Healthcare Realty Trust Incorporated (HR) Q4 2025 Earnings Report, Transcript and Summary

Thank you for standing by. My name is Kate, and I will be your conference operator today. At this time, I would like to welcome everyone to Healthcare Realty Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Ron Hubbard, Vice President of Investor Relations. Please go ahead.

Thank you for joining us today for Healthcare Realty's Fourth Quarter 2025 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. A 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 December 31, 2025. 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.

Thanks, Ron. Joining me on the call today are Rob Hull, our COO; and Dan Gabbbay, our CFO. Also available for the Q&A portion of the call is Ryan Crowley, our CIO. 2025 was a transformational year at Healthcare Realty 2.0. When I joined the company, it quickly became apparent that we had an opportunity to become the clear leader in the outpatient medical sector. We have the best-in-class portfolio. We have scale in the right markets, and we are aligned with leading health systems. We also had the makings of a great team, but we needed to execute better and be more ambitious. In a short period of time, we have added talent across the organization that further differentiates our platform. I am immensely proud of the team and how they rose to the challenge during this critical time. We have more to do, and it will not always be a linear path, but our mission is simple and unwavering to operate and make decisions every day to drive long-term shareholder value. To that end, I wanted to provide an update on the 3-year strategic plan we published in July. Within the plan, we outlined the key steps being taken to overhaul all facets of the organization. I am pleased to report in just a few quarters, we are tracking ahead of schedule. First, the revamp of the asset management platform is complete. We have a new leadership team that is spearheading improved alignment between asset management and leasing. In addition, we have incorporated a new leasing model to drive ROI across the portfolio. The heightened rigor for achieving the best possible economic returns is manifesting into better results. Under the new platform, cash leasing spreads have improved 60 basis points, tenant retention has improved 220 basis points, and we see a meaningful uptick in our lease IRRs and lease payback period. The end result, as we repeat this quarter after quarter will be a higher quality earnings stream and improved earnings growth. Second, we have successfully achieved our target of $10 million run rate G&A savings. Our total G&A expense now sits at $45 million and ranks favorably to peers. We also improved our property NOI margins by 60 basis points and believe there is additional margin expansion to attain over the coming years. Third, we have completed our ambitious asset disposition plan. We have sold $1.2 billion of assets at a blended 6.7% cap rate. Both numbers exceeded the high end of our expectations. We exited 14 noncore markets and have improved our overall geographic footprint into high-growth MSAs. We are confident we have the premier outpatient medical portfolio, confirmed by the nearly 5% same-store NOI growth number that we generated in 2025. Fourth, our balance sheet initiatives are complete. For the first time in years, we have much needed financial flexibility and modest balance sheet capacity for capital allocation. We have reduced net debt to EBITDA nearly a full turn to 5.4x. We have extended our debt maturities and increased our liquidity. And our outlook has improved to stable from both Moody's and S&P. We also took the long overdue step to rightsize our dividend, something HR 1.0 struggled with for over a decade. Our dividend is appropriate, well covered and under the right conditions, able to grow in the future, while at present, offering a nearly 6% current yield to our shareholders. Fifth, we have strengthened our corporate governance and leadership team. We streamlined our Board to 7 individuals. I believe we have one of the highest quality boards in the REIT industry, and I am very fortunate to have them on our team. I would also like to officially welcome Dan Gay as our CFO. Dan and I have known each other for 20 years, both as colleagues and then as a trusted adviser. He brings an exceptional blend of financial acumen, strategic insight and capital markets expertise to the organization. Let me shift now to our 2025 results, which surpassed expectations across the board. Normalized FFO was $1.61 per share, exceeding the midpoint of our original guidance by $0.03. Same-store NOI growth was 4.8%, exceeding the midpoint of our original guidance by 140 basis points. We executed approximately 5.8 million square feet of leases, and we are off to a strong start in 2026 with our health system dialogue at an all-time high. Turning to capital allocation priorities. As you are aware, outpatient medical transaction volume increased significantly in 2025, and we were fortunate to take advantage of this developing trend. Private investors clearly see the same positive backdrop we see, increasing patient and tenant demand, combined with a severe lack of new supply. Notwithstanding the positive backdrop, we are realistic that our current cost of capital and discount to intrinsic asset value limits external growth. Therefore, our capital allocation approach will remain incredibly disciplined as we invest balance sheet capacity, free cash flow and capital recycling proceeds. This targeted approach includes Number one, redevelopments. We are prioritizing redevelopment projects within our existing portfolio. We see attractive yields on cost of approximately 10%, and this is a significant source of NOI upside. Number two, returning capital to shareholders through stock buybacks. In January, we purchased $50 million of stock and have authorization to purchase more. At our current stock price, we trade at a 9% plus FFO yield. Number three, joint venture transactions. As we look at external growth opportunities, we are fortunate to have existing joint venture partners who want to increase their investments in outpatient medical. We will only pursue a JV transaction if we can create earnings accretion through a combination of investment returns and advantageous fee arrangements. As a reminder, other than redevelopments, we do not include any accretive capital allocation opportunities in our guidance. Finishing now with our 2026 guidance and the value creation opportunity. The midpoint of our normalized FFO guidance is $1.61 per share. On the surface, this could be perceived as underwhelming due to the implied flat year-over-year growth. However, embedded within the midpoint of our guidance is approximately 5% core earnings growth, which offsets the necessary dilution we proactively incurred from our back-end weighted 2025 dispositions and deleveraging. With our noncore dispositions now behind us and our balance sheet in great shape, we are well positioned to maximize our go-forward earnings growth potential. When you combine this with our upside from multiple expansion and attractive dividend yield, we see a compelling opportunity to deliver long-term value for our shareholders. Let me turn the call over to Rob, who will expand more on operations and leasing.

