Healthcare Realty Trust Incorporated (HR) Earnings Call Transcript & Summary

Thank you for standing by. My name is Karen, and I will be your conference operator today. At this time, I would like to welcome everyone to the Healthcare Realty Fourth Quarter 2024 Earnings Conference Call. [Operator Instructions]. I will now turn the call over to Ron Hubbard, Vice President of Investor Relations. Please go ahead.

Thank you for joining us today for Healthcare Realty's Fourth Quarter 2024 Earnings Conference Call. For 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, 2024. 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, 2024. The company's earnings press release, supplemental information and Form 10-K are available on our website. I'd now like to turn the call over to our Interim President and CEO, Connie Moore.

Thank you, Ron, and good morning, everyone, and thank you for being with us today. Joining me for our prepared remarks is Austen Helfrich, our Chief Financial Officer; and Rob Hull, our Chief Operating Officer. Also here with us and available for questions and answers is Ryan Crowley, our Chief Investment Officer. As many of you know, I've been affiliated with Healthcare Realty since the middle of 2022 as a member of the Board of Directors. Since our last call and shortly after I stepped into my current role as Interim President and CEO, the company made several meaningful board and management changes. We elevated existing director, Tom Bohjalian to Independent Chair. We appointed 3 new independent directors with deep industry and leadership experience. Dave Henry, Glenn Rufrano and Don Wood and we promoted Austen Helfrich to Chief Financial Officer. In my new leadership role at Healthcare Realty, I've had the opportunity to become directly involved in our operations, our capital allocation decisions, and outlining our 2025 strategic priorities. Coupled with other executive appointments we announced in September, I am pleased to share that our leadership team has a fresh perspective, renewed vigor and is executing with intensity. With these management enhancements, I'm more confident than ever that HR has the management team, competitive position and portfolio to deliver incremental value to shareholders and to do so on an accelerated basis. Moving to our '24 results. We laid out a plan to increase leasing and occupancy momentum and aggressively recycle capital during the year. Our normalized FFO per share in the fourth quarter was $0.40 at the high end of the range we provided and represents 2.5% year-over-year growth. We also achieved new lease commitments of nearly 600,000 square feet in the fourth quarter and 2 million square feet for the year, both all-time records. For occupancy absorption, we had projected a 100 to 150 points of occupancy gains in the multi-tenant portfolio. We finished the year delivering 149 basis points at the high end of our plan. We did what we said we would do. We also continued our efforts to focus on operational efficiency. We reduced controllable operating expenses by 100 basis points. Our 2024 capital allocation plan was to raise proceeds and accretively repurchased shares that were trading at a significant discount. We generated $1.3 billion in proceeds during the year, including nearly $500 million of noncore asset sales that had limited upside. We also raised through an expanded joint venture platform with leading institutional partners, KKR and Nuveen. These joint ventures have been a strong new capital source to monetize largely stabilized assets. We allocated $510 million of the $1.3 billion to repurchase 31 million shares on a leverage-neutral basis. Along with the share repurchases, we also repaid $350 million of debt and ended the year at 6.4x leverage, below the 6.5x leverage we forecasted on our last call. Looking forward to '25. Our strategic priorities are focused on: one, continuing our operational growth and momentum and operating efficiencies; two, refining our portfolio through asset sales to focus the portfolio on the densest and fastest-growing markets to maximize long-term NOI growth; and finally, our capital allocation priority in 2025 is focused on significant debt reduction. Combined with our operational growth, we will allocate proceeds to debt repayment and drive a natural deleveraging process towards the low end of our debt-to-EBITDA range. With this deleveraging process, there will be a modest near-term earnings headwind. We believe it's the right strategy to position HR for a lower cost of capital and stronger long-term growth. Before I turn the call over to the rest of the team, I want to provide an update on the CEO search. When I assumed the interim role, I communicated my tenure would be temporary, and the board was committed to identifying a permanent CEO who would further advance our strategic priorities. The Board's search committee was established and the process began underway and has been underway since December with a leading executive search firm. We will not rush the process to ensure that the right leader is selected. So with that, I'm going to turn the call over to Rob to cover more details on our operations and market fundamentals. Austen will then finish with our financial results for 2025 guidance.

