Healthcare Realty Trust Inc Q4 FY2023 Earnings Call

Good morning or good afternoon, and welcome to the Healthcare Realty Trust Fourth Quarter Earnings Conference Call. My name is Adam, and I will be your operator for today. I will now hand the floor to Ron Hubbard, Vice President of Investor Relations, to begin. Ron, please go ahead when you are ready.

Thank you for joining us today for Healthcare Realty's Fourth Quarter 2023 Earnings Conference Call. Joining me on the call today are Todd Meredith, Kris Douglas, 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, 2023. 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 December 31, 2023. The company's earnings press release, supplemental information, and Form 10-K are available on the company's website. I'll now turn the call over to Todd.

Thank you, Ron, and thank you, everyone, for joining us this morning. Healthcare Realty generated solid quarterly results meeting or exceeding expectations on several key metrics. Normalized FFO of $0.39 per share for the fourth quarter was steady and in line with our expectations. Same-store growth for the quarter and year was in the upper half of our guidance range. You will recall, we published a bridge last quarter, outlining our expectations for multi-tenant occupancy and NOI growth, starting with the fourth quarter. We are pleased to report over 50 basis points of positive absorption at the very top end of our expected range for the multi-tenant properties, and NOI growth accelerated above the high end of our range to 3.3% for all multi-tenant properties, not just same-store. These strong fourth quarter results were achieved through the focus and incredible efforts of our leasing and operations teams. Looking forward, we see a couple of areas where we can keep improving. First, retention. We made incremental progress on tenant retention achieving just over 78% in the fourth quarter compared to 76% in the third quarter. What's significant is that retention at the legacy HTA properties was in line with the HR portfolio. And we see the ability to push retention higher to more than 80%. A second opportunity for improvement is operating expenses. The fourth quarter came in better than expected at just over 4% growth. That's in part due to lower property taxes. We see more opportunity to reduce expense growth to the 3% level in 2024. Together, higher retention and lower expenses will help us reach the upper end of our 2024 goals. What I'm most excited about is our new leasing momentum. Our leasing team signed new leases totaling 425,000 square feet in the fourth quarter. This marks 3 consecutive quarters averaging over 400,000 square feet. The strong pace of new signed leases is what fuels the occupancy gains in our bridge and forecast for 2024. As we look more broadly at what will drive our 2024 growth, we are seeing an uptick in demand from both health systems and independent physician groups. On top of this, supply has steadily tightened, which provides a favorable backdrop for leasing momentum and occupancy gains. What it comes down to is more tenants chasing fewer MOB. To illustrate this point, look at replacement rents today versus 2019. Construction costs have escalated at an annual average of more than 7% over the last 5 years. Couple this with much higher financing costs and you have a recipe for much higher replacement rents. Back in 2019, typical MOB development costs were about $350 a square foot in a place like Dallas. Required yields were in the low 6s, putting net rents around $22 per square foot. Five years later, equivalent MOB development costs are approaching $500 a square foot, and rent yields are now around 8%. That means replacement rents are approaching $40. So replacement rents have increased more than 80% in 5 years or more than 12% annually. This limits new supply and sets us up to improve occupancy and rates in existing buildings. At Healthcare Realty, we're laser-focused on maximizing occupancy gains in 2024 with rate acceleration to follow. Now I'll turn it over to Kris for an overview of our financial and operational results. Kris?

