Thank you for standing by. My name is Tina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Healthcare Realty Trust first quarter 2026 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question- and- answer session. To ask a question, simply press star one on your telephone keypad. To withdraw your question, press star one again. It is now my pleasure to turn the call over to Ron Hubbard, Vice President of Investor Relations. You may begin.
Thank you for joining us today for Healthcare Realty's first 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. This 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 March 31, 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.
Thanks, Ron. Joining me on the call today are Rob Hull, our COO, and Dan Gabbay, our CFO. Also available for the Q&A portion of the call is Ryan Crowley, our CIO. It has been just over a year since I assumed the CEO role, and we have made significant progress in that short period of time. In many ways, we entered 2026 as an entirely new company. We added industry expertise to our revamped and more financially rigorous operating platform. We refined our portfolio, and we right-sized our balance sheet. All of this was in preparation to meet or exceed our three-year earnings forecast. I am pleased to report the hard work and immense preparation is manifesting into better results.
While one quarter does not guarantee a three-year earnings forecast, it does create a solid foundation for outperformance while sustaining the winning mentality we have worked hard to instill at Healthcare Realty 2.0. Now let's turn to our results for the first quarter. Every day, we are executing with purpose and intensity. We signed over 2 million sq ft of leases, an all-time high. We reported Same-Store NOI growth of nearly 7%, also an all-time high. We increasingly bought back more stock. We completed our first joint venture acquisition. We continue to stabilize our redevelopment portfolio, and our capital markets plan is beginning to take shape. The net impact of all this, our first quarter results were far better than expectations. We are raising both FFO and Same-Store guidance early in the year, and there is more to come on the horizon with a strong leasing pipeline.
I wanted to elaborate more on the earnings growth framework for Healthcare Realty 2.0. Earnings growth has unequivocally become the dominant metric that determines a premium multiple in the REIT industry. If you go into any AI platform and search medical office characteristics, you will note the typical catchphrases that have become synonymous with the sector. Stable cash flow, recession resistant, steady Eddie, and 2%-3% growth. In a low interest rate environment like we experienced from 2010 to 2020, when the 10-year Treasury averaged low 2%, this all sounded great. Investors were able to generate alpha in medical office with very little risk. However, with the 10-year Treasury at 4.3% today and our stock trading at an 11x FFO multiple, this simply won't cut it anymore. We see two challenges in front of us.
Put up better numbers, which we are doing, and break down these historical stereotypes. As the only public REIT focused exclusively on outpatient medical, we will be the trailblazer and redefine what success means in our sector. Let me walk you through the main pillars of organic growth. First, occupancy. Sector-wide occupancy is approaching 93% because of strong demand and limited supply growth.
We see multiple years of sustained tailwind in front of us, driven by the rapid growth of the 65+ population and the unabated shift in care to outpatient settings. At Healthcare Realty 2.0, our Same-Store occupancy improved this quarter to 92.3%, a year-over-year increase of 110 basis points. Total occupancy has improved to 90.5% and is a significant near-term earnings growth driver as we stabilize our lease-up and redevelopment portfolios. Second, annual escalators.
Under the new asset management platform, our average annual escalator on signed leases is 3%+ . I cannot overemphasize the importance of the annual escalator on earnings growth. With our portfolio NOI at approximately $650 million, escalators will be the primary driver of core earnings growth going forward. Third, retention rate. Often overlooked, retention rate is a critical driver of earnings growth. Downtime and capital expenditures, which are the silent killer of earnings growth, are significantly lower for renewal lease deals compared to new lease deals. Therefore, the higher the retention rate, the less capital we have to commit, the higher the lease IRR, the more profitable the deal is to us. During the first quarter, our retention rate was 93.5%. Fourth, cash leasing spreads.
With our portfolio optimization complete and our concentration of assets in higher growth markets, including the Sunbelt markets, I would anticipate our cash leasing spreads improving. In the first quarter, our cash leasing spread was 4.2%. Importantly, one out of every four leases we signed had a cash leasing spread greater than 5%. When you add all this up, occupancy growth, annual escalators, higher retention, and improved cash leasing spreads, we expect to generate materially higher earnings growth going forward. Our Same-Store results this quarter are a good indicator that we are heading in the right direction. As a reminder, our core earnings growth in 2026 is tracking above 5%, excluding the impact from the necessary portfolio optimization and deleveraging. I wanted to spend a moment on external growth and capital allocation, which are incremental to our organic pillars of growth.
As we recently disclosed, our capital allocation approach will remain incredibly disciplined. During the first quarter, we did exactly what we said we would do. We bought back $100 million of stock, we completed in excess of $20 million of acquisitions, and we invested $25 million in our redevelopment portfolio. Let me provide a little more context behind our priorities. First, stock buybacks. If we experience dislocation in our stock price, we will not hesitate to acquire shares. This provides us with significant and immediate accretion. We have $400 million of stock buyback capacity remaining under our current authorization. Second, acquisitions. All external acquisitions will be done in joint ventures. Joint ventures currently encompass 5% of our total NOI, so there is ample room for this to grow.
