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Healthcare Realty Trust (NYSE:HR)
Q4 2020 Earnings Call
Feb 11, 2021, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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

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

Todd Meredith -- President and Chief Executive Officer

Thank you, Grant. With me on the call today are Carla Baca, Bethany Mancini, Rob Hull and Kris Douglas. Carla, if you could first read the disclaimer?

Carla Baca -- Associate Vice President, Investor Relations

Except for the historical information contained within, the matters discussed in this call may contain forward-looking statements that involve estimates, assumptions risks and uncertainties. These risks are more specifically discussed in our Form 10-K filed with the SEC for the year ended December 31, 2020. These forward-looking statements represent the company's judgment as of the date of this call. The company disclaims any obligation to update this forward-looking material.

The matters discussed in this call may also contain certain non-GAAP financial measures, such as funds from operations, FFO, normalized FFO, FFO per share, normalized FFO per share, funds available for distribution, FAD, net operating income, NOI, EBITDA and adjusted EBITDA. A reconciliation of these measures to the most comparable GAAP financial measures may be found in the company's earnings press release for the fourth quarter ended December 31, 2020. The company's earnings press release, supplemental information and Forms 10-K are available on the company's website.

Todd Meredith -- President and Chief Executive Officer

Thank you, Carla. First, I want to take a moment to recognize the hard work and dedication of our employees and our tenants over the last year. As you know, many of our buildings are key locations in the fight against COVID-19. Frontline staff at these properties continue to risk their well being, and they deserve our thanks. It has been a privilege providing space where doctors and nurses can treat patients. Looking ahead, we are optimistic the vaccine rollout will continue to improve morale and safety.

Shifting to Healthcare Realty's performance, 2020 was a challenging, but successful year. In the backdrop of a pandemic, steady internal growth and accelerating external volume generated per share growth of about 3% for FFO and over 4% for FAD. Our portfolio quality was validated by stable operating metrics during a volatile year. Despite being below our initial expectations, we are pleased with 2% same-store NOI growth given the challenges of 2020.

As we move into '21, outpatient volumes are stabilizing, and our leasing team reports a healthy level of new inquiries and property tours. Providers are reengaging an expansion plans that were put on hold during the pandemic. As these trends take hold, we expect occupancy to improve and NOI growth to rebound to our historical average of around 3%.

Complementing our stable operational performance, investment activity was robust in 2020, thanks to our experienced team and a proactive sourcing model. In a year where many marketed deals and investors were sidelined, we demonstrated our ability to ramp up acquisition volume. In total, we acquired $547 million of high quality accretive MOBs. This equates to about 10% of the company's enterprise value and will contribute meaningfully to bottom line growth in '21. Going forward, we see the ability to keep up a similar pace without sacrificing quality.

Rather than rely on the flow of marketed deals, we use a targeted relationship-based sourcing model. We focus on properties that complement our existing assets where we can leverage our local market knowledge and reputation. This process often involves years of pursuing properties that are not for sale. These efforts have paid off increasingly. We completed two dozen transactions in 12 markets last year, including one new market, San Diego. Majority of these properties were sourced through direct dialogue with sellers instead of widely marketed offerings.

Our ability to sustain a higher acquisition pace is bolstered by our newly formed venture with Teachers. This vehicle expands our strike zone incrementally and is reflected in the composition of our first four JV acquisitions, which includes two off-campus properties and two on-campus properties, one being value-add and the other ultra core. Taken as a whole, internal operations and external investment potential have never been better. We see this -- we saw this translate to strong bottom line results in '20 and we expect more to come.

In a year where many companies have struggled, HR posted another year of positive FFO and FAD per share growth. Based on reliable internal growth, meaningful external growth, low leverage and flexible capital options, the Healthcare Realty Board declared a dividend increase for the first time in many years. Restarting dividend growth marks a new beginning for Healthcare Realty. With the bright outlook for solid performance in '21 and the years ahead, we see a clear path to keep lowering the dividend payout ratio even as we grow the dividend.

Now I'll turn it over to Bethany.

Bethany Mancini -- Associate Vice President, Corporate Communications

Thank you, Todd. I'd like to provide an overview of the current state of healthcare and government health policy. Hospitals and physicians continue to prove their resilience in contending with the impact of COVID. They are hopeful that with better treatment and an increasing number of vaccinations, healthcare services will see a more normalized operating environment in the coming months.

For hospitals in 2020, service volumes fell primarily among lower acuity underinsured patients, particularly in emergency department, while a higher level of acute admissions resulted in net revenue growth for most companies for the year. As COVID moderate, hospitals' patient volume, acuity and revenue will likely return to more consistent growth pattern. For physicians, outpatient visits are approaching pre-COVID level. After the spike in telemedicine during the height of the pandemic, the majority of care going forward is expected to be done in-person. The advantage of telemedicine is naturally constrained to lower acuity services. It will likely remain a tool for efficiency, including some services that previously went unreimbursed.

A few other notable points we've learned from COVID over the past year. First, the vast majority of elective outpatient care is essential. It's just scheduled. And if delayed too long, it could become critical care. Second, the pandemic revealed the importance of our tenants having strong rent coverage. This underpins the stability of medical office even in rare instances when health services are disrupted. Physicians are working through the pent-up need for outpatient care that was delayed in 2020, and the underlying trend of rising demand for outpatient services remains intact. And third, the hospital ecosystem is critical to the well being of our society, made evident by the extent the Federal government will go to sustain hospitals and physicians and safeguard people's access to healthcare services.

