Q4 2022 Healthcare Realty Trust Inc Earnings Call
Speaker 1: Thank you for standing by. The Healthcare Realty Trust 4th Quarter and in Conference School will be starting in a few moments time.
Speaker 2: And.
Speaker 1: name is Brieka and I'll be your event specialist, operating today's call.
Speaker 1: After the speakers presentation today, we will conduct a question and answer session.
Speaker 1: If you wish to ask a question please press start followed by one on your telephone keypad.
Speaker 1: If you change your mind and would like to withdraw your question, please press start followed by 2.
Speaker 1: and for operator assistance at any point it's star 10. Thank you. I would now like to hand the call over to our host Ron Hubbard of Investor Relations. So you may begin your conference run.
Speaker 3: Thank you, Brica. Thank you, everyone, for joining us today for Healthcare Realty's fourth quarter 2022 earnings conference call.
Speaker 3: Joining me on the call today are Todd Meredith, Chris Douglas, and Rob Hull.
Speaker 3: or a minor that except for the historical information contained within. The matter of discussion in this call may contain four looking statements that involve estimates, assumptions, risks, and uncertainties.
Speaker 3: These risks are more specifically discussed in the company's Form 10-K filed with the SEC for the year ended December 31, 2022. And Form 10-K is filed with the SEC for the quarter ended March 31, June 30, and September 30, 2022.
Speaker 3: These four looking statements represent the company's judgment as of the date of this call.
Speaker 3: The company disclaims any obligation to update this forward-looking material.
Speaker 3: The matters discussed in this call may also contain certain non-GAAP measures, financial measures such as Funds from Operations, or FFO, Normalized FFO, FFO per share, Normalized FFO per share, Funds available for distribution, or FAD, Net Operating Income, and a Y.
Speaker 3: EBITDA and adjusted EBITDA.
Speaker 3: 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 December 31, 2022. The company's earnings press release, supplemental information, informed 10Q are available on the company's website. I'll now turn the call over to Todd.
Speaker 3: Thank you, Ron. And thank you, everyone, for joining us for our fourth quarter 2022 earnings call.
Speaker 3: I'll start by pointing out that we've successfully achieved two key merger integration objectives.
Speaker 4: First, in January we completed the final portion of our planned asset sales to fund the merger-related special cash dividends.
Speaker 4: It's worth noting that we executed these sales at our targeted cap rates. Second, we realized our full annualized GNA savings in the fourth quarter.
Speaker 4: At some half the time, we originally expected.
Speaker 4: The primary driver was reaching our projected staffing levels.
Speaker 4: Most importantly, we fully transition to the healthcare real estate leasing model with full brokerage coverage across our portfolio.
Speaker 4: Later, Rob will expand on how this is already building leasing momentum.
Speaker 4: I would like to commend my healthcare realty colleagues for their incredible effort and dedication to accomplishing these milestones.
Speaker 4: Looking to 2023, we expect to return to a steady state capital recycling mode.
Speaker 4: Given the current state of capital markets and the completed dispositions, we expect to optimize the portfolio at the edges.
Speaker 4: Proceeds will be reinvested primarily into our redevelopment pipeline.
Speaker 4: This is our top priority for 2023.
Speaker 4: We expect acquisitions to be modest, only selected properties to protect our market position in cluster strategy.
Speaker 4: With market scale and deep relationships, we are well prepared to ramp up accretive acquisitions when capital markets improve.
Speaker 4: The secured financing picture has improved notably since last November .
Speaker 4: This is important because secured financing drives nearly two-thirds of MOB buying power.
Speaker 4: Both underlying rates and spreads have improved.
Speaker 4: All in-rates improved more than 100 basis points from the P-Class fall, and now we're about 50 basis points better.
Speaker 4: The breadth of lenders remains tight, but quality properties are getting financed.
Speaker 4: Rates are now trending in the high five.
Speaker 4: This improved financing has pulled MOB cap rates a bit lower since November .
Speaker 4: toward the 6% level.
Speaker 4: M-O-B Fundamentals remain favorable with robust demand for outpatient facilities. Health care is one of the largest, most stable, and fastest growing employment sectors.
Speaker 4: Health care employment grew nearly 4% year over year in the most recent report, with ambulatory services growing even faster. These employees are coming to work every day in one of our buildings.
Speaker 4: We also see green shoots that inflation pressure and labor costs are easing, especially for health systems.
Speaker 4: We're talking to physician groups who are committing to more space today.
Speaker 4: and health systems that are actively planning for more rapid outpatient growth in the near future.
