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Good morning. Welcome to Healthcare Realty Trust first quarter financial results. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference over to Todd Meredith. Please go ahead.
Thank you, Kate. Joining me on the call this morning are Carla Baca, Bethany Mancini, Rob Hull and Chris Douglas. Ms. Baca, if you would read the disclaimer.
Except for the historical information contained within, the matters discussed on this call may contain forward-looking statements that involve estimates, assumptions, risks and uncertainties. These risks are more specifically discussed in a Form 10-K filed with the SEC for the year ended December 31, 2019, and in subsequently filed Form 10-Q. These forward-looking statements represent the Company's judgment as of the date of this call. The Company disclaims any obligation to update this forward-looking material.
The matters discussed in this call may also contain certain non-GAAP financial measures such as funds from operations, FFO, normalized FFO, FFO per share, normalized FFO per share, funds available for distribution, FAD, net operating income, NOI, EBITDA and adjusted EBITDA. A reconciliation of these measures to the most comparable GAAP financial measures may be found in the Company's earnings press release for the first quarter ended March 31, 2020.
The Company's earnings press release, supplemental information, forms 10-Q and 10-K are available on the Company's website. Todd?
Thank you, Carla. Before jumping into business, we would first like to acknowledge those who face difficult times due to COVID-19 or maybe even lost someone to the disease. And we offer our sincere gratitude to first responders and health care providers. I know many of you on the call this morning are in hot spots such as New York City, and we hope that you and your families are safe and doing well.
On a brighter note, we're encouraged by what we've seen recently. Governors and mayors are prioritizing elective medical procedures in Phase 1 of the reopening plans. Timing will vary, but elective procedures are already restarting in most markets.
At Healthcare Realty, 88% of our properties are located on or adjacent to campus. During COVID-19, we've been working even more closely with our hospital partners to ensure protocols and facilities are safe for providers and patients. As an example, we've helped hospitals create [indiscernible] on-campus, so building visitors can be screened for symptoms. We also have 15 COVID-19 testing sites at our properties. Here in Nashville, we're working with hospital administrators to transform our parking lot into a drive-through site for patients to be tested before their scheduled procedures.
It's worth noting that 100% of our properties have remained open throughout this crisis. 9 out of 10 of our tenants have continued to provide patients with essential care in their offices despite significant declines in patient volume. Many tenants who closed temporarily have reopened or will in the coming weeks.
About half of our space is leased to smaller independent physician practices, the lifeblood of our hospital partners. We took an early position to help these practices understand the availability of financial assistance programs, from federal grants and loans to our own rent deferral program.
We are reviewing and granting deferrals 1 month at a time, knowing that circumstances are changing rapidly. April rent collection was successful with 89% collected, and we've been able to help over 400 smaller tenants with some form of deferral. So far, may collections look to be a bit stronger than April, although it's still too early to know the final outcome. We are confident our deferral program will help our smaller independent practices pull through this pandemic, recover more quickly and be stronger in the long run.
Many of these tenants are already ramping up routine care and procedures and plan to pay back deferred rent in the second half of the year as they address pent-up demand. Given the average physician generates $2.4 million in annual hospital revenue, this will greatly benefit our hospital partners who make up the other half of our space. These are mostly large, investment-grade health systems with deep financial footings and community ties. New leasing was inevitably slower in April with prospect tours at half of our normal pace.
We have been pleased to see tours begin to pick up in the last 2 weeks. We expect tenant retention to remain high, potentially higher than usual, as providers focus on rebuilding their patient volume. During this time of uncertainty and even as the recovery begins, we're not asking tenants to make long-term leasing decisions. The intrinsic value of our real estate gives us confidence with short-term renewals. We are encouraged by the increased use in reimbursement of telemedicine during this pandemic, allowing providers to stay connected with their patients.
Going forward, we expect providers to incorporate telemedicine into their daily routines in their medical office space. Select providers can boost productivity and revenue by handling a higher portion of their low acuity care through telemedicine and increasing their capacity for in-office higher acuity care. That equates to more revenue per square foot of office space. Looking ahead, outpatient facilities will become increasingly critical as patients and providers seek to shift more care to the safest and lowest cost setting.
Even during the pandemic, many of our health system partners have continued to plan for outpatient expansion. Healthcare Realty is well positioned to take advantage of rising demand for outpatient facilities with a strong pipeline of acquisitions and developments. We look forward to sharing progress on this front and the resiliency and strength of our health care tenants as the recovery unfolds in the quarters ahead.
In closing, we're deeply grateful for the doctors, nurses, hospitals and patients we serve every day in our facilities. Our property management team and in particular our 90 maintenance engineers have been a daily presence, keeping our properties open, clean and running smoothly throughout this pandemic.
Now I'll turn it over to Ms. Mancini for some additional information on our COVID response and health care trends. Bethany?
Thank you. Healthcare Realty's long-standing health system relationships have proven invaluable during the COVID-19 pandemic. We have been able to support both hospital and physician tenants. From mid-March to April, our tenants were compelled to limit elective cases and office visits to allow for inpatient bed and ICU capacity. By mid-April, our property managers reported a trough in building foot traffic and maintenance orders, ranging from third to half of normal activity levels. Signs of improvement, though, over the past few weeks. Nearly 90% of our tenants remained open across primary and specialty care with their staff in place and have been continuing to meet the essential needs of their patients. Where possible, providers have transitioned lower acuity clinical needs to telehealth and are maintaining communication with patients as they ramp up elective care and office visits.
