Physicians Realty Trust Reit (DOC) Q2 2021 Earnings Call Transcript

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Physicians Realty Trust Reit (DOC)
Q2 2021 Earnings Call
Aug 4, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to Physicians Realty Trust Second Quarter 2021 Earnings Conference Call. [Operator Instructions] I will now turn the conference over to Bradley Page, SVP, General Counsel. Thank you. You may begin.

Bradley D. Page -- Senior Vice President and General Counsel

Thank you. Good morning and welcome to the Physicians Realty Trust Second quarter 2021 Earnings Conference Call and Webcast. Joining me today are John Thomas, Chief Executive Officer; Jeff Theiler, Chief Financial Officer; Deeni Taylor, Chief Investment Officer; Mark Theine, Executive Vice President, Asset Management; John Lucey, Chief Accounting and Administrative Officer; and Laurie Becker, Senior Vice President, Controller. During this call, John Thomas will provide a summary of the company's activities and performance for the second quarter of 2021 and year-to-date, as well as our strategic focus for the remainder of 2021. Jeff Theiler will review our financial results for the second quarter of 2021. Then Mark Theine will provide a summary of our operations for the second quarter of 2021. Following that we will open the call for questions. Today's call will contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. They are based on the current beliefs of management and information currently available to us. Our actual results will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe our assumptions are reasonable, our forward-looking statements are not guarantees of future performance. Our actual results could differ materially from our current expectations and those anticipated or implied in such forward-looking statements. For more detailed description of potential risks and other important factors that could cause actual results to differ from those contained in any forward-looking statements, please refer to our filings with the Securities and Exchange Commission. With that, I would now like to turn the call over to the company's CEO John Thomas. John?

John T. Thomas -- President and Chief Executive Officer, Trustee

Thank you, Brad. And thank you for joining us this morning. Our portfolio of best-in-class medical office facilities continue to perform exceptionally during the second quarter, delivering the predictable growth and operating outcomes that medical office investors have come to expect. This includes the collection of over 99% of all cash rents due during the quarter supported by patient volumes that remain resilient despite the recent spikes in the Delta variant. Along this operating -- operational performance, we continue to have confidence in our external growth pipeline. Since our last call we have made additional progress on our acquisitions and have high quality medical office building targets in various stages of negotiations. Substantially all of this pipeline is off market in direct negotiations with existing health systems and developer and owner clients. So while our investments will be back-end weighted this year, we remain very confident in our guidance of $400 million to $600 million of investment activities for 2021. Our loan pipeline continues to grow as well. It's within the newly announced mezzanine loan in Brooklyn Park Minnesota. DOCs real estate loan book totaled $176 million, an outstanding principal at quarter end, and it's secured by real estate valued at over $1 billion. In addition to the attractive 8% average coupon, our loan portfolio represents a source of future growth through embedded ROFR rights and purchase options. Within this loan book are five projects under development with an expected market value of over $200 million upon completion, including one loan to own transaction. Our pipeline for development financing opportunities continues to grow. We expect to secure many of these new opportunities by year-end supporting our growth in 2022 and 2023. We are also evaluating the opportunity to use the robust medical office market to dispose of some non-core facilities at a profit. This pruning can both enhance the quality of the portfolio and also provide an additional source of funding for the growth this year. Our Chief Financial Officer, Jeff Theiler will review our financial results and balance sheet in a few minutes, but I wanted to recognize Jeff and Mike for leading us in the achievement of our long overdue upgraded credit ratings with both S&P and Moody's. We've already seen the benefits of these well deserved upgrades to our cost of capital amplifying our opportunity for outsized accretive growth going forward. The trends in favor of medical office have proven to be very predictable and reliable driving a consistent and growing rental income stream for the benefit of our shareholders. Public investors in healthcare real estate can count on medical office to remain open, occupied and busy. Medical office does not need to recover. As an asset class, it is only impacted temporarily in spring 2020 and DOC has maintained close to 96% occupancy throughout the pandemic. We remain focused on growing our funds available for distribution each year and we'll continue to manage our organization to achieve that result annually. Jeff will now review our financial results and then Mark Theine will share our operating results. Jeff?

