Healthcare Realty Trust Inc

NYSE:HR

Earnings Call Analysis

Healthcare Realty Achieves Solid Growth Amid Market Challenges

Healthcare Realty reported a strong third quarter with normalized FFO per share at $0.39, up 1.2% year-over-year. The demand for outpatient space is rising, with over 400,000 square feet leased consecutively for five quarters. Same-store NOI grew by 3.1%, and future contractual escalators are expected at 3.1%. Looking ahead, 2024 FFO per share guidance is narrowed to $1.55-$1.56, anticipating continued solid performance despite a $10 million NOI impact from the Steward bankruptcy. The company aims to keep decreasing its payout ratio below 100% in 2025 as it focuses on occupancy and revenue growth.

Solid Third Quarter Performance

Healthcare Realty reported a strong performance for Q3 2024 with a normalized FFO per share of $0.39, exceeding expectations and marking a year-over-year growth of 1.2%. The growth is attributed to robust demand in the outpatient space, primarily driven by demographic shifts and an ongoing transition towards outpatient care. Over the last five quarters, the leasing team successfully executed over 400,000 square feet of new signed leases in their multi-tenant portfolio, helping them achieve a notable occupancy gain of 164 basis points over the past year.

Operational Metrics and Spending Control

Same-store property NOI saw a year-over-year increase of 3.1%, with total multi-tenant properties achieving a 3.5% growth rate in NOI during the third quarter. This growth is partially due to effective expense management, as same-store expenses declined by 1.5% year-over-year. While a slight increase in expenses is expected for the fourth quarter, the company anticipates returning to more normalized patterns after a period of inflationary pressure. Future contractual lease escalators are projected at 3.1%, while cash leasing spreads are at an attractive 3.9%.

Response to Steward Bankruptcy

In dealing with the ongoing Steward bankruptcy, Healthcare Realty manages approximately $27 million in annual NOI exposure across 593,000 square feet. The company has solid visibility into securing new tenants for about $17 million of that NOI, which includes $12 million from reputable institutions like Boston Medical Center and Brown University Health. However, the company projects that loss of the remaining $10 million of annual NOI will begin in November and continue through 2025 as they work to backfill the space.

Guidance for 2024 and Future Expectations

Healthcare Realty has narrowed its guidance for 2024 normalized FFO per share to a range of $1.55 to $1.56, factoring in the anticipated impacts from the Steward situation. As they look ahead, there are expectations for continued growth driven by effective absorption of new leases which the management believes will support growth in occupancy and revenues. They foresee that the payout ratio will decline below 100% by 2025 as the performance improves.

Strong Financial Position and Capital Allocation Strategy

As of the end of the quarter, Healthcare Realty had approximately $1.3 billion available under its credit facility, providing notable financial flexibility. They fully repaid a $100 million unsecured term loan due in 2025 and plan for leverage to decline from 6.6x to 6.5x by the end of 2024. The management emphasized a dynamic capital allocation framework focusing on high-return leasing opportunities while remaining flexible to various capital allocation strategies, including acquisitions, development, and potential stock buybacks.

Leadership Changes and Strategic Focus

The company has announced leadership changes aimed at enhancing operational focus and aligning with growth initiatives set for 2025. The new leadership, including newly appointed interim CFO Austen Helfrich, is expected to drive further growth and develop a more dynamic approach to capital allocation and management strategy. This fresh perspective is seen as a means to maintain momentum in the operational successes achieved over the past year.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning. Thank you for attending the Healthcare Realty Third Quarter 2024 Earnings Conference Call. My name is Bridget, and I'll be your moderator for today. [Operator Instructions]

I would now like to pass the conference over to our host, Ron Hubbard, Vice President of Investor Relations with Healthcare Realty. Thank you, Ron. You may proceed.

[Ronald Hubbard, executive]

Thank you for joining us today for Healthcare Realty's Third Quarter 2024 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 risks are more specifically discussed in the company's Form 10-K filed with the SEC for the year ended at December 31, 2023, and other SEC filings.

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 for the quarter ended September 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 being with us today. Joining me for our prepared remarks is Austen Helfrich, our Interim CFO. Also here with us and available for Q&A are Rob Hull, our Chief Operating Officer; and [ Ryan Crowley ], our Chief Investment Officer. I will start by highlighting key quarterly results, leasin trends and operational metrics. Then I'll turn the call over to Austen to walk through capital allocation.

Healthcare Realty had a strong third quarter. We reported normalized FFO per share of $0.39 at the high end of our expectations. With these results up 1.2%, we are pleased to return to year-over-year growth. MOB market fundamentals are strong with demand for outpatient space outstripping supply. We are benefiting from the secular tailwinds of aging demographics and the shift in care to outpatient settings. Taking advantage of this backdrop, I'm proud of our leasing team for producing their fifth consecutive quarter of over 400,000 square feet of new signed leases in the multi-tenant portfolio.

