Q1 2022 Healthcare Realty Trust Inc Earnings Call
Peter I will be your moderator for today's call all lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.
If you would like to ask a question. Please press star followed by one on your telephone keypad be mindful. There is two participants I would now like to pass the conference over to your host Kris Douglas Chief Financial Officer with healthcare royalty charges close. Please go ahead.
Thank you for joining us today for healthcare Realty's first quarter 2022 earnings conference call.
A reminder, that except for the historical information contained within the matters discussed in this call may contain forward looking statements that involve estimates assumptions risks and uncertainties. These.
These risks are more specifically discussed in the company's Form 10-K filed with the SEC for the year ended December 31 2021.
And a Form 10-Q filed with the SEC for the quarter ended March 31 2022.
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 or <unk> normalized <unk> <unk> per share normalized <unk> per share funds available for distribution or fad net.
Net operating income.
EBITDA and adjusted EBITDA.
A reconciliation of these measures to the most comparable GAAP financial measures may be found in the company's earnings release for the first quarter ended March 31 2022.
The company's earnings press release supplemental information and Form 10-Q are available on the company's website.
I'll now turn the call over to Todd.
Thank you, Chris and thank you everyone for joining us today.
I'll start with a few comments about our solid operating results for the first quarter.
Second I'll provide some updates on our pending strategic combination with HCA and finally I'll touch on the process and expected timeline between now and closing of the HCA transaction.
For the first quarter, we're pleased to report both strong internal growth and robust external investment.
Same store NOI growth of two 9% was driven by healthy top line growth.
Strong leasing interest across the portfolio drove positive sequential absorption of more than 40 basis points.
Based on constructive provider sentiment, we expect steady absorption gains in the coming quarters.
$340 million a year to date acquisitions gives us a head start to 2022.
Our acquisition cap rate is in line with guidance and well above our disposition cap rate.
<unk> and accretive capital recycling.
Additionally, we're seeing accelerated development activity.
Our $1 6 billion embedded development pipeline is expanding with multiple sizable projects slated to start later this year.
Strong demand for space is driving portfolio occupancy gains and.
An increased interest in development, which bolsters our strong outlook for 2022.
Now turning to the HCA transaction I'll first touch on the unsolicited offer we described in the merger proxy and our and in our press release earlier today.
After receiving the proposal from party F. On March 28, our board thoroughly reviewed it with our advisers.
The board unanimously rejected the proposal in writing.
In mid April .
<unk> second letter from party F acknowledging our response and reiterating interest at the same terms.
The board did not respond to this letter.
Then on Tuesday of this week shortly after the Wall Street Journal Article we received another letter from party F. Reiterating interest at the same terms as the March 28th proposal.
So we've now received three letters from parties expressing interest at the same terms.
We can only interpret these letters as an opportunistic and disruptive distraction.
Our board has unanimously rejected the unsolicited proposal and continues to believe that the strategic combination with HCA offers a superior value and is in the best interest of the company's shareholders.
Looking ahead, we remain focused on our pending combination with HDA earlier today, we published an updated presentation on the transaction, which can be found on our investor page.
We've made tremendous progress in the last 60 days and we're even more excited about the combination since our announcement in February .
This is a game changing transaction that positions healthcare realty as the leading pure play REIT.
Operating at scale gives us tremendous efficiencies, but the ultimate benefit here, which you can see on page six of our updated presentation is accelerated growth.
The combination with HCA will enable us to shift into a higher gear moving from average annual fad per share growth of four 5% over the last three years to a range of 5% to 7% going forward.
In a few minutes, Rob will more fully describe how our combined cluster strategy will accelerate our growth.
With regards to the $1 $1 billion special cash dividend for HCA shareholders. I am pleased to report that we've lined up $1 6 billion in proceeds at cap rates of around four 8% through a combination of JV and asset sales.
We've received letters of intent or in advanced discussions with multiple parties.
We expect a portion of the asset sales to close prior to the merger vote.
Already having been approved by FDA.
These proceeds will be held by HCA to fund the special cash dividend just before close and we expect the balance to close on or around the closing of the merger.
