Healthcare Realty (HR) Q3 2026 Earnings Call Transcript

DATE

Oct. 30, 2026

CALL PARTICIPANTS

• President and Chief Executive Officer - Pete Scott
• Doris Lo
• Rob Hull
• Dan Gabbay
• Ryan Crowley

TAKEAWAYS

• Normalized FFO -- $0.42 per share, reflecting strong operational performance across the medical office portfolio.
• GAAP Net Loss -- $(0.05) per share, compared to $(0.17) per share in the prior year period.
• Same-Store Cash NOI -- 5.1% growth, driven by higher occupancy levels and improved leasing economics.
• FY2026 FFO Guidance -- Raised to a range of $1.65 to $1.67 per share, representing a $0.02 increase at the midpoint to $1.66.
• FY2026 Same-Store Cash NOI Guidance -- Increased to a range of 5.00% to 5.25%, reflecting improved fundamental dynamics.
• Cash Leasing Spreads -- 8.6%, the highest level for the company in nearly 10 years, due to strong pricing power in core markets.
• Leasing Activity -- 1.5 million square feet executed during the quarter, including 430,000 square feet of new lease executions.
• Same-Store Occupancy -- 93.1%, representing a 30 basis point sequential increase from the second quarter.
• Tenant Retention -- 88%, supported by limited new supply and high tenant move costs.
• Signed, Not Occupied (SNO) Pipeline -- 480,000 square feet at quarter end, providing a path to further occupancy gains into 2027.
• Redevelopment Portfolio Leasing -- 72%, an increase of 500 basis points sequentially driven by 110,000 square feet of new leasing.
• Share Repurchases -- $75 million in the third quarter and early October at an average price of $17.74 per share.
• Year-to-Date Buybacks -- $250 million, executed as an accretive use of capital while shares trade at a discount to net asset value.
• Joint Venture Acquisitions -- $211 million total since the second quarter, with the company's share totaling approximately $42 million.
• Disposition Activity -- $187 million year-to-date, including loan receivable repayments and the $36 million sale of the Kennestone Cancer Center.
• Liquidity -- Approximately $1.6 billion as of Sept. 30, 2026, comprising revolving facility capacity, a delayed draw term loan, and cash on hand.
• Debt Refinancing -- $1.1 billion executed earlier in the year at a blended interest rate of approximately 4%.
• Net Debt to Adjusted EBITDA -- 5.5x, consistent with the company's mid-5x target for 2026.
• Payout Ratio -- 76% of funds available for distribution, indicating healthy dividend coverage.
• Lease Economics -- Focusing on economic returns over volume, which has resulted in a 3,000 basis point improvement in lease internal rates of return.
• Chicago Market Exit -- Nearly complete following the sale of two properties for $23 million during the quarter.
• Maintenance Capital and Leasing Commissions -- $30.1 million invested during the quarter to maintain portfolio quality and support leasing.
• Annual Escalators -- 3.1% on average for new and renewal leases, with management establishing 3% as a minimum floor.
• Ascension Saint Thomas Redevelopment -- $35 million planned investment in three properties in Nashville to strengthen a key health system relationship.

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RISKS

• Scott stated, "I think transaction volumes may slow a little bit towards the end of the year," noting that interest rate instability could delay market stabilization.

SUMMARY

Healthcare Realty Trust Incorporated (NYSE:HR) reported third-quarter results that supported a third increase to its 2026 financial guidance. Management reported that strong fundamental demand for medical office space and limited new supply are driving occupancy gains and record-high cash leasing spreads. The company stated that its capital allocation strategy continues to prioritize share repurchases and strategic joint venture acquisitions, funded by targeted asset dispositions. Management also indicated that the ongoing shift of healthcare procedures to outpatient settings is providing long-term tailwinds for the pure-play medical office portfolio.

• Pete Scott stated, "Medical office can deliver mid-single-digit growth with the tailwinds we are experiencing, and our results show it."
• Scott noted that sector-wide occupancy is approaching historical peaks at nearly 93%, which has increased the company's pricing power.
• Management reported that the company's new leasing model has led to a 3,000 basis point improvement in lease internal rates of return.
• Pete Scott stated, "Healthcare Realty is a pure play, the only public REIT focused exclusively on medical office."
• Dan Gabbay noted that net operating income from the redevelopment portfolio is expected to be backend-weighted over the three-year strategic plan.

INDUSTRY GLOSSARY

• Cash Leasing Spreads: The percentage change in the rental rate on a new or renewal lease compared to the final rate of the previous lease on a cash basis.
• FAD (Funds Available for Distribution): A non-GAAP liquidity measure that adjusts FFO for recurring capital expenditures and non-cash items.
• FFO (Funds from Operations): A NAREIT-defined performance measure that adjusts GAAP net income for depreciation, gains, losses, and impairments related to real estate assets.
• MOB (Medical Office Building): A specialized office property designed for medical practices and outpatient services, often located on or near hospital campuses.
• NOI (Net Operating Income): A measure of property-level income after operating expenses but before interest, taxes, and depreciation.
• SNO (Signed, Not Occupied): Leases that have been legally executed but have not yet commenced for rent payment or physical occupancy.

Full Conference Call Transcript

Operator: Hello, everyone. Thank you for joining us, and welcome to Healthcare Realty third quarter 2026 earnings call. After today's prepared remarks, we will host a question-and-answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Doris Lo. Doris, please go ahead.

