Thank you for attending today's Healthcare Realty Trust second quarter financial results. My name is Francis, and I'll be your moderator today. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you'd like to ask a question, please press star one on your telephone keypad. I'd like to pass the conference over to our host, Kris Douglas, CFO.
Thank you for joining us today for Healthcare Realty's second quarter 2022 earnings conference call. Joining me on the call today are Todd Meredith and Rob Hull. A reminder that except for the historical information contained within, the matters discussed in this call may contain forward-looking statements that involve estimates, assumptions, risks, and uncertainties. These risks are more specifically discussed in the company's Form 10-K filed with the SEC for the year ended December 31, 2021, and Form 10-Qs filed with the SEC for the quarters ended March 31 and June 30, 2022. These forward-looking statements represent the company's judgment as of the date of this call. The company disclaims any obligation to update this forward-looking material.
The matters discussed in this call may also contain certain non-GAAP financial measures, such as funds from operations or FFO, normalized 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 GAAP financial measures may be found in the company's earnings press release for the quarter ended June 30, 2022. The company's earnings press release, supplemental information, and Form 10-Q are available on the company's website. I'll now turn the call over to Todd.
Thank you, Kris. Thank you everyone for joining us for our second quarter 2022 earnings call. 20 days ago, we closed our transformational combination with HTA. Since we initially began pursuing HTA nearly a year ago, the market has presented a lot of challenges to navigate. Rising debt costs, geopolitical turmoil, and record inflation, among others. We're incredibly fortunate and proud to be where we are today. First, I'd like to express our gratitude to shareholders who voted overwhelmingly in favor of the combination. 79% of shares outstanding and 92% of those who voted. Thank you for your vote of confidence. I'd also like to thank my fellow board members and my colleagues at HR and HTA. We could not have achieved this outcome without their support and hard work. I'm particularly humbled by the commitment and perseverance of my colleagues.
We're also grateful for the counsel of our advisors and the commitment from our bank group throughout this process. Looking forward, we know we have a lot of wood to chop. We're excited about the opportunity to demonstrate for investors, tenants, and our partners the strength and benefits of the new Healthcare Realty. Importantly, we never lost sight of why we're pursuing this combination. We see tremendous advantages to increased scale. The combined portfolio includes well over 700 properties and 40 million sq ft. When I look at the combination, we've nearly doubled the percentage of our portfolio in markets where we own more than 1 million sq ft. This is notable in a largely fragmented MOB sector. We now have unmatched scale in 14 markets. Dallas is our top market, where we now own nearly 4 million sq ft.
What this means is we can operate much more efficiently, strengthen our market knowledge, and leverage much deeper relationships to accelerate leasing and investment momentum. Fortunately, we operate in a sector with steady historical demand, even in uncertain economic times. Demand for outpatient healthcare in the U.S. is projected to accelerate over the next decade. A sharp rise in the aging population will drive outpatient utilization regardless of economic conditions. What's important is our portfolio is concentrated in dense, high-growth markets to capture this demand. Over three-quarters of our properties are in attractive coastal and Sun Belt markets like Seattle, Dallas, Atlanta, Nashville, Raleigh, Tampa, and Boston. We have clusters in the right locations, giving us great relationships with the leading health systems in each market. The combination of rising demand, growing markets, and deep relationships will accelerate bottom-line growth.
In the coming quarters, we're focused on a few key performance indicators that will demonstrate progress and illustrate the power of our combined companies. Number one, asset sales and our joint venture program. We've made great progress and expect to complete the majority of asset sales in the next 30 days to fund the $1.1 billion special cash dividend. Number two, integration. We're hard at work combining our companies to optimize our teams and realize our targeted annual synergies. It's critically important to take care of our talented people and maintain our culture during this process. Number three, leasing momentum. In the second quarter, both HTA and HR generated robust leasing volume. Together, we have over 600,000 sq ft of new leases that are now in build-out. This record leasing activity will contribute to solid occupancy and NOI improvement.
We see momentum building moving into 2023. Number four, relationships. We expect to tap into our expanded relationships to increase our pace of investment. We have greater visibility on several development starts in the coming quarters. We're intently focused on these 4 priorities. Delivering these results will begin to capture the value of the combination, which is not currently reflected in our stock price. Later, Kris will touch on some key valuation markers that should help our investors realize the potential for attractive returns. When I look at the combination, we have many more properties and many more options to refine the portfolio and generate proceeds when there's a disconnect between public and private valuations. We will use excess proceeds from asset sales together with our expanded joint venture program to invest in MOB where we can create the most value through scale, clustering, and our expanded relationships.
While we're only 20 days into the new Healthcare Realty, we're off to a great start. We look forward to executing on our priorities in the coming quarters, and we intend to deliver attractive long-term shareholder value through a compelling combination of lower risk, increased liquidity, and accelerated growth. Now I'll turn it over to Rob to provide an update on our JV and asset sales as well as our investment activity. Rob?
Thanks, Todd. Healthcare Realty has made substantial progress to fund the $1.1 billion special dividend through joint venture transactions and asset sales. Specifically, we have closed on $433 million of properties, and we are under contract on another $613 million expected to close by the end of August. Combined, these transactions that are at a blended cap rate of just under 4.8%. By the end of the third quarter, we expect to complete the remaining sales that will bring the total to over $1.1 billion. The stability of MOBs is translating to more stable pricing relative to other asset types. Every sector is experiencing the headwind of rising rates, yet lenders remain active in the MOB space.
The changing credit environment has pushed the market into a period of price discovery with a broader bid-ask spread on certain offerings. Our asset sales are evidence that MOB pricing remains strong, especially for portfolios valued from $100 million to $200 million. In the next several quarters, we plan to sell additional properties totaling $500 million to $1 billion. These sales will further refine the portfolio and generate proceeds for accretive reinvestment. In terms of investment activity, acquisitions for the combined company this year stand at $417 million at a blended cap rate of 5.2%. Since we last reported earnings, we closed seven additional investments for $58 million. All were in existing markets. One notable acquisition was in Raleigh, where we purchased three buildings for $27.5 million.
