Q3 2024 Healthcare Realty Trust Inc Earnings Call
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Bridget: Good morning. Thank you for attending the healthcare real T-3424 earnings conference call. My name is Bridget and I'll be a moderator for today. All lines will be muted during the presentation portion of the call was an opportunity for questions and answers at the end.
Speaker Change: I will now invite to pass the conference over to our host, Ron Hubbard by the person who have been best relations with healthcare royalty. Thank you, Ron. You may proceed.
Ron Hubbard: Thank you for joining us today for Health Care Realty's third quarter 2024 earnings conference call.
Ron Hubbard: A reminder that except for the historical information contained within, the matters discussed in this call and the contained full looking statements that involve estimates, assumptions, risks, and uncertainties.
Speaker Change: These risks are more specifically discussed in the company's form 10K filed with the SEC for the year ended at December 31, 2023, and other SEC filings.
Speaker Change: These four leading statements represent the company's judgment as of the data this called.
Speaker Change: The company disclaims any obligation to update this forward looking material.
Speaker Change: The matter discussed in this call may also contain certain non-gap financial measures such as funds from operations or FFO.
Speaker Change: Normalized FFO, FFO, Pershare, Normalized FFO, Pershare.
Speaker Change: Funds available for distribution or FAD.
Speaker Change: Net Operating Income, NOI, EBITDA, and Adjusted EBITDA.
Speaker Change: 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 September 30, 2024.
Speaker Change: 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.
Todd: Thank you, Ron. And thank you, everyone, for being with us today. Joining me for our prepared remarks is Austin Helfrich, our interim CFO. Also here with us and available for Q&A are Rob Hull, our Chief Operating Officer, and Ryan Crowley, our Chief Investment Officer.
Todd: I will start by highlighting key quarterly results, leasing trends, and operational metrics.
Todd: Then I'll turn the call over to Austin to walk through capital allocation, the balance sheet, and guidance.
Todd: Healthcare Realty had a strong third quarter. We reported normalized FFO per share of 39 cents at the high end of our expectations.
Todd: With these results up 1.2%, we're pleased to return to year-over-year growth.
Todd: MOB market fundamentals are strong with demand for outpatient space outstripping supply. We are benefiting from the secular tailwinds of aging demographics and the shift in care to outpatient settings.
Todd: Taking advantage of this backdrop, I'm proud of our leasing team for producing their fifth consecutive quarter of over 400,000 square feet of new sign leases in the multi-tenant portfolio.
Todd: Thank you.
Todd: I'm also pleased to report our team delivered another quarter of strong multi-tenant absorption totaling 159,000 square feet or 49 basis points.
Todd: This occupancy gain was driven by 565,000 square feet of new lease commencements, coupled with strong tenant retention of over 80%.
Todd: This is tremendous execution by all members of our team.
Todd: We've gained 164 basis points of occupancy over the last four quarters.
Todd: With one quarter to go in our published five-quarter occupancy bridge, we are on pace to be at the high end of our 150 to 200 basis point goal.
Todd: NOI growth was also solid in the third quarter. We achieved same-store property year-over-year growth of 3.1%. Future contractual escalators for leases commencing were 3.1%, and cash leasing spreads were 3.9%.
Todd: NOI growth also benefited from continued tailwinds from our expense management program, with same store expenses down 1.5% year over year.
Todd: While we expect expenses to increase in the fourth quarter on a year-over-year basis, we're seeing a steady return to a more normal expense pattern versus the high inflationary environment of the last several years.
Todd: For total multi-tenant properties, NOI growth was 3.5% in the third quarter. Although we had significant absorption in the quarter, the full potential economics were not realized due to the relative timing of earlier move-outs versus later move-ins.
Todd: While timing differences are not uncommon, they were more pronounced than usual this quarter.
Todd: We expect NOI growth to accelerate as timing differences moderate and free rent burns off.
Todd: Before I turn it over, I'd like to briefly touch on our recently announced leadership changes.
Todd: We made the changes to build on the operational success of the last year and to more closely align our leadership with our 2025 growth initiatives.
Todd: These changes will extend healthcare realty's operational momentum and further increase focus on execution, acceleration of growth, and accretive capital allocation.
Todd: In just the first few weeks, it's been invigorating to see the fresh perspectives and intensity the team has brought to their new roles.
Speaker Change: Now I'll turn it over to Austin.
Austin Helfrich: Thank you, Todd, and good morning, everyone. Let me start by saying that I'm excited about my new role as interim CFO. I look forward to working with the investor and analyst community.
Austin Helfrich: Through October, proceeds totaled $875 million. Based on this success, we are increasing our full-year proceeds range to $1.05 to $1.15 billion, up $100 million at the midpoint.
Austin Helfrich: Since our last call, we've repurchased over $150 million of additional shares, bringing year-to-date repurchases to nearly $450 million at a weighted average share price of $16.48.
Austin Helfrich: On a leverage-neutral basis, this represents a reinvestment spread to the company of over 100 basis points, a highly accretive outcome for earnings, cash flow, and NAV.
Austin Helfrich: As we look ahead, there is currently a deep and liquid market for medical outpatient buildings, and HR has ample access to that market via third-party asset sales and its joint venture partnerships.
Austin Helfrich: We will target the highest long-term risk-adjusted returns for shareholders through a dynamic capital allocation framework, which will always take into account the valuation and future growth embedded in our own portfolio.
Austin Helfrich: Turning to the balance sheet, in October we used proceeds from asset sales to fully repay the unsecured term loan set to mature in July of 2025.
Austin Helfrich: Including this debt repayment, quarter end net debt to adjusted EBITDA would have been 6.6 times.
Austin Helfrich: We expect leverage to decline to 6.5 times at the end of 2024 and continue to move lower in 2025, driven by organic growth.
Austin Helfrich: Finally, as of the end of the quarter, we had approximately $1.3 billion of availability under our credit facility, providing substantial financial flexibility.
