A Medical Office REIT That Can Help You Sleep Well at Night
Brad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In 2013 REIT investors should continue to benefit from the low interest rate environment making the juicy dividends much more attractive vs. the 10 year Treasury and corporates - providing a continued low cost of debt tailwind for commercial real estate and REITs.
For many REIT investors that low interest rate tailwind works best for the sectors that are generating the lowest risk with the highest returns. I like healthcare because the sector is predominantly considered a defensive one due to the non-cyclical nature - namely, people do not tend to change their healthcare spending patterns depending on the economy.
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. Simply said, 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.
Accordingly, healthcare REITs indirectly participate in the defensive nature of their tenants through their lease payments. Clearly with President Obama in office for four more years the sector is viewed as a positive for healthcare REIT stocks with meaningful exposure to hospitals, medical office buildings and lab space.
Investing in a Core of Competency
Healthcare Trust of America (NYSE: HTA), based in Scottsdale, listed its shares on the New York Stock Exchange on June 6. The HTA portfolio consists of around 12.4 million square feet of space in 27 states. The current market capitalization is $2.125 billion and the company boasts a dividend yield of 5.8%. Accordingly, HTA is well-positioned to take advantage of the considerable tail winds that are expected to grow in this defensive sector.
Unlike some of the larger medical REITs like Ventas (NYSE: VTR) and HCP Inc. (NYSE: HCP) that operate more diversified portfolios (i.e. skilled nursing, MOB, etc..), HTA is a “pure” medical office REIT and that sector will benefit more 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.
HTA’s growing portfolio is driven by 57% of tenants that are credit-rated, with 39% having investment grade ratings. Most of the portfolio was acquired during the economic downturn, when most of the other buyers were on the sidelines. HTA is focused almost exclusively on the Medical Office Building sector and within the healthcare sector, medical office is considered to have the lowest risk profile.
Since HTA tenants are mostly physician groups, the Scottsdale-based REIT has a safer risk profile as compared to skilled nursing REITs like Omega Healthcare (NYSE: OHI) or LTC Properties (NYSE: LTC) that will be under more pressure due to forced expense cuts from their medicare and medicaid driven tenants.
Keep in mind that the medical office sector has the lowest exposure to government reimbursement. In addition, MOB’s are driven by traditional real estate fundamentals and are not as dependent upon the success or failures of a single operating company (i.e. like a hospital).
HTA’s “core of competency” makes the REIT significantly different from the model of the larger, diversified healthcare REITs. Each of these (diversified REITs) 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.
Investing with “Skin in the Game”
Sometimes it’s wise to buy along with insiders; at least that can be a lucrative investment strategy. Recently HTA insiders bought around 100,000 shares (in early December). That equates to around $1 million dollars. To me, HTA has plenty of room to grow (the company quintupled its operating cash flow over the last three years).
HTA has a low debt to enterprise value (around 30%) for this space and just under $600 million available on a credit facility. The company is positioned well to continue to roll up these small medical practice buildings (between $25 million to $75 million in value) in the coming years.
HTA recently announced the acquisition of a 139,000 square foot facility in Oak Park, IL. The $54 million deal was purchased from Rush Medical under a 100% occupied triple-net lease arrangement.
Big Bank Coverage Initiated
Recently Wells Fargo initiated coverage on HTA with an Outperform rating and a valuation range of $10.50 to $11.50 per share. Several positive considerations noted by Wells Fargo include:
- Investor appetite remains robust for medical office buildings
- Strong balance sheet
- Liquidity discount exists at this time, but should subside as shares unlock
- Small acquisitions can move the needle relative to several larger health care REITs
As Wells Fargo explained:
"Supported by an investment-grade (S&P BBB-) balance sheet and experienced management team (led by CEO, Scott Peters), HTA has the potential to compete effectively in the operating and acquiring of MOB space while still somewhat under the radar of the greater investing public. We believe an opportunity exists while the company remains under-followed though still very much in growth mode."
Based upon HTA’s discounted valuation (shares trading at $9.91), I consider the company a bargain. With prospects for growth of around 15% to 20%, combined with a strong dividend yield of 5.5%, HTA should be an exceptional performer in 2013 – and a promising sleep well at night REIT.
I do not own shares in HTA.