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Peter Scott

Thanks, Connie. I am grateful to you and the Board for selecting me to lead the company. and I am truly excited to be at Healthcare Realty. Also on the call with me today are Rob Hull, our COO; Austen Helfrich, our CFO; and available for the Q&A portion of the call is Ryan Crowley, our CIO.
I would like to start by commenting on what attracted me to Healthcare Realty. First, Healthcare Realty is the only pure-play outpatient medical REIT. Our focus is 100% on a single asset class, and our vision is simple: to be the first choice for equity investors when they are seeking exposure to outpatient medical and to be the landlord of choice for health systems.
Second, the underlying operating fundamentals in outpatient medical are as strong as they have ever been. New supply remains muted, and demand is steadily increasing. These incredibly strong tailwinds show no signs of abating. Third, the portfolio is very high quality with a heavy focus on high-growth markets, including Dallas, Seattle, Nashville, Houston, and Denver, to name a few. In addition, the current tenant roster is with market-leading health systems, including HCA, Common Spirit, Baylor, Ascension, and Advocate.
While the portfolio still needs some refining, which I will elaborate on in a bit, the core portfolio should continue to deliver strong returns throughout market cycles. Fourth, the team and culture. Since arriving here in early April, I have been incredibly impressed with the infectious positive attitude across the organization.
There is a lot of pride in healthcare realty and a palpable desire to reestablish credibility with stakeholders. Additionally, the core values of respect, camaraderie, entrepreneurship, and excellence align well with my personal beliefs. One of my near-term focuses will be to augment the core values with a winning mentality.
Fifth, my background lines up well with the skill sets needed to turn around the organization expeditiously. I love a good challenge and have been through similar circumstances, both as an executive and prior to that as an investment banker. Shifting gears, I want to lay out my initial areas of focus for the strategic path forward.
Number one is leasing. At the end of the first quarter, our same store occupancy was 89.3%. I believe stabilized occupancy should be in the low 90% area, so we have 200 to 300 basis points of upside that is out there for us to capture. I would expect to see sequential occupancy growth through 2025 as we make progress on the leasing front.
Number two is portfolio optimization. We are in the process of reviewing the portfolio to maximize NOI growth potential going forward. The path to achieve this is through exiting markets where we have limited scale, and/or markets where we have a limited path to achieve scale. More work still needs to be done, but we are well underway. Our focus is to sell assets rather than contribute them to our joint ventures.
Number three is the balance sheet. While outpatient medical can support higher leverage due to the stability of the asset class, we need to extend the tenor of our debt and reduce overall indebtedness. There are significant benefits to a solid balance sheet, including the opportunity to take advantage of accretive capital allocation opportunities when they arise. In addition, we will be assessing our reported leverage metrics to ensure better alignment with peers.
Number four is efficiency across the organization. This includes efficiency at both the corporate level through lower G&A and at the property level through reduced operating expenses. NOI margins have been in the low 60% area, and we should be able to improve upon this.
Number five is instilling more financial discipline within the organization. This will be a combination of improving our technology and systems alongside making further investments into our platform. This is by no means an exhaustive list but rather my initial areas of focus. We will provide more detail around the strategic plan on our next quarterly earnings call. The end game is to create a more stable platform, an improved earnings growth profile, an increased multiple, and thus a better stock price.
Let me touch on the dividend. As you saw, we maintained the dividend this quarter at $0.31 per share. We are discussing the dividend at the Board level given the elevated payout ratio. That said, no decision will be made until we have clarity on our earnings profile going forward, inclusive of the impact from efficiency gains, leasing upside, as well as deleveraging. In summary, the dividend will be an output of the strategic plan and not an input.
With that, let me turn the call over to Rob to talk about leasing in the first quarter.