Among these were two medical office buildings adjacent to WakeMed's Cary Hospital. Including HTA properties, the company now has substantial scale with 13 buildings totaling 478,000 sq ft in this cluster and 1.1 million sq ft in the growing Research Triangle area. Looking ahead, our team remains focused on fostering lasting relationships in markets where robust population growth is increasing demand for healthcare services. We will remain disciplined as we selectively pursue acquisitions in target markets that build upon our cluster strategy. For the year, we expect to invest $500 to $750 million in the low- to mid-fives, funded largely through asset recycling. Solid demand for MOB space is driving lease up in the portfolio and across our developments. Hospital demand for MOB space remains strong.
This demand is largely driven by a health system's need to recruit new physicians to support the expansion of service lines such as radiology, oncology, and women's services. Third-party demand for space also remains healthy, particularly in the areas of cardiology, dermatology, internal medicine, and ambulatory surgery centers. We are also seeing a lot of interest in move-in-ready suites. Tenants see significant value in avoiding delays caused by supply chain and permitting issues. Strong demand for outpatient services is also leading to an increase in development activity. Our developments are largely sourced through existing relationships in target markets, giving us greater control of the process. In contrast, heavily marketed RFPs generally attract developers looking for fees rather than an appropriate spread above a stabilized acquisition. We have seen our development spreads remain steady 100 to 200 basis points over acquisition yields.
One moment please as we reconnect the speakers. We will resume the call momentarily.
Francis, can you hear me? This is Todd.
Yes, Todd, we can hear you.
Okay. We're having a connection issue for Kris and Rob. Something has been lost here. Can we connect them again?
Absolutely. One moment please.
Excuse me, everyone. Please remain holding while we reconnect the speaker line.
Francis, are we back on?
We are now reconnected with Kris Douglas.
Apologies, we lost connection there. Rob is going to pick back up where he was cut off.
Strong demand for outpatient services is also leading to an increase in development activity. Our developments are largely sourced through existing relationships and target markets, giving us greater control of the process. In contrast, heavily marketed RFPs generally attract developers looking for fees rather than an appropriate spread above a stabilized acquisition. We have seen our development spreads remain steady, 100 to 200 basis points over acquisition yields. Including HTA's pipeline, we currently have $181 million of development and redevelopment projects underway, with about half of this already funded. Our pipeline continues to grow as health systems expand their market footprints. Over the next 12 to 18 months, we expect to start another $100 to $200 million of new redevelopment and development projects.
These are primarily located in target markets such as Atlanta, Dallas, Houston, and Orlando, and include a couple of projects from HTA's development pipeline. Longer term, we expect the addition of HTA's portfolio to be a rich source of development opportunity as we build towards $300 million in annual starts. We remain committed to pursuing accretive investments, focusing on target markets and clusters where we can build scale. The addition of HTA's portfolio gives us a broader base from which to meet robust demand for MOB space and grow cash flow per share. I'll now turn it over to Kris for a review of our financial results.
Thanks, Rob. Before getting into specifics on results, I would like to point out that second quarter financials are for standalone HR and HTA, given the merger closed after quarter end. This morning, we published separate financial and supplemental reports for both companies. The third quarter will be the first period with combined results. Our remarks will focus on legacy HR second quarter results while also highlighting the HTA performance. HR's normalized FFO per share increased 4.7% over the second quarter of 2021 to $0.45. FAD per share increased 11% year over year, driving our FAD payout ratio down to 83% for the quarter and 86% for the trailing 12 months. HTA's normalized FFO for the second quarter was $101 million or $0.43 per share. HTA's FAD payout ratio was 92% for the quarter.
Looking forward, we expect the combined company's FAD payout ratio to remain below 90%. For HTA, second quarter same-store NOI grew 1.6% year over year, an improvement from 0.8% in the first quarter. HR's year-over-year quarterly same-store NOI growth increased 3.3%, driven by a 3.4% increase in revenue, offset by a 3.5% increase in operating expenses. Operating expense growth decelerated from 6.6% in the first quarter, due primarily to property tax refunds. Excluding property taxes, operating expenses increased 5.3% year over year, with the primary driver being utilities. We expect utilities to remain elevated in the third quarter with the extreme h eat across the country.
However, we remain insulated from the higher than historical expenses, with over 90% of the combined company's leases having a pass-through of increased operating expenses. Year over year, second quarter revenue per occupied square foot increased 2.8%, which is generally consistent with our in-place contractual escalators of 2.89%. Second quarter cash leasing spreads of 3.4% were in line with our expectations and historical range of 3% to 4%. Overall revenue growth benefited from a 50 basis point improvement in average occupancy. It is noteworthy that we had 215,000 sq ft of signed leases in the same-store portfolio that are in the process of build-out. This represents 1.6% of total same-store square footage.
HTA had a record number of new leases executed in the second quarter and has over 431,000 sq ft of leases that are in the process of build-out. This represents 1.9% of its total same-store square footage. Given the record amount of new leases and build-out across both portfolios, nearly double historical norms, we're optimistic about meaningful absorption in the coming quarters. Converting these suites to occupancy will create significant incremental NOI and per share value. Looking further ahead, bringing HTA's current multi-tenant occupancy of 84% in line with HR's existing multi-tenant occupancy of 88% generates over $28 million of annual NOI. From there, bringing both portfolios' multi-tenant occupancy to 90% generates another $28 million, for a total of $56 million of annual NOI.
This will take multiple years, but can provide significant value beyond the $33 million to $36 million of G&A synergies we expect to generate in the next twelve months. Now shifting to the balance sheet. We finalized the recast of the combined HTA and HR bank credit facilities in the second quarter. The new combined facilities include $650 million of new term loans to repay the approximately $550 million outstanding on the existing revolvers and to fund remaining transaction costs. We currently have near full capacity under the new $1.5 billion revolver. The new $1.1 billion asset sale term loan was drawn at merger closing to fund the $4.82 per share special dividend to HTA shareholders.
We expect to repay this asset sale term loan with the proceeds from the JV and asset sales that are currently in process. We provided a couple of updated valuation disclosures this quarter. First, we added at the end of the HR supplemental, a summary combined company pro forma NAV schedule. It shows our current implied cap is in the high fives, well above the transaction pricing Rob described earlier. As we complete additional asset sales, we will look at opportunistic share repurchases if our implied cap is more attractive than acquisition and development yields. To that end, last week, the board authorized a $500 million share repurchase program. Second, we provided an updated accretion bridge for 2023 FAD on page 20 of our investor presentation.
