Physicians Realty Trust (NYSE:DOC) Q2 2022 Earnings Conference Call August 4, 2022 10:00 AM ET
Company Participants
Bradley Page – SVP, General Counsel
John Thomas – CEO
Jeff Theiler – CFO
Mark Theine – EVP, Asset Management
John Lucey – Chief Accounting and Administrative Officer
Dan Klein – Deputy Chief Investment Officer
Conference Call Participants
Juan Sanabria – BMO Capital Markets
Austin Wurschmidt – KeyBanc Capital Markets
Connor Siversky – Berenberg Capital Markets
Michael Carroll – RBC Capital Markets
Michael Griffin – Citi
Steven Valiquette – Barclays
Adam Kramer – Morgan Stanley
Dave Rodgers – Baird
Omotayo Okusanya – Credit Suisse
Joshua Dennerlein – Bank of America
Operator
Greetings and welcome to the Physicians Realty Trust Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Brad Page, Senior Vice President, General Counsel. Thank you, Sir. You may begin.
Bradley Page
Thank you. Good morning and welcome to the Physicians Realty Trust second quarter 2022 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; Lori Becker, Senior Vice President and Controller; and Dan Klein, Deputy Chief Investment Officer.
During this call, John Thomas will provide a summary of the company’s activities and performance for the second quarter of 2022 and year-to-date, as well as our strategic focus for the remainder of 2022. Jeff Theiler will review our financial results for the second quarter of 2022 and Mark Theine will conclude with a summary of our operations for the second quarter of 2022.
Today’s call will contain forward-looking statements made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. They reflect view of management regarding current expectations and projections about future events and are based on information currently available to us.
These forward-looking statements are not guarantees of future performance and involve numerous risks and uncertainties. You should not rely on them as predictions of future events. Our forward-looking statements depend on assumptions, data and methods that may be incorrect or imprecise and we may not be able to realize them. We do not guarantee that transactions and events described will happen as described or that they will happen at all. For more detailed description of 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’d now like to turn the call over the company’s CEO, John Thomas. John?
John Thomas
Thank you, Brad. Physicians Realty Trust continue to deliver stable and reliable cash flow growth during the second quarter, driven by exceptional leasing spreads of 8% on 256,000 square feet of renewals and our asset management team’s thoughtful management of operational expenses. These results will be impressive in any period, but are especially remarkable in an economic climate made challenging by double-digit inflation and rapidly rising interest rates.
Doc was built with times like these in mind, where we have a foundation of strength with almost 300 facilities in 36 states, 95% leased and no meaningful debt maturities before our revolving line of credit matures in 2025. Our balance sheet couldn’t be stronger supplemented by the recent Great Falls Disposition.
In addition, we remain protected from inflation operating expense growth, given our portfolio is 95% leased rate with only 2% exposed to full service, gross leases impacted by inflation. We don’t believe that any other healthcare real estate portfolio public or private can come close to providing investors with that level of cash flow stability.
In past periods of volatility provide any lesson to real estate investors, it is that there is almost always a timing disconnect between the changes in investor’s cost of capital and potential seller’s expectations on valuation. This scenario is precisely what we’ve seen in the first half of 2022, and while Doc has chosen to remain disciplined in our deployment of capital toward new investments.
However, this discipline does not mean we have been passive as volatility can also create opportunity. A great example of this strategy is our just announced disposition of a surgical hospital and two adjacent medical office buildings in Great Falls, Montana. Mark will share more details in a moment.
We are beginning to see evidence that rational investors like Doc are shifting the transaction market to a more balanced bid versus us. We’ve made progress in advancing our pipeline accordingly and remain focused on the development of highly pre-leased outpatient care facilities anchored by our existing investment grade health system partners. Our pipeline for development financing currently includes over $100 million in potential commitments.
It finalized construction of these projects will begin in 2023, and we have more opportunities in discussion. Our acquisition pipeline for stabilized assets remains muted while price discovery in this environment continues. Still, we remain confident in our full-year investment guidance, including development commitments and acquisitions of at least $250 million with the potential for more.