We consider these initial efforts to address funding needs for the completion of the transaction as phase one.
And based on the strong demand of phase one we're initiating the next phase to further align the combined portfolio through the sale or JV of an additional $500 million.
Similar to phase one we expect to transact at portfolio sizes, where we can generate premiums relative to single asset pricing.
We'll use the proceeds to match fund attractive higher yielding developments and accretive individual asset acquisitions.
And also the board has recently authorized a $500 million stock repurchase program.
This gives us another choice, where we can reinvest proceeds accretively.
For phase, one or phase two by repurchasing our own stock if the price is materially discounted.
Finally, I'd like to touch on our ongoing transaction process and expected timeline.
We have secured commitments for a new credit facility, which Chris will cover in a few minutes.
We also intend to preserve HTH up REIT status, which gives us a modern operating structure with a tax advantaged currency for future acquisitions.
We filed our preliminary proxy on Monday, which we expect to become effective in early June assuming no material comments from the SEC.
The shareholder vote is likely to occur in early to mid July followed shortly thereafter by the closing of the transaction.
Okay.
Before I turn it over to Rob I want to underscore my confidence in this strategic combination.
We're making great progress studying both companies' processes technology and teams and we are well positioned to implement our integration plan following the closing.
I am excited about our ability to deliver to shareholders. That's rare combination of sector, leading scale increased stability and accelerated growth.
I'll now turn it over to Rob who will provide an update on our investment activity and some more color on our growth strategy Rob.
Thank you Todd.
Our year to date acquisition activity has been robust we invested $341 million at a blended cap rate of five 1% across 17 M obese and eight transactions.
The majority of these are located in target markets and aligned with leading health systems, such as Kaiser and Sutter in San Francisco.
Cedars Sinai in Los Angeles, and common spirit in Houston.
And two thirds of these are in clusters consistent with our acquisitions in 2021.
A portion of this activity totaling $101 million was purchased through our joint venture with teachers.
Over 50% of this investment was off campus in line with our strategy to utilize the joint venture to balance risk, while retaining operational synergies and cluster benefits.
Our success this year reflects our ability to build the highest quality portfolio through selective acquisitions.
By leveraging our direct sourcing channels.
This positions were also an accretive source of funds for our investment activities year to date they have.
It contributed $110 million at a blended cap rate of four 2%.
We realized a positive rotation of 90 basis points between the average sale cap rate and our average acquisition cap rate of five 1%.
Our.
<unk> pipeline continues to expand and shape, our bright outlook for the remainder of this year with almost half of the top end of our guidance completed by the end of April we are on pace to achieve acquisition volumes similar to 2021.
Development and redevelopment activity is accelerating.
We are investing $44 million and 106000 square foot development in Nashville.
The project is supported by our recent expansion of the hospital with 50% of the building already leased for a hospital sponsored comprehensive women's services program.
We're seeing strong leasing interest from independent physician groups and expect to complete this project in the second half of 2023.
In addition, we have four redevelopments totaling $53 million underway.
We view redevelopment as an attractive way to generate incremental returns of 8% to 11% in our existing markets.
Yeah.
Our prospective development pipeline continues to grow as hospitals and health care providers expand their care footprints.
We are in advanced planning stages on a handful of large scale developments totaling over $300 million.
Most of these are within existing clusters in Atlanta, Dallas, Denver, and Los Angeles.
And all of them are on or adjacent to leading hospitals.
Expected returns continue to be 100 to 200 basis points above comparable acquisition cap rates.
And a few of these developments totaling over $100 million are likely to start in 2022.
Now I'd like to touch on a few points that I'm excited about as we work on our strategic combination with HCA.
Together, our portfolios and resources provide a broader foundation to accelerate growth in the coming years.
Combining the companies establishes a long runway to increase the size and number of new hospital centric clusters to drive value for our shareholders.
First I will outline the opportunity to form more clusters, specifically HR has 38 properties, where we only have one building on or adjacent to campus.
HCA has 72 of these non clustered properties together, our opportunity set to apply our direct sourcing model and leverage deep relationships to form these new clusters nearly triples.
