Q4 2023 Healthcare Realty Trust Inc Earnings Call

Operator: www.healthcarerealty.com For your patience, the Healthcare Realty Trust fourth quarter earnings conference call will begin shortly. Please stay on the line, www.healthcarerealtytrust.com www.healthcarerealtytrust.com www.healthcarerealtytrust.com Good afternoon all, and welcome to the Healthcare Realty Trust Fourth Quarter Earnings Conference. My name is Adam, and I will be your operator for today. If you'd like to ask a question during the Q&A portion of today's call, you may do so by pressing star followed by 1 on your telephone key.

Thank you for your patience Healthcare Realty Trust fourth quarter earnings Conference call will begin shortly please stay on the launch.

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Good morning, Good afternoon, and welcome to the Healthcare Realty Trust fourth quarter earnings Conference call. My name is Adam and that will be off rates. If it stay if you'd like to ask a question. During the Q&A portion of today's call you may do so by pressing star one on your telephone keypad.

Ron Hubbard: I will now hand the floor to Ron Hubbard, Vice President of Investor Relations, to begin. So, Ron, please go ahead when you are ready. Thank you for joining us today for Healthcare Realty's fourth quarter 2023 earnings conference call. Joining me on the call today are Todd Meredith, Chris Douglas, and Rob Hull. 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 risks are more specifically discussed in the company's Form 10-K filed with the SEC for the year ended December 31, 2023. These forward-looking statements represent the company's judgment as of the date of this call, and the company disclaims any obligation to update this forward-looking material.

On the field to Ron Hubbard, Vice President of Investor Relations to begin. Please go ahead when you're ready.

Thank you for joining us today for healthcare Realty's fourth quarter 2023 earnings conference call.

Joining me on the call today are Todd Meredith, Kris Douglas and Rob Hull.

Binder 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 risks are more specifically discussed in the company's Form 10-K filed with the SEC for the year ended December 31 2023.

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.

Ron Hubbard: The matter discussed in this call may also contain certain non-GAAP financial measures such as funds from operations, or FFO, normalized FFO, FFO per share, normalized FFO per share, funds available for distribution, or FAD, net operating income, NOI, EBITDA, and adjusted EBITDA. A reconciliation of these measures to the most comparable GAAP financial measures may be found in the company's earnings press release for the quarter ended December 31, 20 The company's earnings press release, supplemental information, and Form 10-K are available on the company's website. I'll now turn the call over to Todd. Thank you, Ron. And thank you, everyone, for joining us this morning.

The matters discussed in this call may also contain certain non-GAAP financial measures such as funds from operations or <unk> normalized <unk> <unk> per share normalized <unk> per share funds available for distribution or Fad net operating income NOI EBITDA and adjusted EBITDA.

A reconciliation of these measures to the most comparable GAAP financial measures may be found in the company's earnings press release for the quarter ended December 31 2023.

The company's earnings press release supplemental information and Form 10-K are available on the company's website.

I'll now turn the call over to Todd.

Thank you Ron.

And thank you everyone for joining us this morning.

Todd J. Meredith: Healthcare Realty generated solid quarterly results, meeting or exceeding expectations on several key metrics. Normalized FFO of 39 cents per share for the fourth quarter was steady and in line with our expectations, and same store growth for the quarter and year was in the upper half of our guidance. You will recall we published a bridge last quarter outlining our expectations for multi-tenant occupancy in InnoiGrid, starting with the fourth quarter. We are pleased to report over 50 basis points of positive absorption at the very top end of our expected range for the multi-tenant property, and NOI growth accelerated above the high end of our range to 3.3% for all multi-tenant properties, not just same store. These strong fourth-quarter results were achieved through the focus and incredible efforts of our leasing and operations teams. Looking forward, we see a couple areas where we can keep improving. First, retention.

Healthcare Realty generated solid quarterly results meeting or exceeding expectations on several key metrics nor.

Normalized <unk> of <unk> 39 per share for the fourth quarter was steady and in line with our expectations.

Same store growth for the quarter and year was in the upper half of our guidance range.

You will recall, we published a bridge last quarter outlining our expectations for multi tenant occupancy and NOI growth starting with the fourth quarter.

We are pleased to report over 50 basis points of positive absorption at the very top end of our expected range for the multi tenant properties.

And NOI growth accelerated above the high end of our range to three 3% for all multi tenant properties not just same store.

These strong fourth quarter results were achieved through the focus and incredible efforts of our leasing and operations teams.

Looking forward, we see a couple of areas, where we can keep improving.

First retention.

Todd J. Meredith: We made incremental progress on tenant retention, achieving just over 78% in the fourth quarter, compared to 76% in the third quarter. What's significant is that retention at the legacy HTA properties was in line with the HR, and we see the ability to push retention higher to more than 80%. A second opportunity for improvement is operating. The fourth quarter came in better than expected, at just over 4% growth. That's in part due to lower property. We see more opportunity to reduce expense growth to the 3% level in 2024. Together, higher retention and lower expenses will help us reach the upper end of our 24 goals. What I'm most excited about is our new leasing momentum. Our leasing team signed new leases totaling 425,000 square feet in the fourth quarter.

We made incremental progress on tenant retention, achieving just over 78% in the fourth quarter compared to 70, 76% in the third quarter.

What's significant is that retention at the legacy HDA properties was in line with the HR portfolio.

And we see the ability to push retention higher to more than 80%.

A second opportunity for improvement is operating expenses.

Fourth quarter came in better than expected at just over 4% growth.

That's in part due to lower property taxes.

We see more opportunity to produce expense growth to the 3% level in 2024.

Together higher retention and lower expenses will help us reach the upper end of our 24 goals.

What I'm most excited about is our new leasing momentum our leasing team signed new leases totaling 425000 square feet in the fourth quarter.

Todd J. Meredith: This marks three consecutive quarters averaging over 400,000 square feet. The strong pace of new sign leases is what fuels the occupancy gains in our bridge and forecast.

This marks three consecutive quarters, averaging over 400000 square feet.

Strong pace of new sign leases is what fuels the occupancy gains in our bridge and forecast for 2024.

As we look more broadly at what will drive our 'twenty for growth, we are seeing an uptick in demand from both health systems and independent physician groups.

Todd J. Meredith: As we look more broadly at what will drive our 24 growth, we are seeing an uptick in demand from both health systems and independent physicians. On top of this, supply has steadily tightened, which provides a favorable backdrop for leasing momentum and occupancy. What it comes down to is more tenants chasing fewer MOVs. To illustrate this point, look at replacement rent today versus 2019, construction costs have escalated at an annual average of more than 7% over the last five years; couple this with much higher financing costs, and you have a recipe for much higher replacement. Back in 2019, typical MOV development costs were about $350 a square foot in a place like Dallas, and required yields were in the low sixes, putting net rents around $22 per square foot.

On top of the supply has steadily tightened which provides a favorable backdrop for leasing momentum and occupancy gains.

When it comes down to is more tenants chasing fewer movies.

To illustrate this point look at replacement rents today versus 2019.

Construction costs have escalated at an annual average of more than 7% over the last five years.

Couple this with much higher financing costs and you have a recipe for much higher replacement rents.

Back in 2019 typical mob development costs were about $350 a square foot in a place like Dallas.

Required yields were in the low sixes, putting net rents around $22 per square foot.

Todd J. Meredith: Five years later, equivalent MOV development costs are approaching $500 a square foot, and Rent Yields are now around $8. That means replacement rents are approaching $40. So replacement rents have increased more than 80% in five years, or more than 12% annually. This limits new supply and sets us up to improve occupancy and rates in existing buildings. At Healthcare Realty, we're laser focused on maximizing occupancy gains in 24 hours with great acceleration to follow. Now I'll turn it over to Chris for an overview of our financial and operational results. Thanks, Todd.

Five years later equivalent MLB development costs are approaching $500 a square foot.

And rent yields are now around 8%.

That means replacement rents are approaching $40.

So replacement rents have increased more than 80% in five years or more than 12% annually.

This limit new supply and sets us up to improve occupancy and rates in existing buildings.

At healthcare Realty, we're laser focused on maximizing occupancy gains in 24 with rate acceleration will follow up.

Now I'll turn it over to Chris for an overview of our financial and operational results Chris.

Thanks Todd.

Chris Douglas: It was a solid fourth quarter with a normalized FFO per share of 39 cents, and FFO dollars were $2.7 million higher than the third quarter. The sequential improvement was the result of a $3.1 million reduction in interest expense from asset sales that were used to repay the line. However, this was offset by a $4.2 million reduction in NOI from disposition. Additionally, operating expenses net of recoveries were down $3.7 million sequentially. The reduction in operating expenses was primarily from the reversal of third quarter seasonal utilities as well as lower property taxes. The lower taxes were the result of successful appeals and lower rates, especially in Texas.

