Executive Summary / Key Takeaways

• Strategic Transformation Underway: Healthcare Realty (HR) is undergoing a significant "Healthcare Realty 2.0" transformation, shifting from a transaction-oriented past to an operations-focused future, aiming to unlock substantial shareholder value through enhanced efficiency and organic growth.
• Portfolio Optimization Driving Growth: The company is strategically optimizing its portfolio by divesting approximately $1.2 billion in non-core assets at attractive cap rates and reinvesting in a "lease-up portfolio" with an estimated $50 million incremental NOI opportunity through targeted capital expenditures.
• Strengthening the Balance Sheet: Aggressive debt reduction, fueled by disposition proceeds and a 23% dividend cut, has significantly improved HR's leverage profile, with net debt to EBITDA falling to 5.8x in Q3 2025, bolstering financial flexibility for future accretive investments.
• Robust Operational Performance: Recent quarters demonstrate strong execution, with same-store NOI growth averaging 5.25% and occupancy increasing by 180 basis points, driven by a tightening supply-demand dynamic in the outpatient medical sector and improved tenant relationships.
• Pure-Play Outpatient Focus: As the only public REIT exclusively focused on outpatient medical, HR leverages its specialized expertise and integrated asset management model to drive superior performance and maintain its competitive edge in a resilient and growing healthcare real estate market.

A New Chapter for Outpatient Medical Real Estate

Healthcare Realty Trust Incorporated ($HR) stands as the sole pure-play real estate investment trust (REIT) dedicated exclusively to the outpatient medical sector. Its core business revolves around owning, leasing, managing, acquiring, financing, developing, and redeveloping income-producing properties vital to outpatient healthcare services across the United States. This specialized focus positions HR uniquely within the broader healthcare real estate landscape, allowing it to concentrate its expertise and resources on a segment characterized by robust demand and constrained supply.

The outpatient medical sector itself is experiencing powerful secular tailwinds. For the 17th consecutive quarter, occupancy rates across the top 100 metropolitan statistical areas (MSAs) have risen, now approaching an all-time record of 93%. Demand consistently outstrips new supply, with building deliveries and construction starts at their lowest levels in a decade. This favorable supply-demand dynamic is further amplified by health systems' ongoing strategic shift to deliver patient care in lower-cost outpatient settings, a trend that directly benefits HR's portfolio.

Historically, HR operated with a "transactions-oriented culture," relying heavily on acquisitions and development to fuel growth, a strategy that yielded a premium valuation for many years. However, this model faced significant challenges in 2022, necessitating a fundamental re-evaluation. Under the new leadership of President and CEO Peter Scott, appointed in April 2025, HR has embarked on a comprehensive strategic transformation, dubbed "Healthcare Realty 2.0." This initiative marks a decisive pivot towards an "operations-oriented culture" where earnings growth, strong tenant relationships, and disciplined capital allocation are paramount. The overarching goal is to create a more stable platform, an improved earnings growth profile, and ultimately, enhanced shareholder value.

Operational Platform as a Differentiator

Despite lacking proprietary, quantifiable technology differentiators, HR's operational platform and asset management model serve as a critical differentiator, leveraging internal "technology and systems" to drive efficiency and enhance its competitive standing. The company's commitment to instilling "more financial discipline" includes improving its technology and systems, alongside further investments into its platform. This focus on operational rigor is exemplified by the implementation of a new asset management-oriented platform, designed to drive meaningful cost savings and promote incremental accountability at the property level.

This enhanced platform is crucial for fostering stronger, better-aligned tenant relationships, particularly with market-leading health systems such as HCA (HCA), CommonSpirit, Baylor, Ascension, and Advocate. The company's "dynamic leasing guideline," an IRR-based model, informs leasing decisions to achieve the highest possible economic returns on every deal. This analytical approach, coupled with empowered local teams, allows HR to optimize lease economics, push for higher escalators (now routinely at 3% or better, with some new leases reaching 4%), and maximize retention, which minimizes costly downtime and capital expenditures. The tangible benefits of this operational focus are evident in improved margins and robust growth, attracting tenants seeking tailored solutions and enhancing HR's pricing power in outpatient segments.

