Thank you for joining. I would like to welcome you all to the Healthcare Realty Trust Fourth Quarter Earnings Conference Call. My name is Brika, and I'll be your event specialist operating today's call. Thank you. I would now like to hand the call over to our host, Ron Hubbard of Investor Relations. Sir, you may begin your conference call.

Thank you, Brika. Thank you, everyone, for joining us today for Healthcare Realty's fourth quarter 2022 earnings conference call. Joining me on the call today are Todd Meredith, Kris Douglas, and Rob Hull. A reminder that, except for 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, 2022, and Form 10-Ks filed with the SEC for the quarters ended March 31, June 30, and September 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 measures, 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 December 31, 2022. The company's earnings press release, supplemental information, and Form 10-Q are available on the company's website. I'll now turn the call over to Todd.

Thank you, Ron. And thank you, everyone, for joining us for our fourth quarter 2022 earnings call. I'll start by pointing out that we've successfully achieved two key merger integration objectives. First, in January, we completed the final portion of our planned asset sales to fund the merger-related special cash dividend. It's worth noting that we executed these sales at our targeted cap rates. Second, we realized our full annualized G&A savings in the fourth quarter. That's in half the time we originally expected. The primary driver was reaching our projected staffing levels. Most importantly, we fully transitioned to the Healthcare Realty leasing model with full brokerage coverage across our portfolio. Later, Rob will expand on how this is already building leasing momentum. I would like to commend my Healthcare Realty colleagues for their incredible effort and dedication to accomplishing these milestones. Looking to 2023, we expect to return to a steady state capital recycling mode. Given the current state of capital markets and the completed dispositions, we expect to optimize the portfolio at the edges. Proceeds will be reinvested primarily into our redevelopment pipeline. This is our top priority for 2023. We expect the acquisitions to be modest on these selected properties to protect our market position and cluster strategy. With market scale and deep relationships, we are well prepared to ramp up accretive acquisitions when capital markets improve. The secured financing picture has improved notably since last November. This is important because secured financing drives nearly two-thirds of MOB buying power. Both underlying rates and spreads have improved. All-in rates improved more than 100 basis points from the peak last fall and now are about 50 basis points better. The breadth of lenders remains tight, but quality properties are getting financed. Rates are now trending in the high 5s. This improved financing has pulled MOB cap rates a bit lower since November toward the 6% level. MOB fundamentals remain favorable with robust demand for outpatient facilities. Healthcare is one of the largest, most stable, and fastest-growing employment sectors. Healthcare employment grew nearly 4% year-over-year in the most recent report, with ambulatory services growing even faster. These employees are coming to work every day in one of our buildings. We also see green shoots that inflation pressure and labor costs are easing, especially for health systems. We're talking to physician groups who are committing to more space today and health systems that are actively planning for more rapid outpatient growth in the near future. For the fourth quarter, we reported strong results and key operating metrics. Same-store revenue grew well above 3%, propelled by healthy rent escalations, cash leasing spreads, and occupancy gains. Kris will get into more detail in a moment. In 2023, we expect same-store NOI growth to trend higher above 3%, assuming moderating expense growth and steady occupancy gains. Leasing momentum is solid with over 600,000 square feet of signed leases yet to take occupancy. This equates to roughly 150 basis points of gross absorption. We aim to capture most of this in the first half of '23, boosting the current trend of 50 basis points of net absorption. Development starts are another clear sign of positive leasing demand. Healthcare Realty has the largest and most visible pipeline in the MOB sector. Our active pipeline is over $230 million, and our near-term prospective pipeline is roughly $350 million. And behind this, we have a long-term embedded pipeline of $1.7 billion. This expanding pipeline is the benefit of the larger Healthcare Realty platform, deeper relationships, and significant market scale. We are in a leadership position to secure more development projects with major health systems. Looking ahead, Healthcare Realty's long-term outlook is bright. Our primary focus post-merger is operational execution to accelerate same-store NOI growth. With a well-scaled platform, we expect to capture outsized absorption and rent growth. We expect higher-yielding development projects to drive our external growth in the near term. And as inflation moderates and interest rates stabilize, we'll add accretive acquisitions to bolster our growth profile. Now I'll turn it over to Kris to provide a review of our financial and operating results.