We would expect initial cash yields of greater than 7%, which exceeds our implied cap rate. In terms of magnitude, I could see us accretively allocating $50 million to $100 million of capital into our KKR joint venture in 2026. Third, redevelopments, which currently consist of 23 properties that are 64% pre-leased. Redevelopments are the primary source of the $50 million of NOI upside in our three-year forecast. We continue to track ahead of schedule. I would expect the number of assets in redevelopment to modestly tick up in the coming quarters as we front-load our spend into the earlier part of our three-year plan. This will allow us to maximize the NOI upside opportunity sooner. As a reminder, our average cash-on-cash yield for the redevelopment portfolio is 10% and comes through a combination of increased occupancy and or increased rental rate.
Importantly, none of these priorities, buybacks, joint venture acquisitions, and redevelopments, are mutually exclusive. In addition, while not part of our guidance, we are open to selling more assets, including core assets, and accretively recycling the proceeds into any one of our priorities to further improve earnings growth. Finishing now with a quick note on our board. As part of our ongoing board refreshment initiative, longtime director Jay Leupp announced he will retire after our upcoming annual meeting. I would like to provide a sincere thanks to Jay for his contributions to the organization over the years. Upon Jay's departure, the average tenure of our remaining directors is less than two years. We plan to add a new director later this year, and we'll prioritize that person's experience and diversity. With that, let me turn the call over to Rob.
Thanks, Pete. The first quarter was the company's strongest ever for leasing. Our team executed over 290 leases, representing more than 2 million sq ft. Lease economics across both new and renewal leases continued to improve. Annual escalators averaged 3.1%, and the weighted average lease term was nearly eight years, bolstering the portfolio's long-term growth profile. Tenant retention was 93.5%, driven by a number of early renewals across the portfolio. Included are eight single-tenant renewals totaling nearly 740,000 sq ft for an average extension of approximately 10 years. This meaningfully reduces our lease maturities through the end of 2027. Cash leasing spreads were strong, averaging 4.2%. Demand for medical outpatient buildings remains robust.
We continue to see favorable sector fundamentals as absorption outstripped completions during the quarter, and rental rates continued to climb. Health systems are seeing steady operating trends and investing in higher margin outpatient services. These favorable industry fundamentals are translating into better performance for our portfolio. Health system relationships remain a key area of focus as their demand for space continues to grow, improving the credit profile of our portfolio. This quarter, we saw substantial health system activity, including in Atlanta, 176,000 sq ft of new and renewal leases with Wellstar across six on-campus buildings, including a 59,000 sq ft cancer center. The renewals carry an average term of five years with a blended cash leasing spread of approximately 4%. Wellstar is a leading health system in the Atlanta MSA with an A+ credit rating.
In Charlotte, six renewal leases totaling 154,000 sq ft with Advocate Health. The average term was more than seven years with a blended cash leasing spread over 5%. Advocate Health is the leading health system in Charlotte, with well over 50% market share and carries a AA credit rating. In Upstate New York, we leased 64,000 sq ft of clinical and surgery center space to Trinity Health St. Peter's Hospital. The leases have an average term of nearly 6.5 years and annual escalators of 3%. Trinity Health is a top 10 health system nationally with a double A minus credit rating. In Charleston, three lease renewals for 55,000 sq ft with MUSC Health, maintaining 100% occupancy across two buildings.
The leases have an average term of nine years with an average cash leasing spread of nearly 14%. MUSC is South Carolina's only comprehensive academic health system, with 16 hospitals and regional medical centers. Looking ahead, occupancy gains over the remainder of the year will be driven by a robust new leasing pipeline of approximately 1.4 million sq ft, strong tenant retention, and our 490,000 sq ft signed not occupied or SNO pipeline. Turning to redevelopment, we saw a gain of 900 basis points sequentially in the lease percentage of our redevelopment portfolio. This quarter, we added two new projects, including a $25 million redevelopment of a 155,000 sq ft MOB connected to Tufts Medical Center in Boston. The building is 100% pre-leased with a 10-year term and 3% annual escalators.
We also completed a $35 million 2 MOB project located in Charlotte, adjacent to Novant Health Huntersville Medical Center. The redevelopment is 98% leased with a stabilized yield within our targeted range of 9%-12%. The two buildings will move into Same-Store once a full calendar year has passed since completion. Our results this quarter demonstrate the team's ability to drive accretive lease economics and strengthen our health system relationships. We are well- positioned to build on this momentum through the balance of the year and deliver strong NOI growth to our shareholders. Now, I will turn it over to Daniel Gabbay to discuss our financial results.