Federal health policy provided a meaningful support to healthcare providers in 2020 through increases in Medicare and Medicaid rates, forgivable loans for payroll and rent and the ongoing distribution of CARES Act Relief Fund. CMS regulatory update to Medicare policy in 2021, increased payment rates across the board. The agency also included 11 new services that will be eligible for Medicare coverage in ambulatory surgery centers. In addition, CMS will phase out over three years their in-patient only risk, which will allow providers to decide the best locations inpatient or outpatient in which to deliver services. We expect health systems to continue to ramp up plans to use a network of MOBs ASCs to lower costs and improve profit margins, while focusing higher acuity care in hospital setting.

Looking ahead, the outlook is fairly positive for government health policy. After a busy and contentious election season, the narrow Democratic majority in both houses is expected to yield more incremental expansion of health coverage. Legislation that can pass on a simple majority under the budget reconciliation process will likely include expansion of APA subsidies and possibly Medicaid benefits as well.

Democrats' more sweeping initiatives such as Medicare for All have minimal chance of garnering the necessary 60 votes in the Senate. Hospitals and physicians should benefit from a stable commercial payer mix, a rise in the total insured population and continued support for positive rate increases in government health spending. We view any legislative or regulatory effort to lower healthcare costs as an advantage to outpatient settings and the development of more outpatient facilities. Healthcare Realty is positioned to benefit from these trends combined with the backdrop of strong underlying healthcare demand and a renewed outlook for our tenants beyond COVID.

Now I will turn the call over to Rob.

Rob Hull -- Executive Vice President, Investments

Thank you, Bethany. Now I will summarize Healthcare Realty's 2020 investment activity and provide our outlook for the coming year. Healthcare Realty capped off the year with a strong quarter of investing. We acquired 16 properties for $337 million, including four properties purchased for $126 million under the newly established joint venture with Teachers. For the year, our volume of $547 million was more than double the previous five year average. This is especially noteworthy given the challenges created by the pandemic.

Much of our recent success comes from directly sourcing deals in markets where we already have a presence. When our investment in an area grows, so does our reputation and network. This leads to more opportunities. Last year, we acquired 29 properties in 24 transactions. 27 of these are in existing markets and nearly three quarters were acquired through our direct sourcing process.

A great example of this process is on the north side of Atlanta. In 2017, we purchased three buildings on a hospital campus, totaling almost 250,000 square feet. Since then, we have fostered strong relationships with the health system, area building owners and influential local brokers. This past year, these relationships generated two acquisitions adjacent to the campus following 113,000 square feet. We also have line of sight on several additional acquisitions. And we are talking to the hospital and local physicians about new development opportunities. Over time, we see a clear path to double the size of our cluster around this hospital to over 600,000.

Increasing our scale and tight clusters drives leasing activity by keeping us in the flow of transactions. Across Los Angeles, we've signed over 60 leases last year. Recently, our leasing team learned of an existing tenant in one of our Orange County buildings that wanted to expand into another nearby submarket where we have recently purchased a few properties. We showed them several options. A mix of our on-adjacent and off-campus buildings that represent different price points. We've agreed on terms with the tenant, and we expect them to execute a lease by the end of this month.

As we start the year, these sourcing efforts continue to drive robust acquisition volume. To date, we have purchased three buildings for a total of $40 million. One MOB in San Diego is located adjacent to Scripps Mercy Hospital and is fully tenanted by UC San Diego Health. The other two are in Dallas on a Baylor Scott & White campus where we own two other MOBs. Beyond these investments, we have a growing pipeline of acquisitions with several properties closing by quarter end. Given this visibility, we are setting initial 2021 guidance at $300 million to $500 million. And we expect cap rates to average 5% to 5.8%, consistent with 2020.

Shifting to development. Our activity is centered on leveraging relationships with health systems and local developers to source new projects. This partnership approach taps into local expertise to facilitate strong leasing momentum and mitigate risk. In the fourth quarter, we started the $17 million redevelopment of our Landry MOB on Baylor Scott & White's Downtown Dallas campus. The project's largest tenant, Cowboys Fit, is associated with the Dallas Cowboys Organization and has an agreement with the hospital to offer wellness services to its downtown employees. The affiliation will serve as a catalyst for rebranding the building as a primary destination for health and wellness in the community.

In Memphis, the $30 million redevelopment of an MOB anchored by Baptist continues to progress steadily. Demand for this property remains solid, with lease square footage increasing to 97%. One of the largest tenants, OrthoSouth, is set to move in later this month. We expect occupancy to stabilize toward the end of this year. Conversations with our hospital partners point to a shift back to growth and expansion. Over the next several quarters, we anticipate a few development starts. Two of these opportunities, one in Nashville and one in Seattle are on campuses where we already have a presence and control the development sites.

As we move into 2021 I am pleased with the pace of acquisitions and the prospects for increased development activity. Our teams' ability to grow critical relationships and scale in specific markets will produce sustainable quality growth. With lower disposition levels at better average cap rates than last year, our outlook for accretion from net investment activity is bright.

Now I will turn it over to Kris.

Kris Douglas -- Executive Vice President and Chief Financial Officer

Thanks, Rob. I will take a few minutes to highlight operating and financial results for the year. The stability of our quality medical office portfolio and accelerating investment volume drove solid per share growth in 2020. We are pleased to produce this growth in a year full of challenges.

Normalized FFO per share increased 2.9% over 2019. We are well positioned for continued earnings growth moving into '21 given 60% of the $547 million of 2020 acquisitions occurred in the fourth quarter. Rent and deferral collections were once again strong. We received 99% of rent and granted no new COVID-19 deferrals in the fourth quarter. As of year end, we have collected $7.1 million of the $7.2 million of total COVID deferrals granted, indicating that most of our tenants' businesses have rebounded.