There are significant share price upside when you apply these expected results to the historical multiples, as shown on page 21 of the Investor Day. Please note this analysis focuses on FAD accretion and multiples. There will be several non-cash accounting adjustments, including reset of straight-line rent and mark-to-market outstanding debt that will make FFO results less meaningful in the coming quarters. In July, HR and HTA declared and paid quarterly stub dividends of $0.201 and $0.029, respectively. The balance of the HR stub dividend of $0.109 was declared last week. The result is HR shareholders will receive a combined dividend of $0.31 this quarter, which is the same as the May dividend. We expect to maintain the legacy HR dividend policy and cadence moving forward.
HR and HTA made great progress this quarter in closing the merger while also continuing to execute operationally. Most noteworthy was the strong leasing results across the two portfolios. Looking ahead, we are eager to continue this progress and maximize the value from our combination. Francis, we're now ready to open the line for questions.
Thank you. If you would like to ask a question, please press star, followed by one on your telephone keypad. If you'd like to remove that question, press star followed by two. Again, to ask a question, please press star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. Our first question comes from Rich Anderson with SMBC. Please go ahead.
Hey, thanks. Good morning, everyone. Wanted to first on the disposition of the $1.1 billion, that's obviously taking longer to clear the finish line, but you're getting the same pricing that you've talked about. What would you say is causing that delay? You know, we thought we'd be pretty much done with it by middle of August, at least based on previous comments from you. Can you just kind of go through that, you know, the cadence of that experience for us?
Hey, Rich, I would say it really hasn't been a material delay. I will say at least what we communicated most recently, I wouldn't say it's a material delay. I would say, you know, today's progress is right on pace with what we were talking about previously. I would say from the original, you know, timing, maybe you have a valid point, and I think it's pretty obvious. I think it's just the markets are challenging. Rob alluded to the, you know, lenders are still active in MOB space. But as you can imagine, these buyers, you know, those who use debt are, you know, are having to go through and make it work as they kind of face some different debt terms than maybe they originally underwrote. So we're not really concerned about it.
We're obviously well on track with nearly half, you know, closed now and the balance closing in August. We're, you know, even if it is a, you know, a tad bit slower, we're not concerned about it. We feel good about it.
Okay. You mentioned in your opening comments there 3/4 of your portfolio are what, you know, you would describe as sort of densely populated areas of the country. It leads me to question, you know, now with the combined company, you know, what is, you know, you mentioned upwards to $1 billion of dispositions on a, you know, over the next several quarters. But what do you think the sweet spot is for the combined company now as it relates to on versus off campus? You know, what do you see as the non-core component of your portfolio that maybe not over the next year, but over the next several years is likely to be sold over time?
Sure. You know, if you look at the combination of the two companies, we end up at about 68% on or adjacent to campus. I think we've shared with folks that, you know, certainly you've seen us in the past be much higher than that. Although I think Rob has communicated a number of times that our investment pace over the last several years has been about 75%, 25%, so 75% being on or adjacent. I would say that's probably a longer term, you know, target that we're looking at. The asset sales that we're working on now that Rob addressed, that'll tick up the on and adjacent a little bit, maybe 1% or so.
I think over time, as we continue to sell assets, as we continue to invest in new assets, we'll drive that, you know, up into the mid-70s ±. I think that's kind of our long, long-term view. As you've heard us talk about our cluster strategy, we've gotten much more comfortable with the idea of investing, you know, again, primarily in on-campus settings, but then complementing that with off-campus that's strategic and relevant to these health systems and providers that we work with in these markets. I think as we gain scale in these markets, you know, filling that in between our campus-based clusters really makes a lot of sense. That's kind of the long-term target, about 75%.
Okay, last one from me. Now that you're, you know, you're a much bigger enterprise, understanding that it's a fairly fragmented market still, do you think that HR can, you know, kind of, institute real change in terms of how people view the business from the lens of the REIT? You know, we get typical 3% type same-store NOI growth, 3%, cash leasing spreads, you know, in that range, sometimes more, sometimes less. When you look at some other sectors in the REIT space, you know, the math is much different, right? For like industrial, where there is, you know, a price insensitive tenant base like yours, they get much bigger cash leasing spreads, bigger same-store numbers.
Is that something that you think you can achieve over the long term, institute real change in terms of the growth profile of the company? I know you've listed a lot of things in the future, but I'm thinking more about systemic change to the medical office business, adding more of a growth element to it, you know, in your umbrella. Thanks.
Sure. Understand the question. I think fundamentally, you know, we're not gonna change medical office from a non-cyclical business to suddenly a cyclical business. I think that's the trade-off, and of course, we've been running for, you know, we're long in the tooth on these cyclical sectors that have really had a huge tailwind for an extended period. I think, you know, we're seeing that slow down, whether that's apartments or industrial. It's still very attractive, but it's slowing down and that will change in the future. That can change. I think medical office is different. You know, it's really built to sort of grind, you know, at these more steady rates, but through economic cycles. I think that's the difference.
I'm not gonna pretend to suggest we're gonna suddenly transform this into a cyclical business that creates, you know, big peaks and valleys. I do think, though, we can incrementally move higher on the growth profile. I think we can sustain a 3%+ type growth profile. You've seen Healthcare Realty do that over the years, and I think we can apply that to this broader portfolio, use our strengths to do that. And I think that will show up in our rent bumps. It'll show up in our cash leasing spreads, obviously, same-store NOI. We're not here to tell you that suddenly we can produce, you know, high single-digit, low double-digit type growth in the business on a sustainable basis. I think that just would defy gravity. You know, this is about safety.
You know, MOBs are largely more about non-cyclical and safety and that's fundamentally, you know, doctors aren't changing that business fundamentally, hospitals aren't. I think it's just different than something like industrial or other sectors.
All right. Good stuff. Thanks, Todd. Thanks, everyone.
Thanks, Rich.
Thank you for your questions. Our next question comes from Michael Griffin with Citi. Please proceed.
Hey, thanks. I just wanna go back to this accretion bridge page in the presentation. Just on the HTA FAD of $370 million for 2023. If you look at current run rates, it's implying about flat relative to last year at $325 million. I'm just curious how you're anticipating that extra, call it $45 million of pickup from FAD on HTA on just that standalone basis.
