Healthcare Realty Trust Incorporated (HR)

HR 
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Healthcare Realty Trust Inc. (HR)

Q3 2008 Earnings Call

November 11, 2008, 10:00 am ET

Executives

David Emery - Chairman and CEO

Scott Holmes - CFO

Doug Whitman - COO

Bethany Mancini - Corporate Communications

Gabrielle Andres - Corporate Communications

Analysts

Jerry Doctrow - Stifel Nicolaus

Chris Haley - Wachovia

Steve Swett - KBW

Rob Mains - Morgan Keegan

Rosemary Pugh - Green Street

Presentation

Operator

Good day, ladies and gentlemen and welcome to the Healthcare Realty Trust third quarter results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions would be given at that time. (Operator Instructions)

I'll now like to turn the conference to your host for today, Mr. David Emery. Mr. Emery, you may begin.

David Emery

Thank you. Good morning, everyone. Joining us today on the call are Scott Holmes, Chief Financial Officer, Doug Whitman, Chief Operating Officer and Bethany Mancini and Gabrielle Andres in Communications. I will ask Ms. Andres to now read the disclaimer.

Gabrielle Andres

Thank you. 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 Form 10-K filed with the SEC for the year ended December 31, 2007 and the Form 10-Q filed with the SEC for the quarter ended September 30, 2008. 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.

Matters discussed in this call may also contain certain non-GAAP financial measures, such as funds from operations, FFO or FFO per share, funds available for distribution, FAD or FAD per share. A reconciliation of these measures to the most comparable GAAP financial measures maybe found in the company's earnings press release for the third quarter ended September 30, 2008. The company's earnings press release, supplemental information, Forms 10-Q and 10-K, are available on the company's website.

David?

David Emery

Thank you. First a few general comments. Over the last several months the heightened market volatility and financial turmoil have certainly created an environment where REITs are finding it more difficult and expensive to access the debt funding.

Healthcare Realty is fortunate in its conservative capital position, liquidity and market valuation place the company in a good position to execute its business plan and to fund commitments.

The company has no 2009 maturities. $400 million revolver matures in 2010 and its $300 million 8 1/8% notes mature in May of 2011. At quarter end the company's leverage ratio was just 37%, with available borrowing capacity of $332 million on its unsecured credit facility.

Despite the looming recession, Healthcare REIT valuations have lead all REIT sectors during this year, as the investors have sought equities that are historically immune to declining economic activity. Given the expansion of cap rates in the past month, some healthcare REITs are still able to make accretive investments with their relative cost of equity.

Given all of the uncertainty and outlook for the economy, I think it's important to be mindful of the positive real estate fundamentals that drive Healthcare Realty's core investment strategy.

Over 75% of the company's outpatient facilities are located on or adjacent to hospital campuses and our physician tenants provide patient services that drive the majority of hospitals inpatient admissions.

Historically, 118 people per thousand are admitted to the hospital each year, a number which has remained relatively constant over the last six decades. With the reality per or the average person now visiting his or her physician 3.3 times per year, physicians and diagnostic practices are at the front gate of these statistics.

Almost every business is affected by recession. Physician practices and clinical services have historically seen less impact during economic downturns. Of course, professionals who are more dependent on elective procedures will be affected to some degree. We do not expect to see any roll down in rents or decreases in tenancy should the recession worsen.

Our recent lease renewal rates are at the highest level they have ever been, up 6% in the third quarter. The low risk nature of the company's portfolio of properties is bolstered by the average physician's revenues, covering rent and estimated eight to ten times and the fact that our average tenant occupancy is only 3,500 square feet per tenant.

As expected, the exit of the leveraged buyer from the acquisition market has provided the company with opportunities to purchase facilities that add value to our existing portfolio. As disclosed last evening, the company is under contract to purchase 15 facilities for $162 million from the largest healthcare provider in North Carolina, owning 23 hospitals and managing approximately 5,000 patient beds in the metropolitan Charlotte area.

The Carolinas HealthCare System portfolio has an average occupancy of over 90%, with rental increases exceeding 3% annually. After the stabilization of a new owned campus MOB, the portfolio is expected to yield approximately 8%. Working with this top tier health system initiates a productive new relationship with additional long-term investment opportunities on the horizon.

With the gradual increase and attractively priced offerings in the acquisition market, we have slowed the expansion of our future development pipeline. In fact, we've recently sold the development site in Illinois for approximately $800,000 gain. Our current developments are on track with two medical facilities in Colorado opening during the quarter. Mr. Whitman will have some additional comments shortly.

I'm pleased with our progress this year and the outlook for our plans. Healthcare Realty's conservative and simple capital structure is exacting investment standards and the company's long-term, low risk business perspective should serve us well during these uncertain times.

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