Q2 2023 Healthcare Realty Trust Incorporated Earnings Call
Good morning, Good afternoon, welcome to the healthcare Realty Trust's second quarter earnings Conference call. My name is Adam and I'll be your operator for today, if you'd like to ask a question in the Q&A portion of today's call can be two separate pressing star slipped by one on your telephone keypad I will now hand, the call after VP of Investor Relations to begin Sharon. Please go ahead when you're ready.
Thanks, Adam Thank you for joining us today for healthcare Realty's second quarter 2023 earnings conference call joining.
Joining me today, joining me on the call today are Todd Meredith, Kris Douglas and Ron Paul.
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 June 32023.
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 adjust.
EBITDA a.
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 June 32023.
Companys 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 second quarter 2023 earnings call.
Healthcare Realty generated steady second quarter operating results.
Despite a volatile macro environment, we remain extremely bullish on our ability to capture operational upside from our portfolio.
We saw record new leasing activity in the quarter.
Robust tours and executed leases are early indicators of the occupancy gains and momentum we expect to see later this year and moving into 2024.
We are also refining the portfolio further through asset sales and positioning healthcare realty for growth through the formation of a joint venture.
On this point I want to be clear that we are net sellers in this environment.
Like many healthcare realty's current public valuation is not conducive to accretive acquisitions.
Our implied cap rate is in the high sixes nearly 7%.
This is disconnected with where we're currently seeing assets trading in the private market.
Core strategic assets are trading either side of 6% some well into the fives.
We are actively selling noncore less strategic assets on average around six 5%.
Given this disconnect we're pursuing the sale of non strategic assets, which also improves the quality of our remaining portfolio.
It's rare when proceeds from non strategic asset sales can be recycled accretively.
We are seizing this window to further refine our portfolio and concentrate on our highest growth properties.
We also recently launched a process to form a strategic joint venture <unk>.
Selling assets into a JV portfolio will generate significant proceeds while retaining ownership of strategic properties.
These proceeds will more than fund healthcare realty's portion of any go forward investments.
We expect to redeploy meaningful excess proceeds from our seed portfolio into a broad range of options, including stock repurchase debt repayment development funding and growth capital to drive occupancy gains.
Through the JV, we can generate attractive returns on limited capital and importantly, diversify healthcare realty's capital sources.
Looking ahead. It also provides the means to invest accretively and grow with our health care providers, who continually need real estate capital and services, regardless of capital market conditions.
Forming a strategic joint venture in the current environment will position us well for what we expect to be an improving backdrop in 2024.
I'll circle back after Chris and Rob to discuss our leasing momentum and growth outlook now I'll turn it over to Chris.
Thanks Todd.
Our second quarter operating performance reflects the stability stability investors have come to know and appreciate from the medical outpatient business.
On the macro front interest rate increases moderated in the second quarter. Despite the moderation, we still experienced a 45 basis point increase in sulfur compared to the first quarter.
This was the primary driver behind the sequential change in normalized <unk> per share to <unk> 39.
The <unk> for the quarter excludes a onetime benefit of $18 million or approximately <unk> <unk> per share.
This was related to a refund of transfer taxes paid in third quarter 'twenty two and included in merger related cost.
Trailing 12 month same store NOI increased two 9%.
Year over year quarterly NOI grew two 1% these.
These both benefited from the company's share of JV, which had NOI growth of over six 5%.
We had tremendous success this quarter maximizing rent growth and occupancy gains to accelerate revenue growth to three 2% for the quarter.
Annual in place contractual increases now averaged $2 71%.
Five basis points from last quarter.
The improvement was driven by future contractual increases of 3% for the million square feet of leases that commenced in the quarter.
Cash leasing spreads in the quarter also averaged 3%.
What is striking is that there are six markets with spreads between five 6% and 17, 8%.
For example, Seattle had spreads of eight 7% on over 130000 square feet of renewals in the last year.
This shows that the pricing power in this market, where we have significant scale.