Our key revenue drivers continue to be noteworthy amid the pandemic. Multi-tenant in place contractual escalators increased to 2.91%, while cash leasing spreads of 4.1% for the year remained at the upper end of our expected range. The level and consistency of these metrics demonstrates the unique desirability of our MOBs.

Same-store NOI growth of 2% was muted by two COVID-19-related items. First, parking income, which makes up less than 2% of revenue, was down 17% for the year. Excluding parking, same-store NOI increased 2.6%. In 2021, we expect parking income to recover through the back half of the year. NOI was also impacted by 50 basis point reduction in average occupancy in 2020. The signs for occupancy improvement moving forward are positive. Occupancy leveled off sequentially in the fourth quarter and tour volumes are running at pre-pandemic levels. This is notable given the increase in COVID-19 cases, hospitalizations and restrictions across the country during the fourth quarter. The path to the back side of the pandemic may cause new leasing momentum to fluctuate and vary by market. But most importantly, our team is engaged with more health systems and providers about expansion needs. As a result, we are optimistic about the overall trajectory of occupancy for '21.

Turning to the balance sheet. Net debt to EBITDA was 5.2 times at the end of the fourth quarter, well within our target range. This ratio increased sequentially, primarily due to $337 million of acquisitions in the fourth quarter. We were able to reinvest the cash from the July Mercy dispositions and then some in the higher growth MOBs. Our healthy balance sheet was fortified in the quarter through refinancing, debt maturity extensions, equity issuance and JV formation. We currently have $56 million of forward equity available and nearly full capacity under our $700 million revolver. This provides us optionality for funding future investments, while maintaining target leverage.

As expected, the slowdown in new leasing activity earlier in 2020 led to lower spending on tenant improvements. This lower capital spend combined with FFO growth drove 400 basis point improvement in the FAD payout ratio to 91%. This includes about $3 million spent in the fourth quarter on vacant suite make-ready capital, which we project will propel leasing moving forward. Excluding this capital, the FAD payout ratio would have been under 90% for the year.

With occupancy poised to increase, spending on maintenance capex is also expected to grow. However, when combined with our stable internal growth and a robust pipeline of accretive investments, we foresee continued improvement in the FAD payout ratio into the mid-80s in the coming years. An improving payout ratio coupled with accelerating per share growth and a balanced capital structure contributed to our decision to increase the dividend. The strength of our portfolio and the need-driven demand of the medical office business bolsters our ability to grow earnings and the dividend for the years ahead.

Grant, we're now ready to open the line for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Jordan Sadler with KeyBanc Capital. Please go ahead.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Hi. Thank you. First, I'd just like to run through maybe what leverage looks like, Kris, on a pro forma basis given sort of the timing of the acquisition in the fourth quarter. I think maybe it's a little bit overstated given that you didn't have the full contribution of NOI. Am I looking at that right?

Kris Douglas -- Executive Vice President and Chief Financial Officer

No, we actually -- when we...

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Is it pro forma?

Kris Douglas -- Executive Vice President and Chief Financial Officer

Yeah, it's already pro forma. So we take into account the timing adjustments already when we make that calculation.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Okay.

Kris Douglas -- Executive Vice President and Chief Financial Officer

The increase from last quarter really had to do with the fact that we were sitting on so much cash last quarter waiting to redeploy it. And so as a result, it was frankly a little bit lower than what the pro forma long-term expectation was then. But we're right in the range, frankly, in the bottom half of the range of what our long-term target is.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

So how should we be thinking about the funding plan for 2021 to sort of support the acquisition guide and the development guidance?

Todd Meredith -- President and Chief Executive Officer

Yeah. It will be -- we'll continue to work to match fund our acquisitions and we'll be working to maintain that leverage in that 5 to 5.5 range that we're talking about. We have over $55 million of equity available under the forward ATM already. We also have full availability under our line of credit. And then of course, we have the optionality that comes through the JV, which we did use to fund some of the acquisitions last year. So we have a lot of options in terms of sourcing capital, but our plan is to maintain that leverage in the low-5s.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Perfect. And then the driver beyond sort of in place escalators, it sounded like pointing to stricter NOI growth next year. Is it parking income that's sort of driving some incremental uplift there versus the 2020 actual?

Todd Meredith -- President and Chief Executive Officer

Yes. Against 2020, I think that that's correct. We were -- long-term, we've been running high-2s, plus or minus 3%. This year, we were lower for the parking income as well as some reductions in occupancy. So even if parking doesn't rebound to 2019 levels, even if it stabilizes here through the first few quarters and hopefully starts to see some rebound through the back half of the year, we won't see the same negative impact. It's about 50 to 60 basis points of drag on NOI growth in '20 related to parking. So that will go away. And then hopefully through the back half of the year as we do start to rebound to pre-pandemic levels, it actually starts to give a boost to overall NOI growth.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Okay, thanks. I'll yield the floor.

Operator

Our next question will come from Juan Sanabria with BMO Capital Markets. Please go ahead.

Juan Sanabria -- BMO Capital Markets -- Analyst

Hi. Thanks for the time. Just hoping you could speak a little bit to the acquisition pipeline, the split between on adjacent and off-campus and if the guidance range includes the net assumed amount for the TIAA joint venture?

