Q4 2024 Healthcare Realty Trust Inc Earnings Call
Karen: Thank you for standing by. My name is Karen and I will be your conference operator today.
Karen: 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.
Karen: These risks are more specifically discussed in the company's Form 10-K filed with the SEC for the year ended December 31 2024.
These forward looking statements represent the company's judgment as of the date of this call.
Karen: The company disclaims any obligation to update this forward looking material.
Karen: The matters discussed in this call may also contain certain non-GAAP financial measures such as funds from operations or <unk> <unk>.
Karen: Normalized <unk> <unk>.
Karen: All per share normalized <unk> per share funds available for distribution or Fad net operating income NOI EBITDA and adjusted EBITDA.
Karen: 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 2024.
Karen: The company's earnings press release supplemental information and Form 10-K are available on our website.
Karen: I'd like to turn the call over to our interim President and CEO Connie Moore.
Karen: Thank you Ryan and good morning, everyone and thank you for being with us today.
Karen: Joining me for our prepared remarks is often health, Rick our Chief Financial Officer, and Rob Hull, Our Chief operating officer.
Karen: Also here with us and available for questions and answers is Brian Crowley, our chief investment Officer.
Speaker Change: As many of you know I've been affiliated with health care real itchy since the middle of 2022 as a member of the board of directors since our last call and shortly after I stepped into my current role as interim President and CEO. The company made several meaningful board and management changes.
Speaker Change: We elevated existing director, Tom but jail in two independent chair, we appointed three new independent directors with deep industry and leadership experience, Dave Henry Glen <unk> and Don Wood.
Speaker Change: And we promoted Aston Hill for it just to Chief Financial Officer.
Speaker Change: In my New leadership role at healthcare Realty I've had the opportunity to become directly involved in our operations, our capital allocation decisions and outlining our 2025 strategic priorities.
Speaker Change: With other executive appointments, we announced in September I am pleased to share that our leadership team at their fresh perspective renewed vigor and is executing with intensity.
Speaker Change: With these management enhancements I'm more confident than ever that HR has the management team competitive position and portfolio to deliver incremental value to shareholders and to do so on an accelerated basis.
Speaker Change: Moving to our 24 results, we laid out a plan to increase leasing and occupancy momentum aggressive and aggressively recycle capital during the year.
Speaker Change: Our normalized <unk> per share in the fourth quarter was <unk> 40 <unk> at.
Speaker Change: At the high end of the range, we provided and represents two 5% year over year growth.
Speaker Change: We also achieved new lease commitments of nearly 600000 square feet in the fourth quarter and 2 million square feet for the year, both all time records.
Speaker Change: Occupancy occupancy absorption, we had projected 100 to 150 points of occupancy gains in the multi tenant portfolio. We finished the year delivering 149 basis points at the high end of our plan. We did what we said we would do.
Speaker Change: We also continued our efforts to focus on operational efficiency, we reduced controllable operating expenses by 100 basis points.
Speaker Change: Our 2024 capital allocation plan was to raise proceeds and accretively repurchase shares that were trading at a significant discount we generated $1 3 billion in proceeds during the year, including nearly $500 million of noncore asset sales that had limited upside.
Speaker Change: We also raised through an expanded joint venture platform with leading institutional partners KKR and nuveen.
Speaker Change: These joint ventures have been a strong new capital source to monetize largely stabilized assets.
Speaker Change: We allocated $510 million of the $1 3 billion to repurchase 31 million shares on a leverage neutral basis.
Speaker Change: Long with the share repurchases, we also repaid $350 million of debt and ended the year at six four times leverage below the $6 five times leveraged we forecasted on our last call.
Speaker Change: Looking forward to 'twenty five our strategic priorities are focused on one continuing our operational growth and momentum and operating efficiencies.
Speaker Change: To refining our portfolio through asset sales to focus the portfolio on the dentist and fastest growing markets to maximize long term NOI growth and finally, our capital allocation priority in 2025 is focused on significant debt reduction combined with our operational growth.
Speaker Change: We will allocate proceeds to debt repayment and drive a natural deleveraging process towards the low end of our debt to EBITDA range.
Speaker Change: With this deleveraging process, there will be a modest near term earnings headwind. We believe it's the right strategy to position eight HR for a lower cost of capital and stronger long term growth.
Speaker Change: Before I turn the call over to the rest of the team I want to provide an update on the CEO search when I assumed the interim role I communicated in my tenure would be temporary and the board was committed to identifying a permanent CEO, who would further advance our strategic priorities.
Speaker Change: The Board search Committee was established in the process began underway and has been underway since December with a leading executive search firm.
Speaker Change: We will not rush rush the process to ensure that the right leader is is selected.
Speaker Change: So with that I'm going to turn the call over to Rob to cover more details on our operations and market fundamentals I assume will then finish with our financial results for 2025 guidance.
Rob Hull: Thanks Connie.