Speaker 4: For the fourth quarter, we reported strong results in key operating metrics.
Speaker 4: Thame Store revenue grew well above 3%.
Speaker 4: Propelled by healthy rent escalations.
Speaker 4: Catch leasing spreads and occupancy games.
Speaker 4: and occupancy gains. Chris, we'll get into more detail in a moment.
Speaker 4: In 2023, we expect same-store-no-aggress to trend higher above 3%.
Speaker 4: Assuming moderating expense growth and steady occupancy gain.
Speaker 4: Leasing momentum is solid with over 600,000 square feet of signed leases yet to take occupancy.
Speaker 4: This equates to roughly 150 basis points of gross absorption.
Speaker 4: We aim to capture most of this in the first half of 23, loosing the current trend of 50 basis points of net absorption. Development starts are another clear sign of positive leasing demands. Elkure Vilti has the largest and most visible pipeline in the MOB sector.
Speaker 4: Our active pipeline is over $230 million, and our near-term prospective pipeline is roughly $350 million.
Speaker 4: And behind this, we have a long-term embedded pipeline of $1.7 billion.
Speaker 4: This expanding pipeline is the benefit of the larger healthcare Realty platform.
Speaker 4: deeper relationships and significant market scale.
Speaker 4: We are in a leadership position to secure more development projects with major health systems.
Speaker 4: Looking ahead, healthcare realties long-term outlook is bright.
Speaker 4: Our primary focus, Post Merger, is operational execution to accelerate same-steroidaligred ?? jurisdictions and tell us to navigate back to Africa
Speaker 4: With a well-scaled platform, we expect to capture outsized absorption and rent growth.
Speaker 4: We expect higher yielding development projects to drive our external growth in the near term.
Speaker 4: And as inflation moderates and interest rates stabilize, we'll add accretive acquisitions to bolster our growth profile. Now I'll turn it over to Chris to provide a review of our financial and operating results.
Speaker 5: Thanks, Todd.
Speaker 4: We made tremendous progress on integration in the fourth quarter.
Speaker 4: Asset sales to fund the merger special dividend were completed and our targeted annualized GNA savings was realized. Normalized FFO for 4Q was 42 cents per share, in line with the third quarter. The FFO results include normalization of $12 million in non-cash interest rates.
Speaker 4: FO in the quarter was impacted by $5.2 million sequential increase in cash interest expense.
Speaker 4: from higher race on floating rate depth as well as higher average depth balance.
Speaker 4: This was partially offset by a $4.5 million sequential reduction in GNA.
Speaker 4: We have now realized $35 million of annualized cost reductions compared to pre-merger combined G&A.
Speaker 4: There are still some marginal synergies yet to be realized over the next two quarters but we expect these to be offset by normal GNA increases.
Speaker 4: $462 million of asset sales were completed since the end of the third quarter to finalize the full funding of the $1.1 billion merger special cash dividend.
Speaker 4: Run rate FFO including the timing impact of the asset sales is $0.41 per share.
Speaker 4: The run rate FFO and FAD shown on page 5 of the supplemental do not include any impact of additional changes in interest rates or growth in portfolio cash flow.
Speaker 4: Operating fundamentals were once again strong and highlight the growth potential of our properties.
Speaker 4: Same store NOI for the year increased 2.5%.
Speaker 4: Year over year, quarterly same store analogue growth was even higher at 2.7%.
Speaker 4: The contribution from the company share of JVs improved both quarterly and annual growth by 10 basis points.
Speaker 4: The quarterly NOI growth was driven by a 3.3% increase in revenue offset by a 4.6% increase in operating expenses.
Speaker 4: The year-over-year quarterly revenue growth was comprised of a 2.8% increase in revenue per occupied square foot and a 50 basis point improvement in average occupancy.
Speaker 4: We continue to focus on maximizing cash leasing spreads, occupancy, and in place contractual increases.
Speaker 4: Cash leasing spreads in the quarter averaged 3.5% up from 2.9% in the third quarter, with 80% of the leases having a spread of 3% or greater. Sequential occupancy increased 59,000 square feet or 10 basis points to 89.3% for the same all properties.
Speaker 4: Total portfolio occupancy is 87.7%.
Speaker 4: providing meaningful opportunity for continued absorption and interlibrary growth.
Speaker 4: Annual contractual increases are now 2.81% up from 2.64% last quarter.
Speaker 4: The improvement was the result of higher increases on leases with CPI-based escalators.
Speaker 4: and 2.9% average future increases for the leases that commenced in the quarter.