Speaker Change: With almost 350,000 square feet of multi-tenant absorption year-to-date, we are investing significant capital in new leasing at very high risk adjusted returns.
Speaker Change: As Todd mentioned, this new leasing activity is only beginning to produce a corresponding NOI benefit.
Speaker Change: Due to the timing mismatch between capital spend and cash rent from new leasing, our payout ratio was 106 percent in the quarter. Excluding the impact of absorption capital, our payout ratio would have been 98 percent.
Speaker Change: Over the course of 2025, we expect our payout ratio to decline below 100% and approach 90% adjusted for absorption capital.
Speaker Change: Now, I'd like to provide an update on the steward bankruptcy process, which is unfolding in real time.
Speaker Change: In recent days, we have gained additional clarity.
Speaker Change: As a reminder, our total exposure to steward leases is approximately $27 million of annual NOI across 593,000 square feet.
Speaker Change: We have secured or have high visibility into leases with new tenants for approximately $17 million of annual NOI, or nearly 2 3rds of our total exposure.
Speaker Change: This includes $12 million in new direct leases with Boston Medical Center and Brown University Health.
Speaker Change: These solid investment grade nonprofit systems represent fantastic upgrades in credit quality as well as new health system partnerships.
Speaker Change: The remaining $10 million of annual NOI represents leases that were not accepted by new operators or where we do not have visibility on near-term replacement leases.
Speaker Change: The loss of this NOI will begin November 1st, and we are assuming that this will continue through 2025.
Speaker Change: Backfilling space will take time as we work with new tenants and operators to program and build out space.
Speaker Change: While it's still very early, we are encouraged by the long-term opportunity to recover approximately half of this NOI through our leasing efforts.
Speaker Change: In summary, we have clarity on almost two-thirds of the annual steward NOI, with a longer-term opportunity to recover over 80 percent.
Speaker Change: of the $27 million of current NOI with greatly improved credit quality and tenant diversification.
Speaker Change: Turning to guidance, we have narrowed our 2024 normalized FFO per share range to $1.55 to $1.56, including the November and December impact from Stewart that I just covered.
Speaker Change: Our core business is performing extremely well.
Speaker Change: This performance is generating a number of tailwinds into 2025, including the benefits of absorption and accretive capital allocation.
Speaker Change: I look forward to meeting with many of you over the next two months at conferences.
Speaker Change: With that, I will now turn it back to the operator to open the line for questions. Operator?
Speaker Change: Thank you.
Speaker Change: We will now begin the question and answer session.
Speaker Change: If you would like to ask a question, please press star followed by 1 on your telephone keypad.
Speaker Change: If for any reason you would like to remove that question, please press star followed by 2.
Speaker Change: Again, to ask a question, press star 1.
Speaker Change: As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking a question.
Speaker Change: We will pause here briefly as questions are registered.
Speaker Change: The first question comes from the line of Nick Ulico with Scotiabank.
Speaker Change: Nick, your line is now open.
Speaker Change: Sounds like maybe we lost him.
Speaker Change: Absolutely.
Speaker Change: The next question comes from the line of Austin Warschmidt with KeyBank Capital Markets.
Speaker Change: Austin, your line is now open.
Austin Warschmidt: Thanks, good morning everybody. Todd, just wanted to go back and make sure I understand the the multi-tenant same-store-no-wide growth guidance and kind of move-in move-out dynamic you discussed. I guess can you just marry
Austin Warschmidt: The timing impact you mentioned with the comment about net absorption kind of exceeding your goals and whether this is a quarter-end occupancy versus average occupancy difference or if there's something else that that we're missing here and Just speak to kind of what went on You know there this quarter
Speaker Change: Yes, good question, good observation Austin. I think you hit it pretty well. We actually spent a fair bit of the quarter below where we ended Sorry, we spent a fair bit of the third quarter below in occupancy in the multi-tenant portfolio where we finished the second quarter and then it rebounded strongly in September.
Speaker Change: And so obviously, as you point out, the average is really the story there. It was well below where we ended.
Speaker Change: So, we really saw a strong pickup in September. Obviously, that bodes well for the fourth quarter, but more importantly, 25. You also have free rent, which I mentioned. That's obviously not in the same store, but that's something also, in terms of thinking about how it translates to the FFO line as well, that you've got free rent burning off as well. So, really, from a true cash perspective, we view a lot of what you see, perhaps in the third quarter, really starting to contribute in early 25.
Speaker Change: So we should really start to think more about the fact that contractual increases are in that high 2% range or in the mid 3% I think on cash leasing spreads and then occupancy should just be the other piece and that should really be the the drivers of base revenue growth moving forward.
Speaker Change: That's I think that's exactly right that's well said I think the other thing you saw just the dynamic when you're having an inflection point around expenses
Speaker Change: We've had declining expenses. Well, that's also dragged down, which is a good thing, reimbursements of expenses as well. So you saw a little softness in revenue overall due to that, but that's something that we think will begin to normalize in the fourth quarter going forward. So I think you got base rent correct there.
Speaker Change: And then just last one for me, on backfilling the steward space, can you give us a sense on timing of the leases that account for, you know, I think you said two-thirds of the $27 million of NOI, you know, when you'd expect those to commence?
Speaker Change: Yeah. Hey, Austin. Good morning. It's Austin.
Austin: Maybe to break up the two buckets, starting with...
Speaker Change: the $17 million that you referenced, we would expect those leases to commence at the end of the steward lease timing. So no real timing mismatch there that you need to think about.
Speaker Change: And then obviously, just to kind of close the loop on that, on the $10 million...
Speaker Change: of NOI impact that I mentioned. Obviously, when we're thinking about
Speaker Change: The fourth quarter in 2025, we do want to make sure to be clear that there will be a timing lag as we work to re-tenant that space.