Thanks, Pete. We finished the year strong, capping a robust year of leasing activity and showing early signs of operating improvement from our revamped asset management platform. For the year, we executed 5.8 million square feet of leasing, including 1.6 million square feet of new leases. Annual escalators across all leasing activity averaged 3.1%, lifting the portfolio average to 2.9%, a 7 basis point increase over last year. The weighted average lease term was nearly 6 years, improving our portfolio average. Tenant retention for the year was 82% and same-store absorption of nearly 290,000 square feet translated to over 100 basis points of occupancy gain. During the quarter, we executed 1.5 million square feet of total leasing. Tenant retention was strong at nearly 83%, our eighth consecutive quarter over 80%. And we saw same-store occupancy improve over 20 basis points. At our redevelopment properties, we have seen a 1,000 basis point increase in the lease percentage since the end of the third quarter. This increase was driven by solid demand across a number of our projects, including a 64,000 square foot lease with St. Peters Health at a redevelopment in Upstate New York. But the backdrop for industry fundamentals remain strong, supporting a steady flow of prospects into our 1.3 million square foot pipeline. Demand in the top 100 MSAs continues to outstrip supply and completions as a percentage of inventory remains near all-time lows. Additionally, robust investment by health systems in outpatient services is an ongoing positive trend. Shifting to the operating platform. We have completed our transition to an asset management model. As Pete mentioned, we have seen early signs of improvement in lease economics as our revamped platform creates greater accountability closer to the real estate to drive better results. As we look ahead, maintaining financial discipline around leasing, further refining operating processes and improving tenant satisfaction are important objectives for our team and the sustainability of these results. This new platform also emphasizes developing and maintaining key relationships with our health system partners. Recent efforts have led to a meaningful uptick in lease activity with a number of these systems. A few examples worth noting include, in Connecticut, we executed 65,000 square feet of leases with Hartford Healthcare, backfilling the Prospect Medical space. We received a substantial credit upgrade, and we retained the full $3 million of NOI. With this transaction, our relationship with Hartford Health has grown to nearly 250,000 square feet across 15 buildings that are 94% occupied. And in Memphis, Baptist extended 15 leases totaling nearly 170,000 square feet for 8 additional years. In addition, they signed 3 new leases totaling 25,000 square feet for a blended term of 10 years. Our portfolio with Baptist is now 99% leased. The Baptist deal is just one example of how our reinvigorated platform is leading our health system partners to want to do more with us. Systems are re-leasing space early and expanding tenancy in our buildings. On top of this, of the 1.4 million square feet of single-tenant expirations in 2026 and 2027, we have already executed renewals or are in the lease documentation phase for over half of this space with more to come. Included in these renewals are a 154,000 square foot 8-year renewal with Tufts Medicine in Boston. The existing lease with Tufts was scheduled to expire in 2027. 3 lease extensions totaling 142,000 square feet with Advocate Health in Charlotte for an average of 7 years. The cash leasing spread was in excess of 5% and a 39,000 square foot renewal with Medical University of South Carolina in Charleston that was set to expire in late 2026. I want to congratulate our team on a great finish to the year. Coming into 2026, our team is executing on our strategy extremely well, positioning us for further occupancy gains that will drive meaningful NOI growth. I will now turn it over to Dan to discuss financial results.