Throughout COVID-19, HHS has issued regulatory updates in an effort to provide sweeping flexibility and support to the U.S. health care system. They have lifted constraints and eased federal rules on a variety of Medicare policies affecting providers. And HHS has offered assurance that any health care provider will be considered eligible for federal relief who has cared for COVID patients or limited services for COVID capacity, making virtually every provider eligible for assistance.
Our tenants began receiving federal relief funds under the CARES Act as early as April 10. The CARES Act provides grants, loans and higher Medicare rates to health care providers. In total, HHS has $175 billion in health care stimulus funding. The first $50 billion, slated for general hospital and physician relief, is estimated to equate to 1 to 2 months of lost cash flow from the impact of COVID-19 on the average provider. Another $50 billion will be distributed for COVID-specific relief to hot spots, rural areas and uninsured care. The remaining $75 billion has yet to be allocated. HHS has distributed more than $100 billion in Medicare loans under the expanded Accelerated and Advance Payment Program. Analysts have estimated this equates to an additional 2 to 3 months of lost cash flow to be repaid by year-end at zero interest. Many of our nonhospital tenants, primarily small independent physician practices, have also qualified for PPP, forgivable SBA loans, equivalent to generally 2 months of payroll rent and utilities.
Hospitals critically depend on these physicians to generate revenue even more during this recovery phase. Our health system partners are actively engaged with our medical office tenants to ramp up elective outpatient care as quickly and safely as possible. Elective procedures were closed on average 34 days in HR's top markets and began reopening by the end of April. Different from discretionary services, elective care is essential, just planned in advance. Over time, elective care becomes more urgent the longer the wait. Our tenants are preparing for an increased caseload from delayed elective care, and our property management teams are working with them to plan for potentially longer workday hours and safety precautions for their most vulnerable patients.
The ability to recapture pent-up demand should bolster HR's tenants. In contrast to many non-health care businesses that may operate at a limited capacity for a prolonged time, HR's tenants comprise a greater proportion of essential and critical services, which are accelerating their return to more typical operations. Higher acuity outpatient services also require more in-office care. We do not anticipate telemedicine will displace elective or in-office visits and outpatient procedures. Telemedicine has advanced quickly over the past 2 months and proven it can play an increasingly profitable role for physicians in allowing more efficient, time-saving strategies to manage lower acuity services. Providers now have the ability to schedule reimbursable telemed visits for follow-up to operative care, routine checks, prescription refills, delivering test results. Previously, these were often unreimbursed patient phone calls. We anticipate the cost savings and better revenue generated for lower acuity care to serve an additive role within the physician's office as providers meet greater health care demand from an aging population.
Healthcare Realty is committed now more than ever to owning outpatient facilities that are integrated with the clinical missions of strong health systems, and we are honored to play a role in our communities as we work together to safely reopen needed health care services.
Now I'll turn it over to Rob for a review of our investment activity. Rob?
Thank you, Bethany. Healthcare Realty's investment activity in the first quarter was strong. Although the transaction market has slowed as it digests COVID-19's impact, our team continues to cultivate a robust pipeline, positioning us for a return to investing as market conditions improve.
In the first quarter, we purchased 7 buildings for $102 million at a blended cap rate of 5.8%. The properties are located in Los Angeles, Atlanta, Raleigh, Colorado Springs and Denver. What I really like is that they are associated with leading health systems in dense, attractive growth markets where we have been successfully investing for years. All of these properties were sourced and closed prior to the pandemic. More recently, a number of heavily brokered deals have been delayed indefinitely or pulled from the market.
In contrast, we source most of our acquisitions through our internal process, which has created advantages for us as we navigate COVID-19. We are in direct contact with many sellers in our pipeline, which facilitates our ability to extend inspection periods and transaction time lines. This gives us the opportunity to monitor the operational and financial performance of the tenants over multiple rent cycles before proceeding. We've revised our acquisition guidance for the year to reflect not only the delay in timing but also the potential of our pipeline when market conditions improve.
At our two development projects underway, we have remained largely on schedule even as hospital leadership has shifted its focus to the coronavirus during recent months. In Memphis, the redevelopment of 111,000-square foot MOB is moving forward. Leasing continues to climb. In April, Baptist Memorial Hospital signed lease amendments for additional space in the building that increased it to 90%. And further commitments recently made by several other existing tenants should move leasing to over 95%.
In Seattle, we completed our development of UW Medicine's Valley Medical, development on UW Medicine's Valley Medical Center campus. More importantly, on February 1, a lease for a 30,000-square foot surgery center commenced. And on May 1, the hospital's 61,000-square foot cancer center began paying rent. The hospital continues to evaluate its need for more space, and leasing discussions with a third-party women's group and a behavioral health provider are active.
Several of our prospective developments remain active such as Nashville, Charlotte and Memphis. These projects, sourced from our embedded pipeline, are supported by expansion plans at hospitals that are part of strong health systems.
