Q4 2022 Healthcare Realty Trust Inc Earnings Call
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Thank you for standing by the Healthcare Realty Trust fourth quarter earnings Conference calls will be starting in a few months' time.
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Thank you for joining I would like to welcome you to the healthcare Realty Trust fourth quarter earnings Conference call.
My name is breaker and I'll be your event specialist operating today's coke.
After the Speakers' presentation today, we will conduct a question and answer session.
If you wish to ask a question. Please press star followed by one on your telephone keypad.
If you change your mind and would like to withdraw your question. Please press star followed by <unk>.
And for operator assistance at any point it stop one day away. Thank you I would now like to hand, the call over to our host Ron Hubbard Investor Relations.
You may begin your conference room.
Thank you breaker thank.
Thank you everyone for joining us today for healthcare Realty's fourth quarter 2022 earnings conference call joining.
Joining me on the call today are Todd Meredith, Kris Douglas and Rob Hull.
A reminder, that except for the historical information contained within the matters discussed in this call may contain forward looking statements that involve estimates assumptions risks and uncertainties.
These 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 as 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.
The matters discussed in this call may also contain certain non-GAAP measures.
Actual measures such as funds from operations or <unk> normalized <unk> <unk>.
<unk> per share normalized <unk> per share.
Funds available for distribution or Fad.
Net operating income NOI 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 December 31 2022.
The company's earnings press release supplemental information and Form 10-Q are available on the company's website I will now turn the call over to Todd.
Thank you Ron.
Thank you everyone for joining us for our fourth quarter 2022 earnings call.
I'll start by pointing out that we have successfully achieved two key merger integration objectives.
First in January we completed the final portion of our planned asset sales to fund the merger related special cash dividend.
It's worth noting that we executed these sales at our targeted cap rates.
Second we realized our full annualized G&A savings in the fourth quarter.
And half the time, we originally expected.
The primary driver was reaching our projected projected staffing levels.
Most importantly, we fully transitioned to the healthcare Realty leasing model with full brokerage coverage across our portfolio.
Later, Rob will expand on how this is already building leasing momentum.
I would like to commend my healthcare Realty colleagues for their incredible effort and dedication to accomplishing these milestones.
Looking to 2023, we expect to return to a steady state capital recycling mode.
Given the current state of capital markets and the completed dispositions, we expect to optimize the portfolio at the edges.
Proceeds will be reinvested primarily into our redevelopment pipeline.
This is our top priority for 2023.
We expect acquisitions to be modest only selected properties that protect our market position and cluster strategy.
With market scale and deep relationships, we are well prepared to ramp up accretive acquisitions when capital markets improve.
The secured financing picture has improved notably since last November .
This is important because secured financing drives nearly two thirds of <unk> buying power.
But the underlying rates and spreads have improved.
All in rates improved more than 100 basis points from the peak last fall and now are about 50 basis points better.
The breadth of lenders remains tight but quality properties are getting financed.
Rates are now trending in the high fives.
This important this improved financing has pulled MOV cap rates a bit lower since November .
Towards the 6% level.
MLB fundamentals remained favorable with robust demand for outpatient facilities.
Healthcare is one of the largest most stable and fastest growing employment sectors.
Healthcare 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 and one of our buildings.
We also see green shoots that inflation pressure and labor costs are easing, especially for health systems.
We're talking to physician groups, who are committing to more space today and health systems that are actively planning for more rapid outpatient growth in the near future.
For the fourth quarter, we reported strong results in key operating metrics same.
Same store revenue grew well above 3%.
Propelled by health healthy rent escalations cash leasing spreads and occupancy gains.
Chris will get into more detail in a moment.
In 2023, we expect same store NOI growth to trend higher above 3%.
Assuming moderating expense growth and steady occupancy gains.
Leasing momentum is solid with over 600000 square feet of signed leases yet to take occupancy.
This equates to roughly 150 basis points of gross absorption.
We aim to capture most of this in the first half of 'twenty three boosting the current trend of 50 basis points of net absorption.
