Healthcare Trust of America, Inc. (NYSE:HTA) is a publicly traded REIT that is one of the largest dedicated owners of medical office buildings in the country. Formed in 2006, HTA has been headquartered in Scottsdale, Arizona since becoming self-managed in 2008. HTA has invested over $2.8 billion in healthcare real estate located in 27 states throughout the United States.
As an investor in HTA, I've developed a fascination with HTA because I like the business model, the potential for future growth, and the stability of their income stream and dividend distribution. To capitalize on a great opportunity to learn more about the company, I recently had the opportunity to interview Scott Peters, Chairman of the Board, CEO and President, and ask him several questions regarding their portfolio management and the future of HTA. Here are the questions and responses:
Q: Relative to the entire Real Estate Investment Trust (REIT) space, what separates HTA from your competitors in the healthcare REIT subsector?
A: Good question. Many investors tend to think that all healthcare REITs are basically the same, with similar risks and similar returns. However, healthcare real estate is really made up of four or five distinct asset types - medical office buildings, senior housing, skilled nursing facilities, hospital, and life science buildings, which all have different investment profiles.
At HTA, we are different than the others in that we focus exclusively on medical office buildings, or MOBs, which we believe provides the most stable income in the industry, with significant potential for growth as the U.S. population gets older and the Affordable Care Act kick in and gets the kinks worked out. We also have a national property management and leasing platform that allows us to effectively operate our assets. Finally, we are not developers, which provides for more stable cash flows and better relationships with local MOB developers in our key markets.
Q: What metrics or economic indicators do you evaluate when considering which geographical areas you should move into?
A: At HTA, we look to invest in MOBs located on the campus of leading health systems across the country. These health systems have significant market share and are investing in their campuses and networks to provide the best care for the future of medicine. We believe the close proximity to these health system campuses help ensure that our properties will always have significant demand from physicians and other healthcare providers that also utilize the services of the hospital. These core, critical locations also provide significant barriers to entry, especially as the integration of healthcare continues to increase.
That said, our sector has significant tailwinds and we certainly look to invest in geographical areas that have a growing population, a stable and expanding economy, attractive demographics for healthcare, business friendly regulatory environment and feature real estate fundamentals that are in-line with the economic activity around it.
Q: Are there any geographical areas that you're currently looking at moving into?
A: We currently have properties in over 27 states, with a focus on 10 to 15 key markets in which we have relationships with the leading healthcare systems. This allows us to build economies of scale in an area and leverage our property management platform.
A significant amount of our recent investments have been in Florida and Texas, two states with growing populations and economies that are expanding. We have also been fortunate to invest in assets affiliated with very strong hospital operators in these markets. That combination is critical to ensuring our properties increase in value over the long term.
Q: In your website's Portfolio Overview section, you have the Building Type broken down as 90% medical office buildings, 5% senior care, and 5% hospital. Do any of your tenants include clinical laboratories?
A: A well located medical office building is attractive to many types of tenants in the healthcare space. Our tenants are primarily physician practices (either independent groups or hospital-owned). However, many ancillary healthcare services also benefit by being in close proximity to physicians and health systems. These other uses can include pharmacies, clinical laboratories, and physical therapy space. More recently, we have started to see an increasing number of healthcare educators looking for space in our buildings. Healthcare employment is expected to outpace the broader U.S. job growth for the next decade. These forward thinking colleges and training programs are looking for space that allows for both educational training and on-site clinical training in the same day. An on-campus MOB allows for that.
Q: The same section of the site states that as of June 30, 2012, the tenant retention rate is at 85%. Though 85% retention isn't a bad rate, was there an identified reason for the 15% non-retention rate?
A: There is certainly a shift going on in the healthcare landscape today. Health systems and larger independent physician groups are doing well. However, the solo practitioner is struggling with the new administrative requirements of healthcare today. We are losing these solo practitioner tenants as they either retire or look for cheaper locations located off-campus or in retail settings.
Q: What attracts tenants to move into an HTA property?