Recent discussions with our health system partners indicate that each opportunity remains an, integral to their growth plans. And once we are on the other side of the pandemic, we believe these developments will move forward. I am pleased with our team's ability to maintain and expand the quality investment pipeline despite disruptions in the market. Our direct sourcing channels, along with our long-standing hospital relationships, have positioned us well to benefit from what we see as another push in demand for outpatient services.
Now I will turn it over to Chris to discuss financial and operational performance for the quarter.
Thanks, Rob. First quarter results were positive, highlighted by strong FFO growth and improved liquidity. After briefly commenting on quarterly results, I will focus on COVID-19's impact on our portfolio and our subsequent response. Normalized FFO in the first quarter was $54.5 million, up 12% over the first quarter of 2019. FFO per share in the quarter was $0.41, increasing 4.4% over the first quarter of last year.
Trailing 12-month NOI was consistent with expectations at 2.6% for multi-tenant and 2.4% for total same store. Multi-tenant results were curbed slightly by higher-than-average expense growth. This was partially driven by the difficult comparison to first quarter 2019, when operating expense growth was less than 1%. In addition, first quarter was impacted by $600,000 of expense true-ups primarily related to property taxes. Much of the expense true-ups were recouped in operating expense reimbursements, evidenced by the 3.5% growth in revenue per occupied square foot in the first quarter.
We expect operating expenses in the second quarter to be more in line with our historical norms of 2% to 2.5%. Trailing 12-month multi-tenant revenue increased 2.6% or 2.8% per square foot, offsetting the above-average expense growth. Solid leasing activity included tenant retention of 84% and average cash leasing spreads of 4.4%. During the quarter, we took several steps to extend our debt maturity schedule and increase liquidity.
On March 4th, we issued $300 million of unsecured bonds at a 2.4% coupon. We also extended the delay draw at the end of May for our $150 million 2026 term loan. As a result, at March 31, we had $738 million of liquidity with less than $50 million of debt maturities through 2022. Shifting to COVID-specific issues. The response was swift and significant from Washington with numerous programs to support the health care system. At the same time, we proactively worked with our tenants to ensure they would weather the impact of shelter-in-place orders and be in a position to thrive as restrictions lift. In March, we rolled out materials to educate our tenants on various COVID-19 financial resources. In particular, we highlighted the Payroll Protection Program, given that we have over 2000 small independent physician practice tenants. The PPP loans through the SBA include forgiveness of funds used for payroll as well as rent and utility expenses. In addition, we created a rent deferral and repayment application reviewed on a case-by-case basis with focus primarily on these small independent physician practices.
We processed over 500 deferral requests for April and provided deferral agreements to over 400 tenants, representing 7% of total rent. Individual deferrals range from 50% to 100% of the tenant's April rent with repayment and monthly installments in the second half of the year. The average deferral tenant size was 3400 square feet compared to the 4400 square feet average for our portfolio, highlighting how most requests came from smaller independent groups. It is still early, but May deferral requests are running in line with what we saw for April at this point in the cycle.
A critical number I know everyone is focused on is April rent collections of 89%. This is better than what we projected in our April 6 business update. The 89%, combined with the 7% of deferral agreements, accounts for 96% of April rent. The remaining 4% in April is -- is in April accounts receivable. For context, our historical current period AR has averaged 4% to 9%, which is typically being collected within the following 30 to 60 days. This strong collectibility is evidenced by our bad debt expense, which averaged less than $100,000 annually over the last two years.
We analyzed our deferral requests to determine if there were any consistent themes. We saw that deferrals were highly correlated to nonhospital tenancy as well as specialties with more elective procedures such as dentistry and plastic surgery. After controlling for these two factors, we did not see meaningful correlation between on versus off-campus buildings or geography. I point you to Pages 5 and 6 of our COVID-19 update for more detail on this analysis.
Our portfolio, composed of a diversified mix of tenants associated primarily with the country's highest credit rated not-for-profit health systems, is especially poised to perform well. The work we have done over the past 10 to 15 years to enhance the quality of our portfolio, combined with our ample liquidity, positions us well to overcome the challenges facing the broader economy and deliver safe and attractive risk-adjusted returns to our investors.
Todd?
Thank you, Kris. Before we go to questions, I'll just mention to everyone that we're practicing social distancing here, and we'll do our best to not interrupt each other.
Operator, with that, we're prepared to begin the question-and-answer period.
We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Jordan Sadler from KeyBanc Capital.
Kris, specifically in your prepared remarks, you touched on May rent. I think you said deferral requests were running in line. I wanted to just clarify and ask if collections are also running in line with April.
Yes. Actually, collections are running slightly above what we saw in April. So we're doing a little bit better than we saw last month on collections. And then on deferrals, as you mentioned, it's pretty close to what we were seeing in April. It's still early in the cycle, but encouraging signs, nonetheless.
I suspect that may be a function of some of the openings that are referenced in your slides. Can you speak to, maybe, Todd, what you're sort of seeing sort of early days in terms of maybe utilization, especially in the places that have been open already a week or two and how those facilities have come back on line?