Thanks, Rob. 2026 is off to a great start. We reported normalized FFO per share of $0.41, up sequentially from $0.40, and we achieved same-store cash NOI growth of 6.9%. Additionally, FAD per share was $0.32, resulting in a quarterly dividend payout ratio of 75%. Our outperformance this quarter was driven by 110 basis points of year-over-year same-store occupancy gains, 4.2% cash leasing spreads, and our improved balance sheet. Q1 same-store occupancy finished at 92.3%, and same-store margins expanded 60 basis points year-over-year. Notably, 95% of our total NOI is included in our same-store pool. Turning to capital allocation, as Pete mentioned, Q1 was active across all our strategic priorities.
In March, we opportunistically repurchased an additional $50 million of shares as global conflicts pushed the stock market into correction territory. This brings our total repurchases year-to-date to $100 million or 5.7 million shares at a weighted average price of $17.38. At quarter end, we closed on a JV acquisition for $18 million at our pro rata share and commenced two new redevelopments with an expected cost of $31 million. We remain confident in our ability to continue allocating capital towards accretive redevelopments and selective external growth while maintaining our year-end leverage target in the mid 5x area. I would like to call out a couple of items related to our balance sheet. First, we are putting in place a new $400 million unsecured delayed draw term loan.
Our strong bank partnerships allowed us to move quickly during a period of heightened volatility. The facility is fully committed and expected to close in May. Drawn pricing is at SOFR+ 90 basis points and all-in pricing inclusive of transaction costs is approximately 4.8%. This is inside our 5% cost of debt assumption for 2026. We plan to draw the term loan in late July to repay our $600 million bond maturity with the balance funded on our line of credit. Factoring in this transaction, we would still have $1 billion of remaining liquidity on our line, which provides meaningful flexibility as we consider all of our future capital markets alternatives. As discussed last quarter, we also launched our commercial paper program.
We currently have roughly $250 million outstanding, which is fully backstopped by our line of credit. Borrowing costs today are approximately 40-50 basis points lower than our line. Finally, during the quarter, we also extended the maturities on $400 million of swaps associated with our existing unsecured term loans, locking in SOFR at 3.3% through debt maturity in 2029. These levels remain attractive as expectations for Fed cuts diminished during the quarter. Turning to 2026 guidance, which you can find on page 11 of our Q1 supplemental report, we increased full-year normalized FFO per share guidance by $0.01 to $1.59-$1.65 per share, or $1.62 at the midpoint.
We increased Same-Store cash NOI growth by 25 basis points to a revised range of 3.75%-4.75%. These results are driven by strong leasing outcomes and 4%+ cash leasing spreads in our Same-Store portfolio. Uses of capital increased $75 million for the year to reflect the incremental share repurchases and acquisitions in Q1 that we discussed earlier. Our guidance does not include any additional acquisitions, redevelopments, or incremental share repurchases for the remainder of the year. Funding sources increased by $75 million to match the capital allocation activity in the quarter. One last item before we go to Q&A. You probably noticed that we published a revised supplemental reporting package and updated investor presentation last night.
We are pleased to provide cleaner, simpler disclosure going forward in our supp on the total portfolio, while also maintaining key information and performance metrics that we have previously provided. The materials commence with our portfolio-level information across top markets and tenants, followed by our Same-Store, redevelopment, and ancillary financial information. To recap, we are very excited about our Q1 results and upside for the year. Our core earnings growth model that Pete described is working across the board, and absent the dilution from our 2025 dispositions, we are already delivering mid-single-digit growth. We therefore remain confident and laser-focused as we target the upper ends of our revised FFO per share and Same-Store NOI guidance. With that, operator, let's open up the call for Q&A.
As a reminder, to ask a question, simply press star one on your telephone keypad. Our first question comes from the line of John Kilichowski with Wells Fargo. Please go ahead.
Good morning. Thanks for taking my question. Maybe first, if we could just start with the Same-Store guide. You know, we appreciate the bump here, but the 6.9% certainly stands out in 1Q. You know, how do we think about that conservatism there? What drove the 6.9%? Was it comps? Was it just a great quarter? Is there an ability to repeat something a little bit closer to that going forward?
Yeah. Hey, John, it's Pete here. You know, I think as you pointed out, we had a great, you know, first quarter posting Same-Store of nearly, you know, 7%. The main pieces of that were, you know, we did see a pretty significant ramp up in occupancy year-over-year and also some margin improvements. That's something if you go all the way back to our strategic deck, we said those were two important metrics that we wanted to improve and we have. We also had some strong leasing in the first quarter. I think to your comments about deceleration implied in our Same-Store guidance, and I think you touched on this just a bit in your note last night. I don't really think about it necessarily as deceleration.
I mean, I think about it as an opportunity to raise guidance a few more times as the year progresses. I like to look at it as the glass is half full, not necessarily the glass is half empty. I will say we had an easier comp in the first quarter. I think that was pretty well known. If you looked at our results last quarter, or excuse me, last year, we had a tough first quarter and it ramped up significantly in quarters two through four. I still expect our growth to be quite strong, and much stronger than historical norms for the balance of the year. We might not see something all the way at that, like, you know, near 7% level, but I would expect it to continue to be strong.