Thanks, Connie. I'd like to take a moment to put our results in context of the trends we're seeing in the industry. The outpatient medical space continues to be one of the most durable property sectors in real estate, offering steady long-term growth. Demand is need-based and benefits from powerful secular demographic tailwinds. Supply remains constrained with building deliveries and construction starts for the fourth quarter at the lowest levels in a decade. Meanwhile, our biggest tenants, the country's largest health care systems continue to shift patient care into lower-cost outpatient settings. All combined, these trends produce long-term tailwinds for our portfolio. When I took over as COO in October of last year, my objective was to continue driving the tremendous leasing and absorption momentum we had achieved and to focus on further operating efficiencies. We saw a robust fourth quarter activity topping off a strong year of leasing and absorption for Healthcare Realty. We finished the year with almost 2 million square feet of new signed leases, of which an all-time quarterly high of nearly 690,000 square feet were signed during the fourth quarter. On tenant retention, we retained 83.4% of expiring tenants for the year, up 400 basis points from 2023. And across new and renewal lease commencements, more than 1,500 leases totaling 6.6 million square feet were commenced during the year. Of these, 349 leases for over 1.5 million square feet commenced during the fourth quarter. This activity was best-in-class compared to the MOB sector. As evidenced, over the past 4 quarters, our rate of new lease commencements as a percentage of vacant space has been 50% higher than our peers. Coupled with strong tenant retention, we generated 44 basis points of multi-tenant occupancy gains during the fourth quarter and nearly 150 basis points for the year. Multi-tenant absorption for 2024 was at the high end of our expectations provided a year ago. Moving to expenses. I am pleased with the 1% reduction in controllable expenses we realized last year. Our team will continue to manage these tightly in 2025 as we implement new operating initiatives that will drive efficiencies in the coming years. In short, our operations team is firing on all cylinders. Our larger scale, leasing model, tenant relationships and day-to-day execution are driving best-in-class performance. At this time, I want to take a moment to say thank you to my entire team for their tremendous effort and dedication this past year. We are energized by the results and poised to carry the momentum into the coming year. The outlook for 2025 is strong. Our signed non-occupied lease pipeline or SNO at year-end represented over 160 basis points of additional occupancy across the portfolio. This is up roughly 40 basis points from the third quarter and provides good visibility into absorption for the coming year. Also, our top-rated health system partners represent a growing portion of our lease pipeline, driven by improving operating margins and the ongoing shift to providing outpatient care in the lowest cost setting. And we'll continue to focus on maintaining high tenant retention with expectations for the year in the 80% to 85% range. In sum, I am confident we can deliver another strong year of performance. Our team is laser-focused on driving further occupancy gains to maximize NOI growth. I will now turn the call over to Austen.