Thanks, Rob, and thank you, Pete, for the introduction. It's nice to meet everyone over the phone, and I look forward to meeting in person over the coming quarters. This morning, I'll provide some additional color on fourth quarter 2025 results, our capital allocation activity and our initial 2026 guidance outlook. But before that, I'll quickly introduce myself. As Pete mentioned, we have an extensive history working together as colleagues and at his prior firm. where I served as an adviser to the company on several strategic transactions. My 20-year career in investment banking will be an asset as we instill greater financial discipline in the organization and continue to restore our financial credibility with shareholders and the analyst community. As some of you already know, I've worked closely with most REITs in the health care sector advising on equity and debt strategies to minimize cost of capital and advising on transformative mergers and acquisitions. This will enable me to bring another strategic perspective to our C-suite. I've also had the pleasure to work with some current members of the Healthcare Realty team dating back nearly a decade. And while it has only been a few short weeks, I have had the opportunity to get better acquainted with the entire executive management team and our highly experienced board. I am extremely impressed with the caliber professionalism and execution mindset of this team. They have quickly transformed the operating platform, improved portfolio quality and reset the outlook for the company. I am honored to work alongside them in my new role. And with that, I'll turn back to our results. 2025 ended strong. In Q4, we reported normalized FFO per share of $0.40 and same-store cash NOI growth of 5.5%. Additionally, FAD per share was $0.32, resulting in a quarterly dividend payout ratio of 75%. Our outperformance this quarter was driven by 103 basis points of year-over-year same-store occupancy gains, 3.7% cash leasing spreads and continued property level and G&A expense controls. As a result, we are proud to have delivered full year normalized FFO per share of $1.61, FAD per share of $1.26 and same-store cash NOI growth of 4.8%. Turning to capital allocation. Q4 remained active with nearly $700 million in dispositions Proceeds were primarily used to pay off our 2027 term loans. Inclusive of our bond repayment earlier this year, we repaid $900 million of debt and extended maturities on our remaining term loans and credit facility by 12 to 24 months. Leverage decreased to 5.4x from 6.4x at the beginning of the year, ahead of target and the timing laid out in our strategic plan. Going forward, we will be prudent and opportunistic deploying capital. In January, we utilized $50 million of disposition proceeds to repurchase 2.9 million shares, and we have $450 million remaining under our current authorization. Overall, the Healthcare Realty team delivered results ahead of or in line with all metrics discussed in our July strategic plan, allowing us to be more front-footed as we position into 2026. Turning to 2026 guidance, which you can find on Page 30 of our Q4 supplemental report published last night, we are forecasting normalized FFO per share of $1.58 to $1.64 representing $1.61 at the midpoint. These results are driven by lease-up and positive releasing spreads in our core portfolio, which we expect to generate same-store cash NOI growth of 3.5% to 4.5%. G&A is anticipated to be between $43 million and $47 million, in line with the strategic plan. Sources of capital for the year will include modest asset sales, proceeds from a note receivable maturing in early '26 and free cash flow post dividends of approximately $100 million at the midpoint of our guidance. Uses will include our asset level capital plan outlined in our guidance and includes the $50 million already utilized towards share repurchases. Recall that our guidance does not include any additional acquisitions, developments or incremental share repurchases. Finally, I would like to call out a couple of items related to our balance sheet. First, we assume the $600 million bond due this August, will be refinanced with new bonds in the low 5% coupon area mid-year as compared to the existing coupon of 3.5%. Second, we published an additional press release last night disclosing our new $600 million commercial paper program. Similar to other REITs in the sector, accessing the CP market will allow us to further diversify our capital sources and reduce our interest costs compared to our line of credit. The size is in line with other REITs and consistent with rating agency frameworks for our mid-BBB ratings. Last but not least, we expect full year leverage in the mid-5x net debt to EBITDA range, although figures can fluctuate modestly from quarter-to-quarter. With that, I'll turn the call back to Pete for any closing remarks.

Thanks, Dan. I'd like to finish by thanking our incredible team for their tireless efforts and laser focus on delivering excellent results. They didn't miss a beat during winter storm firm despite the impact in Nashville. I am energized and excited every day working with this team. With that, operator, let's open the line for Q&A.

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

Just curious on the same-store NOI guidance for '26, you obviously had a strong year for '25 but just curious on the implied decel on the '26 guidance and the piece parts or assumptions assumed in that same-store NOI, whether it's occupancy retention, et cetera.

Yes. Let me spend some time on that, Juan. I mean, obviously, 4.8% is a pretty strong number that we posted in 2025. And again, we also have some absorption benefit. I think we all saw the over 100 basis points of absorption we experienced, which is certainly a significant benefit within our same-store pool, and that aided us getting up close to 5%. I would say this as we think about the 3.5% to 4.5% for 2026, look, we're going to push the envelope across the 4 main drivers, and those drivers are escalators, retention, absorption and cash leasing spreads from an escalators perspective, which is really the primary driver of our same-store growth, it's probably 75% or greater of the same-store number we achieve every year. We're averaging 3% or greater at this point in time on all lease deals we're signing from a retention perspective, which limits downtime and capital we have to put in our assets if we can retain tenants. We're trending towards the mid- to low 80s on that, probably closer to the mid-80s and the low 80s when you look at the last couple of quarters, and that's going in the right direction for us. I think from an absorption perspective, we do expect more absorption this year as well. And we think that will certainly benefit our numbers. It's a little soon to give exact figures on that. I don't know that it will be 100 basis points like we did last year because we're at 92% now, but we certainly expect to see positive absorption as we work our way through the year. And then the last piece of it, which gets a lot of airtime and appropriately so on cash leasing spreads. That is actually probably the smallest driver overall when you think about same store. But I think it's more important because from an industry health perspective, I think it gives you a sense as to where things stand from a supply-demand perspective. And today, demand is much greater than supply. And our cash leasing spreads have ticked up in the second half of the year. And like I said, we're going to look to push the envelope as much as we can.