Year over year average occupancy increased 20 basis points to 89 points year a percent for the same store properties.
Total portfolio multi tenant occupancy is just over 85%.
The largest opportunity for occupancy gains as in the legacy HCA multi tenant portfolio, where current occupancy is over 400 basis points below pre COVID-19 levels.
Returning this portion of the portfolio to pre COVID-19 levels is more than achievable.
This is seen by the fact that legacy HRS current multi tenant occupancy of 87, 7% is 100 basis points higher than legacy Hca's pre COVID-19 levels.
We're already making progress with over 200 basis points of leases and build out across these HTS properties.
As Rob will discuss in more detail, we saw over 375000 square feet of new leases executed in the quarter.
This drove a 30 basis point sequential improvement in the total portfolio lease percentage.
These new leases will drive future absorption as most of these suites move in through the balance of the year.
Revenue growth was offset by five 3% increase in operating expenses.
Net of recoveries quarterly operating expenses increased four 7% year over year. This is an improvement over what we saw in 2022, but still elevated compared to historical norms of less than 3%.
The primary expense driver was continued labor inflation in janitorial and personal expenses, which were up approximately 10%.
Looking ahead, we expect labor pressures to subside later in the year. This will allow operating expenses to trend back toward more historical levels as we move into 2024.
Maintenance Capex increased from the seasonal low in the first quarter to 15, 1% of NOI in the second quarter.
An increase of $8 million in tenant improvement spending is tied to the strong leasing momentum and is expected to continue through the back half of the year.
This growth capital is increasing our payout ratio.
We're comfortable that the payout ratio will come back below 100% as strong NOI growth generated from the positive absorption and underlying portfolio cash flow is realized.
Now a few comments on the updated guidance.
<unk> guidance for the year was adjusted to $1 57 to $1 60 per share.
The revision was primarily driven by two separate but related macro factors first inflation is moderating, but not as quickly as our original expectations.
This is driving higher labor costs and lower operating margins.
In addition interest rates this year are not declining as previously expected.
Short term interest rates in the third and fourth quarter are now projected to be higher than what we experienced in the second quarter before declining in 2024.
Additionally, we lowered straight line rent guidance, a noncash item to reflect year to date actual as well as the impact of higher expected dispositions.
Our additional disposition guidance was increased to $350 million to $450 million.
With over $300 million of dispositions under contract or LOI, we expect to have significant excess proceeds after funding development and other growth capital.
The excess proceeds will be primarily allocated to debt repayment as well as opportunistic share repurchases.
The debt repayment will further reduce our floating rate debt, which is currently 14% of total debt down from almost 20% a year ago.
With this repayment, we expect debt to EBITDA to be in our target range of six to six five times.
The strengthened balance sheet will position us well to capitalize on accelerating same store and <unk> growth in 'twenty four.
As the strong leasing activity, we're seeing boost occupancy.
I'll now turn it over to Rob for more color on leasing and investment activities.
Thanks, Chris.
First I'd like to touch on the increased disposition volumes that Chris mentioned and provide a quick update on the transaction market.
The $300 million currently under contract or LOI is expected to close throughout the balance of this year.
These sales should be characterized as portfolio cleanup.
The properties have lower growth potential and are in areas with little opportunity to build out market scale.
As examples about half of these sales are represented by non mob properties.
Of the Mlps most are not part of a cluster.
And annual escalators for the group average about 40 basis lower than HRS total portfolio.
We expect these sales to generate a blended cap rate in the mid sixes.
At this level of pricing this disposition activity reflects a rare moment when we can achieve meaningful portfolio refinement at accretive levels.
The transaction market for <unk> continues to be driven by debt costs with some of the larger lenders increasing allocations in the space.
All end lending rates remain around 6%.
These rates have steadily held cap rates for core movie product in the low sixes with higher quality assets pricing below six.
Now turning to our leasing activity.
New executed leases have increased each month since the beginning of the year when our leasing teams became fully engaged.
New leases of 376000 square feet were signed in the second quarter.