Speaker Change: I'd like to take a moment to put our results in context of the trends we're seeing in the industry.
Speaker Change: The outpatient medical space continues to be one of the most durable property sectors in real estate offerings steady long term growth.
Speaker Change: Demand is need base and benefits from powerful secular demographic tailwind.
Speaker Change: Supply remains constrained with building deliveries and construction starts for the fourth quarter at the lowest levels in a decade.
Speaker Change: Meanwhile, our biggest tenants the country's largest health care systems.
Speaker Change: Continue to shift patient care into lower cost outpatient settings.
Speaker Change: All combined these trends produce long term tailwind for our portfolio.
Speaker Change: When I took over as CEO.
Speaker Change: In October of last year. My objective was to continue driving the tremendous leasing and absorption momentum we had achieved.
Speaker Change: To focus on further operating efficiencies.
Speaker Change: We saw robust fourth quarter activity topping off a strong year of leasing and absorption for healthcare Realty.
Speaker Change: We finished the year with almost 2 million square feet of new signed leases.
Speaker Change: Of which an all time quarterly high of nearly 690000 square feet were signed during the fourth quarter.
Speaker Change: On tenant retention, we retained 83, 4% of expiring tenants for the year.
Speaker Change: 400 basis points from 2023.
Speaker Change: And across new and renewal lease commencements more than 500 leases totaling $6 6 million square feet or commenced during the year.
Speaker Change: Of these 349 leases for over one 5 million square feet commenced during the fourth quarter.
Speaker Change: This activity was the best in class compared to the MLP sector.
Speaker Change: As evidenced over the past four quarters, our rate of new lease commencements as a percentage of vacant space has been 50% higher than our peers.
Speaker Change: Coupled with strong tenant retention, we've generated 44 basis points of multi tenant occupancy gains during the fourth quarter and nearly 150 basis points for the year.
Speaker Change: Multi tenant absorption for 2024 was at the high end of our expectations provided a year ago.
Speaker Change: Yeah.
Speaker Change: Moving to expenses I am pleased with the 1% reduction in controllable expenses, we realized last year.
Speaker Change: Our team will continue to manage these tightly in 2025 as we implement new operating initiatives that will drive efficiencies in the coming years.
Speaker Change: In short our operations team is firing on all cylinders.
Speaker Change: Our larger scale leasing model tenant relationships and day to day execution are driving best in class performance.
Speaker Change: At this time I want to take a moment to say thank you to my entire team for their tremendous effort and dedication this past year.
Speaker Change: We are energized by the results and poised to carry the momentum into the coming year.
Speaker Change: Yes.
Speaker Change: The outlook for 2025 is strong.
Speaker Change: Our signed not occupied lease pipeline or snow at year end represented over 160 basis points of additional occupancy across the portfolio.
Speaker Change: This is up roughly 40 basis points from the third quarter and provides good visibility into your absorption for the coming year.
Speaker Change: Also our top rated health system partners represent a growing portion of our lease pipeline driven by.
Speaker Change: Improving operating margins and the ongoing shift to providing outpatient care and the lowest cost setting.
Speaker Change: And we will continue to focus on maintaining high tenant retention with expectations for the year in the 80% to 85% range.
Speaker Change: In sum I am confident we can deliver another strong year performance.
Speaker Change: Our team is laser focused on driving further occupancy gains to maximize NOI growth.
Speaker Change: Yeah.
Speaker Change: I will now turn the call over to Austin.
Austin: Thanks, Rob.
Austin: Fourth quarter normalized <unk> per share was <unk> 40.
Austin: At the high end of our prior guidance and represents two 5% year over year growth.
Austin: For the full year normalized <unk> per share was $1 56 again at the high end of our revised range.
Austin: As Rob mentioned, the fourth quarter was highlighted by strong absorption and robust growth in the core portfolio.
Austin: Same store cash NOI growth was three 1% for the fourth quarter and two 9% for the year.
Austin: I'll discuss steward health and prospect medical in more detail in a moment.
Austin: Excluding these bankruptcies same store cash NOI was three 6% for the fourth quarter and three 1% for the full year.
Austin: On capital allocation, we generated nearly $1 3 billion in proceeds in 2024 and executed over $500 million in share repurchases and $350 million in debt paydown ending the year at six four times net debt to EBITDA down from six.
Austin: Seven times at the end of the third quarter and flat to year end 2023.
Austin: We provided a full update on steward health and prospects medical in our supplemental however, I'll make a few brief comments here.
Austin: First our team has made significant progress addressing Stuart.
Austin: Pleased to report that we now have leases in place on over 80% of our pre bankruptcy stewards square footage.
Austin: Of the original $27 million in total exposure that I outlined on the last call. We have already secured 19 million in total revenue trending better than we previously anticipated.
Austin: Longer term, we still expect to recover over 80% of our pre bankruptcy Stuart NOI.
Austin: In January of this year prospect medical filed for chapter 11 bankruptcy.