Robert Hull

Thanks, Pete. Demand for outpatient medical space remains robust. During the quarter, we commenced nearly 1.5 million square feet of new and renewal leases. Our signed-not-occupied pipeline, or SNO, remain solid at more than 630,000 square feet, representing almost 165 basis points of occupancy in the coming quarters. We've signed 370,000 square feet of new leases. Historically, we have executed about 20% of our annual volume in the first quarter of the year. Our new lease volume this quarter is in line with the historical trend and sets us on pace to meet or exceed our annual new lease targets.
Our lease pipeline remains solid with increasing interest from our health system partners. About half of this pipeline is in the letter of intent or lease documentation phase. It's worth noting that in the past five quarters, health system leasing as a percentage of our new signed lease activity has nearly doubled. Systems continue to experience improving revenue and margin trends, which will drive further growth and space needs. And in spite of increased noise around tariffs and potential policy shifts, we have not seen any signs of a slowdown in their expansion plans.
In connection with this growing health system demand, a recent industry research piece assigned our on-campus portfolio with the highest average score at an A plus. This research signals that we have a more resilient outpatient portfolio than our peers, which is notable in a more uncertain macroeconomic and policy environment.
Turning to our same-store portfolio, tenant retention improved more than 300 basis points over last quarter to almost 85%. This generated a slight uptick in occupancy to 89.3%. Looking ahead, we expect occupancy to build throughout the year, with most of our gains expected in the second half. Our outlook for 2025 remains 75 to 125 basis points of absorption by year end. In closing, with a strong leasing pipeline, growing demand from our health system partners, and a resilient tenant base, our portfolio is poised for accelerating NOI growth throughout the remainder of the year.
I will now turn it over to Austen to discuss financial results.

Austen Helfrich

Thanks, Rob. Normalized FFO per share was $0.39 for the quarter. This is in line with our expectations and a great start to the year. The first quarter is our seasonally weakest quarter of the year with almost $0.01 of seasonal expenses that we do not expect to reoccur in the second quarter. Same-store cash NOI growth was 2.3%.
As discussed on our fourth-quarter call, Growth was primarily impacted by higher operating expenses related to weather volatility and a difficult year-over-year comparison. This cadence was anticipated in our 2025 guidance, and we expect a material acceleration in same-store cash NOI growth for the remainder of the year.
On disposition activity, we sold four buildings for $28 million in the first quarter. This was great execution by our team as these buildings required significant capital or asset repositioning in their markets. Subsequent to the quarter end, we also received full payoff of an outstanding loan, resulting in $38 million of additional proceeds. This loan had previously been accruing interest at a 6% rate, well below current market.
Early in the quarter, we did pay down $35 million of term loans maturing in 2026. As indicated in our guidance, we expect increased disposition activity in the second quarter as our sale efforts build. Net debt to adjusted EBITDA was unchanged from 2024 year-end at 6.4 times, inclusive of the previously mentioned sales and loan payoff. We expect this to decrease to the guidance range of 6 to 6.25 times through the year as we execute on our disposition plan.
We ended the quarter with $1.4 billion of capacity on our revolving line of credit. And yesterday, we accessed this available liquidity to pay off $250 million of maturing notes. This $250 million maturity is our only maturity in 2025, and we expect to use sale proceeds to reduce the revolver balance as the year progresses.
In sum, our first-quarter financial performance was in line with our expectations. While we are not providing quarterly guidance, I do want to note that we expect acceleration in same-store NOI growth and an uptick in FFO and FAD per share in the second quarter. For the full year, we are reaffirming our normalized FFO per share guidance of $1.56 to $1.60, as well as our other components of guidance.
Operator, we're now ready to move to the Q&A portion of the call.

Question and Answer Session

Operator

(Operator Instructions) Rich Anderson, Wedbush.

Rich Anderson

Hey, thanks. Good morning and welcome, Pete. So when you laid out your areas of focus, some are going to take longer than others. I wonder, did you list them in order of priority? Or do you think this overall sort of layout that you've put out there is a one-, two-, three-year type of timeframe to sort of right the ship?

Peter Scott

Yes. Hey, Rich. It's Pete. Great to chat with you. I don't know that I would necessarily say that everything is in the perfect order of priority. But if I talk about timing for a second, my main objective is really to get the portfolio optimization as well as deleveraging done in the very near term so that when we look at 2026 and our numbers next year that everything could be incorporated in that guidance year. So we're obviously looking to accelerate that as much as we can.
With regards to leasing, I mean, that's just an important fundamental of any REIT and obviously getting from high 80% occupancy into the low 90s. That's not going to happen in one year, but that will probably happen over multiple years. So I'd say that's probably two to three years to get to the stabilized occupancy levels. And if we could do something on an accelerated basis there, that would be fantastic. But the optimization and deleveraging I'd like to have a clear path on that in the very near term and try and get as much of that done as quickly as possible.

Rich Anderson

Okay, thanks. Second question is, you said sell, not JV when you're exiting or selling out of markets. How do you feel about the JV model generally? Is that something that you see as something to unwind over time to simplify the platform, or are you comfortable with the current setup as is?