Nearly 60% from the first.
Tours are strong.
Positioning us for further gains in new leasing activity in the coming quarters.
A disproportionate share of these new leases were completed in the legacy acre multi tenant portfolio.
This is a strong indication that the benefits of our third party brokerage model are beginning to come through.
Where we're really seeing the advantage of it advantages of increased scale is in our 15 largest markets.
In these markets the merger more than doubled the amount of healthcare Realty's square footage covered by each of our brokerage teams.
Such scale provides them with many more options to meet tenant needs.
In the quarter, we saw an outsized number of our new leases come from these top 15 markets.
For the total portfolio are executed new leases that are in build out represent almost 160 basis points of future occupancy.
This is expanded 40 basis points from last quarter.
The majority of these leases are expected to take occupancy by the end of this year.
Okay.
Regarding broader demand for space, we've seen tremendous volume over the past couple of quarters from third party physician tenants.
We are also seeing increased demand from health systems.
For profit systems have recently reported improving results driven by strong outpatient volume and stabilizing labor costs.
For example, HCA and tenant just reported.
<unk> straight quarter of elevated outpatient surgical volumes.
We are hearing similar trends among the not for profit systems.
Looking ahead, we expect health systems to play a greater role in driving our new leasing volumes higher.
Where we have seen and where we have already seen increased engagement from health systems is around development.
Our development and redevelopment activity totaled $339 million of active projects.
We added one new development and two new Redevelopments this quarter.
And Scottsdale, we formed the joint venture with a national developer for an 80% pre leased 101000 square foot mob adjacent to a growing honor health campus.
The developer source is the obvious choice to partner with on this project given our significant market presence post merger.
We also commenced two redevelopment projects.
One is in Charlotte with Nevada Health and the other is in Washington, DC near where we own three movies on and our Nova campus.
Both redevelopment came from the HCA portfolio.
Across both our leasing and investment opportunities. We are pleased with how much upside potential we see in the HCA portfolio.
Now I'll turn it back over to Todd.
Thank you Rob.
I want to round out our prepared remarks, underscoring how leasing momentum is poised to accelerate our growth in 'twenty four.
As Rob just described new leasing volume was especially encouraging in the second quarter 376000 square feet of new leases as the highest volume we've executed since the merger.
And this volume has risen steadily since January .
It's really picking up momentum as the HCA multi tenant portfolio with over 200 basis points of leased versus occupied and an improvement of 60 basis points over first quarter.
Yes.
Since our merger closed last year, we're seeing two primary drivers elevating our new leasing volume market scale and relationships.
With an average of 29 buildings in our top 15 markets healthcare realty's, the obvious first call for providers and brokers.
We do a lot of repeat business with providers.
As health systems grow their outpatient services. They know we are the most likely owner and developer to be able to immediately address their needs.
And with our scale, we do far more leasing transactions than any other owner in these markets.
This gives us deeper market knowledge and insight that drives both occupancy and pricing power.
Scale also makes us the top priority for our brokerage teams as Rob indicated the merger more than doubled their portfolios with healthcare Realty.
We are often their most reliable and lucrative client motivating them to bring more health care providers to our buildings.
On this note we are hosting an investor day in Raleigh on October 5th to highlight how market scale and relationships drive leasing momentum occupancy gains and rent growth.
Those who joined will have a chance to tour properties meet our brokers and hear from our health system partners.
Healthcare Realty's bright outlook for 2020 for growth is largely built on our leasing momentum we have a tremendous amount of operational upside created by the merger combination.
Record, new leasing volume will bolster occupancy moving into 2020 for especially in the legacy HDA portfolio.
We expect absorption gains to ramp up to a 100 to 200 basis points through the course of 2024.
And this has the potential to boost healthcare realty's same store NOI growth to the 4% to 6% range.
Which can translate to even more at the <unk> per share level.
With that Adam we're now ready to ship to the Q&A portion.
Thank you.
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Philip I wanted to ask a question today.
