Healthcare Realty Trust - Q2 2024

Transcript

Moderator (participant)

Good afternoon. Thank you for attending the Healthcare Realty Second Quarter earnings conference call. My name is Cameron, and I'll be your moderator for today. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. I would now like to pass the conference over to your host, Ron Hubbard, Vice President of Investor Relations. You may proceed.

Ronnie Hubbard (VP of Investor Relations)

Thank you for joining us today for Healthcare Realty Second Quarter 2024 earnings conference call. Joining me on the call today are Todd Meredith, Chris Douglas, and Rob Hull. A reminder that, except for the historical information contained within, the matters discussed in this call may contain forward-looking statements that involve estimates, assumptions, risks, and uncertainties. These risks are more specifically discussed in the company's Form 10-K filed with the SEC for the year ended December 31, 2023. These forward-looking statements represent the company's judgment as of the date of this call. The company disclaims any obligation to update this forward-looking material. The matters discussed in this call may also contain certain non-GAAP financial measures, such as funds from operations, or FFO, normalized FFO, FFO per share, normalized FFO per share, funds available for distribution, or FAD, net operating income, NOI, EBITDA, and adjusted EBITDA.

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

Robert E. Hull (EVP)

Thank you, Ron, and thank you, everyone, for joining us today. Healthcare Realty had a strong second quarter. We are making notable progress on our capital allocation objectives, and we are accelerating our operational momentum. For the second quarter, normalized FFO was $0.38 per share. This was impacted by the previously disclosed Steward revenue reserve. Without the reserve, our results were $0.39 per share. Based on strong execution and momentum generated in the first half, we increased our full-year 2024 FFO guidance midpoint by $0.005. The increase would have been about $0.01 more without the reserve. In terms of capital allocation, we expect to generate more than $1 billion of proceeds from completed or planned JVs and asset sales. Our new JV with KKR is already growing, and we recently announced an expansion of our existing JV with Nuveen.

We expect about 70% of total proceeds to come from asset contributions to these JVs. To redeploy this capital, we moved early in the second quarter, repurchasing stock at discounted levels. To date, we've repurchased almost $300 million at an average implied cap rate of 7.5%. With JV contribution and asset sale cap rates at 6.6%, this equates to 90 basis points of positive spread, or well over 100 basis points, including JV fees. Looking ahead, we will remain opportunistic and continue repurchasing equity if it's accretive. Turning to operational momentum, we're seeing strong leasing trends and accelerating occupancy gains. The second quarter marks the fourth consecutive quarter with more than 400,000 sq ft of new leases signed, and our first-half multi-tenant occupancy gain of 55 basis points was solidly above the top end of our first-half bridge guidance.

We expect this momentum, this strong momentum, to continue into the second half and 2025. I'm especially pleased with our second quarter retention. This is our second consecutive quarter at the 85% level, which has improved materially from the mid- to high 70s last year. Higher retention comes with the benefit of avoiding lost rent from downtime and avoiding higher tenant improvement dollars to re-tenant vacant space. I want to commend our leasing and operations teams. Their efforts to step up service levels and reduce move-outs are really paying off. Our operations team is also successfully controlling operating expenses. Second-quarter expenses declined year-over-year and are nearly flat for the first half. We expect growth in operating expenses to be contained in the 2%-3% range for the full year.

It's worth noting our net operating expenses are expected to grow well below 2% in 2024 after taking into account tenant reimbursements. As a result, we are seeing meaningful margin expansion. The combination of strong occupancy gains and well-controlled expenses is translating to higher NOI growth. Without the Steward reserve, same-store NOI grew 3.5% in the second quarter, and total multi-tenant NOI grew 3.9%. Both of these are at the high end of our guidance ranges. With strong momentum in the first half, we are steadily driving multi-tenant NOI growth toward the 5% level. Turning to maintenance CapEx, spending on TI and commissions is elevated, as expected, based on strong new leasing volumes. This investment in positive absorption is revenue-enhancing capital. In terms of capital allocation priorities, this is our highest return on investment by far.

