Q2 2024 Healthcare Realty Trust Inc Earnings Call
Cameron: Good afternoon. Thank you for attending the Healthcare Realty second quarter earnings conference call. My name is Cameron, and I'll be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the call over to your host, Ron Hubbard, Vice President of Investor Relations. You may proceed.
Good afternoon. Thank you for attending the healthcare Realty's second quarter earnings Conference call. My name is Cameron and I'll be your moderator for today all lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end I would now like to pass the conference over to your host Ron Hubbard.
Ron Hubbard: Vice President of Investor Relations you May proceed.
Ron Hubbard: Thank you for joining us today for Healthcare Realty's second quarter 2024 earnings conference call. Joining me on the call today are Todd Meredith, Chris Douglas, and Rob Hull.
Ron Hubbard: Thank you for joining us today for healthcare Realty's second quarter 2024 earnings conference call.
Speaker Change: Joining me on the call today are Todd Meredith, Kris Douglas and Rob Hall.
Ron Hubbard: 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 uncertainty. These risks are more specifically discussed in the company's Form 10-K, filed with the SEC for the year ended December 31, 2020. These following 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 on-gap financial measures such as funds from operations, or FFO, and normalized FFO.
Speaker Change: 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.
Ron Hubbard: FFO Per Share, Normalized FFO 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 gap financial measures may be found in the company's earnings press release for the quarter ended June 30, 2025. The company's earnings press release, supplemental information, and Form 10-K are available on the company's website. I'll now turn the call over to Todd.
Speaker Change: These risks are more specifically discussed in the company's Form 10-K filed with the SEC for the year ended December 31 2023.
Speaker Change: 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.
Speaker Change: The matters discussed in this call may also contain certain non-GAAP financial measures such as funds from operations or <unk> normalized <unk> <unk>.
Speaker Change: <unk> per share normalized <unk> per share funds available for distribution or Fad net operating income NOI EBITDA and adjusted EBITDA.
Speaker Change: 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 32024.
Speaker Change: The company's earnings press release supplemental information and Form 10-K are available on the company's website.
Speaker Change: Now I'll turn the call over to Todd.
Todd Meredith: Thank you, Ron, and thank you, everyone, for joining us today. Healthcare Realty had a strong second quarter. We are making notable progress on our capital allocation objectives, and we are accelerating our operational momentum. For the second quarter, normalized FFO was $0.38 per share. This was impacted by the previously disclosed Steward Revenue Reserve. Without the reserve, Healthcare Realty's results were $0.39 per share.
Todd Meredith: Thank you Ron and thank you everyone for joining us today.
Todd Meredith: Healthcare Realty had a strong second quarter.
Todd Meredith: We are making notable progress on our capital allocation objectives, and we are accelerating our operational momentum.
Todd Meredith: For the second quarter normalized <unk> was <unk> 38 per share.
Todd Meredith: This was impacted by the previously disclosed steward revenue reserve.
Todd Meredith: Without the reserve results were <unk> 39 per share.
Todd Meredith: Based on strong execution and momentum generated in the first half, we increased our full year 2024 FFO guidance midpoint by half a penny. The increase would have been about a penny more without the reserve. In terms of capital allocation, we expect to generate more than a billion dollars of proceeds from completed or planned JVs and asset sales. Our new JV with KKR is already growing, and we recently announced an expansion of our existing JV with Nuveen. We expect about 70% of total proceeds to come from asset contributions to these JVs.
Todd Meredith: Based on strong execution and momentum generated in the first half we increased our full year 2024, <unk> guidance midpoint by half a penny.
The increase would have been about a penny more without the reserve.
In terms of capital allocation, we expect to generate more than $1 billion of proceeds from completed or planned JV and asset sales.
Todd Meredith: Our new JV with KKR is already growing.
Todd Meredith: And we recently announced an expansion of our existing JV with nuveen.
Todd Meredith: We expect about 70% of total proceeds to come from asset contributions to these jv's.
Todd Meredith: To redeploy this capital, we moved early in the second quarter, repurchasing stock at discounted levels. To date, we've repurchased almost $300 million at an average implied cap rate of 7 and 1 12%. With JV contribution and asset sale cap rates at 6.6%, this equates to 90 basis points of positive spread, or well over 100 basis points, including JV fees. Looking ahead, we will remain opportunistic and continue repurchasing equity if it's accretive.
To redeploy this capital we moved early in the second quarter repurchasing stock at discounted levels.
Todd Meredith: To date, we've repurchased almost $300 million.
Todd Meredith: At an average implied cap rate of seven 5%.
Todd Meredith: With JV contribution and asset sale cap rates at six 6%. This equates to 90 basis points of positive spread or well over 100 basis points, including JV fees.
Todd Meredith: Looking ahead, we will remain opportunistic and continue repurchasing equity if it's accretive.
Todd Meredith: Turning to operational momentum, we're seeing strong leasing trends and accelerating occupancy. The second quarter marks the fourth consecutive quarter with more than 400,000 square feet on New Lease's side. And our first half multi-tenant occupancy gain of 55 basis points was solidly above the top end of our first half bridge guidance. We expect this momentum, this strong momentum, to continue into the second half and 2025.
Todd Meredith: Turning to operational momentum, we're seeing strong leasing trends and accelerating occupancy gains.
Todd Meredith: Second quarter marks the fourth consecutive quarter with more than 400000 square feet of new leases signed.
Todd Meredith: And our first half multi tenant occupancy gain of 55 basis points was solidly above the top end of our first half bridge guidance.
Todd Meredith: We expect this momentum the strong momentum to continue into the second half and 2025.
Todd Meredith: I'm especially pleased with our second quarter retention. This is our second consecutive quarter at the 85% level, which has improved materially from the mid to high 70s last year. Higher retention comes with the benefit of avoiding lost rent from downtime and avoiding higher tenant improvement dollars to re-tenant vacant space. I want to commend our leasing operations. Their efforts to step up service levels and reduce move-outs are really paying off.
Todd Meredith: I'm, especially pleased with our second quarter retention.
Todd Meredith: This is our second consecutive quarter at the 85% level.
Todd Meredith: Which has improved materially from the mid to high <unk> last year.
Todd Meredith: Higher retention comes with the benefit of avoiding lost rent from downtime and avoiding higher tenant improvement dollars to re tenant vacant space.
Todd Meredith: I want to commend our leasing operations teams their efforts to step up service levels and reduce move outs are really paying off.
Todd Meredith: Our operations team is also successfully controlling operating expenses; second quarter expenses declined year over year and are nearly flat for the first half. We expect growth in operating expenses to be contained in the 2% to 3% range for the full year. It's worth noting our net operating expenses are expected to grow well below 2% in 2024 after taking into account tenant reimbursement. As a result, we are seeing meaningful marketing.
Todd Meredith: Our operations team is also successfully controlling operating expenses second.
Todd Meredith: Second quarter expenses declined year over year, and a nearly flat for the first half.
Todd Meredith: We expect growth in operating expenses to be contained in the 2% to 3% range for the full year.
Todd Meredith: It's worth noting our net operating expenses are expected to grow well below 2% and 24 after taking into account tenant reimbursements.
Todd Meredith: As a result, we are seeing meaningful margin expansion.
Todd Meredith: The combination of strong occupancy gains and well-controlled expenses is translating to higher NOI growth. Without the steward reserve, same-store NOI grew 3.5% in the second quarter, and total multi-tenant NOI grew 3.9%. Both of these are at the high end of our guidance. With strong momentum in the first half, we are steadily driving multi-tenant NOI growth towards the 5% level. Turning to maintenance CapEx, spending on TI and commissions is elevated as expected based on strong new leasing volume. This investment in positive absorption is revenue-enhancing capital. In terms of capital allocation priorities, this is our highest return on investment by far.
Todd Meredith: The combination of strong occupancy gains and well controlled expenses is translating to higher NOI growth.
Todd Meredith: Without the Steward reserve same store NOI grew three 5% in the second quarter and total multi tenant NOI grew three 9%.
Todd Meredith: Both of these are at the high end of our guidance ranges.
Todd Meredith: With strong momentum in the first half we are steadily driving multi tenant NOI growth towards the 5% level.
Todd Meredith: Turning to maintenance Capex spending on Ti and commissions is elevated as expected based on strong new leasing volumes.
Todd Meredith: This investment and positive absorption is revenue enhancing capital.
Todd Meredith: In terms of capital allocation priorities. This is our highest return on investment by far.
Chris Douglas: Excluding this revenue-enhancing capital, which we estimate to be $20 to $25 million this year, our dividend is expected to be fully covered going into 2025. Looking at the balance sheet, we expect our leverage to trend lower. Once we complete the announced JV and asset sale transactions, leverage is expected to be approximately 6.4 times, and we expect leverage to improve further going into 2025 as occupancy gains flow through to higher EBITDA. Now I'll turn it over to Chris to discuss results, guidance, and the balance sheet. Chris?