And the first question comes from Austin <unk> from Keybanc capital markets. Your line is <unk>. Please go ahead.
Great. Thank you just breaking down the change to your same store NOI guidance was there any change to the same store revenue growth outlook for 2023 or was expenses the sole driver of the 50 basis points decrease.
Same store NOI guidance.
Yes.
Really all isolated towards the <unk>.
Towards the expense side, which you can see.
Through the updated guidance on our margin.
As well as then through to the to the bottom line same store NOI growth.
Got it and then you highlighted a lot of the leasing you're seeing is in the legacy <unk> portfolio, but I'm curious if those HCA cash leasing spreads are weighing on the combined portfolio and when do you expect the cash leasing spreads to kind of accelerate back to that mid 3% range or better.
Yes, obviously, that's a that's sort of the work that we have in front of US I will point out that we had an interesting sort.
Observation, if you look at on versus off campus, we've actually seen the cash leasing spreads the HCA in the HCA portfolio would be just as strong in fact this quarter was a little stronger than the HR on campus. Both in the mid to high threes and so really it's the off campus is trending if you look at maybe the first six months of this year kind of trending.
In the high ones almost 2%. So we're just seeing a little bit softer in the off and that's true really in the HCA portfolio as well as HR, but we're really not seeing anything in the HTM portfolio that would prevent us from continuing to.
It really push those cash leasing spreads.
Do you expect an acceleration in the back half of the year of 2024 on the combined portfolio.
I think our view is that three to four range is very very consistent we obviously end up doing a lot of volume each quarter and even as Chris pointed out some real highlights in a few markets, where we had really strong cash leasing spreads with the volume that we do it can be difficult to certainly have all of your leases move.
To that high end and push you outside or even above the three to four range. So I think our view is three to four is still a range that we're comfortable in and think we can continue to performance.
Got it thank you.
The next question comes from Michael Griffin from Citi. Please go ahead. Your line is open.
Great. Thanks, maybe just asking on operations real quick I'm curious if guidance has any bank and sort of conservatism in it for this year and then kind of as you look through that 3% to 4% kind of growth range are achievable you think that is going into next year.
Yes.
In terms of the guidance, where we're trying to bring it a little bit tighter based off of where we're seeing things.
And what we're experiencing right now on the on the labor side as well as what we're seeing on the on.
On the interest rate side.
I think one of the things that we also took into account as we started to look at where the margins are in overall store NOI is what we may experience here in the third quarter as it relates to seasonal utilities, given the heat wave is coming through so thats kind of a another piece that that we're trying to take into account that depending on how.
All of that plays out through the remainder of this quarter could shift you.
A little bit better than maybe what we are.
Planning is at right now, but we will have to kind of wait and see how that plays out over the next.
A couple of months.
And I think I just wanted to clarify you mentioned three to four that's our cash leasing spread expectation.
But when we talk about same store, we're talking two to three this year and then I mentioned next year really looking at that 4% to 6% range.
Got you no. That's helpful. And then just turning to the disposition target did anything change in terms of those noncore dispositions that you highlighted relative to last quarter, where they are not performing up to expectations or any clarity around that would be helpful.
Now I would say is very consistent with what we reported last quarter, which was that based off of what we were seeing where we saw.
Our stock trading on an implied cap basis that we're going to lean into that.
Non strategic asset sales and.
And that's what we've done and we're making great progress there with the $300 million that we already have under under contract or LOI.
Great. That's it from me thanks for the time.
The next question comes from <unk> <unk> from BMO capital markets. Your line is open. Please go ahead.
Hi, good morning.
Just a question I guess on that leased pipeline and the spread between the leased rate and the occupancy rate.
What is that historically been in.
With the revised guidance, where do you expect occupancy to end the year.
One I would say that historically obviously.
Relative on history, but it's something that at healthcare Realty, we really track for a couple of I guess since since Covid really if you think about it and.
And it was tracking probably of around 100 basis points, plus or minus a little lower.
