Q1 2025 Healthcare Realty Trust Inc Earnings Call
Yeah.
Operator: Thank you for standing by.
Lot: Thank you for standing by my name is for a lot of it will be your conference operator today at this.
Prilla: My name is Prilla, and I will be your conference operator today.
Operator: At this time, I would like to welcome everyone to the Healthcare Realty First Quarter 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise.
Speaker Change: This time I would like to welcome everyone to the healthcare Realty first quarter 2025 earnings conference call. All lines have been based on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time and Progressive Star followed by the number one I get a telephone keypad.
Operator: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. And if you would like to withdraw your question, please press star 1 again. Thank you.
Lot: And if you would like to read by your question. Please press Star one again thank you.
Ron Hubbard: I would now like to turn the conference over to Ron Hubbard, Vice President of Investor Relations. You may begin. Thank you for joining us today for Healthcare Realty's first quarter 2025 earnings conference.
Rhonda: I would now like to turn the conference over to Rhonda <unk>, Vice President of Investor Relations you may begin.
Speaker Change: Thank you for joining us today for healthcare Realty's first quarter 2025 earnings conference call.
Ron Hubbard: A reminder that except for the historical information contained within, the matter discussed in this column may contain forward-looking statements that involve estimates, assumptions, risks, and uncertainty. These four 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.
Speaker Change: Mind, you that except for the historical information contained within the matters discussed in this call may contain forward looking statements that involve estimates.
Speaker Change: Risks and uncertainties. These forward looking statements represent the company's judgment as of the date of this call.
Speaker Change: The company disclaims any obligation to update this forward looking material.
Ron Hubbard: A discussion of risks and risk factors are included in our press release and detailed in our filings with the SEC. Certain non-GAAP financial measures will be discussed on this call. 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 March 31, 2025.
Speaker Change: A discussion of risks and risk factors are included in our press release and detailed in our filings with the SEC.
Speaker Change: Certain non-GAAP financial measures will be discussed on this call. 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 March 31 2025 the.
Ron Hubbard: The company's earnings press release, earnings supplemental information, and Form 10-Q are available on the company's website.
Speaker Change: The company's earnings press release earnings supplemental information and Form 10-Q are available on the company's website.
Connie Moore: I'd now like to turn the call over to our outgoing President and CEO, Connie Moore. Thanks, Ron, and welcome to Healthcare Realty's first quarter earnings call. Turning to our recent leadership announcement, I am pleased to welcome Peter Scott as Health Care Realty's new President and CEO. Many of you are familiar with Pete, having come from the CFO capacity at one of our peers in the outpatient medical real estate industry. Health Peak Properties.
Speaker Change: I'd now like to turn the call over to our outgoing president and CEO Connie Moore.
Speaker Change: Thanks, Ron and welcome to healthcare Realty's first quarter earnings call.
Speaker Change: Turning to our recent leadership announcements I am pleased to welcome Peter Scott as healthcare Realty's, New President and CEO.
Speaker Change: Many of you are familiar with Pete having come from the CFO capacity at one of our peers in the outpatient medical real estate industry Health peak properties.
Connie Moore: It's been an honor to serve as interim CEO for the past five months, and I look forward to continuing to serve on the board. The board is confident Pete is very well prepared to lead our company going forward.
Speaker Change: It's been an honor to serve as interim CEO for the past five months and I look forward to continuing to serve on the board.
Speaker Change: The board is confident he is very well prepared to lead our company going forward.
Pete Scott: Pete. Thanks, Connie. I'm grateful to you and the board for selecting me to lead the company, and I'm truly excited to be at Health Care Research.
Pete: Pete Thanks, Connie I am grateful to you and the board for selecting me to lead the company and I'm truly excited to be at healthcare Realty.
Pete Scott: Also on the call with me today are Rob Hull, our COO, Austen Helfrich, our CFO, and available for the Q&A portion of the call is Ryan Crowley, our CIO.
Speaker Change: Also on the call with me today are Rob Hall, our CLO Austin, <unk>, our CFO and available for the Q&A portion of the call is Ryan Crowley our CIO.
Pete Scott: I would like to start by commenting on what attracted me to healthcare. First, Health Care Realty is the only pure play outpatient medical. Our focus is 100% on a single asset class and our vision is simple. to be the first choice for equity investors when they are seeking exposure to outpatient medical and to be the landlord of choice for health. Second, the underlying operating fundamentals in outpatient medical are as strong as they have ever been. New supply remains muted and demand is steadily increasing. These incredibly strong tailwinds show no signs of a Third, the portfolio is very high quality with a heavy focus on high growth markets, including Dallas, Seattle, Nashville, Houston, and Denver, to name a few.
Speaker Change: I would like to start by commenting on what attracted me to healthcare Realty first healthcare Realty is the only pure play outpatient medical Reed R focuses 100% on a single asset class and our vision is simple to be the first choice for equity investors when they are seeking exposure to outpatient medical.
Speaker Change: And to be the landlord of choice for health systems.
Speaker Change: Second the underlying operating fundamentals in outpatient medical are as strong as they have ever been new supply remains muted and demand is steadily increasing these incredibly strong tailwind show no signs of abating.
Speaker Change: The portfolio is very high quality with a heavy focus on high growth markets, including Dallas, Seattle, Nashville, Houston, and Denver to name a few.
Pete Scott: In addition, the current tenant roster is with market leading health systems, including HCA, Common Spirit, Baylor, Ascension, and Advil. While the portfolio still needs some refining, which I will elaborate on in a bit, the core portfolio should continue to deliver strong returns throughout market cycle.
Speaker Change: In addition, the current tenant roster is with market, leading health systems, including HCI common spirit, Baylor Ascension and advocate.
Speaker Change: While the portfolio still need some refining which I will elaborate on it a bit the core portfolio should continue to deliver strong returns throughout market cycles.
Pete Scott: Fourth, the team and culture. Since arriving here in early April, I have been incredibly impressed with the infectious positive attitude across the organization. There's a lot of pride in healthcare realty and a palpable desire to reestablish credibility with state. Additionally, the core values of respect, camaraderie, entrepreneurship, and excellence align well with my personal beliefs. One of my near-term focuses will be to augment the core values with a winning mentality.
Speaker Change: Fourth the team and culture.
Speaker Change: Since arriving here in early April I have been incredibly impressed with the infectious positive attitude across the organization. There's a lot of pride in healthcare Realty and a palpable desire to reestablish credibility with stakeholders.
Additionally, the core values of respect camaraderie entrepreneurship and excellence aligned well with my personal belief one of my near term focuses will be to augment the core values with a winning mentality.
Pete Scott: Fifth, my background lines up well with the skill sets needed to turn around the organization expedition. I love a good challenge and have been through similar circumstances both as an executive and prior to that as an investor.
Speaker Change: Fifth my background lines up well with the skill sets needed to turnaround the organization expeditiously I Love a good challenge and have been through similar circumstances, both as an executive and prior to that as an investment banker.
Pete Scott: Shifting gears, I want to lay out my initial areas of focus for the strategic path forward. Number one is leasing. At the end of the first quarter, our same store occupancy was 89.3%. I believe stabilized occupancy should be in the low 90% area. So we have two to 300 basis points of upside that is out there for us to capitalize on.
Speaker Change: Shifting gears I want to lay out my initial areas of focus for the strategic path forward number one is leasing at the end of the first quarter. Our same store occupancy was 89, 3% I believe stabilized occupancy should be in the low 90% area. So we have two to 300 basis points of upside that is.
Out there for us to capture.
Pete Scott: I would expect to see sequential occupancy growth through 2025 as we make progress on the.
Speaker Change: I would expect to see sequential occupancy growth through 2025, as we make progress on the leasing front.
Pete Scott: Number two is portfolio optimization. We are in the process of reviewing the portfolio to maximize NOI growth potential going forward. The path to achieve this is through exiting markets where we have limited scale and or markets where we have a limited path to achieve scale. More work still needs to be done, but we are well underway. Our focus is to sell assets rather than contribute them to our joint.
Speaker Change: Number two is portfolio optimization, we are in the process of reviewing the portfolio to maximize NOI growth potential going forward. The path to achieve this is through exiting markets, where we have limited scale and newer markets, where we have a limited path to achieve scale.
Speaker Change: More work still needs to be done, but we are well underway.
Speaker Change: Our focus is to sell assets rather than contribute them to our joint ventures.
Pete Scott: Number three is the balance sheet. While outpatient medical can support higher leverage due to the stability of the asset class, we need to extend the tenor of our debt and reduce overall indebtedness. There are significant benefits to a solid balance sheet, including the opportunity to take advantage of accretive capital allocation opportunities when they arrive. In addition, we will be assessing our reported leverage metrics to ensure better alignment.
Speaker Change: Number three is the balance sheet, while outpatient medical can support higher leverage due to the stability of the asset class, we need to extend the tenor of our debt and reduce overall indebtedness.