I'm also pleased to report our team delivered another quarter of strong multi-tenant absorption, totaling 159,000 square feet or 49 basis points. This occupancy gain was driven by 565,000 square feet of new lease commencements, coupled with strong tenant retention of over 80%. This is tremendous execution by all members of our team. We've gained 164 basis points of occupancy over the last 4 quarters. With 1 quarter to go in our published 5-quarter occupancy bridge, we are on pace to be at the high end of our 150 to 200 basis point goal.

NOI growth was also solid in the third quarter. We achieved same-store property year-over-year growth of 3.1%. Future contractual escalators for leases commencing were 3.1% and cash leasing spreads were 3.9%. NOI growth also benefited from continued tailwinds from our expense management program with same-store expenses down 1.5% year-over-year. While we expect expenses to increase in the fourth quarter on a year-over-year basis, we're seeing a steady return to a more normal expense pattern versus the high inflationary environment of the last several years.

For total multi-tenant properties, NOI growth was 3.5% in the third quarter. Although we had significant absorption in the quarter, the full potential economics were not realized due to the relative timing of earlier move-outs versus later move-ins. While timing differences are not uncommon, they were more pronounced than usual this quarter. We expect NOI growth to accelerate as timing differences moderate and free rent burns off. Before I turn it over, I'd like to briefly touch on our recently announced leadership changes.

We made the changes to build on the operational success of the last year and to more closely align our leadership with our 2025 growth initiatives. These changes will extend Healthcare Realty's operational momentum and further increased focus on execution, acceleration of growth and accretive capital allocation. In just the first few weeks, it's been invigorating to see the fresh perspectives and intensity the team has brought to their new roles.

Now I'll turn it over to Austen.

[Austen Helfrich, executive]

Thank you, Todd, and good morning, everyone. Let me start by saying that I'm excited about my new role as interim CFO and look forward to working with the investor and analyst community. We are pleased with the value created through JV contributions and asset sale this year. Through October, proceeds totaled $875 million. Based on this success, we are increasing our full year proceeds range to [ 1.05 to 1.15 ] [indiscernible] $150 million of additional shares, bringing year-to-date repurchases to nearly $450 million at a weighted average share price of $16.48.

On a leverage-neutral basis, this represents a reinvestment spread to the company of over 100 basis points. a highly accretive outcome for earnings, cash flow and NAV. As we look ahead, there is currently a deep and liquid market for medical outpatient [ business ] and HR has ample access to that market via third-party asset sales and its joint venture partnerships. We will target the highest long-term risk-adjusted returns for shareholders through a dynamic capital allocation framework which will always take into account the valuation and future growth embedded in our own portfolio. Turning to the balance sheet.

In October, we used proceeds from asset sales to fully repay the unsecured term loan set to mature in July of 2025. We Including this debt repayment, quarter end net debt to adjusted EBITDA would have been 6.6x. We expect leverage to decline to 6.5x at the end of 2024 and continued to move lower in 2025 driven by our organic growth. Finally, as of the end of the quarter, we had approximately $1.3 billion of availability under our credit facility, providing substantial financial flexibility. With almost 350,000 square feet of multi-tenant absorption year-to-date, we are investing significant capital in new leasing at very high risk-adjusted returns. As Todd mentioned, this new leasing activity is only beginning to produce a corresponding NOI benefit. Due to the timing mismatch between capital spend and cash rent from new leasing, our payout ratio was 106% in the quarter. Excluding the impact of absorption capital, our payout ratio would have been [indiscernible]

Over the course of 2025, we expect our payout ratio to decline below 100% and approach 90% adjusted for absorption capital. Now I'd like to provide an update on the Steward bankruptcy process, which is unfolding in real time. In recent days, we have gained additional clarity. As a reminder, our total exposure to Steward leases is approximately $27 million of annual NOI across 593,000 square feet. We have secured or have high visibility into leases with new tenants for approximately $17 million of annual NOI or nearly 2/3 of our total exposure. This includes $12 million in new direct leases with Boston Medical Center and Brown University Health. These solid investment-grade nonprofit systems represent fantastic upgrades in credit quality as well as new health system partnerships.

The remaining $10 million of annual NOI represents leases that were not accepted by new operators or where we do not have visibility on near-term replacement leases. The loss of this NOI will begin November 1, and we are assuming that this will continue through 2025. Backfilling space will take time as we work with new tenants and operators to program and build out space. While it's still very early, we are encouraged by the long-term opportunity to recover approximately half of this NOI through our leasing efforts. In summary, we have clarity on almost 2/3 of the annual Steward NOI with a longer-term opportunity to recover over 80% of the $27 million of [ current ] NOI with greatly improved credit quality and tenant diversification. Turning to guidance.

We have narrowed our 2024 normalized FFO per share range to $1.55 to $1.56, including the November and December impact from Steward that I just covered. Our core business is performing extremely well. This performance is generating a number of tailwinds into 2025, including the benefits of absorption accretive capital allocation. I look forward to meeting with many of you over the next 2 months at conferences.

With that, I will now turn it back to the operator to open the line for questions. Operator?

[Operator]

[Operator Instructions] The first question comes from the line of Nick Yulico with Scotiabank. The next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets.

