Q1 2023 Healthcare Realty Trust Incorporated Earnings Call
Hello, everyone and welcome to healthcare Realty Trust's first quarter earnings release, and Coke and scope.
My name is Charlie and I'll be coordinating the call today.
You will have the opportunity to walk to your question at the end of the presentation, if you'd like to register a question. Please press star followed by one on your telephone keypad.
I will now hand over to our host Ron Hubbard VP of Investor Relations to begin Ron. Please go ahead.
Thank you Charlie and thanks, everyone for joining us today for healthcare Realty's first quarter 2023 earnings conference call.
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.
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 a Form 10-K filed with the SEC for the quarter ended March 31 2023.
These forward looking statements represent the company's judgment as of the date of this call. The company disclaims any obligation to update this forward looking material.
The matters discussed in this call may also contain certain non-GAAP financial measures such as funds from operations or <unk> normalized <unk> <unk> per share normalized <unk> per share.
Funds available for distribution or Fad net 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 March 31 2023.
The company's earnings press release supplemental information and Form 10-Q are available on the company's website.
I'll now turn the call over to Todd.
Thank you Ron and thank you everyone for joining us this morning for our first quarter 2023 earnings call.
Healthcare Realty had a really solid first quarter as.
As expected robust operating performance from our portfolio is the foundation of our steady results.
We're building on this durable foundation with two strategic initiatives to accelerate <unk> growth.
First is our leasing team is generating tremendous momentum.
Converting this momentum to occupancy gains later this year and moving into 2024 will elevate our internal growth over a multiyear period.
Second we're focused on a return to external growth.
We are working on several capital formation initiatives that will lower our cost of capital and drive accretive external growth.
We expect the foundation of reliable performance from our portfolio combined with these two initiatives to boost and sustain.
Our bottom line growth well beyond the pace investors expect from the low risk MLP sector.
We see a clear path to generating <unk> per share growth of 5% to 7% in 2024.
This potential is bolstered by long term rising demand for healthcare services.
And health systems are reporting that demand for outpatient services is accelerating.
We also see near term tailwind that could strengthen our growth our growth outlook, including market expectations for softening inflation and lower short term interest rates in the months ahead.
These tailwind align well with healthcare Realty's post merger strategic initiatives.
For much of the last year, we've outlined the powerful benefits of the combination with HCA.
First we've increased safety through portfolio scale diversification and efficiency.
And second we're elevating growth through market scale concentrated clusters and expanded relationships that amplify our internal and external growth drivers.
It is important to note that it takes three to five years to realize the full value of a significant combination like this.
We are well on our way and we have seen significant results in less than a year.
Within the first six months of the merger, we successfully completed over $1 billion of asset sales in jv's in a challenging market.
We realized our full G&A synergies in half the time, we expected.
And we fully mobilized our leasing team to drive occupancy gains in the portfolio.
In a few minutes, Rob will walk you through how we've organized our internal leasing team to leverage our external broker network and increase our deal flow.
This will lead to significant occupancy gains.
We expect multi tenant absorption to double in 2024 to a 100 to 200 basis points.
And we expect this absorption to accelerate same store NOI growth to a range of 4% to 6% in 2024.
This could be even stronger looking at 2025 and beyond.
Rob will also share the favorable trends, we're seeing in the debt financing market for <unk>.
And a couple of short months, we witnessed cap rates move lower by as much as 50 basis points.
We are increasingly seeing cap rates move into the fives.
Yeah.
Next Chris will share with you how our portfolio performance is tracking extremely well.
He will highlight the company's solid revenue drivers, including embedded escalators cash leasing spreads tenant retention and steady occupancy gains.
Chris will also walk you through our 2023 <unk> guidance that serves as a baseline for our 2020 for outlook.
After remarks from Chris and Rob I'll circle back to spend a few minutes on our capital formation initiatives that will reignite our external growth in 2024.
With that I'll turn it over to Chris.
Thanks Todd.
Operating fundamentals were strong in the first quarter quarterly same store NOI grew two 8%.
Quarterly revenue increased by two 7% and operating expenses by two 6%, marking a return to margin expansion year over year.