Speaker Change: There are significant benefits to our solid balance sheet, including the opportunity to take advantage of accretive capital allocation opportunities when they arise.
Speaker Change: In addition, we will be assessing our reported leverage metrics to ensure better alignment with peers.
Pete Scott: Number four is efficiency across the organization. This includes efficiency at both the corporate level through lower GNA and at the property level through reduced operating. NOI margins have been in the low 60% area and we should be able to improve upon it.
Speaker Change: Number four is efficiency across the organization. This includes efficiency at both the corporate level through lower G&A and at the property level through reduced operating expenses.
Speaker Change: Margins have been in the low 60% area and we should be able to improve upon this.
Pete Scott: Number five is instilling more financial discipline within the organization. This will be a combination of improving our technology and systems alongside making further investments into our platform.
Speaker Change: Number five is instilling more financial discipline within the organization. This will be a combination of improving our technology and systems alongside making further investments into our platform.
Pete Scott: This is by no means an exhaustive list, but rather my initial areas of focus.
Speaker Change: This is by no means an exhaustive list, but rather my initial areas of focus we will provide more detail around the strategic plan on our next quarterly earnings call. The end game is to create a more stable platform and improved earnings growth profile and increased multiple and thus a better stock price.
Pete Scott: We will provide more detail around the strategic plan on our next quarterly earnings call. The end game is to create a more stable platform, an improved earnings growth profile, an increased multiple, and thus a better stock.
Pete Scott: Let me touch on the dividend. As you saw, we maintain the dividend this quarter at $0.31 per share.
Speaker Change: Let me touch on the dividend as you saw we maintained the dividend this quarter at 31 per share we are discussing the dividend at the board level given the elevated payout ratio that said no decision will be made until we have clarity on our earnings profile going forward inclusive of the impact from efficiency gains leasing up.
Pete Scott: We are discussing the dividend at the board level given the elevated payout.
Pete Scott: That said, no decision will be made until we have clarity on our earnings profile going forward. Inclusive of the Impact from Efficiency Gains, Leasing Upside, as well as De-Leasing.
Speaker Change: Upside as well as deleveraging in summary, the dividend will be an output of the strategic plan and not an input with that let me turn the call over to Rob to talk about leasing in the first quarter.
Rob Hull: In summary, the dividend will be an output of the strategic plan and not With that, let me turn the call over to Rob to talk about leasing in the first. Thanks, Pete. Demand for outpatient medical space remains robust. During the quarter, we commenced nearly 1.5 million square feet of new and renewal leasing. Our signed, not occupied pipeline, or SNO, remains solid at more than 630,000 square feet, representing almost 165 basis points of occupancy in the coming quarter. We've signed 370,000 square feet of new lease. Historically, we have executed about 20% of our annual volume in the first quarter of the year.
Thanks Pete.
Speaker Change: <unk> for outpatient medical space remains robust.
Speaker Change: During the quarter, we commenced nearly one 5 million square feet of new and renewal leases.
Speaker Change: Our signed not occupied pipeline or snow remained solid at more than 630000 square feet, representing almost 165 basis points of occupancy in the coming quarters.
Speaker Change: We signed 370000 square feet of new leases.
Speaker Change: Historically, we have executed about 20% of our annual volume in the first quarter of the year, our new lease volume. This quarter is in line with the historical trend and sets us on pace to meet or exceed our annual new lease targets.
Rob Hull: Our new lease volume this quarter is in line with the historical trend and sets us on pace to meet or exceed our annual new lease target. Our lease pipeline remains solid, with increasing interest from our health system partners. About half of this pipeline is in the letter of intent or at least documentation phase. It's worth noting that in the past five quarters, health system leasing as a percentage of our new signed lease activity has nearly doubled. Systems continue to experience improving revenue and margin trends, which will drive further growth and space. and in spite of increased noise around Paris and potential policies.
Speaker Change: Our lease pipeline remains solid with increasing interest from our health system partners.
Speaker Change: About half of this pipeline is in the letter of intent or lease documentation phase.
Speaker Change: It's worth noting that in the past five quarters health system leasing as a percentage of our new signed lease activity has nearly doubled.
Systems continued to experience improving revenue and margin trends, which will drive further growth and space needs and in spite of increased noise around tariffs and potential policy shifts we have not seen any signs of a slowdown in their expansion plans.
Rob Hull: We have not seen any signs of a slowdown in their expansion. In connection with this growing health system demand, a recent industry research piece assigned our on-campus portfolio with the highest average score at an A+. This research signals that we have a more resilient outpatient portfolio than our peers. which is notable in a more uncertain macroeconomic and policy environment.
Speaker Change: In connection with this growing health system demand a recent industry research piece aside our on campus portfolio with the highest average score at an a plus.
Speaker Change: This research signals that we have a more resilient outpatient portfolio than our peers.
Speaker Change: Which is notable and a more uncertain macroeconomic and policy environment.
Rob Hull: Turning to our same store portfolio. Tenant retention improved more than 300 basis points over last quarter to almost 85%. This generated a slight uptick in occupancy to 89.3%. Looking ahead, we expect occupancy to build throughout the year, with most of our gains expected in the second half.
Speaker Change: Turning to our same store portfolio.
Speaker Change: Tenant retention improved more than 300 basis points over last quarter to almost 85%.
Speaker Change: This generated a slight uptick in occupancy to 89, 3%.
Speaker Change: Looking ahead, we expect occupancy to build throughout the year with most of our gains expected in the second half our outlook for 2025 remains 75 to 125 basis points of absorption by year end.
Rob Hull: Our outlook for 2025 remains 75 to 125 basis points of absorption by year-end.
Rob Hull: In closing, with a strong leasing pipeline, growing demand from our health system partners, and a resilient tenant base, our portfolio is poised for accelerating NOI growth throughout the remainder of the year.
Speaker Change: In closing with a strong leasing pipeline growing demand from our health system partners and a resilient tenant base our portfolio is poised for accelerating NOI growth throughout the remainder of the year.
Austen Helfrich: I will now turn it over to Austen to discuss financial results. Thanks, Rob. Normalized FFO per share was $0.39 for the quarter. This is in line with our expectations and a great start to the year.
Speaker Change: I will now turn it over to Austin to discuss financial results.
Speaker Change: Yeah.
Austin: Thanks, Rob.
Austin: Normalized <unk> per share was 39 for the quarter.
Austin: This is in line with our expectations and a great start to the year.
Austen Helfrich: The first quarter is our seasonally weakest quarter of the year, with almost a penny of seasonal expenses that we do not expect to reoccur in the second quarter. Same store cash NOI growth was 2.3%. As discussed on our fourth quarter call, growth was primarily impacted by higher operating expenses related to weather volatility and a difficult year-over-year comparison. This cadence was anticipated in our 2025 guidance, and we expect a material acceleration in same-store cash NOI growth for the remainder of the year.
Austin: The first quarter is our seasonally weakest quarter of the year with almost a penny of seasonal expenses that we do not expect to reoccur in the second quarter.
Austin: Same store cash NOI growth was two 3%.
Austin: As discussed on our fourth quarter call growth was primarily impacted by higher operating expenses related to weather volatility and a difficult year over year comparison. This cadence was anticipated in our 2025 guidance and we expect a material acceleration in same store cash.
Austin: Our growth for the remainder of the year.
Austin: Okay.
Austen Helfrich: On disposition activity, we sold four buildings for $28 million in the first quarter. This was great execution by our team as these buildings required significant capital or asset repositioning in their markets. Subsequent to the quarter end, we also received full payoff of an outstanding loan resulting in $38 million of additional proceeds. This loan had previously been accruing interest at a 6% rate, well below current market. Early in the quarter, we did pay down $35 million of term loans maturing in 2026.
Austin: On disposition activity, we sold four buildings for $28 million in the first quarter.
Austin: This was great execution by our team as these buildings required significant capital or asset repositioning in their markets.
Subsequent to the quarter end. We also received full pay off of an outstanding loan, resulting in $38 million of additional proceeds.
Austin: This loan had previously been accruing interest at a 6% rate well below current market.
Austin: Early in the quarter, we did pay down $35 million of term loans maturing in 2026.
Austen Helfrich: As indicated in our guidance, we expect increased disposition activity in the second quarter as our sale efforts build. Net debt to adjusted EBITDA was unchanged from 2024 year end at 6.4 times, inclusive of the previously mentioned sales and loan payoff. We expect this to decrease to the guidance range of six to six and a quarter times through the year as we execute on our disposition plan.
Austin: As indicated in our guidance, we expect increased disposition activity in the second quarter as our sale efforts build.
Austin: Net debt to adjusted EBITDA was unchanged from 2024 year end at six four times inclusive of the previously mentioned sales and loan pay off.
Austin: We expect this to decrease to the guidance range of six to six and a quarter times through the year as we execute on our disposition plan.