Excluding this revenue enhancing capital, which we estimate to be 20% to $25 million. This year, our dividend is expected to be fully covered going into 2025.
Todd Meredith: Looking at the balance sheet, we expect our leverage to trend lower.
Todd Meredith: Once we complete the announced JV asset sale transactions leverages expected to be approximately six four times.
Todd Meredith: And we expect leverage to improve further going into 2025 as occupancy occupancy gains flow through to higher EBITDA.
Todd Meredith: Now I'll turn it over to Chris to discuss results guidance and the balance sheet Chris.
Chris: Thanks, Todd the first half of the year has been marked by strong operational and capital allocation execution.
Chris Douglas: Thanks, Todd. The first half of the year has been marked by strong operational and capital allocation execution. Normalized FFO per share for the quarter was $0.38, and excluding the previously disclosed $3 million steward revenue reserve, FFO per share was at the upper end of our quarterly guidance of 39 cents. Same-store NOI for the quarter, without the revenue reserve, improved 50 basis points sequentially to 3.5%, and multi-tenant NOI growth improved to 3.9%, which is at the upper end of our bridge expectations for the first half of the year.
Chris: Normalized <unk> per share for the quarter was 38.
Chris: Excluding the previously disclosed $3 million Steward revenue reserve <unk> per share was at the upper end of our quarterly guidance of 39.
Chris: Same store NOI for the quarter without the revenue reserve improved 50 basis points sequentially to three 5%.
Chris: Multi tenant NOI growth improved to three 9%, which is at the upper end of our bridge expectations for the first half of the year.
Chris Douglas: The strong NOI performance was driven by better than projected absorption and expense control. Revenue growth benefited from 122,000 square feet of sequential multi-tenant absorption and a 2.9% cash leasing spread. The absorption outperformance came from a combination of better-than-planned new lease commitments and materially lower move-outs. Tenant retention for the quarter improved to 85.5 percent, up from 79.3 percent last year. Cash NLI margins improved 50 basis points sequentially and 70 basis points year-over-year as a result of the occupancy gains and strong expense control.
The strong NOI performance was driven by better than projected absorption and expense controls.
Chris: Revenue growth benefited from 122000 square feet of sequential multi tenant absorption and two 9% cash leasing spreads.
Chris: The absorption outperformance came from a combination of better than planned new lease commitments and materially lower move outs.
Chris: Tenant retention for the quarter improved to 85, 5% up from 79, 3% last year.
Chris: Cash NOI margins improved 50 basis points sequentially, and 70 basis points year over year as a result of the occupancy gains and strong expense controls.
Chris Douglas: Year over year, quarterly operating expenses decreased almost 1%, and net of recoveries were down almost 3%. This came from discipline and proactive efforts, especially on labor costs and property taxes. Waiver costs declined 2.0% year over year, and property taxes decreased 1.5% from successful property tax appeals late last year.
Chris: Year over year quarterly operating expenses decreased almost 1% and net of recoveries were down almost 3%.
Chris: This came from disciplined and proactive efforts, especially on labor cost and property taxes.
Chris: Labor costs declined 2.0% year over year.
Chris: Property taxes decreased one 5% from successful property tax appeals late last year.
Chris Douglas: We will lapse some of these benefits in the second half but expect total full-year operating expenses to be well below 3%, with operating expenses at or below our in-place contractual escalators of 2.8 percent, lest the full impact of absorption drop to the bottom line and improve overall NOI margins. Turning to capital allocation, JV Contributions and Asset Sales generated $400 million of proceeds here today. The proceeds funded existing capital commitments and $295 million of stock buyback. The average repurchase price was $15.89, representing a 7.5% implied cap or approximately a 20% discount to NAV.
Chris: We will lap some of these benefits in the second half but expect.
Chris: Total full year operating expenses to be well below 3%.
Chris: Operating expenses at or below our in place contractual escalators of two 8% less the full impact of absorption dropped to the bottom line and improve overall NOI margins.
Chris: Turning to capital allocation JV contributions and asset sales have generated $400 million of proceeds year to date.
Chris: The proceeds funded existing capital commitments and $295 million of stock buybacks.
Chris: The average repurchase price was $15 89.
Chris: Representing a seven 5% implied cap or approximately 20% discount to NAV.
Rob Hull: For the year, we expect over a billion dollars in total JV and asset sale proceeds. This will fund $200 million of existing capital commitments and $800 million of combined debt repayment and share buyback. The $800 million of capital allocation proceeds is expected to generate over a penny a share of accretion in 2024 and over $0.025 annualized. FFO per share guidance for the year was increased and reflects the capital allocation accretion. In addition, the updated guidance incorporates the operating assumptions on page 30 of the Supplement, including a reduction in expected G&A expenses and lower straight-line rent from assets.
Chris: For the year, we expect over $1 billion in total JV and asset sale proceeds.
Chris: This will fund $200 million of existing capital commitments and $800 million.
Chris: Combined debt repayment and share buybacks.
Chris: The $800 million of capital allocation proceeds are expected to generate over a penny a share of accretion in 2024 and over $2 five assets annualized.
Chris: <unk> per share guidance for the year was increased and reflects the capital allocation accretion.
Chris: In addition, the updated guidance incorporates the operating assumptions on page 30 of the supplemental.
Chris: Including a reduction in expected G&A expenses and lower straight line rent from asset sales.
Rob Hull: The Midpoint of Guidance does not assume repayment in 2024 of the $3 million Steward Revenue Reserve taken in the second quarter. However, it does assume they will continue to pay monthly rent of approximately $2 million as they did in June and July. Looking to the balance sheet, run rate leverage is 6.4 times, including the expected debt repayment for remaining asset sales and JVs. The debt repayment is expected to pay off the $250 million term loan that expires next July, which will reduce 2025 debt maturities to less than $300 million. The combination of our operational and capital allocation momentum will drive an improved dividend payout ratio and lower leverage moving into 2025. I'll now turn it over to Rob for more details on our leasing project.
Chris: The midpoint of guidance does not assume repayment in 2024 of the $3 million Steward revenue revenue reserve taken in the second quarter.
Speaker Change: It does assume they will continue to pay a monthly rent of approximately $2 million as they did in June and July.
Speaker Change: Looking to the balance sheet run rate leverage six four times, including the expected debt repayment for remaining asset sales and JV.
Speaker Change: The debt repayment is expected to pay off the $250 million term loan that expires next July which will reduce 2025 debt maturities to less than $300 million.
The combination of our operational and capital allocation momentum will drive an improved dividend payout ratio and lower leverage moving into 2025.
Speaker Change: I'll now turn it over to Rob for more details on our leasing progress.
Rob Hull: My comments today will be focused on multi-tenant occupancy gains and strong leasing momentum. We exceeded our bridge guidance in the first half of the year and expect further gains in the second half and into 2025. Multi-tenant occupancy improved sequentially by 37 basis points, or 122,000 square feet. Coupled with the first quarter, net absorption for the year in our total multi-tenant portfolio was 183,000 square feet. At this level, we exceeded the top end of our bridge guidance for the first half of the year by over 30%.
Rob Hall: My comments today will be focused on multi tenant occupancy gains and a strong leasing momentum.
Rob Hall: We exceeded our bridge guidance in the first half of the year and expect further gains in the second half and into 2000 22025.
Rob Hall: Multi tenant occupancy improved sequentially by 37 basis points or 122000 square feet.
Rob Hall: Coupled with the first quarter net absorption for the year and our total multi tenant portfolio was 180 83000 square feet.
Rob Hall: At this level, we exceeded the top end of our bridge guidance for the first half of the year by over 30%.
Rob Hull: Our outperformance was driven by greater than expected new construction and a move-out rate that was over 300 basis points lower than historical levels. Over the last three quarters, we gained 112 basis points of occupancy in our multi-tenant portfolio. This puts us on track to deliver the 150 to 200 basis points of multi-tenant occupancy gains published last November in our five-quarter bridge. It is also worth noting that the legacy HTA assets have gained 172 basis points of occupancy over the same period, highlighting our ability to drive absorption in that portfolio.
Rob Hall: Our outperformance was driven by greater than expected new lease commencements.
Rob Hall: And the move out rate that was over 300 basis points lower than historical levels.
Rob Hall: Over the last three quarters, we gained 112 basis points of occupancy in our multi tenant portfolio.
Rob Hall: This puts us on track to deliver the 150 to 200 basis points of multi tenant occupancy gains published last November and our five quarter bridge.
Rob Hall: It is also worth noting that the legacy HCA assets have gained 172 basis points of occupancy occupancy over the same period.
