Healthcare Realty Trust Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2024

There are 13 speakers on the call.

Operator

Good afternoon. Thank you for attending the Healthcare Realty Second Quarter Earnings Conference Call. My name is Cameron, and I'll be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to your host, Ron Hubbard, Vice President of Investor Relations.

Operator

You may proceed.

Speaker 1

Thank you for joining us today for Healthcare Realty's 2nd quarter 2024 earnings conference call. Joining me on the call today are Todd Meredith, Chris Douglas and Rob Hull. A reminder that except for the historical information contained within, the matters discussed in this call may contain forward looking statements that involve estimates, assumptions, risks and uncertainties. These risks are more specifically discussed in the company's Form 10 ks filed with the SEC for the year ended December 31, 2023. These forward looking statements represent the company's judgment as of the date of this call.

Speaker 1

The company disclaims any obligation to update this forward looking material. The matters discussed in this call may also contain certain non GAAP financial measures, such as funds from operations or FFO, normalized FFO, FFO per share, normalized FFO per share, funds available for distribution or FAD, net operating income, NOI, EBITDA and adjusted EBITDA. A reconciliation of these measures to the most comparable GAAP financial measures may be found in the company's earnings press release for the quarter ended June 30, 2024. The company's earnings press release, supplemental information and Form 10 ks are available on the company's website. I'll now turn the call over to Todd.

Speaker 2

Thank you, Ron, and thank you, everyone, for joining us today. Healthcare Realty had a strong Q2. We are making notable progress on our capital allocation objectives and we are accelerating our operational momentum. For the Q2, normalized FFO was $0.38 per share. This was impacted by the previously disclosed Steward revenue reserve.

Speaker 2

Without the reserve, our results were $0.39 per share. Based on strong execution and momentum generated in the first half, we increased our full year 20 24 FFO guidance midpoint by 0.5 The increase would have been about $0.01 more without the reserve. In terms of capital allocation, we expect to generate more than $1,000,000,000 of proceeds from completed or planned JVs and asset sales. Our new JV with KKR is already growing, and we recently announced an expansion of our existing JV with Nuveen. We expect about 70% of total proceeds to come from asset contributions to these JVs.

Speaker 2

To redeploy this capital, we moved early in the Q2 repurchasing stock at discounted levels. To date, we've repurchased almost $300,000,000 at an average implied cap rate of 7.5%. With JV contribution and asset sale cap rates at 6.6%, this equates to 90 basis points of positive spread or well over 100 basis points including JV fees. Looking ahead, we will remain opportunistic and continue repurchasing equity if it's accretive. Turning to operational momentum, we're seeing strong leasing trends and accelerating occupancy gains.

Speaker 2

The 2nd quarter marks the 4th consecutive quarter with more than 400,000 square feet of new leases signed. And our first half multi tenant occupancy gain of 55 basis points was solidly above the top end of our first half bridge guidance. We expect this momentum, this strong momentum to continue into the second half and twenty twenty five. I'm especially pleased with our 2nd quarter retention. This is our 2nd consecutive quarter at the 85% level, which has improved materially from the mid to high 70s last year.

Speaker 2

Higher retention comes with the benefit of avoiding lost rent from downtime and avoiding higher tenant improvement dollars to re tenant vacant space. I want to commend our leasing operations teams. Their efforts to step up service levels and reduce move outs are really paying off. Our operations team is also successfully controlling operating expenses. 2nd quarter expenses declined year over year and are nearly flat for the first half.

Speaker 2

We expect growth in operating expenses to be contained in the 2% to 3% range for the full year. It's worth noting our net operating expenses are expected to grow well below 2% in 2024 after taking into account tenant reimbursements. As a result, we are seeing meaningful margin expansion. The combination of strong occupancy gains and well controlled expenses is translating to higher NOI growth. Without the Steward reserve, same store NOI grew 3.5% in the 2nd quarter and total multi tenant NOI grew 3.9%.

Speaker 2

Both of these are at the high end of our guidance ranges. With strong momentum in the first half, we are steadily driving multi tenant NOI growth towards the 5% level. Turning to maintenance CapEx. Spending on TI and commissions is elevated as expected based on strong new leasing volumes. This investment in positive absorption is revenue enhancing capital.