Thanks, Rob. Fourth quarter normalized FFO per share was $0.40, which is at the high end of our prior guidance and represents 2.5% year-over-year growth. For the full year, normalized FFO per share was $1.56, again at the high end of our revised range. As Rob mentioned, the fourth quarter was highlighted by strong absorption and robust growth in the core portfolio. Same-store cash NOI growth was 3.1% for the fourth quarter and 2.9% for the year. I'll discuss Steward Health and Prospect Medical in more detail in a moment. But excluding these bankruptcies, same-store cash NOI was 3.6% for the fourth quarter and 3.1% for the full year. On capital allocation, we generated nearly $1.3 billion in proceeds in 2024 and executed over $500 million in share repurchases and $350 million in debt pay down, ending the year at 6.4x net debt to EBITDA, down from 6.7x at the end of the third quarter and flat to year-end 2023. We provided a full update on Steward Health and Prospect Medical in our supplemental. However, I'll make a few brief comments here. First, our team has made significant progress addressing Steward. I'm pleased to report that we now have leases in place on over 80% of our pre-bankruptcy Steward square footage. Of the original $27 million in total exposure that I outlined on the last call, we have already secured $19 million in total revenue, trending better than we previously anticipated. Longer term, we still expect to recover over 80% of our pre-bankruptcy Steward NOI. In January of this year, Prospect Medical filed for Chapter 11 bankruptcy. We have approximately 81,000 square feet of leases across 5 buildings with Prospect Medical in the Hartford, Connecticut area, with total revenue exposure of $2.9 million. The vast majority of our Prospect exposure is in multi-tenant buildings where Prospect is, on average, about half of the existing tenancy. All of these buildings are currently fully leased and Prospect's rent per square foot is materially similar to other tenants in the buildings. Although it's early in the bankruptcy process and we have limited information, we have chosen to assume no revenue from Prospect in our 2025 guidance. In light of the specific guidance that I just provided on Steward and Prospect, these have been removed from same-store in the 2025 guidance in order to provide better visibility into the core portfolio. Let me put some of the recent bankruptcy events into perspective. Pre-merger, our total reserves as a percent of revenue averaged less than 10 basis points per year. Today, less than 2% of our total portfolio is affiliated with non-credit rated health systems. I'll now turn to our 2025 capital priorities and our financial outlook. First, we will continue to capitalize on our best-in-class leasing momentum. As Rob discussed, we had an all-time high in both new leases signed and leases commenced in the fourth quarter. We entered 2025 with strong momentum and are guiding to same-store absorption between 75 and 125 basis points in same-store NOI growth of 3% to 3.75%. Second, we will prioritize continued portfolio refinement with initial guidance of $400 million to $500 million of noncore asset sales during 2025. Let me give you a sense of the refinement at work. The targeted dispositions are in markets with population growth, about 1.5% slower than the rest of our portfolio are in locations where we have comparatively less scale and our properties with operating margins that are approximately 200 basis points below the portfolio average. As we think about use of proceeds from these sales for 2025, we will continue to prioritize leasing capital, which is driving our absorption. We have an extremely high return on this incremental investment and will continue to be a priority. After funding leasing capital, the primary focus of proceeds will be reinvestment back into the balance sheet to proactively address 2025 and 2026 debt maturities. This will serve the simultaneous goals of reducing leverage to 6 to 6.25x by year-end as well as extending the duration of our outstanding debt. This is a targeted reinvestment of near-term earnings to reduce leverage. Finally, unlocking value through cash flow growth is a key focus in 2025. This year, our total portfolio and same-store lease expirations are down approximately 10% from 2024 levels. This decline in expirations, coupled with continued improvements in tenant retention will naturally reduce our exposure to leasing costs while producing same-store absorption gains comparable to or better than 2024. Our focus on capital efficiency, coupled with expected NOI growth and lower lease expiration schedule should contribute to our goal of achieving full dividend coverage in the fourth quarter of '25 or early '26. Let me close out 2025 guidance by providing 2 additional notes. First, our focus in 2025 is on achieving our full year goals. As such, we will not be providing quarterly guidance, but we'll provide additional commentary as necessary to address quarterly seasonality or significant transaction timing. As a reminder, due to typical seasonality, you should expect our first quarter FFO per share to be the lowest quarter of the year. Additionally, the first quarter is a difficult comp for same-store NOI growth due to onetime property tax benefits in '24 as well as the winter weather that has hit the southeast this year, including several significant snow events. Thus, you should expect 1Q same-store NOI growth to be below our full year trend. Second, for simplicity and comparability of financial and operating metrics going forward, we will focus our guidance on the same-store portfolio and the consolidated company. We have provided multi-tenant growth rates for the fourth quarter for completion of 2024 results, but do not plan on providing similar metrics in 2025. You can see our full year guidance ranges and are supplemental. I'll now turn it back to Connie for closing remarks.

