Good morning. Good morning, investor and analyst guests. Welcome to Healthcare Realty's Investor Day in Raleigh. My name is Ron Hubbard, Vice President of Investor Relations. It's nice to see many familiar faces here, and great to see some new and prospective investors in the audience as well. Everyone should have a booklet in front of them on the table. The booklet does start with a property tour, but the management presentation exhibits are in a smaller format in the back. The management presentation is also posted online this morning in large format. So if you prefer that, go to the website and download that. You can take notes on that or in the book. Also, a note on the cameras and electronics.
This event is not being recorded live, but the cameras will be with us throughout the day, even on the buses, and even in some of the property tour visits. That was done so we can prepare a short video highlight afterward and share that. Next week, sometime, we'll post that. With that, I'd like to hand the podium over to our President and CEO, Todd Meredith.
Thank you, Ron. Well, thank you, everybody, for coming today and joining us in beautiful Raleigh. We appreciate you making the trip and spending the day with us. Thankfully, we have a beautiful day to enjoy, and we'll definitely get outside a bit as well. We have a large group here from Healthcare Realty, and it represents our key strategic functions, so I'm not gonna introduce everybody individually. There's actually some pictures in your tour book of a lot of the folks. But I am gonna ask, just for a minute, if all the Healthcare Realty team members would stand up here, and so you guys can just take a look around and see who's here, 'cause it's a much broader group than the usual Three Amigos that you get to see, myself, Kris, and Rob. So got a lot of folks here.
Hope you get a chance to talk to some of them on the tour as we go, pick their brain, even at the concert. We'll all be there. So, also, really just want to address why are we here today? Gotten a few questions about Raleigh. We'll touch on that. Our real goal here today is to show you how we're leveraging our market scale and relationships to create value and accelerate growth in the MOB sector. And, of course, at the same time, deliver value, stability to investors, what you expect from the sector. We'll also provide updates on the progress we're making on two key fronts, our disposition and JV activity, and of course, our leasing momentum. You'll also hear from others as well, not just us.
As Ron said, you'll hear from a number of our top brokers and health systems. These are valued relationships that are key to our success. For those of you who've followed Healthcare Realty for a while, you remember we were pursuing market scale well before the merger with HTA last year. We've had scale in Dallas for quite a long time, but it really started to pick up in 2016 as we grew our Seattle portfolio to more than one million sq ft. From there, we accelerated our efforts to gain scale in more markets through disciplined acquisitions and developments. Five years later, by the end of 2021, we reached the same level of market scale in five markets, comprising about 1/3 of our portfolio.
Of course, in 2022, the HTA merger elevated our market scale with a million sq ft or more to 15 markets, representing about 60% of our portfolio. So what's so critical about market scale? That's obviously what we want to show you today. Through many years of experience, we know that healthcare delivery, much like real estate, is a very local business. The stronger our local presence, the better we know our customers, the physicians, the hospitals, the more we can help them execute their growth strategies. Working with the right health systems in the right markets, we can source more acquisitions and developments. We can generate higher occupancy and faster rent growth. So Seattle is really where we started to see the benefits of market scale come together. It was even better than the scale we've enjoyed in Dallas for many years.
A key difference was the breadth of the health system relationships. In Dallas, we had one great relationship with Baylor. But in Seattle, we developed great relationships with five different health systems. We really saw the power of having diverse clusters centered around multiple thriving hospital campuses across the MSA. And importantly, our performance in Seattle showed superior results to what you typically see, about 2%-3% in the MOB sector. We were averaging about 4.5%, even through the pandemic. So we developed a clear strategy to differentiate HR from the typical far-flung MOB portfolio that might be well-diversified, but lacks any operational synergies or upside. So based on this experience, we sought to make our portfolio look like a collection of Seattles.
As I mentioned, the merger with HTA expanded our market scale to much more of our portfolio, 60% in our top 15 markets you see here, and then, of course, 80% in our top 27 markets. Seven of these top 15 markets are projected to be among the top 10 fastest-growing MSAs over the next five years. We clearly have a strong competitive market position in these markets, typically well ahead of our next largest competitor. Since the merger closing, we've been 100% focused on applying the HR model to unlock the value and accelerate growth by leveraging our market scale and relationships. Our primary goal is to increase occupancy, especially at the HTA properties, but also in our largest markets where we have scale.
We also have a goal of refining the portfolio further through dispositions, to focus our resources where we can really take advantage of operational scale, efficiency, and upside. So this brings us to today. Some of you have asked, "Why are we in Raleigh?" So the Raleigh area, which is often called the Research Triangle, or just the Triangle, is a perfect example of Healthcare Realty's market scale and strong relationships, especially post-merger. Raleigh has incredible, incredible demographics. It's the 41st largest MSA on its own, and combined with Durham, Chapel Hill, it approaches the 30th largest MSA, with well over two million people. It's been the second fastest growing metro area since 2010, just behind Austin. And over the next five years, it's projected to be the fourth fastest growing MSA. So Raleigh was a target market for HR.
