Earnings Call Transcript - HR Q1 2024

Operator, Operator

Thank you for joining us today for Healthcare Realty's First Quarter 2024 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 March 31, 2024. 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.

Todd Meredith, CEO

Thank you, Ron. Healthcare Realty is pleased to report strong first quarter results. FFO per share was at the top half of our expected range as were most of our key operating metrics. Solid NOI growth was driven by robust cash leasing spreads, improved tenant retention, positive multi-tenant absorption and tight operating expense controls. Most importantly, we're focused on two top priorities: capital allocation and operational momentum. First, our top near-term priority is accretive capital allocation. Our express goal is to accelerate FFO growth and improve dividend coverage as quickly as possible. More specifically, we intend to use proceeds from JVs and asset sales to repurchase stock on a leverage-neutral basis as long as the company trades at a substantial discount to NAV. As a major first step, yesterday, we announced a strategic relationship with KKR that is expected to generate proceeds of $300 million within the next 60 days. And there is more KKR capital behind this initial JV seed portfolio, which I'll cover in more detail later. We also expect another $300 million of proceeds in the next 90 days from separate transactions. And in April, we repurchased $42 million of stock at very accretive levels. The average price represents an 8% implied cap rate, which compares favorably to expected JV and asset sale cap rates in the 6.5% to 6.75% range. Our second priority is operational momentum. This is primarily about increasing multi-tenant occupancy. Occupancy gains in the first quarter were on track with expectations that we communicated in our multi-tenant bridge. New leasing volumes remain elevated, and we expect absorption to gain momentum in the second quarter and into the second half of 2024. Many of you will recall, we initially published our bridge two quarters ago. We expected absorption to increase by 150 to 200 basis points over five quarters, through the end of '24. Two quarters in, we have generated 70 basis points of absorption, which is exactly on track with our plan. I'm particularly pleased with the diligent effort and focus of our leasing and operations teams. Our leasing team has produced new leasing volume of more than 400,000 square feet in each of the last three quarters. This quarterly pace is an important indicator of our ability to continue elevating multi-tenant occupancy. Our operations team is focused on accelerating NOI growth by quickly converting new leases to occupancy and controlling operating expenses. Total multi-tenant NOI grew 2.8% in the first quarter, well above 2023 growth of 2.3%. Looking ahead, we're on track to achieve the 4.4% to 5.5% multi-tenant NOI growth published in our bridge for the second half of 2024. Our leasing confidence is boosted by the constructive backdrop for MOB supply and demand. Aging demographics and strong patient utilization are pushing demand steadily higher. Hospitals and providers are initiating more and more outpatient expansion plans. At the same time, a sharp rise in construction and financing costs has severely limited development starts. These tailwinds translate to positive absorption and rising rental rates. Typical replacement net rents are pushing $40, setting up for multi-tenant occupancy gains and robust rate increases for average net rents at existing buildings that are in the low $20 range. Now I'll turn it over to Kris to discuss financial and operating results.

