HR - NYSE

Hello, everyone, and welcome to Healthcare Realty Trust First Quarter Earnings Release and Conference Call. My name is Charlie and I'll be coordinating the call today. You will have the opportunity to ask questions at the end of the presentation. [Operator Instructions] I will now hand over to our host, Ron Hubbard, VP of Investor Relations to begin. Ron, please go ahead.

Thank you, Charlie. Thanks, everyone, for joining us today for Healthcare Realty's first 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, 2022, and the Form 10-K filed with the SEC for the quarter ended March 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, 2023. The company's earnings press release, supplemental information and Form 10-Q are available on the company's website. I'll now turn the call over to Todd.

Thank you, Ron, and thank you, everyone, for joining us this morning for our first quarter 2023 earnings call. Healthcare Realty had a really solid first quarter. As expected, robust operating performance from our portfolio is the foundation of our steady results. We're building on this durable foundation with two strategic initiatives to accelerate FFO growth. First is our leasing team that's generating tremendous momentum. Converting this momentum to occupancy gains later this year and moving into 2024 will elevate our internal growth over a multiyear period. Second, we're focused on a return to external growth. We are working on several capital formation initiatives that will lower our cost of capital and drive accretive external growth. We expect the foundation of reliable performance from our portfolio, combined with these two initiatives to boost and sustain our bottom line growth well beyond the pace investors expect from the low-risk MOB sector. We see a clear path to generating FFO per share growth of 5% to 7% in 2024. This potential is bolstered by long-term rising demand for health care services and health systems are reporting that demand for outpatient services is accelerating. We also see near-term tailwinds that could strengthen our growth outlook including market expectations for softening inflation and lower short-term interest rates in the months ahead. These tailwinds align well with Healthcare Realty's post-merger strategic initiatives. For much of the last year, we've outlined the powerful benefits of the combination with HTA. First, we've increased safety through portfolio scale, diversification and efficiency. And second, we're elevating growth through market scale, concentrated clusters and expanded relationships that amplify our internal and external growth drivers. It's important to note that it takes 3 to 5 years to realize the full value of a significant combination like this. We are well on our way, and we have seen significant results in less than a year. Within the first 6 months of the merger, we successfully completed over $1 billion of asset sales and JVs in a challenging market. We realized our full G&A synergies in half the time we expected. And we've fully mobilized our leasing team to drive occupancy gains in the portfolio. In a few minutes, Rob will walk you through how we've organized our internal leasing team to leverage our external broker network and increase our deal flow. This will lead to significant occupancy gains. We expect multi-tenant absorption to double in 2024 to 100 basis points to 200 basis points. And we expect this absorption to accelerate same-store NOI growth to a range of 4% to 6% in 2024. This could be even stronger looking at 2025 and beyond. Rob will also share the favorable trends we're seeing in the debt financing market for MOBs. In a couple of short months, we witnessed cap rates move lower by as much as 50 basis points. We are increasingly seeing cap rates move into the 5s. Next, Kris will share with you how our portfolio performance is tracking extremely well. He will highlight the company's solid revenue drivers, including embedded escalators, cash leasing spreads, tenant retention and steady occupancy gains. Kris will also walk you through our 2023 FFO guidance that serves as a baseline for our 2024 outlook. After the remarks from Kris and Rob, I'll circle back to spend a few minutes on our capital formation initiatives that will reignite our external growth in 2024. With that, I'll turn it over to Kris.