We acquired seven buildings here, totaling 250,000 sq ft just prior to the merger. But HTA really had more significant scale, with 18 buildings totaling 850,000 sq ft. Our combined assets are with the top three health systems you'll hear about today, WakeMed, UNC Health, and Duke. Of course, we've seen incredibly strong leasing momentum in Raleigh just since the merger. We're over 95% leased here, with the largest signed, not yet occupied gap over occupancy of any market in our portfolio. We have a development pipeline, including one active project that you'll see today on our tour, and two future projects that we'll talk about that demonstrate our ability to work with health systems to meet the robust demand for outpatient space. We clearly have a differentiated strategy.
We've got competitive advantage with unmatched scale and great markets, with strong relationships. We have all the right ingredients, many of which are listed on this page. So how do we translate that to a business model that produces differentiated, higher growth? Well, it's simply based on the premise that rents rise to the level of replacement costs. First, we select the right MSAs, where strong demographics drive the need for outpatient medical services. We amass a cluster of MOBs around a thriving hospital campus. We operate and maintain those assets really well. We improve the experiences for our tenants, and then we invest in those buildings. We become a trusted, collaborative partner with the hospital. We continually put creative development and redevelopment ideas in front of the hospital to address their need for more outpatient space.
As demand exceeds supply, we develop or redevelop a building at replacement costs, with rents that are often 20%-30% higher than the existing rents. Rents in our existing assets then begin to rise, with plenty of room underneath those higher rents that were established at replacement costs. We build market scale by repeating this across the MSA, around numerous thriving hospital campuses that are associated with multiple health systems. It's a model you'll see here in Raleigh, and it's a model we want to replicate in many markets across as much of our portfolio as possible. To their credit, HTA, before the merger, amassed some great assets in great markets, and many of them near thriving hospitals.
In our view, they were missing a couple key ingredients: the ability to truly operate and maintain the assets well, and the ability to be a trusted partner with the hospitals. HR has a tremendous opportunity to unlock value and accelerate growth by applying the HR model to the HTA portfolio. This is a big undertaking. It's not gonna happen overnight, but we're making progress. We've said it before, it'll take us three to five years to realize the full benefits of the combination. Of course, the macro environment has not exactly been helpful, but we're focused on what we can control, where we can create the most impact. We're making great progress on two near-term priorities. First, generating additional proceeds through dispositions that will reduce our variable rate debt and our leverage, and we're driving leasing momentum that will improve occupancy and accelerate growth in 2024.
I'm gonna turn it now over to Julie Wilson. Some of you may have met her, but I'd like to introduce her. She's our EVP of Operations. She's responsible, first and foremost, for operating our assets really well. This is the cornerstone of how we become a trusted partner, hospital partner, with all of our health systems. Julie also oversees marketing, technology, and ESG. She's been with the company for 22 years. She and I joined the same month. And, she actually most recently led our merger integration efforts. So I'll turn it over to Julie.
Good morning. We were pleased to publish our Fifth Annual Corporate Responsibility Report this week. I'm really proud of our ESG team, who worked hard to gather data and report on the combined portfolio. HR has a demonstrated track record of success with ESG, and we're applying that to the HTA portfolio. Last year, HR reported utility data coverage of 89%, compared to HTA's 12% coverage. After the merger, our ESG team really dug in, increasing data collection from 40% to 69% for the combined portfolio. As we reported on Monday, that effort paid off with a 2023 GRESB score of 75, a 29% improvement over a composite of the standalone companies in 2022. Another area, one that's close to my heart, where HR has demonstrated success, is property operations.
Over the past 14 months, our operations team has focused on instilling HR's customer service model across the HTA properties. As we integrated the HTA portfolio, our teams met with tenants and health systems, hearing a common refrain about poor customer service. The repeated message: HTA had gone home for COVID and not really come back to the buildings. Rob is gonna talk about how that impacted occupancy.
We knew that we needed to promote the HR customer service model, employee presence in the buildings, quick responsiveness to physician requests, and show ready spaces to aid the leasing team. We know, and we have been able to prove with tenant retention statistics, that being patient and physician-centric bolsters retention and new leasing efforts. As we met with physicians and health systems around the country, we wanted to establish a baseline to measure stepped-up customer service efforts.
Like many commercial real estate companies, HR uses Kingsley Surveys. We had a consistent survey cadence dating back to 2016. In contrast, HTA conducted its first Kingsley Survey in 2022. This summer, we conducted a Kingsley Survey for the combined portfolio. The results show that HR service model has made a meaningful difference in the HTA portfolio in just one year. First, tenant satisfaction improved significantly, closing over half the gap between legacy HTA and HR scores. A primary care physician in Tampa commented on increased building cleanliness and the open door at the management office. Maintenance service scores increased. I'm so pleased about the improvement on this metric. Our property engineers are the face of our service model, interacting daily with patients and physicians.
In this year's survey, an oncology practice manager recognized by name an engineer who helped a lost and sick patient park his car, get to his appointment. After the appointment, the engineer went back, brought the gentleman's car out front, after the appointment. That service level is a hallmark of Healthcare Realty and has a direct impact on tenant renewal decisions. Using these scores as a baseline, we expect that future Kingsley improvements will mirror leasing velocity and tenant retention. I've described some of HTA's shortcomings. Now I will turn to some of the strengths that both companies brought to this much larger enterprise. HTA, hands down, contributed a more sophisticated technology platform and a robust FP&A team that has added value to our analytics.
Combined with HR's leasing model, HTA's project management expertise, a dedicated team to deliver space, will accelerate speed to rent commencement for Signed Not Occupied leases. We're teaching you an acronym today, Signed Not Occupied, or SNO, S-N-O, that Rob is gonna talk about in a few minutes. HR builds solid tenant and health system relationships, a powerful lever in markets where we've expanded the portfolio. You'll hear about this directly from health system administrators this afternoon. Finally, our organizational strengths are also apparent in the speed with which we delivered our G&A synergies in 2022. At June 30 of this year, our G&A is at a level that is very efficient within our sector. I'm gonna turn this over to Kris to discuss recent disposition activity. We're really glad that you're here in Raleigh and can't wait to show you the properties today.
Thanks, Julie. So this first slide gives an overview of asset sale activity, which we also highlighted in a press release this morning. As you can see, we're making good progress on dispositions this year, with more expected moving into 2024. We closed on over $200 million of sales since the end of June, bringing us to $318 million year to date at a blended 6.8% cap rate. Proceeds are first used to fund development projects, with excess proceeds available for debt repayment. The debt repayment will help bring leverage back within our target range of 6x-6.5x, while also reducing our floating rate debt exposure. Variable rate debt is currently about 15%, which we expect to get closer to 10% and potentially lower in the next few quarters.
As you think about our leverage reduction plans, there are a couple of heuristics to keep in mind. So all else equal, for every $100 million of debt repayment from asset sales, leverage is reduced 0.07 x, and for every 1% growth in NOI or EBITDA, there's also a 0.07 x reduction in leverage. As a result, with a combination of debt reduction and NOI growth, leverage can decrease by as much as a half a turn through 2024. In the current rate environment, we certainly have a view that lower leverage is better. We discussed earlier this year that we'd be looking at a JVC portfolio with sizing of $500 million-$1 billion. Given the current market backdrop, we're leaning towards the lower end, with estimated proceeds of $400 million-$500 million.
Eastdil is our advisor on the JV process, and they've released to select investors an offering memorandum after Labor Day. Members of our team were on the road with Eastdil this week and last for initial meetings with potential partners. The feedback from these meetings has been very positive. We've not picked a partner yet, so don't know the final terms, size, and structure, but we'll have more to report on the JV process in the months ahead. The over $300 million of assets under contract or LOI will more than cover our 2023 and 2024 development commitments. This means the proceeds from a JVC portfolio can be allocated to debt repayment. What you'll see on this slide is a comparison of the property attributes of what we're selling versus our overall portfolio.
For example, in the top left chart, you'll see only 61% of the dispositions are MOBs, compared to our portfolio average of 92%. By selling more non-MOBs, single tenant, and slower growth properties, we're able to enhance the proportion of the portfolio, where we can apply our operating model that Todd discussed. That will allow us to accelerate growth. These sales are viewed as portfolio cleanup, and typically, portfolio cleanup is very painful to earnings. However, we're in a favorable period where we can redeploy proceeds to pay down floating rate debt with little to no dilution. We will continue to lean into this opportunity while it remains available. These charts also show that the JVC portfolio is very high quality and aligns well with the attributes of our overall MOB portfolio.
By selling into a JV, we're able to accretively raise capital for further variable debt repayment, while maintaining the ability to apply our operating platform to generate value from these assets. So asset sales to decrease leverage is one major priority. Another major focus is increasing occupancy, which you will hear about from across our team. Today, we're not specifically providing 2023 and 2024 guidance, but we'll touch on some of the key building blocks of growth, a major component being occupancy and NOI upside. We've disclosed before the $59 million of annual NOI upside from increased occupancy that's seen on this page. But people have asked exactly where in the portfolio is the opportunity for improvement? 51% is in the HTA same-store properties.
By bringing the HTA properties back to their pre-COVID occupancy of 87%, we can generate $25 million of incremental annual NOI. 26% of the upside is in the redevelopment properties. The redevelopment properties have current occupancy of 56% and are 65% leased. Converting the 900 basis points of signed, not yet occupied space to occupancy in the next few quarters generates over $3 million in annual NOI. Another way of looking at the opportunity is through the lens of our top markets. This is important, as you will hear from Rob in a moment, on the outsized leasing success we're having in our markets with scale. We can achieve 93% of our upside by bringing each of our top 25 markets up to our target occupancy of 90%.
The markets with the largest upside opportunities are Houston, Dallas, Denver, and Los Angeles. Later today, you'll hear from health systems and leasing brokers that cover each of these markets. This will allow you to hear firsthand how our differentiated model will help drive lease up in their particular markets. Now I'll turn it over to Rob to dive into some more detail on leasing.
Thanks, Kris. I'll spend my time updating you on leasing trends since closing on HTA, particularly the tremendous leasing momentum throughout the portfolio. Most of our activity is coming from two primary areas, our top 15 major markets and HTA's multi-tenant portfolio. We expect this momentum to translate to accelerated occupancy gains in 2024. So what's happened since the merger closed? In the HR portfolio, occupancy is up about 80 basis points, a testament to our operational expertise and effective leasing model. In contrast, the HTA portfolio has declined about 60 basis points. This was driven by two things. We adopted some strained health system relationships produced by subpar management. This was probably our biggest challenge as we began integrating the two companies.
Also, during the first quarter after the merger, we took time to implement HR's leasing model across HTA's multi-tenant properties to take advantage of the strong underlying portfolio. Combined, total occupancy is estimated to remain relatively flat through the third quarter. That's the history, but what's more exciting is where we are headed. Since Q1 of this year, the first full quarter where our leasing model was in place, we have seen HCA's lease percentage increase 100 basis points. At the end of the third quarter, the difference between our total leased and occupied percentages is estimated to be 200 basis points. This is a strong indication of future occupancy gains. In this next slide, we break down our new leasing activity. During the third quarter, our leasing team signed new leases totaling 447,000 sq ft, a record for our company.
This is up 86% over the first quarter of this year. Almost 70% of our new leases are for properties in the top 15 markets. These same markets represent only 60% of the entire portfolio. As Kris mentioned, these markets are where 79% of our NOI opportunity lies. Our team is taking advantage of the scale created by the merger and getting results where we have the greatest opportunity. This recent leasing momentum sets us up nicely for future occupancy gains in 2024. Within our top 15 markets, we currently have over 460,000 sq ft of signed, not occupied leases, or SNO. This translates to a 240 basis point spread between the leased and occupied percentages, which is up nicely from 150 basis points in the first quarter.
Additionally, our total leasing pipeline is currently over 1.5 million sq ft across the entire portfolio and is poised to fuel new leasing in future quarters. Now, this slide looks a lot like the last one, but there is a difference. This one is just focused on HCA. Since the first quarter, new leasing volume from HCA has increased almost 80% to 269,000 sq ft. What is notable is that the new leasing from HCA Properties has produced just over 62% of our total new leasing volume this year, where they only represent about half of our total multitenant portfolio. This momentum has produced solid improvement in our outlook for future HCA occupancy gains.
SNO leases in the HCA portfolio represent 260 basis points of future occupancy, up from 150 basis points in the first quarter. We expect most of these leases to commence over the next two to three quarters. Our success comes from having our leasing model fully engaged, along with the improvement in tenant relations and overall satisfaction. Now, over the next three slides, I'll focus on three tailwinds that are driving demand in the sector: tightening supply, aging demographics, and improving provider fundamentals. Here, we have a high-level snapshot of the underlying supply and demand backdrop for MOB space. Development starts and completions have been trending down, indicating a favorable backdrop for future improving occupancy. Data from Revista and HR's top 15 markets illustrate the benefits of tightening supply.
I think it's important to pause here and note that when I say HR's top 15 markets, I am referring to the combined HR and HCA portfolio. Both Revista and HR property sets have seen an increase in occupancy over the last year, as absorption has remained steady. The challenging debt market creates a larger hurdle for new supply, suggesting starts will remain lower for some time. An even greater driver of demand for the MOB sector are favorable demographic trends. The population represented by those 65 years plus is the heaviest user of healthcare services and currently represents just under 18% of the country's population. This same segment is expected to increase over the better part of the next decade by over 13 million. This represents 76% of our population increase in the coming years.
Growth from this age group, along with the continuing trend for providers to push services to a more cost-effective outpatient setting, is the cornerstone for increasing MOB demand in the coming years. Our health system partners are also seeing better financial performance this year. Post-COVID, hospitals saw a surge in volumes from pent-up demand. However, last year, they struggled financially from continued labor challenges. This year, we are seeing hospital financial performance improve as volumes increase and labor challenges stabilize. As an example, year-to-date surgical case volume growth is almost four times greater than it was pre-COVID. Likewise, in a recent national hospital report published by Kaufman Hall, they show an improving hospital operating margin index over the past year.
In this same report, they write, and I quote, "That now is an opportune time for hospitals to reinvigorate strategic, financial, and capital planning efforts that may have been previously curtailed." This recent inflection has given health systems renewed confidence to execute on strategies to capture additional market share. Recently, I met with an executive from a leading health system in the Dallas-Fort Worth area. He told me that their margins and cash position had improved substantially. As a result, their team is again focusing on market growth, and he is working on projects as far out as 2026 and 2027. Specific to HR's health system partners, over the last four years, we have seen eight of our top 20 receive credit upgrades. Only one received a downgrade. And I think it's worth noting, the health system that did receive a downgrade remains strong with an A+ rating.
Now I'll touch on our relationships that are an important part of our success. The merger provided an opportunity for us to grow with many of our existing health systems. It also brought us some new, sizable relationships. Some of the more notable ones are listed in the table on this slide. Later today, after we make our way to the WakeMed Cary campus, you will hear from leaders of these various organizations in a video we have prepared. In the case of WakeMed, a member of their leadership team, Tom Cavender, will join us live to share his thoughts on the merger and our new relationship. Some key themes you should pick up on: our existing health system partners see this as an opportunity for further growth with a known partner they have confidence in.
For many of our new relationships, merger gives them a fresh start with a landlord they can look to as a trusted partner. A primary benefit to both groups is that expanded scale provides them with more options to locate growing services and third-party physicians. Across our entire portfolio, we continue to have a lot of positive dialogue with health systems. One notable example that I'll touch on briefly here: In the upcoming video that you'll see this afternoon, you'll hear from the CEO of an HCA hospital in Houston. He will make a strong reference to their strained relationship with HCA. The hospital, this hospital, had not leased any new space in HCA's buildings for almost five years, not because they didn't need it, but because of the soured relationship.
Fast-forward to today, in this past quarter, the hospital signed a lease with us for new space in those same buildings. We are collaborating with them on campus upgrades as they plan for an expansion of the hospital. Finally, our brokerage relationships are key to driving occupancy. Through the merger, our brokers saw their HR portfolios more than double in our largest markets. Greater scale drives greater product optionality, deal flow, process efficiencies, and focus on our portfolio. Brokers gain confidence in us through small pieces of our process, like lease negotiation and vacancy preparedness. What's key about this slide is the map illustrating the diversity of brokerage houses represented throughout the portfolio. Rather than striking a deal with one or two national groups, we task our directors of leasing to identify the best brokers in each market and bring them onto our team.
We're gonna open it up for Q&A right now. Let's first start and direct our Q&A to Brett and Wes while they're up here for the first five or 10 minutes. And we'll have, plenty of time for corporate Q&A after that and for the rest of the day. If you're pointed out for a question, please stand up, and we've got two Healthcare Realty reps on the side that will hand a microphone to you. There's one. Mike?
Thank you. I was just wondering if you could kind of talk about the relationships between the health systems in a market like this, and how you navigate overlapping demand amongst health systems or those relationships where maybe they're not so keen to deal with the same landlord, or if that ever comes up?
Through the years, they have learned to hate each other and work with each other at the same time. It is kind of a landlord's dream here in Raleigh. You have three systems, and they are not shy about spitting in each other's eye. So in other markets, and we do work in Virginia and some other places, the hospitals don't tread on each other. They do here, and they do it openly. That is a tremendous advantage to us as landlords, to you as landlords, because unless you've agreed to some exclusivity clause or something that, you know, may be legally enforceable, you can go to all three, and you can go to others that we're starting to see private equity-backed groups that we haven't seen in Raleigh before.
So now we have three, plus all these big players coming in. When you drive around today and you do your tour, you're gonna see WakeMed's name across the street from UNC's hospital. You're gonna see Duke's name across from UNC's hospital. And a lot of people don't know this, it really is one of the best landlord positions you can be in. To motivate hospitals to do something quickly, you have to have a trigger. You can't play nice. ... I don't want that to get out to the hospital system.
You're a bully.
But they recognize... Yeah, you don't wanna be a bully, but you do wanna say: "Look, I'm not gonna hesitate. We're not gonna hesitate to go to Duke. We're gonna go to all three of you." And we've had that happen recently on properties, specifically in Cary, and you either pull the trigger, and you do it under our terms, that are fair for us. I'm joking. But it's a wonderful position to be in, and it's been that way for quite a while, but dating back to the late nineties, there were a lot of sites out there, so you could have the potential of other developers or the hospitals themselves buying up the sites and building competing product to yours. There's virtually no sites available anymore.
So what's happened is, you go every time we get a new building from Healthcare Realty, we can go and say, "Okay, do we, you know, how do we position it to go to all three of them and have them—let's figure out quickly who wants it the most." So it's a unique situation. Similarly, in the practice realm, you have markets where the hospital systems buy up all the practices, right? And then you're hosed as a landlord. Not hosed, but you're dealing with them, or you're dealing with the same group. We don't have that here. So the hospital systems have bought up a lot of the practices, but historically, it's only, you know, 40%-50%, maybe, in a given submarket. Now with private equity-backed groups and large practices remaining private, now you really have a competitive environment.
One more quick one for the Capital Associates team. Mike? Mike, take the mic.
Thanks. So on the other slide, you had the Raleigh stats, and HR's portfolio looked like their vacancy rate was higher than the market, and then you had the rent, market rents, and it looked like HR's portfolio's rent was lower than the market. Like, why is that? What's driving those discrepancies in those numbers?
So the bulk of the portfolio here is legacy HCA buildings. And as people have alluded to, we used to compete with HCA. We sold them buildings, but we also developed medical office buildings, and we compete with HCA. And I don't wanna knock them too bad, but it was kind of a situation where you'd say: "What the heck's going on over there? Why aren't they leased up? They got great locations, great product. What's going on?" Well, I think what it was, essentially, was they didn't have an on-the-ground leasing team that really understood their position in the market. And so I guess your question is, you know, are we below market? The new deals we're doing are creating a new market.
The legacy leases that are in place kind of drag it down, but as those renewals come up, that's where we're having the discussions and the opportunity. Because a lot of these buildings are multi-tenant, we're able to, we're able to adjust them on the fly, not be locked in for 15 years. A lot of that is the legacy HCA properties that just kind of, kind of did this for a long time. And so that's what's so exciting to us, is we're able to come in and work on these buildings that we used to look at and say, "Gosh, I wish I was working on that one. I would be bumping it, you know, x a fair amount." And you can't go crazy with it, 'cause the tenants really do revolt if you're not careful.
What we're able to do right now is, is focus on those buildings that did have vacancies. The HR portfolio basically had, didn't have a sq ft vacant, but that was six, seven buildings. We had 20-some-odd buildings in the HCA portfolio. The leases we've been doing, the new leases, are mostly HCA properties. And so that's, that's the exciting part of it, is there, there is some serious upside there to integrate the HR style and maintenance of the buildings with these wonderful properties.
Thanks, Brett. Why don't we transition the Q&A to the corporate level now for the next 15, 20 minutes? Does anyone want to start off? Yes, John.
Thank you.
No applause?
Yeah.
Geez, guys.
Yeah.
That was the worst applause. I'm kidding!
Yeah. You mentioned the strained hospital relationships with certain HCA assets. As more leases roll, is there additional bad blood that may pressure occupancy in the next few years that we just haven't seen yet?
Certainly, when Rob talked about that occupancy slide and what we've seen since the merger, I think Rob said we've attributed some of that to that, and we're seeing that turn around. So we've also heard that, you know, these, these tenants, whether they're the hospital, physician groups, whatever the composition, they have long memories, and so the key is we're making a difference. We're changing. They see that difference. So we think that is a little bit of why there's this, you know, bit of a lag, but we're seeing, we're starting to see bright spots on the tenant retention levels incrementally. You know, it's just like the leasing pickup. We're starting to see that pick up, so that's key. One thing I'll point out, and Todd Sloan is a different Todd than me, in case you've been hearing a reference to Todd doing all this...
You know, I'm the CEO. I'm not out doing all the stuff that this Todd's doing. But I'll point out actually, and Laura Gardner, who you heard about, director of leasing, and then Jennifer Horner is our local property manager, leads our team here. Those are all former HTA employees—high quality, excellent people. So it's not that the whole HTA organization was, you know, some disaster. It's just, you got to put it together with the right leadership, the right processes, all the things you've heard about. So we've got great talent here. I think the key is, we're making a difference, so we're starting to see that retention, start to see those improvements. So we're very bullish and optimistic that we're starting to see that come through.
Obviously, it takes that leasing volume to really get back to this level, which, you know, as we said, this quarter, really hitting a record level. That's a level, even if you go back to some of our slides in the past couple of quarters, that 400,000 sq ft, almost 450,000 sq ft, that's a key level. That's a level that says, when that starts kicking into occupancy, you're now well above, you know, move-outs, the volume of move-outs, and as that's trending down with higher tenant retention, now you start seeing.
You know, that's where we start seeing the absorption. So it's not easy. We've got to keep demonstrating this everywhere, as you can imagine, all the customer service levels. That's why we wanted, certainly Julie, to talk about those Kingsley surveys, why we did it in that timing. It was very convenient to sort of have the baseline. So I think all those things are pointing in the right direction, but there's a lot more wood to chop, for sure.
Juan?
Hi. Just curious, given what we've seen in the credit markets lately, and debt costs going higher, where discussions are going with potential buyers for assets as of late, and kind of where you see cap rates currently for higher quality MOBs?
Sure. I may ask Kris to jump in. I don't know if you're supposed to use the microphone, but I'll give it to you.
I'll use it. So yeah, Juan, we've been talking about it really for the last year on cap rates. We've said they're really tied specifically to, to debt costs, and that puts a, a bit of a, a bit of a floor on where things can go. You know, you see one-off transactions that might go a little bit, a little bit below it. Yeah, so right now, as you're looking at, if you know, a private buyer is looking to acquire a property, they're going to go out and get, they're going to get a fixed rate, so they'll take kind of current SOFR. And then we're also hearing the spreads are, are similar to what we hear in our public bonds, which is about 200 over.
So a five-year swap on SOFR right now is a little under 4.5%. So with a 200 basis point spread, you're looking around 6.5% is probably a reasonable expectation of ± of where you should see cap rates. Now, there are certain deals that we see that that go through that. And I would say that's for deals that are being negotiated today. You know, but if you went back three to six months, those rates were a little bit lower, and so that was where you were hearing us talking more in the low sixes. So it has adjusted here, as rates have ticked up in the last two to three months, but that still seems like a reasonable range of where things are getting executed today. Next.
John. Jonathan.
I'll just talk-
Okay, we got to get you to stand up. We should have had you stand up, Juan. Sorry.
Yep.
Got to get it on camera.
Can we just quantify kind of the pricing power and margin upside you have from the cluster strategy? Like, I know you have a slide in the August presentation, but that's comparing like, you know, top five markets versus not top five markets. So maybe like, what has having larger scale in, like, LA or Denver done relative to, like, three or four years ago on, like, the NOI or retention basis?
Sure. Yeah, it's going to vary by market. I mean, you heard Brett and Wes talk about really that pole position we now have in Raleigh, and our occupancy, you see it in the book, it's a little over 90%, but leased is over 95%. So their formula starts looking a little different. You heard them talking about now we can really start to push rate. We certainly think retention stays high in that scenario. So now you have some of those tailwinds kind of going to your advantage, so you can start to say, "Hey, maybe we're moving rents, you know, not at just sort of the ordinary 3%. We're pushing 4% and 5% and a little better." That's what they talked about. So it's going to vary by market.
You know, Kris touched on some of the key markets where we have more occupancy upside. Well, that has a larger, you know, bottom line impact, if you can just advance the occupancy. So in those places, we're going to say, "Hey, we'll save the heavy rent push for the time when we get that occupancy and that leasing percentage up." So it's going to vary by market, but I think what you've heard us say for a long time, this is pre-merger, is where we have those advantages, we feel very good about putting that together in sort of a 3%-4% range on cash leasing spreads, is sort of where the bulk of our activity will be.
But what you're always trying to do is, you know, get out of the markets where you can't get 3%-4% and get more markets where, like Raleigh, where you're going to be able to push on past 3%-4%. So I think our view is, over time, you continue to advance that. So 3%-4% still being very much an anchor. Certainly doesn't hurt to have the inflationary pressures, all the things, the tailwinds that Rob talked about, replacement costs being up.
You know, obviously, the financing costs to get something new up. It's, it's, it's a building set of conditions that should, should help us for sure. We're all seeing those inflationary pressures, whether it's costs and rents and all those things. So, you know, our view is we still like the 3%-4% because we're really focused on occupancy right now, but I think the next leg starts to build, and it's obviously varies by market.
Go ahead, Troy.
On the SNO pipeline or the SNO you have in your portfolio, I think it's around 200 basis points. What was it historically? And what is it for the whole portfolio, not just the HCA portfolio?
So it's a good question, and we'll clarify. It's 200 basis points for the whole portfolio, so that actually is the whole portfolio. That was one of the slides that Rob had up there. It's pretty small in your books, you know, to zoom in on that. But if you go online and take a closer look, you can see the whole portfolio is 200 basis points. It's 260 basis points at HTA. I forget exactly, Rob, what HR is, but it's obviously less, a little less than 200 basis points. Well, yeah. But to your question about history, I think our history, and you guys correct me here if I'm wrong, yeah.
[audio distortion] .
Yeah. For Healthcare Realty pre-merger, sort of history, under 100 basis points. You know, close, but under 100 basis points. So clearly, a wholly different level than where we've been running historically. So there's, you know, that's a lot of potential energy coming in, obviously, to advance the occupancy.
[audio distortion]
Excuse me. That's a good clarification. Everything we're really focusing on is multitenant. The single tenant, you know, largely is assumed it's full. There's not a whole lot of upside there. It's maintaining that. So we're really focused on... And, and the $59 million of NOI that was articulated by Kris on that page, that's the multitenant opportunity. We're not, we're not really even addressing the single tenant there. Assume, kind of assuming that's as it is. Good clarification.
Austin?
Thank you. Can you provide some additional context to the 1.5 million sq ft leasing pipeline? Just unpack that number a little bit. And then, is that the magic number that you need to kinda hit the 450,000 sq ft per quarter over the next few years?
I'll let Rob come up and talk about that.
Yeah. So in the 1.5 million sq ft, it's really composed of what I call four different types, or four different pieces. Some of it is legal or what we call lease out, where there's a lease that's been heavily negotiated, and it may be out for signature. A big component of that in there. The next is you just move down the leasing process pipeline, move to a set of LOIs that are being negotiated there. So we're tracking that square footage as well. Move in the next bucket, it's proposals. And then a big component of the 1.5 million sq ft is the touring activity that we have. And right now, that's making up about half of that 1.5 million. So it is a big bucket of activity.
We do think that that is a significant amount of square footage that will continue to drive the levels that we're seeing on a quarterly basis. Again, you know, these are multitenant properties. The team you heard from, the guys up here on the stage, there's always activity going on. They're always entering new tours. We're moving those, advancing those lease opportunities along in VTS, and that's how we're tracking the bulk of the square footage there. So that is constantly being replenished, and it's kind of maintaining at that 1.5 million sq ft level on an ongoing basis. So we like that level, and we think that we can continue to produce the volumes that we talked about today with that level of activity.
Connor?
Thank you. How should we be thinking about the time between a signed lease and a physical occupancy, just in the current environment? And then second to that, how are fit-out costs looking or TIs per square foot?
I'll touch on that first one, and then, you know, Rob or Chris, if you wanna jump in. The real answer is anywhere from, you know, zero, it can almost be immediate if it's the suite is ready, and it's just a matter of those three, four weeks to get the deal done, but all the way up to a year. I mean, it can take a year to build out a very complex space, you know, if it's an MRI imaging pad, a surgery center. What we have talked about as an average, and we track this, is about six months. It's about six months on average. That probably covers, you know, a good two standard deviations, but then you've got, obviously, the extreme. So it can vary quite a bit.
I think you heard Steve Hall in Atlanta from Transwestern mention, you know, 270 days to build out a suite. I mean, we're really talking about new leasing here, so it can be, you know, it can take a while, for sure, but six months on average is the short answer. On costs, I don't know if you guys, you know, have any particular comments. I would say it's... Yes, there's inflationary pressure, but we're not seeing tremendous uplift on what we're having to throw in. You heard a little bit from Brett on that, you know, when you have that market scale and that strength, and you've got the right trends going the right way, you know, you can kind of pull that back a little bit.
Maybe you're not even pulling it back, you're just sort of offering the same thing you did last year, but the costs have gone up 15%. So on a relative basis, you're not having to give as much. And obviously, we disclose all of this in our supplemental every quarter. We track it, and it can be a little volatile, 'cause every set of leases each quarter is a little different composition, but we keep our eye on that over the longer run, and it wouldn't surprise me that it ticks up a little just with inflationary pressure, but we're trying to use our market scale to sort of contain that.
Mike?
Maybe just quickly, on the 1.5 million sq ft are on the leasing volume, how much of that is incremental demand or that you're capturing competitive share in the marketplace? And then secondly, just especially looking at the map up there, can you maybe differentiate between market scale and cluster in terms of how that drives property performance?
Yeah, on that last one, I may get you to repeat the first part, 'cause I'll forget it. On that last one, that's a great point, and I think you'll hear, you'll see today, as we drive around, and you'll hear from some of your tour guides on the buses, a little bit more about a cluster. That's an important distinction that you're making. 'Cause really, what we're talking about when we talk about market share, it's really at the cluster level. That's, that's where your pricing power really comes in, because when Brett or Wes, their team, gets demand, it's usually very targeted. You know, it's, "I wanna be at the WakeMed Cary campus because I'm practicing at that hospital, or I've got my referral network in there, and I need more space there." So it's very specific.
So that's where your actual rubber meets the road in terms of your, your pricing power, your leverage. And then, really, you then aggregate your different clusters in a market. So we had up there, I think, 26% in the market. I think Brett and Wes would tell you, it's actually greater than that, where it really matters, which is where you see these concentrations. It's gonna be less, you know, when you're out there with one over near a hospital.
It just is. But it's really about really driving it. And, of course, our view, and a lot of the advantage with getting more overlap between us and HTA, is you have the beginnings of more clusters. I mean, inside HTA, for us, there was an equal size portfolio of on or adjacent to campus multi-tenant properties that give us that many more places to go hunting for creating more clusters with more market share. And so I've forgotten your first part. What was your-
[audio distortion]
I think my answer would be too generic. I might give it to Rob, and then maybe we could ask if Brett or Wes had a comment.
I think if I'm understanding you correctly, I would say that all of it's incremental. I mean, it's all new leasing opportunity for us. You know, when I talk about the tours, those are folks that are touring a building, and they're gonna take new space. There's not renewals.
[audio distortion]
I think it could be expansions, it could be we're pulling them from another location. They could be new to the market and moving in. It's all the above.
Take one more. 2 minutes - we got about 2 minutes.
Juan, we'll get yours later.
Yeah.
We'll go to a new guy.
Mike.
Mike Mueller.
What's a reasonable timeframe for hitting 90% occupancy?
So we've certainly put some materials out there over the last few quarters, couple quarters, primarily. You know, obviously, we can't know that answer. We can't give you a precise quarter, even a precise year. But our view is, that's something we see today, we're building. Obviously, we think occupancy is a little flat in the third quarter, but you're seeing the momentum build. We're optimistic about the fourth quarter. It may not be as much as you want, but it's gonna be, you know, the start of what we see as a ramp throughout 2024. So really, what we're trying to do is build our ramp to occupancy gains to get to a level that's very compelling. We've talked about, you know, 100 basis points-200 basis points. That's, that's not gonna happen on January 1st. It's gonna be a build that we're trying to get to.
So we're trying to build to an ambitious run rate that then we can carry on for multiple years. I mentioned three to five years. We've had a year go by. You know, our goal, obviously, is in the next three to four years, we're making really strong headway towards that 90%. It's, you know, it's not a perfectly predictable thing, but you've heard a lot of the stories and the reasons we have confidence around that. And hopefully, you'll continue to build that today. I think we need to wrap it up-
Thanks a lot.
'Cause we've got to get some food. We're obviously gonna be eating with you-
- answering questions all day long throughout the tour. Thank you, guys, very much.