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Healthcare Trust of America Inc (HTA) Q1 2021 Earnings Call Transcript

By Motley Fool Transcribers - May 7, 2021 at 5:31PM

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HTA earnings call for the period ending March 31, 2021.

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Healthcare Trust of America Inc (HTA)
Q1 2021 Earnings Call
May 7, 2021, 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon and welcome to the Healthcare Trust of America First Quarter 2021 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.

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 first quarter 2021 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 on 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, David, and good morning and thank you everyone for joining us today for Healthcare Trust of America's first quarter 2021 earnings conference call. Joining me on the call today is Robert Milligan, our Chief Financial Officer.

Over the last year, the medical office sector has lived up to its reputation as a steady independent asset class. Occupancy and cash collections have remained strong. Tenant utilization and performance in our key markets are returning to near pre-COVID levels. Healthcare systems are rebounding from the temporary shutdowns in March and April of 2020 and patient visits are returning to normal, given healthcare's need-based demand.

However, the sector was not immune from the pandemic. Small practices and more secondary markets have certainly struggled more than most, while larger providers and healthcare systems consolidated and put expansion plans on hold and were subsidized by the relief packages passed by Congress. It has also accelerated additional change that were taking place, including the implementation of telemedicine, the move to lower cost outpatient locations, continued provider consolidations, and what we feel is a significant population trend toward increased growth in our key markets.

Compared to most other sectors, these impacts have been relatively minimal and, in fact, will be positive over the longer term, given the amount of healthcare service demand that is expected in population, as the population ages and the country accelerates investment into healthcare. However, without doubt, there continues a cautious and integrated approach that providers continue to take in their business plans as it relates to the longer lasting impact of the pandemic.

The good news for the sector is that we are seeing activity levels on key growth metrics coming back, which bodes well for expectations for occupancy, acquisitions and developments as we progress throughout the year. For HTA, we have reacted to the pandemic by focusing on the long-term. Going into 2020, we had already positioned our company as a leader in the space with a focus on key markets and an integrated operating team that can take advantage of opportunities as the sector evolves and grows.

Over the last year, we have taken additional steps to ensure we are positioned for the ensuing rebound. First, we focused on our healthcare relationships; working with them through their difficult times, through rent deferrals, early renewals and asset purchases. Second, we positioned our portfolio for the inevitable rebound and focused on outpatient growth, limiting our long-term commitments that would require either below-market rents, abnormal concessions or to tenants with business models or lease structures that are unlikely to succeed as we pivot and anticipate the oncoming new economic business cycle. Third, we have remained disciplined in our investments. As the private market has continued to pursue MOBs, we have remained committed to our underwriting discipline, focused on markets and assets that should perform over the next 10 to 15 years. Finally, we have preserved our capital and balance sheet, ending the first quarter with over $400 million of long-term capital and a balance sheet that can finance longer term growth.

Even with this long-term focus, our first quarter performance has remained extremely strong, highlighted by record earnings of $0.44 per diluted share, an increase of 4.8% compared to the first quarter 2020, and up on a sequential basis; normalized FAD of $88.8 million, an increase of almost 15% from the prior year, fully supporting our dividend, HTA has raised its dividend seven years in a row; rent growth of 3.1% on almost 0.5 million square feet of renewals; an increase in new leasing activity with over 200,000 square feet of new leases signed, the highest level we've had since 2017 and driven by properties in our development and redevelopment pools; acquisitions of $30 million in our key markets and yields approaching 6%.

Further, as of today, we have more than $160 million of additional investments either closed or under exclusive contract and expected to close in the second quarter at yields in our targeted range of 5.5% to 6%. $110 million of development is on track to be delivered in 2021. With a pipeline of potential new development opportunities in the pre-leasing stage, it would get us back to our $100 million to $200 million of annual announcements by the third quarter.

This is a significant change for us as we find new and innovative ways to grow our portfolio accretively in the long term. Finally, a balance sheet with more than $1.3 billion in liquidity and leverage of just 5.4 times incorporating forward equity we have previously raised.

While we did not close on any disposition, we have also entered into an agreement to sell out our non-core markets at attractive pricing and invest in longer term growth opportunities in our key markets. As a result of this performance, we were able to tighten our earnings guidance range for the year. As we look ahead toward the rest of 2021, HTA is focused entirely on continuing to position our company for the long term and positioning the portfolio for the economic implications and effects that may present themselves in the upcoming years.

As we have illustrated in the last 12 months, we will focus on growing our earnings, maximizing our investment capital, protecting our portfolio value and creating long-term enterprise value based on strong underlying fundamentals. This includes a focus on our occupancy and rent levels, investments in our key markets, dispositions in our non-key markets and utilization of our long-term capital, while still maintaining our balance sheet for long-term growth.

I will now turn the call over to Rob.

Robert A. Milligan -- Chief Financial Officer, Treasurer and Secretary

Thanks, Scott. From a financial perspective, in the first quarter, we grew our normalized FFO by almost 5% to $0.44 per share; another record high for HTA, had a recurring capex of $10.9 million which was less than 10% of NOI. As a result, our normalized FAD for the period was also a record at $88.8 million. Note that we do expect these capital expenditures to tick up for the remainder of the year as we increase our leasing and start to complete more of our move in ready space.