Thanks, Todd. Operating fundamentals were strong in the first quarter. Quarterly same-store NOI grew 2.8%, quarterly revenue increased by 2.7% and operating expenses by 2.6%, marking a return to margin expansion year-over-year. We are focused on maximizing rent growth and occupancy gains to accelerate revenue growth. Annual in-place contractual increases averaged 2.7% led by multi-tenant at 2.8%. And the 1.5 million square feet of leases that commenced in the quarter had future contractual increases of 2.9%. Cash leasing spreads in the quarter averaged 3.1% once again above in-place escalators. And notably, over 70% of leases had a spread of 3% or greater. Year-over-year occupancy increased 50 basis points to 89% for the same-store properties with total portfolio multi-tenant occupancy just over 85%. We see a meaningful opportunity for accelerating absorption and NOI growth later this year and into next. As Rob will discuss in more detail, we're seeing significant increases in leading indicators for future absorption. Operating expense growth of 2.6% in the quarter benefited from successful property tax appeals in the fourth quarter. These appeals will benefit year-over-year expense comparisons for the next several quarters. Trailing 12-month operating expenses, net of recoveries, grew at 3%, which is down from 4.6% for full year 2022. Looking forward, inflationary pressure show signs of further easing, which will allow the power of rent growth and absorption to accelerate future NOI growth. Maintenance CapEx trended lower in the first quarter to $24.9 million or 11.8% of NOI. The FAD payout ratio was 95% for the quarter and 97% for the trailing 12 months. We expect the FAD payout ratio to be in the high 90s in 2023 as we invest in positive absorption. We expect steady underlying fundamentals and growth of the portfolio as well as the potential for lower interest rates to benefit the payout ratio moving into 2024. For example, a 1% reduction in variable interest rates results in almost 200 basis points improvement in our payout ratio. Normalized FFO per share for the first quarter of $0.40 was down $0.01 from the $0.41 per share run rate in the fourth quarter. This was primarily due to higher interest expense on variable rate debt. In addition, we fully reserved $2.4 million of first quarter revenue related to two items. $1.5 million for three legacy HCA skilled nursing facilities that we expect to sell later this year. Another $900,000 reflects interest income on a legacy ACA mezzanine construction loan. The project in Houston was paused in the first quarter but remobilized in May. The annual impact of the revenue reserves is $0.025 per share. The 2023 normalized FFO guidance range of $1.60 to $1.65 per share assumes no revenue contribution from these two projects. We expect the Houston construction project to be completed and placed into service by the end of 2023 and the three skilled nursing facilities to be sold later this year. With estimated proceeds of $100 million or more from the asset sales and construction loan repayment, the ultimate annual run rate impact is expected to be less than $0.01 per share. The benefit from the reinvestment proceeds is not included in the 2023 guidance range. The proceeds when received are expected to reduce debt to EBITDA from 6.6 time this quarter back within our target range of 6 times to 6.5 times. Above average same-store NOI growth moving into '24 will also help to drive leverage lower. As a rule of thumb, every 1% growth in same-store NOI reduces debt to EBITDA by over 5 basis points. For example, 5% NOI growth next year would reduce leverage by over 1/4 of a turn. We also see a tailwind from expected lower interest rates. The forward SOFR curve suggest rates may rise modestly over the next few months and then decline in the second half of '23 and into '24. This would augment our expected occupancy gains and expanded external growth. But even without improving interest rates, we see a path for 5% to 7% per share growth next year. I'll now turn it over to Rob for more color on our leasing and investment activities.

Thanks, Kris. First quarter of 2023 marked the first time that Healthcare Realty's leasing team operated under a common set of practices, incentive plans, technology and full brokerage coverage. From the merger closing through the end of last year, our team was busy integrating the legacy HTA portfolio into our leasing model. We onboarded the top talent from HTA's leasing team to our platform and at the first of the year, placed them on our incentive program. We also brought on over 35 new third-party brokerage teams that we identified as the best in their markets. These teams will lease approximately half of the legacy HTA square footage with the balance transitioning to our existing brokerage relationships. To maximize efficiency and speed to lease execution, we now have all of our properties on the same CRM platform called VTS, and we are using Healthcare Realty's streamlined lease documentation process. The result of our integration work began to flow through during the first quarter of this year. Prospective tenant tours, an early indicator of leasing activity, increased to over 775 in the first quarter, up over 50% from the fourth quarter. A more significant point is that tours in our legacy HTA properties were up over 80% during the same time versus a 25% increase for legacy HR properties. The benefits of our leasing model are beginning to come through. With better visibility on tours, expectations for the timing of new leases and resulting absorption are becoming clear. Our leasing analytics indicate that tours converted to leases about 15% to 20% of the time. The data also shows it takes an average of 4 months to convert a tour to a new executed lease. And once a new lease is signed, it takes approximately 6 months for a tenant to take occupancy. This tells us our pickup in the first quarter tours should translate to higher occupancy late this year and into 2024. By maintaining two activity consistent with the past 2 quarters, we expect to generate annual absorption of 100 basis points to 200 basis points next year. This comes from our 34.5 million square foot multi-tenant portfolio. The net effect is these gains are expected to add approximately 1.5% to 3% to our baseline annual NOI growth projections. We have illustrated these points on new slides in our investor presentation on Pages 12 and 13. On the broader demand picture, history shows that even with the economy slowing, clinic-based outpatient medical visits remain resilient during times of slower economic growth. Recently, there have been supportive read-throughs of positive trends from some core profit hospital systems. HTA and tenant reported that outpatient surgical procedures were up 5% to 8% year-over-year compared to a 2% range in 2022. They also reported further moderation in labor costs and stabilizing margins along with continued plans to invest in outpatient delivery settings. These improving demand drivers correlate with the increased tour activity we are experiencing in our buildings. Shifting to the market for MOB investment. Demand is strong. We see both debt and equity investors looking to reallocate the stability and safety of MOBs. On the debt side, we are seeing larger lenders such as Capital One, Wells Fargo and Fifth Third returned to the market with fresh allocations. All in, debt financing appears to have shifted down into the mid-5s. This, coupled with growing institutional equity interest in the MOB space, has shifted cap rates lower by 25 to 50 basis points in the last couple of months. Upper tier MOBs are now trading in the mid-5s to low 6s. With this expanded interest, we see increasing opportunities to leverage our joint venture relationships to accelerate external growth volume. Our pipeline of clustered acquisition opportunities continues to grow with our greater market scale and deeper health system relationships. These relationships are a rich source for development and redevelopment opportunities. Health systems are formulating capital plans to meet the increasing demand for outpatient services. In a few recent examples, hospital reached out to discuss the new -- the need for new outpatient facilities in growing markets like Phoenix, Houston, Raleigh and Dallas. This year, we are building a road map for increased occupancy gains that will accelerate NOI growth next year. Additionally, strong demand for MOBs along with our greater scale and expanding health system relationships, positions us well for accelerated external growth. The combination of these two will drive meaningful increases in FFO per share. Now I'll turn it back over to Todd.

