Healthcare Realty Trust Incorporated Q2 FY2026 earnings call

• One-Year Strategic Plan Progress: One year after launching its strategic plan to improve operations, strengthen the portfolio, rebuild credibility, and maximize shareholder value, the company is outperforming all key objectives. Average same-store NOI growth over the past four quarters is 5.7%, same-store occupancy has reached nearly 93%, average retention is ~90%, average cash leasing spreads are 4.1%, and leverage has declined by nearly one full turn. Lease IRRs have improved by nearly 3000 basis points, and payback periods have fallen by ~25% following the implementation of a new leasing model.
• Health System Partnership Progress: Dialogue with health system partners has grown exponentially, with multiple large mutually beneficial transactions completed or pending: 1) 160,000 square feet of Common Spirit renewals across five states with a +7% cash spread, plus a $16 million land sale in Denver that removed carry costs while Healthcare Realty retained future MOB development rights; 2) 215,000 square feet of WellStar renewal leases (+4% cash spread) plus 27,000 square feet of new leases, alongside a $36 million sale of the Kenistone Cancer Center at a 5% mid cap rate ($600 per square foot); 3) A signed LOI for 203,000 square feet of Ascension St. Thomas leases across three Nashville campuses with an +11% cash spread, expected to close in Q3 2026, alongside a joint $35 million Healthcare Realty-led redevelopment of the West Campus, paired with a $120 million Ascension-led hospital modernization.
• Capital Allocation Update: The company prioritizes redevelopments, joint venture (JV) acquisitions, balance sheet management, and shareholder returns. It successfully addressed near-term debt maturities via a $700 million upsized convertible bond issuance (3% coupon, effective conversion price of $27.41 per share) and a $400 million delayed draw term loan, with a blended 4% interest rate (100 basis points below original guidance) that extends maturities through 2027, with $1.2 billion in additional liquidity available through 2029. The company repurchased $75 million of stock in Q2, bringing total repurchases since the strategic plan launch to $175 million at a blended price of $18.50 per share. Year-to-date, the company has disposed of 6 buildings and 3 land parcels for ~$75 million at a blended 5% cap rate, with an additional ~$200 million of dispositions in the pipeline. With partner KKR, the company has closed, contracted, or signed LOIs for ~$200 million in total assets ($40 million at Healthcare Realty's share) at a 7.5% going-in cash yield to Healthcare Realty, which is accretive compared to the company's ~6% implied cap rate, with assets located in high-barrier markets that complement the existing portfolio.
• Sector Fundamentals: Broad market fundamentals remain strongly favorable: new medical outpatient construction as a share of total inventory is near all-time lows, while sector occupancy is at record highs. Increasing health system M&A activity is expected to strengthen tenant credit quality and drive additional demand for outpatient medical space. A recent third-party tenant survey showed year-over-year improvement across all satisfaction metrics, validating the company's operating platform changes.

Healthcare Realty operates as a single-segment medical office real estate investment trust (REIT) focused on outpatient medical properties. For Q2 2026, normalized FFO per share was 41 cents, AFFO per share was 32 cents, resulting in a 76% quarterly dividend payout ratio. Same-store cash NOI growth came in at 5.1% across nearly the entire portfolio. During the quarter, the company executed 323 leases totaling 1.5 million square feet (including 350,000 square feet of new leasing), with same-store cash leasing spreads averaging 4.8%, average annual rent escalators of 3%, and a weighted average remaining lease term of nearly six years. Tenant retention hit 88.5%, driving 25 basis points of net absorption and lifting same-store occupancy to nearly 93%. The company ended the quarter with 460,000 square feet of signed but unoccupied leases, representing ~140 basis points of future occupancy upside. Year-to-date through Q2, the company has executed 3.5 million square feet of leases, representing over 10% of its total portfolio, bringing the weighted average remaining lease term to 65 months, a 15-month improvement since the launch of its 2025 strategic plan. The current redevelopment portfolio stands at ~25 assets (expected to peak at ~30 assets by end-2026), with $25 million invested in Q2 and overall portfolio leased to 67%, a 1400 basis point increase over the past four quarters. The total new and renewal lease pipeline stands at over 3 million square feet.