[Austin Wurschmidt, analyst]

Todd, just wanted to go back and make sure I understand the multi-tenant same-store NOI growth guidance and kind of move-in, move-out dynamic you discussed. I guess can you just marry the timing impact you mentioned with the comment about net absorption kind of exceeding your goals and whether this is a quarter end occupancy -- average occupancy difference or if there's something else that we're missing here? And just speak to kind of what went on there this quarter.

[Todd Meredith, executive]

Yes. Good question, good observation. Austin. I think you hit it pretty well. We actually spent a fair bit of the quarter below where we ended -- sorry, we spent a fair bit of the third quarter below in occupancy in the multi-tenant portfolio where we finished the second quarter and then it rebounds strongly in September. And so obviously, as you point out, the average is really the story there. It was well below where we ended. So we really saw a strong pickup in September, that bodes well for the fourth quarter, but more importantly, '25.

You also have free rent, which I mentioned, that's obviously not in same-store, but that's something also in terms of thinking about how it translates to the FFO line as well that you've got free rent burning off as well. So really from a true cash perspective, we view a lot of what you see perhaps in the third quarter, really starting to contribute in early '25.

[Austin Wurschmidt, analyst]

So we should really start to think more about the fact that contractual increases are in that high 2% range, you're in the mid-3% I think, on cash leasing spreads and then occupancy should just be the other piece, and that should really be the drivers of base revenue growth moving forward?

[Todd Meredith, executive]

That's -- I think that's exactly right. That's well said. I think the other thing you saw just the dynamic when you're having an inflection point around expenses. We've had declining expenses. Well, that's also dragged down, which is a good thing, reimbursements of expenses as well. So you saw a little softness in revenue overall due to that. But that's something that we think we'll begin to normalize in the fourth quarter and going forward. So I think you've got base rent, correct there.

[Austin Wurschmidt, analyst]

And then just last one for me. On backfilling the Steward space, can you give us a sense on timing of the leases that account for, I think you said 2/3 of the $27 million of NOI, when you'd expect those to commence.

[Austen Helfrich, executive]

Yes. Austin, it's Austen. Maybe to break up the 2 buckets, starting with the $17 million that you referenced we would expect those leases to commence at the end of the Steward lease timing. So no real timing mismatch there that you need to think about. And then obviously, just to kind of close the loop on that. On the $10 million of NOI impact that I mentioned. Obviously, when we're thinking about the fourth quarter in 2025, we do want to make sure to be clear that there will be a timing lag as we work to re-tenant that space. just due to it's now basically going to enter the new leasing pipeline. So we've got to negotiate new leases, build out space. So just to be clear on those 2 different components.

[Operator]

The next question is from the line of Juan Sanabria with BMO Capital Markets.

[Juan Sanabria, analyst]

Just on the multi-tenant same-store NOI, maybe I'm being a little bit thicker, but just curious on why that guidance was brought back or brought down, I should say.

[Todd Meredith, executive]

Yes. I think, Juan, really, if you just look at sort of where we are year-to-date and then you think about the fourth quarter, it's just -- the guide we had before, just given the lag in the third quarter, the timing difference it would suggest something that would be really out of line or out of expectation for the fourth quarter. So we just wanted to sort of rightsize that relative to what we're seeing in the fourth quarter. So clearly, we still see acceleration going on -- and that growth rate picking up, as I mentioned, it's just you have this lag effect. So really just bring in line with where we are year-to-date versus what makes sense for the fourth quarter.

[Juan Sanabria, analyst]

So the lease is just starting later than you would have initially hoped?

[Todd Meredith, executive]

Not necessarily than we hoped. It's just timing of move-outs. So we had move-outs really skewed to the beginning of the quarter. So again, we experienced that sort of drag intra-quarter. And then a really strong rebound and obviously, net [indiscernible] very positive, but a lot of that coming late in the quarter in September. So it's -- again, this can have -- we had a similar but much more muted pattern like that in the prior quarter. It was just much more pronounced this quarter. And that's just going to vary quarter-to-quarter on timing. It's not -- every quarter is the same. There can just be timing differences. So it obviously has an impact in a given quarter.

[Austen Helfrich, executive]

Juan, I think you really have to differentiate on that point as well as how free rent is flowing through that. Obviously, the leases signed in September that Todd referenced that caused the significant increase in absorption in the third quarter. Obviously, there's going to be some free rent carryover into the fourth quarter that's going to impact that cash NOI number. Obviously, GAAP FFO a little bit of a different story, and we will start to see that benefit through straight-line rent in the fourth quarter. So I just want to tease out that nuance as well.

[Juan Sanabria, analyst]

Got you. And then just curious, G&A came down. I guess, what drove that? And should we then expect a higher number in '25 or a bigger increase as that's kind of normalized out or hoping you could tease that out a little bit as we think about turning the calendar over?