Rob Hall: Highlighting our ability to drive absorption in that portfolio.
Rob Hall: Yeah.
Rob Hull: Strong absorption led to total multi-tenant NOI growth of 3.9% for the second quarter, at the top end of our first half bridge guide. Our leasing activity this year has been supported by favorable supply and demand fundamentals. I can see across the sector that absorption in the MOB sector reached five and a half million square feet, the most on record since the data has been tracked.
Rob Hall: Strong absorption led to total multi tenant NOI growth of three 9% for the second quarter at the top end of our first half bridge guidance.
Rob Hall: Okay.
Rob Hall: Our leasing activity. This year has been supported by favorable supply and demand fundamentals.
Speaker Change: Occupancy across the sector continues to decline and new Amobi starts continue to trend lower.
Speaker Change: This quarter absorption in the <unk> sector reached five 5 million square feet the.
Speaker Change: The most on record since the data has been tracked.
Rob Hull: Health system top-line revenue and our operating margins continue to improve, and providers are seeing solid outpatient volume and revenue. Longer term, we expect demand to continue rising. Spending on health care services is expected to increase at 5.6% annually over the next decade. Over the same time period, the 65-year-old age group will grow at more than nine times the rate for the remaining U.S. population, and those over 65 are the largest users of health care services, spending four times more than those under 45.
Speaker Change: Health system topline revenue and our operating margins continued to improve.
Speaker Change: Providers are seeing solid outpatient volume and revenue trends.
Speaker Change: Longer term, we expect demand to continue rising.
Speaker Change: And then on health care services is expected to increase at five 6% annually over the next decade.
Speaker Change: Over the same time period the over at over 65 age group will grow at more than nine times the rate for the remaining U S population.
Speaker Change: And those over 65 of the largest users of health care services spending four times more than those under 45.
Todd Meredith: The combination of limited new supply and rising demand creates a tailwind to support ongoing leasing momentum. New sign leases in the second quarter totaled approximately 432,000 square feet. Notably, this marks our fourth consecutive quarter above $400,000, an important part of the equation driving our projected gain of 100 to 150 basis points of absorption this year. Additionally, our new lease pipeline reached 1.9 million square feet in the quarter, its highest level ever. This gives us visibility and positions us well to achieve projected absorption gains outlined in our bridge.
Speaker Change: The combination of limited new supply and rising demand creates a tailwind to support ongoing leasing momentum.
Speaker Change: New signed leases in the second quarter totaled approximately 432000 square feet.
Speaker Change: Notably this marks our fourth consecutive quarter above 400000 in.
Speaker Change: An important part of the equation driving our projected gain of 100 to 150 basis points of absorption this year.
Speaker Change: Our new lease pipeline reached one 9 million square feet in the quarter its highest level ever.
Speaker Change: This gives us visibility and positions us well to achieve projected absorption gains outlined in our bridge.
Todd Meredith: Our team has executed well in the first half of 2024, delivering a robust level of new leasing and outsized absorption, with current multi-tenant occupancy at 85.9 percent. We are in the early stages of a multi-year plan to reach 90% across our multi-tenant portfolio. This will drive continued absorption and outside NOI growth in 2025 and beyond. Now I'll turn it back to Todd for some final remarks.
Speaker Change: Our team has executed well in the first half of 2020 for delivery.
Speaker Change: Delivering a robust level of new leasing and outsized absorption.
Speaker Change: With current multi tenant occupancy at 85, 9%.
Speaker Change: We are in the early innings of a multi year plan to reach 90% across our multi tenant portfolio.
Speaker Change: This will drive continued absorption and outside NOI growth in 2025 and beyond.
Speaker Change: Now I'll turn it back to Todd for some final remarks.
Todd Meredith: Thanks, Rob. Now I'll just make a few more comments before we shift to the Q&A portion. As our announced JV and asset sale transactions are completed over the next quarter or so, we expect to have excess proceeds to redeploy. In the near term, our capital allocation priorities are first to fund our existing obligations, such as the positive absorption capital I mentioned, which is our highest return on investment by far. Second, to repurchase stock aggressively if the price trades at a discount.
Todd Meredith: Thanks, Rob now I'll, just make a few more comments before we shift to the Q&A portion.
Todd Meredith: As our announced JV and asset sale transactions are completed over the next quarter. So we expect to have excess proceeds to redeploy in the near term our capital allocation priorities are first to fund our existing obligations such as the positive absorption capital I mentioned, which is our highest investment return on investment by far.
Todd Meredith: Second to repurchase stock Accretively, if the price trades at a discount and third to repay debt keeping our leverage neutral we're trending lower.
Todd Meredith: And third, to repay debt, keeping our leverage neutral or trending lower. The year 24 is shaping up to be an important year for HR in terms of building momentum and executing on our capital allocation and operational objectives. We're increasing 2024 FFO guidance based on strong first half results. External tailwinds of limited MOB supply and robust outpatient demand are bolstering our outlook for the second half of 2024 and 2025. Full dividend coverage is well within reach and poised to keep improving in 2025 and 2026, and Healthcare Realty's balance sheet is strengthening with leverage expected to trend lower. Cameron, operator, we're now ready to move to Q&A.
Todd Meredith: So 24 is shaping up to be an important year for HR in terms of building momentum and executing on our capital allocation and operational objectives.
Todd Meredith: We are increasing 2024 <unk> guidance based on strong first half results.
Todd Meredith: External tailwind of limited <unk> supply and robust outpatient demand are bolstering our outlook for the second half of 'twenty four and 2025.
Todd Meredith: Full dividend coverage is well within reach and poised to keep improving in 2025 and 2026.
Todd Meredith: And healthcare Realty's balance sheet is strengthening with leverage expected to trend lower.
Speaker Change: Cameron operator, we're now ready to move to the Q&A.
Cameron: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star followed by one on your telephone keypad. If, for any reason, you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. And as a reminder, if you're using a speakerphone, please remember to pick up your hands before asking a question. And we will pause here briefly as questions are registered. The first question is from the line of Juan Sanabria with BMO Capital Markets. You may proceed.
Speaker Change: Thank you we will now begin the question and answer session. If you would like to ask a question. Please press star followed by one on your telephone keypad. If for any reason you would like to remove that question. Please press star followed by two again to ask a question press Star one and as a reminder.
Speaker Change: If youre using a speakerphone. Please remember to pick up your handset before asking your question and we will pause briefly as questions are registered.
Speaker Change: The first question is from the line of Juan Sanabria with BMO capital markets.
Speaker Change: You May proceed this is.
Robyn: Robyn hitting this is robin sitting in a requirement.
Robyn: Steward.
Speaker Change: What's the expectation for how much space. They will look to keep looking for lowering of contractual rent.
Speaker Change: How does this competitive market.
Todd Meredith: Sure, Robin, this is Todd. It's very early to really be speculating on where that may go. Obviously, we are all paying attention very closely to what may be happening on the hospital front, and that's clearly driving this process through the bankruptcy process.
Speaker Change: Sure Robyn this is Todd.
Todd Meredith: It's very early to really be speculating on where that May go. Obviously, we all are paying attention very closely to what may be happening on the hospital front and that's clearly driving driving this process through the bankruptcy process.
Todd Meredith: It's still very early, excuse me, and so we are not, you know, down to a point where we're engaging. You know, I think the good news is the outpatient space is needed, and it will kind of play out after the hospital pieces are sorted out. So we're really not speculating. The one thing I can say about rents is that we've done an assessment. We don't view that, you know, there's any material difference in terms of where our rents are versus markets.
Todd Meredith: It's still very early excuse me and so we're not down to a point, where we're engaging.
Todd Meredith: I think the good news is the outpatient space is needed and it will kind of play out after the hospital.
Speaker Change: Pieces are sorted out so we're really not speculating that the one thing I can say about rents is we've done an assessment, we don't view that there is any material.
Speaker Change: Difference in terms of where our rents are versus market. So we feel very good about that and obviously any other speculation about space and.
Todd Meredith: We feel very good about that. And obviously, any other speculation about, you know, space and what will be used or not is just way too early to tell. We're very encouraged by what we're hearing generally. And the 120 million real estate impairment in the quarter, was that related to Stewart or something else? Just curious. No, it's related to the asset sales that are ongoing and expected to close here through the balance of the year.
Speaker Change: What will be used or not.
Speaker Change: Just way too early to tell we're very encouraged by what we're hearing generally speaking.
Speaker Change: Yes.
Speaker Change: And the one.
Speaker Change: Wondering fundamentally on real estate impairments in the quarter was all related to Stewart or something else just curious.
Speaker Change: No it's related to the asset sales.
Speaker Change: Our ongoing and expected to close here through the balance of the year.