Austen Helfrich: We ended the quarter with $1.4 billion of capacity on our revolving line of credit. And yesterday, we accessed this available liquidity to pay off $250 million of maturing notes. This $250 million maturity is our only maturity in 2025, and we expect to use sale proceeds to reduce the revolver balance as the year progresses.
Austin: We ended the quarter with $1 4 billion of capacity on our revolving line of credit and yesterday, we access thats available liquidity to pay off $250 million of maturing notes.
Austin: This $250 million maturity is our only maturity in 2025, and we expect to use sale proceeds to reduce the revolver balance as the year progresses.
Austen Helfrich: In sum, our first quarter financial performance was in line with our expectations. While we are not providing quarterly guidance, I do want to note that we expect acceleration in same-store NOI growth and an uptick in FFO and FAD per share in the second quarter.
Austin: In sum our first quarter financial performance was in line with our expectations.
Austin: We are not providing quarterly guidance I do want to note that we expect acceleration in same store NOI growth and an uptick in <unk> and fad per share in the second quarter for the full year, we are reaffirming our normalized <unk> per share guidance of $1 56 to one.
Austen Helfrich: For the full year, we are reaffirming our normalized FFO per share guidance of $1.56 to $1.60, as well as our other components of guidance.
Austin: Dollars 60, as well as our other components of guidance.
Operator: Operator, we're now ready to move to the Q&A portion of the call. Thank you.
Austin: Operator, we're now ready to move to the Q&A portion of the call.
Operator: We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, you may press star 1 again. And once again, please press star one to join the queue.
Austin: Thank you we will now begin the question and answer session. If you have dialed in and would like to ask a question. Please press star one on your telephone keypad you raise your hand and joined the queue. If you would like to withdraw. Your question you May Press Star one again.
Speaker Change: And once again, please press star one to join the queue. Your first question comes from the line of Rich Anderson with Wedbush. Please go ahead.
Rich Anderson: Your first question comes from the line of Greach Anderson with Redbush. Please go ahead. Hey, thanks.
Pete Scott: Good morning and welcome, Pete. So, you know, when you laid out your areas of focus, you know, some are going to take longer than others. I wonder, you know, did you list them in order of priority or or do you do you think, you know, this is this overall sort of layout that you've you've put out? There is a one, two, three year type of time frame to sort of write the ship.
Rich Anderson: Hey, Thanks, Good morning, and welcome Pete.
Rich Anderson: So you know when you laid out your areas of focus.
Rich Anderson: You know some are going to take longer than others.
Rich Anderson: I wonder.
Rich Anderson: Did you list them in order of priority.
Rich Anderson: Or do you.
Rich Anderson: Do you think you know this is this overall.
Rich Anderson: Sort of lay out that you've you've put out there is a.
Rich Anderson: 123 year type of a timeframe.
Rich Anderson: Timeframe to sort of right the ship.
Pete Scott: Yeah, hey, Rich, it's Pete. Great to chat with you. I don't know that I would necessarily say that everything is in the perfect order of priority. But if I talk about timing for a second, you know, my main objective is really to get the portfolio optimization as well as deleveraging done in the very near term, so that when we look at 2026 and our numbers next year, that, you know, everything could be incorporated in that guidance year. So we're obviously looking to accelerate that as much as we can. With regards to leasing, I mean, that's just, you know, an important fundamental of any REIT.
Rich Anderson: Yeah, Hey, rich its peak rate to chat with you.
Rich Anderson: I don't know that I would necessarily say that everything is in the perfect order of priority, but if I talk about timing for a second.
Rich Anderson: My main objective is really to get the portfolio optimization as well as deleveraging Don in the very near term so that when we look at 2026 and our numbers next year that.
Rich Anderson: Everything could be incorporated in that guidance here. So we're obviously looking to accelerate that as much as we can with regards to leasing I mean, that's just.
Rich Anderson: An important fundamental of any REIT, and obviously getting from high 80% occupancy into the low 90 days thats not going to happen in one year, but that will probably happen over multiple years. So I'd say, that's probably two to three years to get to.
Pete Scott: And obviously getting from high 80% occupancy into the low 90s, that's not going to happen in one year, but that will probably happen over, you know, multiple years. So I'd say that's probably two to three years to get to, you know, the stabilized occupancy levels. And if we could do something on an accelerated basis there, that'd be fantastic. But the optimization and deleveraging, I'd like to have a clear path on that in the very near term and try and get as much of that done as quickly as possible. Okay.
Rich Anderson: Stabilized occupancy levels and if we can do something on an accelerated basis, there that would be fantastic, but the optimization of deleveraging.
Rich Anderson: I'd like to have a clear path on that in the very near term.
Rich Anderson: And try and get as much of that done as quickly as possible. Okay. Okay. Second question is how do you you said sell not JV.
Pete Scott: Second question is, how do you, you said sell not JV when you're exiting or selling out of markets. How do you feel about the JV model generally? I mean, is that something that you see as something to unwind over time to simplify the platform or are you comfortable with the current setup as is? I like having JVs as part of your toolkit. So we like the JVs that we have. We've got great relationships with our partners. And we'd like to grow those over time, but probably through acquisitions as opposed to us contributing more assets into those ventures.
Rich Anderson: When you're when you're exiting or selling out of markets.
Rich Anderson: How do you feel about the JV model generally I mean is that something that you see as something to unwind over time to simplify the platform or are you comfortable with the current set up as is.
Rich Anderson: I like having jv's as part of your toolkit. So we like the JV that we have we've got great relationships with our partners.
Rich Anderson: And we'd like to grow those over time, but probably through acquisitions as opposed to us contributing more assets into those ventures, and we probably need to have a better cost of capital before we could do anything in scale to grow those jv's, but I do like the JV model I feel like we've got good partners there, but when we talk about <unk>.
Pete Scott: And we probably need to have a better cost of capital before we could do anything in scale to grow those JVs. But I do like the JV model. I feel like we've got good partners there.
Pete Scott: But when we talk about optimizing the portfolio, it's more about selling 100% of the assets because they're in markets where they're either orphaned assets where we just don't have scale at the moment. So I wouldn't look at those as target assets to contribute into joint ventures. Fair enough.
Rich Anderson: Optimizing the portfolio its more about selling 100% of the assets because they are in markets, where they're either orphaned assets, where we just don't have scale at the moment. So I wouldn't look at those as target assets to contribute into joint ventures right now.
Rich Anderson: I'll let someone else ask the dividend questions. Thanks very much.
Speaker Change: Fair enough I'll, let someone else asked this dividend questions. Thanks very much.
Rich Anderson: Thanks Rich.
Juan Sanabria: And your next question comes from the line of Juan Sanabria with BMO Capital Markets, please go ahead. Hi, Pete. Welcome, and congratulations. First question, just a simple one, I guess, guidance. Is this a kind of Pete stamp approved at this point?
Speaker Change: And your next question comes from the line of <unk> <unk> with BMO capital markets. Please go ahead.
Speaker Change: Welcome and congratulations.
Speaker Change: First question just that.
Speaker Change: A simple one I guess guidance.
Speaker Change: Is this a kind of Pete stamp approved at this point I know you've only been there I think about two weeks or is that something that may be refined as you incorporate some of your strategic plans as you outlined.
Pete Scott: I know you've only been there, I think, about two weeks, or is that something that may be refined as you incorporate some of your strategic plans as you outlined in your prepared remarks? Yeah, I mean, obviously, we reaffirmed guidance on this call, Juan. And I'd say the first couple of weeks I was here, I spent a lot of time with the team going through the 2025 forecast. And we're off to a good start to the year, which allowed us to reaffirm guidance. So I'm comfortable with the numbers we have out there. And our forecast for this year did include 400 to 500 million of sales.
Speaker Change: In your prepared remarks.
Speaker Change: Yeah, I mean, obviously, we reaffirmed guidance on this call one and I'd say the first couple of weeks I was here I spent a lot of time with the team going through the 2025 forecast and we're off to a good start to the year, which allowed us to reaffirm guidance. So I'm comfortable with the numbers, we have out there and our forecast for this year.
Speaker Change: <unk> did include $4 to $500 million out of sales.
Pete Scott: You know, to the extent that we end up selling more assets, it will really be back end weighted with regards to closing. So I don't see a huge impact there.
Speaker Change: To the extent that we ended up selling more assets. It will really be backend weighted with regards to closing so I don't see a huge impact there again it will have an impact on 26, and we're not putting out 26 guidance on this call, but I would also say when I mentioned efficiencies.
Pete Scott: Again, it will have an impact on 26.
Pete Scott: And we're not putting out 26 guidance on this call. But I would also say when I mentioned efficiencies, Those will work their way into earnings, I think, a lot quicker than any asset sale dilution and dilution from deleveraging. And like I said, I'm trying to offset as much of that dilution, if not all of it, from efficiencies as well. We're very mindful of our earnings stream and looking towards earnings growth if we can achieve it next year over this year. Again, too soon to say that that can be the case right now, but I do think the efficiencies will work their way into our 25 earnings a lot faster than any dilution would.