Development starts are another clear sign of positive leasing demand.
Healthcare Realty has the largest and most visible pipeline in the MLP sector.
Our active pipeline is over $230 million and our near term perspective pipeline is roughly $350 million.
And behind this we have a long term embedded pipeline of $1 7 billion.
This expanding pipeline is the benefit of the larger healthcare realty platform deeper relationships and significant market scale.
We are in a leadership position to secure more development projects with major health systems.
Looking ahead healthcare Realty's long term outlook is bright our.
Our primary focus post merger is operational execution to accelerate same store NOI growth.
With a well scaled platform, we expect to capture outsized absorption and rent growth.
We expect higher yielding development projects to drive our external growth in the near term.
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.
Thanks Todd.
We made tremendous progress on the integration in the fourth quarter.
Asset sales to fund the merger special dividend were completed and our targeted annualized G&A savings was realized.
Normalized <unk> for <unk> was <unk> 42 per share in line with the third quarter.
<unk> results include normalization of $12 million and noncash interest expense in both third and fourth quarter for merger related fair value adjustments.
We were encouraged by analysts and investors to normalize for this item to make results more comparable to peers.
Normalized <unk> in the quarter was impacted by $5 $2 million sequential increase in cash interest expense from higher rates on floating rate debt as well as higher average debt balance.
This was partially offset by $4 $5 million sequential reduction in G&A.
We have now realized $35 million of annualized cost reductions compared to pre merger combined G&A.
There are still some marginal synergies yet to be realized over the next two quarters, but we expect these to be offset by normal G&A increases.
$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.
Run rate <unk>, including the timing impact of the asset sales is <unk> 41 per share.
The run rate <unk> and Fad shown on page five of the supplemental do not include any impact of additional changes in interest rates or growth in portfolio cash flow.
Operating fundamentals were once again strong and highlight the growth potential of our properties.
Same store NOI for the year increased two 5%.
Year over year quarterly same store same.
Same store NOI growth was even higher at two 7%.
The contribution from the company share of <unk> improved both quarterly and annual growth by 10 basis points.
The quarterly NOI growth was driven by a three 3% increase in revenue offset by a four 6% increase in operating expenses.
The year over year quarterly revenue growth was comprised of a two 8% increase in revenue per occupied square foot and a 50 basis point improvement in average occupancy.
We continue to focus on maximizing cash leasing spreads occupancy and in place contractual increases.
Cash leasing spreads in the quarter averaged three 5% up from two 9% in the third quarter with 80% of the leases, having a spread of 3% or greater.
Occupancy increased 59000 square feet or 10 basis points to 89, 3% for the same store properties.
Total portfolio occupancy is 87, 7%, providing meaningful opportunity for continued absorption and NOI growth.
Annual contractual increases are now to eight 1% up from 264% last quarter the.
The improvement was the result of higher increases on leases with CPI based escalators.
And two 9% average future increases for the leases that commenced in the quarter.
The improvement was also bolstered by the sale of our lower growth properties, which had annual escalators below two 4%.
Operating expense growth of four 6% was down substantially from the seven 9% in the third quarter.
We benefited in the quarter from several successful property tax appeals.
Excluding their impact expense growth is running approximately 6%.
Operating expense growth remains elevated compared to historical norms, but inflationary pressures show signs of easing.
This will allow the power of our revenue drivers and occupancy absorption to help drive improving NOI growth through 2023.
Maintenance Capex increased in the fourth quarter over the previous three quarters, 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 combined company trailing 12 month maintenance Capex spend.
Based on the healthcare Realty annual dividend of $1 24 per share the pro forma 2022, Fad payout ratio was 94%.
We expect the fad payout ratio to be in the high <unk> in 'twenty three giving capital.
Capital spending for expected occupancy absorption as well as higher average interest rates year over year.
As interest rates increases as interest rate increases moderate the underlying fundamentals and growth of the portfolio will drive the payout ratio lower.
Run rate pro forma debt to EBITDA at year end, including the impact of January asset sales was six four times.
