Healthcare Realty Trust Inc

NYSE:HR

Earnings Call Analysis

Healthcare Realty Anticipates NOI Growth

Healthcare Realty is navigating some headwinds including a $200 million interest rate swap that expiring and new swaps at a higher rate will cost an additional $7 million annually. However, strong leasing activity is setting a robust foundation, with new leases and renewals bringing multi-tenant occupancy up significantly. Dispositions totaling $656 million at a 6.6% cap rate have been executed to optimize the portfolio. A positive outlook is expected for 2024, with robust leasing demand predicted to drive multi-tenant NOI growth between 4.5% to 5.5% in the second half, and possibly higher occupancy. The strategic focus is on sustained operational growth, which is the primary driver for the upper half of FFO guidance. Additionally, the company plans further dispositions in 2024 to fund capital needs, while no JV transactions are assumed in the initial guidance.

Stability and Strategy for Growth

In their Fourth Quarter 2023 Earnings Conference Call, Healthcare Realty conveyed a message of stability and strategic growth. The normalized FFO per share for the fourth quarter was consistent at $0.39, aligning with expectations. The team highlighted positive multi-tenant property absorption, reaching the top end of the projected range, and an accelerated NOI growth to 3.3% for all multi-tenant properties. Looking to the future, the company sees significant room for improvement in tenant retention and operating expenses, targeting over 80% retention and expense growth reduction to 3% in the year 2024.

Operational Excellence Fuels Growth

The leadership praised their leasing and operations teams for driving substantial quarterly results, emphasizing the achievement of over 50 basis points of positive absorption in multi-tenant properties. The organization also saw a remarkable pace in new lease signings, with three consecutive quarters averaging over 400,000 square feet. This new leasing momentum, alongside tightened MOB supply and increasing demand from health systems and physician groups, sets the stage for heightened occupancy and rate improvements.

Solid Financial Performance and Prospects

From a financial perspective, Healthcare Realty delivered a strong quarter with $0.39 normalized FFO per share and a $2.7 million improvement in FFO dollars from the preceding quarter. Strategically, they've managed to optimize operating expenses and enhance revenue growth, with quarterly same-store NOI growth reaching 2.7%. Their in-place rent escalators hold strong at 2.81%, up from the previous year, and multi-tenant occupancy increased to 89.2%. For 2024, the company sets normalized FFO guidance between $1.52 to $1.58 per share and anticipates $150 million to $250 million of dispositions to balance capital needs.

Navigating Headwinds and Leveraging Assets

The company is bracing for headwinds, such as the expiration of a beneficial interest rate swap, and will incur higher costs from new swaps at a rate of 4.71%. Conversely, they have capitalized on dispositions, having sold properties totaling $656 million in the past year at a cap rate of 6.6%. These moves were aimed at enhancing portfolio quality and growth potential. For 2024, they plan to continue this optimization with anticipated dispositions worth $150 million to $250 million to fund capital obligations.

Leasing and Investment Inform Future Direction

Healthcare Realty is proud of their robust leasing activities, which culminated in 518,000 square feet of multi-tenant lease commencements in the last quarter. The company has sustained a successful track record with selling non-core assets while nurturing MOB operating fundamentals. Their 2024 outlook is buying optimism about the leasing market, bolstered by reduced MOB development starts and increasing demand for space. This context, combined with strategic capital allocation and joint venture possibilities, emboldens their belief in a continuously strong performance.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning or good afternoon, and welcome to the Healthcare Realty Trust Fourth Quarter Earnings Conference Call. My name is Adam, and I will be your operator for today. [Operator Instructions]

I will now hand the floor to Ron Hubbard, Vice President of Investor Relations, to begin. Sir Ron, please go ahead when you are ready.

[Ronald Hubbard, executive]

Thank you for joining us today for Healthcare Realty's Fourth 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, 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 December 31, 2023. The company's earnings press release, supplemental information, and Form 10-K are available on the company's website.

I'll now turn the call over to Todd.

[Todd Meredith, executive]

Thank you, Ron, and thank you, everyone, for joining us this morning.

Healthcare Realty generated solid quarterly results meeting or exceeding expectations on several key metrics. Normalized FFO of $0.39 per share for the fourth quarter was steady and in line with our expectations. Same-store growth for the quarter and year was in the upper half of our guidance range. You will recall, we published a bridge last quarter, outlining our expectations for multi-tenant occupancy and NOI growth, starting with the fourth quarter. We are pleased to report over 50 basis points of positive absorption at the very top end of our expected range for the multi-tenant properties and NOI growth accelerated above the high end of our range to 3.3% for all multi-tenant properties, not just same store. These strong fourth quarter results were achieved through the focus and incredible efforts of our leasing and operations teams.