Thanks, Todd. It was a solid fourth quarter with normalized FFO per share of $0.39. FFO dollars were $2.7 million higher than the third quarter. The sequential improvement was the result of a $3.1 million reduction in interest expense from asset sales that were used to repay the line. This was offset by a $4.2 million reduction in NOI from dispositions. Additionally, operating expenses net of recoveries were down $3.7 million sequentially. The reduction in operating expenses was primarily from the reversal of third quarter seasonal utilities as well as lower property taxes. The lower taxes were the result of successful appeals and lower rates, especially in Texas. Approximately $2.4 million of the property tax benefit was related to prior periods and will not repeat in future quarters. The lower property taxes contributed to improved operating expenses. Operating expense growth was 4.1% for the quarter which was down from 4.8% in the third quarter and 5.3% in the second quarter. Same-store revenue fundamentals also improved. Year-over-year quarterly same-store NOI growth was 2.7%, up 40 basis points from last quarter. Revenue growth of 3.2% was driven by a 3% increase in revenue per occupied square foot and a 20-basis point improvement in average occupancy. Cash leasing spreads in the quarter averaged 3.3%. We ended the year with total portfolio in-place rent escalators of 2.81%. This is up 15 basis points since the first quarter of 2023. The improvement was driven by two ways: first, from higher escalators for new and renewal leases, which averaged 2.95%. This was well above expiring leases, especially for legacy HTA escalators that were averaging 2.5%. Second was addition by subtraction. The average escalator of properties sold during 2023 was 1.9%, significantly below the rest of the portfolio. Sequential same-store occupancy increased 65,000 square feet or 20 basis points to 89.2%. Even more impressive, total portfolio multi-tenant occupancy increased 175,000 square feet sequentially. The strong leasing volumes contributed to an increase in maintenance CapEx. Total maintenance CapEx for the year was 18% of NOI or $152 million. This was in the middle of our guidance range for the year. The FAD payout ratio was over 100% for the year. With the anticipated strong absorption in 2024, the payout ratio is likely to remain elevated as we invest in tenant build-outs. We are comfortable that the payout ratio will come back down as we fully realize the NOI from the positive absorption. Net debt to adjusted EBITDA at December 31 was 6.4 times, within our target range. Net debt was lower as the line of credit was fully repaid at year-end from $338 million of asset sales in the quarter. Looking ahead, normalized FFO guidance is $1.52 to $1.58 per share for 2024 and $0.38 to $0.39 for the first quarter. Guidance and the major assumptions are outlined on Page 6 of the supplemental we released this morning. To provide context for guidance, we walk forward the major drivers from an annualized fourth quarter FFO run rate of $1.52 per share. The run rate adjusted for out-of-period items such as the property tax appeals. The major growth driver in 2024 will be internal operations. Multi-tenant absorption is projected to be 100 to 150 basis points and generate $21 million to $29 million of growth in cash NOI. Single-tenant cash NOI growth is projected to be either plus or minus 1%, which is below in-place escalators of 2.5% because of two general office expirations. A government services tenant vacated the end of the lease in January. The building sits at the front door of CommonSpirit St. Anthony Hospital in Denver. When we purchased this property in 2018, the plan was to raze the building and redevelop the parcel. We are working with the hospital on the long-term redevelopment plans and expect to demo the building later this year. The lease for the other property will expire at the end of January. We are marketing the building with a goal of selling the property before year-end. We have not projected any new rent or sale proceeds from either property in 2024, so any progress on these fronts would be upside. G&A expenses are projected to increase $5.8 million at the midpoint. The increase is primarily related to returning to run rate incentive compensation levels as materially lower performance-based compensation in 2023 is creating a tough comparison. The other major headwind is a $200 million interest rate swap with a 1.21% fixed rate that expired in January. In preparation for the expiration, we executed new interest rate swaps during the fourth quarter at an average rate of 4.71%. The new swaps will cost $7 million more annually. There are no acquisitions assumed in guidance. We are projecting $150 million to $250 million of dispositions to match fund our capital needs during the year. The multi-tenant absorption in our guidance is consistent with the occupancy and NOI bridge we introduced last quarter. As Rob will discuss in more detail, an updated occupancy bridge is included on Page 21 of our investor presentation. It shows that we expect sustained positive momentum on occupancy absorption through 2024. This will help drive accelerating NOI growth and generate a strong FFO exit velocity going into 2025.