Yeah, Michael. Hey, this is Kris. Yeah. When you look at it and you take kind of their standalone, we have assumed, you know, that they're gonna be able to grow in the low to mid-twos on a same-store basis. You also get the full impact of their acquisitions that they completed in 2021 that needs to be added to that number that you were talking about, as well as a full impact of some of the developments, including some kind of current-pay construction loan type developments that will go into that. As well as, you know, some incremental acquisitions that we had assumed for this year. Now we've pulled some of that back.
When you roll through all of the impacts from the growth as well as those incremental acquisitions that weren't in that 2021 number, that's what gets us up to the $370 million. I will say that we did bring down that $370 from $390 previously, as we have cut back on the assumption of how much acquisitions we would be doing for the balance of this year moving into next year with HTA, given you know where the current stock price is. Where effectively what you see in this accretion bridge is more of an asset recycling as opposed to significantly more external growth.
However, we are assuming with that asset recycling that we're able to redeploy those proceeds accretively. Really in terms of the accretion bridge, that change in net investment activity is not having a big impact. Really the almost all, if not all of the change from what we had presented previously can be related to change in interest rates.
Should we then assume that $20 million of net investment activity decrease applies to 2022 as well? Because I'm assuming that 2023 number is the one detailed in the proxy, the $390 million, and then for 2022, that's $354. You know, you just track $20 million from that, call it $334 of FAD for HTA for 2022. Is that fair to assume?
That might be pushing a little bit too early, because you are gonna, you know, pick up some of that, some of those acquisitions from earlier in the year. Yes, I would say a disproportionate amount of it would be in 2023, but you would get a portion into 2022 as well.
Cool. Appreciate the color on that. Just maybe touching on leverage. Just curious kind of where it sits on a pro forma basis with the dispo's that have already occurred and sort of, you know, do you still anticipate hitting that six to 6.5 times range or, you know, could there be anything to kind of change the mindset on that?
No, we're still feeling good about getting into that 6% to 6.5% range. You know, obviously, and we have a little bit more on that term loan, that it's higher right now on that asset sale term loan. It's our expectation that will be fully repaid before the end of this quarter. On a combined basis, we should be in that target range that we've disclosed.
All right. That's it for me. Thanks for the time.
Thank you, Michael. Our next question comes from Steven Valiquette with Barclays. Please go ahead.
All right. Great. Thanks for taking the question. The one main question I have was actually just touched on a little bit, and it comes back to the, you know, all the projections in the proxy, the prospectus filed on June 10th for each standalone company through 2026. You just kind of talked about the 2022 numbers around that, but I guess beyond that for 2023 through 2026, you know, before any consideration for the planned divestitures, are those numbers, you know, still valid to use for just kind of, you know, projecting out long term for each standalone company, or are they stale for one reason or another? Just wanted to visit that for the out years as well. Thanks.
Yeah, it obviously kind of depends on exactly where we are in the volume of external growth. However, as I pointed out to Michael, that's really not having a significant impact on the overall results, given the fact that we're assuming if we are in an asset recycling phase as opposed to net external growth, that we're able to do that on a tax-deferred basis by selling you know small portfolios like Rob talked about and reinvesting in individual assets. That really doesn't have a major impact.
Really what is driving the change in what we presented and, you know, you could run that through the balance of those pro formas would be change in interest rates, which obviously have adjusted since earlier in the year when those original pro formas were put together. That's the reason we wanted to provide this updated accretion bridge to make sure that people were picking that up. I think a lot of people were. I don't think that's any surprise to anyone. We just wanted to make sure that that was abundantly clear.
Okay. The only real quick follow-up around that is just that, at the time these numbers came out back in June 10th, I mean, they were, you know, projected before that obviously, but both sets of numbers were above, Street consensus at the time. I don't know if that stood out to you. Maybe you just gave the answer on why you think it might have been above. What sticks out to you on why those projections were above the Street consensus at the time? I guess if it's not obvious, we can just talk about it more offline later, but I was just curious if you had any quick thoughts around that.
Yeah, I mean, I'm happy to, you know, follow up with you if you have more specifics offline. I do think that when you're in a period like this, where you're going through a merger, that as you look at the consensus numbers, you know, people may have a wider dispersion of what those results are, depending on what their assumptions are and how they're looking at those, and what the combination can provide in terms of net external growth, what it can do in terms of G&A. Obviously, we've put in place what we think our assumptions are, but everybody out there doesn't always have the same view.
I think that creates you know the range of kind of results that can flow into that consensus number. But happy to follow up in more detail with you later if you'd like.
Okay. Yeah, that's great. Okay, thanks.
Thank you for your questions. Our next question comes from John Pawlowski with Green Street. Please go ahead.
Great. Thank you for the time. Todd, can you give us a sense for who from HTA senior management is leading the day-to-day integration, given that a CFO left day one?
Sure. You know, obviously we set up long ago some integration teams, and we've got, you know, folks from HTA that are kind of paired off with our counterparts. Julie Wilson, our EVP of operations, is kind of our point person on integration, and she's been coordinating heavily with Amanda Houghton. There's other folks that work. Their Chief Accounting Officer, David Gershenson, and some others in his staff that are key folks on that integration as well. You know, there's clearly key functions like accounting that are critical in terms of that integration, but other folks related to human resources as well. Those are the main folks. It's clearly, you know, there's a staff on both sides focused on that.
Clearly, Healthcare Realty, legacy Healthcare Realty leadership is really driving that exercise.
Okay. A follow-up on the transaction market as it relates to the asset sales. You guys are still achieving pretty solid pricing. Did the pool of assets change at all as the months roll along and we hit the volatility in the debt markets? Or are there any other concessions outside of price that you had to give to, again, close at that 4.8 kind of unaffected pricing?
This is Rob. No. I would say no. I mean, you know, as we indicated throughout the process, you know, we did, you know, break the transactions up into multiple transactions, smaller bite sizes that we were comfortable with, and we were seeing, you know, a deeper market for those, a deeper pool of buyers. In terms of making concessions, I wouldn't say there were any meaningful concessions that were given in order to achieve that pricing.
