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Healthcare Realty Beats by a Whisker

Zacks Equity Research

Healthcare Realty Trust Inc. (HR), a real estate investment trust (:REIT), reported second quarter 2012 funds from operations (:FFO) of $26.5 million or 34 cents per share compared with $22.4 million or 31 cents per share in the year-earlier quarter. The reported FFO per share marginally beat the Zacks Consensus Estimate by a penny.

For second quarter 2012, Healthcare Realty reported funds available for distribution (FAD) of $27.8 million or 36 cents per share. Total revenues during the reported quarter were $78.7 million, compared with $71.7 million in the year-ago quarter. Total revenues during the quarter marginally exceeded the Zacks Consensus Estimate of $78 million.

Total multi-tenant same facility net operating income (:NOI) increased 3.5% year over year in the quarter. For the total portfolio, same-facility NOI growth was 2.1% in the quarter compared to the year-ago period. The same facility portfolio recorded an occupancy level of 90% at quarter-end.

Adjusted NOI for company’s stabilizing properties (:SIP) improved by approximately $300,000 compared with the previous quarter. Occupancy level increased to 33% on year-over-year basis.

Healthcare Realty's SIP portfolio was 51% leased, up from 46% sequentially. The company’s overall development portfolio is now 62% leased, including the properties that the company is funding through construction loans. At quarter-end, the company had only one property under construction (40% leased), which it expects to complete in the third quarter of 2012.

The company's multi-tenant properties exhibited an uptrend in the first quarter, backed by strong 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 1.8%.

During the reported quarter, the company invested $28.5 million for acquiring a property worth $10.7 million, $15.6 million in two existing construction mortgages, and $2.2 million in one property under construction.

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 in the second quarter of 2012, compared to 66% eight quarters ago.

Cash flow from operations during the quarter was $41.9 million compared to $36.8 million in the prior year. At the end of the quarter, the company had cash and cash equivalents of $3.1 million and long-term debt of $1.4 billion. Healthcare Realty declared a dividend of 30 cents per share in the reported quarter. The dividend is equivalent to 83% of FAD.

Healthcare Realty currently has a Zacks #2 Rank, which translates into a short-term Buy rating. We maintain our long-term Neutral recommendation on the stock. We also have a Neutral recommendation and a Zacks #2 Rank for HCP Inc. (HCP), one of the competitors of Healthcare Realty.

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

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

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