Portfolio Optimization: Sharpening the Focus

A cornerstone of the Healthcare Realty 2.0 strategy is a thorough, bottom-up analysis of its 650 assets, segmenting them into three distinct categories: the Stabilized Portfolio, the Lease-Up Portfolio, and the Disposition Portfolio. This optimization aims to significantly improve occupancy and margins, enhance the NOI growth profile, and sharpen the company's geographic focus.

The Stabilized Portfolio, comprising 75% of the total assets (470 properties, over 25 million square feet), represents HR's premier outpatient medical assets. These properties boast a 95% occupancy rate and NOI margins exceeding 65%, with an average lease term of 8 years and average escalators of 3%. The strategy here is to maintain high occupancy and maximize lease economics, serving as the primary engine of growth for the company. Management targets a stabilized year-over-year NOI growth rate of 3% to 4% for this segment.

The Lease-Up Portfolio, accounting for approximately 13% of the total (95 assets, over 7 million square feet), presents a significant value creation opportunity. These well-located, health system-aligned clinical spaces have historically lagged due to underinvestment or strained local relationships, currently sitting at 70% occupancy with 55% NOI margins and rents nearly 20% below market. HR projects generating up to $50 million of incremental NOI from this portfolio, primarily by increasing occupancy to 90%. This will be achieved through targeted, ROI-driven investments, including "ready-to-occupy" (RTO) spec suites and redevelopment projects. The company plans an estimated $300 million capital investment over the next three years, targeting mid-teens IRRs for RTOs and 9% to 12% cash-on-cash yields for redevelopments. In Q3 2025, five assets were added to the redevelopment portfolio with a budget of approximately $60 million, expected to yield nearly $8 million in incremental NOI.

The Disposition Portfolio, representing about 12% of total assets, consists of properties with weaker growth prospects, often located outside HR's priority markets and exhibiting operating margins approximately 200 basis points below the portfolio average. The company is strategically exiting these assets, with a target of $1 billion in sales in 2025 at a blended cap rate of 7%. Year-to-date through Q3 2025, HR has sold $500 million of assets at a blended cap rate of 6.5%. The remaining $700 million pipeline is largely under binding contract or Letter of Intent, with the vast majority expected to close by the next earnings call. Notably, two-thirds of these dispositions are "non-core assets" (blended cap rate of 7.25%), while one-third are "core disposition assets" (blended cap rate of 5.75%) in markets with limited scale. This strategic pruning is crucial for enhancing the overall portfolio's growth profile and geographic concentration.

Financial Performance and Capital Structure Enhancement

HR's recent financial performance reflects the early successes of its strategic overhaul. In the third quarter of 2025, normalized FFO per share increased 5% year-over-year to $0.41, with same-store cash NOI growth of 5.4%. Over the last two quarters, same-store NOI growth averaged 5.25%, and same-store occupancy increased by 180 basis points. This broad-based outperformance was driven by year-over-year occupancy gains, strong cash leasing spreads (3.9% in Q3 2025), and effective expense controls. The company achieved record new lease commitments of 2 million square feet in 2024, with multi-tenant absorption reaching 149 basis points.

A critical component of the transformation is strengthening the balance sheet. Net debt to adjusted EBITDA has significantly improved, falling to 5.8x in Q3 2025, marking the first time it has been below 6x since early 2022. This deleveraging was achieved through disposition proceeds, which funded the repayment of approximately $225 million of 2027 term loans in Q3 2025, contributing to a total of approximately $500 million in notes and term loans paid down in 2025. The company also successfully renewed its $1.5 billion revolver, extending its maturity to 2030, and extended the tenor of its term loans to 2027 and 2029, reducing debt maturing through the end of 2026 from $1.5 billion to approximately $600 million. To further bolster financial flexibility and fund portfolio reinvestment, the Board approved a 23% dividend reduction to $0.24 per share quarterly. Additionally, a $1 billion ATM equity program and up to $500 million in share buybacks were authorized in Q3 2025, providing optionality for future capital allocation.