Speaker Change: just due to, it's now basically going to enter the new leasing pipeline. So we've got to tour, negotiate new leases, build out space. So just to be clear on those two different components.
Speaker Change: Understood, thank you.
Speaker Change: Exhaustion.
Speaker Change: This question is from the line of Juan Sanabria with BMO Capital Markets.
Speaker Change: Juan, your line is now open.
Juan Sanabria: Hi, good morning. Thank you. Just on the multi-tenant SAMHSA ROI guidance, maybe I'm being a little bit fixed here, but just curious on why that guidance was brought back or brought down I should say.
Speaker Change: Yeah, I think one, really, if you just look at sort of where we are year-to-date and then you think about the fourth quarter, it just, the guide we had before, just given the lag in the third quarter, the timing difference.
Speaker Change: It would suggest something that would be, you know, really out of line or out of expectation for the fourth quarter. So we just wanted to sort of right size that relative to what we're seeing in the fourth quarter. So clearly we still see acceleration going on.
Speaker Change: and that growth rate picking up, as I mentioned, it's just you have this lag effect. So, really just bringing it in line with where we are year-to-date versus what makes sense for the fourth quarter.
Speaker Change: So Lisa's just starting later than you would have initially hoped.
Speaker Change: Not necessarily than we hoped. It's just timing of move-outs. So we had move-outs really skewed to the beginning of the quarter. So again, we experienced that sort of drag intra-quarter.
Speaker Change: and then a really strong rebound and obviously net absorption were very positive, but a lot of that coming late in the quarter in September.
Speaker Change: Again, this can happen, you know, we had a similar but much more muted pattern like that in the prior quarter. It was just much more pronounced this quarter, and that's just going to vary quarter to quarter on timing. It's not a, every quarter is the same. There can just be timing differences. So it obviously has an impact in a given quarter.
Speaker Change: One, I think you really have to differentiate on that point in as well as how free rent is flowing through that.
Speaker Change: The leases signed in September that Todd referenced that caused the
Speaker Change: significant increase in absorption in the third quarter.
Speaker Change: Obviously, there's going to be some free rent carryover into the fourth quarter that's going to impact that cash and OI number. You know, obviously, GAAP, FFO, a little bit of a different story, and we will start to see that benefit through straight-line rent in the fourth quarter, so I just want to tease out that nuance as well.
Speaker Change: I guess what what drove that and should we then expect a higher
Speaker Change: a number in 25 or a bigger increase as that's kind of normalized out or hoping you can tease that out a little bit as we think about turning the calendar over.
Speaker Change: Yeah, that's a that's a great question, Juan. If you look at our expense growth year-to-date, that's primarily...
Speaker Change: Here we're going to be thinking more about normal wage inflation, normal G&A inflation, as you start to think about modeling 2025.
Speaker Change: Thank you.
Speaker Change: Thanks, Juan. Thank you.
Speaker Change: Thank you, Juan.
Speaker Change: The next question comes from the line of Jill, John Kulechowski with Wells Fargo. John, your line is now open.
John Kulechowski: Thank you.
John Kulechowski: Hi, thank you. Maybe if we could just turn to the capital activity in the quarter. You said you paid down the rest of your term loan, and based on the upsize of the disposition activity, does that imply about $100 million of further debt buybacks here, assuming sort of flat stock repurchases?
Speaker Change: Yeah, hey, good morning. I think that you are correct. We did pay down the $100 million of remaining unsecured term loan that would have matured in July of 2025.
Speaker Change: really to an eye to starting to decrease that 2025 debt maturity.
Speaker Change: I think based on the increased guidance that we gave around the proceeds, as well as our year-end guidance to be back at six and a half times,
Speaker Change: The
Speaker Change: disposition market and the liquidity in the medical outpatient market right now is very good and so we will remain whether it's thinking about all of the capital allocation options available to us we will remain very flexible in how we're thinking about the opportunities that we have.
Speaker Change: Okay, so it sounds like with that $100 million, roughly, it's the revolver to $579 million. Is the best choice of action for that, or is there other opportunities for that capital?
Speaker Change: No, as far as debt pay down, you are right in your thinking on the revolver.
Speaker Change: Okay and then maybe next there was a 47 million dollar credit loss reserve in the quarter is there anything you could give us on that?
Speaker Change: Yeah, the $47 million of credit loss was related to the final write-down of a MES loan in Houston. We have not been accruing any income for that MES loan since the first quarter of 2023.
Speaker Change: So nothing to really take out from an NOI perspective. That was a loan that HTA had made that we inherited and this was the final impairment on that loan due to loan maturity and actions by the first lien holders.
Speaker Change: Okay, thank you. And then just last one for me, the final $10 million entering the new leasing pipeline of NOI, could you just walk us through maybe normal cadence of what an asset that
Speaker Change: hits that new pipeline looks like in terms of timing, touring and the TI process and, and typical, you know, lease up like is there is there any
Speaker Change: He sort of throws assets so unique that it's hard to sort of put a time frame around it.
Speaker Change: John, I think it's a good question. Austin touched on it broadly.
John Kulechowski: I would say what we're looking at and where the opportunities lie for that opportunity to lease up and recover sort of half, as Austin described, half of that $10 million.
John Kulechowski: a tour to lease execution, and then on average, it's a very wide distribution, but on average, about six months to build out space. Obviously, that can vary depending on the acuity of the space.
John Kulechowski: But I would say this looks a lot like that in terms of the spaces and opportunities we have. So again, that's why I think when you heard Austin talk about the timing, we're essentially saying that 10 million is probably, it's partial impact.
John Kulechowski: in the fourth quarter of this year, which is in our guidance.
John Kulechowski: and then the remainder would continue, in our current estimate, in 2025.
