Earnings call transcript: Healthcare Realty Trust Q4 2024 performance

Healthcare Realty Trust (NYSE:HR) reported its financial results for the fourth quarter of 2024, showcasing a series of strategic developments and financial metrics that highlight the company’s ongoing transformation. The company, currently valued at $5.91 billion, maintains a notable 7.65% dividend yield and has sustained dividend payments for 32 consecutive years. Despite a slight increase in stock price, the earnings call revealed a nuanced picture of the company’s performance across its diverse property segments.

According to InvestingPro, the company has several strengths, including high shareholder yield and significant dividend payments. InvestingPro subscribers have access to 7 additional key insights about Healthcare Realty Trust’s performance and prospects.

Key Takeaways

• Healthcare Realty Trust’s stock price rose by 1.91%, closing at $16.21.
• The company sold $429 million in real estate assets in 2024.
• Liquidity remains strong with over $900 million available.
• Office segment NOI decreased by 2.8%, while the industrial segment saw a 6.3% increase.
• Multifamily lease spreads are expected to turn positive in late 2025.

Company Performance

Healthcare Realty Trust has been actively reshaping its portfolio, with 70% now located in the United States. The company’s strategic focus on U.S. markets, particularly the Sunbelt region, aligns with broader market trends showing strong demand for multifamily units. Despite challenges in the office segment, which saw a decrease in net operating income (NOI), the residential and industrial segments posted gains, reflecting a balanced approach to asset management.

Financial Highlights

• Headline funds from operations (FFO) per unit for Q4 2024 was $0.298, a slight decrease from the previous year.
• Debt to total assets ratio stood at 43.7%, with a debt to EBITDA ratio of 9.4x.
• The company maintained a robust unencumbered asset to unsecured debt coverage ratio of 2.3x.
• Average U.S. residential rents increased significantly, reflecting strong market dynamics.

Outlook & Guidance

Looking ahead, Healthcare Realty Trust anticipates positive multifamily lease spreads by the third and fourth quarters of 2025. Analyst consensus from InvestingPro suggests moderate optimism, with price targets ranging from $16 to $20 per share. The company is planning minimal new deliveries in 2026, focusing instead on potential asset sales and debt refinancing. These strategic moves are intended to streamline operations and enhance financial flexibility, particularly important given the current EV/EBITDA multiple of 13.6x.

Get access to Healthcare Realty Trust’s complete Pro Research Report, along with 1,400+ other detailed company analyses, exclusively on InvestingPro.

Executive Commentary

CEO Tom Hofstetter remarked, "Institutional capital is not going into office at all," highlighting the challenges faced by the office segment. Meanwhile, Emily Watson, President of Land Tower, expressed optimism, stating, "We are optimistic for Q3 and Q4 to be in the positive range." Hofstetter also noted, "Lower interest rates will definitely help," suggesting potential benefits from macroeconomic trends.

Risks and Challenges

• The office segment faces significant headwinds with declining NOI and lack of institutional interest.
• Potential market saturation in the residential sector could impact future growth.
• Macroeconomic pressures, including interest rate fluctuations, may affect refinancing plans.
• The company’s high debt to EBITDA ratio highlights the need for careful financial management.
• Asset sales and refinancing efforts carry execution risks that could impact financial stability.

Healthcare Realty Trust’s Q4 2024 earnings call outlined a clear path forward, emphasizing strategic asset management and market adaptation. While challenges remain, particularly in the office sector, the company’s proactive measures and focus on high-demand markets position it for potential growth in the coming years.

Full transcript - Healthcare Realty Trust (HR) Q4 2024:

Conference Moderator: Good morning and welcome to H and R Real Estate Investment Trust twenty twenty four Fourth Quarter Earnings Conference Call. Before beginning the call, H and R would like to remind listeners that certain statements, which may include predictions, conclusions, forecasts or projections in the remarks that follow may contain forward looking information, which reflect the current expectations of management regarding future events and performance and speak only as of today’s date. Forward looking information requires management to make assumptions or rely on certain material factors and is subject to inherent risks and uncertainties and actual results could differ materially from the statements in the forward looking information. In discussing H and R’s financial and operating performance and in responding to your questions, we may reference certain financial measures which do not have a meaning recognized or standardized as under IFRS or Canadian Generally Accepted Accounting Principles and are therefore unlikely to be comparable to similar measures presented by other reporting issuers. Non GAAP measures should not be considered as alternatives to net income or comparable metrics determined in accordance with IFRS as indicators of H and R’s performance, liquidity, cash flows and profitability.