• Full year 2026 normalized FFO per share guidance was increased by 2 cents to a midpoint of $1.64, with the upper end of the range raised to $1.66 per share.
• Same-store cash NOI growth guidance was revised upward to a range of 4.25% to 5%, an increase of 50 basis points at the bottom of the range and 25 basis points at the top of the range, driven by strong year-to-date leasing results and 4-5% average cash leasing spreads.
• Total projected uses of capital for 2026 were increased by $115 million to account for incremental share repurchases and the $40 million JV acquisition commitment, with disposition guidance increased by a matching amount.
• Management confirmed the company is currently tracking ahead of its original 2028 long-term FFO targets, after 2026 was originally expected to be a flat earnings year due to forecasted dilution from portfolio optimization and refinancing headwinds.

• Forward-looking statements about future performance, growth, and transactions are dependent on multiple uncertain factors, including market interest rate movements, health system capital availability, leasing execution, and broader macroeconomic conditions, as detailed in the company's SEC filings.
• While the company has not yet seen cap rate pricing reset from recent interest rate increases, there is early stage uncertainty about how higher rates will impact transaction pricing and bid activity from leveraged private buyers over time.
• Achieving the high end of projected 9-12% cash-on-cash yields for the redevelopment portfolio is dependent on realizing both occupancy uplift and rental rate growth; projects that only deliver rental rate upside will likely fall at the lower end of the yield range.
• The company faces frictional vacancy even at high overall occupancy levels, and leasing execution for the large 3 million square foot pipeline is not guaranteed.

Q: The company is a year into its strategic plan and tracking ahead on all metrics. Where does this put long-term 2028 FFO targets, and what is the sizing and funding strategy for the KKR JV? / A: Management confirms the company is tracking well ahead of the original 2028 FFO timeline, after 2026 was originally expected to deliver flat earnings due to dilution and refinancing headwinds. To date, the KKR JV has ~$300 million in closed/contracted assets, with attractive yields for both partners. The company currently funds JV investments via capital recycling from non-core asset dispositions and free cash flow, to maintain NAV accretion. Management will maintain discipline on new acquisitions and will pivot to equity markets only if that becomes more accretive than continued dispositions.

Q: What is the size of the redevelopment shadow pipeline, can the current size be sustained over the next few years, and what drives the 9-12% projected yield range? / A: There are currently ~25 assets in active redevelopment, a number that is expected to peak at ~30 by end of 2026 (including the upcoming Ascension St. Thomas campus project) as completed assets cycle out of the pipeline. Redevelopment will remain a permanent part of the business long-term, but at a smaller size than the current peak level associated with the strategic plan. The current pipeline is projected to deliver returns in the middle of the 9-12% range: higher yields are achieved when the project delivers both material occupancy uplift and rental rate growth, while projects that deliver only rental rate upside (like the Nashville Ascension project) fall toward the 9% low end of the range.

Q: With the stock having rerated higher from earlier buyback levels, how does the relative attractiveness of share buybacks compare to JV acquisitions and redevelopments? / A: Management confirms the relative attractiveness of buybacks has changed after the stock's rerating, and buybacks currently do not screen as favorably as high-yielding JV acquisitions and 9-12% yielding redevelopment projects. Buybacks remain an available active lever that can be turned back on immediately if the stock experiences price dislocation, as they deliver immediate accretion when valuations are attractive.

Q: How has the 3000 basis point improvement in lease IRRs been achieved, and what is the expected execution rate for the 3 million square foot leasing pipeline? / A: The IRR improvement comes from both firmed market fundamentals that have supported higher spreads, and a material increase in tenant retention (driven by better tenant service and limited new supply). Renewal leases require far less capital expenditure than new leases, which directly improves overall IRRs. The 3 million square foot pipeline is over half health system activity, and management expects to continue executing ~1.5 million square feet of leases per quarter, a strong sustainable pace supported by the ongoing industry shift of medical procedures from inpatient to higher-margin outpatient settings.