John Kulechowski: Obviously, that timeframe I just laid out would put you at the back end of 25 for some of the early ones to start kicking in. So that's how we're thinking about it. Obviously, you can have a lot of different circumstances with free rent, which could kind of add to that a little bit. So again, that's why we're saying we think for now a lot of that recovery in terms of cash flow and FFO,
John Kulechowski: persist through much of 25. But it doesn't, you know, it does not have a unique character relative to everything else we're doing. We're very encouraged by the space. There's a very significant portion of that space in Florida on some, in some really great buildings, the front door.
John Kulechowski: of a strong hospital. It's an A-plus rated hospital according to the Green Street.
John Kulechowski: research. And so we're very bullish that we have a new operator coming in, we really have a chance to get in there and work with those tenants and create, you know, meet that demand. So
John Kulechowski: a lot of encouraging signs but again just sort of that time frame that it takes to lease that multi-tenant space and it was previously mass-release so obviously you're going from a mass-release to multi-tenant.
Speaker Change: Thank you.
Speaker Change: Got it, thank you.
Speaker Change: Thanks, John. Thank you, John.
Speaker Change: The next question comes from the line of Michael Griffin, Woods City.
Speaker Change: Michael, your line is now open.
Michael Griffin: Thank you. Thank you. Thank you.
Michael Griffin: Great, thanks. I'm wondering if you've noticed whether or not you have a greater ability to push rents or get tenants to sign longer leases, given what seems like continued solid demand and minimal new options from a supply perspective.
Michael Griffin: This is Todd and maybe Rob you can jump in too. I would say, generally speaking, you're seeing really healthy cash leasing spreads.
Speaker Change: We were at 3.9 this quarter, very strong and healthy. Obviously, we have a wide distribution under that. But as you've heard us emphasize, you know, for some time, we're very focused on occupancy gain.
Speaker Change: and James Douglas. Thanks for joining us. We'll see you next time.
Speaker Change: So that's really our big initiative right now, is to really push that and not be indifferent on price, but be very sensitive to gaining occupancy.
Speaker Change: I do think you're seeing some ability to push term, as you just pointed out, I think the negotiation position is strengthening, as you just described, with a lot of limited supply. So it is a very encouraging backdrop, which I alluded to in my remarks.
Speaker Change: But again, we're pushing occupancy here.
Speaker Change: We can show you plenty of examples where we're getting double-digit cash leasing spreads, but when you look across the volume of the activity we're doing, being in that high end of our typical 3% to 4% range, I think, shows some strength. And I think as we continue to improve occupancy,
Speaker Change: You can certainly see an opportunity to turn to a little more on pushing more on the rate, but right now our focus is occupancy.
Speaker Change: Appreciate the color there, Todd. And then just maybe switching to sort of the capital allocation front. I think you guys have done a good job kind of narrowing the discount to NAV with the share of IBEX.
Speaker Change: so far this year. But given there's probably more limited accretion from those at this juncture, and Austin, I think you talked about, you know, a pretty liquid and open transaction market. Have you started seeing deal activity from an acquisition perspective pick up? Or are cap rates, you know, a little bit too narrow relative to where your cost of capital is today to execute on some of those deals?
Austin: Yeah, thanks, Michael. That's a great question.
Austin: As you alluded to, we're really pleased with the activity we've had year-to-date. Obviously, the share buybacks have been highly accretive. I think, to your point, the
Austin: market for medical outpatient right now is significantly different than where we were 12 months ago. I think the depth of the market obviously you know as everyone knows as cap rates improve it naturally brings more sellers to the market.
Austin: In terms of how we're thinking about that vis-a-vis capital allocation,
Austin: I would go back to my earlier point around the dynamic framework, and I think the way that we look at it
Austin: is really we have a range of options available to us. So I'll start kind of going with, you know, that high-level comment, Michael. You've talked, we've talked about...
Austin: the absorption targets for the year, half a million square feet. Obviously, we're funding significant absorption capital right now, which is great for shareholders.
Austin: It's obviously a very high incremental IRR.
Austin: I think in terms of other opportunities available to us, you know, we do have access to the KKR Venture, which obviously comes with a fee structure as well that is compelling for us.
Austin: What I would stress is that we have a myriad of options.
Austin: whether it's what we believe about the future growth rate of our own business, private market valuations, ability to reinvest into the current portfolio, or external growth. So we will continue to look across all of those.
Austin: and allocate capital based on the best available and highest available risk-adjusted return.
Austin: Thank you.
Speaker Change: Great. That's it for me. Thanks for the time.
Speaker Change: Thank you, Michael.
Speaker Change: Thank you, Michael.
Speaker Change: The next question comes from a line of Rich Anderson with Wedbush. Rich, your line is now open.
Rich Anderson: Thanks. Good morning, everyone.
On the occupancy bridge, you know, you're making good progress there. I'm wondering, and Todd, you referred to a move to a rate focus perhaps next year.
Rich Anderson: might we expect sort of a similar sort of communication style about this next phase for health care reality you know you've achieved perhaps
your occupancy goal for the end of this year. Could there be a bridge or a
Rich Anderson: you know, ski lift or something to get to a higher, you know, kind of rate.
Rich Anderson: You know, what's the thought process about communicating, you know, the future, because it seems, you know, it's reasonably well for you this year.
Speaker Change: Right, right, and obviously we thought it was important here.
Rich Anderson: basically this time last year to put out some expectations so
Rich Anderson: We joke about our five-quarter plan, which just throws everybody off from an annual plan.
Rich Anderson: But I do think it was really important. I would say next year we will always be transparent about our goals for occupancy, and you've seen us for a long time provide a lot of detail around what we call our components of expected FFO.
Rich Anderson: along with our FFO guidance. So we'll always be very clear about what those type of operating metrics are. I'm not sure we need to go through the same ski lift diagram each time, but I think we will be abundantly transparent and clear about what our expectations are around occupancy.
for 25. It's early, you know, we're...
Rich Anderson: you know, Austin's getting in, digging into things.