And then just on the CapEx piece. Curious if you can give any guardrails with regards to that relative to the $1.61 normalized FFO expectation for '26?

Yes. Juan, it's Pete again. And in the future, I'll probably have Dan answer most of these, but given it's his first call, I'll jump in a bit on this. We're flat from an FFO perspective, and I think everyone is pretty aware of the pieces as to the core earnings growth and then obviously the necessary dilution we took from deleveraging in the asset sales. If we're flat from an FFO perspective, I'd assume we're flat from a FAD perspective as well. We ended last year in the $1.26 range. And we've actually given the maintenance capital number within our guidance page as well to help everybody triangulate on their modeling and forecast. So I would assume the same thing for FAD that we are assuming for FFO.

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

I think you talked a little bit about this in terms of the last question about absorption potential. I just want to be clear that you said some of that potential. Was that just the same store number? Or is that also applying to redevelopment and leasing? And maybe if you can just give us an update on kind of how to think about redevelopment project, timing, delivering lease-up and how that ultimately could create some earnings benefit beyond this year?

Yes. For sure, Nick, it's Pete again. What I quoted before was purely in the same-store bucket, and I'm glad you brought up the redevelopment portfolio because I think that's going to be a big driver of total portfolio occupancy increasing over the coming years. And I think you mentioned that in your pre-call note last night. As I think about redevelopments. We think it's a great way for us to allocate capital. I was very intentional in listing that first in the prepared remarks. In the fourth quarter of last year, we had a sequential 500 basis points increase within the redevelopment portfolio from leases signed. I don't know if it was totally clear in our prepared remarks, but we did sign a very big new lease deal in January with St. Peter's Health up in upstate New York. And so we would expect probably another 500 basis points of incremental lease-up to show up in our supplemental in -- or at the end of the first quarter. And so I'd say we have really, really good momentum, and this is the key driver to meeting or exceeding the 3-year earnings growth framework. Those leases we're signing now, the real benefits don't start until 2027, but I would say our confidence level in our earnings framework is certainly increasing as we continue to lease up within that bucket. So again, I'm glad you brought this up. Whatever I quoted from an absorption perspective is just to the same-store pool and we'd like to do even better. in the redevelopment bucket.

All right. And then second question is just going back to acquisition potential. I know you talked about stock price not being exactly where you want to be to fund that. But can you also just talk about like just a profile of potential acquisitions because clearly, there's this sort of issue where you're dealing with cap rates or low in some cases when you're -- which is good for selling assets, but it makes it difficult to buy assets. I don't know if there's also a profile of what you're looking at that would sort of enhance your yield and future growth from acquisitions, when you decide to do it?

Yes. Well, 2 pieces to that, Nick. The first is, if we do no acquisitions or stock buybacks this year, which our guidance does not incorporate any of that, we would actually end up in probably below 5 from a net debt-to-EBITDA perspective or below our target, right? So there is a little bit of balance sheet capacity. It's modest, but it's probably in the $200 million to $300 million range. That varies based upon buyback versus any kind of JV acquisition opportunity we could look at. But just to be clear, as we think about JV deals specifically, I mean, we do have partners that would like to grow with us. We do have constraints on how much we can grow. I just pointed out the finite amount of capital we have unless our stock trades at a materially better level than it does currently. But as we think about the yields we would like to get on capital that we put out, our implied cap rate is somewhere in the low 7s, and we would not look to allocate any capital to even a JV transaction unless we felt like the yield to us even if we're funding it with balance sheet capacity is greater than our implied cap rate. I mean that's just going to be an arbiter that we're going to look at. So hopefully, that gives investors comfort that we're not looking to go out and do a bunch of 5.5 cap rate deals just for the sake of doing deals. We were going to be incredibly disciplined in how we put money out. and make sure we are getting the best return possible on that money.

Your next question comes from the line of Seth Bergey with Citi.

It's Nick Joseph here for Seth. How are you thinking about the dispositions going forward? Obviously, you were able to execute on a lot at good pricing and faster than expected. So what's the plan from here? Is it more being on offense with dispositions for any potential? How are you thinking about the portfolio?