[Austen Helfrich, executive]

Yes. That's a great question, Juan. If you look at our expense growth year-to-date, that's primarily the result of actions taken by management to control G&A into 2024. I think it is a good assumption for you to assume that our current run rate base is a reasonable jumping off point. And here, we're going to be thinking more about normal wage inflation, normal G&A inflation as you start to think about modeling 2025.

[Operator]

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

[William John Kilichowski, analyst]

Maybe if we could just turn to the capital activity in the quarter. You said you paid down the rest of your term loan. And based on the upside of the disposition activity, does that imply about $100 million of further debt buybacks you're assuming sort of flat stock repurchases?

[Austen Helfrich, executive]

Yes. I think that you are correct. We did pay down the $100 million of remaining unsecured term loan that would have matured in July of really to an eye to starting to decrease that 2025 debt maturity. I think based on the increased guidance that we gave around the proceeds as well as our year-end guidance to be back at 6.5x. I think your debt pay down calculations are in the realm. I would say just to marry that.

One thing I mentioned in my prepared remarks that I would stress on that point is the disposition market and the liquidity in the medical outpatient market right now is very good. And so we will remain [indiscernible] whether it's thinking about all of the capital allocation options available to us, we will remain very flexible in how we're thinking about the opportunities that we have.

[William John Kilichowski, analyst]

Okay. So it sounds like with that $100 million roughly, it's the revolver, the [ 5 7 9 ] is the best choice of action for that? Or is there other opportunities for that capital?

[Austen Helfrich, executive]

No. As far as debt pay down, you are right in your thinking on the revolver.

[William John Kilichowski, analyst]

Okay. And then maybe next, there was a $47 million credit loss reserve in the quarter. Is there anything you could give us on that?

[Austen Helfrich, executive]

Yes, the $47 million of credit loss was related to the final write-down of a mezz loan in Houston. We have not been accruing any income for that [ mezz ] loan since the first quarter of 2023. So nothing to really take out from an NOI perspective. That was a loan that HTA had made that we inherited, and this was the final impairment on that loan due to loan maturity and actions by the first lien holders.

[William John Kilichowski, analyst]

Okay. And then just last one for me. The final $10 million entering the new leasing pipeline of NOI, could you just walk us through maybe normal cadence of what an asset that hits that new pipeline looks like in terms of timing to touring and DI the process and typical lease up? Like is there an sort of so unique that it's hard to sort of put a time frame around it?

[Todd Meredith, executive]

Yes. John, I think it's a good question. Austen touched on it broadly. I would say what we're looking at and where the opportunities lie for that opportunity to lease up and recover sort of half, as Austen described, [ half ] of that $10 million it really follows, I think, the normal course of what Rob has described for some time that it typically takes us a few months, call it, 4 months to get from a tour to lease execution. And then on average, it's a very wide distribution, but on average, about 6 months to build out space. Obviously, that can vary depending on the acuity of the space.

But I would say this looks a lot like that in terms of the spaces and opportunities we have. So again, that's why I think when you heard Austen talk about the timing. We're essentially saying that $10 million is probably a partial impact in the fourth quarter of this year, which is in our guidance. And then the remainder would continue in our current estimate in Obviously, that time frame I just laid out would put you at the back end of '25 for some of the early ones to start kicking in.

So that's how we're thinking about it. Obviously, you can have a lot of different circumstances with free rent, which could kind of add to that a little bit. So again, that's why we're saying we think for now a lot of that recovery in terms of cash flow and FFO persists through much of '25. But it doesn't -- it does not have a unique character relative to everything else we're doing. We're very encouraged by the space. There's a very significant portion of that space in Florida on some -- in some really great buildings, the front door a strong hospital, [ has ] A+ rated hospital according to the Green Street research. And so we're very bullish that we have a new operator coming in we really have a chance to get in there and work with those tenants and create -- meet that demand. So a lot of encouraging signs, but again, just sort of that time frame that to lease up multi-tenant space. And it was previously master lease. So obviously, you're going from a master lease to multi-tenant.

[Operator]

The next question comes from the line of Michael Griffin with Citi.

[Michael Griffin, analyst]

I'm wondering if you've noticed whether or not you have a greater ability to push rents or get tenants to sign longer leases given what seems like continued solid demand and minimal new options from a supply perspective?

[Todd Meredith, executive]

This is Todd, and maybe, Rob, you can jump in, too. I would say, generally speaking, you're seeing really healthy cash leasing spreads. We were at [ 3.9 ] this quarter, very strong and healthy. Obviously, we have a wide distribution under that. But as you've heard us emphasize for some time, we're very focused on occupancy gain. So that's really our big initiative right now is to really push that and not being different on price to be very sensitive to gaining occupancy.

I do think you're seeing some ability to push term as you just pointed out, I think the negotiation position is strengthening, as you just described, with a lot of limited supply. So it is a very encouraging backdrop, which I alluded to in my remarks. But again, we're putting occupancy here. We can show you plenty of examples where we're getting double-digit cash leasing spreads. But when you look across the volume of the activity we're doing, being in that high end of our typical 3% to 4% range, I think showed some strength. And I think as we continue to improve occupancy, you can certainly see an opportunity to turn to a little more on pushing more on the rate. But right now, our focus is occupancy.