Speaker 2

In terms of capital allocation priorities, this is our highest return on investment by far. Excluding this revenue enhancing capital, which we estimate to be $20,000,000 to $25,000,000 this year, our dividend is expected to be fully covered going into 20 25. Looking at the balance sheet, we expect our leverage to trend lower. Once we complete the announced JV and asset sale transactions, leverage is expected to be approximately 6.4 times. And we expect leverage to improve further going into 2025 as occupancy gains flow through to higher EBITDA.

Speaker 2

Now I'll turn it over to Chris to discuss results, guidance and the balance sheet. Chris? Thanks, Todd. The first half

Speaker 3

of the year has been marked by strong operational and capital allocation execution. Normalized FFO per share for the quarter was $0.38 Excluding the previously disclosed $3,000,000 Steward revenue reserve, FFO per share was at the upper end of our quarterly guidance of $0.39 Same store NOI for the quarter without the revenue reserve improved 50 basis points sequentially to 3.5%. Multi tenant NOI growth improved to 3.9%, which is at the upper end of our bridge expectations for the first half of the year. The strong NOI performance was driven by better than projected absorption and expense controls. Revenue growth benefited from 122,000 square feet of sequential multi tenant absorption and 2.9% cash leasing spreads.

Speaker 3

The absorption outperformance came from a combination of better than planned new lease commitments and materially lower move outs. Tenant retention for the quarter 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 as a result of the occupancy gains and strong expense controls. Year over year quarterly operating expenses decreased almost 1% and net and recoveries were down almost 3%. This came from discipline and proactive efforts, especially on labor cost and property taxes.

Speaker 3

Labor cost declined 2.0% year over year. Property taxes decreased 1.5% from successful property tax appeals late last year. We will lap some of these benefits in the second half, but expect total full year operating expenses to be well below 3%. Operating expenses at or below our in place contractual escalators of 2.8% less the full impact of absorption drop to the bottom line and improve overall NOI margins. Turning to capital allocation, JV contributions and asset sales have generated $400,000,000 of proceeds year to date.

Speaker 3

The proceeds funded existing capital commitments and $295,000,000 of stock buybacks. The average repurchase price was $15.89 representing a 7.5% implied cap or approximately 20% discount to NAV. For the year, we expect over $1,000,000,000 in total JV and asset sale proceeds. This will fund $200,000,000 of existing capital commitments and $800,000,000 of combined debt repayment and share buybacks. The $800,000,000 of capital allocation proceeds are expected to generate over $0.01 a share of accretion in 2024 and over $0.025 annualized.

Speaker 3

FFO per share guidance for the year was increased and reflects the capital allocation accretion. In addition, the updated guidance incorporates the operating assumptions on Page 30 of the supplemental, including a reduction in expected G and A expenses and lower straight line rent from asset sales. The midpoint of guidance does not assume repayment in 2024 of the $3,000,000 Steward revenue reserve taken in the Q2. It does assume they will continue to pay monthly rent of approximately $2,000,000 as they did in June July. Looking to the balance sheet, run rate leverage is 6.4 times, including the expected debt repayment for remaining asset sales and JVs.

Speaker 3

The debt repayment is expected to pay off the $250,000,000 term loan that expires next July, which will reduce 2025 debt maturities to less than $300,000,000 The combination of our operational and capital allocation momentum will drive an improved dividend payout ratio and lower leverage moving into 2025. I'll now turn it over to Rob for more details on our leasing progress.

Speaker 4

Thanks, Chris. My comments today will be focused on multi tenant occupancy gains and a strong leasing momentum. We exceeded our bridge guidance in the first half of the year and expect further gains in the second half and into 2025. Multi tenant occupancy improved sequentially by 37 basis points or 122,000 square feet. Coupled with the Q1, net absorption for the year in our total multi tenant portfolio was 183,000 square feet.

Speaker 4

At this level, we exceeded the top end of our bridge guidance for the first half of the year by over 30%. Our outperformance was driven by greater than expected new lease commencements and a move out rate that was over 300 basis points lower than historical levels. Over the last three quarters, we gained 112 basis points of occupancy in our multi tenant portfolio. This puts us on track to deliver the 150 to 200 basis points of multi tenant occupancy gains published last November in our 5 quarter bridge. It is also worth noting that the legacy HTA assets have gained 172 basis points of occupancy over the same period, highlighting our ability to drive absorption in that portfolio.