Speaker Change: Those will work their way into earnings I think a lot quicker than any asset sale dilution.
Speaker Change: And dilution from deleveraging and like I said, I'm trying to offset as much of that dilution if not all of it from efficiencies as well, we're very mindful of our earnings stream and looking towards earnings growth. If we can achieve it next year over this year again too soon to say that that can be the case right now, but I do think the efficiencies will work their way.
Speaker Change: And to our 25 earnings a lot faster than any dilution well.
Pete Scott: And as we think about the dividend in 26, noting that it sounds like dispositions may be a bit heavier than what's in the 25 guidance, I guess, how should we think about those relative dispositions? Are they going to be dilutive? I'm not sure where you think you can sell assets where cap rates are, but is the earnings base going to shrink before it grows? Or how are you guys kind of at least penciling that currently? Yeah, you know, we've gotten a lot of questions on dividend coverage. And I know there's been some things said in the past on that, but you know, I won't say anything different that we're certainly trending towards, you know, covering our dividend towards the second half of this year.
Speaker Change: And as we think about the dividend in <unk> and 'twenty six noting that it sounds like dispositions may be a bit heavier than what's in the 25 guidance.
Speaker Change: I guess, how should we think about those relative dispositions or are they going to be dilutive I am not sure where you think you can sell assets where cap rates are a bit.
Speaker Change: As the earnings base going to shrink before grows or.
Speaker Change: How are you guys kind of at least penciling that currently.
Speaker Change: We've gotten a lot of questions on dividend coverage and I know there's been some things said in the past on that but I won't say anything different that we're certainly trending towards.
Speaker Change: Covering our dividend towards the second half of this year and that's what's in our forecast right now, but like I said I'm less focused on that and more focused on 2026 and what our coverage is in 2026. So as I said on the dividend, it's going to be an output not an input to the strategic plan and we just need more work to be able to definitively.
Pete Scott: And that's what's in our forecast right now. But like I said, I'm less focused on that and more focused on 2026 and what our coverage is in 2026.
Pete Scott: So as I said, on the dividend, it's going to be an output and not an input to the strategic plan. And we just need more work to be able to definitively answer that question.
Speaker Change: Answer that question.
Juan Sanabria: Thank you.
Speaker Change: Thank you.
Speaker Change: Yes.
Seth Berge: And your next question comes from the line of Seth Berge with Citi. Please go ahead. Hi, um, you know, as a how are you thinking about, you know, potential future acquisitions? Are you still going to be mostly on campus focus? Or could we see additional appetite for off campus? I think our focus on acquisitions is going to be more on the core cluster markets, whether it be on campus or affiliated or perhaps, you know, off campus. There's some pretty good disclosure information on, you know, our core cluster markets.
Speaker Change: And your next question comes from the line of Seth <unk> with Citi. Please go ahead.
Speaker Change: Hi.
Speaker Change: As it.
Speaker Change: How are you thinking about potential future acquisitions are you still going to be mostly on campus focus or could we see additional appetite for off campus.
Speaker Change: Yes, I think our focus on acquisitions, it's going to be more on the core cluster markets, whether it'd be on campus or affiliated or perhaps off campus.
Speaker Change: There is some pretty good disclosure information on our core cluster markets I am a big believer in scale and the opportunity to generate outsized NOI growth and our cluster markets.
Pete Scott: I am a big believer in scale and the opportunity to generate outside NOI growth in our cluster markets. So I'd say we're less focused on the exact split on campus, off campus, and more market based, you know, focused at the moment.
Speaker Change: So I'd say, we're less focused on the exact split on campus off campus and more market based.
Speaker Change: Focused at the moment probably makes sense.
Ryan Crowley: You know, it probably makes sense for Ryan Crowley to give you guys just a quick update on what we're seeing in the transaction market, since that's pretty important for us as we're looking to dispose of some assets. And I think it's, you know, holding up quite well, despite the volatility that we're experiencing.
Speaker Change: For Ryan Crowley to give you guys just a quick update on what we're seeing in the transaction markets and Thats pretty important for us as we're looking to dispose of some assets and I think it's.
Speaker Change: Holding up quite well despite the volatility that we're experiencing right certainly be make Seth I would start by saying the favorable market conditions that we saw build throughout 2024 really did continue into 2025, and namely I'm talking about relative abundance of equity dry powder out there as well as.
Ryan Crowley: Ryan? Certainly, Pete. Thanks, Seth. I would start by saying the favorable market conditions that we saw build throughout 2024 really did continue into 2025. And namely, I'm talking about a relative abundance of equity dry powder out there, as well as, you know, the supply of MOVs for sale in the marketplace today. So with that backdrop, you know, it really is an environment that is supportive of the team's disposition efforts for the rest of the year. Okay, thanks.
Speaker Change: As lenders that are eager to lend and most importantly, a relatively low supply of <unk> for sale in the marketplace. Today, so with that backdrop. It really is an environment that is supportive of the team's disposition efforts for the rest of the year.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Okay. Thanks, and then I guess my second question is kind of are you seeing any impact of potential.
Pete Scott: And then I guess my second question is, you know, kind of, you know, are you seeing any impact of potential, you know, federal health care budget cuts or policy changes? And any impacts to your tenants or tenant decision making there? Yeah, I mean, it's a good question on, you know, policy risks. And it's obviously come up a lot. Ever since the changeover in the administration, I think it's still too soon to say definitively where this is, you know, headed. And I do think you could make the argument that with certain things like site neutrality, or perhaps, you know, cuts to Medicaid, which had very little impact on the portfolio we own.
Speaker Change: Health care budget cuts or policy changes.
Speaker Change: And any impact to your tenants are.
Speaker Change: Tenant decision, making there.
Speaker Change: Yes, it's a good question on.
Speaker Change: Policy risks.
Speaker Change: And it's obviously come up a lot.
Speaker Change: Ever since the changeover in the administration I think it's still too soon to say definitively aware this is hal.
Speaker Change: And I do think you could make the argument that with certain things like site neutrality or perhaps cuts to Medicaid, which have very little impact on the portfolio, we owned but over time, perhaps there could be an indirect benefit to the assets that we own tends to be a lower cost setting for service.
Pete Scott: But over time, perhaps there could be an indirect benefit to the assets that we own tends to be a lower cost setting for services to get provided. But again, I want to be very careful, you know, saying what our beliefs are, because it's really not well known at this point in time. And we do certainly have some third party lobbyists we're working with to make sure that we're, you know, completely aware of what's happening in DC. Great, thanks.
Speaker Change: Says to get provided but again I want to be very careful.
Speaker Change: Saying, what our beliefs are because it's really not well known at this point in time and we do certainly have some third party lobbyists, we're working with to make sure that we're completely aware of what's happening in DC.
Speaker Change: Yes.
Speaker Change: Great. Thanks.
John Kilichowski: And your next question comes from the line of John Kilichowski with Wells Fargo. Please go ahead. Good morning. Thank you. And Pete, congrats again. So, I'd like to start one for you, Pete.
Speaker Change: And your next question comes from the line of John Guinee Celski with Wells Fargo. Please go ahead.
Speaker Change: Yes.
Speaker Change: Good morning, Thank you add Pete Congrats again.
Speaker Change: So I'd like to start one.
Speaker Change: For <unk>.
Pete Scott: Our last conversation on OMR, generally in a different seat, but same idea, was that you saw room to kind of push the frontier on mark-to-markets from maybe that historical 2% to 3% to maybe 5% to 10%. I know in your opening remarks, we talked about kind of growing occupancy here at a steady rate. Do you still think that there's room to do that here at HR, or is the focus to be a little bit more programmatic, drive occupancy, and then maybe address that opportunity later? Yeah, hey, hey, John.
Speaker Change: Our last conversation on LOI more generally in a different fee but.
Speaker Change: Same idea was that you saw rooms and to push the frontier on mark to market from maybe the historical 2% to 3% to maybe 5% to 10% I know in your opening remarks, we've talked about kind of growing occupancy here.
Speaker Change: At a steady rate do you still think that there is room to do that here at HR or is the focus to be a little bit more programmatic drive occupancy and then maybe address that opportunity later.
Speaker Change: Yeah, Hey, Hey, John.
Pete Scott: By the way, I know you're a Vandy grad, so hopefully you can give me some good recommendations on places to get a beer down here. I've been in the office a bunch the last couple weeks. But, you know, generally speaking on operating fundamentals, you know, consistent with our prior, you know, conversations, I mean, I do think they're as strong as they've really ever been in outpatient medical. You know, you've got demand far outstripping supply, escalators are routinely at 3% or better is what we're achieving now. You know, rental rates on in-place product is around $25 a foot, and that's up about 20% over the last four to five years.