[Michael Griffin, analyst]

Appreciate the color there, Todd. And then just maybe switching to sort of the cap allocation front. I think you guys have done a good job kind of narrowing the discount to NAV with the share buybacks so far this year. But given there's probably more limited accretion from those at this juncture and Austen, I think you talked about a pretty liquid and open transaction market. Have you started seeing deal activity from an acquisition perspective pickup or are cap rates a little bit too narrow relative to where your cost of capital is today to execute on some of those deals?

[Austen Helfrich, executive]

Yes. Thanks, Michael. That's a great question. As you alluded to, we're really pleased with the activity we've had year-to-date. Obviously, the share buybacks have been highly accretive. I think to your point, the market for medical outpatient right now is significantly different than where we were 12 months ago. I think the depth of the market, obviously, as everyone knows, as cap rates improve, it naturally brings more sellers to the market.

In terms of how we're thinking about that vis-a-vis capital allocation, I would go back to my earlier point around the dynamic framework. And I think the way that we look at it is really we have a range of options available to us. So I'll start kind of going with that high-level comment, Michael. You've talked -- we've talked about the absorption targets for the year, 0.5 million square feet. Obviously, we're funding significant absorption capital right now, which is great for shareholders. It's obviously a very high incremental IRR.

I think in terms of other opportunities available to us, we do have access to the KKR venture, which obviously comes with a fee structure as well that is compelling for us. What I would stress is that we have a myriad of options, whether it's what we believe about the future growth rate of our own business, private market valuations, ability to reinvest into the current portfolio or external growth. So we will continue to look across all of those and allocate capital based on the best available and highest available risk-adjusted return.

[Operator]

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

[Richard Anderson, analyst]

On the occupancy bridge, you're making good progress there. I'm wondering -- and you -- Todd, you referred to a move to a rate focus perhaps next year. Might we expect sort of a similar sort of communication style about this next phase for Healthcare Realty. You've achieved perhaps got willing your occupancy goal for the end of this year. Could there be a bridge or a ski lift or something to get to a higher kind of rates. What's the thought process about communicating the future because it seems reasonably worked well for you this year?

[Todd Meredith, executive]

Right, right. And obviously, we thought it was [indiscernible] basically this time last year to put out some expectations. So we talk about our 5-quarter plan, which just starts everybody off from an annual plan. But I do think it was really important. I would say next year, we will always be transparent about our goals for occupancy, and you've seen us for a long time, provide a lot of detail around what we call our components of expected FFO along with our FFO guidance. So we'll always be very clear about what those type of operating metrics are.

I'm not sure we need to go through the same ski lift diagram each time, but I think we will be abundantly transparent and clear about what our expectations are around occupancy for '25. It's early. We're -- Austen is getting in, digging into things. The team is, we will look at exactly how we will do that and bring that out and in February. It's certainly not something we're thinking now we're going to put out a 5-quarter plan for including next year. I think we [indiscernible] some -- a really good track record this year to show that we're keeping the leasing new leasing pace up above [ 400,000 ]. As we've said for 5 quarters. Obviously, we're now delivering occupancy gains, absorption gains each quarter. That will be a continued story in '25. Absolutely.

And I think you're right, it's going to be a communication effort that we will make to describe our expectations around occupancy versus rate growth. I think '25, just to be candid, still has a lot of occupancy growth in it. So we will continue to focus on that. but rate is always part of the picture, whether it's as big [indiscernible] next year or the following it will be out there. So we'll be very transparent but haven't really put together our [ '25 ] [indiscernible] yet.

[Richard Anderson, analyst]

Do you sense that tenants though, are getting more and more conditioned to a higher -- we've talked about this for years. higher rate environment in rental rate environment for them? Or are they still sort of pushing back, even though -- despite some of the anecdotal evidence that you've seen in terms of reducing spreads.

[Todd Meredith, executive]

Sure. I think this segment, medical outpatient has certainly matured and has shifted maybe along that curve of maturity towards other more traditional sectors that have been added a longer time and seen those kind of moves. I don't think maybe where you're going is a much more cyclical business like some others where you really capture incredible cash leasing spreads when it's good and then you kind of come down when things are softer.

I do think one of the hallmarks of this subsector is just the stability. So I think it's still very much about that long-term stability, and we're not seeing any behavioral differences in that profile in the business. you can look at things like the employment numbers in the space and just see that steady rock solid year-over-year growth in that 3-plus percent range over a long time frame.

So I think that drives a lot of it. But I do think you're right, with supply down, I think Michael asked earlier, with supply down financing costs as well as construction costs way up, it just limits supply and it does give you advantage. So I think there will be positive trends to the upside, partly because of those dynamics, plus the maturation of the subsector. But I don't think it's -- we're suddenly going to look like the boom bust of some other more cyclical sectors. But it's very encouraging. I think pricing power is something and obviously, what our strategies is to move towards where we think the puck is going in terms of demographic growth, strong health systems, using our strategy and markets and clusters to take advantage of that and maximize.

