space is going to be the most-utilized space. And as this happens, I think you're going to see that. You're going to see maybe some smaller assets that are used in conjunction with other assets. But campuses are one way to able to separate some things. And it's going to be an interesting two, three, four, five years as healthcare systems move slowly. If you remember, the Affordable Care Act, it took probably three or four years until healthcare systems decided how they were going to respond, what they were going to do. But I can imagine that, that's going to be a large component of what they plan to do and how they plan to utilize space, as we see. The next iteration of lease is five to seven years from now.
Daniel Marc Bernstein -- Capital One Securities, Inc. -- Analyst
That's all I have. I appreciate the comments. Thanks.
Operator
Our next question today comes from Rich Anderson with SMBC. Please go ahead.
Richard Charles Anderson -- SMBC Nikko Securities America -- Analyst
So with the surge in cases in the south and the west, I think I saw Arizona is improving, but still, it's a bit substantially higher than it had been in maybe a few months ago. I wonder how that plays into your perspective on elective surgeries. I know that they've it's largely been reopened or allowed, but are people actually doing it even though there's an allowance to do it. And I'm wondering what your thinking is about the dynamics of elective surgery, considering all those sort of variables for the rest of this year.
Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President
Well, we keep a weekly contact. As you can imagine, it's almost a daily contact with our asset management team. And as I mentioned earlier, we have engineers that have been working daily for the last five months in visiting assets, working with tenants. And even in the Phoenix market, we have people are open, their elective surgeries are going. How much are we back to normal? I think the new normal is maybe you get to 75%, and you almost consider that the normal. And I think that people are sort of getting to the conclusion that they need to get out, they need to visit their physicians. They need to take care of the medical maintenance for a better word that they may have pushed off for the last five months. And we're even seeing it in Florida. I mean, we have some we have assets in Florida. We have a whole infrastructure there. And our assets are being visited, and physicians are open and healthcare systems are continuing to function. And we have not gotten any response back from any of our property managers or folks that have said that any of the hospitals have reached capacity. So it's a little bit of disconnection. You hear this and you read this, and but yet I can tell you that, Rich, I don't know one situation within our portfolio. And as I said, we have certainly weekly or daily calls, where we have seen the impact what happened four months ago. Everything is open that we have pretty much, I mean, 95%, 96%. And patients are visiting our assets. And I think it's the volume, which is the question. I do think that the volume is yet to come back to 100%. I think there's still anxiety and fear depending upon your age and that's the biggest thing that the folks are working through is, how do we make sure that people feel comfortable, feel safe, and we can get efficiency out of our operations.
Robert A. Milligan -- Chief Financial Officer, Treasurer and Secretary
Rich, I'd just add one thing to that, too, is that from a volume perspective as well, I think you are seeing a mix shift from hospital surgeries to outpatient surgery centers as well. I think the fear of going into a hospital for surgery is far greater than if you're going to have a procedure done going to an outpatient, even on an off-campus surgery center, the fear of cross-infection is far lower there. So while you see total volumes still down somewhat, although largely recovered, the shift from hospital to outpatient is really giving the surgery centers in our buildings a boost, which is why we're not seeing significant even significant declines there, so.
Richard Charles Anderson -- SMBC Nikko Securities America -- Analyst
Okay. Scott, you and I or all of us probably talked about this as we went through this stance over the past five months. And I'm wondering what you think the hospital industry looks like in the aftermath of all this. I mean, I've said this, I feel like we're perhaps nowhere over hospitals in some areas of the country. And I wonder if you think that there is a retrenchment of the hospital industry. After all, this is set and done, so we prepare notes with some of what your peers have said on that same topic.
Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President
Well, I do think that healthcare systems have got a have had a tremendous benefit of the stimulus act that came through. And I think it was drastically needed. And this is I don't want to say, put a Band-Aid on things, but I think that healthcare systems have gotten through this last five months and frankly, can get through the next three or four months and so forth and manage through. I do think that it's going to take all healthcare systems or most healthcare systems. They're going to sit back and look at their cash flows. They're going to look at the most efficient ways to be not profitable, but certainly to maximize their cash flows, their patient mix, their locations. So I think this is going to have an impact. I think this will be equivalent to the Affordable Care Act where many healthcare systems, there was a consolidation, there was thought processes of how do we make a profitability? How do we make the right mix when we have locations that we build or where we rent it? I think this is going to happen, but I don't think it happens tomorrow, just like telehealth. I think telehealth is going to be something that integrates itself to the healthcare industry, and it does it on an accelerated path, might have taken 10 years and now it might take five years. So this is anyone who thinks that this is just everything will go back to the way it was, I don't think so, Rich. I think there will be a new dynamic. And I think smart management teams, smart companies will certainly try to gain as much information as they can and then adapt their management style and so forth to the future. And that's one of the big reasons that we did our outreach and that we work with our partners on this deferral program. We could have easily taken approach. I think when we look at it in hindsight, we would have very, very little deferral, and we would have gotten collections from all the tenants. And but the opportunity comes once and certainly came once in my lifetime, frankly, to be able to reach out to somebody that you've done business with and say, you know what, can we help you out, we're a strong company, you're a strong healthcare system or a strong physician group, this is something we can do. And we took that chance and an opportunity, and I think it will pay dividends over the next five, 10 years.
