Healthcare Realty Trust - Q3 2023
November 3, 2023
Transcript
Operator (participant)
Hello, and welcome to the Healthcare Realty Trust Third Quarter Earnings Conference Call. My name is Harry, and I'll be your operator today. If you'd like to register a question for Q&A, you may do so by pressing star one on your telephone keypad. I would now like to turn the call over to Ron Hubbard, Vice President of Investor Relations, to begin. Please go ahead.
Ron Hubbard (VP of Investor Relations)
Thank you for joining Healthcare Realty's Third Quarter 2023 Earnings Conference Call. Joining me on the call today are Todd Meredith, Chris 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 a Form 10-K filed with the SEC for the quarter ended September 30, 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 matter 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 September 30, 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.
Todd Meredith (President and CEO in Corporate Management)
Thank you, Ron. Good morning from Nashville, and thank you, everyone, for joining us for our third quarter 2023 earnings call. I would also like to thank those of you who joined us a few weeks ago at our Investor Day in Raleigh. If you did not attend, I would encourage you to go to our Investor Relations section of our website and see the presentation materials and posted videos. We've included a short highlight reel as well as long-format videos with the content of the day. The focus of our Investor Day was Healthcare Realty's competitive advantages of market scale and relationships. We showcased how we're using these advantages to drive leasing and occupancy gains, and we illustrated how our approach enhances long-term growth through the expansion of our market and cluster strategy. A key differentiator within our strategy is our proven leasing model.
Post-merger, it took us about two quarters to fully mobilize the internal leasing team and our brokerage partners across the combined portfolio. Leasing momentum picked up quickly in the first quarter of 2023. Now, in the third quarter, we've generated record new leasing volume of 447,000 sq ft. This includes 269,000 sq ft at the HTA multi-tenant properties, where we have the most upside opportunity. Looking ahead, our current leasing momentum is setting the table for occupancy gains and NOI growth in 2024. Today, we're providing a roadmap, an occupancy and NOI growth bridge that outlines our expectations for the fourth quarter and full year 2024. The bridge represents both multi-tenant properties and the total portfolio. Our single-tenant properties are fully occupied with consistent NOI growth.
I'll focus most of my comments on the multi-tenant properties, where we have upside. As a baseline, our multi-tenant occupancy is currently 85.1%, and our year-over-year NOI growth is currently running at 2.3%. In the fourth quarter of 2024, we expect multi-tenant occupancy gains of 35-50 basis points. NOI growth is expected to improve to the mid 2% level, but not fully reflective of the occupancy gains since they will be back-ended. Looking into 2024, we split our bridge into the first and second half of the year. In the first half, we expect cumulative occupancy gains of 70-100 basis points over current occupancy. We expect NOI growth to elevate to a range of 2.7%-4%.
In the second half, we expect cumulative occupancy gains of 150-200 basis points compared to current multi-tenant occupancy of 85.1%. We expect multi-tenant NOI growth to accelerate to the 4.5-5.5 range in the second half. Folding in the single-tenant properties, NOI growth is expected to be approximately 4%-5% in the second half of 2024. Occupancy and NOI improvement is expected to build over the next five quarters. What we're most focused on is reaching a 4%-5% run rate in the latter part of 2024, providing tremendous velocity going into 2025. I'm confident we have the best team in the industry to deliver this upside. We're laser-focused on leasing momentum, tenant retention, and expense controls that will drive occupancy and NOI gains in 2024.
Stepping back to the broader context, we've done the hard work to merge and integrate two of the largest MOB companies. We are now the safe choice to invest in a high-quality, pure-play MOB company. We have tangible operational upside in our sites, bolstered by secular tailwinds. MOB fundamentals are sound. Demand is accelerating from aging demographics. The supply-demand picture for MOBs is tightening in our favor, and health systems are reengaged in expansion plans as their margins improve. Turning to third quarter results, we're pleased to have met our expectations on a number of fronts. Normalized FFO was in line with our expectations at $0.39 per share.... Same-Store NOI growth improved 20 basis points to 2.3% compared to the second quarter.
