Healthcare Realty Trust Incorporated (HR) Earnings Call Transcript & Summary

Good morning. Good morning, investor and analyst guests. Welcome to Healthcare Realty's Investor Day in Raleigh. My name is Ron Hubbard, Vice President of Investor Relations. It's nice to see many familiar faces here and great to see some new and prospective investors in the audience as well. Everyone should have a booklet in front of them on the table. The book that does start with a property tour, but the management presentation exhibits are in a smaller format in the back. The management presentation is also posted online this morning in large format. So if you prefer that, go to the website and download that, you can take notes on that or in the book. Also note on the cameras and electronics, this event is not being recorded live, but the cameras will be with us throughout the day, even on the buses and even in some of the property tour visits. That was done so we can prepare a short video highlight afterwards and share that next week in time we'll post that. With that, I'd like to hand the podium over to our President and CEO, Todd Meredith.

Thank you, Ron. Well, thank you, everybody, for coming today and joining us in beautiful Raleigh. We appreciate you making the trip, and spending the day with us. Thankfully, we have a beautiful day to enjoy, and we'll definitely get outside a bit as well. So we have a large group here from Healthcare Realty and it represents our key strategic functions. So I'm not going to introduce everybody individually. There's actually some pictures in your tour book of a lot of the folks. But I am going to ask just for a minute, if all the Healthcare Realty team members would stand up here. And so you guys can just take a look around and see who's here because it's a much broader group than the usual 3 amigos that you get to see myself, Kris and Rob. So a lot of folks here, hopefully have a chance to talk to some of them on the tour as we go, pick their brain even at the concert, we'll all be there. So also really just want to address we -- why are we here today? I got a few questions about Raleigh. We'll touch on that. Our real goal here today is to show you how we're leveraging our market scale and relationships to create value and accelerate growth in the MOB sector. And of course, at the same time, deliver value stability that investors what you expect from the sector. We'll also provide updates on the progress we're making on 2 key fronts: our disposition and JV activity and of course, our leasing momentum. You'll also hear from others as well, not just us, as Ron said, you'll hear from a number of our top brokers and health systems. These are valued relationships that are key to our success. For those of you who followed Healthcare Realty for a while, you remember we were pursuing market scale well before the merger with HTA last year. We've had a scale in Dallas for quite a long time, but it really started to pick up in 2016 as we grew our Seattle portfolio to more than 1 million square feet. From there, we accelerated our efforts to gain scale in more markets through disciplined acquisitions and developments. 5 years later, by the end of '21, we reached the same level of market scale in 5 markets, comprising about 1/3 of our portfolio. And of course, in 2022, the HTA merger elevated our market scale with 1 million square feet or more to 15 markets, representing about 60% of our portfolio. So what's so critical about market scale? That's obviously why we want to show you today. Through many years of experience, we know that healthcare delivery, much like real estate is a very local business. The stronger our local presence, the better we know our customers, the physicians, the hospitals, the more we can help them execute their growth strategies. Working with the right health systems in the right markets, we can source more acquisitions and developments. We can generate higher occupancy and faster rent growth. So Seattle is really where we started to see the benefits of market scale come together. It was even better than the scale we've enjoyed in Dallas for many years. A key difference was the breadth of the health system relationships. In Dallas, we had one great relationship with Baylor. But in Seattle, we developed great relationships with 5 different health systems. We really saw the power of having diverse clusters centered around multiple thriving hospital campuses across the MSA. And importantly, our performance in Seattle showed superior results to what you typically see about 2% to 3% in the MOB sector. We were averaging about 4.5% even through the pandemic. So we developed a clear strategy to differentiate HR from the typical far-flung MOB portfolio that might be well diversified, but lacks any operational synergies or upside. So based on this experience, we sought to make our portfolio look like a collection of Seattle's. So as I mentioned, the merger with HTA expanded our market scale to much more of our portfolio, 60% in our top 15 markets you see here and then, of course, 80% in our top 27 markets. Seven of these top 15 markets