Healthcare Realty Trust Inc

NYSE:HR

Earnings Call Analysis

Healthcare Realty's Strong Q2 Performance and Optimistic Outlook

Healthcare Realty achieved significant success in Q2, marked by strong capital allocation and operational gains. Normalized FFO was $0.38 per share, slightly impacted by a Steward revenue reserve. Excluding the reserve, FFO per share reached the upper guidance of $0.39. Encouraged by strong execution, the full-year FFO guidance midpoint increased by $0.05. Over $1 billion in proceeds is anticipated from JVs and asset sales, with $300 million already used for stock repurchase at attractive cap rates. The strategic moves aim to further reduce leverage and enhance dividend coverage. Robust leasing trends and cost control efforts resulted in high occupancy, significant NOI growth, and margin expansion. The company’s positive trajectory is expected to continue into 2025.

Introduction and Financial Performance

Healthcare Realty has showcased a strong performance for the second quarter of 2024, driven by a strategic capital allocation and operational execution. Notably, the company's normalized Funds From Operations (FFO) was reported at $0.38 per share, although it would have been $0.39 without the previously disclosed Steward revenue reserve. In light of their strong execution in the first half, Healthcare Realty has increased its full-year 2024 FFO guidance midpoint by $0.05.

Capital Allocation Strategy

The company is generating significant proceeds from joint ventures (JVs) and asset sales, with the expectation to generate over $1 billion from these activities. Notable partnerships include JVs with KKR and an expanded JV with Nuveen. Approximately 70% of the proceeds are expected from asset contributions to these JVs. Healthcare Realty has also been strategic in repurchasing its stock at discounted levels, having so far bought back nearly $300 million at an average implied cap rate of 7.5%, compared to JV contribution and asset sale cap rates of 6.6%. This results in a positive spread of over 100 basis points when including JV fees.

Operational Momentum and Leasing Gains

In terms of operations, Healthcare Realty has demonstrated strong leasing trends and accelerating occupancy gains. The second quarter marked the fourth consecutive quarter with more than 400,000 square feet of new leases signed. The first half of the year saw multi-tenant occupancy gain of 55 basis points, surpassing their expectations. Tenant retention for the quarter improved to 85.5% from 79.3% last year. This high retention rate minimizes lost rent from downtime and reduces tenant improvement costs.

Expense Management and NOI Growth

The operations team has effectively controlled operating expenses, resulting in a year-over-year quarterly operating expense decrease of nearly 1%, with net recoveries down almost 3%. The primary contributors to these savings were reductions in labor costs and successful property tax appeals. Consequently, cash NOI margins improved by 50 basis points sequentially and by 70 basis points year-over-year, with same-store NOI growing by 3.5% in the second quarter and multi-tenant NOI growing by 3.9%.

Future Outlook and Guidance

Healthcare Realty's focus on maintaining and improving occupancy rates positions the company well for future growth. The expectation to generate over $1 billion in total JV and asset sale proceeds will support $200 million in existing capital commitments, and $800 million in combined debt repayment and share buybacks, leading to over $0.01 per share accretion in 2024. As for leverage, Healthcare Realty expects to see run rate leverage trend lower, achieving approximately 6.4 times by 2025. Looking forward to 2025, the company is optimistic about further gains in occupancy and continued NOI growth, supported by favorable market fundamentals and strategic capital allocation.

Closing Remarks

Healthcare Realty is effectively navigating the current market with strong operational and capital execution. The combination of robust leasing activity, careful expense management, and strategic capital allocation underscores the company's ability to deliver solid financial performance and growth. Their increased guidance for 2024, combined with a disciplined approach to leverage and capital expenditures, positions Healthcare Realty well for sustained success moving into 2025 and beyond.

Earnings Call Transcript 2024-Q2

[Operator]

Good afternoon. Thank you for attending the Healthcare Realty Second Quarter Earnings Conference Call. My name is Cameron, and I'll be your moderator for today. [Operator Instructions]

I would now like to pass the conference over to your host, Ron Hubbard, Vice President of Investor Relations. You may proceed.

[Ronald Hubbard, executive]

Thank you for joining us today for Healthcare Realty's Second Quarter 2024 Earnings Conference Call. Joining me on the call today are Todd Meredith, Kris Douglas and Rob Hull.

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 risks are more specifically discussed in the company's Form 10-K filed with the SEC for the year ended December 31, 2023.