Kris Douglas -- Executive Vice President and Chief Financial Officer

Yeah. I think I'll answer your last question first. The guidance does include the TIAA joint venture investments and we were looking at it. I would say that really when it comes to that, we've targeted a certain amount of investments through that joint venture, but it's too early to tell what from the pipeline is going to move in there at this time. So it's still early, but that is included in our guidance.

In terms of the off-campus properties, I mean, we're still largely focused on and adjacent assets. That will be the bulk of the investing that we do. And if you look at our pipeline, it is heavily weighted toward the on and adjacent assets. Where you see us investing in some off-campus properties will be typically where we're building out these clusters that I mentioned where we have a presence in that market or submarket already, a significant presence. And we see an opportunity to pick up an asset where we can benefit from a higher cap -- potentially higher cap rate, but yet maybe mitigating some of that risk that we see in the off-campus space because we are so plugged into the market and wanting to take advantage of the leasing bonds and the lease flow that we see from day in and day out.

Juan Sanabria -- BMO Capital Markets -- Analyst

Great. And then maybe you could just talk a little bit to -- on the Jordan's question about the plan -- funding plan for the forward equity. Any color you can give us around the expected timing of the execution on that? And then if you could just give us a sense of what that costs you the forward equity structure versus the more traditional ATM?

Kris Douglas -- Executive Vice President and Chief Financial Officer

Yeah. On that, we'll use that to match fund as acquisitions build. And so I could see the $56 million being used a lot for the first quarter acquisitions depending on the timing and potentially moving into some of the second quarter as well. And then in terms of the overall cost, we're doing that under the ATM, so it's very cost effective, and the execution cost is the same. There is some carry costs, but that carry costs of the interest that you have is pretty similar to what will cost us under the lines are very, very cost effective. You also have the dividend costs associated with that given that they are forward contracts. But overall, you're able to lock in your equity costs at times that you feel that the pricing matches up with where you're seeing your acquisitions, you're able to kind of match fund and lock in that accretive spread for those investments. So it's been a nice source of capital for us in '20 and expected to be in '21 as well.

Juan Sanabria -- BMO Capital Markets -- Analyst

Thank you.

Operator

Our next question will come from Nick Joseph with Citi. Please go ahead.

Nick Joseph -- Citi -- Analyst

Thanks. You mentioned the development starts in the conversations with tenants. So I'm wondering through those conversations, are you sensing any changes to space or needs kind of versus pre-COVID development specs?

Rob Hull -- Executive Vice President, Investments

No, we have not. I mean, as our -- these conversations that have sort of increase here recently have picked up from where we left off really pre-COVID, and we continue to have dialogue with these health partners through COVID about these projects, but they've really turned their attention to it now. And we aren't seeing any significant changes in the space planning or their needs as a result of COVID.

Nick Joseph -- Citi -- Analyst

Thanks. And then just on the dividend. Is it fair to assume that going forward this will be revisited and maybe trend with cash flow changes?

Todd Meredith -- President and Chief Executive Officer

Nick, this is Todd. I think as you've seen, this has really been a multi-year path, steady improvement on the payout ratio. And clearly, that's the number one priority is to keep moving that in the right direction. Mid-80s is certainly where we'd like to get to. So it will be a year-by-year evaluation. I think your question goes to the longer term picture. And certainly, we're aware of a couple of different ideas there where you're looking at inflation, you're looking at our cash flow growth, you're looking at competitors' relative return.

So we're aware of all that. I think over the longer term, certainly, we see this as a first step. And we will revisit that as we sort of approached the marker of the mid-80s. And as you said, start to look at those other factors such as cash flow growth. So we're certainly viewing this as a first step and pleased to be doing that. And see it growing longer term at a little higher rate than we are now for sure.

Nick Joseph -- Citi -- Analyst

Thanks.

Operator

Our next question comes from Rich Anderson with SMBC. Please go ahead.

Rich Anderson -- SMBC -- Analyst

Thanks. Good morning, team. So I wanted to ask about the mindset toward acquisitions, and specifically, the acceleration in your activity. You guys have been doing medical office for a long time. I'm wondering what happened to the environment that got you more jazzed up than in the past about starting to pull the trigger on assets. Is it cost of capital related? Is it just a consequence of past efforts that you described about reaching out to relationships or is it something in the marketplace that's caught your eyes that we want to be a much longer medical office now than perhaps we felt five or 10 years ago?

Todd Meredith -- President and Chief Executive Officer

Yeah, Rich, good question. I would say, it's a couple of things. You've certainly seen us evolve our strategy over time. I think if you go back, and you've been around watching us for a while, we were much more relying on marketed deals, number one. But number two, waiting for those bigger portfolios, and that's huge, but maybe a $100 million, $150 million portfolios from health systems to really sort of help our volumes and then sort of waiting for the one-off on-campus building. And as you know, those have not proven to be fast and furious each year. So it's been a very patient game.

So what you've seen us evolve over time is, how can we go be more proactive in these markets, compliment those on-campus assets we have and build up around them. And so we've kind of slowly evolved into that and found that adjacent. If you can have on and adjacent, it's a very powerful combination. You can still work very closely with the hospital and take advantage of that. But waiting just for the hospital to sell is a long game. They're great when you get them, but we kind of figured out how you fill in around that. And as Rob said, we're now even looking at some off-campus selectively that can compliment that as well. So it's that from a strategic standpoint.

I think the other very true reality is we know it's important to have a relevant and meaningful amount of acquisitions that will drive an interesting level and an attractive level for shareholders of earnings growth. And so it's all part of that mosaic. But I would say, the key we want to focus on is making sure the quality stays high. And that is encouraging to us that we're seeing the ability to generate great returns. All these operational metrics are performing very well at this higher volume. So we are very encouraged at the idea of being longer on MOB overall right now.