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 growth.
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 in anticipation of the $300 million of swaps that expired in late January .
The net result is pro forma 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're 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 dispositions of $200 million to $300 million this year.
These sales will further optimize the portfolios long term growth expectations.
Proceeds from our dispositions will fund our active development and redevelopment pipeline and 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 Richard returns in the 8% to 11% range.
In the fourth quarter, one new development advance from our perspective.
Active pipeline.
This 100% leased $25 million project is the first of a two phase <unk> development in Orlando.
This year across our $235 million active pipeline.
We expect to fund approximately $25 million to $30 million per quarter.
We are seeing increased opportunities for development 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 totaling one 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 100000 square foot MOV.
The project of over $50 million is adjacent to a 120 bed hospital in an area undergoing explosive growth.
The developer 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 prospective development pipeline this quarter.
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 <unk> in Houston that came to us from HCA.
I recently traveled to meet with senior leadership to renew their relationship with the hospital.
These shared plans to increase the hospital bed count by almost 50% with the addition of a new acute care bed tower.
Our team shared a $20 million plan to redevelop our buildings.
We all agree that collaborating on these projects will reinvigorate the campus.
The fresh start will attract physicians.
And create a great location to Hal New Hospital services.
We expect to move this project to our active redevelopment pipeline later this year.
Turning to leasing.
During the quarter, we completed the onboarding of 100% of the legacy <unk>.
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.
Cross the portfolio tours in January jumped 60% compared to the last three months of 2022.
And then when local example, our brokerage team in Phoenix recently used seven of their brokers to conduct 11 tours in one day.
Such a broad and efficient coverage is a testament to the value of a strong brokerage team.
In contrast under <unk> in House model. It would have been difficult to complete these tours and a weak, allowing time to pass and interested parties to go elsewhere.
Looking ahead, our Phoenix team is confident they can execute new leases in the next couple of months that will more than double our leased but not yet occupied space in this market.
Similarly, I was recently talking to our Dallas based director of leasing who is energized by the momentum created from the brokers, we added to our legacy assets.
He mentioned that the rate of monthly tours on one campus has doubled since adding them.
More importantly, our brokers quickly sourced the sizeable leafs 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 almost 350 basis points in the near term.
As we look to 2023 success on both the development and leasing fronts 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'd like to ask a question. Please press Star then one on your telephone keypad.
If you change your mind, please cross docking.
The first question we have comes from Austin <unk> with Keybanc. Your line is now open.
Hello, everybody just first question kind of hitting a little bit on some of the strategic objectives. Looking forward 2023 same store NOI growth guidance of 3% to 4%.
Estimate implied acceleration from.
From the fourth quarter, and it's kind of consistent with what you've talked about but I'm curious what your latest thoughts are on the timeline of getting you into that high end of that 3% to 5% same store NOI growth opportunity that you guys have talked talked about following the merger.
As 2024, and a reasonable timeframe to think that you could.
See that continue to accelerate.
Thanks Austin.
In BRCA, if you don't mind, we're having a little bit of a quiet volume. So if you can add some volume for our and that'd be great.
But Austin for your question I think just to clarify our guidance for 'twenty three on same store NOI growth is two five to three 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.
Asian higher and so we see that translating in 'twenty three kind of throughout the year.
From the lower end of that range, where we finished 2002 to sort of the higher end of the range through the balance of 'twenty. Three so I think our view is we're heading north of three later in the year.
And that certainly bodes well for the trend going into 'twenty four building off that momentum. So I think again, two 5% to three and a half of the year, but sort of a build in that range throughout the year.
Sorry about that I was looking at the cash leasing spreads.
Yes, that's certainly an important driver of it and if.
A big contributor yet.
Along similar lines, you've talked about the upside from driving occupancy you noted.
Some of the.
SNL pipeline that you've got today.
With <unk>.
Significant portion of that opportunity across HCA. So how did you embed.
Some of that some of those upside some of that upside and drivers within within the same store NOI guidance. What are what are some of those puts and takes I guess that's.
That we should think about.