Thank you, Rob. It's important to note the merger sparked strong interest among institutional capital partners. They recognize the value of Healthcare Realty's operating expertise, the scale of our premium platform and the strength of our deep industry relationships. We are meeting with blue-chip investors who've earmarked capital for MOBs and want to rapidly scale their exposure. Over the next 6 to 9 months, we intend to see one or more joint ventures with gross asset values between $500 million and $1 billion. We also expect to secure sizable commitments for go-forward investment capital. We will use proceeds from seed portfolios alongside these capital commitments to fund our robust pipeline of investment opportunities. These new ventures will diversify our capital sources and expand our ability to invest in a broad range of burgeoning outpatient trends. We see the potential for our gross investment volume to exceed $1 billion in 2024 and expand from there. As we look ahead, we view 2023 as a critical inflection point for Healthcare Realty. We are carefully investing the resources necessary to sustain higher annual FFO growth well above MOB sector norms. In 2024, we see a clear path to FFO per share growth of 5% to 7%. We also see near-term tailwinds that could strengthen our growth outlook, including softening inflation and lower short-term interest rates. We are eager to engage with everyone further as we execute our growth strategy. We look forward to hosting an Investor Day in the latter part of 2023. We're working on potential dates, and we'll pull many of you over the next few weeks, including at NAREIT. With that, operator, Charlie, we're now ready to shift to the question-and-answer period.

Thank you. [Operator Instructions] Our first question comes from Michael Griffin of Citi. Michael, your line is open. Please go ahead.

It's actually Nick Joseph here with Michael. Todd, you mentioned kind of seeding JVs and the funding robust pipeline of investments. How are you thinking about getting the accretion for HR shareholders from those deals, just given where the cost of equity is today? Obviously, that can fluctuate. But how do you think about actually driving accretive per share earnings from external growth?

Sure. I think how we view it, clearly, as you said, with our cost of equity today, that's not really the basis that we're thinking about. We're really thinking about the basis being the seed portfolio formation cap rates that would come from that, number one. And so obviously, we see that as moving in an attractive direction that both Rob and I both described as cap rates been shifting lower. And then I think the flip side is obviously investing through a JV format, enhancing your returns, leveraging partners' capital, using their expertise to earn fee structures, promote structures that would enhance the return and therefore, creating a spread between those two levels.

And then how do you balance or think about share buybacks versus that pipeline of investment opportunities?