Thanks, Austen. Healthcare Realty has an incredibly steady, consistently growing business with embedded occupancy upside. We are focused on executing our strategic priorities and to enhance shareholder value. In short, we're excited about the future of Healthcare Realty. Before I turn it over to Q&A, I want to personally thank all the Healthcare Realty team members for not only their extraordinary accomplishments last year but also for welcoming me into the organization. It has been a privilege to serve. Karen, we're now ready for question and answers.

At this time, I would like to welcome everyone in order to ask a question. [Operator Instructions]. Your first question comes from Austin Wurschmidt from KeyBanc Capital Markets.

Good morning, everyone. I was hoping that you could break out new leasing this quarter related to some of the backfilling of the Steward space that you achieved? And then along the same lines, I'm curious if the same-store net absorption guidance of 75 to 125 basis points includes any re-leasing of that Steward space? And then what kind of that incremental leasing, what's not in the SNO pipeline is assumed to achieve that absorption?

Hi Austin, this is Rob. I'll start and maybe Austen can chime in. But on the new leasing, we treated the sub-tenant to direct leases, which is a big bulk of the Steward re-leasing activity, we treated those as renewals. So none of that activity is in our new lease number of almost 690,000 square feet. There was about 15,000 square feet of new leasing in the fourth quarter related to those Steward buildings, but those were net new leases. And then can you repeat your other question related to same-store growth in next year?

Yes. Trying to understand how much if there's any Steward -- any of the Steward space included in the 75 to 125 basis points of net absorption expected this year as well as kind of what's the incremental new leasing you need to achieve to reach that absorption guidance, recognizing you've got some lease-up from the expansion of the SNO pipeline.

Austin, I'll chime in here for -- on the first question. Our absorption target for next year is similar to what Rob discussed in the fourth quarter, does not include Steward. So there's no overlap between what we're achieving on Steward and our new absorption targets for 2025. What I would also say is on the lease commencement front for 2025, Rob referenced the SNO pipeline, which is essentially flat year-over-year. So I think from a new commencement standpoint, if you take our lower expiration and run it through the retention that we've given, what we're implying there are similar lease commencements generally in '25 versus '24, and you're really seeing the benefit of having less expirations.

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

I was hoping you could talk a little bit about expectations for FAD as it relates to normalized FFO guidance. And then -- and part of that, just the latest thoughts on the dividend, I know you kind of said you'd expect to be covered by the fourth quarter '25 or into '26. So is a dividend cut that was maybe talked about later last year is that a 100% off the table or just the latest thoughts around that?

Juan, this is Connie. Well, the dividend, as we've talked about and we talked about late last year, is that we're pretty confident that just given what the leasing moment that we have and the operation efficiency that we will grow into our dividend by the end of this year or next year. And so that's really the strategy that we've got right now is focused on our leasing activity and sort of a natural deleveraging from the dividend.

At payout or FAD numbers, the guidance range was to think about that relative to normalize FFO?

Yes. I think if you look at the maintenance capital guidance that we've provided, Juan, and you think about what I talked about expirations and the level of those expirations through next year, that, combined with the core growth in FFO per share, that will sort of bridge you, I think, to what your question is, which is how are we getting to coverage by the fourth quarter. Is that -- am I answering your question there?

Sort of, yes. Thank you.

Well, and I think, too, that it really depends -- I mean if leasing accelerates, FAD will be adjusted because we'll have more TI, but that will be the right decision, so and that's why it's really sort of towards the tail end of '25 or early '26 because it really does depend on our leasing activity.

Your next question comes from Nick Joseph from Citigroup.

Connie, you mentioned, obviously, the CEO process that's ongoing and not wanting to rush it, which makes sense. But just curious where we are in the process and expectations, the timing of an announcement?