Any near term headwinds that are offsetting some of these benefits today.
Today as that starts to build over time.
Yes, 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.
Absorptions as well as some improvement in our cash leasing spreads versus what we saw in 2022 as we bring.
The combination of.
Of the two companies together one piece that is.
It's a bit of a headwind compared to.
Historical.
You'll experience, but an improving picture from where we've been in 2022, our operating expenses.
As I talked about.
Operating expenses are now for us running around 6% that's still elevated from our typical norm of two to two and a half.
But we are seeing some 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 two.
Two to two 5%.
In 2023, but we think it.
We will we will start moving in the right direction, which will allow.
There's different components of the revenue drivers too.
To shine through in and dropped to the bottom line on NOI growth.
Okay. Thanks for the time.
Thank you.
Question comes from Matt.
<unk> of Scotia Bank.
Great. Thanks.
First question is just in terms of interest expense I know you didn't give guidance on it specifically, but I want to just see if there's any way you can get a fuels roughly for how I guess cash interest expense without the mark to market on the debt.
Could look like this year.
Yes.
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.
1% change in the annual interest rate ends up being.
About one five cents.
<unk> 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 'twenty three.
Okay. That's helpful. Thanks, and I guess, just my follow up question was.
On on interest expense I mean, I know you guys are.
Excluding that merger fair value adjustment because it is non cash from your normalized <unk> and I know you were considering doing that because it's a large impact that youre, having but at the same time other other Reits arent doing that granted auto rates don't have as big of an issue that you're facing but I'm just wondering here a little bit more about the decision to.
To remove that from your on the rationale to remove that from your normalized <unk> calculations. Thanks, Chris.
Yes.
We did consider that and look at that and I think youre right. When you look at the impact that it has on us compared to peers and what's going on.
Right now with the rapid change in interest rates is different so we ended up with with almost half of our balance sheet being mark to market, which resulted in over 20% of our income statement interest expense being noncash related to this fair value adjustment. So.
We had several of our.
Analysts, but 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 on.
The recommendation is that we make this.
Made this normalizing adjustment.
That we pointed out and I will.
To remind you that being noncash. This is this is <unk>.
Item its not a not a fad fad items. So that was the thought process the process that that went into that decision.
And.
I'll just add that.
Yes, clearly it was more material because of the merger.
And just the fact that we were buying HCA and therefore, 60%.
Larger balance sheet.
A portion of the combined balance sheet, that's a huge huge amount as Chris said and so we don't have any real maturity significant maturities until 'twenty five 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 feel very good about the balance sheet.
And it helps comparability.
Right.
Thanks Todd.
<unk>.
Yes.
Thank you you may have rich Anderson from.
D C.
It is now.
Thanks.
Good morning.
So on the on the dividend you said high <unk> type of Fad payout closer.
You hear me okay.
Yes go ahead, okay, sorry about that had some feedback.
Hi.
And then Chris you mentioned.
The.
The sensitivity to higher interest rates and what that does too.
Bottom line.
Let's say, it's not high <unk>, 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 the 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 we're all wanting to build to answer Nick's question about where interest rates 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 will read through our very strong and near term and we think those can can go a great deal to offset what might be hopefully short term rising interest rates and then like everybody looking at forward curves.
<unk> not if but when the rates start to come down. So we feel very good about that momentum and even if as you. Just said we found ourselves right at triple digits. I think we're very comfortable that the operational improvements are real and near term.
'twenty three 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 anticipate any notion of any cut obviously, we're all watching the markets and looking at the extent of this so that's something we reevaluate as a board and as a management team.
Every quarter every year, but for now Thats our outlook is that we feel very comfortable with where it's at.
One thing I might add to that rich is that.
One of the thing that's putting putting some pressure there has to do with the capital for the absorption that we're seeing across the portfolio. So that's a good problem to have.
And we look at that as growth capital.
That will enhance long term cash flow and value.
But that's something that if youre 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 this is an obvious question, but if your fad was 80% of payout would you bother doing the swaps at this point or was that it was a tailwind again the dog there in terms of.