Sure. I mean, I think naturally, when you're selling -- if you sell assets, which we certainly expect to do year-to-year for the balance of this year, even next year, just an ongoing process, certainly, we would look at what are opportunities in front of us at the time we have those proceeds in hand. And we would certainly look at what's the return on a share buyback versus a return of putting that capital to work in new investments, whether that's higher-yielding redevelopment, development, acquisitions, whether they're balance sheet or JV acquisitions. So we would certainly look at all those. But we think with the opportunities we're lining up we think there's certainly a lot of opportunity to be focused more on external growth than share buyback. But certainly, that's on the table at all times.

Our next question comes from Juan Sanabria of BMO Capital Markets. Juan, your line is open. Please go ahead.

Just hoping to unpack the potential joint venture opportunities you mentioned. How do we think about the target range of your potential investments or stake in the joint ventures? And how would you feel with [Indiscernible] interest in growing those joint ventures versus investing on balance sheet?

Sure. I think it's early to obviously express exactly what a JV structure would look like. But I think you can look at the two we have in place today as maybe some goalposts to frame that in. In one case, we're 50-50 with Nuveen or Teachers. And then with CBRE Investment Management, we have an 80-20, where we're the 20. So those are probably good goalpost to think about, something in that range, but it's obviously subject to how we structure it with potential partners, including those potential groups. Obviously, we're talking to a lot of folks. Sorry, what was your second question there?

Just the conflicts, I mean, you're going to have -- you had two -- Yes.

Yes. I mean I think, obviously, that's always a balance. We've been very careful in the two JVs we have now not to create a tangled web of conflict, as you point out. JVs for us today are fairly small in the grand scheme of things. We're looking to diversify that, grow that, obviously, lean into that here where our cost of capital isn't quite where we'd like it to be. I think a lot of REITs have seen that through with discounts to NAV or lower multiples than historic norms, certainly looking for ways to leverage that external capital. I think for us, we would continue to evaluate and look at balance sheet investing alongside all of that. So it will be a function of balancing all that. I think our view is leaning into that external JV structure is appropriate now, and we have a lot of runway on that. And I think that can deliver a lot of value to shareholders. And obviously, over time, we'll -- should the cost of capital for the balance sheet makes sense, we'll lean into that. And I think as we described in our JVs before, we've always been careful to balance sort of how these imperatives or directives, if you will, the styles complement each other. The balance sheet would be very focused on our current strategy of market scale and clusters and continuing that heavily focused around hospital-centric investment themes. And I think there's lots of other interesting areas that we've done for years, but would expand upon in terms of different theses that we would invest through these JVs. And we've done that already to date with the two JVs we have. So I think we will continue to balance that very carefully.

And then just on the write-downs that you took this quarter, I guess, what changed on those two, the -- portfolio and the mezz loan from the fourth quarter and the results and in February. Just curious on the change there.

Yes. On the -- specifically on the SNFs, those were assets that we weren't looking to own long term. We're already looking at exiting those. This quarter, kind of the change is just where the operations are currently and what needs to happen in terms of the transfer of operations over to a new operator, a new owner. And so as a result, we felt it was prudent to go with those reserves kind of go to cash accounting for those until they're sold. And on the mezz, we mentioned in my prepared remarks that it did -- that project did have a pause in the first quarter. So no work was being done at that point in time. So that was the change. The developer has since raised additional equity and is in the process of remobilizing. So it does look like the project will be completed and finalized here later this year. But once again, just based off of the facts and circumstances in the first quarter, we felt that going to cash and reserving that amount was the appropriate plan there. So -- but I think the big picture is to keep in mind that these are the only SNFs, the only mezz loans that we have, and they weren't part of our long-term strategy. We did take this conservative position here in the quarter, which has about a 2.5% annual impact. As I mentioned, once the proceeds are recognized from the sale and repayment of the loan, we expect the ultimate impact to be less. So overall, pretty minimal.

Our next question comes from Nick Yulico of Scotiabank. Nick, your line is open. Please go ahead.

I just wanted to tie together a couple of pieces of the guidance. So you're talking about occupancy growth throughout the year. And yet for FFO standpoint, on a normalized FFO basis, you did $0.40 in the first quarter. The low end for the year is $1.60. You have -- really not much growth off the first quarter base. High-end has a little bit of modest growth. But just trying to understand what the offset would be. If occupancy is expected to improve sequentially, what's preventing the sequential FFO to be a little bit better?

