If you've never heard of Healthcare Trust of America (NYSE:HTA), that's okay. It was formed in 2006 and listed on NYSE in 2012, and being a REIT, flies under the radar on most trading days. But with a current yield of 4.05% and in my mind, an impressive quantitative outlook, it deserves a solid Buy rating. This article is aimed at developing the thesis that because this company is internally sound, relatively removed from rate exposure, and benefits directly from a great management team, it represents a sound investment for the dividend investor.
Very little emphasis was put on developing the qualitative picture because earnings, tenant and property quality, and financial measures are what lasts. Short-term opinions and events are exactly that -- short term. For this reason, my time horizon on this company is at least 1.5 years with a target of $36.17.
Healthcare Trust of America is a REIT that invests heavily in medical office buildings. I believe this heavy exposure is the best choice within healthcare REITs because of industry dynamics. The data shows that there is currently an oversupply of senior housing properties, with outpatient visits and the senior citizen population on the rise. This indirect demand should give the company enough selling power to continually increase leases. With 97% of assets on campus, they are also aligned with the three rules of real estate success (location, location, location). Having properties that close to the customers that will use them gives the company an advantageous market position. If competitors want the same exposure, they will either have to build or buy out; neither of which is exactly cost effective.
Additionally, their portfolio is allocated extremely well. Their highest exposure is in the Northeast at 23%, followed by 18% in the Midwest and 14% in the Southeast. This segmented allocation should benefit from diversification as well as lack of exposure to one state. Many other healthcare REITs like to almost take over one state, and if you look at their map of properties, you'll see that they're very well spread out. This dispersion manages the equilibrium between supply of doctors in an area with demand from customers in that same area. This is demonstrated through a steady occupancy ratio of 92% and tenant retention of 82%. This tells me that management plans for growth as well as they maintain profitable relationships.
Not only is the management team comprised of proven financial, real estate, and medical professionals, they are also heavily incentivized through stock and non-equity option compensation. The highest base salary among the executives was 29.7% (M. Engstrom), which helps keep SG/A costs down. While some REITs erode their bottom line through large cash compensation policies, the company incentivizes performance and helps make that happen. Their pedigrees are also outstanding, with past experiences at BofA, GE, Grub & Ellis, and Insite Medical Tech. I believe this collection of diversity on the board has been fundamental to the company's fast growth. Lastly, D. Klein was appointed as EVP of Business Development on 1/5/16, which is a new position aimed at growing the company's strategic relationships to new customers.
- The company issued 5.2m shares in April to pay off some debt and fund acquisitions
Q4 Earnings -
- Normalized FFO increased 11.7% yoy
- FAD increased 5.7% yoy
- Same property cash NOI increased 3% yoy
- Completed investments of $162 million, 91% leased properties around Connecticut
- Closed the quarter with $562 million in liquidity
- Maintained investment grade credit rating due to credit quality of tenants
- Steadily growing at 8.4% compounded since 2011
- Steady increases due to successful acquisitions, tenant retention, and a growing multi-tenant segment
- I expect this segment to grow at a 10% compounded rate through 2019 because of increasing leases, tenant retention, and occupancy
Operating Margins -
- Growing at 8.8% compounded since 2011, currently at ~28
- Starting to grow at a faster rate due to a decreased rate of acquisitions (enabling synergies and cost containment)
- Low interest expense bolsters steady growth into 2019, and I expect margins to be nearly 30% higher than they are today
Debt and Liquidity -
- Massive increases in St/Lt debt due to a period of bolt on acquisitions (20% compounded since 2011; 2.6% since 2015)
- Debt management remains strong due low cost of debt and consistent NOI increases
- I expect the company's Debt/Asset ratio to drop to around 6% to 47 by 2019 due to its NOI generation
- Even though the company had an equity offering, Share capital/APiC has been steadily increasing due to retained cash flows
- Negative retained earnings alarms most investors, but shouldn't be cause for concern with a REIT, because FAD payout is often times greater that NI
Ratio Analysis vs. Peers
To test how the company performed over the last five years, I pulled comparables HCP (HCP, Welltower HCN, and Ventas VTR) from Bloomberg to get a sense of industry trends and the company's performance.
EBIT/Interest Expense is shown in the chart above. The company is plotted in brown compared to its closest three competitors. As you can see, it's the highest of the comps (4.4), and has been steadily increasing for two years. This is attributable to revenue growing 8%, while operating expenses only grew 6.5% compounded since 2011. This is the one trend that I'm not entirely sure about. On the one hand, interest expenses may rise as debt accumulates. On the other, I expect EBIT to increase, given smart purchasing and development. Moving forward, the ratio may level or increase marginally.