This represents over $7 billion in new investments.
Or about five years' worth of acquisition work.
Additionally, we see an enormous opportunity to expand existing clusters around hospitals, where we already own multiple properties.
The combined portfolio will average just over three buildings per hospital centric cluster.
As we've been doing with our own portfolio, we can increase this average.
Increasing the portfolio averaged by just one building across more than 210 hospital centric clusters rep.
<unk> represents another $6 billion of investment opportunity.
This Matt the math behind this opportunity set is outlined in our transaction update on page seven.
Okay.
Hospital centric clusters will serve as the bedrock of growth in the coming years.
By increasing both the size and number of clusters, we can offer more solutions to health systems and providers in support of their outpatient strategies to increase market share in.
And expand their care footprint improve the patient experience and recruit and retain physicians.
A good example of this in Seattle in 2012, we had one cluster with two buildings today, we have seven clusters with an average of almost four buildings per cluster.
As we address the space needs of our growing health system partners, our shareholders will not only benefit from investing in more buildings.
But also from occupancy gains and rent growth across the portfolio.
Specifically for every 50 basis points in occupancy gain we realized an increase of 100 basis points and our fad per share growth.
And for every 10 basis points increase in our average escalator, we realized an increase of 20 basis points and our fad per share growth.
But through our combination with HCA, we are better positioned to create scale around more hospital campuses.
The benefits of scale will accrue to our shareholders shareholders through increased acquisition and development sourcing as well as long term occupancy gains and rent growth.
Which combined can accelerate our bottomline growth by 100 to 200 basis points.
Now I'll turn it over to Chris.
Thanks, Rob.
We've had a productive start to the year defined by strong portfolio performance and consistent earnings growth.
Normalized <unk> per share grew three 6% year over year to 43.
Sequential quarterly <unk> growth was primarily driven by a $2 4 million contribution from net investment activity.
This was partially offset by a $2 $1 million increase in G&A.
The change in G&A was the result of approximately $900000 of typical first quarter only expenses, such as 401, K match and HSA contributions.
Another 800000 is from stock based compensation due to our new forward looking equity incentive plan, we discussed last quarter.
And lastly, a $400000 increase in cash incentive compensation resulted from improved leasing and same store performance.
This quarter same store NOI increased two 9% consistent with our long term historical norm.
I'm also pleased to report that our occupancy continues to build.
Sequentially same store average occupancy increased 40 basis points to 89, 2%.
Which is an acceleration from the 20 basis points of sequential absorption, we generated last quarter.
Year over year occupancy increased 20 basis points and expense reimbursement grew seven 9%.
Which drove four 3% same store revenue growth over first quarter 2021.
Revenue drivers were once again strong.
Contractual escalators were 294% for the same store portfolio and cash leasing spreads were three 4% for the quarter.
As Rob mentioned health systems, and physician groups continued to demonstrate need for additional outpatient space to support increased patient demand.
This was evidenced in our portfolio by a record number of property tours in the first quarter.
Given this backdrop, we are optimistic about our ability to continue to accelerate our revenue growth drivers as well as translate occupancy gains into stronger same store growth.
Regarding our balance sheet and liquidity as Todd mentioned, we're looking at expanded asset sales and JV is to Accretively fund investment activity.
We are also in the process of recasting the bank credit facilities for the combined company to increase liquidity and extend maturities.
We have commitments for a new and expanded $1 5 billion revolving credit facility and $1 5 billion of term loans.
This includes $650 million of new term loans, which will be used to repay outstandings on our existing revolver and pay transaction cost.
When the HCA transaction closes we expect to have full capacity under the expanded revolver.
Separately, we structured a new one <unk> $5 billion asset sale term loan that can be used to backstop the timing of the asset sales and joint ventures that will fund the special dividend.
This asset sale term loan will replace the existing J P. Morgan bridge facility and be much more cost effective for any funding.
We already received commitments for the new bank facilities and expect to have the documentation fully executed by mid may.
This morning, we posted new transaction update slides, including additional financial information on the HCA strategic combination.
Slide four of the deck includes a sources and uses table.