One thing I don't want to lose -- sorry, just to hop in really quick -- one thing I don't want to lose sight of in the cash leasing spread discussion is also the increase in the retention rate that we've had this year. So I think to that question, you do have to look at it. There are multiple levers to that question, not just cash leasing spread. I think from a capital standpoint, obviously, increasing retention, enormous benefit versus new leasing as we think about absorption. So there is a bit of -- it's not -- I think -- there are multiple levers and gauges there that we're looking at in terms of how that supply/demand dynamic impacts the business, not simply cash leasing spread. I just wanted to add that, too. Okay. The question?

[Richard Anderson, analyst]

Second question is you talked about multiple sort of avenues to future growth. Your stock is now just perhaps a hair below at least consensus estimates for net asset value. So are we moving away from buybacks and into a pivot with the JVs where maybe you're selling less into them and alongside with them? I mean how quickly could that evolve vis-a-vis the previous schedule or the previous plan to sell assets and buy back stock?

[Todd Meredith, executive]

Yes. Rich, I think maybe just one comment just overarching and then I'll let Austen jump in. I do think a change you're going to hear from Austin specifically, but all of us is a different framework that's much more dynamic rather than saying, oh, on a static basis, we've reached a certain price and whether it's the consensus or it's a forward view. We're going to be much more dynamic and we can do a range of things. Obviously, we may allocate more heavily depending on where those -- where we see things.

But I would say we're taking a much more dynamic view than just saying, oh, we've hit the number, we'll stop this. We'll start that I think it's looking across all those ranges of activities and returns and balancing where that opportunity lies. Absolutely, you're right, we are taking a close look at that sort of pivot concept where can we start moving capital accretively into a JV program that has that fee structure that's more advantageous. But we've got a -- that's competing against, as often said, very high double-digit type returns into development -- redevelopment of our own properties, lease-up capital for absorption. So we look at all those things. Obviously, the stock repurchase idea as well.

So Austen, sorry if you have anything to add there.

[Austen Helfrich, executive]

No, I think that's great.

[Richard Anderson, analyst]

Last question for me is with all the management change and perhaps other changes ahead Todd, you mentioned a fresh perspective. How much of these changes will be strategic and how much of them will be more communicative. In other words, like what are the intentions of the management changes that are underway and that or have been completed in terms of what the company looks like on a go-forward basis?

[Todd Meredith, executive]

Sure. I don't think it's overly complicated. I think it's just simply -- in the case of Rob, who we put into the Chief Operating Officer role. Rob is really spending his time on leasing. That was his main focus even though his title was really around investments. And so it was really just aligning Rob's leadership and having a clear definitive leadership around that in his role and his title and his responsibilities. And that's really serving what he's been focused on, but more importantly, where we're going. So I think you will see a very high focus clearly from Rob as well as the whole team around that operational growth. And that's clearly driving a lot of our growth this year.

And then on the capital allocation side, really putting -- elevating Ryan to the Chief Investment Officer role. He's been with us quite a long time, just a great guy who's been deep into this space for a long time, knows lots of the parties to get deals done. He's been deeply involved in our JV [indiscernible] position, transactions, which he will continue to lead. So just getting him in that seat and really leading the charge around not only acquisitions and development, redevelopment, but also the disposition and JV strategy, clear leadership there with his team.

And then Julie in the administrative role, really taking on some strategic health care or excuse me, human resource efforts that we really want to bring to the table to really elevate Healthcare Realty to a best-in-class organization. We think we're really good, but we can always improve and really attracting the best talent and retaining that talent. So those are some of the key things. And then Austen, part of it is communication. I think Austen brings a different perspective to the CFO role but also as a former longtime buy-side guy, he brings a very different perspective, style of communication view.

But also, I think all of this team has really brought a rigor around how can we do more things that will improve our ability to predict and drive growth over the course of the future. I don't think we're talking, Rich, about transformational shifts away from the business we're in. we're still very much medical outpatient focused. And so it is strategic, but I would say it's much more operational and focus oriented rather than completely changing the business.

[Operator]

The next question comes from the line of Jonathan Hughes with Raymond James.

[Jonathan Hughes, analyst]

With hoping you could clarify how this Steward, Massachusetts catch-up rent received this month will be treated in 4Q multi-tenant NOI growth. Will that be excluded as I think the negative impact was left out in the second quarter?

[Austen Helfrich, executive]

Really good question, Jonathan. Let me answer it from a kind of overall perspective, and then I'll drill down to your specific question. We do expect to have a positive reserve release related to Steward in the fourth quarter. You're probably talking about under $0.5 million related to the dynamic you just referenced, Jonathan on the payments from BMC and Brown University Health.

What I would say is in the fourth -- or sorry, in the second quarter, we did include the negative impact of those reserves against FFO per share. I don't have a specific answer for you on the same-store cash number, probably something will exclude or look at giving you both.

