Healthcare Realty Trust's Q3 2025 Earnings Call: Contradictions Emerge on Disposition Strategy, RTOs, Dividend Plans, and Acquisition Focus

Guidance:

• FFO per share guidance raised to a range of $1.59 to $1.61.
• Same-store cash NOI growth expected of 4.0% to 4.75% for 2025.
• G&A guidance narrowed to $46 million to $49 million for 2025.
• Board authorized a $1 billion ATM equity program and up to $500 million in share buybacks.

Business Commentary:

* Operational Performance and Lease Activity: - Healthcare Realty Trust reported normalized FFO of $0.41 per share in Q3, with same-store cash NOI growth of 5.4%. - The company maintained a 91.1% occupancy rate, an increase of 44 basis points sequentially, and achieved 89% tenant retention. - This performance was driven by strong leasing activity, including 1.6 million square feet of executed leases, and a focus on improving lease economics and retention.

• Disposition Activity and Balance Sheet Improvement:
• YTD, Healthcare Realty Trust completed $500 million in asset sales at a blended cap rate of 6.5%, with another $700 million under binding contract or LOI.
• The company reduced its net debt to EBITDA ratio to below 6x, the lowest level since early 2022.

• These transactions were driven by a strategy to enhance portfolio quality, improve leverage, and capitalize on a favorable transaction market for outpatient medical facilities.

• Development and Redevelopment Initiatives:

• Healthcare Realty Trust has two projects in its development pipeline, with the All Saints 2 project now 72% leased, and plans to invest $60 million in redevelopment across five assets.
• The company anticipates$8 million in stabilized NOI from these developments and redevelopments.

• These initiatives are aimed at increasing NOI through targeted investments, focusing on strong submarkets and strategic alignment with health systems.

• Strategic Focus and Future Growth:

• The company's strategic plan emphasizes improving earnings through operational efficiency and capital allocation, with a focus on key markets and health system alignment.
• Healthcare Realty Trust's leasing pipeline stands at 1.1 million square feet, with 67% in the LOI or lease document phase.
• The company's positive outlook is driven by secular trends in outpatient medical growth, supply-demand imbalances, and strong health system engagement.

Sentiment Analysis:

Overall Tone: Positive

• Management repeatedly called the quarter a win: "We delivered excellent results," and highlighted operational momentum: "Normalized FFO was $0.41 per share," same-store NOI growth of 5.4%, occupancy gains, and reduced leverage to below 6x, signaling improving fundamentals and confidence in the strategic plan.

Q&A:

• Question from Nicholas Yulico (Scotiabank): How should we model NOI impact from redevelopment vs. asset sales over the next several quarters—any earnings drag and timing on occupancy gains?
  Response: Expect stabilized same-store NOI growth of ~3–4% and ~$50M incremental NOI over 3+ years (roughly $20–40M from redevelopments, remainder from lease‑ups); plan to add ~5–10 redevelopment assets in coming quarters.

• Question from Nicholas Yulico (Scotiabank): The health system share of leasing picked up this quarter—was that driven by renewals or are you capturing more new health‑system leases?
  Response: Increase reflects secular outpatient shift plus improved health‑system relationships—it's a sustained trend, not just quarter‑specific renewals; health‑system activity now comprises ~50% of leasing.

• Question from Richard Anderson (Cantor Fitzgerald): You lowered the expected disposition cap‑rate midpoint by 25bps to 6.75% but are at 6.5% YTD—will remaining sales be at higher cap rates since they're more non‑core/value‑add?
  Response: Yes—the remaining pipeline is skewed toward value‑add/non‑core and some legacy office, so expected cap rates on the balance remaining will be higher than the sold 6.5% YTD average.

• Question from Richard Anderson (Cantor Fitzgerald): With major MOB sellers unloading $8–10B, does that give you pause about market appetite or pricing for acquisitions?
  Response: No—it's evidence of strong private buyer demand; healthy bids validate the asset class and support completing dispositions and potential selective JV or acquisition opportunities.

• Question from Richard Anderson (Cantor Fitzgerald): Is much of the buyback activity going back to health systems, reversing prior ownership shifts—what are long‑term buyer composition implications?
  Response: Health systems are active (often achieving lower cap rates) but the majority of buyer demand remains non‑health‑system private capital; ROFRs will place some assets with systems but not most.

