Healthcare Realty Trust 2026 Q2 Earnings Call
Review the key takeaways and the transcript of this earnings call.
- Healthcare Realty reported strong second quarter 2026 results with normalized FFO per share of $0.41 and same store cash NOI growth of 5.1%.
- Same store occupancy increased to nearly 93%, and tenant retention averaged nearly 90%.
- The company executed 3.5 million square feet of leases year to date, representing over 10% of the total portfolio, with a weighted average remaining lease term of 65 months.
- Cash leasing spreads averaged 4.8% in the quarter, with average escalators at 3%.
- Healthcare Realty raised $1.1 billion through a convertible bond issuance and a delayed draw term loan, reducing blended interest rates to approximately 4%.
- The company repurchased $75 million of stock in the quarter, totaling $175 million since the strategic plan announcement.
- Joint venture acquisitions with KKR totaled approximately $200 million in assets, with Healthcare Realty's share at $40 million, yielding about 7.5% cash yield, accretive to the company's implied cap rate of approximately 6%.
- Dispositions year to date include six buildings and three land parcels for approximately $75 million at a blended 5% cap rate.
- Redevelopment investments totaled approximately $25 million in the quarter, with properties leased up to 67%, an improvement of 1400 basis points over the last four quarters.
- Healthcare Realty highlighted key health system transactions with CommonSpirit, Wellstar, and Ascension Saint Thomas, including land sales and lease renewals with positive cash leasing spreads ranging from 4% to 11%.
- The company’s strategic plan is outperforming all key objectives one year in, with same store NOI growth averaging 5.7%, occupancy near 93%, and leverage reduced by nearly a full turn.
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Transcript
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Hello, everyone. Thank you for joining us and welcome to Healthcare Realty's second quarter 2026 earnings call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Doris Lowe.
Doris, please go ahead. Thank you for joining us today for Healthcare Realty's second 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. 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 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 June 30th, 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, Peter Scott.
Thanks, Doris. Joining me on the call today are Rob Hull, Dan Gabbay, and Ryan Crowley. It has been exactly one year since we put out our strategic plan. At the core of the plan, we laid out clear and purposeful changes designed to improve operational performance, strengthen our portfolio, reestablish credibility, and maximize shareholder value. One year henceforth, and I am pleased to report we are outperforming every one of our key objectives over the last four quarters. Same-store NOI growth has averaged 5.7%, same-store occupancy has increased to nearly 93%, retention has averaged nearly 90%, cash leasing spreads have averaged 4.1%, leverage is down nearly a full turn, and we have raised guidance every single quarter along the way, including by another $0.02 this quarter, driven by strong operations in leasing, a successful convertible bond offering, and accretive capital allocation.
Our outperformance has been a collaborative effort across the entire organization and would not have been possible without the hard work of all 500-plus employees and the support of our best-in-class board of directors. We have built a winning mentality and a culture of executing with purpose and intensity that is now pervasive throughout the organization. Shifting to our recent leasing success. Year to date, we have executed 3.5 million sq ft of leases. That is over 10% of our total portfolio. You can see the benefit of our leasing success in our weighted average remaining lease term, which stands at 65 months today, an improvement of 15 months since we disclosed our strategic plan. Going forward, we have very limited near-term expiration risk, providing a clear path for earnings growth over the next several years.
Our leadership team has also implemented a new leasing model designed to drive ROI across the portfolio. Over the last four quarters, lease IRRs have improved nearly 3,000 basis points, and our payback period is down nearly 25%. As we keep executing this quarter after quarter, our core earnings growth engine will rerate meaningfully higher. Turning now to health system relationships, which was an important facet of our strategic plan. Our dialogue with health systems has increased exponentially over the last year, and we are constantly collaborating to assess mutual value creation opportunities. I want to highlight a couple of recent health system transactions. First, CommonSpirit. In late June, we executed approximately 160,000 sq ft of renewals in five states at a positive 7% cash leasing spread.
