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Healthcare Realty Trust Inc. / (HR-NYSE) / $27.84Note: This report contains substantially new material. Subsequent reports will have changes highlighted.
Reason for Report: 4Q17 and 2017 Earnings Update
Prev. Ed: 3Q17 Earnings Update, Jan 22, 2018
Brokers’ Recommendations: Neutral: 54.5% (6); Positive: 36.4% (4); Negative: 9.1% (1) Prev. Ed.: 6; 5; 1
Brokers’ Target Price: $32.00 (↓$2.13 from previous update; 7 firms) Brokers’ Avg Expected Return: 14.9%
Note: A Flash Update on 4Q17 Earnings was done on Feb 14, 2018.
Note*: We do not have access to the broker report with a Negative recommendation.
Portfolio Manager Executive Summary
Healthcare Realty Trust Inc. owns, manages and develops real estate properties associated with the delivery of healthcare services throughout the United States. The company is headquartered in Nashville,TN.
Trend of Broker Opinions: Broker sentiment on the stock remains skewed toward the neutral side, with 54.5% of the firms in the Digest group rating the stock as neutral. Among the remaining firms, 36.4% gave a positive rating, while 9.1% rendered a negative rating. Target prices provided by the firms range from a low of $29 to a high of $36 per share. The average came in at $32.00, indicating a positive return of 14.9%.
Neutral or equivalent outlook — Six firms or 54.5% — According to these firms, favorable demographic trends, strong fundamentals of the outpatient and medical office building (MOB) sector, and a robust portfolio will assist the company in delivering solid performance. However, these firms are worried about heightening competition in the healthcare sector.
Positive or equivalent outlook —Four firms or 36.4% — These firms are impressed by Healthcare Realty’s premier MOB portfolio and its focus on on-campus facilities. The firms believe the MOB sector displays robust fundamentals among other healthcare asset classes. Hence, given the company’s huge investment in the MOB sector, Healthcare Realty is poised to outperform the sector and its peers.
Jan 22, 2018
Overview
Healthcare Realty Trust , a self-managed and self-administered real estate investment trust (REIT) was the first healthcare REIT to enter the Medical Office Buildings (MOB) segment in 1993. The company primarily focuses on outpatient related facilities that are strategically located in or near the campuses of large acute care hospitals and is associated with leading health systems. This portfolio of premier MOBs and on-campus facilities gives the company a competitive advantage over its peers. Its revenues are mostly derived from rentals on its healthcare real-estate properties, on-site leasing and property management services provided to clients.
As of Dec 31, 2017, Healthcare Realty’s investments totaled around $5.3 billion, across 201 real estate properties. These properties, covering around 14.6 million square feet of space, are situated across 27 states in the United States. Moreover, the company provides leasing and property management services to around 11.5 million square feet across the country.
Further information on the company is available on its website: http://www.healthcarerealty.com
Key investment considerations according to the firms are as follows :
Key Positive Arguments / Key Negative Arguments§ About 86.7% of total medical office properties were located on or adjacent to hospital campuses, which are beneficial for both physicians and patients. Most of these markets have a high-entry barrier and consequently, vacancy risk is lower and tenant retention higher, as compared with off-campus MOBs or other commercial office space. MOBs also have shorter lease terms, which allow rollover rent increases that enhance internal revenue growth.
§ The company has a well-diversified tenant base, with the bulk of its tenants in various outpatient specialties. These have distinct demand and revenue sources, which result in a steady revenue stream.
§ Healthcare is relatively immune to the economic problems faced by office, retail and apartment companies. Consumers will continue to spend on healthcare, while cutting discretionary purchases even in difficult times. In fact, healthcare is one of the largest industries in the country in terms of gross domestic product; and expenses on healthcare are expected to further rise, especially given the increasing number of aging people in the country.
§ Healthcare Realty seeks to grow its portfolio and enhance investor returns through the acquisition of selected medical office and outpatient facilities, along with development of its real estate properties. / § Although Healthcare Realty’s on-campus MOBs have high barriers to entry and enjoy considerable demand, increasing supply can negate its competitive advantage, thereby affecting its rental rates and vacancies.
§ The continuous acquisition and development spree of Healthcare Realty involves significant upfront operating expenses with limited near-term profitability.
§ Healthcare Realty has an active development pipeline that increases operational risks, thereby exposing it to rising construction costs, entitlement delays and lease-up risks, which could drag margins.