Peter Scott

I like having JVs as part of your toolkit. So we like the JVs that we have. We've got great relationships with our partners. And we'd like to grow those over time, but probably through acquisitions as opposed to us contributing more assets into those ventures. And we probably need to have a better cost of capital before we could do anything in scale to grow those JVs.
But I do like the JV model. I feel like we've got good partners there. But when we talk about optimizing the portfolio, it's more about selling 100% of the assets because they're in markets where they're either orphaned assets or we just don't have scale at the moment. So I wouldn't look at those as target assets to contribute into joint ventures right now.

Rich Anderson

Fair enough. I'll let someone else ask the dividend questions. Thanks very much.

Peter Scott

Thanks, Rich.

Operator

Juan Sanabria, BMO Capital Markets.

Juan Sanabria

Hi, Pete. Welcome and congratulations. First question, just a simple one, I guess, guidance. Is this a kind of Pete stamp approved? At this point, I know you've only been there, I think, about two weeks. Or is that something that may be refined as you incorporate some of your strategic plans as you outlined in your prepared remarks?

Peter Scott

Yes, I mean, obviously, we reaffirmed guidance on this call, Juan. And I'd say the first couple of weeks I was here, I spent a lot of time with the team going through the 2025 forecast. And we're off to a good start to the year, which allowed us to reaffirm guidance. So I'm comfortable with the numbers we have out there. And our forecast for this year did include $400 million to $500 million of sales.
To the extent that we end up selling more assets, it will really be back-end weighted with regards to closing, so I don't see a huge impact there. Again, it will have an impact on '26, and we're not putting out '26 guidance on this call. But I would also say, when I mentioned efficiencies, those will work their way into earnings, I think, a lot quicker than any asset sale dilution, and dilution from deleveraging.
And like I said, I'm trying to offset as much of that dilution, if not all of it, from efficiencies as well. We're very mindful of our earnings stream and looking towards earnings growth if we can achieve it next year over this year. Again, too soon to say that that can be the case right now, but I do think the efficiencies will work their way into our '25 earnings a lot faster than any dilution will.

Juan Sanabria

And as we think about the dividend in '26, noting that it sounds like dispositions may be a bit heavier than what's in the '25 guidance, I guess, how should we think about those relative dispositions? Are they going to be diluted? I'm not sure where you think you can sell assets where cap rates are. But is the earnings base going to shrink before it grows, or how are you guys kind of at least penciling that currently?

Peter Scott

Yes, we've gotten a lot of questions on dividend coverage. And I know there's been some things said in the past on that, but I won't say anything different that we're certainly trending towards covering our dividend towards the second half of this year, and that's what's in our forecast right now. But like I said, I'm less focused on that and more focused on 2026 and what our coverage is in 2026. So as I said on the dividend, it's going to be an output and not an input to the strategic plan. And we just need more work to be able to definitively answer that question.

Juan Sanabria

Thank you.

Peter Scott

Yes.

Operator

[Seth Berge, Citi].

Seth Berge

Hi. How are you thinking about potential future acquisitions? Are you still going to be mostly on-campus focus, or could we see additional appetite for off-campus?

Peter Scott

I think our focus on acquisitions is going to be more on the core cluster markets, whether it be on-campus or affiliated or perhaps off-campus. And there's some pretty good disclosure information on our core cluster markets. I am a big believer in scale and the opportunity to generate outside NOI growth in our cluster markets.
So I'd say we're less focused on the exact split on-campus, off-campus, and more market-based focused at the moment. Probably makes sense for Ryan Crowley to give you guys just a quick update on what we're seeing in the transaction market, since that's pretty important for us as we're looking to dispose of some assets. I think it's holding up quite well despite the volatility that we're experiencing. Ryan?

Ryan Crowley

Certainly, Pete. And thanks, Seth. I would start by saying the favorable market conditions that we saw build throughout 2024 really did continue into 2025. Namely, I'm talking about a relative abundance of equity dry powder out there, as well as lenders that are eager to lend, and most importantly, a relatively low supply of MOBs for sale in the marketplace today. So with that backdrop, it really is an environment that is supportive of the team's disposition efforts for the rest of the year.

Seth Berge

Okay, thanks. And then I guess my second question is are you seeing any impact of potential federal healthcare budget cuts or policy changes and any impacts to your tenants or tenant decision-making there?