Speaker 4: The improvement was also bolstered by the sale of our lower growth properties.
Speaker 4: which had annual escalators below 2.4%. Operating expense growth of 4.6% was down substantially from the 7.9% in the recorder.
Speaker 4: We've benefited in the quarter from several successful property tax appeals.
Speaker 4: Excluding their impact, expense growth is running approximately 6%.
Speaker 4: Operating spent growth remains elevated compared to historical norms, but inflationary pressures show signs of easing.
Speaker 4: This will allow the power of our revenue drivers and occupancy absorption to help drive improving NOI growth through 2023.
Speaker 4: Maintenance catbacks increased in the fourth quarter over the previous three quarters.
Speaker 4: which is consistent with the seasonality we typically experience. To give a better picture of capital expenditure trends, we provided on page five of the supplemental the combined company trailing 12-month maintenance cap expend.
Speaker 4: Based on the healthcare real estate annual dividend of $1.24 per share, the performer 2022 fat payout ratio was 94 percent.
Speaker 4: We expect the FAAD-PAIL ratio to be in the high 90s in 23, giving capital spending for expected occupancy absorption, as well as higher average interest rates year-over-year.
Speaker 4: As interest rates increase, as interest rate increases moderate, the underlying fundamentals and growth of the portfolio will drive the payout ratio lower.
Speaker 4: Run rate perform a debt to EBITDAI year-end, including the impact of January asset sales, with 6.4 times.
Speaker 4: Target leverage continues to be in the low to mid-sixes. We expect leverage to trend towards the lower end of this range from underlying portfolio
With minimal near-term funding needs, we will look to additional asset sales to fund limited acquisitions and steady development funding in 2023.
Since the end of the third quarter we have entered into $600 million of new interest rate swaps and anticipation of the $300 million of swaps that expired in late January .
The net result is proforma fixed rate debt at approximately 85%, which is where we expect to remain for the near term.
As we wrap up 2022, we're pleased to have completed the funding of the merger special dividend as well as achieved our targeted synergies ahead of schedule.
In 2023, we are poised to unlock the operational benefits of our scaled and recession-resistant medical office portfolio. Now I'll turn it over to Rob for further updates on investment and leasing activity.
Thanks, Chris. With the completion of our merger-related sales,
We expect additional disposition.
We expect additional dispositions of 200 to 300 million this year.
These sales will further optimize the portfolio's long-term growth expectations.
Proceeds from our Dispositions will fund our active development and redevelopment pipeline in a minimal amount of acquisitions, like those we completed in the fourth quarter.
Our primary focus for investing right now is development and redevelopment.
The development, we target returns of 100 to 200 basis points above stabilized acquisition cap rates.
Redevelopment is expected to produce richer returns in the 8 to 11 percent range.
In the fourth quarter, one new development advanced from our perspective to active pipeline.
This 100% least, $25 million project is the first of a two-phase MMOB development in Orlando.
This year, across our $235 million active pipeline,
We expect to fund approximately 25 to $30 million per quarter.
We are seeing increased opportunities for developments through a greater market presence and a fresh start to newly inherited health system relationships.
An example is in Phoenix, where we now own 35 buildings, filling 1.5 million square feet.
This market scale places us at the center of leasing activity and transaction deal flow.
We are working on a joint venture opportunity with a reputable developer for a 100,000 square foot MOB.
The project of over $50 million is adjacent to a 120-bit hospital and an area undergrowing.
explosive growth.
The developers solicited our participation in the project given our sizable presence in the market and our relationships with multiple health systems.
The development is 50% pre-leased with a clear path to 75 before construction begins.
We added this project to our perspective development pipeline this course.
Our much larger portfolio is a rich source for redevelopment opportunities.
As an example, we are working on the redevelopment of two on-campus 60% occupied Moby's in Houston that came to us from HTA.
I recently traveled to meet with senior leadership to renew the relationship with the hospital.
They shared plans to increase the hospital bed count by almost 50 percent with the addition of a new acute care bed tower.
Our team shared a $20 million plan to redevelop our buildings.
We all agreed that collaborating on these projects will reinvigorate the campus.
The fresh start will attract physicians and create a great location to house new hospital services.
We expect to move this project to our active redevelopment pipeline later this year.
Turning to Leicin. During the quarter, we completed the onboarding of 100% of the legacy HCA portfolio to third-party brokers.
Our brokers, combined with improving relationships with our new health system partners, will drive leasing momentum.
What is really exciting is that we are already seeing early signs of improved leasing activity.
A great example is prospective tenant tours.
