Healthcare Realty Trust (NYSE:HR) reported second-quarter results marked by higher occupancy, leasing activity, same-store net operating income growth and an increase to its full-year funds-from-operations outlook. Management said the company’s performance continues to run ahead of objectives outlined in its strategic plan one year ago.
President and CEO Peter Scott said same-store NOI growth averaged 5.7% over the past four quarters, while same-store occupancy rose to nearly 93%. Tenant retention averaged nearly 90%, cash leasing spreads averaged 4.1%, and leverage declined by nearly one turn, he said.
Second-Quarter Operating Results
Executive Vice President and COO Rob Hull said Healthcare Realty executed 323 leases covering 1.5 million square feet during the quarter, including 350,000 square feet of new leasing. Same-store cash leasing spreads averaged 4.8%, average annual escalators were 3%, and the weighted-average lease term was nearly six years.
Tenant retention was 88.5%, contributing to roughly 25 basis points of absorption and bringing same-store occupancy to nearly 93%, Hull said. The company ended the quarter with approximately 460,000 square feet of signed-but-not-occupied leases, representing about 140 basis points of future occupancy.
Year to date, the company has executed 3.5 million square feet of leases, or more than 10% of its total portfolio, according to Scott. The weighted-average remaining lease term was 65 months, up 15 months from when the company disclosed its strategic plan.
Hull said the new and renewal leasing pipeline exceeded 3 million square feet, with about half tied to health systems. The company cited leasing activity with Baylor Scott & White in Dallas-Fort Worth, UW Medicine in Seattle, Kaiser in San Francisco and HCA in Houston.
Management also pointed to sector conditions, including outpatient medical completions near all-time lows as a percentage of inventory and record-high sector occupancy. Hull said health-system merger and acquisition activity could support stronger tenant credit and increase demand for outpatient medical space over time.
Health-System Transactions and Redevelopment
Healthcare Realty highlighted several agreements with health-system partners. In late June, the company completed about 160,000 square feet of CommonSpirit renewals across five states at a 7% positive cash leasing spread. It also agreed to sell CommonSpirit 15 acres of Denver land for $16 million, while retaining future medical office building development rights at the site.
With Wellstar, the company executed 215,000 square feet of renewal leases year to date at a 4% positive cash leasing spread, plus 27,000 square feet of new leases. Healthcare Realty also agreed to sell the Kennestone Cancer Center to Wellstar for $36 million, or more than $600 per square foot, at a mid-5% cap rate.
In early July, the company signed a letter of intent with Ascension Saint Thomas covering 203,000 square feet across three Nashville campuses. The proposed leases carry an 11% positive cash leasing spread and are expected to be executed in the third quarter. Healthcare Realty plans to invest $35 million in three medical office buildings on the Ascension Saint Thomas West Campus, while Ascension plans a separate $120 million hospital and campus modernization.
Scott said the West Campus currently generates about $7 million of NOI and could generate more than $10 million after the redevelopment and leasing efforts are completed. The Ascension opportunity was not included in the company’s previously discussed $20 million upside estimate for its unstabilized lease-up pool, CFO Dan Gabbay said.
During the second quarter, Healthcare Realty invested approximately $25 million in its redevelopment portfolio, which was 67% leased, up 1,400 basis points over the past four quarters. Management is underwriting approximately 10% cash-on-cash yields across that portfolio, with a stated range of 9% to 12% depending on rental-rate growth and occupancy gains.
Capital Allocation and Balance Sheet Activity
The company continued to emphasize redevelopment investments, joint-venture acquisitions, debt management and share repurchases. Since the end of March, Healthcare Realty and its KKR joint venture have closed on or have under contract or letter of intent for nearly $200 million of acquisitions, representing approximately $40 million at Healthcare Realty’s share.
Scott said the going-in cash yield to Healthcare Realty on those transactions is about 7.5%, while the underlying going-in cap rate is in the low-6% range. The assets are located in markets including Greenwich, Connecticut; Charleston, South Carolina; Port St. Lucie, Florida; Seattle; and Denver.
Management said the company is funding capital-allocation priorities through free cash flow and property dispositions. Year to date, it has sold six buildings and three land parcels for about $75 million at a blended 5% cap rate, and it has an additional disposition pipeline of nearly $200 million.
In May, Healthcare Realty issued $700 million of exchangeable senior unsecured notes due 2032 at a 3% coupon. The offering was upsized by $100 million, and proceeds were used to repay $600 million of senior unsecured notes due in August that carried a 3.5% coupon. The company also raised a $400 million unsecured delayed-draw term loan.
Gabbay said the financing actions addressed debt maturities through 2027. With an additional $1.2 billion of liquidity on its line of credit, the company has flexibility through 2029, he said. The blended interest rate on the convertible bond issuance and delayed-draw term loan was approximately 4%, which Scott said was 100 basis points below the company’s original guidance assumption.
Healthcare Realty repurchased $75 million of stock during the quarter. Since announcing its strategic plan, it has repurchased $175 million of shares at a blended price of about $18.50 per share, according to Scott.
Guidance Raised
For the second quarter, Healthcare Realty reported normalized FFO of $0.41 per share, same-store cash NOI growth of 5.1% and funds available for distribution of $0.32 per share. The quarterly dividend payout ratio was 76%.
The company raised full-year normalized FFO guidance by $0.02 to a midpoint of $1.64 per share and increased the upper end of its range to $1.66 per share. It also increased same-store cash NOI growth guidance to 4.25% to 5%, raising the low end by 50 basis points and the high end by 25 basis points.
Gabbay said the updated outlook reflects strong leasing outcomes and year-to-date same-store cash re-leasing spreads of 4% to 5%. Management said it expects strong leasing momentum, high retention and improving lease economics to continue supporting NOI growth in the second half of the year.
About Healthcare Realty Trust (NYSE:HR)
Healthcare Realty Trust (NYSE: HR) is a real estate investment trust specializing in the ownership, acquisition and management of outpatient medical facilities. Headquartered in Nashville, Tennessee, the company’s portfolio is focused primarily on medical office buildings and outpatient healthcare properties that serve hospitals, health systems and other healthcare providers. Its business model centers on securing long-term, triple-net leases to generate stable income streams from a diversified tenant base.
The company’s properties are located across key metropolitan markets in the United States, including major healthcare hubs in the Southeast, Southwest and in select coastal regions.