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. The matters discussed in this call may also contain certain non-GAAP financial measures such as funds from operations or FFO, normalized FFO, FFO per share, normalized FFO per share, funds available for distribution or FAD, net operating income, NOI, EBITDA and adjusted EBITDA.

A reconciliation of these measures to the most comparable GAAP financial measures may be found in the company's earnings press release in quarter ended June 30, 2024. The company's earnings press release, supplemental information and Form 10-K are available on the company's website.

I'll now turn the call over to Todd.

[Todd Meredith, executive]

Thank you, Ron, and thank you, everyone, for joining us today. Healthcare Realty had a strong second quarter. We are making notable progress on our capital allocation objectives and we are accelerating our operational momentum. For the second quarter, normalized FFO was $0.38 per share. This was impacted by the previously disclosed Steward revenue reserve. Without the reserve, our results were $0.39 per share.

Based on strong execution and momentum generated in the first half, we increased our full year 2024 FFO guidance midpoint by $0.05. The increase would have been about $0.01 more without the reserve.

In terms of capital allocation, we expect to generate more than $1 billion of proceeds from completed or planned JVs and asset sales. Our new JV with KKR is already growing, and we recently announced an expansion of our existing JV with Nuveen. We expect about 70% of total proceeds to come from asset cuttings to these JVs.

To redeploy this capital, we moved early in the second quarter repurchasing stock at discounted levels. To date, we've repurchased almost $300 million at an average implied cap rate of 7.5%. With JV contribution and asset sale cap rates at 6.6%, this equates to 90 basis points of positive spread or well over 100 basis points, including JV fees. Looking ahead, we will remain opportunistic and continue repurchasing equity if it's accretive.

Turning to operational momentum. We're seeing strong leasing trends and accelerating occupancy gains. The second quarter marks the fourth consecutive quarter with more than 400,000 square feet of new leases signed, and our first half multi-tenant occupancy gain of 55 basis points was solidly above the top end of our first half bridge guidance. We expect this momentum, the strong momentum to continue into the second half and 2025.

I'm especially pleased with our second quarter retention. This is our second consecutive quarter at the 85% level, which has improved materially from the mid- to high 70s last year. Higher retention comes with the benefit of avoiding lost rent from downtime and avoiding higher tenant improvement dollars to re-tenant vacant space. I want to commend our leasing and operations teams. Their efforts to step up service levels and reduce move-outs are really paying off.

Our operations team is also successfully controlling operating expenses. Second quarter expenses declined year-over-year and are nearly flat for the first half. We expect growth in operating expenses to be contained in the 2% to 3% range for the full year. It's worth noting our net operating expenses are expected to grow well below 2% in '24 after taking into account tenant reimbursements. As a result, we are seeing meaningful margin expansion.

The combination of strong occupancy gains and well-controlled expenses is translating to higher NOI growth. Without the Steward reserve, same-store NOI grew 3.5% in the second quarter, and total multi-tenant NOI grew 3.9%. Both of these are at the high end of our guidance ranges. With strong momentum in the half, we are steadily driving multi-tenant NOI growth towards the 5% level.

Turning to maintenance CapEx. Spending on TI and commissions is elevated as expected based on strong new leasing volumes. This investment in positive absorption is revenue-enhancing capital. In terms of capital allocation priorities, this is our highest return on investment by far. Excluding this revenue-enhancing capital, which we estimate to be $20 million to $25 million this year, our dividend is expected to be fully covered going into 2025.

Looking at the balance sheet, we expect our leverage to trend lower. Once we complete the announced JV and asset sale transactions, leverage is expected to be approximately 6.4x. And we expect leverage to improve further going into 2025 as occupancy gains flow through to higher EBITDA.

Now I'll turn it over to Kris to discuss results, guidance and the balance sheet. Kris?

[J. Douglas, executive]

Thanks, Todd. The first half of the year has been marked by strong operational and capital allocation execution. Normalized FFO per share for the quarter was $0.38. Excluding the previously disclosed $3 million Steward revenue reserve, FFO per share was at the upper end of our quarterly guidance of $0.39.

Same-store NOI for the quarter without the revenue reserve improved 50 basis points sequentially to 3.5%. Multi-tenant NOI growth improved to 3.9%, which is at the upper end of our bridge expectations for the first half of the year. The strong NOI performance was driven by better-than-projected absorption and expense controls.

