Healthcare Realty Trust Inc

NYSE:HR

Earnings Call Analysis

Healthcare Realty's Optimistic Growth Forecast

Healthcare Realty Trust delivered a solid third quarter in 2023, with achievements aligning with expectations, including normalized funds from operations (FFO) fixed at $0.39 per share. The company's strategy has led to a record new leasing volume and plans to enhance multi-tenant property occupancy from 85.1% to as high as 87.1% by the second half of 2024, with net operating income (NOI) growth anticipated at 2.7% to 5.5%. These projections build towards a strong close for 2024, aimed at providing momentum into 2025. Meanwhile, strategic asset sales have bolstered its capital position, although challenges such as operating expense growth at 4.8% and lower than desired tenant retention at 76% need addressing. Healthcare Realty expects to curb expense growth to 2.5% by the end of 2024 and improve tenant retention to meet historical standards.

Solidifying the Foundation Through Asset Sales and Joint Ventures

The company is poised for a strategic transformation by the end of 2023 or early 2024, marked by $182 million in properties under letter of intent (LOI). These sales are anticipated to fund development commitments, decrease variable rate debt, and maintain leverage within the target range of six to 6.5 times. Additionally, the company is forging a joint venture, targeting proceeds of $400 million to $500 million. This move comes in response to fluctuating interest rates and cap rates hovering around 6% to 7%, although these may shift with the evolving interest rate landscape.

Leasing Success Driving Future Growth

Underpinned by strong sector fundamentals and a supply-demand balance favoring landlords, the company has witnessed a record-setting 86% increase in new leases from the first to the third quarter. With 210 basis points in non-occupied leases expected to boost occupancy within the next few quarters, the company is building momentum. A promising leasing pipeline of over 1.7 million square feet also provides visibility for continued occupancy improvement into 2024.

Occupancy Growth and Expectations for Net Operating Income

There's a clear trajectory for occupancy to rise by 150 to 200 basis points above the current 85.1% for multi-tenant properties, anticipated due to a solid new leasing activity forecast. This strong leasing activity is expected to maintain the strategic occupancy pipeline, thus propelling the company towards its occupancy goals and an anticipated 4% to 5% net operating income (NOI) growth in the latter half of 2024.

Maintaining Dividends and Capital Allocation Strategy

Amidst this growth, the commitment to maintaining current dividends remains unwavering despite a temporarily elevated payout ratio. The company's strategy revolves around disciplined capital allocation, where they are currently net sellers, not pursuing acquisitions, and focusing on selective redevelopments that maximize value. Intending to satisfy current development obligations through asset sales, the firm also prioritizes reducing debt while considering the repurchase of stock for future capital redeployment. Simultaneously, efforts are underway to intensify NOI growth through tenant retention and operational efficiencies, targeting growth in the 4% to 6% range.

Operating Cost Trends and Future Expectations

Operating expenses remain higher than desired, chiefly due to inflation-driven increases in janitorial and personnel costs. Nonetheless, improvement measures are in place, and the company expects to revert to historical levels below 3% in the latter half of the upcoming year. The retention rate, integral to the NOI and occupancy forecasts, is assumed to be in the mid to high-20s as a percentage of lease expirations, aligning with the goal of advancing to the 4.5% to 5.5% range in NOI growth.

Earnings Call Transcript 2023-Q3

[Operator]

Hello, and welcome to the Healthcare Realty Trust Third Quarter Earnings Conference Call. My name is Harry, and I'll be your operator today. [Operator Instructions] And I would now like to turn the call over to Ron Hubbard, Vice President of Investor Relations, to begin. Please go ahead.

[Ronald Hubbard, executive]

Thank you for joining Healthcare Realty's Third 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 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 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 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, executive]

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 2 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 square feet. This includes 269,000 square feet 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 road map in 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 '24, we expect multi-tenant occupancy gains of 35 to 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 '24, we split our bridge into the first and second half of the year. In the first half, we expect cumulative occupancy gains of 70 to 100 basis points of recurrent occupancy. We expect NOI growth to elevate to a range of 2.7% to 4%.

In the second half, we expect cumulative occupancy gains of 150 to 200 basis points compared to current multi-tenant occupancy of 85.1%. We expect multi-tenant NOI growth to accelerate to the 4.5% to 5.5% range in the second half.

Folding in the single-tenant properties, NOI growth is expected to be approximately 4% to 5% in the second half of '24. Occupancy in the NOI improvement is expected to build over the next 5 quarters. What we're most focused on is reaching a 4% to 5% run rate in the latter part of '24, providing tremendous velocity going into '25. 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 '24.

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 a 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 the 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 '24.

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% to 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 '24.

After Kris and Rob, I'll circle back to provide some additional comments before we shift to Q&A. Now I'll turn it over to Kris to discuss financial results. Kris?

[J. Douglas, executive]

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%. 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 averaged 2.76%, up 5 basis points from last quarter. The improvement was driven by future contractual increases of 3% for the 1.1 million square feet 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 square feet 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 and 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 '24. Net debt to adjusted EBITDA at September 30 was 6.6x, 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 to 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 to $1 billion. We expect to generate proceeds of $400 million to $500 million.