Well, I wish I had expectations for you. We -- the search committee really got together and in earnest and really started talking about their thoughts on the CEO search in December, but I think we talked about in Las Vegas. The end of the year is a tough time to be starting a search, particularly the magnitude of a CEO. So it really started in January. So sitting here today, we're at about 60 days in. So I think when we were in Las Vegas, Tom Bohjalian used to say 6 to 9 months, I am certainly hoping that it doesn't take that long. I think this company needs a permanent CEO. But I don't have expectations about when that will be done. But I will say that this committee has been working very aggressively. And like I like to say, they've got their running shoes on. And so I expect that we'll have one soon, but I just -- I can't really give a date because I just -- it's an important position, and we want to make sure that it's right.

That makes sense. Appreciate it. And then just obviously, things are changing in Washington, there's probably some more direct impacts to some other property sectors. But is there anything from an MOB perspective, that maybe changes in Washington could have a downstream in back to your tenants?

I think similar to you, we're watching what's coming out of Washington. I think it would be a difficult statement to say that we have a good feeling for what ultimately the new administration will decide in terms of health care. I think obviously, it's a little early to speculate. What we do believe, as Rob mentioned, that the health system demand for outpatient space right now remains robust. And we continue to be -- an outpatient continues to be the lowest cost setting of care. So to the extent the administration wants to lower cost, we are the natural beneficiary of that. I think to speculate at this point on any specifics out of the administration, candidly, it's just too early to say.

Yes. But Ryan and our legal team spend time in Washington, just staying in front of legislators. So they're clear about the benefits of the MOB space.

Your next question comes from Rich Anderson from Wedbush.

Let me ask a question on the CEO also perhaps you won't answer, but we'll see. You've laid out a very specific game plan around the dividend, around people, around strategy. And I'm wondering if that sort of stake in the ground on those important topics has made it harder to find a candidate that may naturally want his or her own thoughts to come through on the path forward for the company. I'm just wondering if that is at all a headwind with a lot of decision -- big, big decisions already made?

Right. Well, Rich, I think it's a really good question. But I would say, no, first of all, all of the people that we have met with, they understand that there are no sacred cows here, both in terms of people and decisions so any new CEO and the committee is very clear on this, that any new CEO has the opportunity to evaluate the team, evaluate the strategy. We think we have a really good strategy and we think that anyone coming in here is going to see that. But time will tell. But no, I do not believe that it has been a hindrance to our search at all. The quality of the people that we're talking to is extraordinary. So no.

I'm not surprised by that. Okay, thanks for that Connie. And then just a quick one for me. The rub against medical office is it doesn't sort of sitting very well in an inflationary environment. I'm wondering maybe to Rob, if there's any sense that you can sort of deploy inflation into your conversations and get a spread over CPI to a greater degree in terms of rent growth in much of the way we've seen in other asset classes. Is that something that you're finding some success with?

Yes, Rich, I would say that our discussions and our leasing process starts with we introduced what we call the dynamic leasing guideline about a year ago. It's informed by local, really submarket type data and it's an IRR-based model. And so our team is out there going -- whenever they're renewing or looking for new deals, they're going on a lease-by-lease basis. If the opportunity arises to push rents, our model will inform them of that. And they real goal is to achieve the highest IRR on that lease, whether it's a renewal or a new lease. And so that's the way that we guide our leasing decisions. And you can see that in some cases, we put the spread in our supplemental in terms of where our renewals and what the spreads look like. And some of them often -- sometimes you can get high cash leasing spreads, supply-demand factors work out the situations, right? In other cases, our team is driven by the IRR that may produce a lower cash leasing spread but avoid costly downtime and an expensive re-tenanting of the space. So that's the way that we're approaching our renewals and our new leasing in the portfolio, and that we'll continue to do that and where we can push rents, we will. And when the opportunity arises to do so, we'll certainly factor that into our decision making.

But you are getting bumped.

Yes. That is a good point. We are -- we are -- in all cases, we are getting escalators that are 3% plus in all of our deals. And so really, I view that as that's embedded long-term solid growth for the portfolio moving forward. So a very stable -- it supports a very stable cash flow in the MOB space.