Revenue growth benefited from 122,000 square feet of sequential multi-tenant absorption and 2.9% cash leasing spreads. The absorption outperformance came from a combination of better-than-planned new lease commitments and materially lower move-outs. Tenant retention for the quarter improved to 85.5% up from 79.3% last year. Cash NOI margins improved 50 basis points sequentially and 70 basis points year-over-year as a result of the occupancy gains and strong expense controls.

Year-over-year quarterly operating expenses decreased almost 1%, and net of recoveries were down almost 3%. This came from discipline and proactive efforts, especially on labor cost and property taxes.

Labor costs declined 2.0% year-over-year. Property taxes decreased 1.5% from successful property tax appeals late last year. We will lap some of these benefits in the second half, but expect total full year operating expenses to be well below 3%. Operating expenses at or below our in-place contractual escalators of 2.8% less the full impact of absorption dropped to the bottom line and improve overall NOI margins.

Turning to capital allocation. JV contributions and asset sales have generated $400 million of proceeds year-to-date. The proceeds funded existing capital commitments and $295 million of stock buybacks. The average repurchase price was $15.89, representing a 7.5% implied cap or approximately 20% discount to NAV.

For the year, we expect over $1 billion in total JV and asset sale proceeds. This will fund $200 million of existing capital commitments and $800 million of combined debt repayment and share buybacks. The $800 million of capital allocation proceeds are expected to generate over $0.01 a share of accretion in 2024 and over $2.50 annualized. FFO per share guidance for the year was increased and reflects the capital allocation accretion.

In addition, the updated guidance incorporates the operating assumptions on Page 30 of the supplemental, including a reduction in expected G&A expenses and lower straight-line rent from asset sales. The midpoint of guidance does not assume repayment in 2024 of the $3 million Steward revenue reserve taken in the second quarter. It does assume that we'll continue to pay monthly rent of approximately $2 million as they did in June and July.

Looking to the balance sheet, run rate leverage is 6.4x, including the expected debt repayment for remaining asset sales and JVs. The debt repayment is expected to pay off the $250 million term loan that expires next July, which will reduce 2025 debt maturities to less than $300 million. The combination of our operational and capital allocation momentum will drive an improved dividend payout ratio and lower leverage moving into 2025.

I'll now turn it over to Rob for more details on our leasing progress.

[Robert Hull, executive]

Thanks, Kris. My comments today will be focused on multi-tenant occupancy gains and a strong leasing momentum. We exceeded our bridge guidance in the first half of the year and expect further gains in the second half and into 2025. Multi-tenant occupancy improved sequentially by 37 basis points or 122,000 square feet.

Coupled with the first quarter, net absorption for the year and our total multi-tenant portfolio was 183,000 square feet. At this level, we exceeded the top end of our bridge guidance for the first half of the year by over 30%. Our outperformance was driven by greater-than-expected new lease commencements and a move-out rate that was over 300 basis points lower than historical levels.

Over the last 3 quarters, we gained 112 basis points of occupancy in our multi-tenant portfolio. This puts us on track to deliver the 150 to 200 basis points of multi-tenant occupancy gains published last November in our 5-quarter bridge. It is also worth noting that the legacy HTA assets have gained 172 basis points of occupancy over the same period, highlighting our ability to drive absorption in that portfolio.

Strong absorption led to total multi-tenant NOI growth of 3.9% for the second quarter, at the top end of our first half bridge guidance. Our leasing activity this year has been supported by favorable supply and demand fundamentals. Occupancy across the sector continues to climb and new MOB starts continue to trend lower.

This quarter, absorption in the MOB sector reached 5.5 million square feet, the most on record since the data has been tracked.

Health system top line revenue and our operating margins continue to improve. Providers are seeing solid outpatient volume and revenue trends. Longer term, we expect demand to continue rising. Spending on health care services is expected to increase at 5.6% annually over the next decade. Over the same time period, over 65 age group will grow at more than 9x the rate for the remaining U.S. population. And those over 65 are the largest users of health care services, spending 4x more than those under 45.

The combination of limited new supply and rising demand creates a tailwind to support ongoing leasing momentum. New signed leases in the second quarter totaled approximately 432,000 square feet. Notably, this marks our fourth consecutive quarter above 400,000, an important part of the equation driving our projected gain of 100 to 150 basis points of absorption this year.

Our new lease pipeline reached 1.9 million square feet in the quarter, its highest level ever. This gives us visibility and positions us well to achieve projected absorption gains outlined in our bridge. Our team has executed well in the first half of 2024, delivering a robust level of new leasing and outsized solution. With current multi-tenant occupancy at 85.9%, we are in the early innings of a multiyear plan to reach 90% across our multi-tenant portfolio. This will drive continued absorption and outside NOI growth in 2025 and beyond.