Austin: We have approximately 81000 square feet of leases across five buildings with prospects of medical in the Hartford, Connecticut area with total revenue exposure of $2 9 million.
Austin: The vast majority of our prospect exposure is in multi tenant buildings, where prospect is on average about half of the existing tenancy.
Austin: All of these buildings are currently fully leased and prospects rent per square foot is materially similar to other tenants in the buildings.
Austin: Although it's early in the bankruptcy process and we have limited information we have chosen to assume no revenue from prospect in our 2025 guidance.
Austin: In light of the specific guidance that I just provided on Stewart and prospect. These have been removed from same store and the 2025 guidance in order to provide better visibility into the core portfolio.
Austin: Let me put some of the recent bankruptcy events into perspective pre merger, our total reserves as a percent of revenue average less than 10 basis points per year.
Austin: Today less than 2% of our total portfolio is affiliated with non credit rated health systems.
Austin: I'll now turn to our 2025 capital priorities and our financial outlook.
Austin: First we will continue to capitalize on our best in class leasing momentum.
Speaker Change: As Rob discussed we had an all time high in both new leases signed and leases commenced in the fourth quarter.
Speaker Change: We enter 2025 with strong momentum and are guiding to same store absorption between 75, and 125 basis points and same store NOI growth of 3% to 375%.
Speaker Change: Second we will prioritize continued portfolio refinement with initial guidance of $400 million to $500 million of noncore asset sales during 2025.
Speaker Change: Let me give you a sense of the refinement at work.
Speaker Change: The targeted dispositions, our end markets with population growth about one 5% slower than the rest of our portfolio.
Speaker Change: Are in locations, where we have comparatively less scale.
Speaker Change: And our our properties with operating margins that are approximately 200 basis points below the portfolio average.
Speaker Change: As we think about use of proceeds from these sales for 2025, we will continue to prioritize leasing capital, which is driving our absorption.
Speaker Change: We have an extremely high return on this incremental investment and it will continue to be a priority.
Speaker Change: After funding leasing capital the primary focus of proceeds will be reinvestment back into the balance sheet to proactively address 2025, and 2026 debt maturities.
Speaker Change: This will serve the simultaneous goals of reducing leverage to six to six and a quarter times by year end as well as extending the duration of our outstanding debt.
Speaker Change: This is a targeted reinvestment of near term earnings to reduce leverage.
Speaker Change: Finally, unlocking value through cash flow growth is a key focus in 2025.
This year, our total portfolio and same store leased explorations are down approximately 10% from 2024 levels.
Speaker Change: This decline in explorations, coupled with continued improvements and tenant retention will naturally reduce our exposure to leasing costs, while producing same store absorption gains comparable to or better than 2024.
Speaker Change: Our focus on capital efficiency, coupled with expected NOI growth and lower lease exploration schedule should contribute to our goal of achieving full dividend coverage in the fourth quarter of 'twenty five or early 'twenty six.
Speaker Change: Let me close out 2025 guidance by providing two additional notes.
First our focus in 2025 is on achieving our full year goals.
Speaker Change: As such we will not be providing quarterly guidance, but will provide additional commentary as necessary to address quarterly seasonality or significant transaction timing.
Speaker Change: As a reminder, due to typical seasonality you should expect our first quarter <unk> per share to be the lowest quarter of the year.
Speaker Change: Additionally, the first quarter is a difficult comp for same store NOI growth due to a onetime property tax benefits in 'twenty four as well as the winter weather that has hit the southeast this year, including several significant snow events. Thus you should expect <unk> same store NOI growth to be below our full year trend.
Speaker Change: Second for simplicity, and comparability of financial and operating metrics going forward, we will focus our guidance on the same store portfolio and the consolidated company.
Speaker Change: We have provided multi tenant growth rates for the fourth quarter for completion of 2024 results, but do not plan on providing similar metrics. In 2025, you can see our full year guidance ranges in our supplemental I'll now turn it back to Connie for closing remarks, thanks Austin.
Speaker Change: Healthcare Realty has an incredibly steady consistently growing business with embedded occupancy upside we are focused on executing our strategic priorities and to enhance shareholder value in short we're excited about the future of healthcare Realty before.
Speaker Change: Before I turn it over to Q&A I want to personally thank all of the healthcare real itchy team members for not only their extraordinary accomplishments last year, but also for welcoming me into the organization. It has been a privilege to serve.
Karen: Karen we're now ready for question and answers.
Speaker Change: Yes.
At this time I would like to welcome everyone in order to ask a question Press Star then the number one on your telephone keypad. We ask that you. Please limit your questions to one and re enter the queue for any additional questions. You may have we will pause for just a moment to compile the Q&A roster.
Speaker Change: Your first question comes from Austin Bushmeat from Keybanc capital markets. Your line is open.