Looking forward, we see a couple of areas where we can keep improving. First, retention. We made incremental progress on tenant retention achieving just over 78% in the fourth quarter compared to 76% in the third quarter. What's significant is that retention at the legacy HTA properties was in line with the HR portfolio. And we see the ability to push retention higher to more than 80%.

A second opportunity for improvement is operating expenses. The fourth quarter came in better than expected at just over 4% growth. That's in part due to lower property taxes. We see more opportunity to reduce expense growth to the 3% level in 2024. Together, higher retention and lower expenses will help us reach the upper end of our '24 goals.

What I'm most excited about is our new leasing momentum. Our leasing team signed new leases totaling 425,000 square feet in the fourth quarter. This marks 3 consecutive quarters averaging over 400,000 square feet. The strong pace of new signed leases is what fuels the occupancy gains in our bridge and forecast for 2024.

As we look more broadly at what will drive our '24 growth, we are seeing an uptick in demand from both health systems and independent physician groups. On top of this, supply has steadily tightened, which provides a favorable backdrop for leasing momentum and occupancy gains. What it comes down to is more tenants chasing fewer MOB.

To illustrate this point, look at replacement rents today versus 2019. Construction costs have escalated at an annual average of more than 7% over the last 5 years. Couple this with much higher financing costs and you have a recipe for much higher replacement rents. Back in 2019, typical MOB development costs were about $350 a square foot in a place like Dallas. Required yields were in the low 6s, putting net rents around $22 per square foot. Five years later, equivalent MOB development costs are approaching $500 a square foot, and rent yields are now around 8%. That means replacement rents are approaching $40. So replacement rents have increased more than 80% in 5 years or more than 12% annually. This limits new supply and sets us up to improve occupancy and rates in existing buildings. At Healthcare Realty, we're laser-focused on maximizing occupancy gains in '24 with rate acceleration to follow.

Now I'll turn it over to Kris for an overview of our financial and operational results. Kris?

[J. Douglas, executive]

Thanks, Todd.

It was a solid fourth quarter with normalized FFO per share of $0.39. FFO dollars were $2.7 million higher than the third quarter. The sequential improvement was the result of a $3.1 million reduction in interest expense from asset sales that were used to repay the line. This was offset by a $4.2 million reduction in NOI from dispositions.

Additionally, operating expenses net of recoveries were down $3.7 million sequentially. The reduction in operating expenses was primarily from the reversal of third quarter seasonal utilities as well as lower property taxes. The lower taxes was the result of successful appeals and lower rates, especially in Texas. Approximately $2.4 million of the property tax benefit was related to prior periods and will not repeat in future quarters. The lower property taxes contributed to improved operating expenses.

Operating expense growth was 4.1% for the quarter which was down from 4.8% in the third quarter and 5.3% in the second quarter. Same-store revenue fundamentals also improved. Year-over-year quarterly same-store NOI growth was 2.7%, up 40 basis points from last quarter. Revenue growth of 3.2% was driven by a 3% increase in revenue per occupied square foot and a 20-basis point improvement in average occupancy. Cash leasing spreads in the quarter averaged 3.3%.

We ended the year with total portfolio in-place rent escalators of 2.81%. This is up 15 basis points since the first quarter of 2023. The improvement was driven 2 ways: first, from higher escalators for new and renewal leases, which averaged 2.95%. This was well above expiring leases, especially for legacy HTA escalators that were averaging 2.5%. Second was addition by subtraction. The average escalator of properties sold during 2023 was 1.9%, significantly below the rest of the portfolio.

Sequential same-store occupancy increased 65,000 square feet or 20 basis points to 89.2%. Even more impressive, total portfolio multi-tenant occupancy increased 175,000 square feet sequentially. The strong leasing volumes contributed to an increase in maintenance CapEx. Total maintenance CapEx for the year was 18% of NOI or $152 million. This was in the middle of our guidance range for the year. The FAD payout ratio was over 100% for the year. With the anticipated strong absorption in 2024, the payout ratio is likely to remain elevated as we invest in tenant build-outs. We are comfortable the payout ratio will come back down as we fully realize the NOI from the positive absorption.

Net debt to adjusted EBITDA at December 31 was 6.4x, within our target range. Net debt was lower as the line of credit was fully repaid at year-end from $338 million of asset sales in the quarter. Looking ahead, normalized FFO guidance is $1.52 to $1.58 per share for 2024 and $0.38 to $0.39 for the first quarter.