We also collected more than 99% of our contractually due first quarter rents and our rent deferrals continue to be repaid on time and on schedule, with less than $2 million remaining outstanding currently. We generated same-store growth of 1.6%, driven by 1.9% growth in base rent, which was helped by year-over-year comparison of bad debt as a result of our tenant recovery. Our expenses were up 2.9%, primarily a result of weather in our key markets, including Texas, in March. We had G&A of $10.6 million, continuing our efficient overhead. We ramped up our investment activity closing on $30 million of acquisitions as Scott noted, but also getting an additional $150 million under exclusive contract at yields over 5.5%. We anticipate that these will close prior to quarter-end.

We also funded $17 [Phonetic] million of development. We've announced for approximately $15 [Phonetic] million to complete or in-process developments that will add to earnings in 2021. As of today, our developments in Miami and Bakersfield are substantially complete, pending tenant build-out, with our Dallas MOB located on the Medical City Heart and Spine campus on track for completion in the third quarter. These are expected to start adding to our earnings profile in Q3 and upon full stabilization, will add up to $0.04 per share on an annual basis to our current run rate.

Importantly, we are also completing several redevelopment projects, including our Mission Viejo redevelopment and significant repositionings in assets in Denver and Houston. These will start driving occupancy and rent growth in the third quarter, with the ramp up at Mission over the coming quarters. When fully stabilized, we expect these three projects could add from $0.02 to $0.03 earnings on an annualized basis.

On the disposition front, we announced that we've entered into an agreement to sell out of our rural East Tennessee portfolio for over $67 million, very attractive pricing that will lock in double-digit unlevered annual returns since our original investments more than 10 years ago. While, this is subject to final closing, we have a hard money deposit and have classified it as held-for-sale on our balance sheet. Given the current market environment, we will continue to evaluate opportunities to sell non-core assets to fund investments in our key markets.

From a capital availability perspective, we ended the quarter with close to $300 million of dry powder from available cash and our undrawn forward equity. With the closing of our dispositions, we'll have over $350 million of capital available to close on all of our investment activity and continue to remain active as we find interesting deals to pursue.

Our balance sheet remains strong with leverage at just 5.4 times, incorporating the forward equity, and $1.3 billion of liquidity coming from long-term capital. As a result of this performance, we are able to update and raise our earnings guidance for 2021 to $1.73 to $1.79 per share, which incorporates our view that same-store for the year will come back to a range of 2% to 3%, acquisitions continuing at $300 million to $600 million, while also selling between $67 million and $100 million of assets and funding the remainder with already raised capital, which will keep our leverage between 5.5 times and 6 times.

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 we'll open it up for questions.

Questions and Answers:

Operator

[Operator Instructions] And our first question comes from Vikram Malhotra of Morgan Stanley. Please go ahead.

Vikram Malhotra -- Morgan Stanley -- Analyst

Hi. Good afternoon. Thanks for taking the question. Maybe, just first on the acquisition pipeline. I think the first quarter, what we saw universally from multiple companies that there was a bit of a push out into the second quarter, but the pipeline still look pretty strong. So maybe just give us a bit more color. What did you see in the first quarter that may have caused this? And what sort of opportunities are you focused on in the second quarter, both individual one-off properties, but maybe portfolios as well?

Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President

Well, thank you. And I'd like to say thank you everyone for joining our call, of course. I think the acquisition activity for us, not only what we've seen as opportunities in the first quarter, but what we see coming up here this quarter and the rest of the year is very opportunistic for us. I -- it looks to me and it had the feel that in our markets, given our opportunities with one-off assets or, in some cases, we've got a couple opportunities with two or three, we can get back to what we thought we were going to see in 2020 coming out of 2019.

We were focused on three things when we came out of 2019 moving into 2020. One was earnings growth. We had talked a lot about our earnings growth and we've done that here in 2020, 2021. Second, we were talking about acquisitions, where we wanted to get more active and we had shown the activity in the fourth quarter. I think you're going to see that from us moving forward. I think we've been very patient in the last 12 months where others, perhaps, have groaned in order to show some activity. We felt it was prudent to find the right time, focus on our portfolio, move through the hurdles that the last 12 months have presented, and then utilize our cash and utilize our acquisitions to make sure that they are accretive.

So you will be seeing from us, as Robert pointed out, and then we've talked about more acquisitions next three quarters accretive, drive -- continue drive to the bottom line in earnings. We've also seen and you didn't ask, but we've seen an acceleration in our development opportunities, and those are things that we're going to be, I think, very excited to talk to people about when we get to NAREIT in June, because we've been working on those and once we get some confirmation on what we've gotten, I think we will be very -- it will be very interesting to see what we've done in the construction -- in the development side of our business.

Vikram Malhotra -- Morgan Stanley -- Analyst

That makes sense. Thanks for the color. There is also maybe some, I shouldn't say debate, but just some questions over the relative performance of on-campus versus other off-campus settings, whether it's adjacent or truly off-campus and whether that -- if there is a big difference or not. And I know, Scott, you've obviously talked about core community quite a bit over the last few years. So I'm just wondering, with your own portfolio, we clearly see the occupancy, but just from a rent growth and NOI perspective, what's your experience been with the different buckets?

Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President

I think it's changed. We've talked, and it has been a long time and you were one of the first folks to come out with an analysis, I remember, might have been four or five years ago now, with on-campus and off-campus and so forth. And I think we're seeing a continued move to off-campus, it's cost effective, it's a way to get into the community for healthcare systems and they are grouping their buildings, they're grouping the square feet together so they can get the synergies, whether it's a healthcare system, large physician group, and we continue to see that. But what we are seeing right now and this is kind of a follow-up on our discussion about what markets we like, I think it's going to be more critical, whether it is -- I think off-campus and on-campus become much smaller in cap rates and I think that their performance continues to become more similar, but I think it's the markets that you're in.

I think we're going through three things right now that I think are going to play out. One, we're going to start a new economic cycle, and I know for the last seven, eight, nine years, we've been in one cycle with lower interest rates, lower inflation, lower construction costs, lower employment costs and I think that's now going to start to turn the corner. I don't know how many folks actually remember 10 years ago, 15, 20 years ago, but I've been fortunate enough to be around that long.

So we're focused on good markets, those markets are going to have inflows of population. And I think this is what the pandemic has also accelerated, which is a movement to locations. Not everyone is going to move back to work full time, not everyone is going to need to move back to work in the office full time. And so a choice of location from a city perspective, a state perspective, lower taxes, I think that's going to be something that you see talked about. And, actually, we've seen it in Arizona. Arizona has never seen such a population increase over the last 12 months in its history and the numbers that I was talking about with someone in the state government just amazed me at the amount of folks that they say are coming in and are going to stay.

So we're looking for those locations. We like where we're at. We like our cities and we like the mix between on-campus and off-campus. And I think the cap rates continue to compress and it's still -- it's more about making sure that you have a good lease parameters, good lease term in the next 10 years, because you're already seeing higher construction costs, you're already seeing a lack of supply chain in some instances and so rents are going to need to move up to keep pace with that. We want to be in the cycle. We don't want to get into the -- we don't want to be off the cycle. And I think that's one of the things that we've looked very, very hard at over the last six months.

Vikram Malhotra -- Morgan Stanley -- Analyst

Great, thanks so much.

Operator

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

Richard Anderson -- SMBC Nikko Securities America -- Analyst

Hey, good morning out there, guys.

Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President

Morning.

Richard Anderson -- SMBC Nikko Securities America -- Analyst

Scott, you said you didn't want to be as aggressive the last 12 months to buy stuff, whereas others were perhaps more active than you guys for the past 12 months. But you guys, HTA I should say, made your name perhaps in 2008, 2009 when you were buying stuff before or when no one else could, in a very depressed marketplace. So I'm wondering why you feel that way this time around in this cycle. Why it wasn't a good time to be a buyer to the degree, maybe, you will be in the future, the last year or so?

Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President

Rich, it's continued to amaze me, the dichotomy between cap rates, potential interest rate, raises and just the overall economy. I think this time around was so unique in fact that the government has put through such a large stimulus packages that we didn't see that in the last 2008, 2009. That really wasn't a tool that was used in a huge degree. I think that's the difference in this particular event. We didn't see the type of opportunities that you would theoretically think that you might see. If we have things shut down for three months, if business has slowed down, you would have thought that there would have been more opportunity. I think that, in fact, people didn't react, they reacted to what they were seeing and being able to utilize. And so we didn't see those types of opportunities.

I think what we're seeing now which is -- we're seeing the opportunities in our markets, we like the markets that we're in, we like Texas, we like Florida, we like Arizona a lot more than we did before. We like some of the North Carolina, South Carolina, we like some of these markets that we've had success in. We recently put onto our website three of our major campuses, we did a virtual tour and it shows the application of what we see as we built out our new building in Raleigh at WakeMed. We've just remodeled and done our Mission, which we've now shown to folks. I think if people get a chance to take a look at those, they should, because that's sort of what we're trying to build throughout our markets is that continuity. And so we'd like to add to those markets.

And so I think now is a good time to -- we focused on earnings, it's dropping to the bottom line, we have an opportunity to continue to grow and we can do it on an accretive basis in the markets we like.

Richard Anderson -- SMBC Nikko Securities America -- Analyst

Very good. And then on the potential East Texas exit, you described as non-core, but when you bought it 10 years ago, it was probably thought to be core, and I'm wondering if that's just the typical cadence of how the business works for you guys, where non-core is perhaps defined to some degree by time or is it not -- I mean, obviously market conditions and everything else weigh into that. But is that kind of -- or at least a way to think about what -- when core becomes non-core, just the passage of time, and whether or not you're willing to invest in it because of how you feel about the marketplace?

Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President

Robert, I'll let you handle that.

Robert A. Milligan -- Chief Financial Officer, Treasurer and Secretary

Yeah, I think, first of all, Rich, just slight correction to that, it's East really rural Tennessee kind of focused around Bristol and some other areas like that. I think what's changed in our philosophy going back six, seven, eight years now, it's really been a focus on more major markets with much greater population growth, really with a focus on areas that are going to benefit from the continued expansion of the knowledge worker and the knowledge economy and things like that; also happen to be attractive from a lower cost of living perspective. So I think for us it's much more of a transition out of assets -- great assets. They are located next to good health systems and they're steady.