$600 million of swaps recently at this at this level in today's market.
Yes, no I mean, if you really look at historically the way we've handled our floating rate exposure is that we've tried to take a pretty neutral view on on on on rates Bye bye.
Swapping about 50% and Thats, where we ended up.
With the changes that we had with the $600 million of new in the $300 million. That's expiring. So it is still trying to take a balanced view on on where where rates are right now.
Okay, and then I just have a kind of.
Weird question.
Yes, I live dangerously very last moment reporting.
What had to get done in your mind that cause you to be so late in the reporting season is it obviously merger related but is there anything specific you can point to or or was taught us taking this case at Disney World. So you guys just wanted to know.
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 and that was kind of just the plan that said hey lets give ourselves.
Really the maximum amount of time, given the lift post merger.
The 10-K and audit first full audit post merger so.
Easy for me to say, but I think we could have certainly managed an earlier timeframe, but we were just trying to give ourselves the benefit of the doubt in.
And I think Youll see us kind of returned to a more normal scheduled throughout the year. So I wouldn't expect that this trend continues.
Okay. It sounds good thanks, guys.
Sure.
Okay.
Thank you we now have micro question of Citi.
You May proceed.
Great. Thanks, maybe not to harp too much on the interest expense side of the equation, but just from that run rate number that 41. Since you gave heading into 2023 I just want to clarify does that include the effects of the swap burn offs from January and I know you talked about the interest rate sensitivity scenario, but what impact potentially for sure it's going to be.
But that swap burning off from an interest expense perspective.
Yes, no. It doesn't that was that was a.
12, 31 run rate number where that that swap exploration occurred in late January so that.
That swap expiring.
And kind of converting to what our new swap rate.
Is it ends up being about.
Little under half a cent per share per quarter impact related to that that exploration.
Gotcha. That's some helpful clarification, and then just 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 buyer pool or pricing expectations and I did want to clarify are any of these related to that 500.
Incremental dispositions you had initially targeted with the merger.
Legacy assets is there you maybe they are lower performing assets tougher to lease, but any clarity around that would be helpful.
Yes, I think if you look at.
We finished the merger related dispositions.
Now are looking looking ahead and I think when we think about the $2 million to $300 million has continued and pruning of the portfolio.
Really.
Taking a look at it.
Properties that where we see an opportunity to get out of them. They don't maybe theyre not in a cluster that we think that we can.
Buildup over time in a market that we think we can build on.
<unk>.
The expectations for growth are lower than what we're looking for so I think in terms of.
Whats in there and what were expecting to sell its really its 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 the long term as.
As far as pricing.
I think right now.
We've seen we've seen some swings in interest rates over the past couple of quarters I think we've seen.
That debt the debt market is really driving pricing.
<unk> on <unk> and <unk>.
You go back to the fall that costs were.
<unk> gone up.
To them.
Mid to high <unk> is probably in and we've seen about 100 basis points swinging back down and then now probably from there about another 50 basis points up so we think that thats driving the cap rates and right now we're sort of looking at it.
Cap rates that are moving towards around 6%, So I think thats.
And what we're trying to sell we're sort of looking at that as the baseline certainly.
Properties that were targeting for sale.
Could be could be above that could be below that it just depends on what the asset is in the appetite out there.
Alright, that's it from me thanks for the time.
Thank you we now have Steven of Barclays. Your line is open.
Alright, Thanks, Steve Valiquette from Barclays.
All the questions I think around.
The market for acquisitions and divestitures are kind of covered at this point, so maybe just to shift topics a little bit.
On the same store.
Operating expenses.
There was some improvement there a little bit anything worth calling out as far as just areas, where youre seeing better ability to control costs et cetera, I just wanted to hear more about kind of the trends there would be helpful. Thanks.
Yes, 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 exclude.
Excluding those property tax appeals were.
We see our operating expenses right 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 'twenty three.
We could see some.
<unk> 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.
Those were.
Utility expenses, just on the rate side, we're up double digit.
