Q3 2022 Healthcare Realty Trust Inc Earnings Call
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Thank you for your patience, everyone at the healthcare Realty Trust third quarter financial results call will begin shortly during the presentation you have the opportunity to ask a question by pressing star followed by one on your telephone keypad.
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Hello, everyone and welcome to the Housecat Realty Trust third quarter financial results. My name is Jay and I'll be coordinating your crude today during today's presentation, if you'd like to ask a question you may do say by pressing star followed by one on your telephone keypad.
You change your mind, Please press star followed by two.
I would now like to turn the conference over to Ron Hubbard, Vice President of Investor Relations. Please go ahead.
Thank you for joining us today for healthcare Realty's third quarter 2022 earnings conference call.
Joining me on the call today are Todd Meredith, Kris Douglas and Rob Hull.
Remind you 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 risks are more specifically discussed in the company's Form 10-K filed with the SEC for the year ended December 31, 2021 and.
And form 10, Qs filed with the SEC for the quarters ended March 31 June 30 and September 32022.
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.
Matters discussed in this call May also contain certain non-GAAP financial measures such as funds from operations or <unk> normalized.
Normalized <unk>.
<unk> per share normalized <unk> per share.
Funds available for distribution or Fad 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 press release for the quarter ended September 32022.
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 Ron and thank you everyone for joining us for our third quarter earnings call.
First I'd like to say how delighted we are to welcome Ron to healthcare Realty. Many of you know Ron from Duke who joined US just three weeks ago, and we look forward to a long and successful partnership.
Ron will be with us at NAREIT next week.
Turning to the third quarter, we're pleased to report healthcare Realty's first result on a post merger basis.
I'd like to thank my colleagues for <unk>.
<unk> solid operating results, while balancing the extra work related to integration.
We're really just getting started but whats encouraging to me are some early successes.
G&A synergies are well ahead of schedule.
Occupancy is improving steadily and.
On the development pipeline is really strong.
These trends are especially helpful in a challenging capital markets environment.
That costs have risen sharply both underlying rates and credit spreads.
This is true for unsecured debt for public issuers as well as secured financing for private borrowers.
On top of this most banks have pulled back on their funding.
The combination of higher rates and less availability of debt financing has put everyone in price discovery mode.
Right now that costs are serving as a floor on cap rates to avoid negative leverage.
For MLD transactions, we see that costs running in the high fives to the mid sixes.
At the moment and maybe cap rates are running about the same level.
And the last three months, we've made tremendous progress on our top priority of asset sales.
We're pleased to report dispositions approaching $1 billion, so far with a clear path to reach $1 1 billion at an overall cap rate of four 8% by year end.
I'd like to commend my colleagues who've worked tirelessly to accomplish this remarkable outcome in the current market environment.
Moving forward, we can afford to be more patient.
We currently have a lot of lines in the water youll.
Youll see youll see us sell assets selectively where it makes sense strategically and financially.
Any proceeds we generate can be accretively reinvested into development projects selective acquisitions or opportunistic stock repurchases.
Another top priority has been integration and organizational realignment.
We've realized nearly 50% of expected G&A savings moving into the fourth quarter.
We're ahead of schedule and on our way to realizing full annual G&A synergies of 33% to $36 million.
Operationally, we have the opportunity to boost NOI by even more than G&A savings.
To capture this upside our initial focus has been to realign our leasing and operations team.
Our property management and maintenance teams are staffed much more efficiently to deliver excellent service.
And our dedicated project management team is focused on accelerating buildout time, increasing the speed between lease execution and rent commencement.
Our leasing platform is also fully realigned we're leveraging the brokerage model that has worked so well for healthcare realty and applying it to the legacy HCA properties.
We're poised to capture leasing momentum as the largest owner and operator of medical office properties.
Healthcare Realty's top 15 markets comprised 60% of total NOI.
In these markets, we had an average of 31 properties totaling about 1 million square feet or more.
With unmatched market scale, our leasing directors and brokerage partners have the relationships and deep market knowledge to capture demand accelerating healthcare realty's occupancy and rent growth.
Our solid third quarter operating results largely reflect a mash up of legacy results without many operational benefits.
We already see encouraging trends.
Same store NOI growth is accelerating led by 50 basis points of year over year occupancy gains.
We also see a meaningful increase in our development and redevelopment pipeline with the potential for much more value creation.
Chris and Rob will touch on several areas, where we have the opportunity to leverage our cluster model and enhanced operational scale to accelerate growth and create value in the coming quarters.
As I reflect where we are post merger I am pleased to say we are ahead of our own internal expectations.
And looking ahead, we are truly energized by the opportunities in front of us.
Healthcare Realty expects to generate the fastest growth in the medical office sector through occupancy gains rent growth and a growing development pipeline.
I'd also like to point out healthcare Realty's recent ESG efforts, we recently.
We released our fourth annual corporate responsibility report.
And we're also pleased to report our growth score of 80 points, a notable improvement over last year and among the top in our peer group.
Looking ahead, we have a meaningful opportunity to apply our successful ESG practices across a much larger portfolio.
I'd like to thank my colleagues for making this a priority during a very busy time for healthcare Realty.
Now I'll turn it over to Chris for a review of financial results Chris.
Thanks Todd.
This quarter was marked by great progress on the integration, especially G&A, where we saw early success.
On an annualized basis, we realized $16 $4 million of synergies, which is effectively 50% of our projected $33 million to $36 million of G&A synergies.
This is double the savings we originally projected to generate in the quarter.
We expect to realize the remaining 50% of G&A synergies evenly over the next three quarters.
Yes.
Now before getting into specifics on earnings I would like to point out that with the merger closing on July 20th third quarter financials represent only a partial period contribution from HCA.
In the supplemental report posted this morning, we also provided pro forma financials to show the full quarter impact of the merger.
In addition to help people better understand results, we provided run rate data showing the impact of the ongoing asset sales seasonal utilities and remaining G&A synergies.
The pro forma <unk> per share for the third quarter was 39.
And run rate <unk> per share is <unk> 40.
These results include almost $12 million or over <unk> <unk> per share of noncash merger related mark to market interest expense.
We also experienced approximately <unk> of increased cash interest expense due to rising interest rates in the quarter.
We provided a table on page five of the supplemental detailing the adjustments for run rate <unk> Fad and EBITDA.
Please note that run rate numbers do not include any future growth assumptions.