Jeffrey N. Theiler -- Executive Vice President and Chief Financial Officer

Thank you, John. In the second quarter of 2021, the company generated normalized funds from operations of $58 million or $0.26 per share. Our normalized funds available for distribution were $55 million, an increase of 3.6% over the comparable quarter of last year, and our FAD per share was $0.25. Our operating portfolio has continued to perform well in the second quarter. Our same-store portfolio had consistent occupancy year-over-year and generated NOI growth of 2.4%, right in line with the fixed escalators and consistent with our expectations. The one deferment we granted in the midst of the pandemic last year has been fully paid back including $200000 of associated late fees. Through this quarter and to the present time, we are seeing very little negative impact with our tenants from COVID at this point despite the emergence of the Delta variant. We are optimistic that our portfolio will continue to perform and be resilient in the current environment.

Turning to the balance sheet, we have been recognized by two major rating agencies over the past few months for portfolio and balance sheet improvements that have been years in the making. We were upgraded to BBB flat by S&P on May 13 and upgraded to Baa2 by Moody's on July 1st. These upgrades have a significant impact on our cost of capital and improve our ability to compete for the highest quality buildings. In their rating evaluations, both agencies recognized the high quality of our pure play MOB portfolio and its superior performance during the pandemic. They also noted our disciplined capital strategy and best-in-class tenant mix, specifically our 63% concentration of investment grade tenants, 93% exposure to net leases, and significantly lower proportion of near-term lease expirations relative to the sector. We remain highly disciplined with our capital strategy, raising $83 million on the ATM in the second quarter at an average price of $18.39 as we continue to pre-fund our acquisition pipeline. As a consequence we currently sit in an excellent financial position with consolidated debt to EBITDA of 4.5 times and an outstanding revolving credit facility balance of $72 million, leaving $778 million of availability. This pre-funding has placed us in a position to successfully execute on our substantial pipeline in the back half of the year. We are still confident in the acquisition guidance we laid out at the beginning of the year $400 to $600 million of new investments and expect to execute on those investments prior to the end of the year. As we discussed last quarter, the pipeline is full of the types of buildings that are in our sweet spot, high quality MOBs with strong investment grade tenancy from leading health systems. JT has talked about the progress on this pipeline and while perhaps that progress has been slower than we were anticipating, it has been steady and we remain on track.

Turning to other relevant portfolio metrics. Our second quarter G&A came in at $9.1 million and recurring Capex was $5.7 million for the quarter. Our full year guidance for those metrics remain unchanged at $36 million to $38 million for G&A and $25 million to $27 million for CapEx. I will now turn the call over to Mark to walk through some of our portfolios statistics in more detail. Mark?

Mark D. Theine -- Executive Vice President, Asset Management

Thanks, Jeff. Quarter-by-quarter, MOBs continue to improve their reputation for stability with occupancy, collections, and leasing trends that remain strong regardless of market factors. The steady internal growth delivered by our asset management platform is the result of superior tenant satisfaction, strong 2.4% built in rent escalators, and an industry leading 96% lease rate. Our leasing and CapEx teams continued to deliver value during the quarter with an impressive tenant retention of 87%, positive cash releasing spreads of 2.7%, and low CapEx investments that totaled just 7% of cash NOI. The operations team also continues to execute on the plan to expand our in-house property management platform, laying the groundwork for further cost efficiencies across the portfolio that will deliver long-term value for shareholders. Specifically, we recently welcomed Mercedes Mark health [Phonetic] and the Cole [Phonetic] Bradley to the DOC family as we expand our management efforts in Phoenix, Arizona and Birmingham, Alabama. From a performance perspective, our MOB same-store NOI growth in the second quarter was 2.4%. The NOI growth was driven primarily by a year-over-year 2.4% increase in base rental revenue. Operating expenses were up 6.2% and offset by 7% increase in operating expense recovery revenue. Year-over-year operating expenses were up $1.9 million overall, primarily due to a $0.5 million increase in utilities and a $0.4 million increase in insurance cost. Same store occupancy remained steady at 95.4% year-over-year as our leasing team continues to execute consistently with strong retention. On a consolidated basis, we completed a total of 395,000 square feet of leasing activity during the quarter, the second highest quarterly volume in the history of the company. Tenant retention was 87% across 353,000 square feet of lease renewals with cash renewal spreads of positive 2.7%. Notably, these results were achieved with limited leasing costs totaling $1.68 per square foot per year across the full volume of leasing activity, a figure that is much more efficient than the industry averages. Our successful net effective rent outcomes are driven by our deep understanding of our primary markets and constant devaluation of the local leasing trends.