This is the FCF Margin, and as you can see, there is a similar story. the company is plotted in light blue at 40%, while the peer median hovers around -40%. This is most likely attributable to a lowly volatile Depreciation and Am. expense at around 4% of operating assets, meaning as operating assets grow, D/A expense as a dollar value decreases in relation to operating income. I'll go into deeper detail about this discussing the valuation model.
Here, the company is plotted with light blue (6.4) Net Debt/EBITDA. Despite large assumptions of debt, management continually increases top line revenue due to strategic relationship management and tenant retention.
Contained above is the company's Debt/Assets in light blue, and even though it's trending higher, I expect it to eventually flatten out around the high 40s (currently 50.1). This is because debt should start to decrease as management devotes time and attention to developing internal synergies following acquisitions.
Above is the company's cap rate in brown (5%), which signals a lower level of risk in the company. Because NOI has consistently been increasing, the fact that this ratio has been decreasing says that aggregate property values are starting to demand a higher selling price. This is reassuring because if the company ever needs a cash infusion or to sell a property to reallocate the portfolio, there should theoretically be some net gains. On the other hand, this may signal market saturation, and will be on my radar in the coming months.
Included here is the weighted average effective interest rate on net debt in grey. It just hit .91, which is the lowest in its comps. This chart was included to show how their debt remains manageable, and creditors have faith in the earning power of the company.
Included above is their TTM EBITDA margin on top at ~61%, which reinforces my view that internal synergies will continue to contribute to increased earnings power. This is because operating costs could erode margins, but management has committed to increasing triple net lease structure and keeping operating costs and responsibilities to tenants manageable.
Above is the company's same store NOI growth over time (in blue around 15%), and is included to show how compared to its competitors, not only is the growth rate consistently high, it is also steadily reliable. This data was used in the model below to establish a proxy for minimum lease income, and really helps the intrinsic value of the company.
In the two charts above, you can see the company's ROE (in yellow at 2.3%) and ROA (in white at 1%). While these ratios aren't as reassuring as the others, I expect them to improve in the future. This is due to my view that net income will start to increase in relation to BV of equity and assets because of the necessity to integrate acquired properties. Once the company is given time to incorporate operations and processes, margins should continue to expand.
Above is a schedule for: bond principal and interest payments, term loan value outstanding, and revolvers due and available. If my forecasts are correct, the company should have no problem meeting a schedule this far in advance. I'll go into more depth later, but the future value of operating cash flows is an estimated $1B leading into 2019. Granted, a significant portion of that will go to shareholders and non-operating expenses, but the point remains that the company will be able to meet their debt burden.
With a rate hike now probable by the end of 2016, this company's interest rate exposure must be evaluated. Luckily, there is very little real or significant risk of loss due to an increase in interest rates. In fact, most of the risk is totally systematic. If and when rates rise, the PV of all equities will be at risk.
So to evaluate the extent to which the company's share price is susceptible to interest rate movements, I've compiled a list of market-moving rates and their correlations below.
In order, it reads Healthcare Trust of America (share price), US 10-year, effective, and average target federal funds rates. As you can see there is very little, if any correlation between those movements. Additionally, the date range is important. I decided to roughly measure the period where interest rates started to strongly dictate how the market moved on a given day, so this chart is very reassuring.
Additionally, I ran a regression analysis on Bloomberg between the company's cost of equity and the US 10-year, and it yielded an R sq. of .32, SD of 1.8, and a significance of .24. Again, there is some risk of loss here, but it remains marginal at best. I think this is due to the fact that the company manages its debt well, and maintains a consistent and affordable capital structure. For example, they just issued equity after they increased their debt burden to a manageable point.
Above is a screenshot of scenario outcomes for two models. I used a Residual Operating Income and a Dividend Discount Model with bear, base, and bull cases to cover any sort of probable outcome until 2019. From there, the probability of each scenario was incorporated to arrive at a fair value estimate for the total market value of residual operating income as well as dividends. Below is a rundown of base case growth rates used in the models compared to historical averages.
|Average Growth Rates||Forecast||Historical|
|Operating Margin Growth||8%||10%|
|Interest Expense Growth||7%||6.7%|
|FFO Payout Ratio Growth||86%||86%|
|Operating Asset Growth||14%||14%|
As you can see, the growth rates are very reasonable given the growth of this company. Part of the importance in this model is the fact that the company itself is in a very interesting stage. It's still relatively small, so it hasn't experienced diminishing returns yet, and it has gotten large enough to generate steadier income and margins. Going off that point, the deviations in bull/bear cases are reflective of probable outcomes concerning tenant growth, property acquisition, and margin expansion.
Finally, I averaged the two scenarios to equally weight the intrinsic value from the RI and dividend value of the DDM to arrive at a fair value estimate of $36.17, representing a 24% upside to its price at market close on 4/28/2016. This is reflective of my view that the company will be able to generate value for shareholders in the future based on good, consistent, management, a favorable market position, and an inherent mis-pricing.
Disclosure: I am/we are long HTA.
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.