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Healthcare Realty Trust Inc. (HR - Snapshot Report) – a real estate investment trust (REIT) – reported third-quarter 2013 normalized funds from operations (FFO) per share of 32 cents, missing both the Zacks Consensus Estimate and year-ago quarter figure by a penny. This was due to an increase in expenses in the quarter.

Normalized funds available for distribution (FAD) in the reported quarter were 34 cents per share, down from 35 cents in the year-ago period.

Total revenue increased 10.2% year over year to $84.8 million in the reported quarter and exceeded the Zacks Consensus Estimate of $82 million.

Inside the Headlines

In the reported quarter, Healthcare Realty renewed leases on 241,000 square feet of space, with a retention rate of 82.1%. In particular, the company penned new lease deals for 121,000 square feet of space at its same store properties (153 assets). Consequently, same-store occupancy upped 90 basis points year over year to 91.0%.

Also, same-store revenues nudged up 1.8% year over year to $66.4 million. On the other hand, same-store expenses rose 1.5% year over year to $24.5 million. Thus, same-store net operating income (NOI) increased 1.9% year over year to $42.0 million.

At the quarter end, the 12 stabilizing properties (SIP) were 72% leased with an escalating occupancy of 57%.

Portfolio Enhancement Activity

During the quarter under review, Healthcare Realty acquired a Springfield, Mo.-based orthopedic surgical facility for $102.6 million. The property, spanning 186,000 square foot, is currently 100% leased to Mercy Health – an AA- rated healthcare organization.

Also, the company bought 2 medical office buildings, positioned on hospital campuses in South Bend (Indiana) and Denver (Colorado), for $77.5 million. The 91% leased assets, spanning 286,000 square feet, are affiliated with the University of Colorado Health and CHE Trinity.

Subsequent to quarter end, in October, Healthcare Realty purchased 3 medical office properties for $76.8 million. The buildings, spanning 242,000 square feet, are placed on or adjacent to hospital campuses in Charlotte, Seattle and Denver. The 95% leased assets are affiliated with CaroMont Health, University of Colorado Health and Providence Health & Services.

Liquidity

As of Sep 30, 2013, Healthcare Realty had cash and cash equivalents worth approximately $7.2 million, up from $1.2 million at the prior quarter-end.

Dividend

On Oct 29, 2013, Healthcare Realty declared a quarterly dividend of 30 cents per share. This dividend is payable on Nov 29, 2013 to stockholders of record as of Nov 14. The dividend is equivalent to 88.2% of normalized FAD.

Our Viewpoint

Although rise in expenses acted as the dampener, higher revenues and significant leasing activity lead to decent quarterly results at Healthcare Realty. The ongoing strategic opportunistic acquisitions and divestitures bode well for the company’s long-term profitability. Moreover, Healthcare Realty’s strong balance sheet position is also a positive. We expect these factors to provide significant upside potential to the stock going forward.

Yet, a large portion of the company’s revenue originates from a few tenants, which exposes it to concentration risk.

Another healthcare REIT, HCP Inc. (HCP - Analyst Report) reported third-quarter 2013 adjusted FFO (funds from operations) per share of 79 cents, 2 cents ahead of the Zacks Consensus Estimate and 10 cents above the prior-year quarter figure. The result was aided by growth in total revenues.

Healthcare Realty currently carries a Zacks Rank #4 (Sell). However, well-performing REITs include Sabra Health Care REIT, Inc. (SBRA - Snapshot Report) and Parkway Properties Inc. (PKY - Snapshot Report). Both these stocks have a Zacks Rank #1 (Strong Buy).

Note:1. FFO, a widely accepted and reported measure of the performance of REITs, is derived by adding depreciation, amortization and other non-cash expenses to net income.

2. FAD, a measure to ascertain the ability of REITs to generate cash, is derived by subtracting straight-line rent and non-recurring real estate expenses from funds from operations.

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