are projected to be among the top 10 fastest-growing MSAs over the next 5 years. And we clearly have a strong competitive market position in these markets typically well ahead of our next largest competitor. Since the merger closing, we've been 100% focused on applying the HR model to unlock the value and accelerate growth by leveraging our market scale and relationships. Our primary goal is to increase occupancy, especially at the HTA properties, but also in our largest markets where we have scale. We also have a goal of refining the portfolio further through dispositions to focus our resources where we can really take advantage of operational scale, efficiency and upside. So this brings us to today, some of you have asked, why are we in Raleigh? So the Raleigh area, which is often called the research triangle or just the triangle is a perfect example of Healthcare Realty's market scale and strong relationships, especially post merger. Raleigh has incredible demographics. It's the 41st largest MSA on its own and combined with Durham Chapel Hill, it approaches the 30th largest MSA with well over 2 million people. It's been the second fastest growing metro area since 2010, just behind Austin. And over the next 5 years, it's projected to be the fourth fastest growing MSA. So Raleigh was a target market for HR. We acquired 7 buildings here, totaling 250,000 feet just prior to the merger, but HTA really had more significant scale with 18 buildings totaling 850,000 square feet. Our combined assets are with the top 3 health systems, you'll hear about today, WakeMed, UNC Health and Duke. And of course, we've seen incredibly strong leasing momentum in Raleigh just since the merger. We're over 95% leased here, with the largest signed, not yet occupied gap over occupancy of any market in our portfolio. And we have a development pipeline, including one active project that you'll see today on our tour and two future projects that we'll talk about -- that demonstrate our ability to work with health systems to meet the robust demand for outpatient space. So we clearly have a differentiated strategy. We've got competitive advantage with unmatched scale in great markets with strong relationships. We have all the right ingredients, many of which are listed on this page. So how does our business model? How do we translate that to a business model that produces differentiated higher growth? Well, it's simply based on the premise that rents rise to the level of replacement cost. First, we select the right MSAs where strong demographics drive the need for outpatient medical services. We amassed a cluster of MOBs around the thriving hospital campus. We operate and maintain those assets really well. We improve the experiences for our tenants, and then we invest in those buildings. We've become a trusted, collaborative partner with the hospital. We continually put creative development and redevelopment ideas in front of the hospital to address their need for more outpatient space. As demand exceeds supply, we develop or redevelop a building at replacement costs with rents that are often 20% to 30% higher than the existing rents. Rents in our existing assets then begin to rise with plenty of room underneath those higher rents that were established at replacement costs. We build market scale by repeating this across the MSA around numerous thriving hospital campuses that are associated with multiple health systems. It's a model you'll see here in Raleigh, and it's a model we want to replicate in many markets across as much of our portfolio as possible. To their credit, HTA, before the merger, amassed some great assets in great markets and many of them near thriving hospitals. In our view, they were missing a couple of key ingredients, the ability to truly operate and maintain the assets well and the ability to be a trusted partner with the hospitals. HR has a tremendous opportunity to unlock value and accelerate growth by applying the HR model to the HTA portfolio. This is a big undertaking. It's not going to happen overnight, but we're making progress. We said it before, it will take us 3 to 5 years to realize the full benefits of the combination. Of course, the macro environment has not exactly been helpful, but we're focused on what we can control, where we can create the most impact. We're making great progress on 2 near-term priorities. First, generating additional proceeds through dispositions that will reduce our variable rate debt and our leverage and we're driving leasing momentum that will improve occupancy and accelerate growth in 2024. I'm going to turn it now over to Julie Wilson, some of you may have met her, but I'd like to introduce her. She's our EVP of Operations. She's responsible, first and foremost, for operating our assets really well. This is the cornerstone of how we become a trusted partner, a hospital partner with all of our health systems. Julie also oversees marketing, technology and ESG. She's been with the company for 22 years, She and I joined the same month, and she actually most recently led our merger integration efforts. So I'll turn it over to Julie.

