Earnings call transcript: Healthcare Realty Trust Q2 2025 sees FFO boost

Healthcare Realty Trust (HR) reported its second-quarter 2025 earnings, highlighting a 7% year-over-year increase in normalized Funds From Operations (FFO) to $0.41 per share. The company’s stock rose by 3.05% to $17.89 in response to strategic initiatives and operational improvements, despite the absence of a specific earnings forecast. According to InvestingPro data, the company maintains a market capitalization of $6.56 billion and has demonstrated its commitment to shareholder returns by maintaining dividend payments for 33 consecutive years.

Key Takeaways

• Normalized FFO rose to $0.41 per share, a 7% increase year-over-year.
• Same-store cash NOI growth reached 5.1%, the highest in nine years.
• The company launched the "Healthcare Realty 2.0" strategic plan.
• Stock price increased by 3.05% following the earnings call.

Company Performance

Healthcare Realty Trust demonstrated robust performance in Q2 2025, with significant growth in key financial metrics. The company reported a 7% increase in normalized FFO, highlighting its strong operational capabilities. This performance reflects positively against the backdrop of industry trends, where demand for outpatient medical space remains strong. InvestingPro analysis shows the company maintains a FAIR overall financial health score, with particularly strong momentum and relative value metrics. Subscribers can access 8 additional exclusive ProTips and comprehensive financial analysis through the Pro Research Report.

Financial Highlights

• Normalized FFO: $0.41 per share, up 7% year-over-year
• Funds Available for Distribution (FAD): $0.33 per share
• Same-store cash NOI growth: 5.1%
• Year-to-date sales: $211 million at a 6.2% cap rate

Market Reaction

The stock price of Healthcare Realty Trust increased by 3.05% to $17.89, reflecting investor confidence in the company’s strategic initiatives and operational improvements. This upward movement places the stock closer to its 52-week high of $18.82, indicating positive market sentiment. Based on InvestingPro’s Fair Value analysis, the stock appears to be trading above its intrinsic value, with analyst price targets ranging from $16 to $23 per share. The company offers an attractive dividend yield of 5.37%, significantly above industry averages.

Outlook & Guidance

Healthcare Realty Trust raised its 2025 normalized FFO guidance to $1.57-$1.61 and set a three-year target of $1.65-$1.85. The company expects 3-4% NOI growth and plans to sell $800 million to $1 billion in assets in 2025.

Executive Commentary

CEO Pete Scott emphasized the strategic shift with "Healthcare Realty 2.0," focusing on an operations-oriented culture to drive earnings growth. He also highlighted the company’s strong positioning in the outpatient medical sector, aligning with leading healthcare systems.

Risks and Challenges

• Potential impacts from healthcare legislation could affect operations.
• Execution risks associated with the lease-up portfolio investment.
• Macro-economic pressures may influence asset disposition plans.

Q&A

During the earnings call, analysts inquired about the impacts of healthcare legislation and the company’s disposition strategy. The management provided clarity on cost-cutting measures and plans for the lease-up portfolio, which are crucial for future growth. For detailed analysis of Healthcare Realty Trust’s strategic initiatives and comprehensive financial metrics, investors can access the full Pro Research Report, available exclusively on InvestingPro, which covers over 1,400 US stocks with expert insights and actionable intelligence.

Full transcript - Healthcare Realty Trust (HR) Q2 2025:

Ian, Conference Operator: Thank you for standing by.

My name is Ian and I will.

Be your conference operator today.

At this time I would like to welcome everyone to the Healthcare Realty Trust second.

Quarter 2025 earnings conference call.

All lines have been placed on mute.

To prevent any background noise.

After the speaker’s remarks, there will be a question and answer session.

If you would like to ask a question.

During this time, simply press STAR followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press STAR one. Thank you.

I would like to hand the call.

Over to Rob Hull, Vice President Investor Relations.

You may begin your conference.

Thank you for joining us today for Healthcare Realty Trust second quarter 2025 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.

A 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 release for the quarter ended June 30, 2025. The Company’s earnings press release, earnings supplemental information, and Form 10-Q are available on the Company’s website. Now I’d like to turn the call over to our President and CEO, Pete Scott. Thanks, Ron. Joining me on the call today are Rob Hull, our COO, and Austin Helfrich, our CFO. Also available for the Q&A portion of the call is Ryan Crowley, our CIO. We had a very busy second quarter with excellent results and contributions across the organization. Fundamentals are quite strong in outpatient medical and that was clear with our second quarter print. Normalized FFO was $0.41 per share, a 2 penny sequential increase. BAD was $0.33 per share, a 4 penny sequential increase. Same store occupancy was 90%, a 40 basis point sequential increase.

Same store NOI growth was 5.1%, a 280 basis point sequential increase, and net debt to adjusted EBITDA at six times. In addition, it was the second highest new leasing quarter in the last three years. Year to date sales increased to $211 million at a blended 6.2% cap rate. We have over $700 million of additional assets under contract or LOI. We completed a very successful renewal of our revolver, we extended the tenor of our term loans, and we raised guidance. Rob and Austin will cover these items in more detail. A special thanks to the entire Healthcare Realty Trust team for their extraordinary efforts this quarter. Moving on to our Strategic Plan, which we published on our website concurrent with our earnings release.

I have now been at Healthcare Realty Trust just over 100 days and my time has largely been spent seeing the real estate, assessing the team, and receiving valuable feedback from our shareholders. During the quarter, the team and I toured 10 core markets encompassing approximately 50% of our overall NOI and, more importantly, about two thirds of our overall real estate value. In addition, I spent considerable time with our teams out in the field, including leasing and operations. Each and every one of these interactions has had an influence on the strategic plan and I am confident now is the right time to disclose the vision for Healthcare Realty 2.0. Let me start with my overall assessment. The good news: we have the best-in-class outpatient medical portfolio, we have scale in the right markets, and we are aligned with the nation’s leading healthcare systems.

