Healthcare Realty Trust Incorporated

Good morning, ladies and gentlemen. Thank you for attending today's Healthcare Realty First Quarter 2022 Earnings Call. My name is Jaquita. I will be your moderator for today's call. Our lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. Be mindful there is two participants. I would now like to pass the conference over to your host, Chris Douglas, Chief Financial Officer with Healthcare Realty Trust. Chris, please go ahead.

Thank you for joining us today for Healthcare Realty's first quarter 2022 earnings conference call. 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, 2021, and a Form 10-Q filed with the SEC for the quarter ended March 31, 2022. These forward-looking statements represent the company's judgment as of the date of this call. The company disclaims any obligation to update this forward-looking material. The matters discussed in this call may also contain certain non-GAAP 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 release for the first quarter ended March 31, 2022. The company's earnings press release, supplemental information, and Form 10-Q are available on the company's website. I'll now turn the call over to Todd. Thank you, Chris, and thank you, everyone, for joining us today.

I'll start with a few comments about our solid operating results for the first quarter. Second, I'll provide some updates on our pending strategic combination with HTA. And finally, I'll touch on the process and expected timeline between now and closing of the HTA transaction. For the first quarter, we're pleased to report both strong internal growth and robust external investment. Same-store NOI growth of 2.9% was driven by healthy top-line growth. Strong leasing interest across the portfolio drove positive sequential absorption of more than 40 basis points. Based on constructive provider sentiment, we expect steady absorption gains in the coming quarters. $340 million of year-to-date acquisitions gives us a head start to 2022. Our acquisition cap rate is in line with guidance and well above our disposition cap rate, resulting in accretive capital recycling. Additionally, we're seeing accelerated development activity. Our $1.6 billion embedded development pipeline is expanding with multiple sizable projects slated to start later this year. Strong demand for space is driving portfolio occupancy gains and increased interest in development, which bolsters our strong outlook for 2022. Now turning to the HTA transaction, I'll first touch on the unsolicited offer we described in the merger proxy and in our press release earlier today. After receiving the proposal from Party F on March 28th, our board thoroughly reviewed it with our advisors. The board unanimously rejected the proposal in writing. In mid-April, we received a second letter from Party F acknowledging our response and reiterating interest at the same terms. The board did not respond to this letter. Then on Tuesday this week, shortly after the Wall Street Journal article, we received another letter from Party F reiterating interest at the same terms as the March 28th proposal. So we've now received three letters from Party F expressing interest at the same terms. We can only interpret these letters as an opportunistic and disruptive distraction. The board has unanimously rejected the unsolicited proposal and continues to believe that the strategic combination with HTA offers a superior value and is in the best interest of the company's shareholders. Looking ahead, we remain focused on our pending combination with HTA. Earlier today, we published an updated presentation on the transaction, which can be found on our investor page. We've made tremendous progress in the last 60 days, and we're even more excited about the combination since our announcement in February. This is a game-changing transaction that positions healthcare realty as the leading pure-play MOB REIT. Operating at scale gives us tremendous efficiencies, but the ultimate benefit here, which you can see on page six of our updated presentation, is accelerated growth. The combination with HTA will enable us to shift into a higher gear, moving from average annual fad per share growth of 4.5% over the last three years to a range of 5 to 7 percent going forward. In a few minutes, Rob will more fully describe how our combined cluster strategy will accelerate our growth. With regards to the $1.1 billion special cash dividend for HTA shareholders, I'm pleased to report that we've lined up $1.6 billion in proceeds at cap rates of around 4.8 percent through a combination of JV and asset sales. We've received letters of intent and advanced discussions with multiple parties. We expect a portion of the asset sales to close prior to the merger vote, already having been approved by HTA. These proceeds will be held by HTA to fund the special cash dividend just before close, and we expect the balance to close on or around the closing of the merger. We consider these initial efforts to address funding needs for the completion of the transaction as phase one. And based on the strong demand of Phase 1, we're initiating the next phase to further align the combined portfolio through the sale or JV of an additional $500 million. Similar to Phase 1, we expect to transact at portfolio sizes where we can generate premiums relative to single asset pricing. We'll use the proceeds to match fund attractive higher-yielding developments and accretive individual asset acquisitions. And also, the board has recently authorized a $500 million stock repurchase program. This gives us another choice where we can reinvest proceeds accretively from phase one or phase two by repurchasing our own stock if the price is materially discounted. Finally, I'd like to touch on our ongoing transaction process and expected timeline. We have secured commitments for a new credit facility, which Chris will cover in a few minutes. We also intend to preserve HTA's upgrade status, which gives us a modern operating structure with a tax-advantaged currency for future acquisitions. We filed our preliminary proxy on Monday, which we expect to become effective in early June, assuming no material comments from the SEC. The shareholder vote is likely to occur in early to mid-July, followed shortly thereafter by the closing of the transaction. Before I turn it over to Rob, I want to underscore my confidence in this strategic combination. We're making great progress studying both companies' processes, technology, and teams, and we're well positioned to implement our integration plan following the closing. I'm excited about our ability to deliver to shareholders this rare combination of sector-leading scale, increased stability, and accelerated growth. I'll now turn it over to Rob, who will provide an update on our investment activity and some more color on our growth strategy. Rob?