Good morning. We were pleased to publish our fifth annual corporate responsibility report this week. I'm really proud of our ESG team who worked hard to gather data and report on the combined portfolio. HR has a demonstrated track record of success with ESG, and we're applying that to the HTA portfolio. Last year, HR reported utility data coverage of 89% compared to HTA's 12% coverage. After the merger, our ESG team really dug in increasing data collection from 40% to 69% for the combined portfolio. As we reported on Monday, that effort paid off with a 2023 GRESB score of 75, a 29% improvement over a composite of the stand-alone companies in 2022. Another area and one that's close to my heart, where HR has demonstrated success is property operations. Over the past 14 months, our operations team has focused on instilling HR's customer service model across the HTA properties. As we integrated the HTA portfolio, our teams met with tenants and health systems hearing a common refrain about poor customer service. The repeated message, HTA had gone home for COVID and not really come back to the buildings. Rob is going to talk about how that impacted occupancy. We knew that we needed to promote the HR customer service model, employee presence in the buildings, quick responsiveness to physician requests and show ready spaces to aid the leasing team. We know and we have been able to prove with tenant retention statistics that being patient and physician centric bolsters retention and new leasing efforts. As we met with physicians and health systems around the country, we wanted to establish a baseline to measure stepped up customer service efforts, like many commercial real estate companies, HR uses Kingsley surveys, we had a consistent survey cadence dating back to 2016. In contrast, HTA conducted its first Kingsley survey in 2022. This summer, we conducted the Kingsley survey for the combined portfolio. The results show that HR service model has made a meaningful difference in the HTA portfolio in just 1 year. First, tenant satisfaction improved significantly, closing over half the gap between legacy HTA and HR scores. A primary care physician in Tampa commented on increased building cleanliness and the open door at the management office. And maintenance service scores increased. I'm so pleased about the improvement on this metric. Our property engineers are the face of our service model, interacting daily with patients and physicians. In this year's survey an oncology practice manager recognized by name, an engineer who helped a lost and sick patient park his car, get to his appointment. After the appointment, the engineer went back, brought the gentleman's car out front after the appointment. That service level is a hallmark of Healthcare Realty and has a direct impact on tenant renewal decisions. Using these scores as a baseline, we expect that future Kingsley improvements will mirror leasing velocity and tenant retention. I've described some of the HTAs shortcomings. Now I will turn to some of the strengths that both companies brought to this much larger enterprise. HTA hands-down contributed a more sophisticated technology platform and a robust FP&A team that has added value to our analytics. Combined with HR's leasing model, HTA's project management expertise, a dedicated team to deliver space, we'll accelerate speed to rent commencement for signed, not occupied leases. We're teaching you an acronym today, sign not occupied or SNO that Rob is going to talk about in a few minutes. HR builds solid tenant and health system relationships, a powerful lever in markets where we've expanded the portfolio. You'll hear about this directly from health system administrators this afternoon. Finally, our organizational strengths are also apparent in the speed with which we delivered our G&A synergies in 2022. At June 30 of this year, our G&A is at a level that is very efficient within our sector. I'm going to turn this over to Kris to discuss recent disposition activity. We're really glad that you're here in Raleigh and can't wait to show you the properties today.