In short, we have the essential ingredients of what is needed to be a successful real estate company. Great assets, desirable locations, solid tenants. That said, we have fallen short of expectations. Despite our solid foundation, Healthcare Realty 1.0 was a transactions-oriented culture that relied almost exclusively on acquisitions and development to drive growth to the detriment of asset management. This strategy worked too, and for many years the company traded at a premium valuation. Unfortunately, this business model collapsed in 2022, and swift changes are necessary to reverse course and reestablish credibility. Healthcare Realty 2.0 will be an operations-oriented culture where earnings growth is paramount. Strong tenant relationships are essential. Leasing decisions are made based on economics, and capital allocation is initially prioritized towards accretive reinvestment into our existing portfolio. With that as the backdrop, let me elaborate on the five key action items of the strategic plan.

First action item: improve corporate governance.

As was previously disclosed, we reduced the.

Size of our board from 12 to seven directors. The go forward board brings fresh perspectives and decades of industry experience to support our value creation initiatives. Five of the seven directors have been appointed since 2024 and all directors have been appointed since 2020. In addition, five board members have REIT CEO experience. Second action item, a significant organizational restructuring. We have implemented a new operating model that will drive meaningful cost savings and promote incremental accountability at the property level between our operations and leasing personnel. This new asset management oriented platform will create stronger and better aligned tenant relationships. Over the past few months, I have had the benefit of sitting down with leadership at some of our largest health system tenants to discuss expansion opportunities. These tenants include Baylor Scott & White, HCA, Ascension, CommonSpirit, and Banner Health.

With our enhanced platform and renewed focus, we can and will do better to advance our platform changes. During the second quarter, we hired Tony Acevedo and Glenn Preston to lead our asset management efforts. Tony and Glenn have extensive track records in the outpatient medical sector with 16 years and 25 years of experience, respectively. They have been trusted partners of mine in the past and they have hit the ground running. Another important restructuring initiative is streamlining our corporate overhead costs. We’ve completed a thorough review of every line item and have already achieved our initial goal of at least $10 million in run rate G&A savings. 100% of this has been captured through headcount reduction, office expense savings, and of course the previously mentioned reduction in our board size.

At year end, Julie Wilson, EVP and Chief Administrative Officer, will be departing the organization after a 24 year career with the company. We would all like to express sincere thanks to Julie, who played a valuable role in the growth of the organization. She will be missed. Third action item, portfolio optimization to maximize NOI growth. We have completed a full bottom up property by property analysis and segmented all 650 assets into three distinct buckets: the Stabilized Portfolio, the Lease Up Portfolio, and the Disposition Portfolio. Each of these buckets has different characteristics, starting with the Stabilized Portfolio, which is 75% of the total. Ours is hands down the premier outpatient medical portfolio and our well-performing stabilized assets will be the primary engine of growth for Healthcare Realty 2.0. The stabilized portfolio consists of 470 properties encompassing over 25 million square feet.

It includes trophy properties on flagship campuses such as Ascension St. Thomas Midtown in Nashville, Multicare Overlake Medical Center in Seattle, and Baylor Scott and White All Saints Medical Center in Fort Worth, just to name a few. Current occupancy is 95%, NOI margins are over 65%, our average lease term is 8 years, and our average escalators are 3%. Our strategy with this portfolio is to maintain high occupancy and maximize lease economics to drive consistent NOI growth. Moving to the lease up portfolio, which is approximately 13% of the total, these 95 assets contain over 7 million square feet of well-located health system-aligned clinical space. Performance has lagged due to years of underinvestment or deteriorated local relationships. These properties are primarily located within our priority markets, with the top three markets of Denver, Dallas, and Phoenix comprising 25% of the square footage.

We have strong conviction that through targeted ROI-driven investments and engaged asset management leadership, we can harvest meaningful upside in this portfolio and generate up to $50 million of incremental NOI. Current occupancy in these properties is 70%, NOI margins are 55%, and our rents are nearly 20% below market. In a bit, I’ll touch more on unlocking this potential through prudent capital allocation. Shifting to the disposition portfolio, which is approximately 12% of the total, over the last two years, NOI growth for these assets has lagged our stabilized portfolio by 700 basis points. In addition, 80% of this portfolio is located outside of our priority markets where demographic trends are weaker, limiting upside potential. We can capitalize on the current strength in the outpatient medical transaction market to strategically exit these assets at attractive relative valuations.

Today, we have a robust and balanced disposition pipeline across a variety of asset profiles to maximize value and minimize execution risk. We expect asset sales of approximately $1 billion to close in 2025 at a blended cap rate of 7%. We extensively evaluated the real estate fundamentals of these assets and believe our time and capital are best focused on the lease up portfolio. The end result of the portfolio optimization strategy will be significantly improved occupancy and margin, an enhanced NOI growth profile, and a sharpened geographic focus. Fourth action item: reprioritizing our capital allocation. Internally, our near-term priority will be investing capital back into our lease up portfolio. This will come through two different types of targeted investments. Number one, ready to occupy spec suites, which we refer to as RTO, and our strategic investment into select vacant suites to drive leasing.

Number two, redevelopments, which are significant investments to reposition buildings and drive higher rental rates, occupancy, and cash on cash returns. Between RTO and redevelopment opportunities over the next three years, we estimate approximately $300 million of capital investment at attractive returns. Additional accretive opportunities, including acquisitions and development, will come when our cost of capital allows for it or we have sufficient balance sheet capacity. As our balance sheet continues to improve, we could utilize a portion of sale proceeds to repurchase stock should the opportunity present itself. Fifth action item, an improved balance sheet. The company has been playing defense for years with extremely limited financial flexibility due to excessive leverage. With the sale of the disposition portfolio, we expect net debt to EBITDA to be in the mid five times area by year end.

This lower leverage, combined with extended maturities, will allow us to gradually shift from defense to offense. Turning now to the dividend as a final part of the strategic plan, we completed a thorough and careful evaluation of the dividend. The result of this analysis is that the Board unanimously approved a dividend reduction of 23% to $0.24 per share on a quarterly basis. While we could maintain the dividend and grow into a sustainable payout ratio over time, the key factors for right sizing the dividend are it alleviates pressure from $1.4 billion of low coupon bonds maturing over the next three years, it provides $100 million annually of capital that we need to reinvest into our portfolio to drive performance, and it positions the company to maximize our go forward earnings potential. Let me finish with the value creation opportunity.