22 over 21.
<unk>.
As you look at the forecast moving into 'twenty three you see that moderating.
We've even seen some forecast that show it declining.
Im not ready to latch on to that but if you can just start to see that.
Come down a bit from what we saw in 'twenty two that gives a lot of.
Line of sight to feel much much better about where overall operating expenses to trend throughout 2003.
Okay got it okay. That's helpful. Thanks.
Thank you we now have Jonathan Hughes of Raymond James Please.
Please go ahead when you're ready.
Hey, good afternoon.
I just wanted to go back.
I guess can we talk about how much of the decline between the kind of effort do you figure we had talked about last summer.
<unk> 45 this year.
The $1 24 annualized run rate.
How much of that decline is not from the higher interest rate backdrop, I'm, just trying to understand where some of this.
The operational upside that was embedded in those projections has gone in and maybe if that's just simply delayed rather than no longer achievable.
Jonathan I think number one.
The projections you are referring to clearly we're in a very different environment. I think every body is dealing with interest rates and to different degrees I don't think theres any change in the operational picture whatsoever Theres 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 same store. So we're really not seeing anything that is operationally negative I think.
This environment for a lot of folks has two two big impacts you've got your operating fundamental business. How is it doing house demand what are the trends and then what everybody is dealing with is a dramatic sea level change in interest rates.
Unless you're just accretion perfectly accretion maybe lucky 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 certainly see a large impact.
But see a rebound as things moderate coming from that side as well, so again thats kind of what informs our swap position fixing those right. So.
I think operationally, we're very optimistic and bullish about where we're headed so.
Chris much of something that I think it's the majority of that would be the interest rate environment as the impact there yes.
And we do still anticipate as you said to be able to achieve on the operational upside in.
That's kind of what we're pointing to now is being able to have achieved the funding of the dividend a special cash dividend as well as the <unk>.
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 vein kind of.
Operational upside and Thats, what Rob was hitting on that work.
We've kind of set that foundation and we're seeing good indications to be able to start achieving that as we move through 'twenty three.
Enter into 'twenty four.
Okay.
That's helpful and just maybe on the operational side then is there.
Is there some expected vacancy in the portfolio that's may be preventing absorption from running a little higher I think the midpoint.
It is about 60 bps I think it was 50 bps absorption last year.
So I'm just trying to get them.
It is improving I'm, just trying to square some of the bullish comments the strength of the outpatient business.
You mentioned earlier with just that.
I would've thought maybe it was more absorption upside.
Yes, one comment there on the guidance is that that is as overall same store, so thats multi tenant and single tenant we are.
Somewhat diluted by the fact that your single tenant tends to run.
100, 100% 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 just multi tenant which is where the opportunity lies.
So I think to your point, there's a little more than what I would call 40 to 80 is our guide is for the total behind the multi tenant 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 where getting the leasing momentum underway, but it takes there is a process for build out we've got this pent up 600000 square feet plus of.
Occupancy, but not yet or excuse me at least but not yet occupied and building that up over it takes a little time and then it might take six months plus build out the space converted to occupancy.
It does take a little time to deliberate, but obviously, we're seeing the right trends in place to really see that coming through in the second half and certainly moving into 'twenty four.
Alright. Thank you and then just one more for me just back on the.
The kind of run rate <unk> and dividend coverage and you answered most of it.
The prior questions, but can I don't think I heard can you just remind us of what's the target payout ratio. Chris I think you said it had kind of high <unk> this year, but where can we expect that over the longer term. Thanks.
Yes, I would say, we will continue to drive that lower and you actually have seen that in our history. We were at a point in time going back 810 years ago, we were were over 100%.
And through the improvement in the portfolio and growth, we were able to drive that down.
Into the.
Mid to high <unk> in but our expectation from there was to continue to drive it to.
To drive it lower ups 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 yes.
Yes, I think in simple terms below 90 is certainly directionally, where we want to get back to but.
We're obviously navigating the current the current environment and.
Certainly want to see it go into the Eighty's.