§ With a portfolio of steady revenue-producing properties, Healthcare Realty is a likely option for acquisition by other big healthcare REITs. Notably, the healthcare REIT sector has consolidated itself in the recent past, by acquisition of various publicly traded companies.
§ Lately, private equity, pension fund and non-traded REITs have headed for acquisition of assets. This has resulted in increased competition and the assets have become costlier.
Note: Healthcare Realty operates on a calendar-year basis.
Jan 22, 2018
Long-Term Growth
Healthcare Realty is likely to benefit from its strong focus on MOBs, which is expected to insulate it relatively well from reimbursement and economic risks as against other healthcare REITs with operating exposure.
Outpatient visits have steadily increased over the years, driving the need for more outpatient medical space. Compared with senior living investments, MOB and outpatient care can capitalize on demographic trends at an earlier stage. While many seniors occupying assisted living facilities (ALF), independent living facilities (ILF) and skilled nursing facilities (SNF) are in their late 70s and 80s, demand for outpatient facilities crop up much sooner. Consequently, Healthcare Realty is expected to benefit significantly from the increased demand.
The firms view Healthcare Realty as a well-positioned company with a low-risk, highly stable portfolio of MOBs, clinical and surgical outpatient real estate properties. In addition, the company plans to divest underperforming assets in order to gain capital for redeployment into more promising ventures that offer strong long-term growth potential, going forward, which is encouraging according to the firms.
Jan 22, 2018
Target Price/Valuation
Provided below is a summary of valuations and ratings as compiled by Zacks Research Digest:
Rating DistributionPositive / 36.4%↓
Neutral / 54.5%↑
Negative / 9.1%↑
Average Target Price / $32.00↓
Maximum Upside from Current Price / 29.3%
Minimum Upside from Current Price / 4.2%
Upside from Current Price / 14.9%
Digest High / $36.00↓
Digest Low / $29.00↓
No. of Analysts with target price/total / 7↓/11↓
Risks to the price target include increased supply of MOB space leading to rising competition and probable reduction in revenue and continued dependence on favorable financial markets to make accretive acquisitions.
Recent Events
On Feb 14, 2018, Healthcare Realty Trust reported 4Q17 earnings results. Normalized funds from operations (FFO) per share of 38 cents missed the Zacks Consensus Estimate of 39 cents. On a year-over-year basis, FFO per share declined 7.3%.
Note: 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.
Revenue
In 4Q17, total revenues came in at $107.1 million and marginally missed the Zacks Consensus Estimate of $109.1 million. However, revenues were up 2.2% from the prior-year quarter. Total revenues for 2017 came in at $424.5 million, missing the Zacks Consensus Estimate of $426.8 million. However, the figure grew 3.1% year over year (y/y).
Rental Income: Rental income rose 2.5% y/y to $107.3 million in 4Q17. For 2017, it rose 3.7% to $422.8 million y/y.
Other Operating: Other operating income plummeted 30.5% y/y to $0.4 million in 4Q17. Further, y/y, the figure fell 61.7% to $1.6 millon for 2017.
Portfolio Details
Healthcare Realty primarily focuses on maintaining a portfolio of lower-risk, on-campus MOBs. About 86.7% of the total medical office properties were located in or adjacent to hospital campuses at the end of 4Q17 compared with 85.1% recorded in 4Q16.
Leasing activity in 4Q17 included 152 leases and aggregated 546,000 square feet of space. This comprised 395,000 square feet of renewals and 151,000 square feet of new and expansion leases.
For the trailing 12-month period ended Dec 31, 2017, same-store revenues improved 3.4%. Additionally, same-store revenues per average occupied square foot grew 2.8%, while average same-store occupancy expanded 50 basis points (bps) to 89.4% from the prior year.
In the same-store multi-tenant portfolio, contractual rent increases occurring in the quarter averaged 2.8%. Cash leasing spreads were 3.7% on 367,000-square-foot renewed space. Moreover, tenant retention was 81.9% and the average yield on renewed leases advanced 60 bps.
Outlook
The company has provided a same-store annual range of expectations. Same-store TTM revenues per occupied square foot are projected at $33-$34 for multi-tenant properties, and $32-$33 for single-tenant net lease properties. Occupancy is expected in the range of 87.5-89% for multi-tenant same-store properties and 95-100% for single-tenant net lease properties.