Your next question comes from John Kilichowski from Wells Fargo.

Maybe Austen, if I could kind of go back to your comments on sort of the capital recycling activity and the $400 million to $500 million of dispositions and guide. Could you help bifurcate what of those are asset sales versus JVs and then kind of where the capital would go? Initially, it's kind of CapEx and ReDev seems to be the focus, but then what's left over, it looks like it's implied about $100 million to $200 million. Maybe what's on the balance sheet that's your first target? And then what do those '26 term loans may have any early termination fees associated with them?

Yes. Let me make sure I got all of those questions. So I'll start taking through them, and then you can tell me if I missed one. So first, on the $400 million to $500 million, I talked a lot in my script about the noncore nature of those assets and a continued process of portfolio refinement. So you should expect us to primarily weight those towards asset sales. Those are markets, those are properties that not only do we see a benefit from a monetization but also from just a portfolio rationalization, footprint rationalization perspective. So simple answer is expect that to be heavily weighted towards sales. I don't disagree with your math on leftover funding the way that you ran through it. Easiest way to talk about what our intent for that would be, would be we have $250 million. I guess I should say that we're really happy with the flexibility that we have with the balance sheet entering this year. We fully paid off our revolver at the end of '24. We do have $250 million of unsecured notes maturing in May. And then to your second question, we have no pre-payment penalty on the term loans. So we will look to put the bonds maturing in May on the revolver and then from there, we will have flexibility around prepayment of that or pay down of that combined with early paydown of the term loans. And then a lot of that will just depend as we go through the year on market conditions. So I think the good news is we have a lot of flexibility, but we do want to move to reinvest that noncore asset sales proceeds back into debt pay down.

Okay. Great. That's really helpful. And I guess so the disposition guide, I think my second part of this was the disposition cap rate kind of moved up from 6.6% to that 6.8% to 7.3% range. You would say that's mostly indicative of the mix of dispositions between asset sales and JV contribution between '24 and '25 and not necessarily the nature of the portfolio moving in this environment?

That's correct. That's primarily an asset mix. We'll see how the sales go throughout the year. But I think you're right, that's a little bit of a nod to pricing expectations given the noncore nature of some of these assets.

Your next question comes from Michael Gorman from BTIG.

Maybe just sticking with that, Austen, can you just kind of walk through the bucket for the asset sales this year? Were those also potentially part of the noncore asset sales last year? Or has the parameters of how you think about what's noncore in the portfolio changed? And then maybe as you think about the capital allocation here, I'm just curious how you think about your cost of equity as that cap rate on noncore sales starts to creep up and you were still active on kind of share repurchases in the fourth quarter. I'm just kind of curious how that all kind of pieces together.

Yes. Good question. Definitely, I mean when we talk about 2024, I don't think we can gloss over that we did have noncore asset sales in that when we're looking at the $400 million to $500 million in 2025, that is a continuation of portfolio refinement. And I would say, quite honestly, probably a more aggressive position on exiting certain markets entirely and the benefit that we see to the overall portfolio, especially from what I talked about a growth and margin perspective. So I think that is a move forward in the direction of portfolio refinement, and we are taking, I think, a more aggressive step towards that in 2025. On the cost of equity discussion, if you look at 2024, the cap rate on asset sales was 6.6% and that was a pretty diverse group of assets. We did have noncore asset sales in there as well as obviously some stabilized monetization into the ventures. So I think we think about private market cap rates today, we're still seeing good activity for core assets in the mid-6s. So I think that core pricing on MOBs has not moved from 2024. And our 2024 results are really matched that overall market dynamic. I think when you think about capital allocation for '25, obviously, we're going to be dynamic. We are watching what is going on. But for the reasons that I mentioned, the balance sheet is really a focus moving into this year, and Connie touched on in her prepared remarks, really wanting to reinvest in that. It will -- it obviously is a little dilutive to our earnings growth in '25. But from an overall long-term growth perspective, we feel this is the right move.