Thanks, Julie. So this first slide gives an overview of asset sale activity, which we also highlighted in our press release this morning. As you can see, we're making good progress on dispositions this year with more expected moving into 2024. We closed on over $200 million of sales since the end of June, bringing us to $318 million year-to-date at a blended 6.8% cap rate. Proceeds are first used to fund development projects with excess proceeds available for debt repayment. The debt repayment will help bring leverage back within our target range of 6 to 6.5x while also reducing our floating rate debt exposure. Variable rate debt is currently about 15%, which we expect to get closer to 10% and potentially lower in the next few quarters. As you think about our leverage reduction plans, there are a couple of heuristics to keep in mind. So all else equal, for every $100 million of debt repayment from asset sales, leverage is reduced 0.07x and for every 1% growth in NOI or EBITDA, there's also a 0.07x reduction in leverage. As a result, with the combination of debt reduction and NOI growth, leverage can decrease by as much as half a turn through 2024. In the current rate environment, we certainly have a view that lower leverage is better. We discussed earlier this year that we'll be looking at a JVC portfolio with sizing of $500 million to $1 billion. Given the current market backdrop, we are leaning towards the lower end with estimated proceeds of $400 million to $500 million. Eastdil is our adviser on the JV process, and they released to select investors an offering memorandum after Labor Day. Members of our team were on the road with Eastdil this week and last for initial meetings with potential partners. The feedback from these meetings has been very positive. We've not picked a partner yet, so we don't know the final term, size and structure, but we'll have more to report on the JV process in the months ahead. So over $300 million of assets under contract or LOI will more than cover our 2023 and 2024 development commitments. This means the proceeds from a JVC portfolio can be allocated to debt repayment. What you'll see on this slide is a comparison of the property attributes of what we're selling versus our overall portfolio. For example, in the top left chart, you'll see only 61% of the dispositions are MOBs compared to our portfolio average of 92%. By selling more non-MOBs single-tenant and slower growth properties, we're able to enhance the proportion of the portfolio where we can apply our operating model that Todd discussed. That will allow us to accelerate growth. These sales are viewed as portfolio cleanup. And typically, portfolio cleanup is very painful to earnings. However, we're in a favorable period where we can redeploy proceeds to pay down floating rate debt with little to no dilution. We will continue to lean into this opportunity while it remains available. These charts also show that the JVC portfolio is very high quality and aligns well with the attributes of our overall MOB portfolio. By selling into a JV we're able to accretively raise capital for further variable debt repayment, while maintaining the ability to apply our operating platform to generate value from these assets. So asset sales to decrease leverage is one major priority. Another major focus is increasing occupancy, which you will hear about from across our team. Today, we're not specifically providing 2023 and '24 guidance, but we'll touch on some of the key building blocks of growth, a major component being occupancy and NOI upside. We've disclosed before the $59 million of annual NOI upside from increased occupancy that's seen on this page. But people have asked exactly where in the portfolio is the opportunity for improvement. 51% is in the HTA same-store properties. By bringing the HTA properties back to their pre-COVID occupancy of 87%, we can generate $25 million of incremental annual NOI. 26% of the upside is in the redevelopment properties. Redevelopment properties have current occupancy of 56% and are 65% leased. Converting the 900 basis points of signed not yet occupied space to occupancy in the next few quarters generates over $3 million in annual NOI. Another way of looking at the opportunity is through the lens of our top markets. This is important, as you will hear from Rob in a moment on the outsized leasing success we're having in our markets with scale. We can achieve 93% of our upside by bringing each of our top 25 markets up to our target occupancy of 90%. The markets with the largest upside opportunities are Houston, Dallas, Denver and Los Angeles. Later today, you'll hear from health systems and leasing brokers to cover each of these markets. This will allow you to hear firsthand how our differentiated model will help drive lease-up in their particular markets. Now I'll turn it over to Rob to dive into some more detail on leasing.

