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Physicians Realty Trust (DOC) Q1 2019 Earnings Call Transcript

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Physicians Realty Trust  (NYSE: DOC)
Q1 2019 Earnings Call
May. 01, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, welcome to Physicians Realty Trust First Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note this conference is being recorded.

I will now turn the conference over to your host, Bradley Page, Senior Vice President and General Counsel. Thank you, you may begin.

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

Thank you. Good morning and welcome to the Physicians Realty Trust First Quarter 2019 Earnings Conference Call and Webcast. With me today are John Thomas, Chief Executive Officer; Jeff Theiler, Chief Financial Officer; Deeni Taylor, Chief Investment Officer; Mark Theine, Executive Vice President of Asset Management; John Lucey, Chief Accounting and Administrative Officer; Laurie 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 first quarter of 2019 and year-to-date as well as our strategic focus for the remainder of 2019. Jeff Theiler will review our financial results for the first quarter of 2019 and our thoughts for the remainder of the year. Mark Theine will provide a summary of our operations for the first quarter of 2019. Following that, we'll open the call for questions.

Today's call will contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. They are based on the current beliefs of management and information currently available to us. Our actual results will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe our assumptions are reasonable, our forward-looking statements are not guarantees of future performance. Our actual results could differ materially from our current expectations and those anticipated or implied in such forward-looking statements. For a more detailed description of potential risks and other factors that could cause actual results to differ from those contained in any forward looking statements. Please refer to our fillings of the Securities and Exchange Commission.

With that I would now like to turn the call over to the company's CEO, John Thomas. John?

John T. Thomas -- President and Chief Executive Officer

Thank you, Brad. And good morning. Thank you for joining us today. When we last spoke, we informed you of the disappointing closure of the El Paso Surgical Hospital, the operator in late 2018. Both DOC and the onsite physicians learn to this closure with minimal notice effectively ending the company's leases on two facilities, a medical office building and the surgical hospital.

Fortunately, we were able to quickly retenant the affected MOB under a new ten year lease at terms, better than the terminated lease as the position occupants were reemployed by a wholly owned subsidiary of Sierra Providence, Tenet Healthcare's wholly owned subsidiary in El Paso, then lease the medical office building.

Today, we are very pleased to announce the execution of a new ten year lease with two separate subsidiaries of a major National Health System to lease and operate the surgical facility, including the ambulatory surgery center in that building. The new leases will commence June the 1st with rent began on July the 1st. The leases are subject to final Board approval by that organization, which we expect to occur early in May. In total, we have fully replaced the rent loss from the prior leases with a better, more profitable healthcare system or tightly aligned with their positions.

While we were happy to work with all the major health systems in town to explore leasing that facility. Our relationship with this operator in particular was instrumental in turning an unexpected lemon into lemonade very quickly. We executed this transaction, the new lease efficiently and quickly and create a win-win structure that benefits the communities they and we serve together. Relationships matter, and this is another example of how we invested better and execute consistently to get better long-term results. We believe in the strength of our experienced underwriting and credit teams and know that even the most stringent investment criteria will fail to anticipate every tenant to follow.

In this most recent circumstance, our credit monitoring process work proactively identified an opportunity for our leadership team to ensure a positive outcome and preserving shareholder value. While we've continue to work to limit the situations in the future. We hope that you recognize the value in our ability to address them quickly and effectively through our position as the landlord of choice in healthcare. We have limited investments during Q1 2019 with all investments made off-market with historical relationships that have credit and will produce more opportunities for us in the future. All these investments have first year yield exceeding 6% upon rent commencement.

We continue to believe we will have a very good opportunity to invest $200 million or $400 million of new investments in 2019 with a portion of these investments being new development starts that will have rent commencing in 2020. All of our development starts or in due diligence are leased to an investment grade credit tenant or anchored by an investment grade tenant with affiliated physicians or providers in highly pre-leased buildings. We believe culture matters especially the DOC culture. Our team is dedicated to all our stakeholders and we have a teaming environment that works very hard everyday in an inviting location, where they want to be with people, with whom they want to work.

Yesterday, we are proud to be recognized that the Milwaukee Business Journal is the coolest office in Milwaukee, which we believe (Technical Difficulty) the quality of our 1893 vintage office and the culture of our team. We welcome your visit anytime.

Jeff will now share our Q1 2019 financial highlights. Jeff?