Thanks, Todd. We made tremendous progress on integration in the fourth quarter. Asset sales to fund the merger's special dividend were completed, and our targeted annualized G&A savings were realized. Normalized FFO for 4Q was $0.42 per share, in line with the third quarter. The FFO results include normalization of $12 million in noncash interest expense in both the third and fourth quarters for merger-related fair value adjustments. We were encouraged by analysts and investors to normalize for this item to make results more comparable to peers. Normalized FFO in the quarter was impacted by a $5.2 million sequential increase in cash interest expense from higher rates on floating rate debt, as well as higher average debt balance. This was partially offset by a $4.5 million sequential reduction in G&A. We have now realized $35 million of annualized cost reductions compared to pre-merger combined G&A. There are still some marginal synergies yet to be realized over the next two quarters, but we expect these to be offset by normal G&A increases. $462 million of asset sales were completed since the end of the third quarter to finalize the full funding of the $1.1 billion merger special cash dividend. Run rate FFO, including the timing impact of the asset sales, is $0.41 per share. The run rate FFO and FAD shown on Page 5 of the supplemental do not include any impact of additional changes in interest rates or growth in portfolio cash flow. Operating fundamentals were once again strong and highlight the growth potential of our properties. Same-store NOI for the year increased 2.5%. Year-over-year quarterly same-store NOI growth was even higher at 2.7%. The contribution from the company's share of JVs improved both quarterly and annual growth by 10 basis points. The quarterly NOI growth was driven by a 3.3% increase in revenue offset by a 4.6% increase in operating expenses. The year-over-year quarterly revenue growth was comprised of a 2.8% increase in revenue per occupied square foot and a 50-basis-point improvement in average occupancy. We continue to focus on maximizing cash leasing spreads, occupancy, and in-place contractual increases. Cash leasing spreads in the quarter averaged 3.5%, up from 2.9% in the third quarter, with 80% of the leases having a spread of 3% or greater. Sequential occupancy increased 59,000 square feet or 10 basis points to 89.3% for the same-store properties. Total portfolio occupancy is 87.7%, providing meaningful opportunity for continued absorption and NOI growth. Annual contractual increases are now 2.81%, up from 2.64% last quarter. The improvement was the result of higher increases on leases with CPI-based escalators and 2.9% average future increases for the leases that commenced in the quarter. The improvement was also bolstered by the sale of our lower growth properties, which had annual escalators below 2.4%. Operating expense growth of 4.6% was down substantially from the 7.9% in the third quarter. We benefited in the quarter from several successful property tax appeals. Excluding their impact, expense growth is running approximately 6%. Operating expense growth remains elevated compared to historical norms, but inflationary pressures show signs of easing. This will allow the power of our revenue drivers and occupancy absorption to help drive improving NOI growth through 2023. Maintenance CapEx increased in the fourth quarter over the previous three quarters, which is consistent with the seasonality we typically experience. To give a better picture of capital expenditure trends, we provided on Page 5 of the supplemental the combined company trailing 12-month maintenance CapEx spend. Based on the Healthcare Realty annual dividend of $1.24 per share, the pro forma 2022 FAD payout ratio was 94%. We expect the FAD payout ratio to be in the high 90s in '23, giving capital spending for expected occupancy absorption, as well as higher average interest rates year-over-year. As interest rate increases moderate, the underlying fundamentals and growth of the portfolio will drive the payout ratio lower. Run rate pro forma debt-to-EBITDA at year-end, including the impact of January asset sales, was 6.4x. Target leverage continues to be in the low to mid-6s. We expect leverage to trend towards the lower end of this range from underlying portfolio growth. With minimal near-term funding needs, we will look to additional asset sales to fund limited acquisitions and steady development funding in 2023. Since the end of the third quarter, we have entered into $600 million of new interest rate swaps in anticipation of the $300 million of swaps that expired in late January. The net result is pro forma fixed-rate debt at approximately 85%, which is where we expect to remain for the near term. As we wrap up 2022, we're pleased to have completed the funding of the merger's special dividend as well as achieved our targeted synergies ahead of schedule. In 2023, we are poised to unlock the operational benefits of our scaled and recession-resistant medical office portfolio. Now I'll turn it over to Rob for further updates on investment and leasing activity.