We are focused on maximizing rent growth and occupancy gains to accelerate revenue growth.
Annual in place contractual increases averaged two 7% led by multi tenant at two 8%.
In the one 5 million square feet of leases that commenced in the quarter have future contractual increases of two 9%.
Cash leasing spreads in the quarter averaged three 1% once again above in place escalators, and notably over 70% of leases had a spread of 3% or greater.
Year over year occupancy increased 50 basis points to 89% for the same store properties with total portfolio multi tenant occupancy just over 85%, we see a meaningful opportunity for accelerating absorption and NOI growth later this year and into next.
As Rob will discuss in more detail, we are seeing significant increases in leading indicators for future absorption.
The operating expense growth of two 6% in the quarter benefited from successful property tax appeals in the fourth quarter. These.
These appeals will benefit year over year expense comparisons for the next several quarters.
Trailing 12 months operating expenses net of recoveries grew at 3%, which is down from four 6% for full year 2022.
Looking forward inflationary pressures show signs of further easing, which will allow the power of rent growth and absorption to accelerate future NOI growth.
Maintenance Capex trended lower in the first quarter to $24 9 million or 11, 8% of NOI.
The Fad payout ratio was 95% for the quarter and 97% for the trailing 12 months.
We expect the fad payout ratio to be in the high <unk> in 2023, as we invest and positive absorption.
We expect steady underlying fundamentals and growth of the portfolio as well as the potential for lower interest rates to benefit the payout ratio moving into 2024.
For example, a 1% reduction in variable interest rates resulted in almost 200 basis point improvement in our payout ratio.
Normalized <unk> per share for the first quarter of <unk> 40 was down a penny from the <unk> 41 per share run rate in the fourth quarter.
This was primarily due to higher interest expense on variable rate debt.
In addition, we fully reserved $2 4 million a first quarter revenue related to two items.
$1 5 million for three legacy HCA skilled nursing facilities that we expect to sell later this year.
Another 900000 reflects interest income on our legacy HCA mezzanine construction loan.
Projects in Houston was paused in the first quarter, but re mobilized in may.
The annual impact of the revenue reserves is $2.05 per share.
The 2023 normalized <unk> guidance range of $1 60 to $1 65 per share assumes no revenue contribution from these two projects.
We expect the Houston construction project to be completed and placed into service by the end of 2023 and the three skilled nursing facilities to be sold later this year.
With estimated proceeds of $100 million or more from asset sales and construction loan repayment. The ultimate annual run rate impact is expected to be less than a penny per share.
The benefit from the reinvestment proceeds is not included in the 2023 guidance range.
The proceeds when received are expected to reduce debt to EBITDA from six six times this quarter back within our target range of six to six five times.
Above average same store NOI growth moving into 'twenty four will also help to drive leverage lower.
As a rule of thumb every 1% growth in same store NOI reduces debt to EBITDA by over five basis points.
For example, 5% NOI growth next year will reduce leverage by over a quarter of a turn.
We also see a tailwind from expected lower interest rates.
So for curve suggest rates may rise modestly over the next few months and then decline in the second half of 'twenty three and into 'twenty four.
This would augment our expected occupancy gains and expanded external growth.
But even without improving interest rates, we see a path for 5% to 7% per share growth next year.
I'll now turn it over to Rob for more color on our leasing and investment activities.
Thanks, Chris.
First quarter of 2023 marked the first time that healthcare realty's leasing team operated fully under a common set of practices incentive plans technology and full brokerage coverage.
From the merger closing through the end of last year. Our team was busy integrating the legacy HCA portfolio into our leasing model.
We on boarded the top talent from Hca's leasing teams to our platform.
And at the first of the year placed them on our incentive program.
We also brought on over 35, New third party brokerage teams that we identified as the best in their markets.
These teams will leased approximately half of the legacy HCA square footage with the balanced transitioning to our existing brokerage relationships.
To maximize efficiency and speed to lease execution. We now have all of our properties on the same CRM platform called VTS.
And we are using healthcare realty's streamline lease documentation process.