In our strategic plan presentation, we have included a high level framework for a potential earnings growth over a three year forward looking period. There is a clear path to creating attractive FFO per share and the analysis excludes any upside from accretive capital allocation. In addition, we currently trade at approximately 10 times FFO, which is 6 turns below both our 10-year average and the 10-year average of our Healthcare REIT peers. We know our evaluation is a function of many self-inflicted wounds and a loss of credibility and does not remotely reflect a significant value embedded in our irreplaceable portfolio. With the purposeful changes underway at Healthcare Realty 2.0, we see a real opportunity to improve operating performance, restore credibility, and unlock shareholder value.

With the implementation of our strategic plan, we will remain the only public REIT focused exclusively on outpatient medical, we will have a positive earnings outlook, our balance sheet will be a source of strength, we will no longer be burdened by an uncovered dividend, and we can use free cash flow to invest accretively in our portfolio. Our assets will be operating at maximum NOI capacity, we will have a lean cost structure, and we will have a best-in-class team and board. We are firmly committed to this vision and are confident it will maximize value for all stakeholders. Nevertheless, over time, if our platform continues to trade at a significant discount to our intrinsic value, then it will be our responsibility to explore all additional alternatives needed to unlock value. Let me now turn the call over.

Thanks, Pete. Demand for outpatient medical space remains strong, driven by tightening supply and the ongoing migration of services into a lower cost outpatient setting. During the quarter, we executed nearly 1.5 million square feet of leases, including over 450,000 square feet of new leases. Our signed not occupied pipeline, or SNO, remains solid at nearly 610,000 square feet, representing almost 170 basis points of occupancy.

In the coming quarters.

We continue to see robust demand from our health system partners, accounting for about a third of our lease executions this quarter. A few notable transactions include a 24,000 square foot new lease in a redevelopment project on the campus of HCA’s North Cypress Hospital in Houston, a 42,000 square foot renewal also in Houston with the premier pediatrics group associated with Texas.

Children’s hospital.

A 23,000 square foot new lease in Orange County, California with UC Irvine Health. UCI recently acquired the campus hospital from Tenet Health. Looking ahead, our new lease pipeline remains solid at over 1.3 million square feet and growing. Within our pipeline, about 60% is in the letter of intent or lease documentation phase, indicating a high probability of lease execution. Shifting to operations, the second quarter marked the beginning of our transition to an operating platform with a greater focus on asset management. As Pete mentioned, we made some key hires to lead the team and have taken the initial steps to transition portfolio operations under their leadership. We expect to complete the transition to this new model by year end.

Once completed, we will continue to refine the platform over the next year by implementing new operating procedures, identifying further efficiencies, and emphasizing discipline around leasing decisions based on economic returns. Turning to our same store portfolio, with strong new lease commencements and tenant retention of 83%, we gained 40 basis points of occupancy this quarter. Consistent with seasonal trends, we expect most of our occupancy gains to come in the second half of the year. Our outlook for 2025 remains 75 to 125 basis points of absorption by year end. I want to congratulate our team on the leasing and absorption progress we made this quarter. With a robust leasing pipeline, strong tenant retention, and tightening supply, our portfolio is poised to seek further leasing momentum and NOI growth throughout the remainder of the year and into 2026.

I will now turn it over to Austin to discuss financial results. Thanks, Rob. In my remarks this morning, I will cover our second quarter results, progress on asset sales, balance sheet improvements, and increased 2025 guidance. Before I jump in, let me say how pleased I am with our performance this quarter and our momentum heading into the back half of the year. Now let’s dive into the details. Normalized FFO per share was $0.41 for the quarter, up nearly 7% year over year, driven by strong occupancy gains, disciplined cost management, and a decrease in share count. Quarterly FAD per share increased to $0.33, representing a 96% payout ratio, a significant improvement from the first quarter, primarily due to strong earnings growth and lower seasonal maintenance capital.

Second quarter same store cash NOI growth of 5.1% was the highest in nine years as a 100 basis point increase in occupancy, coupled with strong expense controls, drove 50 basis points of year over year margin improvement since the start of the year. I’ve been transparent that we expected the first quarter to be a difficult comp and growth to meaningfully accelerate beginning in the second quarter. I’m very pleased with the level of growth in the second quarter and believe that it more accurately reflects the strong current fundamentals in our business. On disposition activity, we completed $211 million of asset sales through the end of July, inclusive of a $38 million loan repayment. Our total proceeds generated year to date are approximately $250 million. Consistent with our disposition strategy, the sales were largely concentrated in assets with weaker growth prospects outside of our priority markets.

Importantly, we fully exited two smaller, slower growth MSAs in Indiana and Washington. With an additional $700 million under contract or LOI, we are raising our four year disposition outlook to $800 million to $1 billion as part of our strategic plan. Turning to the balance sheet, in the second quarter we successfully completed the first phase of our de-risking strategy. Today, we are pleased to announce the recast of our $1.5 billion revolver as well as the addition of extension options to all of our outstanding term loans. We extended the outside maturity of our revolver to 2030 and term loans to 2027 and 2029. With this, we have decreased the amount of debt maturing through the end of 2026 from $1.5 billion at the end of the first quarter to approximately $600 million today.

This decrease in near term maturities gives us financial flexibility and bolsters our liquidity profile. We’d like to thank our bank partners for a very successful transaction. Over the coming quarters, we will execute the next phase of our balance sheet strategy as we delever by paying off our 2027 term loans with disposition proceeds. Pro forma for our July asset sales, our net debt to EBITDA is six times and we expect leverage to decrease into the mid 5s to the balance of the year. Coupled with the announced dividend resizing, our liquidity and leverage profile has vastly improved from just a few quarters ago. I’m very pleased to report that we are raising our 2025 normalized FFO per share outlook by a penny at the midpoint to $1.57 to $1.61.