H and R’s management uses these measures to aid in assessing the rate’s underlying performance and provides these additional measures so that investors can do the same. Additional information about the material factors, assumptions, risks and uncertainties that could cause actual results to differ materially from the statements in the forward looking information and the material factors or assumptions that may have been applied in making such statements, together with details on H and R’s use of non GAAP financial measures are described in more detail in H and R’s public filings, which can be found on H and R’s website at www.sedarplus.com. I would now like to introduce Mr. Tom Hofstetter, Chief Executive Officer of H and R REIT. Please go ahead, Mr.

Hofstetter.

Tom Hofstetter, Chief Executive Officer, H and R REIT: Good morning, everybody, and thanks for joining us. We have with us Larry Froome, CFO of H and R and Emily Watson, President of Land Tower. I’ll hand it over to Larry

Larry Froome, CFO, H and R REIT: to bring you up to date.

Larry Froome, CFO, H and R REIT: Thank you, Tom, and good morning, everyone. My comments to follow references to growth and increases in operating results unless stated otherwise are in reference to the twelve months ended 12/31/2024 compared to the twelve months ended 12/31/2023. We continue to execute on the strategic repositioning plan. In 2023, we sold $432,900,000 of income producing properties and in 2024, we sold $429,000,000 of real estate assets. On 01/06/2025, we sold a further $49,800,000 70 percent of our real estate asset by value is now in The United States.

Overall, given the headwinds we faced at the end of last year with multifamily supply concerns, a weak office market, inflation and rising interest rates, we are very pleased with our results. Breaking down the results between our segments, our office segment’s same property net operating income on a cash basis decreased by 2.8%. There has been a slate of back to the office policies from different companies and it seems clear that more and more employees are headed back to the office, which is positive for the sector as a whole. Our office portfolio of 16 properties, which includes four properties with residential rezoning opportunities now only comprises 18% of H and R’s total portfolio. 87.6% of our office revenue comes from investment grade tenants, a testament to the quality and location of our office properties.

Our office occupancy at 12/31/2024 was 96.8% with an average remaining lease term of six years. So the portfolio will continue to provide solid cash flow. Our three downtown Toronto office properties with residential rezoning opportunities are valued at $140 per square foot, which is less than half the value they were at the peak of the market and the rest of the portfolio has a weighted average cap rate of 7.76%. Residential segment same property net operating income on a cash basis increased by 0.5% in U. S.

Dollars. The new supply added to our residential market has been absorbed. The positive immigration trends have continued and our tenants are also staying longer. Since the announcement of H and R strategic plan, H and R’s average U. S.

Residential rents increased from $21.16 per square foot as of 06/30/2021 to $26.84 per square foot at the end of the year 12/31/2024 in U. S. Dollars. Our residential portfolio at 12/31/2024 comprised 49% of H and R’s overall portfolio. Land Tower West Loving Dallas was substantially completed and transferred from a property under development to an investment property in Q3 of twenty twenty four.

Land Tower Midtown also in Dallas was transferred to investment properties in Q2 twenty twenty four and has become our twenty sixth residential investment property. We have an additional two residential developments currently under construction, which are expected to be completed in 2026. H and R’s ownership interest in these two new developments is 29.1%. Our retail portfolio at 12/31/2024, comprises 15% of H and R’s overall portfolio. Retail segment same property net operating income increased 5% due to occupancy gains at River Landing and foreign exchange.

The tenants in our retail portfolio predominantly grosses and the portfolio has been very stable. Our largest retail tenant is Giant Eagle, who has 193 locations in our portfolio. Giant Eagle recently announced that they are selling the Gecko convenience stores and leases to which we’re expecting to close in Q2. This will further diversify our tenant mix with Couche Tod comprising about 1.7% of our revenue. Giant Eagle will then comprise about 3.9% of our revenue.

