Healthcare Realty Trust Incorporated

Thank you for standing by. The Healthcare Realty Trust Fourth Quarter Earnings Conference call will be starting in a few moments time. Thank you all for joining. I would like to welcome you all to the Healthcare Realty Trust fourth quarter earnings conference call. My name is Brica and I'll be your event specialist operating today's call. After the speaker's presentation today, we will conduct a question and answer session. If you wish to ask a question, please press start followed by one on your telephone keypad. If you change your mind and would like to withdraw your question, please press start followed by two. And for operator assistance at any point, it's star 10. Thank you. I would now like to hand the call over to our host, Ron Hubbard of Investor Relations. So you may begin your conference, Ron.

Thank you, Brika. Thank you, everyone, for joining us today for Healthcare Realty's fourth 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 matters 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, 2022, and Form 10-K is 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 of the date of this call. The company disclaims any obligation to update this forward-looking material. The matters discussed in this call may also contain certain non-GAAP measures, 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 December 31, 2022. The company's earnings press release, supplemental information, and 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 fourth quarter 2022 earnings call. I'll start by pointing out that we've successfully achieved two key merger integration objectives. First, in January, we completed the final portion of our planned asset sales to fund the merger-related special cash dividends. It's worth noting that we executed these sales at our targeted cap rates. Second, we realized our full annualized G&A savings in the fourth quarter. That's in half the time we originally expected. The primary driver was reaching our projected staffing levels. Most importantly, we fully transitioned to the healthcare realty leasing model with full brokerage coverage across our portfolio. Later, Rob will expand on how this is already building leasing momentum. I would like to commend my healthcare realty colleagues for their incredible effort and dedication to accomplishing these milestones. Looking to 2023, we expect to return to a steady state capital recycling mode. Given the current state of capital markets and the completed dispositions, we expect to optimize the portfolio at the edges. Proceeds will be reinvested primarily into our redevelopment pipeline. This is our top priority for 2023. We expect the acquisitions to be modest only selected properties that protect our market position and cluster strategy. With market scale and deep relationships, we are well prepared to ramp up accretive acquisitions when capital markets improve. The secured financing picture has improved notably since last November. This is important because secured financing drives nearly two-thirds of MOB buying power. Both underlying rates and spreads have improved, All in rates improved more than 100 basis points from the peak last fall and now are about 50 basis points better. The breadth of lenders remains tight, but quality properties are getting financed. Rates are now trending in the high fives. This improved financing has pulled MOB cap rates a bit lower since November toward the 6% level. MOB fundamentals remain favorable with robust demand for outpatient facilities. Healthcare is one of the largest, most stable, and fastest growing employment sectors. Healthcare employment grew nearly 4% year over year in the most recent report, with ambulatory services growing even faster. These employees are coming to work every day in one of our buildings. We also see green shoots that inflation pressure and labor costs are easing, especially for health systems. We're talking to physician groups who are committing to more space today and health systems that are actively planning for more rapid outpatient growth in the near future. For the fourth quarter, we reported strong results in key operating metrics. Same store revenue grew well above 3%, propelled by healthy rent escalations, cash leasing spreads, and occupancy gains. Chris will get into more detail in a moment. In 2023, we expect same-store NOI growth to trend higher, above 3%, assuming moderating expense growth and steady occupancy gains. Leasing momentum is solid with over 600,000 square feet of signed leases yet to take occupancy. This equates to roughly 150 basis points of gross absorption. We aim to capture most of this in the first half of 2023, boosting the current trend of 50 basis points of net absorption. Development starts are another clear sign of positive leasing demand. Healthcare Realty has the largest and most visible pipeline in the MOB sector. Our active pipeline is over $230 million, and our near-term prospective pipeline is roughly $350 million. And behind this, we have a long-term embedded pipeline of $1.7 billion. This expanding pipeline is the benefit of the larger Healthcare Realty platform, deeper relationships, and significant market scale. We are in a leadership position to secure more development projects with major health systems. Looking ahead, healthcare realty's long-term outlook is bright. Our primary focus post-merger is operational execution to accelerate same-store NOI growth. With a well-scaled platform, we expect