Driving this change is a reduction in our G&A expectations reflecting the restructuring efforts discussed in our strategy presentation as well as a 25 bps increase in our same store NOI guidance. We are proud of our second quarter financial performance and energized by our improved outlook for the year despite an almost $500 million increase to our disposition guidance. Before turning to Q&A, I’d like to highlight two items from our second quarter press release regarding reporting. First, this quarter we began reporting leverage utilizing the carrying value of debt. This aligns with the methodology of our peer group as well as the rating agencies. Second, we adjusted our maintenance capital definition to align with peers by classifying leasing commissions based on corresponding TI classifications. Simply put, any leasing commissions associated with first generation capital spend will now also be classified as first gen.

This aligns us with industry norms and we expect this change to reduce maintenance capital by approximately $5 to $10 million annually. It is important to note that our FAD per share in the second quarter would have been $0.32 even without this change. Operator, we’re now ready to move to the Q&A portion of the call. At this time I would like to remind everyone that in order to ask a question, please press STAR followed by.

The number one on your telephone keypad.

Once again, that is STAR followed by the number one. We’ll pause for just a moment to compile the Q&A roster. Our first question comes from the line of Nick Yulico with Scotiabank.

Your line is open.

Thanks. Good morning guys. I guess maybe first off, since in terms of the strategic plan, a lot of the upside feels like is in the lease up portfolio, can you just talk a little bit more about composition of that portfolio, if it’s all multi-tenant or if there’s any single tenant? In terms of the numbers, I just want to make sure I’m understanding. You talk about $20 to $40 million of upside in that portfolio over three years, but then there’s also a $50 million number that you give elsewhere. I just wanted to understand.

Kind of the difference between those two.

Numbers and then also the composition portfolio.

Hey Nick, it’s Pete here. Hope all’s well and great to hear from you. I’m glad you brought up the $20 to $40 million versus the $50 million of upside. We see $50 million in total upside. I think realistically it will take us some time to start to spend that capital and to get that return immediately. These redev projects can take upwards of 12 to 18 months. We’ve obviously identified a nice group of assets that will go into redevelopment. To get the full $50 million within the first three years I think would be a very aggressive assumption. We did add some footnote disclosure that we still assume we’ll get the full $50 million, but it’s going to get layered in or phased in over a little bit more time.

As to the lease up portfolio, what gets me really excited about the opportunity to get the upside, the $50 million that we’re talking about, is if you simply just look at that map page and you see where these assets are located. I mentioned the top markets being Denver. You got Dallas in there as well. There are some other really good markets too: Houston, Charlotte. The way I think about it is it’s really like a value add portfolio embedded within our primary markets and we really like the demographic trends within those markets. That’s what gives us the confidence to be able to put out a number like that, which is a pretty big incremental amount of capital and amount of NOI, but we feel quite good about our ability to achieve that.

Okay, great.

I just want to be.

Clear as well, I mean, in terms of the capital that’s going into that portfolio, and you talked about $300 million over three years. I wasn’t sure though if it was additional capital to get to the $50 million of total upside. From a funding standpoint, I know you have the money saved from the dividend cut, but is there also, I think there also may be some capital you’re sort of putting aside from the asset sales besides, you know, what you’re paying off from debt that you’re going to use for this portfolio.

Thanks.

Yeah.

The $300 million is what’s required.

We believe to get to the full 50.

We don’t see incremental, you know, capital required to get to the balance that you’re mentioning there. I think the primary source of funding is the way we looked at it was to come through the dividend adjustment. You know, dollars are fungible though. To the extent we can actually commence some of these developments or redevelopments, I’ll call them earlier, then certainly we could use sale proceeds for that. I think we’re putting our balance sheet in a position where it’s no longer, you know, a weakness of ours, but a strength. Where the dollars come from are somewhat fungible. We don’t have to wait for year three to be able to spend that capital. To the extent that we see the opportunities present themselves earlier. All right.

Thanks, Pete.

Yeah, thanks, Nick. Our next question comes from the line.

Of Austin Helfrich with KeyBanc Capital Markets. Your line is opened.

Yeah.

Hi. Good morning, everybody. Just wanted to follow up a little bit on the redevelopment pool and some of the rents that you’ve outlined, and the confidence that you can kind of get from that low $20 range up to nearly $40 once you invest this capital.

Just.

Can you talk about that versus maybe underlying market dynamics?

Thanks. Maybe I can jump into that. Obviously, we see some below market rents within our markets where we’re going to redevelop the assets. I’m not sure that I would use the White Plains example that we put in our deck, although that is a great example of how we can achieve a really solid 10% cash on cash yield. Rents there were in the low $20s, and with the capital investment, they’ve gone now to around $40 a share, which is actually up pretty significantly. I’m not sure I would look at White Plains, though. That is a pretty tight market, and we’ve done a lot of leasing with White Plains Hospital there. Nevertheless, I think that’s maybe an extreme example of what can happen. The IRRs on that would be well in excess of the 10% cash on cash yield.

We certainly see with capital getting spent, the opportunity to drive rental rates. I don’t know if they’re going to go from $23 to $40, but we certainly see a nice pop. Our underwriting will be, you know, we will be judicious in the way we think about that. Obviously, the 10% cash on cash yield is really a requirement.

Understood. Sorry about that. Misunderstood. That was a single example, Austin. I wanted to ask about the capitalized interest that increased pretty significantly, presumably related to some of this redevelopment. Was there any change in the policy here? You outlined the capital needs here and the decision to push these forward into redevelopment, as it doesn’t look like it made it into the projects that are under construction in the supplemental.

Yeah.

Hey, good morning, Austin. I’d highlight that if you go into the supplemental, we’ve got almost 2 million square feet in redevelopment today. On the redevelopment page, where we break out projects specifically, we only are breaking out about 650,000 square feet there. You should assume, if you read the footnote on that page, there’s about 1.2 million square feet that’s not broken out on that page in that bucket of redevelopment. Projects, we have obviously been working on that since the beginning of the year and had a significant portion of those commence in the second quarter. I think given that commencement, you are seeing a commensurate step up in cap interest, which is what you’re referring to.