Speaker Change: Okay. Thank you.
Speaker Change: Thank you.
Speaker Change: Okay.
Todd Meredith: The next question is from the line of Austin Wurschmidt with KeyBank Capital Markets. You may proceed.
Austin <unk>: The next question is from the line of Austin <unk> with Keybanc capital markets. You May proceed.
Todd Meredith: Great, thanks. Todd, I'm just curious how sustainable you think the 85% retention is over the next 12 to 18 months. Just trying to understand that, I guess, given that multi-tenant retention this quarter appeared to be lower. I also recall that you have some single-tenant move-outs later this year, another million square feet of expirations on the single-tenant side next year. So, I'm trying to think about it a little bit holistically, as well as the breakout between multi- and single-tenant over that time frame.
Austin <unk>: Great. Thanks, Todd I'm, just curious how sustainable you think the 85% retention is over the next 12 months to 18 months.
Speaker Change: Just trying to understand that I guess, given multi tenant retention this quarter appeared to be lower.
Speaker Change: I also recall I think you have some single tenant move outs later this year another million square footage of explorations on the single tenant side next year. So trying to think about it a little bit holistically as well as the breakout between.
Speaker Change: Multi and single tenant over that timeframe.
Todd Meredith: Sure, sure. A good question.
Speaker Change: Sure sure. Good question, obviously, we're pleased with being around 85% now for a couple of quarters.
Todd Meredith: Obviously, we're pleased with being around 85% now for a couple of quarters. Generally speaking, you know, single-tenant tends to sort of bring the average up a little bit. The mix isn't very high, as you know, in single-tenant versus multi-tenant, but it brings it up maybe a percent or so year-to-date in this quarter. But I would say, generally speaking, we expect the multi-tenant to really be in that 80-to-85 range. Obviously, we hit some numbers that were in the mid-to-upper 70s last year as we were continuing to work through the integration of the portfolio, increasing our service levels across the whole portfolio, and we've really seen that come around and really turn out to really strong retention. Service levels are very strong. The team is fully in gear.
Speaker Change: Generally speaking single tenant tends to sort of bring the average up a little bit the mix isn't very high as you know in single tenant versus multi but it brings it up maybe a percent or so year to date in this quarter.
But I would say generally speaking we expect the multi tenant to really be in that 80% to 85 range. Obviously, we hit some numbers that were in the mid to upper 70 last year as we were continuing to work through the integration of the portfolio.
Speaker Change: Increasing our service levels across the whole portfolio and we've really seen that come come around and really turn out to really strong retention service levels are very strong. The team is fully in gear and I think also on the leasing side, we're making very concerted efforts, where we see tenants who may be thinking about <unk>.
Todd Meredith: And I think also on the leasing side, we're making very concerted efforts where we see tenants who may be thinking about leaving, working with them aggressively to see what we can do to retain them. So it's a joint effort across all of our teams, and I think it's really paying off. And we do think we can sustain this sort of 80-to-85. Obviously, any given quarter can vary, but I think, importantly, over the timeframe you talked about, the rest of this year, and next year, we'll be looking to produce 80-to-85 percent.
Speaker Change: <unk> working with them aggressively to see what we can do to retain them. So it's a joint effort across all of our teams and I think it's really.
Speaker Change: Really paying off and we do think we can sustain this sort of 80 to 85, obviously any given quarter can vary but I think importantly over the timeframe you talked about the rest of this year next year, we'll be looking to produce 80% to 85% and really similar similar levels across.
Todd Meredith: And really similar levels across multi and single, you know, generally higher in single but in that same range, and working on the backfill on both multi and single to not only backfill but create positive absorption.
Speaker Change: Multi and single generally higher.
Speaker Change: In single, but in that in that same range and working on the backfill on both multi and single to to not only backfill that create positive absorption.
Todd Meredith: That's helpful. And then maybe hitting on the guidance piece, you know, implied kind of back half same store growth in the multi-tenant portfolio is, I think, at that lower end of that, you know, four or four to five and a half percent range that you expect to achieve in the back half. Is that, you know, conservatism, or have you not really pulled forward the better performance in the first half, or is there something else that's changed from a timing or back half growth perspective? That's all for me. Yeah, I would I would say it's the best.
Well, Paul Paul and then just maybe hitting on the guidance piece implied back half same store growth in the multi tenant portfolio I think it was up at lower end of that four four to five 5% range that you would expect to achieve in the back half is that <unk>.
Speaker Change: <unk>, one where you havent really pulled forward the better performance in the first half or is there something else that's changed from a timing our back half growth perspective, that's helpful. Thanks.
Todd Meredith: Yeah, I would I would say it's the former just conservatism being halfway through the year, you know, we're feeling good about where things are progressing so far in terms of occupancy, as well as operating expenses. And, you know, especially for the quarter, we were at the upper end of both those ranges, but halfway through the year, you know, we should try not to get too far ahead of ourselves.
Speaker Change: Yes, I would say, it's the former just conservatism being halfway through the year, we're feeling good about where things are progressing so far in terms of occupancy as well as on on operating expenses and.
Speaker Change: Especially for the quarter, we were at the upper end of both of those ranges, but just halfway through the year.
Speaker Change: Scott I'm trying not to get too far ahead of ourselves.
Chris Douglas: The next question is from the line of Michael Griffin with Citi. You may proceed.
Speaker Change: The next question is from the line of Michael Griffin with Citi.
Speaker Change: Proceed.
Rob Hull: Great, thanks. I wanted to ask first about leasing. It looks like cash leasing spreads declined slightly in the quarter of a quarter, including the kind of negative cash rent spread bucket looks like it went up to about 10% from 4% of the leases in this quarter. Should we interpret this as tenants pushing back more on rent increases? Or was there something, you know, maybe market or tenant specific, that drove this delta?
Michael Griffin: Great. Thanks wanted to ask first on leasing it looks like cash leasing spreads declined slightly quarter over quarter, including the kind of negative cash rent spread bucket. It looked like it went up to about 10% from 4% I believe in this quarter should we interpret this as tenants pushing back more on it.
Speaker Change: On rent increases or was there something maybe market or tenant specific that drove the delta.
Rob Hull: Yeah, hey, Michael, this is Rob. Yeah, you're right. They worked; cash leases were 2.9% this quarter. And, you know, what I would say is that, as we noted this year, we're really focused on driving occupancy. And I think our results are coming through, or we've had a lower move-out rate, but we've seen increased occupancy. And that comes in two forms: certainly in places where we can push rents, we're doing that, where market dynamics are strong, and we're able to push even above kind of the averages that we put out there.
Speaker Change: Yeah, Hey, Michael This is Rob, Yes, Youre right. They worked cast leasing spreads were two 9% this quarter.
Speaker Change: What I would say as we've noted this year, we're really focused on driving occupancy and I think our results are coming through where we've had a lower move out rate, but what we've seen increased occupancy in.
Speaker Change: And that comes in two forms certainly in places, where we can push rents were doing that were market dynamics there are.
Speaker Change: Our strong and we're able to push.
Speaker Change: Even above kind of the averages.
Speaker Change: We put out there, but I think it also.
Rob Hull: But I think it also points to some markets where, maybe in price-sensitive markets, we're being more aggressive about negotiating those deals to keep occupancy and avoid costly downtime and incremental, you know, TI from backfilling space. So it's really kind of working the tails and pushing aggressively on the top end. And then at the bottom end of that spread, you noted that was more where we're just being more aggressive now.
Speaker Change: Points to where we have some some markets where maybe.
Speaker Change: It's more price sensitive markets, we're being more aggressive about negotiating those deals to keep.
Speaker Change: Occupancy and avoid costly downtime and incremental.
Speaker Change: Ti from back filling space, So, it's really kind of working.
Speaker Change: The tails and pushing aggressively on the top end.
Speaker Change: And then.
Speaker Change: The bottom end of that spread you noted that that was more.
Speaker Change: We're just being more aggressive.
Speaker Change: Yes.
Speaker Change: Yes.
Todd Meredith: Gotcha. I appreciate the call there, Rob. And then Todd, I appreciated your comments kind of on the cap on expend now for occupancy benefit in the future. But kind of as we think about the cadence of that, you know, what is going to be the near-term impact FAD as a result of this cap expend you're going to need to spend on new leasing and then, you know, how much occupancy upside or, I guess, you know, looking at your return, do you get as a result of that cap expend?
Todd Meredith: Got you I appreciate the color there, Rob and then Todd I appreciated your comments kind of on the Capex spend now for occupancy benefit in the future, but kind of as we think about the cadence of that what is going to be the near term impact.
Speaker Change: As a result of this capex spend youre going to need to spend on new leasing and then how much occupancy upside or I guess.
Speaker Change: Looking at your return do you get as a result of that Capex investment.