Yeah. One of the things that we did is we talked about this in the spring, we had a, you know, larger group of assets that we looked at. It wasn't like we just started and just said, "This is it, and this is all we're gonna do." We worked through that. You know, I think we had announced we were at the point looking at, you know, closer to $1.6 billion to $1.7 billion. We were able to identify out of those that pool of assets, what we felt like we would be able to execute on and be able to get accomplished in terms of the timeframe that we were shooting for.
You just kind of had to set your priorities there. Ultimately, we feel good about the process and the result that we've been able to achieve.
Okay. Was the final pool of assets sold or about to be sold higher quality than the initial assets you guys were underwriting?
No, I wouldn't.
No.
I wouldn't say that. No. I wouldn't say they were higher quality than what we already sold.
Yeah. I would say the assets that we're selling are similar to the overall mix, although a couple of preferences, as I articulated earlier, a little more off-campus, a little more single tenant. You know, we're selling some assets that are, you know, micro-hospitals that, you know, great markets, great health system, but, you know, an asset type that we wanted to reduce our exposure to. So there's some things in there that for us on the margin, you know, actually improve the resulting quality of the combination after the sales.
Okay. Thank you for the time.
Thank you for your questions. Our next question comes from Jonathan Hughes with Raymond James. Please proceed.
Hey, thanks for the time. I was hoping you could kind of stick with the JVs and dispositions that John was just asking about. You know, I think we saw another $600 million that was mentioned in the press release from a month ago that was kind of like to be marketed or in the process. You know, is that $600 million still expected to be marketed and attempted to be sold in the near term, or is that going to be added to that kind of phase two of the post-merger, you know, HR, and a little bit further down the road?
Yeah. I would say that, you know, we're looking at that as sort of the post-merger once, you know, we're gonna complete the asset sales and JV transactions associated with the special dividend and funding that, and then moving into that next phase of really looking at refining, continuation refining the portfolio and looking at opportunities where we can exit markets where we don't see a long-term growth strategy through clustering and working with our health system partners and really rotate out of those types of assets and those types of properties and into, you know, or properties where we do our buying in existing markets and building out clusters.
I think it's more of a refinement strategy and rotating through accretive transactions in the markets where we wanna continue to build.
I think.
Okay.
Jonathan, in terms of timing.
Yeah
Timing on that, I would say, you know, some of that certainly we would expect to occur, you know, in calendar 2022, but some of it will obviously potentially flow over into 2023. We certainly continue to work on those assets that you're referring to. Those are discussions that are ongoing. We're kind of formalizing, you know, a process of selling an additional $500 million to $1 billion that Rob referenced. I think that's kind of in that phase, and we'll see some of that progress this year as well as going into next year.
Got it. Okay. And then maybe turning to that accretion bridge in the slide deck this morning and looking at the 2023 FAD estimate for HTA, it's now, you know, $365 million versus the $390 million previously. That's down kind of 6% versus the last estimate due to the higher rates and less acquisitions that you talked about earlier, Kris. But on the 2023 FAD estimate for HR, standalone, you know, that dropped almost 10% due to the same, you know, higher rates and less acquisitions. Can you just walk us through why the drop was greater for HR versus HTA when, you know, leverage is not that dissimilar, and I think the acquisition activity. Yeah, for this year and future years sounds like it was unchanged.
Yeah. It is, as we talked about, you know, the majority of what the change is really interest rates. Because if you look at the change in net investment activity, they did drop, but we also brought down the shares that was associated with that growth. It really is related, almost all to interest rates. It really has to do with the difference between the fixed and floating percentages between the two portfolios. We've typically run about 70% to 75% fixed in our capital structure. It ended up that HTA at this point in time ended up being almost 100% fixed.
As a result, with the change in the interest rates, it's not having as material impact to them as it does to us. But on a combined basis, we end up in a kinda 80% to 85% you know fixed percentage there. So we think that that's a good place to be right now. It still gives us a lot of flexibility. We'll obviously be watching you know what we can do in the bond markets as well as what we can do with some swaps to term out some of our debt. But that's the reason for the difference of the impact of the interest rates.
Okay. That clears it up. Thank you. One more for me, kind of sticking with that accretion bridge page. You know, the JV and asset sales there show $44 million of FAD removed on the $1.1 billion of sales. Does that imply the you know, 4% yield? How do we kind of square that with the reported 4.8% cap rate on those transactions?
Yeah, this is FAD, and so the difference there is the maintenance CapEx that's associated with it.
Got it. Is that CapEx assumption still the 12.5% of NOI? I think in the last deck, that's what it was. Is that unchanged still?
Yeah. It's in that ballpark.
Got it. All right. Appreciate the time.
Thanks, Jonathan.
Thank you for your questions. Our next question comes from the line of Omotayo Okusanya with Credit Suisse. Please proceed.
Hi. Yes, good afternoon, everyone. First question is around the share buyback program. Again, makes a lot of sense, just kind of given where your implied cap rate is at, you know, kind of mid-sixes or so. Also wondering how you're balancing that against kind of, you know, increased leverage as well from doing share buybacks.
Yeah, I would say.
What exactly can we expect going forward in regards to how aggressive you may get with share buybacks?
Tayo, I think the way we would look at it is we would use disposition proceeds for. We'll basically take disposition proceeds of this program we're talking about, and we will then evaluate fairly clinically, does it make more sense to buy our stock back because it's a better yield, better return, or should we invest in development or acquisitions? You know, at these stock price levels, obviously that could be compelling to buy back the stock. That's how we look at it rather than levering up to do it. I think that's a different order of magnitude question, which we're not really looking to do. This would really be a function of an alternative use of proceeds for asset sales rather than levering up to do it.
I think, again, Kris mentioned six to 6.5 times debt EBITDA. That's a range we're comfortable being in. We're not looking to, you know, accelerate that higher just to buy back the stock. That's sort of the framework we think about.
Okay.
Tayo, the only other thing I would mention, you mentioned an implied cap rate in the mid-sixes. We did provide, Kris referenced, I believe, a supplemental page in our supplemental, sort of a pro forma NAV schedule, and we would look at our implied cap rate being in the high fives currently. We've seen some others coming in around there as well, but our own numbers suggest that. We would certainly encourage everybody to take a look at that.
That's helpful. Then also, you know, the FAD per share growth acceleration. I think, again, the drivers of that all make sense. But you know, in terms of just occupancy gains, I mean, especially again, a lot of it feels like it's going to be focused on the multi-tenant HTA portfolio, where occupancy has just kind of been stubbornly, you know, stuck for a very long time. Again, you guys have had some time now to do some due diligence. I mean, what do you see there that gives you this confidence you can drive occupancy gains when occupancy in that portfolio has not grown for the longest time?