I think that was core for us when we were first up and growing. I think now as we're looking at where we're going to be over the next five, 10 years, it really is much more focused on major markets where we can really deploy all of our platform capabilities and continue to grow. So I think as you see us continue to recycle out of assets, they're going to be out of smaller more rural markets where we can't get as much of economies of scale and growth into more of our major markets where we think there is going to be a lot of growth that we can really leverage going forward.

Richard Anderson -- SMBC Nikko Securities America -- Analyst

Okay. And then the last question real quick one for you, Robert, is a return to 2% to 3% same-store NOI growth, was that all just the Texas weather issue in the first quarter or is there more to it than that?

Robert A. Milligan -- Chief Financial Officer, Treasurer and Secretary

Well, I think we've said, as you look at kind of a couple of things in that, I think first of all, from a occupancy perspective, I think year-over-year, we're certainly going to be down the most in the first quarter. I think we knew that going into it. And so when we set our range we expected our first quarter to be at the low end of the range. But we did have a couple of other things pop up. I do think kind of the weather in East Texas kind of obviously caught everybody surprised and that did impact just a little bit. I think everybody else pointed out to continued parking revenue being down and things like that. So I think it was a couple of one-off things. But it was definitely also related to the occupancy in the first quarter as the most difficult comps year-over-year. And I think as we look toward the rest of the year with the new leasing activities certainly picking up, us being able to drive that to actual getting people in the buildings, I think, that's where we see it coming back.

Richard Anderson -- SMBC Nikko Securities America -- Analyst

When did parking trough last year?

Robert A. Milligan -- Chief Financial Officer, Treasurer and Secretary

I think parking is not nearly as big of a component of our income as it is for a number of other people, but I think it's certainly what we've seen. We do have a couple of garages throughout our campuses and it really did tend to trough second quarter. I think that was definitely the lowest point when you got people not being able to come in for elective surgeries, people were broadly staying away, and I think we've seen that kind of gradually come back over time since then.

Richard Anderson -- SMBC Nikko Securities America -- Analyst

Okay, great, thanks. Thanks, guys.

Operator

The next question comes from Juan Sanabria of BMO Capital Markets. Please go ahead.

Juan Sanabria -- BMO Capital Markets -- Analyst

Hi, just hoping to talk a little bit about the disposition side, just the sales in Eastern Tennessee. And if I look at your supplemental, it seems like 6% or thereabouts of your ABR are outside of the top 75 markets. So from a go-forward perspective, should we expect that most of the dispositions would kind of happen in that bucket? And you know what that 6.3% is pro forma for first quarter sales?

Robert A. Milligan -- Chief Financial Officer, Treasurer and Secretary

Yeah, I think as we look at the dispositions where we're looking to sell out of, I think you're largely going to see it come from that bucket or top 75 markets where we can only -- we only have one or two assets and it's just not worth spending the time to really invest deeply into, knowing all the sub-markets having a good handle and good relationship with all the leading providers in healthcare systems in the market. So I think that's definitely going to be where you see it moving from there. I think as we look at the sales, though, they tend to be in the most part, going to be $5 million, $10 million, $20 million sales kind of one at a time as we look to move through and then recycle those assets into key markets.

So I think as we look at our disposition of recycling activity, this portfolio is probably the largest that you could see us make for a little bit of time. If we do have anything bigger than that, I think you'll see us look to redeploy it pretty immediately. So as we transition through our dispositions, I think you'll see a pretty ready -- readily or investment that we are ready to redeploy into.

Juan Sanabria -- BMO Capital Markets -- Analyst

Okay, that makes sense. And then on the development/redevelopment front, you gave great color on future expected contributions as those come online on an annual basis. But just curious, what's included in 2021 guidance and related -- any change in what tenants are looking for on the new developed space as a result of COVID, more space -- or changes in space issues a result of telemedicine or what have you?

Robert A. Milligan -- Chief Financial Officer, Treasurer and Secretary

Well, I'll answer your first question, and I'll let Scott kind of talk about any changes to the space. But I think from our expectation on the redevelopment front, we're really not expecting any cash NOI to be coming in from those redevelopment properties, at least the ones in Houston and Denver until the fourth quarter. So once we get to that point in time, it's going to be relatively minimal, and it's going to become much more of a 2022 story. But I think the good part about those and why we wanted to highlight them is that we are seeing the leasing activity. We're seeing the repositioning of what we've been able to do, take hold on those two assets, get them leased. We think they're going to be positive contributors to earnings going forward. We just wrapped up kind of the full redevelopment of a couple of the Mission assets that we have, few simple real estate in just a great part of Orange County there. And now that COVID is opening up there, I think this is the opportunity where we should start to see some good traction in leasing that up and I think as we see that. Again, it's going to be a little bit in 2021, but it's going to be much more of an impact in 2022.

Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President

And I'll answer the second question. We -- it gets back to our development opportunities that we're seeing and that we're having discussions about right now. We're fortunate we're working with a couple of folks that I think are going to be at least, we believe, our partners or potential tenants that are really looking forward. The assets that are under consideration are something that is -- it is forward-looking, adapting to what they see in the future. I think that's the exciting part about -- we started our development division almost four years ago, five years ago. We did it in earnest when we did the Duke transaction and we've slowly finished those assets and brought them online and as we've talked about, we've now incurred our own initiative, would be the best word, we've generated our own narrative with healthcare systems, with some of the universities that are starting to go down the path.