Thanks, Kris. Healthcare Realty posted another strong quarter of leasing activity. New signed leases totaled 425,000 square feet that were 13,000 square feet greater than our fourth quarter projection. For the year, our team signed 449 new lease deals for a total of almost 1.5 million square feet. Approximately 60% of these came from the legacy HTA portfolio, which represents slightly over half of our multi-tenant portfolio. In addition, 226 renewals totaling 1.2 million square feet were signed during the quarter, bringing total renewals for the year to 817 that totaled 4.2 million square feet. Our leasing team under the leadership of Amy Poley, senior VP of Leasing, did an extraordinary job of driving momentum in 2023. I want to commend Amy and her team for their hard work and tenacity. Strong leasing throughout the year culminated in 518,000 square feet of multi-tenant lease commencements in the fourth quarter. Combined with lower sequential move-outs, multi-tenant occupancy jumped 53 basis points. This equates to 175,000 square feet of net absorption. This level is at the upper end of the range we provided in the multi-tenant occupancy and NOI bridge published in November of last year. On the disposition front, Healthcare Realty sold 19 properties for $656 million at an average cap rate of 6.6% during the year. These were largely non-core assets with 34% non-MOB and 63% single tenant. We also fully exited smaller markets like Sebring, Florida, and Evansville, Indiana. What I like most is we improved the growth profile of the portfolio by selling properties with annual escalators averaging 1.9% versus 2.8% for the broader portfolio. Our MOB operating fundamentals remain healthy. The transaction market continues to be governed by interest rate volatility. Until we see stable rates over a longer period of time, we expect lower transaction volumes and smaller deal sizes. For now, we see MOBs trading in a range of 6% to 7% with the higher quality properties in the low to mid-6s. Turning to expectations for 2024. Healthcare Realty's outlook for leasing is strong. Our new lease pipeline remains robust at 1.5 million square feet and provides visibility into several quarters of leasing volume. Across the country, new MOB development starts have been trending down over the past 12 months. In the fourth quarter, they were down by over 40% year-over-year. This trend has been driven by tightening credit markets and, as Todd mentioned, a healthy increase in construction costs over the past 5 years. At the same time, occupancy across MOBs has continued to climb. Additionally, we are seeing increased health system demand for space as volumes and financial measures improve. Recently, a couple of for-profit hospital operators reported a 3.6% year-over-year increase in outpatient surgical cases. And hospital operating margins steadily improved throughout 2023. Positive supply-demand fundamentals and improving hospital performance will serve as tailwinds for our 2024 absorption goals. We updated our multi-tenant occupancy and NOI bridge in our recently published investor presentation. The primary change is to the starting occupancy, reflecting the sale of some highly occupied properties during the fourth quarter and the completion of the development. It is also worth noting that we expect absorption during the second half of 2024 to be stronger than in the first. These are shaped by two seasonal patterns. First, we have about 2.7 million square feet of expirations in the first half of the year versus 2.1 million in the second. Even with the consistent renewal rate, we expect more move-outs in the first half of the year versus the second. Second, new lease commencements have historically been lower in the first half of the year versus the second. As a result, we expect net absorption in the second half of the year to be about 200,000 square feet greater than the first. We are reiterating our expectation for 100 to 150 basis points of occupancy gain in 2024 on top of the 53 basis points of absorption this quarter. Our leasing team is off to a great start this year. They are energized by growing demand for health care services and a tightening supply/demand backdrop. Looking ahead, I'm confident in our ability to drive absorption that translates into multi-tenant NOI growth of 4.5% to 5.5% in the second half of 2024. Now, I'll turn it back to Todd for some final comments.

Thank you, Rob. Before we begin our Q&A, I'll touch on capital allocation and our outlook for 2024. We exceeded our own disposition expectations in 2023. We sold $656 million at a cap rate of 6.6% for the year, with over half occurring in the fourth quarter. And what's significant is these sales improve the quality and growth profile of our portfolio. Looking ahead, we're shifting to a more routine annual pace of portfolio optimization. In 2024, we expect dispositions of $150 million to $250 million, which will fund capital obligations, including redevelopment and developments. Beyond this, we're pursuing accretive capital allocation opportunistically. We continue to work towards strategic joint venture partnerships that diversify our capital sources and extend our ability to meet long-term provider demand. In our initial 2024 guidance, we've conservatively assumed no joint venture transactions. Finally, our outlook for 2024. We've updated our occupancy bridge and our occupancy and NOI bridge. Building on the strong absorption in the fourth quarter, we expect healthy occupancy gains and NOI growth in 2024, consistent with what we communicated last quarter. For FFO guidance, robust multi-tenant absorption and NOI growth is the primary driver that moves us into the upper half of our guidance range. For Healthcare Realty, sustained operational growth in 2024 will set the table for attractive FFO and FAD growth in 2025. Operator, we're now ready to begin the Q&A period.

Our first question comes from Michael Griffin from Citi.