Turning to our capital investments for the quarter, we once again proactively managed recurring capex to $5.7 million or 7% of cash NOI. Year-to-date DOC has invested $11.3 million in recurring capital projects. While committed leasing TIs [Phonetic] were low on a per square foot basis, we do expect capital expenditures to tick up during the second half of the year due to increased leasing volumes. As a result, we still expect to fall within the $25 million to $27 million full-year guidance previously announced. Embedded within all capital investments made by DOC is a strong commitment to materials and practices that enhance the patient experience and our ESG efforts. Our second annual interactive ESG report was released in June and highlight the exceptional progress toward our three-year goals to improve the portfolio's overall carbon footprint, energy, water, waste usage by 10% compared to our 2018 base year. In 2020, DOC invested in 29 sustainability driven capital expenditure projects totaling $4.2 million, generating approximately $7.7 million in operating expense savings over the next ten years. Additionally, we exceeded our team social goals by raising or donating over $350,000 for worthy causes across the country and providing over 515 volunteer hours of service to charitable organizations. In the eight years since our IPO, we have not only built one of the best healthcare real estate portfolios in the country, but we have also assembled the best healthcare real estate team. Our efforts directly translate into care for tenants evident in our 2021 Kingsley Associates Tenant Satisfaction survey results. This year we surveyed nearly 365 tenants representing nearly 3.4 million square feet. Physicians Realty Trust received an industry leading 76% response rate. In addition, despite the ongoing COVID 19 pandemic we earned the highest scores in the history of the company, including an overall management satisfaction score of 4.53 out of 5.0, beating the national benchmark. Going forward, we expect continued successes from our growing operating platform resulting in enhanced local market knowledge, repeat investment opportunities with existing partners, profitable operating efficiencies, and continued tenant retention. With that I will now turn the call back to John.

John T. Thomas -- President and Chief Executive Officer, Trustee

Thank you, Mark. Thank you, Jeff. We will now take your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question is from Juan Sanabria with BMO Capital Markets. Please proceed.

Juan Sanabria -- BMO Capital Markets -- Analyst

Thanks guys. Only my wife calls me Juan [Phonetic] but that's fine. Just on the acquisition pipeline, hoping you guys can give us a little bit more color on the expectations for the second half. I think last quarter you talked about visibility on $200 million of opportunities, may be how those have evolved and kind of pricing expectations.

John T. Thomas -- President and Chief Executive Officer, Trustee

Yeah, great question, Juan. The pipeline has just continued to [Indecipherable] very confident about again the full year numbers, $400 million to $600 million. And we've got line of sight to a pipeline that's at least that big right now. So it's a collection of high quality medical office buildings, some that were under construction in the first half of the year and just kind of moving to CO and we'll move to rent commencement here this quarter. And so it's really -- we're really excited about it. So hopefully we are able to share a lot more with the next call.

Juan Sanabria -- BMO Capital Markets -- Analyst

And the pricing is still kind of that mid 5% to 6%?

John T. Thomas -- President and Chief Executive Officer, Trustee

Yeah. 5% to 6%. I mean, again, the higher quality newer buildings are going to be at the low end of that range, but the development pipeline which continues to grow and that's where we achieved those higher returns.

Juan Sanabria -- BMO Capital Markets -- Analyst

Okay. And then you -- just curious on what you guys think about the importance of scale and maybe the opportunity for public M&A given potential cost synergies or further improvements to the cost of capital post to credit rating upgrade, or if you prefer to kind of just onesie twosies and don't really like the prospect of a bigger portfolio transactions or just kind of your general thoughts on that subject matter.