The company estimates multi-tenant contractual rent increases for the annual increase category to be in the range of 92-95%, for non-annual increase type in the band of 4-5% and for no increase (term > 1 year) category to be in the range of 1-2%. Furthermore, multi-tenant lease retention rate is estimated in the range of 75-90%.
Firms believe higher acquisitions in 4Q17 will result in increased rents in 1Q18 for the company.
Margins
Per the company, total expenses in 4Q17 escalated 7.5% y/y to $86 million. Further, for 2017, it flared up 8.1% y/y to $335 million.
For 4Q17, same-store net operating income (NOI) moved up 4% y/y to $59.7 million. Same-store NOI for multi-tenant properties climbed 4.5% y/y to $48.5 million and for single-tenant net lease properties, the same amounted to $11.3 million, up by 4.6% y/y.
For 2017, same-store NOI moved up 4.1% y/y to $235.7 million. Same-store NOI for multi-tenant properties climbed 4.9% y/y to $191.7 million and for single-tenant net lease properties, the same amounted to $0.44 million, up by 0.7%.
Outlook
The company expects same-store annual TTM NOI growth for multi-tenant properties to be in the range of 3-4.5% and single-tenant net lease properties to be in the band of 1-3%. The company also anticipates same-store multi-tenant TTM NOI Margin to be in the band of 58.5-60%.
Firms expect robust growth in same-store NOI, given the strong industry dynamics.
FFO per Share
Healthcare Realty reported 4Q17 normalized FFO per share of 38 cents, missing the Zacks Consensus Estimate of 39 cents. Nonetheless, the figure came in line with the prior-year tally.
For 2017, Healthcare Realty’s normalized FFO per share was $1.53, reflecting a fall of 6.1% from the year-ago figure of $1.63. Further, it lagged the Zacks Consensus Estimate of $1.55.
Outlook
Management expects normalized FFO to increase by nearly $2.2 million in 1Q18 due to increased NOI contributions from 4Q17 acquisitions, as well as net interest savings from refinancing activities undertaken during the same time period.
Some firms decreased the 2018 FFO per share estimates to account for expected dispositions in 2Q18, higher capex spending as well as delay in deployment of capital.
Balance Sheet /Portfolio Activity/Others
Liquidity
The company exited 4Q17 with cash and cash equivalents of $6.2 million, up from $5.4 million recorded at the end of the prior year.
In addition, as of Dec 31, 2017, the company had an unencumbered real estate asset base with a gross book value of approximately $3.4 billion, part of which could serve as collateral for secured mortgage financing.
At-the-Market Equity Offering Program
During 2017, the company did not sell any shares under this program. As of Feb 14, 2018, the company had 5,868,697 authorized shares remaining available to be sold under the existing sales agreements.
Portfolio Activity
Acquisitions, Development & Dispostions
In 4Q17, the company made acquisitons worth $246.6 million, for 662,000 square feet of space at an aggregate leased percentage of 95%.
It purchased eight medical office buildings, spanning across 496,000 square feet, relating to its previously-annnounced Atlanta portfolio transaction for an aggregate purchase price of $193.8 million. The company also purchased a 26,000-square-foot, 96%-leased medical office building adjacent to the Overlake Medical Pavilion for $12.7 million. It acquired two additional medical offcie buildings, spanning 100,000 square feet and 33,000 square feet, respectively, for a total of $37.6 million. The company also increased its stake to 69% in a previously acquired medical office building by purchasing additional 8,000 square feet of space for $2.5 million.
Outlook
The company provided its acquisition guidance for 2018 in the range of $175-$225 million. On the other hand, the company plans to dispose assets worth $45.5 million in 2018. Further, it anticipates development/redevelopment expenditure within $30-$50 million.
Dividend Update
On Feb 13, 2018, Healthcare Realty announced a quarterly cash dividend of 30 cents per share. This dividend was paid on Mar 6 to stockholders of record as of Feb 23, 2018.
Mar 28, 2018
Coverage Team / 11CQCA / Kalyan Nandy
Lead Analyst / Moumita C. Chattopadhyay
Analyst / Devyani Chamria
Copy Editor / Deblina Halder
Content Ed. / Moumita C. Chattopadhyay
No. of brokers reported/Total brokers / 8/12
Reason for Update / Earnings
Jan 22, 2018
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