I will say on the page where we are breaking out specific redevelopment projects, given the strategic plan and given the focus on redevelopment over the next three years, we will start to provide additional information on that page to allow you to better see what’s going on in the redevelopment portfolio. How much of that should we coincide with? You know, how much spend, I guess, should we coincide with that step up and should that continue to ramp as you kind of ramp these redevelopment efforts?

Thanks.

I think from here, Austin, what I would tell you is given the increased level of spend that we will have in redevelopments and the increased price projects that Pete spoke about earlier in the lease up portfolio, I think you should assume that capitalized interest stays at around this level going forward. It will obviously move from quarter to quarter, just depending on development moving out or redevelopments moving in and out. I think generally around this level would be a good assumption.

That’s helpful. Thank you.

Thanks, Austin.

Our next question comes from the line.

John Pawlowski with Green Street.

Your line is open.

Hey, thanks for the time. Good morning, Rob. I wanted to drill into the lease.

Up portfolio, but specifically the ready to occupy space.

Can you give me some historical context of why you couldn’t get this occupied, why was it under managed, and what you’re going to do specifically going forward to unlock that potential?

Yeah, hey John, maybe I’ll start with that. I want Rob to go through the RTO program, which we’ve had a lot of success on. I went out and saw a lot of markets this last quarter, and I intend to see a lot more going forward. I’d like to see every single asset in the portfolio. What I would say is that it was very clear as I went out into the market that certain assets had just been underinvested into for many, many years, and that would be well before the merger as well. A lot of these assets were assets that came over as part of that merger. We own them now, so they’re ours. Right. They clearly had not been invested into.

The other thing I would say that became very clear to me in certain markets is the relationship with the health system had deteriorated or declined to a level where they were not supporting our assets, even if they were proximate to the hospital. That’s a problem when you don’t have your health system and your partner in that market supporting your real estate. We are fixing that. The team has been fixing that. Good work has been done. There is more work to continue to do. I’d say a great example of where this has turned around is in Houston with our North Cypress assets. I would say the relationship with HCA was fractured for many, many years. We are redeveloping that campus. We’re actually having a lot of progress there in leasing that up.

We’re getting the support of the local hospital CEO, who is actually encouraging tenants to look at our properties now as opposed to discouraging them in the past. Those are really the main two drivers. There’s more in there, John. I just wanted to lay out what I saw when I went out into the road. That became abundantly clear to me. Maybe I’ll have Rob just talk about the RTO program now.

Yeah, thanks, Pete. The RTO program has certainly been something that we’ve had some success with in the past, having more success now. I think if you look at year to date, we’ve leased a little over 100,000 square feet in that program. Second quarter was significant, about 16% to 17% of our new leases were coming from the RTO program. We are seeing some good success there. The benefits come in being able to capture demand from tenants who need to move quickly. In some cases, they want to move in that month. Having readily available move-in ready suites is really critical for the leasing team. I would also say that when you look at getting to cash rent and from lease execution to cash rent paying tenants, the time is significantly reduced through the RTO program.

We see generally it’s about a six to ten month improvement from the time they execute a lease to getting to cash paying rent. Some real benefits there for the organization. From a cash flow perspective, I would say in terms of the returns on the IT or in the RTO program, generally targeting the mid-teens IRRs and generally targeting about a seven year WAL T on those deals. Substantial returns, good use of capital, and a nice lease for the organization. Okay, thanks for that context. Second question is on the pool of assets you’ve sold or in the process of selling. I think the average 7% cap rate struck us as high given they’re only 80% occupied. Maybe a buyer is going to be underwriting a higher going-in yield.

Is it mostly a function of deferred CapEx or onerous or short WAL T or short-term ground leases, what’s pushing those cap rates on those assets higher in terms of a stabilized.

Stabilized cap rate?

Yeah.

I mean, it’s a variety of things, but let me have Ryan Crowley spend a little bit of time on that portfolio.

When you think about what we have under contract or LOI, you’re looking at over 40 different assets and nearly 20 different transactions. These assets really run the spectrum of MOB types, whether it’s on campus.

Off campus, single tenant, multi tenant.

Large, small ground lease, terms of various term lengths. Yeah, you’re right. I’d say there’s definitely a value add component in there, but there’s also some core assets in undesirable markets that are sprinkled in there. When you think about what we’re really doing, the overarching theme is that we’re exiting markets with weak real estate fundamentals where we don’t have scale and we don’t see a path to scale. By and large, the disposition portfolio is generally characterized by lower occupancy, lower margin, and older vintage. All those things play into that 7% blended cap rate you’re talking about.

Okay, thank you.

Our next question comes from the line of Omotayo Okusanya with Deutsche Bank. Your line is open. Yes.

Good morning, Pete.

Great to see you are shaking the table so soon. Question around the lease up portfolio.

$300 million you talked about trying to.

Understand the $50 million NOI opportunity there.

How much of that is just pure?

Lease up versus how much of it.

Again, is kind of getting better pricing after you reposition these assets? Could any of the repositioning or.

Redevelopment be disruptive to current NOI? Yeah.

Hey Omotayo, nice to chat with you.

This is as well.

I would say the vast majority of the $50 million is simply just leasing up from 70% to 90%. Obviously, getting a better rental rate is going to have some contribution to it as well. Today we’re getting nothing on that vacant space and we’re actually absorbing all the expenses. The lion’s share of that move is getting tenants into the space. That said, we do see an opportunity to drive rate with capital that gets spent. If we don’t see that opportunity, what we would do is just look at selective RTOs and vacant suites.

Right.

It is not as if the entire amount is going to come all from redevelopment. I mean, as we look at redevelopment of those, you know, 95 assets, we see probably about 10 that fit into the redevelopment, you know, bucket where we think we can get the returns that we need. The balance of that is really going to come through selective capital spend in the vacant suites. That’s helpful.

Austin, just hoping you could help us kind of reconcile guidance again. You have a $0.01 increase in the guidance.

You are picking up from increased things or NOI of a penny or two, you are picking up on the G&A.

Spend about $0.01 or so it sounds like.

You know, you’re talking about higher capitalized interest.

That’s also a couple of pennies. You have an offset from increased asset sales.