Industrial segment’s same property net operating income on a cash basis increased 6.3%. Industrial portfolio of 65 properties at 12/31/2024 comprised of 18% of H and R’s total real estate assets and continues to perform well. Since the announcement of H and R strategic plan, H and R’s average Canadian industrial rents increased from $7.17 per square foot as at 06/30/2021 to $9.66 per square foot as at 12/31/2024. In addition, industrial properties located in the GTA made up 59% of HNO’s portfolio at 06/30/2021 compared to 70% now at 12/31/2024. We continue to grow our industrial portfolio and added two newly constructed properties at the beginning of twenty twenty four.

We currently have one industrial property and a 50% interest in two industrial properties under construction scheduled to be completed later this year. Headline FFO per unit for Q4 twenty twenty four was $0.298 compared to $0.299 in Q4 twenty twenty four. Our balance sheet remains strong. Debt to total assets at the REITs proportionate share 12/31/2024 was 43.7% and debt to EBITDA was a healthy 9.4 times. Liquidity at 12/31/2024 was in excess of $900,000,000 with an unencumbered property pool of approximately $4,400,000,000 Our unencumbered asset to unsecured debt coverage ratio was 2.3 times at 12/31/2024.

And with that, I will now turn the call over to Emily.

Emily Watson, President of Land Tower, H and R REIT: Thanks, Larry, and good morning, everyone. I’m happy to discuss our fourth quarter and 2024 performance for our multifamily platform and some operational highlights. Our 2024 results aligned with our expectations. The United States had an incredible fourth quarter with over 230,000 units being absorbed, further demonstrating the strengthening drivers for our industry. Our multifamily platform continues to benefit from that strong demand as evidenced by a retention of 59% in the fourth quarter.

We remain focused on fundamentals of our business and creating NOI expansion through our repositioning opportunities, development pipeline and other innovative value add strategies that add to our bottom line. Given the declining levels of new supply ahead and growing demand in our markets, we are well positioned for substantial growth and value creation in the coming years. Same property net operating income for residential properties in U. S. Dollars increased by one point four percent and fifty basis points, respectively, for the three months and year ending 12/31/2024, compared to our respective 2023 periods, primarily due to rental growth and lower property operating costs from our Gateway City properties.

Same asset occupancy ended the quarter at 95%, a 90 basis points increase over the third quarter and a 70 basis points increase from Q4 of twenty twenty three. Same asset occupancy in the Sunbelt increased 100 basis points in Q4 to 94.4% over the third quarter. Jackson Park was 99.3% occupied with 72% retention. The Sunbelt continues to show strong demand metrics moving into 2025. Sunbelt move outs due to home purchases continue to flow to a historical low of 7.7% of total move outs in the fourth quarter, and there continues to be approximately 59% discount to rent versus own in our markets.

Blended trade outs for the Sunbelt markets were negative 5.9% in the fourth quarter, ranging from approximately negative 9% in Austin to negative 2% in Dallas, which coincides with levels of direct supply pressure. Based on a recent third party appraisal and a handful of Sunbelt sales comps, we have maintained our fair market value Sunbelt cap rates at 4.97% and believe the rate is appropriate and supported. Cap rates are expected to remain low, relatively speaking, for the institutional quality assets in the Sunbelt with capital flows interested and focused on long term heavy Sunbelt multifamily allocation. On the development front, Land Tower Westlove in Dallas, Texas continues to lease well despite the record level deliveries in Dallas. The community is currently 54% occupied and 58% leased.

The property was completed on time and on budget. Also in Dallas, Texas, Land Tower Midtown is currently 36% occupied and 46% leased. Both properties are leasing well with an average monthly velocity of 25 leases per month, which is above industry reports for our market and a testament to the superior product and unparalleled amenities our development team has delivered. Midtown was also completed on time and on budget. Our Reddit properties are progressing well and also remain on budget with completion expected in mid twenty twenty six.

Land Tower currently has an additional nine development projects in the Sunbelt pipeline, totaling over 2,900 suites at H and R’s ownership interest with multiple sites ready and prepared for construction. We are progressing through the different phases of design, drawing, and permitting on the remainder of our Sunbelt development pipeline and currently have two projects shovel ready. In summary, the multifamily platform continues to achieve encouraging results and strong performance relative to our multifamily counterparts. I believe this is a result of engaged associates taking care of our customer. In the fourth quarter, Land Tower Residential received Best Places to Work in Texas and Best Places to Work for Women by the Best Companies group.