Nick, this is Todd. I think the real key there is really focusing on Rob's prepared remarks. We're moving along nicely at a 50 basis point year-over-year occupancy improvement currently, and we have been for a little while. We see that beginning to build in the second half. But I think what we really, really want to emphasize is the team that's been really put together to motivate and mobilize leasing, and as Rob described, that really came together at the beginning of the year. A lot of hard work went into that in the second half of last year and really see that momentum building on the tour side. And again, ramping up tours, that's a read through of about 10 months until you see the pickup in occupancy. So we do see steady occupancy gains this year, but fairly modest compared to what we see next year. Next year, we see that doubling, going to 100 basis points to 200 basis points. So it's really a 2024 acceleration story on the occupancy side. But again, we've given guidance this year of SS NOI, same-store NOI of 2.5% to 3.5%. We're kind of at the lower end now, building later into this year, but moving to a higher level of 4% to 6% next year. So that's really, I think, the important part.

Just a follow-up, going back to the 5% to 7% potential FFO growth, next year, I wasn't -- I just wanted to be clear if there was any assumptions for acquisitions built into that and as well if there's any view you're taking on the SOFR curve impacting variable rate that's going to drive some level of growth next year as well?

Yes. On the acquisition front, we certainly expect to be ramping up in '24. But as you would expect, that's a build throughout the year. So it's far less of a contribution in '24 than it would be in subsequent years. So it's a fairly modest piece of that guidance range that we're looking at or that outlook that we're looking at. So I would say it's far less than 1% of that. Most of that is related to the same store, the higher same-store growth that I just talked about. So -- and then on the SOFR curve, Kris, do you want to talk on that?

Yes. I hit on that in my prepared remarks a little bit, that no, we're really not playing into -- that's not really playing into that 5% to 7%. That would be additive on top of it, kind of depending on where the ultimate SOFR curve plays out. Right now, it's showing a benefit. But as we know, it's had a lot of a lot of volatility. So it's kind of what we're trying to point to is just from the core operations, we see strong growth and then some potential tailwinds if the interest rates do decline is the forward curve is predicting.

Our next question comes from Steven Valiquette of Barclays. Steven, your line is open. Please go ahead.

My question was kind of on a similar vein to the last one. I'm kind of thinking about the 2024 FFO growth of 5% to 7% that you're targeting. It's really just semantics, but I was just wondering if you could just provide more color on whether you're visualizing maybe a bolus of new leases, all starting on January 1 of next year versus how much the leasing activity and multi-tenant occupancy gains will be more on a rolling basis that may contribute or maybe some in late '23 and potentially throughout '24? Just picture on how you're visualizing that right now. Just more color would be great.

Sure. That's a fair question, Steven. I would say it's not the one bulge, if you will, in the first quarter. I think it's definitely a rolling build, if you will, going from fourth quarter -- the beginning of that shown up in the fourth quarter this year, but really starting to build more materially in the first quarter and throughout the year. So as Rob said, we're really looking at the tour volume spiking. Obviously, we've seen a lot of history on conversion rates, a material increase. And we're also seeing a strong number already through April. So we're watching that and seeing that continue and kind of keeping up the pace and building in over the course of '24.

Okay. And just a quick follow-up question on your comments around the cap rates kind of moving back down to 5s, down almost 50 bps. Just for further context on that, are there maybe just a few larger transactions that are driving that? Or is it kind of widespread that everything is kind of moving down whether it's large or small? Just any further color on that would be helpful.

Yes, I'd say that I would say large or small, I'd say we've seen a number of deals here recently that have sort of across the board in terms of on-campus or off and generally some longer wall product with some credit in it that has significantly move down well into the 5s. You have some typical MOBs kind of trading around the low 6s that I mentioned. So it's a pretty wide gamut of trades that we've seen. The volume, I will say, has been down, but I think we are starting to see some marks that are meaningful for the type of product that we typically invest in and indicative of what we're generally having in our portfolio.

And Rob, just adding to that, I think one of the lowest cap rates we've been hearing about recently was a single asset. So $50 million or less that was testing that 5.5 level. So to your point, it's not just some large deal of some nature that's driving it. I think it's pretty much across the board.

Our next question comes from Tayo Okusanya of Credit Suisse. Tayo, your line is open. Please go ahead.

Just along those same lines of questions, again, I guess I'm a little bit surprised that your cap rates are coming in that low ones on some transactions. Any sense, just again what an underwriter of such a deal must be assuming for those deals to kind of work just given where cost of debt and cost of equity generally is in the market today. And would you expect that you could also contribute assets to any potential JVs at those type of cap rates?

