Healthcare Realty Trust Incorporated

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. You may proceed.

Thank you for joining us today for Healthcare Realty Second 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 make you think forward-looking statements that involve estimates, assumptions, risks, and uncertainties. These risks are more specifically discussed in the Companies Form 10-K 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. 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 end of June 30, 2024. The company's earnings press release supplemental information and Form 10-K are available on the company's website. I'll now turn the call over to Todd.

Thank you, Ron, and thank you, everyone, for joining us today. Healthcare Realty had a strong second quarter. We are making notable progress on our capital allocation objectives and we are accelerating our operational momentum. For the second quarter, normalized FFO was 38 cents per share. This was impacted by the previously disclosed steward revenue reserve. Without the reserve, our results were 39 cents per share. Based on strong execution and momentum generated in the first half, we increased our full year 2024 FFO guidance midpoint by half a penny. The increase would have been about a penny more without the reserve. In terms of capital allocation, we expect to generate more than a billion dollars 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. To redeploy this capital, we moved early in the second quarter, repurchasing stock at discounted levels. To date, we've repurchased almost $300 million 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. The second quarter marks the fourth 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 2025. I'm especially pleased with our second quarter retention. This is our second consecutive quarter at the 85% level, which has improved materially from the mid to high 70s last year. 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 and 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. Second quarter expenses declined year over year and are nearly flat for the first half. 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 24 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 percent in the second quarter, and total multi-tenant NOI grew 3.9 percent. 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 toward the 5 percent 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. 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 to $25 million this year, our dividend is expected to be fully covered going into 2025. 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. Now I'll turn it over to Chris to discuss results, guidance, and the balance sheet. Chris? Thanks, Todd. The first half 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 million 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. 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 of recoveries were down almost 3%. This came from disciplined and proactive efforts, especially on labor costs and property taxes. Labor costs declined 2.0% year-over-year. Property taxes decreased 1.5% from successful property tax appeals late last year. We will lapse 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 are in-place contractual escalators of 2.8%, lest 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 million of proceeds year-to-date. The proceeds funded existing capital commitments and $295 million 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 billion in total JV and asset sale proceeds. This will fund $200 million of existing capital commitments of combined debt repayment and share buybacks. The $800 million of capital allocation proceeds are expected to generate over a penny a share of accretion in 2024 and over two and a half cents annualized. 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 including a reduction in expected G&A expenses and lower straight line rent from asset sales. The midpoint of guidance does not assume repayment in 2024 of the $3 million steward revenue reserve taken in the second quarter. It does assume they will continue to pay monthly rent of approximately $2 million as they did in June and July. Looking to the balance sheet, Run rate leverage is 6.4 times, including the expected debt repayment for remaining asset sales and JVs. The debt repayment is expected to pay off the $250 million term loan that expires next July, which will reduce 2025 debt maturities to less than $300 million. 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.