A: There are three main reasons physicians look to move into an HTA property. The first is location. Tenants want to be located on the campus of leading hospital systems, which accounts for approximately three quarters of our portfolio. The second is service. We manage over 85% of our properties with our internal property management and leasing platform. This enables us to offer a high quality of service for our very demanding healthcare provider tenants. The third is cost-efficiency. Not only does our internal property management platform provide first class service, it also enables us to maintain very cost-efficient buildings that are very competitive from a total cost perspective with alternate buildings.
Q: $802 million in acquisitions were made in 2010. $68 million in acquisitions were made in 2011. $295 million in acquisitions were made in 2012. And $242 million in acquisitions were made in 2013. What events have taken place over this period that resulted in more or less acquisitions year-on-year?
A: The medical office space sector has historically been very under-invested in from an institutional perspective. We estimate that there are over $250 billion worth of investable medical office real estate in the U.S., but less than 10% of it is owned by the public REITs. This is significantly lower than the 30-40% institutional ownership in other asset classes and represents a significant opportunity for investors in this space.
We founded HTA in 2006 and were raising significant amounts of capital through 2011. This enabled us to buy a significant amount of high quality assets during the economic depression of 2008-2010, when other investors were on the sidelines. Since then, new investors have started to identify the key macroeconomic tailwinds facing this sector and have started to invest. However, the combination of our significant relationships with health systems, developers, and physician practices and our internal property management platform allow us to see tremendous amounts of opportunities in the sector. This has enabled us to expand our asset base by over 10% in each of the last 2 years - tremendous growth for a company of our size.
Q: Your site lists various healthcare systems and providers as your key relationships. While investors' eyes will be on your own portfolio expansion, do you imagine that your key relationships will also expand, subsequently helping in your expansion as well?
A: We certainly believe that is the case. The Affordable Care Act is changing the way our health systems operate. The better operated health systems and physician practices will do well and expand, while the weaker ones will be acquired or close. Selecting the right health system and physician partners is critical to our long term success. Additionally, the better we treat our health system and physician tenants, the more opportunities we believe will come our way. That was one of the key reasons that we founded our internal property management platform several years ago.
Q: What will be the key events or indicators needed to happen to accomplish portfolio growth and investor returns at the same time?
A: We view our ability to return capital to investors several ways. First, we provide a very attractive and well protected dividend that is currently over 5%. Second, we expect to continue to grow our existing portfolio cash flows through active asset management. Third, we will invest in acquisitions that are accretive to our cost of capital and improve our earnings. We think this combination will be very rewarding for our investors over the long term.
Q: Over the last year and a half, REITs have cut dividends quite a bit. Is HTA's dividend safe and/or sustainable for income investors? What would make the dividend unsafe and/or unsustainable?
A: HTA operates in one of the most stable asset classes in the U.S. - medical office buildings - and has over 56% of our annual base rent coming from credit-rated tenants. This provides for tremendously stable cash flows that should keep our dividend safe and allow us to grow it in the years ahead.
Q: Looking at five and ten years down the road, what are HTA's goals in terms of financial position and growth rate in geographical expansion?
A: We are certainly focused on being the leading owner and operator of medical office buildings in the United States. As I mentioned before, we think there is a tremendous opportunity to invest in this attractive sector by utilizing our national management platform. However, it is important to us that we grow in a prudent manner that allows us to grow earnings for the long term while maintaining our excellent investment grade balance sheet.
Q: Do you see the healthcare industry continuing to grow in the next five years? Specifically, do you see any trends either beginning to take place or likely to take place over that time - not limited only to the healthcare REIT space, but the entire sector.
A: Absolutely. The combination of the aging of the U.S. population and the implementation of the Affordable Care Act is growing the healthcare sector faster than the overall economy. This care is moving towards more cost-efficient, outpatient settings (like medical office buildings), but is increasing in volume. It will also result in tremendous employment growth, making healthcare the fastest growing sector for job growth over the next decade. All of this is tremendously favorable to owners of core, critical medical office buildings.
I believe that this interview provides information and some insights that would benefit investors considering investing in HTA. This interview information is in my opinion a good supplement to the quantitative and qualitative information you'll find while researching the background and doing your due diligence.