Across the portfolio, tours in January jumped 60% compared to the last three months of 2022.
In a local example, our brokerage team in Phoenix recently used seven of their brokers to conduct 11 tours in one day. Such broad and efficient coverage is a testament to the value of a strong brokerage team. In contrast, under HTAs in-house model, we have a large number of
and double our least but not yet occupied space in this market.
Similarly, I was recently talking to our Dallas-based Director of Leasing.
It was energized by the momentum created from the brokers we added to our legacy HCA assets.
He mentioned that the rate of monthly tours on one campus has doubled since adding them.
More importantly, our brokers quickly source the sizable lease through their established provider network.
our brokers quickly source the size of a lease through their established provider network. With this momentum,
And with this momentum and leases currently in build out, we expect gross absorption in this market to increase on those 350 basis points in the near term. As we look to 2023, success on both the development and leasing front.
will serve as the foundation for accelerating growth.
Operator, we are now ready to open the line for questions.
Thank you. As a reminder, if you would like to ask a question, please press star then one on your telephone
If you do change your mind please press star 2.
The first question we have comes from Austin Watchmen of Keybank. Your line is now open.
Hello everybody. Just first question kind of hitting a little bit on some of the strategic objectives looking forward. I mean, 2023, same-stron-wide growth guidance of 3-4 percent has some implied acceleration from the fourth quarter and is kind of consistent with what you've talked about. But I'm curious what your latest thoughts on
Thanks, Austin. In Brica, if you don't mind, we're having a little bit of a quiet volume, so if you can add some volume for RN, that'd be great. But also, for your question, I think just to clarify, our guidance for 23 on same-strand at Y-growth is 2.5 to 3.5%.
But directionally, Austin, I think the point here, and I mentioned it in my remarks, that we're seeing a lot of strong trends in place, obviously on the revenue side, through occupancy gains, rent growth, that are really pushing that revenue equation higher. And so we see that translating in 23 kind of throughout the year.
from the lower end of that range where we finished 22 to sort of the higher end of the range through the balance of 23. So I think our view is we're heading north of 3 later in the year, and that certainly bodes well for the trend going into 24, building off that momentum. So I think, you know, again, 2.5 to 3.5 for the year, but sort of a...
from driving occupancy, you noted some of the SNO pipeline that you've got today with significant portion of that opportunity across HTA. So how did you embed...
some of that, you know, some of those upside, some of that upside and drivers within the same for NOI guidance. What are some of those puts and takes, I guess, that we should think about any near-term headwinds that are offsetting some of these benefits today as that starts to build over time?
Yeah, no, I think you can kind of see what we're trying to get through with the different components of the same store. We are expecting to get some absorption as well as some improvement in our cash leasing spreads versus what we saw in 2022 as we bring.
the combination of the two companies together. One piece that is, it's a bit of a headwind compared to...
you know, historical experience, but an improving picture from where we've been in 2022 are operating expenses. You know, as I talked about, you know, operating expenses are now for us running around 6%. You know, that's still elevated from our typical norm of 2 to 2.5.
But we are seeing some signs that that could start moving in the right direction. But we don't anticipate that we'll get all the way back to that, you know, 2-2-1-1-2% in 2023. But we think it, if we will, will start moving in the right direction, which will allow those different components of the revenue drivers to shine.
first question is just in terms of you know interest expense and i didn't give guidance on it specifically but i want to see if you know there's any way you can get a few of roughly for how uh... you know i guess cash interest expense without the mark to mark on the debt could look like this year
Yeah, you know, it really kind of depends on exactly how much overall interest rates move across the year. To kind of give you a bit of kind of a puristic, so to speak, on it is that with about $900 million of floating rate debt right now, a 1% change in the annual interest rate ends up being...
about one and a half cents to overall growth on a per share amount for the year. So that gives you a little bit of the magnitude of the impact, but we'll have to kind of continue to watch that through the balance of 23.
Okay, that's helpful. Thanks. My follow-up question was on interest expense. I mean, I know you guys are excluding that merger fair value adjustment because it's non-cash from your normalized FFO. And I know you were considering doing that because it's a large impact that you're having. But at the same time, other...