It still feels like, you know, that all kind of sums up to.

$0.03 or $0.04. But guidance was really increased by a penny. Trying to understand the difference. Yeah. Hey, Tayo, thanks for the question. I think you should assume that we had good insight into the capitalized interest moves at the beginning of the year. What I would point you to from a guidance perspective is really the $4 million decrease in G&A, coupled with the 25 bps increase in same store NOI. Obviously, we’ve taken disposition volume up half a billion dollars. What I would also say, Tayo, is we’re halfway through the year. Ryan and his team are very hard at work at getting through the $1.2 billion of strategic dispositions as quickly as they can. We’ve guided $800 million to $1 billion this year.

I would say it’s early in the year and there’s continued timing uncertainty around when exactly Ryan will close on dispositions in the back half of the year. When you put all that together, we’re pleased to be able to raise a penny given the increase in dispositions and given what Ryan and his team are working to accomplish this year. Much appreciated. Thank you and best of luck to you guys.

Thanks, Tiya.

Our next question comes from the line of Seth Bergey with Citigroup. Your line is opened. All right.

Good morning. Thanks for taking my question. What gives you the confidence you can achieve the 92% to 93% occupancy? Given occupancy has kind of trended near the high 80% range over the past several years.

Is that just a function of go forward portfolio composition? Is it the change in the structure?

To better align leasing and operations, just if you could talk a little.

Bit more about that.

Yeah. I would say a couple things to that. One, the macro environment has improved. If you look at the last five years and even the last couple years, occupancy has trended up in outpatient medical. You’ve got simply demand exceeding, you know, supply. I think that’s something that we see, you know, for the foreseeable future. Obviously, we have that opportunity as well. A couple other things I would just mention, we are doing a very significant revamp to our asset management platform here, which I outlined in my prepared remarks. We certainly see a benefit coming from that. We’re also disposing of assets that have historically been under occupied. As we laid out the bridge to go from the high 80s into the low 90s, the disposition portfolio certainly plays a role. Our same store occupancy today is at 90%. I think that’s the highest it’s been.

I asked someone for the stat, I think, since like 2016. It’s been, you know, almost 10 years since you’ve seen a 90% same store number here. I mean, things are changing on their own. I said a little bit of this in my prepared remarks, but the company was not really in a position to have free cash flow to reinvest into its assets. The balance sheet was really a big liability, not a source of strength. We’re fixing all of those things. I have a lot of confidence now that we have the cash flow to invest into our assets to be.

Able to get that occupancy upside.

That is something that hasn’t existed for quite some time here. I think for all those reasons, we have a lot of confidence that we can get into that 92%, 93% range over time. It’s not going to happen overnight, although you should see a nice incremental benefit as we get more and more of these dispositions done. Thanks. You talked in your opening remarks about the opportunities for.

Expansion with some of your top tenants.

You know, can you just provide a little bit about what that looks like?

Is that, you know, kind.

Of investing in the portfolio and leasing.

Existing space with them. Is that external acquisitions?

Just.

What does the growth opportunity?

Look like with that? I think first and foremost it’s having our health systems expand within our existing portfolio, if there’s room for that. I think what we outlined on that slide in the strategic plan was in some cases we can do better. I think we will do better. We’ve opened communication with all those health systems to improve upon that. I feel confident that we will gain some traction within that. I don’t know, Rob, if you want to add anything more onto that topic.

Yeah, I mean, I think certainly restructuring the platform is going to help in that area. You know, having relationships really driving more at the local level. I also think that the opportunities within the redeploy portfolio, there’s a lot of strong relationships inside of that lease up portfolio that we are going to continue to expand on, and we think a lot of the opportunities are going to be taken by the health systems. I mentioned in my remarks that about a third of our leasing was related to or came from our health system partners. I think we can do better than that. I think we’re going to continue to focus on that stat and drive that upwards.

Great, thanks. Our next question comes from the line.

Juan Sanabria with BMO Capital Markets.

Your wine is opened.

Hi.

Thanks for the time. Just maybe piggybacking off of Tayo’s prior.

Question with regards to dispositions and the earnings.

How should we think about the exit run rate? It seems like some of the disposition dilution won’t necessarily be fully factored into this year’s increased FFO guidance. As part of that, could you talk about the next leg of cost cutting and what is driving that? Let me start with that. You know, we’ve been spending a lot of time. First of all, Juan, it’s great to talk with you. We’ve been spending a lot of time going through the platform and savings within the platform. It’s a little bit of what I would call just pure blocking and tackling. We’ve started heavily on the G&A side and I think we’re pretty pleased that we’ve been able to identify. We said we thought we could find about $0.03 of savings to help offset some of the dilution as we want to get the balance sheet into a better spot.

We’ve been able to do that. It’s not easy. Those are tough conversations to have with people. Everybody here understands that we’ve got an objective and we know where we want to go with regards to additional savings. We’ll certainly continue to look for that. I think most of that will come at the property level.

Right.

Which will certainly help from a margin perspective. As we complete the dispositions, we look at the stabilized plus the lease up portfolio. If you look at the chart in there, there is some references to the total amount of employees within the platform and that number coming down. I would say that’s not the biggest driver of margins improving. That certainly helps improve those margins, but really the biggest driver of margins improving is going to be from occupancy increasing, and that’s where our focus is going to shift. We certainly have some additional cost savings opportunities, but really what’s going to drive the path to FFO growth is going to come through lease up and revenue growth.

Juan, I’ll just touch on your disposition. I think at the beginning of that you had a question around disposition timing as well.

Yeah, more just the run rate given the acquisitions are going to be back half loaded of how you’ll exit the year from FFO perspective vis a vis your revised guidance.

Yeah, that makes sense. I would point you to page 28 of the strategy presentation. One, just give you some insight into this, on the dispositions line item here we give you the $1.2 billion at a 7%. You should expect that we are selling assets at that 7% cap rate to pay down debt at approximately 5%. We have given you the $0.06 of estimated dilution off of the 2025 revised guidance. It would be safe to assume that we would assume the vast majority of that $0.06 is going to impact 2026. To the extent that we close on additional asset sales in 2026, I would expect it to be earlier in the year. I think it is a good assumption to include that full $0.06 impact in your 2026 numbers.