Yes. We're carefully using the O-word within the office here at the moment. That came up a lot last quarter, and I'm not sure it helped us. But I would say from an asset sale perspective, let me just hit on it, really from 2 different perspectives. So we've got $175 million of sales embedded within our guidance for this year. Within that, though, is about $70 million of deals that are closing early this year that was part of our $1.2 billion disposition plan. They just leaked over into the beginning of 2026. And we were pretty clear that some could leak over into this year. But we expect to have all of that done in the very, very near term. In fact, 1 is done and 1 is imminently about to close within that $70 million. The other is a $45 million loan that's expected to get repaid late March. And so after that, you've really got about $60 million of dispositions baked into our guidance. And if you recall last quarter, I said we would consider selling some noncore non-income producing assets as well. We do have a pretty significant land bank that I think is undervalued currently within our stock price. I think there's a lot of things undervalued in our stock price, but certainly, that's one of them. So you should assume we would look at certain things like that. But then stepping back, what's not in our guidance, like would we consider selling core real estate, I would say we would consider selling anything that's going to maximize value to our shareholders. So nothing is off the table. But at the moment, that's not baked into our guidance.

That's very helpful. And then just given how active you have been as part of the transaction market, are there any insights either from buyers or competition that you've seen change over the last, call it, 6 to 9 months?

Maybe I'll start, I will ask Ryan to quickly comment our Chief Investment Officer. I would say the biggest change that we've seen over the last year has been the availability of debt the pricing of debt and obviously, the LTVs that buyers are able to achieve. That has been probably the biggest benefit to why transaction volumes have picked up. But I will also say that the perpetuation of demand exceeding supply continued absorption just nationwide in outpatient medical assets has certainly piqued the interest of private capital, and there's no shortage of private capital that is looking to enter this space or increase their exposure into the space. And I think you've seen that in some of the volume numbers that are out there. I'll ask Ryan to maybe comment on cap rates for a second.

Sure. We're beginning to see more assets come to the market, and those are pricing at cap rates in the high 5s to low 6s. While core plus is pricing in the low 6s to upper 6s depending on property attributes. And of course, value-add properties are primarily IRR driven, not cap rate driven. But the -- as Pete alluded to, buyer demand remains high and the transactions volumes have been really elevated in the space.

Your next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets.

Pete, you've discussed in the past just how precious capital in this business is and your intent to target high retention. I think kind of putting a goal or maybe a stretch goal out there of 85% or better. What are you guys assuming as far as retention this year? And how much visibility, I guess, beyond the single tenant deals you described, do you have into the remaining expirations for this year?

Yes, Austin. Well, I know the expiration question did come up a call or 2 ago. And I will say that has been top of mind for us, and I would expect to see a significantly improved lease expiration schedule when we come out with our next supplemental, especially we're working our way through the '26 and '27 expirations. I mean we have a pretty good line of sight at this point into those, as you would expect. With regards to the multi-tenant portfolio, I would say that we are expecting retention to be kind of in the 80% to 85% range. It will ebb and flow a little bit. Like in the third quarter at '25, we were at think 88%. And this past quarter, we were at close to 83%. That kind of blends to 85%. So I think the 80% to 85% number is probably a pretty good assumption that we've embedded within our guide for this year.

That's helpful. And then Pete or Rob, you guys footnoted and also flagged this 64,000 square foot lease in January new lease, was there any additional new leasing component to the nearly 1 million square feet that have been signed year-to-date? And then can you just kind of talk about how negotiations are moving along for the 1.3 million square foot pipeline.

Yes. I'll have Rob jump in and talk about that deal. Obviously, I mentioned it quickly that one, and he could talk about new leasing in general. I mean that's with St. Peters, and we just had a ribbon-cutting ceremony with them. up at that building. They took some other space as well in the building too and hopefully have some appetite to grow even more. But it's a big lease, and we're excited to be expanding our exposure with them. Rob, why don't you talk generally about the 1 million square feet, though?

Yes. I think the 1 million square feet certainly off to a strong start. There is additional new leasing inside of that 1 million square feet that we've executed this quarter as well as a number of renewals, some of which I covered in my prepared remarks. But I think in general, we're extremely encouraged by the level of activity that we're seeing. We expect that to continue as we move forward. the 1.3 million square foot pipeline that I did mention is an active pipeline that is growing every day. Our team is continuing to add to that. And that will certainly feed our leasing new leasing expectations in 2026. And we're just very optimistic on demand, as you can imagine, health systems continue to move services from the inpatient setting to the outpatient setting, which is driving a lot of that demand. And we think that we're well positioned to continue to capture that.

Your next question comes from the line of Michael Gorman with BTIG.

Pete, maybe just a couple of quick questions here on the CapEx number. I appreciate the guidance. I'm just curious, when we think about the stabilized portfolio and all the work that you put into it, as we move through '26, do some more leasing, get the asset management program for a full year here. Is that kind of 15% to 16% of NOI is the right range for the maintenance CapEx second gen leasing CapEx number on this platform going forward?