Thank you, Todd. Our year-to-date acquisition activity has been robust. We invested $341 million at a blended cap rate of 5.1 percent across 17 MOBs in eight transactions. The majority of these are located in target markets and align with leading health systems such as Kaiser and Sutter in San Francisco. Cedars-Sinai in Los Angeles, and Common Spirit in Houston. And two-thirds of these are in clusters, consistent with our acquisitions in 2021. A portion of this activity, totaling $101 million, was purchased through our joint venture with teachers. Over 50% of this investment was off-campus, in line with our strategy to utilize the joint venture to balance risk while retaining operational synergies and cluster benefits. Our success this year reflects our ability to build the highest quality portfolio through selective acquisitions by leveraging our direct sourcing channels. Dispositions were also an accreted source of funds for our investing activities. Year-to-date, they have contributed $110 million at a blended cap rate of 4.2 percent. We realized the positive rotation of 90 basis points between the average sale cap rate and our average acquisition cap rate of 5.1%. Our acquisition pipeline continues to expand and shape our bright outlook for the remainder of this year. With almost half of the top end of our guidance completed by the end of April, we are on pace to achieve acquisition volumes similar to 2021. Development and redevelopment activity is accelerating. We're investing $44 million in 106,000 square foot development in Nashville. The project is supported by a recent expansion of the hospital, with 50% of the building already leased for a hospital-sponsored comprehensive women's services program. We are seeing strong leasing interest from independent physician groups and expect to complete this project in the second half of 2023. In addition, we have four redevelopments totaling $53 million underway. We view redevelopment as an attractive way to generate incremental returns of 8 to 11 percent in our existing markets. Our prospective development pipeline continues to grow as hospitals and healthcare providers expand their care footprints. We are in advanced planning stages on a handful of large-scale developments totaling over $300 million. Most of these are within existing clusters in Atlanta, Dallas, Denver, and Los Angeles. And all of them are on or adjacent to leading hospitals. Expected returns continue to be 100 to 200 basis points above comparable acquisition cap rates. And a few of these developments, totaling over 100 million, are likely to start in 2022. Now I'd like to touch on a few points that I'm excited about as we work on our strategic combination with HTA. Together, our portfolios and resources provide a broader foundation to accelerate growth in the coming years. Combining the companies establishes a long runway to increase the size and number of new hospital-centric clusters that drive value for our shareholders. First, I'll outline the opportunity to form more clusters. HR has 38 properties where we only have one building on or adjacent to a campus. HTA has 72 of these non-clustered properties. Together, our opportunities set to apply our direct sourcing model and leverage deep relationships to form these new clusters nearly triples. This represents over $7 billion in new investment, or about five years' worth of acquisition work. Additionally, we see an enormous opportunity to expand existing clusters around hospitals where we already own multiple properties. The combined portfolio will average just over three buildings per hospital-centric cluster. As we've been doing with our own portfolio, we can increase this average. Increasing the portfolio average by just one building across more than 210 hospital-centric clusters represents another $6 billion of investment opportunity. The map behind this opportunity set is outlined in our transaction update on page seven. Hospital-centric clusters will serve as the bedrock of growth in the coming years. By increasing both the size and number of clusters, we can offer more solutions to health systems and providers in support of their outpatient strategies to increase market share and expand their care footprint, improve the patient experience, and recruit and retain physicians. A good example of this is Seattle. In 2012, we had one cluster with two buildings. Today, we have seven clusters with an average of almost four buildings per cluster. As we address the space needs of our growing health system partners, our shareholders will not only benefit from investing in more buildings, but also from occupancy gains and rent growth across the portfolio. Specifically, for every 50 basis points in occupancy gain, we realize an increase of 100 basis points in our FAD per share growth. And for every 10 basis points increase in our average escalator, we realize an increase of 20 basis points in our FAD per share growth. Through our combination with HTA, we are better positioned to create scale around more hospital campuses. The benefits of scale will accrue to our shareholders through increased acquisition and development sourcing, as well as long-term occupancy gains and rent growth, which combined can accelerate our bottom line growth by 100 to 200 basis points. Now I'll turn it over to Chris.