It was a solid fourth quarter with normalized <unk> per share of <unk> 39.

<unk> dollars were $2 $7 million higher than the third quarter.

The sequential improvement was the result of a $3 $1 million reduction in interest expense from asset sales that were used to repay the line.

This was offset by $4 $2 million reduction in NOI from dispositions.

Additionally, operating expenses net of recoveries were down $3 $7 million sequentially.

The reduction in operating expenses was primarily from the reversal of third quarter seasonal utilities as well as lower property taxes.

The lower taxes was the result of successful appeals and lower rates, especially in Texas.

Chris Douglas: Approximately $2.4 million of the property tax benefit was related to prior periods and will not repeat in future quarters. The lower property taxes contributed to improved operating expenses. Operating expense growth was 4.1% for the quarter, which was down from 4.8% in the third quarter and 5.3% in the second quarter. However, same store revenue fundamentals also improved. Year-over-year quarterly SAMHSA ROI growth was 2.7%, up 40 basis points from last quarter. Revenue growth of 3.2% was driven by a 3% increase in revenue per occupied square foot and a 20 basis point improvement in average occupancy. Cash leasing spreads in the quarter averaged 3.3%.

Approximately $2 $4 million of the property tax benefit was related to prior periods and will not repeat in future quarters.

The lower property taxes contributed to improved operating expenses.

Operating expense growth was four 1% for the quarter, which was down from four 8% in the third quarter and five 3% in the second quarter.

Same store revenue fundamentals also improved.

Year over year quarterly same store NOI growth was two 7%.

Up 40 basis points from last quarter.

Revenue growth of three 2% was driven by a 3% increase in revenue per occupied square foot.

And a 20 basis point improvement in average occupancy.

Cash leasing spreads in the quarter averaged three 3%.

Chris Douglas: We ended the year with total portfolio in-place rent escalators of 2.81%, which is up 15 basis points since the first quarter of 2023. The improvement was driven two ways.

We ended the year with total portfolio in place rent escalators of 281%.

This is up 15 basis points since the first quarter of 2023.

The improvement was driven two ways.

Chris Douglas: First, from higher escalators for new and renewal leases, which averaged 2.95%. This was well above expiring leases, especially for legacy HTA escalators that were averaging two and a half percent. Second, was addition by subtraction.

First from higher escalators for new and renewal leases, which averaged 295%.

This was well above expiring leases, especially for legacy HCA escalators that were averaging two 5%.

Second was addition by subtraction the average escalator of property sold during 2023 was one 9% significantly below the rest of the portfolio.

Chris Douglas: The average escalator of properties sold during 2023 was 1.9%, significantly below the rest of the portfolio. However, sequential same-store occupancy increased 65,000 square feet, or 20 basis points, to 89.2%. Even more impressive, total portfolio multi-tenant occupancy increased 175,000 square feet sequentially. The strong leasing volumes contributed to an increase in maintenance catbacks. Total maintenance capital expenditure for the year was 18% of NOI, or $152 million. This was in the middle of our guidance range for the year. The FAD payout ratio was over 100% for the year.

Sequential same store occupancy increased 65000 square feet.

20 basis points to 89, 2%.

Even more impressive total portfolio multi tenant occupancy increased 175000 square feet sequentially.

The strong leasing volumes contributed to an increase in maintenance Capex total maintenance capex for the year was 18% of NOI or $152 million.

This was in the middle of our guidance range for the year.

The fad payout ratio was over 100% for the year.

Chris Douglas: With anticipated strong adsorption in 2024, the payout ratio is likely to remain elevated as we invest in tenant buildout. However, we are comfortable the payout ratio will come back down as we fully realize the NOI from the positive adsorption. Net debt to adjusted EBITDA at December 31st was 6.4 times, within our target range. However, net debt was lower as the line of credit was fully repaid a year in from $338 million of asset sales in the quarter.

With anticipated strong absorption in 2020 for the payout ratio is likely to remain elevated as we invest in tenant build outs.

We're comfortable the payout ratio will come back down as we fully realize the NOI from the positive absorption.

Net debt to adjusted EBITDA at December 31 was six four times within our target range.

Net debt was lower as the line of credit was fully repaid at year end from $338 million of asset sales in the quarter.

Chris Douglas: Looking ahead, normalized FFO guidance is $1.52 to $1.58 per share for 2024 and $0.38 to $0.39 for the first quarter. Guidance and the major assumptions are outlined on page 6 of the supplementary we released this morning. To provide context for guidance, we walk forward the major drivers from an annualized fourth-quarter FFO run rate of $1.52 per share. The run rate is adjusted for out-of-period items, such as property tax appeals. The major growth driver in 2024 will be internal operations. Multi-tenant absorption is projected to be 100-150 basis points and generate $21-29 million of growth in cash NOI. Single-tenant cash-in-a-lot growth is projected to be plus or minus 1%, which is below in-place escalators of 2.5% because of two general office expirations. A government services tenant vacated the end of their lease in January.

Looking ahead normalized <unk> guidance is $1 52 to $1 58 per share for 2024, and 38 to 39 for the first quarter.

Guidance and the major assumptions are outlined on page six of the supplemental we released this morning.

To provide to provide context for guidance, we walk forward. The major drivers from an annualized fourth quarter <unk> run rate of $1 52 per share.

The run rate adjusted for out of period items, such as the property tax Appeals.

The major growth driver in 2024 will be internal operations.

Multi tenant absorption is projected to be 100 to 150 basis points and generate 21% to $29 million of growth in cash NOI.

Single tenant cash NOI growth is projected to be plus or minus 1%, which is below in place escalators of two 5% because of two general office explorations.

A government services tenant vacated at the end of their lease in January.

Chris Douglas: The building sits at the front door of Common Spirits St. Anthony Hospital in Denver. When we purchased this property in 2018, the plan was to raise the building and redevelop the parcels. We are working with the hospital on the long-term redevelopment plans and expect to demolish the building later this year. The lease for the other property will expire at the end of January.

The building sets at the front door of common spirit, St. Anthony Hospital in Denver.

When we purchased this property in 2018, the plan was to raise the building and redevelop the parcel.

We are working with a hospital on the long term redevelopment plans and expect to demo. The building later this year.

So at least for the other property will expire at the end of January January we are marketing the building with the goal of selling the property before year end.

Chris Douglas: We are marketing the building with a goal of selling the property before year end. We have not projected any new rent or sale proceeds from either property in 2024, so any progress on these fronts would be upside. G&A expenses are projected to increase $5.8 million at the midpoint.

We have not projected any new rent or sale proceeds from either property in 2024, So any progress on these fronts would be upside.

G&A expenses are projected to increase $5 $8 million at the midpoint.

Chris Douglas: The increase is primarily related to returning to the run rate incentive compensation level, as materially lower performance-based compensation in 2023 is creating a tough comp. The other major headwind is a $200 million interest rate swap with a 1.21% fixed rate that expired in January. In preparation for the expiration, we executed new interest rate swaps during the fourth quarter at an average rate of 4.71%. The new swaps will cost $7 million more annually. There are no acquisitions assumed in guidance.

The increase is primarily related to returning to run rate incentive compensation levels as materially lower performance based compensation in 2023 is creating a tough comp.

The other major headwind is a $200 million interest rate swap with a 1% to 1% fixed rate that expired in January.

In preparation for the exploration, we executed new interest rate swaps during the fourth quarter at an average rate of 471%.

The new swaps will cost $7 million more annually.

There are no acquisitions assumed in guidance.

Chris Douglas: We are projecting $150 million to $250 million in dispositions to match fund or capital needs during this time. The multi-tenant absorption in our guidance is consistent with the occupancy and NOI bridge we introduced last quarter. As Rob will discuss in more detail, an updated occupancy bridge is included on page 21 of our investor presentation. It shows that we expect sustained positive momentum on occupancy absorption through 2024. This will help drive accelerating NLI growth and generate a strong FFO exit velocity going into 2025. I will now turn it over to Rob for more detail on our leasing progress. Thanks, Chris.

We are projecting $150 million to $250 million of dispositions to match fund our capital needs during the year.

The multi tenant absorption in our guidance is consistent with the occupancy and NOI bridge, we introduced last quarter.

As Rob will discuss in more detail and updated occupancy bridge is included on page 21 of our investor presentation.