Todd, maybe I can go back to your comments on the dividend first. I think if you look at guidance for both normalized FFO and CapEx, it implies about a 107% payout ratio for 2024. I know the guidance has been elevated for some time and you talked about maybe being able to grow into a healthier payout ratio. But at some point, could a potential cut be warranted? Any color around that would be helpful.

Sure. Michael, we've certainly said that for a while that we think that as we ramp up our absorption and invest in TI, that we'll certainly see that capital spend continue. So as Kris described in his remarks, we expect a similar payout ratio in 2024 as 2023, kind of in that 107-110% range. And we're comfortable with that because we know we're investing the capital that will generate the NOI that will flow through to FFO and FAD afterwards. And so we really see 2025 as an important transition in that. So we're very bullish on what we see. Obviously, we'd love it to happen sooner, like everyone, but we think the key is that operational improvement and investing in that capital to generate the NOI. So our view is we feel very comfortable. As Kris remarked that we can get there in 2025. And so certainly, we're not thinking about a cut. The board is not thinking about that at this point. And obviously, we can't control all market conditions, but our view is, operationally, we can deliver the NOI that will improve that ratio.

Yes. And just a follow-up on that. I mean what kind of payout ratio are you comfortable with? And how long would you kind of have to keep that as is until you would grow into the cash flows?

Yes, we believe that 2024 will resemble 2023 in terms of the payout ratio, but we anticipate that by 2025, we will start moving towards a covered dividend level. Ideally, we would like to see that ratio decrease significantly, aiming for levels of 90% or even lower. That's the direction we are heading in. While we would prefer to see improvements sooner, we expect those changes to start to materialize in 2025.

Got you. And then maybe one question about the joint venture or disposition front. At your Investor Day in October, you mentioned about $400 million to $500 million of funding for the joint ventures, but your guidance has changed since then. What has changed between now and then? Is it related to current cap rates or interest rate volatility? That seems like a significant shift in a short period. I'm just curious about your thoughts on that.

Yes. I wouldn't say we're moving away from that in terms of scale. As we've discussed recently since Investor Day, particularly during earnings calls and NAREIT meetings, it's clear that the cap rate environment is influenced by significant interest rate volatility and financing challenges. Therefore, we haven't felt any urgency. We've completed a considerable number of dispositions that have more than met our capital needs. We believe there's no rush; instead, we prefer to be strategic and patient. Time is benefiting us, as we've noticed an improvement as we approach 2024. While interest rate volatility continues to be a factor, we anticipate a couple of transactions rather than just one. Ultimately, we expect to generate proceeds in the range of $300 million to $500 million, which may require a few transactions of different types that are strategic and beneficial for us. Some may focus on core investments, while others could be oriented towards value-add developments or redevelopments. We see this coming together, but we are choosing to be patient as we navigate the current interest rate volatility.

The next question comes from Connor Siversky from Wells Fargo.

One question on the leasing pipeline. In the NAREIT presentation, you had the number at 1.7 million square feet. It looks like in the new presentation, now you have a range of 1.4 to 1.7. I'm just curious what's driving the change there, or whether that's just a function of having more visibility into the Q4 expectations?

Yes. I believe that the pipeline is constantly changing. There are always new entries and exits, and we feel that the range of 1.4 to 1.7 million square feet we shared in the investor presentation accurately reflects where the pipeline will fluctuate. We believe it offers solid visibility, as you mentioned, into the expectations for new leasing in the upcoming quarters. We think that this range indicates a strong outlook for several quarters of new signed leasing activity. Therefore, we are confident that the activity we are seeing aligns with our projections for 2024.

Okay. And then in consideration of expirations through 2024, almost 6 million square feet. Am I right to think about maybe a 300,000, 400,000 square foot number per quarter as a reasonable target to keep that ratio in the same place?

Yes. Regarding expirations, we have more expirations in the first half of the year, so we expect a higher number of move-outs during that time. This, along with the fact that lease commencements tend to be lower in the first half of the year, means we anticipate that absorption will be lighter in the first half than in the second half. The increase in expirations or move-outs that we have projected is primarily due to our higher expectations for expirations and the renewal rate we've applied to those.

