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

Hello, everyone. Thank you for joining us, and welcome to Healthcare Realty Third Quarter 2026 Earnings Call. After today's prepared remarks, we will host a question-and-answer session. [Operator Instructions] I will now hand the conference over to Doris Lo. Doris, please go ahead.

Thank you for joining us today for Healthcare Realty's Third Quarter 2026 Earnings Conference Call. 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 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. . Discussion of risks and risk factors are included in our press release and detailed in our filings with the SEC. Certain non-GAAP financial measures will be discussed on this call. 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 September 30, 2026. The company's earnings press release and earnings supplemental information are available on the company's website. I'd now like to turn the call over to our President and CEO, Pete Scott.

Thanks, Doris. Joining me on the call today are Rob Hull, Dan Gabbay and Ryan Crowley. The third quarter was another strong quarter for Healthcare Realty. Higher interest rates have weighed on real estate stocks, including ours, but not on our fundamentals. Demand for our space is rising and so are our rents. Let me start with our results. Normalized FFO was $0.42 per share. Same-store NOI grew 5.1%. We signed 1.5 million square feet of leases including 430,000 square feet of new leases. Our redevelopment portfolio is now 72% leased, up 500 basis points sequentially. Same-store occupancy improved to 93.1%. Cash leasing spreads were 8.6%, and we are raising guidance for the third time this year. Let's turn to capital allocation. We remain disciplined and everything we do is aimed at improving our earnings growth. Earlier this year, we executed on $1.1 billion of debt refinancings at a blended interest rate of approximately 4%. Our balance sheet gives us the flexibility to be nimble across our 2 main external capital allocation priorities, stock buybacks and joint venture acquisitions. On stock buybacks during the quarter and through October, we repurchased $75 million of stock at an average price of approximately $17.75 bringing our year-to-date total to $250 million. Our philosophy on buybacks is simple. Our stock must compete for capital like any other investment. When we trade at a meaningful discount as we do today, buying back our stock is one of the most accretive uses of our capital. On joint venture acquisitions, year-to-date, we have acquired 8 medical office buildings and have 1 more under contract for a total of $338 million or $67 million at our share. That is within the $50 million to $100 million range we outlined earlier this year. These investments carry a mid-7% initial cash yield to Healthcare Realty before accounting for meaningful additional platform benefits. Together with our partners at KKR, we will pace our acquisitions with discipline. We will also continue to evaluate select asset sales to help systems that want to own strategic real estate on their hospital campuses and to private buyers who remain attracted to the strong tailwinds benefiting our sector. Year-to-date, we have monetized over $200 million of assets with over $100 million more under contract or LOI. For the year, we expect our average disposition yield to be in the mid-5% range. Opportunistically selling assets to fund buybacks and joint venture acquisitions is significantly accretive to earnings. Shifting to the MOB sector and why we are so well positioned. First, growth. Medical office can deliver mid-single-digit growth with the tailwinds we are experiencing and our results show it. Tenant demand continues to rise with the needs of an aging population, site of care continues to shift to outpatient settings, while new MOB supply remains muted due to elevated construction and debt financing costs. Second, pricing power. Sector-wide occupancy is now nearly 93% at historical peaks. Rising tenant demand and constrained new supply are driving rents higher in our buildings. The evidence is cash leasing spreads in excess of 5% year-to-date and nearly 90% retention rates. We have a best-in-class portfolio predominantly located in the nation's fastest-growing markets, which positions us well to continue to benefit from these powerful dynamics. Third, return on capital. Our leasing model is designed to drive ROI across the portfolio. Every leasing decision is made on economic returns, not volume. That rigor is paying off. Since we introduced the new model, lease IRRs have improved nearly 3,000 basis points and payback periods are down 25%. With higher occupancy and retention our capital burden is reduced and our profitability improved. Our plan is to continue repeating this quarter after quarter. Fourth, focus. Healthcare Realty is a pure play the only public REIT focused exclusively on medical office. For others, it's an afterthought. For us, it is 100% of what we do. Our capital, our people and our attention are never divided. This laser focus is leading to better results across the board. We are outperforming that is by design. In finishing, with fundamentals firmly on our side, we will keep executing, putting up strong numbers, allocating capital with discipline, following through on our commitments and focusing on the things we can control. Healthcare Realty offers much better growth than our share price reflects. This motivates us every day. With that, let me turn the call over to Rob.