Excluding this revenue-enhancing capital, which we estimate to be $20 million-$25 million this year, our dividend is expected to be fully covered going into 2025. Looking at the balance sheet, we expect our leverage to trend lower. Once we complete the announced JV and asset sale transactions, leverage is expected to be approximately 6.4x. We expect leverage to improve further going into 2025 as occupancy gains flow through to higher EBITDA. Now I'll turn it over to Chris to discuss results, guidance, and the balance sheet. Chris.

J. Christopher Douglas (CFO)

Thanks, Todd. The first half of the year has been marked by strong operational and capital allocation execution. Normalized FFO per share for the quarter was $0.38. Excluding the previously disclosed $3 million Steward revenue reserve, FFO per share was at the upper end of our quarterly guidance of $0.39. Same-store NOI for the quarter without the revenue reserve improved 50 basis points sequentially to 3.5%. Multi-tenant NOI growth improved to 3.9%, which is at the upper end of our bridge expectations for the first half of the year. The strong NOI performance was driven by better-than-projected absorption and expense controls. Revenue growth benefited from 122,000 sq ft of sequential multi-tenant absorption and 2.9% cash leasing spreads. The absorption outperformance came from a combination of better-than-planned new lease commitments and materially lower move-outs. Tenant retention for the quarter improved to 85.5%, up from 79.3% last year.

Cash NOI margins improved 50 basis points sequentially and 70 basis points year-over-year as a result of the occupancy gains and strong expense controls. Year-over-year, quarterly operating expenses decreased almost 1%, and net of recoveries were down almost 3%. This came from discipline and proactive efforts, especially on labor costs and property taxes. Labor costs declined 2.0% year-over-year. Property taxes decreased 1.5% from successful property tax appeals late last year. We will lapse some of these benefits in the second half, but expect total full-year operating expenses to be well below 3%. Operating expenses at or below our in-place contractual escalators of 2.8%, lest the full impact of absorption drop to the bottom line and improve overall NOI margins. Turning to capital allocation, JV contributions and asset sales have generated $400 million of proceeds year to date.

The proceeds funded existing capital commitments and $295 million of stock buybacks. The average repurchase price was $15.89, representing a 7.5% implied cap, or approximately 20% discount to NAV. For the year, we expect over $1 billion in total JV and asset sale proceeds. This will fund $200 million of existing capital commitments and $800 million of combined debt repayment and share buybacks. The $800 million of capital allocation proceeds are expected to generate over $0.01 a share of accretion in 2024 and over $0.025 annualized. FFO per share guidance for the year was increased and reflects the capital allocation accretion. In addition, the updated guidance incorporates the operating assumptions on page 30 of the supplemental, including a reduction in expected G&A expenses and lower straight-line rent from asset sales.

The midpoint of guidance does not assume repayment in 2024 of the $3 million Steward revenue reserve taken in the second quarter. It does assume they will continue to pay monthly rent of approximately $2 million as they did in June and July. Looking to the balance sheet, run rate leverage is 6.4x, including the expected debt repayment for remaining asset sales and JVs. The debt repayment is expected to pay off the $250 million term loan that expires next July, which will reduce 2025 debt maturities to less than $300 million. The combination of our operational and capital allocation momentum will drive an improved dividend payout ratio and lower leverage moving into 2025. I'll now turn it over to Rob for more details on our leasing progress.

Robert E. Hull (EVP)

Thanks, Chris. My comments today will be focused on multi-tenant occupancy gains and a strong leasing momentum. We exceeded our bridge guidance in the first half of the year and expect further gains in the second half and into 2025. Multi-tenant occupancy improved sequentially by 37 basis points, or 122,000 sq ft. Coupled with the first quarter, net absorption for the year in our total multi-tenant portfolio was 183,000 sq ft. At this level, we exceeded the top end of our bridge guidance for the first half of the year by over 30%. Our outperformance was driven by greater-than-expected new lease commencements and a move-out rate that was over 300 basis points lower than historical levels. Over the last three quarters, we gained 112 basis points of occupancy in our multi-tenant portfolio.

