Healthcare Realty Rolls Out $500M Share Repurchase – Buyback Wednesdays

  • June 7, 2023

Key Insights:

  • Healthcare Realty is the largest pure play Medical Office Buildings (MOB) REIT in the United States.
  • The company’s properties are on or adjacent to hospital campuses. Dallas, Seattle, Houston, Los Angeles, and Atlanta are its top 5 markets.
  • The REIT has a forward dividend yield of 6.6% and is well-covered by a 75% payout ratio.
  • Future growth will be driven by a combination of higher rents, an increasing shift from in-patient to outpatient services and a greater need for medical services by an aging population.
  • With the stock down more than 30% over the last year, we saw insider buying in March and now the company wants to opportunistically buyback shares.
  • Expansion through acquisitions has left the REIT with a leveraged balance sheet and debt maturities in the next few years at higher interest rates is a key concern.

Healthcare Realty Trust (HR) is a real estate investment trust that integrates owning, managing, financing and developing real estate properties associated primarily with outpatient healthcare services throughout the United States. From an initial portfolio of 21 healthcare facilities in 1993, HR now owns 715 properties totaling more than 40 million square feet. Its portfolio mostly includes multi-tenant, on-campus medical office buildings. Dallas, Seattle, and Los Angeles are its three largest markets with a combined 20.2% of its medical office building portfolio.

Healthcare Trust - property details

Source: Investor Presentation -HR

On June 1, 2023, HR announced a $500 million share repurchase program which represents around 7% of its market cap at announcement. The company does not intend to use debt to fund the share repurchase program. Just before the announcement, on May 30, the stock price dropped to $18.33/ share, close to its lowest price in the last five years. The company has a lot of debt (6.6x adjusted EBITDA) but would prefer to have the option to buyback stock in case the stock gets significantly cheaper.

Addressing a press release, Todd Meredith, the company’s President and CEO, stated,

We are committed to prudently allocating capital to create value for our shareholders. We expect to further refine our portfolio through asset sales to increase our focus on key markets where we have the greatest potential for scale, concentrated clusters, and strong relationships that drive internal growth. This authorization represents the confidence we have in our business and strategy to drive long term growth, which we believe is not reflected in the current market valuation.

Acquisitions:

HR has shown an inclination to grow through both partnerships and acquisitions. In 2020, it formed a joint venture partnership with TIAA to invest in $200 million worth of properties each year. In 2022, it merged with Healthcare Trust of America entering into an $18 billion strategic combination. According to its May 2023 investor presentation, HR was the second largest developer of new projects in 2022. The fact that the company was also the second largest seller shows that it is constantly optimizing its portfolio of properties.

Source: Investor Presentation -HR

Dividend Yield:

HR has a forward annual dividend of $1.24 per share, working out to a yield of 6.55%. Funds from operations (FFO) over the last four quarters were $1.66 per share, implying a payout ratio of 75%. The firm had been very gradual with its dividend increases even before the Healthcare Trust of America merger and I would not be surprised if the company focused more on paying down debt instead of increasing its dividend in the near future.

Q1 2023 Results:

  • Quarterly same-store net operating income (NOI) grew 2.8% and quarterly revenue increased by 2.7%.
  • Year-over-year occupancy increased 50 basis points to 89% for the same-store properties with total portfolio multi-tenant occupancy just over 85%.
  • Maintenance CapEx trended lower in the first quarter to $24.9 million or 11.8% of NOI.
  • Normalized FFO per share for the first quarter of $0.40 was down $0.01 from the $0.41 per share run rate in the fourth quarter. This was primarily due to higher interest expenses on variable rate debt.

2024 Outlook:

HR is optimistic about its future outlook. A combination of rising demand for healthcare services from an aging population and an increasing shift from in-patient to outpatient services should help HR’s growth. It expects to generate FFO per share growth of 5% to 7% in 2024. The firm also expects multi-tenant absorption to double in 2024 from 100 basis points to 200 basis points. It expects this absorption to accelerate same-store NOI growth to a range of 4% to 6% in 2024. This could be even stronger, looking at 2025 and beyond.