Looking at the balance sheet run rate pro forma debt to EBITDA is six three times.
This assumes the full repayment of the asset sale term loan, which had $423 million outstanding at September 30.
Subsequent to quarter end, an additional $136 million of asset sales are closed.
We expect the remaining asset sales to repay the term loan to be closed before year end.
At the end of September we had fixed interest rates on 81% of outstanding debt.
This excludes the soon to be repaid asset sale term loan.
Subsequent to the ended the quarter, we completed $250 million of additional interest rate swaps, bringing our current fixed debt ratio to over 85%.
We expect to keep our fixed to floating ratio in this range.
Turning to same store performance, we've seen accelerating growth.
Want to point out that the same store results included the combined legacy and <unk> legacy HR, an HCA portfolios for all eight quarters shown.
The same store properties represent 83% of total portfolio cash NOI.
Notably the combined portfolio is generated sequential improvement in same store NOI for each of the last four quarters.
Same store NOI growth of two 8% in the third quarter is up from 2% a year ago.
We expect to build on this momentum moving forward.
Strong revenue drivers helped to offset a 9% increase in operating expenses in the third quarter. The expense growth was driven primarily by utilities, which increased 16%.
We are generally insulated from the higher than historical operating expenses with 92% of leases having expense pass throughs.
This drove an 11% increase in operating expense recoveries year over year.
Looking ahead, the merger provides opportunities to improve overall utility expenses.
For example, we've installed real time electricity monitoring and about half of the legacy HR properties.
As indicated in our recently filed corporate responsibility report, we've seen an average 8% reduction in energy consumption. After installing these systems.
Comparatively none of the HCA properties have real time electricity monitoring.
We currently have over $10 million and sustainability capital projects underway.
These projects will help reduce overall energy usage and cost.
Shifting back to rental income same store third quarter revenue per occupied square foot increased four 4%.
This growth was driven by 50 basis points of year over year occupancy absorption and cash leasing spreads of two 9%.
Looking ahead same store revenue is poised for accelerating future growth with escalators for leases executed in the quarter being 16 basis points higher than the portfolio average escalators of 264%.
In particular, we have an opportunity in the legacy <unk> assets were at where escalators are running more than 50 basis points below legacy HR.
And cash leasing spreads are about half of the HR assets.
We expect to accelerate the growth and the escalators and cash leasing spreads in the legacy <unk> assets.
This will drive compounding NOI growth.
Now I will turn the call over to Rob for further updates on leasing and investment activities.
Thank you Chris.
Since closing the merger with HCA healthcare Realty has sold 29 properties for a total of $922 million at a four 6% cap rate.
This includes $489 million closed since we last reported.
We expect expect to close the balance of the transactions related to the special dividend by year end, bringing the total to over $1 1 billion at a cap rate of approximately four 8%.
As Todd alluded to the market for medical office buildings remains in a period of price discovery likely.
Likely for the remainder of this year and into next.
This is largely been caused by a significant increase in the cost of debt.
This increase seems to have created a floor on cap rates around the 6% level.
It's also become more difficult to secure financing, especially for larger portfolios.
Transactions greater than about $100 million.
Often need to be syndicated with multiple lenders, increasing the complexity and cost of the financing.
As we move into our next phase of asset sales, we remain active but measured as we navigate this period of price discovery.
We are testing the market with multiple smaller offerings, having a wide variety of characteristics to gauge where relative pricing is strongest.
We will consider opportunistic sales when it aligns with our long term portfolio strategy.
Any proceeds can be redeployed accretively into our development pipeline or select acquisitions.
<unk> remains an area, where we see the prospect for meaningful investments with higher yielding risk adjusted returns.
Through the merger with HCA, we picked up two active developments in Orlando and Raleigh, with a combined budget of $114 million.
Together with legacy HR projects, we now have $209 million of active development and redevelopment underway.
We expect to fund approximately 20% to $25 million per quarter for these projects during 2023.
Our long term embedded development pipeline has also increased through the merger to approximately $2 billion.
From this embedded pipeline, we have identified over $300 million of near term prospective projects.
These are made up of opportunities, where we have a high degree of control of both timing and project economics.
As an example, we inherited a land parcel from HCA adjacent to a hospital in Houston.
We are engaged in discussions with the hospital and physicians to lease space and a new 112000 square foot <unk>.
Another example from the legacy HCA portfolio as a redevelopment.
This project includes 260% occupied <unk> on another hospital campus in Houston.
A change in hospital ownership is reinvigorate invigorating investment and demand on the campus.
Identifying and executing on redevelopment opportunities like this creates a path to increase occupancy across the legacy HCA portfolio.
On the leasing front, we've made considerable progress transitioning legacy hca's portfolio to our own proven leasing platform.
We reconfigured our regional leasing coverage in each of our directors of leasing now has a more efficient portfolio to manage.
We have also transitioned almost 75% of the legacy HCA portfolio to third party brokers.
A key element of our model includes the use of third party brokers, providing enhanced deal flow and greater market knowledge to increase portfolio occupancy.
The response from our brokers and hospital partners to this transition has been incredibly positive.
For example, our health system in Dallas to reach out to our local team and express the desire for more collaboration around their strategic initiatives since we now own more buildings on their campus.
As we've experienced with other hospital centric clusters, having a deep relationship with the hospital will drive demand for our <unk>.
And the brokerage community is energized by having more leasing options. We've had several of our brokers in top markets articulate how the increased scale and variety of offerings will help them generate greater leasing velocity and improve our occupancy occupancy.
The moment the momentum generated by this transaction transition will serve as the foundation for improving occupancy across the portfolio.
Notably, bringing the combined portfolios current multi tenant occupancy of 85% to 90%, we will generate over $57 million of annual NOI.
This will take multiple years, but generate significant value.
And as Chris mentioned earlier, there is further upside from improving Keith key growth drivers such as cash leasing spreads and annual escalators across the legacy HCA portfolio.
I will note we have successfully achieved this time and time again with many of our acquisitions.
I am proud of the progress made this past quarter to integrate the two portfolios and our teams.
Through this process, we are identifying additional areas for future growth.
Executing on these will generate substantial upside for our shareholders.
Drew for now ready to open the line for questions.
Thank you we will now start today's Q&A session. If you would like to ask a question. Please press star followed by one on your telephone keypad now if you change.