This puts us on track to deliver the 150-200 basis points of multi-tenant occupancy gains published last November in our five-quarter bridge. It is also worth noting that the legacy HTA assets have gained 172 basis points of occupancy over the same period, highlighting our ability to drive absorption in that portfolio. Strong absorption led to total multi-tenant NOI growth of 3.9% for the second quarter at the top end of our first-half bridge guidance. Our leasing activity this year has been supported by favorable supply and demand fundamentals. Occupancy across the sector continues to climb, and new MOB starts continue to trend lower. This quarter, absorption in the MOB sector reached 5.5 million sq ft, the most on record since the data has been tracked. Health system top-line revenue and our operating margins continue to improve. Providers are seeing solid outpatient volume and revenue trends.

Longer term, we expect demand to continue rising. Spending on healthcare services is expected to increase at 5.6% annually over the next decade. Over the same time period, the over-65 age group will grow at more than nine times the rate for the remaining U.S. population. And those over 65 are the largest users of healthcare services, spending four times more than those under 45. The combination of limited new supply and rising demand creates a tailwind to support ongoing leasing momentum. New signed leases in the second quarter totaled approximately 432,000 sq ft. Notably, this marks our fourth consecutive quarter above 400,000, an important part of the equation driving our projected gain of 100 to 150 basis points of absorption this year. Our new lease pipeline reached 1.9 million sq ft in the quarter, its highest level ever.

This gives us visibility and positions us well to achieve projected absorption gains outlined in our bridge. Our team has executed well in the first half of 2024, delivering a robust level of new leasing and outsized absorption. With current multi-tenant occupancy at 85.9%, we are in the early innings of a multi-year plan to reach 90% across our multi-tenant portfolio. This will drive continued absorption and outsized NOI growth in 2025 and beyond. Now I'll turn it back to Todd for some final remarks.

Thanks, Rob. Now I'll just make a few more comments before we shift to the Q&A portion. As our announced JV and asset sale transactions are completed over the next quarter or so, we expect to have excess proceeds to redeploy. In the near term, our capital allocation priorities are first to fund our existing obligations, such as the positive absorption capital I mentioned, which is our highest return on investment by far. Second, to repurchase stock accretively if the price trades at a discount. And third, to repay debt, keeping our leverage neutral or trending lower. So 2024 is shaping up to be an important year for HR in terms of building momentum and executing on our capital allocation and operational objectives. We're increasing 2024 FFO guidance based on strong first-half results.

External tailwinds of limited MOB supply and robust outpatient demand are bolstering our outlook for the second half of 2024 and 2025. Full dividend coverage is well within reach and poised to keep improving in 2025 and 2026. And Healthcare Realty's balance sheet is strengthening with leverage expected to trend lower. Cameron, operator, we're now ready to move to Q&A.

Moderator (participant)

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking a question, and we will pause here briefly as questions are registered. The first question is from the line of Juan Sanabria with BMO Capital Markets. You may proceed.

Robin Haneland (Senior Equity Research Analyst)

This is Robin Haneland. This is Robin Haneland and I'm with Juan. Just from Steward, what's the expectation for how much space they'll look to keep? Are they looking to lower any contractual rent? How does it compare to the market?

Todd Meredith (CEO)

Sure, Robin. This is Todd. It's very early to really be speculating on where that may go. Obviously, we all are paying attention very closely to what may be happening on the hospital front, and that's clearly driving this process through the bankruptcy process. It's still very early, excuse me. So we are not down to a point where we're engaging. I think the good news is the outpatient space is needed, and it will kind of play out after the hospital pieces are sorted out. So we're really not speculating. The one thing I can say about rents is we've done an assessment. We don't view that there's any material difference in terms of where our rents are versus markets. We feel very good about that. And obviously, any other speculation about space and what will be used or not is just way too early to tell.

We're very encouraged by what we're hearing, generally speaking.