Now I'll turn it back to Todd for some final remarks.

[Todd Meredith, executive]

Thanks, Rob. Now I'll just make a few more comments before we shift to the Q&A portion. As our announced JV and asset sale transactions are completed over the next quarter or so, we expect to have excess proceeds to redeploy. In the near term, our capital allocation priorities are first to fund our existing obligations such as the positive absorption capital I mentioned, which is our highest investment -- return on investment by far.

Second, to repurchase stock accretively if the price trades at a discount. And third, to repay debt, keeping our leverage neutral or trending lower.

So '24 is shaping up to be an important year for HR in terms of building momentum and executing on our capital allocation and operational objectives. We're increasing 2024 FFO guidance based on strong first half results. External tailwinds of limited MOB supply and robust outpatient demand are bolstering our outlook for the second half of '24 and 2025. Full dividend coverage is well within reach and poised to keep improving in 2025 and '26. And Healthcare Realty's balance sheet is strengthening with leverage expected to trend lower.

Cameron, operator, we're now ready to move to Q&A.

[Operator]

[Operator Instructions]. The first question is from the line of Juan Sanabria with BMO Capital Markets.

[Unknown Analyst]

This is Robin sitting in for Juan. Just on Steward, what's the expectation, how much space they look to keep? Are they looking to lower any contractual rent? How does it compare to the market?

[Todd Meredith, executive]

Sure, Robin. This is Todd. It's very early to really be speculating on where that may go. Obviously, we all are paying attention very closely to what may be happening on the hospital front, and that's clearly driving this process through the bankruptcy process. Still very early, excuse me. And so we are down to a point where we're engaging, I think the good news is that the outpatient space is needed, and it will kind of play out after the hospital pieces are sorted out. So we're really not speculating.

The one thing I can say about rents is we've done an assessment. We don't view that there's any material difference in terms of where our rents are versus market. We feel very good about that. And obviously, any other speculation about space and what will be used or not, it's just way too early to tell. We're very encouraged by what we're hearing generally speaking.

[Unknown Analyst]

And the $120 million real estate impairment in the quarter, was that related to Steward or something else? Just curious.

[J. Douglas, executive]

No. It's related to the asset sales that are ongoing and expected to close here through the balance of the year.

[Operator]

The next question is from the line of Austin Wurschmidt with KeyBanc Capital Markets.

[Austin Wurschmidt, analyst]

Great. Todd, I'm just curious how sustainable you think the 85% retention is over the next 12 to 18 months. Just trying to understand that, I guess, given that multi-tenant retention this quarter appeared to be lower. I also recall, I think you have some single tenant move-outs later this year, another 1 million square foot of expirations on the single-tenant side next year. So trying to think about it a little bit holistically as well as the breakout between multi and single tenant over that time frame.

[Todd Meredith, executive]

Sure, sure. Good question. Obviously, we're pleased with being around 85% now for a couple of quarters. Generally speaking, single-tenant tends to sort of bring the average up a little bit, the mix isn't very high, as you know, in single-tenant versus multi. But it brings it up maybe 1% or so year-to-date in this quarter.

But I would say, generally speaking, we expect the multi-tenant to really be in that 80% to 85% range. Obviously, we hit some numbers that were in the mid- to upper 70s last year as we were continuing to work through the innovation of the portfolio, increasing our service levels across the whole portfolio. And we've really seen that come around and really turn out to really strong retention.

Service levels are very strong. The team is fully in gear. And I think also on the leasing side, we're making very concerted efforts where we see tenants who may be thinking about leaving, working with them aggressively to see what we can do to retain them. So it's a joint effort across all of our teams. And I think it's really, really paying off.

And we do think we can sustain this sort of 80% to 85%. Obviously, any given quarter can vary. But I think importantly, over the time frame you talked about the rest of this year or next year, we'll be looking to produce 80% to 85% and really similar levels across multi and single, generally higher in single but in that same range and working on the backfill on both multi and single to not only backfill but create positive absorption.

[Austin Wurschmidt, analyst]

That's helpful. And then just maybe hitting on the guidance piece, implied kind of back half same-store growth in the multi-tenant portfolio. I think is at that lower end of that 4%, 4% to 5.5% range that you expect to achieve in the back half, is that conservatism or you haven't really pulled forward the better performance in the first half? Or is there something else that's changed from a timing or back half growth perspective? That's all for me.