Doris Lo: Thank you for joining us today for Healthcare Realty's third quarter 2026 earnings conference call. A reminder that except for the historical information contained within, the matters discussed in this call may contain forward-looking statements that involve estimates, assumptions, risks, and uncertainties. These forward-looking statements represent the company's judgment as of the date of this call. The company disclaims any obligation to update this forward-looking material. Discussion of risks and risk factors are included in our press release and detailed in our filings with the SEC. Certain non-GAAP financial measures will be discussed on this call.

A reconciliation of these measures to the most comparable GAAP financial measures may be found in the company's earnings press release for the quarter ended September 30, 2026. The company's earnings press release and earnings supplemental information are available on the company's website. I'd now like to turn the call over to our President and CEO, Pete Scott.

Pete Scott: Thanks, Doris. Joining me on the call today are Rob Hull, Dan Gabbay, and Ryan Crowley. The third quarter was another strong quarter for Healthcare Realty. Higher interest rates have weighed on real estate stocks, including ours, but not on our fundamentals. Demand for our space is rising, and so are our rents. Let me start with our results. Normalized FFO was $0.42 per share. Same-store NOI grew 5.1%. We signed 1.5 million sq ft of leases, including 430,000 sq ft of new leases. Our redevelopment portfolio is now 72% leased, up 500 basis points sequentially. Same-store occupancy improved to 93.1%. Cash leasing spreads were 8.6%, and we are raising guidance for the third time this year.

Let's turn to capital allocation. We remain disciplined, and everything we do is aimed at improving our earnings growth. Earlier this year, we executed on $1.1 billion of debt refinancings at a blended interest rate of approximately 4%. Our balance sheet gives us the flexibility to be nimble across our two main external capital allocation priorities: stock buybacks and joint venture acquisitions. On stock buybacks, during the quarter and through October, we repurchased $75 million of stock at an average price of approximately $17.75, bringing our year-to-date total to $250 million. Our philosophy on buybacks is simple. Our stock must compete for capital like any other investment.

When we trade at a meaningful discount, as we do today, buying back our stock is one of the most accretive uses of our capital. On joint venture acquisitions, year-to-date, we have acquired eight medical office buildings and have one more under contract for a total of $338 million, or $67 million at our share. That is within the $50 million-$100 million range we outlined earlier this year. These investments carry a mid-7% initial cash yield to Healthcare Realty before accounting for meaningful additional platform benefits. Together with our partners at KKR, we will pace our acquisitions with discipline.

We will also continue to evaluate select asset sales to help systems that want to own strategic real estate on their hospital campuses and to private buyers who remain attracted to the strong tailwinds benefiting our sector. Year-to-date, we have monetized over $200 million of assets, with over $100 million more under contract or LOI. For the year, we expect our average disposition yield to be in the mid-5% range. Opportunistically selling assets to fund buybacks and joint venture acquisitions is significantly accretive to earnings. Shifting to the MOB sector and why we are so well-positioned. First, growth. Medical office can deliver mid-single-digit growth with the tailwinds we are experiencing, and our results show it.

Tenant demand continues to rise with the needs of an aging population. Site of care continues to shift to outpatient settings, while new MOB supply remains muted due to elevated construction and debt financing costs. Second, pricing power. Sector-wide occupancy is now nearly 93% at historical peaks. Rising tenant demand and constrained new supply are driving rents higher in our buildings. The evidence is cash leasing spreads in excess of 5% year-to-date and nearly 90% retention rates. We have a best-in-class portfolio predominantly located in the nation's fastest-growing markets, which positions us well to continue to benefit from these powerful dynamics. Third, return on capital. Our leasing model is designed to drive ROI across the portfolio.

Every leasing decision is made on economic returns, not volume. That rigor is paying off. Since we introduced the new model, lease IRRs have improved nearly 3,000 basis points, and payback periods are down 25%. With higher occupancy and retention, our capital burden is reduced and our profitability improves. Our plan is to continue repeating this quarter after quarter. Fourth focus, Healthcare Realty is a pure play, the only public REIT focused exclusively on medical office. For others, it's an afterthought. For us, it is 100% of what we do. Our capital, our people, and our attention are never divided. This laser focus is leading to better results across the board. We are outperforming. That is by design.

In finishing, with fundamentals firmly on our side, we will keep executing, putting up strong numbers, allocating capital with discipline, following through on our commitments, and focusing on the things we can control. Healthcare Realty offers much better growth than our share price reflects. This motivates us every day. With that, let me turn the call over to Rob.

Rob Hull: Good morning, everyone, and thank you, Pete. Strong operating momentum continued in the third quarter. We completed approximately 1.5 million sq ft of new and renewal leasing and produced more than 85,000 sq ft of positive same-store absorption, increasing occupancy 30 basis points sequentially to 93.1%. Retention came in strong at 88%. In addition, we had more than 480,000 sq ft of signed, not occupied leases at quarter end, providing a clear path to further occupancy gains in the fourth quarter and into 2027. Cash leasing spreads were another bright spot at 8.6%, the highest level for the company in nearly a decade. Health systems accounted for more than 600,000 sq ft of leasing this quarter.

Within this activity, Ascension Saint Thomas in Nashville signed new leases totaling 18,000 sq ft and renewed 185,000 sq ft for 10 years. Along with these leases, our planned $35 million redevelopment of three properties on the Ascension Saint Thomas West Campus in Nashville strengthens our relationship, complements the hospital's $120 million investment in the same campus, and positions these properties for long-term growth. Other notable health system leases this quarter were with Cedars-Sinai in Los Angeles, Trinity Health in Columbus, Ohio, and Indiana University Health in Indianapolis, underscoring the value of these long-term partnerships. We also made meaningful progress on redevelopment leasing.