Despite the challenges of the current economic climate, we continue to execute consistently on our overall ESG strategy with the recent publication of our third annual ESG report and recognize the critical need to invest in healthy, physical and social spaces for our communities.
Within our ESG report, we have substantially enhanced our disclosures by aligning with the global reporting initiative while expanding our reporting within the frameworks of the sustainability accounting standards board and task force on climate-related financial disclosures. We adopted a climate mitigation plan recognized by this science-based targets initiative in line with a well below two degree Celsius strategy. This increased transparency provided a better understanding of our impacts on the environment and society and the direct economic benefits to our tenants.
We’ve taken bold steps to build upon our DE&I efforts to shape an open and diverse internal culture while setting aggressive multi-year goals to chart our progress. While we’re proud to celebrate our milestones, we recognize that our progress is simply a step forward for Doc as we continue to invest in better in our communities and families.
We remain firm in our conviction that outpatient care of medical office facilities leads to investment-grade tenants offers the best risk adjusted returns in real estate. We seek to improve the quality of our portfolio with each investment decision we make. We will continue to focus on creating long-term value for our shareholders while ultimately getting the portfolio to a 100% concentration in outpatient care facilities over time.
Before opening the call to Q&A, Jeff Theiler will share our financial results and Mark Theine will provide more detail on our exceptional operating performance. Jeff?
Jeff Theiler
Thank you, John. In the second quarter of 2022, the company generated normalized funds from operations of $63.7 million or $0.27 per share. Our normalized funds available for distribution were $61 million, an increase of 11% over the comparable quarter of last year and our FAD per share was $0.26.
In the broader economy, we now have two consecutive quarters of negative GDP growth and whether this will technically be defined later on as a recession is unclear. It is clear however that we are in highly uncertain times. The economic experts are debating whether we have bigger inflation problems or recession problems and while we hope for a soft landing like everyone else, we have positioned our portfolio to perform well in any scenario.
With the sale of the Great Falls hospital, we have improved the percentage of our rent from investment grade quality entities to 66%. This is far better than any other healthcare REIT and will provide exceptional stability to our rental income. Alongside with safety we also see green shoots of growth in an industry typically defined by more modest rent increases. The 8% leasing spreads in the current role should lead to increasing internal growth in the quarters to come and alongside this enhanced rent growth, we are well shielded from inflationary increases in operating expenses based on our lease structure and high occupancy. 98% of our leases are protected from expense pressures through their triple net structure and our expense loss to vacancy is only 5%.
Our overall capital structure is designed to be conservative while providing the flexibility needed to grow our company when the time is right. We have eliminated virtually all refinancing risks over the next three years and currently maintain a consolidated debt-to-EBITDA ratio of 5.65 times, which will be reinforced with the $116 million of cash proceeds from the Great Fall sale. We also raised $18 million on the ATM this quarter at an average price of $18.61 to help fund our acquisition pipeline.
With that, I’ll turn it Mark to walk through the details of the Great Fall sale and other operations. Mark?
Mark Theine
All right. Thanks, Jeff. We’re proud to announce another very successful quarter of growth, driven by our long term strategy of partnering directly with high quality health systems and physician groups to meet their real estate needs. At the heart of this strategy, is an acute focus on improving the overall quality of our real estate portfolio, operating results and relationships.
We successfully made progress on all three of these initiatives this quarter as demonstrated by one; the profitable sale of the Great Falls clinic facilities, two, achievement of record releasing spreads and three, excellent Kingsley Tenant satisfaction survey results.
Starting with the Great Falls disposition; since our first investment in 2013, we have watched the Great Falls clinic grow as an essential provider of care to the people of Great Falls, the State of Montana, and even patients from Canada. Over time, we ultimately acquired three facilities on this campus for a blended 7.9% cap rate, consisting of inpatient surgical hospital, an ambulatory surgery center and a medical office building. The facilities were 100% occupied and leased to the Great Falls clinic, now a wholly-owned subsidiary of Surgery Partners.