Speaker Change: By the way I know Youre of Andy Grad. So hoping you can give me some good recommendations on places to get a beer down Arizona and in the office of box a last couple.
Speaker Change: A couple of weeks, but.
Speaker Change: Generally speaking on operating fundamentals consistent with our prior conversations I mean, I do think they're as strong as they've really ever been an outpatient medical.
Speaker Change: You've got demand far outstripping supply escalators are routinely at 3% or better as what we're achieving now rental rates.
Speaker Change: On in place product is around 25 Bucks a foot and that's up about 20% over the last four to five years, new construction rental rates are probably 35 Bucks a foot.
Pete Scott: New construction rental rates are probably at $35 a foot. So there's still room for in-place to grow, I think, higher, not all the way to the new construction rental rates, but somewhere in between. So my view has not changed. I'd say, at the moment, we are certainly focused on two things. One, achieving the best lease economics possible on every single deal. But we obviously want to continue to grow occupancy as well as margins. So I wouldn't say that we're looking to sign deals at lower rates than what we think we can achieve, but we're trying to balance the two.
Speaker Change: So there is still room for in place to grow I think higher not all the way to the new construction rental rates, but somewhere in between so my view has not changed.
Speaker Change: I'd say at the moment, we are certainly focused on two things one achieving the best lease economics possible.
Speaker Change: Every single deal, but we obviously want to continue to grow occupancy as well as margin. So I wouldn't say that we're looking to.
Speaker Change: <unk> signed deals at lower rates than what we think we can achieve but we're trying to balance the two I do think when you get occupancy to more stabilized levels that youll have an even greater opportunity to push rents.
Pete Scott: I do think when you get occupancy to more stabilized levels, that you'll have an even greater opportunity to push rents. So that may be a reason why you're seeing perhaps lower cash leasing spreads today. But we look at every lease deal and all the economics, and we try and achieve the best rate of return possible. Got it.
Speaker Change: So that maybe a reason why youre seeing perhaps lower cash leasing spreads today.
Speaker Change: But we look at every lease deal and all of the economics, and we try and achieve the best rate of return possible.
Pete Scott: And then maybe on your remark around the potential for dispositions to be increased sort of back halfway to the end of 26. The number you've got right now has about $450 million with $300 million in capex, so I guess the other $150 million is the pay on your line. Use the funds strictly to pay down the line. Is there any consideration where the stock is trading? Because, you know, that helps with dividend coverage versus I know the focus seems right now to be deleveraging, but you're balancing those. So I'm curious, if you were to increase those proceeds, is there any consideration of the stock versus purely deleveraging at the Yeah, sorry, you went in and out of it.
Speaker Change: Got it and then <unk>.
Speaker Change: Maybe on your remark around the potential for dispositions to be increased sort of back half weighted and then the 2006.
Speaker Change: Right now has about $450 million 300 million.
Speaker Change: FX I guess another one on your line.
Speaker Change: To increase that number is that.
Speaker Change: And use of funds strictly to pay down the line is there any consideration of where the stock is trading because that.
Speaker Change: With dividend coverage versus I know the focus things right now to be deleveraging, but you are balancing those so I'm curious if you were to increase those proceeds is there any consideration of soccer is this purely deleveraging at this point.
Speaker Change: Yes, sorry, you went in and out of it but I think your question is generally what are my views on stock buybacks.
Pete Scott: But I think your question is generally, you know, what are my views on stock buybacks? You know, look, I think if you have the balance sheet capacity, then buybacks can absolutely be a good use of capital and a good near term, you know, tactic. And the team here did take advantage of that a little bit last year, actually more than a little bit, a lot. But ultimately, that's resulted in our leverage being at, you know, 6.4 times now, and we're on negative outlook by one of the rating agencies. So I don't think buybacks are a great long term strategy, but they certainly can, you know, help your stock price in the very near term.
Speaker Change: Look I think if you have the balance sheet capacity than buybacks can absolutely be a good use of capital and a good near term tactic.
Speaker Change: The team here did take advantage of that a little bit last year actually more than a little bit a lot.
Speaker Change: But ultimately that's resulted in our leverage being at six four times now and we are on negative outlook by one of the rating agencies.
Speaker Change: So I don't think buybacks are great long term strategy, but they certainly can help your stock price in the very near term I would say my immediate focus right now is on creating balance sheet capacity, so I would prioritize that.
John Kilichowski: I'd say my immediate focus right now is on creating balance sheet capacity. So I would prioritize that before I would prioritize stock buybacks at the moment. But to the extent we can achieve, you know, what we're seeking to achieve and de-lever in the near term, then certainly if we had dry powder, we could take a look at, you know, buybacks at that point in time. But we don't have that opportunity today. So that will take some time to get there. Got it. Well, thank you. Congrats again. And I'll have that list of ours over to you shortly.
Speaker Change: <unk> I would prioritize stock buybacks at the moment, but to the extent, we can achieve what we're seeking to achieve and delever in the near term then certainly if we have dry powder, we could take a look at buybacks at that point in time, but we don't have that opportunity today, so that will take some time to get there.
Speaker Change: Got it well. Thank you congrats again and I'll have that list of ours over to you shortly.
John Kilichowski: Perfect. Thanks, John.
Speaker Change: Perfect. Thanks, John.
Niki Yulico: And your next question comes from the line up Niki Yulico with Scotiabank. Please go ahead. Oh, hi, thanks, everyone.
Speaker Change: And your next question comes from the line of Mickey <unk> with Scotiabank. Please go ahead.
Mickey: Oh, hi, thanks, everyone. So in terms of.
Nick: So in terms of prospects, I didn't see an update versus what you said back in, you know, March and any any update you could provide there, you know, on on rent collection and extra Yeah, hey, Nick, it's a I think it tells a good story on where we've started to trend with prospect and also with store, but I'll kick it to Austin. Yeah, good morning, Nick. We disclosed in our 10Q that we did receive full rent from Prospect for February and March, and we also received full rent in April. I would say it's still early in Prospect in the bankruptcy process, so not much more to update you on there.
Speaker Change: Prospect.
Speaker Change: We didn't see an update versus what you said back in.
Speaker Change: March at any any update you can provide there.
Speaker Change: On rent collection and expectations.
Nick: Yeah, Hey, Nick it's big.
Nick: It tells a good story on where we've started to trend with prospecting and also with store, but I'll kick it to Austin.
Austin: Yes, good morning, Nick we disclosed in our 10-Q that we did receive full.
Nick: Full rent from prospect for February and March.
Nick: And we also received full rent in April I would say, it's still early and prospect in the bankruptcy process. So not much more to update you on there.
Austen Helfrich: On the steward front, obviously, we talked about overachieving on our expectations in the fourth portfolio. That's now in Rob's leasing pipeline. A lot of that just kicked off at the end of the year, so I don't expect we're gonna provide a lot of updates on Steward as we move through the year. I think it's in the pipeline. Neither prospect, rent, nor outside from Steward is in our original guidance. So I think good things so far, but it's still early in the year. Okay, great thing. Thanks, Austin.
Nick: On the steward front.
Nick: Obviously, we've talked about over achieving on our expectations in the fourth quarter regarding some of the backfill opportunities that we had in that portfolio.
Nick: That's now in Rob's leasing pipeline a lot of that just kicked off at the end of the year. So I don't expect we're going to provide a lot of updates on Stuart as we move through the year I think it's in the pipeline neither prospect rent nor outside from steward is in our original guidance.
Nick: So I think good things so far but it's still early in the year.
Speaker Change: Okay, great. Thanks, Thanks, Austin, and then yeah, congrats on the new role so it sounds like.
Pete Scott: And then, yeah, Pete, congrats on the new role. So it sounds like, you know, there's there's sort of a strategy plan being put in place. And, you know, at some point, I guess, later this year, there's going to be an update on that, you know, to the market, and then sort of at the same time, to the board to think about. you know, where the dividend, I guess, could be set in the future. Is there any, like, specific, you know, more timeframe you're able to kind of share on that? Yeah, I mean, we're not going to spend a lot of time on the road this next quarter.
Nick: There's sort of a strategy plan.
Nick: Being put in place and at some point.
Nick: Guess later this year is going to be an update on that.
Nick: Yes.
Nick: To the market and then sort of at the same time.
Nick: To the board to think about.
Nick: Where were the dividend.
Nick: I guess could be set in the future is there any like specific timeframe.
Speaker Change: Timeframe, youre able to kind of share on on that thanks.
Nick: Yes.
Nick: <unk>.
Nick: We're not going to spend a lot of time on the road. This next quarter and this is something I've actually talked to some of our key stakeholders on I mean, our focus is.
Pete Scott: And this is something I've actually talked to some of our key stakeholders on. I mean, our focus is internally on the strategic plan and where we intend to take things going forward. And I think that's where we should be focusing the vast majority of our time. So the plan right now is to provide more detail on our next call with regards to that. And we'll certainly, you know, comment more on the dividend at that time. But again, as I said, it's going to be an output, not an input to this. And, you know, at that time, hopefully we can provide some more clarity on the way we're seeing things shape up, not only for this year, but how our dispositions are trending, as well as where we see the trajectory heading into 26.
