Healthcare Realty: An 8.9% Dividend Yield That Shouldn’t Be Cut (NYSE:HR)

I’ve been buying Healthcare Realty Trust (NYSE:HR) in recent weeks as REITs pulled back in response to sticky inflation numbers and comments from the Fed that they’re willing to keep base interest rates higher for longer. HR is an internally managed medical office building (“MOB”) REIT with a 688-property portfolio at the end of its fiscal 2023 fourth quarter. This is spread across 40.3 million square feet and 35 states. HR focuses on Class A MOBs concentrated in medical clusters of fast-growing Sun Belt markets. Dallas and Houston form its two top locations at 8.9% and 4.6% of its portfolio respectively.

The REIT has situated 72% of its MOB portfolio in clusters on or around hospital campuses to drive efficiencies in leasing and tenant services. This strategy also helps form a moat against any new MOB supply, as the REIT is set to benefit from a broad growth in outpatient care and as the US population ages. HR last declared a quarterly cash dividend of $0.31 per share, left unchanged sequentially, and $1.24 per share annualized for an 8.8% dividend yield. This would be amongst the highest yield in HR’s history if we adjusted out the abnormal selloff at the onset of the pandemic.

Here lies the opportunity for the bulls, as a dividend yield that has moved to sit close to its highest-ever level since HR became a public entity in 1993 has presented an opportunity to build and expand an average cost base on the commons that captures this abnormality. HR sits at the intersection of a tripartite of bearish factors that have left shares trading at a low multiple to annualized fourth-quarter NFFO. Consumer inflation has remained sticky, base interest rates remain at 22-year highs, and investor sentiment toward office-focused REITs has cratered against the work-from-home zeitgeist.

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NFFO And 2024 Guidance

HR is currently subject to the discounting of office REITs despite MOBs being an entirely different property type from standard corporate office buildings. The REIT recorded a fourth-quarter normalized funds from operations (“NFFO”) of $0.39 per share, and $1.56 per share annualized. Fourth quarter NFFO was in line with analyst consensus but dipped by 3 cents from NFFO of $0.42 per share a year ago. HR is essentially now swapping hands for 9x its annualized 2023 fourth-quarter NFFO, roughly 30% below its peer group median.

The REIT is guiding for 2024 NFFO of $1.52 per share to $1.58 per share. This would represent a growth of 6 cents, roughly 3.9% year-over-year growth at the top end of the range. This is set to be driven by multi-tenant cash net operating income (“NOI”) growth of between 3.5% to 4.75%. HR’s cash from operations came in at $127.32 million at the end of the fourth quarter, with the REIT’s cash and cash equivalents position ending the quarter at $25.7 million.

Debt Maturities And Growth

HR spent a remarkable $472 million in dividend payments through its fiscal 2023, a significant growth from $283.7 million in the prior year following the REIT’s merger with Healthcare Trust of America. This merger was completed just as the Fed’s fight with inflation began to ramp up, with the stock down materially since then. HR faces no real debt maturities in 2024 with its portfolio average years to maturity at roughly 4 years as of the end of the fourth quarter.

Critically, HR continues to record growth as it guides for continued growth through 2024. The REIT’s combined total same-store cash NOI increased by 2.7% during its fourth quarter, against an average in-place rent increase of 2.8%. Outpatient facilities, where physicians can offer routine consultations, check-ups, and minor treatments, are set to see continued demand growth. The REIT’s leverage is also manageable, with its net debt to adjusted EBITDA of 6.4x within its expected range of 6.0x to 6.5x.

The REIT was also rated, albeit now withdrawn, investment grade at ‘BBB’ by Fitch Ratings in the summer of 2023. This is an investment grade-rated REIT with a high-quality Class A MOB portfolio and a near-9% dividend yield that is trading markedly below its historical range. The REIT should be able to meet its dividend payments at the midpoint of its 2024 NFFO guidance range. Hence, I’m comfortable taking a position here with the commons being rated as a buy.