Okay. And last one for me, just on the office assets in the SNF sold during Q4. Could you provide the full NOI contribution from those assets? Just to save me from doing the math, if you could provide the average cap rate on the MOB sold during the quarter, that would be appreciated.

Yes, I don't have the exact figure right now, but I can share the cap rates. Overall, we were around 6.3 to 6.4 for everything sold in the fourth quarter. For the skilled nursing facilities, we recognized no income, so that was zero. Some of the office properties were at the upper end. Removing those extremes on either side, it accounts for about half of the total proceeds, and the cap rate for the medical office buildings falls in the high 6s, around 6.8 to 6.9.

The next question comes from Juan Sanabria from BMO Capital Markets.

I just wanted to ask about G&A. Just curious if you could talk about the size of the increase and the thoughts behind that. I seem to recall that post-HTA, the G&A was maybe sacrificed a little bit in terms of compensation to kind of hit some of the numbers, but it seems like that maybe was just a temporary phenomenon. Is kind of that the right way to think about it?

Juan, there isn't a change in the target numbers for compensation. The actual results for incentive compensation in 2023 and even 2022 were lower, which leads to a reduced figure for those periods. In 2024, our guidance simply reflects a return to the targeted amounts of the incentive program. We're essentially comparing target levels to the lower levels from previous years. There hasn't been a significant change in the actual compensation programs or total amounts. As Kris pointed out, it's really about making a difficult comparison and reflecting the accrual in place for the compensation program against the actual results from previous years.

Okay. So the 10% growth isn't factoring any sort of investments in the platform or technologies, just the comp and getting back to the average hurdle rate that you were below. Is that fair then?

There is definitely investment happening within our platform. We've hired some strong individuals who are assisting us with analytics and portfolio strategy. However, that's not the main factor behind the changes we're seeing. The primary driver is what Todd mentioned about returning to normalized incentive compensation. At the midpoint, there is an increase of $5.8 million, which amounts to approximately $4 million returning to the normalized incentive compensation range. The remainder of the difference is attributed to growth in general and administrative expenses, which is about a 3% increase year-over-year. Therefore, the key difference relates to Todd's points about returning to the standard performance compensation rate.

Very helpful. I wanted to clarify the message as it has changed over the past few quarters. Looking back at the first quarter of 2024, you mentioned a baseline FFO growth of 5% to 7% and same-store NOI growth of 4% to 6% for the entire company, not just multi-tenant properties. It seems there may be some single-tenant expirations that weren't initially considered, which could have been unexpected. I'm curious if you could explain what has changed throughout the year. The leasing pipeline you've discussed has been strong for some time, and we've started to see some benefits from that in the fourth quarter. Can you help reconcile these two points? That would be very helpful, as we are certainly trying to understand this on our end.

Sure, Juan. Big picture, we talked about aiming for 4% to 6% growth a year ago. What you see in our update from last quarter and this quarter is our focus on multi-tenant growth throughout the year, as Rob mentioned. We're expecting to see an increase in the second half, partly because of expiration patterns and the leasing activity we pushed significantly in 2023. You saw the beginning of this improvement in the fourth quarter, and it should consistently contribute through 2024. Our goal is to reach growth that approaches the 5% range in the latter half of the year. While we'd prefer to achieve this sooner, one challenge has been that operating expenses have proven to be a bit more persistent than expected. We've made good progress this quarter, but we anticipate continued improvement going forward. There's also a potential shift in the rate of growth in our operating expenses. With more detailed insights as we move forward, we see the momentum building and remain focused on our target of 4% to 6% multi-tenant growth, aiming to reach that by the end of 2024.

Okay. And then just one last quick follow-up, sorry. You guys were saying that the absorption for the quarter was at the high end, but occupancy came in below on the multi-tenant side. Could you just help us square those two comments?

We clearly outlined this in our supplemental materials and earnings press release. Specifically, on Page 4 of the supplemental, the difference was discussed by Rob. The properties we sold in the fourth quarter, which contributed to the starting occupancy calculation, had higher occupancy rates, causing the starting point to decrease. We also completed a development project. When you consider these factors, the starting occupancy naturally went down somewhat. However, the difference remains at 53 basis points and 175,000 square feet of absorption. Consequently, the projected starting occupancy mentioned in the bridge during the last update had to be adjusted due to the sales and the completion of developments. This adjustment is standard as the portfolio evolves. We aimed to clarify that the starting point is different, while the change is still at the high end of the expected range.

