Healthcare Realty Trust Incorporated Price & Performance (HR)

Additional information about the material factors assumptions, risks and uncertainties that could cause actual results to differ materially from the statements in the forward looking information and the material factors or assumptions that may have been applied in making such statements together with details on H and R's use of non GAAP financial measures, are described in more detail in H and R's public filings which can be found on H and R's website and www.sedarplus.com. I would now like to introduce Mr. Tom Hochstetter, Chief Executive Officer of H and R REIT. Go ahead, Mr. Hofstetter.

Good H&R, everybody, and thanks for joining us. We have us Larry Froome, CFO of H and R and Emily Watson, President of Landtower. I'll hand it over to Larry to bring you up to date. Thank you, Tom, and good morning, everyone. In my comments to follow H&R to growth and increases in operating results, unless stated otherwise, are in reference to the twelve months ended December '24 H&R, compared to the twelve months ended 12/31/2023 H&R. We continue to execute on the strategic repositioning plan in 2023 we sold $432,900,000 of income producing H&R, and in 2024, we sold $429,000,000 of real estate assets On 01/06/2025, we sold a further 49800000.070% of our real estate asset value is now in The United States. Overall, given the headwinds we faced at the end of last year, with multifamily supply concerns a weak office market, inflation and rising interest rates, we are very pleased with our results. Breaking down the results between our segments, our Offset segment same property net operating income on a cash basis decreased by 2.8% There has been a slate of back to the office policies from different companies and it seems clear that more and more employees are headed back to the office.

Which is positive for the sector as a whole. Our asset portfolio of 16 properties which includes four properties with residential rezoning opportunities, now only comprises 18% of H and R's total portfolio. 87.6% of our H&R revenue comes from investment grade tenants. A testament to the quality and appreciation of our office properties Our office occupancy at 12/31/2024 was 96.8% with an average remaining mid term of six H&R. So the portfolio will continue to provide solid cash flow Our three H&R Toronto office properties with residential, H&R 40 and $40 per square foot which is less than half the value they were at the peak of the market and the rest of the portfolio has a weighted average cap rate of 7.76%. Residential segment same property net operating income on a cash basis increased by 0.5% in U. S. Dollars The new supply added to H&R residential markets has been absorbed. The positive immigration trends have continued and our tenants are also staying longer. Since the announcement of H and R H&R plan, H And R's Average U. S. Residential rents increased from 21 per square foot as of 06/30/2021, to $26.84 per square foot at the end of the year 12/31/2024 H&R, in U. S. Dollars.

Our residential portfolio at 12/31/2024 comprised 49% of H and R's overall portfolio Land Tower West Lubbock in Dallas was substantially completed and transferred from a property [indiscernible] to an investment property in Q3 of twenty twenty four H&R. Land Tower Midtown also in Dallas was transferred to investment properties in H&R twenty twenty four and has become our twenty sixth residential investment property. We have an additional two residential developments currently under construction which are expected to be completed in 2026. H and R's ownership interest in these two new developments is 29.1%. Our retail portfolio at 12/31/2024 comprises 15% of H and R's overall portfolio Retail segment same property net operating income H&R due to occupancy gains at River Landing and foreign exchange. The tenant in our retail portfolio predominantly H&R and the portfolio has been very stable. Our largest retail tenant is Giant Eagle, has 193 locations in our portfolio. Giant Eagle recently announced that they are selling the GetGo convenience stores and leases to which H&R expecting to close in Q2. This will further diversify our tenants' mix with Couche Todd comprising about 1.7% of our revenue. Giant Eagle will then comprise about 3.9% of our revenue.

Industrial segment same property net operating income on a cash basis increased 6.3% industrial portfolio of 65 properties at 12/31/2024 comprises 18% of H and R's total real estate assets and continues to perform well. Since the announcement of H and R H&R plan, H and R's average Canadian industrial rents increased from $7.17 per square foot As at 06/30/2021, to $9.66 per square foot as at December 31, 2024 H&R. In addition, in the H&R properties located in the GTA, made up 59% of H and R's portfolio at 06/30/2021, compared to 70% now at 12/31/2024 H&R. We continue to grow our industrial portfolio and added two newly constructed properties the beginning of twenty twenty four H&R. We currently have one industrial property and 50% interest in two industrial properties under construction scheduled to be completed later this year. Headline FFO per unit for Q4 twenty twenty four was $0.298 compared to $0.299 in Q4 twenty twenty four H&R. Our balance sheet H&R strong. Debt to total assets at the REIT's proportionate share 12/31/2020 was 43.7% and debt to EBITDA was a healthy 9.4 Liquidity at 12/31/2024 was in excess of $900,000,000 with an unencumbered property pool of approximately $4,400,000,000 Our unencumbered asset to unsecured debt coverage ratio was 2.3x at 12/31/2024 H&R.