New leasing within this portfolio was over 110,000 sq ft, nearly twice the second quarter level, and increased the redevelopment portfolio's lease rate from 67% to 72%. The broader supply-demand backdrop in our sector remains very favorable. New medical outpatient construction is limited, while demand continues to benefit from health systems moving more care into lower-cost outpatient settings. These dynamics support increasing levels of occupancy and reinforce the positive environment for rent growth, bolstering our confidence in the leasing outlook. Our new and renewal pipeline remains robust at more than 3 million sq ft, with health systems representing approximately half of that opportunity. I'll now turn the call over to Dan to discuss financial results.

Dan Gabbay: Thanks, Rob. Let me turn back to our financial performance. Our results remain consistently strong quarter-over-quarter, with normalized FFO per share of $0.42, same-store cash NOI growth of 5.1%, FAD per share of $0.32, and a 76% payout ratio. In September and October, we repurchased $75 million worth of shares at a weighted average price of $17.74. This represents an accretive FFO yield in excess of 9% and an important component of our long-term capital allocation framework. Repurchases were funded with previously announced and closed dispositions, such as the Kennestone Cancer Center for $36 million and our nearly complete exit from the Chicago market.

Leverage as of September 30th ticked down slightly to 5.5x, consistent with our mid-5x target in our 2026 guidance. We have over $1.2 billion liquidity on our line of credit after netting out our commercial paper balances, plus an additional $400 million delayed draw term loan that backstops our July 2027 bond maturity. Our only floating rate debt today is our commercial paper and $100 million of unswapped term loans, as we swapped the other $400 million earlier this year until 2029 at a 3.3% SOFR rate. We maintain significant flexibility, and our capital structure is effectively locked in for the duration of our strategic plan period.

Turning to guidance, which you can find on page 10 of our supplemental report, we increased our full-year normalized FFO per share guidance range to $1.65-$1.67, up two cents at the midpoint to $1.66. We also raised full-year same-store cash NOI growth guidance to a range of 5%-5.25%, up 75 basis points at the bottom end of the range and 25 basis points at the upper end. These results are driven by strong leasing outcomes and portfolio-wide mid-single-digit cash leasing spreads. Sources and uses of capital increased by $85 million to reflect the incremental share repurchases and JV acquisitions at share. Disposition guidance increased by the same amount.

Please recall, our guidance only reflects acquisitions, redevelopments, or other uses of capital announced to date. Operator, let's go ahead with Q&A.

Operator: We will now begin the question-and-answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimal sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question is from the line of Rich Anderson from Cantor Fitzgerald. Your line is now open. Please go ahead.

Rich Anderson: Okay. Thanks. Good morning, everyone. I want to first talk about the cash leasing spread number of 8.6. Obviously, you are guiding to something slightly lower than that, mid-single digits. But how repeatable do you think this is? Should we be putting 5% or 6% cash leasing spreads in our 2029 numbers? Same question on same-store NOI growth. How much is that just occupancy that will run its course, and then you are left with something lower? I am just curious what we should think about on these two measures in particular as a long-term run rate for medical office, and specifically HR. Thanks.

Pete Scott: Sure. Hey, Rich. It is Pete here. A decent amount in that question, and let me hit each of those. One, I do not want to lose sight of the fact that we had a great quarter, and we are having a great year just across the board. We have raised guidance 3x, including by two pennies each of the last couple of quarters. If you look back a year and a half ago, our FFO was $1.56, if I am pulling up the right number. Off the top of my head, today we are at $1.66, and same-store occupancy a year and a half ago was at 89%. Today, it is at 93%.

So, I think we have done a lot better than maybe we even expected. Along the way, fundamentals have absolutely improved. Remember too, we also sold $1 billion of assets and delevered almost a turn and still put up those kind of numbers. As we think about cash leasing spreads, I think we have always been pretty consistent over the last year and a half, that it needs to be better than what it historically has been. 8.6% is a great number. It is a great number. We did benefit from the West Campus and Ascension, so if you strip that out, we are still above 6%.

I think what we have said to investors, and we will say on this call, is that we are going to keep trying to get in the 5% area, if not better. I am trying not to put a ceiling on anything, because if I put a ceiling on occupancy a year and a half ago, we would be above that ceiling right now, just based upon how fundamentals have improved. So, big picture, we feel really good about the backdrop, and we are obviously going to push in every single area where we feel like we have pricing power.

Rich Anderson: Okay. And so maybe, as a sort of addition to that question, my second question here is on site-neutral payments. Obviously, a factor that is helping move more into lower-cost settings like yours. Do you have an expectation of that expanding further, and is that a part of your calculus as you go forward too? Are you seeing any sort of evidence of that playing a role in your ability to have more pricing power and so on? Just curious what your thoughts are on that broader topic. Thanks.

Pete Scott: Yeah. Absolutely. I know we have been continuing to put out the shift to outpatient versus inpatient, that chart in our investor decks, and I think people look at those charts. I know I look at those charts. I believe that trend is here to stay. I was actually reading a report yesterday that was sent across by one of the banks, and in the inpatient-only rule, which is effectively what you are referring to right now, the amount of procedures coming off the inpatient-only list is rising at a very, very significant pace. Where is it going? It is going into outpatient facilities.