Thanks, Kris. With the completion of our merger-related sales, we expect additional dispositions of $200 million to $300 million this year. These sales will further optimize the portfolio's long-term growth expectations. Proceeds from our dispositions will fund our active development and redevelopment pipeline and a minimal amount of acquisitions like those we completed in the fourth quarter. Our primary focus for investing right now is development and redevelopment. For development, we target returns of 100 basis points to 200 basis points above stabilized acquisition cap rates. Redevelopment is expected to produce richer returns in the 8% to 11% range. In the fourth quarter, one new development advanced from our perspective to active pipeline. This 100% leased $25 million project is the first of a 2-phase MOB development in Orlando. This year, across our $235 million active pipeline, we expect to fund approximately $25 million to $30 million per quarter. We are seeing increased opportunities for developments through a greater market presence and a fresh start to newly inherited health system relationships. An example is in Phoenix, where we now own 35 buildings filling 1.5 million square feet. This market scale places us at the center of leasing activity and transaction deal flow. We are working on a joint venture opportunity with a reputable developer for a 100,000 square foot MOB. The project of over $50 million is adjacent to a 120-bed hospital in an area undergoing explosive growth. The developer solicited our participation in the project given our sizable presence in the market and our relationships with multiple health systems. The development is 50% pre-leased with a clear path to 75% before construction begins. We added this project to our prospective development pipeline this quarter. Our much larger portfolio is a rich source for redevelopment opportunities. As an example, we are working on the redevelopment of two on-campus 60% occupied MOBs in Houston that came to us from HTA. I recently traveled to meet with senior leadership to renew the relationship with the hospital. They shared plans to increase the hospital bed count by almost 50% with the addition of a new acute care bed tower. Our team shared a $20 million plan to redevelop our buildings. We all agree that collaborating on these projects will reinvigorate the campus. The fresh start will attract physicians and create a great location to house new hospital services. We expect to move this project to our active redevelopment pipeline later this year. Turning to leasing. During the quarter, we completed the onboarding of 100% of the legacy HTA portfolio to third-party brokers. Our brokers, combined with improving relationships with our new health system partners, will drive leasing momentum. What is really exciting is that we are already seeing early signs of improved leasing activity. A great example is prospective tenant tours. Across the portfolio, tours in January jumped 60% compared to the last three months of 2022. And in a local example, our brokerage team in Phoenix recently used seven of their brokers to conduct 11 tours in one day. Such a broad and efficient coverage is a testament to the value of a strong brokerage team. In contrast, under HTA's in-house model, it would have been difficult to complete these tours in a week, allowing time to pass and interested parties to go elsewhere. Looking ahead, our Phoenix team is confident they can execute new leases in the next couple of months that will more than double our leased but not yet occupied space in this market. Similarly, I was recently talking to our Dallas-based Director of Leasing, who was energized by the momentum created from the brokers we added to our legacy HTA assets. He mentioned that the rate of monthly tours on one campus has doubled since adding them. More importantly, our brokers quickly sourced a sizable lease through their established provider network. With this momentum and leases currently in build-out, we expect gross absorption in this market to increase almost 350 basis points in the near term. As we look to 2023, success on both the development and leasing fronts will serve as the foundation for accelerating growth. Operator, we are now ready to open the line for questions.

The first question we have comes from Austin Wurschmidt of KeyBanc.

Just a first question, kind of hitting a little bit on some of the strategic objectives looking forward. I mean 2023 same-store NOI growth guidance of 3% to 4% has some implied acceleration from the fourth quarter, and it's kind of consistent with what you've talked about. But I'm curious what your latest thoughts are on the timeline of getting you into that high end of that 3% to 5% same-store NOI growth opportunity that you guys have talked about following the merger. Is 2024 a reasonable timeframe to think that you could see that continue to accelerate?