Kris Douglas, CFO

Thanks, Todd. The year is off to a great start on operational and capital allocation efforts. Normalized FFO per share of $0.39 was at the upper end of our guidance range for the quarter. Net income for the quarter was impacted by a $250 million goodwill write-off. This noncash accounting impairment was driven by the current macroeconomic environment and does not speak to the durability or growth potential of our assets. In fact, same-store cash NOI growth accelerated in the first quarter to 3%, up from 2.7% last quarter. Cash NOI margins improved 30 basis points year-over-year as a result of holding operating expense growth below our average in-place rent escalators of 2.8%. First quarter operating expenses increased 1.7%. This was a significant improvement compared to 4.1% in the fourth quarter and 4.3% for full year '23. Disciplined and proactive efforts, especially on property taxes and labor costs helped to control operating expenses. The successful property tax appeals in the fourth quarter resulted in first quarter year-over-year property tax increases of just 1.1%. Labor costs increased 2.7% in the first quarter compared to 10% in the fourth quarter and 9.5% for full year '23. The improvement was achieved through rightsizing and staffing and rebidding service contracts, particularly in markets with scale. We don't expect the 1.7% growth in the first quarter to be our new run rate, but we are on track to beat the full year expense growth assumptions in the occupancy and NOI bridge. Revenue drivers were also strong in the first quarter. Cash leasing spreads were pushed to 3.7%, up from 3.3% last quarter. Initiatives to retain tenants were successful as tenant retention improved significantly from 78% in the fourth quarter to 85% in the first. Notably, the 85% was consistent in both the legacy HR and HTA portfolios. And as Rob will discuss in more detail, we achieved sequential occupancy absorption in line with expectations. The cash leasing spreads, retention and absorption are especially impressive given high scheduled lease expirations in the quarter. Over 1.6 million square feet of same-store leases expired and over 2 million square feet across the total portfolio. Yesterday, we announced a JV agreement with KKR at a 6.6% cap rate that will generate near-term proceeds of $300 million and provide a source of additional long-term capital. In addition, we are in process on separate transactions that are expected to generate an additional $300 million of proceeds in the next 90 days. These transactions are expected to price in the 6.5% to 6.75% range. The total proceeds of $600 million will be used to fund existing capital commitments as well as leverage neutral share repurchases. Applying approximately 50% to 55% of the excess proceeds to share repurchase will maintain debt to EBITDA within our target range of 6 to 6.5x. Last week, the Board authorized a new $500 million share repurchase program. In April, 3 million shares were bought for $42 million under the previous repurchase authorization. The average price was just over $14 per share, which represents an implied cap of 8% and FFO yield of approximately 11%. Given the current disconnect between our stock price and private valuations, recycling capital and to leverage neutral share repurchases generate significant accretion and shareholder value. It also accelerates efforts to improve dividend coverage. Second quarter and full year guidance does not reflect the KKR JV additional $300 million of transactions or associated leverage neutral share repurchases. Guidance will be updated at the end of the second quarter once the final timing and economics of these transactions are known. I'll now turn it over to Rob for more details on our leasing momentum.

Robert Hull, COO

Thanks, Kris. I will focus my comments today on multi-tenant occupancy gains and leasing momentum, which are right on track with our bridge. For the first quarter, multi-tenant occupancy improved 57,000 square feet or 17 basis points. Combined with our fourth quarter, we have achieved 70 basis points of absorption. This puts us on pace to deliver the 150 to 200 basis points of multi-tenant occupancy gains we communicated last November in our five-quarter bridge. It's worth noting that occupancy has increased by 130 basis points at the legacy HTA assets in the last two quarters. Our progress this quarter was driven by strong new lease commitments totaling 480,000 square feet. Move-outs were elevated due to high scheduled lease expirations of 1.6 million square feet in the first quarter. This was nearly double the volume of expirations in the previous quarter. Although volume was high, the move-out percentage was in line with our expectations. For the remainder of 2024, our expiration schedule averages just over 1 million square feet per quarter. This is about 60% less than the first quarter. So we expect fewer move-outs through the balance of the year. Turning to lease momentum. Our new lease pipeline remains robust at 1.7 million square feet, the top end of our historical range. The pipeline gives us visibility into future activity and positions us well to achieve projected absorption gains outlined in our multi-tenant bridge. Total signed not occupied leases or SNO in the multi-tenant portfolio remained solid, representing an additional 170 basis points of future occupancy. The legacy HTA multi-tenant properties have 190 basis points of SNO. We expect the SNO pipeline to increase as we maintain our new signed lease volumes and move-outs moderate to lower levels moving forward. Our strong leasing activity is supported by favorable supply and demand fundamentals. Occupancy across the sector is climbing, and new medical outpatient building starts are continuing to decelerate. This quarter, we saw the largest year-over-year decline in starts since the pandemic. Health System top line revenue and operating margins continued to improve. Providers are seeing increasing admission rates and growing outpatient revenues. And healthcare employment remains robust, increasing at a rate more than 2.5 times the rate of total job growth. The combination of rising demand and limited supply is creating a nice tailwind for leasing. New signed leases in the first quarter totaled approximately 440,000 square feet. What is noteworthy is this marks our third consecutive quarter above 400,000. Included in this activity were meaningful gains across our development and redevelopment projects. The combined lease percentage for these projects is now 70%, up 400 basis points over last quarter. A significant contributor to this increase is a building here in Nashville that came online in the fall, and many of you have visited. A leading orthopedic group signed a lease that increased the building to 88% leased from 50% last quarter. With a fairly complex build-out, including the new surgery center, we expect this tenant to take occupancy in the first quarter of 2025. I'm proud of the solid occupancy gains and sustained pace of new leasing our team has achieved. Our strong leasing momentum and the constructive supply/demand backdrop is the foundation from which we can produce projected new leasing activity. Coupled against moderating move-outs, we are poised for accelerating multi-tenant absorption in the back half of the year to hit our targeted growth levels.