Yeah, I mean, a couple things I would throw out there, Tayo, to think about. You know, one thing we've talked about is a little difference in our leasing approach than HTA's historical approach. We at Healthcare Realty historically have really engaged with the brokerage community and used the brokerage community in markets to really extend our reach to find new tenants and to really help attract, you know, those new tenants that really do expand occupancy. We've begun to see a lot of benefit from that. Obviously, having more scale in a market, more clusters within a market and getting the benefits of that, getting the focus of brokers, getting the first call from those brokers or directly from tenants, prospective tenants, I think is key.
We see a lot of strength building out of that and where we've been able to develop those critical levels of scale. Having much more of the combined portfolio at scale, having much more of a broker-oriented approach, we think we can get a lot of benefit out of that as in the HTA portfolio. You're right, most of that opportunity lies, or at least half the opportunity overall lies in their multi-tenant portfolio. We also think there's a lot more room in the legacy Healthcare Realty multi-tenant portfolio. Kris, I think, walked through some numbers that suggested, you know, north of $55 million of NOI pickup if we can bring both, basically all the portfolio up towards that 90% occupancy level. We think there's just a lot of tailwinds right now.
You're seeing it across the sector. With rising replacement costs, there's just not as much supply that's gonna go up that's affordable. We think that's gonna benefit our buildings, and we're just seeing a lot of demand from providers. I think some of that's pent up from the last couple of years and having their heads down focused on COVID. We're very bullish and we're seeing it come through in the leasing as we talked about earlier.
I might add to that, Todd, that you are starting to see some of that in the HTA portfolio already. It has not flowed through all the way to occupancy.
If you look at their lease percentage, it's up in their same-store portfolio. It's up year-over-year by 70 basis points. This is what I hit on in my prepared remarks, that there is a large amount between both portfolios of leases that are in the process of build out and frankly almost you know double the amount that we've seen historically. As those build outs are completed and are able to be converted to occupancy, we see you know some good upside and very optimistic about what it can do to drive occupancy, which actually drives rent and NOI and overall earnings growth.
I don't think that we're saying, "Okay, we've got a long integration process, and then we might start seeing some." I think that it's already. You can already kind of see it set up inside of their portfolio and ours to start to be able to capitalize on some of this occupancy we're talking about.
Gotcha. If you could indulge me with one more question. One of your peers on their earnings call kind of really talked about a really remarkable mark-to-market of about 8%. I think you guys kind of came in at about 3.5 or 3.4 or so. Just kind of curious, again, with everything you're kind of seeing with inflation, do you expect mark-to-markets to accelerate going forward? Or how do you kind of look at that versus the need to kind of manage the client relationship?
Yeah, it's a good question. We saw that as well, and certainly wouldn't take anything away from the numbers that you know, Physicians Realty put up. Certainly a great quarter of cash leasing spreads. I think in their own remarks, though, they acknowledged that you know, it's not exactly what they expect the next couple quarters. But I think like them, we would agree there's definitely tailwinds here that you know, give us optimism about continuing to push rate. I think with replacement costs being clearly up significantly, build out costs are up significantly, both for you know, leasing activity as well as development, that gives us some tailwinds to continue to push on rate. You know, even higher rates being a lower cost alternative than something new, a new development. We're optimistic.
I'm not gonna say that 8% is the new norm at all. You've seen us in past years put up some numbers that are, you know, getting up to that order of magnitude. I think our view is we think 3% to 4% is, you know, very doable and occasionally, you know, getting, you know, in the 3% to 5% range is feasible as well. You know, directionally, I think we're optimistic on that just like our peers.
Thank you.
Thank you for your questions. Our next question comes from Michael Griffin with Citi. Please go ahead.
Hey, it's Michael Bilerman here with Griffin. Todd, if we could just sort of get back to the cost of capital. You know, as you think about, sort of where the company is today, you know, obviously the cost of capital for the entire sector overall in the REITs has moved up pretty dramatically since last August. For you specifically, it's moved up more, right? Your stock's down more, right? Your implied cap rate, I mean, implied cost of equity is up. More so on the debt side, your spreads have gapped out wider than where REITs are.
You know, I think to the value, Todd, that you've been able to create over time at HR, a lot of it has come from external investment, either through acquisitions or through the development or redevelopment activities that the company has undertaken. Now that you've done this transaction, obviously the market has spoken in terms of. I don't think the market, unless maybe you think the market's missing something, but the market is clearly, I don't know what we'll call it, putting you in a penalty box, but your multiple is clearly low, lower than where it has been in the past, which you've shown in your slides. You have very limited free cash flow, right? $1.30 of a dividend relative to the $1.45 of FAD next year.
Leverage is at the higher end of where you want, so you can't be as aggressive without selling assets. I guess, how do you get to the other side, right? What's the catalyst that you're looking for the market to recognize for you to be able to have that cost of capital to be able to embark on that accretive growth.
Sure. Yeah. Fair, you know, framework and question. You know, I think clearly where we are today is we've just completed the merger, and I think as no surprise, that's why I articulated these four priorities in my remarks. Clearly, we need to keep demonstrating progress and success on the asset sales and the JV. I think people wanna keep seeing that progress. It's a tough market out there. We all know. We're all trying to figure out where cap rates are and where they're going, with rising debt costs. So I think people wanna see that come through. I think we clearly need to keep showing progress on the synergies. But I think probably the key, you know, answer to your question is in the near term, it's what Kris just talked about on leasing.
It's that leasing momentum and really driving operational improvement that, like Kris said, we're not waiting, you know, two years from now to get to. We see that progress coming, and we're excited about getting after that and demonstrating those results, and we think it's coming true. I think clearly development is also a piece where we think we can create long-term value that's, you know, higher returns. But at the end of the day, you're right, we obviously need to show progress on all those things and kind of earn back that reputation for delivering those results so that we can get back to a valuation, a multiple that makes sense to grow, you know, through external growth as well.
'Cause it takes all those pieces, as you well know, to deliver that 5% to 7%, you know, per share growth. We know that, so we've got to get back to that. But I think for us, it's just executing and showing how we can drive the operational benefit of this combination to then get back to that external side.