Robin Haneland (Senior Equity Research Analyst)

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

Todd Meredith (CEO)

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

Robin Haneland (Senior Equity Research Analyst)

Okay. Thank you.

Todd Meredith (CEO)

Thank you.

Moderator (participant)

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

Austin Wurschmidt (Managing Director)

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

Todd Meredith (CEO)

Sure. Sure. Good question. Obviously, we're pleased with being around 85% now for a couple of quarters. Generally speaking, single-tenant tends to sort of bring the average up a little bit. The mix isn't very high, as you know, in single-tenant versus multi, but it brings it up maybe 1% or so year to date in this quarter. But I would say, generally speaking, we expect the multi-tenant to really be in that 80%-85% range. Obviously, we hit some numbers that were in the mid- to upper 70s% last year as we were continuing to work through the integration of the portfolio, increasing our service levels across the whole portfolio. And we've really seen that come around and really turn out to really strong retention. Service levels are very strong. The team is fully in gear.

I think also on the leasing side, we're making very concerted efforts where we see tenants who may be thinking about leaving, working with them aggressively to see what we can do to retain them. So it's a joint effort across all of our teams, and I think it's really paying off. We do think we can sustain this at sort of 80%-85%. Obviously, any given quarter can vary, but I think importantly, over the timeframe you talked about, the rest of this year, next year, we'll be looking to produce 80%-85% and really similar levels across multi and single, generally higher in single, but in that same range and working on the backfill on both multi and single to not only backfill, but create positive absorption.

Austin Wurschmidt (Managing Director)

That's helpful. And then just maybe hitting on the guidance piece, implied kind of back half, same-store growth for the multi-tenant portfolio. I think is that that lower end of that 4.4%-5.5% range that you expect to achieve in the back half. Is that conservatism or you haven't really pulled forward the better performance in the first half, or is there something else that's changed from a timing or back half growth perspective? That's all for me. Thanks.

Todd Meredith (CEO)

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

Moderator (participant)

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

Michael Griffin (Senior Equity Research Analyst)

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

Robert E. Hull (EVP)

Yeah. Hey, Michael, this is Rob. Yeah, you're right. The cash leasing spreads were 2.9% this quarter. And what I would say is that we've noted this year we're really focused on driving occupancy. And I think our results are coming through where we've had a lower move-out rate, but we've seen increased occupancy. And that comes in two forms. Certainly, in places where we can push rents, we're doing that where market dynamics are strong and we're able to push even above kind of the averages that we put out there. But I think it also points to where we have some markets where maybe more price-sensitive markets, we're being more aggressive about negotiating those deals to keep occupancy and avoid costly downtime and incremental TI from backfilling space. So it's really kind of working the tails and pushing aggressively on the top end.

And then on the bottom end of that spread, you noted that was more where we're just being more aggressive now.

Michael Griffin (Senior Equity Research Analyst)

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

Todd Meredith (CEO)

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

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

Michael Griffin (Senior Equity Research Analyst)

Great. That's it for me. Thanks for the time.

Todd Meredith (CEO)

Thanks, Mike.

Moderator (participant)

Next question is from the line of Mike Mueller with J.P. Morgan. You may proceed.

Robin Haneland (Senior Equity Research Analyst)

Yeah. Hi. I guess your comments about multi-tenant occupancy going above 90%, first, was that a leased or an occupied comment? And what sort of timeframe are you expecting to get there by?

Todd Meredith (CEO)

Yeah. Mike, Rob talked about a multi-year plan of getting to 90. And when we talk about it in multiple years, we're talking about occupancy. Obviously, that lease percentage versus occupied is a delta that we track and report and gives us a lot of optimism along with our leasing pipeline that we can push gains over multiple years, but certainly looking out over the second half of this year and into 2025. And so if you look at this year, we're saying 100-150 basis points of gain in the multi-tenant portfolio. That's probably a similar range we'll be thinking about in 2025, but it's a little early to lay that down specifically. But certainly another strong year in terms of our expectations next year.