Thanks, Rob. We've had a productive start to the year defined by strong portfolio performance and consistent earnings growth. Normalized FFO per share grew 3.6% year-over-year to 43 cents. Sequential quarterly FFO growth was primarily driven by a $2.4 million contribution from net investment activity. This was partially offset by a $2.1 million increase in G&A. The change in G&A was the result of approximately $900,000 of typical first quarter only expenses such as 401K match and HSA contributions. Another $800,000 is from stock-based compensation due to our new forward-looking equity incentive plan we discussed last quarter. And lastly, a $400,000 increase in cash incentive compensation resulted from improved leasing and same-store performance. This quarter, same store NOI increased 2.9%, consistent with our long-term historical norm. I'm also pleased to report that our occupancy continues to build. Sequentially, same store average occupancy increased 40 basis points to 89.2%, which is an acceleration from the 20 basis points of sequential absorption we generated last quarter. Year over year, occupancy increased 20 basis points and expense reimbursement grew 7.9%, which drove 4.3% same-store revenue growth over first quarter 2021. Revenue drivers were once again strong. Contractual escalators were 2.94% for the same-store portfolio, and cash leasing spreads were 3.4% for the quarter. As Rob mentioned, health systems and physician groups continue to demonstrate need for additional outpatient space to support increased patient demand. This was evidenced in our portfolio by a record number of property tours in the first quarter. Given this backdrop, we are optimistic about our ability to continue to accelerate our revenue growth drivers as well as translate occupancy gains into stronger same-store growth. Regarding our balance sheet and liquidity, as Todd mentioned, we're looking at expanded asset sales and JVs to accretively fund investment activity. We're also in the process of recasting the bank credit facilities for the combined company to increase liquidity and extend maturities. We have commitments for a new and expanded $1.5 billion revolving credit facility and $1.5 billion of term loans. This includes $650 million of new term loans, which will be used to repay outstandings on our existing revolver and pay transaction costs. When the HTA transaction closes, we expect to have full capacity under the expanded revolver. Separately, we structured a new $1.125 billion asset sale term loan. that can be used to backstop the timing of the asset sales and joint ventures that will fund the HTA special dividend. This asset sale term loan will replace the existing JPMorgan Bridge facility and be much more cost effective for any funding. We already received commitments for the new bank facilities and expect to have the documentation fully executed by mid-May. This morning, we posted new transaction update slides including additional financial information on the HTA strategic combination. Slide four of the deck includes a sources and uses table, while slide three is an accretion bridge walking through the approximately 2% accretion to 2023 FAD. This analysis takes into account the original $1.1 billion joint venture and asset sales, together with the cash G&A savings. What is not shown on this analysis are the benefits from the additional growth drivers, including those outlined on slide six, that can accelerate our annual per share growth by 100 to 200 basis points. Before we go on to Q&A, I want to leave you with a couple key takeaways regarding our pending strategic combination. On the capital front, we've made substantial progress on our new credit facilities as well as structuring for our JV and asset sales. And operationally, we're poised for accelerated growth through expanded investment volume, positive occupancy gain, and higher rent growth. Operator, we're now ready to open the line for questions.