Speaker 4

Strong absorption led to total multi tenant NOI growth of 3.9% for the Q2 at the top end of our first half bridge guidance. Our leasing activity this year has been supported by favorable supply and demand fundamentals. Occupancy across the sector continues to climb and new MOB starts continue to trend lower. This quarter, absorption in the MOB sector reached 5,500,000 square feet, the most on record since the data has been tracked. Health system top line revenue and our operating margins continue to improve.

Speaker 4

Providers are seeing solid outpatient volume and revenue trends. Longer term, we expect demand to continue rising. Spending on healthcare services is expected to increase at 5.6% annually over the next decade. Over the same time period, the over 65 age group will grow at more than 9 times the rate for the remaining U. S.

Speaker 4

Population. And those over 65 are the largest users of healthcare services, spending 4 times more than those under 45. The combination of limited new supply and rising demand creates a tailwind to support ongoing leasing momentum. New signed leases in the 2nd quarter totaled approximately 432,000 square feet. Notably, this marks our 4th consecutive quarter above 400,000, an important part of the equation driving our projected gain of 100 to 150 basis points of absorption this year.

Speaker 4

Our new lease pipeline reached 1,900,000 square feet in the quarter, its highest level ever. This gives us visibility and positions us well to achieve projected absorption gains outlined in our bridge. Our team has executed well in the first half of twenty twenty four, delivering a robust level of new leasing and outsized absorption With current multi tenant occupancy at 85.9%, we are in the early innings of a multiyear plan to reach 90% across our multi tenant portfolio. This will drive continuing absorption and outside NOI growth in 2025 and beyond. Now, I'll turn it back to Todd for some final remarks.

Speaker 2

Thanks, Rob. Now, I'll just make a few more comments before we shift to the Q and A portion. As our announced JV and asset sale transactions are completed over the next quarter or so, we expect to have excess proceeds to redeploy. In the near term, our capital allocation priorities are first to fund our existing obligations such as the positive absorption capital I mentioned, which is our highest investment return on investment by far. 2nd, to repurchase stock accretively if the price trades at a discount.

Speaker 2

And 3rd, to repay debt, keeping our leverage neutral or trending lower. So 2024 is shaping us to be an important year for HR in terms of building momentum and executing on our capital allocation and operational objectives. We're increasing 2024 FFO guidance based on strong first half results. External tailwinds of limited MOB supply and robust outpatient demand are bolstering our outlook for the second half of twenty twenty four and twenty twenty five. Full dividend coverage is well within reach and poised to keep improving in 20252026.

Speaker 2

And Healthcare Realty's balance sheet is strengthening with leverage expected to trend lower. Cameron, operator, we're now ready to move to Q and A.

Operator

Thank you. We will now begin the question and answer session. The first question is from the line of Juan Sanabrio with BMO Capital Markets. You may proceed.

Speaker 5

This is Robin sitting.

Speaker 6

This is Robin sitting in Erewa Quon. Just on Steward, what's the expectation for

Speaker 5

how much space they look to keep or looking to lower any contractual rent? And how does this compare to the market?

Speaker 2

Sure, Robin. This is Todd. It's very early to really be speculating on where that may go. Obviously, we all are paying attention very closely to what may be happening on the hospital front and that's clearly driving this process through the bankruptcy process. It's still very early, excuse me.

Speaker 2

And so we are not down to a point where we're engaging. I think the good news is the outpatient space is needed and it will kind of play out after the hospital pieces are sorted out. So we're really not speculating. The one thing I can say about rents is we've done an assessment. We don't view that there's any material difference in terms of where our rents are versus markets.

Speaker 2

We feel very good about that. And obviously, any other speculation about space and what will be used or not, it's just way too early to tell. We're very encouraged by what we're hearing, generally speaking.

Speaker 6

And the $120,000,000 in real estate impairment

Speaker 5

in the quarter, was that related to Steward or something else? Just curious.

