Business Overview
Healthcare Realty Trust Incorporated (NYSE:HR) is a real estate investment trust (REIT) that owns, leases, manages, acquires, finances, develops, and redevelops income-producing real estate properties associated primarily with the delivery of outpatient healthcare services throughout the United States. The company's diversified portfolio of medical office buildings, outpatient facilities, and other healthcare-related properties positions it as a leading player in the dynamic medical real estate sector.
Healthcare Realty Trust has a rich history spanning over three decades. The company was founded in 1992 and has since grown to become a premier owner and operator of high-quality healthcare facilities. Over the years, the company has strategically expanded its portfolio, leveraging its expertise in the medical real estate space to capitalize on the increasing demand for outpatient care.
On July 20, 2022, Healthcare Realty Trust completed a significant merger with Healthcare Trust of America, Inc., which merged with and into a wholly-owned subsidiary of Healthcare Realty Trust Incorporated. Following the merger, the combined entity retained the name Healthcare Realty Trust Incorporated and continued trading on the New York Stock Exchange under the ticker symbol "HR." This merger was treated as a reverse acquisition for accounting purposes, with Legacy HR (the pre-merger Healthcare Realty Trust) considered the accounting acquirer.
The company has faced some challenges in recent years, particularly related to tenant bankruptcies. In 2024, Steward Health, which leased approximately 593,000 square feet of space from the company (accounting for about 2% of rental revenue), filed for Chapter 11 bankruptcy protection. Healthcare Realty Trust was able to assume leases for six buildings in Massachusetts totaling approximately 244,000 square feet, but leases for about 349,000 square feet in Florida and Massachusetts were rejected by Steward. The company pursued claims for outstanding rent against Steward in bankruptcy court.
Another challenge arose in January 2025 when Prospect Medical Holdings, which leased approximately 80,910 square feet of space from the company (accounting for about $2.9 million of annual rental revenue), filed for Chapter 11 bankruptcy protection. In response, Healthcare Realty Trust moved these leases to cash basis accounting and recorded a revenue reduction of $0.7 million in the fourth quarter of 2024.
As of December 31, 2024, Healthcare Realty Trust had gross investments of approximately $11.8 billion in 589 consolidated real estate properties, construction in progress, redevelopments, financing receivables, financing lease right-of-use assets, land held for development, and corporate property. The company's portfolio is geographically diversified, with properties located across 33 states and totaling approximately 34.2 million square feet. Additionally, the company had a weighted average ownership interest of approximately 31% in 63 real estate properties held in unconsolidated joint ventures.
The company's real estate portfolio is primarily focused on medical office and outpatient facilities, with 565 properties classified as "Medical office/outpatient" facilities, representing $10.66 billion in investment and 31.92 million square feet. Healthcare Realty Trust also has investments in inpatient facilities, totaling $438.07 million across 15 properties, and office facilities, totaling $426.69 million across 6 properties.
Healthcare Realty Trust's strategy is to generate stable, growing income and lower the long-term risk profile of its portfolio by focusing on facilities primarily located on or near the campuses of acute care hospitals associated with leading health systems. The company seeks to reduce financial and operational risk by owning properties in high-growth markets with a broad tenant mix that includes over 30 physician specialties, as well as surgery, imaging, cancer, and diagnostic centers.
Financial Performance
In the fourth quarter of 2024, Healthcare Realty Trust reported normalized funds from operations (FFO) per share of $0.40, which was at the high end of the company's previously provided guidance range and represented a 2.5% year-over-year growth. For the full year 2024, normalized FFO per share was $1.56, also at the high end of the revised range.
The company's strong operational performance was highlighted by robust leasing activity, with nearly 2 million square feet of new signed leases in 2024, including a record-breaking 690,000 square feet in the fourth quarter. Tenant retention remained strong at 83.4% for the year, up 400 basis points from 2023. These impressive leasing results, coupled with 149 basis points of occupancy gains in the multi-tenant portfolio, contributed to the company's same-store cash NOI growth of 3.1% in the fourth quarter and 2.9% for the full year.
Healthcare Realty Trust's disciplined capital allocation strategy also played a crucial role in its financial performance. In 2024, the company generated nearly $1.3 billion in proceeds, including $500 million from non-core asset sales and additional funding from an expanded joint venture platform. The company allocated $510 million of these proceeds to repurchase 31 million shares on a leverage-neutral basis, while also repaying $350 million of debt, ending the year with a net debt to EBITDA ratio of 6.4x.
For the most recent quarter, Healthcare Realty Trust reported revenue of $309.77 million, with a net loss of $106.8 million. This represents a year-over-year revenue decline of 6.3% and a shift from positive net income in the prior year quarter to a loss in the current quarter.
In 2024, the company completed no property acquisitions but disposed of 67 properties for sales prices totaling $1.50 billion, including 30 properties contributed into two unconsolidated joint ventures in which the company maintains a non-controlling interest. These transactions yielded net cash proceeds of $1.20 billion, net of $67.30 million in closing costs and related adjustments and $172.70 million in retained joint venture interests.