Nick: Internally on the strategic plan, and where we intend to take things going forward and I think thats, where we should be focusing the vast majority of our.
Nick: Time, so the plan right now is to provide more detail on our next call with regards to that and we will certainly.
Nick: Comment more on the dividend at that time, but again as I said, it's going to be an output not an input to that.
Nick: At that time, hopefully we can provide some more clarity on the way, we're seeing things shape up not only for this year, but how our dispositions are trending as well as where we see the trajectory heading into 'twenty six.
Pete Scott: Okay, thanks. Yep.
Nick: Okay. Thanks.
Nick: Yes.
Austen Wurschmidt: And your next question comes from the line of Austen Wurschmidt with Kbank. Please go ahead. Thanks. Good morning. Hey, Pete. Welcome. Appreciate all the comments and your prepared remarks.
Nick: Thank you. Our next question comes from the line of Austin, where Smith with Keybanc. Please go ahead.
Austin Smith: Alright, Thanks, Good morning, Hey, Pete welcome.
Nick: I appreciate all the comments in your prepared remarks.
Pete Scott: Just wanted to hone in on one about the upside and the margin profile of the company and really, you know, how much, you know, upside do you see as kind of that initial low-hanging fruit? And, you know, what are the best opportunities you see to drive margin just given kind of your background and, you know, what you've recently gone through in your prior role and whether internalizing certain, you know, leasing is an opportunity, you know, across the platform, maybe where, you know, just curious what you see on that front. Yeah, it's a good question, Austin.
Nick: Just wanted to hone in on one about the upside in the margin profile of the company and really.
Nick: How much upside do you see as kind of that initial low hanging fruit.
Nick: What are the best opportunities you see to drive margin just given kind of your background.
Nick: What you've recently gone through in your prior role and whether internalizing certain leasing as an opportunity across the platform, maybe where were.
Nick: And I'm just curious what you see on that front.
Nick: Yeah.
Nick: Good question, Austin and obviously.
Pete Scott: And obviously, You know, in my prior role, there was a lot of internalization that happened the last few years, I'd say, within this platform, a lot of that internalization was already in place. So I don't know that there's a ton of additional internalization, although we've certainly talked about some. We don't, you know, have internalized operations in every single, you know, market. So selectively, that is something we certainly will look at.
Nick: In my prior role there was a lot of internalization that happened. The last few years I would say within this platform a lot of that internalization was already in place. So I don't know that there is.
Nick: A ton of additional internalization, although we've certainly talked about some we don't have internalized operations in every single market. So selectively that is something we certainly will look at.
Rob Hull: You know, I think the other thing I would just mention, you know, Rob and I have spent a lot of time talking at length on just organizational structure and how to maximize, you know, margin within the local markets. And I think one of the key things is just empowering the local teams and pushing down some P&L responsibility much closer to the real estate. More of the structure here from that perspective has been kind of centralized, you know, historically, and we're looking to improve, as we said, profitability as well as, you know, the tenant experience. And I think the more you empower your local teams to have some control over that, we think the better off you'll be from an expense perspective, which will improve margin.
Nick: I think the other thing I would just mention Robin I've spent a lot of time talking at length on just organizational structure and how to maximize.
Nick: Margin within the local markets and I think one of the key things is just empowering the local teams in pushing down some P&L responsibility much closer to the real estate more.
Of the structure here from that perspective, it's been kind of centralized.
Nick: Historically, and we're looking to improve as we said profitability as well as the tenant experience and I think the more you empower your local teams to have some control over that we think the better off you'll be from an expense perspective, which will improve margin and the other way to improve margin is sign more leases and take your revenues up in fact, that's probably the easy.
Pete Scott: And the other way to improve margin is sign more leases and take your revenues up. In fact, that's probably the easiest way to improve your margins there. But we're certainly looking at, you know, both ways.
Speaker Change: <unk> way to improve your margins there, but we're certainly looking at both ways I don't know Rob if you have any other comments you want to make on that topic, yes, I would say for sure. The Occupancies number one way to do it.
Rob Hull: I don't know, Rob, if you have any other comments you want to make on that topic. Yeah, I would say for sure that occupancy is number one way to do it, but then continuing to push that responsibility down. But then not to lose sight of, you know, improvements in technology and being able to take advantage of technology, not just here in the home office, but also out in the field. So we will continue to evaluate those opportunities and implement them where we think it allows us to drive greater efficiency. Yeah.
Speaker Change: But then continuing to push that responsibility down, but then not to lose sight of improvements in technology and being able to take advantage of technology not just here in the home office, but also out in the field. So we will continue to evaluate those opportunities and implement them, where we think it allows us to drive greater efficiencies.
Pete Scott: And then I'll just say one last thing in case you have a follow-up. Our costs are generally in line with peers. But simply put, if you can find three and a half million of savings, that's a penny a share in earnings. The entire C-suite here is in Nashville, which is actually incredibly efficient. We do have a couple of extra offices in areas like Charleston, Scottsdale. So those are just a couple examples of areas perhaps we could strip those costs out of our G&A as well. And like I said, if you can find a penny a share of G&A, that's pretty significant.
Speaker Change: And then I will just say one last thing in case, you have a follow up I think that the G&A side.
Our costs are generally in line with peers.
Speaker Change: But simply put if you could find $3 5 million of savings Thats, a penny a share in earnings.
Speaker Change: The entire C suite here in Nashville, which is actually incredibly efficient we do have a couple of extra offices in areas like Charleston in Scottsdale. So those are just a couple of examples of areas, perhaps we could strip those costs out of our G&A as well.
Speaker Change: Like I said, if you can find a penny a share G&A that's pretty significant.
Austin Wurschmidt: That's all very helpful.
Rob: So that's all very helpful. And then maybe Rob just switching over to you.
Rob Hull: And maybe, Rob, just, you know, switching over to you, you know, you had some some positive commentary around just what you're seeing in the leasing pipeline, despite maybe optically what looked like a little bit of a softer quarter to start the year. Can you just give us the aggregate size of what that that leasing pipeline looks like today versus, you know, where that stood in prior quarters, and then just given kind of the probability that you think you can, you know, you know, deliver on that. Maybe given what's a little bit of an uncertain environment overall.
Rob: Some some positive commentary around just what youre seeing in the leasing pipeline. Despite maybe optically looked like a little bit of a softer quarter to start the year can you just give us the aggregate size of what that that leasing pipeline looks like today versus where that stood in prior quarters and then just given kind of the probability that you would think.
Rob: Can deliver.
Rob: Deliver on that may be given what's a little bit of an uncertain environment overall.
Rob Hull: Thanks. Sure. No, I, I think the pipeline is remains as strong as it's ever been. You know, I mentioned in my remarks that we're seeing an increasing amount of health system participation in that pipeline and executing leases with a growing number of health systems. So I'm very optimistic about the outlook for this year. You know, we continue to this quarter, we did 370,000 square feet of new leasing. If you look historically at our at our new leasing trends, typically the first quarter is is is the softest. And so even at the at the lower amount versus the 4th quarter, we are on pace to meet or exceed our annual targets for new leasing.
Rob: Sure No I think the pipeline is remains as strong as it's ever been.
Rob: I mentioned in my remarks that we're seeing an increasing amount of health system participation in that pipeline.
Rob: And executing leases with growing number of health systems. So.
Rob: I am very optimistic about the outlook for this year.
Rob: We continue to this quarter, we did 370000 square feet of new leasing if you look historically at our at our new leasing trends typically the first quarter is the softest and so.
Rob: Even at the lower amount versus the fourth quarter, we are on pace to meet or exceed our annual targets for new leasing. So I'm very optimistic about where we are today and the path that we have in front of us.
Rob Hull: So I'm very optimistic about where we are today and the path that we have in front of us. So, I think health systems and this morning, the jobs report came out and, you know, health system and health care input employment continues to to to be a strong point in the, in the, in the labor on the labor front. So that's certainly good for our business and we'll continue to drive space needs inside of them. Thanks for the talk.
Speaker Change: I think health systems and this morning, the jobs report came out in.
Rob: Health system.
Speaker Change: In health care input.
Speaker Change: Employment continues.
Speaker Change: To be a strong.
Speaker Change: Point, and the and the labor on the labor front so.
Speaker Change: That's certainly good for our business and will continue to drive.
Speaker Change: Space needs inside of them and mob space.
Speaker Change: Great. Thanks for the time.
Speaker Change: Okay.
Omotayo Okusanya: And your next question comes from the line of Omotayo Okusanya with Deutsche Bank. Please go ahead. Congratulations! Thanks, Ty. I'm sorry to miss your conference in April. That was my one week of unemployment. You're forgiven. That's perfectly fine.