John T. Thomas -- President and Chief Executive Officer, Trustee

Yeah, Juan, I'm sorry we had a brief disruption here. The -- I think I got to just your question the -- our execution strategy from the beginning has been direct negotiated off market transactions primarily through health system relationships, physician relationships, and healthcare real estate developers, and that's what we're focused on our strategy and execution there. And again we've got a a high quality pipeline, we'll be able to share a lot more about with the next earnings call. Scale is obviously very important as we've grown as Mark mentioned, we've expanded our property -- our internal property management team in a couple of markets where we have had some significant growth opportunities. And so again scale in our core markets continues to drive a lot of synergy value and it grows more -- it provides more opportunities. So public market M&A or large portfolio transactions, we certainly look at everything. But we're focused on our core strategy. And we're approaching $6 billion in assets so we've got a pretty good scale already.

Juan Sanabria -- BMO Capital Markets -- Analyst

Thank you, guys.

John T. Thomas -- President and Chief Executive Officer, Trustee

Thanks, Rob.

Operator

Our next question is from Nick Joseph with Citigroup. Please proceed.

Nick Joseph -- Citigroup -- Analyst

Thanks. As you look at your acquisition pipeline, obviously a lot of it is back end loaded this year. Is that kind of unique to this year or is that representative of what your acquisition pipeline should also look like heading into 2022?

John T. Thomas -- President and Chief Executive Officer, Trustee

Yeah, I mean it is unique for this year, it's just the circumstances of how the pipeline built in the -- at the end of last year. Again we'd like to be a little more spread out and I think historically there was a time where we were closing the building a week. So it's just the uniqueness of this year. And I think there were some seller, some health systems at the end of last year that we weren't really thinking about monetizing but with the expecting changes in tax laws, kind of changing in the political environment, things like that, we're seeing more opportunities kind of evolved, kind of bubbled up in the first quarter that we've been negotiating through and again expect to execute on this quarter and the last quarter. So, I think it's just unquiet to this year but it's been -- frankly has been pretty exciting for us.

Nick Joseph -- Citigroup -- Analyst

Thanks. And then just back to the broader transaction market you mentioned cap rates may be 5% to 6%. How have you seen portfolios trade relative to individual assets. And then what does the buyer pool look like?

John T. Thomas -- President and Chief Executive Officer, Trustee

Yeah, the buyer pool has gotten bigger. Private equity continues to -- "Private equity", if you will, continues to raise a lot of capital, continues to explore both individual assets and the portfolios have been floating around. We haven't seen anything -- I mean, of course, we look at everything that's marketed but most of our -- substantially all of our transaction volume this year will be off market and not portfolio based transactions, but there is a premium out there for the portfolios, we've seen traded at least based on the quoted cap rates. Those -- the ones that have the $300 million to $500 million portfolios that have floated around. I think we're hearing five in the quarter kind of cap rates, 5.5 on some of those on assets that are probably high fives to six if bought on an individual basis. So a lot of capital chasing the assets. As we said, we're -- we expect to dispose of opportunistically a few of our assets that just don't fit our strategic portfolio going forward. But they are tracking a nice high price.

Nick Joseph -- Citigroup -- Analyst

Thank you.

Operator

Our next question is from Joy -- Jordan Sadler with KeyBanc Capital Markets. Please proceed.

Jordan Sadler -- KeyBanc Capital Markets Inc. -- Analyst

Good morning, guys.

John T. Thomas -- President and Chief Executive Officer, Trustee

Good morning.

Jordan Sadler -- KeyBanc Capital Markets Inc. -- Analyst

Good. So I want to follow up on that last piece JT, you mentioned dispositions, which I feel like we've kind of had a -- you guys have had on-again, off-again view toward dispose a little bit. And it sounds like you are mentioning them again, which makes me feel like you're a bit closer maybe than you had been in the past to selling some stuff. Can you maybe offer a little bit more color surrounding the sales?