Other REITs aren't doing that. Granted, other REITs don't have as big of an issue that you're facing. We just want to hear a little bit more about the decision to remove that from your rationale, to remove that from your normalized FFO calculation. Thanks, Chris. Yeah, we did consider that and look at that, and I think you're right. When you look at the impact that it has on us compared to the
this fair value adjustment. So you know we we had several of our analysts really we spoke to all of our analysts on this as well as a lot of our investors and the consensus was that given the size and the unusual nature of that it was going to create a lot of comparability issues and so
The recommendation is that we make this normalizing adjustment that we pointed out. And I will remind you, being non-cash, this is an FFO item. It's not a fad item. So that was the thought process that went into that decision.
sheet. That's a huge, huge amount as Chris said. And so we don't have any real maturity, significant maturitys until 25. So there's like everyone, as we refinance in the future, we'll deal with the cash change like everyone in real time, but we're in really good position on that. So, it's still very good about the balance sheet and it helps comparability as Chris said.
Thanks Todd. Thank you, we now have Rich Anderson of SMDC. Your line is now open. Thanks, good morning. So on the dividend you said your high 90s type of fad payout.
Here me okay. Yes. Go ahead. Had some feedback.
You know, and then Chris, you mentioned the...
the sensitivity to higher interest rates and what that does to the bottom line. Let's say it's not high 90s, but it's in triple digits in 2023 for whatever reason. To what degree are you willing to live with that and for what amount of time? Do you feel like you have enough visibility?
or is a dividend cut at least being thought about at this point based on where you stand today and all the moving parts? Sure, thanks Rich. Fair question. We're all wanting to be able to answer Nick's question about where interest rates are going.
But like everyone, we're using heuristics and just trying to manage appropriately. But I think the short answer is we are confident that the operational improvements we're seeing that we'll read through are very strong and near term. We think those can go a great deal to offset what might be, hopefully, short term.
rising interest rates and then like everybody looking at forward curves, you know, seeing, you know, not if but when derates start to come down. So we feel very good about that momentum and even if, as you just said, we found ourselves, you know, right at triple digits. I think we're very comfortable that the operational improvements are real in your term.
you know, in 23 but also in 24. So we feel very comfortable that that should drive down fairly quickly just through operational improvement. So we do not, at this point, you know, anticipate any notion of any cut. Obviously we're all, you know, watching the markets and looking at the extent of this. So, you know, that's something we reevaluate as a board and as a management team, you know, every quarter, every year.
But for now, that's our outlook, is that we feel very comfortable with where it's at.
One thing I would add to that, Rich, is that one of the things that is putting some pressure there has to do with the capital for the absorption that we're saying across the portfolio. So that's a good problem to have. And we look at that as growth capital that will enhance your long-term cash flow and value.
But that's something that, you know, if you're dealing with that in the short term, that doesn't point to a long-term dividend issue. Okay. And maybe, I don't know if it's an obvious question, but if you're sad, was 80% of payout, would you have bothered doing the swaps at this point? Or was that...
was the tail wagging the dog there in terms of you know uh... six hundred million swaps recently at this at this level in today's market yeah no i mean if you really look at historically the way we've handled our our floating rate uh... exposure is that we've tried to take a pretty neutral
view on rates by swapping about 50%. And that's where we ended up with changes that we had with 600 million of new and the 300 million that's expiring. So it's still trying to take a balanced view on where rates are right now.
Okay and then I just have a kind of weird question. You know, I live dangerously, very last moment reporting. What had to get done in your mind that caused you to be so late in the in the reporting season? Is it, you know, obviously merger related but is there anything specific you can turn point to or-
or was taught to take his kids to Disney World. So you guys just weren't available. We were both in all the way to the right. That's a fair point. We're trying to have a little more normalized post-merger frenzy. But no, I think rich for us, it was really, I mean, this was not a change we made recently. We anticipated that and put that out well ahead.
That was kind of just the plan that said, hey, let's give ourselves, you know, really the maximum amount of time given the the lift post merger and, you know, the 10k and audit, you know, first full audit post merger. So, I'm easy for me to say, but I think we could have certainly managed an earlier time frame, but we were just trying to give ourselves the benefit of the doubt. And I think you'll see us kind of return to a more normal schedule throughout the year. So I wouldn't expect.
41 cents you gave heading into 2023. I just want to clarify, does that include the effect of the swap burnoffs from January ? And I know you talked about the interest rate sensitivity scenario, but you know what impact potentially the shares could be of that swap bring off from an interest expense perspective?
Yeah, no, it doesn't, because that was a 1231 run rate number where that swap expiration occurred in late January . So that swap expiring and kind of converting to what our new.
swap rate is ends up being about a little under half a set per share per quarter impact related to that expiration.
Gotcha. That's a couple clarification. And then just on the targeted dispositions and guidance, I'm curious, obviously the expectation for the beginning of the year is probably more muted capital markets environment, but just any sense of a buyer pool or pricing expectations. And I did want to clarify, are any of these related to that 500 million of incremental disposition few that are initially targeted.
with the merger, or they legacy assets is there. Maybe they're lower performing assets tougher to lease, but any clarity around that would be helpful.