Speaker 3

No. It's related to the asset sales that are ongoing and expected to close here through the balance of the year.

Speaker 7

Okay. Thank you.

Speaker 8

Thank you.

Operator

The next question is from the line of Austin Wurschmidt with KeyBanc Capital Markets. You may proceed.

Speaker 6

Great. Thanks. Todd, I'm just curious how sustainable you think the 85% retention is over the next 12 to 18 months. Just trying to understand that, I guess, given the multi tenant retention this quarter appeared to be lower. I also recall, I think you have some single tenant move outs later this year, another 1,000,000 square foot of expirations on the single tenant side next year.

Speaker 6

So trying to think about it a little bit holistically as well as the breakout between multi and single tenant over that timeframe?

Speaker 2

Sure, sure. Good question. Obviously, we're pleased with being around 85% now for a couple of quarters. Generally speaking, single tenant tends to sort of bring the average up a little bit. The mix isn't very high as you know in single tenant versus multi, but it brings it up maybe 1% or so year to date in this quarter.

Speaker 2

But I would say generally speaking, we expect the multi tenant to really be in that 80 to 85 range. Obviously, we hit some numbers that were in the mid to upper 70s last year as we were continuing to work through the integration of the portfolio, increasing our service levels across the whole portfolio. And we've really seen come around and really turn out to really strong retention. Service levels are very strong. The team is fully in gear.

Speaker 2

And I think also on the leasing side, we're making very concerted efforts where we see tenants who may be thinking about leaving, working with them aggressively to see what we can do to retain them. So it's a joint effort across all of our teams and I think it's really paying off. And we do think we can sustain this at sort of 80 to 85. Obviously, any given quarter can vary. But I think importantly, over the time frame you talked about, the rest of this year and next year, we'll be looking to produce 80% to 85% and really similar levels across multi and single, generally higher in single, but in that same range and working on the backfill on both multi and single to not only backfill but create positive absorption.

Speaker 6

That's helpful. And then just maybe hitting on the guidance piece, implied kind of back half same store growth for the multi tenant portfolio. I think is that that lower end of that 4% to 5.5% range that you expect to achieve in the back half. Is that conservatism or you haven't really pulled forward the better performance in the first half? Or is there something else that's changed from a timing or back half growth perspective?

Speaker 6

That's all for me. Thanks.

Speaker 3

Yes, I would say it's the former just conservatism being halfway through the year. We're feeling good about where things are progressing so far in terms of occupancy as well as on operating expenses and especially for the quarter, we were at the upper end of both of those ranges, but just halfway through the year, try not to get too far ahead of ourselves.

Operator

The next question is from the line of Michael Griffin with Citi. You may proceed.

Speaker 8

Great, thanks. I wanted to

Speaker 7

ask first on leasing. It looks like cash leasing spreads declined slightly quarter over quarter, including the kind of negative cash rent spread bucket. It looked like it went up to about 10% from 4% of the leases in this quarter. Should we interpret this as tenants pushing back more on rent increases? Or was there something maybe market or tenant specific that drove this delta?

Speaker 4

Yes. Hey, Michael, this is Rob. Yes, you're right. They worked cash leases spreads were 2.9% this quarter. And what I would say is that, as we've noted this year, we're really focused on driving occupancy.

Speaker 4

And I think our results are coming through where we've had a lower move out rate, but we've seen increased occupancy and that comes in 2 forms. Certainly in places where we can push rents, we're doing that where market dynamics are strong and we're able to push even above kind of the averages that we put out there. But I think it also points to where we have some markets where maybe more price sensitive markets, we're being more aggressive about negotiating those deals to keep occupancy and avoid costly downtime and incremental TI from the backfilling space. So it's really kind of working the tails and pushing aggressively on the top end. And then in those the bottom end of that spread, you noted that was more where we're just being more aggressive.

Speaker 7

Got you. Appreciate the color there, Rob. And then Todd, I appreciated your comments kind of on the CapEx spend now for occupancy benefit in the future. But kind of as we think about the cadence of that, what is going to be the near term impact to FAD as a result of this CapEx spend you're going to need to spend on new leasing? And then how much occupancy upside or I guess looking at your return do you get as a result of that CapEx investment?

