Buried within Healthcare Realty Trust's (HR) Q1 2024 earnings call [1] lies a fascinating potential strategy that seems to have slipped under the radar of most analysts. While the company's focus on accretive capital allocation through joint ventures and share buybacks dominates the headlines, a closer look at their operational momentum reveals a potential pathway to deleveraging that doesn't rely solely on asset sales. Could HR be playing a long game, aiming to reduce leverage organically through the impressive occupancy gains they're projecting?

HR's commitment to deleveraging is clear. They've consistently reiterated their target debt to EBITDA range of 6 to 6.5x. In their Q1 call [1], they outlined a plan to use 50-55% of excess proceeds from JVs and asset sales for leverage-neutral share repurchases, keeping debt to EBITDA within that range. This approach, while logical in the face of HR's substantial discount to NAV, implies a continued reliance on asset sales to manage leverage.

However, the company's operational narrative paints a different picture. HR's multi-tenant bridge, introduced two quarters ago [2] and reaffirmed in Q1 [1], projects 150 to 200 basis points of occupancy gain over five quarters. Crucially, they've already achieved 70 basis points, perfectly on track with their ambitious plan. This robust absorption, driven by consistently high new leasing volumes and moderating move-outs, hints at a potential turning point for HR's leverage profile.

Consider this: HR's multi-tenant bridge projects 4.4% to 5.5% multi-tenant NOI growth in the second half of 2024. Let's assume they achieve the midpoint of that range – a 5% growth in multi-tenant NOI. If we generously assume zero growth from their single-tenant portfolio, their total NOI growth still reaches a respectable 3.75%, factoring in the current single and multi-tenant NOI split.

This projected NOI growth translates to a corresponding increase in EBITDA. Without any additional asset sales beyond the announced $600 million, this organic EBITDA expansion could naturally reduce their debt to EBITDA ratio. Further bolstering this hypothesis, HR reported 3% same-store cash NOI growth in Q1 2024 [1], accelerating from the previous quarter. They also highlighted successful property tax appeals and a proactive approach to controlling operating expenses, particularly labor costs. These actions demonstrate a commitment to maximizing operational efficiency, laying the groundwork for further EBITDA expansion.

Projected Multi-Tenant Occupancy Gains

This chart illustrates HR's projected occupancy gains based on their multi-tenant bridge. As of Q1 2024, they are on track to achieve their target.

While it's too early to definitively declare a strategic shift, HR's operational momentum suggests a compelling possibility. By diligently executing their multi-tenant bridge and enhancing operational efficiency, HR could potentially reduce their leverage organically. This wouldn't negate their near-term focus on accretive capital allocation, but it could provide a powerful complementary strategy, ultimately accelerating their path to a healthier dividend payout ratio and long-term shareholder value creation.

Of course, this is just a hypothesis. It will be crucial to observe HR's execution on their occupancy bridge and expense control initiatives in the coming quarters. However, the potential for a dual deleveraging strategy - driven by both strategic capital allocation and operational momentum - presents a compelling narrative for Healthcare Realty, one that might be worth more attention than it's currently receiving.

"Fun Fact: Did you know that HR owns MOBs near some of the nation's most prestigious hospitals, including the Mayo Clinic and Johns Hopkins Hospital? Their commitment to high-quality, strategically located assets positions them well to capitalize on the growing demand for outpatient healthcare services."