Coming out of Covid, and then it expanded out a little bit of supply chains, and so forth extended.
But call it 100 basis points or less and as we mentioned I think 160 basis points overall in the multi tenant portfolio now and then within the HCA portfolio actually over 200 basis points. So that's where clearly we're seeing more of that potential.
We obviously lay out in our components of expected <unk> in our disclosure, where we see occupancy moving so we certainly see it.
Still have our 50 to 100 basis points in the multi tenant side that gets diluted down a little bit when you mix in the single tenant I think our view is the success on the leasing momentum to 376000 of executed leases, it's really going to come down to as Rob said getting most of those and build out.
One by the end of the year, so it could be.
Within that 50 to 100, and the multi tenant but either way we feel like that is really building and we think that will show up in a combination of if not the fourth quarter certainly rolling into the first quarter. So.
Certainly still looking at that 50 to 100 basis points improvement at that pace on the multi tenant side.
So that 50 to 100 is kind of a year end.
That net absorption yes.
That number or an average cost that youre running I think at 35 basis points year to date.
Yes, I mean really we're looking at rolling into that sort of by year end. So obviously.
Whether that hits exactly at year end, where that hits in December end of December .
It will show up in the end of the year, but I think our view is again, it's just going to come down to the pace of build out some of the on some of these and most of them as Rob said, we expect a lot of these leases to be done by year end, but whether or not that hits exactly by December 31, or not we see rolling in to getting to that pace as we round the year into year end.
And I would add to that.
Todd one I'd add to that that we're really focused on the new leasing activity.
As Todd said it was strong this quarter and if you look at that level of new leasing activity activity and the projected move outs that we see going forward.
Look it you get to that 50 to 100 basis points. So we feel like we're at that run rate now and if you look at the strength of the tours that we've seen this year and the level that we have kind of average. This year. We think that supports a lot of momentum moving into 2024, and moving us to that level of new leasing that will set us up too.
Accomplish that 100 to 200 basis points of absorption, that's really where we're focused is looking looking into 2024.
And then just as a follow up.
Could you comment on what if anything is assumed in guidance with regards to.
The JV you mentioned, the process started and or a buyback that.
To be a focal point for proceeds.
Sure I'll touch on the JV, one we certainly don't have anything in guidance related to that for this for this calendar year. So that's something that we'll as we make progress on that process will incorporate to our.
And our guidance for 'twenty four so assume nothing for this year, we think it will certainly take the balance of the year to work through that.
Whether at closing happens this year or into early next year is not critical to that to that guidance either way and we will incorporate that then and then I think in terms of excess proceeds from asset sales to your point I think as Chris said, the first stop will be certainly debt repayment.
It's the easy place to very quickly have that be.
The least amount of dilution, but frankly could potentially even be accretive there and then we will look opportunistically certainly at the share repurchase as well we obviously.
Had the board reauthorized, a large amount of larger amount in June and certainly as we have excess proceeds will be evaluating that to compare that to sort of debt repayment versus other choices and funding choices that we will have.
Thank you.
Thanks.
The next question comes from Steven Valiquette from Barclays. Steven Your line is open. Please go ahead.
Thanks, Hello, everyone.
One or two questions here just around the guidance I appreciate all the details around the revision, but maybe just.
And with the <unk> guidance going down about <unk> at the midpoint and it wasn't really crystal clear how much of that can be broken down into the higher operating costs versus higher interest expense, yes, I think the increase in the normalized G&A only brings it up less than a penny or something like that so if there's any further breakdown and also with the disposition.
So if youre going immediately redeploy those proceeds and the debt reduction just trying to figure out just any sort of quantification of the <unk> by all the components might be helpful. If youre able to get some color on that thanks.
Yes, so I think the way to think about it the big pieces of it are interest expense with higher average. So first so thats really a big change from what we had last quarter. When we were looking at in the last quarter.
It was looking like sofa was going to decline through the balance of the year and into going into next year and so as a result.
Now compared to what we were looking at in the spring.