It shows that we expect sustained positive momentum on occupancy absorption through 2024.

This will help drive accelerated NOI growth and generate a strong <unk> exit velocity going into 2025.

I'll now turn it over to Rob for more detail on our leasing progress.

Thanks, Chris.

Robert E. Hull: Healthcare Realty posted another strong quarter of leasing activity. New signed leases totaled 425,000 square feet, which was 13,000 square feet greater than our fourth quarter projection. For the year, our team signed 449 new lease deals for a total of almost 1.5 million square feet. Approximately 60% of these came from the legacy HGA portfolio, which represents slightly over half of our multi-tenant portfolio. In addition, 226 renewals totaling 1.2 million square feet were signed during the quarter, bringing total renewals for the year to 817, totaling 4.2 million square feet. Our leasing team, under the leadership of Amy Poley, Senior VP of Leasing, did an extraordinary job of driving momentum in 2023. I want to commend Amy and her team for their hard work and tenacity.

Healthcare Realty posted another strong quarter of leasing activity.

New signed leases totaled 425000 square feet that were 13000 square feet greater than our fourth quarter projections.

For the year, our team signed 449, new lease deals for a total of almost $1 5 million square feet.

Approximately 60% of these came from the legacy <unk> portfolio.

Which represents slightly over half of our multi tenant portfolio.

In addition, 226 renewals totaling one 2 million square feet were signed during the quarter.

<unk> total renewals for the year to 817 at.

That totaled $4 2 million square feet.

Our leasing team under the leadership of Amey Poli senior VP of leasing did an extraordinary job of driving momentum in 2023.

I want to commend Amy and her team for their hard work and tenacity.

Robert E. Hull: Strong leasing throughout the year culminated in 518,000 square feet of multi-tenant lease commencements in the fourth quarter. Combined with lower sequential move-outs, multi-tenant occupancy jumped 53 bases. This equates to 175,000 square feet of net absorption.

Strong leasing throughout the year culminated in 518000 square feet of multi tenant lease commencements in the fourth quarter.

Combined with lower sequential move outs multi tenant occupancy jumped 53 basis points.

This equates to a 175000 square feet of net absorption.

Okay.

Robert E. Hull: This level is at the upper end of the range we provided in the Multi-Tenant Occupancy and NOI Bridge published in November of last year. On the disposition front, Healthcare Realty sold 19 properties for $656 million at an average cap rate of 6.6% during the year. These were largely non-core assets with 34% non-MOV and 63% single-tenant. We also fully exited smaller markets like Sebring, Florida, and Evansville, Indiana. What I like most is that we improved the growth profile of the portfolio by selling properties with annual escalators averaging 1.9%, versus 2.8% for the broader portfolio. Additionally, all MOB operating fundamentals remain healthy.

This level is at the upper end of the range, we provided in the multi tenant occupancy and NOI NOI Bridge published in November of last year.

On the disposition front healthcare Realty sold 19 properties for $656 million at an average cap rate of six 6% during the year.

These were largely non core assets with 34% non MLB and 63% single tenant.

We also fully exited smaller markets like Sebring, Florida in Evansville, Indiana.

What I like most as we improved the growth profile of the portfolio by selling properties with annual escalators, averaging one 9% versus.

Versus two 8% for the broader portfolio.

Our <unk> operating fundamentals remained healthy the transaction market continues to be governed by interest rate volatility.

Robert E. Hull: The transaction market continues to be governed by interest rate volatility. Until we see stable rates over a longer period of time, we expect lower transaction volumes and smaller deals. For now, we see MOBs trading in a range of 6% to 7%, with the higher quality properties in the low to mid 60s. Turning to expectations for 2024, Healthcare Realty's outlook for leasing is strong.

Yes.

Until we see stable rates over a longer period of time, we expect lower transaction volumes and smaller deal sizes.

Yeah.

For now we see some of these trading in a range of 6% to 7% with the higher quality properties in the low to mid sixes.

Turning to expectations for 2020 for.

Healthcare royalties outlook for leasing is strong.

Robert E. Hull: Our new lease pipeline remains robust at 1.5 million square feet and provides visibility into several quarters of leasing volume. However, across the country, new MOV development starts have been trending down over the past 12 months. In the fourth quarter, they were down by over 40% year over year.

New lease pipeline remains about remains robust at one 5 million square feet and provides visibility into several quarters of leasing volume.

Across the country, New MLB development starts have been trending down over the past 12 months.

In the fourth quarter, they were down by over 40% year over year.

Robert E. Hull: This trend has been driven by tightening credit markets and, as Todd mentioned, a healthy increase in construction costs over the past five years. Meanwhile, occupancy across MOBs has continued to climb. Additionally, we are seeing increased health system demand for space as volumes and financial measures improve. Recently, a couple of for-profit hospital operators reported a 3.6% year-over-year increase in outpatient surgical procedures, and Hospital Operating Margins steadily improved throughout 2026. Positive supply-demand fundamentals and improving hospital performance will serve as tailwinds for our 2024 absorption goal. We updated our multi-tenant occupancy and NOI bridge in our recently published investor presentation. The primary change is to the start, reflecting the sale of some highly occupied properties during the fourth quarter and the completion of a development. It is also worth noting that we expect absorption during the second half of 2024 to be stronger than in the first. These are shaped by two seasonal patterns.

This trend has been driven by tightening credit markets and as Todd mentioned, a healthy increase in construction costs over the past five years.

At the same time occupancy across some obese has continued declines.

Additionally, we are seeing increased health system demand for space as volumes and financial measures improve.

Recently, a couple of for profit hospital operators reported a three 6% year over year increase in outpatient surgical cases.

And hospital operating margins steadily improved throughout 2023.

Positive supply demand fundamentals and improving hospital performance will serve as a tailwind for our 2020 for absorption goals.

We updated our multi tenant occupancy and NOI bridge and our recently published an investor presentation.

The primary changes to the starting occupancy reflecting the sale of some highly occupied properties during the fourth quarter and the completion of the development.

It is also worth noting that we expect absorption during the second half of 2024 to be stronger than in the first.

These are shaped by two seasonal patterns.

Robert E. Hull: First, we have about 2.7 million square feet of expirations in the first half of the year versus 2.1 million in the second. Even with a consistent renewal rate, we expect more move-outs in the first half of the year versus the second. Second, new lease commencements have historically been lower in the first half of the year versus the second.

First we have about $2 7 million square feet of expirations in the first half of the year versus $2 1 million in the second.

Even with the consistent renewal rate, we expect more move outs in the first half of the year versus the second.

Second new lease Commencements have historically been lower in the first half of the year versus the second.

Robert E. Hull: As a result, we expect net absorption in the second half of the year to be about 200,000 square feet greater than the first. We are reiterating our expectation for 100 to 150 basis points of occupancy gain in 2024 on top of the 53 basis points of absorption this quarter. Our leasing team is off to a great start. They are energized by growing demand for healthcare services and a tightening supply-demand backbone. Looking ahead, I'm confident in our ability to drive absorption that translates into multi-tenant NOI growth of 4.5% to 5.5% in the second half of 2024. Now I'll turn it back to Todd for some final comments. Thank you, Rob.

As a result, we expect net absorption in the second half of the year to be about 200000 square feet greater than the first.

We are reiterating our expectation for 100 to 150 basis points of occupancy gain in 2024 on top of the 53 basis points of absorption this quarter.

Our leasing team is off to a great start this year. They are energized by growing demand for health care services, and a tightening supply demand backdrop.

Looking ahead and confident in our ability to drive absorption that translates into multi tenant NOI growth of four five to five five in the second half of 2024.

Now I'll turn it back to Todd for some final comments.

Thank you Rob before we begin our Q&A I'll touch on capital allocation and our outlook for 2004.

Todd J. Meredith: Before we begin our Q&A, I'll touch on capital allocation and our outlook for 24. We exceeded our own disposition expectations in 2023. We sold $656 million at a cap rate of 6.6% for the year, with over half occurring in the fourth quarter.

We exceeded our own disposition expectations in 2023, we sold $656 million at a cap rate of six 6% for the year with over half occurring in the fourth quarter.

Todd J. Meredith: And what's significant is these sales improve the quality and growth profile of our portfolio. Looking ahead, we're shifting to a more routine annual pace of portfolio optimization. By 24, we expect dispositions of $150 to $250 million, which will fund capital obligations including redevelopment and development.

And whats significant is these sales improve the quality and growth profile of our portfolio.

Looking ahead, we're shifting to a more routine annual pace of portfolio optimization.