I guess the question is how long it takes to get there and potential capital and sort of the execution of it because, you know, we're gonna go through.
Yeah
two years, almost two and a half years, right? Where, you know, like you call it an accretion bridge. I mean, I jokingly said you just call it a bridge 'cause you're ending up with the same number, right? There's no accretion. It's a $1.45 start, and you're a $1.45 at the end. At some point, right, you need to be able to demonstrate that there's, you know, a real reason why the company pursued this merger. I recognize you did a stock for stock deal.
Sure
You used the asset sales to fund the dividend, and I understand, you know, the contribution. That stock for stock, you effectively offered, you know, a higher exchange ratio 'cause you are the buyer, right? You have to play ball, so you step back from that, you know, how do you get to the other side? 'Cause I mean, is leasing that different now that you're a combined company from where you were before? I would have thought you had pretty good relationships in both companies. I mean, the margin is not like you're gonna get 20 deals versus getting 10, right? Help me understand that part.
Yeah. Sure, sure. I mean, I think as Kris said, even independently, both companies are seeing momentum build on the leasing side, so you're right about that, you know, both companies have, you know, relationships and strengths and ability to produce leasing results. We do see more powerful results through the combination. You know, just the sheer volume in the markets. We think though, ultimately, that leads to also more opportunity through expanded, you know, development activity, redevelopment activity, where you can actually create net new space. We see a lot of opportunity there, and we think rent growth itself will be strengthened. Not just gains in occupancy, but actually being able to, you know, dial up that rent growth. We think we can do that better through this combination.
Again, it's not something we're saying that's three years off. We think that's coming, you know, in the near term. We'll be able to track that as we're also tracking some of these other, you know, specific merger metrics as well. The other thing I would comment on, though, is that the combination does give us a lot to work with in terms of asset sales. We can sell what are, you know, quality assets to the market, but maybe don't fit for us as well. We can sell them at, you know, maybe a sub five cap rates. Maybe it's, you know, a little above five cap. We can rotate that into, accretively into other investment activities. Let's say it's not our stock. Maybe our stock's, you know, in a better spot.
It doesn't make sense to buy back. We can invest in higher yielding acquisitions. We can fund higher yielding development. I think there's. It's not just, you know, hit the pause button completely. I think it's clearly a mind towards, you know, smart capital allocation here.
Right. When you put the two portfolios together, there's more opportunities to sell down because you have a greater scale, so less impact, and you're being able to maintain the platform and things like that. That definitely makes sense. One thing just on the bridge page, does this include anything on additional asset sales and tapping into that buyback or all of that is separate? That's something that we should think about, you know, as we start to model for 2023 additional asset sales and buybacks. There's nothing in here particularly for that, right?
Yeah. There is not in terms of share buyback. What we are assuming here is the change in net investment activity, that it goes into more of an asset recycling. We, inside of this, we're assuming that we're selling assets and redeploying them in new acquisitions. But as Todd said, we would make that determination dependent on when those proceeds come in and where our share price is. And so if the share price is more accretive, then you know, obviously there would be some upside here in terms of what the accretion would be. But we'll have to wait and see where that is.
How much accretion?
what the timeline is.
I guess how much accretion do you have in here from capital recycling then? Because I would assume selling assets and buying assets, if there's a positive spread, you could have some accretion. Or is it limited?
Yeah. Yeah. We do. We're running, call it about 30 basis points or so, 30 to 40 basis points of spread between our acquisition and disposition inside of here, with the ability to, you know, to sell as Todd was talking about. You know, portfolios and reinvest those into individual assets, so we're not paying the same portfolio premium.
What is that? Because I assume that part of that's 2022 and 2023. How much accretion is based in that $45 from accretive capital recycling?
So-
$0.05? $0.10?
Yeah, no. I would say it's more in that $0.02 to $0.03 range. You know, pretty similar to what we would have historically there. You know, once again, it goes back to what. You gotta. You kind of have to build it, so I'm sorry I'm not able to give you just a direct number because it kind of builds over time. Yeah, in that $0.02 to $0.03 range.
Yeah. We're just trying to understand what's in there so that as we go through and benchmark, we actually understand what's coming in and out. It may be helpful to include these slides in the supplemental. That way, you know, we heard from some people that they didn't realize it was out there. You know, perhaps just wrap that into the press release and the supplemental in Q3.
Sure.
Thank you.
Thanks for that.
Thanks, Michael.
Thank you for your questions. Our next question comes from Daniel Bernstein with Capital One. Please go ahead.
Some of my questions were actually just answered. I just wanted to go back to kind of how you're thinking about the buybacks versus investments. I mean, kind of like you said, you're in the upper five implied yield, but the real IRR is probably a lot higher given the upside in HTA occupancy. I don't know if you can just talk about maybe kind of the process a little bit more of buybacks versus investments, especially at the current stock price.
Yeah. I would say, Dan, you're right. I mean, I think we, you know, buying back our stock, we think is a great investment, not only because it's at an attractive yield, but you're right, there's some real upside there. We would agree with that. We would compare whatever we might be looking at to reinvest in. Let's say we sell $500 million of assets, and you know, we're looking at do we rotate into some acquisitions. Do we rotate into some development or some combination, or do we just buy back stock? I think it's pretty clinical. We would look at the types of IRRs we might be facing with some acquisitions that we might be looking at with some development versus what we would infer from buying back the stock.
I think we would just look at that very clinically and choose to do that. I think, you know, at today's prices, you know, the stock's pretty darn attractive, so that would probably be a clear preference at this point.
Okay. I just, you know, maybe there's some historical perspective you can give on when you have really wide bid-ask spreads in the MOB space. Typically, you know, what could we expect in terms of timing of when that might close? If it's wide today, you don't wanna push the investment side, the external growth side as much today as you would have, you know, a couple of months ago before debt costs went up. You know, when could we expect higher cap rates, initial yields in the MOB space? I know it's a big ask. You know, we're mid-2022. You know, you might be looking at mid-2023 or something. Is it a six-month process, three-month process? Is it typically longer?
I know it's unusual times, but, you know.
It's-
That's kind of where I.
I think it's really difficult.
Just if you have any historical perspective.