[Todd Meredith, executive]

I think it's probably honestly, Jonathan, a bigger question around on how we're going to show the core performance of the portfolio in the fourth quarter vis-a-vis some of the obviously [indiscernible] Yes, that's a fair comment. I think to the extent we had catch-up payments in Florida, we would treat it the same way. I would say just to recap what I said earlier, this is very much live. I mean we [indiscernible]

[Jonathan Hughes, analyst]

[indiscernible] So look forward to hearing more about that. I have just one more. On the dividend, I know it was just declared yesterday and you did really mentioned for the first time last quarter. So I guess my question is why the change now you're looking at [Audio Gap]

[Todd Meredith, executive]

[Audio Gap] calculation or we show the math, show the 2 numbers that you can divide we're headed. Is this sustainable, this dividend. And our belief based on the forward look is absolutely, it's a sustainable [Audio Gap] looking at that and where are we headed is the idea. Obviously, if we were just in a steady state, it would be a very different framework. It wouldn't make a lot of sense. So I think our view is just trying to help people better understand what where we see that going in the future. Is that helpful.

[Jonathan Hughes, analyst]

[Audio Gap]

[Unknown Executive]

Okay. Talking about $9 a foot per lease year. Take the average lease term of new leases and you get close to $70, get more NOI that will come as a result of all that leasing.

[Operator]

The next question comes [Audio Gap]

[Unknown Analyst]

I just wanted to talk a little bit about kind of long [Audio Gap] like the building that could eventually get you to that.

[Todd Meredith, executive]

[Audio Gap] that you can't have occupancy game forever, but we saw a long runway post merger to continue driving our multi-tenant occupancy higher. And you're seeing that. You're seeing that come through in terms of all the occupancy and net absorption gain this year. And what we're spending a lot of time talking about here is, hey, that's all great and it's starting to -- we're seeing that path to that converting to actual same-store growth, especially as we look towards 2025.

And we're not putting out guidance for what we think exactly the growth rate will be in '25 at this point. We'll do that in February. But our view is that yes, you can see much higher levels of same-store growth when you have that level of occupancy improvement kicking in -- that's a multiyear concept. But obviously, it's not a forever long-term growth rate concept because at some point, you begin to normalize at an occupancy level and maybe have less, if any, occupancy gains. So it is an opportunity that we see to accelerate growth based on occupancy gain in addition to the underlying fundamentals, which are sort of very strong rent escalators that are in that neighborhood of the high post cash leasing spreads and so forth, good expense management, all the other normal fundamentals. So it's the normal fundamentals plus occupancy gain is the short answer to your question.

[Unknown Analyst]

That's helpful. And then a second question just around capital allocation. Again, I appreciate the comments made earlier on that you would really kind of allocate capital based on where it would create the most kind of earning accretion or shareholder value? And I guess when you do kind of think about acquisitions versus development versus stock buyback today, I mean, you're kind of ranking all those potential kind of uses of capital. How do you kind of think about the best use of capital today versus maybe some other alternative uses?

[Austen Helfrich, executive]

It's Austen. I'll just go back to, I think, the best way to answer this is probably to go back to some of the opportunities that I mentioned earlier that we have available to us. I think, obviously, if you're talking about rank ordering, Tayo, the #1 place to start has to be absorption capital. Just the returns that we get on TI and LCs and building capital, targeting absorption, whether that be through the higher renewal rate or new leasing is by far the best return available to us today. I think as you go through the remaining options there's a number of factors you have to consider, which is most importantly, one, where is our stock price.

Number two, where are valuations in the private market. I talked about a deep and liquid market, 60, 70 basis points in a couple of weeks. So obviously, we're paying attention to all of that. You've seen what we've done year-to-date through capital allocation, which can give you some sense I also referenced earlier the $16.48 at the average share price, and I gave a little bit of my view into what our reinvestment spread on that is. So all of that, I think, can help you triangulate to those thoughts.

But in terms of what we're going to do from here, I think my message would be, we have good access to capital. We have a lot of opportunity to accretively redeploy that internally. And as far as all the other options. It depends on the myriad of factors how we'll kind of rank order those at any given time.

[Unknown Analyst]

That's helpful. Then just indulge me one more. Just in terms of certain rates rising, how do we kind of think about upcoming debt maturity and as well as swap expiration kind of in 2025 and even possibly '26.

[Austen Helfrich, executive]

That's such a great question, Todd. Thanks for asking it. Obviously, as we look to 2025, sure pay off that $100 million of unsecured term loan is a great start on our '25 maturities. Our next maturity is the unsecured -- the $250 million of unsecured bonds that are due in May. I think to some of the earlier question that I got around debt paydown, obviously, we are looking to pay down more debt to bring our leverage back to 6.5x by the end of the year, and the #1 opportunity to do that is the revolver.

So we do expect to enter '25 with additional capacity on the revolver, which gives us great flexibility in terms of options for that '25 unsecured maturity. I would say, to your point, Tayo, we look at the current rate environment and that may unsecured maturity. We will continue to be very fluid and opportunistic in how we look at that. But I think the great news for us in the near term is we do have a lot of flexibility because of where our revolver will be going into 2025.