And the biggest advantage that we have had recently is the fact that we are a large dedicated MOB. We have the capital capacities. We are dedicated to the particular task that's being discussed. And so, I think that has brought us the ability to really be at the cutting edge of this. And the same thing in redevelopment, we're looking at assets not simply to redevelop. We're also not looking at leasing as saying, simply to lease up a space, get it behind you and be satisfied for three or five years. We want space. We want tenants. We want assets that are primed for the next 10 to 15 years or at least certainly as we move forward in this new economic cycle that we're going to experience. And so, we're taking a lot of time. And I think Amanda, who heads up our leasing and asset management brock, we're doing a lot of careful thought processes as we go through our leases and as we go through our redevelopment process.

Juan Sanabria -- BMO Capital Markets -- Analyst

Appreciate the time. Thank you.

Operator

The next question comes from Nick Joseph of Citi. Please go ahead.

Nick Joseph -- Citigroup -- Analyst

Thanks. You talked about the occupancy impact in the first quarter. But just given the leasing environment and the forward pipeline, how do you see the recovery playing out sequentially from here?

Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President

Yeah. We were fortunate we've had the most activity that we have seen as we mentioned in our script. And the key -- I think there's a multitude of things that are playing out right now. I go back to the fact that you want to make sure that what you're doing in 2021 is working in 2023 and 2024. I still think that we're starting a cycle. We want to focus on really strong tenants. We want to focus on relationships that are going to expand in assets. And we want to reposition our assets if needed out of space that is not going to be functionable or long-term and more than probably the next three or four years. Because I do think there's going to be a big cycle come 2025, 2026 for space needs and how tenants have adapted and so forth.

So, we feel good. Again, we're in some really nice markets if you look at our geographic locations. I go back to Houston, Dallas, Tampa, Orlando, Miami. We've got some really nice locations that we are seeing a lot of activity on. And I think that's our opportunity. Our opportunity, as Robert described, is to take our current occupancy and build on it, as we've talked about the last year, year-and-a-half. We're now through COVID hopefully. And so, we now need to just add that increase in occupancy to the bottom line.

We're in a great position. We just hit our best quarter, again, from an earnings perspective. We've got capital. We've got opportunities for acquisitions. We're seeing the development side of our business take hold. And now we have the opportunity to do some very good leasing without any urgency of being quarter-to-quarter or month-to-month response. We've seen some very aggressive -- I mean, very aggressive leasing deals in the marketplaces in some locations that you look at it and say, I don't know why. There must be a reason inherently that they're just trying to occupy space because the economics didn't work. We don't want to compete with those. Frankly we want to make sure that our earnings continues to grow over the next two, three, four, five years, not flat. We don't want to be flat in this marketplace.

Nick Joseph -- Citigroup -- Analyst

Thanks. Appreciate that. And then, just back to same-store guidance. Obviously, you maintained it -- and Robert, you walked through some of the noise in the first quarter. But are your expectations still that you should end up around the midpoint or it's trending more toward the low end, just given what's happened in 1Q?

Robert A. Milligan -- Chief Financial Officer, Treasurer and Secretary

Well, Nick, I think certainly as we mentioned, we always anticipated that our first quarter would be lower than what our expectation would be for the rest of the year, whether it was from just year-over-year comps and then just from a building and potential occupancy from there. So, I think our view is that it was slightly lower than what we expected in the first quarter, given the handful of items we discussed. And I think the rest of it still comes down to our execution on leasing and getting people in the building.

If all that activity that we're seeing really translates to signed leases quickly, I think we feel good about the midpoint of the range. Certainly I think it takes a little bit longer to get them signed and moved in. I think that's kind of the noise and the uncertainty that we're working with right now.

Nick Joseph -- Citigroup -- Analyst

Thank you.

Operator

Our next question comes from Daniel Bernstein of Capital One. Please go ahead.

Daniel Bernstein -- Capital One -- Analyst

Hi. Good afternoon. You guys are talking about a new cycle in the long-term. So, I was trying you maybe if you could put it together in terms of you look at construction costs the move from inpatient to outpatient which I think is going to continue to accelerate for many specialties, what's kind of the peak occupancy you think your portfolio can hit can get to? Is there a change in the frictional occupancy for the MOB industry?

Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President

Well, we've given that -- I think, everyone is giving that thought. Once again, there was an earlier question about 2008-2009 time period, 2010. I go back to the fact that you really don't know. And I say this, because again, the government assistance that has been given in this economic downturn is just unparalleled. I mean, it's -- I'm not sure that folks can be actually contemplate how much help and how much liquidity has been pushed through the system.

And so, we've had -- what does that really mean as we get into 2022? What does that really mean is that assistance isn't there any longer. And how does that impact systems or tenants physician groups? How does that affect secondary markets or assets that may not be as prominent in their thought process any longer? That's the process we're going through and we're going through it in detail because I don't know that you can see that right now. It's sort of like the housing market, right? We really know what's going on there. But you're saying, OK, that's what it is. It is what it is.

So, I think it's still back to we feel comfortable in our goal. And what we're looking at our leasing teams for our conversations is that we want to get to that 92%, 93% occupancy. I think that that's -- just given our portfolio and that's not looking at the overall market. That's not looking at different states or different locations. That's looking at the assets we own. And I think that's where we've started.