Todd Meredith, CEO

Thank you, Rob. Let me make a few more specific comments about capital allocation. The company is currently trading at a substantial discount to NAV. So we're focused on maximizing the opportunity to sell or JV assets and repurchase our stock at accretive levels. In terms of generating proceeds, we announced the KKR joint venture yesterday, where HR will contribute 12 properties to the joint venture at a gross asset value of $383 million, representing a cap rate of approximately 6.6%. KKR will make an equity contribution to the JV equal to 80% of the value of the properties, yielding proceeds to HR of probably $300 million. Healthcare Realty will retain a 20% interest, manage the JV and oversee leasing and operations. HR will also earn various fees for overseeing the JV properties, which is not reflected in the 6.6% cap rate. The property contributions are subject to customary closing conditions and are expected to occur throughout May and June. Asset-level financing is not contemplated for this JV, which simplifies the management of leverage for Healthcare Realty. The 12 JV properties represent a high-quality stabilized MOB portfolio. The properties are located in seven top markets, including Austin, Seattle, Philadelphia, and Los Angeles to name a few. They're located predominantly on or adjacent to leading hospital campuses. In short, the portfolio looks a lot like Healthcare Realty as a whole. Beyond the initial seed portfolio, KKR has also committed up to $600 million of equity to pursue additional investments in high-quality stabilized assets. This could increase the potential value of the JV to more than $1 billion. We may contribute more Healthcare Realty properties to the JV or pursue acquisitions depending on market conditions. In the near term, our capital allocation priority is to repurchase stock on a leverage-neutral basis. Separate from the KKR JV, we're working on additional transactions that are expected to generate more than $300 million of proceeds within the next 90 days. We're very encouraged by the level of interest from capital partners and potential buyers. There's a deep pool of equity seeking to increase exposure to the MOB sector, which has been aided by a much-improved financing market. As I said at the top, we are focused on our top two priorities, capital allocation and operational momentum. We intend to execute quickly on the accretive capital allocation priorities outlined today. Coupled with multi-tenant occupancy gains and operational momentum, we're making progress toward our goal of accelerating FFO growth and dividend coverage.

Nicholas Yulico, Analyst

It's great to see the joint venture completed. Can you provide more details on how that process unfolded? I recall you mentioned it last fall before reaching closure. How were the discussions with the various buyer groups? Did you end up modifying the types of assets in the initial seed portfolio? I'd appreciate any additional insights into the background of the formation.

Todd Meredith, CEO

Thanks, Nick. The process began last fall, and we observed that the debt markets were challenging during that time, which also affected equity. We realized it would be difficult to push forward with the transaction, so we approached it cautiously and ramped up our efforts at the start of this year. As I mentioned earlier, we noticed a significant improvement in the market, with better capital commitments on the equity side and enhanced financing conditions for 2024 thus far. Although interest rates remain relatively high, there seems to be a growing sense of stability, and that has bolstered confidence among equity investors. Concerning the portfolio, we are actively pursuing more joint ventures and asset sales. The portfolio itself has changed somewhat, but it primarily consists of the properties we initially considered. Some properties will now be evaluated for other joint ventures or asset sales. It is always a bit of a moving target when aligning with a JV partner, but we believe we've established a strong, stabilized portfolio that accurately represents the Healthcare Realty portfolio. As we noted last fall, this aligns with our approach towards joint ventures rather than asset sales, which tend to focus more on single-tenant off-campus properties and similar characteristics.

Nicholas Yulico, Analyst

Okay. My second question is about Steward. Could you remind us of the composition and location of those assets? Also, how do you see the Chapter 11 filing impacting any potential rents? I’m not sure if there’s anything included in the guidance to address potential fallout from that.