In 2019 Doc began discussions with the Great Falls clinic leadership team about a potential expansion to the hospital and surgery center facilities. Under the leadership of Dave Domres, our VP of Construction and Project Management, Doc assisted in the design, coordination and financing arrangements of these expansions in exchange for new long-term leases covering the entire campus.
These lease extensions executed in September and October of 2021 increased the overall annual rental revenue, increased the existing annual rent escalator by 50 basis points and extended the term to 20 years at each facility. Through the value created with these new leases, Doc ultimately was able to opportunistically sell the existing facilities and future development expansion last month for approximately $116.3 million in net proceeds representing a gain on sale of $53.9 million, a 4.7% disposition cap rate, and a 16% unlevered IRR.
As Jeff mentioned, the proceeds from this sale provides capital to recycle into accretive future acquisitions. It also improves the quality of our portfolio and the security of our cash flows by increasing our investment grade tendency to 66%. The life cycle of this investment is an outstanding example of the value created by the Doc team through its active asset management and trusted healthcare relationships.
Our leasing team also continues to leverage trusted healthcare relationships and market knowledge to unlock the value of the Doc portfolio through strong tenant retention and lease renewal spreads. During the second quarter, our leasing team completed 256,000 square feet of lease renewals on the consolidated portfolio at an aggregate releasing spread of 8.0%, the highest quarterly mark in the company’s history.
Importantly, we achieve these results without sacrificing retention or leasing costs. In total tenant improvements and incentive packages total just $2.19 per square foot per year on renewals, well below industry averages, as we continue to focus on net effective rent as the most important measure of total leasing performance while tenant retention of 76% is in line with long-term medical office averages.
Given the strong demand for outpatient real estate, both on and off campus, we remain committed to unlocking the full value of our real estate through leasing. When appropriate, this strategy includes the selective vacating of suites that have higher rental potential with different tenants even if that impacts same-store metrics on a short term basis.
Looking forward to the second half of 2022, we expect lease renewal spreads to continue to be between 5% and 7% as the cost of new construction continues to outpace the benefit of renewing leases in place. Simply stated, we believe this is the strongest leasing market in the company’s history, and we are optimistic about our pricing power in the years ahead.
At the portfolio level MOB same-store NOI growth was 1.9% in the second quarter. The NOI was driven primarily by a year-over-year 2.1% increase in base rental revenue. Operating expenses were up 8.0% slightly below the 9.1% year-over-year CPI change as of June 30. As expected, increased operating expenses were largely offset by an 8.7% increase in expense recovery revenue due to the high occupancy and triple net structure of our portfolio.
In the nine years since our IPO, we have not only built one of the highest quality healthcare real estate portfolios in the industry, but we have also assembled an award-winning healthcare real estate team. Our efforts directly translate into care for tenants, evident in our 2022 Kingsley Associates tenant satisfaction survey results. This year we surveyed nearly 320 tenants representing approximately 5.5 million square feet.
Physicians Realty Trust received an impressive 74% response rate compared to the industry average of approximately 55% this year. In addition, we beat the Kingsley index in every property management category, including overall management satisfaction with a score of 4.48 out of 5.0. While we sincerely appreciate the positive feedback from our healthcare partners, the surveys that we actually value the most offer opportunities for improvements and where we can invest in better in order to earn our tenant’s trust and secure their renewal before the lease expiration.
At Doc, we believe that great customer service does not happen by accident. It happens by design and it all starts with the great team dedicated to our mission to help medical providers, developers and shareholders realize better healthcare, better communities and better returns.
With that, I’ll turn the call back to John.
John Thomas
Thank you, Mark. Michelle. We’re now ready for Q&A.
Question-and-Answer Session
Operator
Thank you. We’ll now be conducting a question-and-answer session. [Operator instructions] Our first question comes from the line of Juan Sanabria with BMO Capital Markets. Please proceed with your question.
Juan Sanabria
Hi, good morning. Just hoping to start on the releasing spreads, obviously a great number. Just curious on as part of those negotiations, what kind of annual rent increases you’re getting and is there any shift away from a fix towards a more of a floating structure, maybe with a cap collar? So just curious on a little bit more fuller details on those lease negotiations.