In-place contractual rent escalators moved incrementally higher to 2.76%, and cash leasing spreads jumped to 4.8%, well above our guidance range. We also sold 5 properties in the quarter for net proceeds of over $200 million, funding our capital requirements and reducing our floating rate debt. These bright spots are counterbalanced by a couple of areas where we have plans to improve. Operating expense growth was 4.8% in the third quarter. This is down materially from the second quarter, but well above where we need to be to meet our NOI goals. We're actively working on a number of cost reduction initiatives to reduce operating expense growth to a run rate of 2.5% by the end of 2024. Another key area is tenant retention.
Third quarter retention of 76% was below our long-term expectation of 80% or higher. Retention at the HTA properties has been running about 5%-10% lower than the HR properties. Our team is actively improving customer service and tenant satisfaction to lift tenant retention into our historical range. Tenant survey scores have already improved at the HTA properties, and we expect retention to follow in 2024. After Chris and Rob, I'll circle back to provide some additional comments before we shift to Q&A. Now I'll turn it over to Chris to discuss financial results. Chris?
Kris Douglas (EVP and CFO in Corporate Finance)
Thanks, Todd. We're pleased to report a steady quarter with improvements on several key fronts. Normalized FFO per share for the third quarter was $0.39. This was consistent with the second quarter, as seasonal utilities and higher interest expense were offset by G&A savings. FFO for the fourth quarter is expected to grow modestly, generating per share results of $0.39. As a result, we expect full year FFO at the low end of our guidance range. Trailing 12-month same-store NOI increased 2.8%, and year-over-year quarterly NOI grew 2.3%, a 30 basis point improvement over second quarter. In particular, we incrementally improved our rent growth drivers. Annual in-place contractual increases now average 2.76%, up 5 basis points from last quarter.
The improvement was driven by future contractual increases of 3% for the 1.1 million sq ft of leases that commenced in the quarter. Cash leasing spreads averaged 4.8%, up significantly from 3% last quarter. Tenant retention was at the bottom end of our expected range. As a result, sequential occupancy was down modestly by 10 basis points. Looking forward, we expect move-outs to moderate, which will help drive positive absorption from significant new leasing volumes. As Rob will discuss in more detail, we executed 447,000 sq ft of new leases in the quarter. This drove a 30 basis point sequential improvement in the total portfolio lease percentage to 89.2%.
Operating expense growth of 4.8% in the quarter was driven primarily by continued labor inflation in janitorial and personnel expenses, which were up a combined 9%. These two categories comprise 20% of our operating expenses. Excluding them, operating expenses increased 3.7% year-over-year. The higher janitorial and personnel expense was primarily driven by a goal to improve overall service at the legacy HTA properties. We will start to lap these higher comps as we move into early 2024. Together with cost reduction initiatives, we expect to bring overall operating expense growth below 3% in the back half of 2024. Net debt to Adjusted EBITDA as September 30 was 6.6 times, consistent with the second quarter.
Net debt was $112 million lower than June 30, from $209 million of asset sales in the quarter. We have $138 million of asset sales under contract that are expected to close in the fourth quarter. In addition, we currently have $182 million of properties under LOI that are expected to close by year-end or early 2024. We expect these asset sales to fund our development commitments, as well as reduce variable rate debt and overall leverage to within our target range of 6-6.5x. We're also continuing to work on a joint venture with a seed portfolio of existing HR assets.
Given the volatility in the market, we announced at our Raleigh Investor Day that we expect the size of a JV to be at the lower end of our target range of $500 million-$1 billion. We expect to generate proceeds of $400 million-$500 million. As interest rates have moved higher over the last few months, cap rates have also increased to the upper 6%-7% range. Of course, this does not consider the pullback in rates this week, and we'll have to see how that plays through to debt financing and cap rates moving into 2024. I'll now turn it over to Rob to delve further into recent leasing success. Rob?
Todd Meredith (President and CEO in Corporate Management)
Thank you, Chris. We are seeing strong underlying fundamentals in the MOB sector. The supply-demand landscape is tilting in favor of the landlord.
Rob Hull (EVP in Investments)
...On the demand side, demographic secular trends are accelerating and have a long runway. Healthcare provider operating trends are also improving, and what is really beginning to come through is a tightening supply picture. Higher construction and capital costs have created a larger hurdle for new supply, suggesting starts will remain lower for some time. This presents a favorable backdrop for improving occupancy in existing MOBs. During the third quarter, our leasing team signed 142 new leases totaling 447,000 sq ft, a record for our company. This is up 86% over the first quarter of this year. Almost 70% of these new leases are for properties in our top 15 markets. These same markets represent 60% of the total portfolio.