Thanks, Kris. I'll spend my time updating you on leasing trends since closing on HTA, particularly the tremendous leasing momentum throughout the portfolio. Most of our activity is coming from 2 primary areas: our top 15 major markets and HTA's multi-tenant portfolio. We expect this momentum to translate to accelerated occupancy gains in 2024. So what's happened since the merger closed? In the HR portfolio, occupancy is up about 80 basis points, a testament to our operational expertise and effective leasing model. In contrast, the HTA portfolio has declined about 60 basis points. This was driven by 2 things. We adopted some strained health system relationships produced by subpar management. This was probably our biggest challenge as we began integrating the 2 companies. Also during the first quarter after the merger, we took time to implement HR's leasing model across HTA's multi-tenant properties to take advantage of the strong underlying portfolio. Combined total occupancy is estimated to remain relatively flat through the third quarter. That's the history, but what's more exciting is where we're headed. Since Q1 of this year, the first full quarter where our leasing model was in place, we've seen HTA's lease percentage increase 100 basis points. At the end of the third quarter, the difference between our total leased and occupied percentages is estimated to be 200 basis points. This is a strong indication of future occupancy gains. In this next slide, we break down our new leasing activity. During the third quarter, our leasing team signed new leases totaling 447,000 square feet, a record for our company. This is up 86% over the first quarter of this year. Almost 70% of our new leases are for properties in the top 15 markets. These same markets represent only 60% of the entire portfolio. And as Kris mentioned, these markets are worth 79% of our NO opportunity lies. So our team is taking advantage of the scale created by the merger and getting results where we have the greatest opportunity. This recent leasing momentum sets us up nicely for future occupancy gains in 2024. Within our top 15 markets, we currently have over 460,000 square feet of signed non-occupied leases or SNO. This translates to a 240 basis point spread between the leased and occupied percentages, which is up nicely from 150 basis points in the first quarter. Additionally, our total leasing pipeline is currently over 1.5 million square feet across the entire portfolio and is poised to fuel new leasing in future quarters. Now this slide looks a lot like the last one, but there is a difference. This one is just focused on HTA.. Since the first quarter, new leasing volume from HTA has increased almost 80% to 269,000 square feet. What is notable is that the new leasing from HTA properties has produced just over 62% of our total new leasing volume this year, where they only represent about half of our total multi-tenant portfolio. This momentum has produced solid improvement in our outlook for future HTA occupancy gains. SNO leases in the HTA portfolio represent 260 basis points of future occupancy, up from 150 basis points in the first quarter. We expect most of these leases to commence over the next 2 to 3 quarters. Our success comes from having our leasing model fully engaged, along with the improvement in tenant relations and overall satisfaction. Now over the next 3 slides, I'll focus on 3 tailwinds that are driving demand in the sector. Tightening supply, aging demographics, and improving provider fundamentals. Here, we have a high-level snapshot of the underlying supply and demand backdrop for MOB space. Development starts and completions have been trending down, indicating a favorable backdrop for future improving occupancy. Data from Revista and HR's top 15 markets illustrate the benefits of tightening supply. And I think it's important to pause here and note that when I say HR's top 15 markets, I'm referring to the combined HR and HTA portfolio. Both Revista and HR property sets have seen an increase in occupancy over the last year as absorption has remained steady. And the challenging debt market creates a larger hurdle for new supply, suggesting starts will remain lower for some time. An even greater driver of demand for the MOB sector are favorable demographic trends. The population represented by those 65 years plus is the heaviest user of health care services and currently represents just under 18% of the country's population. This same segment is expected to increase over the better part of the next decade by over $13 million. This represents 76% of our population increase in the coming years. Growth from this age group, along with the continuing trend for providers to push services to a more cost-effective outpatient setting is the cornerstone for increasing MOB demand in the coming years. Our health system partners are also seeing better financial performance this year. Post COVID, hospitals saw surge in volumes from pent-up demand. However, last year, they struggled financially from continued labor challenges. This year, we are seeing hospital financial performance improve as volumes increase and labor challenges stabilized. As an example, year-to-date surgical case volume growth is almost 4x greater than it was pre-COVID. Likewise, in a recent national hospital report published by Kaufman Hall, they show an improving hospital operating margin index over the past year. In this same report, they write and I quote "that now is an opportune time for hospitals to reinvigorate strategic financial and capital planning efforts that may have been previously curtailed. " This recent inflection has given health systems renewed confidence to execute on strategies to capture additional market share. Recently, I met with an executive from a leading health system in the Dallas-Fort Worth area. He told me that their margins and cash position had improved substantially. As a result, their team is again focusing on market growth, and he is working on projects as far out as 2026 and 2027. Specific to HR's health system partners, over the last 4 years, we have seen 8 of our top 20 receive credit upgrades. Only 1 received the downgrade. And I think it's worth noting the health system that did receive a downgrade remains strong with an A+ rating. Now I'll touch on our relationships that are an important part of our success. The merger provided an opportunity for us to grow with many of our existing health systems. It also brought us some new sizable relationships. Some of the more notable ones are listed in the table on this slide. Later today, after we make our way to the WakeMed Cary campus, you will hear from leaders of these various organizations in a video we have prepared. In the case of WakeMed, a member of their leadership team, Tom Cavender will join us live to share his thoughts on the merger and our new relationship. Some key themes you should pick up on our existing health system partners see this as an opportunity for further growth with a known partner they have confidence in. For many of our new relationships, merger gives them a fresh start with the landlord they can look to as a trusted partner. A primary benefit to both groups is that expanded scale provides them with more options to locate growing services and third-party positions. Across our entire portfolio, we continue to have a lot of positive dialogue with health systems. One notable example that I'll touch on briefly here. In the upcoming video that you'll see this afternoon you'll hear from the CEO of an HTA hospital in Houston. He will make a strong reference to their strained relationship with HTA. This hospital had not leased any new space in HTA's buildings for almost 5 years now because they didn't need it, but because of the sour relationship. Fast forward to today, in this past quarter, the hospital signed a lease with us for new space in the same buildings. We are collaborating with them on campus upgrades as they plan for an expansion of the hospital. Finally, our brokerage relationships are key to driving occupancy. Through the merger, our brokers saw their HR portfolios more than double in our largest markets. Greater scale drives greater product optionality, deal flow, process efficiencies and focus on our portfolio. Brokers gain confidence in us through small pieces of our process, like lease negotiation and vacancy preparedness. What's key about this slide is the math illustrating the diversity of brokerage houses represented throughout the portfolio. Rather than striking a deal with one or two national groups, we task our directors of leasing to identify the best brokers in each market and bring them on to our team.

