Healthcare Realty Trust Incorporated (HR)

HR 
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Healthcare Realty Trust Inc. (HR)

Q4 2008 Earnings Call

February 24, 2009 10:00 am ET

Executives

David Emery – Chairman and Chief Executive Officer

Scott Holmes – Chief Financial Officer

Doug Whitman – Chief Operating Officer

Bethany Mancini – Corporate Communications

Gabrielle Andres – Corporate Communications

Analysts

Rob Mains – Morgan Keegan & Company

Tayo Okusanya – UBS

[Connor Feneti] – Deutsche Bank

[Doug Sanfisto]

Jerry Doctrow – Stifel Nicolaus & Co.

Stephen Swett – Keefe, Bruyette & Woods

Michael Mueller – JP Morgan

Rosemary Pugh – Green Street

[Ben Lentz]

Presentation

Operator

Welcome to the Healthcare Realty Trust fourth quarter results conference call. (Operator Instructions) I would now like to turn the conference over to your host, David Emery. Sir, you may begin.

David Emery

Joining us on the call today are Scott Holmes Chief Financial Officer, Doug Whitman Chief Operating Officer and Bethany Mancini and Gabrielle Andres in our communications. Ms. Andres will now read the disclaimer.

Gabrielle Andres

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 our Form 10-K filed with the SEC for the year ended December 31, 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.

The 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 fourth quarter ended December 31, 2008. The company's earnings press release, supplemental information and Form 10-K are available on the company's website.

David Emery

Healthcare Realty Trust completed a productive fourth quarter. As our core portfolio continued to perform well, with stable occupancy and increases in renewal rental rates and property level in line. Despite difficult economy, outpatient medical office continues to be resilient having sound operating fundamentals that continue to follow the broader context of positive historical growth trends.

Since 1972, through six recessions, physician office employment has grown annually by approximately 4.8% compared with the national private employment growth rate of only 1.8%. We view healthcare employment as the best indicator of demand for facility utilization and our managing our expectations of lease rates and the time necessary to lease up new buildings.

Excluding government and education, healthcare was the only industry to experience a significant increase in employment throughout 2008, and even in January 2009 when national unemployment reached its highest rate in 16 years. The healthcare industry added 19,000 jobs in January versus the national loss of some 598,000 non-farm jobs.

Physician office employment grew 3% over the last 12 months, which was slightly higher than the prior year's growth rate. Healthcare real estate remains a business that is driven by the increasing number of clinical services demanded from hospitals by physicians and ultimately the consumers rather than economic trends.

Heightened sensitivity to the current economic climate has prompted leasing concerns across most sectors of real estate. Having developed several hundred million dollars in outpatient facilities over the last ten years, it has been our experience that leasing is usually ruled by randomness and medical office has historically not been subject to the same economic cycle seen in general office. Furthermore, the low fundability nature of MOBs enhances the prospects for success.

Leasing activity for prior facilities and stabilization continues to be positive. This month our recently opened Colorado Springs project received a letter of intent for 20,000 square feet from a national outpatient center. And another in tenant expressed interest in leasing the entire second building.

The Scottsdale project is experiencing similar activity as discussions are underway with a tenant for 15,000 square foot surgery center along with offices for several physician groups. We expect to see continued interest in our new facilities.

Hospital company initiatives are centered on physician recruitment for improving operations in gaining market share. And according to a survey by the American Hospital Association, 31% of all hospitals are cutting their capital budgets by 50% or more this year as they content with lower endowment values.

In this environment, Healthcare Realty's capital may prove to be a more attractive alternate source for well managed health systems to fund project and initiatives critical to their operations, physician relationships and growth.

Regarding acquisitions, in December we were pleased to close on a 15 building portfolio with the largest healthcare provider in North Carolina, Carolina's Health System. This acquisition represents another bellwether investment relationship for Healthcare Realty with potential for strong rental rate growth and additional long-term investments.

We have begun to see a number of outpatient portfolios coming to market. With any capital deployment by HR will likely remain tempered in the near-term. It is our intent to take advantage of compelling opportunities for acquisition as long as such opportunities enable us to maintain our conservative balance sheet metrics and augment our existing portfolio.

To enhance liquidity for future investments, management is pursuing sources for secured financing on its existing stabilized assets and redeploying capital from typical asset sales. Additionally, credit markets have recently shown tentative signs of improvement, which should be a catalyst for equities in the months to come.

Lastly, we have ongoing dialogue with the participants in our credit facility, along with other banks, and have been pleased with their intentions regarding the renewal of our line of credit later this year. With Healthcare Realty's conservative and simple capital structure, strong portfolio performance and exacting investment standards, we believe our long-term low risk business profile should maintain underlying shareholder value even in these uncertain times.

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