While slide three is an accretion bridge walking through the approximately 2% accretion to 2023 Fad.
This analysis takes into account the original $1 $1 billion joint venture and asset sales.
Together with the cash G&A savings.
What is not shown on this analysis are the benefits from the additional growth drivers, including those outlined on slide six that can accelerate our annual per share growth by 100 to 200 basis points.
Before we go into Q&A I want to leave you with a couple of key takeaways regarding our pending strategic combination.
On the capital front, we've made substantial progress on our new credit facilities as well as structuring for our JV and asset sales.
And operationally, we are poised for accelerated growth through expanded investment volume positive occupancy gain and higher rent growth.
Operator, we're now ready to open the line for questions.
Absolutely.
I would like to ask a question. Please press star followed by one on your telephone keypad.
The reason you would like to remove a question. Please press star followed by team.
To ask a question Thats Star one.
As a reminder in may.
Speakerphone, please pick up here.
Before asking your question also limit two questions.
Your first question comes from the line Rich Anderson with NBC.
Steve.
Thanks.
Good morning, everybody.
So on the on the.
The asset sales on the joint venture I see you've given some some of the markets that you're targeting.
If you could give a little bit more.
On the on the transactions, though.
Is your existing teachers.
Relationship involved at all.
I assume all of the assets come out of the HCA portfolio and is there any sort of common thread two types of assets that are being targeted for sale that you could share with us today.
Sure. Good morning, rich. Thanks for the question, Yes on page five of the transaction update we do provide some characteristics for the asset sales as well as joint venture assets and I guess to answer one of your questions about teachers or the parties, we have not disclosed that yet.
We're at the LOI phase as you know and so we will obviously disclose more on that as we reach definitive agreements. There. So we're not yet disclosing those parties, but but as it relates to the assets. Your question. There on page five of the update we do provide that generally speaking the asset sales have a higher percentage of off campus a higher <unk>.
Vintage of single tenant.
Tend to be longer lease terms, as well and a little bit lower contractual escalators on the red So again, great assets, but obviously not necessarily a part of the strategy that Ralph articulated in terms of how we expect to expand and grow in our markets in and around our clusters. So that's really the idea with.
The asset sales, just really trying to narrow it down to assets, where we can really apply our strengths and our strategy and then the joint venture is really more of the same of what we've been doing with our teachers joint venture.
But also pulling in assets that might be a little bit more off campus.
But also helpful to the hospital centric clusters that Rob described and in markets, where we're building scale. So.
Again, tilting a little bit more towards off campus, a little more value add but still strongly aligned with our markets and our cluster strategy.
And.
Primarily HCA owned assets is that correct, yes, sorry that was your other question. We yes. They are all all currently HTH assets that's correct.
And then second call it the $18 billion of question.
What is it.
I assume applied some math to a path to achieving.
Yes.
<unk>.
Offer $31 75, and how you get to that for shareholders.
As a combined company with HCA rather than to take the cash offer.
Is there like.
A mathematical approach that you can share that gets us there within a reasonable period of time.
Or you're just going on the additional fact growth that will be valued more.
In the marketplace and 31 75 is it is a beautiful level within a relatively short period of time.
Sure. Thank you rich, yes, obviously, we can't speculate exactly how the market will play out relative to our performance, but certainly we have confidence that as we put the companies together the portfolios together. The teams together, we can drive that accelerated growth and we think through that combination you will see a path to your question.
Two to drive value to shareholders Thats far in excess of what you referred to as party yes.
Suppose also unsolicited proposals. So our view is clearly that we can exceed that we view some of the indications that we've shown through these asset sale and joint venture transactions as clear marks as to where value lies and value. We can create for shareholders. So that's.
That's really our focus obviously that we can accelerate growth and deliver that value to shareholders over a very reasonable timeframe.
Okay. Thank you.
Thanks Rich.
Yeah.
Thank you.
The next question comes from the line one from operating with BMO capital markets. You May proceed.
Please proceed.
Hi, good morning.
I saw.
You kind of gave the updated accretion.
Nice looking graphic.