Mark Theine
Sure. Good morning, Juan. This is Mark. So yeah, we’re really proud of our leasing team’s efforts this quarter and seeing really strong leasing momentum to achieve those 8% releasing spreads. In addition to focused on the initial rate, when the renewal kicks off we’re also focused on the annual escalators you mentioned.
In fact, two thirds of our lease escalators this quarter had a rent bump of 3% or higher. So we’re excited about the compounding cash flow from those embedded annual escalators going forward. And, we do try and put a lot of CPI adjustments into our new lease renewals that does come with sometimes the floor and the ceiling. And in the negotiations now I’d say, since the CBI number’s been even higher than anticipated we’re getting requests for more fixed escalators and those we’re now pushing back in the 4% range on leases going forward.
Juan Sanabria
So how quickly do you think you can get towards like a 3% plus escalator? Should we just think of it as looking at your average least term and the 5% rolling and thinking that those go 3% plus versus I think you said [indiscernible] at quarter end.
Jeff Theiler
Yeah Juan. It’s JT, it’s an incremental growth across the portfolio. Walt’s [ph] always been a good thing until the last couple of years. So with only 2% rolling this year, 3% next year, but it is incrementally growing. Before this year, we had about 10% of the portfolio on CPI increasers and that’s a strategy we implemented four years ago as we started doing new generation and renewal leasing. So it’ll take time, but I think the higher increases may get us quicker than we thought.
Juan Sanabria
And then just on the investments pipeline and dispositions, still sticking to the guidance, I’m assuming that it sounds like it’s going to be more development commitment. Yeah, right now — we’re right — I was going to say is the dollar amount that you’d previously targeted? Is that more the commitment dollars we should be thinking about you allocating or actual spend on which you’ll earn yield on in this current year?
John Thomas
It includes the future development commitments and really always has. We maybe have not made that as clear as we should, but we think we’ll clear $250 million of development commitments and/or acquisitions this year, probably 50-50 weighted, maybe a little bit more toward the development commitments. Most of those dollars, the development dollars will be spent in 2023 and those will start generating returns in 2024.
Operator
Thank you. Our next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets. Please proceed with your question.
Austin Wurschmidt
Hi, good morning, everybody. Just curious how the disposition in Montana came about, how long that deal was in the works, and then maybe if you could just speak to like the depth of the buyer pool?
John Thomas
Yeah. We’ve been really proud of that facility. Mark kind of walk through the history of it. It was one of our first investments in the surgical hospital out there and then there’s a separate MOB with an ambulatory surgeon center in it, all on the same campus and then a fairly large medical office building. We’ve been working with the physicians and who were co-owners out there again for eight years.
So we really hadn’t had a plan to sell it. It was a very high yielding asset, but we’d been approached by a number of potential buyers and then just started exploring some price discovery with them, and frankly, those exceeded our expectations. So it wasn’t a plan disposition, but, really an opportunity. So I need to pull really deep. I think we kind of once we started getting some offers that were attractive, we kind of took it to a broader market. So, there’s still a broad pool out there and again, we’re excited, the new owners are people we trust to take care of those physicians and that’s important to us.
Austin Wurschmidt
That’s helpful. And then, so with sort of this sale, I guess, and the majority, or sorry, half of the capital needs on the $250 million being spent next year, does this Montana sale kind of meet the capital needs now for the year? Or are there other deals you’re contemplating given the strong pricing you achieved here on this transaction?
Jeff Theiler
Hey, Austin, I’ll take that. This is Jeff. Look, we’re always looking at opportunistic dispositions. The Great Falls sale takes us down in terms of leverage about a quarter turn. So that puts us in a really good position to fund our acquisition pipeline through the remainder of the year, but that said, we have been getting inbounds on various assets, and so we always look at opportunistically selling something to help fund our pipeline.
Austin Wurschmidt
Got it. And then just one clarification. I couldn’t make out what the development financing pipeline is today. Could you share that figure again?