And with that, I will now turn the call over to Emily.

Thanks, Larry H&R. And good morning, everyone. I'm happy to discuss our fourth quarter and twenty twenty four performance for our multifamily Our 2024 results rely aligned with our expectations. The United States had an incredible fourth quarter with over 230,000 units being H&R, further demonstrating the strengthening H&R for our industry.

Our multifamily platform continues to benefit from that strong demand as evidenced by a retention of 59% in the fourth quarter. We remain focused on fundamentals of our business H&R creating NOI expansion through our repositioning opportunities development pipeline and other innovative value add strategies that add to our bottom line. Given the declining levels of new supply ahead and growing demand in our markets, we are well positioned H&R Same property net operating income for residential properties in U. S. Dollars increased by one point four percent and fifty basis points respectively for the three months and year ending 12/31/2024 H&R, compared to our respective 2023 periods Same asset occupancy ended the quarter at 95% a 90 basis points increase over the third quarter and a 70 basis points increase from Q4 of twenty twenty three H&R. Same asset occupancy in the Sunbelt increased 100 basis points in Q4 to 94.4 over the third quarter. Jackson Park was 99.3% occupied with 72% retention. The Sunbelt continues to show strong demand met Sunbelt move outs due to home purchases continued to slow to a historical low of 7.7% of total move outs in the fourth quarter. And there continues to be approximately 59% discount to rent versus own in our markets.

Blended trade outs for the Sunbelt H&R were negative 5.9% in the fourth quarter ranging from approximately negative 9% in Austin to negative two in Dallas, which coincides with levels of direct supply H&R Based on a recent third party appraisal and a handful of Sunbelt sales comps, we have maintained our fair market value Sunbelt cap rates at 4.97% and believe the rate is appropriate and supported. H&R rates are expected to remain low, relatively speaking, for the institutional quality assets in the Sunbelt with capital flows interested and focused on long term heavy Sunbelt multifamily allocation. On the development front, Lantower West Love in Dallas, Texas continues to lease well despite H&R level deliveries in Dallas. The community is currently 54% occupied and 58% leased. The property was completed on time and on budget. Also in Dallas, Texas, Lantower Midtown is currently 36% occupied and 46 Both properties are leasing well with an average monthly velocity of 25 leases per month. Which is above industry reports for our market and a testament to the superior product and unparalleled amenities our development team has delivered. Midtown was also completed on time and on budget. Our Reddit properties are progressing well and also remain on budget with completion expected in mid-twenty twenty six.

Lantower currently has an additional nine development projects in the Sunbelt pipeline, totaling over 2,900 suites at H and R's ownership interest with multiple sites ready and prepared for construction. Are progressing through the different phases of design, drawing and permitting on the remainder of our Sunbelt development pipeline and currently have two projects shovel ready. In summary, the multi family platform continues to achieve encouraging results and strong performance relative to our multifamily H&R. [indiscernible] I believe this is a result of engaged associates taking care of our customer. In the fourth quarter, Lantower Residential received Best Places to Work in Texas and Best Places to Work for Women by the Best Companies Group. The Lantower team is engaged and charging into 2025 ready to drive continued performance.

And with that, I pass along the conversation back to Tom.

Thank you, Emily. Operator, you can open up the call for questions. Thank you. Ladies and gentlemen, we will now begin the question and answer session. The first question comes from Matt Kornack at National Bank Financial. Please go ahead. Hey, guys. Just quickly, Larry H&R, I think in some of the disclosure, you mentioned that you have I think a true up in property taxes in The U. S. Portfolio. You give us a sense that how that would have impacted the H&R? And is that in same property numbers?

Good morning, Matt. Yes, it is in the same H&R. The effect was $1,900,000 in savings and property taxes for the H&R. But we had a had about in Q4 twenty twenty three, H&R had about $1,000,000 adjustments of in effect, if you H&R to do a percentage increase back out $1,000,000 from Q3 from 2023 and back out $1,900,000 from 2024 H&R. [indiscernible] H&R broader statement, like the margins that you have I guess for this year, for the full year, is that kind of representative of of where you see things at this point? And then maybe extending that on just the cadence of how you look at the revival of The U. S. Multifamily space [indiscernible] how you foresee kind of the trough and then improvement thereafter because I think the supply side gets better at least maybe towards the end of this year? Thanks. Emily, do you want to take that one?