The result of our integration work began to flow through during the first quarter of this year.
Prospective tenant tours and early indicator of leasing activity increased to over 775 in the first quarter.
Up over 50% from the fourth quarter.
A more significant point is that tours in our legacy HCA properties were up over 80% during the same time.
Versus a 25% increase for legacy HR properties.
The benefits of our leasing model are beginning to come through.
With better visibility on tours expectations for the timing of new leases and resulting absorptions are becoming clear.
Our leasing analytics indicate that tours are converted to leases about 15% to 20% of the time.
The data also shows it takes an average of four months to convert a tour to a new executed lease.
And then once the new leases signed it takes approximately six months for tenants to take occupancy.
This tells us our pick up in the first quarter tours should <unk>.
<unk> to higher occupancy late this year and into 2024.
By maintaining tour activity consistent with the past two quarters, we expect to generate annual absorption of 100 to 200 basis points next year.
This comes from our $34 5 million square foot multi tenant portfolio.
The net effect is these gains are expected to add approximately one 5% to 3% to our baseline annual NOI growth projections.
We have illustrated these points on new slides in our investor presentation on pages 12 and 13.
On the broader demand picture history shows that even with the economy slowing.
Clinic based outpatient medical visits remain resilient during times of slower economic growth.
Recently, there have been supportive read throughs are positive trends from some for profit hospital systems.
HCA and Tennant reported that outpatient surgical procedures were up to up 5% to 8% year over year.
<unk> to 2% range in 2022.
They also reported further moderation in labor cost and stabilizing margins.
Along with continued plans to invest in outpatient delivery settings.
These improving demand drivers correlate with the increased activity we are experiencing in our buildings.
Shifting to the market for <unk> investment.
Land is strong we.
We see both debt and equity investors looking to reallocate to the stability and safety of their movies.
On the debt side, we are seeing larger lenders such as capital one Wells Fargo and fifth third returned to the market with fresh allocations.
All in debt financing appears to have shifted down into the mid fives.
This coupled with growing institutional equity interest in the mob space has shifted cap rates lower by 25 to 50 basis points in the last couple of months.
Upper tier <unk> are now trading in the mid fives to low sixes.
With this expanded interest, we see increasing opportunities to leverage our joint venture relationships to accelerate external growth volume.
Our pipeline of clustered acquisition opportunities continues to grow with our greater market scale and deeper health system relationships.
These relationships are a rich source for development and redevelopment opportunities.
Health systems are formulating capital plans to meet the increasing demand for outpatient services.
And a few recent examples hospitals have reached out to discuss the new the need for new outpatient facilities and growing markets like Phoenix, Houston, Raleigh and Dallas.
This year, we are building a roadmap for increased occupancy gains that will accelerate NOI growth next year.
Additionally, strong demand for <unk>, along with our greater scale and expanding health system relationships positions us well for accelerated external growth.
The combination of these two will drive meaningful increases in <unk> per share.
Okay.
Now I'll turn it back over to Todd.
Thank you Rob.
Yes.
It's important to know the merger sparked strong interest among institutional capital partners. They.
They recognize the value of healthcare realty's operating expertise the scale of our premium platform and the strength of our deep industry relationships.
We are meeting with Blue chip investors who've earmarked capital for <unk> and want to rapidly scale their exposure.
Over the next six to nine months, we intend to seek one or more joint ventures with gross at gross asset values between $500 million and $1 billion.
We also expect to secure sizable commitments for go forward investment capital.
We will use proceeds from seed portfolios alongside these capital commitments to fund our robust pipeline of investment opportunities.
These new ventures will diversify our capital sources and expand our ability to invest in a broad range of burgeoning outpatient trends.
We see the potential for our gross investment volume to exceed $1 billion in 2024 and expand from there.
As we look ahead, we view 2023 as a critical inflection point for healthcare Realty.
We are carefully investing the resources necessary to sustain higher annual <unk> growth well above <unk> sector norms.
In 2024, we see a clear path to <unk> <unk> per share growth of 5% to 7%.
We also see near term tailwind that could strengthen our growth outlook, including softening inflation and lower short term interest rates.