[J. Douglas, executive]

Yes, I would say it's the former, just conservatism being halfway through the year. We're feeling good about where things are progressing so far in terms of occupancy as well as on operating expenses and especially for the quarter. We were at the upper end of both of those ranges, but it's halfway through the year, try not to get too far ahead of ourselves.

[Operator]

The next question is from the line of Michael Griffin with Citi. You may proceed.

[Michael Griffin, analyst]

I wanted to ask first on leasing. It looks like cash leasing spreads declined slightly quarter-over-quarter, including the kind of negative cash rent spread bucket. It looks like it went up to about 10% from 4% of the leases in this quarter. Should we interpret this as tenants pushing back more on rent increases? Or was there something maybe market or tenant specific that drove this delta?

[Robert Hull, executive]

Yes. Michael, this is Rob. Yes. You're right, they worked -- cash leasing spreads were 2.9% this quarter. And what I would say is that as we noted this year, we're really focused on driving occupancy and I think our results are coming through where we've had a lower move-out rate, but we've seen increased occupancy.

And that comes in 2 forms, certainly in places where we can push rents, we're doing that where market dynamics are strong and we're able to push even above kind of the averages that we put out there. But I think it also points to where we have some markets where maybe more price-sensitive markets, we're being more aggressive about negotiating those deals to keep occupancy and avoid costly downtime and incremental TI from the backfilling space.

So it's really kind of working the tails and pushing aggressively on the top end. And then those -- the bottom end of that spread, you noted that was more -- where we're just being more aggressive [indiscernible].

[Michael Griffin, analyst]

Got you. Appreciate the color there, Rob. And then Todd, I appreciate your comments kind of on the CapEx spend now for occupancy benefit in the future. But kind of as we think about the cadence of that, what is going to be the near-term impact to FAD as a result of this CapEx spend you're going to need to spend on new leasing? And then how much occupancy upside or I guess looking at your return do you get as a result of that CapEx invested?

[Todd Meredith, executive]

Sure. Yes, I've mentioned it's clearly our highest return on investment by far. And maybe a simple way to think about it is our marginal gross revenue that we can gain from absorbed space is around $36 kind of the average for the portfolio. And then if you divide that by -- even on the high end, about $60 of all-in cost to -- for a new lease, that's obviously a great return, 50%, 60-plus percent type returns on the marginal capital. So from our standpoint, that's a home run and something we want to be doing, even looking at it almost as comparison to an external investment opportunity, but much, much higher returns.

So our view is that's very much revenue enhancing capital. We're not -- we haven't broken it out as such, but we're just talking about, hey, there's $20 million to $25 million this year and frankly, would be similar next year, just given the absorption expectations we have that you really can think of that way. And that takes probably 6% off the payout ratio if you just kind of run through that math. So it's a material piece of how we look at our dividend coverage and can get there as we go into 2025.

[Operator]

Next question is from the line of Mike Mueller with JPMorgan.

[Michael Mueller, analyst]

I guess your comments about multi-tenant occupancy going above 90%. First, was that a lease or an occupied comment? And what sort of time frame are you expecting to get there by?

[Todd Meredith, executive]

Yes. Mike, Rob talked about a multiyear plan of getting to 90%. And when we talk about it in multiple years, we're talking about occupancy. Obviously, that lease percentage versus occupied is a delta that we track and report and gives us a lot of optimism along with our leasing pipeline that we can push gains over multiple years, but certainly looking out over the second half of this year and into 2025.

And so if you look at this year, we're saying 100 to 150 basis points of gain in the multi-tenant portfolio, that's probably a similar range we'll be thinking about in '25, but it's a little early to lay that down specifically. But certainly another strong year in terms of our expectations next year. So if you started thinking about that as an annual pace, that's a 3-year sort of time frame, but making some real headway in '24 and '25 on that.

[Michael Mueller, analyst]

Got it. Okay. That's helpful. And then second question, are you expecting more activity with the Nuveen JV?

[Todd Meredith, executive]

We are underway working on that. So we talked about a, what, roughly $400 million set of transactions with Nuveen. So that work is underway. And so I guess depending on your question, it's in process, some a couple of closings. So very much...

[Michael Mueller, analyst]

I was thinking beyond that, I mean, should we think of that as kind of a growing program beyond the $400 million that you flagged already?