Yes, it's a good question, Tayo. I think what's -- what people are certainly looking at is sort of looking out ahead and saying, we've been through some of the toughest times in terms of quick rise in underlying treasury rates, index rates. So for all that SOFR swaps, all those things, plus we had spreads gap out. And you're just seeing, obviously, that all start to stabilize a little bit come down. And I think the outlook, as we touched on is certainly. I think Kris described the outlook for the SOFR curve. Not that it's exactly right, but it's directionally indicative of what people are thinking the market expects. So I think people are looking through that and saying, Hey, I might even do this mostly equity and take the risk and refi as things get a little bit more stable in the future. But as Rob said, there's also sizable banks adding liquidity, fresh allocations to the market, pricing cap rates into those mid-5s. So I think it's a combination of all those things. And I think it will take more time to continue to flush out where these cap rates fall. But I think back to the mid 5s, low 6s is very reasonable. I think for us, with seed portfolios, we'll obviously work with the investors that -- what are the thematic ideas that we're putting into a seed portfolio and that may have an impact exactly where cap rates are. We're not going to come here and tell you that it's a 5.5% cap. I don't think that's the right direction to tell you. But whether that 6% plus or minus is certainly on our mind, and I think that's what it's taking to kind of really play in the MOB space now. So we'll continue to update you on that as we make further progress throughout the year. But I think that range that Rob said is still indicative of the right range of where MOBs are pricing.

[Operator Instructions] Our next question comes from Connor Siversky of Wells Fargo. Connor, your line is open. Please go ahead.

So thinking about external activity into 2024 and looking at the $1.8 billion long-term development opportunities you guys list in the presentation, I mean in consideration of some of the commentary coming from the REIT space in general that we've seen delays related to air handling equipment, HVAC and so forth, I mean, can we expect a pickup in development activity in 2024 as well in conjunction with an increase in acquisition cadence?

Yes. I think that if you look at the pipeline we have in our supplemental, we've got a number of projects that we have starting at the end of this year. And really, the bulk of that -- those dollars will be spent in '24. So I would say that certainly a pickup. If you look at what's rolling off today, and coming on in 2024 as new projects, it's about an additional $150 million of spend. We've said -- I believe I said on the last call that this year, we're spending about $25 million a quarter. That would certainly take it up to $50 million -- almost $50 million a quarter. So we certainly are optimistic and bullish on our development pipeline. We see a lot of runway there in 2024 to get those projects started and completed in the 12- to 24-month time frame that we typically lay out for development. So I think also just what we're seeing on the health system front in terms of this past quarter, we saw a few of the for profits where they reported increases in outpatient surgeries and some relief on the labor front. We certainly are seeing that as an opportunity where the growth plans that these health systems have is certainly going to continue into 2024 to meet the rising demand for outpatient services that's out there. So we really don't see the development side slowing down. I think it's more about capitalizing on what we have in our portfolio and being able to realize those returns, the proper risk adjusted return for the developments that we're embarking on.

Our next question comes from Mike Mueller of JPMorgan. Mike, your line is open. Please go ahead.

Yes. So I guess, not surprisingly going back to the 5% to 7% growth next year. I mean, it seems to imply that if you're talking about doing these large JVs where you're ceding assets later in the year, that you would have to have a lot of acquisitions lined up kind of right behind it to use the proceeds or else you're creating a lot of short-term dilution that seems to work against the 5% to 7%. So can you just maybe just elaborate a little bit more on that 5% to 7%? And does it contemplate these JVs that you're talking about? And any sort of timing considerations just so we can try to get our arms around that.

Sure. And we're certainly happy to walk through that more as we develop sort of the timing details in the quarters ahead. But I think conceptually, you make a fair point and our view is we'll watch that very carefully. We certainly see a rising opportunity set in terms of acquisitions and development, as Rob said, that could make a lot of sense in the JV setting. And I think we will also look at -- if you do see portfolio structure, you can time some of that. If you're working, you can do a stage takedown that could mitigate some of that timing gap. So I think we'll be very mindful of that. But I would say that the investment opportunity pipeline is very strong, and we see that as something that we can quickly roll into moving into '24. But certainly, you raised a good point, and we'll certainly think about that as we're structuring our JVs.