Speaker Change: Hey, good morning, everyone. I was hoping that you could break out new leasing this quarter related to some of the back filling of the storage space that you've achieved and then along the same lines I am curious if the same store net absorption guidance of 75 to 125 basis points includes any re leasing of that steward space.
Speaker Change: And then what kind of that.
Speaker Change: Incremental leasing.
Speaker Change: What's not in the snow pipeline is assumed to achieve that net absorption. Thank you.
Rob Hull: Hey, Austin this is Rob I'll start.
We also can chime in but on the new leasing.
Rob Hull: We treated the.
Rob Hull: The sub tenant to two direct leases, which was a big bulk of the Seward re leasing activity, we treated those as renewals. So none of none of that activity is in our new lease number of almost 690000 square feet.
Rob Hull: There was about 15000 square feet of new leasing in the fourth quarter related to those steward built ins, but those were net net new leases.
Rob Hull: And then can you repeat your other question.
Rob Hull: Related to same store growth.
Rob Hull: Trying to understand how much if theres any steward.
Rob Hull: Any of the storage space is included in the 75 to 125 basis points.
Rob Hull: Net absorption expected this year as well as.
Rob Hull: Kind of what's the incremental new leasing you need to achieve to reach that that absorption guidance recognizing you've got some.
Lease up from from this the expansion of the snow pipeline. Thank you.
Speaker Change: Austin I'll chime in here for.
Speaker Change: On the first question our absorption target for next year similar to what Rob discussed in the fourth quarter does not include Stuart. So there is no overlap between what we're achieving on Stewart and our new.
Speaker Change: Absorption targets for 2025.
Speaker Change: What I what I would also say is on the lease commencement front for 2025, Rob referenced the snow pipeline, which is essentially flat year over year. So I think from a new commencement standpoint, if you take our lower explorations and run it through the retention that we have given what we're implying.
Speaker Change: Similar lease commencement generally and $25 24, and you're really seeing the benefit of having less explorations.
Speaker Change: Your next question comes from <unk> <unk> from BMO capital markets. Your line is open.
Speaker Change: Hi, good morning.
Speaker Change: I was hoping you could talk a little bit about expectations for fad.
Speaker Change: As it relates to normalized <unk> guidance and then.
Speaker Change: And part of that just the latest thoughts on the dividend I know you kind of said you would expect to be covered by the fourth quarter 'twenty fiber into 'twenty six.
Speaker Change: Pays a dividend cut that was maybe talked about later last year that 100% off the table are just the latest thoughts around that thank you.
Speaker Change: Okay.
Connie Moore: Juan this is Connie.
Speaker Change: The dividend.
Rob Hull: As we've talked about and we talked about late last year is that we're pretty confident that just given with the leasing momentum that we have in the operation efficiency that we will grow into our dividend by the end of this year or next year and so that's really the strategy that we've got right now is focused on our leasing activity and sort of the natural delevering.
Speaker Change: <unk> from the dividend.
Speaker Change: Okay.
Speaker Change: Great.
Speaker Change: Payout or.
Speaker Change: For Fad numbers the guidance ranges.
Speaker Change: Think about that relative to normalized SSL.
Speaker Change: Yes, I think I think if you look at the maintenance capital guidance that we've provided one and you think about what I talked about explorations in the level of those explorations through next year that combined with the core growth in <unk> per share that will sort of bridge you I think to what your question.
Speaker Change: Is which is how are we getting too.
Speaker Change: Coverage by the fourth quarter does that is that am I answering your question there.
Speaker Change: Yes.
Speaker Change: Thank you.
Speaker Change: Well and I think too that it really depends I mean, if leasing accelerates fad will be adjusted because we will have more ti, but that will be the right decision, so and thats why its really sort of towards the tail end of 'twenty five or early 'twenty six because it really does depend on our leasing activity.
Speaker Change: Yes.
Speaker Change: Got it thank you.
Speaker Change: Okay.
Speaker Change: Your next question comes from Nick Joseph from Citigroup. Your line is open.
Nick Joseph: Thanks Connie.
You mentioned, obviously, the CEO process Thats ongoing and did not wanted to rush it.
Speaker Change: It makes sense, but just curious where we are in the process and expectations of timing of an announcement.
Nick Joseph: Well I wish I had expectations for you.
Speaker Change: We the search committee really got together and in areas you really started talking about their thoughts on the CEO search in December, but I think we talked about.
Speaker Change: In Las Vegas, I mean at the end of the year is a tough time to be starting a search, particularly the magnitude of the CEO. So it really started in January so sitting here today, we're at about 60 days in so.
Speaker Change: When we were in Las Vegas, Tom Bridge alien used to say six to nine months I'm certainly hoping that it doesn't take that long I think I think this company needs a permanent CEO.
Speaker Change: But I don't have expectations about when that will be done, but I, but I will say that this committee has been working very aggressively.
Speaker Change: I like to say they've got their running shoes on and so I expect that we will have one soon.