We are eager to engage with everyone further as we execute our growth strategy. We look forward to hosting an investor day in the latter part of 2023.
We're working on potential dates and will pull many of you over the next few weeks, including at NAREIT.
With that operator, Charlie we're now ready to ship to the question and answer period.
Thank you of course, if you'd like to ask a question. Please press star followed by one on your telephone keypad.
If you'd like to be truly a question. Please press star followed by two when preparing to ask a question. Please ensure you're on you said locally as a reminder, that star followed by one on your telephone keypad now.
Our first question comes from Michael Griffin of Citi. Michael Your line is open. Please go ahead.
It's actually Nick Joseph here with Michael.
Todd you mentioned kind of <unk> and the funding robust pipeline of investments.
How are you thinking about getting accretion for HR shareholders from those deals just given where the cost of equity is today, obviously that can that can fluctuate, but how do you think about actually driving accretive per share earnings from external growth.
Sure.
I think how we view it clearly as you said with our cost of equity today.
Really the basis that we're thinking about we're really thinking about the basis being.
The seed portfolio formation cap rates that would come from that number one.
And so obviously, we see that is moving in an attractive direction that both Rob and I. Both described as cap rates been shifting lower and then I think the flip side is obviously investing through a JV format enhancing your returns leveraging partner partners capital using your expertise to earn fee.
<unk> promote structures that would enhance the return and therefore, creating a spread between those.
Those two levels.
And then how do you balance or think about share buybacks versus that pipeline of investment opportunities.
Sure I mean, I think naturally when you are selling if you sell assets, which we certainly expect to do year to year for the balance of this year. Even next year, just just an ongoing process certainly we would look at what our opportunities in front of us at the time, we have those proceeds in hand, and we would certainly look at what's the return on a share buyback versus a return of putting.
That that capital to work in new investments, whether thats higher yielding redevelopment development acquisitions, whether they are balance sheet or JV acquisition. So we would certainly look at all of those but we think with the opportunities were lining up.
We think there is there is certainly a lot of opportunity to be focused more on external growth and share buyback, but certainly thats on the table at all times.
Okay.
Thank you very much.
Okay.
Thank you. Our next question comes from Juan Sanabria of BMO capital markets. Your line is open. Please go ahead.
Hi, good morning, just.
Hoping to unpack.
Potential joint venture opportunities.
<unk>.
How should we think about it.
The target range.
Potential investments or a stake in the ventures.
And.
Where.
This is growing.
Joint ventures versus on.
Our balance sheet.
Sure I think.
It's early to obviously express exactly what a JV structure would look like but I think you can look at the two we have in place today.
Maybe some goalpost.
Same that in.
In one case, we're 50 50 with nuveen are teachers.
And then with CBRE investment management, we have it in 2020, where were the 20.
So those are probably good goalpost to think about something something in that range, but it's obviously subject to how we structure it with with potential partners.
Including those potential groups, obviously, we're talking to a lot of folks.
Sorry, what was your second question there.
Just the conflict I mean youre going to have.
Sure sure.
Yeah.
Sure.
Yes, I mean, I think obviously, that's always a balance we've been very careful in the <unk>. We have now not to create a tangled web of conflicts as you point out.
JV for us today are fairly small in the Grand scheme of things.
We're looking to diversify that grow that obviously lean into that here, where our cost of capital isn't quite where we'd like it to be I think a lot of a lot of Reits have seen that through with discounts to NAV or lower multiples than than historic norms.
Looking for ways to to leverage that external capital I think for US we would continue to evaluate and look at balance sheet investing alongside all of that so it'll it'll be a function of balancing all that I think our view is leaning into that external JV structure is appropriate now and we have a lot of runway on that and I think that can deliver a lot of value to <unk>.
Shareholders and obviously over time, we will.
Should the cost of capital for the balance sheet makes sense, we'll lean into that and I think as we described in our JV as before we've always been careful to balance sort of how these these imperatives or directives. If you will the styles.
Complement each other the balance sheet would be very focused on our current strategy of of market scale in clusters.