Perfect, thanks. Just on the capital spend.

On the lease up, some of which.

Sounds like it’s rev, some of it is first gen which is now not included inside. Could you just give us a breakdown of, like, to drive that lease up occupancy higher, the different buckets of CapEx and what will be and kind of won’t be in that, if that makes sense.

Yeah, I think it’s a good question, Juan. If you look at redevelopment and the RTO, RTOs fall into first gen capital, and then obviously we break out the redevelopment separately. I would assume that the vast majority of that $300 million will not be included in maintenance capital.

Thank you.

Our next question comes from the line.

Of Michael Gorman with BTIG.

Your wine is opened. Yeah, thanks. Good morning, Pete. Could you spend just a minute on kind of the core portfolio? You talked about a focus being maximizing lease economics, and maybe give us some context that with the new organizational structure and with kind of the refined focus, maybe what the opportunity set there is from the lease escalator perspective or the lease spread perspective to kind of drive incremental growth out of that 75% that really represents kind of the core of the Healthcare Realty Trust platform.

Yeah, it’s a good question, Michael, because I think that’s going to be the biggest growth engine and the biggest driver of earnings growth going forward. One of the things that actually was encouraging when I was out seeing the real estate is I’m not saying we’re getting this in every lease, but in some leases, we’re actually getting escalators all the way up to 4%. You look back three, five years ago, escalators were kind of in that 2.5% range and didn’t move for a long, long time. They started to trend up to 3%. I think 3% is absolutely the norm today, unless a tenant has a lease extension option already embedded in with a fixed escalator. If they don’t have that, then we’re getting 3% or better in every single deal. We’ve actually started to talk about, can we push that even further?

The other thing I would say is that portfolio being 95% occupied, we certainly want to keep retention really, really high because capital spend and downtime is actually what really impacts your go forward earnings trajectory. Keeping that portfolio fully occupied, pushing on retention, and obviously, when you’re in the 95% range, I think pushing on cash leasing spreads is important as well. It’s really a combination of all those, but I think pushing on the escalators more is something that we’re going to continue to work on and see if we can’t have some success with that.

That’s helpful, thanks. Maybe a question for Ryan. Can you just give us a sense for, as you look at the pipeline of dispositions, given the volatility we’ve seen year to date, how leverage sensitive are the buyers that are coming in and looking at these assets? Are these more cash buyers, owner occupants? What’s the composition of the buyer pool here for those dispositions?

Yeah, it’s a great question, Mike.

Given the breadth of what we’re doing, it really runs the gamut. What I would say is that today there’s more buyers and more equity looking to be deployed than there are assets available for sale. Frankly, our bid rosters, we’ve seen them deeper here on recent deals than we have in recent years, and we’re seeing a lot of competitive bidding in the later rounds of our transaction processes, and that drives up pricing. As we work through this large disposition portfolio, as always, it’s about finding the right property for the right buyer. The private investors, the operators, they’ve partnered in recent years with a lot of new institutional equity that’s come into our space, and that equity is continuing to look to flow into outpatient medical. Over the last several quarters, the financing market has been accretive to going in cap rates.

We’ve seen banks really step up today. They’re eager to lend. We’ve seen compression on the spreads, and we’ve seen good movement on the base rates. Today, if you’re looking at financing a deal that you’re acquiring from us, it’s 5.6% to the low 6% on an all-in rate, which again is accretive to going in cap rates. Cap rates today, we’re seeing deals go off in the high 5% to the 7% range. For a stabilized asset, you could see typically in that 6.5% cap rate range. One of the more interesting observations we’ve had as we’ve been progressing through the dispositions through the year is a real increase in health system MOB acquisition activity. The proportion of deals that were going to health systems has more than doubled when you look at the transactions volume over the last two years.

What’s interesting about the health systems is their decision making is less about price, it’s more about long-term strategy and control over an asset. Frankly, that’s constructive to our disposition pricing. We’re doing direct deals with health systems, we’re doing marketed deals that are broker driven. We’re maximizing price and finding the right buyers, and there’s no shortage of buyers out there. That’s really helpful. Thank you for the time, guys.

Thanks, Michael. Our next question comes from the line.

Of John Kilichowski with Wells Fargo. Your line is open. Thank you. Good morning and great work on the strategic plan team. First question from me is on, just on the G&A savings. I know there’s roughly $5 million that’s kind of identified, but could you maybe help me bucket sort of that second tranche of savings into or maybe the entirety of it into already achieved or identified but not achieved and then maybe yet to identify and give us sort of a timeline and on that three year plan when you expect to achieve that savings. Yeah, hey John, it’s Austin. Let me bucket this, starting with the G&A savings that we have already identified and I would say carried out the actions necessary to achieve. That is the $10 million of initial savings that we spell out in the strategy presentation.

We will have achieved $5 million of that this year and we expect to capture the remaining $5 million next year. If you then look at page 28 of our three year growth plan, we are highlighting another $5 to $10 million in additional saves beyond the $10 million of G&A that I just outlined. I think it would be safe to assume that $5 to $10 million will be embedded more on the property operating expense side. As Pete mentioned, the majority of the increase in margin at the properties will be driven by occupancy. With the asset management platform and new leadership, we do believe there are some opportunities to achieve some additional savings in there as well. I would expect that to be more split over the next three years. Got it, thank you.

Maybe on the same store performance, the same store cash NOI growth is running still well ahead of the midpoint of your new revised upward guide. I’m curious how much of that is just you’re seeing better demand for your product and better leasing up versus maybe this is also part of the culling process of those non-core assets. It’s a really good question, John. I’m going to be really specific on this, which is just to your last point. The assets that were sold during the quarter had only about a 30 basis point impact on our same store. We were right at 5% either way. If you look under the surface, what is happening is the 100 basis points year over year increase in occupancy is really starting to pull into that same store NOI growth in the first quarter.