• Question from Austin Wurschmidt (KeyBanc): Are the assets you plan to add to the redevelopment pool mostly occupied with initial move‑outs or are they current vacancies/lease‑up assets needing modest capital?
  Response: Mostly current vacancies or near‑term roll opportunities where targeted capital can secure anchor extensions and mark‑to‑market gains; true tenant vacates are the minority given high retention.

• Question from Austin Wurschmidt (KeyBanc): You established an ATM—should we expect near‑term equity issuance to fund an offensive acquisition strategy?
  Response: ATM is precautionary; management does not plan equity issuance at current share levels—any offensive moves will be modest (JV/tuck‑ins) funded within available dry powder while maintaining leverage targets.

• Question from Robin Haneland (BMO): Of the $700M under contract, are any targeted for JVs or part of the same‑store pool and what pricing should we expect?
  Response: None are intended for JVs; they are being sold 100% and are not in the same‑store pool—they've been reclassified to held‑for‑sale.

• Question from Robin Haneland (BMO): Did recent dispositions materially affect the same‑store NOI increase this quarter?
  Response: No—core stabilized portfolio performance drove same‑store NOI outperformance; dispositions provided a modest uplift but same‑store results would still be at the top of revised guidance.

• Question from Robin Haneland (BMO): When could you realistically pivot to offense—how much capital is available without breaching leverage targets?
  Response: With current and expected disposals, net debt/EBITDA should move to <5.5x, providing approximately $150–$300M of immediate capital capacity for accretive tuck‑ins while maintaining targets.

• Question from Robin Haneland (BMO): Can you elaborate on timing to achieve the margin improvement targets (65%–66%) outlined in the deck?
  Response: Margin and occupancy targets are multi‑year; dispositions accelerate progress but further gains will come over time via organic leasing and continued expense control.

• Question from Seth Bergey (Citi): How has the buyer pool depth/quality changed since you began dispositions?
  Response: Buyer depth remains strong; improved lending and bank liquidity (loan rates dipping into high‑4s) have increased demand—buyer mix for our sales is roughly half private institutional and half health systems.

• Question from Seth Bergey (Citi): Is the $700M under contract timing‑related and could closings spill into next year, explaining unchanged disposition guidance?
  Response: Yes—timing of many discrete transactions may push some closings into early January; that's largely a timing issue, not a change in disposition intent.

• Question from Michael Carroll (RBC): Given strong private bids, how can HR find strategic acquisitions—do you have relationships or a pipeline?
  Response: Yes—HR maintains a Tier‑1 target list (~400 targets, ~20M sq ft, ~$8B value) and leverages direct owner/broker/health‑system relationships to pursue off‑market, relationship‑driven opportunities.

• Question from Michael Carroll (RBC): You said you can be more aggressive on pricing—what levers will you push (spreads, escalators, retention)?
  Response: Using payback and IRR models, focus is on escalators and retention (reduces downtime/capital) plus low single‑digit mark‑to‑market rent gains to maximize lease economics.

• Question from Michael Gorman (BTIG): With unsecured markets strong, how are you thinking about the $600M bond maturing in Aug‑2026 and accessing capital markets?
  Response: We have ample time before the $600M maturity and will be opportunistic—monitoring favorable spreads and may act if market windows present attractive unsecured financing options.

• Question from Michael Gorman (BTIG): How do 2026 expirations/backups compare to recent escalators—what upside exists?
  Response: Escalators averaged ~3.1% across renewals/new leases this quarter; with tightening supply and portfolio improvement, management expects to push average escalators into the mid‑3% range in 2026.

• Question from Michael Mueller (JPMorgan): What's the right scale of development vs. redevelopment to run—pre‑lease thresholds and expected yields?
  Response: No new ground‑up starts without heavy preleasing; redevelopment is prioritized—targeting ~25 projects averaging $10–15M each with expected cash‑on‑cash yields of ~9–12% and higher IRRs.

• Question from Michael Mueller (JPMorgan): After closing the $700M pipeline, should we expect further large disposition programs?
  Response: No—future dispositions would be nominal and opportunistic on an annual pruning basis, not a large ongoing program.

• Question from John Pawlowski (Green Street): You recorded ~$12M this quarter and ~$22M over two quarters in restructuring—what total restructuring costs remain and what inning are you in organizationally?
  Response: Management sees restructuring in the later innings; charges are being offset by lower G&A (down $2–3M this quarter) and progress is substantial though not yet fully complete.