As interest rates have moved higher over the last few months, cap rates have also increased to the upper 6% to 7% range. Of course, this does not consider the pullback in rates this week. And we'll have to see how -- 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?

[Robert Hull, executive]

Thank you, Kris. We are seeing strong underlying fundamentals in the MOB sector. The supply-demand landscape is tilting in favor of the landlord. On the demand side, demographic secular trends are accelerating and have a long runway. Health care providers 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 from 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 time -- our leasing team signed 142 new leases totaling 447,000 square feet, a record for our company. This is up 86% over the first quarter of this year.

Almost 70% of these new leases are for properties in our top 15 markets. These same markets represent 60% of the total portfolio. Signed non-occupied leases, or snow leases, across the multi-tenant portfolio currently represent 210 basis points of future occupancy that will commence mostly over the next 3 quarters. This is up from 140 basis points in the first quarter of this year.

At the HTA properties, snow leases represent 250 basis points of future occupancy, up from 150 basis points in the first quarter and a particularly attractive opportunity for occupancy and NOI growth is within our redevelopment properties, where we have 630 basis points of snow leases.

In addition, our prospective leasing pipeline is currently over 1.7 million square feet, up from 1.5 million that I 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 turn phase.

Collectively, this pipeline gives us about 4 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 to 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 snow pipeline as new leases commence. In the first half of the year, we expect new lease commencements of about 400,000 square feet per quarter. Over the second half of the year, we expect this pace to increase to about 430,000 to 450,000 square feet 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 square feet 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 square feet ]. 325,000 to 290,000 square feet 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 to move into the -- NOI growth to move into the 4% to 5% range in the second half of 2024 and set us up for continued success into 2025. Todd?

[Todd Meredith, executive]

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 '24.

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 nonstrategic 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 4 full post-merger quarters behind us with the major merger integration work complete. We 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% to 6% range. We expect to elevate our NOI growth run rate throughout '24, reaching the 4% to 5% range in the second half. This gives us tremendous velocity going into '25. 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 road map 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]

[Operator Instructions] Our first question today is from the line of Michael Griffin of Citi.

[Unknown Analyst]

This is [indiscernible] on for Michael Griffin. Kris, 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 would be great.

[J. Douglas, executive]

Yes. They're still elevated compared to where we like them long term. We've made some improvements since the last 2 quarters, but still higher than we 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 going to be looking kind of throughout the cost structure at ways that we can bring down costs. We'll also start to lap some of those comps that we had from last year as we improve the service level. So with that, we do see that operating expense is trending lower as we move into next year, but likely looking more towards the back half of the year before we can get back to more historical levels below 3%.

[Unknown Analyst]

That's helpful. Just for a quick follow-up. Just wondering what the retention rate is assumed in the occupancy and NOI bridge that you provided in the deck? Is that 80%...

[Robert Hull, executive]

Yes. We used -- we use move-outs as a percentage of expirations. And it was -- the rate that was used in the deck was the mid- to high 20s for the different levels. On a move-out percentage, yes.

[Operator]

Our next question today is from the line of Connor Siversky of Wells Fargo.

[Connor Siversky, analyst]

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 out such that you can hit those occupancy figures and get to that 4.5% to 5.5% range?

[Todd Meredith, executive]

Yes. Connor, this is Todd. I would say if you look at our bridge that we provided in our Investor Presentation, we laid that out pretty clearly, and I think Rob certainly walked through that. We've talked about the new leasing volume that we reached this quarter, about 450,000 feet. That's a level that you see in our bridge starting to come through really throughout '24. We really hit that stride in the second half, but you see it building from sort of the high 300,000 square foot 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 really starts to produce the amount of new leasing that will drive this occupancy gain. But as was just asked and as Rob touched on, the vacate numbers, the move-outs are just as critical.

And frankly, in the third quarter, as I mentioned in my remarks, it was high -- the move-outs were higher than we needed. So our retention levels were not quite where we need them to be. So as we discussed, we are putting a lot of measures in place to increase 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 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, analyst]

Yes. I appreciate the color there. And just maybe taking a longer-term view on the business. I appreciate the comments on responsible capital allocation for the next year or so. But when you look 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, maybe a smaller slice of the broader pie, but just any indication of what that addressable market looks like would be appreciated.

[Todd Meredith, executive]

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 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 2 companies and have as many clusters that are especially better hospital-centric, as you mentioned, that we can go in and expand. So we're very focused on 30 to 40 markets where we can go in and expand our clusters, it's much, much larger than our company as it exists today. So it gives us a long runway to grow. And yes, it would be hospital-centric, but certainly, we're comfortable expanding our clusters even a little further away from the hospital, but they still are in sort of that 2-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 $1 billion plus. And we were, frankly, on that path back when interest rates were lower than 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.

[Operator]

Our next question today is from the line of Rich Anderson of Wedbush.