Guidance and the major assumptions are outlined on Page 6 of the supplemental we released this morning. To provide context for guidance, we walk forward the major drivers from an annualized fourth quarter FFO run rate of $1.52 per share. The run rate adjusted for out-of-period items such as the property tax appeals.

The major growth driver in 2024 will be internal operations. Multi-tenant absorption is projected to be 100 to 150 basis points and generate $21 million to $29 million of growth in cash NOI. Single-tenant cash NOI growth is projected to be plus or minus 1%, which is below in-place escalators of 2.5% because of 2 general office expirations. A government services tenant vacated the end of the release in January. The building sits at the front door of CommonSpirit St. Anthony Hospital in Denver. When we purchased this property in 2018, the plan was to raze the building and redevelop the parcel. We are working with the hospital on the long-term redevelopment plans and expect to demo the building later this year. The lease for the other property will expire at the end of January. We are marketing the building with a goal of selling the property before year-end. We have not projected any new rent or sale proceeds from either property in 2024 so any progress on these fronts would be upside.

G&A expenses are projected to increase $5.8 million at the midpoint. The increase is primarily related to returning to run rate incentive compensation levels as materially lower performance-based compensation in 2023 is creating a tough comp. The other major headwind is a $200 million interest rate swap with a 1.21% fixed rate that expired in January. In preparation for the expiration, we executed new interest rate swaps during the fourth quarter at an average rate of 4.71%. The new swaps will cost $7 million more annually. There are no acquisitions assumed in guidance. We are projecting $150 million to $250 million of dispositions to match fund our capital needs during the year.

The multi-tenant absorption in our guidance is consistent with the occupancy and NOI bridge we introduced last quarter. As Rob will discuss in more detail, an updated occupancy bridge is included on Page 21 of our investor presentation. It shows that we expect sustained positive momentum on occupancy absorption through 2024. This will help drive accelerating NOI growth and generate a strong FFO exit velocity going into 2025.

I will now turn it over to Rob for more detail on our leasing progress.

[Robert Hull, executive]

Thanks, Kris.

Healthcare Realty posted another strong quarter of leasing activity. New signed leases totaled 425,000 square feet that were 13,000 square feet greater than our fourth quarter projection. For the year, our team signed 449 new lease deals for a total of almost 1.5 million square feet. Approximately 60% of these came from the legacy HTA portfolio, which represents slightly over half of our multi-tenant portfolio. In addition, 226 renewals totaling 1.2 million square feet were signed during the quarter, bringing total renewals for the year to 817 that totaled 4.2 million square feet. Our leasing team under the leadership of Amy Poley, senior VP of Leasing, did an extraordinary job of driving momentum in 2023. I want to commend Amy and her team for their hard work and tenacity.

Strong leasing throughout the year culminated in 518,000 square feet of multi-tenant lease commencements in the fourth quarter. Combined with lower sequential move-outs, multi-tenant occupancy jumped 53 basis points. This equates to 175,000 square feet of net absorption. This level is at the upper end of the range we provided in the multi-tenant occupancy and NOI bridge published in November of last year.

On the disposition front, Healthcare Realty sold 19 properties for $656 million at an average cap rate of 6.6% during the year. These were largely non-core assets with 34% non-MOB and 63% single tenant. We also fully exited smaller markets like Sebring, Florida, and Evansville, Indiana. What I like most is we improved the growth profile of the portfolio by selling properties with annual escalators averaging 1.9% versus 2.8% for the broader portfolio.

Our MOB operating fundamentals remain healthy. The transaction market continues to be governed by interest rate volatility. Until we see stable rates over a longer period of time, we expect lower transaction volumes and smaller deal sizes. For now, we see MOBs trading in a range of 6% to 7% with the higher quality properties in the low to mid-6s.

Turning to expectations for 2024. Healthcare Realty's outlook for leasing is strong. Our new lease pipeline remains about -- remains robust at 1.5 million square feet and provides visibility into several quarters of leasing volume. Across the country, new MOB development starts have been trending down over the past 12 months. In the fourth quarter, they were down by over 40% year-over-year. This trend has been driven by tightening credit markets and, as Todd mentioned, a healthy increase in construction costs over the past 5 years. At the same time, occupancy across MOBs has continued to climb.

Additionally, we are seeing increased health system demand for space as volumes and financial measures improve. Recently, a couple of for-profit hospital operators reported a 3.6% year-over-year increase in outpatient surgical cases. And hospital operating margins steadily improved throughout 2023.