Thanks, Austin. And Brika, if you don't mind, we're having a little bit of a quiet volume. So if you can add some volume for the audience? That would be great. But Austin, for your question, I think just to clarify, our guidance for '23 on same-store NOI growth is 2.5% to 3.5%. But directionally, Austin, I think the point here, and I mentioned it in my remarks, that we're seeing a lot of strong trends in place, obviously, on the revenue side, through occupancy gains, rent growth that are really pushing that revenue equation higher. And so we see that translating in '23 kind of throughout the year from the lower end of that range where we finished '22 to sort of the higher end of the range through the balance of '23. So I think our view is we're heading north of 3% later in the year. And that certainly bodes well for the trend going into '24, building off that momentum. So I think, again, 2.5% to 3.5% for the year, but sort of a build in that range throughout the year.

Sorry about that. I was looking at the cash leasing spreads.

Yes, that's certainly an important driver, rather a big contributor.

You've mentioned the potential for increasing occupancy and referred to the SNO pipeline, particularly concerning HTA. How have you incorporated this potential and the factors influencing it into your same-store NOI guidance? What are the key considerations we should keep in mind? Are there any immediate challenges that might be counterbalancing these positive aspects as you expect them to develop over time?

Yes. No, I think you can kind of see what we're trying to get through with the different components of the same store. We are expecting to get some absorption as well as some improvement in our cash leasing spreads versus what we saw in 2022 as we bring the combination of the two companies together. One piece that is it's a bit of a headwind compared to historical experience, but an improving picture from where we've been in 2022, our operating expenses. As I talked about, operating expenses are now for us running around 6%. That's still elevated from our typical norm of 2% to 2.5%. But we are seeing some signs that, that could start moving in the right direction, but we don't anticipate that we'll get all the way back to that 2% to 2.5% in 2023. But we think it will start moving in the right direction, which will allow those different components of the revenue drivers to shine through and drop to the bottom line on NOI growth.

Your next question comes from Nick Yulico of Scotiabank.

Great. The first question is regarding interest expense. Although you did not provide specific guidance on it, I would like to understand if there is a way to estimate the cash interest expense, excluding the mark-to-market adjustments on the debt, for this year.

Yes. It really kind of depends on exactly how much overall interest rates move across the year. To kind of give you a bit of kind of heuristic, so to speak, on it is that with about $900 million of floating rate debt right now, a 1% change in the annual interest rate ends up being about $0.015 to overall growth on a per share amount for the year. So that gives you a little bit of the magnitude of the impact, but we'll have to kind of continue to watch that through the balance of '23.

Okay, that's helpful. My follow-up question is about interest expense. I understand you are excluding the merger fair value adjustment from your normalized FFO because it's a noncash item, and I know you're doing this due to its significant impact. However, other REITs are not excluding it, although they may not face the same challenges. I would like to hear more about the decision and rationale behind removing that from your normalized FFO calculation.

Kris?

Yes. We did consider that and look at that. And I think you're right. When you look at the impact that it has on us compared to peers and what's going on right now, the rapid change in interest rates, it is different. So we ended up with almost half of our balance sheet being mark-to-market, which resulted in over 20% of our income statement interest expense being noncash related to this fair value adjustment. So we had some of our analysts really, we spoke to all of our analysts on this as well as a lot of our investors. And the consensus was that given the size and the unusual nature of that, it was going to create a lot of comparability issues. And so the recommendation is that we make this normalizing adjustment that we pointed out. And I will remind you, being noncash, this is an FFO item. It's not a FAD item. So that was the thought process that went into that decision.

I would just add that it was more significant because of the merger and the acquisition of HTA, resulting in a 60% larger balance sheet. That's a substantial amount, as Kris mentioned. We don't have any significant maturities until 2025. As we refinance in the future, we'll manage the cash changes in real time like everyone else, but we're in a very strong position. I'm feeling very confident about the balance sheet, and it improves comparability, as Kris pointed out.

We now have Rich Anderson with SMBC.

So on the dividend, you said high 90s type of FAD payout. Hear me okay?

Yes.

Okay. Sorry about that. I had some feedback. And then Kris, you mentioned the sensitivity to higher interest rates and what that does to the bottom line. Let's say it's not high 90s, but it's in triple digits in 2023 for whatever reason. To what degree are you willing to live with that? And for what amount of time? Do you feel like you have enough visibility, or is a dividend cut at least being thought about at this point based on where you stand today and all the moving parts?