If you start thinking about that as an annual pace, that's a three-year sort of timeframe, but making some real headway in 2024 and 2025 on that.

Robin Haneland (Senior Equity Research Analyst)

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

Todd Meredith (CEO)

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

Robin Haneland (Senior Equity Research Analyst)

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

Todd Meredith (CEO)

It's absolutely an option. As we embarked upon this process earlier this year to sort of ramp up our efforts, they came to the table interested, and that was great. So obviously, we have a strong relationship with them, work with them regularly on our existing properties in our JV together. So they've really come back multiple times and through that relationship. So it's always an option. It's not maybe to differentiate a little bit with KKR, it's not necessarily expressed in a way like KKR has said, "We want to commit a certain amount of capital equity capital to grow it." So it's more opportunistic is maybe the way I would describe it versus KKR being more of a programmatic commitment that will look to grow.

Robin Haneland (Senior Equity Research Analyst)

Got it. Okay. Thank you.

Todd Meredith (CEO)

Thanks, Mike.

Moderator (participant)

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

Richard Anderson (Managing Director)

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

Todd Meredith (CEO)

Yeah. Maybe to think about the trajectory of those two approaches with and without the revenue-enhancing treatment there, we still think we can drive towards a covered dividend, even with that extra capital, sort of towards the end of 2025. But obviously, if we have outsized absorption capital, then maybe that ticks you over a little bit, but that's obviously a good problem to have. As we're—this is a ramping process in our occupancy and the flow-through. So clearly, the further out you go, the more beneficial you're starting to get all the NOI, EBITDA, FAD that comes from that coverage. So it really becomes less of a concern late in 2025. But treating it as revenue-enhancing capital, sort of separate than maintenance CapEx, you get there basically going into 2025. So that's the difference.

Richard Anderson (Managing Director)

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

Todd Meredith (CEO)

Yeah. Maybe to use the stoplight analogy, there's red and green, but then there's sort of the yellow. And I would say that's where probably we are today, where you're right, the accretion gets pretty minimal. And maybe a different way to express it is what discounts to NAV. And I'm just kind of using market consensus for the NAV levels. Once you get into the 10% single-digit, less than 10% discounts to NAV, yeah, the accretion math starts to fade. And so that's sort of where we're treading right now, which is a good thing. It's been moving the right direction. So we got in early. We bought nearly 30% discounts to NAV and then continued all the way down to about 10%. And as Chris said, sort of averaged 20%. So there's a little more that can be gained.

I think really our view is we'll just be opportunistic. If we see dislocations, we'll jump on it.

Richard Anderson (Managing Director)

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

J. Christopher Douglas (CFO)

Yeah. Rich, this is Chris. So on the impairments, yes, we have had to take some of those. But really think about it, a lot of those have been assets that were valued at the merger. And so at that point, cap rates were in the kind of low- to mid-5s where they were put on. And so now we're saying we're selling them in the mid-6s. And so that's really a balance sheet impact. That doesn't change at all what's going through on the income statement and what happens on your accretion. But that's the reason that you have the impairments that are going on. And so we'll continue to see some of that as we continue with the asset sales. In terms of the debt repayment, we still have capacity right now in terms of bank lines. I mentioned our delayed draw term loan, $250 million.

We paid down $100 million in the second quarter. We have $250 million left. That was set to expire July of 2025. So that will be a priority of ours to pay off, and there's no prepayment penalty associated with that. And the overall cost on that is around 64. So it's not a significant negative drag to be paying that type of debt down. And then we certainly have a bit of a line balance that we'll address that as well. So generally, from what we see right now, we're not having to get into prepayment penalties. But if we increased it, then we certainly would take that into consideration as we're considering our options.