Signed, Not Occupied leases, or SNO leases, across the multi-tenant portfolio currently represent 210 basis points of future occupancy that will commence mostly over the next three quarters. This is up from 140 basis points in the first quarter of this year. At the HTA properties, SNO leases represent 250 basis points of future occupancy, up from 150 basis points in the first quarter. A particularly attractive opportunity for occupancy and NOI growth is within our redevelopment properties, where we have 630 basis points of SNO leases. In addition, our prospective leasing pipeline is currently over 1.7 million sq ft, up from 1.5 million that are reported at our Investor Day. Almost 20% of the pipeline is in the lease-out and documentation phases.
Another 30% is in the LOI and proposal phases, with the balance in the active touring phase. Collectively, this pipeline gives us about four quarters of new leasing visibility that will drive our occupancy in 2024. The bridge that Todd referred to is provided on page 19 of our investor presentation that was updated this morning. This multi-tenant occupancy and NOI bridge includes the fourth quarter of 2023 and runs through the end of 2024. In the fourth quarter, we expect to see positive absorption that will mark the beginning of steady gains in occupancy throughout 2024. Cumulatively, these gains are expected to drive occupancy 150-200 basis points above our current occupancy level of 85.1% for the multi-tenant properties. Strong new leasing activity is expected to replenish our SNO pipeline as new leases commence.
In the first half of the year, we expect new lease commencements of about 400,000 sq ft per quarter. Over the second half of the year, we expect this pace to increase to about 430,000-450,000 sq ft per quarter. Vacating square footage is the other side of the absorption equation. Move-outs correlate with our expiration schedule. In our bridge, we expect move-outs as a percentage of expirations to be in the mid- to high-20s%, consistent with historical averages for both HR and HTA. We project vacates of about 340,000 sq ft per quarter in the first half of the year, a product of a greater number of expirations during that time.
Over the second half of the year, we expect this pace to decrease to about 225,000 sq ft - 225,000 to 290,000 sq ft per quarter. To achieve our occupancy goals, preventing move-outs is just as critical as the volume of new lease commencements. I am confident the right people and processes are in place to deliver our targeted occupancy levels. We expect NOI growth to move into the 4%-5% range in the second half of 2024 and set us up for continued success into 2025. Todd?
Todd Meredith (President and CEO in Corporate Management)
Thanks, Rob. Now I'd like to hit a couple of key points before we move to Q&A. First, I'll comment on our dividend. Our board of directors is keenly focused on our upside potential and is 100% committed to maintaining our current dividend. While we expect to have an elevated payout ratio as we invest in occupancy gains, we remain extremely bullish on our ability to improve our payout ratio as we look beyond 2024. Second, we want to stress discipline around capital allocation. In this environment, we remain net sellers. We're not pursuing acquisitions, we are avoiding new development starts, and we're pursuing only selective redevelopments of existing assets where it makes sense to maximize value. We will continue to meet our current development and funding obligations through non-strategic asset sales, with excess proceeds earmarked for debt repayment.
Once we're comfortably within our target leverage range, we will balance further debt repayment with accretive capital redeployment, including the repurchase of stock. We now have four full post-merger quarters behind us, with the major merger integration work complete. We've shifted to the blocking and tackling phase that allows us to deliver operational upside that's not driven by the interest rate environment. We are focused on accelerating NOI growth through occupancy gains, improved tenant retention, and operating expense control. We remain committed to achieving NOI growth in the 4%-6% range. We expect to elevate our NOI growth run rate throughout 2024, reaching the 4%-5% range in the second half. This gives us tremendous velocity going into 2025.
With the occupancy and NOI bridge provided today, our aim is to create a heightened sense of visibility for investors and accountability around our goals and objectives, both internally and externally. We look forward to discussing this further, our bridge and roadmap, with many of you in the coming weeks. Thank you for listening this morning, and we'll now turn it over to the operator for our Q&A portion of the call. Harry?
Operator (participant)
Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two, and when preparing to ask your question, please ensure your phone is unmuted locally. Our first question today is from the line of Michael Griffin of Citi. Michael, your line is now open. Please proceed.