• Question from John Pawlowski (Green Street): Beyond the highlighted ~100k sq ft single‑tenant roll in 2027, have any other material single‑tenant vacates appeared for '26 or '27?
  Response: No additional material single‑tenant vacates have emerged; the 2027 lease roll remains the primary notable item and discussions to extend occupancy are progressing.

Contradiction Point 1

Disposition Strategy and Market Demand

It reflects differing views on the strategic approach to dispositions and the market demand for healthcare real estate assets, which directly impacts the company's growth prospects and financial health.

Did you reduce the cap rate assumption for dispositions by 25 basis points due to conservatism or non-core assets? - Richard Anderson (Cantor Fitzgerald & Co.)

2025Q3: We have a lot of demand as it turns out, a lot of interest in those assets. We're probably getting a little bit broader than we have in the past. - Peter Scott(CEO)

Has demand for healthcare real estate and grocery-anchored retail changed in recent years regarding buyer preferences for asset types, interest rates, and cap rates? - Omotayo Tejumade Okusanya (Deutsche Bank)

2025Q2: We have a strong demand for these assets. That's why we're selling them at 7% cap rate. - Austen Helfrich(CFO)

Contradiction Point 2

RTOs and Leasing Success

It involves differing statements about the effectiveness and utilization of RTOs (Rent through Occupancy) in leasing activities, which can impact the speed of revenue generation and occupancy rates.

Is the increase in the health system's leasing share due to renewals or new leasing success? - Nicholas Yulico (Scotiabank)

2025Q3: The volume is total leasing. Health systems continue to grow and increase market share, and we're seeing better tenant relations. - Robert Hull(COO)

Why were RTOs not effectively utilized, and how will they be unlocked? - John Joseph Pawlowski (Green Street)

2025Q2: RTOs have been successful, contributing to 17% of new leases in Q2. This program shortens the time from lease execution to cash rent significantly and offers good returns with IRRs in the mid-teens. - Robert E. Hull(COO)

Contradiction Point 3

Dividend Strategy and Earnings Growth

It involves the company's strategic approach to dividends and earnings growth, which are crucial for investor expectations and financial planning.

How are you assessing access to the unsecured market and bond refinancing? - Michael Gorman(BTIG)

2025Q3: We've been very clear that we would only issue equity at levels that we perceive to be in the interest of long-term shareholders. We think that's at a premium to where the stock is trading today. - Peter Scott(CEO)

What strategies are being used for balance sheet management and addressing debt obligations? - Omotayo Okusanya(Deutsche Bank)

2025Q1: We believe that access to the unsecured market will likely allow us to refinance debt ahead of schedule at better rates. And we'll also consider refinancing early if desired. - Austen Helfrich(CFO)

Contradiction Point 4

Disposition Strategy and Market Demand

It involves differing views on the strategic approach to dispositions and the market demand for healthcare real estate assets, which directly impacts the company's growth prospects and financial health.

Why was the cap rate assumption for dispositions reduced by 25 basis points—conservatism or non-core assets? - Richard Anderson(Cantor Fitzgerald & Co.)

2025Q3: We have been very methodical in our portfolio optimization plan and are now in the final stages of executing that plan. We expect to have most of the assets under contract by year-end. - Peter Scott(CEO)

Is the current guidance approved by Pete or subject to refinement? - Juan Sanabria(BMO Capital Markets)

2025Q1: Trending towards covering the dividend in the second half of this year. The dividend is an output of the strategic plan, not an input. More clarity will be provided on future dividend considerations on the next earnings call. - Peter Scott(CEO)

Contradiction Point 5

Acquisition Strategy and Focus

It involves the company's approach to acquisitions, which is crucial for growth and strategic positioning in the market.

How difficult is it to identify strategic investments with strong private bids? - Michael Carroll(RBC Capital Markets)

2025Q3: We have a pipeline of Tier 1 acquisition targets. Cap rates are at record lows, and quality assets are coming to market. - Ryan Crowley(CIO)

How are you evaluating potential future acquisitions? - Unidentified Analyst(Citi)

2025Q1: Acquisitions will focus on core cluster markets, both on and off campus. There's abundance of equity and lending markets for disposition efforts. - Peter Scott(CEO)