Jeff Theiler
Yeah, it’s over a $100 million today and we’ve got some other opportunities that we’re kind of deep in negotiations on. So, I think we’re — we felt like we might can get to a $100 million, $150 million, commitments this year. Most of those dollars be spent next year and I think we’re on a good track to do that.
Operator
Thank you. Our next question comes from the line of Connor Siversky with Berenberg. Please proceed with your question.
Connor Siversky
Morning out there. Thanks for having me on the call. Just to clarify, the $65.8 million you have in real estate held for sale on the balance sheet for Q2 that did not include the payment assets, correct?
Jeff Theiler
Oh, no, it did. It did include those assets.
Connor Siversky
Okay. Okay.
Jeff Theiler
Where a subsequent event, the sale does.
John Thomas
They went under contract and then didn’t close, went under a contract in the second quarter, didn’t close till subsequent event. So we had to put it in held for sale at that point.
Connor Siversky
Okay. And then, on the broad subject of, of cap rate expansion, I’m just wondering on a market-by-market basis, if you’re seeing any more upward pressure, in any market in particular versus others.
John Thomas
Yeah. There’s hot markets like the Texas market continues to be high, Florida continues to be high, the Atlantas continues to be strong, but you really across the board and we’re seeing more and more assets that were for sale that went kind off market, i.e. under LOI or kind of contemplated transactions and then have seen some of those assets come back to market at potentially better cap rates for the buyer. So I think, we’re still in that price discovery phase, but there’s still a strong bit out there for medical office buildings for.
Operator
Our next question comes from the line of Michael Carroll with RBC Capital Markets. Please proceed with your question.
Michael Carroll
Yeah. Something to drill down into the development interest that you’re tracking in the marketplace. Is it more difficult for Doc to find those types of investments just given the higher construction costs that’s harder to pencil out those deals or are most of those deals more strategic in the actual cost for the health system or the developer is not as important as you would typically think?
John Thomas
Yeah, Mike, obviously cost is important to, to everybody, but these are all related to health system expansion, strategic expansions. I think they’re all but one or a 100% pre-leased by the health system and the other one is heavily preleased to a health system, with a clear track on where the physicians will come from to fill that space.
Construction costs is high. These are all yield on cost transactions. That’s the way, I’m a little hesitant to say exactly what the commitments are because some in the end maybe determine they’re too expensive based upon kind of current market rents but, these are all heavily preleased strategic developments with high revenue outpatient surgical services that the hospitals want to pursue. So kind of a balanced approach. We’re not out there to inspect development. We’re not out there and our funding, comes with signed leases and with this signed GMP contract where we know exactly what the cost is going to be.
Michael Carroll
Has your yields, the yields that you demand for those, initial funding and takeout acquisitions opportunity has, have those changed given what happened with interest rates.
John Thomas
Yeah. Those are trying to move up.
Michael Carroll
Okay. And then, you talked about this in your prepared remarks. I’m not sure if I missed this part, I know you said that the market is still in a price discovery mode right now. How long do you think it’s going to take for you to or the market to better understand where cap rates are? I’m not sure. Did you indicate of how much you think cap rates have increased so far or where you expect them to kind of settle out at?
John Thomas
Yeah, I think we’re starting to see assets that underwrite well and that we’re attracted to that are, starting to movement to well north of five, but mid fives to high fives are kind of — we’re starting to see more and more of that. Those aren’t always reflect the kind of quality and credit that we want to pursue. But, it’s rare that we see — we still get a lot of ask for the low fours, but I don’t think anybody’s out there paying low fours for assets right now.
Operator
Thank you. Our next question comes from the line of Michael Griffin with Citi. Please proceed with your question.
Michael Griffin
Hey, thanks for checking the question. Just going back to the 250,000 of renewals, can you talk about maybe what drove that? Was there any specific tenant types? Were they looking for expansions staying in their existing space? Any additional color on that would be great.
Mark Theine
Yeah. Michael, Mark here, I’ll take that one. So on the renewals, the 256,000 square feet represented a retention rate of 77% and we do expect that the tenants are looking to stay in place in their existing suites now, especially as John was just mentioning, the construction costs are rising. So it’s become more expensive to relocate. Supply chain challenges that made it, difficult to relocate from a timing perspective as well. And so that’s also — the combination of those two things are helping us to push on our leasing spreads while, keeping retention high.