Jeff N. Theiler -- Executive Vice President and ChiefFinancial Officer

Thank you, John. In the first quarter of 2019, the company generated funds from operations of $47.4 million or $0.25 per share. Our normalized funds from operations were also $47.4 million and $0.25 per share. Our normalized funds available for distribution reported $2.1 million or $0.22 per share, $0.01 per share less than the previous quarter.

The primary negative impact sort of quarterly earnings to sort of two major items. The first was the temporary vacancy at the El Paso Specialty Hospital, which generated $725,000 of cash NOI last quarter. The second was a seasonally higher G&A expense that we have historically seen in the first quarter, which was expected and discussed on our previous earnings call.

For the interest rate theory of lower for longer taking hold again in 2019, there has been increased equity investor interest at Physicians Realty Trust, which has in turn driven our cost of capital lower and supported our stated acquisition strategy. We invested $20 million in (Technical Difficulty) for first quarter of 2019 at an average first through yield of 7.7%. And completed a $4.3 million addition to an existing building, which will generate 7% yield.

Subsequent to quarter end, we invested another $14.8 million partially funded with OPUs and a 27,000 square foot freestanding ASC in Pasadena, Texas. 100% leased to a joint venture of USPI Memorial Hermann and another $900,000 with mezzanine loan for a building in San Francisco, Florida. These two investments collectively yield just over 6%. In summary, year-to-date, we have invested a total of $40 million of an average first two yields of 7% and remain comfortable with our guidance range of %200 million to $400 million if investments at an average cap rate of 5.5 to 6 in the quarter, assuming favorable capital market conditions.

The same assets remain insulated for disposition category with a net book value of $96 million. Some of these assets are in the early stages of sale negotiations, but not yet advanced enough to provide reasonable certainty of sale. First quarter end, we closed on two dispositions that are the result of unsolicited offers for buildings in Tacoma, Washington and Panama City in Florida.

The total net proceeds were $12.5 million, resulting in a gain on sale of $3.1 million. The buildings are yielding a cash cap rate of 6.4% in the most recent quarter and generated an unlevered IRR of 12% during our whole period. Our portfolio was 95.4% leased as of the end of the quarter was 53% of total GLA of lease to investment grade tenants and their subsidiaries.

Our same-store NOI grew by 1.5% this quarter and to pre-empt the questions we've received in the past it updated and enhanced our disclosure to allow investors to track all of our NOI by adding the contributions from asset slated for dispositions and repositioning assets. And we included the results of all those assets the overall same-store NOI growth would have been 30 basis points higher at 1.8%.

As a reminder, the main negative driver this quarter was the El Paso specialty hospital, which has now been resolved and the tenant is expected to resume rental payment in the second half of 2019. This temporary vacancy tops our portfolio of 140 basis points to same-store NOI growth this quarter and we'll do the same in the second quarter of the year before payments reserve. We utilize the ATM in the first quarter to provide capital for our acquisitions raising $31 million of net proceeds at an average price of $18.61.

Our balance sheet remains strong in 5.89% EBITDA and net debt to growth out of the 34%. G&A expense was elevated this quarter due to seasonal factors, but we remain comfortable with our previous projection of G&A for the year of $31 million and $33 million.

I'll now turn the call over to Mark to walk through some of our operating statistics in more detail. Mark?

Mark D. Theine -- Senior Vice President of Asset and Investment Management

Thanks, Jeff. From net operational standpoint, the first quarter of 2019 was another period of stable and consistent growth for Physicians Realty Trust. Our relationship centric approach to asset management continues to enhance the value of our portfolio, resulting in strong internal growth and a continued commitment to operational excellence through our philosophy of investment better.

Our portfolio is an industry-leading 95.4% leased, including 53% leased to investment grade rated health systems or their subsidiaries. This unmatched achievement illustrates our ability to attract and lease space to additional positions contributing to an optimized tenant ecosystem. So that our partners may reach their clinical and business goals while increasing community access to care.

This approach is particularly evident in our ability to release the El Paso surgical facility within one quarter as John previously mentioned. Our deep hospital and physician relationships, the strength of the El Paso healthcare market and the premier location of this facility all contributed releasing 100%, but the 89,000 square foot facility on terms similar to the previously in placed leases.

In addition to the favorable economic impact of this agreement, we are also proud to include green lease provision throughout the new lease. These terms have become standard in our lease template illustrating our continued commitment to ESG best practices. With the newly executed lease in El Paso, we expect our occupancy to return to the 96% benchmark for which our company is known.