Speaker Change: Soon but I just I can't really give a date because they just it's an important position and we want to make sure that it's right.
Speaker Change: That makes sense I appreciate it and then.
Speaker Change: Obviously things are changing in Washington.
Speaker Change: Probably some more direct impacts to some other property sectors, but is there anything from a MLP perspective that maybe changes in Washington could have a downstream impact to your tenants.
Speaker Change: Okay.
Speaker Change: Similar to you we're watching what's coming out of Washington, I think it'd be a difficult statement to say that we have a good feeling for what ultimately.
Speaker Change: The New administration will decide in terms of health care.
Speaker Change: I think obviously, it's a little early to speculate what we do believe is as Rob mentioned that the health system demand for outpatient space right now remains robust and we continue to be an outpatient continues to be the lowest cost setting of care. So to the extent the administration wants to lower.
Speaker Change: Cost we.
Speaker Change: We are the natural beneficiary of that I think to speculate at this point on any specifics out of the administration candidly its just too early yes, but Ryan and our legal team.
Speaker Change: Spend time in Washington, just staying in front of legislators. So there they are clear about the benefits of the mlps.
Speaker Change: MLP space.
Speaker Change: Thank you very much.
Speaker Change: Your next question comes from Rich Anderson from <unk> your.
Speaker Change: Your line is open.
Rich Anderson: Thanks, Good morning.
Speaker Change: Morning.
Speaker Change: To ask a question on the CEO also perhaps you won't answer, but we'll see.
Speaker Change: You've laid out a very specific game plan around the dividend around people around strategy.
Speaker Change: And I'm wondering if that sort of sort of stake in the ground on those important topics has made it harder to find the candidate that may naturally want.
Speaker Change: His or her own thoughts to come through on the path forward for the company I'm. Just wondering if that is at all a headwind with a lot of decision big big decisions already made.
Speaker Change: Right well.
Rich Anderson: Rich I think it's a really good question, but I would say no first of all all of the people that we have met with they understand that there are no sacred cows here both in terms of people and decisions. So that any new CEO and the committee is very clear on this that any new CEO has the opportunity to evaluate the <unk>.
<unk> evaluate the strategy.
We think we have a really good strategy and we think that anyone coming in here is going to see that but time will tell but no I do not believe that it has been a hindrance to our search at all the quality of the people that we're talking to is extraordinary so no.
Rich Anderson: All right.
Rich Anderson: I'm not surprised by that okay. Thanks for that Connie and then just a quick one for me the rub against medical office is it doesn't sort of sit very well in an inflationary environment and I'm wondering maybe to Rob if theres any sense that you can sort of deploy inflation into your conversations and.
Rich Anderson: Get a spread over CPI.
Rich Anderson: A greater degree in terms of rent growth.
Rich Anderson: In much in the way we've seen in other asset classes is that something that you are finding some success with thanks.
Rich Anderson: Yes rich.
Speaker Change: I would say that our our discussions and our leasing process starts with.
Speaker Change: We introduced what we call dynamic leasing guideline in about a year ago, it's informed by.
Speaker Change: Local really submarket type data.
Speaker Change: And it's an IRR based model and so our teams.
Speaker Change: <unk> whenever they are renewing or looking for new deals on a lease by lease basis if.
Speaker Change: The opportunity arises to push rents.
Speaker Change: Our model will will inform them of that and the real goal is to achieve the highest IRR on that lease whether it's a renewal or a new lease and so.
Thats the way that we guide our leasing decisions.
Speaker Change: You can see that in some cases.
Speaker Change: We put the spread in our supplemental in terms of where our.
Speaker Change: Renewals, what the spreads look like and some of them some of them often sometimes you can get high cash leasing spreads and a supply demand factors workout situations right in other cases our team.
Speaker Change: It's driven by the.
Speaker Change: The higher IRR that may produce up.
Speaker Change: Lower cash leasing spread but avoid costly downtime.
Speaker Change: And an expensive.
Speaker Change: Re tenant the space. So that's the way that we're approaching our.
Speaker Change: Our renewals and our new leasing in the portfolio and that we will continue to do that and where we can where we can push rents we will and when the when the opportunity arises to do so we will certainly.
Speaker Change: And factor that into our decision, making but you are getting bumps, yes that is a good point. We are we are in all in all cases, we are getting escalators that a 3% plus and all of our deals and so really I view that as.
Speaker Change: Embedded long term solid growth for the portfolio moving forward so very.
Speaker Change: A very stable supports a very stable cash flow in the mob space.
Speaker Change: Fair enough. Okay. Thanks, thanks, everyone.
Speaker Change: Your next question comes from John Geely Cheskey from Wells Fargo. Your line is open.
Speaker Change: Thank you good morning, maybe Austin, if I could kind of go back to your comments on sort of the capital recycling activity in the $4 to $500 million of dispositions and guide could you help bifurcate what of those are asset sales versus.