In the not too distant future.
Alright, thank you.
Thank you, we'll now have Mike Mueller of J P M.
Your line is open yes, hi.
Thanks, Chris I think you talked about some of the swaps not being in the 41 run rate. So when you layer everything into it.
For the full impact of the swaps and then.
What youre expecting for acquisitions dispositions do you think you'll end the year with.
Run rate.
Similar higher or lower to that 41 set now.
Yeah as we start looking at the end of 'twenty three.
Does come a bit once again back to back to interest rates, but we.
As I mentioned.
The 41 says doesn't have any expectation.
Changes in interest rates, but it also.
Doesn't have any growth in the underlying portfolio.
Which is meaningful so our expectation is we get to the end of the year that we should be able to outpace.
The pressures on interest rates.
That would have us ending <unk>.
'twenty three.
And at a higher better run rate position than we were then we're entering the year.
Got it even with net dispositions.
Yes, because we're looking at those dispositions to fund.
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 slated for the second half of the year I mean, how.
How should we think about as you move into 'twenty four 'twenty five in terms of starts and Youll start.
Yes, I think if you look at if you look at our prospective pipeline youre right. Its about $350 million, there's about $200 million of that that we have slated to you expect to start in second half of this year.
So if you if.
If you combine that with the existing pipeline of $2 $35 million there'll 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 funding run rate of moving from $25 million to $30 million per quarter. This year up to about $50 million per quarter next year. So.
We are optimistic on those on those projects.
Pushing them forward and have a great dialogue with all of the prospective tenants.
Health system partners.
Got it okay. Thank you.
Okay.
Thank you we now have.
Amit.
From credit Suisse.
Yes.
That would be one.
Christine.
Our response to Michael was helpful. So kind of talk through how the <unk>.
That's a full run rate will build up in 'twenty three.
But when I apply that same logic to kind of how should.
Build up in 2003.
Does it not imply that.
Do you do.
Meaning.
At kind of a dividend coverage a bulk.
100%.
Kind of given you.
You are 100% in fourth Q.
The diluted impact from a full year of assets now.
It's probably still rate pressure going forward.
You forecast with a decent amount of recurring capex.
Leasing commissions as you kind of lease up the portfolio. So I'm just trying to think through that as well in the context of Rich's earlier question about dividend policy.
Yes, we are.
Looking at it I think the same fundamentals that we're talking about being able to drive improvement in overall growth of the operations that we're seeing that will flow through to fad as well.
As I've said in my prepared remarks.
The expectation for the year will probably be in that and that that high <unk> on the payout ratio and as rich said does that in any particular quarter because.
Capex spend is not not as smooth as earnings are.
And so you are going to have some variation in any quarter could you be however over 100% for some period of time.
Yes, that's possible, but as Todd kind of pointed to.
We don't see that as concerning especially if that is being driven by.
Additional capital spend for absorption.
Which is really growth capital.
And so.
Plus or minus any any one quarter, depending on how youre running your models that would not be surprising, but we still feel like long term directionally with what.
What we're seeing in terms of.
Internal growth.
That will be able to to.
Balance out this year as well as drive that payout ratio.
Lower.
In the future.
Excellent.
And the high Ninety's number just for clarification is that on average for 2003 or that's a year end target.
That really is an average.
One key piece of helpful information, we put in our earnings release, and I think it's worth a look.
Five of the supplemental.
It's 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 you. If you look at the 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 was 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 of 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.
And one more if you would indulge me.
Wondering if you get a lot more information from healthcare systems right now and again their bottom line is also under pressure.
We are hearing about them again, starting to consolidate them will be consolidate their regular Adam in the space.
Kind of a try to.
Improve the bottom line.
Can you just kind of talking about what you're hearing from them as well and what potential impact that could have on not just demand, but even potentially the ability to drive pricing going forward.
Sure, Yes, I think 'twenty two is a pretty challenging year for everybody saw the interest rate side of the world changed dramatically, but I think in health care.