Rich Anderson -- SMBC -- Analyst

Would you say that the hospital industry comes out of COVID weaker than it was going in? And if that or maybe the opposite of that to you, but if that's informing you at all about your future endeavors from...

Todd Meredith -- President and Chief Executive Officer

Yeah, I wouldn't say that we see it as coming out weaker. I think like any storm that you go through, you come out and there's a period of reflection and recovery and so forth. And if anything, I think this particular COVID pandemic has underscored how critical and important hospitals are. I think there was this sort of concept that hospital, I've even heard an investor say, aren't hospitals a dying breed. Well, I think we all know that's not the case now. It's evolving, it's changing constantly. There's new technologies that increase the acuity that can be done in a hospital. And obviously, there's acuity shift into the outpatient setting over time as well. But I think if anything, we think it was there to stay.

And we've always said, you've got to pick your points. You got to pick your partners well, pick your markets well. So that I think continues to be true. And we'll -- any stress test will hurt the ones that weren't prepared. So it's all the more important that we are sharpshooters in that effort. But we think the hospital business will continue to be super strong. And we still lean toward that on and adjacent investment thesis.

Operator

Our next question will come from Omotayo Okusanya with Mizuho. Please go ahead.

Omotayo Okusanya -- Mizuho -- Analyst

Yes. Good afternoon. Congrats on the quarter and the encouraging outlook to 2021. JV, could you talk a little bit again the deals you did in the quarter exactly how you determined what was better suited for the JV versus what was better suited for the balance sheet? And kind of going forward if that kind of is going to be the mantra in something what goes where with the acquisition pipeline?

Rob Hull -- Executive Vice President, Investments

Yeah. I think first, we're going to evaluate every opportunity and see if it's a fit for the JV that we're looking at. Before that we closed on in the fourth quarter, I think it was a good representation of really our intention for the JV. And that was to -- we're going to expand our ability to invest in our volumes. The JV gave us an opportunity to maybe participate in some more off-campus properties where we can benefit from the higher cap rate, but share in some of the added risks that we see. And I think that was evident in the weighting of the off-campus properties that we put into the JV. You can see that on Page 19 of our supplemental where the JV we point out that 30% of those properties are off-campus.

I also think it represents some value-add property where we see -- we can view us sharing in some of the load of carrying empty space. And so we can share some of that load with our JV partner and carrying that unleased space. So we do that as an opportunity for the JV, and one of those properties represents that. And then finally, ultra core deals where pricing is that a premium. And I think there the JV helps us with our economics. And I think that's represented by the property that we placed into the JV in California this past quarter. So I think it's a good mix of our intention for the JV going forward. But again, we are going to evaluate every opportunity and determine kind of one-by-one whether it's a fit.

Omotayo Okusanya -- Mizuho -- Analyst

Okay. That's helpful. And then just another quick one for me. Tenant improvements and leasing costs are little bit elevated this quarter versus say last quarter. Again, leasing velocity, so I need to come back up a little bit, but to kind of down at least the rest of last quarter. I mean, what TI is obviously higher in an effort to kind of start to really kind of generate leasing activity and occupancy or was this kind of something unique to one or two leases in a quarter?

Todd Meredith -- President and Chief Executive Officer

Yeah, Tayo. I wouldn't say that it was driven by trying to drive additional occupancy, obviously, we're always looking to do that, and if we need to spend some additional capital we will consider it. I think if you look at it, it's really the fact that those TI commitments will vary quarter-to-quarter depending on the space that's being used and the requirements of the tenant. You're right that it was up a little bit this quarter, but frankly, this was not the highest quarter of the year. I believe second quarter was even a little bit higher than that.

So we did add some disclosure to our capital commitments page about TI and leasing costs, percentage of net rent. And that takes into account trying to show a little bit that it also depends on what market you're in and where -- what the rental rates are. But over the last five quarters alone, TI commitments had ranged from over 40% to as low as almost 20%. So there's a sizable standard deviation each quarter. But long-term, we think it should average around 30%, a little over 30%, which is what we've seen over the last few years. So I wouldn't read too much into it other than just the variability that's going to kind of to take place from quarter-to-quarter.

Omotayo Okusanya -- Mizuho -- Analyst

Great. Thank you.

Operator

Our next question comes from Rich Anderson with SMBC. Please go ahead.

Rich Anderson -- SMBC -- Analyst

Hey, thanks. So I think somehow Scott Peters keeps rerouting -- restarting my Wi-Fi router. But anyway, we'll get through it. So I asked the question about the hospital industry, and I didn't hear the answer. Did you get the question? I apologize.

Rob Hull -- Executive Vice President, Investments

We did. I think the short answer is we think the hospital business should do well coming out of this. There may be a little recovery period, and it maybe a little sorting of the weaker ones. But again, sharpshooting, as you know, we like to say we're focused on is important. And we think that long-term it's a very positive outlook for hospitals. And the pandemic underscored how important they are. We'll get you a copy of the transcript. I'm sure you can get it, but we elaborate a little more. He lost it again.

Operator

Our next question will come from Daniel Bernstein with Capital One. Please go ahead.

Daniel Bernstein -- Capital One -- Analyst

I'm actually having router problems too. So I'm going to blame whatever's going on Rich for my problems here. Let's see. I wanted to ask just a little bit more about the cash leasing spreads. They were strong in the quarter, but a little bit thinner than previous quarters. So any particular items or are leases skewing that?