Todd Meredith: Sure. Yeah, I mentioned it's clearly our highest return on investment by far. And maybe a simple way to think about it is our marginal gross revenue that we can gain from absorbed space is around $36, kind of the average for the portfolio. And then if you divide that by, you know, even on the high end, about $60 of all in cost to, you know, for a new lease, that's obviously a great return, 50, 60 plus percent type returns on the marginal capital.
Speaker Change: Sure Yes.
Speaker Change: Mentioned is clearly our highest return on investment by far in maybe a simple way to think about it is our marginal.
Speaker Change: Most revenue that we can gain from absorbed space is around $36 kind of the average for the portfolio and then if you divide that by.
Speaker Change: Even on the high end about $60 of all in cost to for a new lease.
Speaker Change: That's obviously a great return 50, 60 plus percent type returns on the marginal capital.
Todd Meredith: So from our standpoint, that's a home run and something we want to be doing, you know, even looking at it almost as a comparison to an external investment opportunity, but with much, much higher returns. So our view is that it's very much revenue-enhancing capital. You know, we're not, we haven't broken it out as such, but we're just talking about, hey, there's 20 to 25 million this year and, frankly, would be similar next year, just given the absorption expectations we have. You really can think of that way.
Speaker Change: So from our standpoint, that's a home run and something we want to be doing.
Speaker Change: Even looking at it almost as comparison to an external investment opportunity, but much much higher returns. So our view is that's very much revenue enhancing capital we're not we haven't broken it out as such but we're just talking.
Speaker Change: About hey, there's $20 to $25 million this year and frankly would be similar next year, just given the absorption expectations. We had that you really can think of that way and that takes probably 6% off.
Todd Meredith: And that takes probably 6% off the payout ratio if you just kind of run through that math. So it's a material piece of how we look at our dividend coverage and can get there as we go into 2025.
Speaker Change: Payout ratio can you just kind of run through that math.
So it's a material piece of how we look at our dividend coverage and can get there as we go into 2025.
Speaker Change: Yes.
Todd Meredith: Great. That's it for me. Thanks for the time.
Speaker Change: Great. That's it for me thanks for the time thanks.
Speaker Change: Thanks, Mike.
Speaker Change: Okay.
Todd Meredith: The next question is from the line of Mike Mueller with J.P. Morgan. You may proceed.
Speaker Change: Next question is from the line of Mike Mueller with JP Morgan.
Speaker Change: You May proceed.
Todd Meredith: Yeah, hi. I understand your comments about multi-tenant occupancy going above 90%. First, was that a leased or an occupied comment? And what sort of timeframe are you expecting to get there by?
Mike Mueller: Yes, hi.
Your comments about multi tenant occupancy going above 90%.
Mike Mueller: Was that a leased or occupy comment and what sort of timeframe are you expecting to get their buy.
Todd Meredith: Yeah, Mike, Rob talked about a multi-year plan of getting to 90. And when we talk about it over multiple years, we're talking about occupancy. Obviously, that leased percentage versus occupied, you know, is a delta that we track and report and gives us, you know, a lot of optimism along with our leasing pipeline that we can push gains over multiple years, but certainly looking out, you know, over the second half of this year and into 2025.
Speaker Change: Yes, Mike Raab talked about a multiyear plan of getting to 90 and when we talk about it in multiple years, we're talking about occupancy obviously that that lease percentage versus occupied is a delta that we track and report and gives US a lot of optimism along with our leasing pipeline that we can push.
Speaker Change: Gains over multiple years, but certainly looking out.
Speaker Change: The second half of this year and into 2025 and so if you look at this year, we're saying 100 to 150 basis points of gain in the multi tenant portfolio.
Todd Meredith: And so if you look at this year, we're saying 100 to 150 basis points of gain in the multi-tenant portfolio. That's probably a similar range we'll be thinking about in the next 25, but it's a little early to lay that down specifically. But certainly another strong year in terms of our expectations next year. So if you start thinking about that as an annual pace, that's a three-year sort of timeframe, but making some real headway in 24 and 25 on that.
Speaker Change: Probably a similar range will be thinking about in 'twenty five but its a little early to tell.
Lay that down specifically.
Speaker Change: But certainly another strong year in terms of our expectations next year. So if you start thinking about that as an annual pace.
Speaker Change: That's the three year sort of timeframe, but making some real headway in 'twenty four 'twenty five on that.
Todd Meredith: Got it. Okay, that's helpful. And then the second question: are you expecting more activity with the new...
Speaker Change: Got it Okay. That's helpful. And then second question are you expecting more activity with the Nuveen JV.
Todd Meredith: We are already working on that, so we talked about a roughly $400 million set of transactions with Nuveen. So that work is underway, and so I guess, depending on your question, it's in the process, a couple closings, so very much expanding that existence. I was thinking beyond that, I mean, can we think of that as kind of a growing program beyond the $400 million that you flagged already? It's absolutely an option.
Speaker Change: We are underway working on that so we talked about a roughly 400 million dollar.
Speaker Change: Set of transactions with nuveen, so that work is underway and so I guess, depending on your question. It's in process. Some couple of closings. So.
Speaker Change: Very much.
Speaker Change: I was thinking.
Speaker Change: I was thinking beyond that I mean should we think of that is.
Speaker Change: It's kind of a growing program beyond the 400 that you flagged already.
Speaker Change: It's absolutely an option.
Todd Meredith: As we embarked upon this process earlier this year to sort of ramp up our efforts, they came to the table interested, and that was great. So obviously, we have a strong relationship with them, work with them regularly on our existing properties and in our JV together. So they've really come back multiple times and through that relationship. So it's always an option.
Speaker Change: As we embarked upon this process earlier this year to sort of ramp up our efforts.
Speaker Change: They came to the table interested and that was great. So obviously, we have a strong relationship with them work with them regularly on our existing.
Speaker Change: Properties in our JV together, so they've they've really come back multiple times and through that that relationship. So.
Speaker Change: So it's always an option, it's not maybe maybe to differentiate a little bit with KKR, it's not necessarily expressed in a way like KKR has said, we want to commit a certain amount of existing.
Todd Meredith: It's not maybe to differentiate a little bit with KKR. It's not necessarily expressed in a way like KKR has said that we want to commit a certain amount of capital, equity capital to grow it. So it's more opportunistic is maybe the way I would describe it versus KKR being more of a programmatic commitment that will look to grow it. Okay, thank you.
Speaker Change: Of capital equity capital to grow it so it's more opportunistic as the maybe the way I would describe it versus KKR being more of a programmatic commitment that we'll look to grow.
Todd Meredith: Got it. Okay. Thank you.
Speaker Change: Got it okay. Thank you.
Mike Mueller: Thanks, Mike.
Todd Meredith: The next question is from the line of Rich Anderson with Wedbush. You may proceed.
Mike Mueller: The next question is from the line of Rich Anderson with Wedbush.
Mike Mueller: Received.
Todd Meredith: Thanks. Good morning down there.
Mike Mueller: Thanks.
Speaker Change: <unk> down there so you.
Speaker Change: You mentioned the revenue enhancing Capex program. If you didn't do it you would be at.
Speaker Change: 100% payout I think you've kind of alluded to that.
Speaker Change: So.
Speaker Change: Let's just isolate on that dynamic between that and payout.
Speaker Change: Our dividend coverage.
Todd Meredith: So you mentioned the revenue-enhancing CapEx program. If you didn't do it, you'd be at, you know, 100 percent payout. I think you kind of alluded to that. So let's just isolate that dynamic between that and payout or dividend coverage. How much longer would we have to wait for dividend coverage if you continue to do this $20 to $25 million with these great returns on incremental investment, as opposed to shutting it down now, which you're not going to do, and getting coverage that way?
Speaker Change: How much longer would want would we have to wait for dividend coverage. If you continue to do this $20 to $25 million with these great returns on incremental investment.
Speaker Change: As opposed to shutting it down now what you are not going to do in getting getting great coverage that way.
Todd Meredith: Yeah, maybe to think about the trajectory of those two approaches, with and without the revenue-enhancing treatment there, we still think we can drive towards a covered dividend and even with that extra capital sort of towards the end of twenty-five. But obviously, if we have outsized absorption capital, then, you know, maybe that ticks you over a little bit. But that's obviously a good problem to have, as we're, you know, this is a ramping process in our occupancy and the flow through.
Speaker Change: Yes, maybe to think about the trajectory of those two approaches with and without the revenue enhancing treatment there.
Speaker Change: We still think we can drive towards a covered dividend and even with that extra capital sort of towards the end of 'twenty five, but obviously, if we have outsized absorption capital then maybe that ticks you over a little bit, but thats, obviously, a good problem to have.
Speaker Change: <unk>.