Sure. Jordan, you're right. A lot of places, especially the elective procedures, are beginning to ramp up, you're right. And really, so we've been really dialoguing with all of our property management folks across the country and monitoring that weekly to sort of see what anecdotally or what they're observing in the buildings.
And also, we look at maintenance orders. So the number of maintenance orders relative to historical volumes is a pretty strong correlation. So we saw probably in mid-April volume on average, and this is just on average, but it sort of correlates with the maintenance orders, probably 60% to 70% reduction in activity in the buildings across the board. And we began to see that lift almost two weeks ago now. So we've definitely seen that uptick where you're starting to cross 50% in many cases, even more than that in some others.
And then anecdotally, certainly, even locally, I know we, one of our directors of real estate was talking with some providers in the building, and they were excited, frankly, that they were back to 5 days a week in their work schedule. So definitely seeing a lot of that. As I mentioned, we're working with some hospitals to figure out the logistics of how we're going to not only screen folks but move to the next recovery phase, which is how do we help them screen for procedures?
And how do we, as the buildings get more full, how do we create the proper protocol, social distancing cues, just safety measures. So we're, all of that is beginning to feel very real. And we're seeing it, as I said, in the maintenance orders. They're definitely back up for sure.
And I'll just add to that, Todd, that, and just to clarify on utilization, all of our buildings were open. And 9 out of 10, I think there are, at least, 9 of our 10 tenants remained seeing patients inside of their suites, did not even temporarily shut their doors. But obviously, it reduced volumes.
And so that's what was driving those work orders. And so we're starting to see those volumes start to ramp back up. But all of our buildings did remain open, and a super majority of our tenants continued to use their space but obviously just at a lower rate.
Just to come back to one of the comments there on screening at your facilities. Is it your perception that each of your facilities are screening for COVID patients prior to letting folks into either doctor suites or offices?
We're not necessarily taking a one-size-fits-all approach to it. So I can't say it's 100%. It's really being driven largely by that heavy coordination with hospitals but also just the tenants in the building. So a lot of tenants are proactively looking to do that. And whether it's coordinated, whether it's sort of a central screening for every visitor in the building or it's specific to a suite, we're allowing that to work case by case.
So it's definitely, we're not trying to be health care providers, let's put it that way. We are trying to be facilitators of what our tenants want to do. So it's largely, I would say, driven by the hospitals that are key tenants in our buildings. But also, obviously, we're, half of our buildings are actually occupied by those hospital tenants. But then 2/3 to even over 80% are on or next to the campus. So we work with the hospital there.
And Jordan, I would add to that it really, when we, you use the word screening, there's a continuum there as well. All of our buildings have signage up that if you have symptoms, fever, et cetera, that you were to contact your health care provider before entering the building. Some of the buildings, we're also then going through screening to look for and ask about any symptoms you may have. And then it continues all the way on to actual testing.
So you may have testing that is going on in the building or potentially out in the parking lot before someone would be entering the building for a procedure. Typically, that testing is actually going to be done a day or 2 ahead, depending on how rapidly they can get those tests back. So we are certainly putting in place protocols to make sure we are limiting exposure, but the extent of screening to testing kind of goes across a continuum, as I discussed.
Our next question is from Nick Joseph from Citi.
How long do you expect it to take to work through the pent-up demand for these nonessential medical procedures to get back to more of a normal monthly run rate?
Obviously, Nick, it is a little challenging to know that. But I think as everybody would like to do, we make our best educated guesses at that. And based on what we're hearing, feedback, we do get a lot of feedback, as you can imagine, through the deferral program. We're asking a lot of questions in those applications as well as just the conversations we're having with our local staff. And our view is generally that May is clearly going to be a month of transition.
That's really ramping up but probably not all the way back in a lot of cases. I think it's going to take through June easily to really kind of get back to somewhat more normal levels. Hopefully, we'll roll into the beginning of the third quarter in July looking a lot more like normal. Obviously, that remains to be seen. So what we're looking at right now then is that based on the feedback and what we're hearing and seeing is that it should be a lot of pent-up demand being addressed in the second half of the year. Obviously, it's going to vary a little bit by location, by specialty and how different providers choose to ramp up and so forth. So it's encouraging right now that it looks like it could be largely in the second half. Whether that really spills over into '21, it's hard to know at this point. So it's kind of, as we all know, a month-by-month evaluation or even week-by-week. But so far, it looks to be something like that for the majority -- vast majority of our tenants.
Thank you.
Our next question is from John Kim from BMO Capital. Go ahead.
Good morning. Todd, in your prepared remarks, you mentioned the increased use of telehealth as one of the near-term impacts of COVID-19. I was wondering if there were any other ramifications that you foresee, whether it's increased demand, for instance, for off-campus MOBs as some patients have become more reluctant to go in your hospital?
We certainly don't expect that. I think, as you would imagine, the nature of our on-campus MOBs tends to skew towards higher acuity specialists, which is less optional, if you will. As Bethany described, I think we all think of elective as being optional, but it's really not. And I think the key there is people -- I think people ultimately trust their physician. They may -- as human behavior will dictate, people can be hesitant around those things. But I think when you have something serious, cancer, cardiology, whatever that serious issue may be, I think people ultimately trust their physician. And if their physician recommends that it's safe and advises them, I think they will do that. Just thinking about deferrals and the use of telemedicine, we have not seen a distinction between the physician aspect of that or component of it on versus off. This has been -- sort of unfortunately, like the broader economy, this has been an indiscriminate pandemic and disease, and it's hitting everyone.