And continuing that heavily focused around hospital centric investment themes and I think theres lots of other interesting areas that we've done for years, but expand upon in terms of different thesis.
<unk> that we would invest through these these jv's and we've done that already to date with with the two JV. We have so I think we will continue to balance that very carefully.
Okay, and then just on the <unk>.
Right.
That you took this quarter I guess what changed on those too.
The portfolio of the Mezz loan.
From the fourth quarter results.
Just curious on the change there.
Yes on the specifically on the Sneath says were assets that we werent looking to own long term, we're already looking at exiting those.
This quarter kind of the change is just where the operations are currently and what needs to happen in terms of the transfer of the operations over to a new operator in new owner.
And so as a result, we felt it was prudent to.
Sure.
Go with those reserves kind of go to cash accounting for those until they are sold.
And on the Mezz, we mentioned.
The prepared remarks that it did.
That project did have a pause in the in the.
First quarter.
So no work was being done at that point in time, so that was the change the.
The.
The developer has since.
Raised additional equity is in the process of re mobilizing.
So it does look like the project will be.
<unk> completed and finalized here later this year.
But once again, just based off of the facts and circumstances in the first quarter, we felt that.
Go on go into cash and reserving that amount was the it was the appropriate.
Plan there.
I think the big picture is to keep in mind that these are the only sniffs the only mezz loans that we have.
They werent part of our long term strategy we.
We did take this conservative position here in the quarter, which has about two 5% annual impact as.
As I mentioned once the proceeds.
Our recognized from the sale.
Repayment of the loan we expect that the ultimate impact to be lessened.
So overall pretty minimal.
Thank you.
Okay.
Thank you. Our next question comes from Nick <unk> of Scotiabank. Nick Your line is open. Please go ahead.
Yeah.
Thanks, Good morning, I, just wanted to tie together a couple of pieces of the guidance. So you are talking about occupancy growth.
Throughout the year and yet.
<unk> standpoint on a normalized <unk> basis, you did 40 in the first quarter. The low end for the year is $1 60, so there's really not much growth off the first quarter base.
Hi, and has a little bit of growth modest growth, but just trying to understand what the offset would be if occupancies expected to improve sequentially.
Whats, preventing the sequential <unk> to be a little bit better.
Okay.
Hey, Nick this is Todd.
I think the real key there is is really focusing on rob's prepared remarks.
We're moving along nicely at a 50 basis point year over year occupancy improvement currently and we have been for a little while we see that beginning to build in the second half, but I think what we really really want to emphasize is that the team thats been really put together to motivate and mobilized leasing and as Rob described.
That really came together at the beginning of the year a lot of hard work went into that in the second half of last year and really see that momentum building on the tour side and again ramping up tours.
Read through of about 10 months until you see the pick up in occupancy. So we do see steady occupancy gains this year, but fairly modest compared to what we see next year next year, we see that doubling going to 100 200 basis points. So it's really a 2020 for acceleration story on the occupancy side, but again, we've given guidance this year of SS NOI.
Same store NOI of two five to three and a half we're kind of at the lower end now building later into this year, but moving to a higher level of 4% to 6% next year. So that's really I think the important part.
Yeah.
Okay. Thanks, Todd just just a follow up.
Going back to the 5% to 7% potential <unk> growth next year I wasn't I just want to be clear. If there was any assumptions for acquisitions built into that and as well if there's any you're taking on the sofa curve impacting variable rate that's going to drive some level of growth next year.
As well.
Yes on the acquisition front, we certainly expect to be ramping up in 'twenty four but as you would expect that's a build throughout the year. So it's far less of a contribution in 'twenty. Four then it would be in subsequent years. So it's a fairly modest piece of that guidance that guidance range that we're looking at it that outlet.
That we're looking at so I would say.
It's far less than 1% of that most of that is related to the same store.
Higher same store growth that I, just talked about so and then on the sofa or Chris I wanted to ask on that yeah I hit on that in my prepared remarks, a little bit but no we're really not.