Rob Hull -- Executive Vice President, Investments

No, nothing more pointing out there, Dan. It was -- I think it was 2.8 for the quarter 4.1 for the year. So for the year, it was a little above our three to four typical range, and for the quarter we were a little bit below. But if you look at, we always -- you're always looking at the average, but it's really going to kind of pull things apart and look at the distribution, and we've laid that out each quarter. But you still see the majority of our spreads over 50% were in that 3% to 4% range. And so long-term, that's still what we are guiding to and what our expectation is. But just the variability between leases in any particular quarter can skew that a little above a little below, but that's -- we're very pleased that in 2020, when you look at the full year, we were at the upper end, slightly above the upper end of that range.

Daniel Bernstein -- Capital One -- Analyst

Okay. And then just following up on Tayo's questions on what you're putting into the JV. Would you consider putting development into the JV, maybe taking a little bit of the development risk of well, especially in light of some of your comments may be a development might accelerate. So is the JV a source of capital there?

Todd Meredith -- President and Chief Executive Officer

Yes, Dan. We would consider development inside of the JV. And again, we treat it like we do the acquisitions, each one's going to be different. And if there's an opportunity that we see that fits within what we're trying to accomplish then we would certainly offer that up to our JV partner.

Daniel Bernstein -- Capital One -- Analyst

Okay. That's all I have. Thanks.

Operator

Our next question comes from Connor Siversky with Berenberg. Please go ahead.

Connor Siversky -- Berenberg -- Analyst

Hey everybody. Thanks for having me. Short one on 18% of rents expiring this year. I'm just wondering how we could judge the timing on renewals or releasing to incorporate the spread you've provided in guidance?

Kris Douglas -- Executive Vice President and Chief Financial Officer

Yeah. I would actually point out that that level of expirations is at the low end of what we've seen for the last few years. And so we think it's very manageable and we still expect our range of three to four on the cash leasing spreads to maintain. I don't have that buy quarter, expiration schedule at hand. But I don't recall anything that sticks out as being an unusual quarter. It won't be exactly even, but I don't recall off the top of my head a particular quarter that's significantly outsized. But happy to follow-up with you on that.

Connor Siversky -- Berenberg -- Analyst

Okay, that helps. Thanks. And then one more, a little more abstract on one of Rich Anderson's points. Just some of these changing dynamics within the healthcare industry either maybe further shifts in procedures to the outpatient environment, providers finding some cost savings there as well. I mean, I'm wondering if this makes certain -- maybe secondary markets seem a bit more attractive where the MOB infrastructure may not be as built out as it is in some of the primary markets?

Todd Meredith -- President and Chief Executive Officer

I would say certainly there's a lot of secondary markets that can be very attractive in that regard. I think for us it's a balance. Certainly, COVID is suggesting that maybe some secondary markets might be interesting. I mean, we actually invested in a number of properties recently in Greensboro, North Carolina. It's not far down the road from the Raleigh-Durham area, Chapel Hill, it's a great area. We just invested in Gainesville, Georgia, which is really part of the broader Atlanta area, but it's a little further out and we think markets like that can be very attractive. So I think you're right, it supports that theme.

When you get detached from a large MSA, I think probably not as much our focus because you just -- you don't have that density that we might be looking for, but some of those markets I just mentioned are some of the fastest growing areas. So I think there is a thesis to that. But I also say that our top markets tend to be very attractive, even the larger denser one. So just moving a little further a field in each of those and adding to our number of submarkets is certainly in our view something we'll be looking at.

Connor Siversky -- Berenberg -- Analyst

Thanks. That's all for me.

Operator

Our next question will come from Vikram Malhotra with Morgan Stanley. Please go ahead.

Vikram Malhotra -- Morgan Stanley -- Analyst

Thanks for taking the question. Just wanted to go back to sort of the external growth side of things, I know you've emphasized on and adjacent. Just want to get your latest thoughts on sort of maybe widening that a little bit given your cost to capital and maybe just some changing trends you alluded to more off-campus. And is that somewhat -- I know you had sort of indicated that a couple of quarters ago, but just wondering how the mix is over the next year?

Todd Meredith -- President and Chief Executive Officer

Yeah. I think -- Vikram, I think if you look at again the off-campus, we're certainly -- the portfolio currently is 88% on and adjacent, 12% off. I think our kind of feeling is that we're comfortable with about 15% of the portfolio being represented by the off-campus products. But I think that where you'll really see us get more comfortable that is going back to this clustering strategy. I think we have really found that whenever we -- when we're invested in a submarket and we have on and adjacent product, we find that there's some opportunity there to take advantage of the higher cap rates that we can find with some of the off-campus product, but yet mitigate some of the risks that we see because we know the markets so well.

And we are in the leasing flow. We are able to offer a variety of product offerings to potential tenants, pricing and location wise. And so we think there's a real benefit to having some of that in the portfolio, but just kind of managing it with having a larger kind of presence inside of a submarket.

Vikram Malhotra -- Morgan Stanley -- Analyst

Okay. That makes sense. And then just any -- you've obviously done a great job getting the portfolio where it is and being able to grow the dividend again. I know you gave a target payout ratio. But just given when you sort of have that 80%-ish or a little over that, any change in thoughts on where longer term leverage could be for the company?

Todd Meredith -- President and Chief Executive Officer

Yeah. As of now, Vikram, we've been very comfortable with the 5 to 5.5 range. We don't anticipate changing that materially. And we'll always kind of watch that and consider depending on what's going on in the market, whether that we should make some adjustments. But at this point, we don't have any expectations of adjusting our leverage targets.