So our view is telemedicine is a very useful tool, no matter -- almost no matter what specialty you're in to do some of the things Bethany described, these more low acuity sort of basic tasks. And hopefully, they get reimbursed, that hopefully that sticks and, frankly, generates more revenue. But we're not seeing or expecting a material change in where telemedicine may help or hurt in terms of location.
Okay. And on the increased use of short-term renewals that you're anticipating or offering, can you provide some color on what the economics of those look like? Are these more -- and the terms, are these more month-to-month or 1 year out and flat rents to what they were paying before and as far as any free rent period offered?
Yes. On the renewals, we're just -- as Todd mentioned in the prepared remarks, we're not asking people to make long-term decisions while they're trying to handle short-term uncertainty. So as we are looking at renewals, we are comfortable with doing 6-month or maybe even a year renewal, letting people see the rebound, get their feet under them, get comfortable in terms of making that longer-term commitment.
In terms of what the rents would be, our expectation is probably more in that zero to 3% that we've updated in terms of our guidance on cash leasing spreads. Not looking to really do a big mark-to-market at that point. We'll just kind of take the current situation or the current growth that's embedded in the lease and then get back to the longer-term discussion. One of the things that will be helpful in that is that it does, we don't anticipate spending any capital that would be associated with those short-term renewals. So there will be some maintenance CapEx, second-gen TI, leasing and commissioning improvement in, associated with those shorter-term renewals, and that was also reflected in the updated guidance that we provided.
Do you think this will have a near-term positive impact on same-store growth or more of a neutral impact?
No. On same-store in our guidance, we assume that it would be down slightly, and that really has to do with the expectation for new leasing. We don't know exactly what the impact will be. New leasing, there is a lag, it can be 6 months between when you start tours to when somebody actually starts commencing their lease. So it will probably be later in the year, but we may start seeing a little bit of slowdown in terms of backfill of space.
And so as a result of that, we're looking at occupancy that is flat to maybe slightly down. And that could, as opposed to our previous expectation, which was flat to up in terms of occupancy. And so as a result of that, you could see a bit of a slowdown on same store. But we're still, on multi-tenant, we're looking at a little over 2%, kind of 2.4%, 2.5% at the midpoint of our range, so still growth, still strong growth. And then on single tenant, we don't anticipate really much, if any, impact there. So we didn't change our expectations on single tenant.
Our next question is from Rich Anderson from SMBC.
So Kris, to you, the 4% in AR that you went through, would that be correctly described as an abatement or forgiveness that you offered? Or is it, are people that simply didn't sort of communicate an interest in a deferral plan and you haven't been able to track down? I'm just curious if you can give the cadence of those, of that 4% of the April.
Yes. Rich, it's not abatement. It's more of just pieces that have been uncollected as of yet. And as we talked about, we, each month, each quarter, you're going to have a piece of that for various reasons. A lot of it ends up being related to operating expense billings, maybe after-hour canned billings, so those types of things. And so it may not even be the full rent. A large portion of this is just, call it, kind of a short pay AR balance that's outstanding.
And as those are kind of cleared up over the next 30 to 60 days, they get paid. And that's been our historical experience is that we do collect that over 30 to 60 days. So we think a lot of it is in that camp. We are certainly reaching out to and, to all of our tenants in trying to understand, hey, should we be looking for that payment coming in? Or do we need to have a discussion related to a deferral. So nothing at this point that I would say is out of the ordinary, and we'll continue to monitor and work on those collections as we would in a normal course.
Okay. So when was it 9%?
I have to pull up the, we look back over like 3 to 5 years, and it bounces around. I wouldn't say it's anything in particular that we were able to say, "All right, it was exactly this." The average ended up, I think we pointed out, was about 5%.
Okay. I didn't know if there was any relevance to that number. Okay. When you're kind of going through this and thinking about next quarter, I wonder how much of an effort now will be put into really digging in about sort of coming up with a bad debt reserve to the extent it's needed, whether or not you'll have to move to cash basis versus GAAP. I mean, are all these sort of the moving parts that you have left to work through as we go through this? Or do, you don't think that maybe they'll be much in the way of that kind of accounting process that will be necessary as these months go by?
Yes. We're still working through determining exactly how we'll do that. Obviously, we will be watching collectibility as it relates to bad debt. But there is, the FASB has provided some relief related to the lease accounting and lease modifications in terms of how you account for these deferrals, which actually could create different methods of accounting for this across different companies, depending on which method that you choose to use, whether you take it more as AR and you review your collectibility over time as those deferrals are scheduled to be repaid, or if you go, as you pointed out, more to a cash basis accounting.
And we're analyzing both of those and trying to determine which direction. But ultimately, at this point, as we've mentioned, our expectation is that these deferral amounts will be repaid and will be repaid by the end of the year. So regardless of which method that you use, on a full year basis, the results should be pretty similar. If things extended and you started looking at deferrals that started wrapping the year, then you could end up with potentially some differences in results over the years.