Positive supply-demand fundamentals and improving hospital performance will serve as tailwinds for our 2024 absorption goals. We updated our multi-tenant occupancy and NOI bridge in our recently published investor presentation. The primary change is to the starting occupancy, reflecting the sale of some highly occupied properties during the fourth quarter and the completion of the development. It is also worth noting that we expect absorption during the second half of 2024 to be stronger than in the first.

These are shaped by 2 seasonal patterns. First, we have about 2.7 million square feet of expirations in the first half of the year versus 2.1 million in the second. Even with the consistent renewal rate, we expect more move-outs in the first half of the year versus the second. Second, new lease commencements have historically been lower in the first half of the year versus the second. As a result, we expect net absorption in the second half of the year to be about 200,000 square feet greater than the first. We are reiterating our expectation for 100 to 150 basis points of occupancy gain in 2024 on top of the 53 basis points of absorption this quarter.

Our leasing team is off to a great start this year. They are energized by growing demand for health care services and a tightening supply/demand backdrop. Looking ahead, I'm confident in our ability to drive absorption that translates into multi-tenant NOI growth of 4.5% to 5.5% in the second half of 2024.

Now, I'll turn it back to Todd for some final comments.

[Todd Meredith, executive]

Thank you, Rob.

Before we begin our Q&A, I'll touch on capital allocation and our outlook for '24. We exceeded our own disposition expectations in 2023. We sold $656 million at a cap rate of 6.6% for the year, with over half occurring in the fourth quarter. And what's significant is these sales improve the quality and growth profile of our portfolio.

Looking ahead, we're shifting to a more routine annual pace of portfolio optimization. In '24, we expect dispositions of $150 million to $250 million, which will fund capital obligations, including redevelopment and developments. Beyond this, we're pursuing accretive capital allocation opportunistically. We continue to work towards strategic JV partnerships that diversify our capital sources and extend our ability to meet long-term provider demand. In our initial '24 guidance, we've conservatively assumed no JV transactions.

Finally, our outlook for '24. We've updated our occupancy bridge -- our occupancy and NOI bridge. Building on the strong absorption in the fourth quarter, we expect healthy occupancy gains and NOI growth in '24, consistent with what we communicated last quarter. For FFO guidance, robust multi-tenant absorption and NOI growth is the primary driver that moves us into the upper half of our guidance range. For Healthcare Realty, sustained operational growth in '24 will set the table for attractive FFO and FAD growth in '25.

Operator, we're now ready to begin the Q&A period.

[Operator]

[Operator Instructions] Our first question comes from Michael Griffin from Citi.

[Michael Griffin, analyst]

Todd, maybe I can go back to your comments on the dividend first. I think if you look at guidance for both normalized FFO and CapEx, it implies about 107% payout ratio for 2024. I know the guidance has been elevated for some time and you talked about maybe being able to grow into a healthier payout ratio. But at some point, could a potential cut be warranted? And any color around that would be helpful.

[Todd Meredith, executive]

Sure. Michael, we've certainly said that for a while that we think that as we ramp up our absorption and invest in TI, that we'll certainly see that capital spend continue. So as Kris described in his remarks, we expect a similar payout ratio in '24 as '23, kind of in that 107-110% range. And we're comfortable with that because we know we're investing the capital that will generate the NOI that will flow through to FFO and FAD afterwards. And so we really see '25 as an important transition in that. So we're very bullish on what we see.

Obviously, we'd love it to happen sooner, like everyone, but we think the key is that operational improvement and investing in that capital to generate the NOI. So our view is we feel very comfortable. As Kris remarked that we can get there in '25. And so certainly, we're not thinking about a cut. The board is not thinking about that at this point. And obviously, we can't control all market conditions, but our view is, operationally, we can deliver the NOI that will improve that ratio.

[Michael Griffin, analyst]

Yes. And just a follow-up on that. I mean what kind of payout ratio are you comfortable with? And how long would you kind of have to keep that as is until you would grow into the cash flows?

[Todd Meredith, executive]

Yes. I mean I think our view is that, again, 2024 looks a lot like '23 in terms of the payout ratio, but we think '25 starts to drive towards that covered dividend level. And obviously, what we like long term obviously is drive much lower than that into the 90% or even below 90% level. So that's certainly the path that we see. We know it's -- we'd love to see it sooner, but we think that starts to take shape in '25.

[Michael Griffin, analyst]

Got you. And then just maybe one on the JV or disposition front. I know I think at your Investor Day back in October, you laid out about a $400 million to $500 million of funding -- seed funding in the joint ventures versus your guidance now that sort of pivoted away from that. I guess what changed between then and now? Is it a function of where cap rates are, interest rate volatility, that seems like kind of a large pivot in a shorter amount of time. So just curious what your thinking on that was.