Okay. Let's do an inventory of what we have. Let's do an inventory of the relationships we have in the market with the assets, with the physicians and then let's reposition our assets and let's make sure that we've got the right tenant mix and the right tenants that are in those buildings. As I said, there has been many tenants starting to see this now I think that are getting the impact of COVID. They are getting the impact of the downturn for 12 months. And they are looking for just basically, in some cases, the most cost-effective space they could find. In some locations, that's not our building. We're not the lowest place to go. We want to get value. I feel that we need to value our portfolio. We've got a great cost basis, having bought when we bought, where we bought. And now what we need to do is, as we've talked about it, get the value for it as we go forward.

So, for HTA, we are looking in that 92%, 93% range. For this sector, I think that it's going to depend upon markets and it's going to depend upon the question earlier, which is what is your mix between off-campus and on-campus? I think that it's going to be much more articulate and this is a general statement.

Daniel Bernstein -- Capital One -- Analyst

Okay. And then, one quick question, a follow-up on construction costs and TI. Should we be building in or thinking about higher TI costs, not just from more leasing but from the construction and initially at least that how our tenants were reacting to increased build-out cost?

Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President

Well, I'll start first and let Robert finish, right. I think you can. I think that you're going to start seeing higher costs throughout the economy. And we've seen it. And I think that that's something that's going to come. I think it's just started and I think we're going to see it. And we're starting see narrative from general economy folks who are now recognizing it.

I know that when we're looking to hire folks, it's a very tough market and the cost compensation structure is different than it was 16 months ago. So that's going to come through tenants. Tenants don't want to come out of pocket. I would say that the general statement that I've seen is, they're willing to advertise additional costs within their lease structure. They're willing to put in the needs that they want to stay there longer term. But tenants aren't saying, gee whiz, I want to come out of my own pocket and put in dollars. And so, those are the kind of the trends that we're seeing. Frankly I think they're expected.

So, Robert, you want to add anything?

Robert A. Milligan -- Chief Financial Officer, Treasurer and Secretary

Yeah. I think just the particulars is you're right, Dan, is that I think TI costs in some markets were up 20%, 25%, I think from a build-out perspective. And I think it certainly looks as we're looking at development and construction costs, I think we're looking in markets where, frankly, it's an expansion of the population. So, health systems and providers just need the space to be built for them to go in there, probably a little less price sensitive and can absorb the construction costs there. I think in markets where it's more of a market share type game. We're looking at our renewal discussions. We've got people saying, well, maybe I'm just going to go build a new building. And as they look at the expected price that they got a year ago and now what they're seeing now, I think if they does some of that math for tenants that are in place where they are. So I think it's very much a market-specific analysis that we're doing on that but it certainly is -- we certainly are seeing it go up quite a bit.

Daniel Bernstein -- Capital One -- Analyst

Okay. I appreciate the time. Thank you.

Operator

The next question comes from Todd Stender of Wells Fargo. Please go ahead.

Todd Stender -- Wells Fargo Securities -- Analyst

Hi. Thanks. Just looking at a recent deal flow for you guys, with the backdrop of getting same-store NOI growth back to that 3% ballpark, can you share just some of the annual growth expectations in your underwriting on Q1 acquisitions as well as the stuff in Q2?

Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President

Robert, you want to talk on that?

Robert A. Milligan -- Chief Financial Officer, Treasurer and Secretary

Oh, I think the -- you mean from an annual growth perspective on the acquisitions, I think what we're seeing we're certainly expecting that it's going to average out 2.5%, 3.5% annual growth from the assets that we're buying. I think we've been very particular about where we're buying and what's in place, what the opportunity is for us to add on top of that. So, I think our acquisitions -- we're fully anticipating that they're going to support that 2.5% to 3%, 3.5% type run rate that we've historically targeted.

Todd Stender -- Wells Fargo Securities -- Analyst

And what's in place now? Are these third-party operated and managed? And maybe where some of the opportunities that you're seeing whether it's lease up space or the rents are below market?

Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President

I think it's a little bit of both. I think there's kind of three things that we see when we're looking at our opportunities. I think, one, when we're looking at the acquisitions it's a matter of where are the -- A, what's the market and what do we think the market rent growth is going to be as we're looking at it. I think the second thing that we're looking at certainly is where are the rents relative to market in the long-term outlook there. And I think the third thing certainly is, any available occupancy that we have. We bought some assets certainly in markets that were kind of high 80%s, low-90% occupancy that we think we can push up and see some potential growth on top of that.

So then the last thing that we do or look that you point out, Todd, is just the ability to put things on our platform from removal of third-party management. That's almost always the case when we're buying assets. They almost always have a third-party manager that we can replace and then look at the impact of the economies of scale that we have in the market and how that will flow through. So, I think that's typically what we're seeing the upside from.

Todd Stender -- Wells Fargo Securities -- Analyst

All right, thanks. Just last one for me and for Robert, for you. From a modeling perspective, how are you thinking about this timing of settling your forward shares? Is that going to coincide with these second quarter investments?