[Todd Meredith, executive]

It's absolutely an option. As we embarked upon this process earlier this year to sort of ramp up our efforts they came to the table interested and that was great. So obviously, we have a strong relationship with them, work with them regularly on our existing properties in our JV together. So they've really come back multiple times and through that relationship.

So it's always an option. It's not maybe to differentiate a little bit with KKR. It's not necessarily expressed in a way like KKR has said, we want to commit a certain amount of existing of capital -- equity capital to grow it. So it's more opportunistic. It's maybe the way I would describe it versus KKR being more of a programmatic commitment that we'll look to grow.

[Operator]

The next question is from the line of Rich Anderson with Wedbush.

[Richard Anderson, analyst]

So you mentioned the revenue-enhancing CapEx program, if you didn't do it, you'd be at 100% payout. I think you kind of alluded to that. So let's just isolate on that dynamic between that and payout or dividend coverage. How much longer would one -- would we have to wait for dividend coverage if you continue to do this $20 million to $25 million with these great returns on incremental investment as opposed to shutting it down now, which you're not going to do and getting coverage that way?

[Todd Meredith, executive]

Yes. Maybe to think about the trajectory of those 2 approaches with and without the revenue-enhancing treatment there. We still think we can drive towards a covered dividend and even with that extra capital sort of towards the end of '25. But obviously, if we have outsized absorption capital, then maybe that ticks you over a little bit, but that's obviously a good problem to have.

This is a ramping process in our occupancy and the flow-through. So clearly, the further out you go, the more beneficial you're starting to get all the NOI, EBITDA, FAD that comes from that coverage. So it really becomes less of a concern late in '25. But treating it as revenue-enhancing capital is sort of separate than maintenance CapEx, you get there basically going into '25. So that's the difference.

[Richard Anderson, analyst]

Okay. Next question. You've got $1 billion of dispositions. And well, I guess the first part of the question is the buyback option at today's stock price, is that essentially off the table? Or does it still make sense to buy back stock at these levels?

[Todd Meredith, executive]

Yes. It's -- maybe to use the stop light analogy, there's red and green, but then there's sort of the yellow. And I would say that's where probably we are today where you're right, the accretion gets pretty minimal. And maybe a different way to express it is what discounts to NAV and I'm just kind of using market consensus for the NAV levels.

Once you get into the 10%, single-digit, less than 10% discounts to NAV, yes, the accretion math starts to fade. And so that's sort of where we're trading right now, which is a good thing. It's been moving in the right direction. So we got in early. We bought nearly 30% discounts to NAV and then continued all the way down to about 10%. And as Kris said, sort of average 20%. So there's a little more that can be gained. And I think really, our view is we'll just be opportunistic. And if we see dislocations, we'll jump on it.

[Richard Anderson, analyst]

Okay. So that leaves the question. You got this capital program, $20 million, $25 million share buyback on and off, we'll see, and then debt repurchase. Your asset sales are creating a stream of impairments. And so that's one sort of ghost factor. And then the other is on the debt repurchases, will there be prepayment penalties associated with that since that maybe will be weighted more in the deployment math? So can you comment on both potential for more impairments and the potential for prepayment penalties on the debt?

[J. Douglas, executive]

Yes, Rich, this is Kris. So on the impairments, yes, we have had to take some of those, but really think about it, a lot of those have been assets that were valued at the merger. And so at that point, cap rates were in the kind of low to mid-5s where they were put on. And so now we're saying, we're selling them in the mid-6s. And so that's really a balance sheet impact that doesn't change at all what's going through on the income statement and what happens on your accretion. But that's the reason that you have the impairments that are going on. And so we'll continue to see some of that as we continue with the asset sales.

In terms of the debt repayment, we still have capacity right now in terms of bank lines. I mentioned our delayed draw term loan, $250 million. We paid down $100 million in the second quarter. We have $250 million left that was set to expire July of '25. So that will be a priority of ours to pay off and there's no prepayment penalty associated with that.

And the overall cost on that is around [ 6.4% ]. So it's not a significant negative drag to be paying that type of debt down. And then we certainly have a bit of a line balance that we'll address that as well. So generally, from what we see right now, we're not having to get into prepayment penalties, but if we increased it, then we certainly would take that into consideration as we're considering our options.

[Richard Anderson, analyst]

So there's a good chance then you could be sitting on more cash than anticipated by the end of this year because of all these moving parts. Is that a fair statement?