But that 2% Fad accretion does that change at all with the upsize.
Joint Ventures clash asset sales now a $1 7 billion gross one six net given the original was one wants to just curious on what the revised.
Math is or how you guys are thinking about that.
Yes. This is Chris good question.
No.
What we showed here is just the base accretion that we had announced when we.
When we announced the transaction.
The 2% that we had talked about.
We do view, the additional JV asset sales over and above the $1 1 billion as being.
Being an accretive way too.
<unk>.
Two.
<unk> our portfolio.
Portfolio, moving forward and fund our acquisitions and development.
So if you if you assume that we're able to reinvest at the same.
Kind of midpoint of our guidance range that we've given right now call. It in kind of in the low fives five two.
That additional 500 million adds about 30 basis points.
Two year accretion.
Okay, and then just a quick follow up to Rich's line of questioning worthy assets or are the assets that are being sold or joint ventured or any of those.
Developments that maybe have a lower occupancy that maybe skew the cap rates down or.
Alright.
Part B of that same question would be are.
Are you seeing any signs of cap rates are expanding.
Sure. So on your question one the average occupancy in those portfolios is actually pretty strong I think it's over 90%. So no developments with low occupancy included so I think that answers that.
Sorry, your second question.
Any signs of cap rate expansion given the move in rates or discussions you are having today im not sure windows that one 7 billion that when those discussions started I.
I guess prospectively, what's your view of cap rates.
Sure.
These conversations as you can imagine are very very current may.
It may have started back in February but have obviously continued and we continue to see strength in those conversations and a lot of depth to continue that as we mentioned, we're looking at initiating phase II.
These asset sales or joint ventures more of those to really play into what we're seeing obviously, we can't speak to everybody's view on cap rates at all times and markets you have different views youre going to find people that may have a different view, but we're finding plenty of depth lots of parties. In addition to the ones we've already and.
<unk> these with that Theyre variance at these cap rates. So we're very.
Very optimistic and bullish that theres step here and those cap rates.
Thank you.
Thank you.
The next question comes from the line of Steven Valiquette with Barclays. You May proceed.
Great. Thanks, Good afternoon, everybody. So one of the common theme across a lot of the health care REIT earnings calls this quarter related to the medical office segment.
Is that accurate or inflationary trends or just allowing for greater rent escalators.
And also in that renewal I'm wondering if you were to stabilize and also just speak to that.
Is that sort of dynamic and what youre seeing within your portfolio in yogurt.
The leasing expense growth just in relation to the ability to push those higher thanks.
Sure. Good question I would say marginally yes, we are seeing some signs of uplift in terms of being able to push rents a bit as inflation increases obviously, it's not the hotel business or some other shorter duration business, where you can see it all moves super quickly we're talking about.
Leases that are five years or so on average so it's a little different but we are seeing some signs I think Chris referred to a record level of interest in tours. So we're seeing a lot of demand the real common thread. Obviously is replacement cost and we are seeing clear signs as we price out developments Ti.
Projects of inflation in terms of build out costs replacement cost. So that's ultimately the driver that will lift rents and we've seen that cycle play out over time.
Construction inflation is always run a bit ahead of sort of the broader inflation metrics and it generally causes that lift in.
In rent. So we are seeing some signs of it I would say its medical office, so it's not going to immediately pop.
And maybe some other sectors, but we think long term, we can drive growth. That's in line or ahead of long term inflation rates.
Okay, Great Alright.
Alright, thats it from me thanks.
Thanks, Steve.
Thank you.
Our next question comes from the line of Rob Simone.
Risk management you May proceed.
Hey, guys. Thanks for taking the question maybe two.
Two part question for me so.
Thanks, a lot for the color and I.
I guess.
Cleaning the merits of HR in HCA as a combined entity I guess, presumably.
And the board deliberations.
It obviously weighed and you guys, obviously weight the merits or lack thereof of party yet so I guess to the extent possible could you could you talk about like the deficiencies I guess the board saw in that offer and what drove that side of the decision and maybe.
What it might take to improve that offer at all and then the second part is.
Obviously.