Good morning, everyone, and thank you, Pete. Strong operating momentum continued in the third quarter. We completed approximately 1.5 million square feet of new and renewal leasing and produced more than 85,000 square feet of positive same-store absorption. Increasing occupancy 30 basis points sequentially to 93.1%. Retention came in strong at 88%. In addition, we had more than 480,000 square feet of signed nonoccupied leases at quarter end providing a clear path to further occupancy gains in the fourth quarter and into 2027. Cash leasing spreads were another bright spot at 8.6%. The highest level for the company in nearly a decade. Health Systems accounted for more than 600,000 square feet of leasing this quarter. Within this activity, Ascension St. Thomas in Nashville, signed new leases totaling 18,000 square feet and renewed 185,000 square feet for 10 years. Along with these leases, our planned $35 million redevelopment of 3 properties on the Ascension St. Thomas West Campus in Nashville, strengthens our relationship, complements the hospital's $120 million investment in the same campus and positions these properties for long-term growth. Other notable health system leases this quarter were with Cedars-Sinai in Los Angeles, Trinity Health in Columbus, Ohio and Indiana University Health in Indianapolis, underscoring the value of these long-term partnerships. We also made meaningful progress on redevelopment leasing. New leasing within this portfolio was over 110,000 square feet, nearly twice the second quarter level and increased the redevelopment portfolio's lease rate from 67% to 72%. The broader supply/demand backdrop in our sector remains very favorable. New medical outpatient construction is limited, while demand continues to benefit from health systems moving more care into lower-cost outpatient settings. These dynamics support increasing levels of occupancy and reinforce the positive environment for rent growth, bolstering our confidence in the leasing outlook. Our new and renewal pipeline remains robust at more than 3 million square feet, with health systems representing approximately half of that opportunity. I'll now turn the call over to Dan to discuss financial results.

Thanks, Rob. Let me turn back to our financial performance. Our results remain consistently strong quarter-over-quarter with normalized FFO per share of $0.42, same-store cash NOI growth of 5.1% and FAD per share of $0.32 and a 76% payout ratio. In September and October, we repurchased $75 million worth of shares at a weighted average price of $17.74. This represents an accretive FFO yield in excess of 9% and an important component of our long-term capital allocation framework. Repurchases were funded with previously announced and closed dispositions such as the Kennestone Cancer Center for $36 million and our nearly complete exit from the Chicago market. Leverage as of September 30 ticked down slightly to 5.5x consistent with our mid-5x target in our 2026 guidance. We have over $1.2 billion liquidity on our line of credit after netting out our commercial paper balances, plus an additional $400 million delayed draw term loan that backstops our July 2027 bond maturity. Our only floating rate debt today is our commercial paper and a $100 million of unswapped term loans as we swap the other $400 million earlier this year until 2029 at a 3.3% SOFR rate. We maintained significant flexibility and our capital structure was effectively locked in for the duration of our strategic plan period. Turning to guidance, which you can find on Page 10 of our supplemental report, we increased our full year normalized FFO per share guidance range to $1.65 to $1.67, up $0.02 at the midpoint to a $1.66. We also raised full year same-store cash NOI growth guidance to a range of 5% to 5.25%, up 75 basis points at the bottom end of the range and 25 basis points at the upper end. These results are driven by strong leasing outcomes and portfolio-wide mid-single-digit cash leasing spreads. Sources and uses of capital increased by $85 million to reflect the incremental share repurchases and JV acquisitions at share. Disposition guidance increased by the same amount. Please recall our guidance only reflects acquisitions, redevelopments or other uses of capital announced to date. Operator, let's go ahead with Q&A.

[Operator Instructions] Your first question is from the line of Rich Anderson from Cantor Fitzgerald.

Okay. So I want to first talk about the cash releasing spread number of $8.6 million. Obviously, you're guiding to something slightly lower in that mid-single digits. But how repeatable do you think this is -- should we be putting 5% or 6% cash releasing spreads in our 2029 numbers? And same question on same-store NOI growth, how much of that just occupancy that will run its course and then you're left with something lower. I'm just curious what we should think about on these 2 measures, in particular, as a long-term run rate for medical office and specifically HR?