We're looking at about 60 basis points, a little bit more increase in the average so for rate in the back half of the year. So that's that's one.
One of the first items second is labor inflation is running through a couple of different ways.
As we already talked about its running through the same store portfolio in our margin as well as in the.
And at the same store NOI declined that adjustment that we did.
And then you mentioned the other piece of that rolling through the G&A.
And then the kind of the last big pieces on.
Noncash straight line rent, which we're adjusting to really be in line with what we're seeing so far for the year as well as the additional dispositions through the balance of the year. The dispositions on a cash basis really arent going to have a.
Big impact given the fact of if you just look at where.
Our all in kind of line cost is right now with that increase sofa or in <unk>.
Six and a quarter, maybe a little bit a little bit above that and we're looking at being able to sell cap rates on a cash basis and that six five so really not not much impact from that but but there is some some straight line rent that also plays through.
Those are those are kind of all the big.
The big larger pieces that make up the change.
Okay I appreciate the extra color. Thanks.
The next question comes from <unk> from Wells Fargo.
One is open. Please go ahead.
Hey, good afternoon, Hey, Suzanne for kind of today, thanks for taking the question guys.
So just a follow up to the capital allocation and guidance questions in the context of the heightened dispositions from the lowered guide how should we be thinking about the dividend going into 2024.
Yes, I think on the dividend Chris touched on it in prepared remarks, certainly our view is that we may be sort of in this current level of just over 100% for the balance of the year and we're comfortable that the momentum we are seeing going into 24 on the operational upside, we'll put us back in a position below a 100%.
On the payout and certainly.
It's early to say, but the macro environment has had obviously a tremendous impact on the overall picture, but we do see like many a better picture of that looking ahead to 'twenty four so we see that as a potential tailwind obviously, we'll revisit that after multiple fed meetings and how we look at guidance going into <unk>.
For but I think our view from all of that is that we see the dividend as being sustainable for sure and something that we can tolerate a little over 100 for a bit while we capture this upside and really drive it but well below 100% next year.
Great and just a quick follow up can you just give us an update on the M&A environment. Following the updated guidance for acquisitions and dispositions how is the cap rate environment kind of influencing your appetite for deals at the moment.
Yes, I think.
What we're seeing on the on the <unk>.
Transaction market right now.
Saying cap rates kind of.
Table for core assets in that low <unk> range.
We have seen some some high quality deals that have dipped below that.
Generally though.
Volumes are down, but we're seeing some.
Some decent activity there, we do see opportunity is as lenders.
Get back into the space that we think that transaction volume.
We will continue to.
B, where it is and move up throughout the balance of the year and into next as interest rates.
Our projected to come down so I think there's still an appetite out there for the for the product.
Just you've got.
An opportunity for some folks to kind of get in and and achieve.
The IRR is that they are targeting but right now we are.
We're seeing some folks that are kind of sit on the sidelines, but but still continuing to underwrite the space looking for the right opportunities and looking for their moment. So.
Still a very attractive space and I think maybe Rob mentioned this in his prepared remarks, but I think the lender environment is key to that and we are seeing like probably a lot of sectors. We're seeing a lot of interest in MRV from buyers, who may even just say I'll do it all cash and maybe do a little less volume for the year, but go all cash because we see it.
<unk> lending environment in the future, but even on top of that we are seeing some of the major lenders the bigger banks back in the space.
And not dependent upon the regional banks. So there are some encouraging signs there that those lenders want to be in the <unk> space and I think it goes back to simply the stability just the reliability of the MLB space and Thats, a big contrast to some other sectors that are facing much tougher times.
Not just general office. There is some there was an article in wall Street about apartments, even so.
We certainly see lenders really seeking out the stability and safety of the MLP sector, which is helping the transaction market.
I appreciate the color thanks, guys.
As a reminder, that star followed by one on your telephone keypad to enter the queue.
Next question comes from Michael Mueller from J P. Morgan Michael. Please go ahead. Your line is open.
Yes, hi, and I apologize for any background noise here, but.
