Healthcare Realty Trust Incorporated

Thank you for standing by. My name is Tina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Health Care Realty First Quarter 2026 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. To ask a question, simply press star 1 on your telephone keypad. To withdraw your question, Press star 1 again. It is now my pleasure to turn the call over to Ron Hubbard, Vice President of Investor Relations. You may begin.

Thank you for joining us today for Healthcare Realty's first quarter 2026 earnings conference call. 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 forward-looking statements represent the company's judgment as of the date of this call. company disclaims any obligation to update this forward-looking material. 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 in 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, 2026. The company's earnings press release and earnings supplemental information are available on the company's website. I'd now like to turn the call over to our President and CEO, Pete Scott.

Thanks, Ron. Joining me on the call today are Rob Hull, our COO, and Dan Gabay, our CFO. Also available for the Q&A portion of the call is Ryan Crowley, our CIO. It has been just over a year since I assumed the CEO role, and we have made significant progress in that short period of time. In many ways, we entered 2026 as an entirely new company. We added industry expertise to our revamped and more financially rigorous operating platform, we refined our portfolio, and we right-sized our balance sheet. All of this was in preparation to meet or exceed our three-year earnings forecast. I am pleased to report the hard work and immense preparation is manifesting into better results. While one quarter does not guarantee a three year earnings forecast, it does create a solid foundation for outperformance while sustaining the winning mentality we have worked hard to instill at Healthcare Realty 2.0. Now let's turn to our results for the first quarter. Every day we are executing with purpose and intensity. We signed over 2 million square feet of leases and all time. We reported same-store NOI growth of nearly 7%, also an all-time high. We increasingly bought back more stock. We completed our first joint venture acquisition. We continue to stabilize our redevelopment portfolio. And our capital markets plan is beginning to take shape. The net impact of all this, our first quarter results were far better than expectations. We are raising both FFO and same-store guidance early in the year. and there is more to come on the horizon with a strong leasing pipeline. I wanted to elaborate more on the earnings growth framework for Healthcare Realty 2.0. Earnings growth has unequivocally become the dominant metric that determines a premium multiple in the REIT industry. If you go into any AI platform and search medical office characteristics, you will note the typical cash phrases that have become synonymous with the sector. Stable cash flow, recession resistant, steady-eddy, and 2% to 3% growth. In a low interest rate environment, like we experienced from 2010 to 2020, when the 10-year Treasury averaged low 2%, this all sounded great. Investors were able to generate alpha in medical office with very little risk. However, with the 10-year Treasury at 4.3% today, and our stock trading at an 11 times FFO multiple, this simply won't cut it anymore. We see two challenges in front of us. Put up better numbers, which we are doing, and break down these historical stereotypes. As the only public read focused exclusively on outpatient medical, we will be the trailblazer and redefine what success means in our sector. So let me walk you through the main pillars of organic growth. First occupancy sector wide occupancy is approaching 93% because of strong demand and limited supply growth. We see multiple years of sustained tailwind in front of us driven by the rapid growth of the 65 plus population. And the unabated shift in care to outpatient settings at HR 2.0, our same store occupancy improved this quarter to 92.3%. a year over year increase of 110 basis points. Total occupancy has improved to 90.5% and is a significant near-term earnings growth driver as we stabilize our lease up and redevelopment portfolios. Second, annual escalators. Under the new asset management platform, our average annual escalator on signed leases is 3% plus. I cannot overemphasize the importance of the annual escalator on earnings growth. With our portfolio NOI at approximately $650 million, escalators will be the primary driver of core earnings growth going forward. Third, retention rate. Often overlooked, retention rate is a critical driver of earnings growth. Downtime and capital expenditures, which are the silent killer of earnings growth, are significantly lower for renewal lease deals compared to new lease deals. Therefore, the higher the retention rate, the less capital we have to commit, the higher the lease IRR, the more profitable the deal is to us. During the first quarter, our retention rate was 93.5%. Fourth, cash leasing spreads. With our portfolio optimization complete and our concentration of assets in higher growth markets, including the Sunbelt markets, I would anticipate our cash leasing spreads improving. In the first quarter, our cash leasing spread was 4.2%. Importantly, one out of every four leases we signed had a cash leasing spread greater than 5%. When you add all this up, occupancy growth, annual escalators, higher retention, and improved cash leasing spreads, we expect to generate materially higher earnings growth going forward. Our same store results this quarter are a good indicator that we are heading in the right direction. And as a reminder, our core earnings growth in 2026 is tracking above 5%, excluding the impact from the necessary portfolio optimization and deleveraging. I wanted to spend a moment on external growth and capital allocation, which are incremental to our organic pillars of growth. As we recently disclosed, our capital allocation approach will remain incredibly disciplined. During the first quarter, we did exactly what we said we would do. We bought back $100 million of stock, we completed in excess of $20 million of acquisitions, and we invested $25 million in our redevelopment portfolio. Let me provide a little more context behind our priorities. First, stock buybacks. If we experience dislocation in our stock price, we will not hesitate to acquire shares. This provides us with significant and immediate accretion. We have $400 million of stock buyback capacity remaining under our current authorization. Second, acquisitions. All external acquisitions will be done in joint ventures. Joint ventures currently encompass 5% of our total NOI, so there is ample room for this to grow. We would expect initial cash yields of greater than 7%, which exceeds our implied cap rate. In terms of magnitude, I could see us accretively allocating $50 million to $100 million of capital into our KKR joint venture in 2026. Third, redevelopment, which currently consists of 23 properties that are 64% pre-leased. Redevelopments are the primary source of the $50 million of NOI upside in our three-year forecast, and we continue to track ahead of schedule. I would expect the number of assets in redevelopment to modestly tick up in the coming quarters as we front load our spend into the earlier part of our three-year plan. This will allow us to maximize the NOI upside opportunity sooner. As a reminder, our average cash-on-cash yield for the redevelopment portfolio is 10%, and comes through a combination of increased occupancy and or increased rental rate. Importantly, none of these priorities, buybacks, joint venture acquisitions, and redevelopments are mutually exclusive. In addition, while not part of our guidance, we are open to selling more assets, including core assets, and accretively recycling the proceeds into any one of our priorities to further improve earnings growth. Finishing now with a quick note on our board. As part of our ongoing board refreshment initiatives, longtime director Jay Luke announced he will retire after our upcoming annual meeting. I would like to provide a sincere thanks to Jay for his contributions to the organization over the years. Upon Jay's departure, the average tenure of our remaining directors is less than two years. We plan to add a new director later this year, and we'll prioritize that person's experience and diversity. With that, let me turn the call over to Rob.