Peter Scott

Yes, I mean, it's a good question on policy risks. And it's obviously come up a lot ever since the changeover in the administration. I think it's still too soon to say definitively where this is headed. And I do think you could make the argument that with certain things like site neutrality or perhaps cuts to Medicaid, which had very little impact on the portfolio we own; but over time, perhaps there could be an indirect benefit to the assets that we own.
It tends to be a lower-cost setting for services to get provided. But again, I want to be very careful saying what our beliefs are because it's really not well known at this point in time, and we do certainly have some third-party lobbyists we're working with to make sure that we're completely aware of what's happening in DC.

Seth Berge

Great. Thanks.

Operator

John Kilichowski, Wells Fargo.

John Kilichowski

Good morning. Thank you. And Pete, congrats again. So I'd like to start one for you, Pete. Our last conversation on OM were done really in a different seat, but same idea was that you saw room to kind of push the frontier on mark-to-markets from maybe that historical 2% to 3% to maybe 5% to 10%. I know in your opening remarks, we talked about kind of growing occupancy here at a steady rate. Do you still think that there's room to do that here at HR, or is the focus to be a little bit more programmatic, drive occupancy, and then maybe address that opportunity later?

Peter Scott

Yes, hey John. By the way, I know you're a Vandy grad, so hopefully you can give me some good recommendations on places to get a beer down here, as I've been in the office a bunch the last couple weeks. But generally speaking, on operating fundamentals, consistent with our prior conversations, I mean, I do think they're as strong as they've really ever been in outpatient medical. You've got demand far outstripping supply. Escalators are routinely at 3% or better is what we're achieving now.
Rental rates on in-place product is around $25 a foot, and that's up about 20% over the last four to five years. New construction rental rates are probably at $35 a foot, so there's still room for in-place to grow, I think, higher, not all the way to the new construction rental rates but somewhere in between. So my view has not changed. I'd say at the moment, we are certainly focused on two things: one, achieving the best lease economics possible on every single deal, but we obviously want to continue to grow occupancy as well as margins.
So I wouldn't say that we're looking to sign deals at lower rates than what we think we can achieve, but we're trying to balance the two. I do think when you get occupancy to more stabilized levels that you'll have an even greater opportunity to push rents. So that may be a reason why you're seeing perhaps lower cash leasing spreads today. But we look at every lease deal and all the economics, and we try and achieve the best rate of return possible.

John Kilichowski

Got it. Maybe on your remark around the potential for dispositions to be increased sort of back halfway to the end of '26 the guide right now has about $450 million with $300 million to CapEx, so I guess the other $150 million is the underlying. If you were to increase that number, is that use of funds strictly to pay down the line? Is there any consideration where the stock is trading? Because that helps with dividend coverage versus I know the focus seems right now to be deleveraging, but you're balancing those. So I'm curious, if you were to increase those proceeds, is there any consideration of the stock or is this purely deleveraging at this point?

Peter Scott

Yes, so you went in and out of it, but I think your question is generally what are my views on stock buybacks? Look, I think if you have the balance sheet capacity, then buybacks can absolutely be a good use of capital and a good near-term tactic. And the team here did take advantage of that a little bit last year, actually more than a little bit, a lot. But ultimately, that's resulted in our leverage being at 6.4 times now, and we're on negative outlook by one of the rating agencies.
So I don't think buybacks are a great long-term strategy, but they certainly can help your stock price in the very near term. I'd say my immediate focus right now is on creating balance sheet capacity. So I would prioritize that before I would prioritize stock buybacks at the moment. But to the extent we can achieve what we're seeking to achieve and de-lever in the near term, then certainly, if we had dry powder, we could take a look at buybacks at that point in time. But we don't have that opportunity today, so that will take some time to get there.

John Kilichowski

Got it. Well, thank you. Congrats again. And I'll have that list of ours over to you shortly.

Peter Scott

Yes, perfect. Thanks, John.

Operator

Nick Yulico, Scotiabank.

Nick Yulico

Hi. Thanks, everyone. So in terms of prospects, I didn't see an update versus what you said back in March. Any update you could provide there on rent collection and expectations?

Peter Scott

Yes. Hey, Nick, I think it tells a good story on where we've started to trend with Prospect and also with store, but I'll kick it to Austen.