Then, a couple other examples I would just point to, you have had a few not-for-profits actually start to acquire outpatient businesses. You look at Ascension Saint Thomas bought AMSURG not that long ago, and then Bon Secours announced just this past week or last week that they were going to buy Surgery Partners. So, the push into outpatient settings is accelerating, in our view, and I think, again, it is just part of the fundamental backdrop that is working in our favor.

Rich Anderson: Awesome. Thanks very much. Good quarter.

Pete Scott: Thanks, Rich.

Operator: Your next question comes from the line of Michael Stroyeck from Green Street. Your line is now open. Please go ahead.

Michael Stroyeck: Thanks, and good morning. Could you maybe just provide some color on what you're seeing out in the transaction market? Has there been any repricing given higher rates, or are you seeing bidding tension at all as levered buyers pull back?

Pete Scott: Yeah. Hey, Michael. It's Pete here, and I saw your note reducing cap rates. I'm glad you asked that question because I would like to address that. Look, from our perspective, we're still seeing core cap rates in the 5.5%-6% area and core plus in the 6%-6.5% area. So they've actually held in quite well. The private bid for MOBs, which you did reference in your report, does remain very deep, and it's increasing. Transaction volumes are going up because private buyers see a lot of the same positive fundamentals that we see. Where I think you are seeing a bit of an impact is on the weaker assets in the marketplace, which frankly, we don't traffic in that.

And you're probably seeing more of a shift in cap rates there. And the reason for that is weaker assets are basically value-add buyers, and they're heavily dependent upon leverage. So if interest rates increase, like they have, cap rates are going to get impacted a lot more. In the core to core plus areas of the market, buyers are not nearly as reliant upon debt as well. I think transaction volumes may slow a little bit. My guess is they're going to slow across the entire real estate industry as buyers and sellers wait for things to stabilize, and that's just a natural thing. But we'll see what happens.

Over the last couple weeks, the treasuries have rallied, so you've got your benchmark rates coming in. But I'm just telling you everything I know up and until this point, and obviously it's still fluid.

Michael Stroyeck: Understood. Appreciate the color.

Pete Scott: Yeah.

Michael Stroyeck: Maybe a similar question on the acquisition side. So you called out the mid-7% initial cash yield on the JV deals. Can you just remind us where pricing is on those deals, excluding any JV fees? And I assume based on your answer there hasn't been any change in expectations on future deals, but I'm just curious if that's still the same ballpark you expect to transact at in the future.

Pete Scott: Yeah. I would say that the core plus cap rate range I just articulated, the 6%-6.5%, that would be the blended cap rate for all the assets that we bought. It's within that range. And obviously, we get an asset management fee on top of that, which gets us into the sevens before you get any additional other platform benefits. We talk to KKR all the time. They are a wonderful partner, and we look forward to doing more with them. As I said before, I think the transaction market may slow a little bit towards the end of the year, but it can turn back on pretty quickly too if you get stability in interest rates.

So, we do not guide to acquisitions. So anything we would do either from an acquisition standpoint or from a stock buyback standpoint is not included in our guidance right now.

Michael Stroyeck: Great. Appreciate the time.

Operator: Your next question is from the line of Omotayo Okusanya from Deutsche Bank. Your line is now open. Please go ahead.

Omotayo Okusanya: Yes, good morning. Solid quarter there. Question around tenant improvements and leasing commissions. Again, I know you guys are kind of focusing overall on improving leasing economics. Can you just kind of talk a little bit about what you're kind of seeing on that end and how you're kind of working to kind of have less drag from that in your bottom line cash flow numbers?

Pete Scott: Yeah. Hey, Tayo. I did mention a little bit of this in the prepared remarks, but I will touch on it again. About a year and a half ago, we did completely revamp our leasing model within the organization, and it coincided with significant changes within our asset management group. And we are economics-driven and not volume-driven. And I think prior to that, there was a very big push within this organization to be volume-driven, probably to the detriment of your question around capital costs. And we've been very mindful to limit the amount of capital that we put out into deals. It ticked up a little bit this quarter.

We got a few questions on that, but I will point everybody back to, we did a heck of a lot of leasing deals in our redevelopments, which are likely to have slightly higher tenant improvement costs associated with that, just given the fact that these are buildings, and I've said this before, that have been underinvested into for probably decades. When I think about regular way TIs, we have been holding the line on that despite the fact that construction costs continue to go up across the board. Building out medical space is more and more expensive today. Where is the money coming from if we're not providing it to them?

The tenants are coming out of pocket for that. Again, that's another area where we think we have a little bit of pricing power today. It's also another reason why you're seeing retention go up so much in this space, is one, there really is not a development option for tenants to go to, with development having dropped off a cliff. Then two, if a tenant wanted to move, the build-out of their space is very expensive, and it's expensive to move equipment. The retention is working in our favor from that perspective. The more tenants you retain, the less capital you put out the door, the more profitable the lease deal is to us.

That's another reason why you're seeing our IRRs go up, as I said, probably nearly 3,000 basis points when you look at deals we're doing now versus what was done a couple of years ago.

Omotayo Okusanya: Got you. Then another quick one on occupancy again. 93.1, as you mentioned a little earlier, Pete, the industry itself has got 93%, so you're kind of in line. I figure you guys have always held yourselves out as owning kind of premier assets in great locations. Just curious in regards to the alpha you feel you can get occupancy-wise, kind of relative to where the overall industry is.