[Todd Meredith, executive]

No, Rich, I think if you look back at what Kris described in his prepared remarks, the $1 billion, the way we think about it is there's about $200 million if you look at our capital obligations that comes out first. That's development, redevelopment funding, it's this revenue-enhancing capital that I was talking about, first gen acquisition capital. So you pull that $200 million out, you're at $800 million. And then if you think of 50-50 leverage neutral, as a rough guide, that's $400 million for debt repayment, $400 million for stock buyback.

Obviously, there's some flex in there. We've used up about $300 million for stock buyback. So it kind of leaves us with about $500 million. And Kris -- just if you look at our debt, we have variable rate debt that we can pay off, it's about $500 million between the line and that term loan Kris mentioned. So I really don't see a scenario where we're sitting on excess cash there.

Rich, we'd have to increase our proceeds beyond the $1 billion, let's put it that way.

[Operator]

The next question is from the line of John Kilichowski with Wells Fargo.

[William John Kilichowski, analyst]

I'll just follow-up on the last other question there for the sources and [ uses ]. Earlier in opening remarks, you mentioned $0.01 of accretion. Is that to do with what -- mostly with what has been accomplished year-to-date? Or is that largely to do with what you plan to do with the disposition proceeds for the rest of the year?

[J. Douglas, executive]

Yes. The $0.01is what we're talking about for this year '24 and $0.25 on an annualized basis, just to be clear on that. And it's a combination of doing the entire $1 billion, but really I'm looking at the $800 million of what I have kind of called the capital allocation portion, the portion that goes to debt repayment and the share repurchase.

We obviously leaned in early on the share repurchase piece and have already executed on about $300 million of that. But then so now here on the back half of the year, you'll be leaning a little bit more on the debt repayment. But the $0.01 for the year is the combination of all of that work.

[William John Kilichowski, analyst]

Got it. And just like as we look at the uses, you broke out the math the $200 million of CapEx. And then right now, we're at $300 million share repurchases. Assuming you trade in line with where you are today, that leaves about $500 million on the debt repayment side. I know you paid down some of your term loan. So what is it about $250 million left of the term loan and then the rest would be on the line. Is that correct? And could you give the rates on what you're paying on those today?

[J. Douglas, executive]

Yes. So yes, and as of 6/30, we had $250 million on the delayed drill term loan and $250 million on the line. And there -- slightly different rate, but 6.3% and 6.4% is what we're paying on those right now. We also have a little bit more term loan, non-hedge term loan that we could address as well with -- if we did have additional proceeds.

[William John Kilichowski, analyst]

Okay. Okay. And then I guess, thinking about '25 here with the incremental $600 million for KKR. Let's say, if you start to trade at a premium to NAV and attractiveness of this disposition program fades. I guess do you have any protections there? Or what the next most accretive course of action for that capital?

[Todd Meredith, executive]

Yes, John, as I mentioned, our priorities right now are very focused on the $1 billion that we've been talking about and what Kris just walked through. So it's really our existing commitments stock repurchase and debt repayment. And that really kind of speaks for most of the capital we're talking about.

As you look further, you're right, there is an opportunity as our stock price makes sense and it's accretive and it becomes more accretive to JV, as you can imagine, with fee structures and putting out less capital. So it's a higher ROI. We can look selectively at incremental acquisitions through that KKR JV. But that's something that we'll evaluate depending on our valuation.

As you said, as we get to a full value relative to NAV or a premium that really starts to make a lot of sense. So clearly, as I mentioned earlier, we've sort of been in this yellow range, but as you get to sort of the green light, that's a great opportunity for us for external growth.

[Operator]

The next question is from the line of Emily Meckler with Green Street.

[Emily Meckler, analyst]

I would like to better understand the quality of recent dispositions associated with the Nuveen JV. How do occupancy levels average age and remaining lease term compared to your portfolio average? And is it faily similar to the assets in the KKR JV?

[Todd Meredith, executive]

Sure. Good question. We actually have a page on this in our investor presentation. It's our key highlights, Page 8. And we don't necessarily break out the 2 JVs, not that specifically, but we do differentiate between the wholly owned portfolio, the HR portfolio, JVs and dispositions. And this takes into account sort of the $1 billion that we've been talking about.

So if you look at that, probably the main differentiator, our geography, top 50 MSAs. There's quite a big difference where the JV and the portfolio are similar, sort of the 90% to 100% range in top 50 MSAs. Dispos are down at 57%. So a pretty big difference.