Into that's not really playing into that 5% to seven that would be additive on top of it kind of depending on where the ultimate sopra curve plays out right now it's showing a showed a benefit but as we know it's had a lot of a lot of volatility. So it's kind of what we're trying to point to is just from the core operations we see.
Strong strong growth and then.
Some potential tailwind.
If the interest rates do decline as the forward curve is predicting.
Thanks appreciate it.
Yeah.
Thank you. Our next question comes from Steven Valiquette.
Please Steven your line is open. Please go ahead.
Thanks, Hi, Good morning, and my question was kind of on a similar vein to the last one.
Thinking about the 2024 <unk> growth of 5% to 7% that youre targeting it's really just semantics I was just wondering if you could describe or color on whether you're visualizing, maybe a bolus of new leases all starting on January one of next year versus how much of the leasing activity in multi tenant occupancy gains will be more on a rolling basis that may contribute.
Simon late 'twenty, three and potentially throughout 'twenty four just picture on how you visualize on that right now just more color would be great. Thanks.
Sure. That's fair question, Steven I would say.
It's not.
The one bulge, if you will in the first quarter I think it's definitely a rolling build if you will going from fourth quarter or the beginning of that shown up in the fourth quarter of this year, but really starting to build more materially in the first quarter and throughout the year. So.
As Rob said, we're really looking at the tour volume spiking, obviously, we've seen a lot of history on conversion rates and material increase and we're also seeing.
<unk> number already through April so, we're watching that and seeing that continue and kind of keeping up the pace and building in over the course of 'twenty four.
Okay, and just a quick follow up question on your comments around the cap rates kind of moving back down into the fives down almost 50 bps.
Just for further context in that or are there maybe just a few larger transactions that are driving that or is it kind of widespread it everything is kind of moving down whether it's large or small just any further color on that would be helpful. Thanks.
Yes, I'd say that.
I would say larger small I would say we've seen a number of deals here recently.
That is.
Sort of across the board in terms of on campus or off.
Generally some some longer Walt.
With some some credit and it has significantly moved down well into the fives you have.
Some typical.
<unk> kind of trading around the around the low sixes that I mentioned, so it's a pretty it's.
Pretty.
Wide gamut of trades that we've seen the.
The volume I will say has been down but I think we are starting to see some marks that are meaningful to the type of product that we typically invest in an indicative of what we're generally.
And our portfolio.
And Rob just.
Adding to that I think one of the lowest cap rates. We've been hearing about recently was the single asset so $50 million or less that was testing that five five level so to your point.
It's not just some large deal of some nature thats driving it I think it's pretty much across the board.
Got it okay. That's helpful. Thanks.
Thank you.
Our next question comes from Tayo Okusanya of Credit Suisse. Your line is open. Please proceed.
Hi, good morning, everyone.
Just along those same lines.
Of questions again.
I guess I'm, a little bit surprised to hear that cap rates are coming in that nuance I'm transaction.
And just again wouldn't underwrite such a deal must be must be assuming for those deals to kind of work just given where cost of debt and cost of equity generally is in the market today and would you expect that you could also contribute assets to any potential JV that those type of cap rate.
Yes, it's a good question Tayo I think what's what people are certainly looking at is sort of looking out ahead, and saying we've been through some of the toughest times in terms of quick rise in underlying treasury rates index rates.
So for all of that so for swaps all of those things plus we had spreads gap out and Youre just seeing obviously that that will start to stabilize a little bit come down and I think the outlook as we touched on is certainly I think Chris described the outlook for the sofa curve not that it's exactly right, but it's directionally indicative of what people are thinking the market <unk>.
So I think people are looking through that and saying Hey, I might even do this mostly equity and take the risk and refi as things get a little bit more stable in the future, but as Rob said Theres also sizable banks, adding liquidity fresh allocations to the market pricing cap rates into those mid five so I think it's a combination of all.
All of those things and I think it will take more time to continue to flush out where these cap rates fall, but I think back to the mid fives low sixes is very reasonable I think for us with seed portfolios, we will obviously work with.
Investors that.
What are the thematic.
Ideas that we're putting into a seed portfolio and that may have an impact exactly where cap rates are we're not going to come here and tell you that it's a five five cap I don't think thats the right direction to tell you but.