Got it. That's very helpful. Then the second one, Pete, you gave some very helpful color in the opening remarks on the capital allocation opportunities and the buyback and doing what's best. I'm curious how you feel about the push and pull of doing what's most accretive, but also managing leverage. You know, you've put a ton of effort into getting the balance sheet into a good place, and now, you know, you've kind of done that. You take up leverage ever so slightly, like it's still in a good spot. What's that point at which you're like, "Okay, the buyback is now off the table. You know, we can't lever up past this, and the incremental proceeds need to go towards," like you said, the JVs or the redev versus that?
Yeah. It's a good question, and I'm glad you brought it up because I didn't want to spend a lot of time on it in the prepared remarks and on this call. You know, in the first quarter, we did all three. I think it was a nice mix of buyback. We did a JV acquisition and we allocated capital to redevelopments. All three are accretive to our earnings growth, so we're pleased about that, especially since we can utilize balance sheet, you know, capacity for it. I think it's the right mix to continue to focus on all three. I will highlight the word disciplined, right? I have seen, and I'll again repeat the O word pop up from time to time, and I would not characterize it as that. I would characterize this as a very, very disciplined capital allocation approach, to your point about leverage.
I would also point out that, you know, we will not shy away from selling more assets, including core assets, right? Not selling lower quality. That was a lot of what we did last year to get the portfolio to where we wanted it to be today. Our focus could be on selling more core assets and accretively recycling that back into the three priorities. We just think it's good to have a good mix of different, you know, options available to us, and we think it's the right mix right now.
Got it. Thanks, Pete. Congrats on a great quarter.
Great. Thanks, John.
Your next question comes from the line of Nick Yulico with Scotiabank. Please go ahead.
Oh, hi. Good morning, everyone. I wanted to first ask on, you know, total occupancy. I know you have that 92%-93% target. You said you're at 90.5% in the first quarter. I think, you know, sort of twofold here. One is just latest thoughts on, you know, sort of the timeframe for achieving that target. A component of that is leasing up development, redevelopment, where there is just some pure vacancy today. I think, Rob, you gave some stats on, like, a signed not occupied pipeline, but I'm wondering if you had any of that signed not occupied specifically you could cite for that development, redevelopment pool.
Hey, Nick. It's Pete here. I'll start, maybe I'll have Rob jump in on the backside. You know, we do see redevelopments as a great way to invest capital and get a nice cash on cash return. It's the 10% cash on cash return that we are targeting on average. You know, as we think about that portfolio, we did improve our disclosures a couple quarters ago to track the percent, you know, pre-leased within that bucket.
That's actually where a lot of our SNO sits right now. Our 90.5% of occupancy today does not, you know, get the benefit of a lot of that pre-leasing that we've been able to do in the redevelopments, but, you know, we will continue to disclose that. As you saw, there's 900 basis points effectively of sequential occupancy gains within that, or I'd say leased gains within that portfolio. It hasn't turned into occupancy yet. I don't know, Rob, if you want to give any more, you know, color behind that.
Yeah. I'll just add to that. The substantial in our SNO pipeline, so 490,000 sq ft, say nearly half of that is in the lease up redevelopment bucket. A substantial amount, which is where we see a lot of the opportunity to drive occupancy over the course of this year. I would also say that our pipeline remains strong at the 1.4 million sq ft. That's a good leading indicator of where we're headed. Tenant retention is still a major source of occupancy gains, and we expect all three of those to contribute meaningfully this year.
Okay, great. That's, that's really helpful, guys. Just second question, Pete, I want to go back to the commentary about, you know, you're open to selling core assets. I guess then also going back to your point about, you know, earnings growth and that being a focus. Is this more than just a sort of opportunity to sell a, at a strong cap rate and sort of arbitrage that on the investing side, which is maybe like a one-time earnings benefit? Or are you also, you know, open to selling core assets because in some ways you're gonna get a low cap rate, and they're also structurally slower growth assets for whatever reason? Maybe they're safer profile, the lease, whatever it is, that if you're actually selling core assets, you could be improving sort of a long-term growth profile. Thanks.
Yeah. I would go back to my comment in the prepared remarks about 5% of our portfolio, the NOI being in joint ventures right now. We get some pretty nice advantageous fees. Any going in, you know, cap rate for like a core plus asset is an enhanced yield to us with regards to our initial, you know, cash yields. I think that's one of the beauties of JVs. That's why a lot of REITs employ JVs as an important part of their, you know, business model.
I think 5% is low. I think 5% could grow. I won't give a number as to where it could grow, but I think it could grow, you know, well beyond 5%. I think I look at selling core assets and recycling that capital back into potentially JVs as a use of proceeds could be done accretively, and I think would be a good thing for our portfolio as well as for shareholders.
Okay. Thank you.
Thanks, Nick.
Your next question comes from the line of Seth Bergey with Citigroup. Please go ahead.