Our 238 same-store properties representing 89% of the portfolio overall generated NOI growth of 1.5% in the first quarter of 2019. Same-store NOI growth is 2.9%, if the El Paso surgical facility is excluded. Over the long term, we continue to expect our same-store portfolio to drive to 2% to 3% growth year-over-year as our in-place average rent escalator at 2.3%.

At Q1 2019, same-store operating expenses were up 8.5% almost entirely due to increases in real estate taxes. Our corresponding operating expense recoveries were up 8.1%, demonstrating the inflated nature of our cash flow through triple net leases and high occupancy. With confidence and continued momentum, our leasing team also delivered outstanding results in Q1 2019, completing 171,000 square feet of leasing activity with a favorable 2.1% releasing spreads and a 74% retention rates.

More than half of lease are signed in the quarter contain annual rent escalations of 3% or more, providing strong internal growth for the future. Tenant improvement allowances for the quarter were $2.06 per square foot per year for new leases and $1.56 per square foot per year for lease renewals. Overall, we invested $4.9 million in tenant improvements and leasing commissions in Q1 2019, representing just 7% of the portfolio NOI. This conservative investment in capital expenditures relative to our peers is driven primarily by our low lease exploration schedule, which is a key differentiator for DOC that enables us to return more cash to our shareholders.

Looking ahead to 2% of the portfolio of lesions are scheduled to renew during the remainder of 2019 and no more than 7% of portfolio scheduled to renew in any one year for the year 2025. Our lease exploration schedule is strategically ladder driving predictable growing cash flow for investors for year to come -- years to come.

Before turning the call back over to John and opening for questions. We quickly like to congratulate Amy Hall, our VP of Leasing and Jenn Manna, our VP and Associate General Counsel on a new additions to their families and the DOC family. Olivia Miranda Hall (ph) was born April 3 and Sierra Anne Manna (ph) was born April 19. The future DOC certainly looks bright. John?

John T. Thomas -- President and Chief Executive Officer

Thank you, Mark and good work. Thank you. We look forward to questions now.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from Michael Carroll with RBC Capital Markets. Please state your question.

Michael Carroll -- RBC Capital Markets -- Analyst

Yeah, thanks. I just wanted to touch on the El Paso leases, real quick. I believe, Mark indicated that the combined lease is done at similar rents but the MOB lease was done at better terms, should we assume that the hospital leases was done at slightly lower terms but net-net, it was better given the MOB results?

Mark D. Theine -- Senior Vice President of Asset and Investment Management

Yeah. On a combined basis, just slightly better, so slight addition and a slight subtraction, but there -- they averaged out and added together more rate (ph) like what we were getting before.

Michael Carroll -- RBC Capital Markets -- Analyst

Okay, great. And then, John, how are you looking at the investment market today. Given the competition in this space, where do you see the most value, where you can execute deals, should we assume most of your investment activity is going to be smaller relationship type deals like the stuff, you announced this quarter?

John T. Thomas -- President and Chief Executive Officer

Yeah. We're going to continue to focus on the relationship strategy and with existing health systems. As we've said, all the investment in the first quarter were done with existing hospital relationships. So our existing developers and existing health system and provider relationships, so that's always going to be our focus. But there is some interesting opportunities available out in the market and where we can expand those relationships and create some new relationships. So we -- as I said in my comments, the -- our guidance is still pretty -- we feel really confident about and there is an uptick in the capital markets getting stronger.

Michael Carroll -- RBC Capital Markets -- Analyst

Okay, great. And then, are there larger portfolios out there that would interest you then that you think DOC can pursue given the improvement in the cost of capital? Or is that you still think the smaller deals is the primary focus?

John T. Thomas -- President and Chief Executive Officer

We look at everything, so it just depends again on the metrics and the strategic value of those opportunities for us. So there's not a lot of portfolios out there but that is interesting or exciting to us, we see a lot of one-off opportunities will accumulate to those acquisition guidance.

Michael Carroll -- RBC Capital Markets -- Analyst

Okay, great. And last question from me, can you talk a little bit about the LTACH portfolio. I know it seem like coverage to drop pretty dramatically this quarter compared to the prior quarter, just adding I guess three additional months to that trailing 12 months calculation. I mean, how should we think about that portfolio? And is there more risk with the LTACHs given that decline?