Particularly challenging on the labor front as we all know, but I think if you look month over monthly trends throughout 'twenty. Two is a dramatic difference in the first half to the second half and by the end of the year that was starting to go.
Be much improved and I think thats, obviously, a bright spot going into 'twenty three.
With moderating COVID-19 impacts.
As well as better labor cost I think thats, a much better environment I think like everyone. They're grappling with the interest expense side of the world.
So we're seeing some some easing there just like we talked about earlier on inflation, which is really encouraging but I think the real takeaway is that theres always rationalization going on by health systems of their space usage, but I think the overwhelming trend youre seeing is a continued focus on how do we shift.
More to the outpatient setting where it is lower cost and more effective and I would say everything that we're seeing on the leasing side everything on the development side underscores 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 are margins better. So I think really outpatient continues to be part of the solution doesn't mean, they're not going to always be trying to rationalize where they put their care in and get it optimized, but but I think we're we're really poised to capture a lot of that incremental demand.
Great. Thank you.
Thanks, Tom.
Thank you. Thank you we now have John .
<unk> with Green Street. Please go ahead, when you're ready.
Thanks, I have a follow up question on the occupancy upside in the multi tenant square footage you guys outlined on page 16 can you just give us a sense when do you think youll be able to get to 90%.
The 90%. So this is something we've certainly talked about.
Through the merger through Investor presentation, we've outlined some upside and NOI dollars and getting to 90% for just for context I think for US it's early stages and as Jonathan Hughes just asked.
Sort of what it's 23 look like where is that occupancy upside and we talked about I talked about 150 basis points of gross absorption that we're really optimistic about in the early part of 'twenty three on a net basis, we see that trend right now at 50 basis points of upside, but building towards the 100 level throughout the year our guidance.
Thats kind of for the average for the year so.
Obviously, the implication of that would be Oh, youre sort of in the multi tenant side 85 go into 100 are going to 90 is that does that mean, it's 10 years, where in the short answer is no. We don't think it's that long and we think it's the early stages of building that momentum. So it's a multiyear process, we can't say exactly what it is but we'll we'll keep bills.
<unk>.
That that execution year to year, but I think it's we sort of think of it as a <unk>.
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 time frame.
Okay understood.
And then Chris the $10 8 million in merger related costs in the quarter, what additional costs are less to incur.
Or are there any other just integration risks that are still in your mind.
To your second question no no big integration risk.
We see we do still have some some work to be done we are still working through combining our.
Some of our systems, our accounting system.
Fortunately, we were on the same system, but under a different version. 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 moving into the second quarter, but.
But a lot of a lot of that work is done, but but yes. There is still still some too.
To be finalized.
Okay can you quantify the costs that will be incurred in 2003.
I don't have it right at my fingertips, but it will certainly be coming down from from 10.
I think in the quarter so.
It's going to be it's going to be less than less than $20 million.
Okay.
Question for me can you just give some context on what drove the decline and then retention tenant retention in the quarter downloads 70, 576%.
Yes.
Yes.
It bounces around from quarter to quarter. If you look at the annual we were just kind of just under 80%. There is a difference that we are seeing between the.
The legacy HR legacy HCA portfolio, we did see as a result of I think some of the distraction that the HCA.
The team was going through over the last few years with.
With the sale and things that frankly.
We saw some kind of lower customer service scores.
That was playing through so I think that that.
Yes.
Impacting.
Some of that lower retention, but that's also an opportunity that our team sees and that.
Very excited about kind of going in and showing.
The.
Positive customer.
Service experience that we're used to providing.
So.
As we look forward I would say.
We see that improving from that the low end of that 75% to 90 closer up to.
80, or 80, plus in terms of that retention ratio.
Yes.
Okay. Thank you.
Thank you you have no further questions from the lines I'd like to hand, it back to Todd Meredith CEO for any final remarks.
Thank you thanks, everybody for joining us today, we will see some of you some conferences next week.
Everybody have a great day. Thank you.
Thank you. This does conclude today's call you may now disconnect your lines and have a lovely day.
Yes.
Sure.
Yeah.