We're going to open it up for Q&A right now. Let's first start in direct our Q&A to Bret while up here for the first 5 or 10 minutes. And we'll have plenty of time for corporate Q&A after that and for the rest of the day. If you're pointed out for a question, please stand up, and we've got 2 Healthcare Realty reps on the side that we'll hand the microphone to you. Here's one. Mike?

I was just wondering if you could kind of talk about the relationships between the health systems in a market like this and how you navigate overlapping demand amongst health systems or those relationships where maybe they're not so keen to deal with the same landlord or if that ever comes up?

Through the years, they have learned to hate each other and work with each other at the same time. It is kind of a landlord's dream here in Raleigh. You have 3 systems, and they are not shy about spitting in each other's eye. So in other markets, and we do work in Virginia and some other places, the hospitals don't tread on each other. They do here, and they do it openly. That is a tremendous advantage to us as landlords to you as landlords because unless you agreed to some exclusivity clause or something that may be legally enforceable, you can go to all 3, and you can go to others that we're starting to see private equity-backed groups that we haven't seen in Raleigh before. So now we have 3 plus all these big players coming in. When you drive around today and you do your tour, you're going to see WakeMed's name across the street from UMC's hospital. You're going to see Duke's name across UMC's hospital. And it -- a lot of people don't know this. It really is one of the best landlord positions you can be in to motivate hospitals to do something quickly, you have to have a trigger. You can't play in eyes. I don't want that to get out to the hospitals -- they recognize you don't want to be fully, but you do want to say, look, I'm not going to hesitate. We're not going to hesitate to go to Duke. We're going to go to all 3 of you. And we've had that happen recently on properties specifically in Cary, and you either pull the trigger and you do it under our terms that are fair for us. But it's a wonderful position to be in. And it's been that way for quite a while, but dating back to the late '90s, there were a lot of sites out there, so you could have the potential of other developers or the hospitals themselves buying up the sites and building -- competing product years. There's virtually no sites available anymore. And so what's happened is you go -- every time we get a new building from Healthcare Realty, we can go and say, okay, how do we position it to go to all 3 of them and have them, let's figure out quickly who wants it the most. So it's a unique situation. Similarly, in the practice realm you have markets where the hospital systems buy up all the practices, right? And then your host is a -- not host but as a landlord, you're dealing with them or you're dealing with them, same group. We don't have that here. So the hospital systems have bought up a lot of the practices, but historically, but it's only 40%, 50% maybe in a given submarket. And now with private equity-backed groups and large practices remaining private, now you really have a competitive environment.