Kris Douglas, CFO

Yes, this is Kris. We are currently involved with around twelve hospital campuses linked to Steward across three states. Generally, these are their higher-performing hospitals. In fact, about 80% of our space is tied to hospitals rated as A or better by Green Street's hospital scoring index. This suggests a strong potential for future outcomes, including possible sales of some of these hospitals, which are vital to their communities. Recently, we saw Massachusetts state officials confirm their commitment to keeping these hospitals operational. Last year, Steward sold some hospitals to Common Spirit in Utah, which illustrates the trend. Currently, Steward accounts for approximately 580,000 square feet, translating to about 1.6% of our annual base rent. It's still a bit early to determine the final outcomes, as we have about $2.5 million in outstanding accounts receivable that fits within our annual guidance range, and while we could potentially absorb that if it's not repaid, it's premature to make a call on it. If these hospitals are sold, the associated outpatient facilities will be crucial for the new operator. We will keep monitoring the situation but remain generally optimistic about the locations we are involved with.

Austin Wurschmidt, Analyst

So Todd, would you say it's fair to say that the transaction market for outpatient medical assets has fallen at this point? And I mean, are you guys done selling today? Or could we continue to see kind of go down a path towards additional dispositions after completing the $600 million that you've highlighted?

Todd Meredith, CEO

Sure, Austin. We are not done. I would say we have a lot more in the works. Obviously, what we tried to articulate today is what we have a high degree of confidence in like the KKR JV as well as these additional transactions. So we do have more behind that. Obviously, we're watching the markets. We're paying attention to what makes the most sense. But I wouldn't put that out of the realm of reason that we would look at additional JV transactions as well as additional asset sales. Obviously, we'll balance that as market conditions evolve.

Austin Wurschmidt, Analyst

I was curious if everything on the operating front is on track, but was there anything specific or unexpected that caused the slowdown in the consolidated multi-tenant portfolio this quarter regarding same-store NOI growth? It seems like the JVs compensated for that, but I am wondering what's causing the difference between those two areas.

Kris Douglas, CFO

Yes. It's really going back to just quarterly fluctuations when you look at a year-over-year and a quarter, you can end up with kind of one-time items that can have a particular impact on any specific stat. So you're right that I'd say the multi-tenant, those kind of went against them in terms of that 2.2% growth, and it was related to some property taxes that were accrued in the first quarter of '24 that really are associated with some '23 time period, and it was a bill that came in that we're actually contesting. So that's still a little bit up in the air what the ultimate impact will be for all of '24. But I will say on the flip side, you actually kind of had the reverse on the single tenant. So that single tenant growth was a little bit escalated versus what I would say you would expect for the long term, and that was related to, once again, a similar one-time item on the flip side that was to the positive. And so those two kind of offset each other that gets you back to what I think is a very normal and expected total same-store growth of 3%.

Austin Wurschmidt, Analyst

Would you expect those to convert them through the balance of the year? And that's it for me.

Kris Douglas, CFO

Yes. I think that as you start getting into year-to-date and full-year performance, those kind of one-time quarter-to-quarter variations start to smooth out and don't have as large of an impact. So yes, I do think that that will adjust and not have as big an impact. But once again, like I said, kind of on the total, the multi-tenant versus single-tenant kind of set each other off. So I think as you look at that total same-store, it's indicative of where we think things are today, and we expect that to accelerate through the balance of the year with the absorption that we've talked about.

Michael Griffin, Analyst

I wanted to ask a couple of questions on the joint venture. First off, can you give us maybe the leverage that was used in the deal and the amount of fees you expect to receive from us? And then are there any implications of the dividend as a result of the joint venture or potential asset sales?

Todd Meredith, CEO

Michael, this is Todd. Regarding the joint venture, no leverage is being utilized in this initial deal, and it's not planned for future activities either. It's entirely funded by KKR's equity. The two organizations have the capability to manage leverage independently of the joint venture, so there is no financing at the asset level. As for the fees, I won't provide specific amounts, but we do earn fees for managing the joint venture, leasing, operations, and similar activities. Typically, our existing joint ventures, including this one, could offer a net benefit of around 25 to 50 basis points relative to the cap rate. This is just an estimate, as these fees are often performance-dependent, but they are beneficial to the cap rate and the economics of a joint venture. Concerning the dividend, we do not anticipate any changes or triggers for a special dividend at this time. We will reassess this as the year progresses, but it is not currently under consideration.