Speaker Change: Jv's and that kind of the.
Speaker Change: Where the capital would go initially it's kind of Capex and re does seem to be the focus but then what's leftover it looks like it's implied about 100 to 200 million may be what's on the balance sheet. That's your first target and then what are those 26 term loans may.
Speaker Change: Any early termination fees associated with them.
Speaker Change: Yeah, Hey, John Good morning, Let me make sure I got all of those questions. So I'll start taking through them and then.
Speaker Change: You can tell me if I missed one.
Speaker Change: So first on the $4 million to $500 million.
Speaker Change: I've talked a lot in my script about the non core nature of those assets and a continued process of portfolio refinement. So you should expect us to primarily wait those towards.
Speaker Change: Towards asset sales those are markets those are properties that not only do we see a benefit from a monetization, but also from just a portfolio rationalization and footprint rationalization perspective. So simple answer is expect that to be heavily weighted towards sales I don't disagree with.
Your math on leftover funding the way that you ran through it easiest way to talk about.
Speaker Change: What our intent for that would be would be we have $250 million I guess I should say that.
Speaker Change: We're really happy with the flexibility that we have with the balance sheet entering this year, we fully paid off our revolver at the end of 'twenty four.
Speaker Change: We do have 250 million of unsecured notes maturing in May and then to your second question. We have no prepayment penalty on the term loans. So we will look to put the bonds maturing in may on the revolver and then from there we will have flexibility.
Speaker Change: Around prepayment of that our pay down of that combined with early pay down of the term loans and that a lot of that will just depend as we go through the year on market conditions. So.
Speaker Change: I think the good news is we have a lot of flexibility, but we do want to move to reinvest that non core.
Speaker Change: Asset sales proceeds back into debt pay down.
Speaker Change: Okay, great. Thank you that's really helpful and I guess, so the disposition guide I think by my second part of this was that disposition cap rate kind of moved up from six six to that six eight to 730 range. You would say that's mostly indicative of the mix of dispositions between asset sales and JV contributions between 'twenty four 'twenty five.
Speaker Change: Five and not.
Speaker Change: Necessarily the the nature of the portfolio moving to this environment.
Speaker Change: That's correct, that's primarily an asset mix, we will see how the sales go throughout the year, but I think youre right thats, a little bit of a nod to pricing expectations given the non core nature of some of these assets.
Got it thank you.
Speaker Change: Your next question comes from Michael Gorman from <unk>. Your line is open.
Michael Gorman: Yes. Thanks, good morning, maybe just sticking with that Austin can you just kind of walk through the buckets for the asset sales. This year were those also potentially part of the noncore asset sales last year or has the have the parameters of how you think about what's non core in the portfolio have changed.
Michael Gorman: And then maybe as you think about the capital allocation here I'm. Just curious how you think about your cost of equity as that cap rate on noncore sales starts to creep up.
Michael Gorman: And you were still active on kind of share repurchases in the fourth quarter I'm, just kind of curious how that all kind of pieces together.
Michael Gorman: Yes, good question.
Michael Gorman: Definitely I mean, we talk about 2024 I don't think we can gloss over that we did have non core asset sales and that when we're looking at the $4 million to $500 million in 2025 that is a continuation of portfolio refinement and I would say quite honestly, probably a more aggressive.
Michael Gorman: Our position on exiting certain markets entirely.
Michael Gorman: The benefit that we see the overall portfolio, especially from what I talked about a growth and margin perspective.
Michael Gorman: So I think that is a move forward in the direction of the portfolio refinement and we are taking I think a more aggressive.
Michael Gorman: Step towards that in 2025.
Michael Gorman: On the cost of equity discussion if you look at 2020 for the cap rate on asset sales was six 6% and that was a pretty diverse group of assets. We did have noncore asset sales in there as well as obviously since stabilized monetization into the ventures. So I think we.
Michael Gorman: Think about private market cap rates today, we're still seeing good activity for core assets in the mid sixes. So I think that core pricing on <unk> has not moved from 2024 and our 2024 results are a really matched that overall market dynamic I think when you think about capital.
Speaker Change: Acacia for 25, obviously, we are going to be dynamic we are watching what is going on but for the reasons that I mentioned the balance sheet is really a focus moving into this year and Connie touched on in her prepared remarks really wanting to reinvest in that it will it obviously is a little Duluth.
Michael Gorman: <unk> to our earnings growth in 'twenty, five but from an overall long term growth perspective, we feel this is the right move.
Speaker Change: Great. Thank you.
Speaker Change: Your next question comes from almost all your Alco Sanya from Deutsche Bank. Your line is open.
Speaker Change: Hi, yes, good morning.
Speaker Change: So my question is really around when.
Speaker Change: You guys think about sustainable earnings growth.
Speaker Change: The overall HR platform.
Speaker Change: What are you guys kind of estimate that.
How soon does he get there and.
Speaker Change: And I think you gave you talked a little bit about delevering near term being a little bit of a headwind.