John T. Thomas -- President and Chief Executive Officer

Yeah. The LTACH industry has been under some pressure, particularly the last couple of years with the changing criteria. We feel pretty good about R3, the Plano facility in particular is a rockstar and does extremely well. It's probably the number one asset in the LifeCare portfolio. The other two have struggled from time to time. But they're all having a one master lease. And so we have a good relationship with that organization. But you know, they and other LTACH operators are all under pressure, right now. So it's certainly something we've continually monitor and evaluate for both either disposition or repositioning. But at this point, Plano really leads the way for us.

Michael Carroll -- RBC Capital Markets -- Analyst

Okay. Then what drove the weakness in the coverage ratio? The coverage drops about 1.3 from two times previously that seems like a pretty steep decline?

John T. Thomas -- President and Chief Executive Officer

Yeah. As I said, Plano continues to perform extremely well, but Fort Worth and Pittsburgh particularly lagged. LifeCare has made some changes in the Pittsburgh market, which should help to improve the performance there and have also added some service lines there. They are just starting to initiate same in Pittsburgh (ph). So again, we're monitoring all three, but Plano really covers us well and we got the corporate guarantee behind that.

Michael Carroll -- RBC Capital Markets -- Analyst

Okay. Great. Thank you.

Operator

Thanks. Our next question comes from Jonathan Hughes with Raymond James. Please state your question.

Jonathan Hughes -- Raymond James -- Analyst

Hey, good morning. Glad to see the El Paso progress, I know that took a lot of work. Just one question from me, on acquisitions and would love to hear from maybe Deeni or Dan on this. But expected pricing on acquisitions this year is in that high-5 low 6% cap rate range, a little higher from deals over the prior three years and -- and some of the better pricing I get is a reflection of her relationship network. But on the marketed deals you see, have you seen any change in MOB cap rates over the past six or nine month.

John T. Thomas -- President and Chief Executive Officer

Yeah. Thanks, Jon, and I'll let Deeni response.

Del Mar Deeni Taylor -- Executive Vice President, Chief Investment Officer

Yeah, Jonathan. For marketed deals, we're seeing portfolios and then 5.3, 5.4 cap rate range. If they were individual assets, and probably more 5.5 up to a 6, but that's what we're seeing with the portfolios in the market.

Jonathan Hughes -- Raymond James -- Analyst

Okay. And maybe a year ago with those have been more in the low 5 range on the like-for-like basis, which I realize is a hard (inaudible).

John T. Thomas -- President and Chief Executive Officer

Yes, they were -- they could have been that low. It just depends on kind of the relationships that went along in those assets, whether they were health system relationships.

Jonathan Hughes -- Raymond James -- Analyst

Okay. And I mean, is that -- is that just a reflection of the fact that interest rates kind of stabilized upward tire here or less demand. I'm just kind of curious, what's driving maybe the potential expansion of cap rates.

John T. Thomas -- President and Chief Executive Officer

Jon, I think this is -- I think it is a combination of both. Certainly, the capital markets have approved for the -- we've kind of come out of the REIT bare market from last year and the rates continued -- tend to be more disciplined and long-term thinking on pricing and IRR expectations from the assets. Probably seen more private equity sellers than buyers, right now, but there's still a lot of private equity out there to -- in order to pursue some of the portfolio. So I think it's just a combination of all of those matters.

Jonathan Hughes -- Raymond James -- Analyst

Got it. Okay, that's great. Thanks for taking my questions.

John T. Thomas -- President and Chief Executive Officer

Yeah. Thanks, Jonathan.

Operator

Our next question comes from Jordan Sadler with KeyBanc Capital Markets. Please state your question.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Thanks, good morning. I wanted to just follow-up on what happened with El Paso in terms of the income statement, if I could, Jeff, maybe you just walk us through sequentially from 4Q to 1Q what happened and then what we should anticipate in the balance of this year?

Jeff N. Theiler -- Executive Vice President and ChiefFinancial Officer

Yeah, sure. So in 4Q to 1Q, you had a reduction of 725,000 of cash NOI, part of that there is a little bit of a write-off of bad-debt expense in 4Q, so the reduction wasn't the full 800,000 that we expected. But going forward, we're going to add about $800,000 or so to the cash NOI line because they're going to start paying that operating expense as well.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

When that's in 3Q?

Jeff N. Theiler -- Executive Vice President and ChiefFinancial Officer

That's in 3Q, yeah. Sorry.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Plus 800 in 3Q. Okay. And you said cash NOI decline, is that also a GAAP NOI decline in 4Q-1Q?