Austen Helfrich

Yes, good morning, Nick. We disclosed in our 10-Q that we did receive full rent from Prospect for February and March, and we also received full rent in April. I would say it's still early in Prospect in the bankruptcy process, so not much more to update you on there.
On the Steward front, obviously, we talked about overachieving on our expectations in the fourth quarter regarding some of the backfill opportunities that we had in that portfolio. That's now in Rob's leasing pipeline. A lot of that just kicked off at the end of the year, so I don't expect we're going to provide a lot of updates on Steward as we move through the year. I think it's in the pipeline. Neither Prospect rent nor aside from Steward is in our original guidance. So I think good things so far, but it's still early in the year.

Nick Yulico

Okay, great. Thanks, Austen. And then, yes, Pete, congrats on the new role. So it sounds like there's sort of a strategy plan being put in place. And at some point, I guess later this year, there's going to be an update on that to the market and then sort of at the same time to the Board to think about where the dividend could be set in the future. Is there any specific timeframe you're able to share on that? Thanks.

Peter Scott

We're not going to spend a lot of time on the road this next quarter. This is something I've actually talked to some of our key stakeholders on. Our focus is internally on the strategic plan and where we intend to take things going forward. And I think that's where we should be focusing the vast majority of our time.
So the plan right now is to provide more detail on our next call with regards to that. And we'll certainly comment more on the dividend at that time. But again, as I said, it's going to be an output, not an input to this. And at that time, hopefully we can provide some more clarity on the way we're seeing things shape up, not only for this year but how our dispositions are trending, as well as where we see the trajectory heading into 26.

Nick Yulico

Okay, thanks.

Peter Scott

Yes.

Operator

Austin Wurschmidt, KeyBanc.

Austin Wurschmidt

Thanks. Good morning. Hey, Pete, welcome. Appreciate all the comments in your prepared remarks. Just wanted to hone in on one about the upside and the margin profile of the company and really how much upside do you see as kind of that initial low-hanging fruit? And what are the best opportunities you see to drive margin just given kind of your background and what you've recently gone through in your prior role and whether internalizing certain leasing is an opportunity across the platform, maybe where -- just curious what you see on that front.

Peter Scott

Yes, it's a good question, Austen. And obviously in my prior role, there was a lot of internalization that happened the last few years, I'd say. Within this platform, a lot of that internalization was already in place. So I don't know that there's a ton of additional internalization, although we've certainly talked about some. We don't have internalized operations in every single market. So selectively, that is something we certainly will look at.
I think the other thing I would just mention, Rob and I have spent a lot of time talking at length on just organizational structure and how to maximize margin within the local markets. And I think one of the key things is just empowering the local teams and pushing down some P&L responsibility much closer to the real estate. More of the structure here from that perspective has been kind of centralized historically, and we're looking to improve, as we said, profitability as well as the tenant experience.
And I think the more you empower your local teams to have some control over that, we think the better off you'll be from an expense perspective, which will improve margin. And the other way to improve margin is sign more leases and take your revenues up. In fact, that's probably the easiest way to improve your margins there. But we're certainly looking at both ways. I don't know, Rob, if you have any other comments you want to make on that topic?

Robert Hull

Yes, I would say for sure the occupancy is number-one way to do it but then continuing to push that responsibility down; but then not to lose sight of improvements in technology and being able to take advantage of technology, not just here in the home office, but also out in the field. So we will continue to evaluate those opportunities and implement them where we think it allows us to drive greater efficiency.

Peter Scott

Yes. And then I'll just say one last thing in case you have a follow up. I think at the G&A side, our costs are generally in line with peers. But simply put, if you can find $3.5 million of savings, that's $0.01 a share in earnings. The entire C-suite here is in Nashville, which is actually incredibly efficient. We do have a couple of extra offices in areas like Charleston, Scottsdale. So those are just a couple examples of areas perhaps we could strip those costs out of our G&A as well. And like I said, if you can find $0.01 a share of G&A, that's pretty significant.

Austin Wurschmidt

That's all very helpful. And maybe, Rob, just switching over to you, you had some positive commentary around just what you're seeing in the leasing pipeline, despite maybe optically what looked like a little bit of a softer quarter to start the year. Can you just give us the aggregate size of what that leasing pipeline looks like today versus where that stood in prior quarters, and then just given the probability that you think you can deliver on that, maybe given what's a little bit of an uncertain environment overall. Thanks.