So these are existing tenants and I’d say our customer service and property management team does a great job keeping these tenants happy and then renewing in their space for the long term.
Michael Griffin
Great. That’s helpful. And then on the real estate technology fund investment mentioned in the release, can you maybe expand on that a little bit what that is, maybe a continuing focused on investment in technology in your business? Some additional color there would be great.
Jeff Theiler
Yeah. Michael, this is Jeff. So it was a relatively small investment in a real estate technology fund that’s run by Fifth Wall. It actually has a lot of other REITs and real estate companies as LPs. And while we think the investment itself will perform well, the primary reason for the investment is to just get an early look at, the real estate technologies that are out there.
So you get enhanced access and early access to these types of technologies and, ultimately what we’d like to do is just enhance the efficiency of our operations and our portfolio. So we think it’s a win-win from both access to these technologies as well as a, a good return.
Operator
Thank you. Our next question comes from the line of Steven Valiquette with Barclays. Please proceed with your question.
Steven Valiquette
Thanks. Good morning, everybody. So I guess with your, bullish comments that were in one of the strongest leasing environments in the history of the company and that releasing spread are trending quite favorably, just hoping you can maybe give some more color on just the context of that in the fact that the operating expenses in the same-store data we’re up 8% year-over-year.
So I guess with the better, you know, leasing environment is also higher cost. I guess the question is at the end of the day, if same store cash NOI growth is kind of hanging around that 2% to 3% range with the better leasing environment, could that accelerate or do higher expenses kind of offset that, and you kind of maintain that same sort of cash NOI growth up the next couple of years. Just want to get more thoughts around that. Thanks.
Jeff Theiler
Yeah, Steve, it’s a great question. So as Mark alluded to, kind of high construction costs and higher kind of the opportunities for other space at much higher rates allows us to push kind of retention rates that or retention renewal rates at a higher cost. At the end of the day, there’s a total to your point the total cost of occupancy that the tenant bear, the hospital system, investment grade tenants, like we like to least to can bear, so that’s why service to those tenants and managing the operating cost and expenses, the best we can really matters really paying attention to the energy cost of the building, the utility cost generally.
So, the more we can do to help hold those costs down, the more we can kind of push on the rent side as well in a balanced way. So, 8% is an outstanding number. I think it’s a little unique to some of the particular buildings and leases that were impacted by that 8%, but we are seeing, 5% and 6% for the next couple of quarters. So it’ll be a balance over time, but for the foreseeable future, we see the real opportunity to do that while at the same time, impressing our tenants with management of the operating expenses to hold those down the best we can.
Steven Valiquette
Okay. Got it. Okay. All right. That’s it for me. Thanks.
Operator
Thank you. Our next question comes from the line of Adam Kramer with Morgan Stanley. Please proceed with your question.
Adam Kramer
Hey guys. Good morning, and thanks for taking the question. I guess kind of a little bit similar to the prior question, but just kind of looking at this quarter same-store NOI number, I think a little bit below kind of maybe, maybe what we were expecting and I think others as well. And I think, maybe below kind of the historical trends that you guys have kind of performed at as well, wondering if there’s anything in that number, that maybe brought it a little bit lower and then kind of just thinking broader higher level, right, it’s really positive leasing momentum you guys are doing. When do we kind of start to see that, I guess in kind of the same-store NOI quarterly figures?
Mark Theine
Adam is Mark, I’ll take that. That’s a great question. Our same-store number that’s quarter 1.9 is slightly below our historical average in our rent bump around 2.4% and, as we were mentioning about the leasing results we’re really excited about the leasing momentum that we have because what’s pulling our same-store down this quarter is a slight dip in our occupancy of that same-store portfolio.