Jeff N. Theiler -- Executive Vice President and ChiefFinancial Officer

Yeah. There is a decline in GAAP NOI as well.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Same number, pretty much.

Jeff N. Theiler -- Executive Vice President and ChiefFinancial Officer

Similar.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Okay. And I just wanted to -- the guidance in terms of acquisition guidance in pipeline -- in the pipeline, pretty significant, I know your confidence is reasonably high, could we get a little bit of a refresh on where you stand there, JT and maybe what timing looks like?

Jeff N. Theiler -- Executive Vice President and ChiefFinancial Officer

Yeah, I think, we've got a number of things in the pipeline, right now. But it's kind of moving toward kind of, finalizing LOIs and putting under agreement. And then, so I think it's probably more, I mean, obviously, it just happened here. We're going to see more in the third quarter and the fourth quarter. But we got a handful of things, we expect to close in another contract this quarter. So like I said, feel pretty good about that. The total number and approximately $100 million or $400 million of development starts that will be there either finalized, announced already or in the process of finalizing so.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

And the -- these are largely smaller one-offs, you were saying or could we expect to see a couple of bigger chunks in here?

John T. Thomas -- President and Chief Executive Officer

Couple of bigger chunks, couple of bigger assets. But we don't expect -- right now where that number is based upon onesie, twosie transactions, they might be $50 million to $75 million transaction but a handful in the $25 million.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Okay. Thank you.

John T. Thomas -- President and Chief Executive Officer

Yeah.

Operator

Thank you. Our next question comes from Drew Babin with Baird. Please state your question.

Drew Babin -- Robert W. Baird -- Analyst

Hey, good morning. Given the opportunistic ATM raises in the first quarter as well as assets slated for dispositions, would it be fair to say that maybe the upper half of the acquisition guidance range for the year is maybe feels a little more on the table than it did a quarter ago or do the ATM proceeds maybe just kind of, have substitute for some dispositions that might have happened this year that maybe now happen next year.

John T. Thomas -- President and Chief Executive Officer

Yeah, I mean look so whenever we put up this acquisition range, it's always subject to our cost of capital. Our cost of capital improved in the first quarter, we were able to utilize the ATM, which does put that upper bound of the range in flight (ph). As we said that we can't fund intelligently either with the ATM or recycling some of our assets later for disposition obviously will -- we'll reduce our acquisition volume accordingly. But right now, it seems very achievable.

Drew Babin -- Robert W. Baird -- Analyst

Great. That's helpful. And then just a couple of questions on the leasing for the quarter, you mentioned 2.1% releasing spreads. Was that a blended spread with renewals or was that just on new leases?

John T. Thomas -- President and Chief Executive Officer

Spent on renewal.

Drew Babin -- Robert W. Baird -- Analyst

Okay. And then lastly, just on the expiring -- expiring leases for both this year and next year, how do you feel about where expiring rents are relative to market and should we continue to expect a similar tick-ups that we've seen just last year in the first quarter of this year? Or do you expect kind of any deviation either way as those come up?

Mark D. Theine -- Senior Vice President of Asset and Investment Management

Yeah, So, Drew, this is Mark. So for the remainder of this year as I mentioned in the comments, we've got about 2% of our portfolio rolling the average rental rate on that 2% to $22.29 and then next year we've got about 3.5% of our ABR rolling at an average rate of 21.58 per square foot. So certainly, it's a market by market evaluation that we need to do, but those are right in line with national averages for medical office rate. So we expect to renew on similar terms there and we'll continue to push on our releasing spreads and building in place of players (ph) of 2% to 3% to drive our internal growth.

Drew Babin -- Robert W. Baird -- Analyst

Great. Thank you. And congrats Mark, on your office design skills being recognized?

Mark D. Theine -- Senior Vice President of Asset and Investment Management

Thanks, Drew.

Operator

Thank you. Our next question comes from Vikram Malhotra with Morgan Stanley. Please state your question.

Vikram Malhotra -- Morgan Stanley -- Analyst

Thanks for taking the question. Just wondering, if -- to get any color or any -- if there is any updated thoughts post or formation of common spirit, any thoughts on -- any opportunities with them? Any location that they might be looking to see move around or divest of any updates there would be?