Speaker Change: This is a ramping process in our occupancy and the flow through so clearly the further out you go the more beneficial youre starting to get all the NOI EBITDA.
Todd Meredith: So clearly, the further out you go, the more beneficial you're starting to get all the NOI, EBITDA, FAB that comes from that for coverage. So it really becomes less of a concern late in twenty five. But treating it as revenue-enhancing capital sort of separate than maintenance capex, you get there basically going into. So that's the difference.
Speaker Change: That comes from that average.
Speaker Change: It really becomes less of a concern late in 'twenty five.
Speaker Change: But try to get as revenue enhancing capital sort of separate than maintenance Capex you get there basically going into 25. So that's the difference okay.
Speaker Change: Okay.
Todd Meredith: Next question, you know, you've got billions of dispositions, and Well, I guess the first part of the question is, the buyback option at today's stock price, is that essentially off the table, or does it still make sense to buy back stock at today's price?
Next question.
Speaker Change: You've got.
Speaker Change: $1 billion of dispositions and.
Speaker Change: Well I guess the first part of the question is the buyback option at today's stock price is that essentially off the table as it still make sense to buy back stock at these levels.
Todd Meredith: Yeah, it's maybe to use the stoplight analogy, you know, there's red and green, but then there's sort of the yellow. And I would say, you know, that's probably where we are today, where you're right, the accretion gets pretty minimal. Maybe a different way to express it is, you know, what discounts to NAV. And I'm just kind of using market consensus for the NAV levels. You know, once you get into the 10%, you know, single-digit less than 10% discounts to NAV, yeah, the accretion mass starts to fade.
Speaker Change: Yes.
Speaker Change: Maybe to use the stoplight analogy.
Theres Red and Green, but then there is sort of the yellow and I would say, that's where probably we are today, where you are right. The accretion gets pretty minimal and maybe a different way to express it as what discounts to NAV.
Speaker Change: And I'm, just kind of using market consensus for the NAD levels.
Speaker Change: Once you get into the 10% single digit less than 10% discounts to NAV.
Todd Meredith: And so that's sort of where we're treading right now, which is a good, good thing. It's been moving in the right direction. So we got in early, we bought, you know, nearly 30% discounts to NAV, and then continued all the way down to about 10%. And, as Chris said, sort of average 20.
Todd Meredith: So there's a little more that can be gained. And I think really, our view is we'll just be opportunistic. And if we see dislocations, we'll jump on them.
Speaker Change: The accretion math starts to fade and sort of thats sort of where we're trading right now which is a good good thing it's been moving the right direction. So we got we got an early we bought nearly 30% discounts to NAV.
Speaker Change: And then continued all the way down to about 10% and as Chris said sort of average 20.
Chris: So there is a little more that can be gained and I think really our view is we'll just be opportunistic and if we see dislocations will jump on it.
Chris Douglas: Okay, so that leaves the question. You've got this capital program, 20-25 million share buyback on an awful sea, and then debt repurchase. Your asset sales are creating a stream of impairments, so that's one sort of ghost factor. And then the other is on the debt repurchases; will there be prepayment penalties associated with that since that maybe will be weighted more in the deployment math? So can you comment on both the potential for more impairments and the potential for prepayment penalties on the debt? Thanks.
Speaker Change: Okay, so that debt.
Speaker Change: Leaves the question you've got this capital program 2000, 25 million share buyback on an off we'll see and then debt repurchase.
Speaker Change: Your asset sales or creating a stream of impairments and so that's one sort of ghost factor and then the other is on the debt repurchases.
Speaker Change: Will there be prepayment penalties associated with that since that maybe will be weighted more in the deployment mass. So can you comment on both the potential for more impairments and the potential for prepayment penalties on the debt. Thanks.
Speaker Change: Yes.
Chris Douglas: Yeah, Rich, this is Chris. So, on the impairments, yes, we have had to take some of those, but really think about it. A lot of those have been assets that were valued at the merger, and so at that point, you know, cap rates were in the kind of low to mid-fives where they were put on, and so now we're saying we're selling them in the mid-sixes, and so that's really a balance sheet impact that doesn't change at all what's going through on the income statement and what happens on your accretion, but that's the reason that you have the impairments that are going on.
Speaker Change: Yes, rich this is Chris so on the on the impairments, yes, we have had to take some of those but really think about it a lot of those have been assets that were.
Speaker Change: That were valued at the merger and so at that point.
Speaker Change: Cap rates were in the kind of low to mid fives, where they were put on and so now we're saying we're selling them in the in the mid sixes and so that's really a balance sheet impact that doesn't change at all what's going through on the income statement and what happens on your accretion, but thats. The reason that you have to have the impairments that are going on.
Chris Douglas: And so that, you know... We'll continue to see some of that as we continue with the asset sales. In terms of debt repayment, we still have capacity right now in terms of bank lines. I mentioned our delay-draw term loan of $250 million. We paid down $100 million in the second quarter. We have $250 million left. That was set to expire in July of 2025. That will be a priority of ours to pay off, and there's no prepayment penalty associated with that.
Speaker Change: And so.
Speaker Change: <unk>.
Speaker Change: We'll continue to see some of that as we continue with the asset sales in terms of the debt repayment, we still have capacity right now in terms of.
Speaker Change: Our bank lines.
Speaker Change: <unk>, our delayed draw term loan $250 million, we paid down $100 million in the in the second quarter, we have $250 million left that was set to expire.
July of 25 so.
Speaker Change: That will be a priority of ours to pay off and Theres no prepayment penalty associated with that and the overall cost on that is around 64. So.
Chris Douglas: The overall cost on that is around 6-4. It's not a significant negative drag to be paying that type of debt down. We certainly have a bit of a line balance, so we'll address that as well. Typically, from what we see right now, we don't have to get into prepayment penalties, but if we increased it, then we certainly would take that into consideration as we're considering our options.
Speaker Change: It's.
Speaker Change: It's not a significant.
Speaker Change: Negative drag to be paying that type of debt down and then we certainly have.
Speaker Change: A bit of a line balance that will address that as well. So so generally from what we see right now, we're not having to get into into into prepayment penalties, but.
Speaker Change: If we.
Speaker Change: <unk> increased it then we certainly would take that into consideration as we're considering our options.
Chris Douglas: So, there's a good chance, then, you could be sitting on, you know, more cash than anticipated by the end of this year because of all these moving parts. Is that a fair statement? No, Rich.
Speaker Change: There's a good chance and you could be sitting on more cash than anticipated by the end of this year because of all these moving parts is that is that a fair statement.
Chris Douglas: No, Rich, I think if you look back at what Chris described in his prepared remarks, the billion dollars, the way we think about it is there's about $200 million if you look at our capital obligations that come out first, you know, that's development, redevelopment funding. It's this revenue-enhancing capital that I was talking about, first-gen acquisition capital. So you pull that $200 million out, you're at $800 million. And then if you think of 50-50 leverage as a neutral, rough guide. That's $400 for debt repayment and $400 for the stock buyback. Obviously, there's some wiggle room in there.
Speaker Change: No rich.
Speaker Change: I think if you look back at what Chris described in his prepared remarks, the $1 billion. The way we think about it is there's about $200 million. If you look at our our capital obligations that comes out first that's development redevelopment funding.
Speaker Change: This revenue enhancing capital that I was talking about.
Speaker Change: First Gen acquisition capital.
Speaker Change: So you pull that $200 million out you're at 800, and then if you think of a 50 50 leverage neutral rough guide that's 400 for debt repayment 400 for stock buyback. Obviously, there is some flex in there we've used up about 300 million for stock buybacks. So it kind of leaves us with about 500.
Chris Douglas: We've used up about $300 million for the stock buyback. So it kind of leaves us with about $500. And Chris, if you look at our debt, we have variable rate debt that we can pay off. It's about $500 between the line and that term loan Chris mentioned.
Speaker Change: And Chris just if you look at if you look at our debt we have variable rate debt that we can pay off it's about 500 between the line in that term loan Chris mentioned, so really don't see a scenario where were sitting on excess cash there.
Chris Douglas: So really, I don't see a scenario where we're sitting on excess cash. Okay. Thanks very much. We would have to increase... Rich, we'd have to increase our proceeds beyond a billion. Let's put it that way.
Rich Anderson: Okay. Thanks, very much we would have to increase rich we would have to increase our our proceeds beyond the $1 billion, let's put it that way yes.
Chris: Thank you.
Rich Anderson: Thanks Rich.
Todd Meredith: The next question is from the line of John Kilichowski with Wells Fargo. You may proceed.
John <unk>: The next question is from the line of John <unk> with Wells Fargo. You May proceed.