John T. Thomas -- President and Chief Executive Officer, Trustee

Yeah, we think our portfolios -- we pruned some things a couple of years ago out of the portfolio. We think our portfolio is outstanding, so about 275 buildings we love all our children so -- but there's just a couple of I'd say small circumstances where either portfolio might trade and our assets are complementary to that or -- I know, we're always kind of exploring the opportunity to sell the LTACHs, things like that. So it's just opportunistic in things that have bubbled up, but I do -- we do expect to close on a handful of dispositions this year and what we'd use that capital to fund our acquisitions.

Jordan Sadler -- KeyBanc Capital Markets Inc. -- Analyst

Volume wise, are we looking at like $100 million total or something smaller? Hey Lucia. We dropped the line. Can you guys hear me?

Operator

They are still connected I do not what the technical difficulty is.

Jordan Sadler -- KeyBanc Capital Markets Inc. -- Analyst

Yeah, they might be muted.

John T. Thomas -- President and Chief Executive Officer, Trustee

Hey, Jordan. We lost you from there, sorry about that.

Jordan Sadler -- KeyBanc Capital Markets Inc. -- Analyst

Do you want me to repeat the question or you've got that.

John T. Thomas -- President and Chief Executive Officer, Trustee

Yeah, your question was you said $100 million and my response to that was, that would be on the high end. It's a handful of dispositions

Jordan Sadler -- KeyBanc Capital Markets Inc. -- Analyst

Okay. And then along the same lines, the leverage really with the [Indecipherable] ATM, Jeff. Good job, you're -- I think about as low as we've seen in a while, it's 4.5 times net debt to EBITDA I think you quoted?

Jeffrey N. Theiler -- Executive Vice President and Chief Financial Officer

Yeah.

Jordan Sadler -- KeyBanc Capital Markets Inc. -- Analyst

So sort of appetite will continue to sort of use that to get the leverage lower ahead of sort of the back-end weighted acquisitions, it would be my question. And then any insight on additional ATM that's been issued post quarter end.

Jeffrey N. Theiler -- Executive Vice President and Chief Financial Officer

Yeah. Good questions, Jordan. Like you said, we've been pretty proactive about funding the acquisition pipeline in the first two quarters of the year. So really we're at a point right now where we can execute on that acquisition, guidance and not raise additional equity. So I think we're in a really good spot. I mean, look, we're always opportunistic about how we fund our deals and it's dependent on what we see coming down the line in the far future as well. So we'll take it day by day, but as a need we don't have any need for additional equity.

Jordan Sadler -- KeyBanc Capital Markets Inc. -- Analyst

Okay. Administrative one for you. Jeff. The late fees in collections total book in 2Q that won't repeat?

Jeffrey N. Theiler -- Executive Vice President and Chief Financial Officer

Yeah, yeah. Just 200,000.

Jordan Sadler -- KeyBanc Capital Markets Inc. -- Analyst

$200,000. Okay, thank you.

Operator

Our next question is from Amanda Sweitzer from Baird. Please proceed.

Amanda Sweitzer -- R.W. Baird & Co. -- Analyst

Thanks, good morning guys. Following up on your comments on increased CapEx and the increased leasing volume you expect, your back half lease maturities actually look comparable to what you experienced in the first half. So are you expecting to be able to build occupancy over there at the end of the year and what's the outlook for leasing vacant space today.

Mark D. Theine -- Executive Vice President, Asset Management

Yeah. Thanks, Amanda, this is Mark. As just mentioned in the back half of the year we've got about 2% of our ABR coming up for renewal in the second half of 2021, it's about 91 leases, and an average of about $23 per square feet. So we feel really good about where the market rental rates are especially a lot of the local market trends being able to push some of those rents and some of the escalators upon lease renewal. And then what we're seeing a lot of right now is a request for CapEx and TI and some early lease renewal. So we accelerated a few leases this quarter extended early adding so [Phonetic] nice term to hospital leases and extended them into the future of a solid rent bumps. So we expect solid leasing activity to continue there.