Pete Scott: Yeah. I think our portfolio is situated in a way that we'd like to do better than market. But remember, we were at 89%, and now we're at 93%. I'm talking same store with those numbers, just to be clear.

Omotayo Okusanya: Yep.

Pete Scott: We've made some pretty good strides over the last year and a half. As Rob said in his script, we've got a pretty good SNO pipeline. If you think about our SNO pipeline today, that would get us closer to 94% as those leases commence. We would like to do better than market. Believe me, we don't sit around here within this organization and say, "Let's get to market and then job well done." We'd like to do better than that. There will be a little bit of natural vacancy. I don't think we're going to be able to get up to 100%, but I certainly think we can do better than 93%.

I would also point out too, and I know you know this because I saw your forecasting and you've got the redevelopment lease-up in there. We also look at total occupancy, right? Total occupancy today is trending towards, I think, right around 91%. I want to get total occupancy up to the market level numbers, not just same store occupancy, and that's going to be a big driver of earnings over the next one to two years.

Omotayo Okusanya: Excellent. That's a lot.

Pete Scott: Yeah. Thanks, Tayo.

Operator: Your next question is from the line of Nick Yulico from Scotiabank. Your line is now open. Please go ahead.

Nick Yulico: Thanks. Good morning. I want to just turn to that slide you have in the investor presentation on page 21, the portfolio optimization update. In terms of the lease-up, unstabilized bucket, and the redevelopment bucket, you give the NOI at the strategic plan 2025, then stabilized NOI. The gap there was the upside. Has any of that upside already been captured, and how should we think about incremental upside being able to capture now through the end of next year? Thanks.

Dan Gabbay: Hey, it's Dan here. I'll take that one, and great question. Page 21 in that deck is something that we will update on a regular basis, and that NOI, that second to last row of NOI, is how we're currently trending. As we've always talked about with the redevelopments, especially in the lease-up portfolio, over the course of the three-year plan, this was more backend weighted. If I go back to Pete's original comments, we talked about $50 million of NOI in the strat plan that we were looking to recapture that was lost in some of these assets post-merger. Some of that was going to come up after the strategic plan.

We're looking to get 40 of that 50 back over the course of the three-year plan. It is more backend weighted, just when you think about, again, we're leasing these up. It takes time to put the improvements in place. We talked about some of the ASCs earlier this year that can take 18 months on some of those large leases we signed in the redev portfolio. So it is a little bit more backend weighted. It's an upward curve. I think these are good indications where we're currently trending in the back half of this year, and we'll continue to provide more guidance on these numbers as we have more leasing updates.

Think about it as back-ended over those three years. As you think about getting later into 2027 and to 2028, a lot more of this comes online.

Nick Yulico: Okay, thanks, Dan. My second question is just on the difference between FFO and FAD, where you are seeing more FFO benefit than FAD growth right now. I know, Pete, you already talked about some of the leasing CapEx issues. My other question is, if you look on the adjustments there, your straight-line adjustment is pretty large this year versus last year, even though revenue is down. I do not know if there is a free rent issue sort of going on, but can you just talk about that line item and how, think about that, if that impact reduces, which would also help going forward, which could help your FAD. Thanks.

Pete Scott: Yeah. Hey, Nick. I would encourage you to look at our lease expiration table alongside the straight-line rent comment. I do agree that you will start to see some nice FAD growth catch up to FFO. We had and made a conscious effort to look out over the next couple of years and look at large lease deals that we could accelerate. If you go back to the first quarter call, we talked about some significant large deals, almost 1 million sq ft, where they had maturities over the next couple years, and we bundled them together and did one large renewal. We have been doing a lot of that within this organization.

As you look at our weighted average lease term, a year and a half ago, it was like 50 months. Today, it is somewhere in the range of like 65 months. That is the result of getting out of some leases much earlier on before expiration. You do get an initial FFO benefit, and the FAD benefit is going to follow suit. Thanks. Very helpful, Pete.

Operator: Your next question is from the line of Jamie Feldman from Wells Fargo. Your line is now open. Please go ahead.

Jesus Gonzalez: Hey, good morning. This is Jesus on for Jamie. Thanks for taking the question. Just with your current sources and uses already spoken for, how large is the remaining disposition pool that could fund additional JV investments or buybacks, particularly after the asset sales you have already completed in 2025 to strengthen the balance sheet?

Pete Scott: Yeah. Maybe, Jesus, I will jump in. I think I understand your question. As we think about additional JV investments and buybacks, since we are right around that mid-5x net debt to EBITDA, a source of capital would certainly be strategic sales. We do not guide to that, just like we do not guide to capital allocation numbers. As I said in my prepared remarks, we are certainly open-minded to selling more assets to the extent that we continue to trade at a discount to NAV, and at the moment, a pretty significant discount to NAV. And we will recycle that capital accretively into our two main external capital allocation priorities, that being buybacks and JV acquisitions.

And it will be accretive.

Jesus Gonzalez: Great. And the updated range implies roughly $0.40-$0.42 of normalized FFO here in 4Q. What keeps the quarter from moving above that level despite all the additional buybacks and acquisition activity we have done?

Dan Gabbay: Yeah. Hey, Jesus, it is Dan. I will take that question. It is a great question. I think as we have said all year long, we look to outperform. I think we have done that consistently through the course of the year. You are getting a little bit into the law of small numbers as you get into fourth quarter. We feel good about our business across the board and have put out a range that we think is consistent with how we have been guiding over the course of this year. Feel good about our progress in Q4, and we will look forward to providing those results as we get into February next year.

