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Healthcare Realty Trust Inc. (HR - Snapshot Report), a real estate investment trust (REIT), reported first quarter 2013 normalized funds from operations (FFO) per share of 32 cents, in line with the Zacks Consensus Estimate, but a cent lower year over year. The company experienced a rise in revenues in the quarter, which also exceeded the Zacks Consensus Estimate.

Funds available for distribution (FAD) in the reported quarter were $29.0 million or 33 cents per share compared with $28.0 million or 36 cents per share in the year-ago period.

Behind the Headlines

Total revenue increased 8.4% year over year to $82.6 million in the reported quarter and also exceeded the Zacks Consensus Estimate of $80 million. NOI for the same-store portfolio increased 2.5% year over year in the reported quarter. Healthcare Realty renewed 72 leases in its same-store portfolio, spanning 270,168 square feet, with a retention rate of 84.2%.

Moreover, at the end of the reported quarter, the 12 stabilizing properties (SIP) were 65% leased with occupancy escalating to 45% while NOI for the SIP properties came in at around $1.3 million per quarter.

Portfolio Restructuring

Healthcare Realty continued its strategic shift towards lower-risk, on-campus medical office buildings. About 77% of the total medical office properties were located on or adjacent to hospital campuses at the end of the first quarter of 2013, compared with 75% at the prior-year quarter end.

During the quarter, Healthcare Realty acquired 2 facilities for a total value of $32.5 million. The buildings span approximately 95,000 square feet in total and are both 100% occupied.

As of Mar 31, 2013, Healthcare Realty owned 200 properties, spanning approximately 13.5 million square feet, located across 28 U.S. states.

Liquidity

As of Mar 31, 2013, Healthcare Realty had $94.2 million of cash and cash equivalents, compared with $6.8 million as of the prior quarter-end.

During the reported quarter, the company raised $39.7 million through its at-the-market equity program for funding recent acquisitions. Furthermore, the company issued $250 million of unsecured senior notes due in Apr 2023 with a coupon rate of 3.75% and redeemed its 5.125% 2014 unsecured senior notes in Apr 2013. Moreover, it extended the maturity date to Apr 2017 and reduced borrowing costs under its unsecured $700 million revolving credit facility.

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 88.2% of normalized FAD.

Our Take

We are encouraged with the decent results at Healthcare Realty. The company is well-positioned with a low risk, highly stable portfolio of physician-oriented medical office buildings (MOB) and 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 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) has yet again come up with impressive first-quarter 2013 results. Its normalized FFO reached $1.03 per share in the first quarter, 4 cents ahead of the Zacks Consensus Estimate of 99 cents and 13% ahead of the year-ago FFO of 91 cents per share, primarily driven by the strategic investments in 2012.

Healthcare Realty currently holds a Zacks Rank #3 (Hold). REITs that are performing better than Healthcare Realty include Extra Space Storage Inc. (EXR - Snapshot Report) and Franklin Street Properties Corp. (FSP - 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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