Absolutely. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If for any reason you would like to remove that question, please press star followed by 2. Again, to ask a question, press star 1. As a reminder, if you're using a speakerphone, please pick up your headset before asking your question. Also, limit two questions per participant. Your first question comes from the line of Rich Anderson with SMBC. You may proceed.

Thanks. Good morning, everybody. So on the asset sales and the joint venture, I see you've given some of the markets that you're targeting. I wonder if you can give a little bit more on the transactions, though. Is your existing teacher's relationship involved at all? I assume all the assets come out of the HTA portfolio. And is there any sort of common thread to types of assets that are being targeted for sale that you can share with us today?

Sure. Good morning, Rich. Thanks for the question. Yeah, on page five of the transaction update, we do provide some characteristics for the asset sales as well as joint venture assets. And I guess to answer one of your questions about teachers or the parties, we've not disclosed that yet. We're at the LOI phase, as you know, and so we'll obviously disclose more on that as we reach definitive agreements there. So we're not yet disclosing those parties. But as it relates to the assets, your question there on page five of the update, we do provide that, generally speaking, the asset sales have a higher percentage of off-campus, a higher percentage of single-tenant tend to be longer lease terms as well, and a little bit lower contractual escalators on the rent. So again, great assets, but obviously not necessarily a part of the strategy that Rob articulated in terms of how we expect to expand and grow in our markets and around our clusters. So that's really the idea with the asset sales, just really trying to narrow it down to assets where we can really apply our strengths in our strategy. And then the joint venture is really more of the same of what we've been doing with our teachers' joint venture, but also pulling in assets that might be a little bit more off-campus, but also helpful to the hospital-centric clusters that Rob described and in markets where we're building scale. So, you know, again, tilting a little bit more towards off-campus, a little more value add, but still strongly aligned with our markets and our cluster strategy.

And primarily HTA-owned assets, is that correct?

Yeah, sorry, that was your other question. Yes, they're all currently HTA assets, that's correct.

Okay, and then the second, call it the $18 billion question, you know, what is, if you, I assume you applied some math to a path to achieving Pardieff's, Welltower's offer, $31.75, and how do you get to that for shareholders as a combined company with HTA rather than take the cash offer. Is there, like, a mathematical approach that you can share that gets us there within a reasonable period of time? Or are you just going on, you know, the additional fad growth that will be valued more in the marketplace and $31.75 is a beatable price? level within a relatively short period of time. Thanks.

Sure. Thank you, Rich. Obviously, we can't speculate exactly how the market will play out relative to our performance, but certainly we have confidence that as we put the companies together, the portfolios together, the teams together, we can drive that accelerated growth. We think through that combination, you will see a path to your question to drive value to shareholders that's far in excess. of what you referred to as Party F's proposal, unsolicited proposal. So our view is clearly that we can exceed that. We view some of the indications that we've shown through these asset sale and joint venture transactions as clear marks as to where value lies and value we can create for shareholders. So that's really our focus, obviously, that we can accelerate growth and deliver that value to shareholders over a very reasonable timeframe.

Okay, thank you.

Thanks, Rich.

Thank you. The next question comes from the line of Juan Sanabria with BMO Capital Markets. You may proceed.

Hi, good morning. I saw you kind of gave the updated accretion and had the nice-looking graphic. But that 2% fat accretion, does that change at all with the upsize Joint venture slash asset sales now 1.7 billion gross, 1.6 net, given the original was 1.1. Just curious on what the revised math is or how you guys are thinking about that.