to capture outsized absorption and rent growth. We expect higher-yielding development projects to drive our external growth in the near term. And as inflation moderates and interest rates stabilize, we'll add accretive acquisitions to bolster our growth profile. Now I'll turn it over to Chris to provide a review of our financial and operating results. Thanks, Todd. We made tremendous progress on integration in the fourth quarter. Asset sales to fund the merger special dividend were completed, and our targeted annualized G&A savings was realized. Normalized FFO for 4Q was 42 cents per share, in line with the third quarter. The FFO results include normalization of $12 million in non-cash interest expense in both third and fourth quarter for merger-related fair value adjustments. We were encouraged by analysts and investors to normalize for this item to make results more comparable to peers. Normalized FFO in the quarter was impacted by a $5.2 million sequential increase in cash interest expense from higher rates on floating rate debt, as well as higher average debt balance. This was partially offset by a $4.5 million sequential reduction in G&A. We have now realized $35 million of annualized cost reductions compared to pre-merger combined G&A. There are still some marginal synergies yet to be realized over the next two quarters, but we expect these to be offset by normal G&A increases. $462 million of asset sales were completed since the end of the third quarter to finalize the full funding of the $1.1 billion merger special cash dividend. Run rate FFO, including the timing impact of the asset sales, is $0.41 per share. The run rate FFO and FAD, shown on page 5 of the supplemental, do not include any impact of additional changes in interest rates or growth in portfolio cash flow. Operating fundamentals were once again strong and highlight the growth potential of our properties. Same store NLI for the year increased 2.5%. Year-over-year quarterly same store NLI growth was even higher at 2.7%. The contribution from the company's share of JVs improved both quarterly and annual growth by 10 basis points. The quarterly NOI growth was driven by a 3.3% increase in revenue offset by a 4.6% increase in operating expenses. The year-over-year quarterly revenue growth was comprised of a 2.8% increase in revenue per occupied square foot and a 50 basis point improvement in average occupancy. We continue to focus on maximizing cash leasing spreads, occupancy, and in-place contractual increases. Cash leasing spreads in the quarter averaged 3.5% up from 2.9% in the third quarter, with 80% of the leases having a spread of 3% or greater. Sequential occupancy increased 59,000 square feet, or 10 basis points, to 89.3% for the same store properties. Total portfolio occupancy is 87.7%, providing meaningful opportunity for continued absorption and NOI growth. Annual contractual increases are now 2.81% up from 2.64% last quarter. The improvement was the result of higher increases on leases with CPI-based escalators and 2.9% average future increases for the leases that commenced in the quarter. The improvement was also bolstered by the sale of our lower growth properties, which had annual escalators below 2.4%. Operating expense growth of 4.6% was down substantially from the 7.9% in the third quarter. We benefited in the quarter from several successful property tax appeals. Excluding their impact, expense growth is running approximately 6%. Operating expense growth remains elevated compared to historical norms, but inflationary pressures show signs of easing. This will allow the power of our revenue drivers and occupancy absorption to help drive improving NOI growth through 2023. Maintenance CapEx increased in the fourth quarter over the previous three quarters, which is consistent with the seasonality we typically experience. To give a better picture of capital expenditure trends, we provided on page five of the supplemental the combined company trailing 12-month maintenance capex spend. Based on the healthcare realty annual dividend of $1.24 per share, the pro forma 2022 FAB payout ratio was 94%. We expect the FAB payout ratio to be in the high 90s in 23 giving capital spending for expected occupancy absorption as well as higher average interest rates year-over-year. As interest rate increases moderate, the underlying fundamentals and growth of the portfolio will drive the payout ratio lower. Run rate pro forma debt to EBITDA year-end including the impact of January asset sales was 6.4 times. Target leverage continues to be in the low to mid sixes. We expect leverage to trend towards the lower end of this range from underlying portfolio growth. With minimal near-term funding needs, we will look to additional asset sales to fund limited acquisitions and steady development funding in 2023. Since the end of the third quarter, we have entered into $600 million of new interest rate swaps in anticipation of the $300 million of swaps that expired in late January. The net result is pro forma fixed rate debt at approximately 85%, which is where we expect to remain for the near term. As we wrap up 2022, we're pleased to have completed the funding of the merger special dividend, as well as achieved our targeted synergies ahead of schedule. In 2023, we're poised to unlock the operational benefits of our scaled and recession resistant medical office portfolio. Now I'll turn it over to Rob for further updates on investment and leasing activity. Thanks, Chris.