Robert A. Milligan -- Chief Financial Officer, Treasurer and Secretary

I think there's going to be a part of that gets settled in the second quarter. When we look at just the straight math on that, we've got, call it, $150 million of acquisitions kind of under contract or investments that we expect we'll be able to close. We've got $67 million of dispositions. Second quarter, we always get a little bit of a pickup in working capital. First quarter is when a preponderance of our property tax payments are actually made so we have a use of working capital in the first quarter. All that to say, I think the math comes out to about $50 million plus or minus issuance of equity to kind of fund that gap. And so that's how we're looking at it. Now, as we buy things, as we get net investments, we're going to use our equity to go ahead and close on them.

Todd Stender -- Wells Fargo Securities -- Analyst

Thanks, Robert.

Operator

The next question comes from Omotayo Okusanya of Mizuho. Please go ahead.

Omotayo Okusanya -- Mizuho -- Analyst

Hi, yes. Good afternoon and congrats on the record quarter, the guidance increase. It's always nice to see. I wanted to stick on the acquisitions front and kind of the acquisitions guidance going forward. Could you just talk a little bit the nature of the pipeline? Is it kind of more -- do you guys just kind of see more on-campus versus off-campus activity and specifically any potential opportunities to go into new markets?

Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President

Well, I think what we were seeing is a blend. I think you'll see from us, the off-campus comes with functionally leasehold free. So we are still looking -- the first advantage you get is if you can get it without any ground lease. We look at those opportunities and especially given the fact that we're seeing the compression and the synergies between the off-campus and the on-campus. So, I think you'll see the blend, it's about 60/40. It's probably going to be 60/40 as we continue down the path.

I think, Robert, you want to give some more color on that?

Robert A. Milligan -- Chief Financial Officer, Treasurer and Secretary

Yeah. I mean, I think that's just more where we're seeing good assets. I think, in all the discussion of on-campus versus off-campus and studies in rent growth, I think our biggest takeaway has been that there's really good assets in both places. I think there's certainly great on-campus assets with good health systems that are going to continue to grow and continue to have long-term demand, that's great. There's just also more growth and more opportunities in off-campus locations now too as the location of care continues to shift into those locations.

So, I think we see good real estate opportunities in both. And I think that's what the studies that we've seen have really supported. Not so much that, oh, my gosh, this is better than off-campus, it's better than on or that on-campus has got to be better than off. I think it's that medical office is great. I mean, there's a tremendous amount of growth in the amount of outpatient care that's going to be delivered. It's got to be in good locations. And if you own that real estate, that's the opportunity to own assets that produce that kind of steady long-term growth that we've come to expect.

So, I think from our outlook, we become a little bit agnostic. I think our view is just that there's really good real estate both locations and it's tended to be 60/40 as we've looked at the individual characteristics. And I think we'll see that ebb and flow based on what we buy. But long-term, that's probably where our portfolio is going to end up.

Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President

And I would just like to say on that question on the fact that we've added a new dynamic to our underwriting, both from an acquisition perspective and also from a disposition perspective. We're starting to analyze not just -- it used to be location, and real estate was a very hands-on sort of specific decision. We started to look more from a data perspective. We want to see -- and when we look at acquisitions now, we're looking to see trends in the market.

We're looking to -- we're getting data compiled that says, is there geographic trend toward the asset? Is the utilization of the medical outpatient experiences, is that something that's going to grow? What's the mix of the physicians in that location or in that small geographic location? Is it over one particular -- overstaffed in one particular area or another?

That's something that I think, again, as we move forward, you want to be in the right locations and it's the right cities, the right parts of cities, the right growth patterns in those cities, in those communities. And there's so much data out there right now that we're starting to put much more emphasis on the underwriting of looking forward, not looking back. And so, off-campus is part of that analysis.

Omotayo Okusanya -- Mizuho -- Analyst

Thank you for that.

Operator

The next question comes from Lukas Hartwich of Green Street. Please go ahead.

John Pawlowski -- Green Street -- Analyst

Hey. This is John on for Lucas. Just a quick one for me. Just as you look at your portfolio and, in particular, the non-MOB assets, how are you thinking about those over the longer-term, especially as you look to find sources of capital and potential dispositions? Any views on that would be much appreciated. Thank you.

Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President

Robert, go ahead.

Robert A. Milligan -- Chief Financial Officer, Treasurer and Secretary

Yeah. John, I think we continue to look at those. I think our view has always been non-core assets are secondary markets that we don't see as much opportunity on or assets that just don't fit our focus going forward. So I think as we look at the hospitals that we have, we've certainly seen a bit on it. So I think that could be an opportunity for us to look -- to exit those at the right point in time. I think, as we look at our portfolio, it is such a small portion of it that we have in it. So, we've tended to focus elsewhere and it's continuing to shrink as a percentage of our portfolio as we continue to grow, but there certainly are ones that you will see us sell at the right point in time.

John Pawlowski -- Green Street -- Analyst

Got you. Thank you.

Operator

The next question comes from Michael Gorman of BTIG. Please go ahead.

Michael Gorman -- BTIG -- Analyst

Thank you, Scott. If we could just step back a little bit more strategically, I mean, you've talked about being at the potential of the start of a new cycle. Obviously, as you also highlighted, a lot of liquidity in the system that could be cycling in or out, we have potential tax consequences and changes coming in the next legislative session. So, I guess, as you compare it to '08-'09, I'm trying to think ahead. Do you think that there could be some disruption or some opportunities as a result of this going forward that we actually haven't seen the result of this going forward that we actually haven't seen the disruption in the property markets yet that you could take advantage of?

Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President

I think it's interesting that we haven't seen disruption yet. And I think historically, if you're a believer that things do over time react in some traditional manner, I do think there will be a disruption. I saw -- I read an article last couple of days that said for the first time that there's some concern about an asset reset valuation. It was -- I read it came out where folks are saying, there's a possible possibility that there's a reset from a valuation perspective. So, I do think that that's going to happen at some point. I think it'll be if we could predict it, we'd all be in a much better position. I think you have to prepare for it.

Our viewpoint, big picture is strategically invest in those locations that are growing that have the business environment and then have lower business impediments, meaning the taxes and just those types of dynamics. And then see how that responds over time. I do think that at some point you're going to have some sort of reaction to either interest rates or inflation or something that's going to give folks that are well-positioned an opportunity. And we want to make sure that we always have that opportunity.

Michael Gorman -- BTIG -- Analyst

Great. And then I guess to that end, we've both had the opportunity to be around for a while. In the past year, have you seen anything in the marketplace in terms of underwriting from other capital sources deals that you've competed on where it's looked like '06-'07 where people are making unreasonable assumptions about forward cash flows or is it just they're projecting the current status quo to continue out into the future.

Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President

I think that what we've seen -- I've seen some acquisitions on some transactions that I continue to look at and say wow that's rich pricing. I don't know that it's realistic because of writing and it's sort of like putting money out in order to say that they've had activity. And we have resisted that. And I think my investment committee made up my board in with me the majority of them for the duration of our company. And so, we've been through a couple of cycles and we've tried to be disciplined and prepare ourselves for both types.

I think, we're very fortunate that we are right now, the major markets that we're in, the opportunities that we're seeing in one-off acquisitions are unique. We've not been in this position before because we were much smaller 10 years ago. We were much different how we were growing and the pressures that we had. So, it's a good plan for us right now. Buy things in the $5.5 million to $6 million get development in that $6 million, $6.5 million, get our leasing up 3 or 4 points and continue to build on our earnings. We don't need to do anything drastic. We're not facing the hurdles that the other sectors are facing. And that's something that we always have to remember.

We may not go up like other folks go up but we certainly haven't gone down. We've been consistent both from a dividend perspective and NOI perspective and FFO perspective. And so, we're not in the sector that's going to go up and down unless you make bad mistakes. We can just have a very, very steady growth as a company and that's what we're focused on.

Michael Gorman -- BTIG -- Analyst

Great. Thanks, Scott.

Operator

The next question comes from Nick Yulico of Scotiabank. Please go ahead.

Josh Brown -- Scotiabank -- Analyst

Hey there. This is Josh Brown with Nick. I was hoping you just talk about what drove the sequential decrease in lease rate and occupancy this quarter. And then also if you can provide some color behind the decrease in retention to around 65%. I think it's typically like 80%, 85% historically. So, yeah, that's be helpful.

Robert A. Milligan -- Chief Financial Officer, Treasurer and Secretary

Yeah.

Scott D. Peters -- Chairman of the Board, Chief Executive Officer and President

Robert, you want to?

Robert A. Milligan -- Chief Financial Officer, Treasurer and Secretary

Yeah. Appreciate that. I think what we saw this quarter from a retention perspective was frankly some move outs of a couple of tenants that we knew about. It was planned kind of pre-COVID. One instance a group had bought their own building kind of pre-COVID and it was just a matter of getting everything kind of figured out. Another instance, it was just a consolidation of practices on there that drove most of the lower level of retentions. I think that's abnormal for us. And it's certainly not a trend that we're expecting to see the rest of the year.

I think, our outlook frankly for the year on retention is that it will be 75% to 85%-type range when all is said and done. So I think it's just a bit of a blip as far as that goes. But from an occupancy perspective, from a timing of those vacates, we got caught up a little bit with new leasing that would typically backfill that space and time and be able to allow us to maintain kind of pretty flat, if not growing, occupancy there.

It was just impacted by COVID. Certain things took longer. The activity in the second and third quarter last year that would typically result in a move in by the first quarter of this year was obviously impacted by that. So it was slower new leasing activity that impacted the occupancy as some known vacates just came to bear in the first quarter. But the good news is, as we talked about, I mean, the new leasing activity now is very strong. The new leases that we actually able to sign is the highest that we've seen in 12 quarters. So we see that trend reversing itself as we work ourself -- our way through the year.

Josh Brown -- Scotiabank -- Analyst

Thanks.

Operator

This concludes our question-and-answer session. I would 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, thank you, everyone, for joining us. And we look forward to following up with any questions and seeing folks at [Indecipherable] coming up soon in the next month or so. So, thank you and everybody have a good weekend.

Operator

[Operator Closing Remarks]

Duration: 60 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

Vikram Malhotra -- Morgan Stanley -- Analyst

Richard Anderson -- SMBC Nikko Securities America -- Analyst

Juan Sanabria -- BMO Capital Markets -- Analyst

Nick Joseph -- Citigroup -- Analyst

Daniel Bernstein -- Capital One -- Analyst

Todd Stender -- Wells Fargo Securities -- Analyst

Omotayo Okusanya -- Mizuho -- Analyst

John Pawlowski -- Green Street -- Analyst

Michael Gorman -- BTIG -- Analyst

Josh Brown -- Scotiabank -- Analyst

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