Yeah, this is Chris. Good question. No, what we showed here is just the base accretion that we had announced when we announced the transaction. It's the 2% that we had talked about. But we do view the additional JV and asset sales over and above the $1.1 billion as being an accretive way to grow our portfolio moving forward and fund our acquisitions and development. So if you assume that we're able to reinvest at the same kind of midpoint of our guidance range that we've given right now, call it kind of in the low fives, five, two, that additional 500 million adds about 30 basis points to your accretion.

And then just a quick follow-up to Rich's line of questioning, were the assets or are the assets that are being sold or joint ventured or any of those developments that maybe have a lower occupancy that maybe skew the cap rates down? I guess part B of that same question would be, are you seeing any signs cap rates are expanding?

Sure. So on your question, Juan, the average occupancy in those portfolios is actually pretty strong. I think it's over 90%. And no developments with low occupancy included. So I think that answers that. Sorry, your second question.

Any signs of cap rate expansion given the move in rates for discussions you're having today? I'm not sure when those, that $1.7 billion, when those discussions started, but I guess prospectively, what's your view of cap rates?

Sure. These conversations, as you can imagine, are very current. May have started back in February, but have obviously continued And we continue to see strength in those conversations and a lot of depth to continue that. As we mentioned, we're looking at initiating phase two of these asset sales or joint ventures, more of those to really play into what we're seeing. Obviously, we can't speak to everybody's view on cap rates. At all times in markets, you have different views. You're going to find people that may have a different view. But we're finding plenty of depth, lots of parties, in addition to the ones we've already announced these with that are very interested at these cap rates. So we're very optimistic and bullish that there's depth here in those cap rates.

Thank you.

Thank you.

The next question comes from Delana Steven, Veloclap with Barclays. You may proceed.

Great. Thanks. Good afternoon, everybody. One of the common themes across a lot of the healthcare earnings calls this quarter related to the medical office segment is just that macroinflationary trends are just allowing for greater rent escalators in new leases and also in renewals. I'm wondering if you're just able to also just speak to that investment dynamic and what you're seeing within your portfolio and your releasing, et cetera, just in relation to the ability to push those higher. Thanks.

Sure. Good question. I would say marginally, yes. We are seeing some signs of uplift in terms of being able to push rents a bit as inflation increases. Obviously, it's not the hotel business or some other shorter duration business where you can see it all move super quickly. We're talking about leases that are five years or so on average. So it's a little different, but we are seeing some signs. I think Chris referred to a record level of interest in tours. So we're seeing a lot of demand. The real common thread, obviously, is replacement costs. And we're seeing clear signs as we price out developments, TI projects of inflation in terms of build-out costs, replacement costs. So that's ultimately the driver that will lift rents. And we've seen that cycle play out over time. Construction inflation has always run a bit ahead of sort of the broader inflation metrics, and it generally causes that lift in rent. So we are seeing some signs of it. I would say it's medical office, so it's not going to, you know, immediately pop the way maybe some other sectors, but we think long-term we can drive growth that's in line or ahead of long-term inflation rates. Okay, great. All right, that's it for me.

Thanks. Thanks, Stephen.

Thank you. The next question comes from Alana Robb-Simon with Hedgeye Risk Management. You may proceed.

Hey, guys. Thanks for taking the question. Maybe a two-part question for me. So, thanks a lot for the color in, I guess, you know, explaining the merits of HR and HTA as a combined entity. I guess, presumably, in the board deliberations, you know, it obviously weighed, and you guys obviously weighed the merits or lack thereof of Part EF. I guess to the extent possible, could you talk about like the deficiencies, I guess the board saw in that offer and what drove that side of the decision and maybe what it might take to improve that offer, if at all. And then the second part is, you know, obviously, I would assume that in this process, you kind of canvassed your shareholder base vis-a-vis the two-thirds vote hurdle. And so I was wondering if maybe you could talk about that a little bit and and kind of how you feel about shareholder approval of the HTA deal. And those are the two for me. Thanks.

