Release Date: May 07, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Healthcare Realty Trust Inc reported strong first quarter results with FFO per share at the top half of the expected range and solid NOI growth driven by robust cash leasing spreads, improved tenant retention, and tight operating expense controls.
- The company announced a strategic relationship with KKR expected to generate proceeds of $300 million within the next 60 days, enhancing capital allocation and accelerating FFO growth.
- Healthcare Realty Trust Inc has a focus on operational momentum, particularly in increasing multi-tenant occupancy, which is on track with expectations and supported by elevated new leasing volumes.
- The company successfully controlled operating expenses, with first quarter operating expenses increasing only 1.7%, a significant improvement from previous quarters.
- Healthcare Realty Trust Inc's leasing confidence is boosted by favorable MOB supply and demand dynamics, with aging demographics and strong patient utilization pushing demand higher, while a rise in construction costs limits new developments.
Negative Points
- Net income for the quarter was impacted by a $250 million goodwill write-off due to the current macroeconomic environment, although this is a noncash impairment.
- Despite strong operational performance, the company's stock is trading at a substantial discount to NAV, prompting strategic asset sales and joint ventures to improve valuation.
- The company faces challenges with high scheduled lease expirations, although they have managed to maintain strong tenant retention and leasing spreads.
- Healthcare Realty Trust Inc is still working through the integration and stabilization of properties, with a focus on converting new leases to occupancy.
- There are ongoing concerns with specific tenants like Steward, which has filed for Chapter 11, potentially affecting future rental income, although exposure is limited and managed.
Q & A Highlights
Q: Can you provide more information on the process of the JV formation with KKR and the types of assets included in the initial seed portfolio?
A: Todd J. Meredith, President, CEO & Director of Healthcare Realty Trust, explained that the JV process began in the fall of the previous year and was pursued more aggressively at the start of the year. The JV includes a stable portfolio representative of Healthcare Realty's overall portfolio, primarily involving properties that were initially contemplated. The focus was on creating a strong, stabilized portfolio that aligns with the company's long-term investment strategy.
Q: How is the Chapter 11 filing of Steward expected to impact the rents and is there any provision built into the guidance for this?
A: James Christopher Douglas, Executive VP & CFO, noted that the properties associated with Steward are on higher-tier performing hospitals, which suggests a positive outcome like hospital sales. About 1.6% of annual base rent is linked to Steward, with around $2.5 million in outstanding accounts receivable. The guidance range accounts for potential impacts, but it's too early to determine the exact outcomes.
Q: Is the transaction market for outpatient medical assets softening, and are there plans for further dispositions beyond the discussed $600 million?
A: Todd J. Meredith mentioned that the company is not done with transactions and has high confidence in additional JV transactions and asset sales, depending on market conditions. The focus remains on leveraging market opportunities to enhance shareholder value.
Q: Can you discuss any unexpected factors that influenced the deceleration in consolidated multi-tenant portfolio growth for same-store NOI?
A: James Christopher Douglas highlighted that quarterly fluctuations, such as property taxes accrued from a previous period, impacted the growth figures. These are expected to smooth out over the year, aligning with the company's overall growth expectations.
Q: What are the leverage and fee details for the joint venture deal, and are there any implications for the dividend?
A: Todd J. Meredith clarified that no leverage is being used in the JV, which simplifies management. The JV is expected to generate various management and operation-related fees, contributing positively to the economics of the JV. There are no immediate changes expected to the dividend policy as a result of the JV.
Q: What is the impact of the $600 million in dispositions and JVs on FFO and earnings, and how should we think about it in terms of earnings accretion or dilution?
A: Todd J. Meredith responded that the transactions are viewed as accretive, with the proceeds expected to be used to pay off variable rate debt and for share repurchases. The transactions are aligned with the company's strategy to enhance FFO and FAD per share, with a focus on operational improvements and strategic capital allocation.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