Avery Tiras (Senior Associate and Equity Research Analyst)
Great, thanks. This is Avery Tiras for Michael Griffin. And Chris, I know you touched on this in your opening remarks, but can you expand on how operating costs are trending versus your expectations? And if you could just touch on the cost-saving initiatives you're undergoing, that'd be great. Thanks.
Todd Meredith (President and CEO in Corporate Management)
Yeah, they are, they're still elevated compared to where we like to see them long term. We've made some improvements since the last two quarters, but still higher than we'd like to see. As I mentioned, a lot of that has to do with kind of inflationary items on the janitorial and personnel side. And some of that was known, given the fact that we were attempting to improve some service levels. But we're gonna be looking kind of throughout the cost structure at ways that we can to bring down costs. We'll also start to lap some of those costs that we had from last year as we improve those service levels.
So with that, we see that operating expenses trending lower as we move into next year, but you know, likely looking more towards the back half of the year before we can get back to more historical levels below 3%.
Avery Tiras (Senior Associate and Equity Research Analyst)
That's helpful, thank you. Just for a quick follow-up, just wondering, what retention rate is assumed in the occupancy and NOI bridge that you provided in the deck? Is that 80%?
Todd Meredith (President and CEO in Corporate Management)
Yeah, we used move-outs as a percentage of expirations, and it was the rate that was used in the deck was the mid-20s to high 20s for the different levels.
Avery Tiras (Senior Associate and Equity Research Analyst)
On a move-out percentage.
Todd Meredith (President and CEO in Corporate Management)
On a move-out percentage, yes, that's correct.
Avery Tiras (Senior Associate and Equity Research Analyst)
Got it. Thanks, very helpful. That's all for me. Thank you.
Operator (participant)
Our next question today is from the line of Kinner—sorry, Connor Siversky of Wells Fargo. Connor, your line is open. Please proceed.
Connor Siversky (Research Analyst)
Hi there. Thanks for taking the question. Just thinking about the 2024 guide figures that you have in the presentation, and in terms of leasing, how should we be looking at new leases, or the spread between new leases versus natural move-outs, such that you can hit those occupancy figures and get to that 4.5%-5.5% range?
Todd Meredith (President and CEO in Corporate Management)
Yeah, Connor, this is Todd. I would say if you look at our bridge that we provided in our investor presentation, we lay that out pretty clearly, and I think Rob certainly walked through that. You know, we've talked about the new leasing volume that we reached this quarter, about 450,000 sq ft. That's a level that you see in our bridge starting to come through really throughout 2024. We really hit that stride in the second half, but you see it building from sort of the high 300,000 sq ft level of new leases in the fourth quarter, next quarter, and then starting to move into the 400,000 range in the first half, and then towards that 450,000 range per quarter in the second half.
So it's really, that's a critical level, and we mentioned at our Investor Day, this third quarter leasing volume really puts us on plan at a level that, that really starts to produce the, the amount of new leasing that will drive this occupancy gain. But as, as was just asked, and as Rob, Rob touched on, the vacate numbers, the move-outs are just as critical. And, and frankly, in the third quarter, as I had mentioned in my remarks, it was, you know, it was high. It, it, the, the move-outs were higher than, than we needed, so our retention levels were not quite where we need them to be. So as we've discussed, we, we are putting a lot of measures in place to increase our, our tenant retention. So we expect that to play through.
That's clearly been a weakness on the HTA side, which we've talked about, and we're already seeing improvements. We've done surveys and are seeing nice improvements there. So we expect that to move into where our move-outs are running, you know, in line with our expirations, more in the mid- to high-20% range. And when you do that math, you come out to these occupancy gain levels, which, as we show in our bridge, is 150-200 basis points from our starting point at the end of the third quarter. Hopefully, that's helpful, Connor.
Connor Siversky (Research Analyst)
Yep. No, I appreciate the color there, and just maybe taking a longer-term view on the business, you know, appreciate the comments on responsible capital allocation for the next year or so. But when you look at out past 2024, what does that opportunity set look like in outpatient medical? I mean, I would assume that we're only really looking at on-campus assets, you know, maybe a smaller slice of the broader pie. But just any indication of what that addressable market looks like would be appreciated.