Yeah, I think if you look at, you know, we've finished the merger related dispositions and we now are looking ahead, and I think the way we think about the $2,300 million is continued in printing of the portfolio, really taking a look at that.
properties that we see an opportunity to get out of them. They don't, maybe they're not in a cluster that we think that we can build up over time or market that we think we can build up the time or the expectations for growth or lower than what we're looking for. So I think in terms of...
of what's in there and what we're expecting to sell. It's really trying to optimize the portfolio going forward and looking at getting out of possibly some smaller markets that we don't want to be in a long term. As far as pricing, I think right now, we've seen some swings and interest rates over the past couple of quarters. I think we've seen.
that debt markets really driving pricing on MOBs. And if you go back to the fall, that cost work, going up to the mid to high sixes probably. And we've seen about 100 basis points swing back down. And then now probably from there about another 50 basis points up. So we think that that's driving the cap rates.
Alright, that's it for me. Thanks for the time.
Thank you. We now have Stephen of Barclays. Your line is open.
All right, thanks. It's Steve Valaket from Barclays. Yeah, all the questions, I think, around both the market for acquisitions and divestitures were kind of covered at this point. So, just to shift topics a little bit, just on the same store, operating expenses, what do you see as seeing goes on in other control!?
I think there was some improvement there a little bit, ending with calling out as far as areas where you're seeing, you know, better ability to control costs, et cetera. I just want to hear more about kind of the trends there would be helpful.
Yeah, I mentioned a little bit in my prepared remarks about the improvement that we did see in the fourth quarter compared to the third quarter. And a good portion of that related to some successful property tax appeals, excluding those property tax appeals where we see our operating expenses running around 6%.
which is still trending down from what we were seeing earlier in the year. The good news we're also seeing some signs that as we move into 23, we could see some continued improvement. A lot of that comes from the utility side. That's one of our largest expenses that kind of over 20% of our operating expenses are related to utilities.
I'm not ready to latch onto that, but if you can just start to see that, you know, come down a bit from what we saw in 22, that gives a lot of line of sight to feel much better about where overall operating expenses did trend throughout 23.
Okay, got it. Okay, that's helpful. Thanks. Thank you. We now have Jonathan Hughes and Raymond James.
Please go ahead when you're ready. Hey, good afternoon. I just wanted to go back a little bit in time. I guess can we talk about how much of the decline between the kind of FAD figure we had talked about last summer of like $1.45 this year and the $1.24 annualized run rate FAD.
How much of that decline is not from the higher interest rate backdrop? I'm just trying to understand where some of this, you know, the operational upside that was embedded in those projections has gone and maybe such just simply delayed rather than no longer achievable.
Jonathan, I think number one.
The projections you're referring to clearly were in a very different environment. I think everybody is dealing with interest rates and to different degrees. I don't think there's any change in the operational picture whatsoever. There's been no material delay or decline in the opportunity. In fact, I think we're seeing very strong signs as Rob walked through some specific examples. I talked about what we're seeing come through on the same store.
and interest rate.
you know unless you just were you know prescient perfectly prescient and maybe lucky you know the interest rate side is what it is we're all managing through it the ways we can and I think we're in very good shape there but you know certainly see a large impact but see a rebound as things moderate coming from that side as well so again that's kind of what informs our our swap position you know fixing those rates so
I think operationally we're very optimistic and bullish about where we're headed. So I think, you know, Chris, unless you have something to add, I think the majority of that would be the interest rate environment is the impact there. Yeah, and we do still anticipate, as you said, to be able to achieve on the operational, you know, upside, and we'll continue to do that.
That's kind of what we're pointing to now, is being able to have achieved the funding of the dividend, special cash dividend, as well as the synergies. Those were kind of two of what I would say are the three main pieces that we knew we needed to execute on, third being kind of the operational upside, and that's what Rob was hitting on, that we've kind of set that foundation and we're seeing good indications to be able to start achieving that as we move through 23.
So I'm just trying to, you know, it is improving. I'm just trying to square, you know, some of the bullish comments for the strength of the outpatient business, you know, that you mentioned earlier with just that, you know, what I would have thought maybe was more absorption upside.
Yeah, one comment there on the guidance is that that is overall same store. So that's multi-tenant and single-tenant. We are, you know, you're somewhat deluded by the fact that your single-tenant tends to run, you know, closer to 100 percent occupancy and you don't expect a lot of changes. So...