Yes. I would say it's probably 15% to 20% is a little bit of a wider range than I would go with. But I think you're right, we've been achieving 16%, 17%. So maybe I'm just being slightly conservative with bucketing that into the 15% to 20% range. But I think that's a good run rate number. I'd say if your retention continues to go up, I would expect that number to perhaps even tick down a little bit. But obviously, look, we are making a concerted effort to invest capital back into our portfolio, and that was one of the reasons why we decided to rightsize our dividend a couple of quarters ago to take that additional retained earnings and reinvest it back into redevelopment. We think that is probably the highest and best use of our capital right now. So what I quoted before was purely just a maintenance capital number and we are certainly investing above and beyond that at the moment. I think that will obviously be a more near-term investment that will eventually tail off in a couple of years, but we think it's the right place to invest capital today.

Got it. That's helpful. And you certainly made a clear kind of the discipline that you're putting forward when you're thinking about deploying capital. I'm just curious, again, with the improvement that you've managed to generate on the asset management side and maybe some of the success that you're seeing on the redevelopment side, does that expand the scope of opportunity that you're willing to look at, whether it be in the JV structure or on balance sheet in terms of the type of assets that you would be comfortable bringing into the portfolio now with the confidence that you have on the asset management side?

Yes. I mean, look, as I think about how we would bucket assets between what we would acquire and what we would do on balance sheet. I think we've got plenty of value add on balance sheet at the moment, and that's our redevelopment portfolio. And again, we enhanced our disclosures last quarter people can track the progress that we're making there. So we have a report card every quarter to see how we're doing. And I'd say we've got a pretty good grade in the fourth quarter on that. With regards to the external growth, I think you've got capital that is more wanting to chase core and core plus right now that, frankly, we don't have the cost of capital to allow us to do that on balance sheet alone. So I think for the current time being, we're going to do any type of acquisition primarily through JVs, right? And like I said, we've got partners that want to grow in this space, and we do have some advantageous fee arrangements that allow our going-in yield to be much better than what the cap rate is for the transaction. And that's where our focus would be today on any kind of external growth. But again, there's a finite amount of capital we have with that to put to work this year, and we will compare that to what's our FFO yield from a share buyback perspective. what are we looking at from a redevelopment perspective. But it all goes back to our balance sheet is in much better shape, and we have much needed free cash flow from the dividend adjustment to reinvest into our portfolio. So we're in a much better position 9 months hence forth from when I began to actually be able to talk about these things.

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

Pete, maybe if I go back to your strategic plan and I look at some of these pages, you laid out $90 million of NOI upside from the redev and RTO portfolio. And then another $50 million of NOI from margin expansion due to these processes. I guess I'm curious how much of that do you feel like was captured in 4Q? What's included in guide? And then what sort of longer term down the road, if you could help us bucket those?

Yes. That's a good question, John. Let me see if I can give a couple of pieces on that. As I said in my prepared remarks, we are tracking generally ahead of schedule, and that would also be attributed to how we're thinking about the $50 million of NOI upside. But just to be clear, within our strategy deck, we just assumed $20 million to $40 million of NOI within the first 3 years just because there's a lag. You spend the capital you signed leases, but the commencement of those leases and when you get the full run rate benefit just -- it takes time, right? So as I would think about the $20 million to $40 million and the leasing we've done, it's not just what we did in the second half of 2025, but also to start the year in 2026. As Rob mentioned, we've got about 1,000 basis points of incremental lease percentage within that bucket. So that's a long preamble to basically get to -- I think we've probably identified about $15 million of the $50 million at this point in time through the leasing activity we've done since the strategic plan went out. So that's probably about 1/3 of the $50 million of upside. But when you think about that relative to the $20 million to $40 million that was in that earnings frame, we're probably about halfway there, right? And I'd say that's good progress. And it's ahead of schedule. I'm not expecting it to be a benefit to 2026, purely because of the reason I gave before. You sign a lease, it takes a while to do the build-out and for that to commence. But we should start to see pieces of it build up in and then further benefit in '28.

Got it. Very helpful. And then you answered this partially in the last question, but just kind of fleshing out here on the guidance is no further buybacks. But is that simply a yield question for you when determining does incremental dollars go there versus even maybe more deleveraging, although we've got some extra asset sales that are probably going towards the revolver. And then as you're considering JVs, as you mentioned, is it simply what's most accretive? Or would you probably tilt towards the JV as you look to grow the business as long as that's greater than your implied. Just would love to get your thoughts there.