The Land Tower team is engaged and charging into 2025 ready to drive continued performance. And with that, I pass along the conversation back to Tom.

Tom Hofstetter, Chief Executive Officer, H and R REIT: Thank you, Emily. Operator, you can open up the call for questions.

Conference Moderator: Thank you. The first question comes from Matt Kornack at National Bank Financial. Please go ahead.

Matt Kornack, Analyst, National Bank Financial: Hey guys. Just quickly Larry, I think in some of the disclosure you mentioned that you have, I think, a true up in property taxes in The U. S. Portfolio. Can you give us a sense of how that would have impacted the quarter?

And is that in same property numbers?

Larry Froome, CFO, H and R REIT: Good morning, Matt. Yes, it is in same property. The effect was $1,900,000 in savings and property taxes for the quarter. But we had about in Q4 twenty twenty two, we had about $1,000,000 adjustment. So in effect, if you’re trying to do a percentage increase back out $1,000,000 from 2023 and back out $1,900,000 from 2024.

Matt Kornack, Analyst, National Bank Financial: And as broader statement, like the margins that you have, I guess, for this year, for the full year, is that kind of representative of where you see things at this point? And then maybe extending that on just the cadence of how you look at the revival of The U. S. Multifamily space, if you can give a sense in the Spry family, how you foresee kind of the trough and then improvement thereafter because I think the supply side gets better at least maybe towards the end of this year? Thanks.

Larry Froome, CFO, H and R REIT: Emily, do you want to take that one?

Emily Watson, President of Land Tower, H and R REIT: Sure. Hi, Matt. Good morning. I am pleased actually with the we are still seeing NOI expansion despite the supply headwinds and January was really off to a great start. Just for comparison, we had negative 5.9 in the Sunbelt for our lease spreads and in January that dropped to a negative 1.7.

So now don’t get me wrong, we still have a lot of deliveries that are going to be hitting us in Q1 and Q2, but really drop off dramatically. So in January or in sorry, in 2024 In 2024, we had 120,000 in our markets deliver and in 2025, we have 69,000. So it’s front loaded. So Q1 and Q2 are still going to be a little bit choppy, but we do expect Q3 and Q4 to rebound pretty nicely. And then, of course, you know the story in 2026.

So those deliveries are very minimal. So we think that 2026 as we have kind of forecasted 2026 is going to be a banner year, but 2025 is going to be front loaded and then level out in Q3 and Q4.

Matt Kornack, Analyst, National Bank Financial: Okay. I appreciate that color. On the industrial portfolio, I mean, the growth is low, but I think it’s just a function of you don’t have any leases maturing essentially. 2027 looks like it’s a bigger year for maturities. Is that when we should kind of expect an acceleration on the organic growth front for the industrial portfolio?

Larry Froome, CFO, H and R REIT: Hey, Matt. Yes, the industrial portfolio, I mean, our average rent is $9.66 based on current rents, they’re around $14.15 on our renewals. So as the expiries come up, that’s what you should expect. So the more expiries, the bigger growth.

Matt Kornack, Analyst, National Bank Financial: Lastly, transactions wise, obviously, we’re living through a period of a bit of uncertainty. But can you give us a sense, maybe Tom, in terms of where institutional capital is moving or not moving at this point?

Tom Hofstetter, Chief Executive Officer, H and R REIT: Oh, I can’t really say that the market changed one quarter over the next quarter. Institutional capital is, I guess, trending in the sectors we’ve been seeing for the past many, many quarters. Institutional capital is not going into office at all. Institutional capital is not excited about a whole lot. They have to go ahead and spend their money somewhere.

So they’re really focusing on industrial, which is weakening, a little on the side and residential for the most part. And retail there, I would say, on the sidelines. Nothing new, nothing that you don’t know. Life sciences has been a bloodbath. So there’s an awful lot of money that has to play in a lot of sectors.

They’re not playing multi res as far as land values go. No one’s touching that right now. So it’s a very, very difficult market with very few trades and comps. Not a whole lot going on. The reason there’s few trades is the spread between ask and bid is too wide.

Matt Kornack, Analyst, National Bank Financial: Fair enough. No. And that’s as expected. Hopefully, things get better, but it is what it is.