Sure. Thanks, Rich. Fair question. We're all wanting to be able to answer Nick's question about where interest rate is going. But like everyone, we're using heuristics and just trying to manage appropriately. But I think the short answer is we are confident that the operational improvements we're seeing that will read through are very strong in the near term. And we think those can go a great deal to offset what might be, hopefully, short-term rising interest rates. And then like everybody looking at forward curves, seeing not if, but when the rates start to come down. So we feel very good about that momentum. And even if, as you just said, we found ourselves right at triple digits. I think we're very comfortable that the operational improvements are real in the near term in '23, but also in '24. So we feel very comfortable that, that should drive down fairly quickly just through operational improvement. So we do not, at this point, anticipate any notion of any cut. Obviously, we're all watching the markets and looking at the extent of this. So that's something we reevaluate as a Board and as a management team every quarter, every year. But for now, that's our outlook is that we feel very comfortable with where it's at.

One thing I would add to that, Rich, is that one of the things that is putting some pressure there has to do with the capital for the absorption that we're seeing across the portfolio. So that's a good problem to have. And we look at that as growth capital that will enhance long-term cash flow and value. But that's something that if you're dealing with that in the short term, that doesn't point to a long-term dividend issue.

Okay. I don't know if this is an obvious question, but if that's 80% of the payout, would you have made the swaps at this point? Or was the situation driven by the recent $600 million in swaps at this level in today's market?

Yes. No. I mean if you really look at, historically, the way we've handled our floating rate exposure is that we've tried to take a pretty neutral view on rates by swapping about 50%. And that's where we ended up with the changes that we had with the $600 million of new and the $300 million that's expiring. So we're still trying to take a balanced view on where rates are right now.

Okay. And then I just had kind of a weird question. I live dangerously what is very last moment reporting. What had to get done in your mind that caused you to be so late in the reporting season? Is it obviously merger-related, but is there anything specific you can point to? Or was Todd just taking his kids to Disney World so you guys weren't available? What's the reason for that?

That's a valid observation. We are aiming for a more normalized period after the merger excitement. It’s important to note that this change wasn't something we made recently. We anticipated it in advance and communicated that early on. Our plan was to allow ourselves ample time considering the challenges following the merger during the 10-K and the first full audit after the merger. While it may seem simple to say, we could have managed to meet an earlier timeline, but we wanted to give ourselves some leeway. Moving forward, you can expect us to return to a more regular schedule throughout the year, so I don't foresee this trend continuing.

We now have Michael Griffin of Citi.

Maybe not to harp too much on the interest expense side of the equation. But just from that run rate number, that $0.41 you gave heading into 2023. I just want to clarify, does that include the effects of the swap burn-offs from January? And I know you talked about the interest rate sensitivity scenario. But what impact potentially the shares could see of that swap burning off from an interest expense perspective?

Yes. No, it doesn't because that was a 12/31 run rate number where that swap expiration occurred in late January. So that swap expiring and kind of converting to what our new swap rate is, ends up being about a little under $0.005 per share per quarter impact related to that expiration.

That's a helpful clarification. Regarding the targeted dispositions and guidance, I'm interested in the buyer pool and pricing expectations, especially since the beginning of the year is likely to have a more subdued capital markets environment. I also want to confirm whether any of these dispositions are connected to the $500 million of incremental dispositions you initially aimed for with the merger, or if they are legacy assets. Perhaps they are lower-performing or more challenging to lease assets. Any clarity on this would be appreciated.

Yes. We have completed the merger-related asset sales and are now focused on the future. We're considering the $200 million to $300 million target by refining our portfolio and identifying properties that we believe we can exit. These might not fit into clusters where we see potential for growth, or the markets may not meet our growth expectations. Our goal is to optimize our portfolio and potentially exit smaller markets that we don't want to invest in long-term. Regarding pricing, we've observed some fluctuations in interest rates recently. The debt market is influencing pricing for medical office buildings. In the fall, debt costs rose to the mid to high 6s, but we have seen a decline of about 100 basis points, followed by an increase of around 50 basis points. This impacts cap rates, which are currently moving towards approximately 6%. So, as we evaluate properties for sale, this serves as a baseline. The targeted properties could be above or below this range depending on the asset and market demand.