24, we expect dispositions of $150 million to $250 million, which will fund capital obligations, including redevelopment and development.

Beyond this we are pursuing accretive capital allocation opportunistically.

Todd J. Meredith: Beyond this, we're pursuing a creative capital allocation opportunity. We continue to work towards strategic JV partnerships that diversify our capital sources and extend our ability to meet long-term provider demand. In our initial 24 guidance, we've conservatively assumed no JV transactions.

We continue to work towards strategic JV partnerships that diversify our capital sources and extend our ability to meet long term provider demand.

And our initial 24 guidance, we've conservatively assumed no JV transactions.

Todd J. Meredith: Finally, we are outlooked for 2024. We've updated our occupancy and NOI bridge. Building on the strong absorption in the fourth quarter, we expect healthy occupancy gains and NOI growth in 2024, consistent with what we communicated last. For FFO guidance, robust multi-tenant absorption and NOI growth is the primary driver that moves us into the upper half of our guidance cycle. For Healthcare Realty, sustained operational growth in 24 will set the table for attractive FFO and FAD growth in 25. Operator, we're now ready to begin the Q&A period. Thank you. As a reminder, if you would like to ask a question today, please press star followed by one on your telephone keypad now to enter the queue. We're preparing to ask you a question. Please ensure that you are unmuted locally.

Finally.

Our outlook for 'twenty four we've updated our occupancy bridge and our occupancy and NOI Bridge building on the strong absorption in the fourth quarter, we expect healthy occupancy gains and NOI growth and 24, consistent with what we communicated last quarter.

For <unk> guidance robust multi tenant absorption in NOI growth is the primary driver that moved us into the upper half of our guidance range.

For healthcare Realty sustained operational growth in 'twenty, four will set the table for attractive <unk> and fad growth and 25.

Operator, we're now ready to begin the Q&A period.

Yes.

As a reminder, if you would like to ask a question today. Please press star followed by one on your telephone keypad announcements the queue. We're preparing to ask you. A question. Please ensure you're on mute locally.

Todd J. Meredith: Our first question comes from Michael Griffin from Citi. Michael, please go ahead; your line is open. Great, thanks. Todd, maybe I can go back to your comments on the dividend first. I think if you look at guidance for both normalized FFO and CapEx, it implies about a 107% payout ratio for 2024. I know the guidance has been elevated for some time, and you talked about maybe being able to grow into a healthier payout ratio. But at some point, you know, could a potential cut be warranted? And any color around that would be helpful.

Our first question comes from Michael Griffin from Citi. Michael. Please go ahead. Your line is open.

Great. Thanks.

Todd maybe I can go back to your comments on the dividend first.

If you look at guidance for both normalized <unk> and Capex. It implies about 107% payout ratio for 2024 I know the guidance has been elevated for some time and you talked about maybe being able to grow.

Healthier payout ratio, but at some point.

Could it potentially be warranted and any color around that would be helpful.

Sure.

Todd J. Meredith: Sure. Michael, we've certainly said that for a while, that we think that as we ramp up our absorption and invest in TI, we'll certainly see that capital spend continue. So, as Chris described in his remarks, we expect a similar payout ratio in 2024 to 2023, kind of in that 100%, 700%, 10% range. And, you know, we're comfortable with that because we know we're investing the capital that will generate the NOI that will flow through to FFO and FAD afterwards. And so, we really see 2025 as an important transition in that. And we're very bullish on what we see. Obviously, we'd love it to happen sooner, like everyone, but we think, you know, the key is that operational improvement and investing in that capital to generate the NOI. So, our view is we feel very comfortable, as Chris remarked, that we can get there in 2025. And so, certainly, we're not thinking about a cut. The board is not thinking about that at this point.

Michael We've certainly said that for a while that we think that as we ramp up our absorption and invest in Ti that we'll certainly see that capital spend continue so as Chris described in his remarks, we expect a similar payout ratio in 'twenty four as 'twenty three kind of in that debt.

100, 710% range.

And we're comfortable with that because we know we're investing the capital that will generate the NOI that will flow through to <unk> and Fad afterwards, and so we really see 25 as an important transition in that so we're very bullish on what we see obviously, we'd love it to happen sooner like everyone, but we think the key is that operational.

<unk> and investing in that capital to generate the NOI. So our view is we feel very comfortable as Chris remarked that we can get there in.

In 'twenty five and so certainly we're not thinking about the board is not thinking about that at this point in.

Todd J. Meredith: And obviously, you know, we can't control all market conditions, but our view is operationally, we can deliver the NOI that will improve that ratio. Yeah, and just to follow up on that, I mean, what kind of payout ratio are you comfortable with? And you know, how long would you kind of have to keep that as is until you grow into the cash flow? Yeah, I mean, I think our view is that again, 2024 looks a lot like 2023 in terms of the payout ratio, but we think 2025 starts to, you know, drive towards that covered dividend level. And obviously, what we like long term, obviously, just drive much lower than that, you know, into the 90% or even below the 90% level.

Obviously, we can't control all market conditions, but our view is operationally we can deliver.

The NOI that will improve that ratio.

Yes, and just to follow up on that I mean, what kind of payout ratio are you comfortable with and how long would you kind of have to keep that as is until until you would grow into the cash flows.

Yes, I mean, I think our view is that again in 2024 looks a lot like 'twenty three in terms of the payout ratio, but we think 25 starts to drive towards that covered dividend level and obviously, what we like long term, obviously to drive much lower than that into the the 90% or even below 90% level. So.

Todd J. Meredith: So that's certainly the path that we see. We know it's, you know, we'd love to see it sooner, but we think that starts to take shape in 2025. Gotcha. And then just maybe one on the JV or disposition front. I know, I think at your investor day back in October, you laid out about 400 to 500 million in funding, seed funding into joint ventures, versus your guidance now that sort of pivoted away from that. I guess what changed between then and now?

That's certainly the path that we see we know.

We'd love to see it sooner, but we think that starts to take shape in 'twenty five.

Got you.

And then just maybe one on the on the JV or disposition front I know I think at your Investor Day back in October you laid out about a $400 million to $500 million funding seed funding into joint ventures versus your guidance now that sort of pivoted away from that.

I guess what changed between then and now is it a function of where cap rates or interest rate volatility that seems like kind of a large <unk> and <unk>.

Todd J. Meredith: Is it a function of where cap rates are, or interest rate volatility? You know, that seems like kind of a large pivot in a shorter amount of time. So just curious what your thinking on that was.

Amount of time, so I'm, just curious what youre thinking on that was.

Todd J. Meredith: Yeah, I wouldn't describe that we're turning away from that. In terms of scale, I think what we've talked about, you know, in recent times since Investor Day, whether it was earnings or a nary with folks is that, you know, clearly, as Rob described the cap rate environment, there is a lot of interest rate volatility and financing challenges that go into that. And so our view is we've not been in a hurry. Obviously, we've had a very large amount of dispositions that have more than covered what we needed in capital. So our view is there's no reason to hurry.

Yes, I wouldnt describe that were turning away from that.

Of scale I think what we've talked about in recent time.

<unk> since Investor day, whether it was earnings or NAREIT with folks is that clearly as Rob described the cap rate environment. There is a lot of interest rate volatility and financing challenges that go to that and so our view is we've not been in a hurry obviously we've had very.

A large amount of dispositions that are more than covered what we needed on capital. So our view is there is no reason to hurry.

Robert E. Hull: We want to be more strategic and patient than too rushed on that. And time is certainly serving us well, because I think as we turn 24, we've seen a pickup in how things are going. Obviously, we're all navigating, you know, interest rate volatility, but our view is that we see a couple of transactions, maybe rather than just one. But we still think over time, we will generate proceeds that kind of are in that, you know, call it, 300 to 500 million range. It just may take a couple of transactions of a couple of different styles that, for us, are strategic and helpful. Some may be more core, you know, investment oriented. Some may be more, you know, value-add development, or redevelopment oriented. So we still see that coming together. We're just being patient here as we kind of navigate interest rate volatility. All right, that's it for me. Thanks for the time. The next question comes from Connor Saversky from Wells Fargo. Connor, your line is open, please go ahead. Good morning.

We want to be more strategic and patient. Then then too rushed on that and time is certainly serving as well because I think as we turned into 24.

We've seen a pickup in how things are going obviously, we're all navigating interest rate volatility, but our view is we see a couple of transactions, maybe rather than one but.

But we still think over time, we will we will generate proceeds that kind of are in that.

Call it $3 million to $500 million range. It just may take a couple of transactions a couple of different styles.