Okay. Bethany went through some interesting stuff about all the different stimulus programs and how that equates to x number of months of business activity or rent or whatever the case may be. I'm curious if you have a sense of within your world, the sort of the average, let's call it within the maybe the smaller physician practices groups that make up half of your business, how much they have received and what that equates to in terms of months? Do you, have you done that math at all?
We certainly have, Rich. I would say that all providers, for the most part, who received Medicare, received some of this allocation. And so I think that 1 to 2 months that Bethany referred to, of that general relief allocation, really pertains to most providers, including physicians. The PPP would be the other piece that I think would apply to, not all, but a good portion of our physician group or physician tenants. So I would say a lot of that applies. And as Bethany described, that equates to about 2 months of payroll and rent utilities, as it's defined. So it's a little hard to put all that together perfectly. But I do think, as we generally described in our remarks, there's been a great amount of relief provided. It's not -- certainly not business as usual, and things can -- are tight for a lot of physicians, clearly. And our deferrals will help that. But I do think there's a huge amount of help that's been provided. And obviously, now we'll begin all the lobbying to provide more and forgive some of the -- and they also -- the accelerated payments was another piece that a lot of providers got and who knows whether some of that gets forgiven. So all in all, it's a little hard to quantify perfectly. But I think 2 -- 1 to 2 months seems to be the prescribed design for a lot of the programs, and that seems to be fitting so far with the pattern. With procedures down an average of 34 days and now starting to recover, maybe there's another slug that will need to be allocated. But generally, 1 to 2 months has been pretty helpful.
Okay. Last for me and maybe to Rob. You -- it was mentioned about pent-up demand for elective surgeries and whatnot. I wonder how you're monitoring that as it relates to external growth and getting in front of it and perhaps getting assets or deals done pre that activity and thereby sort of like a nice arbitrage type of scenario? Or is it just too soon and there's just not a market really to know if you could get yourself a decent deal at a higher cap rate than normal?
Yes. Rich, I think it's too soon to know whether you're going to see any real impact on pricing. I think what we're doing is our pipeline, as I mentioned, is largely built through 1- and 2-building transactions where we're in direct dialogue with building owners and principals. And that's offering us an opportunity to obtain extended inspection periods and closing time lines to allow us to monitor the tenant's operational and financial sort of health and throughout the process.
So I think it's too early to tell. We'll take the time that we have to monitor that situation. And if we see some clarity on the net operating income at the buildings, then we'll move forward. If we don't, then we'll have the opportunity not to move forward and wait. I think also, as market conditions improve, and when they improve, that'll dictate some of the timing as well.
Thanks, Rich. I'll just add to Rob's comments that some of the opportunity that comes about in times like this may also be the very things you don't want to get involved with. Our view is the stronger operators, the stronger assets in the better markets generally are not going to be distressed to a great degree. It could depend upon the circumstances of the owner. We have seen a couple of scenarios where maybe some smaller private owners just feel that liquidity tension. This is somewhere where they can get more value relative to precrisis levels. And so they'll get that liquidity there if they need to. So we're having some of those conversations. But also, I would say you've seen a little bit of the distressed things come to market or be talked about by brokers, even some for-profit hospital, smaller hospital groups, looking at monetizations, and you kind of go, that doesn't mean we want it. Obviously, we'll see where cap rates go on that. But frankly, our expectation is cap rates are pretty, going to be pretty stable, unless something dramatic changes. I mean, a lot of, cost of capital has got a long way to go to kind of balance out, but we're not seeing a lot of reason for cap rates to change dramatic, unless there's a distressed situation, which you got to be careful about.
Our next question is from Daniel Bernstein from Capital One.
I really just have one question, and that's really more on the design of the facilities. Do you see any, and maybe this is a little bit early. But do you see any perhaps design changes or trends that might emerge post-COVID? Anything that might be even near-term where you have to put CapEx into the facilities?
Dan, I think it is too early. But I certainly think you're right. People are going to be thinking through that, whether it's tenants as they're looking at planning new space or hospitals as they plan their future outpatient programs. We certainly have not seen all of a sudden a dramatic change, other than these temporary measures for testing, as we described. We're certainly doing that, but that's all more temporary.
The question we've been contemplating through talks with providers, several of our Board members who are health system leaders, consultants and so forth, there may be some scenario where you see a little shift within the suites as to providing more of this telemedicine capability within the suite. The old days, in a doctor's office, all the doctors had nice big private offices and were separated.
And I think more modern times, you've seen those come to be a little bit more like the rest of the world where there's pods and hoteling going on. Well, that could shift a little bit to provide a little more back to private offices with this telemedicine capability. So little things like that certainly may happen. We've even contemplated, do we want to provide some kind of telemedicine capability within our building as an amenity? But all that is early and remains to be seen. We're not seeing just overall a net real significant impact. But certainly, interesting things to keep our eye on.
No delays in the current development pipeline, thinking about those kind of design trends, something for future developments that you haven't actually turned dirt on? Okay.
Correct. It hasn't shown up yet, that's right.
