The primary advantage to owning health care properties is that they tend to be recession resistant in that demand for health services is relatively inelastic. That consistency in need-based services is the primary reason that health care REIT shares have performed significantly better than their peers during periods of economic weakness.
When building a defensive REIT portfolio, health care REITs are usually the most stable sector, and similarly, these REITs are often over-weighted in long-term portfolio management practices. Historically, health care REITs have provided low volatility and the consistent dividend yields have become core real estate holdings for many investor portfolios. By gaining exposure to the health care sector, investors can further diversify their portfolios (reducing risk) while also maximizing overall dividend performance (increasing returns).
There are 11 health care REITs that are included in the composite FTSE NAREIT All Equity REIT Index. This necessity-based sector has a market capitalization of around $66.15 billion which represents around 12.8 percent of the entire equity REIT capitalization (as of July 31, 2012 the total market cap was $516.277 billion).
The health care sector has the highest overall average dividend yield performance as the sector boasts a current yield of 4.59 percent and year-to-date total return performance of 17.4 percent.
Health Care Trust of America: A Battleship Armed with Dividends
Healthcare Trust of America (NYSE:HTA), based in Scottsdale, recently (June 6, 2012) listed its shares on the New York Stock Exchange. The HTA portfolio consists around 12.4 million square feet in 26 states. The current market capitalization is $ 1.918 billion and the company boats a dividend yield of 6.26 percent percent - almost three times the sector average.
This excerpt below is from a Forbes.com interview with Brad Thomas and Scott Peters, CEO and co-founder of Health Care Trust of America:
Brad Thomas (Forbes Contributor): Scott, first off, congratulations on your new listing on the New York Stock Exchange - a well-deserved milestone. Tell us about Healthcare Trust of America.
Scott Peters: Healthcare Trust of America is a fully integrated, self-administered healthcare REIT that I co-founded in 2006. We focus on acquiring, owning, and operating high-quality medical office buildings that are located on the campuses of nationally recognized healthcare systems. Since our founding, we have invested approximately $2.5 billion to create an enterprise with operations in 27 states comprising over 12.4 million square feet. Fifty-seven percent of our tenants are credit-rated, with thirty-nine percent having investment grade ratings. Most of our portfolio was acquired during the economic downturn, when most of the other buyers were on the sidelines.
Now that we are a publicly traded entity, we are well-positioned to take advantage of the considerable tail winds that we expect to grow this defensive sector. We think the medical office sector will benefit from several macro-economic trends, including the recently confirmed Patient Protection and Affordable Care Act, the aging US demographics, and the increasing pace of healthcare expenditures.
Thomas: Your Company listed under the ticker HTA in early June, without issuing any new shares. What was the purpose of that structure and how much equity will HTA unlock?
Peters: The IPO market has been challenging for real estate companies that need to raise capital. Several of the REITs that have gone public, have been forced to do so at large discounts to fair value because they needed to raise equity and repay debt. This was very dilutive to their existing shareholders.
We were fortunate to list our shares on the New York Stock Exchange without raising capital. We see the long-term value of being a publicly traded entity. However, we have prudently maintained very low leverage throughout the economic downturn and did not feel the need to dilute our shareholders with new equity.
In 2010, HTA's shareholders approved a phased-in liquidity program which allows a quarter of the existing shares to become eligible to trade every 6 months. This program allows for a measured, patient and structured entry into the public markets. It also gives the company time to introduce itself to new investors, something we have been on the road doing, ever since we listed our shares.
Thomas: The medical sector is predominantly made up of several large REITs. How does HTA fit in the space and what differentiates your platform?
Peters: HTA is focused almost exclusively on the Medical Office Building sector. Within the healthcare sector, medical office is considered to have the lowest risk profile. It has the lowest exposure to government reimbursement. It also is driven by traditional real estate fundamentals and is not dependent upon the success or failures of a single operating company. Additionally it allows us to concentrate all of our efforts on maintaining and building our relationships with health systems and developers in this sector; relationships which are key to our long term success.