Speaker 2

Sure. Yes, I mentioned it's clearly our highest return on investment by far. And maybe a simple way to think about it is our marginal gross revenue that we can gain from absorbed space is around $36 kind of the average for the portfolio. And then if you divide that by even on the high end about $60 of all in cost to for a new lease, that's obviously a great return, 50%, 60 plus percent type returns on the marginal capital. So from our standpoint, that's a home run and something we want to be doing, even looking at it almost as comparison to an external investment opportunity, but much, much higher returns.

Speaker 2

So our view is that's very much revenue enhancing capital. We're not we haven't broken it out as such, but we're just talking about, hey, there's $20,000,000 to $25,000,000 this year and frankly would be similar next year, just given the absorption expectations we have that you really can think of that way. And that takes probably 6% off the payout ratio if you just kind of run through that math. So it's a material piece of how we look at our dividend coverage and can get there as we go into 2025.

Speaker 7

Great. That's it for me. Thanks for the time.

Speaker 2

Thanks, Mike.

Operator

Next question is from the line of Mike Mueller with JPMorgan. You may proceed.

Speaker 8

Yes. Hi. I guess your comments about multi tenant occupancy going above 90%. First, was that a leased or an occupied comment? And what sort of timeframe are you expecting to get there by?

Speaker 2

Yes. Mike, Rob talked about a multi year plan of getting to 90. And when we talk about it multiple years, we're talking about occupancy. Obviously, that lease percentage versus occupied is a delta that we track and report and gives us a lot of optimism along with our leasing pipeline that we can push gains over multiple years, but certainly looking out over the second half of this year and into 2025. And so if you look at this year, we're saying 100 to 150 basis points of gain in the multi tenant portfolio.

Speaker 2

That's probably a similar range we'll be thinking about in 2025, but it's a little early to lay that down specifically. But certainly another strong year in terms of our expectations next year. So if you start thinking about that as an annual pace, that's a 3 year sort of timeframe, but making some real headway in 2024 and 2025 on that.

Speaker 8

Got it. Okay, that's helpful. And then second question, are you expecting more activity with the Nuveen JV?

Speaker 2

We are underway working on that. So we talked about a roughly $400,000,000 set of transactions with Nuveen. So that work is underway. And so I guess depending on your question, it's in process, some a couple of closings. So very much expanding

Speaker 4

that exactly. Yes.

Speaker 9

I was

Speaker 8

thinking beyond that. I mean, should we think of that as kind of a growing program beyond the 400 that you flagged already?

Speaker 2

It's absolutely an option. As we embarked upon this process earlier this year to sort of ramp up our efforts, they came to the table interested and that was great. So obviously, we have a strong relationship with them, work with them regularly on our existing properties in our JV together. So they've really come back multiple times and through that relationship. So it's always an option.

Speaker 2

It's not maybe to differentiate a little bit with KKR. It's not necessarily expressed in a way like KKR has said we want to commit a certain amount of existing or of capital equity capital to grow it. So it's more opportunistic is maybe the way I would describe it versus KKR being more of a programmatic commitment that will look to grow.

Speaker 8

Got it. Okay. Thank you.

Speaker 2

Thanks,

Operator

Mike. The next question is from the line of Rich Anderson with Wedbush. You may proceed.

Speaker 10

Thanks. Good morning down there. So, you mentioned the revenue enhancing CapEx program. If you didn't do it, you'd be at 100% payout. I think you kind of alluded to that.

Speaker 10

So let's just isolate on that dynamic between that and payout or rent or dividend coverage. How much longer would we have to wait for dividend coverage if you continue to do this $20,000,000 to $25,000,000 with these great returns on incremental investment as opposed to shutting it down now, which you're not going to do and getting coverage that way?

Speaker 2

Yes. Maybe to think about the trajectory of those two approaches, with and without the revenue enhancing treatment there. We still think we can drive towards a covered dividend and even with that extra capital sort of towards the end of 2025. But obviously, if we have outsized absorption capital, then maybe that ticks you over a little bit, but that's obviously a good problem to have. As we're this is a ramping process

Speaker 6

bad that comes from that

Speaker 2

coverage. So it really becomes less of a concern late in 2025. But treating it as revenue enhancing capital sort of separate than maintenance CapEx, you get there basically going into 2025. So that's the difference. Okay.