[Todd Meredith, executive]

Yes. I wouldn't describe that we're turning away from that in terms of scale. I think what we've talked about in recent times since Investor Day, whether it was earnings or NAREIT with folks is that clearly, as Rob described, the cap rate environment, there is a lot of interest rate volatility and financing challenges that go to that. And so our view is we've not been in a hurry. Obviously, we've had very -- a large amount of dispositions that have more than covered what we needed on capital. So our view is there's no reason to hurry. We want to be more strategic and patient than too rushed on that. And time is certainly serving us well because I think as we turned into '24, we've seen a pickup in how things are going. Obviously, we're all navigating interest rate volatility.

But our view is we see a couple of transactions, maybe rather than one. But we still think, over time, we will generate proceeds that kind of are in that, call it, $300 million to $500 million range. It just may take a couple of transactions of a couple of different styles that for us are strategic and helpful. Some may be more core investment-oriented. Some may be more value-add development -- redevelopment oriented. So we still see that coming together. Just being patient here as we kind of navigate interest rate volatility.

[Operator]

The next question comes from Connor Siversky from Wells Fargo.

[Connor Siversky, analyst]

One question on the leasing pipeline. In the NAREIT presentation, you had the number at 1.7 million square feet. It looks like in the new presentation, now you have a range of 1.4 to 1.7. I'm just curious what's driving the change there, or whether that's just a function of having more visibility into the Q4 expectations?

[Robert Hull, executive]

Yes. I think that pipeline, I mean, it moves around all the time. I mean, things come in and out of there, and it's -- we think that the range that we put in the investor presentation of the 1.4 to 1.7 is reflective of where we think that pipeline will kind of bounce around. We do think that it does provide us good visibility, as you said, into coming quarters of expectations for new leasing. And the way we think about it is in that range that we provided in 1.4 to 1.7, we think that, that provides good visibility in several quarters' worth of new signed leasing activity. And so we're comfortable that the activity that we're seeing and that we laid out in there, that it's -- that that pipeline supports our assumptions for 2024.

[Connor Siversky, analyst]

Okay. And then in consideration of expirations through 2024, almost 6 million square feet. Am I right to think about maybe a 300,000, 400,000 square foot number per quarter as a reasonable target to keep that [ snow ] ratio in the same place?

[Robert Hull, executive]

Yes. I think on the -- in terms of the expirations, I mean, the way that we look at it is that we've got more expirations in the first half of the year. And so we are expecting more move-outs there. And so that, combined with typically the lease commitments -- commencements that we see are lighter in the first half of the year, is the way that we see that absorption number because of that will be lighter in the first half of the year than the second.

So I think what's causing that increase in expirations or move-outs that we modeled in the bridge, it's generally from the higher expectation for expirations and the corresponding renewal rate that we've applied to that.

[Connor Siversky, analyst]

Okay. And last one for me, just on the office assets in the SNF sold during 4Q. Could you provide the full NOI contribution from those assets? Just to save me from doing the math, if you could provide the average cap rate on the MOB sold during the quarter, that would be appreciated.

[J. Douglas, executive]

Yes. I don't have the specific number in front of me, but I can give you the cap rates. So effectively, we were about 6.3, 6.4 for everything sold in the fourth quarter. The SNFs, we weren't recognizing any income so those were zero. We did have some office that were up on the upper end. So if you take those extremes out on either side, ends up being about half of the total proceeds and the MOBs end up -- that cap rate ends up being in the high 6s, 6.8, 6.9 range.

[Operator]

The next question comes from Juan Sanabria from BMO Capital Markets.

[Juan Sanabria, analyst]

I just wanted to ask about G&A. Just curious if you could talk about the size of the increase and the thoughts behind that. I seem to recall that post-HTA, the G&A was maybe sacrificed a little bit in terms of compensation to kind of hit some of the numbers, but it seems like that maybe was just a temporary phenomenon. Is kind of that the right way to think about it?

[Todd Meredith, executive]

Juan, really, it's not a change in the target numbers in compensation. It's really the fact that '23 and even '22 were softer in terms of the actual results for incentive comp. And therefore, you end up with a lower number in the actual periods. And then really, '24 what we have in our guidance is simply returning to, in essence, the accrued target of the incentive program. So it's just comparing kind of target levels to under target levels in the prior years. Not a big change of any sort in the actual comp programs or all-in amounts. So it's really, as Kris described, it really just a tough comparison. And just -- it's the accrual you always put in place for your comp program compared to the actual results in the prior years.