This is significantly different than the model of the larger, diversified healthcare REITs you mentioned. Each of these invests in a disparate set of businesses, from skilled nursing and assisted living facilities, to medical office and even life science buildings. HTA is dedicated to only one asset type, medical office buildings.
Thomas: HTA has a well-balanced platform with around 1,600 leases. I see that your biggest tenant (based on revenue) is in my hometown of Greenville, SC. Tell me about your diversification strategy and what lead HTA to Greenville, SC?
Peters: We have a very diverse portfolio, consisting of buildings in 27 states and tenanted by a large number of health systems and medical practices. The Greenville Hospital System is our largest tenant, with just under 6 percent of our annual base rent. They are rated A1 by a leading credit rating agency and have an average of 11 years left on their leases. They were also one of the first health systems to "monetize" a large part of their real estate portfolio. We were fortunate to be able to partner with them in 2009.
The Greenville portfolio of assets has everything that we look for in an acquisition. The buildings are largely located on-campus - the core, critical real estate for healthcare systems, and are affiliated with a credit-rated health system with significant market share. They also have a nice mix of long-term, single tenant leases - which provide long-term stability, and multi-tenant buildings leased to physician practices - which provide the ability to grow with the economy.
Thomas: HTA has contractual rent bumps of around 2 to 3 percent annually. How does that compare to other triple-net REITs that have more modest income growth?
Peters: Generally speaking, we expect to grow our same-store NOI by 2 to 4 percent annually. As you mentioned, our existing leases have contractual rent bumps of between 2 and 3 percent annually. We also have the ability to grow earnings through occupancy gains, increases in market rents and expense reductions, many of which will be driven by our continued roll-out of our self-management operating platform into additional markets. This compares very favorably to the 1 to 1.5 percent annual rent bumps locked in for long lease terms typically found in the triple-net space.
Thomas: Since 2007, HTA has closed on around $2.55 billion in acquisitions. What do you project for 2012 and what has HTA closed so far this year?
Peters: In general, we target acquisitions that are between $25 and $75 million in size. These are meaningful to HTA and also allows for disciplined growth. In 2012, we have acquired over $260 million in medical office buildings affiliated with leading health systems. The largest of these was a $100 million acquisition of a portfolio located in the Boston area that is leased to the Steward Health System.
Thomas: HTA has around 18 percent secured debt ($639.1 million) and an undrawn $575 credit facility. Tell me about your capitalization and overall culture as it relates to debt?
Peters: We are an investment rated company, receiving investment grade ratings from the leading rating agencies in the summer of 2011. We earned those by retaining very low leverage throughout the economic downturn and investing in a very stable, defensive asset class. As of June 30, our debt to enterprise value was only 27.4 percent. These ratings have enabled HTA to access the lower-cost, unsecured debt markets and lower our overall borrowing costs. As a publicly traded company, we intend to maintain a low to moderate capital structure and access the public debt markets in the future. This will enable us to grow with nominal risk.
Thomas: I know we met a few years ago when you were President of Triple Net. Tell us about your management team's experience?
Peters: Our management team, Kellie Pruitt (NASDAQ:CFO), Mark Engstrom (EVP-Acquisitions) and Amanda Houghton (EVP-Asset Management), has more than 75 years combined experience in the real estate and healthcare industries. We have been working together since 2009, when we took the company under self-management. Since that time, we have more than doubled the size of the company and implemented the management platform that is at the core of our success today.
Thomas: Your stock is trading at $9.16 per share today and the dividend yield is 6.2 percent. Tell me how this current price compares to your asset value? (I think HTA has a most compelling value proposition).
Peters: We believe that we currently offer a very compelling opportunity to investors. We are an investment grade company in a defensive asset class with 91 percent occupancy, which offers a yield over 6 percent. This compares favorably to our healthcare REIT peers, most of whom are offering dividends below 5 percent.
HTA closed today at $9.15 per share and the current dividend yield is 6.3 percent. I also wrote an article on HTA here.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.