Todd Meredith (President and CEO in Corporate Management)
Sure. We actually touched a little bit on that on the Investor Day. At least one of the buses that I was on, Ryan Crowley, who heads up acquisitions, and his team have a very, you know, specific analysis of the total addressable market. And it's quite large, gives us a lot of runway. And that was certainly one of the compelling pieces to the merger, is to put together the two companies and have as many clusters that are especially that are hospital-centric, as you mentioned, that we can go in and expand. So we're very focused on 30-40 markets, where we can go in and expand our clusters. It's, you know, much larger than our company as it exists today. So it gives us a long runway to grow.
And yes, it would be centric, you know, hospital-centric, but certainly we're comfortable expanding our clusters, you know, even a little further away from the hospital, but that still are in sort of that two-mile radius of a hospital and complement our existing clusters. So we see that as a very addressable runway. We talked about during the merger, obviously, we're not doing this now, but really being able to elevate acquisition volume to, you know, $1 billion+. And we were frankly on that path, you know, back when interest rates were lower and pre-merger, and we see that ability, and we just have a richer target total addressable market and target markets that we can do post-merger, given all the clusters and markets that we're in.
Connor Siversky (Research Analyst)
Got it. I'll leave it there. Thank you.
Todd Meredith (President and CEO in Corporate Management)
Sure.
Operator (participant)
Our next question today is from the line of Rich Anderson of Wedbush. Rich, your line is open. Please proceed.
Rich Anderson (Managing Director and Senior Equity Research Analyst in REITs)
Hey, thanks. Good morning, everyone. So, on the, the bridge, what, why now? I guess is my question. Like, you know, this is something we've all talked about, about creating some more growth out of medical office. I think we've probably talked about it ad nauseam for 20 years. And I'm curious why you think that the opportunity set starts to happen now. Is it, is it mainly a you, Healthcare Realty event, or do you think the business in its entirety starts to grow as well, along with you, maybe you at a, at a faster pace? I'm just curious if you could comment on that.
Todd Meredith (President and CEO in Corporate Management)
Sure, Rich. Good to hear from you. We would say—I would say the short answer is yes to both. I think, as we discussed, there are some secular trends going on that we think really do lift the broader MOB tide, if you will. But certainly, our opportunity is post-merger, improving occupancy at the HTA properties. And in short, we think that they lost a fair bit of occupancy with a lack of focus for a few years, COVID, you know, being part of that. And we really see a bright opportunity with our leasing model, as well as our property management, asset management teams to really turn things around and get that occupancy up.
Frankly, and I guess to your question of why now, as it relates to us specifically, we certainly expected a little more gain here in the third quarter. We didn't quite get there. Our tenant retention wasn't high enough, but we see that improving starting next quarter. So, you know, frankly, it's not just why now, it should already be happening, and, you know, we're a little disappointed with the move-outs this quarter. So, you know, the leasing side is meeting our expectations. So putting that together in 2024 is the real story, and really beginning next quarter.
So, you know, I think it is us specifically, and I think we have a sustained period where we can hit this run rate that's sort of four to five, and then try to move even beyond that into our broader range, our target in 2025 as well. But I do think broadly speaking, the MOB sector has a lot of tailwinds coming its way.
Rich Anderson (Managing Director and Senior Equity Research Analyst in REITs)
A lot of it is occupancy gains, but are you also, you know, kind of conditioning tenants for higher rent growth as well? Because I just wonder about the sustainability of 5% same-store NOI growth, you know, in the back on the other side of this effort through 2024, once you've achieved-
Todd Meredith (President and CEO in Corporate Management)
Yeah, I mean, obviously-
Rich Anderson (Managing Director and Senior Equity Research Analyst in REITs)
occupancy lift.
Todd Meredith (President and CEO in Corporate Management)
Right. Right. Occupancy can't go up forever, to your point, so we understand that. But we think we've set the bar at 90% for our multi-tenant portfolio. So we're at 85-ish today, so getting to 90 gives us quite a runway. If we're generating 100 to 200 between now and the end of next year, that gives us multiple years to be sustaining high levels of growth through occupancy gains. But you're right, that rent growth is the other equation to that rental rate growth. And as you saw, our cash leasing spreads were 4.8. You're seeing some pretty strong numbers across other MOB companies as well. So we really do think there is a tailwind there. And frankly, you know, that's probably the second piece to our story.
We'll focus on occupancy primarily here, but where we can, we will be really pushing a dynamic pricing model where we see that opportunity. You've known us for a long time. We've been pushing that for a while, but really see that as another sort of leg or phase to this effort. So I do think it can carry us further, but practically speaking, the next two or three years is really more focused around the opportunity for occupancy gain.