[Juan Sanabria, analyst]

Okay. So the 10% growth isn't factoring any sort of investments in the platform or technologies, just the comp and getting back to the average hurdle rate that you were below. Is that fair then?

[J. Douglas, executive]

I mean there certainly is investment going on inside of our -- inside of our platform. We've brought on some good solid people that we think are helping us as relates to some of the analytics and some of the portfolio strategy and things we're doing. But I would say that that's not the major difference of what's driving the change. It really has to do with what Todd was talking about of kind of returning to normalized incentive comp.

So out of the -- at the midpoint, it's $5.8 million, that's the increase. It ends up being about around $4 million or so that you -- is getting back to that normalized incentive comp range. And so the balance of the difference is just growth in G&A for the things you're talking about. That ends up being more of like a 3% growth on a year-over-year basis. So really, the main difference has to do with what Todd was talking about of that returning to the run rate on the performance compensation.

[Juan Sanabria, analyst]

Very helpful. And then I just wanted to kind of try to square things as the message has evolved over the last few quarters. If I look back to the first quarter '24, you kind of talked about a baseline '24 FFO growth of 5% to 7% and same-store NOI growth of 4% -- 4% to 6% for the whole company, not just multi-tenant. I guess, it sounds like there's some single tenant expirations that maybe weren't factored in there, may have been a bit of a surprise. But just curious if you could try to talk through what's changed over the course of the year. Can you -- the leasing pipeline you guys have been talking about has been robust for a while. You started to see some of that benefit come through in the fourth quarter. So just -- if you could just kind of square those 2, that would be super helpful as we're definitely getting at that on our end.

[Todd Meredith, executive]

Sure. Juan, I think just big picture, we -- a year ago did talk about that 4% to 6% growth. And I think what you're seeing in our bridge that we laid out last quarter and sort of reiterated and updated this quarter is really getting that multi-tenant throughout the year, as Rob described it. Obviously ramping up in the second half, just some of that due to expiration patterns. Some of that being due to the leasing that we really ramped up in '23. You saw it started to come through in the fourth quarter and really continuing to contribute throughout '24.

So it's putting all those pieces together to get to -- at the back half of the year, we show growth that starts to get into that 5% range, plus or minus. Obviously, we'd love to do it sooner. One of the challenges probably that has changed a little bit since a year ago is operating expenses have been a little more stubborn. We're making great headway, some nice progress this quarter, but we're certainly projecting continued improvement on that going in. And again, a ramp up or maybe a ramp down in the rate of growth in operating expenses.

So some of it is just, obviously, knowing more detail on specificity as we've approached it, but we see the momentum and really driving towards that same goal at 4% to 6% multi-tenant growth goal and getting there throughout the course and really by the end of '24.

[Juan Sanabria, analyst]

Okay. And then just one last quick follow-up, sorry. You guys were saying that the absorption for the quarter was at the high end, but occupancy came in below on the multi-tenant side. Could you just help us square those 2 comments?

[Todd Meredith, executive]

We -- yes, if you look in our -- whether it's our supplemental or our earnings press release, we laid this out very clearly that really -- on Page 5 of the -- sorry, 4 of the supplemental, and really the delta was -- I think Rob touched on this in his remarks. We -- the properties we sold in the fourth quarter that were part of that calculation that starting occupancy, when you sold those that had higher occupancy in those particular cases, it brought down the starting point. And also we completed a development.

So when you layer those things in, your starting occupancy actually came down a bit. So actually, the delta is still very much the 53 basis points and 175,000 square feet of absorption. So the occupancy -- the starting occupancy that we projected in the bridge last time obviously had to be adjusted for those transactions, the sales and the development completion. And that's something that you're always adjusting as your portfolio evolves. So we tried to make that as clear as possible to show that the starting point is just different, and the change is still obviously at the top end of the range.

[Operator]

The next question is from Mike Mueller from JPMorgan.

[Michael Mueller, analyst]

A couple occupancy leasing questions. I guess you finished the year multi-tenant 85.2%. And just kind of given the commentary about the timing of move-outs versus commencements and stuff, is it safe to say that at least in 1Q occupancy dips from 85.2% to before going up? Or does it just kind of head up regardless of that from year-end?

[Robert Hull, executive]

I would say that we think that occupancy is going to move up from here. Those are our expectations. We don't expect to see a dip moving from Q4 to Q1.

[J. Douglas, executive]

Just not going to be at the same pace that you saw in the fourth quarter. So it could be a slight positive as opposed to the significant positive absorption we saw in the fourth quarter.