Hi, good morning. Thanks for taking my question. I just want to kind of go back to the JV comments. You know, how are partners thinking about, you know, how many partners are you kind of in discussions with that are interested in investing in outpatient medical? Can you just talk about kind of the overall depth of the transaction market and the interest in the outpatient medical space?
Yeah. Maybe I'll start with that, and Ryan can talk briefly about the transaction market. You know, as you think about our JV exposures, we do have a few different, you know, JVs, but there's really just one at the moment that is what I would call more a growth JV, and that's with our partner at KKR. That was set up a couple years ago. There was a pool of assets that was contributed by the company into that joint venture. The hope was that that joint venture would grow over time by acquiring, you know, third-party assets, or I'd say external growth is another good way to characterize that.
Nothing happened over the last couple years really because there was no capital or balance sheet capacity here for any desire at Healthcare Realty to grow, even though our partner had desire to grow. I would say what we're focused on right now is growing with that, you know, one partner. I don't know that I want to get into any additional JVs that we could potentially look to set up over time. The other JVs that we do have, they're more discreet assets. Those were set up many years ago prior to that, you know, KKR joint venture, and I would not look at those necessarily as growth ventures. Our growth is really gonna be focused with that one partner right now. Ryan, do you want to talk about a transaction market briefly?
Sure, Pete. I'll say that the momentum that built from the transaction market last year has certainly carried into 2026. If anything, the strength of that private bid has only increased and financing remains readily available. There's plenty of demand and liquidity out there. If you want me to talk about cap rates, I'd say that core assets are pricing today in the 5.5%-6% range. Frankly, core plus isn't much above those levels.
Great. Thanks. Then just coming back to some of the, your opening comments about retention and escalators. Just given that occupancy for outpatient medical is kind of in that low 90%s place, where do you think those metrics could ultimately go in terms of, you know, just new lease economics?
Yeah. Good question, Seth. I mean, what I would say is we completely revamped our approach to leasing about the middle of last year, and we've become just much more financially rigorous as we underwrite deals. I think what you're starting to see is the benefits of that change is starting to work its way into both the amount of leases we're getting done as well as the, you know, the output of those. Retention, as you point out at 93.5% is really strong. We did get the benefit of doing two very large leases in our single tenant bucket that were pushed out quite a way.
If you look at our weighted average lease term, it actually almost went up about one year, this quarter, which is a pretty big change in one quarter. I would say from a retention perspective, I don't know that I would model 93.5% going forward, but if it used to be 75%-80%, I'd like to think that it could be more like 80%-85% going forward. On the cash leasing spreads, you know, we did put up a good quarter.
This quarter, it was over 4%. I'll point out one out of every four lease deals that we did was greater than 5%. We are focusing heavily on that to try and push as much as we can on that metric. You know, I'd like to think it can even improve upon, you know, 4%, but this will take perhaps a little bit of time to continue to work into the system, but we are optimistic, and we'll continue pushing.
Great. Thank you.
Your next question comes from the line of Michael Carroll with RBC Capital Markets. Please go ahead.
Yeah, thanks, Pete, I wanted to circle back on those early renewals that you were able to execute during the quarter. I mean, what drove those decisions? Is that something that you approached the tenant about, or did they approach you about it? Given that those assets now have much longer term, is that something that you sell now or could potentially sell, just given that you have about 10 years on some of those leases?
Yeah, I mean, we certainly could. you know, I don't know that I can go into each one of those deals. It would take too long on this call to go through all the different, you know, assets within that bucket. Certainly if it's a single tenant, you know, expiration, and it's got less term on it, I mean, you guys can go talk to the folks in the triple net world, but when there's not a lot of term on a single tenant asset, it's really not worth anything.
We've certainly unlocked some value in extending those. I won't really comment at the moment on, you know, what our plans are for those in particular. you know, I will say extending the weighted average lease term was actually quite important. We got a question on that a couple of quarters ago, and I felt confident we were going to do it. I would say many of these discussions on those lease deals took multiple quarters to get done. I think you're seeing multiple quarters of work in our results, that we put out in the first quarter.
I would just add to that, Pete, you know, to your question about the systems approach us. Yeah, in some cases they did. I would say that it's kind of an indication of the environment that we're in. You know, vacancy is getting lower. It's more expensive to build a new product. We're seeing, you know, uptick in discussions with health systems, and I think that's where you're seeing us able to drive lease economics.
That's helpful. On the investment side, I know, like the call, I mean, there's been a lot of discussions on how attractive some of those opportunities are. It does look like given the stuff that you've done year-to-date, you're kind of approaching the top end of the guidance range provided. I mean, how do we kind of compare those two? You're seeing good opportunities, but it's not reflected in guidance. Is that just you trying to be cautious, not wanting to overextend yourself without having some type of source of funds coming in? How do we explain those two differences?
Yeah. I mean, one thing, then I'll turn it to Dan. I mean, look, Mike, it is early in the year, obviously we put up some good results, and we're able to raise guidance in the first quarter. I feel quite pleased with that. You know, there's more quarters to go, more for us to do, and I think there's more upside for us to go capture as well as we execute with purpose. Maybe I'll have Dan talk about balance sheet capacity.