Sure. Rich, it's Pete here. A decent amount in that question, and let me hit each of those. One, I don't want to lose sight of the fact that we had a great quarter, and we are having a great year just across the board. We've raised guidance 3x including by $0.02 each of the last couple of quarters. And if you look back 1.5 years ago, our FFO was $1.56 if I am pulling up the right number. Off the top of my head today, we're at $1.66, and same-store occupancy 1.5 years ago was at 89%. Today, it's at 93%. So I think we've done a lot better than maybe we even expected. And along the way, fundamentals have absolutely improved. And remember, two, we also sold $1 billion of assets and delevered almost a turn and still put up those kind of numbers. So as we think about cash leasing spreads, I think we've always been pretty consistent over the last year, 1.5 years that it needs to be better than what it historically has been. 8.6% is a great number. It is a great, great number. We did benefit from the West Campus and Ascension. So if you strip that out, we're still above 6%. And I think what we've said to investors and we'll say on this call is that we're going to keep trying to get in the 5% area, if not better. And I'm trying not to put a ceiling on anything because if I put a ceiling on occupancy 1.5 years ago, we'd be above that ceiling right now just based upon how fundamentals have improved. So big picture, we feel really good about the backdrop and we're obviously going to push in every single area where we feel like we have pricing power.

Okay. And so maybe as a sort of a addition to that question, my second question here is on site-neutral payments. Obviously, a factor that's helping move more into lower-cost settings like yours. Do you have an expectation of that expanding further? And is that a part of your calculus as you go forward to? Are you seeing any sort of sort of evidence of that playing a role in your ability to have more pricing power and so on. Just curious what your thoughts are on that broader topic.

Yes. I mean, absolutely. And I know we've been continuing to put out the shift to outpatient versus inpatient that chart in our investor decks. And I think people look at those charts. I know I look at those charts. And I believe that, that trend is here to stay. And I was actually reading a report yesterday that was sent across by one of the banks and in the inpatient-only rule, which is effectively what you're referring to right now, the amount of procedures coming off the inpatient-only list is rising at a very, very significant pace. And where is it going? It's going into outpatient facilities. And then A couple of other examples I would just point to, you've had a few not-for-profits, actually start to acquire outpatient businesses. You look at Ascension St. Thomas bought AmSurg not that long ago. And then Bon Secours announced just this past week or last week that they were going to buy surgery partners. So the push into outpatient settings is accelerating in our view. And I think, again, it's just part of the fundamental backdrop that's working in our favor.

Awesome. Good quarter.

Your next question comes from the line of Michael Stroyeck from Green Street.

Could you maybe just provide some color on what you're seeing out in the transaction market. Has there been any repricing given higher rates? Or are you seeing bidding in at all as levered buyers pull back?

Michael, it's Pete here. And I saw your note reducing cap rates. I'm glad you asked that question because I would like to address that. Look, from our perspective, we're still seeing core cap rates in the 5.5% to 6% area and core plus in the 6% to 6.5%. And area. So they've actually held in quite, quite well. The private bid for MOBs, which you did reference in your report, does remain very deep. And it's increasing. Transaction volumes are going up because private buyers see a lot of the same positive fundamentals that we see. Where I think you are seeing a bit of an impact is on the weaker assets in the marketplace, which, frankly, we don't traffic in that. And you're probably seeing more of a shift in cap rates there. And the reason for that is weaker assets are basically value-add buyers and they're heavily, heavily dependent upon leverage. So if interest rates increase, like they have, cap rates are going to get impacted a lot more in the core to core plus areas of the market, buyers are not nearly as reliant upon debt as well. I think transaction volumes may slow a little bit. My guess is they're going to slow across the entire real estate industry as buyers and sellers wait for things to stabilize and that's just a natural thing. But we'll see what happens. I mean over the last couple of weeks, the treasuries have rallied so you've got your benchmark rates coming in, but I'm just telling you everything I know up and until this point. And obviously, it's still fluid.

Understood. Appreciate the color. Maybe a similar question on the acquisition side. So you called out the mid-7% initial cash yield on the JV deals. Can you just remind us where pricing is on those deals, excluding any JV fees? And I assume based on your answer there, there hasn't been any change in expectations on future deals, but -- just curious if that's still the same ballpark you expect to transact at in the future?

