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Healthcare Realty Trust Inc. (HR - Snapshot Report), a real estate investment trust (REIT), reported fourth quarter 2012 normalized funds from operations (FFO) per share of 31 cents in line with the Zacks Consensus Estimate. However, this was lower than the year-ago figure of 33 cents.

The results were negatively impacted by around 3 cents owing to 9.2 million shares issued at the end of the third quarter for funding under construction properties. However, this is expected to prove accretive to the earnings going forward, after the completion of the construction of properties in the second half of 2013.

Funds available for distribution (FAD) in the reported quarter were $28.4 million or 33 cents per share compared with $27.5 million or 35 cents per share in the year-ago period.

Behind the Headlines

Total revenue increased 8% to $81.3 million from $75.3 million in the year-ago quarter and also exceeded the Zacks Consensus Estimate of $78 million.

Total multi-tenant same facility net operating income (NOI) increased 3.4% year over year in the quarter to $31.8 million. For the total portfolio, same-facility NOI upped 3.8% year over year to $45.1 million during the quarter. The same facility portfolio recorded an occupancy level of 90.3% at the end of the quarter.

The company's multi-tenant properties exhibited an uptrend, backed by modest weighted average increase in lease rates. While contractual rates for in-place leases inched up 3.1%, average increase in the rate on newly executed leases hovered around 1.0%.

During the quarter, occupancy at the company’s stabilization in progress (SIP) properties reached 41.2%. However, the company’s SIP portfolio was 60% leased at the end of the year.

Portfolio Restructuring

Healthcare Realty continued its strategic shift towards lower-risk, on-campus medical office buildings. About 78% of the total medical office properties were located on or adjacent to hospital campuses at the end of 2012, compared with 74% at the end of 2011.

During the quarter, Healthcare Realty acquired 5 properties for a total value of $87.6 million.  The facilities, spanning approximately 288,000 square feet, have an average occupancy rate of 98%.

As of Dec 31, 2012, Healthcare Realty owned 202 properties, spanning approximately 13.6 million square feet, located across 28 U.S. states.

Liquidity

As of Dec 31, 2012, Healthcare Realty had $6.8 million of cash and cash equivalents.
 
Subsequent to the quarter-end, the company sold 1.6 million of common shares under its at-the-market equity offering program (‘ATM’) for roughly $39.7 million. The net proceeds were utilized for funding the recent acquisitions.

Dividend

Concurrent with the earnings release, Healthcare Realty declared a dividend of 30 cents per share in the reported quarter. The dividend is equivalent to 90.9% of normalized FAD.

Our Take

We are encouraged with the decent result at Healthcare Realty. The company is well-positioned with a low risk, highly stable portfolio of physician-oriented medical office buildings (MOB) as well as clinical and surgical outpatient real estate properties.

Also, the company has almost completed the strategic shift away from a single-tenant/Master Lease model to a multi-tenant operating model, thereby reducing concentration risk and augmenting the probability. We expect this, along with company’s ongoing opportunistic acquisitions, to provide significant upside potential to the stock going forward.

One of the REITs, Ventas Inc. (VTR - Analyst Report) reported a better-than-expected fourth quarter 2012 results with normalized FFO of 99 cents per share, beating the Zacks Consensus Estimate by a couple of cents.

Healthcare Realty currently holds a Zacks Rank #3 (Hold). REITs that are performing better than Healthcare Realty include Hersha Hospitality Trust (HT - Snapshot Report) and Medical Properties Trust Inc. (MPW - Snapshot Report), both carrying a Zacks Rank #2 (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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