I would assume that in this process you kind of canvas to your shareholder base vis vis the two thirds vote hurdle and so I was wondering if maybe you could talk about that a little bit and kind of how you feel about shareholder approval of the HCA deal and.
Great. Thanks.
Sure. Thanks, Rob.
I guess first we obviously put out the results of our board's deliberations and they unanimously rejected the party proposals so.
Really all we can say there obviously, we're not going to get into the details and speculate where that could go or what party F may or may not do or.
Or where.
<unk> might be so we're just going to obviously steer clear of that the board obviously, we will always review.
Seriously and thoroughly with advisors.
And management is well input as to.
Any any unsolicited proposals at anytime.
Given.
So that's where we stand that's what we've done to date in terms of canvassing shareholders. We would absolutely engage with a lot of shareholders and have had lots of positive conversations. So we continue to be very confident in our ability to convince shareholders that the strategic combination is in the best interest of those shareholders. We have a lot of work to do.
<unk> ahead of ourselves, we obviously are very pleased.
Merger proxy filed earlier this week. So it gives us a lot of opportunity to go out and discuss.
With shareholders those merits and we will we will continue to do that and we've got some time here to to really engage aggressively with everyone and anyone who wants to to hear our case. So we've got our work cut out for US we understand that and that's what we.
<unk>.
Got it thanks, a lot I appreciate it.
Thanks, Rob.
Thank you.
The next question comes from the line of Austin <unk> with Keybanc you May proceed.
Yes, Hi, just.
I just had one curious what the conversations have been like with the tenant relationships about this strategic combination and sort of what the increase Scott how they feel about the.
The increased size and concentration within the portfolio and whether weather.
They are not to the extent there is any purchase options.
That there is a heightened risks that they would exercise those down the road.
Sure I think it's early to say obviously there is curiosity.
Questions that may come into our property managers various managers throughout the company, but certainly a lot of excitement as well.
To work together with the two companies.
Really no signs of anything yet that would give us any indication that there is any alarm or concern around.
Any rights purchase rights that may be there there certainly are some I think in the.
Proxy youll see that we identified nearly $1 billion of potential there in the portfolios, but our view is it's lower likelihood for sure on execution.
Always the case, but certainly in this type of market.
We certainly would expect that to be much lower probability so not saying there wouldn't be any we certainly expect some but we don't think it's an outsized risk there.
I appreciate the thoughts and then one follow up just.
I guess, how did you guys arrive at the $500 million of additional dispositions.
And how quickly do you think you can redeploy that capital or maybe I guess, how quickly can you ramp development as it seems like thats the intended use.
Proceeds.
Sure obviously, we have been coming through the portfolios for quite some time and our due diligence going back to last year as well as through current so we continue to refine that analysis is really studying as Rob articulated the cluster approach and really where we can apply our recent resources in markets and in those clusters to really affect our <unk>.
Strategy in this accelerated growth so really it's identifying properties that are great assets, but just don't really fit with that strategy. So.
That's really how that's come about I would say, it's not a hard and fast number at $500 million, but our view is theres certainly that kind of room, there and we're.
We're certainly seeing a lot of that come out of conversations we've had with some of these parties in the.
What I call phase one so continuations, there, which are very encouraging so really just seeing that being used over time. There is no urgency there, but I think throughout the back half of the year. After closing we can use that to match fund with other acquisitions, obviously development funding.
Articulated Rob did I did that we have a pickup in development just at HR, but also then layering in <unk>. So I think you can really see that pickup in our original presentation of the combination we talked about accelerating the pace from having $100 million of projects underway at HR to more of a pace of three.
<unk> hundred million, so that won't happen day, one, but we think that will ramp. So we showed a sort of a heuristic of adding $100 million a year to the pace. So maybe within 12 months kind of elevating from $100 million to $200 million of more projects. So that's really the pace, but obviously funding acquisitions and then obviously we mentioned two off.
Rising the share repurchase program. So it gives us another accretive choice to put put those proceeds to work.
Yes.
I appreciate the time thank you.
Thanks Austin.
Thank you.
The next question comes from the line over to you Okay.