I would say between just maybe going a later further between Nuveen and KKR, not a huge difference there, maybe some slightly different preferences among those 2 groups, but generally high occupancy, strong markets, similar profile.

And then the other aspect that I would say that's important to us is this clustered idea where it's part of our strategy, obviously, to own multiple properties in a tight cluster typically around a hospital campus. And we're seeing very similar levels and maintaining similar levels on the balance sheet or wholly owned and the JV, but our dispos are much, much lower. So I would encourage you to check out that page. We do provide some other stats as well.

One comment, maybe one other differentiator is average escalator, Typically, we're trying to keep those higher growth escalators on the balance sheet wholly owned. The JVs and dispos are slightly lower.

On occupancy, you don't necessarily see as much differentiation, but I think it's important to note, generally more stabilized assets going into the JV than even the portfolio. And on dispos similar, although there's sort of 2 tales. We'll sell some things that are highly occupied. We'll also sell some things where Rob and his team don't see a lot of opportunity to improve leasing, so trying to keep as much of the occupancy upside on the balance sheet wholly owned as we can. So certainly, we can follow up if there's more questions, but that's a good page to look at.

[Emily Meckler, analyst]

Okay. Great. And then just one more question generally on the depth of the transaction market. How big would you say the bid intent is for the top 10% of your properties versus bottom 10%?

[Todd Meredith, executive]

Say that again, Emily. I got the top 10% versus bottom 10%. How big is the what, the buyer pool or what did you see?

[Emily Meckler, analyst]

The bid intent, yes, yes, the buyer pool, the bid intent.

[Todd Meredith, executive]

I wouldn't say it's gotten a lot better. I would say there's quite a market at both ends. Typically, I would lean to say, hey, there's a bigger pool of buyers at the top end. But I think there's definitely folks looking for things they can get at discounted prices or maybe an opportunity where they say they think they can go lease it up, maybe we don't. So it's improved dramatically.

The other factor there has been financing. That's gotten a lot, lot better. And so it's actually helped both ends of that. But if you go back 6, 9 months, I would say, big deals were harder to finance. That's changed dramatically. So that's good to see. And it was actually the other way where you could do one-off deals maybe at the bottom end and get financing done with smaller loans that weren't syndicated. So I would say it's been -- it's trending towards neutralizing where both are pretty deep at either end.

[J. Douglas, executive]

One Comment I would add to that. I was talking to Ryan Crowley yesterday, and he mentioned on one specific transaction we're working on that the brokers representing us said that it was the highest ratio of LOIs to CAs that they've seen in quite some time. And I think that just is an indication of the depth of the market and what we're seeing right now and how it's improved over the last 12 to 18 months.

[Operator]

The next question is from the line of Omotayo Okusanya with Deutsche Bank.

[Omotayo Okusanya, analyst]

Yes. Great work on the operational side. It's kind of good to see the staff coming along. On the Steward issue, I think in your 10-Q filing, there's a statement there about maybe 2 leases that got canceled as part of the bankruptcy process? Could you just talk a little bit about what's kind of going on there and why [indiscernible] have already been made and if there's any week through going forward about how Steward is thinking about the overall HR portfolio?

[J. Douglas, executive]

Yes, Tayo, those were very small. I'd say de minimis, is under 8,000 square feet, I believe, it's 2 leases, and these were in buildings that they didn't have any other operations and were off-campus. So it was -- they were just kind of small things that didn't really matter what happened with the sale of the hospitals. And so those did occur. But like I said, it's pretty small, de minimis in the overall scheme of things.

[Todd Meredith, executive]

And Tayo, I would say at this point, there's -- there would be no inference from those as it relates to everything else, they were, as Kris said, kind of one-offs. And frankly, not even in Massachusetts. So it's really not material at all. So again, it's kind of early to even try to speculate what may play out. But we're generally encouraged what we're hearing in the process. So -- and maybe I won't forget your comment, Tayo, thank you. I think the operations and leasing team are pretty ecstatic about the work this quarter and sort of the outlook ahead. So I appreciate your comments there.

[Operator]

There are no additional questions waiting at this time. I would like to pass the conference over to the management team for any closing remarks.

[Todd Meredith, executive]

Thanks, Cameron. We appreciate it. Thank you, everybody, for joining us today, and we will be around and available for follow-up and look forward to seeing many of you soon. Take care.

[Operator]

That concludes the Healthcare Realty Second Quarter Earnings Conference Call. Thank you for your participation, and enjoy the rest of your day.