John T. Thomas -- President and Chief Executive Officer

Yeah. Thanks Vikram. This is JT. They continue to integrate that organization, I think integrating it maybe faster than most organizations that sales would anticipate. But they're still working through some of that as well. So some of the projects we've been working on are on hold, which you would expect in this kind of environment, all there in the process of integrating their teams.

The only thing that we actively had discussions with them routinely about is is global, and they continue to work on the transition of the local KentuckyOne facilities Jewish Medical Center in particular. And it's publicly noted they're primarily working with the University of Louisville to transition those hospitals to that university, which frankly would be a pretty positive thing for MOBs. We feel very confident about the long-term viability and security behind our leases and comes for instance some things to assure us of that.

I mean, we've had some other offer in that market as well. So if that's the one that -- like so we don't have, we don't have anxiety about our leases being maintained there, but we do continue to monitor that as who our new operators is going to be and look forward to that continuation. Other than that, we don't have to expect any other changes, and we expect to continue to start our new opportunities with them always cognizant -- too much concentration in some markets.

Vikram Malhotra -- Morgan Stanley -- Analyst

Okay. That's helpful. And then just on the El Paso asset, given that the new relationship slightly better rents et cetera, if you were to sort of, market that today, what would that asset sort of create for on a cap rate or a per foot basis?

John T. Thomas -- President and Chief Executive Officer

Yeah. That's a great question. Certainly stronger than it would have been with the old owner. And I think right now, we are just proud to have this tenant in the building and we'll collect rent from them, but it's one of those -- it's in the surgical facilities that's going to be a little higher cap rate than in MOB but mid-sixes to sevens would be realistic with the quality of this operator. And once we get back in there and take care of patients. So feel very good about both the NAV accretion and then the opportunity to work and collect rent to contribute to our bottom line.

Vikram Malhotra -- Morgan Stanley -- Analyst

Okay, great. And just one quick question on same-store. Jeff, maybe I missed this. Sorry if I missed this, the 8.7% increase in OpEx was that partly driven by sort of, the vacancy and can you just clarify the occupancy impact into 2Q from El Paso?

Mark D. Theine -- Senior Vice President of Asset and Investment Management

Sure, this is Mark. The increase in the operating expenses of the same-store portfolio is almost -- almost exclusively driven by the increase in real estate taxes. For Q1 as we've reset the accrual of expenses for real estate taxes. So out of that $2.3 million increase in our operating expenses, almost $2 million of that is real estate tax related -- not related to the vacancy, the portfolio there. And then the -- the change in occupancy will be approximately 89,000 square feet added to our -- to our occupancy from the El Paso facility that was not in there this quarter.

Vikram Malhotra -- Morgan Stanley -- Analyst

So the 80 bp decline, was that -- is that -- that's partly El Paso and then there something else?

Mark D. Theine -- Senior Vice President of Asset and Investment Management

Almost all El Paso and a couple of small leases. That's right.

Vikram Malhotra -- Morgan Stanley -- Analyst

Okay, great. Okay. Thanks, guys.

Mark D. Theine -- Senior Vice President of Asset and Investment Management

Thanks.

Operator

Our next question comes from Chad Vanacore with Stifel. Please state your question.

Chad Vanacore -- Stifel -- Analyst

Thanks. I just want to get some more clarification. Mark, did you say that there will be excess costs in regenerating in El Paso next quarter that we should take into account?

Mark D. Theine -- Senior Vice President of Asset and Investment Management

No. Sorry, I was saying that the occupancy will come back into the same-store portfolio calculation.

Chad Vanacore -- Stifel -- Analyst

All right. As far as the OpEx -- a pretty substantially year-over-year, is there anything in there that comes out next quarter?

Mark D. Theine -- Senior Vice President of Asset and Investment Management

No, it's just property taxes and again our -- our expense recovery is also increased 8.1% again showing kind of the insulated nature of our triple net leases.

Daniel Bernstein -- Capital One -- Analyst

Okay. And just thinking about the same store NOI, you're up 1.5% this quarter, how should we think about same-store NOI trends for the balance of the year?

Jeff N. Theiler -- Executive Vice President and ChiefFinancial Officer

Yeah, sure. It's Jeff. I think the long-term trends, Mark said in his remarks, our average escalator is 2.3% largely leased portfolios. We think over the long-term 2% to 3% is a good goal for us and we anticipated that.

Chad Vanacore -- Stifel -- Analyst

All right. But, Jeff, you've trended below there for the past couple of quarters at least. Is there anything that get you back above that 2%?