Speaker Change: And your next question comes from the line of armour Tamayo of Cassandra with Deutsche Bank. Please go ahead.
Speaker Change: Yeah.
Speaker Change: Congratulations.
Speaker Change: Thanks to ISR to Miss Your conference in April that was my one week of unemployment.
Speaker Change: Youll forgive and that's perfectly fine.
Pete Scott: So I am curious, sir, if you've had an opportunity just to speak with a lot of the healthcare systems that are tenants of yours, again, there's clearly an overlap versus your prior job, but just kind of curious, what are healthcare systems at this point just thinking, just kind of given the way the macro backdrop is evolving, and how do you see that impacting your business one way or another? Yeah, I mean, we haven't seen it. to date. And, you know, the one thing about outpatient medical is it's a pretty resilient, you know, asset class and demand is holding up quite well.
Speaker Change: Well I am curious.
Speaker Change: If you had an opportunity to speak with a lot of the health care systems.
Speaker Change: That tenant of yours.
Speaker Change: Overlap versus your prior prior job.
Speaker Change: I'm just curious what are the health care systems at this point, just thinking just kind of given the way the macro backdrop is evolving and how do you see that.
Speaker Change: In your business, one way or another.
Speaker Change: Yes, I mean, we haven't seen it.
Speaker Change: To date and the one thing about outpatient medical is its a pretty resilient.
Speaker Change: Asset class and demand is holding up quite well.
Pete Scott: You know, Ryan talked about the transaction market. I'd say that's holding up quite well, despite, you know, the whipsawing of rates and overall volatility. And on the health system side and leasing, if anything, we're actually today seeing the amount of lease deals we're doing with health systems increasing and not decreasing. And that's been a trend that's been going on for the last couple of decades. And I don't see that trend, you know, changing going forward.
Speaker Change: Ryan talked about the transaction market I'd say that is holding up quite well despite the whipsawing of.
Speaker Change: Rates overall volatility and on the health system side in leasing if anything we're actually today seeing the amount of lease deals were doing with health systems, increasing and not decreasing and that's been a trend that's been going on for the last couple of decades.
Speaker Change: And I don't see that trend.
Speaker Change: Changing going forward.
Rob Hull: You know, I didn't talk about the importance of relationships. I mean, one of the overarching things that we're very focused on here is continuing to maintain our strong relationships with our counterparties, and obviously trying to work with them on, you know, allowing them to grow within our portfolio for the demand that they see. But to date, we've seen a lot of demand from health systems, and there's nothing we're seeing right now that shows any signs of it abating.
Speaker Change: Didn't talk about the importance of relationships.
Speaker Change: One of the overarching things that we're very focused on here is continuing to maintain our strong relationships with our counterparties.
Speaker Change: And obviously, you're trying to work with them on.
Speaker Change: Allowing them to grow within our portfolio for the demand that they see but to date, we've seen a lot of demand from health systems and there is nothing we're seeing right now that shows any signs of it abating.
Rob Hull: Rob, do you want to add anything to that? Yeah, I would just add to that, maybe a little more granular that, you know, there are a number of campuses that we're on now where, you know, the systems are coming to us and increasing their, you know, maybe we're talking about 10,000 feet and saying, hey, we need to double that because demand is so great. They're continuing to execute on their expansion plans by establishing new service lines and surgical suites and forming new partnerships with physicians on the ASC front. So as Pete said, not seeing any slowdown and not, at this point, not seeing any signs of a slowdown in the near term.
Speaker Change: Rob do you want to add anything to that yes, I would just add to that maybe a little more granular that there are a number of campuses.
Speaker Change: We're on now where.
Speaker Change: Systems are coming to us in an increasing there maybe we're talking about 10000 feet of saying, Hey, we need to double that because demand is.
Speaker Change: So great there.
Speaker Change: Continuing to execute on their expansion plans by establishing new service lines and surgical suites and forming new.
Speaker Change: Partnerships with physicians on the.
Speaker Change: C front, so as Pete said, not seeing any slowdown and not at this point not seeing any signs of the slowdown in the near term.
Omotayo Okusanya: But that's helpful.
Speaker Change: But.
Omotayo Okusanya: And then on the balance sheet front again.
Speaker Change: That's helpful and then on the balance sheet front again.
Pete Scott: Everything you said makes sense, but I'm just kind of curious, just tactically, as you kind of start thinking about, you know, 1.2 billion of debt coming due in 26, over half a billion dollars of swaps coming due in 26, like, are there things one can be doing now, just kind of based on the forward curve, or do you kind of really have to just kind of wait for things to play out a little bit better before you can actually start to make some kind of some real moves. Yeah, hey, Ty, it's Pete here. You know, I think as we look at our overall liquidity measurement, and back to the question on stock buybacks and why we're less focused on that, as you bring up a good point, yes, we have liquidity today, but we also have, you know, well over a billion dollars in debt coming due, you know, not really this year, we paid off with our line of credit, the one bond that we had coming due this year, but it's really next year.
Speaker Change: Everything you said makes sense, but I am just kind of curious just tactically as you kind of start thinking about.
Speaker Change: Again, the $1 2 billion of debt coming due in 2000, <unk> fills a half a billion dollars of.
Speaker Change: Swaps coming due in 2006.
Speaker Change: Other things one can be doing now will just kind of based on the forward curve, where do you kind of really asked this kind of way.
Speaker Change: For things to play out a little bit better before you can actually start to make some kind of some real moves.
Speaker Change: Yeah, Hey, Tayo, it's Pete here.
Speaker Change: <unk>.
Speaker Change: I think as we look at our overall liquidity measurement and back to the question on stock buybacks and why we're less focused on that as you bring up a good point, yes, we have liquidity today, but we also have.
Speaker Change: Well over $1 billion of debt coming due.
Speaker Change: Not really this year.
Speaker Change: Paid off with our line of credit the one bond that we had coming due this year, but it's really next year. So we're going to work with our bank group.
Pete Scott: So we're going to work with our bank group on our revolver and look at any options that we have. There are some extension options on those term loans as well. But I just don't think we have enough, you know, runway today in a downside scenario. And we're very, very focused on enhancing that in the very near term. So more to come on that.
Speaker Change: On our revolver and look at any options that we have there are some extension options on those term loans as well, but I. Just don't think we have enough runway today in a downside scenario and we're very very focused on enhancing that in the very near term so more to come on that I think just generally speaking.
Pete Scott: I think just generally speaking, I did want to spend a second on, you know, overall, you know, leverage, because I've gotten varying, you know, feedback from different investors on what they think is the right, you know, leverage level for us. But I'll tell you the way I think about it is, you know, look, 6.4 times net debt to EBITDA, like that's just too high. And you're never going to have a CEO tell you, I really want to be on negative outlook from one of the rating agencies, like that would be crazy if somebody said that, and I'm not going to say that.
Speaker Change: I did want to spend a second on overall leverage because I've gotten varying feedback from different investors on what they think is the right leverage level for us, but I will tell you the way I think about it is.
Speaker Change: Six four times net debt to EBITDA like that's just too high.
Speaker Change: Youre never going to have a CEO I really want to be on negative outlook from one of the rating agencies like that would be crazy, if somebody said that and I'm not going to say that so I.
Pete Scott: So I don't think we have to delever though, all the way to five times net debt to EBITDA. I think if we got closer to those levels, then we'd have some balancing capacity to redeploy those proceeds. So probably somewhere in between. I don't want to peg, you know, a specific number right now, but you can, you know, take the average and come up with where we're sort of targeting that to be. And if we delevered a little bit more initially, that's more just because we don't think those assets make sense to be in our portfolio long term, and we think they're going to be habitual underperformers and drag down NOI growth.
Speaker Change: I don't think we have to Delever, though all the way to five times net debt to EBITDA I think if we got closer to those levels than we would have some balance sheet capacity to redeploy those proceeds so it's probably somewhere in between I don't want to peg a specific number right now, but you can tell.
Speaker Change: The average and come up with where we are sort of targeting that to be.
Speaker Change: And if we de Levered a little bit more initially that's more just because we don't think those assets make sense to be in our portfolio long term and we think theyre going to be habitual underperformers and dragged down NOI growth.
Pete Scott: So if we end up going a little further on the balance sheet initially, you should expect us to redeploy capital into the right markets over time. So I'd say that would be a temporal impact to our earnings. Hopeful.
Speaker Change: So if we ended up going a little further on the balance sheet. Initially you should expect us to redeploy capital into the right markets over time, So I would say that would be a temporal impact to our earnings.
Omotayo Okusanya: Thank you and good luck. Thanks, Tyler.
Speaker Change: Helpful. Thank you and good luck.
Speaker Change: Yep.
Michael Mueller: And your next question comes from the line of Michael Mueller with JPMorgan. Please go ahead. Yeah, hi.