Change your mind, Please press star followed by Tim.
Our first question today comes from Nick <unk> from DB. Your line is now open.
Hi, Yes, Nick <unk> with Scotiabank.
So I guess just in terms of first of all Chris just from a modeling standpoint.
The rate on the new swaps at the 250 million and also just thoughts on why not.
Do even more swaps to reduce our floating rate debt exposure.
Yes.
That $250 million, a little over 4% I think right at $4, one 2% as to all in all in rate on the swaps with a term between four five and five years.
And what that does is it brings us a little over 50% fixed on our all of our bank debt.
As we look at it it's really kind of taking a true hedge position as opposed to saying that we know exactly where interest rates are going to be for the next.
For years, which is the average remaining.
Term on on all of our bank debt.
But certainly that's something that we'll continue to watch and monitor.
If we wanted to we could we could tick tick it up a little bit, but im not sure that you want to go to a 100% fixed right now and.
Not be able to.
To recognize the back end of that forward curve when.
Hopefully rates will start to moderate.
Okay, Great and second question is just on I. Appreciate all the disclosures you gave on pro forma.
So as a D.
If I look at page five of the Sup, where you have that.
Adjusted run rate of.
Around 33 cents in the third.
Quarter.
How should we think about that as sort of the building blocks for next year and.
I guess I.
Realize that was done a while ago, but originally when you when you put out some of the.
Accretion numbers on the transaction.
Earlier this year you talked about.
$48 49 2023 combined.
Realizing interest rates.
Gone out of.
Favre for that number right now, but I'm just wondering if there's anything else relative to that.
Initial number you put out earlier this year to think about as we're thinking about next year. Thanks.
Nick Nick This is Tod I'll jump in and maybe Chris can add to it but clearly as you just pointed out the big wildcard has been interest rates and so thats had a pretty big impact on <unk>.
All that cost as Chris just talked about managing sort of the exposure on that is key in the merger was certainly a benefit gave us a larger balance sheet frankly moved us to more fixed than we were independently at healthcare Realty. So there was some benefit there.
But that's what's really causing <unk>.
'twenty three outlook to be different than it was three six months ago with rates changing that quickly. So what we've tried to do here is just sort of start.
Really set the starting blocks for the for what you said, which is building upon that with the building blocks of growth versus sort of the headwinds. We're all looking at with interest rates. So I think for US. We view. This as interest rates has not only impacted just your absolute cost of debt, but they also ripple through to things.
Like acquisition activity disposition disposition activity the types of accretion that you would normally have in those models.
So I think for us that's largely a pause beyond the asset sales that we're focused on today in terms of future acquisition volume, we're not trying to project what that might be at this point, we need things to settle out like everyone. So I think our view is really the building block. The key building block is what you've heard all of us talking about which is occupancy upside clearly we have.
<unk> strong fundamental growth drivers that compound rental growth rates cash leasing spreads those types of things, but it's really the opportunity Rob articulated to generate significant NOI through through occupancy upside. So we kind of view that is 3% to 5% growth.
On fundamental contractual escalations cash leasing spreads plus occupancy the one headwind in that Chris touched on.
Which is also a wildcard as inflation and operating expenses. The good news is we can still have strong same store performance, but it can soften it is expenses arent.
Cooling down a little bit. So those are the building blocks, we think sort of 3% to 5% operating.
Growth and then it's really kind of the question of interest rates, what do you look at it with interest rates and Chris you might touch on sort of how we think about every percent change in interest rates.
Yes.
So if you look at it right now.
About a 1% change in interest expense.
<unk>.
Overall growth by about one 5%.
So it's kind of those two building blocks are the main focus right now obviously as the market settles out with price discovery. We can we can start to look back at things like does it make sense to be selling assets recycling accretively to acquisitions at some point does it make sense that cost of capital makes sense relative to.
<unk> cap rates development yields that kind of thing so we're kind of putting those pieces in the back burner.
In the current moment.
All right very helpful. Thanks, Todd Chris.
Sure.
Our next question comes from Austin <unk> from Keybanc. Your line is now open.
Hi, Thanks, everybody Todd you highlighted the realignment of your leasing and operations teams and I was just wondering if you could give a little more detail as to what exactly that means and why maybe they were separated historically as we think about sort of that occupancy opportunity that you've continued to talk about.
Sure I mean, the realignment clearly is taking the two portfolios there was nearly 70% overlap in markets. So that was obviously a huge opportunity to get more efficient as Rob said with our leasing directors and really give them more.
More assets quality assets and fewer markets. So they can focus more on on transactions in those markets and be smarter accelerate those relationships with health systems and then the same thing with brokers, but I think the key difference was if you think about it we essentially pulled about half were able to kind of sort of what I would say is take the top talent the high performers.
Of both companies on leasing and where it made sense geographically with they're not their market knowledge their relationships and reorganize that and if you recall HCA had a very internal.
Internally driven leasing process, not really using brokers to two represent the the portfolio assets and so that's a pretty big shift so going to the healthcare Realty model of using brokers really getting access to all deal flow as Rob described so thats been a real focus of ours is getting the leasing directors.
Our employees aligned on their portfolio is getting the top talent there, making the most of that more efficiently. But then also getting brokers in place and really for all of these HTH assets that did not have brokers. So it's it is an organizational process and I think in three months time its been really.
Encouraging accomplishment.
I'm just curious if you can then kind of give us what the leasing pipeline looks like today, what's your thoughts on sort of near term occupancy gains in the signed but not occupied.
Backlog for the combined portfolio.
Yes, I think again I mentioned that our operating results for the third quarter, just really largely a mash up of the two companies without a lot of this performance.
Hansman that should come from the combination.
Encouragingly you saw the last two or three quarters healthcare realty's portfolio had been building momentum on occupancy gains.
<unk> was lagging a little but it was sort of pent up.
Progress and improvement and we're starting to see that come through here in the third quarter.
So that's encouraging and you saw that 50 basis points year over year. So I think thats the baseline momentum that we're talking about that we think can continue to carry forward, but it's really sort of what can all all of the benefits of the merger do to accelerate that so I think it's thinking how do we move 50 basis points to 7500 basis points year over year and that has.
A material benefit to the rate of growth on same store on the overall NOI growth at 3% to 5% level that I was talking about earlier. So that's really what we're seeing the least but unoccupied Chris.
Yes.
Over 500000 square feet of <unk>.