Robert Hull

Sure. No, I think the pipeline remains as strong as it's ever been. I mentioned in my remarks that we're seeing an increasing amount of health system participation in that pipeline and executing leases with growing a number of health systems. I'm very optimistic about the outlook for this year. We continue to -- this quarter, we did 370,000 square feet of new leasing.
If you look historically at our new leasing trends, typically, the first quarter is the softest. Even at the lower amount versus the fourth quarter, we are on pace to meet or exceed our annual targets for new leasing. I'm very optimistic about where we are today and the path that we have in front of us. So I think health systems -- and this morning the jobs report came out, and health system and healthcare employment continues to be a strong point on the labor front. So that's certainly good for our business, and will continue to drive space needs inside of the MOB space.

Austin Wurschmidt

Great. Thanks for the time.

Operator

Omotayo Okusanya, Deutsche Bank.

Omotayo Okusanya

Congratulations.

Peter Scott

Thanks, Tayo. I'm sorry to miss your conference in April. That was my one week of unemployment.

Omotayo Okusanya

You're forgiven. That's perfectly fine. So I am curious, sir, if you had an opportunity just to speak with a lot of the healthcare systems that are a tenant of yours -- again, there's clearly an overlap versus your prior job. But just kind of curious, what are healthcare systems at this point just thinking, just kind of given the way the macro backdrop is evolving? And how do you see that impacting your business one way or another?

Peter Scott

Yes. I mean, we haven't seen it to date. And the one thing about outpatient medical is it's a pretty resilient asset class, and demand is holding up quite well. Ryan talked about the transaction market. I'd say that's holding up quite well despite the whipsawing of rates and overall volatility. And on the health system side and leasing, if anything, we're actually today seeing the amount of lease deals we're doing with health systems increasing and not decreasing.
And that's been a trend that's been going on for the last couple of decades. And I don't see that trend changing going forward. I didn't talk about the importance of relationships. I mean, one of the overarching things that we're very focused on here is continuing to maintain our strong relationships with our counterparties and obviously trying to work with them on allowing them to grow within our portfolio for the demand that they see. But to date, we've seen a lot of demand from health systems, and there's nothing we're seeing right now that shows any signs of abating. Rob, do you want to add anything to that?

Robert Hull

Yes, I would just add to that, maybe a little more granular, that there are a number of campuses that we're on now where the systems are coming to us and increasing their -- maybe we're talking about 10,000 feet and saying, hey, we need to double that because demand is so great. They're continuing to execute on their expansion plans by establishing new service lines and surgical suites and forming new partnerships with physicians on the ASC front. So as Pete said, not seeing any slowdown; and not, at this point, not seeing any signs of a slowdown in the near term.

Omotayo Okusanya

That's helpful. And then on the balance sheet front, again, everything you said makes sense, but I'm just curious. Just tactically, as you start thinking about, again, the $1.2 billion of debt coming during '26, over $0.5 billion of swaps coming during '26, are there things one can be doing now, just kind of based on the forward curve? Or do you really have to just wait for things to play out a little bit better before you can actually start to make some real moves?

Peter Scott

Yes, hey, Tayo, it's Pete here. I think as we look at our overall liquidity measurement, and back to the question on stock buybacks and why we're less focused on that, as you bring up a good point, yes, we have liquidity today, but we also have well over $1 billion of debt coming due not really this year. We paid off with our line of credit the one bond that we had coming due this year, but it's really next year.
We're going to work with our bank group on our revolver and look at any options that we have. There are some extension options on those term loans as well, but I just don't think we have enough runway today in a downside scenario, and we're very, very focused on enhancing that in the very near term. So more to come on that.
I think just generally speaking, I did want to spend a second on overall leverage because I've gotten varying feedback from different investors on what they think is the right leverage level for us. But I'll tell you the way I think about it is, look, 6.4 times net debt to EBITDA, that's just too high. And you're never going to have a CEO tell you, I really want to be on negative outlook from one of the rating agencies. That would be crazy if somebody said that, and I'm not going to say that.
So I don't think we have to de-lever, though, all the way to 5 times net debt to EBITDA. I think if we got closer to those levels, then we'd have some balance sheet capacity to redeploy those proceeds. So it's probably somewhere in between. I don't want to peg a specific number right now, but you can take the average and come up with where we're sort of targeting that to be.
And if we de-levered a little bit more initially, that's more just because we don't think those assets make sense to be in our portfolio long-term, and we think they're going to be habitual underperformers and drag down NOI growth. So if we end up going a little further on the balance sheet initially, you should expect us to redeploy capital into the right markets over time. So I'd say that would be a temporal impact to our earnings.