[Operator Instructions] Our next question comes from John Pawlowski of Green Street. John, your line is open. Please go ahead.

I just wanted to circle back to, I believe, Nick Joseph's question on your cost of capital. The cap rates are compressing and they are where you say they are. You're trading at a pretty big discount to NAV. So I just can't reconcile that with your pounding the table on external growth. So just curious your cost of capital stays where it is, why aren't you aggressively shrinking the balance sheet?

Well, I mean, I think two things. We are selling some assets, number one. You're seeing us do that this year. We've done a lot of that, obviously, over the last year or last since the merger. And the seed portfolios are a function of that. I mean that's also raising capital in terms of selling those assets into a JV structure. Clearly, that's really the cost of capital we're thinking about and then turning around with those proceeds and using that combined with those go-forward commitments from a JV structure to create external growth and accretive growth. So that's -- and obviously, within that, you would have various fees and promotes and structures that would give you an enhanced return as well. So we're not looking at this as just a pour out equity at unfavorable valuation and have dilutive type activity. So that's clearly something we're sensitive to and mindful of. Obviously, over time, our plan would be to drive that stock price, that cost of capital to a better place and be able to use that as well. But clearly leaning into the JVs for a lower effective cost of capital.

But the gross investment volumes that you referenced earlier in the call, apologies if I missed this, could you share what HR's balance sheet commitment will be?

Well, I think we would look at it as being essentially the proceeds from seed portfolios. So obviously, we're not -- it is either selling assets outright to other counterparties or proceeds from seeding portfolios that we would then use to pair with external capital, significant amounts of external capital, so really leveraging these JV structures to go after the types of volumes we're talking about here.

[Operator Instructions] Our next question comes from Austin Wurschmidt of KeyBanc Capital Markets. Austin, your line is open. Please go ahead.

How much of the 5% to 7% earnings growth and 4% to 6% cash same-store growth for '24 you highlighted, is just HTA merger playing out as you had previously highlighted versus something different that you're seeing more broadly across the leasing environment that's broader based, not specifically tied to kind of improving the operating metrics of the HTA assets?

I think it's really both. I mean it is certainly an extension of what we talked about for the rationale for the combination with HTA. Certainly, we saw a lot of opportunity within the HTA portfolio, their multi-tenant occupancy being materially lower than ours. But we also see the power of the combination through market scale, extended scale in those markets, building on our cluster thesis, our strong -- adding to our strength, historically, Healthcare Realty strength to the relationships that HTA had and putting that together to drive additional momentum. And then I think on top of that, what Rob talked about is really seeing a recovery of sort of a sentiment of really meeting the rising demand of health care services and specifically outpatient services. So it's a combination of both but I would say it's across both portfolios. It's not just purely an HTA play and their portfolio. It's also additive in the HR portfolio and then the combined benefits that are not only occupancy driven, but also all the metrics that we're always trying to drive, whether it's in place escalators, cash leasing spreads, containing expense growth, all those things that we have more scale and leverage to be able to do across the bigger combined portfolio.

And then you guys highlighted the time line from tour to occupancy. But given all the uncertainty in the world, the recovery that health systems are kind of underway from the challenges faced related to the pandemic, I guess, did that time line from tour to occupancy be extended relative to historical periods? And what just gives you the confidence to provide that forward guidance this early for '24 instead of just letting it play out, I guess, in the form of signed leases through middle to back half part of the year?

Yes. I think the time line I laid out is based on historical data that we've looked at. Certainly, there are approximations and averages of the data that we looked at. So you could get some that go ahead of that, you can get something that could go a little longer than that. But I think that what we're seeing right now is health systems are -- and providers are remaining active and growing market share and growing their service areas. And so we see that as an opportunity to kind of lay out based on the increased activity that we've experienced by rolling in HTA's portfolio to our leasing model and then seeing some of the green shoots and the improved performance by the health systems. We see that as an opportunity to kind of lay out our expectations based on what we know today for leasing and occupancy going into 2024.

Thank you. At this stage, we have no further questions. And therefore, this concludes today's Q&A session. I would now like to turn the call back over to the CEO for any final remarks.

Thank you, Charlie, and thank you, everybody, for joining us this morning. We look forward to seeing you at upcoming conferences, including NAREIT, and we'll be engaging with you about our growth story, but obviously, also the Investor Day that we're looking put together for later this year. Thank you, everybody.