Michael Griffin, Analyst

And then just wanted to ask on the rent owed by Steward. It looks like it's about $2.6 million according to your 10-Q this morning. Is there any bad debt that's assumed in the guidance?

Kris Douglas, CFO

Generally, no, it's mostly a run rate type of bad debt. Regarding our guidance, the range is broad enough, and the $2.6 million is something we'll consider as we update our guidance for the rest of the year. However, in relation to the overall guidance and net operating incomes, it's relatively minor. Therefore, I don’t anticipate it having a significant effect. We will need to keep monitoring this situation. We'll approach our accounting conservatively in terms of how we manage and reserve that accounts receivable, but we can't definitively say that it is uncollectible.

Todd Meredith, CEO

And there's nothing past 90 days. So that was just saying Michael, can you hear us?

Michael Griffin, Analyst

Yes, yes. Sorry. Sorry, there's something going on with my phone, apologies.

Todd Meredith, CEO

That's okay. I was just adding that there's no accounts receivable past 90 days. So that's kind of a key point on the bad debt question.

Michael Griffin, Analyst

Got you. And then just, Kris, real quick, is there a current amount of bad debt like the range in your guidance? And what would be the total dollar amount assumed in terms of bad debt?

Kris Douglas, CFO

We generally reserve anything over 90 days to manage our bad debt. However, this quarter we actually saw some improvements with collections. We're optimistic that we can reduce that further. Our guidance does not expect collections to exceed what we have reserved. If we manage to achieve that, it would help, especially in offsetting any potential impacts from Steward. However, it’s still too early to determine the exact effect Steward has on our accounts receivable.

Juan Sanabria, Analyst

Just wanted to ask about the dispositions in the joint ventures and how we should think about the impact to FFO and earnings, granted that your stock is trading at a discount to where you see cap rates, but should we think of it as dilutive to earnings or accretive or what's the math that you guys are doing on your end?

Todd Meredith, CEO

Juan, this is Todd. I would say we view it as accretive. I think maybe your question is a little more technical just in the immediate term and how that might affect earnings. I think the simple math on the immediate term is that you would use proceeds to pay off variable rate debt, which is in the low to mid-6s. So I think that puts it right there at nearly neutral. And then it's just a question of how quickly you're repurchasing stock. And as you've heard Kris say, you're talking about potentially double-digit yields on the equity portion. So that's where you climb back quickly to very accretive. The simple math we're looking at, which you can get it a couple of ways, but I'll look at it as the current implied cap rate for HR is in the high 7s to 8% range. And then we're looking at asset sales and JVs in the 6.5% to 6.75% range. So that's 100 to 150 basis points of accretion. You can also look at that math more specifically around FFO yield, cost of debt like a WACC basis versus GAAP cap rates and you get very similar math, so 100 to 150 basis points accretive. I think the specific question is about how quickly you can get all that done. And we think it's actually timed out pretty well where it should be absolutely accretive to 2024.

Juan Sanabria, Analyst

And just to check, do you think it's accretive on a FAD or AFFO basis post CapEx and given the dividend gap?

Todd Meredith, CEO

Yes.

Juan Sanabria, Analyst

Okay. And then just on the disposition front, it seems like the incremental $300 million is kind of at a 7% cap. Do you see that as indicative of kind of market cap rates today? And is that 7% cap roughly a good placeholder for that incremental $300 million of dispositions?

Todd Meredith, CEO

I'm not sure where you're getting the 7% cap figure. Perhaps there was a misunderstanding. I believe you mentioned that the joint venture was at 6.5%, and the blend is around 6.75%. So it's approximately the same amount. However, what we’re really discussing is that the transactions between the joint venture and these other asset sales fall within the 6.5% to 6.75% range, with both being in that range. This doesn't rule out the possibility that an individual asset might be at a 7% cap, but we are not considering the asset sales at 7%. Therefore, we think 6.5% to 6.75% is a more accurate range for our transactions.