Omotayo Okusanya

Helpful. Thank you, and good luck.

Peter Scott

Thanks, Tayo.

Operator

Michael Mueller, JPMorgan.

Michael Mueller

Yes, hi. Just first, how do you think about balancing the disposition-driven portfolio optimization and deleveraging with earnings impact over the next few years?

Peter Scott

Yes, I think it's pretty simple, Mike. I mean, obviously, we're going to be very mindful of what we're selling and the cap rates that we can get, and we don't have to be a price taker in this market, and I think the market's holding up pretty well. But the other side of that question is, okay, there's a negative impact from deleveraging. That's just a fact of where our interest rates are, where we're going to sell assets at. But if you can offset that and think about the upsides, I mean, we've got pretty good year-over-year lease escalators that are built in place at close to 3%.
I've talked about efficiencies. More to come on that. But I will tell you, we are going to turn over every rock here to find as many efficiencies as we possibly can. And then obviously, we've got the leasing upside as well. So we're looking at it from all angles. I know when you say asset sales, the first thought that comes out to the street is dilution, but our first thought is how do we offset that dilution? And that's an important work stream we're working on.

Michael Mueller

Got it, okay. And then I know you said you'll review the dividend, but as you sit there today, are there any benefits that you can point to from not cutting the dividend as it relates to operations and growth prospects?

Peter Scott

Look, do I wish the dividend coverage was lower? Of course, I wish it was lower, but it's not. And like I said, we've talked to a variety of different investors, and I think there's an opportunity for us to grow earnings irrespective of what we do with the dividend. I think retaining some earnings could have a nominal benefit to earnings growth going forward. But again, we've got more work to do, no decisions have been made, and we'll provide more thoughts on that topic next quarter.

Michael Mueller

Okay, thanks.

Peter Scott

Yes.

Operator

Michael Gorman, BTIG.

Michael Gorman

Yes, thanks. Good morning. Going back to the discussion on the NOI margins, I'm wondering if you could kind of break out the potential for the dispositions to help drive margin higher as well. Do you see kind of a material differentiation between some of your larger markets and some of your core markets in terms of the NOI margin you can drive there versus maybe some of the smaller markets that you would be looking to exit?

Peter Scott

Yes, I'll have Ryan jump in and answer this.

Ryan Crowley

Yes, Michael, you're thinking about it the absolute correct way. It's the way we looked at it. As we came up with our list of potential disposition properties, we took an asset-by-asset, bottom-up approach and analyzed margin and historical rent growth. Those are all things we looked at and analyzed. As Pete referenced earlier, we also looked at where do we have scale and where can we get those operational efficiencies out of the platform into the property level.
So the team has been hard at work. We've been really deliberate about building the list of potential properties to sell. And we've also been meticulous about preparing those assets for sale. And what the team has done over the last couple of months is provide the company with maximum optionality as we look to potentially throttle dispositions throughout the year. So I think the potential is there to see NOI margins improve as its pace of dispositions continues throughout the coming quarters.

Michael Gorman

Okay, great. That's helpful. And then, Pete, maybe just approaching the dividend from a different angle here, given your prior role, can you just spend a minute talking about, as you think about the strategic plan and the opportunities for HR, how you think about the role of retained cash flow in the capital stack and in the future of leasing CapEx and potential either redevelopment or development opportunities and just kind of how you view retained cash flow in an MOB portfolio? Thanks.

Peter Scott

Yes, look, I think there's really good redevelopment opportunities within outpatient medical where you get a solid return from reinvesting capital into high-quality real estate that may be older, but you can get a much higher rental rate to the extent that you can refurbish that asset or the suite for the individual health system or doctor.
So I mean, the first area you put retained earnings is into redevelopment capital. And I think that would be priority number one. Priority number two would probably be along the lines of reinvesting it into development or something of that light. But I'd really focus more on the redevelopment capital because I think you get a much higher rate of return on that and its assets you already own, and you're just bringing them up to a higher standard.

Michael Gorman

Great. Thank you for the time.

Peter Scott

Thanks.

Operator

And that concludes our question-and-answer session. I would like to turn it back to Peter Scott for closing remarks.

Peter Scott

Great. Well, first of all, thanks, everyone, for joining, and I look forward to seeing all of you at NAREIT [next month].

Operator

Thank you. And this concludes today's conference call. You may now disconnect.