To answer that. Yeah. I think you can't necessarily just rely on history. I mean, normally, maybe I would've said, you know, six to 12 months. You know, Rob, I don't know if that's what you would say, but I think that's what we would typically lean on. I think we've seen tremendous interest from buyers to get at quality assets, and you know, see portfolios coming. As Rob said, we've kind of pulled this back to about $100 million to $200 million portfolios, and we've seen a ton of demand, so, and plenty more to go. We think there's plenty of capital out there. They're just trying to figure out how to, you know, keep buying these assets and deal with the rising, you know, debt costs in the market.
It's again, very difficult to say. You know, it could take. I think we're all trying to figure out exactly where debt costs are going. You know, it feels a little bit like it, you know, overcorrected, but yet we all know it's still sort of poised to rise over the long term. I think it's just gonna take a while. I don't know if that's, you know, six months or a year, but it's.
Okay.
I'd argue, you know. We're into six months now, so it's longer than that, and we'll see.
Okay. That's all I have. Appreciate the call. Thanks.
Thanks, Dan.
Thank you. Our next question comes from Jonathan Hughes with Raymond James. Please go ahead.
Hey, thank you for the follow-up. On the share repurchase program, I see that was authorized a week ago, but was also authorized, I think, back on May third. Is it only a three-month authorization? I'm just trying to understand why the need to kind of redo that program, you know, from May, and if it really is something new.
It was really just because the merger was completed, and we obviously wanted the new Healthcare Realty Board to authorize that. It was really just I would say that's a year, I think. I believe, Kris, is that right? It's basically authorized for a year.
We-
is the typical timeframe.
Yeah. I can't remember specifics in that language, but we typically look at that every year. Todd, you're right that we already had it. With the new board, we needed to go ahead and get that reauthorization.
Got it. I noticed in the supplement, I think the components of expected FFO page was removed. Can you just confirm, you know, expectations for, you know, same-store NOI growth are unchanged or maybe even, you know, higher since the legacy HR portfolio is actually running north of, you know, 3%, closer to that higher end of guidance from then?
Yeah, you're right. We did pull back because the way we're presenting these, that we didn't think just providing a standalone HR guidance by itself would be that helpful to people. You know, we will be, you know, in the coming quarters, you know, providing some more update. As you heard in our remarks, our expectation of what we're seeing related to leasing, as well as our cash leasing spreads and bumps is really not had a material change. You know, on the combined basis as you just look at it in terms of where the contractual escalators are running, in that kind of 2.5% to 3% range is a reasonable position without any changes in occupancy.
As we talked about, we're optimistic that we could see some upside in occupancy moving forward, which could help drive that higher.
All right. Thanks for the time.
Thank you, Jonathan. Our next question comes from Mike Mueller with J.P. Morgan. Please proceed.
Yeah, thanks. Kris, I guess I appreciate the comments on accounting issues, but is there any shot of providing even rough FFO guideposts for 2023? I mean, that is, you know, the most standard reporting metric, and when you look at consensus estimates now, the range is, you know, high $1.60s to almost $1.90, so it's pretty wide.
Yeah, that's fair. Yes, we'd like to be able to provide some additional even if it reflects some of these non-cash accounting items. You know, I don't have the full. We're still going through the opening balance sheet and the valuation of that information, so I don't have that to be able to provide to you right now. Frankly, that's gonna be what creates more, you know, a wider range of potential outcomes depending on where that lies, rather than the underlying fundamentals, which are gonna tie back more to the FAD numbers that we're providing to people.
You know, 'cause one of the things that we're gonna do is we have to mark to market the, you know, all the debt, so over $3.1 billion of debt that's on the HTA was on the HTA balance sheet. So depending on what the ultimate rates are that are determined there compared to what's inside their current pay, it could have a meaningful impact. So I think that probably is driving a lot of the difference. Hopefully as we are able to get more clarity on exactly how those numbers come out, we'll then be able to report it.
You know, regardless, I still look at it as yes, people look at that and it's meaningful, but I would say that those adjustments are not as meaningful to what we think the underlying value and cash flow of the combination are moving forward, which is the reason you see us focusing more on the FAD growth.
No, I appreciate that, but I'd imagine the range would probably not be the $0.20-some cent range that it is now, at least what's on Bloomberg. You know, again.
Yeah.
That's the headline for it, so.
Yeah, I get that. I think it also depends on, Mike, the way people have different views of how they do this, and I can appreciate that, of how they look at the synergies. You know, some people will kind of normalize that and assume that you've already gotten it. Some of them will assume that, all right, no, you're gonna have that drag. I do think that there may be differences in people's methodologies or definitions of how they're looking at some of those earnings result numbers.
Got it. Just one quick one too. Do you get to the roughly $300 million of annual development starts? What's a ballpark timeframe, do you think, for that?
You know, there's a lot of—we're seeing a lot of demand from health systems for development, which not only from our internal and kind of embedded pipeline, but then as we're looking at HTA's pipeline, we're seeing a lot of demand and have some good discussions going on. We think that, you know, to kind of get to that at $200 million to $300 million in annual starts.
Mike, can you hear Rob?
No. I heard get to-
Okay.
The $200 million to $300 million starts.
Rob? Yeah, okay. Unfortunately, I think we're having these technical problems. I'm not sure what's going on. I'm on a separate line on my iPhone 'cause I'm isolating for or recovering from COVID. I'm on a different line. Anyway, I think if we were to put some time on it, Mike, I would say it's probably not, you know, 2023, but I think it's building, and I think it can get we can get to that pretty quickly, maybe by 2024. We're seeing a lot of demand, as Rob said. I do think that's gonna pick up pretty quickly, both picking up ours versus you know, HTA's, put them together, we think we can get there pretty quickly. I don't
Got it.
It looks like Rob and Kris are not on audio. They're not gonna be able to join back in.
That was it.
Mike, I think you were the last.
That was it. I'm good.
You were the last question, so, that unfortunately worked out okay. Again, apologies to everybody for the technical difficulties. My iPhone wasn't reliable this quarter. Well, thank you all for all the questions. We appreciate your time today. We look forward to seeing many of you at conferences in the fall here as we wrap up summer, and look forward to catching up with each of you then. Thank you all. Have a great day.
That concludes the Healthcare Realty Trust second quarter financial results. Thank you for your participation. You may now disconnect your line.