Michael Mueller: And our next question comes from the line of Michael Mueller with Jpmorgan. Please go ahead.
Michael Mueller: Yes, hi.
Pete Scott: First, how do you think about balancing the disposition driven portfolio optimization and deleveraging with with earnings impact over the next few years? Yeah. I think it's pretty simple, Mike. I mean, obviously, we're going to be very mindful of what we're selling and the cap rates that we can get. And we don't have to be a price taker in this market. And I think the market's holding up pretty well.
Michael Mueller: I guess first how do you think about balancing that disposition driven portfolio optimization and deleveraging with earnings impact over the next few years.
Michael Mueller: Yeah.
Michael Mueller: I think it's pretty simple Mike I mean, obviously, we're going to be very mindful of what we're selling and the cap rates that we can get and we don't have to VA.
Michael Mueller: Price taker in this market.
Michael Mueller: And I think the market is holding up pretty well, but the other side of that question is okay. There is a negative impact from deleveraging right. That's just a fact of where our interest rates are and where we're going to sell assets at but if you can offset that and think about the upside I mean, we've got pretty good year over year lease escalators that are built in.
Pete Scott: But the other side of that question is, okay, there's a negative impact from deleveraging. That's just a fact of where our interest rates are, where we're going to sell assets at. But if you can offset that and think about the upsides, I mean, we've got pretty good year-over-year lease escalators that are built in place at close to 3%. I've talked about efficiencies, more to come on that. But I will tell you, we are going to turn over every rock here to find as many efficiencies as we possibly can. And then obviously, we've got the leasing upside as well.
Michael Mueller: <unk> said close to 3% I've talked about efficiencies more to come on that but I will tell you. We are going to turnover every rock here to find as many efficiencies as we possibly can and then obviously, we've got the leasing upside as well. So we're looking at it from all angles I know when you say asset sales the first thought.
Pete Scott: So we're looking at it from all angles.
Michael Mueller: I know, when you say asset sales, the first thought that comes out to the street is dilution. But our first thought is, how do we offset that dilution? And that's an important work stream we're working on. Got it. Okay.
Michael Mueller: That comes out to the street is dilution, but our first thought is how do we offset that dilution and thats an important work stream we're working on.
Michael Mueller: Got it Okay, and then I know you said you will review the dividend, but as you sit there today are there any benefits that you can point to from not cutting the dividend as it relates to operations and growth prospects.
Michael Mueller: And then I know you said you'll review the dividend, but as you sit there today, are there any benefits that you can point to from not cutting the dividend as it relates to, you know, operations and growth prospects? You know, look, do I wish the dividend coverage was lower? Of course, I wish it was lower, but it's not. And like I said, we've talked to a variety of different investors and You know, I think there's an opportunity for us to grow earnings irrespective of what we do with the dividend. I think retaining some earnings could have a, you know, nominal benefit to, you know, earnings growth going forward.
Michael Mueller: Look do I wish the dividend coverage was lower of course I wish it was lower but it's not and like I said, we've talked to a variety of different investors.
Speaker Change: I think there is an opportunity for us to grow earnings irrespective of what we do with the dividend I think retaining some earnings could have.
Speaker Change: Nominal benefit to earnings growth going forward, but again, we've got more work to do no decisions have been made.
Michael Gorman: But again, we've got more work to do. No decisions have been made. And, you know, we'll provide more more thoughts on that topic next quarter. Okay, thanks. Yeah.
Speaker Change: We'll provide more more thoughts on that topic next quarter.
Speaker Change: Okay. Thanks.
Speaker Change: Yes.
Michael Gorman: And your next question comes from the line of Michael Gorman with BTIG. Please go ahead. Yeah, thanks. Good morning.
Speaker Change: And your next question comes from the line of Michael Gorman with BTG. Please go ahead.
Michael Gorman: Yeah. Thanks, good morning.
Michael Gorman: Going back to the discussion on the NOI margins, I'm wondering if you could kind of break out the potential for the dispositions to help drive margin higher as well. Do you see kind of a material differentiation between some of your larger markets and some of your core markets in terms of the NOI margin you can drive there versus maybe some of the smaller markets that you would be looking to exit?
Michael Gorman: Going back to the discussion on the NOI margins I'm wondering if you could kind of break out the potential for the dispositions to help drive margin higher as well do you see kind of a material differentiation between some of your larger markets and some of your core markets in terms of the NOI margin you can drive there versus maybe some of the smaller markets that you would be looking to.
Michael Gorman: Exhibit.
Ryan Crowley: Yeah, I'll have Ryan jump in and answer this. Yeah, Michael, you're thinking about it the absolute correct way. It's the way we looked at it. As we came up with our list of potential disposition properties, we took an asset by asset bottom up approach. And NOI margin and historical rent growth, those are all things we looked at and analyzed. As Pete referenced earlier, we also looked at where do we have scale and where can we get those operational efficiencies out of the platform into the property level? So what the team has been hard at work has been, you know, we've been really deliberate about building the list of potential properties to sell.
Yes, hi, Brian jump in and answer that yes, Michael Youre thinking about it the absolute correct way, it's the way we looked at it as we came up with our list of potential disposition properties, we took an asset by asset and bottom up approach and NOI margin in historical rent growth. Those are all things we've looked at and analyzed.
Speaker Change: Pete referenced earlier, we also looked at where do we have scale and where can we get those operational efficiencies out of the platform into the property level. So what the team has been hard at work has been we've been really deliberate about building the list of potential properties to sell and we've also been meticulous about preparing those assets for sale.
Ryan Crowley: And we've also been meticulous about preparing those assets for sale. And what the team has done over the last couple of months is provide the company with maximum optionality as we look to potentially throttle dispositions throughout the year. So I think the potential is there to see NOI margins improve as its pace of dispositions continues throughout the coming quarter. Okay, great. That's helpful.
Speaker Change: And what the team has done over the last couple of months is provide the company with optional maximum optionality as we look to potentially throttle dispositions throughout the year. So I think the potential is there to see NOI margins improve as its pace of dispositions continues throughout the coming quarters.
Speaker Change: Okay.
Rich Anderson: Okay, Great. That's helpful and then Pete maybe just approaching the dividend from a different angle here given your prior role can you just spend a minute talking about as you think about the strategic plan and the opportunities for HR.
Pete Scott: And then, Pete, maybe just approaching the dividend from a different angle here, given your prior role, can you just spend a minute talking about as you think about the strategic plan and the opportunities for HR, how you think about the role of retained cash flow in the capital stack and in the, you know, the future of leasing CapEx and potential either redevelopment or development opportunities and just kind of how you view retained cash flow in an MOB portfolio. Thanks. Yeah, look, I, I think there's really good redevelopment opportunities within outpatient medical where you get a solid return from reinvesting, you know, capital into high quality real estate that, you know, may be older, but you can get a much higher rental rate to the extent that you can refurbish that asset or, you know, the suite for the individual health system or doctors.
Speaker Change: How you think about the role of retained cash flow and the capital stack and in the future of leasing capex and potential either redevelopment or development opportunities and just kind of.
Rich Anderson: How you view retained cash flow and in that mob portfolio. Thanks.
Speaker Change: Yes look.
Speaker Change: I think there's really good redevelopment opportunities within an outpatient medical where you get a solid return from reinvesting capital into high quality real estate that may be older. But you can get a much higher rental rate to the extent you can refurbish that asset or that.
Speaker Change: The suite for the individual health system or Doctor So I.
Pete Scott: So, I mean, the first area you put retained earnings is into redevelopment capital. And I think that'd be priority, you know, number one, you know, priority number two would probably be, you know, along the lines of Reinvesting it into, you know, development or something of that like, but, you know, I'd really focus more on the redevelopment capital, because I think you get a much higher rate of return on that, and it's assets you already own, and you're just bringing them up to a higher standard. Great. Thank you for the time.
Speaker Change: The first area you put retained earnings as into redevelopment capital.
Speaker Change: And I think that'd be priority number one.
Speaker Change: Priority number two will probably be along the lines of.
Speaker Change: Reinvesting it into development or.
Speaker Change: Something of that like but I would really focus more on the redevelopment capital because I think you get a much higher rate of return on that and its assets you already own and you're just bringing them up to a higher standard.
Speaker Change: Yeah.
Speaker Change: Great. Thank you for the time.
Speaker Change: Thanks.
Pete Scott: And that concludes our question and answer session.
Speaker Change: And that concludes our question and answer session I would like to turn it back to pitch for closing remarks.
Pete Scott: I would like to turn it back to Pete Scott for closing remarks. Great. Well, first of all, thanks everyone for joining and look forward to seeing all of you at NARIF.
Speaker Change: Great well first of all thanks, everyone for joining and look forward to seeing all of you at NAREIT next month.
Operator: Thank you and this concludes today's conference call. You may now disconnect.
Speaker Change: Thank you and this concludes today's conference call you may now disconnect.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: [music].