The team is we will we will look at exactly how we will do that and bring that out and
Rich Anderson: in February. It's certainly not something we're thinking, you know, now we're going to put out a five-quarter plan for including next year. I think we've brought some, you know, a really good track record this year to show that we're keeping the leasing, new leasing pace up above 400,000, as we've said, for five quarters. Obviously, we're now delivering occupancy gains, absorption gains each quarter.
That will be a continued story in 25, absolutely, and I think you're right, it's going to be, you know, a communication effort that we will make to describe our expectations around occupancy versus rate growth.
Rich Anderson: I think 25, just to be candid, still has a lot of occupancy growth in it, so we will continue to focus on that, but rate is always part of the picture.
whether it's you know as big of an instance next year or the following it will it will be out there so we'll be very transparent but but haven't really put together our 25 pages yet.
Do you sense that tenants though are you know getting more and more conditioned to a higher you know we've talked about this for years you know
Rich Anderson: a higher rate environment, in rental rate environment for them or are they still sort of pushing back even though despite some of the anecdotal evidence that you've seen in terms of releasing spreads.
Sure, yeah, I think this segment, you know, medical outpatient, has certainly matured and has shifted maybe, you know, along that curve of maturity towards other more traditional sectors that have been at it a longer time and, you know, seen those kind of moves. I don't think maybe it's where you're going is a much more cyclical business.
where you really capture incredible cash leasing spreads when it's good,
I do think one of the hallmarks of this subsector is just the stability. So I think it's still very much about that long-term stability and we're not seeing any behavioral differences.
and that profile in the business. You can look at things like the employment numbers in the space and just see that steady rock solid.
year-over-year growth in that 3-plus percent range over a long time frame. So I think that drives a lot of it.
But I do think you're right with supply down, I think Michael asked earlier.
with supply down, financing costs as well as construction costs way up, it just limits supply and it does give you advantage. So I think there will be positive trends to the upside.
partly because of those dynamics plus the maturation of the subsector.
Rich Anderson: But I don't think it's, you know, we're suddenly going to look like the boom bust of some other more cyclical sectors, but it's very encouraging. I think pricing power is something, and obviously what our strategies is to move towards where we think the puck's going in terms of demographic growth, strong health systems.
using our strategy and markets and clusters to take advantage of that and maximize.
Rich Anderson: One thing I don't want to lose
side of. Sorry, just to hop in really quick. One thing I don't want to lose sight of in the cash leasing spread.
Rich Anderson: discussion is also the
increase in the retention rate that we've had this year? So I think to that question, you do have to look at it. There are multiple levers to that question, not just cash leasing spread. I think from a capital standpoint, obviously, increasing retention, enormous benefit versus new leasing as we think about absorption. So there is a bit of
Rich Anderson: It's not, I think,
There are multiple levers and gauges there that we're looking at in terms of how that supply-demand dynamic impacts the business, not simply cash leasing spread. I just wanted to add that too.
Okay, the question second question is you you talked about multiple sort of
avenues to future growth. Your stock is now just, you know.
Speaker Change: Are we moving away from buybacks and into a pivot with the JVs, where maybe you're selling less into them and buying alongside with them? I mean, how quickly could that evolve, you know, vis-a-vis the previous schedule or the previous plan to, you know, start?
Speaker Change: Sell assets and buy back stock
Yeah, Rich, I think maybe just one comment, just overarching, then I'll let Austin jump in.
I do think a change you're going to hear from Austin specifically, but all of us.
is a different framework that's much more dynamic, rather than saying, oh, you know, in a static basis we've reached a certain price, and whether it's the consensus or it's, you know, a forward view.
We're going to be much more dynamic and, you know, we can do a range of things. Obviously, we may allocate more heavily depending on where those where we see things.
But I would say we're taking a much more dynamic view than just saying, oh, we've hit the number, we'll stop this, we'll start that.
I think it's looking across all those ranges of activities and returns and balancing where that opportunity
Rich Anderson: live.
Absolutely, you're right. We are taking a close look at that sort of pivot concept where
Rich Anderson: you know, can we start moving capital accretively into a JV program that has that fee structure that's more advantageous, but we've got a that's competing against as Austin said very high double-digit type returns
into redevelopment of our own properties, lease up capital for absorption. So we look at all those things. Obviously, the stock repurchase idea as well. So, Austin, sorry, if you have anything to add there. No, I think that's great.
Last question for me is with all the management change and perhaps other changes ahead Todd you mentioned a fresh perspective How much of these changes?
Rich Anderson: will be strategic, and how much of them will be more communicative. In other words, you know, like, what are the...
intentions of you know the the management changes that you know that are underway and that or have been completed in terms of you know what what the company looks like on a go-forward basis. Thanks.
Sure, you know, I don't think it's overly complicated. I think it's just simply in the case of Rob, who we put into the Chief Operating Officer role, you know, Rob was really spending his time on leasing.
Douglas Goldstein, CFP®, is the director of Profile Investment Services and the host of the Goldstein on Gelt radio show. He is a licensed financial professional both in the U.S. and Israel. Securities offered through Portfolio Resources Group, Inc., Member FINRA, SIPC, MSRB, NFA, SIFMA. Accounts carried by National Financial Services LLC. Member NYSE®, a Fidelity Investments company. His book Building Wealth in Israel is available in bookstores, on the web, or can be ordered at www.profile-financial.com. All information on this website is purely information and should not be used as the sole basis for making financial decisions. The opinions rendered herein are those of the guests, and not necessarily those of Douglas Goldstein, Profile Investment Services, Ltd., or Israel National News.
Speaker Change: aligning robs.
Speaker Change: leadership and having clear definitive leadership around that in his role in his title and his responsibilities and that's really serving you know what he's been focused on but more importantly where we're going.
So, I think you will see a very high focus, clearly, from Rob.
as well as the whole team around that operational growth. And that's clearly driving a lot of our growth this year.
and then on the capital allocation side.