Vikram Malhotra -- Morgan Stanley -- Analyst

Okay, great. And I might have missed this because I jumped on late, but just given the new administration, are there any medium to longer term potential changes in kind of healthcare regulation or policy that you may be watching that may influence and aware and when you invest?

Todd Meredith -- President and Chief Executive Officer

Sure. I wouldn't say there's anything imminent, Bethany's remarks covered a lot of this. And I think the takeaway is that it's fairly benign for now and encouraging pretty bright outlook. So we're not overly concerned. I think the things we're watching naturally are what you might expect, which is expansion of the ACAs and subsidies. But all of that is generally good because it's an increase in access and coverage, and that's generally good for providers. Obviously, we'll be looking at more detailed things as rates of reimbursement and so forth, but generally all that looks pretty good. So we think right now, it's a pretty favorable outlook. And with this administration, I think there's some positives. But anything dramatic should be fairly in check. So we'll see as that evolves, but we're encouraged.

Vikram Malhotra -- Morgan Stanley -- Analyst

Okay. Thank you.

Todd Meredith -- President and Chief Executive Officer

Thank you.

Operator

Our next question will come from Michael Gorman with BTIG. Please go ahead.

Michael Gorman -- BTIG -- Analyst

Yeah, thanks. Good afternoon. Just wanted to touch on the multi-tenant portfolio. You all did a great job navigating the pandemic, and Kris, you gave some positive sounding commentary on the direction of the portfolio. But I'm just trying to juxtapose, the guidance for 2021 is kind of like the fifth or sixth year we've been in that 87.5 to 88.5. And I'm just wondering, what you see on the horizon that may be breaks -- allows multi-tenant to break higher and maybe what the long-term potential is in that portfolio from an occupancy perspective?

Kris Douglas -- Executive Vice President and Chief Financial Officer

Yeah, Mike. We have been kind of in that level and it has to do with buildings that you may be selling or buildings that you're buying and buildings that have come in from development that we're still doing a little bit of lease up. So you've got a lot of things over time that are adjusting on that. As you look at our guidance for this year, one of the things you have to take into account is that we did -- the portfolio held up well, but we did see a reduction in an average occupancy of about 50 basis points. And it was -- and it really that occurred through the second and third quarter, started leveling out in the fourth.

So as you start looking at 2020 -- excuse me, 2021, we're having to kind of rebound off of that to get back -- to get that average back up equal to where it was for last year. So there's a bit of work that has to happen from that. And then I think you're looking forward into 2022 and beyond, where you can start to push that up higher into the high-80s, hopefully approaching 90%, but it has to do with the kind of the mix of properties and where you're willing to take risks.

We talked about -- we did buy through the JV a more of a lower occupied value-add acquisition. We are doing a little bit that right now inside of our -- on the balance sheet over in Dallas where we have a couple of properties on a campus where we already own some assets. And so that may bring down your average, but we think that that's a great opportunity to create value. And so over time, yeah, we do expect to -- expect it to grow. But it will be balanced in terms of what we're bringing in and maybe what we're selling. We have sold some higher occupied buildings, some of our single-tenant net that are 100% just because we thought we kind of effectively maximize the value on that.

So there's always the ins and outs that are going on. But we do think given the trends that are going on long-term for outpatient and the population and the need for healthcare, there certainly is opportunity for occupancy growth and the value that comes from that.

Michael Gorman -- BTIG -- Analyst

That's helpful. And then maybe just on a technical aspect there. If you look at kind of that 12%, is there any of that that's not available for lease because maybe it's tied up in an option for health system or an existing tenant or would all that be technically available for lease?

Kris Douglas -- Executive Vice President and Chief Financial Officer

Pretty much all of that is going to be available. Not so -- I mean, there are some instances where someone may have a ROFR on some space. But generally, you are not just agreeing to hold that space for them without some type of guarantee and lease arrangement in place for that. So the majority of that is leasable. We do have some space that in some buildings that frankly we kind of put in, in our underwriting that may have some static vacancy in them given the location of it, maybe it's in a lower level or because it's the way that it's configured around other suites. So I don't want to mislead you there. There is some of that, but I wouldn't say it's material. I think that we do have the ability to lease a lot of that space.

And you've heard us talk about, it's finding -- a lot of times, it's finding the right tenant for the right size space. It's the Swiss cheese effect that you've heard us discuss. And so as you get higher up in those occupancies, when you start getting to that 90% plus, it's -- it can reduce the potential of who you're able to fit into that space, but then that's also an opportunity to increase your rents because of the scarcity of that space. So you're balancing a bit of that. But that's why for a multi-tenant building, we say you shouldn't expect it to be 95% or 100%, that's unusual.

Michael Gorman -- BTIG -- Analyst

Very helpful. Thanks.

Operator

Our next question will come from Todd Stender with Wells Fargo. Please go ahead.

Todd Stender -- Wells Fargo -- Analyst

Hey, thanks. It's been a while since we've seen a dividend increase, maybe even earlier than what we had modeled for. Was it the flurry of acquisitions and debt costs continued decline? Maybe what pulled this decision forward, if it was pulled forward?

Todd Meredith -- President and Chief Executive Officer

Yeah. I think Todd, it wasn't necessarily a case of pulling it forward. I think it really is, as we've said for a while, that what we wanted to see was this very clear path to move the payout ratio to where we needed it to be to really have a long-term target of sort of a mid-80s and even be able to move lower than that. So it's really just that confidence. And you're right, there are certain performance attributes that happened in '20 and in prior years, but also complemented by the acquisition volume, all of which certainly gets us that clear path toward a better payout ratio.