But feel good about the business.

Jesus Gonzalez: Appreciate the color. Thanks, guys.

Pete Scott: Thanks, Jesus.

Operator: Your next question is from the line of Connor Mitchell from UBS. Your line is now open. Please go ahead.

Connor Mitchell: Hey, good morning. Thanks for taking my questions. I'd like to just continue on with that question line there. First, with the updated guidance, it seems like the same-store NOI may be a slight deceleration in the fourth quarter after some very healthy results at this point. Could you just provide some of the building blocks or maybe what will get you to the upside or even the downside for the updated guidance for NOI growth?

Pete Scott: Yeah. I will touch on that. I mean, look, we have had six straight quarters above 5%, which for the way this business has historically generated same-store NOI, I would say that is pretty good. I think that is evidence that fundamentals have improved. When you think about the fourth quarter, I would just say that we are not forecasting as much absorption. I will repeat that again. We are not forecasting as much. It is not that we are saying there is going to be no absorption or there is going to be negative absorption. It is just not as much in the fourth quarter.

Perhaps that is a conservative number as we have a big SNO pipeline and we try and get leases commenced. Also, we have more pricing power today than we have ever had before with CLS, so with our CLS improving. I think that is probably the best way I can describe the way that our guidance works at the moment for the fourth quarter. Obviously, we always try and hit the high end of our guidance ranges.

Dan Gabbay: Yeah. I will just add, I mean, if you think about the building blocks, you commented on that. We talked about that a lot as well this year. It is 3% escalators in place and those cash leasing spreads. If you are not picking up occupancy, we have always talked about delivering 3%-4% same-store NOI. The occupancy and pushing on our margins is how we drive above that, as well as our leasing activity, absorption, and cash leasing spread. You guys have the building blocks, and I think we have a great fundamental business.

But as Pete said, it is not as much absorption necessarily forecasted for Q4, and it is our toughest comp when you think about how much absorption we picked up in late last year as the new asset management model really gained steam after the changes middle of 2025.

Connor Mitchell: Okay. I really appreciate all the color. Second, on the dispositions as well, I know you said that there is kind of a pipeline there, but it is not a commitment. But I am just curious about kind of the process in that. Maybe how many of some of your targeted disposition assets are either ones that are either marketed or potentially just having conversations, versus some that are more inbound requests, either from the private buyers that you mentioned or some of the partnerships with the health systems that are looking at the MOB assets that are on their campus already?

Just kind of getting a sense of how that process and how the conversations kind of work for the dispositions.

Pete Scott: Yeah. If you are selling back to a health system, you are not running a process, and they are calling you, telling you their interest to buy back real estate. I mean, I think it is probably as simple as that. We do not have any large portfolios or even small portfolios out with brokers at the moment. We like to do our deals off market where we can, and I think that is the best execution.

Connor Mitchell: Thank you.

Operator: Your next question is from the line of Seth Bergey from Citi. Your line is now open. Please go ahead.

Seth Bergey: Hey, good morning. Thanks for taking my question. I just wanted to kind of go back to some of your comments on capital allocation. Can you talk about kind of the decision with your JV partner to go out and acquire more assets? Is there just constraints on the amount of kind of capacity you can do, or is it really kind of deal by deal specific in terms of what you would look to acquire in the future?

Pete Scott: Yeah. Hey, Seth. I mean, obviously, our conversations are ongoing with our partner, and we screen everything that fits the underwriting criteria. It doesn't mean we're going to pursue it necessarily. I would maybe just focus a little bit on just numbers to date, right? So, year-to-date, we've committed about $70 million into joint venture acquisitions. That's our share. And year-to-date, we've bought back $250 million worth of stock. So, the way I look at those numbers is, at times where we feel like our stock is trading a little bit better, we'll probably lean in more to doing JV acquisitions.

And at times where we feel like there's a disconnect between the public and private markets, we can shift, and we can buy back stock, right? We're not looking to be the largest platform out there. We're looking to do smart, disciplined capital allocation moves that maximize our earnings growth. And getting all of our asset sales done last year, deleveraging the balance sheet, putting ourselves in a position where we have flexibility to shift between one and the other was absolutely essential, and we're benefiting from that now.

Seth Bergey: Great. Thank you. And appreciate the comments earlier on the cash leasing spreads, but I know you kind of focus holistically on the rest of the lease economics as well. So, as you kind of see fundamentals continuing to improve, where are you kind of pushing the most on lease economics, and where are you focused on there?

Pete Scott: Yeah. Good question. I mean, as we think about pricing power, it's not just cash leasing spreads. I think it's a combination of a few different things. Cash leasing spreads being one of them, escalators being another, and then retention being another as well. And all three are moving in the right direction. On cash leasing spreads, we put up an 8.6% number this quarter, one of our strongest quarters ever. It's been a big focus of ours. That's up from 4.2% in the first quarter, and then we hit 4.8% in the second quarter. So, it's sequentially improving as the year has gone along. On escalators, I'd say 3% is now the floor, not the ceiling.

It's very rare for us to sign a deal below 3%. In fact, it is typically only because there is a renewal option in place, and the tenant had locked that in many, many years ago. But absent that, 3% is the minimum, and in some select circumstances, if we have to provide additional capital, we are actually getting upwards close to 4%. I think with inflation increasing, it is obviously something we are going to continue to try and push on our tenants. I think on retention, I have touched on it before, but we have averaged the high 80s.