Amanda Sweitzer -- R.W. Baird & Co. -- Analyst

That's helpful. And then as you see more companies start to kind of solidify their return to office plan, can you provide an update on how you're thinking about your health system administration tenants today? Has those tenants given you any update about how they're thinking about their go forward space needs?

Mark D. Theine -- Executive Vice President, Asset Management

Yeah, I think we have a small amount of, if you will, Administrative space with health system but it's leased for multiple years. So we're having that dialog. I think health systems are, again, with this delta variant, it's going to slow down some of their internal thinking while they focus on the hospitals that are full and again shifting patients to the outpatient care facilities like we own. So we don't have any good color yet other than systems are trying to rationalize and make that decision. We've had conversations about either selling those buildings, subleasing those buildings, or keeping them in shape while they figure out those plans maybe in the fourth quarter. So, sorry to be so vague, but it's -- we don't have a lot in that space.

Amanda Sweitzer -- R.W. Baird & Co. -- Analyst

Yeah, no, that makes sense. I appreciate the time.

Mark D. Theine -- Executive Vice President, Asset Management

Yep.

Operator

Our next question is from Vikram Murata with Morgan Stanley. Please proceed.

Vikram Malhotra -- Morgan Stanley -- Analyst

Thanks for taking the questions, good morning. I guess maybe just on that last point around health systems figuring things out given even COVID and maybe its resurgence. Can you just give us any color on conversations you may have had or expect to have on either sort of sale leasebacks or just even more directly on health systems looking at that whole off-campus close to resident -- close to consumers in terms of pushing care out there.

John T. Thomas -- President and Chief Executive Officer, Trustee

Yeah. So we're obviously big believers in that long-term strategy by health systems to plant outpatient care facilities in new markets. That's exactly like the Brooklyn Park development we're financing and the projects we're developing this year are almost all -- or financing the development of this year almost all exactly that kind of descripts [Phonetic] an ambulatory surgery center anchored health system, employed physicians, outpatient care diagnostics, things like that. Our portfolio does include a nice balance or mix of on campus assets that are the health system in this -- in our case in our pipeline are monetizing to raise capital for their balance sheets and at the same time coordinating discussion around new developments with those same health systems. So it's a good mix. I haven't seen a real change in the long-term trends of expanding on campus newer assets and at the same time planting flags in new demographics for growth.

Vikram Malhotra -- Morgan Stanley -- Analyst

Okay, that's helpful. Maybe Jeff, if you can just remind us in this environment where there is still inflation concerns, whether it's on labor, materials, taxes, can you remind us again just the overall structure kind of the preponderance of leases, how the pass throughs work?

Mark D. Theine -- Executive Vice President, Asset Management

Yeah Vikram, this is Mark. Actually, Jeff mentioned in his prepared remarks that our portfolio is very well insulated from rising operating expenses due to the triple net structure. 93% of our portfolio is triple-net. And then really all but 2% have some protection against inflation of operating expense. Some of them are modified gross leases which also have a cap that's paid for by the tenants. So, [Indecipherable] saw that in our same-store results with a slight increase in operating expenses but nearly all of it was recovered through our recovery structures in the portfolio.

Vikram Malhotra -- Morgan Stanley -- Analyst

Got it. Okay, that's helpful. And then I just want to go back to the disposition comments that you made, and I guess like leverage obviously is the great place so you can look to use the balance sheet, but just given where the -- maybe some of what your private peers are doing, which seems like they're in the market to sell more given pricing. What would make you want to kind of really move that disposition number higher?

Mark D. Theine -- Executive Vice President, Asset Management

Really not Vikram, I would like to say these are opportunistic sales, if you will, and we've talked for years about selling the LTACH if we can get an appropriate price, they continue to perform very well in the COVID environment and that's kind of what they're used for. So their EBITDA -- EBITDAR has been stronger than a year. So there is a potential good opportunity to sell those this year, the others, again it's a very small handful of buildings and unique situations that we've had the opportunity to sell, pricing has been excellent and we're ready to move those out. Now we've really -- the portfolio is in fantastic shape, 96% occupied. It's -- and there's not a lot in the portfolio we want to -- that we want to even consider selling.