Yeah. Mike, you know, as we started talking about at the beginning of the year, we have balance sheet capacity. We've always talked about, you know, having upwards of $100 million to $200 million, sort of in that range, of balance sheet capacity as we entered the year. We've used some of that. We continue to have capacity. As Pete mentioned, we have the ability, if there's the right assets to sell and harvest at great valuations, we can recycle more capital into external growth. As it relates to our guidance specifically, you know, we're taking the approach with guidance that what you see in sources and uses is what we've announced to date, we don't include any future acquisitions or share repurchases in our guidance going forward.
We've given folks, you know, our outlook on for the year of dispositions as well, which is tracking nicely. I think we're already including, you know, this $45 million loan repayment we talked about in our press release being repaid. Actually, it's this week. We are halfway on our dispositions already towards the midpoint of our target. Feeling good about those sources and uses. As we have more activity, we'll continue to update those ranges and update you in the market as those transpire.
Great. Appreciate it.
Thanks, Mike.
Your next question comes from the line of Michael Goldsmith with UBS. Please go ahead.
Good morning. Thanks a lot for taking my question. I'm here with Justin Massey. Maybe first, your same-store occupancy was up 110 basis points to 92.3% in the quarter. Maybe the question is, how high can occupancy go in the same-store portfolio? Maybe asked another way, how should we think about frictional vacancy for your portfolio in outpatient medical?
Hey, Michael, it's Pete, and thanks for picking up coverage. We appreciate it. I mean, look, we're in the low 92% area. If you go back to our strategy deck, we said we'd like to get to 92%-93%. I think as we've improved our portfolio, I'd like to think we can get closer to, you know, the 93%. We've said actually that we believe there is some absorption as the year progresses as well, which is a positive, you know, for us, and that certainly will help our same store. You know, as to your question around just, like, frictional vacancy, I mean, I think that's probably about right. Like, you know, mid to high single digits.
I mean, we just don't have a very, very large triple net, you know, single tenant portfolio, which typically when you see other REITs that own assets like we do, will have higher, you know, occupancy levels because of that. You know, we have a big multi-tenant portfolio, which is actually we think a positive in an environment where you've got more demand and less supply right now. I think you'll always have a little bit of vacancy as doctors retire and things like that. You know, but I feel like we're getting close to it. We're very focused on getting the totqal occupancy in the portfolio, the 90.5%. I mean, getting that up to 92%-93%. I mean, that's gonna be the big, you know, opportunity for us as we think about exceeding our three-year forecast over the next few years.
Got it. Then just as a follow-up, you know, when you annualize your first quarter normalized FFO, you get pretty close to the high end of the guidance range. Just wondering if there's some conservatism baked in or another drag outside of the August debt maturity that we should be aware of, or just how we should think about it. Thanks.
I think you're thinking about it the right way. The only drag I would point out is, you know, what's gonna happen with that, you know, bond that does come due in August. We did put out that delayed draw term loan, the announcement on that. I feel like we've been able to significantly de-risk that. Frankly, we've got plenty of runway now with that term loan. You know, I'm a big believer in the capital markets. You can never time them perfectly, you can certainly access those markets at times when you can become a price maker and not a price taker. I felt like we were in the price taker bucket without putting that term loan in place and with that bullet maturity coming up in August.
With the dislocation in the markets the last couple of weeks, we pivoted very, very quickly, and I credit Daniel Gabbay and his team for putting that together, and I thank our banking partners for that because I think the all-in cost on that is in the mid-fours. You know, when you compare that to bond pricing today, we'd probably be 50 to 75 basis points wider. That's a really good financing for us to put in place.
Thank you very much. Good luck in the second quarter.
Thank you.
Your next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets. Please go ahead.
Hey, good morning, everybody. Pete, appreciate you highlighting some of the various items that you're targeting to improve the growth profile and just returns associated with medical office. If 2%-3% internal growth doesn't cut it for the reasons you highlighted, I guess, what's the right growth level you think is achievable and just the timeline it takes to reset that internal growth based on the lease maturity schedule?
Yeah. Good question. I mean, yeah, I agree, 2%-3% on ROI growth. Just as much as I'd like to say it works, it just won't work anymore. you know, so I don't know that 7% is the right number for us to anchor ourselves to right now for the reasons I mentioned in a question before, but probably something right in between, and then I will go back and focus you on a comment I said in my prepared remarks. I get this is, you know, us, you know, working around, some magic numbers behind the scenes.
If you back out the dilution from the portfolio optimization and the de-leveraging from last year, and you look at our actual organic growth this year, it's actually, you know, above 5%. I'd probably start anchoring around a number like that. I mean, obviously we have other things we have to factor in as well with regards to, you know, our balance sheet, and our refinancings over the next two years. I think from a pure organic growth perspective, that's probably the best number I can anchor you to.