From a swap perspective, I think it's a great call out. that we do have $75 million of unswapped term loans outstanding. And the remainder of our swap expirations really starts in 2026. So it's a great question, Tayo, all something we are actively thinking about. We're trying to set ourselves up for maximum flexibility heading into '25. And then obviously, I did reference an intent to continue to delever through '25. So it's something we're very focused on, and I appreciate the question. Thank you.

[Operator]

The next question comes from the line of Mike Mueller with JPMorgan.

[Michael Mueller, analyst]

I guess one quick question first. Can you give a little more color on why you're just recapturing $5 million of the remaining $10 million from Steward? Is it issues with certain buildings? Is it rents above market or something else? Can you just kind of help put that in context?

[Todd Meredith, executive]

Sure. Good question, Mike. I think the core answer is simply you have a number of dynamics going on. We've got, what, 22 buildings across the whole Steward exposure for that $27 million. And so you're going from multi-tenant to -- sorry, from single-tenant to multi-tenant in many cases. So you're clearly going to have some difference in a general vacancy factor, if you will, if you think about that from a modeling standpoint. So our expectation is about right back to [ 100 ]. And that can go across multiple assets.

So it's sort of a part of that -- there are some small rate differences here and there that we may see. We've conservatively assumed in our backfill as well. You also had a couple of campuses closed in Massachusetts where we didn't have a lot of exposure. But frankly, you have low expectations there that much is going to happen probably we're actually having some positive conversations with those assets, but long term, those are probably sales where you're not replacing the NOI per se or at least on a one-for-one basis through an asset sale. So there's just some things that we're factoring in. We don't know for sure now exactly how that will play out, but we're trying to be very conservative and assume that realistically, what do we think we can get and back to in a time frame that people can think about from the standpoint of modeling and building and expectations.

[Michael Mueller, analyst]

Got it. Okay. And then I guess, based on what you see today, what do you think the likelihood is that you won't be a net seller again next year?

[Todd Meredith, executive]

The broad question, Mike. That probably goes back again to where Austen was on capital allocation. Again, we're just going to be opportunistic. We clearly have some capital needs each year to fund a pivot to acquisitions through a JV. It's on a venue. But obviously, we're not going to commit at this point to where that lines up in a rank order sense. So look, where we are today, we all the things that come with that. So not really committing to what we think '25 looks like. I think, generally, as Austen pointed out we're encouraged about the MOB market and the liquidity there, the access to that and our ability to generate attractive pricing on proceeds. So we'll obviously refine that as we provide guidance in early '25.

[Operator]

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

[Emily Meckler, analyst]

I just have a quick question on the first generation PI. So what is causing the $12 million increase from the previous expectation of $35 million.

[Austen Helfrich, executive]

Emily, it's Austen. The -- I think the simple answer is just the absorption that we've done year-to-date and where that is. I don't know if there's anything really more complicated to it other than just part and parcel with the absorption.

[Emily Meckler, analyst]

Okay. And then one more on move-out. So outside of skewer, are there any known move-outs in upcoming lease expirations later this yearly next year, that will lead to a temporary drag on occupancy?

[Austen Helfrich, executive]

No, I don't think anything to call out at this time, Emily.

[Operator]

. The next question comes from the line of Nick Yulico with Scotiabank.

[Nicholas Yulico, analyst]

Sorry for the technical difficulties earlier. In terms of the maintenance capital expenditures, they've trended down a bit in recent quarters as a percentage of NOI. Can you just give us a feel for like how to think about that impact next year? Are you still kind of running higher than normal as a percentage of NOI on that CapEx right now, it could come down next year?

[Austen Helfrich, executive]

I'm just -- I'll provide a little bit of context here, but I think we're going to save 2025 guidance until February. I would say that obviously, that is going to be tied into our absorption targets for next year. So I think you've heard Todd be optimistic and the team be optimistic around continuing to grow occupancy dive into. I think you've seen a real focus on efficiency within the building capital as well. But I think generally, as you look forward, it's going to be tied to absorption. So as we continue to drive absorption [indiscernible] of that absorption.

And so it is a disproportional impact in the near term, which is why we are trying to [Audio Gap]

[Nicholas Yulico, analyst]

[Audio Gap] You've been getting some 50 basis points roughly of absorption, the last 2 quarters. Is there -- as we're thinking about just kind of going forward, is there anything on [Audio Gap]

[Todd Meredith, executive]

I think, if anything, not to put too much pressure on Rob here, but we've had high expectations that we can sustain that. In fact, how can we elevate that is really the focus. And so we're very bullish on done, but the team is hard at work trying to drive that volume of new leasing demand.

[Robert Hull, executive]

And I think I'll just add to that, that [Audio Gap] mid- to high 20s. And so certainly, that's a new leasing required to not only backfill that, but didn't hit our absorption targets is the pace we've been on. [Audio Gap]

[Operator]

There are no additional questions waiting at this time. I would like to [Audio Gap]

[Todd Meredith, executive]

[Audio Gap]

[Operator]

Thank you for your participation, and enjoy the rest of the day.