Lease leases that are in the process of build out so it ends up being about one 5%.
Of total square feet.
Thanks, and then sticking kind of operationally last one for me here is why.
While our leasing spreads so much lower than the HCA portfolio. I think you said they were about half and how much of that spread do you think you can realistically close versus.
HR is legacy portfolio.
Yes, Yes, I think if you look at that.
Have I think if you look at where we've been running.
It kind of been running on average about three five and I think that's that's.
With the realignment that we discussed in terms of.
More more given our leasing team more buildings more square footage in our market deeper relationships and transitioning to that.
To that.
Coker model, we think that we can we can close that gap over time and move that.
Lower cash leasing spread.
What we're seeing in the HCA portfolio up to something Thats.
Symbols, where where we've been operating historically.
And I think a big part of it Austin as to just a laser focus on that priority that's been a huge.
Real boost I think to healthcare Realty for the last seven eight years is really just being very focused on that.
And that's something that I think is not that HCA and other.
Operators don't look at it but it's just we think we have a very well defined.
Focus on that and I think our teams has organized the way Rob described.
We're able to produce that so again, if we're looking at something that's a little less than two versus something thats running three to four we think we can close that gap and now with so much overlap in these markets the same.
Brokers the same leasing directors internally, we think we can take that focus and really lift that rate across the HTM portfolio.
Okay. Thanks, guys.
Thank you.
Our next question today comes from Juan Sanabria from BMO Capital. Your line is now open.
Hi.
Hoping to speak a little bit more about the dispositions.
I was confused maybe a little bit by having the numbers, Chris you threw out there I mean, it sounds like there's about $100 million lastly, dispositions, but there is still four.
400 million plus left on the term loan. So I just wanted to make sure I understood that correctly.
And then secondly.
What are the realistic prospects for further dispositions, which you had previously highlighted.
As a potential source to fund the buyback at this point.
Okay.
What's a good earmark for kind of expectations for 'twenty three as you sit here today granted but theres a ton of uncertainty in the markets and where rates are going up but just curious on your thoughts there.
Yes.
I can I can touch on that so basically the way to think about is the $423 million that was outstanding at the end of the third quarter.
It has been paid down because we did have after a quarter close we had an additional $136 million of asset sales that closed in October we have another 100 million or so that that are scheduled to close here in November .
Kind of leaving the balance there to get to the full paydown.
In December so.
That's the that's kind of the progression on the.
On the asset sales and the and the Paydown of the debt.
And then as you think about dispositions going into your second question on just expectations for 'twenty three I think thats something I would say as you pointed out it's a little I think.
It's a little presumptive to know what that would be for 'twenty, three but I understand the modeling question before you will recall, we talked about our phase III $500 million to 1 billion certainly we're not we're not in that realm, I think with what's going on in the market today, Rob describing sort of how we're looking at a lot of different smaller transactions in the market.
Looking at something that maybe is in the 250 $300 million range is probably not an unreasonable spot to think about for the year, but I think that's going to evolve quarter by quarter as price discovery unfolds. So you can even see in some of the assets that Chris just went through in November and December I mean, those cap rates I mean, we have the luxury that.
We had sold the lower cap rate assets sooner. So we're working from a four six and we had a little room.
Sell at cap rates that are maybe six or so on average.
Here more recently and I think thats kind of where your head has to be if you wanted to sell assets and its almost quality be damn it doesn't matter youre, just not going to find many people willing to pay too much I mean, maybe if you all cash buyers will or if there's something unique about the property stabilized or something that you can get a lower cap rate. So I.
For us it will just be measured I think thats the word patient measured in other words, we're using is just kind of feeling our way through this price discovery and I think with such a huge portfolio. We've got a lot of opportunity to really discover early where price prices are and make the best of that we.
We think we've got lots of accretive choices to redeploy that capital.
And then you flagged.
2 billion kind of enhance.
Okay.
Predominant pipeline.
But you could maybe to 300 million.
Curious.
The timing of that $300 million.
Okay.
Capital spending in the.
Funding for that.
And then kind of.
Yields were you expecting.
Benchmark that.
Kind of a 6% you flagged as your cost of debt.
To get a sense of how accretive that could be.
Essentially for the companies.
Sure. This is rob on the.
As I've mentioned earlier for 2023, we're looking at about 2000 $25 million of funding and Thats really related to the current pipeline as you move to that $300 million perspective pipeline I'll point out those those.
What's really encouraging about those projects that we control those either through we own the land.
The relationship with the developer.
Something that really allows us to to be measured and to work with the health system and physicians in terms of planning.
And generating the right economics for us and so I think as we think about the timing of that we've laid out sort of I think the.
First the first projects with possibly started towards the end of 'twenty three and then it didn't really move into 2024 before we would have to start funding anything. So those are our expectations right. Now those projects are still early we are still in the planning phase we're having great.
<unk> with those health systems in those physician groups.
As you guys know and as we've communicated before these types of developments take time to quality developments take time, and so we think fit.
End of 'twenty and into 'twenty, four won't be where we will have to start thinking about funding those.
Probably $20 million to $25 million next year, maybe that.
Fix up into that $25 million to $50 million range per quarter for 2024 in terms of yields.
You said you mentioned, the 6% cap rate that we're seeing right now kind of sort of earmarking as the cost of.
Sell assets and we really view that as a proxy for our cost of capital and so traditionally we said about 100 to 200 basis points over our cost of capital is where we want to be on developments and and for that group of that $300 million of developments and redevelopments. So thats. The range that we're targeting kind of that right now that 7% to 8%.
Initial yields stabilize yield on those deals so.
Certainly.
As I mentioned the control over those projects and that we can control the timing and really manage the economics.
We we control the projects and so.
As we move forward as if the environment shifts its costs rise if capital costs changed and we can certainly be mindful of that and adjust but that's the range. We're looking at right now.
Thank you guys.
Our next question comes from Michael <unk> from Citi. Please go ahead.
Thanks, Nick Joseph here with Michael maybe just on those asset sales from from the quarter at a four six relative to where cap rates are today is that just a timing mismatch that you guys got the timing right there or is there anything about those assets either from an occupancy.
Or near term rent growth opportunity that makes the <unk> not really a stabilized cap rate.
No I mean, there is certainly a variety of cap rates within that within the four six I would say there is some things in there maybe one or two that have a little bit of lower occupancy as you point out in fact, a couple of a group of assets, we sold into the JV with CBRE would fit that description, but again that's relative.