One more quick one for the capital associates team. Mike? , take the mic.

So on the other slide, you had the Raleigh stats. And HR's portfolio looks like their vacancy rate was higher than the market. And then you had the market rents, and it looked like HR's portfolio's rent was lower than the market. Like why is that? What's driving those discrepancies in those numbers?

So the bulk of the portfolio here is legacy HTA buildings. And as people have alluded to, we used to compete with HTA. We sold them buildings, but we also developed medical office buildings, and we compete with HTA. And I don't want to knock them too bad, but it was kind of a situation where you'd say, what the heck is going on over there? Why aren't they leased up. They've got great locations, great product, what's going on. Well, I think what it was essentially was they didn't have an on-the-ground leasing team that really understood their position in the market. And so I guess your question is, are we below market? The new deals we're doing are creating a new market. The legacy leases that are in place kind of drag it down. But as those renewals come up, that's where we're having the discussions and the opportunity because a lot of these buildings are multi-tenant. We're able to adjust them on the fly, not be locked in for 15 years. A lot of that is the legacy HTA properties that just kind of did this for a long time. And so that's what's so exciting to us is we're able to come in and work on these buildings that we used to look at and say, "Gosh, I wish I was working on that one. I would be bumping it a fair amount. " And you can't go crazy with it because it's really do revolt if you're not careful. But what we're able to do right now is focus on those buildings that did have vacancies. The HR portfolio basically didn't have a square foot vacant. But that was 6, 7 buildings. We had 20-some-odd buildings in the HTA portfolio, the leases we've been doing, the new leases are mostly HTA properties. And so that's the exciting part of it is there is some serious upside there to integrate the HR style and maintenance of the buildings with these wonderful properties.

Thanks, Bret. Why don't we transition the Q&A to the corporate level now for the next 15, 20 minutes. Does anyone want to start off? Yes, John.

You mentioned the strained hospital relationships with certain HTA assets. Is there -- as more leases roll, is there additional bad blood that may pressure occupancy in the next few years, we just haven't seen yet?

Certainly, when Rob talked about that occupancy slide and what we've seen since the merger, I think Rob said we've attributed some of that to that, and we're seeing that turn around. So we've also heard that these tenants, whether the hospital, physician groups, whatever the composition, they have long memories. And so the key is we're making a difference. We're changing. They see that difference. So we think that is a little bit of why there's this bit of a lag, but we're seeing -- we're starting to see bright spots on the tenant retention levels incrementally. It's just like the leasing pickup. We're starting to see that pick up. So that's key. One thing I'll point out and Todd Sloan is a different tide than me in case you've been hearing a reference to Todd doing all this -- I'm the CEO, I'm not out doing all the stuff that this Todd is doing. But I'll point out, actually, in Laura, Gartner, who you heard about, Director of Leasing; and then Jennifer Horner is our local property manager, leads our team here. Those are all former HTA employees, high-quality, excellent people. So it's not that the whole HTA organization was some disaster. It's just you got to put it together with the right leadership, the right processes, all the things you've heard about. So we've got great talent here. I think the key is we're making a difference. So we're starting to see that retention start to see those improvements. So we're very bullish and optimistic that we're starting to see that come through. Obviously, it takes that leasing volume to really get back to this level, which as we said this quarter, really hitting a record level, that's a level -- even if you go back to some of our slides in the past couple of quarters, that 400 square feet, almost 450,000 square feet, that's a key level. That's a level that says, when that starts kicking into occupancy, you're now well above move-outs, the volume of move-outs. And as that's trending down with higher tenant retention, now you start seeing -- that's where we start seeing the absorption. So it's not easy. We've got to keep demonstrating this everywhere, as you can imagine, all the customer service levels. That's why we wanted to certainly Julie to talk about those Kingsley surveys, why we did it in that timing. It was very convenient to sort of have the baseline. So I think all those things are pointing in the right direction, but there's a lot more wood to chop for sure.