It gets a little diluted by that if you look at the ratio, so it's really a more bullish sentiment on just multi-tenant, which is where the opportunity lies. So I think to your point, you know, there's a little more than what I would call, you know, 40 to 80 as our guide is for the total behind the multi-tenant, you know, more 50 to 100 plus basis points.
The only other comment though that I would add is that we're very bullish. We see a lot of early signs. We're getting the leasing momentum underway. But it takes, there's a process for buildout. We've got this pent-up 600,000 square feet plus of occupied, but not yet, or excuse me, leased, but not yet occupied.
and building that up over time, you know, takes a little time, and then it might take, you know, six months plus to build off the space, convert it to occupancy. So it does take a little time to deliver it, but obviously we're seeing the right trends in place to really see that coming through in the second half and certainly moving into 24.
All right. Thank you. And one more for me. Just back on the.
They kind of run right FAD and dividend coverage and you answered most of it with the prior questions. But I don't think Eric, can you just remind us of what's the target payout ratio? Chris said that you said it had kind of high 90s this year, but where can we expect to add up to the longer term? Thanks.
Yeah, I would say we would continue to drive that lower and you actually have seen that in our history. You know, we were at a point in time going back, you know, eight, ten years ago, we were over 100 percent and through the improvement in the portfolio and growth, we were able to drive that down into the mid to high 80s, but our expectation from there was to
continue to drive it lower up before some of these interest expense pressures and things that we've talked about. So long-term, our goal is to continue to drive that lower with at the same time being able to provide some growth in the underlying dividend. I think in simple terms, below 90 is certainly directly where we want to get back to, but...
Your line is open. Yeah, hi. Thanks. Chris, I think you talked about some of the swaps not being in the $0.41 run rate. So when you layer everything into it, the full impact of the swaps, and then looking at what you're expecting for acquisitions, dispositions, do you think you'll end the year with a run rate that's
Similar higher or lower to that 41 cent now. Yeah, as we start looking at the end of 23, you know, it does come a bit once again back to, back to interest rates, but we, you know, as I mentioned, the 41 cent doesn't have any expectation of changes in the market.
that would have us ending 23 and a higher, better run rate position than we're entering
Got it, even with net dispositions. Yes, because we're looking at those dispositions to find some marginal acquisitions as well as our development. Got it. And then on the development, it looks like you have about 350 million of starts, played it for the second half of the year.
I mean, how should we think about as you move into 24 and 25 in terms of starts, annual starts? Yeah, I think if you look at our perspective pipeline, you're right, it's about 350 million. There's about 200 million of that that we've slated to expect to start at the second half of this year. So if you combine that with the existing pipeline of 2 and 35 million, there will be some of those that are rolling off. But we think that
Going into 2024, we could have six new starts towards the end of this year, first of next year, roughly 200 million. And that would equate to a funding run rate of moving from 25 to 30 million per quarter this year up to about 50 million per quarter next year. So we're optimistic on those projects and pushing them forward and having great dialogue with all of the prospective tenants and health system partners. Got it. Okay, thank you.
I mean, does it not imply that at some point, though, you do end up meaningfully, you know, at kind of a dividend coverage above?
100%, especially kind of given you are at 100% in 4Q, there's a diluted impact from a full year of asset sales. There's probably still rate pressure going forward. You have forecasted a decent amount of recurring.
the same fundamentals that we're talking about being able to drive improvement and overall growth of the operations that we're seeing that will flow through to FAD as well. You know, as I said, my prepare remarks is the expectation for the year will probably be in that.
and that high 90s on the payout ratio, and as Rich said, does that in any particular quarter because the CapEx spend is not as smooth as earnings are. And so you are going to have some variation in any quarter. Could you be over 100% for some period of time? Yes, that's possible, but as Ty pointed to...
we don't see that as concerning, especially if that is being driven by, you know, additional capital spend for absorption, which is really growth capital. And so, you know, plus or minus any one quarter, depending on how you're running your models, that would not be surprising, but we still feel like...
long-term, directionally, with what we're seeing in terms of internal growth that we'll be able to balance out this year as well as drive that payout ratio lower in the future.
I'm not high 90s number just for clarification. Is that an average for 23 or that's a year-end target?
That really is an average. I think the one key piece of helpful information we put in our earnings release, and I think it's worth a look, it's page five of supplemental, is really looking at that seasonality on capital spend. And so clearly we see a pattern year to year that fourth quarter is always high. So then if you look at fourth quarter, your payout ratio might be high.