Whether that six plus or minus is certainly on our mind and I think that's what it's taking to kind of really play in the mob space now. So we'll continue to update you on that as we make further progress throughout the year, but I think that range that Rob said is still indicative of the right range of where <unk> or pricing.
Thank you.
Thanks, Tom.
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Our next question comes from <unk> <unk> of Wells Fargo. Your line is open. Please go ahead.
Good morning out there thanks for having me on the call so thinking about external activity into 2024 and looking at the one point.
Yeah.
A long term development opportunities you guys listed in the presentation.
In consideration of some of the commentary coming from the REIT space in general that we've seen delays related to air handling equipment HVAC and so forth I mean can we expect a pickup in development activity in 2024 as well in conjunction with it.
The increase in acquisition cadence.
Yes, I think that if you look at the pipeline we have in our supplemental we've got a number of.
Projects that we have starting at the end of this year and really the bulk of that.
Those dollars will be spent in 'twenty four so I would say certainly a pickup if you look at what's rolling off today and coming on in 2024 as new projects, it's about an additional $150 million of spend.
We've we've said I think I believe I said on the last call that.
This year, we're spending about $25 million a quarter that would certainly take it up to about 50% almost $50 million a quarter. So we certainly are optimistic and bullish on our on our development pipeline.
We see.
A lot of runway there in 2024 to to get those projects started and completed.
In the 12 to 24 month timeframe that we typically.
Lay out for development. So I think also just what we're seeing on the on the health system front in terms of.
This past quarter, we saw a few of the for profits where they reported.
Increases in outpatient surgeries.
Some relief on the on the Labor front, we certainly are.
Are you seeing that as an opportunity where.
The growth plans that these health systems have certainly going to continue into 2024 to meet the rising demand.
Outpatient.
For outpatient services that's out there so we really don't see the development side.
Slowing down I think it's more about capitalizing on what we have in our portfolio.
And being able to realize those returns a proper risk adjusted returns developments.
Embarking on.
Okay I'll leave it there thank you.
Got it.
Thank you. Our next question comes from Mike Mueller of J P. Morgan Mike. Your line is open. Please go ahead.
Yes, hi, so I guess that's.
And really going back to the 5% to 7% growth next year.
I mean, it seems to imply that if you are talking about doing these large jv's. We're seeding assets later in the year that you would have to have a lot of acquisitions lined up.
Kind of right behind it to use the proceeds.
Or else Youre, creating a lot of short term dilution that seems to work against the 5% to 7%. So can you just maybe just elaborate a little bit more on that 5% to 7%.
It does it does it contemplate these jv's that youre talking about.
Any sort of timing considerations, just so we can try to get our arms around that.
Sure and we're certainly happy to walk through that more as we develop sort of a timing details in the quarters ahead, but I think conceptually.
You make a fair point and I think our view is we'll watch that very carefully we certainly see a rising opportunity set in terms of acquisitions and development as Rob said.
That could make a lot of sense in the JV setting and I think we will also look at if you do a seed portfolio structure. You can time some of that if youre working you can do.
A staged takedown that could mitigate some of that timing gap. So I think we'll be very mindful of that.
But I would say that the investment opportunity pipeline is very strong and we see that as something that we can quickly roll into moving into 'twenty four but certainly you raise a good point and we will we will certainly think about that as restructuring.
Our JV.
Okay.
Thank you.
Thanks, Mike.
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Our next question comes from John <unk> of Green Street, John Your line is open. Please go ahead.
Thanks for the time I just wanted to circle back to I believe Nick just as a question on your cost of capital. So the cap rates are.
<unk> and they are say they are trading at pretty big discount to NAV. So just can't reconcile that with your pounding the table on external growth. So just curious your cost of capital stays where it is why aren't you aggressively shrinking the balance sheet.
Well I mean, I think two things. We are we are selling some assets number one you're seeing us do that this year, we've done a lot of that obviously over the last year.