Jeff N. Theiler -- Executive Vice President and ChiefFinancial Officer

Sorry, can you repeat that question?

Chad Vanacore -- Stifel -- Analyst

Sorry, same store NOI 1.5% this quarter. I think last quarter it was 1.3%. Do you have to wait for the back half of the year, where you retenanted El Paso to get back above that 2% trend line?

Operator

I think that's right, Chad because we're not putting El Paso in a repositioning bucket or anything like that, so that's going to negatively impact our same-store next quarter as well as our second quarter as well until it starts paying rent again in the back half of year.

Chad Vanacore -- Stifel -- Analyst

All right. And that probably adds about $0.01 per share FFO in the back half of '19?

Unidentified Speaker --

Yeah, I mean, I think on, that's about right.

Chad Vanacore -- Stifel -- Analyst

All right. Thanks for taking the questions.

Operator

Thank you. Our next question comes from Daniel Bernstein with Capital One. Please state your question.

Daniel Bernstein -- Capital One -- Analyst

Hi, good morning. Just two questions from me. I think one, I just wanted to understand the assets that were sold in 2Q is that part of the assets held for sale at the end of 1Q or those different assets?

John T. Thomas -- President and Chief Executive Officer

No, Dan. No they are different assets. They were just kind of one-off opportunities to reposition older assets and their (inaudible).

Mark D. Theine -- Senior Vice President of Asset and Investment Management

Yes. I'm sorry, Dan. Just to clarify, so they weren't insulated for disposition bucket, but they were in assets held for sale categorization, because we had them -- we have certainty of sale as of 3/31.

Daniel Bernstein -- Capital One -- Analyst

Okay. Are you still -- are you actively marketing the eight assets held for sale?

Jeff N. Theiler -- Executive Vice President and ChiefFinancial Officer

Yeah, yeah. We're again -- we're not in a stage where we're confident enough to put them in held for sale bucket and in the accounting term, but they are (Technical Difficulty).

Daniel Bernstein -- Capital One -- Analyst

Okay, OK. And then the other question I had was on the, I guess you talked about I guess was almost $100 million, maybe more of funding of development, I just wanted to understand is that all kind of coming in the form of development draws on a loan or are you taking any kind of preferred equity stakes just trying to understand the structures that are being considered there?

John T. Thomas -- President and Chief Executive Officer

Yeah, it's a kind of above , Dan. So the first couple of projects are kind of construction loans to developer on our 100% pre-leased building to our credit tenant. We traditionally used either mezzanine financing or kind of a preferred equity positioning in capital stacks, depending upon the circumstances. The needs of the developer and the opportunity set, kind of risk-adjusted returns that we're looking forward, so it's really a combination of the above where we're kind of flexible with the -- both the health system tenant and the developer in the middle, so all of the above.

Daniel Bernstein -- Capital One -- Analyst

What's the typical yield on those investments maybe between the draws and the mezzanine preferred?

John T. Thomas -- President and Chief Executive Officer

So I think the rent constant going forward is six plus for this market and kind of mezz financing will be 8 eight plus again, depending on the underlying credit. But again, we're only focused on investment-grade type tenants on the back end, so it'll be little bit tighter, but also at the high end at the -- top end of the capital stack (inaudible).

Daniel Bernstein -- Capital One -- Analyst

Yeah, I agree. That's all I have. Thank you.

John T. Thomas -- President and Chief Executive Officer

Thanks, Dan.

Again, we appreciate your time and attention today. We look forward to your follow-up questions and seeing you in NAREIT. Thank you.

Operator

Thank you. This includes today's conference. All parties may disconnect. Have a great day.

Duration: 37 minutes

Call participants:

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

John T. Thomas -- President and Chief Executive Officer

Jeff N. Theiler -- Executive Vice President and ChiefFinancial Officer

Mark D. Theine -- Senior Vice President of Asset and Investment Management

Michael Carroll -- RBC Capital Markets -- Analyst

Jonathan Hughes -- Raymond James -- Analyst

Del Mar Deeni Taylor -- Executive Vice President, Chief Investment Officer

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Drew Babin -- Robert W. Baird -- Analyst

Vikram Malhotra -- Morgan Stanley -- Analyst

Chad Vanacore -- Stifel -- Analyst

Daniel Bernstein -- Capital One -- Analyst

Unidentified Speaker --

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