Yes. Look, I think it's going to be a combination of the 3 as we think about capital allocation priorities. I know for a fact, it's redevelopment that we will spend money. So it's really what about the other 2. And I would say that we will look at both of those. I'd like to think we can accomplish a bit of both. But stock buybacks, we don't control where our stock trades. So it's hard for me to give you an exact number there. But I will say we've turned on at least the underwriting engine here with one of our partners to certainly look at deals that we can do within JVs. And again, as I said, you should expect any yield that we would get would be greater than the implied cap rate we trade at right now.

Your next question comes from the line of Michael Stroyeck with Green Street.

Have you seen any change in the number of office repositionings across your markets? Is there any trend there either up or down in terms of just shadow supply from traditional office?

Not -- nothing of note, I would say.

No. I would say that no, we haven't -- you've heard stories of one-off opportunities where people have been successful in that. But I would say, generally, that shadow sort of supply, we're just not seeing it in our markets and with the space that we're leasing. We're doing a lot of health system leasing where they're growing critical service lines inside of those buildings that requires certain parking ratios, certain building design. And so I think for what we're doing, that's generally not a factor in our in our day to day.

Makes sense. Maybe one on the balance sheet. And as interest rate swaps begin to burn off later this year, what sort of mix between fixed and floating rate debt are you targeting?

Yes. I'm going to let Dan take that one.

Yes. Finally got one. I appreciate it. It's the first one. It's a great question. I think you've seen the balance sheet repair the company has undergone over the last 9, 12 months just from the dispositions. I think that's something particularly important to protect that balance sheet and our leverage levels I think when you think about fixed and floating mix, especially with the new commercial paper program, we're always looking to be most efficient with our balance sheet. We're also looking to extend our maturities overall. We've got some good term loans and bonds in that cap structure right now. I think a floating rate mix is generally speaking, mid-single digits to upper single digits proportion with respect to our overall debt, especially as we're spending money on redevelopment this year. So something we'll be prudent about may fluctuate up and down, but you're not going to see us go all floating rate debt all of a sudden.

Your next question comes from the line of Michael Carroll with RBC Capital Markets.

Pete, I want to circle back on your comments regarding the joint venture. I mean it sounds like that these conversations are pretty far along. I'm not sure if it was just with one of those partners or if it's a broader group. But what could these deals look like? I mean would HR create some type of fund to go pursue deals? Or could HR contribute assets into the fund to kind of expand it and be a little bit more active? I guess, how do you think about that?

Yes. Michael, maybe I would say specifically that our comments have been on existing joint venture arrangements we have today, where we could look to grow and where our partners want to grow and we already have those ventures effectively solidified. So we're not talking about a new joint venture at the moment. But frankly, since you bring it up, I think that it is something that we will continue to consider. I think we have some real opportunities we could do with our current existing partner, and we'd like to grow with them. They would like to grow with us. but we certainly could look to expand that. It's tough to compete in this space today with all the private capital that is looking to chase deals and our private counterparts that are GPs and have raised a lot of capital from those LPs are having the time of their lives, buying assets right now. I talked a bit about this when I was in my prepared remarks about private capital sees a lot of benefits to investing in this space. We see it, too. And so we can't just go out and buy core, core plus assets on balance sheet. Our cost of capital would get I think, impacted quite significantly to the downside right now. So we would have to figure out ways to manufacture better returns. And it is something we are actively considering. But at the moment, we would do deals with our existing partner or partners, and we have very good structures lined up with them and a good dialogue.

Okay. And I don't know if it's premature to talk about this the or not, but that private capital that's looking to get into the MOB space, I mean, what type of returns are they typically targeting I mean, are they just looking for the stability and have kind of a lower unlevered IRR hurdle they're typing achieving? I guess how are they thinking about the space?

Yes, maybe I'll Ryan answer that.

Sure. It really runs to the spectrum. I mean if you're looking at a value-add JV with institutional capital, they're targeting high leverage, upper teens IRRs but there's also plenty of institutional foreign and domestic capital in the space that's looking for a very core product with credit, long-term WALTs, very high acuity, newer vintage that are targeting much lower returns than that. So it runs the full spectrum depending on the institutional capital you're talking about.

Congrats Dan for joining the team.

Your next question comes from the line of Michael Mueller with JPMorgan.

So for the 2 questions. I guess, first, what's the typical scope of the redevelopment that's on your redevelopment page. It looks like they average about $10 million to $15 million each. Is it any square footage, lighting brightening or just what in general? And then the second question, Pete, you talked about the areas where you've kind of met exceeded expectations so far with the turnaround. Can you talk about I guess, any aspects of it or areas where you may have run into more obstacles or things were more challenging than you originally thought?