Small and the mixture I think the overall occupancies high Eighty's of everything we sold so far.
So it's not a material difference.
But you also have some assets some deals that are in the sixes for sure. So it's a range.
Had.
Few people stepping up to some very aggressive cap rates that reflected.
The environment at that time so.
Certainly nothing material that would say oh that $4 six is materially higher on a stabilized basis certainly for six is just the pit stop on the way to 48, it's not it's not as though we think 46 is the norm.
<unk>.
And then so I think <unk> is really still where we're focused I think if you use the run rate table. You can you can begin to sort of see how.
That's shifting a little higher in some of these later sales, but that was kind of by design and we're very glad to have that some of that lower cap rate.
As physicians completed and behind Us.
Thanks, that's helpful.
And then just maybe on buyer underwriting or how you are even thinking about underwriting from an IRR perspective, obviously the cap rates have moved up is there anything from a growth.
Perspective that may have changed over the next three to five years, what do you think either from a transaction.
IRR standpoint.
Are you talking about on sales or how we look at IRR for what we're buying how you look at it and how you think a buyer would be either how youre looking at acquisitions, if you're underwriting today or just broadly how the broader market is not the right thing. So just trying to think about how changes have occurred over the last six months, obviously cap rates are.
Yes, I'm trying to get a sense of where IR.
<unk>.
I mean thats the big one next year I mean for sure is the cap rate and if you think the other big moving part would be the growth profile that you would expect I think broadly speaking for the <unk>.
B business I think people are still going to be in the two to three range. When they think about growth and it then it's going to come down to the specific situation and say what are the contractual escalators whats the occupancy what's the ability to drive that based on market rents and where you are relative to that.
What's the Capex side, I mean, that's an important piece as well so.
I don't think I see anything thats fundamentally shifting the landscape beyond.
Beyond cap rates I think people are sort of trying to wrap their head around the old bogie of IRR was in the seven range Unlevered is that now eight because cap rates have moved a 100 basis points I mean, that's where I think price discovery is focused and I think maybe the one nuance to us which you've seen us for due for some time is.
We do look at the growth rate, a little differently because of our cluster model and our market scale. We do think we can go in there and it's kind of all the things. We just talked about I mean, we're looking at that same idea that we can accelerate growth from what I would call. The low end of the two to three range to the three range or better, especially if you add.
Occupancy in the HCA legacy portfolio, and even HR portfolio give being strengthened by enhanced scale. So I think we do look at it where there's opportunity to accelerate growth, but I think broadly speaking people are still looking at two to three and I don't see sort of a systemic challenge to that.
Two to three concepts.
Thanks I appreciate it.
Sure.
Okay.
Our next question comes from Rich Anderson from SMB. Please go ahead.
Thanks, just a quick clarification first to Chris.
1%.
1% increase in interest expense creates a one 5% impact on <unk> did you mean, a 1% increase in interest rates.
Yes, I, probably misspoke and technically we should be saying, one percentage point 100 basis points, not 1% change, but yes, I think you've got the idea.
Yes, okay.
I just want to make sure I understood that.
The.
Yes.
The side by side I did myself.
Before the call what you guys looked at it from a releasing and escalators.
<unk> relative to the combined company you went through that in some detail, but one part that struck me as interesting was.
Today, the combined company, 26% of the portfolio was between zero and 3% escalators.
You guys were exactly zero percent in that range.
As a standalone company.
I imagine, it's going to take some time to improve upon that statistic at that 26% up into the upper echelon category. So when you think about the timing of all these escalator improvements to the portfolio cash releasing spreads and so on is that it sounds like it's going to be like a three or four year type of kind of <unk>.
<unk> is that fair to say.
Yes.
Well.
I think in terms of.
Your point of being able to capture all of it yes. It does take multiple years. If you look at our weighted average lease term that's got passed it flow through.
But in any particular quarter.
We lay that out in terms of what those spreads are and each quarter to give a bit more detail and show some.
That distribution behind the average, but it does move around quarter to quarter. The consistency that you have seen is at the back part of the distribution is that three to four so that's still there.
But.
As you know rich one of the things that we've talked about is we've had a focus on this for the last seven eight years is changing that distribution, reducing the amount that are negative or zero to three so that you can latch.
The fat ended the tail the strong and.
The over four which some of those or even double digits really start to.
To show through in terms of the average so thats I think thats whats going to be our focus and.
The expectation is that we're able to continue to improve that over.
Over time, which.
And I think it goes back a bit to what what Rob mentioned that this is something that we've been doing on acquisitions for years. So what we see in the HCA.
Folio is not dissimilar from what we've seen in other properties and other portfolios we've seen seen historically so.
<unk>.
We're very encouraged and we think that there is.
There's a lot of value that can be can be unlocked as you said.
It's a multiyear process to capture all of it rich one of the I think youre right in observing that that takes a little time.
That's getting organized first but I think the key phrase that our head of leasing would would use would be deal discipline.
And just having a rigorous process around that and a laser focus on the objective and I think thats just something as Chris said is for US is unfolded and been very effective.
Its organizational but it's also leadership.
Deal discipline, and I think Thats, what were encouraged by that we see a huge opportunity to bring that to bear on a significant portfolio and frankly, some tailwind that can help us lift that across both portfolios as well so.
As we said the mash up this quarter as you just pointed out presents some interesting comparisons or contrasts to standalone, HR and Thats really where the opportunity lies.
Okay.
On the cap rate discussion and the 48 average that youre expecting on the $1 $1 billion is there anything definitional about that cap rate and what you are saying from the 6% ish type range that youre seeing in the market today is I assume that <unk> is a backward looking number is that correct.
It's really I mean, both are really thinking about that first year with not a lot of lease up and we were pretty disciplined about how we think about when we talk about a cap rate on the acquisition, we talk about the first year NOI starting now.
And it's the same thing on this four eight that we're talking about and the only I mean, you can kind of pick it up in the run rate table in the supplemental.
We're talking cash we're not talking to straight line rent because thats can be a wildcard and unknown.
But I would say on average our typical difference between the cash cap rates, we're talking about and the noncash straight line rent, maybe 20 to 30 basis points.
In the run rate table, it's more subtle than that because we sold a number of quite a few assets early in the quarter. So there wasn't really much if any straight line rent booked.