Sure. Thanks, Rob. I guess first, we obviously put out the results of our board's deliberations, and they unanimously rejected the Part EF proposal. So that's really all we can say there. Obviously, we're not going to get into the details and speculate where that could go or what Part EF may or may not do or or where prices might be. So we're just gonna obviously steer clear of that. The board obviously will always review seriously and thoroughly with advisors and management as well as input as to any unsolicited proposals at any time. That's a given. So that's where we stand. That's what we've done to date. In terms of canvassing shareholders, we've absolutely engaged with a lot of shareholders and have had lots of positive conversations. continue to be very confident in our ability to convince shareholders that the strategic combination is in the best interest of those shareholders. We have a lot of work to do ahead of ourselves. We obviously are very pleased to have the merger proxy filed earlier this week, so it gives us a lot of opportunity to go out and discuss with shareholders those merits, and we'll continue to do that. And we've got some time here to really engage aggressively with everyone and anyone who wants to to hear our case. So we've got our work cut out for us. We understand that, and that's what we intend to do. Got it. Thanks a lot. Appreciate it. Thanks, Rob.

Thank you. The next question comes from the line of Austin Worshmuth with KeyBank. You may proceed.

Yeah, hi. Just had one curious what the conversations have been like with the tenant relationships about the strategic combination and sort of what the increased, how they feel about the increased size and concentration within the portfolio and whether or not to the extent there's any purchase options that there's heightened risk that they would exercise those down the road.

Sure. I think it's early to say. Obviously, there's curiosity, you know, questions that may come in to our property managers, various managers throughout the company, but certainly a lot of excitement as well to work together with the two companies. Really, no signs of anything yet that would give us any indication that there's any alarm or concern around any rights, purchase rights that may be there. There certainly are some. I think in the proxy, you'll see that we identified nearly a billion dollars of potential there in the portfolios. But our view is it's lower likelihood for sure on execution. Always the case, but certainly in this type of market, I think we certainly would expect that to be much lower probability. So not saying there wouldn't be any. We certainly expect some, but we don't think it's an outsized risk there.

I appreciate the thoughts. And then one follow-up, just I guess, how did you guys arrive at the $500 million of additional dispositions, and how quickly do you think you can re-employ that capital, or maybe, I guess, how quickly can you ramp development, as it seems like that's the intended use of proceeds?

Sure. Obviously, we've been combing through the portfolios for quite some time and our due diligence going back to last year as well as through current. So we continue to refine that analysis. It's really studying, as Rob articulated, the cluster approach and really where we can apply our resources in markets and in those clusters to really affect our strategy and this accelerated growth. So really, it's identifying properties that are great assets but just don't really fit with that strategy. So That's really how that's come about. I would say it's not a hard and fast number at $500 million, but our view is there's certainly that kind of room there, and we're certainly seeing a lot of that come out of conversations we've had with some of these parties in what I call phase one, so continuations there, which are very encouraging. So really just seeing that being used over time, there's no urgency there, but I think throughout the back half of the year after closing We can use that to match fund with other acquisitions, obviously development funding. We've articulated, Rob did, I did, that we have a pickup in development just at HR, but also then layering in HTA's piece. So I think you can really see that pickup. In our original presentation of the combination, we talked about accelerating the pace from having 100 million of projects underway at HR to more of a pace of 300 million. That won't happen, you know, day one, but we think that will ramp. So we showed a sort of a heuristic of, you know, adding $100 million a year to the pace. So maybe within 12 months kind of elevating from $100 to $200 million or more projects. So that's really the pace. But obviously funding acquisitions, and then obviously we mentioned too authorizing the share repurchase program. So it gives us another accretive choice to put those proceeds to work. Appreciate the time. Thank you. Thanks, Austin.

Thank you. The next question comes from the line of Omoteya Okasanya with Credit Suisse. You may proceed.

