Healthcare Realty Trust Incorporated 2026 Q3 Earnings Call

Doris, please go ahead. Thank you for joining us today for Healthcare Realty's third 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. The company disclaims any obligation to update this forward-looking material. 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 on 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 September 30, 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, Doris. Joining me on the call today are Rob Hull, Dan Gabbay, and Ryan Crowley. The third quarter was another strong quarter for Healthcare Realty. Higher interest rates have weighed on real estate stocks, including ours, but not on our fundamentals. Demand for our space is rising, and so are our rents. Let me start with our results. Normalized FFO was $0.42 per share. Same-store NOI grew 5.1%. We signed 1.5 million square feet of leases, including 430,000 square feet of new leases. Our redevelopment portfolio is now 72% leased, up 500 basis points sequentially. Same-store occupancy improved to 93.1%. Cash leasing spreads were 8.6%, and we are raising guidance for the third time this year. Let's turn to capital allocation. We remain disciplined, and everything we do is aimed at improving our earnings growth.

Earlier this year, we executed on $1.1 billion of debt refinancings at a blended interest rate of approximately 4%. Our balance sheet gives us the flexibility to be nimble across our two main external capital allocation priorities: stock buybacks and joint venture acquisitions. On stock buybacks, during the quarter and through October, we repurchased $75 million of stock at an average price of approximately $17.75, bringing our year-to-date total to $250 million. Our philosophy on buybacks is simple. Our stock must compete for capital like any other investment. When we trade at a meaningful discount, as we do today, buying back our stock is one of the most accretive uses of our capital.

On joint venture acquisitions, year-to-date, we have acquired 8 medical office buildings and have one more under contract for a total of $338 million, or $67 million at our share. That is within the $50 million-$100 million range we outlined earlier this year. These investments carry a mid-7% initial cash yield to Healthcare Realty before accounting for meaningful additional platform benefits. Together with our partners at KKR, we will pace our acquisitions with discipline. We will also continue to evaluate select asset sales to help systems that want to own strategic real estate on their hospital campuses and to private buyers who remain attracted to the strong tailwinds benefiting our sector. Year-to-date, we have monetized over $200 million of assets, with over $100 million more under contract or LOI. For the year, we expect our average disposition yield to be in the mid-5% range.

Opportunistically selling assets to fund buybacks and joint venture acquisitions is significantly accretive to earnings. Shifting to the MOB sector and why we are so well-positioned. First, growth. Medical office can deliver mid-single-digit growth with the tailwinds we are experiencing, and our results show it. Tenant demand continues to rise with the needs of an aging population. Site of care continues to shift to outpatient settings, while new MOB supply remains muted due to elevated construction and debt financing costs. Second, pricing power. Sector-wide occupancy is now nearly 93% at historical peaks. Rising tenant demand and constrained new supply are driving rents higher in our buildings. The evidence is cash leasing spreads in excess of 5% year-to-date and nearly 90% retention rates. We have a best-in-class portfolio predominantly located in the nation's fastest-growing markets, which positions us well to continue to benefit from these powerful dynamics. Third, return on capital. Our leasing model is designed to drive ROI across the portfolio.

Every leasing decision is made on economic returns, not volume. That rigor is paying off. Since we introduced the new model, lease IRRs have improved nearly 3,000 basis points, and payback periods are down 25%. With higher occupancy and retention, our capital burden is reduced and our profitability improves. Our plan is to continue repeating this quarter after quarter. Fourth focus, Healthcare Realty is a pure play, the only public REIT focused exclusively on medical office. For others, it's an afterthought. For us, it is 100% of what we do. Our capital, our people, and our attention are never divided. This laser focus is leading to better results across the board. We are outperforming. That is by design.

In finishing, with fundamentals firmly on our side, we will keep executing, putting up strong numbers, allocating capital with discipline, following through on our commitments, and focusing on the things we can control. Healthcare Realty offers much better growth than our share price reflects. This motivates us every day. With that, let me turn the call over to Rob.

Good morning, everyone, and thank you, Pete. Strong operating momentum continued in the third quarter. We completed approximately 1.5 million square feet of new and renewal leasing and produced more than 85,000 square feet of positive same-store absorption, increasing occupancy 30 basis points sequentially to 93.1%. Retention came in strong at 88%. In addition, we had more than 480,000 square feet of signed, not occupied leases at quarter end, providing a clear path to further occupancy gains in the fourth quarter and into 2027. Cash leasing spreads were another bright spot at 8.6%, the highest level for the company in nearly a decade. Health systems accounted for more than 600,000 square feet of leasing this quarter. Within this activity, Ascension Saint Thomas in Nashville signed new leases totaling 18,000 square feet and renewed 185,000 square feet for 10 years.

Along with these leases, our planned $35 million redevelopment of three properties on the Ascension Saint Thomas West Campus in Nashville strengthens our relationship, complements the hospital's $120 million investment in the same campus, and positions these properties for long-term growth. Other notable health system leases this quarter were with Cedars-Sinai in Los Angeles, Trinity Health in Columbus, Ohio, and Indiana University Health in Indianapolis, underscoring the value of these long-term partnerships. We also made meaningful progress on redevelopment leasing. New leasing within this portfolio was over 110,000 square feet, nearly twice the second quarter level, and increased the redevelopment portfolio's lease rate from 67% to 72%. The broader supply-demand backdrop in our sector remains very favorable. New medical outpatient construction is limited, while demand continues to benefit from health systems moving more care into lower-cost outpatient settings.

These dynamics support increasing levels of occupancy and reinforce the positive environment for rent growth, bolstering our confidence in the leasing outlook. Our new and renewal pipeline remains robust at more than 3 million square feet, with health systems representing approximately half of that opportunity. I'll now turn the call over to Dan to discuss financial results.

Thanks, Rob. Let me turn back to our financial performance. Our results remain consistently strong quarter-over-quarter, with normalized FFO per share of $0.42, same-store cash NOI growth of 5.1%, FAD per share of $0.32, and a 76% payout ratio. In September and October, we repurchased $75 million worth of shares at a weighted average price of $17.74. This represents an accretive FFO yield in excess of 9% and an important component of our long-term capital allocation framework. Repurchases were funded with previously announced and closed dispositions, such as the Kennestone Cancer Center for $36 million and our nearly complete exit from the Chicago market. Leverage as of September 30th ticked down slightly to 5.5x, consistent with our mid-5x target in our 2026 guidance.