Yes. I would say the core plus cap rate range I just articulated, the 6% to 6.5% that would be the blended cap rate for all the assets that we bought within that range. And obviously, we get an asset management fee on top of that, which gets us into the seventh before you get any additional other platform benefits. We talked to KKR all the time. They are a wonderful partner, and we look forward to doing more with them. As I said before, I think the transaction market may slow a little bit towards the end of the year, but it can turn back on pretty quickly too, if you get stability in interest rates. So we do not guide to acquisitions. So anything we would do either from an acquisition standpoint or from a stock buyback standpoint, is not included in our guidance right now. .

Your next question is from the line of Omotayo Okusanya from Deutsche Bank.

Yes. Solid quarter there. Question around tenant improvements and leasing commissions. I know you guys are kind of focusing on overall on improving at least in economics. Can you just kind of talk a little bit about what you're kind of seeing on that end and how you're kind of working to kind of have less drag from that in your bottom line cash flow numbers?

Yes. I did mention a little bit of this in the prepared remarks, but I will touch on it again. About 1.5 years ago, we did completely revamp our leasing model within the organization, and it coincided with significant changes within our asset management group, and we are economics driven and not volume driven. And I think prior to that, there was a very big push within this organization to be volume-driven probably to the detriment of your question around capital costs. And we've been very, very mindful to limit the amount of capital that we put out into deals, it ticked up a little bit this quarter. We got a few questions on that, but I will point the fact everybody back to, we did a heck of a lot of leasing deals in our redevelopments, which are likely to have slightly higher tenant improvement costs associated with that just given the fact that these are buildings and I've said this before, that have been underinvested into for probably decades. When I think about regular way TIs, we have been holding the line on that despite the fact that construction costs continue to go up across the board. And building out medical space is more and more expensive today. So where is the money coming from, if we're not providing it to them, the tenants are coming out of pocket for that. Again, that's another area where we think we have a little bit of pricing power today. And it's also another reason why you're seeing retention go up so much in this space is one that really is not a development option for tenants to go to with development having like dropped off a cliff. And then two, if a tenant wanted to move the build-out of their space is very, very expensive. And if expensive to move equipment. So the retention is working in our favor from that perspective. And the more tenants you retain, the less capital you put out the door, the more profitable the lease deal is to us. And that's another reason why you're seeing our IRRs go up, as I said, probably nearly 3,000 basis points when you look at deals we're doing now versus what was done a couple of years ago.

Got you. And then another quick one on occupancy again. 93.1% as you mentioned a little earlier the industry felt was at 93% so you're kind of in line. But I think again, you guys have always held yourselves out of owning kind of premium assets in great locations. So just curious in regards to the outflow you feel you can get occupancy-wise kind of relative to where the overall industry is.

Yes. I think our portfolio is situated in a way that we'd like to do better than market. But remember, we were at 89% and now we're at 93%. And I'm talking same-store with those numbers, just to be clear. So we've made some pretty good strides over the last 1.5 years. As Rob said in his script, we've got a pretty good snow pipeline. If you think about our snow pipeline today, that would get us closer to 94% as those leases commence. So we would like to do better than market. Believe me, we don't sit around here within this organization. and say, let's get to market and then job well done. We'd like to do better than that. But there will be a little bit of natural vacancy. I don't think we're going to be able to get up to 100%, but I certainly think we can do better than 93%. I would also point out, too, and I know you know this because I saw your forecasting and you've got the redevelopment lease-up in there. We also look at total occupancy, right? And total occupancy today is trending towards, I think, right around 91%. I want to get total occupancy up to the market level numbers, not just same-store occupancy, and that's going to be a big driver of earnings over the next 1 to 2 years.

Your next question is from the line of Nick Yulico from Scotiabank.

I wanted to just turn to the next slide you have in the investor presentation on Page 21, the portfolio optimization update. In terms of the lease-up unstabilized bucket and the redevelopment bucket, you gave the NOI at the strategic plan, 2025 and stabilized NOI. So the gap there was the upside. How much of that -- is any of that upside already been captured? And how should we think about incremental upside being able to capture sort of now through the end of next year. .