Competitive Landscape and Strategic Positioning

Healthcare Realty operates in a competitive landscape alongside other major healthcare REITs such as Welltower Inc. , Ventas Inc. , and Omega Healthcare Investors Inc. (OHI). While these competitors offer diversified healthcare real estate portfolios including senior housing and life sciences, HR differentiates itself through its singular focus on outpatient medical properties. This specialization allows HR to develop deep expertise and strong, integrated relationships with health systems, which is a key competitive advantage. A recent industry research piece even assigned HR's on-campus portfolio an A+ rating, signaling its resilience compared to peers.

HR's "sharpshooter" reputation in acquisitions, focusing on Tier 1 targets in its top 20 priority markets, highlights its strategic approach to growth. The company has cataloged over 400 such acquisition targets, representing over $8 billion in value, which it actively pursues through direct relationships. While larger, more diversified competitors like Welltower (WELL) and Ventas (VTR) may offer greater scale and broader market reach, HR's focused strategy aims for superior operational execution and efficiency within its niche. The company's ability to drive new lease commencements 50% higher than its peers over the past four quarters underscores its operational effectiveness. In the transaction market, HR observes a strong bid for outpatient medical assets from both private institutional capital and health systems, with bank-originated loan rates dipping into the high 4s, fueling buyer appetite and driving cap rate compression. This favorable market allows HR to execute its disposition strategy effectively, even for non-core assets.

Outlook, Guidance, and Risk Considerations

Healthcare Realty's outlook for 2025 reflects its strategic transformation and operational momentum. The company has raised its normalized FFO per share guidance to $1.59 to $1.61, with same-store cash NOI growth now projected at 4% to 4.75%. General and administrative (G&A) expenses are guided to $46 million to $49 million, reflecting initial savings from organizational restructuring. Management anticipates 75 to 125 basis points of same-store absorption by year-end 2025, with sequential occupancy growth expected throughout the year. The vast majority of the remaining $700 million in dispositions are expected to close by the next earnings call, further streamlining the portfolio.

Despite this positive outlook, several risks warrant investor attention. The company's operations have been, and will continue to be, impacted by the bankruptcies of Steward Health and Prospect Medical. While HR has secured $19 million in total revenue from Steward Health's pre-bankruptcy exposure of $27 million, with expectations to recover over 80% of pre-bankruptcy NOI, Prospect Medical's Chapter 11 filing in January 2025 led to the assumption of no revenue from these leases in 2025 guidance. Interest rate risk remains a factor, with $2.80 million reclassified from AOCI in Q3 2025 due to ineffective hedged transactions. The illiquidity of real estate investments, risks associated with development and redevelopment, and potential geographic concentration also pose challenges. However, management's proactive debt reduction strategy and focus on operational efficiency aim to mitigate these risks and position the company for sustainable long-term growth.

Conclusion

Healthcare Realty is in the midst of a profound strategic reawakening, transitioning to an operations-oriented model designed to unlock the inherent value within its specialized outpatient medical portfolio. The "Healthcare Realty 2.0" vision, spearheaded by new leadership, is systematically addressing past challenges of high leverage and underinvestment through aggressive portfolio optimization, disciplined capital allocation, and a relentless focus on operational excellence. Recent financial and operational results, including strong same-store NOI growth and significant deleveraging, underscore the early success of this transformation.

By divesting non-core assets, strategically reinvesting in its lease-up portfolio, and strengthening its balance sheet, HR is building a more resilient and growth-oriented platform. Its unique position as a pure-play outpatient medical REIT, coupled with an integrated asset management model and deep health system relationships, provides a distinct competitive advantage in a sector with compelling long-term demographic tailwinds. While risks such as tenant bankruptcies and interest rate volatility persist, management's clear guidance and proactive measures aim to mitigate these factors. For discerning investors, Healthcare Realty presents a compelling investment thesis centered on a company poised for sustained earnings growth and enhanced shareholder value as its strategic initiatives continue to manifest.