Rich Anderson: really putting, elevating Ryan to the Chief Investment Officer role. He's been with us quite a long time, just a
Great guy who's been, you know, deep into this space for a long time, knows
of the parties to get deals done. He's been deeply involved in our JVs, our disposition transactions, which he will continue to lead. So just getting him in that seat and really leading the charge around not only acquisitions and redevelopment, but also the disposition and JV strategy.
clear leadership there with his team. And then Julie in the administrative role, really taking on some strategic healthcare.
or excuse me, human resource efforts that we really want to bring to the table to really elevate healthcare realty to.
a best-in-class organization. We think we're really good, but...
Rich Anderson: We can always improve.
and really attracting the best talent.
and retaining that talent. So those are some of the key things. And then Austin, part of it is communication. I think Austin brings a different perspective to the CFO role, but also as a former, long time by side guy, he brings a very different perspective, style of communication, view. But also I think all of this team has really brought a rigor around
How can we do more things that will improve our ability to predict and drive growth over the course of the future? I don't think we're talking, Rich, about transformational shifts away from the business we're in.
were still very much medical outpatient focused. And so it's, you know, it is strategic, but I would say it's much more operational and, you know, focus oriented rather than, you know, completely changing the business.
Very good. Thanks very much, everyone.
Speaker Change: Thanks, Rich.
Speaker Change: Thank you, Rich.
The next question comes from the line of Jonathan Hughes with Raymond James.
Jonathan, your line is now open.
Hi, good morning. I was hoping you could clarify how the Steward Massachusetts catch-up rent received this month will be treated in 4Q multi-tenant NOI growth. Will that be excluded as I think the negative impact was left out in the second quarter?
Really good question, Jonathan. Let me answer it from an overall perspective and then I'll drill down to your specific question.
We do expect to have a positive reserve release related to Stewart in the fourth quarter. You're probably talking about under half a million dollars related to the dynamic you just referenced, Jonathan, on the payments from BMC and Brown University Health.
What I would say is in the second quarter, we did include the negative impact of those reserves against
Rich Anderson: FFO per share that was almost a penny from 39 cents to 38 cents in the second quarter So probably include that back out in normalized FFO per share In the fourth quarter, I don't have a specific answer for you on the same store cash number probably something will Exclude or look at giving you both ways I think it's probably honestly Jonathan a bigger question around how we're going to show the core performance of the portfolio in the fourth quarter Vis-a-vis some of the obviously impact of Stewart in November and December So we'll come back to you on that We're going to try to provide I think very good clarity into the core portfolio and then obviously give you the Stewart impact as well
And Jonathan, I would say, yeah, if you look back at the second quarter, we showed it both ways. And I think that's probably a safe assumption, is all I'm saying.
Speaker Change: Thank you.
Speaker Change: Okay, that's helpful. And I assume like Florida would be treated similarly, right? I mean, roped in with Massachusetts.
Thank you. Thank you. Thank you.
Yes, that's a fair comment. I think to the extent we had catch-up payments in Florida, we would treat it the same way.
Speaker Change: Just to reemphasize what I said earlier, this is very much live. I mean, we, you know, this is happening this week, so we're giving you our best current view and trying to box what, you know, the ultimate outcome is. I would say, yes, theoretically, if we had the same in Florida, we would do that as well.
Speaker Change: It's fluid, so look forward to hearing more about it as it evolves. I have just one more on the dividend. I know it was just declared yesterday, and you did talk about the visibility into reaching a 90% payout ratio, but I was hoping you could talk about the
that reported payout ratio versus an absorption capital adjusted payout ratio, I think.
Absorption capital was really mentioned for the first time last quarter, so I guess my question is why the change in how you're...
Speaker Change: You're looking at payout ratio, or maybe looking at it with another metric, since I don't really recall hearing absorption capital mentioned until recently.
Sure, Jonathan, I'll hit it high level and then Austin can add to it maybe.
If necessary, follow up if you have follow ups, I think it's really just saying okay. Yes We we certainly understand and we provide a payout ratio Calculation or we show the math show the two numbers that you can divide and get get the ratio in this quarter. That's 106
Speaker Change: is often referenced.
Speaker Change: And that's Come Down.
Sharply substantially, I think you've seen generally a good trend line on that and just trying to really look forward and say how is
How is management, how is our board looking at where we're headed?
Is this sustainable, this dividend? And our belief, based on the forward look, is absolutely it's sustainable.
It's a sustainable dividend, and we can grow into it. In fact, we can get to a payout ratio that is quite good going forward.
the throughput of all this absorption capital converts to obviously NOI and then FFO per share. So it's really saying, how are we looking at that and where are we headed is the idea.
Obviously, if we were just in a steady state, it would be a very different framework. It wouldn't make a lot of sense. So I think our view is just trying to help people better understand where we see that going in the future.
That's helpful.
Yeah, that is helpful. So the absorption capital, just to be clear, that's the leasing commissions, right?
with your... ...furning like those are cash-expend.
So it's basically taking the absorption gain of the quarter, so that 159,000 feet, or kind of what we expect through the year on a smooth basis.
Speaker Change: and then applying what we're spending on new leasing both in the way of TI
Speaker Change: and commissions. So it's a combination. So just in rough math, if you look at our disclosure around our commitments, you're talking about
you know, $9 a foot per lease year, take the average lease term of new leases, and you get close to $70.
Speaker Change: So it's kind of looking at that incremental, only the incremental, not all new leasing, just the incremental absorption at that cost of commissions and TI and saying, hey, if you take this out and just look at where we are, here's where it calculates. In the future, we should get more NOI that will come as a result of all that leasing.
Speaker Change: Thank you.
Got it. That's helpful. Thanks for the time.
Thanks, Jonathan.
Speaker Change: Thank you, Jonathan.
The next question comes from the lines of Amontorio Aconsona with Deutsche Bank.