Sure. Hi, Matt. Good morning. I am pleased actually with the we H&R still seeing NOI expansion despite the supply headwinds.

And January was really off to a great start.

Just for comparison, we had five negative 5.9 in the Sunbelt for our lease spreads. And in January, that dropped to negative 1.7. So now don't get me H&R, we still have a lot of deliveries that are going to be hitting us in Q1 and Q2 but really drop off dramatically. So in January H&R in sorry, in 2024 H&R, In 2024, we had 120,000 in our markets deliver. And in '25, we have 69,000. So it's front loaded. So Q1 and Q2 are still going to be a little bit choppy, but we do expect Q3 and Q4 to rebound pretty nicely. And then of H&R, you know the story in 2026. So those deliveries are are very minimal. So we think that '26 as we have kind of forecasted '26 is going to be a banner year, but '25 is going to be front loaded and then level out in Q3 and Q4 H&R.

Okay.

I appreciate that color. On the industrial portfolio, I mean, the growth is low, but I think it's a function of you don't have any leases maturing essentially. 2027 looks like it's a bigger year for maturities Is that when we should kind of expect an acceleration on the organic growth front for the industrial portfolio?

Hey, Matt. Yes, the industrial portfolio, I mean, our average range is 9.66 based on current rents, they're around 14%, 15% on our renewals. So as the expiries come up, that's what you should expect. So the more expiries the bigger growth Lastly, transaction wise, obviously, we're living through period of a bit of uncertainty. But can you give us a sense maybe Tom, in terms of H&R institutional capital is moving or not moving at this point?

Oh, I can't really say that the markets changed one quarter over the next quarter. Institutional capital is I guess, trending in the sectors we've been seeing for the past many, many H&R. Interest capital is not going into office at all. Institutional capital's not excited about a whole lot They have to go ahead and spend their money somewhere. So they're really focusing on H&R, which is weakening a little on the weaker side and residential for the most H&R. And retail, H&R I would say, on sidelines. Nothing new, nothing that you don't know. Life sciences has been bloodbath So H&R an awful lot of money that has to play in a lot of sectors. They're not playing multi res as far as land values go. No one's touching that right now. So it's a very, very difficult market with very few trades and comps. Not a whole lot going on H&R reason there's few trades is the spread between ask and bid is Fair enough. No, that's as expected. Hopefully things get better, but it is what it is.

Yes. Lower interest rates will definitely help. [indiscernible] That's it for me. Thanks. Thank you. The next question comes from Jimmy Chen at RBC Capital Markets.

Please go ahead.

Just to follow-up on that question. So last H&R, the transaction market was no better than it is now.

But you did achieve $400,000,000 in asset sales. So, maybe can you talk a little bit about what you're working on in terms of asset sales and what are you targeting in terms of amount and what do you think is realistically what is realistic that you can achieve? So to put an asset in office building on the H&R, there's not going to be bid. To put H&R res land in the bid, there's not going to be a bid. The rest of stuff that you could sell which is retail for example or H&R, it's predicated on interest rates of thinking the answer last H&R. There's no point in selling when H&R rates are high when the values are just really where they are because of interest rates.

So we're focused on hopefully by the end of this year liquidating our potentially our Echo position, our Guanace H&R, And my expectation is by the end of the year we shall probably have done a deal on our Caledon Lands for the 413 Highway. So an awful lot of money, but that should could come in. It's really not market driven as market conditions. The balance market is very strong. I think the Echo market is again they're looking for a chunky institutional dollars to spend and retail is very safe and our case, Giant will have zero debt of Pankaj H&R a deal. This year. I don't expect a whole lot of other transactions in the office slash we're not selling industrial, and retail, as I said, we're going to wait till the trades come down. On either of those three, which one is more advanced in terms of asset sales. So the Cowenlands does not advance. That's a discussion. And that's in the government's hands as far as timing goes and how fast they want Brexit item has a lot to do with the politics the provincial election. So I would say that's they seem engaged I think that is realistic say by the end of this H&R.