Speaker Change: Alright. Thank you I will just follow up on the last set of questions. There for the sourcing Houston earlier in the opening remarks, you mentioned the kind of accretion is that to do with what mostly with what has been accomplished year to date or is that largely to do with what you plan to do with the disposition proceeds for the rest of the year.
Todd Meredith: Alright, thank you. I'll just follow up on the last set of questions there about sources and uses. Earlier in the opening remarks, you mentioned the penny of accretion. Is that to do mostly with what has been accomplished year-to-date, or is that largely to do with what you plan to do with the disposition proceeds for the rest of the year?
Chris Douglas: Yeah, the penny is what we're talking about for this year, 24 and two and a half cents on an annualized basis, just to be clear on that. And it's a combination of doing the entire billion dollars, but really, I'm looking at the $800 million of what I have kind of coined the capital allocation portion, the portion that goes to debt repayment and share repurchase. You know, we obviously leaned in early on the share repurchase piece and have already executed on about $300 million of that. But then, so now in the back half of the year, you'll be leaning a little bit more on the debt repayment. But the penny for the year is the combination of all of that work.
John <unk>: Yes.
Speaker Change: The Penny is what we're talking about for.
Speaker Change: For this year 24 in two and a half since on an annualized basis just to be clear on that.
Speaker Change: And it's a combination of doing the entire bill.
Speaker Change: But really I'm looking at the $800 million of what.
Speaker Change: I've kind of coined the capital allocation portion of the portion that goes to debt repayment and two to share repurchase.
Speaker Change: We obviously leaned in early on the on the share repurchase.
Speaker Change: Peace and have already executed on about $300 million of that.
Speaker Change: But then so now here on the back.
Speaker Change: Half of the year, you'll be waiting a little bit more on the.
Speaker Change: On the debt repayment.
Speaker Change: The penny for the year is the combination of of all of that work.
Chris Douglas: Got it. And just, like, as we look at the uses, you broke out the math, the 200 of CapEx, and then right now, we're at 300 of share purchases. Assuming you trade in line with where you are today, that leaves about 500 on the debt repayment side. I know you've paid down some of your term loan. So what is it, about 250 left on the term loan, and then the rest would be on the line? Is that correct? And could you give the rates on what you're paying for those today?
Speaker Change: Got it.
Speaker Change: Yes.
Speaker Change: We look at the uses you broke out the math of the two.
Speaker Change: 200 of Capex, and then right now we're at 300 or share repurchases, assuming you trade.
Speaker Change: In line with where you are today that leaves about 500 on the debt repayment side I know you paid down some of your term bonds. So what is it about 250 left of the term loan and then the rest would be on the line is that correct and could you give the rates on what you are paying on those today.
Chris Douglas: Yep, so yeah, and as of 6-30, we had 250 on the delayed-drill term loan and 250 on the line, and they're slightly different rates, but between 6-3 and 6-4 is what we're paying on those right now. We also have a little bit more term loans, you know, non-hedged term loans that we could address as well with if we did have additional presentations.
Speaker Change: Yes, so yes and as of 630, we had 250 on the delayed draw term loan and 250 on the on the line.
Speaker Change: And there.
Speaker Change: Slightly different rate, but between six three and six four as well.
Speaker Change: Paying on those right now we also have a little bit more term loan.
Non hedged term loan that we could address as well with if we did have additional proceeds.
Todd Meredith: Okay, okay, and then I guess thinking about 25 here with the incremental 600 for KKR, you know, if, let's say, you start to trade at a premium to NAV and the attractiveness of this disposition program fades, I guess do you have any protections there or what's the next most accretive course of action for that capital? Yeah, John, as I
Speaker Change: Okay, Okay, and then I guess thinking about 25 here with the incremental 600 for KKR.
Speaker Change: Let's say if you start to trade at a premium to NAV.
Speaker Change: Tractor.
Disposition program trades I guess do you have any protections there what's the next.
Speaker Change: Most accretive of course of action for that capital.
Todd Meredith: Yeah, John, as I mentioned, our priorities right now are very focused on, you know, the billion dollars that we've been talking about and what Chris just walked through. So, you know, it's really our existing commitments, stock repurchase, and debt repayment. And that really kind of speaks for most of the capital we're talking about.
Speaker Change: Yes, John as I mentioned, our priorities right now we're very focused on the $1 billion that we've been talking about and what Chris just walked through so it's really our existing commitments.
Stock repurchase and debt repayment and that really kind of speaks for most of the capital. We're talking about as you look further youre right. There is an opportunity as our stock price makes sense and it's accretive.
Todd Meredith: As you look further, you're right; there is an opportunity as our stock price makes sense, and it's accretive. And it becomes more accretive to the JV, as you can imagine, with fee structures and putting out less capital. So it's a higher ROI. We can look selectively at incremental acquisitions through that KKR JV. But, you know, that's something that we'll evaluate depending on our valuation. As you said, as we get to full value relative to NAV or a premium, that really starts to make a lot of sense. So clearly, as I mentioned earlier, we've sort of been in this yellow range. But as you get to sort of the green, the green light, that's a great opportunity for us for external growth.
Chris: And it becomes more accretive to the JV as you can imagine with fee structures and putting out less capital. So it's a higher ROI.
Chris: We can look selectively at incremental acquisitions through that KKR JV.
Chris: But that's something that we'll evaluate depending on evaluation as you said as we get to a a a.
Chris: Full value relative to NAV or a premium that really starts to make a lot of sense. So clearly as I mentioned earlier, we've sort of been in this yellow range, but as you get to sort of the green the green light.
That's a great opportunity for us for external growth.
Speaker Change: Got it thank you.
Speaker Change: Thank you.
Todd Meredith: The next question is from the line of Emily Meckler with Green Street. You may proceed.
Speaker Change: The next question is from the line of Emily Liu with Green Street.
Speaker Change: May proceed.
Emily Meckler: Thank you, guys. Good morning.
Emily Liu: Thank you guys good morning.
Emily Liu: To better understand the quality of recent disposition associated with Nuveen JV, how did occupancy levels average age and remaining lease term compare to your portfolio average.
Todd Meredith: I would like to better understand the quality of recent dispositions associated with the new BEAM JV. How do occupancy levels average age and remaining lease term compared to your portfolio average? And is it fairly similar to the assets in the KKR JV?
Speaker Change: Finally, similar to the assets and KKR JV.
Todd Meredith: Sure. Good question.
Speaker Change: Sure. Good question, we actually have a page on this in our Investor presentation. It's our key highlights page eight.
Todd Meredith: We actually have a page on this in our investor presentation. It's our key highlights, page 8. And we don't necessarily break out the two JVs, not that specifically, but we do differentiate between the wholly owned portfolio, the HR portfolio, JVs, and dispositions. And this takes into account sort of the billion dollars that we've been talking about. So if you look at that, probably the main differentiators are geography, top 50 MSAs. There's quite a big difference where the JV and the portfolio are similar, you know, sort of the 90 to 100% range in the top 50 MSAs. Disposals are down at 57%, so pretty big difference. I would say between just maybe going a layer further between Nuveen and KKR; not a huge difference there.
Speaker Change: And we don't necessarily breakout the two JV is not that specifically, but we do differentiate between the wholly owned portfolio. The HR portfolio Jv's and dispositions and this takes into account sort of the $1 billion that we've been talking about so if you look at that probably the main differentiators are.
Speaker Change: Geography.
Speaker Change: Top 50, Msas Theres, a quite a big difference, where the JV in the portfolio or a similar sort of 90% to 100% range in top 50, Msas disposer down at 57%, it's a pretty big difference.
Speaker Change: I would say between just maybe going to layer further between nuveen and KKR not a huge difference there.
Speaker Change: Maybe some slightly different preferences, among those two groups but.
Todd Meredith: Maybe some slightly different preferences among those two groups, but generally, high occupancy, strong markets, similar profiles. And then the other aspect that I would say that's important to us is this clustered idea where it's part of our strategy, obviously, to own multiple properties in a tight cluster, typically around a hospital campus. And we're seeing very similar levels and maintaining similar levels on the balance sheet, or wholly owned and the JV, but our disposal costs are much, much lower.
Speaker Change: Generally high occupancy strong markets similar profile.
Yes.
Speaker Change: And then the other aspect that I would say thats important to US is this clustered idea, where it's part of our strategy obviously to own multiple properties in a tight cluster typically around a hospital campus and we're seeing very similar levels and maintaining similar similar levels.
Speaker Change: On the balance sheet, our wholly owned and the JV, but our dispose.
Speaker Change: Much much lower so I would encourage you to check out that page, we do provide some other stats as well one comment maybe one other differentiators average escalator typically we're trying to keep those higher growth escalators on the on the balance sheet wholly owned JV and dispose or slightly lower.