I'm going to tell you, you're lying to yourself.
Hi, yes, good morning, everyone. I just wanted to talk a little bit about kind of long-term growth for the overall portfolio. Again, clearly, with some of your kind of, you know, casting, so NOI numbers,
steadily improving, things are moving in the right direction.
the merger, there was a viewpoint that the merged portfolio could kind of generate like five-ish percent.
same stochastic NOI growth, if I'm recalling that correctly. And can you just walk us through a little bit of, you know, like the building block that could eventually get you to that number if you still believe in that number, and how soon that could potentially happen?
Sure, Ty, good question. I think, you know, that kind of sort of adds to some of the questions we've talked about. Same store growth this quarter, next quarter, versus next year, in the future.
The number you're talking about, we talked about, you know, four or five plus percent growth potential post-merger. That was really built around the idea of occupancy gain.
and the idea is that you can't have occupancy gain forever, but we saw a long runway post-merger to continue driving our multi-tenant occupancy.
higher, and you're seeing that. You're seeing that come through in terms of all the occupancy.
and Net Absorption Gain this year.
And what we're spending a lot of time talking about here
to actual same store growth, especially as we look towards 2025.
We're not putting out guidance for what we think exactly the growth rate will be in 2025 at this point. We'll do that in February.
But our view is that, yes, you can see much higher levels of same-store growth when you have that level of occupancy improvement kicking in.
That's a multi-year concept, but obviously it's not a forever long-term growth rate concept because at some point you begin to normalize
at an occupancy level and maybe have less, if any, occupancy gain. So it is an opportunity that we see to accelerate growth based on occupancy gain in addition to the underlying fundamentals, which are, you know, sort of very strong rent escalators that are in that neighborhood of the high twos plus cash leasing spreads and so forth. You know, good expense management, all the other normal fundamentals. So it's.
It's the Normal Fundamentals plus Occupancy Gain is the short answer to your question.
That's helpful. Thank you. And then a second question just around capital allocation. Again, I appreciate the comment made earlier on that.
I mean you really kind of allocate capital based on
you know, where we create the most kind of, you know, earnings, equity sharing of shareholder value. And I guess when you do kind of think about, you know,
acquisitions versus development versus stock buyback
you know, today? I mean, you're kind of ranking all those potential kind of, you know, uses of capital. How do you kind of think about the best use of capital today versus
Speaker Change: versus maybe some other alternative uses.
Hey, it's Austin. I'll just go back through, I think, the best way to answer this is probably to go back through some of the opportunities that I mentioned earlier.
Speaker Change: that we have available to us.
I think, obviously, if you're talking about rank ordering, Taiyo, the number one place to start has to be absorption capital. Just the returns that we get on TI and LCs and building capital targeting absorption, whether that be through
Speaker Change: The Higher Renewal Rate or New Leasing is by far the best return available to us today. I think as you go through the remaining options,
There's a number of factors you have to consider, which is, most importantly, one, where is our stock price?
number two
Speaker Change: where are valuations in the private market? I talked about a deep and liquid market. Everyone can see where the cap rate on dispositions has been year to date.
So, I think that's a very good reflection of what's going on in the private market, but I'll also tell you it's very fluid right now. I think everyone on this call is aware that, you know, interest rates just went up.
60-70 basis points in a couple of weeks. So obviously, we're paying attention to all of that. You know, you've seen what we've done year to date through cap allocation, which can give you some sense. I also referenced earlier
the 1648 as the average share price, and I gave a little bit of my view into what our reinvestment spread on that is.
So, all of that I think can help you triangulate to those thoughts, but in terms of what we're going to do from here, I think my message would be, we have good access to capital, we have a lot of opportunity to accretively redeploy that internally, and as far as all the other options.
It depends on a myriad of factors how we'll kind of rank order those at any given time.
That's helpful. And if you'll just indulge me one more, just in terms of rates rising, how do we kind of think about upcoming debt maturities and as well as swap expirations kind of in 2025 and even possibly 2026?
That's such a great question, Todd. Thanks for asking it. Obviously, as we look to 2025, the security paid off that 100 million of unsecured term loan is a great start on our 25 five maturities. Our next maturity is the unsecured, the 250 million unsecured bonds.
that are due in May, I think to some of the earlier question that I got around debt pay down.
Obviously, we are looking to pay down more debt to bring our leverage back to six and a half times by the end of the year. And the number one opportunity to do that is the revolver. So we do expect to enter 25 with additional capacity on the revolver, which gives us great flexibility.
Speaker Change: in terms of
Speaker Change: options for that 25 unsecured maturity.
I would say to your point, Tyler, as we look at the current rate environment and that
Speaker Change: We will continue to be very fluid and opportunistic in how we look at that, but I think the great news for us in the near term is we do have a lot of flexibility because of where our revolver will be going into 2025.
From a swap perspective, I think it's a great call-out that we do have $75 million of unswapped term loans outstanding.
And the remainder of our swap expirations really starts in 2026. So it's a great question, Tyo. All something we are actively thinking about. We're trying to set ourselves up for maximum flexibility heading into 25. And then obviously, I did reference
an intent to continue to de-lever through 25. So it's something we're very focused on and appreciate the question.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you.
Thank you all, Matteo.
The next question comes from the line of Mike Muller with J.P. Morgan.
Mike Muller: Mike, Yolanda, and Alton.
Mike Muller: Yeah, hi. I guess one quick question first. Can you give a little more color on why you're just recapturing five of the remaining ten million from steward? Is it, you know, issues with certain buildings? Is it rents above market or something else? Can you just kind of help put that in context?
Sure. Good question, Mike. I think the core answer is simply, you have a number of dynamics going on. You know, we've got, what, 22 buildings across the whole...
