Healthcare Realty Trust, Inc. Q3 FY2024 earnings call

• Key quarterly results: Normalized FFO per share at $0.39, up 1.2% year-over-year.
• Leasing trends: Fifth consecutive quarter of over 400,000 sq ft new signed leases in multi-tenant portfolio, 159,000 sq ft absorption, 565,000 sq ft new lease commencements, over 80% tenant retention.
• NOI growth: Same-store property up 3.1% year-over-year, future contractual escalators 3.1%, cash leasing spreads 3.9%.
• Capital allocations: Repurchased over $150M of shares year-to-date, with year-to-date repurchases near $450M. Proceeds from JV contributions and asset sales increased to a range of $1.05B to $1.15B.
• Balance sheet: Repaid unsecured term loan, quarter end net debt to adjusted EBITDA 6.6x, expects 6.5x by end of 2024, $1.3B availability under credit facility.
• Steward bankruptcy: ~$27M annual NOI exposure, ~$17M secured or visible for new leases, $10M remaining with timing lag for backfilling.

Healthcare Realty had a strong third quarter with normalized FFO per share of $0.39, up 1.2% year-over-year, at the high end of expectations. MOB market fundamentals are strong with demand for outpatient space outstripping supply. The multi-tenant portfolio had its fifth consecutive quarter of over 400,000 square feet of new signed leases. There was 159,000 square feet of absorption (49 basis points), driven by 565,000 square feet of new lease commencements and over 80% tenant retention. Same-store property NOI growth was 3.1% year-over-year, future contractual escalators were 3.1%, and cash leasing spreads were 3.9%.

• Narrowed 2024 normalized FFO per share range to $1.55 to $1.56.
• 2025 outlook: Absorption accretive capital allocation, payout ratio expected to decline below 100% and approach 90% adjusted for absorption capital.

• Steward bankruptcy impact: ~$10M annual NOI remaining with timing lag for backfilling.
• Interest rate changes affecting debt maturities and capital allocation.
• Timing differences in move-ins/move-outs impacting NOI growth.

Q: Good morning, everybody. Todd, just wanted to go back and make sure I understand the multi-tenant same-store NOI growth guidance and kind of move-in, move-out dynamic you discussed. I guess can you just marry the timing impact you mentioned with the comment about net absorption kind of exceeding your goals and whether this is a quarter end occupancy – average occupancy difference or if there is something else that we're missing here? And just speak to kind of what went on there this quarter.

A: Yes. Good question, good observation Austin. I think you hit it pretty well. We actually spent a fair bit of the quarter below where we ended – sorry, we spent a fair bit of the third quarter below in occupancy in the multi-tenant portfolio where we finished the second quarter and then it rebounds strongly in September. And so obviously, as you point out, the average is really the story there. It was well below where we ended. So, we really saw a strong pickup in September, obviously that bodes well for the fourth quarter, but more importantly, 2025. You also have free rent, which I mentioned, that's obviously not in same-store, but that's something also in terms of thinking about how it translates to the FFO line as well that you've got free rent burning off as well. So, really from a true cash perspective, we view a lot of what you see perhaps in the third quarter, really starting to contribute in early 2025.

Q: So the lease is just starting later than you would have initially hoped?

A: Not necessarily than we hoped. It's just timing of move-outs. So we had move-outs really skewed to the beginning of the quarter. So again, we experienced that sort of drag intra-quarter. And then a really strong rebound and obviously, net absorption very positive, but a lot of that coming late in the quarter in September. So it's – again, this can have – we had a similar but much more muted pattern like that in the prior quarter. It was just much more pronounced this quarter. And that's just going to vary quarter-to-quarter on timing. It's not – every quarter is the same. There can just be timing differences. So it obviously has an impact in a given quarter.

Q: In terms of the maintenance capital expenditures, they've trended down a bit in recent quarters as a percentage of NOI. Can you just give us a feel for like how to think about that impact next year? Are you still kind of running higher than normal as a percentage of NOI on that CapEx right now, it could come down next year?

A: I'm just – I'll provide a little bit of context here, but I think we're going to save 2025 guidance until February. I would say that obviously, that is going to be tied into our absorption targets for next year. So I think you've heard Todd be optimistic and the team be optimistic around continuing to grow occupancy in the portfolio which obviously has a capital requirement. I do think what you have seen this year to your earlier point is a real focus when you look into the maintenance CapEx and kind of dive into that. I think you've seen a real focus on efficiency within the building capital as well. But I think generally as you look forward, it's going to be tied to absorption. So as we continue to drive absorption that will obviously have a corresponding impact with the maintenance capital. What I would also generally add is, what Todd mentioned, which is we are at this period where we are seeing only the very early benefits to NOI of that absorption. And so it is a disproportional impact in the near term, which is why we are trying to provide additional insight with this payout ratio excluding absorption capital.