- HTA entered the MOB space at a perfect time – when new MOB development started to decline.
- If I was a physician and I wanted to be as close to my customers as possible, where would I lease?
- All I ask is for management to increase the dividend and spread the love.
Well, it's just around two weeks away from July 29th when one of my top Healthcare REITs report earnings. I have been following Healthcare Trust of America (NYSE:HTA) since the Scottsdale-based REIT listed on the New York Stock Exchange around two years ago (IPO was June 2012).
HTA commenced as a non-traded REIT, and since the company's inception the focused "pure play" Medical Office Building (or "MOB") platform has been the primary revenue driver. HTA is one of two such "pure play" MOB-focused REITs with a dedicated focus on investing in core, critical healthcare assets. Since MOBs are one of the most stable real estate assets, HTA has benefited from one of the most defensive cash flows in the REIT sector.
HTA entered the MOB space at a perfect time - when new MOB development started to decline. Since 2008 MOB start-ups have decreased by 70%, and because of the limited new growth, HTA has been able to become a consolidator of high-quality medical space.
Also, as a result of muted growth, MOB rental rates have created a constrained rental market in which landlords benefit the most. Think of it like this: if I was a physician and I wanted to be as close to my customers as possible, where would I lease? Some MOB landlords own buildings near the hospitals, but HTA has 96% of its portfolio on-campus. By owning the "best" and "closest" assets, HTA's portfolio has a substantially better barrier to entry component. In addition, rental rates are now experiencing positive growth.
It's important to recognize that HTA's MOB portfolio is one of the best in REIT-dom. When you compare the quality of the portfolio, you must consider the on-campus affiliation.
In addition, HTA owns a majority (69%) of multi-tenant properties with lease terms ranging three, five and seven years. HTA does own single-tenant assets (around 31%), and I consider that a healthy mix. The multi-tenant properties provide more rent growth, and the single tenant assets provide more stable cash flow.
Also, HTA's portfolio is well balanced - 288 properties in 27 states. Florida, Taxes and Arizona represent the markets with the highest concentration.
Here's a snapshot of Key Market exposure:
One other consideration with HTA is the fact that this REIT has developed a fully integrated property management and leasing platform. While other REITs "outsource" these responsibilities, HTA has created considerable value by utilizing in-house staff. By internalizing these positions, HTA has created an organization focused entirely on meeting physician and health system demands. That means that HTA is focused on Customer Service.
HTA now has eight regional offices that include property managers, leasing agents and building engineers. As of March 31 (2014), HTA had internal management in 89% of the portfolio. That should pay dividends for HTA (and investors) as Customer Service is a key reason for high tenant retention.
So What Am I Looking For in 2 Weeks?
As mentioned above, HTA is around two weeks away from releasing Q2-14 earnings. I have been pleased with the operating results for the company and especially the consistent same-store growth history. Over the last six quarters, HTA has grown its same-store growth by more than 3%. As of Q1-14, the portfolio was 91.2% leased (an increase of 30 bps year-over-year). As mentioned, the favorable multi-tenant portfolio has contributed to the ramp up in rental income.
For the upcoming earnings period, I'm hoping to see continued same-store growth and improving occupancy. Now that HTA has built out its internal management model, I'm also hoping to see continued operating efficiencies (and savings).
I've also been pleased with HTA's external growth prospects. HTA is considered a mid-cap REIT (with a market cap of around $2.9 billion) so it doesn't have to grow as much as Ventas, Inc. (NYSE:VTR) or HCP, Inc. (NYSE:HCP).
As I reported in a previous article, HTA recently closed on around $200 million in acquisitions. Based on "back of the napkin" analytics, I assume that the new deals will produce around $.04 of FFO growth (estimated 6% cap rate). HTA disclosed that it plans to assume $90 million of debt (on the new deal), so I assume that a $.02 run rate is likely given the longer-term capital structure. I project a 2014 FFO annualized run rate of $.73 per share. HTA is at $.18 normalized FFO per share (in Q1) or $.71 annualized, so the "back of the napkin" estimate gets the new acquisition deal up to $.73 per share.
One noticeable difference with HTA has been its dividend growth. As a public company, HTA has not increased its dividend YET.
It's clear that without leveraging the portfolio HTA has not been in a position to raise its dividend; however, by adding more high-quality revenue, I suspect that HTA will boost its dividend. Here's my "napkin" illustration utilizing my FFO per share estimate of $.73:
After all, most other Health Care REITs have been spreading the love:
Keep in mind that HTA has been "spreading the love" with its conservative capital management. As evidenced by the snapshot below, HTA has maintained a very conservative balance sheet with just 21% unsecured debt.
As of March 31 (2014), HTA had $575 million in credit available, and the company's weighted average borrowing costs is 3.82% (impressive). In addition the company's debt maturities are well-laddered.
It's evident that HTA has maintained low leverage and high liquidity. Here is a snapshot comparing the company's Debt / 2014 EBITDA with the peer group:
Compared with the broader health care sector, HTA's Total Debt to Total Capitalization is healthy:
How Does HTA Fit in my REIT Portfolio?
I own five Health Care REITs: Ventas, Inc., Physicians Realty (NYSE:DOC), Health Care REIT (NYSE:HCN), Healthcare Trust of America, and Omega Healthcare Investors (NYSE:OHI). Since January 1st (2014), OHI has been my best performing Healthcare REIT (returning 29.41%) followed by HTA (returning 27.18%). My average Total Return for all of my five Health Care REITs (since January 1) is 21.64%.
As much as I would like a dividend increase, the most important thing I'm looking for with HTA (in two weeks) is steady growth. That has been the key to my strategy, and while I have some terrific DGI stocks in my portfolio (OHI, VTR, and HCN), I own HTA for the growth (in share price). Take a look at the latest 30-day results:
As noted, since January 1 HTA has produced solid results:
And over the last two years HTA has performed better than the peer group:
I'm not sure that I would BUY HTA today. At $12.21, the share price has become fairly valued. As evidenced by the P/FFO illustration below HTA is not cheap - the peer group average P/FFO is 14.8x.
Besides, there are better options for yield in Health Care, and when I look at the chart below it screams: "Where's the HTA DIVIDEND INCREASE?"
Finally, it's important to recognize that the market sees value in HTA. Although I consider the share price a tad too expensive for me, I believe that the underlying cap rate of around 6% is indicative that there is a take-out market (by a larger big 3 REIT).
Based on the substantial growth in the large-cap Healthcare sector, I believe that HTA could trade at a premium value (as in merger). HTA is the only mid-cap Health Care REIT with a BBB rated (by S&P) balance sheet, and when you can combine a fortress and a wide moat you have a very reliable model of repeatability. That's precisely why I'll stay Long (and hope for a dividend increase). All I ask is for management to increase the dividend and spread the love.
Today the July edition on my newsletter, The Intelligent REIT Investor, is available. SUBSCRIBE TODAY.
Sources: F.A.S.T. Graphs, SNL Financial, and HTA Investor Presentation.
Disclaimer: This article is intended to provide information to interested parties. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended.