Healthcare Realty Trust Incorporated (NYSE:HR) Q2 2022 Earnings Conference Call August 9, 2022 12:00 PM ET
Company Participants
Kris Douglas – CFO
Todd Meredith – President, CEO and Director
Robert Hull – EVP of Investments
Conference Call Participants
Rich Anderson – SMBC
Michael Griffin – Citi
Steven Valiquette – Barclays
John Pawlowski – Green Street
Jonathan Hughes – Raymond James
Tayo Okusanya – Credit Suisse
Michael Bilerman – Griff
Daniel Bernstein – Capital One
Mike Mueller – JPMorgan
Operator
Good afternoon. Thank you for attending today’s Healthcare Realty Trust Second Quarter Financial Results. My name is Francis, and I’ll be your moderator today. [Operator Instructions]
I’d like to pass the conference over to our host, Kris Douglas, CFO.
Kris Douglas
Thank you for joining us today for Healthcare Realty’s Second Quarter ’22 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, 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.
Todd Meredith
Thank you, Kris, and 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. And we’re also grateful for the counsel of our advisers 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 increase scale. The combined portfolio includes well over 700 properties and 40 million square feet.
And when I look at the combination, we’ve nearly doubled the percentage of our portfolio in markets where we own more than 1 million square feet. 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 square feet. 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 health care 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 3/4 of our properties are attractive coastal and Sunbelt 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 square feet of new leases that are now in buildout. This record leasing activity will contribute to solid occupancy and NOI improvement. We see momentum building moving into 2023. And 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 MOBs 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?
Robert Hull
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 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 training credit environment has pushed the market into a period of price discovery with a wider 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 stands at $417 million at a blended cap rate of 5.2%. Since we last reported earnings, we closed 7 additional investments for $58 million.
All were in existing markets. One notable acquisition was in Raleigh, where we purchased 3 buildings for $27.5 million. Among these were 2 medical office buildings adjacent to WakeMed’s Cary Hospital. Including HTA properties, the company now has substantial scale with 13 buildings totaling 478,000 square feet in this cluster and 1.1 million square feet 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 health care 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 million to $750 million in the low to mid pods, 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 systems 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 moving 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. 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 million to $200 million of 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.
Kris Douglas
Thanks, Rob. Before getting into specifics on results, I would like to point out that second-quarter financials are for stand-alone 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 $0.21 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 heat across the country. However, we remain insulated from the higher than historical expenses with over 90% of the combined companies’ leases have been 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 square feet 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 square feet 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 are 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 12 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 the 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 5s, well above the transaction pricing Rob described earlier. As we complete additional asset sales, we will look at opportunistic share repurchases of 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 is significant share price upside when we applied these expected results to the historical multiples as shown on Page 21 of the Investor deck. 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 $0.01 and $0.09, 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 main 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 2 portfolios. And 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.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Rich Anderson with SMBC.
Rich Anderson
So I wanted to first, on the dispositions, 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? We thought we’d be pretty much done with it by middle of August, at least based on previous comments from you. So can you just kind of go through that — the cadence of that experience for us?
Kris Douglas
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 today’s progress is right on pace with what we were talking about previously. I would say from the original 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 lenders are still active in MOB space. But as you can imagine, these buyers, those who use debt are having to go through and make it work as they 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 closed now and the balance closing in August. So we’re — even if it is a tad a bit slower, we’re not concerned about it, and we feel good about it.
Rich Anderson
Okay. And then you mentioned in your opening comments there, 3/4 of your portfolio and what you would describe as densely populated areas of the country. it leads me to question now with the combined company. What is — you mentioned upwards to $1 billion of dispositions 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? What do you see as the non-core component of your portfolio that over the — maybe not over the next year, but over the next several years is likely to be sold over time?
Kris Douglas
Sure. If you look at the combination of the 2 companies, we end up at about 68% on or adjacent to campus. And I think we’ve shared with folks that 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 target that we’re looking at. So the asset sales that we’re working on now that Rob addressed, that will pick up beyond an adjacent a little bit, maybe 1% or so.
And I think over time, as we continue to sell assets, as we continue to invest in new assets, we’ll drive that up into the mid-70s, plus or minus. So I think that’s our long-term view. As you’ve heard us talk about our cluster strategy, we’ve gotten much more comfortable with the idea of investing again, primarily on adjacent settings, but then complementing that with off-campus the strategic and relevant to these health systems and providers that we work with in these markets. And I think as we gain scale in these markets, filling that in between our campus-based clusters really makes a lot of sense. So that’s a long-term target about 75%.
Rich Anderson
Okay. Last one for me. Now that you’re a much bigger enterprise, understanding that it’s a fairly fragmented market still, do you think that HR can institute real change in terms of how people view the business from the lens of the REIT. We had typical 3% type same-store NOI growth, 3% cash re-leasing spreads in that range, sometimes more, sometimes less.
But when you look at some of the other sectors in the REIT space, the math is much different, right, for like industrial, where there is a price-insensitive tenant base like yours, they get much bigger cash releasing 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 having more of a growth element to it in your umbrella.
Kris Douglas
Sure. I understand the question. I think fundamentally, we’re not going to 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 long in the tooth on the cyclical sectors that have really had a huge tailwind for an extended period. And I think we’re seeing that slow down, whether that’s departments 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. It’s really built to grind at these more steady rates but through economic cycles. And so I think that’s the difference. So I’m not going to pretend to suggest we’re going to suddenly transform this into a cyclical business that creates big peaks and valleys. I do think though we can incrementally move higher on the growth profile. I think we can sustain a 3%-plus type growth profile. And 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 will show up in our cash leasing spreads, obviously, same-store NOI. But we’re not here to tell you that suddenly we can produce high single-digit, low double-digit type growth in the business on a sustainable basis. I think that just would defy gravity. And this is about safety. MOBs are largely more about noncyclical and safety. And that fundamentally factors aren’t changing that business fundamentally hospitals aren’t. So I think it’s just different than something like industrial or other sectors.
Operator
Our next question comes from Michael Griffin with Citi.
Michael Griffin
I just want to go back to the secretion bridge page in the presentation. Just on the HTA FAD of $370 million for ’23. If you look at current run rate, it’s implying about flat relative to last year of $325 million. So I’m just curious how you’re anticipating that extra, call it, $45 million of pickup from FAD on HTA on just that stand-alone basis?
Kris Douglas
Yes, Michael, this is Kris. Yes, when you look at it, and you take kind of their stand-alone, we have assumed they’re going to be able to grow in the low to mid-2s on a same-store basis. You also get the full impact of their acquisitions that they completed in ’21 that needs to be added to that number that you were that you were talking about as well as a full impact of some of the developments, including some current pay construction loan type developments that will go into that as well as some incremental acquisitions that we hit assumed for this year, now we’ve pulled some of that back.
But when you roll through all of the impacts from the growth as well as those incremental acquisitions that weren’t in that ’21 number. That’s what gets us up to the $370 million. And I will say that we did bring down that $370 million from $390 million 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 where the current stock price is or effectively what you see in the secretion 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. So really, in terms of the accretion bridge, that change in net investment activity is not having a big impact. Really, almost all, if not all, of the change from what we have presented previously can be related to a change in interest rates.
Michael Griffin
So should we then assume that, that $20 million of net investment activity decrease applies to ’22 as well? Because I’m assuming that ’23 number is the one detailed on the proxy of the $390 million and then for ’22, that’s a $354 million. So track $20 million for that, call it, 334 FAD for HTA for ’22. Is that fair to assume?
Kris Douglas
That might be pushing a little bit too early because you are going to pick up some of that — some of those acquisitions from earlier in the year. But yes, I would say a good disproportion amount would be in ’23, but you would get a portion into ’22 as well.
Michael Griffin
Cool. I appreciate the color on that. And then just maybe touching on leverage. Just curious where it sits on a pro forma basis with the disposed that have already occurred and sort of do you still anticipate hitting that 6% to 6.5% range? Or could there be anything to kind of change the mindset on that?
Kris Douglas
No, we’re still feeling good about getting into that 6% to 6.5% range. Obviously, if we have not — and we have a little bit more on that term loan that is higher right now on that asset sale term loan, but it’s our expectation that will be fully repaid before the end of this quarter. So on a combined basis, we should be in that target range that we’ve disclosed.
Operator
Our next question comes from Steven Valiquette with Barclays.
Steven Valiquette
All right. Great. The one main question I have was actually just touched on a little bit, and it comes back to the — all the projections in the proxy prospectus filed on June 10th for each stand-alone company through 2026. You just kind of talked about the ’22 numbers around that. But I guess beyond that for ‘23 through ‘26 before any consideration for the planned divestitures. Are those numbers still valid to use for just projecting out long term for each stand-alone company? Or are they sale for one reason or another? Just wanted to visit that for the out years as well.
Kris Douglas
Yes. And obviously, it depends on exactly where we are of 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 of we are assuming that we are in an asset recycling phase as opposed to net external growth that we’re able to do that on an accretive basis by selling small portfolios like Rob talked about reinvesting in individual assets.
So that really doesn’t have a major impact, really what is driving the change in what we presented and 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. And that’s the reason we wanted to provide this updated accretion bridge to make sure that people were picking that up. And I think a lot of people were. I think I don’t think that, that’s any surprise to anyone, but we just want to make sure that, that was abundantly clear.
Steven Valiquette
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 projected before that, obviously, but both set of numbers were above street consensus at the time. So 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. But what’s the cat to you on why those projections were above the street consensus at the time? And I guess, if it’s not obvious, we can just talk about it more off-line later, but I was just curious if you had any quick thoughts around that.
Kris Douglas
Yes. I mean I’m happy to follow up if you have more specific offline. But 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, people are — 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 don’t always have the same view. And so I think that creates the range of results that can flow into that consensus number. But happy to follow up in more detail with you later, if you’d like.
Operator
Our next question comes from John Pawlowski with Green Street.
John Pawlowski
Great. Todd, could you give us a sense from HTA senior management is leading the day-to-day integration given the other CFO left day one?
Todd Meredith
Sure. We — obviously, we set up long ago some integration teams. And so we’ve got folks from HTA that are kind of paired off with our counterparts. So Julie Wilson, our EVP of Operations, is our point person on integration, and she’s been coordinating heavily with Amanda Houghton, — but 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. And so there’s clearly key functions like accounting that are critical in terms of that integration, but other folks related to human resources as well. So those are the main folks. But it’s clearly — there’s a staff on both sides, focused on that. But clearly, Healthcare Realty — legacy Healthcare Realty leadership is really driving that exercise.
John Pawlowski
Okay. And then a follow-up on the transaction market as it relates to the asset sales, you guys are still achieving pretty solid pricing. Were there — the pool of assets changed at all as the months roll a little long and we hit the volatility in the debt markets? Or are there any other concessions outside of price that you have to give to again close at that 4.8 unaffected pricing.
Robert Hull
This is Rob. No, I would say no. I mean, as we indicated throughout the process, we did break the transactions up into multiple transactions, smaller bite sizes that we were comfortable with, and we were seeing a deeper market for those a deeper pool of buyers. But in terms of making concession, I wouldn’t say there are any meaningful concessions that were given in order to achieve that pricing.
Kris Douglas
Yes. And one of the things that we did is — and we talked about this in the spring, we had a larger group of assets that we looked at. So it wasn’t like we just started and just said, this is it, and this is all we’re going to do. And so we worked through that. I think we had announced we were probably looking at closer to $1.6 billion, $1.7 billion. And so 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 time frame that we were shooting for. And so you should had to tenor priorities there. But ultimately, we feel good about the process and the results that we’ve been able to achieve.
John Pawlowski
Okay. But was the final pool of assets sold or about to be sold, higher quality than the initial assets you guys were underwriting?
Robert Hull
No. I wouldn’t say that. I would — no.
Todd Meredith
I wouldn’t say they’re higher quality than what we already sold. Yes, 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. We’re selling some assets that are micro-hospitals that great markets, great health system, but an asset type that we wanted to reduce our exposure to. So there’s some things in there that for us on the margin actually improved the resulting quality of the combination after the sales.
Operator
Our next question comes from Jonathan Hughes with Raymond James.
Jonathan Hughes
I was hoping you could stick with the JVs and dispositions that John was just asking about. I think we saw another $600 million that was mentioned in the press release from a month ago. That was like to be marketed or in the process. 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 Phase 2 of the post-merger HR and a little bit further down the road?
Robert Hull
Yes, I would say that we’re looking at that as sort of the pros merger once we’re going to 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 of 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 transaction properties where we do are buying in existing markets and building out clusters. So I think it’s more of a refinement strategy and rotating through accretive transactions into — in the markets where we want to continue to build.
Kris Douglas
And I think in terms of timing on that, I would say some of that certainly we would expect to occur in calendar ’22, but some of it will obviously potentially flow over into ’23. But we certainly continue to work on those assets that you’re referring to. Those are discussions that are ongoing. But we’re formalizing a process of selling an additional $500 million to $1 billion that Rob referenced. So 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.
Jonathan Hughes
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 $365 million versus the $390 million previously, that’s down 6% versus the last estimate due to the higher rates than less acquisitions that you talked about earlier, Kris. But on the 2023 FAD estimate for HR stand-alone, that dropped almost 10% due to the same higher rates and less acquisitions. Can you just walk us through why the drop was greater for HR versus HTA when leverage is not that dissimilar. And I think the acquisition activity for this year and future years sounds like it was unchanged?
Kris Douglas
Yes. And as we talked about, 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 it was — we also brought down the shares that was associated with that growth. And so it really is related all almost all to interest rates. And it really has to do with the difference between the fixed and floating percentages between the 2 portfolios.
We typically run about 70%, 75% fixed in our capital structure, ended up at HTA at this point in time, ended up being almost 100% fixed. And so as a result, with the change in the interest rates, it’s not having this material impact to them as it does to us. But on a combined basis, we end up in 80% to 85% 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 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.
Jonathan Hughes
Okay, that accretion. And then one more for me on sticking with that accretion bridge page, the JV and asset sales there show $44 million of FAD removed on the $1.1 billion of sales. Did that imply the 4% yield? So how do we score that with the reported 4 cap rate on those transactions?
Kris Douglas
Yes. This is FAD. And so the difference there is the maintenance CapEx is associated with it.
Jonathan Hughes
Got it. And what — and is that CapEx assumption still to 12.5% of NOI, I think in the last deck, that’s what it was. Is that unchanged so…
Kris Douglas
Yes. It’s in that ballpark.
Operator
Our next question comes from the line of Tayo Okusanya with Credit Suisse.
Tayo Okusanya
First question is around the share buyback program. Again, it makes a lot of sense just kind of given we implied cap rate is at the mid-6s or so. But also wondering how you’re balancing that against kind of increased leverage as well from doing share buybacks? — what exactly can we expect going forward in regards to how aggressive you make up with share buyback…
Todd Meredith
I think we — 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? And so at these stock price levels, obviously, that could be compelling to buy back the stock. So 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. So I think, again, Kris mentioned 6 to 6.5x debt to EBITDA, that’s a range we’re comfortable being in. We’re not looking to accelerate that higher just to buy back the stock. So that’s sort of the framework we think about… The only other thing I would mention, you mentioned an implied cap rate in the mid-6s. 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 5s currently. And we’ve seen some others coming in around there as well, but our own numbers suggest that. So we would certainly encourage everybody to think look at that.
Tayo Okusanya
That’s helpful. And then also the FAD per share growth acceleration, I think, again, the drivers of that all makes sense. But in terms of 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 often occupancy been stubbornly stuck for a very long time. Again, you guys have had some chance at some time now to do some due diligence. I mean what do you see there that gives you this confidence you have occupancy gain when occupant our portfolio has not grown for the longest time?
Todd Meredith
Yes. I mean a couple of things I would throw out there, Tayo, to think about. One thing we’ve talked about is a little different than 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 end markets to really extend our reach to find new tenants and to really help attract those new tenants that really do expand occupancy. And so 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. So we see a lot of strength building out of that and where we’ve been able to develop those critical levels of scale. So 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 in the HTA portfolio. And you’re right, most of that opportunity lies or at least half the opportunity overall lies in their multi-tenant portfolio.
But 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 north of $55 million of NOI pickup if we can bring both basically all the portfolio up towards that 90% occupancy level. And we think there’s just a lot of tailwinds right now. You’re seeing it across the sector. A lot of — with rising replacement costs, there’s just not as much supply that’s going to go up that’s affordable. And so we think that’s going to 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. So we’re very bullish, and we’re seeing it come through in the leasing, as we talked about earlier.
Kris Douglas
I might add to that, that you are starting to see some of that in the HTA portfolio already. It’s not flow through all the way to occupancy. But if you look at their lease percentage and it’s up in their same-store portfolio, it’s up year-over-year by 70 basis points. And so there’s a — 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 double the amount that we’ve seen historically.
So as those build-outs are completed and are able to be converted to occupancy, we see some good upside and very optimistic about what it can do to drive occupancy, which actually drives rent and NOI and overall earnings growth. So 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 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.
Tayo Okusanya
Got you. 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 seeing in the last 3.5% or 3.4%. Just using with everything you’re seeing with inflation, do you expect market to market to accelerate going forward? Or how do you kind of look at that versus the need to kind of manage the client relationship?
Todd Meredith
Yes, it’s a good question. We saw that as well and certainly wouldn’t take anything away from the numbers that physicians reality put up certainly a great quarter of cash leasing spreads. I think in their own remarks, they acknowledge that it’s not exactly what they expect in the next couple of quarters. But I think like them, we would agree there’s definitely tailwinds here that are — give us optimism about continuing to push rate.
And I think with replacement costs being clearly up significantly, build-out costs are up significantly, both for leasing activity as well as development. That gives us some tailwinds to continue to push on rate, even higher rates being a lower cost alternative than something new, a new development. So we’re optimistic. I’m not going to say that at the new norm at all. But you’ve seen us in past years put up some numbers that are getting up to that order of magnitude. So I think our view is we like — we think 3 to 4 is very doable and occasionally getting in the 3 to 5 range is feasible as well. So directionally, I think we’re optimistic on that just like our peers.
Operator
Our next question comes from Michael Griffin with Citi.
Michael Bilerman
It’s Michael Bilerman here with Griff. So Todd, to sort of get back to on the cost of capital. As you think about where the company is today, obviously, the cost of capital for the higher sector overall, we has moved up pretty dramatically since last August. But for you specifically, it’s moved up more at your stock’s down more right to your placate the blast equity is up. But more so on the debt side, your spreads have gapped out wider than where REITs are.
And 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. And so now that you’ve done this transaction, obviously, the market has spoken in terms of — I don’t think the market — look, maybe you think the market is missing something. But the market is clearly — I don’t know if you help in your elite box, but your multiple is clearly 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 the 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. 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?
Todd Meredith
Sure. Yes. Framework and question. I think clearly, where we are today is we’ve just completed the merger. And I think no surprise, that’s why I articulated these 4 priorities in my remarks, clearly, we need to keep demonstrating progress and success on the asset sales in the JV. I think people want to 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 driving debt costs.
So I think people want to see that come through. I think we clearly need to keep showing progress on the synergies. But I think probably the key 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 2 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 through. I think clearly, development is also a piece where we think we can create long-term value that’s higher returns.
But at the end of the day, you’re right. We obviously need to show progress on all those things and earn back that reputation for delivering those results so that we can get back to a valuation multiple that makes sense to grow through external growth as well. It takes all those pieces, as you well know, to deliver that 5% to 7% per share growth. We know that. So we’ve got to get out of that. But I think for us, it’s just executing and executing and showing how we can drive the operational benefit of this combination to then get back to that external side.
Michael Bilerman
I guess the question is how long it takes to get there and potential capital and the execution of it because we’re going to go through 2 years, almost 2.5 years, right, where look, you call it an accretion bridge. I mean I totally said you just call it a bridge because you’re ending up with the same number — there’s no accretion. It’s 145 start and you’re about 45 at the end. So at some point, right, you need to be able to demonstrate that there’s a real reason why the company pursued this merger.
And I recognize you did a stock-for-stock and you use the asset sales to fund the dividend. And I understand the contribution, but that stocks are soft, you effectively offered a higher exchange ratio because you were the buyer, right? And you have to play ball. And so — but you step back from that, how do you get to the other side? Because I mean is leasing that different now that you’re a combined company from where you before, I would have above you had pretty good relationships in both companies. I mean the margin is not like you’re going to get 20 deals versus getting 10, right? So help me understand that part.
Todd Meredith
Yes. 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, that both companies have relationships and strength and ability to produce leasing results, but we do see more powerful results through the combination, just the sheer volume in the markets. And so we think, though, ultimately, that leads to also more opportunity through expanded development activity, redevelopment activity where you can actually create net new space so we see a lot of opportunity there.
And we think rent growth itself will be strengthened. So not just gaining in occupancy, but actually being able to dial up that rent growth, we think we can do that better through this combination. So again, it’s not something we’re saying that’s 3 years off. We think that’s coming in the near term. So we’ll be able to track that as we’re also tracking some of these other 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 our quality assets to the market but maybe don’t fit for us as well, but we can sell them at maybe a sub-5 cap rates, maybe it’s a little above 5% cap, but we can rotate that into accretively into other investment activities. Let’s say, it’s not our stock. Maybe our stocks in a better spot doesn’t make sense to buy back. So if we can invest in higher-yielding acquisitions, we can fund higher-yielding development. So I think there’s — it’s not just in the pause button completely, but I think it’s clearly a mind towards smart capital allocation here.
Michael Bilerman
Right. Anyway the particular 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. So 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 as we start to model for ‘23 additional is of sales and buybacks. There’s nothing in here particularly for that, right?
Kris Douglas
Yes, 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. So we — inside of this, we are assuming that we’re selling assets and redeploying the 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 than obviously, there would be some upside here in terms of what the accretion we made. But we’ll have to wait and see where that is.
Michael Bilerman
I guess how much accretion do you have in her from capital recycling then because you over to you in selling assets and buying assets if there’s a positive spread, you could have some accretion? Or is it limited…
Kris Douglas
Yes, we do. We’re running, call it, about 30 basis points or so, 30, 40 basis points of spread between our acquisition and disposition inside of here with the ability to sell, as Todd is talking about portfolios and reinvest those into individual assets. So we’re not paying the same portfolio premium.
Michael Bilerman
So what is that? Because I assume that part of that ’22 and ’23, how much accretion is based in that $1.45 from accretive capital recycling?
Kris Douglas
Yes. No, I would say it’s more in that $0.02 to $0.03 range but pretty similar to what we would have historically there. And once again, it goes back to what the — you have to build it. So I’m sorry, and able to give you just a direct number as it kind of builds over time. But yes, in that $0.02 to $0.03 range.
Robert Hull
I was just trying to understand what’s in there. So that as we go through a benchmark, we actually understand what’s coming in and out. And it may be helpful to include these slides in the supplemental that way. We heard from some people that they didn’t realize it was out there. So perhaps as wrapped that into the press release and the supplemental in 3Q.
Operator
Our next question comes from Daniel Bernstein with Capital One.
Daniel Bernstein
Some of my questions were actually just answered. But I just wanted to go back to how you’re thinking about the buybacks versus investments. I mean, like you said, you’re in the upper implied yield, but the real IRR is probably a lot higher given the upside of HTA occupancy. So I don’t know if you can just talk about maybe the thought process a little bit more of buybacks versus investments, especially at the current stock price.
Kris Douglas
Yes. I would say, Dan, you’re right. I mean I think our buying back our stock, we think, is a great investment, not only because it’s at an attractive yield, but you’re right. So there’s some real upside there. So we would agree with that. We would compare whatever we might be looking at to reinvest in. Looks like we sell $500 million of assets — and we’re looking at do we rotate into some acquisitions? Do we rotate in some development or some combination? Or do we just buy back stock? And 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 out with some development versus what we would infer from buying back the stock. So I think we would just look at that very clinically and choose to do that. And I think at today’s prices, the stock is pretty darn attractive. So that would probably be a clear preference at this point.
Daniel Bernstein
Okay. And then I just — maybe just some historical perspective you can give on when you have really wide bid-ask spreads in the MOB space? How — typically, what could we expect in terms of timing of when that might close. So if it’s why today, you don’t want to maybe make — you don’t want to push the investment side, the external growth side as much today as you would have a couple of months ago before debt costs went up. When could we expect higher cap rates, initial yields in the MOB space? Is it I know it’s a big ask. — mid-’22, you might be looking out mid-’23 or something. But is it a 6-month process, 3-month process? Is it typically longer? I know it’s unusual times, but that’s kind of…
Todd Meredith
I think it’s really… to answer that. Yes, I think you can’t necessarily just rely on history. I mean normally, maybe I would have said 6 to 12 months. Rob, I don’t know if that’s what you would say, but I think that’s what we would typically lean on. But I think we’ve seen tremendous interest from buyers to get a quality assets and see portfolios coming. As Rob said, we’ve pulled this back to about $100 million to $200 million portfolio, and we’ve seen a ton of demand, so — and plenty more to go. So we think there’s plenty of capital out there.
They’re just trying to figure out how to keep buying these assets and deal with the rising debt costs in the market. So it’s, again, very difficult to say. It could take — I think we’re all trying to figure out exactly where debt costs are going. And it feels a little bit like it’s overcorrected. But yet we all know it’s still poised to rise over the long term. So I think it’s just going to take a while. And I don’t know if that’s 6 months or a year, but it’s I’d argue we’re into 6 months now, so it’s longer than that, and we’ll see.
Operator
Our next question comes from Jonathan Hughes with Raymond James.
Jonathan Hughes
On the share repurchase program, I see that operates a week ago, but was also authorized, I think, back on May 3rd. Is it only a 3-month authorization? I’m just trying to understand why the need to redo that program for May if it really is something new.
Todd Meredith
It was really just because the merger was completed, and we obviously wanted the new Healthcare Realty Board to authorize that. So 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 is the typical time frame.
Kris Douglas
Yes. I can’t remember specific in that language, but we typically look at that every year. And Todd, you’re right that we already had it. But with the new board, we needed to go ahead and get that reauthorization.
Jonathan Hughes
Got it. And then I noticed in the supplement, I think the components of expected FFO page was removed, but can you just confirm expectations for same-store NOI growth or unchanged or maybe even higher since the legacy HR portfolio is actually running north of 3% closer to that higher end of guidance for May?
Kris Douglas
Yes, you’re right. We did pull back because the way we’re presenting these we didn’t think just providing a stand-alone HR guidance by itself would be that helpful to people. We will be in the coming quarters, providing some more update. But 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 has really not had a material change. And so the — on a combined basis, as you just look at it in terms of where the contractual escalators are running in that 2.5% to 3% range is a reasonable position without any changes in occupancy. But as we talked about, we’re optimistic that we could see some upside and occupancy moving forward, which could help drive that higher.
Operator
Our next question comes from Mike Mueller with JPMorgan.
Mike Mueller
Kris, I guess I appreciate the comments on accounting issues. But is there any shot at providing even rough FFO guidepost for ’23? I mean that is the most standard reporting metric. And when you look at estimates now, the range is high $1.60s to almost $1.90, so it’s pretty wide.
Kris Douglas
Yes, that’s fair. And yes, we’d like to be able to provide some additional even if it reflects some of these noncash accounting items. I don’t have the fall. 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. And frankly, that’s going to be what creates more a wider range of potential outcomes depending on where that lies rather than the underlying fundamentals, which going to tie back more to the FAD numbers that were providing to people.
Because one of the things that we’re going to do is we have to mark-to-market all of the debt, so over $3.1 billion of debt that’s on the — on the HTA was on the HTA balance sheet. And 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. And so I think that, that probably is driving a lot of the difference. And hopefully, as we are able to get more clarity on exactly how those numbers come out, we’ll then be able to report it. But regardless, I still look at it of, 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 overlying value and cash flow of the combination are moving forward, which is the reason you see us focusing more on the FAD growth.
Mike Mueller
No, I appreciate that, but I’d imagine the range would probably not be the $0.20-some range that it is now, at least with on Bloomberg. And again, that’s the headline reported.
Kris Douglas
Yes, I get that. I think it also depends on Mike, the way people — and people have different views of how they do this, and I can appreciate that of how they look at the synergies. Some people will kind of normalize that and assume that you’ve already gotten it. Some will assume that I know you’re going to have that drag. So I do think that there may be differences in people’s methodologies or definitions of how they’re looking at some of those earnings results…
Mike Mueller
Got it. And then just one quick one, too. Do you get to the roughly $300 million of annual development starts? What’s the ballpark time frame do you think for that?
Todd Meredith
There’s a lot of — we’ve seen a lot of demand from health systems for development with 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. So we think that kind of get to that $200 million to $300 million in annual starts.
[Technical Difficulty]
Kris Douglas
Mike, can you hear Rob?
Mike Mueller
No. I heard to $200, $300…
Todd Meredith
We’ll start. If we were to put some time on it, Mike, I would say it’s probably not ‘23, but I think it’s building. And I think it can get — we can get to that pretty quickly, maybe by 2024. But we’re seeing a lot of demand, as Rob said. So I do think that’s going to pick up pretty quickly, both picking up ours versus HTAs put them together, we think we can get there pretty quickly.
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.
Operator
That concludes the Healthcare Realty Trust second quarter financial results. Thank you for your participation. You may now disconnect your lines.
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