Richard Anderson (Managing Director)

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

Todd Meredith (CEO)

No. Rich, I think if you look back at what Chris described in his prepared remarks, the $1 billion, the way we think about it is there's about $200 million if you look at our capital obligations that comes out first. That's development, redevelopment funding. It's this revenue-enhancing capital that I was talking about, first-gen acquisition capital. So you pull that $200 million out, you're at $800 million. And then if you think of 50/50 leverage neutral, that's a rough guide. That's $400 million for debt repayment, $400 million for stock buyback. Obviously, there's some flex in there. We've used up about $300 million for stock buyback. So it kind of leaves us with about $500 million. And Chris, just if you look at our debt, we have variable rate debt that we can pay off. It's about $500 million between the line and that term loan Chris mentioned.

So, really, don't see a scenario where we're sitting on excess cash there.

J. Christopher Douglas (CFO)

Okay. Thanks very much.

Todd Meredith (CEO)

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

J. Christopher Douglas (CFO)

Yes. Okay. Thank you.

Todd Meredith (CEO)

Thanks, Rich.

Moderator (participant)

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

John Kilichowski (Senior Analyst)

All right. Thank you. I'll just follow up on the last set of questions there for the sources and uses. Earlier in the opening remarks, you mentioned $0.01 of accretion. Is that to do mostly with what has been accomplished year to date, or is that largely to do with what you plan to do with the disposition proceeds for the rest of the year?

J. Christopher Douglas (CFO)

Yeah. The penny is what we're talking about for this year, 2024, and $0.025 on an annualized basis, just to be clear on that. And it's a combination of doing the entire $1 billion, but really I'm looking at the $800 million of what I have kind of coined the capital allocation portion, the portion that goes to debt repayment and to share repurchase. We obviously leaned in early on the share repurchase piece and have already executed on about $300 million of that. But then so now here on the back half of the year, you'll be leaning a little bit more on the debt repayment. But the penny for the year is the combination of all of that work.

John Kilichowski (Senior Analyst)

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

J. Christopher Douglas (CFO)

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

John Kilichowski (Senior Analyst)

Okay. Okay. And then I guess thinking about 2025 here with the incremental $600 for KKR, let's say if you start to trade at a premium to NAV and the attractiveness of this disposition program fades, I guess, do you have any protections there, or what's the next most accretive course of action for that capital?

Todd Meredith (CEO)

Yeah. John, as I mentioned, our priorities right now are very focused on the $1 billion that we've been talking about and what Chris just walked through. So it's really our existing commitments, stock repurchase, and debt repayment. And that really kind of speaks for most of the capital we're talking about. As you look further, you're right, there is an opportunity as our stock price makes sense and it's accretive and it becomes more accretive through the JV, as you can imagine, with fee structures and putting out less capital. So it's a higher ROI. We can look selectively at incremental acquisitions through that KKR JV. But that's something that we'll evaluate depending on valuation. As you said, as we get to a full value relative to NAV or a premium, that really starts to make a lot of sense.

Clearly, as I mentioned earlier, we've sort of been in this yellow range, but as you get to sort of the green light, that's a great opportunity for us for external growth.

John Kilichowski (Senior Analyst)

Got it. Thank you.

Todd Meredith (CEO)

Thank you.

Moderator (participant)

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

Emily Arft (Analyst)

Yeah. Thank you, guys. Good morning. I would like to better understand the quality of recent dispositions associated with the Nuveen JV, how do occupancy levels, average age, and remaining lease term compare to your portfolio average, and is it fairly similar to the assets in the KKR JV?

Todd Meredith (CEO)

Sure. Good question. We actually have a page on this in our investor presentation. It's our key highlights, page 8. We don't necessarily break out the two JVs, not that specifically, but we do differentiate between the wholly owned portfolio, the HR portfolio, JVs, and dispositions. This takes into account sort of the $1 billion that we've been talking about. So if you look at that, probably the main differentiators are geography, top 50 MSAs. There's quite a big difference where the JV and the portfolio are similar, sort of the 90%-100% range in top 50 MSAs. Dispos are down at 57%. So pretty big difference. I would say between just maybe going a layer further between Nuveen and KKR, not a huge difference there. Maybe some slightly different preferences among those two groups, but generally high occupancy, strong markets, similar profile.