Okay. Thank you.
With credit Suisse. You May proceed.
Hi, good afternoon.
Wanted to talk a little bit about.
The strategic combination and this viewpoint you guys have put out that you will be able to accelerate.
<unk> growth through.
So about 5% to 7%.
Once the acquisition is done.
I guess the question for me is.
Ken HR on its get to that level.
Of F&B pursuit, given some of these factors or drivers were talking about.
Multi tenant occupancy increases.
The redevelopment those are all things you guys are planning to accelerate anyway as a standalone entity. So why do you need to do to get to that number it sounds like you maybe to get to that nevertheless valuation by yourselves.
Sure I mean, it's a natural question understand the question I think you have heard us talk a lot about our own successes in that regard clearly the key is it's really I think Rob said the keyword is tripling the opportunity set that you already have a foothold in many places where you can naturally.
Really then expand through hospital relationships and market presence. It's those what we would call non cluster single building on or near our hospital campus that we can go in and our own portfolio, which Rob articulated what 38 of those and then another 72 at HCA. Those are really just sort of the low.
Hanging fruit opportunities, where we can go naturally start to build those clusters. Obviously then the second piece is expanding the clusters. We already have so we articulate this in our update on page seven just the sheer volume of numbers. So our view is it really opens up the opportunity set tremendously to combined with HCA. So it really puts us on that.
<unk> much faster than we would be on our own certainly thats, what we would be striving for on our own and we think Thats just absolutely accelerates that.
Okay. That's very helpful. And then one more if you could indulge me.
So the revenue synergies again, not baked into any of your numbers I think on the slides you guys kind of talk about them, but you are radically and what they could be in <unk>, but any sense in general.
Quantification perspective, what that could do to potential.
F&B pursuit of growth and what that could do to potential accretion from the deal.
Very high level.
If you get some months ago I think within the next 12 months.
Yes, I mean, I think what we're articulating I think you're referring to is that page six where we layer in these four pieces, but occupancy gains rent growth redevelopment expansion as well as direct acquisition sourcing accelerating all of those things we've kind of laid out how each of those increments can really drive that growth from that $4 five level, we've been at in the last three.
The year is up to this 5% to seven so we absolutely think these are kind of the heuristics and the achievable types of incremental upside that we can achieve through the combination.
We would we would point to and we don't need to go through it here on the call, but there are several pages afterwards, the last of which shows how we've done that in Seattle and some of the performance that we've seen in Seattle, expanding both the size and number of clusters and really showing how that really is the model for growth and how it results in very solid.
Performance within those portfolios and so thats really how we look at doing that across more and more markets and through more and more clusters.
Gotcha. Thank you.
Thanks, Tom.
Thank you.
The next question comes from the line of John Pawlowski with Green Street, You May proceed.
Thanks, just one follow up question on the asset sales if you drill down on the weighted average four 8% cap rate, but is there a meaningful difference between the outright asset sales and joint venture.
Pretty similar pretty tight range there John .
Okay.
Todd could you talk a little bit about just a few minutes talking about the future board combined HR in HCA to us that our team directors and the size of the board seems excessive and the three new HCA members, joining it's not clear that they are doing their job all of that effectively at HCA. So.
Our HR shareholders can benefit from this new massive board.
Sure.
When you put two companies together, it's not uncommon that you would see a forward expand I think from our standpoint, we see bringing over board members from HCA as value add simply because of their knowledge base of the portfolio. The team the employees at HCA, we see some tremendous value there.
We've already seen that in terms of looking through the integration.
The integration efforts, we have made so far obviously, we've got a.
New candidate as well who will be on the board that we see is adding tremendous value. So we see a lot of benefits from these board members coming on but we do have an eye towards making sure we naturally bring down the side size of the board over time. So this isn't a 13 member board from here on out we do specifically have the Ida.
That it will it will come back down over time.
So so we're mindful of your question, but we think there's value in having some overlap here and some of those members from HCA. So.
That's kind of how we view it we think we've also placed.
Folks in the right committees with the right skill sets. So we see tremendous value from that combined board going forward.
