Healthcare Realty Trust Incorporated (HR)

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Healthcare Realty Trust Incorporated (HR)

Q3 2012 Earnings Call

November 08, 2012 10:00 am ET


David R. Emery - Founder, Chairman of the Board, Chief Executive Officer, President and Chairman of Executive Committee

Carla Baca

Bethany Mancini

Douglas Whitman

Todd J. Meredith - Executive Vice President of Investments

Scott W. Holmes - Chief Financial Officer and Executive Vice President


James Milam - Sandler O'Neill + Partners, L.P., Research Division

Jeff Theiler - Green Street Advisors, Inc., Research Division

Michael Carroll - RBC Capital Markets, LLC, Research Division

Michael W. Mueller - JP Morgan Chase & Co, Research Division

Daniel M. Bernstein - Stifel, Nicolaus & Co., Inc., Research Division



Good morning, and welcome to the Healthcare Realty Trust Third Quarter 2012 Results Conference Call and Webcast. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. David Emery, Chairman and CEO. Please go ahead.

David R. Emery

Thank you. Good morning, everyone. Joining us today on the call today are Scott Holmes; Doug Whitman; Todd Meredith; Carla Baca; and Bethany Mancini. Ms. Baca will now read the disclaimer.

Carla Baca

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 a Form 10-K filed with the SEC for the year ended December 31, 2011, and a Form 10-Q filed with the SEC for the quarter ended September 30, 2012.

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 may be found in the company's earnings press release for the third quarter ended September 30, 2012. The Company's earnings press release, supplemental information, Forms 10-Q and 10-K are available on the company's website. David?

David R. Emery

Thank you. During the third quarter, we were pleased with the company's progress on multiple fronts. The steady performance of our core portfolio resulted in solid gains in year-over-year same-store NOI growth, leasing momentum in our development properties remained on track, and the company's sale of 9.2 million shares for net proceeds of $201 million, positioned us well to fund ongoing development, a growing acquisition pipeline. Upon closing $50 million in acquisitions by year-end and bringing online the 2 fully leased Mercy Health properties in 2013, these investments will be accretive to FFO. We're pleased to be seeing more low risk, high-quality properties coming to market that meet our criteria and pricing expectation. The company's conservative balance sheet and available line of credit, will enable us to take advantage of improving acquisition environment and the rise in hospital-centric outpatient facilities.

We believe that the election and the political debate surrounding implementation of insurance reform will have little impact on the outpatient segment of health care real estate. The alignment of physicians with health systems, in the face of increasing payment and regulatory pressure is already evident and clearly here to stay. Consolidation in the health care industry will require capital and new facilities in cost-effective, centralized locations, which will further the trend towards on-campus outpatient care. Healthcare Realty remains focused on investments that we believe will prosper in this new environment. With 78% of our $3 billion in properties affiliated with 60 hospitals, the company benefits from the high certainty of renewal and a portfolio comprised of 83% multi-tenant, outpatient properties, where an average tenant size of only 4,300 square feet. The underlying credit of our health system partners has become increasingly important. Over the last few years, Healthcare Realty's investment strategy has diligently focused on health system relationships and future growth opportunities, enhancing the intrinsic value of the company's portfolio. The consistent performance of our asset base throughout the economic concession and with its strategic position to expand in the post-reform era, affirms our belief in the company's positive fundamentals and low business risk. We see the future as increasingly bright for the company's prospects, given the size of the industry and the booming demand, and the pressing need for new buildings by hospitals. We believe our investment strategy will continue to produce solid near-term operating results, decreased leverage and make HR a distinctive investment alternative, with strong long-term growth potential. Those are my opening comments this morning, now I'd like to go to Mrs. Mancini to give us views on the current events and trends related to healthcare. Bethany?

Bethany Mancini

Thank you, David. With the election now behind us, the focus in Washington now shifts to the most pressing legislative concerns, namely the federal deficit and the looming 2% sequestration cut, the budget fiscal cliff and force physicians to 27% sustainable growth rate formula or SGR, cut to Medicare rates in January. There is reportedly widespread agreement on Capitol Hill to reverse the physician cut as Congress has done each of the past 10 years. With pressure to curb the federal deficit and find savings to forgo the 2% budget-wide cut in 2013, any long-term solution to the SGR is arguably out reach. Healthcare providers remain hopeful that sequestration will be avoided. And if not, could potentially be offset by annual market basket increases, cost controls and higher acuity casement. The reelection of President Obama and the Democratic control of the Senate likely means continued implementation of health reform, and providers should benefit from this near-term operational visibility. Even so, uncertainty lingers as Congress is now faced with intense pressure to cut spending ahead of another looming fiscal cliff, and the political balance in Congress could raise issues surrounding key provisions and funding of the Affordable Care Act. In addition, many questions remain concerning the creation of health insurance exchanges, states' roles, the expansion of Medicaid coverage, taxes and regulatory changes that could impact the Medicare program and provider reimbursements. As reform-related uncertainty persists going forward, we believe the operational changes that could actually have an impact on medical office real estate, are already underway and should progress unchecked. We saw over a year ago, among Healthcare Realty's tenants, that providers were ready to digest healthcare reform and move on with new strategies to contain costs and improve patient care, a trend which should continue to benefit leasing at our facility.

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