Just curious, given what we've seen in the credit markets lately and debt costs going higher, where discussions are going with potential buyers for assets as of late and kind of where you see cap rates currently for higher quality MOBs ?

Sure. I may ask Kris to jump in. We're supposed to use the microphone, but I'll give it to you. I'll use it .

So one is we've been talking about it really for the last year on cap rates, we've said they're really tied specifically to debt costs, and that puts a bit of a floor on where things can go. You see one-off transactions that might go a little bit below it. So right now, as you're looking at if a private buyer is looking to acquire a property, they're going to go out and get in to get a fixed rates, so it'll take kind of current SOFR. And then we're also hearing the spreads are similar to what we hear in our public bonds, which is about 200 over. So a 5-year swap on SOFR right now is a little under 4.5%. So with a 200 basis point spread, you're looking around 6.5% is probably a reasonable expectation of plus or minus of where you should see cap rates. Now there are certain deals that we see that go through that. And I would say that's for deals that are being negotiated today. But if you went back 3 to 6 months, those rates were a little bit lower. And so that was where you were hearing us talking more in the low 6s. So it has adjusted here as rates have ticked up in the last 2 to 3 months, but that still seems like a reasonable range of where things are getting executed today.

Jonathan? I'll just talk about -- . We got to get you to stand up. We should have you stand up one, sorry...

Can you just quantify kind of the pricing power and margin upside you have from the cluster strategy. Like I know you have a slide in the August presentation, but that's comparing like top 5 markets versus not top 5 markets. So maybe like what has having larger scale in like L.A. or Denver done relative to like 3 or 4 years ago unlike the NOI or retention basis?

Sure. Yes, it's going to vary by market. I mean you heard Bret and Wes talk about really that pole position we now have in Raleigh and our occupancy, you see it in the book, it's a little over 90%, but at least is over 95%. So their formula starts looking a little different. You heard them talking about now we can really start to push rate. We certainly think retention stays high in that scenario. So now you have some of those tailwinds kind of going to your advantage, so you can start to say, hey, maybe we're moving rents not at just sort of the ordinary 3%, we're pushing 4% and 5% and a little better. That's what they talked about. So it's going to vary by market. Kris touched on some of the key markets where we have more occupancy upside. Well, that has a larger bottom line impact, if you can just advance the occupancy. So in those places, we're going to say, "Hey, we'll save the heavy rent push for the time when we get that occupancy and that leasing percentage up. " So it's going to vary by market, but I think what you've heard us say for a long time, this is pre-merger, is where we have those advantages, we feel very good about putting that together in sort of a 3% to 4% range on cash leasing spreads is sort of where the bulk of our activity will be. But what you're always trying to do is get out of the markets where you can't get 3% to 4% and get more markets where like Raleigh, where you're going to be able to push on past 3% to 4%. So I think our view is, over time, you continue to advance that. So 3% to 4% still being very much an anchor certainly doesn't hurt to have the inflationary pressures, all the things, the tailwinds that Rob talked about, replacement costs being up, obviously, the financing cost to get something new up. It's a building set of conditions that should help us for sure. We're all seeing those inflationary pressures, whether it's cost and rents and all those things. So our view is we still like the 3% to 4% because we're really focused on occupancy right now. But I think the next leg starts to build, and it obviously varies by market.