Yeah. That's helpful. Then switching gears, you know, Ryan or Pete, as a follow-up to some comments earlier, you flagged the cap rates are in the 5.5%, 6% range for core assets. Core plus isn't much above that. I mean, is that what we should be thinking about on future dispositions? What gives you the confidence then that you can source deals at going-in yields in excess of 7%, I think you said in the prepared remarks, especially if these are, you know, lease-up opportunities with higher growth potential?
Well, I point you to the deal we just did in Birmingham. It's a $90 million deal, core asset, 100% occupied, you know, newly developed, 12-year weighted average lease term. You know, the going and cap rate on that was a 6%, and our going and yield was in the, you know, low 7%s from a cash perspective. I'd say from a GAAP perspective, which we don't really talk about a lot, you're actually north of an 8% on that. As we think about stock buybacks and, you know, the FFO yield versus, you know, putting capital to work in investments, we do have to look at, you know, GAAP yields from time to time.
That's a core plus asset that we feel quite good about the accretion on that because the going and yield is actually wider than or above our implied cap rate, and that's an important metric that we would look at. I'd say if we were looking to sell core assets, I would expect to be getting pricing even inside of that. That would be our take. Not every asset we're gonna sell is gonna be core. I think we will look to do just some typical core plus pruning as well. To the extent we looked at selling core assets, and we've got a lot of them, I would expect us to do quite well if we decided to transact.
Thanks for the time.
Yep. Thanks, Austin.
Your next question comes from the line of Rich Anderson with Cantor Fitzgerald. Please go ahead.
Hey, thanks. Good morning. Perhaps a cynical question first. You said at the top, you know, and you just kind of went through the growth numbers, steady Eddie growth isn't gonna cut it in this market, and you're saying maybe somewhere between 3% and 7% will cut it. I recognize you can't be very precise there. I wonder if that'll sway the conversation around the growth profile of MOBs.
We'll see. I guess the question I have is, if you're solving for a growth level and then sort of work backwards to achieve it, there have been dangers in the past of people doing unnatural things to sort of break the status quo. How do you avoid, you know, sort of the complications around that? How do you avoid, you know, sort of, losing reputational capital if the rest of the MOB market isn't sort of buying into this new paradigm shift? I'm just curious, how do you, how do you manage all of those sort of moving parts as you reassess-
Yeah
... the growth of the business?
Rich, good question, thanks for your cynicism. Let me just spend a second on the value creation opportunity and maybe expand on my premium multiple comments that were in the prepared remarks. You know, if you think about our current valuation, in my opinion, that implies basically minimal to no growth going forward, right? I mean, I'm biased. I think it's way too low. I think it implies very little growth when you look at how we stack up within the entire REIT industry. I think it's very much backwards looking. I respect that that's where we are right now, and we're still, you know, less than a year to putting out our strategic plan.
As I said, we have a challenge in front of us. One, we have to put up better numbers. I think this quarter, and actually if you look at the last couple quarters, they've been much better than they've been historically. We obviously have to redefine what we think success is in our sector. I would say success for us is not going from an 11x FFO multiple to a 30x FFO multiple. I mean, I, I tip my cap to those companies that trade at those stratospheric levels, then they're doing a fantastic job keeping the market excited, it's great for them. Success for us is not going all the way to those stratospheric levels.
It is taking our multiple from 11x to something commensurate with where I think other similar growth characteristics or other REIT sectors that grow at a similar level to where we can grow are. They're not at 11x . They are better than 11x . I think they are about 3x- 4x better than where we trade right now. I'll let you guys do the math, that's pretty significant value creation from where we trade today. I'm not looking to all of a sudden persuade everybody and say, oh my God, these guys are now gonna grow at such an amazing level that they deserve this stratospheric level type multiple. We're very much rooted in realism here and what we think the right total return profile is. It's a lot better we think from an earnings growth perspective than the old steady Eddie model.
Okay. Perfectly fair. Thanks for that, Pete.
Yeah.
Second question, on selling core assets. I know it's a little bit of a conversation piece today. You know, what governors do you have on yourself to, you know, limit how much of that you are willing to do? Because, you know, you don't want to be guilty of throwing the baby out with the bath water. I recognize that there is, you know, sort of an accretive transfer of capital. Someone just brought up core numbers, core cap rates for core assets, let's just say are 5.5%-6% and not so core are just a little bit above that. I just wonder what the real, you know, risk reward benefit is of being-
Yeah
...overly aggressive with core to asset sales. Thanks.
Yeah. I will go back to the word disciplined, Rich. Like we're gonna be disciplined, and I said we are open to selling core assets and recycling that capital accretively. If you go back and take a look at all the numbers I've been discussing in here, they are all very modest type figures. I would not look at this as we're just going and liquidating the highest quality stuff. You know this even better than we do. There's a limit from a tax gain capacity from how much we can do as well.