Can you comment on what's the expected size.
<unk> portfolio that Youll contribute and then taking that into consideration assuming it's a 24 events, which we anticipate being a net seller again in 2024.
Mike I would say no change from what we said last quarter on the size of the seed portfolio, we sort of loosely laid out $500 million to $1 billion I would say that's certainly the target.
Obviously in this kind of market and as we engage with potential JV partners that can move around as you would expect.
So I would still say that's sort of the range. We're thinking about I would also add certainly we're looking at a structure that would probably lead us to be a smaller piece, maybe 20% to 30%, but again that is a flexible thing that will evolve through the process.
So sorry, what was your last question.
Our net seller position currently will it will it continue into 'twenty four.
That's largely dependent on the macro environment.
It depends where our cost of capital is it depends.
How things are moving for us, but but I think we're going to be very careful here and prudent here in terms of where our cost of capital is relative to where we can reinvest but I think the JV certainly gives us.
In addition to asset sales and attractive source of capital that will have a lot of options to to pursue all of those different redeployment.
Options, which is everything from share repurchase to development funding debt repayment.
So were we.
Were pursuing those for now and I think that will continue into 'twenty four until we see something different.
Okay.
Okay. Thanks.
Thanks.
The next question is from John Pawlowski from Green Street, John Your line is open. Please go ahead.
Yeah.
Thanks, Chris at the expense pressures Youre seeing persist curious if there is risk to that 4% to 6% guidance for same store next year.
Yes, we'll just have to see how quickly it comes down.
And how much we're able to recover as a pass through through the structures of the leases.
And so as we get further along and we see how it's how it's adjusting then.
We will analyze that as we start to put our our expectations and formal guidance together for for next year.
Okay setting aside guidance.
Maybe you can elaborate on the expense pressures is it seemed like it kind of a structural change to the intermediate term growth of the expense profile of the business or is it more transitory in your mind.
Yes.
Yes.
I'm wary of using that word because.
What we saw from that over the last few years, but I can't speak a little bit to the trends and what I can say that.
As I mentioned right now it still seems to be.
Mostly on the labor side is what we're seeing.
And it is coming down so I want to make that clear, but it's just not coming down quite as quickly so year over year in the first quarter labor in terms of personnel and janitorial was up almost 14%.
In the second quarter, it came down but it was still.
We are up 10%, so we're making progress but it just hasnt.
Come back to full historic level. So as we continue to pass just difficult comps and things we do feel like we'll start to see that trend lower but we are making some great progress in other other portions of the of the expense structure.
That.
That I think can help offset that but we'll continue to monitor that and work through that through the balance of the year.
Okay last question for me.
Where are you aiming to get debt to EBITDA down to by.
End of the year.
Yes, so our goal is to be in that in a range of six to six five.
Just kind of where we are today.
We expect that that'll probably be it.
Closer to the high end of that range by the end of the year, but then trending down through next year as we have had more.
<unk>.
Growth in terms of cash flow as well as we did talk about last quarter. We had a couple of things that we're not booking income on right now that we're working on potential sale and repayment ones.
<unk> assets as well as in other mezz loan that will be repaid so that would be additional proceeds that can pay down debt.
Without a loss of income so that has a pretty meaningful impact when that occurs which will likely be late this year moving into moving into early next year, but.
But yes, I would say for the end of the year still expectations to be to be in that range of six to six five.
Okay. Thanks for taking the questions.
And the final reminder, that followed by one on the telephone keypad to ask a question today.
As we have no further questions I'll hand, the coupon to the management team for any concluding remarks.
Thank you Adam and thank you everybody for joining us. This morning, we look forward to seeing many of you in Raleigh on October 5th in our Investor Day.
And a reminder, should be coming out soon so if you did not get one and are interested please reach out to Ron and we will make sure you get an invitation. Thank you everybody have a great day.
Okay.
This concludes today's call. Thank you very much for your attendance you may now disconnect your lines.
Yeah.
Okay.
Okay.