So there is actually much smaller difference so I think the four acres to like a 49, if you kind of look at the run rate table. So its more subtle than that across all $1 1 billion across all of it.
Okay and last for me.
The other thing when I did my side by side as you provide your components of <unk> guidance, you're not doing that now obviously a lot of movement around do you think by this time next quarter youll be able to resurrect the components of <unk>.
The combined company or is that is that going to take some time.
Hi.
I won't say, we're committed to it by next quarter, but I think conceptually we like it helps us have better conversations with with.
You and your peers investors.
In general So I think we some form of that will come back whether it's next quarter or the following but it makes sense coming into the beginning of 'twenty. Three we'll just have to look at that and I think again, just with where the market is.
Some of those things are a little tougher so you might see us do a little more operationally focused.
The part about predicting exactly how many acquisitions are going to do in the year and dispositions that part maybe that holds for a little longer so we're well understood yes.
Yes, no no big promises, but I think directionally, we favor that.
Okay. It sounds good thanks, everyone.
Welcome Ron.
Our next question comes from Steven Valiquette from Barclays. Please go ahead.
Great. Thanks, good morning, everybody so.
And there was a lot of discussion.
Around the time of the merger and the announcement of merger close around revenue synergy potential from the deal just a couple of questions around that I guess first with the.
That long term embedded development pipeline of $2 billion that you talked about is there any part of that you could earmark as incremental opportunities specifically related to the merger with all the incrementals will be forthcoming in would be in addition to that $2 billion.
First question, then I've got a couple of follow ups based on the answer on that.
Yes. This is Rob I'll hit you hit your first question there I think that.
When we when we did the merger we looked at the two.
Pipelines in our embedded pipeline was about 1213 and I think there is there a pipeline at the time, which is about $6 million to $700 million. So if you take the $2 billion.
Really what we see as sort of a mash up of the two pipelines, we really believe that there's more behind that we're just getting into kind of.
Understanding.
Finding opportunities within the portfolio for redevelopment I think decided one on my.
In my prepared remarks in Houston, two buildings, there that or they are about 60% occupied.
We view that as an.
<unk> two <unk>.
Redevelop those properties and drive occupancy given the favorable environment on that campus and we think there's more there's going to be more behind that and as we get in we will we will add to that $2 billion and grow that $2 billion. So we're optimistic and excited about.
The opportunities that we have ahead of us.
Okay.
For the 300 plus million dollars of near term opportunities I mean, do you show that list on page 15 of the supplement so it makes our lives easier to track all of that.
I guess the question is since we're not really in the greatest operating environment for health system as a whole right now.
Is there any chance that some of that 300 plus million could be cancelled or is that all contractually locked in and then also notwithstanding the tough operating environment sounds like you still think that 300 plus million of near term opportunity could actually grow based on what you see I just wanted to confirm those.
Those views just in light of the overall operating environment for health systems.
Yes.
You touched on your first question related to the $300 million.
Certainly those are those are we're not locked in in terms of.
Contractually with those systems to do anything.
But those <unk>.
Doherty of those.
Projects are associated with growing health systems that have growth initiatives in front of them and they are aligned with leading.
Hospitals in markets like Denver.
There they have a real initiative to grow and its and its and its part of their ongoing kind of market share.
Our plan and so.
Certainly some of these can move around and it could be delayed certainly they could be they could.
It would be canceled, but right now where we're having deep dialogue with most of those.
Projects on that list and so we're very encouraged by what we see.
Going forward and have a high degree of confidence in those projects.
Yes, I think Steve I might touch on your comment about the health systems in the environment I think.
You followed this closely but certainly health systems are dealing with a pretty historic labor cost problem and availability problem. So no doubt and then also just.
Following some of the public companies that have reported.
Margins are still for the better better hospitals and systems margins are still.
There is still strong but they're.
Being challenged by those labor.
And cost increases everywhere, so no doubt, but I think the stronger systems have the wherewithal to stomach some of that.
Yes.
The plentiful cash on hand at a lot of not for profit systems have.
Credit ratings, they have but their cost of capital is going up too. So in many ways I think what we can look at is the actual day to day conversations. We're having are very productive I think it's going to create opportunity with these health systems may need to lean more into folks like ourselves to execute on their strategic initiatives and rely on.
On third party capital and operators to get things done because they are their old days of Super cheap debt, which is their main source of capital just as much more expensive today like everyone's. So I think we see opportunity there, but we're certainly mindful that they have challenges of just putting together those those operating plans and initiatives.
<unk> for their growth.
Growth plans, because staffing challenges so I think it's.
Kind of like the interest rate environment, it's navigating here quarter by quarter to see how it goes.
Okay, Alright, I appreciate it thanks.
Sure.
Our next question comes from Daniel Bernstein from perhaps your line. Your line is now open.
Hi, Thanks for taking the questions here.
I had a question here on the Capex, which seemed a little bit elevated in the quarter, Although I think in your <unk>.
Mentally you said it would come down to about 16% of NOI, which still seems a little bit higher than what I was modeling and expecting so.
Just wondering whether you have changed some of your your thoughts on the amount of capex relative to <unk> guidance and.
Is there any other changes in their relative to say, we've seen activity or.
Capex needs, which.
Let me see HCA portfolio. Thanks.
Yes, Dan.
As we look at Capex is something that moves around from quarter to quarter.
So.
When we typically talk about it we typically look at it on a trailing 12 month basis.
But with the merger that's a little bit more complicated, but digging behind if you look at it year to date between the two companies were running just under 16%.
That's the reason, we use that number as well as thats, what we used.
Inside of our initial underwriting of the of the merger of what we expected the combined maintenance capex to be.
Now Thats, a kind of a long term trend number if we're seeing real benefits in terms of absorption on occupancy and we're spending capital there.
That's.
Certainly growth capital, that's well that's well worth it.
But yet either side of that 16% and like I said, it's going to move around from quarter to quarter fourth quarter is typically one of our higher quarters as just things wrap up so.
I wouldn't think that that would be unusual next quarter either.
Okay.
Potential tenants or signing leases or are they asking for additional ti relative to I.
I guess increasing.
<unk> spreads and increasing rents and we've seen that in the life science space, a little bit I'm, just wondering if you've seen that in the MLP space as well.
Trend wise, it's not showing up I mean, if you see our SaaS that we provide in our supplemental we even combined with <unk>. This quarter. It really is not ticking up much.