We now have Steven of Barclays.

It's Steve Valiquette from Barclays. I believe we've covered the questions regarding acquisitions and divestitures, so I would like to shift topics slightly. Regarding same-store operating expenses, I noticed some improvement. Can you highlight any specific areas where you're better able to control costs? I would appreciate hearing more about the trends in that regard.

I touched on the improvements we observed in the fourth quarter compared to the third quarter, which were largely due to successful property tax appeals. Without those appeals, our operating expenses are around 6%, continuing the downward trend we noted earlier in the year. The positive news is that as we approach 2023, there are indications of further improvement, particularly on the utility side, which constitutes over 20% of our operating costs. Utility expenses on the rate side saw a double-digit increase in 2022 compared to 2021. Looking ahead to 2023, forecasts suggest a moderation in these costs, with some even indicating a decline. While I'm cautious about fully embracing that view, any decrease from the 2022 levels would provide us with greater confidence regarding the overall trend of operating expenses throughout 2023.

We now have Jonathan Hughes of Raymond James.

I just wanted to go back a little bit in time. I guess can we talk about how much of the decline between the kind of FAD figure we had talked about last summer of like $1.45 this year and the $1.24 annualized run rate FAD? How much of that decline is not from the higher interest rate backdrop? I'm just trying to understand where some of this operational upside that was embedded in those projections has gone and maybe it's just simply delayed rather than no longer achievable?

Jonathan, I think, number one, the projections you're referring to, clearly, were in a very different environment. I think everybody is dealing with the interest rates and to different degrees. I don't think there's any change in the operational picture whatsoever. There's been no material delay or decline in the opportunity. In fact, I think we're seeing very strong signs, as Rob walked through some specific examples. I talked about what we're seeing come through on same store. So we're really not seeing anything that is operationally negative. I think this environment for a lot of folks has two big impacts. You've got your operating fundamental business. How is it doing? How is demand? What are the trends? And then what everybody is dealing with is a dramatic C-level change in interest rates. Unless you just were prescient, perfectly prescient, maybe lucky, the interest rate side is what it is. We're all managing through it the ways we can. And I think we're in very good shape there, but certainly see a large impact but see a rebound as things moderate coming from that side as well. So again, that's kind of what informs our swap position fixing those rates. So I think operationally, we're very optimistic and bullish about where we're headed. So I think, Kris, unless you have something to add, I think the majority of that would be the interest rate environment is the impact there.

Yes, we are still entering the space aiming to achieve operational improvements. What we are currently focused on is successfully funding the regular and special cash dividends, as well as realizing the synergies. Those are two of the three main objectives we identified as crucial for execution, with the third being another significant operational improvement. Rob touched on this foundation we've established, and we are seeing promising signs that we can start to achieve these goals as we progress through 2023 and into 2024.

Is there some expected vacancy in the portfolio that's preventing absorption from being higher? The midpoint is 60 basis points, compared to 50 basis points of absorption last year. I see improvement, but I'm trying to reconcile some of the positive comments regarding the strength of the outpatient business with what I had anticipated would be more potential for absorption.

Yes. One clarification regarding the guidance is that it encompasses overall same-store performance for both multi-tenant and single-tenant properties. The single-tenant properties, which generally maintain occupancy levels close to 100%, somewhat dilute the overall expectations. This means we are more optimistic about the multi-tenant segment, where the real opportunities lie. I believe our guidance suggests that the increase could be more than just the projected 40 to 80 basis points for the total, leaning more towards 50 to over 100 basis points for multi-tenant properties. Additionally, we are quite optimistic and noticing early signs of leasing momentum. However, the build-out process requires time. We have occupied spaces that are leased but not yet occupied, and it takes time to develop these properties, potentially over six months to convert them to active occupancy. Although there’s a necessary lead time for delivery, we are observing positive trends that should become evident in the second half of the year and into 2024.