Hi, yes. Good afternoon. I wanted to talk a little bit about the strategic combination and this viewpoint you guys have put out that you'll be able to accelerate your FAD per share growth to about 5% to 7% once the acquisition is done. I guess the question for me is can HR on its own get to that level of FAD per share growth given some of these factors or drivers you're talking about, multi-tenant occupancy increases, rent growth, redevelopment. Those are all things you guys are planning to accelerate anyway as a standalone entity. So why do you need the deal to get to that number? sounds like you may be able to get to that level of acceleration by yourselves.

Sure, Ty. It's a natural question. I understand the question. I think you have heard us talk a lot about our own successes in that regard. Clearly, the key is it's really, I think Rob said the key word, is tripling the opportunity set, that you already have a foothold in many places where you can naturally then expand through hospital relationships and market presence. It's those what we would call non-cluster, you know, single building on or near a hospital campus that we can go in in our own portfolio, which Rob articulated, what, 38 of those, and then another 72 at HTA. Those are really just sort of the low-hanging fruit opportunities where we can go naturally start to build those clusters. Obviously then the second piece is expanding the clusters we already have. So we articulate this in our update on page 7. just the sheer volume of numbers. So our view is it really opens up the opportunity set tremendously to combine with HTA. So it really puts us on that path much faster than we would be on our own. Certainly that's what we'd be striving for on our own. And we think this just absolutely accelerates that.

Okay, that's very helpful. One more if you could indulge me. So the revenue synergies, again, not based into any of your numbers, I think on the slide you guys kind of talk about them very theoretically and what they could be and they make sense. But any sense in general from a quantification perspective what that could do to potential FAD for sure growth or what that could do to potential accretion from the deal kind of at a very high level if you get some of that over the next 12 to 15 months?

Yeah, I mean I think what we're articulating and I think you're referring to is that page 6 where we layer in these four pieces, but occupancy gains, rent growth, redevelopment, expansion, as well as direct acquisition sourcing, accelerating all of those things, we've kind of laid out how each of those increments can really drive that growth from that four and a half level we've been at in the last three years up to this five to seven. So we absolutely think these are kind of the heuristics and the achievable types of incremental upside that we can achieve through the combination. We would point to, and we don't need to go through it here on the call, but there's several pages afterwards, the last of which shows how we've done that in Seattle and some of the performance that we've seen in Seattle, expanding both the size and number of clusters and really showing how that really is the model for growth and how it results in very solid performance within those portfolios. And so that's really how we look at doing that across more and more markets and through more and more clusters.

Gotcha. Thank you.

Thanks, Kyle.

Thank you. The next question comes from the line of John Polosky with Green Street. You may proceed.

Thanks. Just one follow-up question on the asset sales. So if you drilled down on the weighted average 4.8% cap rate, is there a meaningful difference between the outright asset sales and the joint venture pool?

Pretty similar, pretty tight range there, John.

Okay.

Todd, could you talk a little bit about, just spend a few minutes talking about the future board of combined HR and HTA? To us, 13 directors, the size of the board seems excessive, and the three new HTA members joining it's not clear that they're doing their job all that effectively at HTA. So how are HR shareholders going to benefit from this new massive board?

Sure. Obviously, when you put two companies together, you know, it's not uncommon that you see a board expand. I think from our standpoint, we see bringing over board members from HTA is value-add simply because of their knowledge base. of the portfolio, the team, the employees at HTA. We see some tremendous value there. We've already seen that in terms of looking through the integration, all the integration efforts we've made so far. Obviously, we've got a new candidate as well who will be on the board that we see as adding tremendous value. So we see a lot of benefits from these board members coming on. But we do have an eye towards making sure we naturally bring down the size of the board over time. So this isn't a 13-member board from here on out. We do specifically have the idea that it will come back down over time. So we're mindful of your question, but we think there's value in having some overlap here and some of those members from HTA. So that's kind of how we view it. We think we've also placed folks in the right committees with the right skill sets. So we see tremendous value from that combined board going forward.

Okay, I understand the board will come down over time, but correct me if I'm wrong, the HTA board members have negotiated a nomination through 2025. So is the shrinking going to come from legacy HR directors? And so two years from now, we're looking at a legacy HTA-heavy board?