As part of this transaction, we agreed to sell CommonSpirit 15 acres of land in Denver for $16 million, removing our current land carry costs. CommonSpirit intends to use the land to expand the hospital. On top of that, we also retained future MOB development rights on the site. A great win-win transaction for both sides. Second, Wellstar. Year to date, we have executed 215,000 sq ft of renewal leases at a positive 4% cash leasing spread, along with 27,000 sq ft of new leases. As part of our lease negotiations, we agreed to sell Wellstar to Kennestone Cancer Center for $36 million, which equates to more than $600 per sq ft and a mid-5% cap rate. We plan to recycle these proceeds into JV acquisitions at a substantially higher yield. Another great example of a win-win outcome. Third, Ascension Saint Thomas. In early July, we executed an LOI for 203,000 sq ft of leases across three campuses in Nashville.
The cash leasing spread is positive 11%, and we expect these leases to be executed in the third quarter. As part of this transaction, Ascension and Healthcare Realty will launch a comprehensive redevelopment of the Ascension Saint Thomas West Campus Located in one of the most vibrant submarkets in Nashville.
We plan to invest $35 million in our three medical office buildings. The hospital and health campus will undergo a $120 million modernization led by Ascension to enhance the consumer experience and develop new service lines. This is a great win-win outcome and further deepens our partnership with Ascension Saint Thomas. Shifting now to capital allocation, which is quickly becoming an important component of our earnings growth narrative. Our targeted approach continues to prioritize redevelopments, joint venture acquisitions, and managing our balance sheet and returning capital to shareholders. In the second quarter, once again, we did exactly what we said we would do. First, redevelopments. During the quarter, we invested approximately $25 million in this portfolio, and we have leased it up to 67%, an improvement of 1,400 basis points over the last four quarters.
We are underwriting 10% cash-on-cash yields across our redevelopment portfolio. We see some larger campuses in key markets, like our West Campus in Nashville, entering the redevelopment portfolio in the near term. Second, joint venture acquisitions. We are fortunate to have a great partner in KKR who has a stated goal to grow in the medical office sector. Since our last earnings call, we have closed on or have under contract or LOI, approximately $200 million of assets or $40 million at our share. The going-in cash yield to Healthcare Realty on these transactions is approximately 7.5%, which is highly accretive relative to our implied cap rate of approximately 6%. All of these high-quality acquisition assets complement our existing sizable footprints within their respective markets, including Greenwich, Connecticut, Charleston, South Carolina, Port St. Lucie, Florida, Seattle, Washington, and Denver, Colorado. The medical office transaction market remains vibrant.
Institutional capital clearly sees the same positive sector fundamentals we see, strong tenant demand, a severe lack of new supply, and rising NOI growth rates. Third, balance sheet and return of capital. During the second quarter, we moved quickly and decisively to address our near-term debt maturities. We raised $1.1 billion in capital through our convertible bond issuance and delayed draw term loan. The blended interest rate on this capital is approximately 4%, saving us 100 basis points versus our original guidance. Importantly, we can be opportunistic and patient now before we access the debt capital markets again. We also bought back $75 million of stock in the second quarter. Since putting out our strategic plan, we have now repurchased $175 million of stock at a blended price of approximately $18.50, creating more than $30 million of value for shareholders.
Our capital allocation priorities are currently being funded with free cash flow and disposition proceeds. Year to date, we have disposed of six buildings and three land parcels for approximately $75 million at a blended 5% cap rate. We also have an additional disposition pipeline of nearly $200 million in various stages. That amount could grow further if we are successful in opportunistically executing on low cap rate direct to health system sales at premium pricing levels. Let me finish now with what is on the horizon for Healthcare Realty 2.0. We have proven we can execute a new superior medical office model. The next several years are about scaling it. We set out to become the trailblazer in medical office, and today, we are not just talking about that ambition, we are delivering it.
In addition, the pillars of organic growth, occupancy, retention, cash leasing spreads, and consistent escalators, they are real, and they are the engine underneath everything else we do. Now, we are layering disciplined, accretive capital allocation on top of that engine. This is not a one-quarter story. It is a durable, repeatable framework, and we intend to keep pulling on every lever. We are pleased to see our valuation improving, but let me be very clear, we are not satisfied, and we are not slowing down. We see meaningful upside ahead of us. As the only public REIT that is actively growing its medical office platform, we intend to lead this sector, not just participate in it. We have the team, portfolio, balance sheet, and momentum to define what best in class looks like for outpatient medical, and we are just getting started.
With that, let me turn the call over to Rob.
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