Juan Sanabria, Analyst

Just one last question. Does the $2.6 million that Steward owes represent the quarterly run rate that was not paid in the first quarter? How should we view that amount?

Kris Douglas, CFO

Yes. It's a little over a month, approximately 1.5 months of rent, mostly for April and a little bit for March.

Richard Anderson, Analyst

So the contributed properties to the joint venture were on or adjacent, which has always been your sweet spot. So by definition, perhaps very much at the margin here, but you're reducing your exposure and increasing your exposure to off-campus as a function of this. Should we read into that, perhaps getting more jazzed up about your concentric circle sort of story? Or do you still remain largely committed to growing beyond or adjacent side of the business?

Todd Meredith, CEO

Rich, I wouldn't take this as some big signal. I think the bigger message here is that the JV idea as it has been in the past, but here with KKR is the idea to not only seed a portfolio that looks a lot like Healthcare Realty as a whole, but it's also a go-forward investment vehicle that would continue to be a source of capital and diversifying our sources of capital and allowing us to continue to invest in those types of assets. And that's a theme you've heard us for years talking about really making sure we have the right sources of capital to continue to invest in the types of assets we want to invest in. So this is part of that strategy. I wouldn't read into it that we're trying to lighten up or shift our exposure away. In fact, it's probably the opposite that we would continue to see our exposure to predominantly on adjacent to campus remaining consistent. Obviously, you're right, at the margin, if you really do the math of 80-20 on the JV, maybe it tweaks it a little, but we would think, over time, that wouldn't change materially for Healthcare Realty. So no big signal there just really part of seeing that disconnect in our public valuation versus private taking advantage of that in the near term and then long term, having another source of capital.

Richard Anderson, Analyst

Okay. I know you're targeting 6% to 6.5% on a leverage basis. I think the market would love a 5% handle eventually, perhaps you would too. With the additional asset sales that you're looking to beyond the $600 million, would you think that a lot of that would still go toward buyback? Or would you might intermingle more in the way of deleveraging so that we can maybe test that sub-6% level at some point in the reasonable future?

Todd Meredith, CEO

Rich, I would say we're very comfortable at 6.5% currently. I think what you're talking about is a much longer-term view and not taking it away from you. But we're focused on the near term of really driving FFO and FAD per share accretion and managing our leverage. So we think there's a number of ways that it will naturally through operational improvements in NOI and EBITDA that it will naturally delever. But clearly, right now, we think the signal is repurchasing shares makes a lot of sense. So that's what we'll do. Obviously, as conditions evolve, we'll continue to reevaluate it. But not signaling a difference in our view on leverage at this point. I'm sorry, I forgot your question about the dividend strategy. We're pretty confident on growing into that over time. I wouldn't see a significant change. That falls in the same category of what we've talked about. We're not signaled that we're going to cut, and we believe there's a pathway to growing into that assuming we execute on our opportunities.

John Pawlowski, Analyst

I have a few more questions regarding the quality of the properties and the $600 million pool of disposals. Can you share the average age of the properties and how the deferred CapEx profile compares to your portfolio average? Is it significantly better or worse?

Todd Meredith, CEO

The average age is somewhat newer, but there hasn’t been a significant change. Typically, it's in the range of a very stabilized portfolio, around 15%. Last year, we were slightly above 18%, which was due to absorption and increased spending on tenant improvements, but we are more in that traditional stabilized range now.

Kris Douglas, CFO

I don't have the weighted average, but can give you a range of age. The oldest building was originally constructed in '92 and the youngest was in 2017. So let's say, generally consistent with the portfolio.

Todd Meredith, CEO

Most in the last 20 years, predominantly the last 20 years.

John Pawlowski, Analyst

Is the remaining lease term on the $600 million close to your portfolio average?

Todd Meredith, CEO

It's a little longer, about six years compared to just over four years for the KKR joint venture assets. Overall, it's around six years versus the portfolio's remaining average of just over four.

John Pawlowski, Analyst

Okay. Final question from me. You still have about 35 properties that you consider to be unstabilized. There have been many properties in this category for the last few years. I'm curious about your willingness to sell these unstabilized properties, as they are not generating much NOI, and if you plan to redeploy that capital elsewhere in the business.