Stuart exposure for that 27 million and so you're going from multi-tenant to sorry from single tenant to multi-tenant in many cases so you're clearly going to have some difference you know in a a general vacancy factor if you will
he thinks about that from a modeling standpoint. So our expectation isn't to go back right back to 100 and that you know that can go across multiple assets. So it's it's sort of a part of that
Mike Muller: assumed in our backfill as well. You also had a couple of campuses closed in Massachusetts where we didn't have a lot of exposure, but frankly, you know, you have low expectations there that much is going to happen. We'll probably
Speaker Change: We're actually having some positive conversations with those assets, but long term, those are probably sales.
where you're not replacing the NOI per se.
or at least on a one-for-one basis through an asset sale. So there's just some things that we're factoring in. We don't know for sure now exactly how that will play out, but we're trying to be very conservative and assume that, you know, realistically, what do we think we can get back to in a time frame that people can think about from the standpoint of modeling.
Speaker Change: in Building and Expectations.
Speaker Change: Got it. Okay. And then, I guess, based on what you see today, what do you think the likelihood is that you won't be a net seller again next year?
Speaker Change: Yeah.
That's a broad question, Mike. That probably goes back again to where Austin was on capital allocation.
Again, we're just going to be opportunistic. We clearly have some capital needs each year to fund, whether it's development or redevelopment, it's absorption capital, so forth, debt paydown, potential share repurchases, all the different options that we have.
You know, I think for us, we certainly currently see it as more attractive to be meeting those needs with asset sales, but we're going to continue to be opportunistic and look at that.
Again, we talked earlier about...
are we looking at a pivot to acquisitions through a JV? It's on the menu, but obviously we're not going to commit at this point to where that lines up in a rank order sense. So, look, where we are today, we're still looking at this as a very...
the things that come with that. So not really committing to what we think 25 looks like. I think generally, as Austin pointed out, we're very encouraged.
about the MOB market and the liquidity there, the access to that, and our ability to generate attractive pricing on proceeds. So we'll obviously refine that as we provide guidance in early 2025.
Got it. Okay, thanks.
Speaker Change: Thanks, Brian.
Mike Muller: Thank you, Mike
For more information visit www.FEMA.gov
The next question comes from the line of Emily Meckler with Green Street. Emily, your line is now open.
Hey Emily, it's Austin. I think the simple answer is just...
Austin: the absorption that we've done year to date and where that is. I don't know there's anything really more complicated to it other than just part and parcel with the absorption.
Okay, and then one more on move-outs. So outside of Stuart, are there any known move-outs in upcoming lease expirations later this year or early next year that will lead to a temporary drag on occupancy?
No, I don't think anything to call out at this time, Emily.
Speaker Change: Okay, thank you guys very much for the time. That's it for me.
Thanks everyone.
Speaker Change: Thank you, Emily.
The next question comes from the line of Nick Ulico with Scotiabank.
Speaker Change: Nick, your line is now open.
Yeah, thanks. Sorry for the technical difficulties earlier. In terms of, you know, the maintenance capital expenditures, they've trended down a bit in recent quarters as a percentage of NOI. Can you just give us a feel for, like, how to think about that impact next year? You know, are you still kind of running higher than normal as a percentage of NOI on that capex?
right now.
and it could come down next year.
and James Douglas. Thank you.
I'll provide a little bit of context here, but I think we're going to save 2025 guidance until February. I would say that obviously that is, you know,
capital requirement. I do think what you have seen this year to your earlier point
Speaker Change: kind of dive into that. I think you've seen a real focus on efficiency within the building capital as well.
But I think generally, as you look forward, it's going to be tied to absorption. So as we continue to drive absorption, that will obviously have a corresponding impact with the maintenance capital. What I would also generally add is, you know,
What Todd mentioned, which is we are at this period where we are seeing only the very early benefits to NOI of that absorption, and so it is a
disproportional impact in the near term, which is why we are trying to provide additional insight with this payout ratio excluding absorption cap.
Okay, thanks Austin. Second question is just as you know as we think about the sign leasing activity and you've been running on the multi-tenant you've been running over 400,000
Square feet for five quarters now and
Thank you.
Speaker Change: Is there, you know, as we're thinking about just kind of going forward, is there anything unusual about that pace? I mean, is there just like a catch-up element, you know, in those numbers that, you know, we shouldn't sort of extrapolate and assume going forward for a leasing pace or absorption?
Good question, Nick. I would say no, it's much more about getting up on plane. And now, as you said, we've been doing that for five quarters and we've got a page that shows back to.
2023, where we were really more in the ramp up mode getting to that level. And I think if anything, not to put too much pressure on Rob here, but we have high expectations that we can sustain that. In fact, you know, how can we
elevate that is really the focus. And so we're very bullish on continued demand. It kind of goes to the core of the question about demand for space. So we are, we're driving that, you know, we're looking to keep that and improve it and grow it in terms of
the run rate. So it's not, you know, something easier said than done, but the team's hard at work trying to drive that volume of new leasing demand. And I think I'll just add to that that, you know, we've been on a pace about that level, and I think it kind of comes back to the...
the expirations that we see for 2024 is what we saw, and then we look at 2025 and say, okay, we have a certain number of expirations. Historically, we've had a move-out rate of kind of mid to high 20s. And so certainly
looking at the new leasing required to not only backfill that but then hit our absorption targets.
is the pace we've been on, and as Todd said,
as we look out to 2025, you know, trying to improve upon that and push that a little higher so that we can, you know, capture the absorption targets that we set for 2025. But I think it comes down to expirations, historical move-out rates, and then setting volume based on that.
Speaker Change: Okay, thanks guys.
Thanks Nick, glad you circled back.
Speaker Change: Thank you, Nick.
There are no additional questions waiting at this time. I would like to pass the conference over to the management team for closing remarks.
Thank you, Bridget, and thank you everybody for joining us again today, and we look forward to seeing many of you soon at various conferences. Hope everybody has a great day. Thank you.
Thank you. Thank you. Thank you.