Tom Hofstetter, Chief Executive Officer, H and R REIT: Yes. Lower interest rates will definitely help.

Matt Kornack, Analyst, National Bank Financial: Yes. That’s it for me. Thanks.

Conference Moderator: Thank you. The next question comes from Jimmy Shen at RBC Capital Markets. Please go ahead.

Larry Froome, CFO, H and R REIT: Just a follow-up on that question. So last year the transaction market was no better than it is now, but you did achieve 400,000,000 in asset sales. So maybe can you talk a bit about what you’re working on in terms of asset sales and what are you targeting in terms of amount and what do you think is realistically that you can achieve?

Tom Hofstetter, Chief Executive Officer, H and R REIT: So to put an asset in office building on the market, there’s not going to be a bid. To put multi res land, there’s not going to be a bid. The rest of the stuff that you could sell, which is retail, for example, or industrial, it’s predicated on interest rates, the same came the answer last quarter. There’s no point in selling when interest rates are high, when values are just really where they are because of interest rates. So we’re focused on hopefully by the end of this year, liquidating our potentially our Echo position, our Guanace position.

And my expectation is by the end of the year, we shall probably have done a deal on our calendar lands for the 413 Highway. So that’s an awful lot of money, but that could come in. It’s really not market driven as market conditions. The volumes market is very strong. I think the echo market is, again, they’re looking for a chunky institutional dollars to spend and retail is very safe.

In our particular case, China will have zero debt upon completion of the Couche Tard deal. So those are three realistic deals that could potentially be done by the end of this year. I don’t expect a whole lot of other transactions in the office slash we’re not selling industrial and retail. As I said, we’re going to wait till the trades go down.

Larry Froome, CFO, H and R REIT: On either of those three, which one is more advanced in terms of asset sales?

Tom Hofstetter, Chief Executive Officer, H and R REIT: So the Kalinlands is not advanced. That’s a discussion and that’s in the government’s hands as far as timing goes and how fast they want to exit item has a lot to do with the politics of the provincial election. So I would say that they seemed engaged and I think that is realistic to say by the end of this year. I could say for the other two, Echo seems to have a good likelihood as well. I can say one more or less.

And one, it’s just a potential of cleaning up some environmental issues, not ours, but within the city. And there would be a demand for that product. Again, all three are very realistic, but they won’t happen probably till Q4.

Larry Froome, CFO, H and R REIT: Okay. And then on the Hess (NYSE:HES), the 280,000 square feet that you’re planning to vacate, I know you’ve leased a good chunk of it. How does the rent compare with the expiring rent? And then what is the expectation for the rest of the space?

Tom Hofstetter, Chief Executive Officer, H and R REIT: So the it’s way off. The market in Houston like everywhere else is very, very low. It’s really a question of net effect to rent, not face rent. And if you’re not doing a whole lot of TIs, which we don’t plan on doing, the space is in good condition. In addition, we want to bring down the average rent, because we want to bring on the average price per pound of value of the building.

You can expect a substantial deterioration in the rent and the rent, net rent and the net effective rent rather.

Larry Froome, CFO, H and R REIT: Like a half?

Tom Hofstetter, Chief Executive Officer, H and R REIT: No. On a net effective basis, I would say it’s single digit.

Larry Froome, CFO, H and R REIT: Okay. And what about the rest of the remaining 200 some odd foot feet?

Tom Hofstetter, Chief Executive Officer, H and R REIT: Well, it’s not 200. There’s two eighty five in total and around 110 is going to be the one that’s done. We’re negotiating with substantially the balance of that space in allowing those single digit net net effective. And my guess is that they’ll all be leased up by 2026.

Larry Froome, CFO, H and R REIT: Okay. And can you remind me with that space, was it the decision to vacate before the Chevron (NYSE:CVX) announcement or is it just something that came up after the acquisition?

Larry Froome, CFO, H and R REIT: Say it

Larry Froome, CFO, H and R REIT: again. That space that’s maturing, were they planning to vacate that space even upfront announced?

Tom Hofstetter, Chief Executive Officer, H and R REIT: So they vacated that space already. The one third of the building that’s expired in 2026 is not occupied by Hess. It’s leased by Hess, but it’s been sublet by Hess to other tenants.

Larry Froome, CFO, H and R REIT: Oh, I see. How long when did they vacate? It was quite a while back?