Think situations that involve redevelopment like Rob articulated certainly thats, a little different game and so youre going to see more significant dollars to reinvigorate some buildings, maybe that had been lagging.
But just in the normal course that goes into maintenance Capex I would say, we're not seeing any particular trends that suggest that.
We've been through some some elevation of that in past years, but don't see that as a new trend that suddenly that's going to be on the rise, but it's case by case with tenants I think a lot of health systems arent looking for a lot of capital and relying on us where it's kind of split that way, whereas the physician side might be.
From time to time, a little more elevated so it kind of balances out so I wouldn't say that there is a remarkable trend worth pointing out here and I will say that our leasing process and the way that we run the analysis on each of our leases and IRR based.
Analysis.
With hurdle rates and so.
If you are.
Looking for more Ti.
We are going to balance that with making sure we're getting the return on it through through higher rents.
Of course.
Another quick question here it seems like your development pipeline is fairly robust, but I would think.
If you're a merchant builder, where regional builder youre going to have trouble, making the math work for development.
Are you seeing any delays in development outside of your portfolio.
Broadly for the mob space or any maybe transaction development deals that somebody else was going to take and develop that maybe that have come your way or somebody you.
The hospitals inquired, whether you want to take it or not.
Just trying to see.
Maybe development in the industry will be.
A little bit subdued relative to where demographics.
Okay.
Yes, Dan this is Rob I think that.
In terms of developments coming our way I mean, we're certainly out there in the market.
Dialog and with all of our health system partners.
But we have seen some some deals that.
Are out there that are probably headed in a direction that you're that you are articulating and then somebody somebody cut a deal it up at a lower yield on cost and debt markets have shifted and now they're upside down on in terms of the negative the negative leverage and so.
Certainly going back to the health system, and having that conversation as well.
A tough one and I think that.
We could see some opportunities there that will come back our way at adjusted.
Yields that better represent today's today's cost of capital so certainly.
I haven't seen a ton of it yet, but we think that theres going to be some opportunity out there, yes, Dan it's early but I think youre exactly right, we saw a little bit of that in the prior cycle.
Five years ago.
You could see it again because <unk>.
That costs are such the driver of these third party private developers and Thats, just wreaking havoc on their economics, and maybe some of the promises they made so.
It's early but I think that is a bright spot for us I do think just to add that I do think thats whats unique about our pipeline as we control those opportunities and so.
We can we can we can manage the economics, when we can kind of work with the systems.
Because we own the land and in many cases, that's adjacent to the hospital. So I think that's the key difference between us and a merchant builder.
That's great color.
Actually if I could I'm.
I'm sorry.
Can I ask one more here sure go ahead.
Sure.
How are you thinking about the trade off between maybe the future yield on development versus buying back your stock here I mean, the implied yield clearly over 7%.
Obviously, the markets with some kind of pricing discovery, but it seems like your stock is fairly attractive.
Yes, I think the difference there is time horizon.
If we find ourselves with excess proceeds and just.
I'm, just making up a number but let's say, we had an extra $100 million of proceeds and Chris.
Chris is looking at as choices and saying, what's the best in the near term that might be stock repurchases. As we look further down the line I think clearly you start looking at things like development because those can as Rob said be at yields that are that are even higher than that that 7%.
Buying back the stock has growth implications in it too.
So we like those prospects. So I think we would look at both very carefully stock repurchases are more immediate and and known whereas development is much more of a long term planning process. So we think of it more as what Rob said, a $20 to $25 million a quarter and kind of ticking that up as we go into the latter part of 'twenty three.
Four assuming the environment.
<unk> is comfortable.
It's really about excess proceeds from dispositions so we.
We'll see when we get there.
So maybe it depends on that $500 million to $1 billion, whether that materializes or whether it's just behind them exactly yes.
Alright, Thanks, that's all I have.
Okay.
Yes.
Yes.
Our next question comes from John Pawlowski from Green Street. Please go ahead.
Okay.
Maybe just a follow up.
Just your comments right there Todd could you just give us a sense for the debate.
By $995 million of acquisitions versus buybacks. It would seem that you did have some dry powder you chose acquisitions over share repurchases.
Any color on that debate internally it would be great to hear.
Yes.
Really a rearview mirror issue and it's not how we think about it going forward I mean, those were things that were committed much earlier, obviously at cap rates that made more sense at the time relative to the cost of capital. So I think that frameworks just completely shifted.
In recent times, so I think you will see the quarterly pattern.
<unk>.
Next to nothing and we might buy one small asset or here or there if it fits into our strategy around a hospital, but youre not going to see large acquisition volume.
In the fourth quarter for sure. So it's a very different conversation today than it was three months ago four months ago, even two months ago, but.
Those are all as we said really kind of almost defensive moves around clusters that we have an opportunity we see with health systems that we don't want to lose but.
If you look at the detail on the third quarter pretty small individual deals I mean, we're certainly not looking to to move material amounts of capital in and again fourth quarter, you won't see anything like that.
Okay.
Same store NOI growth in the legacy HCA portfolio trending versus expectations, you had embedded in prior <unk>.
Yes.
Okay.
Yes no.
It's following the trajectory of what's going on with with leasing across both portfolios, where occupancy is rebounding there a little bit.
I think as Todd mentioned earlier, a little bit behind us encourage of that rebound but.
They have been if you look back over the last year or so they've been running more like 1%.
And that's starting to move up to the two plus.
And our expectation as we continue to.
See that improvement in occupancy.
That's building that they can.
You can start to move that into.
Mid twos to even towards three.
On their assets, which.
We think being combined with with what's going on in the legs Chr portfolio can push us above the high twos, where we are now to three plus moving forward.
Okay.
Is it in line with expectations, our Occupancies that was lagging a little bit.
No I was saying that their occupancy.
Rebound.
Is behind where.
<unk> was but no in terms of what is actually the performance and what is happening is.
As in line with with what we underwrote.
It was always behind and we knew that was an opportunity coming ahead, so that hasnt changed.
Okay understood. Thank you for the time.
Thanks, John .
Our next question is from.
Sanya from credit Suisse. Your line is now open.
Okay.
Hi, Yes. Good afternoon, just a quick focus on just kind of dividend policy on dividend outlook.
The quarter, if im looking at this rate did not cover the dividend and then even when you kind of pro forma everything out.