The next question is from Mike Mueller from JPMorgan.

A couple occupancy leasing questions. I guess you finished the year multi-tenant 85.2%. And just kind of given the commentary about the timing of move-outs versus commencements and stuff, is it safe to say that at least in Q1 occupancy dips from 85.2% to before going up? Or does it just kind of head up regardless of that from year-end?

I would say that we think that occupancy is going to move up from here. Those are our expectations. We don't expect to see a dip moving from Q4 to Q1.

Just not going to be at the same pace that you saw in the fourth quarter. So it could be a slight positive as opposed to the significant positive absorption we saw in the fourth quarter.

Got it. Okay. On the leased side, I think it was 87.2% at year-end, give or take, for the leased rate. You've outlined in the presentation your expectations for physical occupancy. Do you anticipate the lease rate to increase as well, or is the occupancy trend simply the start of what is already included in that leased rate?

Yes. I think that what we're observing in terms of lease commencements moving forward indicates that we currently have about 210 basis points of difference between the two rates, 87.2% and 85.2%. I expect that these rates will move in tandem as occupancy increases. In the short term, I don't anticipate the gap between the two narrowing significantly.

The next question comes from Michael Gorman from BTIG. Robert Hull, our Chief Revenue Officer, stated that in terms of lease commencements moving forward, we currently have a difference of about 210 basis points between the two occupancy rates, which are 87.2% and 85.2%. He expects these two rates to move together as occupancy increases, but does not foresee the gap between them narrowing significantly in the near term.

Just wanted to maybe synthesize some of the questions here. Obviously, one of the questions on the dividend and then thinking about the 2024 outlook earlier last year. And as we start to think about how 2024 plays out and going into 2025. I just want to make sure if I'm doing my math correctly, the implication here is that if you kind of move towards dividend coverage in 2025, it's kind of in that 6% to 8% FAD growth in 2025 is what would be implied. I know you're not giving guidance, but like is that the way to think about how 2024 plays out is that the run rate by the end of the year is going to be such that kind of mid- or even upper single-digits FAD growth is what we're looking at in the out years?

Mike, I would say you're directionally headed the right way. I think it's early to be calling that for sure, for 2025 and an earlier question was asked about we're obviously very bullish on our multi-tenant side. And our single-tenant side is fine. The retention rates are strong, but backfilling single-tenant vacates have typically a lag effect. And so we don't have perfect visibility into expirations for single-tenant as an example, in 2025. So it's early to call the net number, if you will. But you're right in terms of what the implied math, implied dividend coverage would suggest in terms of the growth potential in 2025. So we're certainly bullish on that and see a very strong uptick going into 2025. Now like everyone, we're watching interest rates. We're looking at all that, but we've brought our variable rate exposure down significantly. We don't have big maturities in 2024. So from what we can see, we can see that exit velocity of 2024 being quite strong as you said.

Okay. Great. And then maybe just helping me out on that as you think about that. I mean exiting 2024, you see a lot of strong absorption, a lot of leasing momentum. So obviously, the NOI coming online is a benefit. Should we expect a normalization in CapEx as a percentage of NOI as well as we get towards the back half of 2024? So if I'm thinking about the guidance of $140 million to $160 million, is that going to be front-end weighted as we think about the CapEx bill this year?

The timing of maintaining new leases in the latter half of the year and into 2025 will be crucial, and we are currently experiencing some growth in this area. For the year, we spent 18.4% of our NOI on maintenance CapEx, and I expect a similar amount for 2024. Even at this level, the additional NOI from leasing late in 2023 and throughout 2024 will provide benefits. Regarding stronger growth in FAD, I believe the answer is yes, without needing to anticipate a major reduction in maintenance CapEx as a percentage of NOI. If we return to a regular situation, such as 15% of leases expiring each year, that will likely represent the percentage of NOI spent on maintenance CapEx. A normalization would align with that expectation, rather than a drastic reduction in maintenance CapEx.