Again, I think that is really a function of the fact that there is not a lot of places for tenants to go at the moment. It is also expensive for tenants to move, so it is working in our favor. So, I think about pricing power as a combination of all of those, and they are all trending in the right direction.

Seth Bergey: Great. Thank you.

Operator: Your next question is from the line of Austin Wurschmidt from KeyBanc Capital Markets. Your line is now open. Please go ahead. As a reminder, please remember to unmute your device. Your next question comes from the line of Juan Sanabria from BMO Capital Markets. Your line is now open. Please go ahead.

Robin Haneland: Hey, this is Robin Haneland sitting in for Juan. I was just curious, health systems consolidation has definitely strengthened your outpatient demand. Just kind of curious where this consolidation is that could create overlapping locations, less space requirements, and thus sort of strengthen tenant negotiation leverage?

Pete Scott: Health system consolidation. We couldn't hear you as well, but I think we understand the gist of the question. I can start, and then if Rob wants to jump in. We have seen some consolidation, and also, as I mentioned before, we've also seen health systems expand their platforms with a couple of deals, I said, with Ascension Saint Thomas and Bon Secours earlier. I would say there's almost no overlap in this consolidation. It's not like they're consolidating to shut down business lines. It's consolidation to get bigger as an organization, consolidation to get synergies on their own cost side. It's not about getting out of a market. It's about expanding within that market.

I'd say it's complementary to what we are seeing out in the market. If anything, I think their profitability improving allows us, I think, to extract maybe even better lease deals. I would say these negotiations, though, with health systems, we do half our deals with health systems. It's not easy, right? It's certainly work because we're changing what was a complacent market probably for many, many decades of everybody doing just like, "Hey, let's just do the up 3% cash leasing spread deal." We're doing something different. It requires some explaining with the health systems. From a consolidation perspective, I would say that we're seeing, if anything, only a benefit as a result of it.

Robin Haneland: That's helpful. As a follow-up on the 8.6% leasing spreads, just curious what that suggests about the remaining sort of mark-to-market opportunity as we head into 2027?

Pete Scott: Yeah. Look, as we think about the mark-to-market opportunity today, I would probably say it's somewhere in the mid-single digits, if not slightly better than that. That's a number that we've been consistently quoting.

Robin Haneland: Thank you.

Operator: Your next question is from the line of Siti [inaudible] from JPMorgan. Your line is now open. Please go ahead.

Siti: Hi. Thanks. Maybe following up on the occupancy question from earlier, are there any particular markets where the remaining lease-up opportunities are concentrated to push the total portfolio and same-store number higher, as you mentioned?

Pete Scott: I do not know that I would say it is particularly concentrated. I would say that not all markets are equal in the medical office space. Where we are having more success is certainly in the Southeast markets and a little bit up in Seattle. Where I think we have got some upside in front of us from an occupancy perspective, I would say Phoenix. Phoenix has always been a little bit more of a challenging market. And then I would say some pockets down in Texas as well. So those would be two areas that we are certainly focused on. But I would say where we are seeing real outperformance is in our markets in the Southeast.

And it is no coincidence that as you look at the assets we have been acquiring, it is typically in markets where we are having a lot of success.

Siti: That's it for me. Thanks.

Pete Scott: Thank you.

Operator: Your next question is from the line of Dave Rodgers from Raymond James. Your line is now open. Please go ahead.

Dave Rodgers: Yeah. Good morning, Pete. You talked earlier about working the expiration schedule lower. It's, I think, down to 3.1 million sq ft for next year. So, maybe you or Rob could give us a little bit of color now that you're getting kind of into that period of re-leasing or renewing space for 2027. What's kind of the outlook, if you give us a little peek into next year, in terms of kind of the confidence around spaces, what you know is leaving, and what you have pretty good confidence in keeping?

Pete Scott: Yeah. Thanks, Dave. Good question. We are proud of the fact that we have really worked our way through that lease expiration schedule. I got a lot of questions on that early on when I first started, and we have meaningfully improved it. I would say for next year, even though it would be great to sign every one of those leases tomorrow and have that number stay zero, it just does take some time to get leasing done. My view on retention would be no different than the retention numbers that I have quoted, in the mid to high 80s being a good underwriting assumption for what we think will happen with that expiring square footage.

I also look at it. Sometimes people look at these tables, and they think about it as, "Oh, there is a problem." I think just given what has happened in our space, lease roll is sometimes an opportunity as well. I would say we are looking at it more as an opportunity and not as a problem that we are facing. So we feel quite good about it.

Dave Rodgers: Great. Then maybe just a follow-up on capital deployment. We have talked about, obviously, acquisitions and then the stock. Are there any other opportunities or avenues besides whether it is the JV, wholly owned, or back into your own stock? Are there opportunities to do development funding, mortgage funding in the space, lending to some of the partners in a bigger way, the health systems as well? Any partnership opportunities you are seeing as obviously the capital markets tighten up a little bit?

Pete Scott: Yeah. We have done a little bit of debt financing, and in select circumstances, it makes sense, for sure. I think if there was one area I would focus on, and we have said this a few times, I would expect us to increase our percent of NOI towards joint ventures going forward. Obviously, we want to grow the KKR venture. If we could do other joint ventures as well, I am not necessarily referring to this as a recapitalization joint venture. We do not need to go and do that as a defensive move to delever.