<unk> 33 cents on a dividend of 31.
It's pretty tight just again as you kind of think out over the next 12 months with some of the synergies.
The other thing is going on how should we kind of think about about that going forward.
Yes, Tayo I think the key thing is that run rate that we've provided.
Taking the current operational status adjusting for specifics that we know on asset sales G&A savings.
Interest rate impacts, obviously, some noncash as well, but on fad at all.
Cash I think our view is that the key there is it doesn't reflect any operational improvement or upside clearly we will see playing out as we were just discussing.
In the quarters ahead, especially in 'twenty three so I think thats. The key and then obviously the countervailing force is interest rates, which we've talked about so.
I think our objective here is that we don't we don't see a material change, but that's something we'll evaluate each quarter as we navigate this environment with interest rates and competitive growth operational growth might take.
A little longer, but it's recurring and it's powerful but interest rates have moved swift swiftly and that impact is pretty quick. So I think you just have to balance out. The two when you think about dividend policy I think on Capex, Chris touched on that we don't see a material shift there on anything the only caveat being.
We might invest in some growth capital that generates occupancy upside, but that's not a permanent run rate type of conversation. So I think from a dividend policy standpoint, we will reevaluate that with the board.
In the coming quarter and revisit it and see where we are but we're not we're not overly concerned at this point as to where that is we think we've got a path to improving so.
I would say its workforce.
Sure.
Okay.
If I may ask a follow up.
You did make some some useful comments up about.
The hospital, operator landscape and kind of what youre seeing in regards to demand.
With renewals and kind of getting in front of.
Really good retention rates, but in regards to new leasing.
Are you just kind of focusing a little bit more on that and just kind of how the hospital operators are kind of thinking.
Kind of about kind of picking up new species.
Just ask that in the context of looking at your leasing velocity this quarter versus kind of like the last two quarters of the two separate entities, where it seemed like it slowed a little bit in third quarter relative to <unk>.
Okay.
Yes.
I don't think its a material change.
In terms of velocity I think we're seeing the conversations we're having the activity level the amount of leased and occupied is staying strong. So I wouldn't say, we're seeing a material change and certainly we're mindful of the operating environment, but I think the best feedback as those conversations with whether it's physician groups or hospital groups.
And that's that's robust and it helps to be in really attractive markets, where the demographic growth is is really pushing the demand and theres still a lot of pent up need coming out of COVID-19 to address what wasn't sort of.
Growing in terms of space needs.
<unk> lease commitments.
Better part of two years. So I think there is there is some pent up demand there that we see that will keep that accelerating so.
Notwithstanding there is labor challenges, there's cost pressures, but I think if anything shifting more to outpatient is often the answer to the challenges that you had health system space. So we don't see any slowdown on that front, yet and certainly we're mindful that there is challenges in the operating environment for our customer base.
Okay, great. Thank you.
Thanks Pat.
Our final question today comes from Mike Mueller from J P. Morgan. Please go ahead.
Yes, hi.
Couple of questions. One I think you touched on redevelopment before but for new development, what sort of return hurdles do you need given that cost today and to market rents are they didn't really justifying the development. That's the first one and then the second question is to the extent that you can find acquisition opportunities where the.
That pencils out are you seeing any.
Guess differences in terms of the mix of.
Stuff.
Fit the JV versus on balance sheet.
Yeah, Hey, Mike, It's Rob I'll touch on the development I think in terms of.
Returns on new development that makes sense right now.
<unk> indicated earlier that.
We think cap rates from Obs right now are around 6% and kind of view that as our cost of capital or selling assets to rotate into new developments and so we still look for that 100 to 200 basis points over and above.
The cost of capital day, so I'm kind of thinking seven right now today in that 7% to 8% and I think in terms of rents and can you justify that.
Generally when we're working with health systems, who have growth initiatives and are eager to to to expand.
The outpatient services, they are buying practices and moving them into these.
These new locations and so oftentimes they understand that when they have a new building.
It's going to come.
With rates that are at the top of the market and oftentimes you're pushing them.
The market so.
Certainly see that occurring with the development opportunities that we have where we control.
These opportunities through land that we own next door to the hospital and its a great expansion plan and really as Todd mentioned right now in there.
The cost of capital is rising is really a valuable.
Piece for them to have that they can they can rely on that third party capital, but yet still execute on our growth plan. So we think it makes a lot of sense and that's why we.
We continue to focus on health system relationships and deepening those relationships and when we do development. It's in line with their growth initiatives.
Yes.
Mike on your second question about acquisitions, penciling thinking about balance sheet versus JV I.
I think if you go back to a little bit what Rob said I think right now if you think about the balance sheet. The way, we think about cost of capital.
It's really those disposition cap rate, so maybe thats in the six range.
And certainly I think as the market settles out we'll start to find some of those.
We certainly see them already but as I mentioned before we're not looking to to do much in the way of acquisitions for the time being until some of this settles out a little bit and we have more clear sight on excess disposition proceeds.
I think the default is always the balance sheet number one, but where we can make sense of JV.
Acquisitions, really and development to some extent, but focusing on acquisitions is really using that to counterbalance sort of that sort of down the center of the fairway.
Type of acquisition, we put on our balance sheet, but it's a little bit more off campus, a little bit more value add where we can create an extra set of returns for some of the risk profile that might come with those.
We like those two and we can do them on balance sheet, but sometimes it can make some sense. There is also sort of some geography that we try to make sense of again, we're not really constrained necessarily with our JV partners on geography, but I think it would be a good partner, we want to make sure that we're everything we're doing in a particular cluster we want to be in alignment with our partner on those.
So we tend to try to whatever we're doing in a particular cluster if it's in a JV already we might do the next acquisition whatever it is.
Style is whether its value add core or off campus whatever it might be.
If it's related geographically will probably default to that or at least give them an opportunity. So those are kind of the boundaries of how we think about I think balance sheet versus versus JV acquisition.
Got it okay. Thank you.
Thanks, Mike.
Yes.
There are no further questions at this time, so I'll hand, you back over to CEO .
Todd Meredith for closing remarks.
Thank you drew and thank you everybody for joining us. This morning, we appreciate everybody's time and joining us and we look forward to seeing many of you at NAREIT NAREIT out in San Francisco.
We have a great rest of your week.
That concludes today's healthcare reality Trust third quarter financial results you may now disconnect your line.