But if you average it throughout the year, we tend to be a little lower in the first half and it builds in the second half. That's true pre-merger and we expect it to be true post-merger. And so you really have to look at the balance of the year and so you can't really extrapolate off a fourth quarter purely on a payout ratio. You really have to look at the full year which is why we provide that additional disclosure.
Gotcha. Then one more, if you would indulge me. You're starting to get a lot more information from healthcare systems right now. Again, their bottom line is also under pressure. We are hearing about them, again, starting to, you know, consolidate their regular admin space.
as they kind of try to improve their bottom line. You just kind of talked about what you're hearing from them as well. And what potential impact that could have are not just demand, but even potentially ability to drive pricing going forward.
Sure. Yeah, I think 22 is a pretty challenging year, you know, for everybody saw the interest rate side of the world change dramatically, but I think in healthcare, you know, it was particularly challenging on the labor front as we all know. But I think if you look month over, you know, monthly trends throughout 22 is a dramatic difference.
much better environment. I think like everyone, they're grappling with the interest expense side of the world. So we're seeing some easing there, just like we talked about earlier on inflation, which is really encouraging. But I think the real takeaway is that there's always rationalization going on by health systems of their space usage. But I think the overwhelming trend you're seeing is a continued...
focus on how do we shift more to the outpatient setting where it is lower cost, more effective. And I would say everything that we're seeing on the leasing side, everything on the development side underscores that. That there's just sort of a renewed energy to say that. That is really the picture of how we continue to drive.
our cost structure lower, our revenue models, our margins better. So I think really outpatient continues to be part of the solution. It doesn't mean they're not going to always be trying to rationalize where they put their care and get it optimized. But I think we're really poised to capture a lot of that incremental demand.
great thank you thank you thank you thank you thank you we now have John
Piotrowski of Green Street. Please go ahead when you're ready. Thanks. I have a follow-up question on the occupancy upside and the multi-tenant square footage you guys outlined on page 16. Can you just give us a sense when do you think you'll be able to get to 90 percent?
The 90 percent, so this is something we've certainly talked about, you know, through the merger, through investor presentation, we've outlined some upside in NOI dollars in getting to 90 percent just for context. I think for us, you know, it's early stages, and as Jonathan Hughes just asked, you know, sort of what does 23 look like? Where's that occupancy upside? And we talked about…
Obviously the implication of that would be, oh, you're sort of in the multi-tenant side, 85 going to 100, or going to 90, does that mean it's 10 years worth? And the short answer is no, we don't think it's that long. We think it's the early stages of building that momentum. So it's a multi-year process. We can't say exactly what it is, but we'll keep building.
you know, that execution year to year. But I think it's, you know, we sort of think of it as a three, four year timeframe, but we've obviously got to sort of put some successes here under our belt to really point to a more specific timeframe. Okay, understood.
Then Chris, the 10.8 million in merger related costs in the quarter, what additional costs are left to incur, and are there any other just integration risks that are still looming your mind?
To answer your second question, no big integration risk that we see. We do still have some work to be done. We're still working through combining some of our systems, our accounting system. Fortunately, we're on the same system but on different versions. So we're bringing those together. We do have
some consultants that are helping us through that process. So that's one of the merger-related costs that you will still see in the first quarter and probably there will still be some moving into the second quarter. But a lot of that work is done, but yes, there is still some to be finalized. Okay, can you quantify the cost that will be incurred in 23rd?
I don't have it right at my fingertips, but it will certainly be coming down from 10, you know, I think in the quarter. So you know, it's going to be less than 20 million. Okay. Last question from me. Can you just give some context of what drove the decline in the tenant retention in the quarter down to 75, 76%? Okay. Okay. Very good.
Yeah, you know, it bounces around from quarter to quarter. If you look at the manual, we're just kind of just under 80%. There is a difference that we are seeing between the, you know, the legacy HR, legacy HTA portfolio. We did see as a result of, I think, some of the distractions.
that was playing through. So I think that that's impacting some of that lower retention. But that's also an opportunity that our team sees and that they're very excited about, kind of going in and showing the positive customer service experience that we're used to providing.
Okay, thank you.
Thank you. You have no further questions or questions on the line so I would like to hand it back to Todd Merida to CEO for any final remarks.
Thank you. Thanks everybody for joining us today. We'll see some of you at some conferences next week and everybody have a great day. Thank you.
Thank you. Thanks everybody for joining us today. We'll see some of you at some conferences next week. And everybody have a great day. Thank you.
Thank you. This does conclude today's call. You may now disconnect your line and have a lovely day.