All right. Just one more question from me. Returning to the run rate for FAD and dividend coverage, you've addressed most of it with previous questions. Can you remind us what the target payout ratio is? You mentioned it reached the high 90s this year, but what can we expect that to be over the longer term?

Yes. I would say we will continue to reduce that. You have actually seen this in our history. About eight to ten years ago, we were over 100%. Through improvements in our portfolio and growth, we managed to bring that down to the mid- to high 80s. However, our expectation was to keep driving it lower from there. This was before we faced some of the pressures from interest expenses that we've mentioned. Our long-term goal is to keep reducing it while also being able to provide some growth in the underlying dividend.

Yes. I think in simple terms, below 90 is certainly directionally where we want to get back to. But we're obviously navigating the current environment and certainly want to see it go into the 80s in the not-too-distant future.

We now have Mike Mueller of JPM.

Kris, I think you talked about some of the swaps not being in the $0.41 run rate. So when you layer everything into it, the full impact of swaps and then looking at what you're expecting for acquisitions, dispositions, do you think you'll end the year with a run rate that's similar, higher or lower to that $0.41 now?

Yes. As we approach the end of 2023, the focus returns to interest rates. However, the $0.41 figure does not account for any anticipated changes in interest rates, nor does it reflect any growth in the underlying portfolio, which is significant. Therefore, we expect that by the end of the year, we should be able to outperform the pressures from interest rates, resulting in a higher and more favorable run rate position than where we began the year.

Got it. Even with net dispositions?

Yes, because we're looking at those dispositions to fund some marginal acquisitions as well as our development.

Got it. Looking at the development, it seems you have around $350 million in starts planned for the second half of the year. How should we view this as you transition into 2024 and 2025 in terms of annual starts?

Yes, if you examine our prospective pipeline, it stands at about $350 million. Approximately $200 million of that is expected to begin in the second half of this year. When combined with the existing pipeline of $235 million, some of which will be rolling off, we believe that by the end of this year and into early next year, we could see six new starts totaling around $200 million. This would result in a funding run rate increasing from $25 million to $30 million per quarter this year, reaching about $50 million per quarter next year. We are optimistic about these projects and are actively engaging with potential tenants and health system partners.

We now have Tayo Okusanya from Credit Suisse.

Yes, Kris, your response to Michael was helpful in explaining how the FFO run rate will develop in '23. However, when I consider this same reasoning for how FAD should increase in '23, doesn't it suggest that at some point we will see a significant dividend coverage above 100%, particularly since you were at 100% in the fourth quarter? There is a dilutive effect from a full year of asset sales, and there will likely still be rate pressure going forward. You have projected a considerable amount of recurring CapEx and TI leasing commissions as you lease up the portfolio. I am trying to think about that in relation to Richard's earlier question regarding dividend policy.

Yes. As we're looking at it, I think the same fundamentals that we're talking about being able to drive improvement in overall growth of the operations that we're seeing, that will flow through to FAD as well. As I've said in my prepared remarks, is the expectation for the year, we'll probably be in the high 90s on the payout ratio. And as Rich said, does that in any particular quarter because the CapEx spend is not as smooth as earnings are. And so you are going to have some variation in any quarter. Could you be over 100% for some period of time? Yes, that's possible. But as Todd kind of pointed to, we don't see that as concerning, especially if that is being driven by additional capital spend for absorption, which is really growth capital. And so plus or minus any one quarter depending on how you're running your models, that would not be surprising, but we still feel like long term directionally with what we're seeing in terms of internal growth, that we'll be able to balance out this year as well as drive that payout ratio lower in the future.

And that high 90s number just for clarification, is that an average for '23 or that's the year-end target?

That really is an average. A key piece of helpful information included in our earnings release, particularly on Page 5 of the supplemental, is the seasonality of our capital spending. We clearly see a year-to-year pattern where the fourth quarter is always high. Therefore, if you examine the fourth quarter, your payout ratio may appear elevated. However, if you average it out over the year, we tend to have a lower ratio in the first half, which increases in the second half. This was the case before the merger and we expect it to remain the same after the merger. It's important to consider the full year's balance, so we can't simply extrapolate from a fourth quarter payout ratio. This is why we provide that additional disclosure.