For us our strategic and helpful. Some may be more core investment oriented some may be more.

Value add development redevelopment oriented so we still see that coming together, just just being patient here as we kind of navigate interest rate volatility.

Alright Thats it from me thanks for the time.

It's Michael the next question comes from Carlos <unk> from Wells Fargo. Your line is open. Please go ahead.

Good morning, Thank you for the time.

Robert E. Hull: Thank you for your time. I have one question on the leasing pipeline. In the NARIP presentation, you had the number at 1.7 million square feet. It looks like in the new presentation now you have a range of 1.4 to 1.7. I'm just curious what's driving the change there, or whether that's just a function of having more visibility into the Q4 expectations. Yeah, I think that pipeline, I mean, it, it, it, moves around all the time. I mean, things come in and out of there.

One question on the leasing pipeline and the NAREIT presentation, you have the number at one 7 million square feet.

It looks like in the new presentation now you have a range of one four to $1 seven I'm just curious what's driving the change there or whether that's just a function of having more visibility into the Q4 expectations.

Yes, I think that pipeline I mean it did.

It moves around all the time, I mean things come in and out of there and it's.

We think that that the range that we put in the investor presentation. At the 107 is reflective of where we think that pipeline will kind of bounce around and we do think that it does provide us good visibility as you said into the coming quarters of.

Robert E. Hull: We think that the range that we put in the investor presentation of the 1.417 is reflective of where we think that pipeline will bounce around. We do think that it does provide us with good visibility, as you said, into the coming quarters of expectations for new leasing. And the way we think about it is that in that range that we provided, 1-4 to 1-7, you know, we think that that provides good visibility into several quarters worth of new signed leasing activity. And so we're comfortable that the activity that we're seeing, that we laid out in there, that it's. That pipeline supports our assumptions for 2020. Okay, thanks for that. And then, in consideration of expirations through 2024, almost 6 million square feet, am I right to think about maybe a 300,000, 400,000 square foot number per quarter as a reasonable target to keep that snow? ratio in the same place.

Foundations for new leasing and the way, we think about it is that in.

In that range that we provided at 104 to $1. Seven we think that that provides good visibility several quarters worth of new signed leasing activity and so we're comfortable that the activity that we're seeing and that we laid out in there.

That is.

That pipeline supports our our assumptions for 2024.

Okay. Thanks for that and then in consideration of.

Explorations through 2024, almost 6 million square feet.

Right to think about maybe a <unk>.

300000, 400000 square foot number per quarter as a reasonable target to keep that snow race.

<unk> ratio in the same place.

Yes, I think on the on the in terms of the explorations I mean, the way that we look at it as that.

Robert E. Hull: Yeah, I think in terms of the expirations. The way that we look at it is that, you know, we've got more expirations in the first half of the year. And so, we are expecting more move-outs there. And so, that combined with, you know, typically the lease commencements that we see are lighter in the first half of the year, it's the way that we see that the absorption number will be lighter in the first half of the year than it would be... So I think what's causing that increase in expirations or move-outs that we modeled in the bridge is generally from the higher expectation for expirations and the corresponding renewal rate that we've Okay, and last one for me, just on the office assets and the SNF sold during 4Q, could you please provide, For more information, visit www.healthcarerealtytrust.com Yeah. I don't have the specific number in front of me, but I can give you the cap rates. So, effectively, you know, we were about 6364 for everything sold in the fourth quarter. The SNFs, you know, we weren't recognizing any income, so those were, you know, zero.

We've got we've got more expirations in the first half of the year.

And so we are expecting more move outs.

And so that combined with typically the lease commitments commencements that we see are lighter in the first half of the year.

The way that we see that absorption number because of that.

<unk> will be will be lighter in the first half of the year than the second.

So I think I think whats with.

What's causing that increase in and explorations are move outs that we modeled in the bridge.

Generally from the higher expectation for expert expirations and a corresponding renewal rate that we've applied to that.

Okay and last one for me just on the office assets in the sniff sold during <unk> could you provide the full NOI contribution from those assets.

To save me from doing the math, if you could provide the average cap rate on the MLB sold during the quarter that would be appreciated.

Yes.

I don't have the specific number in front of me, but I can give you the cap rates. So effectively we were about 6364 for everything sold in the fourth quarter.

The sniffs.

We werent recognizing income so those were <unk>.

Zero.

Chris Douglas: You know, we did have some offices that were up on the upper end. So, if you take those extremes out on either side, it ends up being about half of the total proceeds, and the MOBs end up, that cap rate ends up being in the high sixties, 6869 range. Great, thank you for the call. Next question, Councilor McCormick, from Juan Sanabria from BMO Capital Markets. Juan, your line is open, please go ahead. Hi, good morning.

We did have some office that were up on the upper end. So if you take those extremes out on either side ends up being about half of the total proceeds.

And the Mlps.

That cap rate ends up being in.

In the high sixes 6869 range.

Great. Thank you for the color.

Got it <unk> question comes from Colin.

From Juan Sanabria from BMO capital markets. Your line is open. Please go ahead.

Hi, Good morning, just wanted to ask about G&A.

Chris Douglas: I just wanted to ask about GNA. I was just curious if you could talk about the size of the increase and the thoughts behind that. I seem to recall that, post-HTA, the GNA was maybe sacrificed a little bit in terms of compensation to kind of hit some of the numbers, but it seems like that maybe was just a temporary phenomenon. Is that the right way to think about it? get one really it's it's not.

I'm just curious if you could talk about the size of the increase in the thoughts behind that I seem to recall that post HCA.

G&A was maybe sacrifice a little bit in terms of compensation too.

Kind of hit some of the numbers, but it seems like that maybe it was just a temporary phenomenon as kind of that the right way to think about it.

One really it's not.

Chris Douglas: It's not a change in the target numbers for compensation. It's really the fact that 23 and even 22 were softer in terms of the actual results for incentive comp, and therefore, you end up with a lower number in the actual periods. And then really, 24, what we have in our guidance is simply returning to, in essence, the accrued target of the incentive program. So it's just comparing target levels to under-target levels in the prior years, not a big change of any sort in the actual comp programs or all-in amounts. So it's really, as Chris described it, really just a tough comparison, and it's the accrual you always put in place for your comp program compared to the actual results in the prior. Okay, but the 10% growth isn't factoring in any sort of investments in the platform or technology. It's just the comp and getting back to kind of the average hurdle rate that you were below. Is that fair then?

It's not a change in the target numbers in compensation, it's really the fact that 23 and even 22 were softer in terms of the actual results for incentive comp and therefore, you end up with a lower number and the actual periods and then really 24, what we have in our guidance is simply return.

<unk> two.

In essence, the accrued target of the incentive program. So it is just comparing kind of target levels to under target levels in the prior year is not a big change of any sort and the actual comp programs or.

All in amounts so its really as Chris described it really just a tough comparison.

And just it's the accrual you always put in place for your comp program compared to the actual results in the prior years.

Okay. So the 10% growth isn't factoring in any sort of.

Investments in our platform our technology is the key.

Comps are getting back to that.

The average hurdle rate that you were below is that does that further.

Chris Douglas: I mean, certainly, there certainly is investment going on inside of our platform. We brought in some good, solid people that we think are helping us as we relate to some of the analytics and some of the portfolio strategy and things we're doing. But I would say that that's not the major difference driving the change.

I mean, there is certainly is investment going on inside of our.

Inside of our platform.

We brought on some some good solid people that we think are helping us.

As it relate to some of the analytics and some of the portfolio strategy and things we're doing.

But I would say that that's not the major difference.

Of what's driving the change it really has to do with what Tom was talking about of kind of returning to normalized.

Chris Douglas: It really has to do with what Todd was talking about of kind of returning to normalized incentive comps. So at the midpoint, it's $5.8 million. That's the increase. It ends up being about, it's around $4 million or so that is getting back to that normalized incentive comp range.

Incentive comp so out of the at the midpoint $5 $8 million.

The increase.

It ends up being about around $4 million or so that you.

Getting back to that normalized.

Chris Douglas: And so the balance of the difference is just growth in G&A for the things we're talking about. That ends up being more of like 3% growth on a year-over-year basis. So really, the main difference has to do with what Todd was talking about of that returning to the run rate on performance compensation. Very helpful.

Incentive comp range and so the balance of the difference is just growth in G&A for the things you are talking about that ends up being more of like a 3% growth.

On a year over year basis. So the really the main difference has to do with what Tom was talking about that.

Turning to the run rate on the.

Performance compensation.

Very helpful. Thanks, and then.