Speaker 10

Next question, you've got $1,000,000,000 of dispositions and well, I guess the first part of the question is the buyback option at today's stock price, is that essentially off the table? Or does it still make sense to buy back stock at these levels?

Speaker 9

Yes.

Speaker 2

It's maybe to use the stoplight analogy, there's red and green, but then there's sort of the yellow. And I would say that's where probably we are today, where you're right, the accretion gets pretty minimal. Maybe a different way to express it is what discounts to NAV. And I'm just kind of using market consensus for the NAV levels. Once you get into the 10% single digit less than ten percent discount NAV, yes, the accretion math starts to fade.

Speaker 2

And so that's sort of where we're trading right now, which is a good thing. It's been moving in the right direction. So we got in early. We bought nearly 30% discounts to NAV and then continued all the way down to about 10%. And as Chris said, sort of average 20%.

Speaker 2

So there's a little more that can be gained and I think really our view is we'll just be opportunistic and if we see dislocations, we'll jump on it.

Speaker 10

Okay. So that leaves the question, you got this capital program $20,000,000 $25,000,000 share buyback on and off, we'll see. And then debt repurchase, your asset sales are creating a stream of impairments and it will so that's one sort of ghost factor. And then the other is on the debt repurchases. Will there be prepayment penalties associated with that since that maybe will be weighted more in the deployment mass?

Speaker 10

So can you comment on both potential for more impairments and the potential for prepayment penalties on the debt? Thanks.

Speaker 2

Yes, Rich, this is Chris. So on the impairments, yes, we have had to take some of those. But really think about it,

Speaker 3

a lot of those have been assets that were valued at the merger. And so at that point cap rates were in the kind of low to mid fives where they were put on. And so now you're we're saying we're selling them in the mid-6s. And so that's really a balance sheet impact that doesn't change at all what's going through on the income statement and what happens on your accretion. But that's the reason that you have the impairments that are going on.

Speaker 3

And so we'll continue to see some of that as we continue with the asset sales. In terms of the debt repayment, we still have capacity right now in terms of bank lines. I mentioned our delayed draw term loan $250,000,000 We paid down $100,000,000 in the Q2. We have $250,000,000 left. That was set to expire July of 2025.

Speaker 3

So that will be a priority of ours to pay off and there's no prepayment penalty associated with that. And the overall cost on that is around 6.4. So it's not a significant negative drag to be paying that type of debt down. And then we certainly have a

Speaker 2

bit of

Speaker 3

a line balance that we're going to we'll address that as well. So generally from what we see right now, we're not having to get into prepayment penalties. But if we increased it, then we certainly would take that into consideration as we're considering our options.

Speaker 10

So there's a good chance then you could be sitting on more cash than anticipated by the end of this year because of all these moving parts. Is that a fair statement?

Speaker 2

No, Rich. I think if you look back at what Chris described in his prepared remarks, the $1,000,000,000 the way we think about it is there's about $200,000,000 if you look at our capital obligations that comes out first. That's development, redevelopment funding. It's this revenue enhancing capital that I was talking about, 1st gen acquisition capital. So you pull that $200,000,000 out, you're at $800,000,000 And then if you think of fifty-fifty leverage neutral, it's a rough guide, that's $400,000,000 for debt repayment, dollars 400,000,000 for stock buyback.

Speaker 2

Obviously, there's some flex in there. We've used up about $300,000,000 for stock buyback. So it kind of leaves us with about 500 dollars And Chris, just if you look at our debt, we have variable rate debt that we can pay off. It's about $500,000,000 between the line and that term loan Chris mentioned. So really don't see a scenario where we're sitting on excess cash there.

Speaker 7

Okay.

Speaker 1

We would have to increase Rich, we'd have

Speaker 2

to increase our proceeds beyond the $1,000,000,000 let's put it that way.

Speaker 3

Yes.

Speaker 7

Okay. Thank you.

Speaker 2

Thanks, Rich.

Operator

The next question is from the line of John Kilachowski with Wells Fargo. You may proceed.