I think in moderation, we will certainly look to dispose of or potentially contribute some core assets into, you know, ventures as well, where we still retain a stake in those. Like I said, we're looking at all options. I knew we'd get questions on balance sheet capacity and our ability to recycle capital into our capital allocation priorities, and I felt like just pointing out we're not just gonna utilize the balance sheet for this and lever up. We will certainly look at, you know, taking advantage of our portfolio to allow us to continue to further that.
Okay. Sounds good. Thanks very much.
Thanks, Rich.
Your next question comes from the line of Daniella de Armas Rosales from JPMorgan. Please go ahead.
Hi. Thank you for taking my question. Your rent spreads in the quarter were strong with 4% average, but can you give us some color on the 13% of renewals that had negative spreads? Do you think those roll downs are largely behind you?
Yeah. We tend to focus on the blended number of, you know, over 4% and actually achieving a lot higher on the upside. I would say that selectively, if we feel like, and I would go back to my comment earlier, if we feel like the better play for us is to retain a tenant as opposed to seeing them walk from a building, we will at times selectively, you know, look at modest roll downs, because we will look at the whole financial package as we look at this.
What's it gonna cost to re-lease that? What's the downtime? What's the CapEx? I don't know that I would say, you know, going forward, we're always gonna have every lease 5% or above. We'll certainly strive to do something like that. At times, we may selectively make a decision to allow a tenant to stay for a variety of reasons. At the end of the day, we would make that decision because the IRR for that lease is much better than the alternative.
Thank you.
Your next question comes from the line of Michael Stroyeck with Green Street. Please go ahead.
Thanks, good morning. Maybe going back to Same-Store NOI growth, are there any known tenant move-outs or any other moving pieces that you expect to weigh on NOI growth during the rest of the year outside of just, you know, tougher year-over-year comps?
No. I mean, if I look at the remaining lease expiration for 2026, I mean that number, if you go back and look last quarter versus this quarter has come down significantly. I gave you some thoughts on retention before in the 80%-85%, you know, area. I'd expect the remaining, you know, lease expirations for this year to kind of track within that range. We'll retain the vast majority of those tenants. There's nothing that jumps out to me. I would just point out that we had a bit of an easier comp this quarter that we won't have the next couple quarters. I would still look at the blended, you know, midpoint of 4.25% today.
As we've said, we think there is probably a little bit of upside as the year progresses on that, or at least that's what we would hope if we execute. That's still really strong growth. While we are focusing on the strong number this quarter, you know, one quarter you gotta average out over an entire year. I think for the year it's still quite strong growth relative to historical norms.
Got it. That's helpful. Then maybe following up on an earlier acquisition yield discussion. You outlined the 6% yield going to 7% on that recent Alabama deal. Just clarifying, is that 7%+ yields that you're underwriting, is that more of a stabilized yield or is that actually, you know, expected year one that you expect to see?
That's year one, that's not a stabilized yield. That's what we're going in on.
Okay. Understood. Thanks for the.
Yeah, Mike, could just point out that's, you know, when we talk about the JVs, that's inclusive of the advantageous fee arrangements that we have with our partners that we've talked about so far this year.
Got it. Okay. That makes sense. Thanks.
Your final question comes from the line of Juan Sanabria with BMO Capital Markets. Please go ahead.
Hey, this is Robin Hanlon sitting in for Juan. Just curious on the strategic three-year plan, if there's any updates compared to initial expectations and whether you could share with us the next low-hanging fruits?
Yeah. Look, I think what I would say on that is that we're tracking ahead of schedule at this point in time. Frankly, we're one quarter into a 12-quarter forecast. To be tracking ahead of schedule, I think is a testament to the hard work that the entire organization has put into preparing for kicking off this three-year, you know, forecast. Also for the financial rigor that we're improving in this organization. I hate to continue to repeat that word, but I think if you guys were in here every day, you would see it and be quite impressed. You know, the other thing I would just point out with regards to this year, I mean, this year was expected to be a flat year from an FFO perspective.
I think one quarter into the year, we're already exceeding from that perspective, and we'd like to continue to have an opportunity if we execute to increase guidance for the balance of the year as we go along. Obviously, we have to continue to execute with the intensity that we have been. As I would say, I feel like we're tracking ahead of schedule. Not ready to say much more than that at this point in time being one quarter in. It's good to be saying that at least that early on.
I was just also curious on if there are any signs of supply picking up and I'd be curious to know how far rents are off from being able to pencil.
Wanna talk about supply, Ryan? 'Cause it really hasn't ticked up.
No. We've seen new completions drop in recent quarters and new starts have remained fairly flat. They're actually tracking well below historical industry average of call it 0.5%-2% in what is a 1% of inventory range. No, not much on that front.
Thank you.
I'm with no further questions in queue. I will now turn the call back over to the company for closing remarks.
Great. Well, thanks everyone for joining the call. We have a couple industry conferences coming up later this month. We look forward to seeing you there. If we don't see you there, we'll see you at Nareit. Thanks very much.
Thank you again for joining us today. This does conclude today's presentation. You may now disconnect.