Todd J. Meredith: Thanks. And then I just wanted to kind of try to square things as the message has evolved over the last few quarters. If I look back to the first quarter, twenty-four, kind of talked about a baseline 24 FFO growth of five to seven and seems to run a wide growth of 46, 46% for the whole company, not just multi-tenant, I guess. It sounds like there's some single tenant explorations that maybe weren't factored in there may have been a bit of a surprise, but just curious if you could try to talk through what The leasing pipeline you guys have been talking about has been robust for a while, and you started to see some of the benefits come through in the first and fourth quarters so just, If you could just kind of square those two, that'd be super helpful, as we're definitely getting asked that on our end. Sure.

I just wanted to kind of try to square things.

The message has evolved over the last few quarters, if I look back to the first quarter 'twenty for.

You kind of talked about a baseline 24 <unk> growth of five to seven in same store NOI growth of 46, 4% to 6% for the whole company.

Not just multi tenant I guess.

It sounds like Theres, some single tenant explorations that maybe werent factored in there may have been a bit of a surprise, but just curious if you could try to.

Talk through whats changed over the course of the year.

<unk> pipeline you guys have been talking about has been robust for a while you started to see some of that benefits come through in the FERC in the fourth quarter. So just.

If you could just kind of square those two that would be super helpful. As we're definitely getting asked that on our end.

Todd J. Meredith: One, I think just big picture. We talked about that 4% to 6% growth a year ago. And I think what you're seeing in our bridge, which we laid out last quarter and sort of reiterated and updated this quarter, is really getting that multi-tenant throughout the year, as Rob described it, you know, obviously ramping up in the second half, just some of that due to expiration patterns. Some of that being due to the leasing that we really ramped up in 2023, you saw start to come through in the fourth quarter and really continuing to contribute throughout 24. So it's putting all those pieces together to get to, in the back half of the year, we show growth that starts to get into that 5% range, plus or minus. Obviously, we'd love to do it sooner.

Sure Juan I think just big picture.

A year ago did talk about that 4% to 6% growth and I think what youre seeing in our bridge that we laid out last quarter and reiterated and updated this quarter is really getting that multi tenant throughout the year as Rob described it obviously ramping up in the second half just some of that due to exploration patterns some of that.

<unk>.

Being due to the leasing that we really ramped up in 'twenty. Three you saw started to come through in <unk> in the fourth quarter and really continuing to contribute throughout 2000 and for US it's putting all those pieces together to get to at the back half of the year, We show growth it starts to get into that 5% range plus or minus.

Obviously, we'd love to do it sooner one of the challenge is probably that has changed a little bit since a year ago.

Todd J. Meredith: You know, one of the challenges that probably have changed a little bit since a year ago is operating expenses. We're making great headway, some nice progress this quarter, but we're certainly projecting continued improvement on that going forward. And again, a ramp up, or maybe a ramp down in the rate of growth in operating expenses. So, you know, some of it is just, you know, obviously, knowing more detail and specificity as we've approached it, but we see the momentum and really driving towards that same goal, that 4% to 6% multi-tenant growth goal, and getting there throughout the course and really by the end of 2024. Okay, and then just one last quick follow up. Sorry.

Operating expenses have been a little more stubborn, we're making great headway. Some nice progress this quarter, but we're certainly projecting continued improvement on that going in again, a ramp up or maybe a ramp down in the rate of growth.

Operating expenses so.

Some of it is just obviously, knowing more detail and specificity as we've approached it but we see the momentum and really driving towards that same goal at 4% to 6% multi tenant growth goal and getting there throughout the course and really by the end of 'twenty four.

Okay, and then just one last quick follow up sorry.

Robert E. Hull: You guys were saying that the absorption for the quarter was at the high end, but occupancy came in below on the multi-tenant side. Could you just help us square that, those two? comments... Wait.

You guys were saying that the absorption for the quarter was at the high end.

Occupancy came in below that.

On the <unk>.

Multi tenant side could you just.

Help us square those two.

Hi, Matt.

<unk>.

Robert E. Hull: Yeah, if you look in our supplemental or our earnings press release, we lay this out very clearly that it's on page five of the, sorry, four of the supplemental. And really, the delta was, I think Rob touched on this in his remarks, the properties we sold in the fourth quarter that were part of that calculation, that starting occupancy, when you sold those that had higher occupancy in those particular cases, it brought down the starting point. And we also completed a development. So when you layer those things in, your starting occupancy actually comes down a bit. So actually, the delta is still very much 53 basis points and 175,000 square feet of absorption.

Yes, if you look at our whether it's our supplemental or our earnings press release, we laid this out very clearly that really it's on page five of the sorry for the supplemental and really the Delta was I think Rob touched on this in his remarks, we the properties we sold in the fourth quarter.

That was part of that calculation that starting occupancy.

When you sold those that had higher occupancy in those particular cases it brought down in the starting point and also we completed a development. So when you layer those things in your starting occupancy actually came down a bit.

So actually the Delta is still very much the 53 basis points and 175000 square feet of absorption. So.

Robert E. Hull: The starting occupancy that we projected in the bridge last time obviously had to be adjusted for those transactions, the sales, and the development completion. And that's something that you're always adjusting as your portfolio evolves. So we tried to make that as clear as possible to show that the starting point is just different, and the change is still obviously at the top end of the range. Very helpful. Thanks and I appreciate it. Thanks, Juan. The next question is from Mike Mueller from J.P. Morgan. Mike, your line is open, please go ahead.

The occupancy starting occupancy that we projected in the bridge last time, obviously had to be adjusted for those transactions the sales and the development completion and Thats something that Youre always adjusting as your portfolio evolves. So we tried to make that as clear as possible to show that the starting point is just different and the.

<unk> is still on.

Obviously at the top end of the range.

Super helpful. Thanks.

I appreciate it.

Thanks Juan.

The next question is from Michael Mueller from J P. Morgan.

Line is open. Please go ahead.

Robert E. Hull: Yeah, a couple of occupancy leasing questions. I guess you finished the year, multi-tenant, 85-2, and just kind of given the commentary about the timing of move-outs, first commencements, and stuff, is it safe to say that, at least in one case, occupancy dips from 85-2 before going up, or does it just kind of head up regardless of that from year end? I would say that, you know, we think that occupancy is going to move up from here. Those are our expectations.

Yes, hi.

Couple of occupancy leasing questions.

I guess you finished year multi tenant 85, two and just kind of given the commentary about the timing of move outs versus commencement and stuff.

Is it safe to say that at least in <unk> occupancy dips from 85, two before going up or does it just kind of head up regardless of that from year end.

Yes.

I would say that we.

Think that occupancy is going to move up from here those are our expectations, we don't expect to see a dip.

Robert E. Hull: We don't expect to see a dip moving from Q4 to Q1. It's just not going to be at the same pace that you saw in the fourth quarter, so it could be a slight positive as opposed to the significant positive absorption we saw in the fourth quarter.

Moving from.

Q1.

So that could be at the same patch that you saw in the fourth quarter, yes.

It could be a slight positive as opposed to the significant.

A positive absorption we saw in the fourth quarter.

Got it Okay, and then I guess on the lease side. The I think it was 87 two at year end give or take for the leased rate.

Robert E. Hull: Okay. And then, on the lease side, the 80. I think it was 87.2 at year end, give or take for the lease rate. You've mapped out in the presentation where you think physical occupancy is going. Do you expect the lease rate to climb higher as well, or is what you're seeing on the occupancy side just the commencement of, you know, what's embedded in that lease rate? Yeah, I think that what we're seeing in terms of lease commitments and commencements moving forward, we would expect that those two would move together right now. We've got about 210 basis points, a difference between the two, 87.2 and or 8. And I would expect that those two would move together as occupancy moves up. I don't see in the near term that... getting the delta between the two. Got it.

You've you've mapped out in the presentation, where you think physical occupancy is going do you expect to lease screet decline higher as well or is what youre seeing on the occupancy side, just the commencement of whats embedded in that lease great.

Yes, I think that the.

What we're seeing in terms of lease commitments Commencements moving forward I would expect that the.

Those two would move right now we've got about 210 basis points of.

Difference between the 287 two.

85 two.

And I would expect that that would those two move together as as occupancy moves up I don't see I don't see.

In the near term debt.

Getting.

The delta between the two is getting much smaller.

Robert E. Hull: Okay. So new leasing's in there as well. Okay. That was it.

Got it okay. So some new leasing is in there as well okay.

Robert E. Hull: Thank you. Thanks, bye. As a reminder, that star 1 on your telephone keypad turns to Q. The next question comes from Michael Gorman from BTIG. Michael, your line is open, please go ahead. Yeah, thanks. Good morning.