It's Dan here. I'll take that one. And great question. Page 21 in that deck is something that we will update on a regular basis and that NOI that's second to last row of NOI is how we're currently trending. As we've always talked about with the redevelopment, especially in the lease-up portfolio, over the course of the 3-year plan, is this was more back-end weighted. If I go back to Pete's original comments, we talked about $50 million of NOI in the strat plan that we were looking to recapture that was lost in some of these assets post merger. And some of that was going to come after the strategic plan. We're looking to get $40 million of that $50 million back over the course of the 3-year plan. And it is more back-end weighted just when you think about, again, we're leasing these up. It takes time to put the improvements in place. We talked about some of the ASCs earlier this year that can take 18 months on some of those large leases we signed in the Redact portfolio. So it is a little bit more back-end weighted. It's an upward curve. And I think these are good indications where we're currently trending in the back half of this year, and we'll continue to provide more guidance on these numbers as we have more leasing updates. But think about it as back-ended over those 3 years. So as you think about getting later into '27 into '28, a lot more of this comes online.

Okay. And then my second question is just on the difference between FFO and FAD, where you're seeing more FFO benefit than FAD growth right now. I know Peter already talked about some of the leasing CapEx issues. But my other question is if you look on the adjustments there, like your straight loan adjustment is pretty large this year versus last year, even though revenue is down. So I don't know if there's a free rent issue sort of going on. But can you just talk about that line item and how think about that, if that impact reduces, which would also help going forward, which could help your FAD.

Yes. it, I would probably I would encourage you to look at our lease expiration table alongside the straight-line rent comment. I do agree that you will start to see some nice FAD growth catch up to FFO. We had made a conscious effort to look out over the next couple of years. And look at large lease deals that we could accelerate. If you go back to the first quarter call, we talked about some significant large deals, almost 1 million square feet where they had maturities over the next couple of years, and we bundled them together and did one large renewal. We've been doing a lot of that within this organization. So if you look at our weighted average lease term, 1.5 years ago, it was like 50 months, today, it's somewhere in the range of like 65 months, and that's the result of getting out of some leases much earlier on before expiration. And you do get an initial FFO benefit and the FAD benefit is going to follow suit.

Your next question is from the line of Jamie Feldman from Wells Fargo.

This is [ Jesus ] on for Jamie. Just with your current sources and uses already spoken for, how large is the remaining disposition pool that could fund additional JV investments or buybacks, particularly after the asset sales you've already completed in 2025 to strengthen the balance sheet.

Yes. Maybe I'll jump in. I think I understand your question. As we think about additional JV investments and buybacks since we're right around that mid-5x net debt to EBITDA, a source of capital would certainly be strategic sales. We don't guide to that, just like we don't guide to capital allocation number. So as I said in my prepared remarks, we're certainly open-minded to selling more assets to the extent that we continue to trade at a discount to NAV and at the moment, a pretty significant discount to NAV, and we'll recycle that capital accretively into our 2 main external capital allocation priorities, that being buybacks and JV acquisitions, and it will be accretive.

And the updated range implies roughly $0.40 to $0.42 of normalized FFO here in 4Q. What keeps the quarter for moving above that level despite all the additional buybacks and acquisition activity we've done. .

This is Dan. I'll take that question. It's a great question. I think as we've said all year long, we look to outperform. I think we've done that consistently through the course of the year. You're getting a little bit into the law of small averages as you get into fourth quarter. We feel good about our business across the board and have put out a range that we think is consistent with how we've been guiding over the course of this year. We feel good about our progress in Q4, and we'll look forward to providing those results as we get into February next year. We feel good about the business.

Your next question is from the line of Connor Mitchell from UBS.

I'd kind of like to just continue on with that question line there. First, with the updated guidance, it seems like the same-store NOI may be a slight deceleration in the fourth quarter after some very healthy results at this point. Can you just provide some of the building blocks or maybe what will get you to the upside or even the downside for the updated guidance for NOI growth?

Yes. I'll touch on that. I mean, look, we've had 6 straight quarters above 5%, which, for the way this business has historically generated same-store NOI, I'd say that's pretty good, right? And I think that's evidence that fundamentals have improved. When you think about the fourth quarter, I would just say that we're not forecasting as much absorption. I repeat that again. We are not forecasting as much, it's not that we're saying there's going to be no absorption or there's going to be negative absorption. It's just not as much in the fourth quarter. And perhaps that's a conservative number as we have a big snow pipeline and we try and get leases commenced. And also, we have more pricing power today than we've ever had before with CLS. So with our CLS improving so I think that's probably the best way I can describe the way that our guidance works at the moment for the fourth quarter. And obviously, we always try and hit the high end of our guidance ranges.