Speaker 9

All right. Thank you. I'll just follow-up on the last set of questions there for the sources and uses. Earlier in the opening remarks, you mentioned the penny of accretion. Is that to do with what mostly with what has been accomplished year to date?

Speaker 9

Or is that largely to do with you plan to do with the disposition proceeds for the rest of the year?

Speaker 3

Yes. The $0.01 is what we're talking about for this year $0.24 $0.25 on an annualized basis, just to be clear on that. And it's a combination of doing the entire $1,000,000,000 but really I'm looking at the $800,000,000 of what I have kind of coined the capital allocation portion, the portion that goes to debt repayment and to share repurchase. We obviously leaned in early on the share repurchase piece and have already executed on about $300,000,000 of that. But then so now here on the back half of the year, you'll be leaning a little bit more on the debt repayment.

Speaker 3

But the penny for the year is the combination of all of that work.

Speaker 8

Got it. And just like as

Speaker 9

we look at the uses, you broke out the math, the $200,000,000 of CapEx and then right now we're at $300,000,000 of share purchases. Assuming you trade in line with where you are today, that leaves about $500,000,000 on the debt repayment side. I know you paid down some of your term loan. So what is it about $250,000,000 left of the term loan and then the rest would be on the line. Is that correct?

Speaker 9

And could you give the rates on what you're paying on those today?

Speaker 3

Yes. So yes, and as of sixthirty, we had 250 on the delayed drill term 1 and 250 on the line. And they're slightly different rate, but between 6.3 $6.4 is what we're paying on those right now. We also have a little bit more term loan, non hedge term loan that we could address as well with if we did have additional proceeds. Okay.

Speaker 9

Okay. And then I guess thinking about $25,000,000 here with the incremental $600,000,000 for KKR, Let's say, if you start to trade at a premium to NAV and the attractiveness of this disposition program fades, I guess, do you have any protections there? Or what's the next most accretive course of action for that capital?

Speaker 2

Yes. John, as I mentioned, our priorities right now are very focused on the $1,000,000,000 that we've been talking about and what Chris just walked through. So it's really our existing commitments, stock repurchase and debt repayment. And that really kind of speaks for most of the capital we're talking about. As you look further, you're right, there is an opportunity as our stock price makes sense and it's accretive and it becomes more accretive to the JV as you can imagine with fee structures and putting out less capital.

Speaker 2

So it's a higher ROI. We can look selectively at incremental acquisitions through that KKR JV. But that's something that we'll evaluate depending on our valuation. As you said, as we get to a full value relative to NAV or a premium that really starts to make a lot of sense. So clearly, as I mentioned earlier, we've sort of been in this yellow range, but as you get to sort of the green light, that's a great opportunity for us for external growth.

Speaker 9

Got it. Thank you.

Speaker 8

Thank you.

Operator

The next question is from the line of Emily Meckler with Green Street. You may proceed.

Speaker 11

Yes. Thank you, guys. Good morning. I would like to better understand the quality of recent dispositions associated with the New Bean JV. How do occupancy levels, average age and remaining lease term compared to your portfolio average?

Speaker 11

And is it fairly similar to the assets in the KKR JV?

Speaker 2

Sure. Good question. We actually have a page on this in our investor presentation. It's our key highlights, Page 8. And we don't necessarily break out the 2 JVs, not that specifically, but we do differentiate between the wholly owned portfolio, the HR portfolio, JVs and dispositions.

Speaker 2

And this takes into account sort of the $1,000,000,000 that we've been talking about. So if you look at that, probably the main differentiators are geography, top 50 MSAs. There's quite a big difference where the JV and the portfolio are similar, sort of the 90% to 100% range in top 50 MSAs. Dispos are down at 57%. So pretty big difference.

Speaker 2

I would say between just maybe going a layer further between Nuveen and KKR, not a huge difference there. Maybe some slightly different preferences among those two groups, but generally high occupancy, strong markets, similar profile. And then the other aspect that I would say that's important to us is clustered idea where it's part of our strategy obviously to own multiple properties in a tight cluster typically around a hospital campus. And we're seeing very similar levels and maintaining similar levels on the balance sheet or wholly owned and the JV, but our dispose are much, much lower. So I would encourage you to check out that page.