[Michael Mueller, analyst]

Got it. Okay. And then I guess on the leased side, the -- I think it was 87.2% at year-end, give or take, for the leased rate. You've mapped out in the presentation where you think physical occupancy is going. Do you expect the lease rate to climb higher as well? Or is what you're seeing on the occupancy side just the commencement of what's embedded in that leased rate?

[Robert Hull, executive]

Yes. I think that the -- what we're seeing in terms of lease commencements moving forward, I would expect that the those would move -- right now, we've got about 210 basis points of difference between the two, 87.2% and 85.2%. And I would expect that that would -- those two would move together as occupancy moves up. I don't see in the near term that getting -- the delta between the two getting much smaller.

[Michael Mueller, analyst]

Okay. So new leasing is in there as well.

[Operator]

[Operator Instructions] The next question comes from Michael Gorman from BTIG.

[Michael Gorman, analyst]

Just wanted to maybe synthesize some of the questions here. Obviously, one of the questions on the dividend and then thinking about the 2024 outlook earlier last year. And as we start to think about how '24 plays out and going into '25. I just want to make sure if I'm doing my math correctly, the implication here is that if you kind of move towards dividend coverage in 2025, it's kind of in that 6% to 8% FAD growth in '25 is what would be implied. I know you're not giving guidance, but like is that the way to think about how '24 plays out is that the run rate by the end of the year is going to be such that kind of mid- or even upper single-digits FAD growth is what we're looking at in the out years?

[Todd Meredith, executive]

Mike, I would say you're directionally headed the right way. I think it's early to be calling that for sure, for '25 and an earlier question was asked about we're obviously very bullish on our multi-tenant side. And our single-tenant side is fine. The retention rates are strong, but backfilling single tenant vacates have typically a lag effect. And so we don't have perfect visibility into expirations for single tenant as an example, in '25.

So it's early to call the net number, if you will. But you're right in terms of what the implied math, implied dividend coverage would suggest in terms of the growth potential in '25. So we're certainly bullish on that and see a very strong uptick going into '25. Now like everyone, we're watching interest rates. We're looking at all that, but we've brought our variable rate exposure down significantly. We don't have big maturities in '24. So from what we can see, we can see that exit velocity of '24 being quite strong as you said.

[Michael Gorman, analyst]

Okay. Great. And then maybe just helping me out on that as you think about that. I mean exiting '24, you see a lot of strong absorption, a lot of leasing momentum. So obviously, the NOI coming online is a benefit. Should we expect a normalization in CapEx as a percentage of NOI as well as we get towards the back half of '24? So if I'm thinking about the guidance of $140 million to $160 million, is that going to be front-end weighted as we think about the CapEx bill this year?

[J. Douglas, executive]

I think it really depends on the ultimate timing of being able to sustain additional new leasing moving forward to the back half of the year and even moving into '25 but we are certainly seeing a bit of an escalation right now. We ended up for the year, I think it was 18.4% in terms of percentage of NOI that we spent on maintenance CapEx. I would say that what we're seeing for '24 is a similar amount. But even if you stay at that level just because you start getting the additional NOI from all of the leasing that occurred late in '23 and then all the way through '24, it still drives a benefit.

So I think that your earlier question of can we see much stronger growth in FAD? I think the answer is yes, even without assuming a significant decline in your maintenance CapEx as a percentage of NOI. I would still say that I would think that if we get back to a regular -- call it, 15% of leases that are expiring every year, that's probably the percentage of NOI that you're talking about of spending on maintenance CapEx. So if we do see some normalization, it's going to be to that degree. It's not like we're assuming that that maintenance CapEx number is going to be cut in half or something.

[Michael Gorman, analyst]

Okay. Great. And then maybe just last one for me. Just on the JV, obviously, being conservative not including that in guidance. How should we think about that conservatism? So if I look at the bridge in your release this morning, is the kind of $5.5 million to $7.5 million of dilution from additional dispositions, is that in place of the JV? Is that the conservatism? Or I'm just trying to understand the potential benefit if the JVs do come to fruition over the course of the year. Does that take the place of those dispositions? Or is it coming through fee income? Or how does that play out?

[Todd Meredith, executive]

No, I wouldn't necessarily say it's a substitute. I think I would continue to expect the disposition. Some of that is just our normal course portfolio optimization. And I think that level is not an unreasonable run rate for us going forward, call it, $200 million, plus or minus.

