Healthcare Realty Trust Incorporated

Hello everyone and welcome to the Healthcare Realty Trust third quarter financial results. My name is Drew and I'll be coordinating your call today. During today's presentation, if you would like to ask a question, you may do so by pressing star followed by one on your telephone keypad. If you change your mind, please press star followed by two. I would now like to turn the conference over to Ron Hubbard, Vice President of Investor Relations. Please go ahead.

Thank you for joining us today for Health Care Realty's third quarter 2022 earnings conference call. Joining me on the call today are Todd Meredith, Chris Douglas, and Rob Hull. A reminder that except for the historical information contained within, the matter discussed in this call may contain forward-looking statements that involve estimates, assumptions, risks, and uncertainties. These risks are more specifically discussed in the company's Form 10-K filed with the SEC for the year ended December 31, 2021, and form 10Qs filed with the SEC for the quarters ended March 31, June 30, and September 30, 2022. These forward-looking statements represent the company's judgment as to the date of this call. The company disclaims any obligation to update this forward-looking material. The matter discussed in this call may also contain certain non-GAAP financial measures such as funds from operations or FFO, normalized FFO, FFO per share, normalized FFO per share, funds available for distribution or FAD, net operating income, NOI, EBITDA, and adjusted EBITDA. A reconciliation of these measures to the most comparable GAAP financial measures may be found in the company's earnings press release for the quarter ended September 30, 2022. The company's earnings press release supplemental information in Form 10-Q are available on the company's website. I'll now turn the call over to Todd.

Thank you, Ron, and thank you, everyone, for joining us for our third quarter earnings call. First, I'd like to say how delighted we are to welcome Ron to Healthcare Realty. Many of you know Ron from Duke. He joined us just three weeks ago, and we look forward to a long and successful partnership. Ron will be with us at NAREIT next week. Turning to the third quarter, we're pleased to report Healthcare Realty's first results on a post-merger basis. I'd like to thank my colleagues for producing solid operating results while balancing the extra work related to integration. We're really just getting started, but what's encouraging to me are some early successes. G&A synergies are well ahead of schedule. Occupancy is improving steadily, and the development pipeline is really strong. These trends are especially helpful in a challenging capital markets environment. Debt costs have risen sharply, both underlying rates and credit spreads. This is true for unsecured debt for public issuers, as well as secured financing for private borrowers. On top of this, most banks have pulled back on their funding. The combination of higher rates and less availability of debt financing has put everyone in price discovery mode. Right now, debt costs are serving as a floor on cap rates to avoid negative leverage. For MOB transactions, we see debt costs running in the high fives to the mid sixes. At the moment, MOB cap rates are running about the same level. In the last three months, we've made tremendous progress on our top priority of asset sales. We're pleased to report dispositions approaching a billion dollars so far with a clear path to reach 1.1 billion at an overall cap rate of 4.8% by year end. I'd like to commend my colleagues who've worked tirelessly to accomplish this remarkable outcome in the current market environment. Moving forward, we can afford to be more patient. We currently have a lot of lines in the water. You'll see us sell assets selectively where it makes sense strategically and financially. Any proceeds we generate can be accretively reinvested into development projects, selective acquisitions, or opportunistic stock repurchases. Another top priority has been integration and organizational realignment. We've realized nearly 50% of expected G&A savings moving into the fourth quarter. We're ahead of schedule and on our way to realizing full annual G&A synergies of $33 to $36 million. Operationally, we have the opportunity to boost NOI by even more than G&A savings. To capture this upside, our initial focus has been to realign our leasing and operations teams. Our property management and maintenance teams are staffed much more efficiently to deliver excellent service. And our dedicated project management team is focused on accelerating build-out times, increasing the speed between lease execution and rent commencement. Our leasing platform is also fully realigned. We're leveraging the brokerage model that has worked so well for healthcare realty and applying it to the legacy HTA properties. We're poised to capture leasing momentum as the largest owner and operator of medical office properties. Healthcare Realty's top 15 markets comprise 60% of total NOI. In these markets, we own an average of 31 properties, totaling about a million square feet or more. With unmatched market scale, our leasing directors and brokerage partners have the relationships and deep market knowledge to capture demand, accelerating Healthcare Realty's occupancy and rent growth. Our solid third quarter operating results largely reflect a mash-up of legacy results without many operational benefits. We already see encouraging trends. Same-store NOI growth is accelerating, led by 50 basis points of year-over-year occupancy gains. We also see a meaningful increase in our development and redevelopment pipeline with the potential for much more value creation. Chris and Rob will touch on several areas where we have the opportunity to leverage our cluster model and enhanced operational scale to accelerate growth and create value in the coming quarters. As I reflect where we are post-merger, I'm pleased to say we're ahead of our own internal expectations. And looking ahead, we're truly energized by the opportunities in front of us. Healthcare Realty expects to generate the fastest growth in the medical office sector through occupancy gains, rent growth, and a growing development pipeline. I'd also like to point out Healthcare Realty's recent ESG efforts. We recently released our fourth annual corporate responsibility report, and we're also pleased to report our grad score of 80 points, a notable improvement over last year and among the top in our peer group. Looking ahead, we have a meaningful opportunity to apply our successful ESG practices across a much larger portfolio. I'd like to thank my colleagues for making this a priority during a very busy time for Healthcare Realty. Now I'll turn it over to Chris for a review of financial results. Chris? Thanks, Todd. This quarter was marked by great progress on integration, especially G&A, where we saw early success. On an annualized basis, we realized $16.4 million of synergies, which is effectively 50% of our projected $33 to $36 million of G&A synergies. This is double the savings we originally projected to generate in the quarter. We expect to rise the remaining 50% of G&A synergies evenly over the next three quarters. Now, before getting into specifics on earnings, I would like to point out that with the merger closing on July 20th, third quarter financials represent only a partial period contribution from HTA. In the supplemental report posted this morning, we also provided pro forma financials to show the full quarter impact of the merger. In addition, to help people better understand results, we provided run rate data showing the impact of the ongoing asset sales, seasonal utilities, and remaining G&A synergies. The pro forma FFO per share for the third quarter was $0.39, and run rate FFO per share is $0.40. These results include almost $12 million, or over $0.03 per share, of non-cash merger-related mark-to-market interest expense. We also experienced approximately one cent of increased cash interest expense due to rising interest rates in the quarter. We provided a table on page five of the supplemental detailing the adjustments for run rate FFO, FAD, and EBITDA. Please note the run rate numbers do not include any future growth assumptions. Looking at the balance sheet, run rate pro forma debt to EBITDA is 6.3 times. This assumes the full repayment of the asset sale term loan, which had $423 million outstanding at September 30. Subsequent to quarter end, an additional $136 million of asset sales have closed. We expect the remaining asset sales to repay the term loan to be closed before year end. At the end of September, we had fixed interest rates on 81% of outstanding debt. This excludes the soon to be repaid asset sale term loan. Subsequent to the end of the quarter, we completed $250 million of additional interest rate swaps, bringing our current fixed debt ratio to over 85%. We expect to keep our fixed to floating ratio in this range. Turning to same-store performance, we've seen accelerating growth.