Speaker Change: We took a look at interest.
Speaker Change: Debt maturities over the next two years or so the large amount of debt maturity.
Speaker Change: The.
Speaker Change: Yes.
Speaker Change: The swaps also in place.
Speaker Change: Some of the interest rate risk that public.
Speaker Change: Headline.
Speaker Change: Our headwind for the next two to three years, how do you guys you would depend on what.
Speaker Change: And then they kind of have all of that you will have the right capital structure in place.
Speaker Change: This company is capable of generating.
Speaker Change: You said, 4% per share growth with the dividend.
Speaker Change: Growth commensurate with that how do you think through all that.
Speaker Change: And basically what's the ask to investors.
Speaker Change: <unk> for the next two years that we fix this.
Speaker Change: Before you tried to yet.
Speaker Change: Sustainable earnings growth.
Speaker Change: I'll start by saying that if you look at the core growth in our portfolio right now, we obviously feel like we are executing extremely well.
Speaker Change: I think you made an excellent point around the capital structure and we do have an earnings headwind into 2025 from de levering from interest rates I think when you look at the long term growth rate, which I suspect is where you're going in the MLP space 20 years of data would tell you that.
Speaker Change: At the long term growth rate of this business is wrapped around 3% I think in the near term healthcare Realty has an excellent opportunity to outperform that.
Speaker Change: And from a headline growth perspective, we do face the same headwinds as many of our peers in terms of debt refinancing costs.
Speaker Change: So I think on the total <unk> growth long term Tayo I think if you think about the core growth of the portfolio you can obviously leverage at to get your <unk> growth long term. We're obviously focused on executing 2025 and heads down on that at the moment, but I think those are the components.
Speaker Change: Pieces and Youre right for long term growth for the company and a lot of it goes back to 20 years of history of what what is extremely durable growing cash flows and that is the model and that is where we are.
Speaker Change: <unk> focused on executing and getting back to the clean durable cash flow growth story with a near term opportunity for occupancy improvement that we've talked about.
Speaker Change: Thank you we do that it is as as often says clearly we have the headwind with paying off the debt.
Speaker Change: The difference in the interest rate, but we're using sale proceeds to do that so we also have a headwind if you will by reducing NOI to pay off debt. So there's two things that are sort of headwinds for us in 'twenty five but it's the right decision.
Speaker Change: To get the balance sheet, where we want to say to your point, we get to a long term stabilized growth.
Speaker Change: Thank you very much.
Speaker Change: Yes.
Speaker Change: Your next question comes from John Pawlowski from Green Street. Your line is open.
John Pawlowski: Hey, Thank you for the time, maybe just a follow on question to that conversation topic.
Speaker Change: Austin in 2026 maturities $1 2 billion Rolling in 2026, I think a lot of it's clustered around the middle of the year. How quickly will you look to refinance that is that a second half of 'twenty five exercise in your mind more color on how you tend to address the.
John Pawlowski: Significant in 2026 maturities will be appreciated.
Jon: I think you answered the question well Jon It is second half of 'twenty five is going to be the primary focus point for us and what we're assuming in our 25 outlook.
Jon: Obviously, I talked about having flexibility on the balance sheet today, our near term unsecured debt maturities and then really in the second half of the year looking to.
Jon: Execute on the debt pay down that I outlined from the asset sales and then b.
Jon: We'll start to refinance and chip away at those 26 maturities.
Jon: Okay.
Speaker Change: I wanted to go back to the conversation around the trajectory of Fad relative to the dividend I know that maybe the messaging has changed late last year, but.
Speaker Change: Last year, there was commentary from the company that you thought the dividend will be fully covered entering 2025, and we're not really close to that right now so I guess, what fundamentally has changed in.
Speaker Change: In the portfolio.
Speaker Change: That's led to an underwhelming trajectory of fat and throughout the second half of 2024.
Speaker Change: I don't remember, obviously I wasn't sitting in this seat at that point in time, but I don't remember, saying that it would be covered at the beginning of 'twenty five.
Speaker Change: We always sort of said late 'twenty, five and we pushed it out a little bit potentially to 2006, just depending on our leasing our leasing activity has been extraordinary as Rob has communicated and I think thats part of P&L. I mean, we spent a lot of money this year on Ti and leasing to lease up all that space. So.
Speaker Change: But I don't remember, saying that we would have it I don't remember the company, saying because I wasn't saying anything at that point.
Speaker Change: I don't remember, saying at the beginning but we have we have visibility into end of 'twenty. Five early 26 based on our current business plan that our dividend will be covered.
Speaker Change: I'll add to that John I want to put into perspective that are <unk>.
Speaker Change: <unk> per share growth in the back half of 'twenty five was up over 10%.
Speaker Change: And I think the honest answer to your question Jon is we've got a new team here looking out to 'twenty five.
Speaker Change: And that's where we feel comfortable today.