Okay. And then in terms of strategy, just seeing what you've seen in COVID so far with [indiscernible] there's no potential shift in strategy more towards off-campus assets or nonaffiliated assets. Just you're just going to continue to maintain the current strategy of, I guess, more on-campus, affiliated.
Yes. I think, sure. I don't think at all that we see anything here that tells us we need to be shifting. As Chris described in our deferral patterns, we did see more, or I guess, a better outcome or less deferrals, if you will, on-campus, but it's not because they were on campus. It was because we just have a higher mix of hospital tenancy within our MOBs on campus versus the ones that are adjacent or off.
So it's, again, we saw about the same rate of deferral among physicians no matter the location. But all that to say, there is some safety in these bigger, more well financially backed entities, these not-for-profit investment-grade health systems. I mean, their rent is just a small piece. They understand they're often landlords, they have to think about that as well. So there is some safety in that, and we don't see anything that suggests a big shift. We're still interested in off-campus. We're just very selective about it. And so you see our mix of 80%, 90% on, and I don't see that changing dramatically.
Our next question is from Connor Siversky from Berenberg.
Appreciate the color you guys provided in the business update preso. It was all very helpful. A quick one on lease expirations. Seems like you took out a pretty sizable chunk of 2020 maturities in Q1. I mean, just how are those conversations progressing for the remainder? And I mean, is there any color you could provide on potential renewal spreads through the end of the year?
Yes. We did make some good progress in the first quarter, pretty consistent across the year in terms of our expirations. And we expect to continue to be able to maintain the strong tenant retention that we've had. We did provide in our updated guidance on our components of expected FFO. The cash leasing spreads, we could see coming down some. As we are looking, we may be doing more short-term renewals as opposed to our 3-, 5-year typical annual renewal. So we've brought down our range more in that 0% to 3%. And the ultimate, where we'll fall out on that, probably depends on how long.
If you're talking a month or 2, maybe you're willing to go flat. But if you're doing it in 1 year, then you would kind of look more to that 3%, which is in line with what our bumps are inside the existing leases. So a bit of an impact, but, in the short term, but we're willing to do that because we feel good about the long-term intrinsic value of our buildings and feel like that we'll be able to work out deals that will benefit us as well as provide long-term certainty for our tenants, once everybody has more clarity when hopefully, things get back closer to normal with volumes.
And then I saw that same-store property expenses were up pretty meaningfully in Q1. I mean, is that due to any measures related specifically to COVID? Or is there something else driving that increase?
Yes. No. It was nothing related to COVID, very minimal impact, if anything, in the first quarter on the revenue or expense side, frankly, from COVID. The higher expense growth, there was a couple of, 2 main items. One is a difficult comp compared to first quarter of '19 when our expense growth at that point was about 0. So we anticipated that we were going to be in the upper end, maybe even a little bit above our historical range just because we're coming off of that comp. We also had about $600,000 of expense true-ups that occurred in the first quarter. Those were primarily related to property taxes. So final bill comes in, in the first quarter, and we've been accruing a certain amount through 2019. The [first] bill shows up first quarter 2020, and we've got to make up for that, given the fact of the final billing end up being slightly different than what the accruals have been estimated to be. But that was primarily what drove that. And we expect, moving forward, that we'll get back closer to our historical norms.
Okay guys. That's all for me.
Our next question is from Lukas Hartwich from Green Street Advisors. Go ahead.
Thanks. The occupancy on the LA acquisition seems a little bit on the low side. I'm just curious if there's any leasing upside there.
Yes, there's -- that -- those properties were -- that property was purchased, and there is some leasing opportunity there. There is an active dialogue going on with some tenants right now, potential tenants right now. And so we think that there's a little bit of upside there.
Is that factored into the cap rate, the 5.3% cap rate? Or is that -- would that be incremental to the 5.3%?
That would be incremental, over and above, yes.
Great. And then I know it's hard to know what exactly has happened to asset values because it's still pretty early. But I'm just curious if you all were underwriting acquisitions today, how would you adjust your return expectations given what -- the environment we're in?
Yes. I think our sense is that we're not seeing at this point a change in cap rates. I think what we're doing on the underwriting side is we're seeking and obtaining longer inspection periods and closing time lines. That allows us to monitor the health of the tenants operationally and financially over multiple rent cycles, so that we can see just whether that NOI is holding up or not. And I think as we go through that, we'll determine at that point in time whether we think there needs to be an adjustment in the price.
And I would add, Lukas, that I would say there's been quite a lot of private capital built up over time that wants to -- before this pandemic, they wanted to get into MOB. And they've always struggled how to get in there, how to access it rather than just small deals at a time trying to -- whether it's partnering up with people or developing their own platform. And just some -- a few conversations we've had, we've certainly heard that some private capital funds and so forth are looking at this as an opportunity to move in. So I really don't see that, unless, as Rob said, there's some fundamental issue with a property that requires a change. But that may not even improve the cap rate, it just may lower the price relative to the lower NOI. So there's a lot of forces, I think, that suggests it's not a big move up at this point. Again, it's too early to know. And obviously, the longer time frame we look at, our cost of capital will play into that. But for now, we're not seeing anything that suggests that it's going up on cap rates.
Great. Thank you.