Bottom Line:

Outpatient demand for ages 55+ alone is forecast to grow 16.9% by 2025, a rate that is 4.3% higher than the general population. HR’s portfolio mostly includes Medical Office Buildings (MOB). Strong demand for these MOBs along with expanding health system relationships, positions the firm for accelerated growth in the future.

My primary concern is the company’s debt and it is encouraging to see that the company does not have significant maturities before 2025. If interest rates remain elevated going into 2025, HR will see a hit to its bottom line as it has to refinance debt at higher rates and FFO growth may stall.

I have personally been long the stock since before the Healthcare Trust of America merger and plan to add to my position in the coming weeks.

Heathcare Trust - Balance sheet - Debt Maturity Schedule

Source: Investor Presentation -HR

Welcome to edition 62 of Buyback Wednesdays, a weekly series that tracks the top stock buyback announcements during the prior week. The companies in the list below are the ones that announced the most significant buybacks as a percentage of their market caps. They are not the largest buybacks in absolute dollar terms. A word of caution. Some of these companies could be low-volume small-cap or micro-cap stocks with a market cap below $2 billion.

With the end of earnings season, buyback activity slowed down significantly. A total of 13 buybacks were announced in the last week compared to 15 in the prior week.

Top 5 Stock Buyback Announcements 

1. Xunlei Limited (XNET): $1.68

 On June 6, 2023, the Board of Directors of this Chinese digital media internet platform authorized a new $20 million share repurchase program, equal to around 18.8% of its market cap at announcement.

Market Cap: $108.79MAvg. Daily Volume (30 days): 74,863Revenue (TTM): $361.64M
Net Income Margin (TTM): 4.73%ROE (TTM): 5.48% Net Cash: $226.53M
P/E: 5.25Forward P/E: N/AEV/EBITDA (TTM): -11.98

2. Scorpio Tankers Inc. (STNG): $45.93

 On May 31, 2023, the Board of Directors of this marine transportation company authorized a new $250 million share repurchase program, equal to around 9.7% of its market cap at announcement.

Market Cap: $2.42BAvg. Daily Volume (30 days): 74,863Revenue (TTM): $1.77B
Net Income Margin (TTM): 51.60%ROE (TTM): 42.51% Net Debt: $1.44B
P/E: 3.2Forward P/E: 4.04EV/EBITDA (TTM): 3.21

3. Sharecare, Inc. (SHCR): $1.65

On May 31, 2023, the Board of Directors of this digital health company authorized a new $50 million share repurchase program of the company’s Class A common stock, representing around 9.4% of its market cap at announcement.

Market Cap: $$589.75MAvg. Daily Volume (30 days): 2,091,569Revenue (TTM): $458M
Net Income Margin (TTM): -25.15%ROE (TTM): -19.76% Net Cash: $152.16M
P/E: N/AForward P/E: N/AEV/EBITDA (TTM): -6.6

4. Ready Capital Corporation (RC): $10.8

On June 1, 2023, the Board of Directors of this real estate finance company approved a new $100 million share repurchase program, equal to around 9.1% of its market cap at announcement.

Market Cap: $1.21BAvg. Daily Volume (30 days): 2,667,584Revenue (TTM): $472.46M
Net Income Margin (TTM): 35.12%ROE (TTM): 9.12% Net Debt: $9.31B
P/E: 8.21Forward P/E: 7.73Price/Tang.Book: 0.74 

5. NRG Energy Inc. (NRG): $32.94

On May 31, 2023, the Board of Directors of this integrated power company authorized an additional $650 million share repurchase program, equal to around 8.4% of its market cap at announcement.

Market Cap: $7.58BAvg. Daily Volume (30 days): 6,421,411Revenue (TTM): $31.37B
Net Income Margin (TTM): -5.9%ROE (TTM): -45.62% Net Debt: $12.19B
P/E: N/AForward P/E: 4.56EV/EBITDA (TTM): -20.30

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Voluntary Disclosure: I hold a long position in Healthcare Realty Trust (HR).