Healthcare Realty Trust Incorporated

Hello and welcome to the Healthcare Realty Trust third quarter earnings conference call. My name is Harry and I'll be your operator today. If you'd like to register a question for Q&A, you may do so by pressing star 1 on your telephone keypad. And I would now like to turn the call over to Ron Hubbard, Vice President of Investor Relations, to begin. Please go ahead.

Thank you for joining Healthcare Realty's third quarter 2023 earnings conference call. Joining me on the call today are Todd Meredith, Chris Douglas, and Rob Holt. A reminder that except for the historical information contained within, the matters discussed in this call may contain forward-looking statements that involve estimates, assumptions, risks, and uncertainties. These risks are more specifically discussed in the company's Form 10-K filed with the SEC for the year ended December 31, 2022, and a Form 10-K filed with the SEC for the quarter ended September 30, 2023. These forward-looking statements represent the company's judgment as of the date of this call. The company disclaims any obligation to update this forward-looking material. The matter discussed in this call may also contain certain non-GAAP financial measures, such as funds from operations or FFO, normalized FFO, FFO per share, normalized FFO per share, funds available for distribution or FAD, net operating income, NOI, EBITDA, and adjusted EBITDA. A reconciliation of these measures to the most comparable GAAP financial measures may be found in the company's earnings press release for the quarter ended September 30, 2023. The company's earnings press release, supplemental information, and Form 10-Q are available on the company's website. I'll now turn the call over to Todd.

Thank you, Ron. Good morning from Nashville, and thank you everyone for joining us for our third quarter 2023 earnings call. I would also like to thank those of you who joined us a few weeks ago at our investor day in Raleigh. If you did not attend, I would encourage you to go to our investor relations section of our website and see the presentation materials and posted videos. We've included a short highlight reel as well as long format videos with the content of the day. The focus of our investor day was healthcare realty's competitive advantages of market scale and relationships. We showcased how we're using these advantages to drive leasing and occupancy gains. And we illustrated how our approach enhances long-term growth through the expansion of our market and cluster strategy. A key differentiator within our strategy is our proven leasing model. Post merger, it took us about two quarters to fully mobilize the internal leasing team and our brokerage partners across the combined portfolio. Leasing momentum picked up quickly in the first quarter of 2023. Now in the third quarter, we've generated record new leasing volume of 447,000 square feet. This includes 269,000 square feet at the HTA multi-tenant properties where we have the most upside opportunity. Looking ahead, our current leasing momentum is setting the table for occupancy gains and NOI growth in 2024. Today, we're providing a roadmap, an occupancy and NOI growth bridge that outlines our expectations for the fourth quarter and full year 2024. The bridge represents both multi-tenant properties and the total portfolio. Our single-tenant properties are fully occupied with consistent NOI growth. I'll focus most of my comments on the multi-tenant properties where we have upside. As a baseline, our multi-tenant occupancy is currently 85.1%, and our year-over-year NOI growth is currently running at 2.3%. In the fourth quarter of 24, we expect multi-tenant occupancy gains of 35 to 50 basis points. NOI growth is expected to improve to the mid-2% level, but not fully reflective of the occupancy gains since they will be back-ended. Looking into 24, we split our bridge into the first and second half of the year. In the first half, we expect cumulative occupancy gains of 70 to 100 basis points over current occupancy. We expect NOI growth to elevate to a range of 2.7 to 4%. In the second half, we expect cumulative occupancy gains of 150 to 200 basis points compared to current multi-tenant occupancy of 85.1%. We expect multi-tenant NOI growth to accelerate to the 4.5 to 5.5 range in the second half. Folding in the single tenant properties, NOI growth is expected to be approximately 4% to 5% in the second half of 24. Occupancy and NOI improvement is expected to build over the next five quarters. What we're most focused on is reaching a 4% to 5% run rate in the latter part of 24, providing tremendous velocity going into 25. I'm confident we have the best team in the industry to deliver this upside. We're laser focused on leasing momentum tenant retention, and expense controls that will drive occupancy and NOI gains in 24. Stepping back to the broader context, we've done the hard work to merge and integrate two of the largest MOB companies. We are now the safe choice to invest in a high-quality, pure-play MOB company. We have tangible operational upside in our sites bolstered by secular tailwinds. MOB fundamentals are sound. Demand is accelerating from aging demographics. The supply-demand picture for MOBs is tightening in our favor. And health systems are reengaged in expansion plans as their margins improve. Turning to third quarter results, we're pleased to have met our expectations on a number of fronts. Normalized FFO was in line with our expectations at $0.39 per share. Same-store NOI growth improved 20 basis points to 3 points 2.3% compared to the second quarter. In-place contractual rent escalators moved incrementally higher to 2.76%, and cash leasing spreads jumped to 4.8%, well above our guidance range. We also sold five properties in the quarter for net proceeds of over $200 million, funding our capital requirements and reducing our floating rate debt. These bright spots are counterbalanced by a couple of areas where we have plans to improve. Operating expense growth was 4.8% in the third quarter. This is down materially from the second quarter, but well above where we need to be to meet our NOI goals. We're actively working on a number of cost reduction initiatives to reduce operating expense growth to a run rate of 2.5% by the end of 24. Another key area is tenant retention. Third quarter retention of 76% was below our long-term expectation of 80% or higher. Retention at the HTA properties has been running about 5% to 10% lower than the HR properties. Our team is actively improving customer service and tenant satisfaction to lift tenant retention into our historical range. Tenant survey scores have already improved at the HTA properties, and we expect retention to follow in 24. After Chris and Rob, I'll circle back to provide some additional comments before we shift to Q&A. Now I'll turn it over to Chris to discuss financial results. Chris? Thanks, Todd.