Richard Charles Anderson -- SMBC Nikko Securities America -- Analyst
Okay. Last question is, do you see any implications on a political or an election season if there's a Biden win? What does that mean? Does that create clarity in that healthcare system because you sort of stabilize Affordable Care Act, the tax? Or is it the reverse? Do you think it would be a negative to your business overall?
Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President
Well, in taking out politics completely, I think in the past, when you see Democrat controlled or focused processes periods of time, it's actually been fortuitous for the healthcare system. It's been for fortuitous they move more programs, they have more subsidies, they have more emphasis on healthcare, more emphasis from a national perspective. So just like the Affordable Care Act, it actually was positive for us as a company and for the process of healthcare systems deciding to sell assets and so forth. I think this if that occurs, I think it won't be negative. I would expect it would be positive as it rolls through the process.
Richard Charles Anderson -- SMBC Nikko Securities America -- Analyst
Great. All right, thanks guys.
Operator
Our next question today comes from Mike Mueller with JPMorgan. Please go ahead.
Michael William Mueller -- JPMorgan Chase & Co, -- Analyst
Just wondering, in terms of development, does anything change with what you put into buildings to on a go-forward basis because of what we're going through today?
Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President
Absolutely. One of the nice things we have a gentleman, Jeff Spiller, who's been with us for a while, and we were fortunate to bring some of the Duke folks with us. But we were in the process of building a development at Forest Park. And so we sat back and it's actually with HTA, and they're moving to some new touch-free, just as simple as touch-free elevators, touch free types of things. And so we've gone through and we've actually sat down and Jeff had sat down with our current development team to discuss are there things that we can move forward? Are there things that can adapt to a more safety environment? And I think that's something that's going to progress. It's been quick. Anything that happens in three months is long term. But I do think that the type style components that are in buildings are going to adapt to the future of what does the future look like? It's certainly going to change. And healthcare systems will be at the forefront of that. And we, as owners of assets and developers, we need to be receptive to that.
Michael William Mueller -- JPMorgan Chase & Co, -- Analyst
Okay. That was it. Thank you.
Operator
Our next question today comes from Lukas Hartwich with Green Street Advisors. Please go ahead.
Lukas Michael Hartwich -- Green Street Advisors, -- Analyst
I think another way to get clarity on all the free rent questions is looking at net effective rent concept. Can you talk about that? And how did that change in net effective rent on the renewals compared to the last four quarters of renewals?
Robert A. Milligan -- Chief Financial Officer, Treasurer and Secretary
Yes. I think, Lukas, that's a good question because we gave free rent, but TI and certainly, the leasing commissions was significantly lower than it would have been. So the net effect of rents on these early renewals, I would estimate to be about 20% the concessions were, call it, 20% lower than they would have been if we had just done a normal course deal. So that translate to net effective rents that were 3%, 4%, 5% higher than they would be traditionally.
Lukas Michael Hartwich -- Green Street Advisors, -- Analyst
Great. And then on the new leases, the TIs were a bit higher than they've been the last few quarters. Is there anything that stood out there?
Robert A. Milligan -- Chief Financial Officer, Treasurer and Secretary
Well, I think where we are getting some of the new leases done, some of the new leases were around some of our redevelopment properties where we're getting things done. I think we've had some pretty strong leasing for some of the redevelopments that we've had that requires a little bit TI. So that's really the correlation from the reported TI per square foot on the new leases relative to what they've been historically.
Operator
And ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the conference back over to Scott Peters for any closing remarks.
Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President
Well, I want to thank everybody for joining us, and we appreciate the opportunity to talk about our second quarter. And as mentioned, we're optimistic about the third and fourth quarters. So thank you very much.
Operator
[Operator Closing Remarks]
Duration: 51 minutes
Call participants:
David Gershenson -- Chief Accounting Officer
Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President
Robert A. Milligan -- Chief Financial Officer, Treasurer and Secretary
Zachary D. Silverberg -- Mizuho Securities USA -- Analyst
Nicholas Gregory Joseph -- Citigroup Inc. -- Analyst
Connor Serge Siversky -- Joh. Berenberg, Gossler & Co. -- Analyst
Todd Jakobsen Stender -- Wells Fargo Securities -- Analyst
Daniel Marc Bernstein -- Capital One Securities, Inc. -- Analyst
Richard Charles Anderson -- SMBC Nikko Securities America -- Analyst
Michael William Mueller -- JPMorgan Chase & Co, -- Analyst
Lukas Michael Hartwich -- Green Street Advisors, -- Analyst