And as Kris mentioned, we did spend a little extra capital in the fourth quarter to again advance the idea of this occupancy improvement that Kris just talked about. So just balancing all those factors and saying, I think -- and I think the other important thing is to really signal to investors that it's an important priority to us. We know it's an important component of shareholder return. So we didn't want to wait till everything is just perfect and wait too long. So it's just balancing all of that together.

Todd Stender -- Wells Fargo -- Analyst

Right. That's helpful. And then back to the cash releasing spreads, there's generally a portion of leases that get renewed where rents roll down. If I interpret that right, there was 11% worth less than zero. Are those generally above market rents to begin with? Maybe just some context around how that goes negative in this environment?

Todd Meredith -- President and Chief Executive Officer

Yeah. And you've heard us say -- you're right, there's going to be a portion of that. You're not going to always be able to expect rents to grow in every situation. And long-term, we say, plus or minus 10% it's about what you should expect and that's what you have this quarter at 11%. It can be a variety of things. It could be an asset that you -- that we may have bought. A lot of times we underwrite that we may have some roll down because the previous landlord may have amortized some additional TI into the rent. And so you have the expectation that that's going to reset.

You also have to take into account the competitive position and what's going on around you. The good news is, generally, we're in tight markets where the supply is constrained. And so it doesn't negatively impact us, but that's not everywhere and that's not all the time. And so you have to be aware of what's going on, what your competitors are doing. And so you may for strategic reasons, maybe you may need to have some roll down. But the good news is, that if you look at our averages and that distribution, it's been manageable. It's at a level that the corporate, so to speak of what we do in that three to four still is able to shine through. And those instances where you're able to get that 4% plus are able to offset the -- those few instances where you do have to have some roll down.

Todd Stender -- Wells Fargo -- Analyst

Got it. Thank you.

Operator

Our last question will come from Lukas Hartwich with Green Street Advisors. Please go ahead.

Lukas Hartwich -- Green Street Advisors -- Analyst

Thanks. On the external growth front for the guidance, the cap rate range is roughly in line with where the implied cap rate for HR has kind of trended over the last year or so. So I was just hoping you could walk through the thought process around setting that is there expectations that, there will be share price depreciation hence in lower implied cap rate. Just trying to think through that map?

Todd Meredith -- President and Chief Executive Officer

Sure. I think for from our standpoint, Lukas, it's -- when you're -- yes, the implied cap rate in NAV is a set of guideposts. And obviously if you're extremely off there's something going on there either negative or positive, but I think when you're in a tight range around that, it certainly is very functional and we can make accretive investments. We can create value that dropped to the bottom line and to the share price.

Certainly like anyone we'd love the price to be higher. I think a lot of times that premium comes and goes depending on how massive of an opportunity there might be, and if there's an inflection point. So MOBs are just known for being so steady. We're certainly seeing a pickup in our volume. I think that's encouraging. We hope that translates a bit to the momentum and the share price. And certainly that's a virtuous cycle, if you can translate that. So that's our view, we're cognizant of it, but we look at FFO per share impact, FAD per share impact, not just NAV, but it certainly is in our way of thinking as well.

Lukas Hartwich -- Green Street Advisors -- Analyst

That's helpful. Thanks. And then the single tenant seems to our NOI growth was pretty strong in the fourth quarter, and it looks like guidance for 2021s pretty healthy as well. Is there anything kind of big to point out on that front?

Todd Meredith -- President and Chief Executive Officer

Yeah, it really has to do with one building that has a nine annual increase, which that that can change your average pretty significantly. That one building has a 7.5% increase every three years, and that occurred in the fourth quarter. And that's a specific asset actually makes up almost 40% of our single tenant, given the fact of our single tenant portfolio has just a with a lot of the printing things that we've done has gotten much smaller. It's under 10% of our overall NOI.

So even when you are seeing some higher growth and it's -- it really just has to do with the structure of the lease escalator and anything else, but given the fact of it is such a small, it doesn't have a huge and outsized impact to the overall company NOI, but certainly, it's great when it does occur, which is what's going on right now. And that will play through all the way through the next year given the fact we look at our NOI on a trailing 12-month basis.

Lukas Hartwich -- Green Street Advisors -- Analyst

Perfect. Thank you.

Operator

This will conclude our question-and-answer session. I would like to turn the conference back over to Todd Meredith for any closing remarks.

Todd Meredith -- President and Chief Executive Officer

Thank you, Grant, and thank you, everybody for tuning in with us and being flexible on our time change. We hopefully made that more available to everyone. Everybody have a great day and we'll be around for any follow-up questions. Thank you.

Operator

[Operator Closing Comments]

Duration: 64 minutes

Call participants:

Todd Meredith -- President and Chief Executive Officer

Carla Baca -- Associate Vice President, Investor Relations

Bethany Mancini -- Associate Vice President, Corporate Communications

Rob Hull -- Executive Vice President, Investments

Kris Douglas -- Executive Vice President and Chief Financial Officer

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Juan Sanabria -- BMO Capital Markets -- Analyst

Nick Joseph -- Citi -- Analyst

Rich Anderson -- SMBC -- Analyst

Omotayo Okusanya -- Mizuho -- Analyst

Daniel Bernstein -- Capital One -- Analyst

Connor Siversky -- Berenberg -- Analyst

Vikram Malhotra -- Morgan Stanley -- Analyst

Michael Gorman -- BTIG -- Analyst

Todd Stender -- Wells Fargo -- Analyst

Lukas Hartwich -- Green Street Advisors -- Analyst

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