Speaker Change: Okay. Thank you for your time.
Speaker Change: The next question comes from Nicole <unk> from Jpmorgan. Your line is open.
Hey, Good morning, you guys talked about the occupancy absorption for 'twenty five, but specifically can you talk about the multi tenant.
Speaker Change: And maybe if you're comfortable providing an exact occupancy percent 425, do you expect multi tenant occupancy to be well over 25.
Speaker Change: Okay.
Speaker Change: No we talked about really focusing guidance. This year on the same store portfolio as well as the total portfolio I think given the focus on same store growth in total portfolio growth. We don't intend to provide an outlook on multi tenant specifically obviously in our supplemental we do give you details.
Speaker Change: In the multi tenant single tenant growth that you can reference, but we're not going to guide specifically on multi tenant. This year I think really streamlining our occupancy guide versus same store and keeping the outlook simple is beneficial.
Speaker Change: Your next question comes from design of <unk> <unk> from BMO capital markets. Your line is open.
Speaker Change: Hi, Thanks for letting the queue back up just hoping you could go through a little bit more detail on the sources and uses.
Speaker Change: I'm not sure how much should we budget to towards redevelopment.
Speaker Change: And just trying to think about.
The excess capital that you may have.
Speaker Change: Coming from dispositions that would allow you to do.
Speaker Change: Further buybacks in the 'twenty five and just your general views on buybacks at this point.
Speaker Change: One I'm going to point you to the last page of our supplemental we outlined pretty specifically the sources and uses for 25 I think somebody earlier on the call highlighted when you go through those you kind of come back into call. It about 150 to 200 million.
Speaker Change: Debt repayment will be the focus for 2025, obviously, we watch the stock obviously were.
Speaker Change: Looking at the market and we'll be flexible, but I think the real focus on what we're trying to convey on this call is asset disposition proceeds for 2025 will be focused on leasing the portfolio and after that the focus is on.
Speaker Change: Proactively addressing debt maturities and reducing debt.
Speaker Change: And through that reducing our leverage to six to six and a quarter times.
Speaker Change: Yeah. It was I mean, we've been saying it sort of all morning, but that really is the focus for 25 and obviously early on in 'twenty four is very opportunistic buy.
Speaker Change: Our stock back just given.
Speaker Change: The discount to NAV.
Speaker Change: But I think going forward and in 25, our focus really is continuing on the leasing activity, which is going to allow US then to.
Speaker Change: It produces additional cash flow and lingual and between sales and the operational <unk>.
Speaker Change: <unk>, we will pay down debt.
Speaker Change: Okay.
Speaker Change: And then just curious you guys have any commentary on how margins may trend you've done a good job on controllable expenses. It sounds like some of the dispositions being further enhanced and as you have more.
Speaker Change: Jeff in the markets you're staying in so just curious on.
Speaker Change: Margins at our controllable expenses as group.
Speaker Change: Thinking about modeling in 2012.
Rob Hull: Yes. This is rob.
Rob Hull: I'd say that if you look at last year, we had a nice move in our margins I think was up 60 basis points.
Rob Hull: Year over year.
Rob Hull: As we continue to see.
Rob Hull: Improvement in occupancy in the portfolio, we would certainly expect that to improve this next year.
Rob Hull: Projecting 75 to 125 basis points of occupancy improvement and the same store portfolio. So we would expect to Martin margins to trend.
Rob Hull: Trend to trend upward with that occupancy improvement.
Rob Hull: A lot of margin leverage with all of that leasing activity for sure yes.
Rob Hull: And one last one if you wouldn't mind indulging me anything that's baked into guidance for.
Rob Hull: Store order prospects in terms of further backfill in the space are those were those leases coming online that we should be factoring in.
Rob Hull: Really good question one.
Rob Hull: No.
Rob Hull: There is the answer the simple answer I think on prospect I want to touch on prospect vis vis your question, which is that we have taken it fully out of 25 guidance. It is early in the bankruptcy process I outlined a few reasons for why we feel good about that space.
Rob Hull: But I think for simplicity and clarity for 25 guidance, we have just.
Rob Hull: Gone ahead and remove that as we have updates from the court process and door.
Rob Hull: Expectations will provide those to you and.
Rob Hull: And on Stewart similar answer no.
Speaker Change: Thank you.
Rob Hull: Yes.
Rob Hull: That concludes the Q&A session I will now turn the call over to Connie Moore for closing remarks.
Connie Moore: Thank you Karen Thank you everyone for joining the call today, and we look forward to engaging with many of you next month at the upcoming REIT industry Conference in Florida. Thank you.
Speaker Change: Ladies and gentlemen that concludes today's call. Thank you all for joining and you may now disconnect.
Speaker Change: Please wait the conference will begin shortly.
Speaker Change: Sure.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Sure.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: <unk>.
Speaker Change: Thanks.
Speaker Change: [music].
Speaker Change: No.