Healthcare Realty Trust (HR) is a real estate investment trust (REIT) that specializes in owning, leasing, managing, acquiring, financing, developing, and redeveloping income-producing real estate properties associated primarily with the delivery of outpatient healthcare services throughout the United States.

Business Overview

As of March 31, 2024, HR had gross investments of approximately $13.4 billion in 654 consolidated real estate properties, construction in progress, redevelopments, financing receivables, financing lease right-of-use assets, land held for development, and corporate property, excluding held for sale assets. HR's real estate properties are located in 35 states and total approximately 38.4 million square feet.

Recent Developments

HR reported strong first quarter 2024 results, with Normalized FFO per share at the top half of the expected range. The REIT's focus on two key priorities - capital allocation and operational momentum - has been paying off. On the capital allocation front, HR announced a strategic relationship with KKR that is expected to generate $300 million in proceeds within the next 60 days. Additionally, HR expects another $300 million of proceeds from separate transactions in the next 90 days. These transactions are expected to be priced in the 6.5% to 6.75% cap rate range. HR plans to use these proceeds to fund existing capital commitments as well as leverage-neutral share repurchases, which are expected to be accretive to FFO and FAD per share.

Operational Progress

On the operational front, HR is making steady progress in increasing multi-tenant occupancy, which is a key priority. In the first quarter, multi-tenant occupancy improved by 57,000 square feet or 17 basis points, putting HR on track to deliver the 150 to 200 basis points of multi-tenant occupancy gains it communicated in its 5-quarter bridge. HR's leasing team has produced new leasing volume of more than 400,000 square feet in each of the last 3 quarters, indicating its ability to continue elevating multi-tenant occupancy. HR's operations team is also focused on accelerating NOI growth by quickly converting new leases to occupancy and controlling operating expenses.

Financials

HR's financial performance in the first quarter of 2024 was impacted by a $250 million goodwill write-off, a non-cash accounting impairment driven by the current macroeconomic environment. However, HR's underlying business fundamentals remain strong, with same-store cash NOI growth accelerating to 3% in the first quarter, up from 2.7% in the previous quarter. HR's disciplined and proactive efforts, especially on property taxes and labor costs, helped to control operating expenses, with a significant improvement compared to the fourth quarter and full year 2023.

On the revenue side, HR's cash leasing spreads improved to 3.7% in the first quarter, up from 3.3% in the previous quarter. Tenant retention also improved significantly, from 78% in the fourth quarter to 85% in the first quarter. HR's strong leasing activity is supported by favorable supply and demand fundamentals, with occupancy across the sector climbing and new medical outpatient building starts continuing to decelerate.

For the full year 2023, HR reported annual net income of -$281,616,000, annual revenue of $1,343,769,000, annual operating cash flow of $499,820,000, and annual free cash flow of $268,794,000. In the first quarter of 2024, HR reported Normalized FFO per share of $0.39, which was at the upper end of its guidance range.

Outlook

Looking ahead, HR is focused on executing its capital allocation priorities, which include repurchasing stock on a leverage-neutral basis using proceeds from asset sales and joint ventures. HR believes this strategy will be accretive to FFO and FAD per share. Additionally, HR is poised to deliver accelerating multi-tenant absorption in the back half of the year, driven by its strong leasing momentum and the constructive supply/demand backdrop.

Liquidity

In terms of HR's financial position, the REIT had $1.4 billion available to be drawn on its unsecured credit facility and available cash as of March 31, 2024. HR expects to continue to meet its liquidity needs through cash flows from operations and its available liquidity sources, including the unsecured credit facility.

Risks and Challenges

One potential risk facing HR is the financial strength of its tenants, particularly in the healthcare industry, which has faced a wide range of economic, competitive, government reimbursement, and regulatory pressures. HR's revenues are subject to the financial strength of its tenants and associated health systems, and any slowdown in the economy or changes in healthcare regulations could adversely affect the businesses of HR's tenants and their ability to make rental payments.

Conclusion

Overall, Healthcare Realty Trust (HR) is well-positioned to navigate the evolving medical office landscape. HR's focus on capital allocation and operational momentum, coupled with its strong financial position and diversified portfolio, make it an attractive investment opportunity for investors seeking exposure to the healthcare real estate sector.