Got you. And then one more if you would indulge me. You're starting to get a lot more information from health care systems right now. Again, their bottom line is also under pressure. We are hearing about them, again, starting to consolidate MOBs, consolidate their regular admin space as they kind of try to improve the bottom line. Could, you just kind of talk a little about what you're hearing from them as well? And what potential impact that could have on not just demand but even potentially ability to drive pricing going forward?

Sure. I believe that 2022 was a challenging year for everyone, especially with the significant changes in interest rates. However, if you examine the monthly trends throughout the year, there is a noticeable difference between the first half and the second half. By the end of the year, we began to see considerable improvement, which I see as a positive sign for 2023, particularly with the easing of COVID impacts and improving labor costs. The environment appears to be much more favorable. Like others, health systems are grappling with interest expenses, but we're noticing some relief there, similar to what we discussed regarding inflation, which is encouraging. The key point is that health systems continually reassess their space usage. A major trend is the ongoing focus on shifting more services to outpatient settings, which are more cost-effective and efficient. Everything we're observing in leasing and development highlights this renewed focus, demonstrating our ability to reduce costs, enhance our revenue models, and improve margins. Outpatient care continues to be a crucial part of the solution. Health systems will always seek to optimize care delivery, but we are well-positioned to capture the growing demand in this area.

We now have John Pawlowski of Green Street.

I have a follow-up question on the occupancy upside and the multi-tenant square footage you guys outlined on Page 16. Could you just give us a sense when do you think you'll be able to get 90%?

The 90% occupancy rate is something we've discussed throughout the merger and in our investor presentations. We've highlighted potential growth in NOI dollars and reaching that 90% occupancy level for context. It's still early stages for us. In response to Jonathan Hughes' question about what 2023 looks like and where we see occupancy growth, I mentioned that we are optimistic about achieving 150 basis points of gross absorption in the early part of 2023. Currently, we observe a net trend of 50 basis points of growth, with the potential to reach around 100 basis points as the year progresses. Our guidance reflects an average for the year, implying a move from 85% occupancy to 90% on the multi-tenant side. However, this doesn't suggest it will take 10 years to achieve, as we don't believe it will take that long. We see it as the beginning of building momentum over several years. While we can't provide an exact timeline, we aim to continue executing year-over-year. We consider this a process that may take around 3 to 4 years, but we'll need to have some successes to establish a more precise timeline.

Okay. Understood. And then, Kris, the $10.8 million in merger-related costs in the quarter, what additional costs are left to incur? And are there any other just integration risks that are still looming your minds?

In response to your second question, we do not see significant integration risks. There is still some work to be completed as we are in the process of merging our accounting systems. Fortunately, we were using the same system, just on different versions, and we're working to combine them. We have consultants assisting us with this process, which is part of the merger-related costs you will continue to see in the first quarter, and likely some will carry over into the second quarter. Much of that work is nearing completion, but there are still some final details to address.

Okay. Can you quantify the cost that will be incurred in '23?

I don't have it right at my fingertips, but it will certainly be coming down from $10 million, I think, in the quarter. So it's going to be less than $20 million.

Okay. Last question for me. Can you just give some context on what drove the decline in the tenant retention in the quarter down to the 75%, 76%?

Yes, it fluctuates from quarter to quarter. When looking at the annual figures, we're slightly below 80%. We're noticing a difference between the legacy HR and legacy HTA portfolios. We observed some lower customer service scores, likely due to the distractions faced by the HTA team over the past few years related to their sale. This may be contributing to the reduced retention rates. However, our team sees this as an opportunity and is eager to demonstrate the positive customer service experience that we typically deliver. Looking ahead, we expect retention to improve, increasing from the lower end of 75% to 90%, moving closer to 80% or above.

Thank you. We have no further questions on the line. So I'd like to hand it back to Todd Meredith, the CEO, for any final remarks.

Thank you. Thanks, everybody, for joining us today. We'll see some of you at some conferences next week. And everybody, have a great day. Thank you.

Thank you. This does conclude today's call. You may now disconnect your lines, and have a lovely day.