Todd Meredith: So I would encourage you to check out that page. We do provide some other stats as well. One comment, maybe one other differentiator, is the average escalator. Typically, we're trying to keep those higher growth escalators on the balance sheet wholly owned. The JVs and dispositions are slightly lower. On occupancy, you don't necessarily see as much differentiation, but I think it's important to note, generally, more stabilized assets going into the JV than even the portfolio. And on dispos, similar, although there's sort of two tails.
Speaker Change: On occupancy you don't necessarily see as much differentiation, but I think it is important to note generally more stabilized assets going into the JV.
Speaker Change: And then even the portfolio and dispose similar although theres sort of two tales, we'll sell some things that are highly occupied will also sell some things where rob and his team don't see a lot of opportunity to improve leasing. So we're trying to keep as much of the occupancy upside on the balance sheet wholly owned as we can so.
Todd Meredith: We'll sell some things that are highly occupied. We'll also sell some things where Rob and his team don't see a lot of opportunity to improve leasing. So we're trying to keep as much of the occupancy upside on the balance sheet wholly owned as we can. Certainly, we can follow up if there are more questions, but that's a good page to look at. Okay.
Speaker Change: Certainly we can follow up if there's more questions, but thats a good page to look at.
Todd Meredith: Okay, great, thank you. And then just one more question generally on the depth of the transaction market. How big would you say the bidding tent is for the top ten percent of your properties versus the bottom ten?
Speaker Change: Okay, great. Thank you and then just one more question generally on the depth of that change.
Pat: Option market, how big would you say that they think Pat answer the top 10% of your properties versus bottom 10.
Todd Meredith: Say that again, Emily. I got the top 10 versus the bottom 10. How big is the what? The fire pool or, what did you say? The bidding tent. Yeah, yeah, the fire pool, the bidding tent. You know, um...
Pat: Say that again, Emily I got the top 10 versus bottom to and how big is the what the buyer pool or what did you say bidding Ken yes, yes.
Kent: I think Kent.
Speaker Change: You know.
Todd Meredith: I wouldn't say it's gotten a lot better, but I would say there's quite a market at both ends. You know, typically, I would lean to say, hey, there's a bigger pool of buyers at the top end, but I think, you know, there's definitely folks looking for things they can get at discounted prices or maybe an opportunity where they say they think they can go lease it up. Maybe we don't.
Speaker Change: I wouldn't say it's.
Kent: It's gotten a lot better I would say there is quite a market at both ends.
Speaker Change: Typically I would lean to say, hey, Theres, a bigger pool of buyers at the top end, but I think.
Speaker Change: Definitely folks looking for.
Speaker Change: For things they can get at discounted prices or maybe an opportunity where they say they think they can go lease it up maybe we don't.
Todd Meredith: So it's improved dramatically. The other factor there has been financing. That's gotten a lot, lot better. And so it's actually helped both ends of that. But if you go back six, nine months, I would say big deals were harder to finance. That's changed dramatically, so that's good to see. And it was actually the other way around, where you could do one-off deals, maybe at the bottom end, and get financing done with, you know, smaller loans that weren't syndicated.
Speaker Change: So it's improved dramatically the other factor there has been financing that's gotten a lot lot better and so its actually help both ends of that but if you go back six to nine months I would say big deals were harder to finance that has changed dramatically. So that's good to see.
Speaker Change: And it was actually the other way where you could do one off deals maybe at the bottom end and get financing done with smaller loans that werent syndicated so I.
Speaker Change: I would say, it's been it's trending towards neutralizing where both are pretty deep.
Speaker Change #100: It's either in one comment I would add to that I was talking to Ryan Crowley yesterday, and he mentioned on one specific transaction and working on that.
Todd Meredith: So I would say it's been, it's trending towards neutralizing where both are pretty deep at either end. One comment I would add to that: I was talking to Ryan Crowley yesterday and he mentioned on one specific transaction they're working on that the brokers representing us said that it was the highest ratio of LOIs to CAs that they'd seen in quite some time, and I think that just is an indication of the depth of the market and what we're seeing right now and how it's improved over the last 12 to 18 months.
Speaker Change #101: The brokers represent representing US said that it was the highest ratio of of LOI to see as they have seen in quite some time and I think that just as an indication of the depth of the market and what we're seeing right now and how it's improved over the last.
Speaker Change #100: 12 to 18 months.
Todd Meredith: Okay, great. Thank you guys very much for your time.
Speaker Change #102: Okay, great. Thank you guys very much at the time.
Speaker Change #102: Thank you.
Speaker Change #102: Yeah.
Omoteo Okusanya: The next question is from the line of Omoteo Okusanya with Deutsche Bank.
Speaker Change #104: The next question is from the line of Tayo Okusanya with Deutsche Bank You May proceed.
Todd Meredith: Yes, good afternoon, guys. Great work on the operational side. It's kind of good to see the staff coming along. On the steward issue, I think in your 10-Q filing, there's a statement there about, you know, maybe two leavers that got canceled as part of the bankruptcy process. Could you talk a little bit about what's kind of going on there and why this is a way to be made and if there's any reason for it going forward as to how Stewart is thinking about the overall HR portfolio? Yeah, Taya, those were very small. I'll say De Minimis is under.
Tayo Okusanya: Hi, Yes, good afternoon, guys great work on the operational side that kind of good to see the stats coming along.
Tayo Okusanya: <unk>.
Tayo Okusanya: Yes.
Speaker Change #106: Thank you.
Speaker Change #106: Thank you.
Speaker Change #106: Sure.
In Q filings.
Speaker Change #106: All statements say about.
Speaker Change #106: Is that got canceled as part of the bankruptcy process.
Speaker Change #108: Could you just talk a little bit about what's kind of going on there and why.
Speaker Change #108: This isn't related to me.
Speaker Change #108: We will go forward about how Stewart is thinking about the award.
Speaker Change #108: Julio.
Chris Douglas: Yeah, Taya, those were very small. I'll say De Minimis is under 8,000 square feet, I believe. It's two leases.
Tayo Okusanya: Yes, Tayo those were very small say de Minimis under 8000 square feet I believe it's two leases and these were in buildings that they didn't have any other.
Chris Douglas: And these were in buildings that they didn't have any other operations in and were off campus. So they were just kind of small things that didn't really matter what happened with the sale of the hospitals. Those did occur, but like I said, it's... Pretty small diminishment in the overall scheme. And Taiyo, I would say at this point, there would be no inference from those as it relates to everything else. They were, as Chris said, kind of one-offs, and frankly, not even in Massachusetts, is really not material at all.
Speaker Change #108: Operations.
Speaker Change #110: And we're off campus.
Speaker Change #108: <unk> kind of <unk>.
Speaker Change #110: Small.
Speaker Change #111: Things that didn't didn't really matter what happened with the sale of the hospitals and so.
Speaker Change #110: Okay.
Speaker Change #110: Those did those did occur but like I said, it's pretty pretty small de minimis.
Tayo Okusanya: In the overall scheme of things and Tayo I would say at this point Theres there would be no inference from those as it relates to everything else. They were as Chris said kind of one offs.
Chris: And frankly, not even in Massachusetts.
Tayo Okusanya: So.
Chris: It's really not not material at all.
Chris Douglas: So again, it's kind of early to even try to speculate what may play out, but we're generally encouraged by what we're hearing in the process. So, and maybe I won't forget your comment, Taiyo, thank you. I think the operations and leasing team are pretty ecstatic about the work this quarter and sort of the outlook ahead, so appreciate your comments there.
Speaker Change #112: Again, it's kind of early to even try to speculate what may play out, but we're generally encouraged what we are hearing.
Speaker Change #113: In the process so.
Speaker Change #114: And maybe I won't forget your comment I think the operations and leasing team.
Speaker Change #115: Pretty ecstatic about the work this quarter and sort of the outlook ahead. So I appreciate your comments there.
Sounds good thank you.
Tom: Thanks, Tom.
Cameron: There are no additional questions waiting at this time. I would like to pass the conference over to the management team for any closing remarks.
Speaker Change #117: There are no additional questions waiting at this time I would like to pass the conference over to the management team for any closing remarks.
Todd Meredith: Thanks, Cameron. We appreciate it. Thank you, everybody, for joining us today, and we will be around and available for follow-up, and look forward to seeing many of you soon. Take care.
Speaker Change #118: Thanks Cameron we appreciate it. Thank you everybody for joining us today, and we will be around and available for follow up and look forward to seeing many of you.
Speaker Change #119: Soon take care.
Operator: That concludes the Healthcare Realty Second Quarter Earnings Conference Call. Thank you for your participation, and enjoy the rest of your day.
Speaker Change #120: That concludes the healthcare Realty's second quarter earnings conference call. Thank you for your participation.
Speaker Change #119: Enjoy the rest of your day.