Healthcare Realty Trust, Inc. Q1 FY2025 earnings call

Leadership Announcement

• Connie Moore welcomes Peter Scott as new President and CEO; Connie served as interim CEO for five months and will continue on the Board.

Attraction to Healthcare Realty

• Pure-play outpatient medical REIT focused on a single asset class; strong operating fundamentals with muted new supply and increasing demand; high-quality portfolio in high growth markets with market-leading health systems as tenants; positive team culture aligning with core values.

Initial Areas of Focus

• Leasing: Target stabilized occupancy in low 90% range, with 200-300 basis points of upside; expect sequential occupancy growth in 2025.
• Portfolio Optimization: Reviewing portfolio to maximize NOI growth potential by selling assets in markets with limited scale instead of contributing to JVs.
• Balance Sheet: Aim to extend debt tenor and reduce indebtedness; net debt to adjusted EBITDA expected to decrease to 6-6.25 times through the year.
• Efficiency: Improve G&A at corporate level and operating expenses at property level to enhance NOI margins.
• Financial Discipline: Improve technology/systems and invest in platform to instill financial discipline.

Dividend

• Dividend maintained at $0.31 per share; under review at Board level, will be output of strategic plan.

Leasing in Q1

• Rob Hull noted robust demand for outpatient medical space, nearly 1.5 million sq. ft. of new/renewal leases, solid signed not occupied pipeline over 630,000 sq. ft., improved tenant retention to almost 85% leading to 89.3% same-store occupancy.

Financial Results

• Austen Helfrich reported normalized FFO per share $0.39 for Q1, same-store cash NOI growth 2.3%, sold four buildings for $28M, received full payoff of a loan for $38M, paid down $35M of term loans, net debt to adjusted EBITDA unchanged at 6.4 times, expect decrease to 6-6.25 times through the year, ended Q1 with $1.4B capacity on revolver and accessed to pay off $250M of maturing notes.

No specific product segment financial performance with revenue contribution % provided in the transcript.

Guidance

• Reaffirmed normalized FFO per share guidance of $1.56 to $1.60 for full year.
• Expect acceleration in same-store NOI growth and uptick in FFO and FAD per share in Q2.
• Net debt to adjusted EBITDA expected to decrease to 6-6.25 times through the year as disposition plan is executed.

Risks

• Policy Risks: Uncertainty around federal healthcare budget cuts and policy changes, such as site neutrality or Medicaid cuts, with potential indirect impact on portfolio; still early to definitively assess impact.
• Market Volatility: Potential impact on disposition activity and tenant decision-making due to macroeconomic and policy uncertainties.

Q: When you laid out your areas of focus, did you list them in order of priority or with a one, two, three-year timeframe?

A: Pete Scott said he wouldn't say everything is in perfect priority order, but aims to get portfolio optimization and deleveraging done near term for 2026 guidance, leasing to take 2-3 years to reach stabilized occupancy.

Q: How do you feel about the JV model generally?

A: Pete Scott likes JVs as part of the toolkit, has good relationships with partners, but for portfolio optimization, focuses on selling 100% of assets in certain markets rather than contributing to JVs.

Q: Is this year's guidance kind of Pete's stamp approved, and will it be refined as you incorporate strategic plans?

A: Peter Scott said guidance was reaffirmed after spending time with the team, comfortable with numbers, and efficiencies will work into earnings faster than asset sale dilution.

Q: How are you thinking about potential future acquisitions?

A: Peter Scott said focus on core cluster markets, whether on campus, affiliated, or off campus, with scale being key.

Q: Are you seeing any impact of potential federal healthcare budget cuts or policy changes on tenants?

A: Peter Scott said it's too soon to definitively say, but some assets are in lower cost settings, and working with third-party lobbyists to stay informed.

Q: Do you still think there's room to push the frontier on mark-to-markets at HR?

A: Peter Scott said operating fundamentals are strong, demand outstrips supply, rental rates on in-place product are up, and there's room for in-place rent growth, balancing lease economics and occupancy growth.

Q: What's your view on stock buybacks?

A: Peter Scott said immediate focus is on creating balance sheet capacity, prioritizing deleveraging over stock buybacks for now, but could consider buybacks once balance sheet is strengthened.

Q: Any update on Prospect and Steward rent collection?

A: Austen Helfrich said received full rent from Prospect for February, March, and April; Steward's backfill opportunities are in Rob's leasing pipeline, early in the year.

Q: When will there be an update on the strategic plan and dividend?

A: Peter Scott said will provide more detail on the strategic plan on the next call, and will comment more on the dividend then, with it being an output of the plan.

Q: How much upside do you see in the margin profile and what are the best opportunities to drive margin?

A: Peter Scott said empowering local teams, pushing down P&L responsibility, improving technology, and looking at G&A cost savings; Rob Hull added occupancy is the number one way, and leveraging technology for efficiencies.

Q: Aggregate size of leasing pipeline and probability of delivering on it?

A: Rob Hull said pipeline remains strong, with increasing health system participation, and optimistic about delivering on it despite uncertain environment.

Q: Tactics on balance sheet with debt coming due in 2026?

A: Peter Scott said focused on enhancing liquidity, working with bank group on revolver and term loans, and aiming to redeploy capital into right markets after deleveraging.

Q: Balancing disposition-driven portfolio optimization/deleveraging with earnings impact?

A: Peter Scott said mindful of sale cap rates, offsetting dilution with lease escalators, efficiencies, and leasing upside; focusing on finding efficiencies to offset dilution.

Q: Benefits of not cutting the dividend relating to operations and growth prospects?

A: Peter Scott said while dividend coverage is a consideration, retaining earnings could have nominal benefit to earnings growth, with more thoughts to come next quarter.

Q: Potential for dispositions to drive NOI margin higher and differentiation by market?

A: Ryan Crowley said took asset-by-asset approach analyzing NOI margin and rent growth, with potential for NOI margins to improve as disposition pace continues.

Q: Role of retained cash flow in capital stack and redevelopment/development?

A: Peter Scott said priority for retained earnings is redevelopment capital to get higher rental rates from refurbishing assets, with development being secondary.