Your next question comes from Omotayo Okusanya from Deutsche Bank.

So my question is really around when you guys think about sustainable earnings growth as for the overall HR platform, what do you guys kind of estimate that is? And how soon does HR get there? And I think again, you talked a little bit about delevering near term being a little bit of a headwind. When we took a look at interest debt maturities over the next 2 years or so of a large amount of debt maturity, the swaps also in place and some of the interest rate there that probably is a headline or a headwind for the next 2 to 3 years. Just how do you guys really kind of think through that? But I mean the kind of past all that you have the right capital structure in case this company is capable of generating 3%, 4% AFFO per share growth with a dividend growth commensurate with that? Just how do you kind of think through all that? And basically, what's the ask to investors of the patient for the next 2 years as we fix this before you kind of get to sustainable earnings growth?

I'll start by saying that if you look at the core growth in our portfolio right now, we obviously feel like we are executing extremely well. To your -- I think you made an excellent point around the capital structure, and we do have an earnings headwind in 2025 from delevering from interest rates. I think when you look at the long-term growth rate, which I suspect is where you're going in the MOB space, 20 years of data would tell you that the long-term growth rate of this business is wrapped around 3%. I think in the near term, Healthcare Realty has an excellent opportunity to outperform that. And from a headline growth perspective, we do face the same headwinds as many of our peers in terms of debt refinancing costs. So I think on the total AFFO growth long term, Tayo, I think if you think about the core growth of the portfolio, you can obviously leverage that to get your AFFO and FFO growth long term. We're obviously focused on executing 2025 and heads down on that at the moment. But I think those are the component pieces, and you're right for long-term growth for the company. And a lot of it goes back to 20 years of history of what is extremely durable growing cash flows. And that is the model, and that is where we are focused on executing and getting back to the clean durable cash flow growth story with a near-term opportunity for occupancy improvement that we've talked about.

As we do that, as Austen says, clearly, we have the headwind with paying off the debt and the difference in the interest rate, but we're using sale proceeds to do that. So we also have a headwind, if you will, by reducing NOI to pay off debt. So there's two things that are sort of headwinds for us in '25, but it's the right decision to get the balance sheet where we want to. So to your point, we get to a long-term stabilized growth.

Your next question comes from John Pawlowski from Green Street.

Maybe just a follow-on question to that conversation topic. Austen, the 2026 maturities, $1.2 billion rolling in 2026. I think a lot of it's clustered around the middle of the year. How quickly will you look to refinance that? Is that a second half of '25 exercise in your mind? More color on how you tend to address the significant 2026 maturities would be appreciated.

I think you answered the question well, John. It is second half of '25 is going to be the primary focus point for us and what we're assuming our '25 outlook. Obviously I talked about having flexibility on the balance sheet today, our near-term unsecured debt maturities. And then really in the second half of the year looking to, a, execute on the debt pay down that I outlined from the asset sales and then b, we'll start to refinance and ship away of those '26 maturities.

I wanted to go back to the conversation around the trajectory of FAD relative to the dividend. I know that maybe the messaging has changed late last year, but middle last year, there was commentary from the company that you thought the dividend would be fully covered entering 2025, and we're not really close to that right now. So I guess what fundamentally has changed in the portfolio that's led to an underwhelming trajectory of FAD and throughout the second half of 2024?

I don't -- obviously, I wasn't sitting in this seat at that point in time. But I don't remember saying that it would be covered at the beginning of '25. I think we always sort of said late '25 and we pushed it out a little bit potentially to '26, just depending on our leasing. Our leasing activity has been extraordinary, as Rob has communicated. And I think that's part of -- I mean, we spent a lot of money this year on TI and leasing to lease up all that space. So -- but I don't remember saying that we'd have it -- I don't remember the company saying because I wasn't saying anything at that point. But I don't remember saying at the beginning, but we have visibility into end of '25, early '26 based on our current business plan that our dividend will be covered.