So looking forward at the leasing momentum, we’ve had, we actually have a 100,000 square feet of leases that are executed, but not yet commenced. They’re under construction and so we’re excited that those leases will be coming on later this year in early part of 2023 and, just looking if you had performed all those 100,000 square feet as paying rent today our same-store would’ve been about 2.8% this quarter. So there’s a nice pipeline coming of leases that are under construction. And as you know, these leasing results lag just a little bit until the cash flow starts. Yeah to be clear under construction is the TI build outs. So…
Adam Kramer
That’s really helpful guys. And I think that’s really helpful to be able to kind of quantify the 2.8 number. Are you able to kind of give a obviously not exact number, maybe more of a range of kind of the cash NOI that this development would yields bridging to that 2.8% from the 1.9%?
Mark Theine
Yeah. So the new developments technically our yield on cost of 6% plus, I’m not sure that’s the question you are asking, but that’s in the new developments, those numbers tend to be more than 6% and much higher than kind of current acquisition cap rates.
Adam Kramer
Okay. Got it. That’s helpful. And then just maybe switching gears a little bit and just the final one here just the opportunity send in the loan book, maybe comparing that, today versus call it three, six, twelve months ago, and how things may have changed.
Mark Theine
Yeah. So the loan book a little unusual a year ago, because we had $50 million out in as part of the landmark mezzanine loans that was kind of the first step towards the eventual acquisition of that portfolio. We do see some opportunities, again, some of them are mezzanine, excuse me, some of our development financings is really in the form of mezzanine financing at a higher yielding rate as part of the capital stack of those projects.
Some of our development is kind of loan owned or owned where we are funding, the development directly off our books and it’s greater opportunity to deploy more capital. So we’re seeing more — we’re seeing more loan opportunities, but last year was kind of an unusually high number because of landmark and that went away as part of that acquisition.
Adam Kramer
Really helpful guys. Thanks again for the time. Chat soon.
Operator
Thank you. Our next question comes from the line of Dave Rodgers with Baird. Please proceed with your question.
Dave Rodgers
Yeah. Good morning. Wanted to follow up on the leasing spreads. JT, you made a comment just a couple minutes ago regarding next couple of quarters had some good visibility, but there were some unique things about the assets that drove the bigger increases. So I guess the first question is, do you not really see that continuing into next year? Is that just kind of cautiousness and then maybe Mark, this would be a better question for you on the rent spreads that you’ve achieved in the escalator increases. Is there anything unique between on campus or off campus or single tenant or multi-tenant that’s driving those numbers higher in the second half of this year?
Mark Theine
Yeah, my comments, you said at earlier cost just, again, right now for the foreseeable future, we’re seeing lots 4%, 5%kind of 6% opportunities for roll up. In some cases it’s just a function of which markets where the buildings are and, however more aggressively we can push those rates. I’ll let Jeff answer the — or excuse me, I’ll let Mark answer the second after the question.
Mark Theine
Yeah. So looking forward for our leasing spreads in the back of the year, you think we’ll be looking at, 5% to 7% releasing spreads on target, which is as I mentioned in the prepared remarks. In terms of, what we’re seeing single tenant multitenant or single tenants typically have very long leases, we don’t have too many single tenant renewals right now. So primarily our leasing activity is in the multi-tenant buildings and not seeing too much difference in the on campus versus off campus. Again, we’re really paying attention to what the overall market rate is for the particular location of that asset.
Operator
Thank you. Our next question comes from the line of Tayo Okusanya with Credit Suisse. Please proceed with your question.
Omotayo Okusanya
Hi. Yes. Good morning, everyone. So first of all, just on acquisitions, your target for the year versus where you are right now, you seem to be running a little bit behind if you would, let me use those words. I’m just kind of curious, is it the whole kind of price discovery scenario right now that’s making you maybe not be as aggressive, but maybe, you expect to have better acquisition volumes in the back half of ’22.
John Thomas
I can’t say a better time. So, there’s lots of — we’ve seen lots of opportunities. It’s just, seller’s expectations are a year out of date right now. So we’re starting to see more and more. We’re getting closer to closer on kind of a bit an ask that works for us and that, will work for the seller. So the second half of the year you’ll see more acquisitions.