Okay I understand the board will come down over time, but correct me if I'm wrong. The HCA Board members have negotiated nomination through 2025. So is the shrinking going to come from legacy HR directors and so two years from now we're looking at legacy HCA heavy board.
So obviously, we don't want to comment specifically on individual board members and who that would be I think our view is there's a transition period here and then it would naturally through attrition, whether it's through age or anybody circumstances, changing we're not trying to signal that.
The HR portion of the board or were not really looking at factions like that we think it'll be very natural and balanced going forward.
Alright, thank you.
Okay.
Thanks, Sean.
Thank you.
The next question is a follow up question from the line of one brand would.
With BMO capital markets you May proceed.
Hi, Thanks for letting me get back in the queue or just a couple of quick follow ups on the buyback authorized.
Would you guys feel comfortable.
Situation presented itself to lever up to <unk>.
<unk> buyback, particularly given the backdrop with the proposed HDA mergers in fact elaborating.
Actually for you guys.
Certainly we wouldn't rule out anything one obviously, we have some reciprocal operating covenants with us in HCA. So we would balance that with all the other things that are that are going on.
A lot of really what we're designing here with this authorization is to think about how we use these excess proceeds from what we're calling the current phase one joint venture in asset sales, but then really phase two that we're introducing so it's really geared towards that but certainly we're not going to rule out anything whether that requires some debt to do it.
But really it's geared towards those excess proceeds I would add to that if you just look at the authorization, we announced today. If you did that across the combined company, it's not a material it would not be a material change to our leverage level.
So if it did happen it would be.
Very measured very marginal.
Yeah.
Okay and then.
Last one for me.
Good news.
The merger from an HCM perspective have you seen any.
Turnover.
Does not.
Yes, ultimately plan forward with the synergies.
It causes any hesitance here or what kind of retention payments to <unk>.
In place to keep those people that you want to just any update on turnover as a result of the news.
Sure obviously.
There may have been some small amount I wouldn't say that we have a concerning level or anything I think it's natural.
Ordinary course, plus some folks that may be.
We have made other decisions, but nothing of concern I think our view is both boards. Both management teams are very cognizant.
What it may it may take to make sure that we retain the right people and keep everybody motivated and incentives to really focus on the transaction closing, but also the integration beyond that so we're obviously not going to comment on specifics, but certainly both very focused on that and aware of that and you can imagine we're spending a lot of time.
With the two management teams in various senior leaders across the company to make sure that.
Those bases are covered so good question, but certainly something we're very aware of and on top of.
Yes.
That's it for me thank you.
Thank you.
Thank you.
The next question.
From the line of a follow up question from Rich Anderson with CNBC you May proceed.
Thank you.
So just one follow up for me on the joint venture Slash asset sale program, how much of that was an original thought and how much of that maybe was modified since the merger announcement since the approach from party.
And through conversations with investors that you alternate or grew it to a point that made some some of your constituents talk a little bit more comfortable with the overall deal.
Was this the plan all along from the very beginning.
Sure. Good question Rich I think if you read the background of the merger you'll see that at least the concept of JV and asset sales was always there going back further our board deliberations is certainly there.
We we obviously knew we could do more than one one but we wanted to be careful about over promising under delivering there.
And so clearly we put that in in a measured level that we thought was appropriate and obviously it was combined with negotiations that we were going through so I think our view was it was always something that we could expand.
And I think the success of what we've done so far has led us to expand that so certainly if that gets more and more shareholders.
Comfortable we liked that outcome, but it certainly makes sense to us it's accretive move it's also a way to refine the portfolio and really align our strategy to be more effective going forward. So I wouldn't say any current events party or otherwise have changed our view, but certainly think it helps.
Okay, great. Thank you.
Thank you operator, I think we are.
We are done with questions and we appreciate everybody's time today.
We will see a lot of you and talk to a lot of you in the coming weeks certainly at NAREIT in a month or so and we appreciate everybody's time today. Thank you very much.
That concludes the healthcare Realty's first quarter 2022 earnings call. Thank you for your participation you may now disconnect your line.
Yeah.
Yes.