The JV, really, the way to think about that would be maybe 2 ways. One would be to simply say, hey, we have proceeds, we can buy back stock. We could obviously pay off debt, some combination of that for a leverage-neutral impact, and that would be accretive. Obviously, timing is the key point there, how much of that do you get in a year. And then maybe the other way to think about the positive would be maybe somewhat related, but would be to say, hey, if we did anything that involved our redevelopments or developments, it would certainly reduce capital spend that we would have and then you would enhance your return on what dollars you do continue to commit to -- smaller dollars that you do commit to those projects.

So again, timing would be a key impact there. So it's really sort of what do you do with the proceeds from the joint venture structures and what's the timing of that. And so obviously, since we're not giving specific direction on that, we're keeping it out of guidance, and then we will certainly update and layer that in as we progress and have more specifics on that.

[Operator]

The next question comes from John Pawlowski from Green Street.

[John Pawlowski, analyst]

I want to go back to Juan's question on what's changed between now and last May when you signaled total same-store growth from 4% to 6%. And I don't really care about guidance and things change, but more concerned about a structural shift in the pricing power in the portfolio, stickiness and tenants. And so -- I know you pointed to expenses being more challenging, it feels like to divide between 3% same-store growth and 4% to 6% previously signaled is much more -- it's much bigger than just expenses. So can you talk -- can you just expand on that? What's changed in terms of retention of tenants with the multi-tenant or single tenant. What's changed in the portfolio? It's a big shift.

[Todd Meredith, executive]

Yes. I think the way to think about it is, obviously, all the different pieces that go into same-store growth, the occupancy piece, I think probably is one of the key things was really talking about same-store versus total multi-tenant. Obviously, what we see a lot of upside in is even some assets that aren't in same-store. And those will, over time, roll into same-store. So they could actually come back in and increase same-store but we have assets in our redevelopment side, our development side that generate a lot of upside.

And so that's really why we put the bridge together to really illustrate how all of our multi-tenant properties do get into that range. And over time, that may become really the same-store, but it's going to be a matter of when those projects roll or when those properties roll into same-store. But beyond that, at the edges, I've talked about some of the challenges have been retention as well. It's subtle, but it's an important difference. We're running currently. I think for the year, we were at about 79%, for the quarter, we're about 78%. That really needs to hit 80% and really get up there to kind of drive fully the positive absorption that will get us to that 4% to 6%.

We've been somewhat conservative in what we have in our bridge. We're not assuming a huge change in that retention, but that would be a bonus or a plus to what we see there that would push it further. Obviously, I mentioned, we already talked about operating expenses.

The one other one that I think we're touching on, but maybe not in the right context here is the single tenant side. And that certainly is -- was lower for us in '23 and also expected in '24 simply because of those 2 properties that Kris talked about. So those growing at about 1% is below the escalators that are in place in the single-tenant portfolio of about 2.5. And so that difference is a little bit of a drag on that.

So again, we may be able to address some of that. As Kris said, we're looking to sell one of the assets. The other is a redevelopment play. And so as those evolve and we are able to work out some improvement, we've conservatively assumed those go to 0. But if we can generate additional growth out of those, some leasing out of those or a sale, that will help. So there's some conservatism there, but I would say that's another piece to the puzzle.

[John Pawlowski, analyst]

Okay. I appreciate all that. Todd, second question on balance sheet and just how you're managing the duration of the debt. So average months to maturity of -- or average years to maturity about 4 years. If you got $1 billion of interest rate swaps expiring 3-ish years, should we expect this type of duration on the balance sheet to remain pretty similar? Or are you more open to issuing longer-term unsecured debt and taking refinancing risk off the table?

[J. Douglas, executive]

Yes. No, I think -- this is Kris. I'll jump in on that. Yes, with everything that's gone on in the last couple of years related to interest rates going up and the volatility and everything associated with that, we obviously haven't issued any new long-term debt. But that is always on the table. We're always looking at that, and it certainly has improved from where we were, call it, 4, 5 months ago, but then you got to look at your use of proceeds. And so if we were to do something like that right now, we don't really have a matching use of proceeds to be able to redeploy those accretively. But we certainly would anticipate as we move forward that we'd be looking at a long-term debt as a source of financing and refinancing of expiring debt.

[Todd Meredith, executive]

Yes. Our first debt or unsecured bond maturity is next summer '25. So certainly, as we get closer to that, we'll be keeping an eye on that opportunity to extend that maturity and duration as you said.

[Operator]

[Operator Instructions] We have no further questions. So I'll hand the call back to the management team for any concluding remarks.

[Todd Meredith, executive]

Thank you, Adam, and thank you, everybody, for joining us this morning. We will be available for your follow-up and questions, and we look forward to seeing many of you at some upcoming conferences. Everybody, have a great day. Thank you.

[Operator]

This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.