Well, maybe I'll start with the second question first. I will tell you since I've joined this organization, every interaction I have had with people here has been a positive one. And the toughest part of that is when you have to tell somebody that they can no longer be a part of this team and no longer be a part of the exciting things we have moving forward. That's not fun. And that's unfortunately something that we've had to do. But it's been a very necessary thing in order for us to get our cost structure in line and get our earnings growth and trajectory headed in the right direction. I probably underestimated how difficult that was going to be. And I'm being totally open and honest with everybody on this call on that one. With regards to the typical scope. I would say the average project is probably in the $10 million area and it's probably in the $200 to $300 a foot overall. And you're really taking a building from a much older vintage, and you're improving all the common areas you're improving the elevators, you're improving the build out of the space with regards to each one of these individual tenants. I mean it's a significant reinvestment into an asset that probably has not been invested into for, call it, 20 to 25 years. And so it's really soup-to-nuts taking something that's much older vintage and converting it to, I wouldn't call it the equivalent of a new development, but it gets pretty darn close to it and you get some really good rental rate pickup. If you go back to our strategy deck, we actually put a really good example of the projects we're doing in White Plains and the amount of leasing we've been able to generate with White Point Hospital there, which is a Montefiore subsidiary. And we did soup-to-nuts on that, and it looks fantastic. You skin the outside, you put new windows in, you're putting all new systems in, and you're bringing it up to basically brand new product.

Your next question comes from the line of Omotayo Okusanya with Deutsche Bank.

I appreciate all the hospital on the operational improvements and the capital allocation discipline. Dan, congrats, welcome aboard. It was good to have a solid HBS guy in a seat like that. Question-wise, curious on the build-to-suit side of things. Again, just given how strong demand seems to be, at this point, what's going on with a whole bunch of hospital systems. Just kind of curious on the BTS side, what that's looking like, whether we can expect to see more activity on that front.

Yes. Tayo, and by the way, for someone that completed the Antarctica Marathon, Ron Hubbard did not do you any favors putting you towards the tail end of our Q&A list.

I dialed in late, not Ron's fault.

Yes, I know. Well, next time we'll get you a little further up. That was quite an accomplishment. You looked a little cold in some of the pictures I saw, but congrats. Build-to-suits. -- yes, build-to-suits are happening. I would say developments, generally speaking, you do not see spec development happen right now in the outpatient medical space. And I just -- I don't know of any capital that's looking to chase spec development. So development that gets done is definitely heavily pre-leased. So I don't know that I would call that a build-to-suit, but I would put it in a similar category. I think the challenges with new developments today, and it's really one of the reasons why you've seen deliveries and starts come down considerably as costs have gone up so much the last 3 to 5 years, especially coming out of COVID that the rental rates needed to get to the return necessary for a developer who want to start that project is pretty significant. So you have to have a health system or a tenant willing to step up and pay much higher rental rates than what's in place right now. And so if they get done, great. I think there's plenty of demand to allow for some development to happen in the space. I don't think you're going to cannibalize existing product from that. If anything, we'd like to try and draft off of those rental rates that are required in order to get those types of deals to pencil. So they're happening out there in select markets and in select circumstances, but they're happening a lot less than they have been in the past.

That's helpful. And then my second question, again, you do see some of the health care REITs actively selling out of MOBs. Again, the argument being -- they're trying to move to higher growth asset classes. I mean what kind of your remodel for that, given this viewpoint that MOBs are also benefiting or should also be benefiting from kind of the changing U.S. demographics. How do you kind of think about the space and when you kind of think 5 years out, are we dealing with an asset class where the earnings growth profile has improved materially just kind of giving some of these secular demand drivers that are happening.

Yes. Probably a good question, I think, maybe to end on. Look, I think this is a pretty significant value creation opportunity. And that's really what got me excited to take on this job and move to Nashville. As you think about where we trade it's probably somewhere in the 10x to 11x FFO at the moment. And I think, personally, that kind of multiple is typically reserved for companies or sectors that are struggling, right? Let's just be pretty candid about it. And frankly, I think that kind of multiple significantly undervalues our platform, right? As I said in the prepared remarks and as Dan said, we've entered 2026 front-footed. Fundamentals in outpatient medical are strong. our portfolio is best-in-class with our dispositions now complete. Our balance sheet is a source of strength. We've overhauled our team, and we're posting strong results, right? I also think it's important to just note, the way we look at it, we think we're in a subsector of 1. There is not one direct peer out there in the public markets. There are those that have exposures to this space, but they don't have 100% exposure to it like we do. And so we are starting to expand our thoughts about our peer sets and looking at other property types with similar earnings growth characteristics. And based upon this, we think that there's expansion in our multiple that could be in front of us if we continue to execute on the strategic plan and we think that, that will create value for shareholders. So that's our mission, and that's what we're focused on right now.

I will turn the call back over to Pete Scott for closing remarks.

Great. Well, look, we thank everybody for joining the call today, and we look forward to seeing all of you in person at least many of you in person in Florida in a couple of weeks at the Citi conference. Thanks very much.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.