Vikram Malhotra -- Morgan Stanley -- Analyst

Great. Okay, thanks so much. Our next question is from Michael Carroll with RBC Capital Markets. Please proceed.

Mike Carroll -- RBC Capital Markets -- Analyst

Yeah, thanks. JT on the investment pipeline, I mean it sounds like that the size of the pipeline is -- equals the amount of deals that you want to close in the second half of the year. I mean, do you have those deals under contract right now and you just need to close on those. I mean, how does that work out?

John T. Thomas -- President and Chief Executive Officer, Trustee

Yeah, a good portion of them are under contract and just moving to work down the normal closing process with those transactions. Others are under exclusive kind of signed, letters maintained, all the economics and deal terms are worked out, just working through the commutation [Phonetic] and closing process, little slower in part because of travel restrictions and frankly the demand in construction and other things and going around the country, but we remain very confident about not only getting those transactions closed, but continue to work through negotiations on several other things in our pipeline.

Mike Carroll -- RBC Capital Markets -- Analyst

Okay. And how many of those deals in the second half of the year reflect development projects and do you work out those deals during the time of those projects beginning [Phonetic] the construction as soon as occupancy or the leases commence, that's when you're -- you close those deals, I guess, how does that work out?

John T. Thomas -- President and Chief Executive Officer, Trustee

Yeah, I think it varies a little bit, the loan downs essentially work out where we finance the construction off of our balance sheet. There are 100% occupied investment grade credit quality tenants. And then the loan stays in place for, typically for a year for tax reasons but stays in place for one year and then it collapses into ownership. You'll see one of the investments we made this year was [Indecipherable] Cancer Center, which is exactly the process. We -- that's been on our books for a couple of years first as alone and now it's converted to P ownership. Some of the development financing is where we just are part of the capital stack and typically that happens when the building is pre-leased to some high percentage, but not fully leased and the developer has their own capital and gets thrown construction loan. We provide some capital and then we have a refer [Phonetic] that is triggered again with use of rent commencement, and then maybe for a year after that for tax reasons. So it just varies. But as we said or I said in my comments, the assets under construction on our books today would be valued at about $200 million once we convert those to ownership. So that will happen -- most of that will happen in 20 -- what's under construction today will convert over in 2022. Some of that couldn't -- could blend into 2023. Projects we start in the fourth quarter of this year and we're working through most likely by about 20 -- early 2023 conversion to full ownership. But the pipeline is growing. It's been an interesting year for health systems, moving forward with projects that didn't do -- that they didn't start last year but proceeded with this year.

Mike Carroll -- RBC Capital Markets -- Analyst

Okay. And then your investment targets, does that reflect the amount of capital you're going to deploy out this year, does that reflect the amount of capital you're going to commit to deploy including those development projects that will bleed into '22 and '23?

Jeffrey N. Theiler -- Executive Vice President and Chief Financial Officer

Yeah, hey, Mike, it's Jeff. It will reflect obviously the amount of acquisitions we complete and then the amount of development that we're committed to for the year.

Mike Carroll -- RBC Capital Markets -- Analyst

Okay, great. And then just last one, Jeff. Can you remind us what the long-term leverage targets, is it still mid five net debt to EBITDA number. Has that changed?

Jeffrey N. Theiler -- Executive Vice President and Chief Financial Officer

Yeah, that's right, Mike, so five in the quarters are kind of long-term debt target obviously that's a conservative number. So there can be some flex around that, but that is the, in general, our long-term target.

Mike Carroll -- RBC Capital Markets -- Analyst

Okay, great. Thank you.

Jeffrey N. Theiler -- Executive Vice President and Chief Financial Officer

Thanks.

Operator

[Operator Instructions] Our next question is from Daniel Bernstein with Capital One. Please proceed.

Daniel Bernstein -- Capital One Securities -- Analyst

Hi, good morning. I just wanted to dig into a little bit about the benefits of the increasing internal management and maybe kind of the strategic direction of that as it related to ESG. The signal maybe that you guys are looking a little bit more away from triple net to more gross lease type of assets. And then maybe -- and is there any way to quantify kind of benefits or what benefits you've seen as you've grown [Indecipherable] that Management side of the business.