I can say for the other two echo seems to have a good likelihood as well. I can say one more or less. And Guanace is just a potential of cleaning up some environmental issues not ours but within the city and there would be a demand for that product. Again, all three H&R very realistic. But they won't happen probably till Q4 H&R. [indiscernible] And then on the on the Hess the 280,000 square feet that planning to vacate I know you've leased a good chunk of it. How would this H&R compare with the expiring rent? And then what is the expectation for the rest of the space? So the it's way off The market in Houston H&R H&R else is very, very low. It's really a question of net effector rent, not face rent. And if you're not doing a whole lot of TIs, which we don't plan on doing because the space is in good condition. In addition, we want to bring down the average rent because we want to bring on the average price per pound of value of the building. You can expect that a substantial deterioration in the H&R, net rent the net effective rent rather.

Like a house No. On a net effective basis, I would say it's it's single digit. Okay.

Okay. And what about the rest of the the remaining 200 Well, it's not 200, there's $2.85 in total and around 110 is going to be the one that's done.

Negotiating with substantially a substantial amount of the balance of that space. In allowing those single digit net net effectives And my guess is that there will all be leased up by 2026. Okay. And can you remind me with that space, was it H&R decision to vacate before the Chevron announcement or is this something that came up after the acquisition?

H&R space that's maturing, were they planning to vacate that space even So they vacated that space already. There was one third of the building that's H&R in 2026 is not occupied by Hess. It's leased by Hess, but it's been sublet by Hess to other tenants.

Oh, I see.

How long? When did they vacate? It was quite a while back. Three years ago. Something like that.

Got it.

Okay. Okay. Sorry, one last on land tower, so I guess some of your peers saying that the blended lease spreads may be turning. Positive in the second half of twenty twenty five based on your comment sounds like that would be just Q2 with respect to your portfolio on the Sunbelt?

Yes, I can definitely see that. Just the momentum that we have coming into 2025 when we still have 70,000 units that are delivering. Optimistic for Q3 and Q4 to be in the positive range.

Okay.

Thank you.

Thank you. And the next question comes from Sumaya Syed at CIBC. Please go ahead.

Thanks.

Good morning. Just following up on the Lantower discussion, and we're just wondering how concessions in your markets have H&R, and if you're seeing those come down over time at all?

They've been pretty consistent from Q3 to Q4. H&R seeing more than we did obviously in when we didn't have headwinds. So I think eventually in the second half they'll come down as well. But Q3, we were around 35% of our leases that had concession in an average of thirty days. And that really ranges from a week to to five weeks in Austin as you can probably assume. And then in Q4 H&R that crept up more seasonality on the number of leases of concessions, a percentage of the leases at 63% of our leases had concessions. And came down to about twenty seven days. So and then Q1 has again off to a good start back to about 45% is what we saw in the month of January. So seasonality played a a part of it. Obviously, the deliveries will play a part of it. So I don't expect us to be using concessions similar to what we were doing our strategy before in the second half of the year. As well. So I think our lease trade outs will improve as well as the use of concessions will come back down to pre COVID, pre delivery days.

Okay. Got it.

And then just moving on to the dispositions final discussion. Tom, you mentioned you have some potentially in the back end by the end of the H&R. Just wondering when and if those planned dispositions come to fruition, how H&R thinking about allocating the sale proceeds and if you have H&R between deleveraging or buying back shares? [indiscernible] amount of dollars and then we do both. And if not all would happen, then the first and foremost is pay down debt.

Okay.

And then just on the sale of the Canadian H&R post the H&R, was it one on multiple buyers and should we expect more sales in the near term of that category?

No. This was a joint venture partner that we had that brought out our position. And we should not expect more retail sales. As I mentioned beforehand, we're going to wait until H&R rates come down There's no danger in our retail. It's very safe. It's leased to quality tenants. H&R that [indiscernible] there's no danger on H&R any risk to it. It's just a question of value and value is going to be predicated on on interest rates. So until interest rates come down, we are not planning selling any more assets.

H&R those properties that we sold from Meyer were joint venture properties just in accordance with simplifying the structure. Our H&R now is basically all 100% H&R Okay, got it.

And then just lastly on the debt maturity side, you have some debentures coming due in June. Just wondering what H&R thoughts are there, and what seems to be the most H&R [indiscernible] Addressing those. So we have $400,000,000 coming in June H&R.

The debenture market is currently open. The spreads are well, so we have probably looked H&R six weeks or so. Do another debenture issue for other floating rates for fixed term That's probably what we're going to do. We'll have some more visibility on the sales Tom's talking about could happen towards the end of the year by then. And that's probably when we will decide to replace those dimensions.

Okay. That's all H&R me. Thank you.

Thank you. That concludes our Q and A today. Will turn the call back over to Tom for closing comments.

For joining us everybody. Have a great day.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your lines.