Speaker 2

We do provide some other stats as well. One comment, maybe one other differentiator is average escalator. Typically, we're trying to keep those higher growth escalators on the balance sheet wholly owned. The JVs and dispose are slightly lower. On occupancy, you don't necessarily see as much differentiation, but I think it's important to note generally more stabilized assets going into the JV than even the portfolio.

Speaker 2

And on dispose, similar, although there's sort of 2 tails. We'll sell some things that are highly occupied. We'll also sell some things where Rob and his team don't see a lot of opportunity to improve leasing. So we're trying to keep as much of the occupancy upside on the balance sheet wholly owned as we can. So certainly, we can follow-up if there's more questions, but that's a good page to look at.

Speaker 11

Okay, great. Thank you. And then just one more question generally on the depth of the transaction market. How big would you say the bidding tent is for the top 10% of your properties versus bottom 10?

Speaker 2

Say that again, Emily. I got the top 10 versus bottom 10. How big is the what, the buyer pool or what did you say?

Speaker 11

The bidding tent. Yes, yes, the buyer pool, the bidding

Speaker 2

tent? I wouldn't say it's gotten a lot better. I would say there's quite a market at both ends. Typically, I would lean to say, hey, there's a bigger pool of buyers at the top end. But I think there's definitely folks looking for things they can get at discounted prices or maybe an opportunity where they say they think they can go lease it up, maybe we don't.

Speaker 2

So it's improved dramatically. The other factor there has been financing. That's gotten a lot, lot better. And so it's actually helped both ends of that. But if you go back 6, 9 months, I would say big deals were harder to finance.

Speaker 2

That's changed dramatically. So that's good to see. And it was actually the other way where you could do one off deals maybe at the bottom end and get financing done with smaller loans that weren't syndicated. So I would say it's been it's trending towards neutralizing where both are pretty deep at either end.

Speaker 3

One comment I would add to that, talking to Ryan Crowley yesterday and he mentioned on one specific transaction they're working on that the brokers representing us said that it was the highest ratio of LOIs to CAs that they've seen in quite some time. And I think that just is an indication of the depth of the market and what we're seeing right now and how it's improved over the last 12 to 18 months.

Speaker 11

Okay, great. Thank you guys very much for the time.

Speaker 8

Thank you.

Operator

The next question is from the line of Omotayo Okusanya with Deutsche Bank. You may proceed.

Speaker 12

Yes. Good afternoon, guys. Great work on the operational side. It's kind of good to see your staff coming along. On the Steward issue, I think in your 10 Q filing, there's a statement there about maybe 2 leases that got canceled as part of the bankruptcy process.

Speaker 12

Could you talk a little bit about what's kind of going on there And why the new decisions have already been made? And if there's any read through going forward about how Steward is thinking about the overall HR portfolio?

Speaker 3

Yes, Tayo. Those were very small. I'll say de minimis is under 8,000 square feet, I believe. It's 2 leases and these were in buildings that they didn't have any other operations and were off campus. So it was they were just kind of small things that didn't really matter what happened with the sale of the hospitals.

Speaker 3

And so those did occur. But like I said, it's pretty small de minimis in the overall scheme of things.

Speaker 2

And Tayo, I would say at this point, there would be no inference from those as it relates to everything else. They were, as Chris said, kind of one offs and frankly, not even in Massachusetts. So it's really not material at all. So again, it's kind of early to even try to speculate what may play out. But we're generally encouraged what we're hearing in the process.

Speaker 2

And maybe I won't forget your comment, Tayo. Thank you. I think the operations and leasing team are pretty ecstatic about the work this quarter and sort of the outlook ahead. Appreciate your comments there.

Speaker 12

Sounds good. Thank you.

Operator

Thanks, Tayo. There are no additional questions waiting at this time. I would like to pass the conference over to the management team for any closing remarks.

Speaker 2

Thanks, Cameron. We appreciate it. Thank you everybody for joining us today and we will be around and available for follow-up and look forward to seeing many of you soon. Take care.

Operator

That concludes the Healthcare Realty 2nd quarter earnings conference call. Thank you for your participation and enjoy the rest of your day.

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Earnings Conference Call
Healthcare Realty Trust Q2 2024
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