John T. Thomas -- President and Chief Executive Officer, Trustee

Yeah, I'll give Mark that segment to think [Phonetic] about and direct financial relation but it's really again part of our long-term strategy, Dan, of again when we have a health system and we always have a lot of repeat business with at least that's our goal with the health systems that we work with. And so once we get the scale and you can internalize that management, again there is a financial benefit of -- every time you add another building but you don't have to add another property management team, just the direct correlation there. So it's -- like in the Phoenix market and the Birmingham market, we just continue to grow in those two markets and just had the opportunity to hire a couple of outstanding people to put on the team and then directly manage those buildings in those markets ourselves. So scale is pretty natural. Columbus, Ohio has been fantastic example for us of how once we internalize management not only are we getting a dollar return from that, the financial returns from that, it's also leading to more opportunities in those markets. They just kind of build upon itself. So it's not a sign of moving away from triple net leases. Again, we're focused on, again kind of minimizing the risk, maximizing the synergy value of internalizing management and managing the buildings better and at a lower cost. And thus hopefully moving more of the total cost of occupancy to triple net rent to us, not just expenses.

Mark D. Theine -- Executive Vice President, Asset Management

Yeah, I'd add to that, as it is -- it all starts with the relationship, with the hospital relationships, the local market knowledge, the ability to expand our acquisition opportunities with hospital partners across the country. Then secondly, the financial impact. Starts of the economies of scale from just having more properties in the market and being able to lower operating expenses for our healthcare partners in the buildings. Again, most of our expenses are insulated by the triple net leases. But we look to benefit upon lease renewal from the total occupancy cost that we can show the tenants. And the management fee itself usually adds about 20 to 30 basis points onto a cap rate in an acquisition if we internally manage there. So there -- as JT said, there is a direct impact from the management fees associated with internal, I think, Property Management. So we've really grown a great team around the country and look forward to leveraging the economies of scale and the team as we grow the portfolio in the future.

Daniel Bernstein -- Capital One Securities -- Analyst

All right. And what portion of the portfolio is now internally managed?

Jeffrey N. Theiler -- Executive Vice President and Chief Financial Officer

Yeah, seven of our largest markets -- our top ten largest markets are all internalized. We have to manage everything in the portfolio of course, but there is a few markets where we partner with hospital system to have a real estate team directly and we treat them exactly like part of our partner or a development partner that has lifelong relationships in the market. We work just hand in hand with them almost as if they're part of the DOC team but technically it's not internally managed. So seven of our top ten largest markets today.

Daniel Bernstein -- Capital One Securities -- Analyst

Okay. I appreciate it. That's all I have. Thanks.

John T. Thomas -- President and Chief Executive Officer, Trustee

Thank you, Dan.

Operator

This does conclude our question and answer session. I would like to turn the conference back over to management for closing remarks.

John T. Thomas -- President and Chief Executive Officer, Trustee

Yeah. Thank you again for joining us today. We really appreciate the questions dialog and please follow if Jeff you got any other -- and Mike, if you got any other questions. We do encourage you all to get vaccinated. We are starting to move back into the office ourselves and -- so stay safe. We hope to see everyone at the conferences this fall. Thank you.

Operator

[Operator Closing Remarks]

Duration: 39 minutes

Call participants:

Bradley D. Page -- Senior Vice President and General Counsel

John T. Thomas -- President and Chief Executive Officer, Trustee

Jeffrey N. Theiler -- Executive Vice President and Chief Financial Officer

Mark D. Theine -- Executive Vice President, Asset Management

Juan Sanabria -- BMO Capital Markets -- Analyst

Nick Joseph -- Citigroup -- Analyst

Jordan Sadler -- KeyBanc Capital Markets Inc. -- Analyst

Amanda Sweitzer -- R.W. Baird & Co. -- Analyst

Vikram Malhotra -- Morgan Stanley -- Analyst

Mike Carroll -- RBC Capital Markets -- Analyst

Daniel Bernstein -- Capital One Securities -- Analyst

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