So obviously, I don't want to comment specifically on individual board members and who that would be. I think our view is there's a transition period here, and then it would naturally, through attrition, whether it's through age or, you know, anybody's circumstances changing. We're not trying to signal that, you know, the HR portion of the board or, you know, we're not really looking at factions like that. We think it will be very natural and balanced going forward.

All right. Thank you for your time.

Thanks, John.

Thank you. The next question is a follow-up question from Alana Juan Canabrea. would be a more capital market. You may proceed.

Hi, thanks for letting me get back in the queue. Just a couple quick follow-ups. On the buyback that's authorized, would you guys feel comfortable if the situation presented itself to lever up to fund a buyback, particularly given the backdrop that the proposed HDA merger is, in fact, a levering transaction for you guys?

We, you know, certainly we wouldn't rule out anything, Juan. Obviously we have some reciprocal operating covenants with us in HTA, so we would balance that with all the other things that are going on. You know, a lot of really what we're designing here with this authorization is to think about how we use these excess proceeds from what we're calling the current phase one joint venture and asset sales, but then really phase two that we're introducing. So it's really geared towards that, but certainly we're not going to rule out anything, whether that requires some debt to do it, but really it's geared towards those excess proceeds.

I would add, too, that if you just look at the authorization we announced today, if you did that across the combined company, it would not be a material change to our leverage level. So if it did happen, it would be very measured, very marginal.

Okay, and then just a last one for me. With the news of the merger from an HTA perspective, have you seen any turnover that was not, I guess, ultimately planned for with the synergies that causes any hesitancy, or what kind of retention payments do you have in place to keep those people that you want to? Just any update on turnover as a result of the news.

Sure. Obviously, you know, there may have been some small amount. I wouldn't say that, you know, we have a concerning level or anything. I think it's natural. Ordinary course plus, you know, some folks that maybe, you know, have made other decisions. But nothing of concern. I think our view is both boards, both management teams are very cognizant of what it may take to make sure that we retain the right people and keep everybody motivated and incented to really focus on the transaction closing, but also the integration beyond that. So we're obviously not going to comment on specifics, but certainly both very focused on that and aware of that. And you can imagine we're spending a lot of time with the two management teams and various senior leaders across the companies to make sure those bases are covered. So good question, but certainly something we're very aware of and on top of.

That's it for me. Thank you. Thank you. Thank you.

The next question comes from the line of a follow-up question from Rich Henderson with CMBC. You may proceed.

Thank you. So just one follow-up for me. On the joint venture slash asset sale program, how much of that was an original thought and how much of that maybe was modified since the merger announcement, since the approach from Part EF? And, you know, through conversations with investors that you, you know, altered it or grew it to a point that made some of your constituents a little bit more comfortable with the overall deal or was this the plan all along from the very beginning? Thanks.

Sure, good question, Rich. I think if you read the background of the merger, you'll see that at least the concept of JV and asset sales was always there, you know, going back further. Our board deliberations is certainly there. You know, we obviously knew we could do more than, you know, 1.1, but, you know, we wanted to be careful about over-promising, under-delivering there. You know, and so clearly we put that in at a measured level that we thought was appropriate, and obviously it was combined with negotiations that we were going through. So I think our view was it was always something that we could expand, and I think the success of what we've done so far has led us to expand that. So certainly if that gets more and more shareholders comfortable, we like that outcome, but it certainly makes sense to us. It's a creative move. It's also a way to refine the portfolios and really align our strategy to be more effective going forward. So I wouldn't say... Any current events, party F or otherwise, have changed our view, but certainly think it helps.

Okay, great. Thank you.

Thank you. Operator Jaquita, I think we are done with questions, and we appreciate everybody's time today. We will see a lot of you and talk to a lot of you in the coming weeks, certainly at NARIT in a month or so, and we appreciate everybody's time today. Thank you very much.

That concludes the Health Care Realty First Quarter 2022 earnings call. Thank you for your participation. You all may now disconnect your lines.