- Normalized FFO per Share: $0.38, impacted by Steward revenue reserve; without reserve, $0.39.
- Full Year 2024 FFO Guidance Midpoint: Increased by $0.005.
- Proceeds from JVs and Asset Sales: Expected to generate more than $1 billion.
- Stock Repurchase: Almost $300 million repurchased at an average implied cap rate of 7.5%.
- New Leases Signed: Over 400,000 square feet for the fourth consecutive quarter.
- Multi-Tenant Occupancy Gain: 55 basis points in the first half.
- Retention Rate: 85% for the second consecutive quarter.
- Operating Expenses: Declined year over year; nearly flat for the first half.
- Same-Store NOI Growth: 3.5% in the second quarter without the Stewart reserve.
- Total Multi-Tenant NOI Growth: 3.9% in the second quarter.
- Maintenance CapEx Spending: Estimated $20 million to $25 million for the year.
- Leverage: Expected to trend lower to approximately 6.4 times.
- Tenant Retention: Improved to 85.5%, up from 79.3% last year.
- Cash NOI Margins: Improved 50 basis points sequentially and 70 basis points year over year.
- Operating Expenses: Decreased almost 1% year over year; net recoveries down almost 3%.
- Labor Costs: Declined 2.0% year over year.
- Property Taxes: Decreased 1.5% from successful appeals.
- Stock Buybacks: $295 million at an average repurchase price of $15.89.
- FFO per Share Guidance: Increased, reflecting capital allocation accretion.
- Multi-Tenant Occupancy: Improved sequentially by 37 basis points or 122,000 square feet.
- New Signed Leases: Approximately 432,000 square feet in the second quarter.
- New Lease Pipeline: Reached 1.9 million square feet, its highest level ever.
Release Date: August 02, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Healthcare Realty Trust Inc (HR, Financial) reported a strong second quarter with normalized FFO of $0.38 per share, slightly impacted by a Steward revenue reserve.
- The company expects to generate over $1 billion from completed or planned JVs and asset sales, with significant contributions from partnerships with KKR and Nuveen.
- Operational momentum is strong, with four consecutive quarters of over 400,000 square feet of new leases signed and a notable increase in multi-tenant occupancy.
- Second quarter retention improved to 85%, reducing lost rent from downtime and tenant improvement costs.
- Operating expenses are well-controlled, with a year-over-year decline in the second quarter and expected growth contained within 2% to 3% for the full year.
Negative Points
- The Steward revenue reserve impacted the FFO per share, reducing it by $0.01.
- Maintenance CapEx spending on tenant improvements and commissions is elevated, impacting short-term financials.
- Leverage remains relatively high at 6.4 times, although it is expected to trend lower with future transactions.
- The company has taken impairments related to asset sales, impacting the income statement.
- Cash leasing spreads declined slightly quarter over quarter, indicating potential tenant pushback on rent increases.
Q & A Highlights
Q: Just on Steward, what are the expectations for how much space they look to keep and how does it compare to the market?
A: It's very early to speculate on this. The outpatient space is needed, and we feel good about our rents compared to the market. Any other speculation about space usage is too early to tell.
Q: Regarding the $120 million real estate impairment in the quarter, was that related to Steward or something else?
A: No, it's related to the asset sales that are ongoing and expected to close by the end of the year.
Q: How sustainable do you think the 85% retention rate is over the next 12 to 18 months?
A: We expect multi-tenant retention to be in the 80% to 85% range. Single-tenant retention tends to bring the average up slightly. We believe we can sustain this level due to improved service levels and aggressive efforts to retain tenants.
Q: On leasing, cash leasing spreads declined slightly quarter over quarter. Should we interpret this as tenants pushing back more on rent increases?
A: We are focused on driving occupancy. In some markets, we are being more aggressive about negotiating deals to keep occupancy and avoid costly downtime and incremental tenant improvements.
Q: What is the near-term impact on FAD due to the CapEx spend on new leasing, and how much occupancy upside do you get as a result?
A: The marginal gross revenue from absorbed space is around $36 per square foot, with an all-in cost of about $60 per square foot for a new lease. This results in high returns, making it a revenue-enhancing capital investment.
Q: Are you expecting more activity with the Nuveen JV?
A: We are currently working on a roughly $400 million set of transactions with Nuveen. While it's more opportunistic compared to the programmatic commitment with KKR, there is potential for further growth.
Q: How does the quality of recent dispositions associated with the Nuveen JV compare to your portfolio average?
A: The main differentiators are geography and average escalators. Dispositions are generally in lower-tier markets and have lower growth escalators compared to our wholly-owned and JV portfolios.
Q: Could you talk about the depth of the transaction market for the top 10% versus the bottom 10% of your properties?
A: The market has improved dramatically, with a deep buyer pool for both high-end and lower-end properties. Financing has also become more accessible, supporting both ends of the market.
Q: On the Steward issue, could you talk about the leases that got canceled as part of the bankruptcy process?
A: These were very small, de minimis leases in buildings where Steward had no other operations. They were not material and do not indicate any broader trend regarding Steward's overall portfolio with us.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