That was it thank you.

Thanks, Mike.

As a reminder, that star one on your telephone keypad and sticky.

The next question comes from Michael Gorman from BTG, Michael Your line is open. Please go ahead.

Yes, thanks, good morning.

Chris Douglas: Just wanted to maybe synthesize some of the questions here. Obviously, one of the questions on the dividend and then thinking about the, for Outlook earlier last year, start to think about how 24 plays out and going into 25. I just want to make sure if I'm doing my math correctly, the implication here is that if you kind of move towards dividend coverage in 2025, kind of in that percent FAD growth. I just want to start with the question, like, you said, like, 24-25 is what would be implied. I know you're not giving guidance, but like, the way to think about how 24 plays out is that the run rate by the end of the year is going to be such that that kind of mid- or even upper single-digit FAD growth is what we're looking at in the out-years. Mike, I would say you're directionally headed the right way. I think it's too early to be calling that for sure at 25.

Just wanted to maybe synthesize some of the questions here, obviously, one of the questions on the dividend and then thinking about the.

2024 outlook earlier last year and as we start to think about.

24 plays out and going into 'twenty five I just want to make sure if I'm if I'm doing my math correctly. The implication here is that if you kind of move towards dividend coverage in 2025.

Kind of in that 6% to 8%.

Growth in 'twenty five is what would be implied I know youre, not giving guidance, but is that the way to think about how 24 plays out is that the run rate by the end of the year is going to be such that that kind of mid or even upper single digits F&B growth is what we're looking at.

In the out years.

Mike I would say you're directionally headed headed the right way I think it's early to be calling that for sure for 25 and earlier question was asked about.

Chris Douglas: An earlier question was asked about how we're obviously very bullish on our multi-tenant side, while our single tenant side is fine. The retention rates are as strong, but back-filling single tenant vacates typically have a lag effect. We don't have perfect visibility into expirations for single-tenant properties, as an example, in 25. So it's early to call the net number, if you will, but you're right in terms of what the implied map, the implied dividend coverage, would suggest in terms of the growth potential in 25.

We're obviously very bullish on our multi tenant side and our single tenant side is fine the retention rates are as strong but back billing single tenant vacates.

Have typically a lag effect.

And so we don't have perfect visibility into explorations.

For single tenant as an example, and 25% so.

It's early to call that net number if you will but youre right in terms of what the implied math implied dividend coverage would suggest in terms of the growth potential in.

25, so we're we're certainly bullish on that and see a very strong uptick going into 'twenty five now like everyone. We're watching interest rates. We're looking at all of that but we brought our variable rate exposure down significantly we don't have big maturities in 'twenty four or so.

Chris Douglas: So we're certainly bullish on that and see a very strong uptick going into 25. Now, like everyone, we're watching interest rates. We're looking at all that, but we've brought our variable rate exposure down significantly. We don't have big maturities in 24. So from what we can see, we can see that exit velocity of 24 being quite strong, as you said.

From what we can see we can we can see that exit velocity of 24 being quite strong as you as you said.

Chris Douglas: Okay, great. And then maybe just helping me out on that, as you think about that, I mean... Exiting 24, you see a lot of strong absorption, a lot of leasing momentum. So obviously, the NOI coming online as a benefit. Should we expect a normalization in CapEx as a percentage of NOI as we get towards the back half of 24? So if I'm thinking about the guidance of 140 to, is that going to be front-end weighted, as we think about... This is the CapEx bill this year. You know, I think it really depends on the ultimate timing of being able to sustain additional new leasing moving forward to the back half of the year and even moving into 2025. But we are certainly seeing a bit of an escalation right now.

Okay, Great and then maybe just helping me out on that as you think about that.

Exiting 'twenty four you see a lot of strong absorption a lot of leasing momentum. So obviously the NOI coming online is it benefit should we expect a normalization in capex as a percentage of NOI as well as we get towards the back half of 'twenty four or so if I'm thinking about the guidance of $1 40 to 160 is that going to be front end weighted as we think.

About.

The Capex this year.

I think it really depends on the ultimate timing of being able to sustain additional new.

New leasing.

Moving forward to the back half of the year and even moving into 'twenty five, but we are certainly seeing a bit of an escalation right now and we ended up the year I think it was 18 four.

Chris Douglas: We ended the year, I think it was 18-4 in terms of the percentage of NOI that we spent on maintenance cap backs. I would say that what we're assuming for 2024 is a similar amount. But even if you stay at that level just because you start getting the additional NOI from all of the leasing that occurred late in 2023 and then all the way through 2024, it still drives a benefit. So, to your earlier question of whether we can see much stronger growth in FAD, I think the answer is yes, even without assuming a significant decline in your maintenance cap backs as a percentage of NOI. I would still say that, you know, I would think that, you know, if we get back to a regular call at 15% of leases that are expiring every year, that's probably the percentage of NOI that you're talking about of spending on maintenance cap backs. So, you know, if we do see some normalization, it's going to be to that degree. It's not like we're assuming that that maintenance cap back number is going to be cut in half. Okay, great.

In terms of percentage of NOI that we spend on maintenance capex.

I would say that what we're seeing for 'twenty four is similar.

Mount.

But even if you stayed at that level, just because you start getting the additional NOI from all of the leasing that occurred late in 'twenty three and then all the way through 'twenty four it still drives a benefit so.

I think that to your earlier question of can we see.

Much stronger drove growth in fact, I think the answer is yes, even without assuming a significant decline in your maintenance capex as a percentage of NOI I would still say that.

I would think that if we get back to a regular call. It 15% of leases that are expiring every year thats, probably the percentage of NOI that you are talking about spending on maintenance capex. So if we do see some normalization, it's going to be is going to be.

To that degree it's not like we're assuming that that maintenance capex number is going to be cut in half or something.

Chris Douglas: And then maybe just last one for me, just on the JV, obviously, and the Transition Project. Thank you. Thank you. Thank you.

Okay, Great and then maybe just last one for me.

Just on the <unk>.

<unk>.

Being conservative not including that in guidance, how should we think about that conservatism. So if I look at the bridge in your release. This morning as is the kind of five 5% to seven 5 million of <unk>.

Todd J. Meredith: Thank you. Is the kind of 5 12 to 7 12 million of www.healthcarerealtytrust.com benefit if the JVs do come to fruition over the course of the year? Does that take the place of those dispositions or..., coming through fee income, or how does that play out? No, I wouldn't necessarily say it's a substitute.

Dilution from additional dispositions is that in places that JV is that is that the conservatism or I'm just trying to understand the potential benefit.

Benefit if the JV do come to fruition over the course of the year is that take the place of those dispositions or is it coming through fee income or how does that play out.

No I wouldn't necessarily say, it's a substitute I think I would I would continue to expect the dispositions. Some of that is just our normal course portfolio optimization and I think that level is not an unreasonable run rate for us going forward call it $200 million plus or minus.

Todd J. Meredith: I think I would continue to expect the disposition. Some of that is just our normal course portfolio optimization, and I think that level is not an unreasonable run rate for us going forward. Call it $200 million plus or minus. The JV, really, the way to think about that would be maybe two ways.

The JV really the way to think about that would be maybe two ways. One would be to simply say hey, we have proceeds we can we can buy back stock we could obviously pay off debt some combination of that for leverage neutral.

Todd J. Meredith: One would be to simply say, hey, we have proceeds. We can buy back stock. We could, obviously, pay off debt. Some combination of that for a leverage-neutral impact, and that would be accretive. Obviously, timing is the key point there. How much of that do you get in a year?

Impact and that would be accretive obviously timing is the key point there how much of that do you get in a year and then maybe the other way to think about the positive would be maybe somewhat related but would be to say hey, if we did anything that involved our redevelopments or developments. It would certainly reduce capital spend that we would have and then you.

Todd J. Meredith: Then maybe the other way to think about the positive would be somewhat related, but it would be to say, hey, if we did anything that involved our redevelopments or developments, it would certainly reduce capital expenditure that we would have, and then you would enhance your return on what dollars you do continue to commit to, smaller dollars that you do commit to those projects. Again, timing would be a key impact there. It's really what do you do with the proceeds from the joint venture structures, and what's the timing of that? Obviously, since we're not giving specific direction on that, we're keeping it out of guidance, and then we will certainly update and layer that in as we progress and have more specifics on it. Okay, thank you. Next slide. The next question comes from John Pawlowski from Green Street. John, your line is open. Please go ahead.