And then the other aspect that I would say that's important to us is this clustered idea where it's part of our strategy, obviously, to own multiple properties in a tight cluster, typically around a hospital campus. And we're seeing very similar levels and maintaining similar levels on the balance sheet or wholly owned and the JV, but our dispos are much, much lower. So I would encourage you to check out that page. We do provide some other stats as well. One comment, maybe one other differentiator is average escalator. Typically, we're trying to keep those higher growth escalators on the balance sheet, wholly owned. The JVs and dispos are slightly lower. On occupancy, you don't necessarily see as much differentiation, but I think it's important to note generally more stabilized assets going into the JV than even the portfolio.

On dispositions, similar, although there's sort of two tails. We'll sell some things that are highly occupied. We'll also sell some things where Rob and his team don't see a lot of opportunity to improve leasing. So we're trying to keep as much of the occupancy upside on the balance sheet, wholly owned as we can. So certainly, we can follow up if there's more questions, but that's a good page to look at.

Emily Arft (Analyst)

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

Todd Meredith (CEO)

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

Emily Arft (Analyst)

The bidding intent. Yeah, yeah, yeah. The buyer pool, the bidding intent.

Todd Meredith (CEO)

I wouldn't say it's gotten a lot better. I would say there's quite a market at both ends. Typically, I would lean to say, "Hey, there's a bigger pool of buyers at the top end." But I think there's definitely folks looking for things they can get at discounted prices or maybe an opportunity where they say they think they can go lease it up, maybe we don't. So it's improved dramatically. The other factor there has been financing. That's gotten a lot, lot better. And so it's actually helped both ends of that. But if you go back six, nine months, I would say big deals were harder to finance. That's changed dramatically. So that's good to see. And it was actually the other way where you could do one-off deals maybe at the bottom end and get financing done with smaller loans that weren't syndicated.

I would say it's trending towards neutralizing where both are pretty deep at either end. One comment I would add to that. I was talking to Ryan Crowley yesterday, and he mentioned on one specific transaction they're working on that the brokerage representing us said that it was the highest ratio of LOIs to CAs that they've seen in quite some time. I think that just is an indication of the depth of the market and what we're seeing right now and how it's improved over the last 12-18 months.

Emily Arft (Analyst)

Okay. Great. Thank you, guys, very much for the time.

Robert E. Hull (EVP)

Thank you.

Moderator (participant)

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

Omotayo Okusanya (Managing Director and Head of US REIT Research)

Yes. Good afternoon, guys. Great work on the operational side. It's kind of good to see those stats coming along. On the Steward issue, I think in your 10-Q filing, there's a statement there about maybe two leases that got canceled as part of the bankruptcy process. Could you talk a little bit about what's kind of going on there and why those decisions have already been made and if there's any reason to go forward about how Steward is thinking about the overall HR portfolio?

Todd Meredith (CEO)

Yeah, Tayo, those were very small. I'd say de minimis, it's under 8,000 sq ft, I believe. It's two leases, and these were in buildings that they didn't have any other operations and were off-campus. So they were just kind of small things that didn't really matter what happened with the sale of the hospitals. And so those did occur. But like I said, it's pretty small, de minimis, in the overall scheme of things. And Tayo, I would say at this point, there would be no inference from those as it relates to everything else. They were, as Chris said, kind of one-offs and frankly, not even in Massachusetts. So it's really not material at all. So again, it's kind of early to even try to speculate what may play out, but we're generally encouraged what we're hearing in the process, so.

Maybe I won't forget your comment, Tayo. Thank you. I think the operations and leasing team are pretty ecstatic about the work this quarter and sort of the outlook ahead. Appreciate your comments there.

Omotayo Okusanya (Managing Director and Head of US REIT Research)

Sounds good. Thank you.

Todd Meredith (CEO)

Thanks, Tayo.

Moderator (participant)

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

Todd Meredith (CEO)

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

Moderator (participant)

That concludes the Healthcare Realty Second Quarter earnings conference call. Thank you for your participation and enjoy the rest of your day.