Tom Hofstetter, Chief Executive Officer, H and R REIT: Three years ago,

Larry Froome, CFO, H and R REIT: something like that. Got it. Okay. Okay. Sorry, one last.

On Land Tower, so I guess some of your peers are saying that the blended lease spreads may be turning positive in the second half of twenty twenty five based on your comment. It sounds like that will be your view too with respect to your portfolio on the Sunbelt?

Emily Watson, President of Land Tower, H and R REIT: Yes, I can definitely see that. Just the momentum that we have coming into 2025 when we still have 70,000 units that are delivering, I’m optimistic for Q3 and Q4 to be in the positive range.

Conference Moderator: Okay. Thank you. Thank you. And the next question comes from Sumaya Saeed at CIBC (TSX:CM). Please go ahead.

Sumaya Saeed, Analyst, CIBC: Thanks. Good morning. Just following up on the Land Tower discussion, Emily, just wondering how concessions in your markets have trended if you’re seeing those come down over time at all?

Emily Watson, President of Land Tower, H and R REIT: They’ve been pretty consistent from Q3 to Q4. We’re seeing more than we did obviously in when we didn’t have headwinds. So I think eventually in the second half they’ll come down as well. But Q3, we were around 35% of our leases that had concessions in an average of thirty days. And that really ranges from a week to five weeks in Austin as you can probably assume.

And then in Q4 that crept up more seasonality on the number of leases of concessions, a percentage of the leases of 63% of our leases had concessions, and came down to about twenty seven days. So and then Q1 has has again off to a good start back to about 45% is what we saw in the month of January. So seasonality played a part of it. Obviously, the the deliveries will play a part of it. So I don’t expect us to be using concessions similar to what we were doing our strategy before in the second half of the year as well.

So I think our lease trade outs will improve as well as the use of concessions will come back down to pre COVID, pre delivery days.

Sumaya Saeed, Analyst, CIBC: Okay. Got it. And then just moving on to the dispositions line of discussion. Tom, you mentioned you have some potentially in the bag maybe by the end of the year. Just wondering when and if those planned dispositions come to fruition, how you’re thinking about allocating the sale proceeds?

And if you have preference between deleveraging or buying back shares?

Tom Hofstetter, Chief Executive Officer, H and R REIT: So if all of it happens, it’s a significant amount of dollars and then we do both. And if not all of them happen, then the first and foremost is pay down debt.

Sumaya Saeed, Analyst, CIBC: Okay. And then just on the sale of the Canadian retail post the quarter, was it one or multiple buyers? And should we expect more sales in the near term of that category?

Tom Hofstetter, Chief Executive Officer, H and R REIT: No. This was a joint venture partner that we had to write out our position. And we should not expect more retail sales. As I mentioned beforehand, we’re going to wait until interest rates come down. There’s no danger in our retail.

It’s very safe. It’s least quality tenants, supermarkets that will be there forever. The rental rates are low and they’re dominant in their market. So there’s no danger on or any risk to it. It’s just a question of value and values will be predicated on interest rates.

So until interest rates come down, we are not planning on selling any more assets.

Larry Froome, CFO, H and R REIT: All of those properties that we sold from Maja were joint venture properties. So it’s just in accordance with simplifying the structure. Retail now is basically all 100% on.

Sumaya Saeed, Analyst, CIBC: Okay, got it. And then just lastly on the debt maturity side, you have some debentures coming due in June. Just wondering what your thoughts are there and what seems to be the most attractive option for addressing those?

Larry Froome, CFO, H and R REIT: So we have $400,000,000 coming in June. The debenture market currently is currently open. It spreads so well. So we’ll probably look to replace it in about six weeks or so to do another debenture issue of either floating rates or fixed term. But that’s probably what we are going to do.

We will have some more visibility on the sales Tom is talking about that could happen towards the end of the year by then. And that’s probably when we will decide to replace those debentions.

Sumaya Saeed, Analyst, CIBC: Okay. That’s all from me. Thank you.

Conference Moderator: Thank you. That concludes our Q and A today. I will turn the call back over to Tom for closing comments.

Tom Hofstetter, Chief Executive Officer, H and R REIT: Thanks for joining us everybody. Have a great day.

Conference Moderator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your lines.

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