I'll add to that, John. I want to put into perspective that our FAD per share growth in the back half of '25 was up over 10%. And I think the honest answer to your question, John, is we've got a new team here looking out to '25 and that's where we feel comfortable today.

The next question comes from Nikita Bely from JPMorgan.

You guys talked about the occupancy absorption for '25. But specifically, can you talk about the multi-tenant? And maybe if you're comfortable providing an exact occupancy percent for '25, do you expect multi-tenant occupancy to be over '25?

No. We talked about really focusing guidance this year on the same-store portfolio as well as the total portfolio. I think given the focus on same-store growth and total portfolio growth, we don't intend to provide an outlook on multi-tenant specifically. Obviously, in our supplemental, we do give you details in the multi-tenant, single-tenant growth that you can reference, but we're not going to guide specifically on multi-tenant this year. I think, really streamlining our occupancy guide versus same-store and keeping the outlook simple is beneficial.

Your next question comes from the line of Juan Sanabria from BMO Capital Markets.

Thanks for letting me queue back up. Just hoping you could go through a little bit more detail on the sourcing uses. I'm not sure how much should we budget towards redevelopment? And just trying to think about excess capital that you may have coming from dispositions that would allow you to do further buybacks in the '25 and just your general views on buybacks at this point?

Juan, I'm going to point you to the last page of our supplemental. We outlined pretty specifically the sources and uses for '25. I think somebody earlier on the call highlighted when you go through those, you kind of come back into, call it, about $150 million to $200 million of debt repayment will be the focus for 2025. Obviously, we watch the stock. Obviously, we're a looking at the market and will be flexible. But I think the real focus and what we're trying to convey on this call is asset disposition proceeds for 2025 will be focused on leasing the portfolio. And after that, the focus is on proactively addressing debt maturities and reducing debt and through that, reducing our leverage to 6x to 6.25x.

Yes. It was -- I mean, that's -- we've been saying it sort of all morning, but that really is the focus for '25. And obviously, early on in '24, we're very opportunistic to buy our stock back just given the discount to NAV, but I think going forward in '25, our focus really is continuing on the leasing activity, which is going to allow us then to produce additional cash flow in between the sales and the operational enhancements will pay down debt.

Okay. And then just curious, do you guys have any commentary on how margins may trend? You've done a good job on controllable expenses. It sounds like some of the dispositions may further enhance them as you have more depth in the markets you're staying. And so just curious on the margins in your control expenses as we think about modeling '25.

Yes, Juan, this is Rob. I would say that if I look at last year, we had a nice move in our margins. I think it was up 60 basis points year-over-year. As we continue to see improvement in occupancy in the portfolio, we would certainly expect that to improve this next year. I think we're projecting 75 to 125 basis points of occupancy improvement in the same-store portfolio. So we would expect the margins to trend upward with that occupancy improvement.

Yes, there's a lot of margin leverage with all that leasing activity for sure.

And one last one, if you wouldn't mind indulging me. Anything that's baked into guidance for Steward or Prospect in terms of further backfilling the space or those leases coming online that we should be factoring in?

Really good question, Juan. No. Is the answer. It's the simple answer. I think on Prospect, I do want to touch on Prospect vis-a-vis your question, which is that -- we have taken it fully out of '25 guidance. It is early in the bankruptcy process. I outlined a few reasons for why we feel good about that space. But I think for simplicity and clarity for '25 guidance, we have just gone ahead and removed that. As we have updates from the court process and/or expectations, we'll provide those to you. And on Steward similar answer, no.

That concludes the Q&A session. I will now turn the call over to Connie Moore for closing remarks.

Thank you, Karen. Thank you, everyone, for joining the call today. And we look forward to engaging with many of you next month at the upcoming REIT Industry Conference in Florida. Thank you.

Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.