The company also invested $150.60 million toward the development and redevelopment of properties in 2024, with a focus on maintaining and improving the physical and aesthetic attributes of its owned properties. As of December 31, 2024, Healthcare Realty Trust had $158.8 million in total estimated investment across active development and redevelopment projects.
Strategic Priorities and Outlook
Looking ahead to 2025, Healthcare Realty Trust has outlined a clear set of strategic priorities to drive continued growth and enhance shareholder value. The company's key focus areas include:
1. Continuing its operational momentum and driving further efficiencies: The company aims to build on its strong leasing performance and occupancy gains, while also maintaining a tight control on operating expenses.
2. Refining its portfolio through strategic asset sales: Healthcare Realty Trust plans to selectively dispose of non-core properties in slower-growth markets, with the goal of further focusing its portfolio on the densest and fastest-growing areas.
3. Proactive balance sheet management: The company will prioritize debt reduction, using proceeds from asset sales to address upcoming maturities and drive leverage down to the low end of its target range.
In line with these priorities, Healthcare Realty Trust has provided 2025 guidance for same-store NOI growth of 3% to 3.75% and expects to generate $400 million to $500 million from non-core asset sales. The company also anticipates achieving full dividend coverage by the fourth quarter of 2025 or early 2026, as it continues to execute on its operational and financial initiatives.
Additionally, Healthcare Realty Trust expects 75 to 125 basis points of same-store occupancy gains in 2025. The proceeds from asset sales will primarily be used to fund leasing capital and pay down debt, with the goal of reducing leverage to 6.0x to 6.25x net debt to EBITDA by year-end 2025.
Risks and Challenges
Despite its strong operational performance, Healthcare Realty Trust faces several risks and challenges that investors should be aware of. The company's exposure to the broader healthcare industry and its reliance on the financial health of its tenants, primarily healthcare providers, can make it vulnerable to changes in government reimbursement policies, industry consolidation, and other regulatory and economic factors.
Additionally, the company's heavy focus on outpatient healthcare facilities can expose it to risks associated with the ongoing shift in patient care towards lower-cost settings. While this trend generally benefits Healthcare Realty Trust, any disruptions or slowdowns in this transition could impact the company's growth prospects.
Furthermore, the company's capital-intensive development and redevelopment activities carry inherent risks, such as cost overruns, construction delays, and difficulties in leasing newly completed properties. Navigating these challenges while maintaining financial discipline will be crucial for Healthcare Realty Trust's long-term success.
Financials
Healthcare Realty Trust's financial performance has been solid, as evidenced by its normalized FFO per share of $0.40 in the fourth quarter of 2024 and $1.56 for the full year 2024. The company's same-store cash NOI growth of 3.1% in Q4 and 2.9% for the full year demonstrate its ability to generate consistent revenue from its existing properties. Additionally, the company's disciplined capital allocation strategy, which included $510 million in share repurchases and $350 million in debt repayment, has helped to optimize its financial structure.
The company's total real estate investments, net, amounted to $9.33 billion as of December 31, 2024, with a total portfolio occupancy of 88%. Healthcare Realty Trust's rental income for the year ended December 31, 2024, was $1.23 billion, with a weighted average remaining lease term of approximately 4.2 years.
Liquidity
Healthcare Realty Trust maintains a strong liquidity position, which is crucial for its ongoing operations and future growth initiatives. The company's ability to generate nearly $1.3 billion in proceeds in 2024, including $500 million from non-core asset sales, demonstrates its capacity to access capital when needed. Furthermore, the company's focus on proactive balance sheet management, including its goal to drive leverage down to the low end of its target range, should help maintain a healthy liquidity profile going forward.
As of December 31, 2024, Healthcare Realty Trust had $68.92 million in cash on hand and $1.5 billion available under its Unsecured Credit Facility, with no outstanding borrowings. The company's debt-to-equity ratio stood at 0.95, while its current ratio and quick ratio were both 2.35. Additionally, the company held approximately $33.40 million in letters of credit and security deposits to ensure tenant performance in the event of default.
Industry Trends and Corporate Governance
The medical office building (MOB) sector has continued to see robust demand driven by the shift of healthcare services to lower-cost outpatient settings and favorable demographic trends. Supply of new MOB developments remains constrained, leading to high occupancy levels and rent growth across the industry.
In terms of corporate governance, Healthcare Realty Trust experienced some changes in late 2024. Todd Meredith stepped down as President and CEO in November 2024, with Constance Moore appointed as interim President and CEO. Additionally, the company entered into a cooperation agreement with Starboard Value LP in December 2024, resulting in the appointment of three new independent directors to the Board.
Conclusion
Healthcare Realty Trust has demonstrated its resilience and operational excellence in the face of a dynamic healthcare landscape. The company's strategic focus on high-quality outpatient facilities, disciplined capital allocation, and commitment to driving efficiencies have positioned it well to capitalize on the growing demand for medical office space.
As the company navigates the shifting dynamics in the healthcare real estate sector, its ability to execute on its strategic priorities, maintain a strong balance sheet, and adapt to industry changes will be critical in driving long-term value for its shareholders. With a solid track record and a clear vision for the future, Healthcare Realty Trust remains a compelling investment opportunity in the medical REIT space.