Omotayo Okusanya
Okay. That’s helpful. And then just curious, in markets where you tend to overlap, HTA and HR, but just kind of curious, kind of post-merger, what are you hearing from hospital systems in those markets? So what are you seeing in regards to how the merge MTD may be competing differently and again, how are you guys kind of responding to that? If anything is changing at all?
John Thomas
Well, a lot of our development opportunities are coming from health systems who are looking for kind of expansion and strategic relocation of some of their practices. We’re seeing some other opportunities in some markets that are more acquisition in nature and back filling billings that are less than occupied by those health systems where they would be interested in occupying them more. If we were the owner. We’ll see some opportunities.
Omotayo Okusanya
So you actually think that that’s actually going to create more opportunities for you because physician practices and hospital systems are looking for alternatives to that.
John Thomas
Yeah. I don’t know if they’re looking for alternatives to others. I just think we’re working closely with several health systems on opportunities just like that. So either new development on and off campus or occupying more space and existing buildings that are kind of that they are in today, but are will move more space into it, but you own the buildings in the future.
Omotayo Okusanya
Okay. And the last one for me, just can any updates from a regulatory perspective, anything changing from a Medicare reimbursement or commercial insurance or reimbursement perspective that potentially could impact physicians and hospital systems that maybe we should be aware of?
John Thomas
Yeah, so we’re not directly impacted by the inpatient rates, but that certainly affects the P&L of our health systems, which again we 66% of our space or leased to health systems, that’s outpatient space, but, CMS did readjust their proposals for next year. I think they came out in the last week, so that’s a 4.3% bump, which is filled probably still not enough to cover existing inflation and nurses salaries in particular, but it is much better than it was last year.
Commercial insurance, again, talking to the health systems that shared that data with us about their ongoing negotiations, those are growing in the, 5% to 6% or more rate depending upon the market. So we’re still waiting on CMS to kind of their proposal on the physician reimbursement was lower than it should be. But they always start low and kind of works higher by the time the final rule. So we would expect that to improve as well again, reflecting inflation.
And then the outpatient surgery space, they’re looking at about a 3% bump and I’m sure they’ll try to fight for some more as well and again, that’s for Medicare. So commercial insurance rates should grow at a pace in excessive 3% for those outpatient surgery center operators that we have so many — that we lay so much space to.
Omotayo Okusanya
Okay. That’s helpful. Thank you.
Operator
Thank you. Our next question comes from the line of Joshua Dennerlein with Bank of America. Please proceed with your question.
Joshua Dennerlein
Yeah. Hey everyone. Thanks for the question. Just kind of curious how you’re thinking about debt needs over the next 18 months and what kind of rates you could potentially achieve?
Jeff Theiler
Yeah. Hey Josh, this is Jeff. The nice thing about our lease maturity schedule is there’s no refinancing or anything coming up over the next I guess over three years. So there’s no refinancing needs. Right now we were comfortable where we are in the line. So I don’t know that there’s necessarily a need to term out that debt. It’s hard to say exactly what long term rates — what our 10-year rates would be right now, just because there isn’t a whole lot of activity in the market. So there’s not a lot of visibility. We would guess maybe 5% or so give or take. So like I said, I don’t think, we’ll need to use it, but that’s where we see rates right now.
Joshua Dennerlein
I’ve noticed some other REITs in like the net lease space kind of like term loans. Like, would you do like 10-year or worse like a term loan, if you needed to term out the line kind of look attracted?
Jeff Theiler
Yeah. If we decided that we wanted to term out the line, we’d probably look, the term loans, a better execution right now than 10-year debt. I thought you were just asking about 10-year costs.
Joshua Dennerlein
Yeah. Sorry. I was probably too specific just to get a sense of where cost of capital is across all the companies. So appreciate that. Thanks guys.
Operator
Thank you. We have reached the end of our question-and-answer session. I’d like to turn the call back over to Mr. Thomas for any closing remarks.
John Thomas
Thank you, Michelle. Thanks for everybody for joining us today. We’re excited about the prospects of the third quarter and look forward to seeing you at the investor conferences and on the next earning call. Thank you.
Operator
Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.
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