[Richard Anderson, analyst]

So on the bridge, what -- why now? I guess, is my question. Like 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 at nauseam for 20 years. And I'm curious why you think that the opportunity set starts to happen now. Is it mainly, 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 faster pace. I'm just curious if you could comment on that.

[Todd Meredith, executive]

Sure, Rich. Good to hear from you. We would -- 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 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. It, 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 frankly, it's not just why now? It should already be happening, and we're a little disappointed with the move-outs this quarter.

So the leasing side is meeting our expectations. So putting that together in '24 is the real story and really beginning next quarter. So 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 4% to 5% and then try to move even beyond that into our broader range, our target in '25 as well. But I do think, broadly speaking, the MOB sector has a lot of tailwinds coming its way.

[Richard Anderson, analyst]

A lot of it is occupancy gains, but are you also kind of conditioning tenants for higher rent growth as well because I just wonder about the sustainability of 5% same-store NOI growth in the back -- on the other side of this effort through 2024. Once you have achieved...

[Todd Meredith, executive]

Yeah. I mean obviously. 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, 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 know us -- 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 2 or 3 years is really more focused around the opportunity for occupancy gain.

[Richard Anderson, analyst]

Okay. Last for me. Rob, you mentioned mid-20s move-out percentage as a percentage of expirations. Just definitionally, so I understand, does that not mean sub-80% retention?

[Robert Hull, executive]

Yes. The way we're looking at it is move out as a percentage of expirations and the historical numbers put you in that mid- to high 20% levels. It is sub-80%, but I think it's the retention levels that we've 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...

[Richard Anderson, analyst]

So we shouldn't interpret mid or mid-20s move-outs in your bridge as tenant retention running below 80%, it's apples to oranges?

[Todd Meredith, executive]

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. And so that tends to add 5-plus percent to your retention rate.

[Operator]

Our next question today is from the line of Mike Mueller of JPMorgan.

[Michael Mueller, analyst]

Curious, where in the portfolio are you expecting 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, executive]

Sure. Mike, we touched a little bit on this at Investor Day, but to sort of reiterate that I would say, certainly, we 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 that's certainly a place like Houston. We see a lot of opportunity. We've talked about that a bit. But other market -- 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, and probably the last piece would be to characterize it would be our redevelopment group of properties. And those properties have -- if you look at our disclosure, talking about occupancy that's closer to 50%. So a lot of upside there. And 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 some momentum there. That's a more volatile group of properties where major shifts are going on. We're repositioning and reinvesting capital as well as TI to change that occupancy. So a lot of pent-up opportunity there as well.

[Michael Mueller, analyst]

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, executive]

Yes. It's a balance. Kris talked about $138 million that are under contract and scheduled to close this year, another 180 behind that, that could 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 nonstrategic asset sales. And we haven't put out guidance for '24, but I think directionally, you could expect to see us putting out something that is in the neighborhood of what we did this year, which is 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 Kris articulated at Investor Day, trying to do two things. One is use that incrementally to refine the portfolio 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.

[Michael Mueller, analyst]

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 effectively a disposition? Or are you talking about ignoring the JV, this is all separate from the JV?

[Todd Meredith, executive]

Ignoring the JV. So just completely separate. I really think about it nonstrategic asset sales, whereas the JV would be much more about strategic assets in a seed portfolio.

[Operator]

[Operator Instructions] And our next question today is from the line of Juan Sanabria of BMO Capital Markets.

[Unknown Analyst]

It's [indiscernible] 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, executive]

The historical spread for HR premerger was really more around 100 or less than 100 basis points. So today, Healthcare -- the Healthcare Realty piece of the portfolio is about 140 million. So that's trending above our historical norms. And obviously, as you just touched on, the HTA side at 260 is well above -- more than double our historical trends. So that gives a little context to it.

[Unknown Analyst]

Okay. And then just on the pipeline of the 1.7 million square feet, obviously, up from the Investor Day, how does this compare to historical levels? And then what's your historical conversion rate on the pipeline?

[Robert Hull, executive]

Yes. I think if you look at -- if you kind of look at the pipeline in total, I said 1.5 million at Investor Day, it's now 1.7. It does -- has been ebb and flow 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 when we put our processes and our leasing team in place, we saw an uptick in the pipeline there. But I would say that really looking at the current levels and looking out over the course of the next year, I view it as it's about 4 quarters' worth of activity. So it's probably going to 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 the level of the pipeline right now. In terms of the conversion rate, I think I threw out the percentages of, hey, you've got about 20% of that that's currently in the lease-out and documentation phase. That equates to about a little over 300,000 square feet. I would say that, that's probably a pretty continuous level of percentage of the portfolio. We do view those as highly, highly probable that they'll -- all of that will convert. And so we're generally looking at about 20% to 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 some of that will feed the continuing new leasing pipeline or new leasing activity that we've targeted, that's about 400,000 to 450,000 square feet.

[Operator]

And 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, executive]

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]

This concludes today's conference call. Thank you all for joining. You may now disconnect your lines.