Rich Anderson (Managing Director and Senior Equity Research Analyst in REITs)
Okay, last for me. Rob, you mentioned mid-twenties move-out percentage as a percentage of expirations. Just definitionally, just so I understand, does that not mean sub 80% retention?
Yeah. The way we're looking at it is move-outs as a percentage of expirations. And, yeah, you know, the historical numbers put you in that mid- to high-20% levels. It is sub-80%, but I think it's, you know, the retention levels that we've-
Regan Sweeney (Equity Research Senior Associate)
... been reporting, they do include our holdover bucket, whereas this analysis that we're running does not include that holdover bucket. So there is a difference-
Rich Anderson (Managing Director and Senior Equity Research Analyst in REITs)
So we shouldn't interpret mid or mid-twenties move-outs in your bridge as tenant retention running below 80%, that it's apples to oranges?
Regan Sweeney (Equity Research Senior Associate)
Correct.
Todd Meredith (President and CEO in Corporate Management)
That's correct.
Rich Anderson (Managing Director and Senior Equity Research Analyst in REITs)
Okay.
Todd Meredith (President and CEO in Corporate Management)
That's correct. There's just a definitional difference. So the way that tenant retention is calculated does get the benefit of month to month or holdover as well.
Rich Anderson (Managing Director and Senior Equity Research Analyst in REITs)
Got it.
Todd Meredith (President and CEO in Corporate Management)
And so that tends to add, you know, 5%+ to your retention rate.
Rich Anderson (Managing Director and Senior Equity Research Analyst in REITs)
Okay, fair enough. Thanks. Thanks, everyone.
Todd Meredith (President and CEO in Corporate Management)
Thanks, Rich.
Operator (participant)
Our next question today is from the line of Mike Mueller of JPMorgan. Mike, your line is open. Please go ahead.
Mike Mueller (Senior Equity Research Analyst in REITs)
Yeah, hi. Curious, where in the portfolio are you expecting the most lease up to occur? I know it's going to be tied to HTA, but is there anything notable in terms of geographies or tenant categories where you're seeing a bit more of outsized demand?
Todd Meredith (President and CEO in Corporate Management)
Sure. Mike, we touched a little bit on this at Investor Day, but to sort of reiterate that, I would say certainly see it disproportionately in our top markets, which is obviously great because that's where we certainly see the most upside, the most resources, the best teams in place to capture that. So, you know, that's certainly, you know, a place like Houston, we see a lot of opportunity. We've talked about that a bit, but other great markets like Denver and Nashville and plenty of other attractive markets. So definitely focused on the larger markets where we have scale. And as you pointed out, obviously, it's much larger in the HTA portfolio for sure, but again, in those higher markets or those larger markets.
Probably the last piece would be, to characterize it, would be, our redevelopment group of properties. You know, those properties have, if you look at our disclosure, you're talking about occupancy that's closer to 50%, so a lot of upside there. Rob touched on the signed not occupied potential there, where there's 630 basis points of difference between occupied and leasing. So we're seeing, you know, some momentum there. That's a, that's a more volatile group of properties where, you know, major shifts are going on. We're, we're repositioning and reinvesting capital as well as TI to, to change that occupancy. So a lot of pent-up opportunity there as well.
Mike Mueller (Senior Equity Research Analyst in REITs)
Got it. And then what's the current thinking on dispositions outside of the JV formation and outside of what's expected to close in Q4 and Q1? So if we're thinking beyond what's been announced so far, how significant can dispositions be in 2024?
Todd Meredith (President and CEO in Corporate Management)
Yeah, it's, it's a balance. Chris talked about $138 million that are under contract and scheduled to close this year. Another $180 million behind that that could, you know, kind of flip on either side of the fourth and first quarter. I would tend to think, and this is our view currently, which we'll continue to adjust as interest rates and cap rates evolve. But I would say we are still net sellers, and we will continue to lean into non-strategic asset sales. And, you know, we haven't put out guidance for 2024, but I think directionally, you could expect to see us putting out something that is, you know, in the neighborhood of what we did this year, which, you know, maybe starting at $300 million and going up as we get more visibility through the year.