Or less since the merger and the seed portfolios are a function of that I mean, thats also raising capital in terms of selling those assets into a JV structure clearly that's the really the cost of capital we're thinking about and then turning around with those proceeds and using that combined with those go forward commitments from a JV structure too.
Two to create external growth and accretive growth. So thats, obviously within that you would have various fees and promotes and structures that would give you an enhanced return.
As well so we're not looking at this as just a.
Pour out equity at unfavorable valuation and have dilutive type activity. So thats clearly something we are sensitive to and mindful of obviously over time, our plan would be to drive that that stock price that cost of capital to a better place.
And be able to use that as well, but clearly leaning into the JV for a lower lower effective cost of capital.
Okay, but the gross investment volume that you referenced earlier in the call apologies if I missed this could you share what HR as balance sheet commitment will be.
Well I think we would look at it as being essentially the proceeds from from seed portfolios. So obviously, we're not.
Either selling assets outright to other counterparties or proceeds from.
Seeding. These portfolios that we would then use to pair with external capital significant amounts of external capital. So really leveraging these JV structures to go after the types of volumes, we're talking about here.
Okay Alright, thank you for your time.
Sure. Thanks.
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Our next question comes from Austin <unk> of Keybanc capital markets. Austin. Your line is open. Please proceed.
Great. Thanks, Hey, guys, how much of the 5% to 7% earnings growth and 4% to six cash same store NOI growth for 2004, you highlighted is just kind of the HCA merger playing out as you had previously highlighted versus something different that you're seeing more broadly across the leasing environment.
Thats broader based and not specifically tied to kind of.
Improving the operating metrics of the <unk>.
<unk> assets.
I think its really both I mean it is certainly.
An extension of what we talked about for the rationale for the combination with HCA certainly we sell a lot of opportunity within the HCA portfolio, theyre multi tenant occupancy being being materially lower than ours, but we also see the power of the combination through market scale extended.
Scale in those markets building on our cluster thesis are strong adding to our strength historically healthcare realty strength to the relationships that <unk> had and putting that together to drive additional momentum and then I think on top of that what Rob talked about is really seeing a recovery of sort of a sentiment of really meeting the <unk>.
Demand of health care services, and specifically outpatient services. So it's a combination of both but I would say.
It's across both portfolios, it's not just purely an HCA play in their portfolio. It's also additive in the HR portfolio and then the combined benefits that theyre not only occupancy driven but also all the metrics that we're always trying to drive whether it's in place escalators cash leasing spreads.
<unk> expense growth all of those things that we have more scale and leverage to be able to do across the bigger combined portfolio.
Got it and then you guys highlighted the timeline from toward occupancy, but given all the uncertainty in the world.
Cover.
That health systems are kind of underway from the challenges facing related to the pandemic I guess does that timeline.
From toward occupancy be extended relative to historical periods and what gives you the confidence to provide that for guidance. This early for 'twenty four instead of just letting it play out I guess in the form of signed leases through.
Middle to back half part of the year.
Yes, I think thats the timeline that I laid out based on historical data that we've looked at.
Certainly there are approximations and averages of the data that we looked at so.
You could get some that go go ahead of that you can get something.
I'll go a little longer than that but I think that what we're seeing right now is.
Health systems and providers are remaining active in growing market share and growing.
Their service areas and so we see that as an opportunity to kind of lay out based on the increased activity that we've experienced.
Rowling in Hca's portfolio to our leasing model.
And then <unk> seen some of the green shoots on the improved performance by the health system. So we see that as an opportunity to kind of lay out our expectations based on what we know today.
Four four for leasing and occupancy going into 2024.
Understood. Thank you.
Thanks Ross.
Okay.
Thank you at this stage, we have no further questions and therefore this concludes today's Q&A session I would now like to turn the call back over to the CEO for any final remarks.
Thank you Charlie and thank you everybody for joining us. This morning, we look forward to seeing you at upcoming conferences, including NAREIT and we'll we'll be engaging with you about our growth story, but obviously also the investor day that we're looking to put together for later this year. Thank you everybody.
Yes.
Ladies and gentlemen. This concludes today's call. Thank you for joining you may now disconnect your lines.
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