But if there was a way for us to utilize capital that likes this space, and we are a really good platform to bolt onto, and we are one of the only public REITs that is actually looking to grow in the space, we could be a really good partner for capital trying to enter the space. We will certainly continue to look at those types of opportunities because I think our assets trade pretty efficiently. Unless we are trading at a pretty significant premium to NAV, it is hard to make acquisitions accretive, right? Maybe one day we will be trading at that kind of premium, and there is certainly plenty we can do.

But in the interim, if we are not, if we want to grow our square footage, it is likely to come through additional joint ventures.

Dave Rodgers: All very helpful. Thanks, Pete.

Pete Scott: Thanks, Dave.

Operator: Your next question is from the line of Austin Wurschmidt from KeyBanc Capital Markets. Your line is now open. Please go ahead.

Austin Wurschmidt: Hey, good morning. Can you hear me okay?

Pete Scott: Yeah. You are good now, Austin.

Austin Wurschmidt: All right, great. Pete, I guess with tenants having fewer options available today and just tying that back to the cash leasing spreads this quarter, over 8%, in the mid-single-digit range you have pointed us to looking forward, how much is that mark-to-market narrowing versus where rents would underwrite on a new development, both on the starting rent and then also as you look to where that ends up five years or so down the line?

Pete Scott: Yeah. That is a great question, Austin. Actually, we did add a slide to our investor presentation this quarter. I know there is a lot of information that goes out when we put these earnings releases out, but I would point you to page 17, and if anything, that spread just continues to widen, and that is a function of construction costs continue to increase. I see a lot of runway in front of us between new construction rental rates and in-place rental rates, and that is something we are going to draft off of. It is a great question, and it is something we added additional disclosures on.

Austin Wurschmidt: I appreciate that. I am also curious, just going back to the conversation around cap rates and some of the answers that you gave on core and core plus product, but when you talk to your partners, what is kind of your view on putting capital out at the cap rates you quoted for both of those product types? Then, to the point on the last question, what are development yields today then, that you would need, I guess, to justify the risk of development and what is going on with interest rates as well? Thanks.

Pete Scott: Yeah. I think on development, the yield you are going to want to achieve is a function of the pre-leasing amounts, right? I would say developers across the board have begun to require much higher pre-leasing amounts from health systems to do development. I think a lot of health systems are just doing them on their own today. But they are, in effect, build-to-suits for themselves. They have also got to be putting in typically expansion business lines that are very, very profitable to make that math pencil. As much as I would like to say developments will pick up, it is dilutive to do developments right now. We have a few we are working on at the moment.

Nothing that is far enough along that we can announce, but also no guarantee that we do those. But if we did, you should expect pretty good rental rates and a lot of pre-leasing within those developments. So, I am not too concerned about developments picking up anytime soon, especially with where construction costs have gone. I think it is going to remain quite low and depressed for a long time.

Austin Wurschmidt: Thank you.

Operator: Your last question is from the line of Michael Carroll from RBC Capital Markets. Your line is now open. Please go ahead.

Michael Carroll: Yeah, thanks. I guess, Pete, I have a bigger picture question. How are your discussions going on with your key health system relationships? I am just trying to understand what is their growth mindset, and do the bigger, better health systems, do they want to grow? If so, where is that focused at? Is that focused at the hospital campus, or is that focused more off campus?

Pete Scott: Yeah. It is a combination of the two, especially if you think about outpatient surgery centers and so on and so forth. It is not always going to be on campus. I would say they are looking at both avenues. I just thought, it is a good question. Maybe I will spend a second just broadly on health system relationships. One of the benefits of us being able to really get out in front of our strategic plan and putting up good numbers is, I have been able to spend a lot more time with health systems. I mean, that is where I spend the majority of my time at the moment.

Every conversation we have with a health system, we learn something new, and we are able to come up with a lot of win-win type transactions. I think the evidence is in the volume of leases we have gotten done, and then ultimately in the results that are coming out of those leases. They are critical, important partners of us. We have highlighted deals we have done with CommonSpirit, deals we have done with Ascension recently in our latest investor deck. We continue to do a lot of lease deals. Baylor, we continue to do a lot of lease deals. I am not going to name every health system, but it has picked up a lot.

I feel like that is one of the benefits we have had of getting through the cleanup faster than we thought, is I can spend my time where shareholders want me to spend my time, which is with the health systems, because better leasing turns into better profitability and better earnings, right? As opposed to dealing with cleaning up a legacy portfolio. I would say that's really been a big focus of ours, and the results underscore the benefits of all those conversations.

Michael Carroll: That's great. When you're partnering with these health systems, are you able to, when you get a new relationship or you expand, are you able to utilize your existing portfolio where they can expand to, or is it going to be more of a development where a health system needs to go to some place where an asset doesn't exist, and then HR needs to help them develop that or redevelop an existing building in that area?

Pete Scott: Yeah, I think it's more the former than the latter at the moment. It's not to say that we aren't having conversations on the latter, but it's much more focused on how do we efficiently lease space inside of our existing portfolio.

Michael Carroll: Okay, great. Thank you.

Pete Scott: Yeah. Thanks, Mike.

Operator: There are no further questions at this time. I will now turn the call back to Pete Scott for closing remarks.

Pete Scott: Great. Thanks, everybody, for joining us for the third quarter call. Like I said, it was a great quarter. We are having a great year. Look forward to seeing many of you in Atlanta in the coming weeks, and we look forward to finishing out a strong year. Talk soon. Bye.

Operator: This concludes today's call. Thank you for attending. You may now disconnect.

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