Kris Douglas, CFO

Yes, that's certainly something we constantly evaluate. Sometimes it can be a timing issue; our occupancy has decreased, and it has taken us some time to improve that. We actually have a significant number of properties already within this portfolio; I would estimate it's about six to twelve properties that are fully leased. The next step is to convert the lease percentage into occupancy. Overall, it involves our efforts to drive absorption in some of these assets, as well as considering markets where we may not want to grow long-term or specific submarkets where we might decide to sell those assets. Our long-term goal is to significantly reduce the number of properties in the unstabilized portion of the portfolio.

Nikita Bely, Analyst

The term med tail has been starting to come up more on conference calls recently in the retail world of medical retail, right? And is that something that you see is there's some overlap with those properties, those kind of medical office and outpacing medical and the retail centers? Is there any similarity any overlap? Any impact that you're seeing on your business maybe?

Todd Meredith, CEO

It's a good question. I would say it's not a new concept, but it is certainly a trend that has been underway for quite a while. We've looked at those types of properties to buy or even develop over the years, and we're pretty selective about it. We tend to really try to focus more around the hospital and for more higher acuity services. What you tend to see in those med tail, medical retail locations, they're very convenient. They tend to have fairly low acuity services. They're very convenient for the consumer when they're doing other things in the retail setting. And so we think there's a lot of room for that. It's certainly needed and good for the consumer, but it is generally not our target. We haven't seen it be a big problem for what we're trying to do, which is focus more on the higher acuity services that tend to be closer to the hospital in location.

Nikita Bely, Analyst

Got it. Can you provide any updates on the development side, specifically any major projects or redevelopments you plan to initiate in the next 12 months, along with the expected return hurdles for those potential projects compared to the ones currently ongoing?

Todd Meredith, CEO

Sure. I want to emphasize that we usually disclose information about our pipeline and active projects. We are aware that initiating new projects at this time can lead to short-term dilution, despite the potential for attractive long-term returns. Therefore, we are currently being cautious about starting new projects to mitigate that dilution effect in the near term. However, we are exploring joint ventures that could involve both existing and new development projects, as we see this as a valuable opportunity for creating long-term shareholder value while being aware of the short-term impacts. Regarding returns, Rob, I don't believe there has been a significant change from what we have previously disclosed, but there has been a slight increase.

Robert Hull, COO

Yes. I mean I think generally, it's going to be dependent on how well leased it is and how much risk you're taking. But in prior quarters and years, we've sort of used the 100 to 200 basis points above where we think similar stabilized assets are trading today. So if they're in the mid-6s today, you're probably looking in that 8% to 9% range on a new development, redevelopment certainly, certainly we target higher returns for that.

Austin Wurschmidt, Analyst

Just another one on the asset sales. I guess, is the goal to sell some of the more stable assets into joint ventures or outright so that you can monetize that value? And I guess on the flip side, could we see any improvement in your same-store growth for either the single-tenant assets that you sold last quarter and the impact they have on single tenant growth and then kind of similarly for the multi-tenant assets that you announced this quarter?

Todd Meredith, CEO

Yes, Austin, I agree that it makes sense to sell and joint venture stabilized assets because we're focusing on those that can really enhance our occupancy rates and benefit the company's financial performance. We are optimistic about this approach. There are certainly some assets that Kris mentioned earlier, specifically the unstabilized properties, where we might decide that we cannot increase occupancy and opt to sell instead. Overall, you can expect to see us engage in more joint ventures and sell more stabilized assets. Currently, the market's financing environment is more favorable for these types of properties. Additionally, we will consider joint venturing on some development projects, whether they are existing or new. I am not sure if Kris wants to elaborate on the potential impact of these actions. It's still early to determine how this could affect our same-store metrics, but we will provide updates as we progress with asset sales or joint ventures.

Kris Douglas, CFO

Yes, I agree.

Todd Meredith, CEO

All right. Well, thank you, everybody, for joining us this morning. We appreciate your time, and we look forward to visiting with many of you in the next few weeks at various conferences. Thank you, everybody. Have a great day.

Operator, Operator

Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.