Would enhance your return on what dollars you do continue to commit to smaller dollars that you do commit to to those projects. So.

Again timing.

Key impact there so it's really sort of what do you do with the proceeds from the joint venture structures and what's the timing of that and so obviously since we're not giving specific.

Direction on that were keeping it out of guidance and then we will certainly update and layer that in.

As we progress and have more specifics on that.

Okay. Thank you.

Thanks, Mike.

The next question comes from John Pawlowski from Green Street, John Your line is open. Please go ahead.

Todd J. Meredith: Thanks for your time. I want to go back to Juan's question on what's changed between now and last May when you signaled total same-story growth of 4 to 6%. And I don't really care about guidance, and things change, but I'm more concerned about a structural shift in the pricing power of the portfolio of thick units and tenants. And so, I know you pointed to expenses being more challenging, but it feels like the divide between 3% same-story growth and 4 to 6% previously signaled is much bigger than just expenses. So, Todd, can you just expand on that? What's changed in terms of retention of tenants out of the multi-tenant or single-tenant? What's changed in the portfolio?

Thanks for your time.

Let me go back, though Ron's question on what's changed between now and last May when we signaled total same store growth for the 6%.

I don't really care about guidance and things change the more concerned about a structural shift in the pricing power of our portfolio sticky tenants. So.

I pointed to expenses as being more challenging what feels like goodbye between 3% same store growth.

4% to 6% previously signaled as much more it's much bigger than just expenses. So.

Can you talk can you just expand on whats changed in terms of retention upon loans out of the multi tenant or single upon on what's changed in the portfolio.

Todd J. Meredith: It's a big shift. Yeah, I think the way to think about it is, obviously, all the different pieces that go into same-store growth. The occupancy piece, I think probably one of the key things was really talking about same-store versus total multi-tenant. Obviously, what we see a lot of upside in are even some assets that aren't in same-store. And those will, over time, roll into same-store sales. So they could actually come back in and increase same-store sales.

It's a big shift.

Yes.

The.

The way to think about it is obviously all of the different pieces that go into the same store growth. The occupancy piece I think probably one of the key things was really talking about same store versus total multi tenant obviously, what we see a lot of upside in is even some assets that arent in same store and those will.

Overtime roll into same stores, so they could actually come back in and increase same store, but we have assets in our redevelopment side, our development side that generate a lot of upside and so that's really why we put the bridge together to really illustrate how all of our multi tenant properties do get into that range.

Todd J. Meredith: But we have assets on our redevelopment side, our development side, that generate a lot of upside. And so that's really why we put the bridge together, to really illustrate how all of our multi-tenant properties do get into that range. And over time, that may become really the same store.

And over time that may become really the same store, but it's going to be a matter of when those projects roll or windows properties roll into the same store, but beyond that at the edges I've talked about some of the challenges have been retention as well.

Todd J. Meredith: But it's going to be a matter of when those properties roll into the same-store. But beyond that, at the edges, I've talked about some of the challenges of retention as well. It's subtle, but it's an important difference.

It's subtle but it's an important difference we're running currently I think for the year, we were at about 79% for the quarter were about 78 that really needs to hit 80% and really get up there to kind of drive fully.

Todd J. Meredith: We're running currently, I think for the year, we were at about 79%. For the quarter, we were at about 78%. That really needs to hit 80% and really get up there to kind of drive fully the positive sortion that will get us that four to six. We've been somewhat conservative in what we have in our bridge. We're not assuming a huge change in that retention, but that would be a bonus or a plus to what we see there that would push it further. Obviously, as I mentioned, we already talked about operating expenses. The one other one that I think we're touching on, but maybe not in the right context here, is the single-tenant side. And that certainly was lower for us in 23, and also expected in 24, simply because of those two properties that Chris talked about. Those growing at about 1% are below the escalators that are in place in the single-tenant portfolio of about two and a half. That difference is a little bit of a drag on that.

The positive sorption that'll get us that four to six.

We've been somewhat conservative in what we have in our bridge.

We're not assuming a huge change in that retention, but that would be a bonus or a plus to what we see there that would push it further obviously I mentioned, we already talked about operating expenses. The one other one that I think we're we're touching on but maybe not in the right context here as the single tenant side and.

It certainly is was lower for us in 'twenty three and also expected in 2004 simply because of those two properties that Chris talked about so those growing at about 1% is below the escalators that are in place and the single tenant portfolio of about two five and so that difference is.

<unk> is a little bit of a drag on that so again, we may be able to address some of that.

Todd J. Meredith: Again, we may be able to address some of that. As Chris said, we're looking to sell one of the assets. The other is a redevelopment play.

As Chris said, we're looking to sell one of the assets. The other is a redevelopment play and so as those evolve and we are able to work out some improvement.

Todd J. Meredith: Those evolve, and we are able to work out some improvement. We've conservatively assumed those go to zero, but if we can generate additional growth out of those, some leasing out of those, or a sale, that will help. There's some conservatism there, but I would say that's another piece to the, Okay, I appreciate all that. Todd, second question on the balance sheet and just how you're managing the duration of the debt. So the average amongst the maturity of or average years of maturity is about four years.

<unk> conservatively assumed those go to zero, but if we can generate additional growth out of those.

Some leasing out of those or a sale that will help so theres some conservatism there, but I would say that's another piece to the puzzle.

Okay I appreciate all that Todd a second question on balance sheet and just.

How you how youre managing the duration of the debt so average.

The majority of our average years to maturity of about four years, we've got a $1 billion of interest rate swaps expiring three ish years.

Chris Douglas: If you got a billion dollars in interest rate swaps expiring in the next three-ish years, should we expect this type of duration on the balance sheet to remain pretty similar, or are you more open to issuing longer-term unsecured debt and taking refinancing risk off the table? Yeah, no, I think this is Chris. I'll jump in on that. Yeah, with everything that's gone on in the last couple of years related to interest rates, you know, going up and the volatility, everything associated with that, we obviously haven't issued any new long-term debt. But that is always on the table.

Should we expect this type of.

Duration on the balance sheet to remain pretty similar or are you more open to issuing longer term unsecured debt and taking.

Taking refinancing risk off the table.

Yes, no I think this is Chris I'll jump in on that with.

With everything that's gone on in the last couple of years related to interest rates going up and the volatility and everything associated with that.

We obviously haven't issued any any new long term debt.

But that is always on the table, we're always looking at that and it certainly is has improved from where we were.

Chris Douglas: We're always looking at that, and it certainly has improved from where we were, you know, call it four or five months ago. But then you have to look at your use of proceeds. And so if we were to do something like that right now, we don't really have a matching use of proceeds to be able to redeploy those accretively.

Call. It four five months ago, but then you got to look at your use of proceeds and so if we were to do something like that right now.

We don't really have a matching use of proceeds to be able to redeploy those.

Chris Douglas: But we certainly would anticipate as we move forward that we'd be looking at, you know, long-term debt is a source of financing and refinancing of expiring debt. Yeah, our first debtor or unsecured bond. The maturity is next summer, 2025, so certainly as we get closer to that, we'll be keeping an eye on that opportunity to extend that maturity and duration, as you said.

Accretively, but but we certainly.

Would would anticipate as we move forward.

That we'd be looking at.

Long term debt as a source of financing and refinancing of <unk>.

Expiring debt.

Our first debt or unsecured bond.

Maturity is next summer 'twenty five.

Certainly as we get closer to that we'll be we'll be keeping an eye on that opportunity to extend that maturity and duration as you said.

Chris Douglas: Okay, thanks. Thanks, John. As a final reminder, that's a star followed by one on your telephone keypad to ask a question today. If there are any further questions, I'll hand the call back to the management team for any concluding remarks. Thank you, Adam, and thank you everybody for joining us this morning. We will be available for your follow-up and questions, and we look forward to seeing many of you at some upcoming conferences. Everybody have a great day. Thank you.

Okay. Thanks for the question.

Thanks, Sean.

That's in front of a bunch of that staff Philip I want no telephone keypads or ask a question today.

We have no further questions. So I'll hand, the coupon to the management team for any concluding remarks.

Thank you Adam and thank you everybody for joining us. This morning, we will be available for your follow up and questions and we look forward to seeing many of you at some upcoming conferences everybody have a great day. Thank you.

Operator: This concludes today's call. Thank you very much for your attendance. You may now disconnect. www.healthcarerealtytrust.com. This concludes today's call. Thank you very much for attending.

This concludes today's call. Thank you very much for your attendance you may now disconnect your lines.

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Sure.

Okay.

This concludes today's call. Thank you very much for your attention.