I talked about some difficult comps, but I think as we get in the second quarter, this is what I would say is much more reflective of what I would expect from the business given the year-over-year occupancy increases that we’re seeing. I do think to your earlier question, our same store growth year to date is 3.9%. Obviously, that’s a little bit above where our guidance, our revised guidance, is for the year. As we’re halfway through the year, we’ve got a lot of leasing still to do this year. We’ll see how things play out in the third quarter and update.

Yeah, the one thing I would add to that, John, as you look at the three-year framework that we put out in the deck, it’s got 3 to 4% NOI growth embedded within it. I’m searching for the 3 to 4%. I know some of the numbers you’ve seen have been at 5%. If we could do better, great. The baseline that we set out was the 3 to 4%. We’re working hard to achieve that.

Okay, very helpful. Just last one for me, I know, Pete, you’ve already talked a ton about this today, but just as we think about CapEx and the focus on the RTO plan, I’m just kind of curious how I should think about the cadence of CapEx as a percentage of NOI going forward here. Yeah.

Austin, you want to take that?

Yeah, I think, John, it would be a fair assumption. I answered this a little bit earlier, but just to put a fine point on it, the RTO program is really, I think, what many people call spec suite program, which is going to fall into, and does fall into, our first generation TI bucket. The capital for redevelopment will obviously flow through the redevelopment bucket. I think from a maintenance capital perspective, it would be fair to look at our year to date experience and assume that’s a reasonable starting place looking forward.

Maybe that didn’t answer your question entirely. I know that those are all the right facts.

I was just.

Your question might just be how should we model the $300 million getting spent? I mean, I think the RTO probably gets spent, you know, ratably over, you know, three years. I think the read, as probably the best assumption today, is it’s probably, you know, more of a ratable spend. If we can accelerate that a little bit, right, because we talked about $20 to $40 million of the $50 million in our framework. I’d like to get as much of that as we can. I think the way we initially thought about it is spending that over, you know, three years. If there’s an opportunity to accelerate it, great. I think for modeling purposes, I’d probably look at that $300 million as $100 million each year for the next three years.

Got it. Very helpful.

Thanks, guys. Yeah, thanks, John.

Our next question comes from the line of Mike Mueller with JPMorgan. Your line is opened. Yeah, I have a couple of questions, but a quick clarification first. Rob, when you were talking about 75 to 125 basis points of leasing absorption in 2025, was that overall occupancy, same store occupancy, multi-tenant occupancy, what was the metric that was for? Yeah, that’s the same store occupancy gain guide that we gave for this year in the same store. Okay, so that’s overall, okay. Yeah. And then I guess when we’re looking at the three-year normalized FFO target $1.65 to $1.85, what are the biggest moving parts between the top and the bottom end of that range? Go ahead. Yeah, good question, Mike. I think on page 28 we try to give you some of kind of what I’ll call the, you know, goalposts here for either side.

I would say I think some of the biggest things that we’ll look to drive is the biggest number, if you look across this page, right, is the annual NOI growth that Pete touched on earlier for the base portfolio. Driving that compounding cash flow growth of 3% to 4% in the portfolio, the closer we can be to 4%, the bigger that delta becomes, and there’s obviously an enormous amount of spread there in terms of the compounding over three years. I think the second is how quickly can we achieve the $50 million of upside in the lease up portfolio. From a redevelopment perspective, that can take time for that number to hit, so how much falls into that three-year period. We’re going to be working as hard as we can, but that will be a little bit of a spread as well.

I think from the dispositions and other things we’ve laid out, those things kind of are what they are and the math is what it is at this point based on the strategic plans. I would kind of point to those two top side items.

Obviously, Mike, as you know, everyone’s going to model our refinancing rates in some way. We laid out what we think the sort of bookends are with a little bit of cushion on the low end and the high end. We have zero control over that at this point in time. That could change and there’s nothing that we can do about it. We’d be fans of rates declining. I think everyone in REITland would say that’d be fantastic. We don’t have any control over that. We did lay out what we thought were kind of the bookends today and that could change tomorrow.

Got it. Okay, that’s good. Thank you.

Yeah, thanks Mike.

Thank you. Our next question comes from the line of Omotayo Okusanya with Deutsche Bank.

Your line is open.

Thanks for taking my follow up. I just wanted.

Hello? Yeah, hey Omotayo.

Hey, just a quick follow-up. Just curious what your thoughts are in regards to the one, the big beautiful bill, and potential positive or negative implications for medical office buildings.

Yeah, that’s a good question. I think the short answer is probably.

It’s still a little too soon for.

Us to know exactly what’s going to happen. We actually met with one of our larger health systems earlier this year, and she conceded that they’re still getting their arms around what exactly this means. I’d say probably too soon to tell. Our initial reaction to it is, like a lot of these changes, it tends to indirectly have a benefit on the outpatient model, and that’s something that has not changed for a long time. I think there are charts that show that that’s been happening for many, many years. Just given the profitability inside of our buildings versus inside of the hospital, you know, what hospitals could be most affected by this? We have talked about that as well. I think the rural hospitals are probably the ones that will struggle the most with the Medicaid cuts.

We really are not impacted at all by that, just given where our assets are geographically located.

It’s a good question.

We’re continuing to monitor it. I mean, outside of that, there’s obviously been some CMS proposals that have been out there on site neutrality that’s come up a little bit. I’ll just reiterate the point I said before, which is, you know, that to me feels more like a real benefit to the outpatient model, as doctors can choose the site where they.

Would like that procedure to happen.

They don’t just have to have the default at the hospital. We see that as a demand driver for our space as well. I think a lot of our other peers have been saying the same thing as well. It’s a really good question. We’re continuing to monitor it, but I don’t look at it as having an impact necessarily on our business. Great.

Thank you. Thanks, Kyle. There are no further questions at this time. I would like to hand the call back over to Pete Scott for some closing remarks. Yeah, perfect.

Thanks very much. Thanks for everyone for joining the call.

We put a lot out.

We appreciate you digesting it all and asking some great questions on this call. We look forward to seeing all of you as we get out into the market and do a lot more IR work this quarter. We look forward to seeing you in the upcoming months. Thanks very much. This concludes today’s conference call. You may now disconnect.

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