So certainly continuing to push that, refining the portfolio, trying to, as Chris articulated at Investor Day, trying to do two things. One is, you know, use that incrementally to refine the portfolio, you know, generate proceeds, pay down debt, and so forth, but it also improves the quality of the portfolio, and frankly, the focus of our team on where we have that upside. So we'll continue to lean into that in this environment for sure.
Mike Mueller (Senior Equity Research Analyst in REITs)
Got it. And just one clarification. When you're talking about a starting point potentially being a similar number to this year, is that inclusive of thinking of the JV as being an effective disposition, or are you talking about ignoring the JV, this is all separate from the JV?
Todd Meredith (President and CEO in Corporate Management)
Ignoring the JV, so just completely separate.
Mike Mueller (Senior Equity Research Analyst in REITs)
Okay.
Todd Meredith (President and CEO in Corporate Management)
I really think of that as non-strategic asset sales, whereas the JV would be much more about strategic assets in a seed portfolio.
Mike Mueller (Senior Equity Research Analyst in REITs)
Got it. Okay.
Todd Meredith (President and CEO in Corporate Management)
Yeah.
Mike Mueller (Senior Equity Research Analyst in REITs)
Thank you.
Todd Meredith (President and CEO in Corporate Management)
Thanks.
Operator (participant)
As a reminder, for any further questions, please dial star one on your telephone keypad. Our next question today is from the line of Juan Sanabria of BMO Capital Markets. Juan, please go ahead.
Regan Sweeney (Equity Research Senior Associate)
Great, thank you. It's, Regan Sweeney on for Juan. Most of my questions have been addressed in the prepared remarks and some of the better questions here now. Also, I appreciate the NOI bridge. I just wanted to follow up on the signed but not occupied delta. Multi-tenants are at 210 basis points, with HTA at 250. What's the historical spread? Just to kind of help contextualize this opportunity here.
Todd Meredith (President and CEO in Corporate Management)
The historical spread for HR pre-merger was really more around 100 or less than 100 basis points. So today, Healthcare, the Healthcare Realty piece of the portfolio is about 140. So that's trending above our historical norms. And obviously, as you just touched on, the HTA side at 260 is well above, you know, more than double our historical trends. So that gives a little context to it.
Regan Sweeney (Equity Research Senior Associate)
Okay, thank you. And then just on the pipeline of 1.7 million sq ft, obviously up from the Investor Day, how does this compare to historical levels? And then what's your historical conversion rate on the pipeline? Thank you.
Todd Meredith (President and CEO in Corporate Management)
Yeah, I think if you look at, if you kind of look at the pipeline in total, you know, I said 1.5 million at Investor Day, it's now 1.7. It has been ebb and flow, and at those levels, it's been pretty consistent this year.
... It's up some from the first of the year. I would say that that's, you know, when we put our processes and our leasing team in place, you know, we saw an uptick in the pipeline there. But I would say that really looking at the current levels, and looking out over the next course of the next year, I view it as it's about four quarters worth of activity. So it's probably gonna remain pretty consistent at those levels, and is enough to continue to drive the levels of new leasing that we've seen. So, we're very comfortable and optimistic with this level of the pipeline right now.
In terms of the conversion rate, I think, you know, I threw out the percentages of, you know, hey, you've got about 20% of that that's currently in the lease-out and documentation phase. You know, that equates to about a little over 300,000 sq ft. I would say that that's probably a pretty continuous level of percentage of the portfolio. We do view those as highly probable that they'll, that all of that will convert. And so you're generally looking at about a 20%-30% out of that total pipeline. So, I do think that out of the lease-out and LOI piece, we generally find that we pull some of that forward as well and get it executed in the same quarter.
So, you know, some of that will feed the continuing new leasing pipeline or new leasing activity that we've targeted, that's about 400-450,000 sq ft.
Regan Sweeney (Equity Research Senior Associate)
Great. Thank you.
Ron Hubbard (VP of Investor Relations)
Thank you.
Operator (participant)
We have no further questions in the queue at this time, so I'd like to hand back to the management team for any closing remarks.
Todd Meredith (President and CEO in Corporate Management)
Thank you, Harry, and thank you everybody for joining us today. I know today is a busy earnings day with other companies as well. We look forward to seeing a lot of you at NAREIT in a couple of weeks, and, we'll be available otherwise. Have a great day. Thanks.
Operator (participant)
This concludes today's conference call. Thank you all for joining. You may now disconnect your lines.