Okay. Great. And then maybe just last one for me. Just on the JV, obviously, being conservative not including that in guidance. How should we think about that conservatism? So if I look at the bridge in your release this morning, is the kind of $5.5 million to $7.5 million of dilution from additional dispositions, is that in place of the JV? Is that the conservatism? Or I'm just trying to understand the potential benefit if the JVs do come to fruition over the course of the year. Does that take the place of those dispositions? Or is it coming through fee income? Or how does that play out?

I wouldn't say it's a substitute. I still expect the disposition as part of our normal portfolio optimization. A run rate of around $200 million going forward seems reasonable. Regarding the joint venture, there are a couple of ways to think about it. One is that we could use the proceeds to buy back stock or pay down debt, or a mix of both to maintain leverage neutrality, which would be beneficial. Timing is crucial here—how much we could achieve in a year is important. Another perspective is that if we engage in any redevelopment or new development projects, it could lower our capital expenditures and improve returns on the smaller amounts we do invest in those projects. So once again, the timing will significantly impact this. Ultimately, it’s about how we utilize the joint venture proceeds and when we do so. We're not providing specific guidance on this yet, but we’ll offer updates as we refine our plans and obtain more details.

The next question comes from John Pawlowski from Green Street.

I want to revisit Juan's question regarding the changes that have occurred since last May when you announced total same-store growth expectations of 4% to 6%. I'm less interested in guidance and the fact that things evolve, but rather focused on any structural shifts affecting pricing power, tenant loyalty, and overall portfolio dynamics. You mentioned that expenses have become more challenging, but the difference between the anticipated 3% same-store growth and the previously indicated 4% to 6% seems to indicate a more significant issue beyond just expenses. Can you elaborate on this? What has changed regarding tenant retention for both multi-tenant and single-tenant properties? What developments have taken place within the portfolio? This represents a substantial shift.

Yes. To understand the situation, we need to consider all the factors contributing to same-store growth, particularly occupancy, which is a crucial element when comparing same-store to total multi-tenant properties. We see significant potential even in some assets currently not classified as same-store, which will eventually transition into that category and could help increase same-store figures over time. We have properties in redevelopment and development that present substantial upside. That's why we created the bridge to outline how all our multi-tenant properties fit into this framework. In the future, these may contribute to same-store metrics, but it depends on when those projects are completed and integrated into same-store data. Additionally, I’ve mentioned the challenges with tenant retention. Currently, we're running at approximately 79% for the year and about 78% for the quarter, but we need to reach 80% to drive positive absorption that aligns with our 4% to 6% growth target. Our estimates are somewhat conservative regarding retention changes, but any improvements in that area would be beneficial. Regarding operating expenses, another important factor is the single-tenant segment, which experienced lower performance in 2023 and is expected to do so in 2024 due to two specific properties. The growth rate for these is around 1%, which falls short of the 2.5% escalators in the single-tenant portfolio, creating some drag. There is potential to alleviate some of this pressure, as we're exploring the sale of one asset, and the other is in redevelopment. If we see improvements or can lease or sell these properties, it will aid our situation. So, while we remain conservative in our expectations, this aspect is also part of the overall picture.

I appreciate that. Todd, regarding the balance sheet and how you're managing the debt duration, currently, the average years to maturity is around 4 years. Given that you have $1 billion in interest rate swaps expiring in about 3 years, should we expect the duration on the balance sheet to stay relatively consistent, or are you considering issuing longer-term unsecured debt to eliminate some refinancing risk?

Yes, this is Kris. I'll respond to that. Given the events of the past couple of years concerning rising interest rates and the associated volatility, we haven't issued any new long-term debt. However, that's always a possibility we consider. The situation has improved compared to four or five months ago, but we must evaluate our use of proceeds. If we were to pursue this now, we don't have a suitable use of proceeds to redeploy those funds effectively. Nonetheless, as we progress, we do see long-term debt as a viable option for financing and refinancing maturing debt.

Yes. Our first debt or unsecured bond maturity is next summer 2025. So certainly, as we get closer to that, we'll be keeping an eye on that opportunity to extend that maturity and duration as you said.

We have no further questions. I will now turn the call back over to the management team for any final comments.

Thank you, Adam, and thank you, everybody, for joining us this morning. We will be available for your follow-up and questions, and we look forward to seeing many of you at some upcoming conferences. Everybody, have a great day. Thank you.

This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.