Our next question is from Tayo Okusanya from Mizuho. Go ahead.
Yes, Good afternoon. Also let me add my thanks for all the disclosure and information. As we start to think 3 to 6 months out, could you just talk a little bit about how you think about hospital profitability, just kind of given the high unemployment rates we're likely to face? What the implications of that could be for demand of MOBs or even for the ability to kind of pay rent?
Sure. Certainly, our history does not suggest, and even the month of April does not suggest, that rent payment through all kinds of issues, the great financial crisis, the Affordable Care Act on...
[Technical Difficulty]
I think we may have lost Todd's down there. I think he's coming back. Todd, are you back?
There. Can you hear me?
Yes.
Yes.
Okay. I'm sorry. I was on a roll. Sorry, Tayo. Yes, I guess where I was going with that was that we have not seen historically through a lot of prior cycles, whether it was great financial crisis, the Affordable Care Act or September 11 or on before that, we've not seen issues of hospital collections. There were some pretty tough times in the past. So I certainly don't think we expect that to be a problem with rent collection.
Now to your point, certainly, there's going to be an impact on hospitals. In general, there will be more uninsured patients, as you suggest, with all the unemployment. So there's going to be an effect. And if you think about a typical health system, certainly the investment-grade tranche, if you will, runs EBITDA margins around 8%.
Certainly, you could see that come down a bit over the next six months to a year or however long it might be. And certainly, they're going to be thinking about that and expense savings and things like that. But I think the one thing that's clear is outpatient is certainly where things have moved. You've seen that trend over a long time frame. It's lower cost. It's lower capital cost for them. It's more profitable.
And so I think really, what we expect is that, and it's playing out. And a lot of the conversations that Rob alluded to and I alluded to, we're still seeing a lot of health systems that we're working with looking at expansion plans. And it got a little quiet in the first part, later March, first part of April.
But frankly, in the last couple of weeks, we've seen some of those conversations perk back up already, and I'm talking about future development and expansion. So I think to us, that's very encouraging. I think outpatient becomes a really, as I mentioned, a really bright spot within the health care space, notwithstanding they're going to feel some margin pressure.
Got you. So sorry, just at this point, when you just kind of think out, what are they kind of most worried about as it pertains to your business? Is it just, is it a second wave of the pandemic? Is it, I'm just kind of curious like what, when you kind of think about the business, what kind of concerns, what would you be most worried about at this point?
Certainly, I think that's true. I mean I think that's the big unknown that we're all dealing with is, none of us has been through this exact thing before. It's just, it's unprecedented. So it looks fairly favorable right now. And I think we're all aware that, yes, it could be a real issue if we all start getting back too quickly or not taking the appropriate precautions and so forth.
So clearly, there's some good chance that we take two steps forward and have to take a step back. So just that tempo is going to be important in pacing, as you said. That certainly weighs on everybody's minds, including ours. I think the good news is health care is fundamental. It's need-driven. It's going to happen. It's just our providers feel, have felt that pressure, those doctors, especially.
The good news is, I think people have realized authorities, whether it's mayors, governors, public health officials, probably realize that shutting down all the elective procedures was a little bit more than necessary because it was really all about trying to preserve resources to deal with the surge on the inpatient side. And that obviously did play out pretty close in New York and some other hot spots. But for the most part, we didn't see that across the country. So I do think that's a positive that even if we have a second surge, I don't see elective procedures going to 0 as much as maybe reducing that level.
So that weighs on us. Clearly, you also have just the broader picture of ability to proceed with external growth. That's something we saw play out public versus private valuations. '17 was more public companies. '18 was more of the private companies, and '19 was back to public. So it's kind of alternated. And I think that's something that, as all REITs have to deal with, is when can you get back to some external growth? So the good news is, for us, liquidity, I think, is very strong, and we're not as concerned about that. It's more about just how does this unfold and move back to normal, how quickly.
Got you. And then last one, if you would indulge me. Just the dividend policy going forward, how does one think about that, especially as you kind of have a decent amount of rent deferrals that do, that does temporarily impact the FFO?
Sure. I think that's another good thing for us that even though these deferrals, as Kris articulated those, we started early on that in April, and we think May is looking similar. And I think the good news is it's really helping, and we hope that helps our tenants recover faster. We don't see anything at this point that would really cause us to certainly think about our dividend any other way than maintaining it.
Growth is obviously not something that anybody would probably think about at this point. That certainly would get pushed out. But I think our view is there's some, even though the growth may be a little slower, I think our cash flow and our coverage of the dividend, we expect to be very solid this year. And I think Chris described that we may see some capital spend come down a little bit with the, a little bit lower leasing. So all in all, we don't see any concern with rent coverage, I'm sorry, dividend coverage for 2020.
And our last question is from Mike Mueller from JP Morgan.
I didn't realize I was in the queue again. So I don't have a question.
This concludes our question-and-answer session. I would now like to turn the conference back over to Todd Meredith for closing remarks.
Thank you, Kate, and thank you, everybody, for listening this morning. We hope everybody stays safe and hopefully can start to do a few more normal things very carefully and social distancing and so forth, but we thank everybody for joining us today, and we will be around if you have any additional questions. Have a great day. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.