Business Overview and History
National Healthcare Properties, Inc. (HTIBP) is a real estate investment trust (REIT) that has been at the forefront of the healthcare real estate industry for over a decade. The company's portfolio consists of a diverse array of properties, including outpatient medical facilities (OMFs) and senior housing operating properties (SHOPs), strategically positioned across the United States.
National Healthcare Properties, Inc., formerly known as Healthcare Trust, Inc., was founded in 2013 with the goal of acquiring and managing a diversified portfolio of healthcare-related real estate. The company elected to be taxed as a real estate investment trust (REIT) for U.S. federal income tax purposes from its inception. Initially, the company was externally managed by Healthcare Trust Advisors, LLC (the "Advisor"), which was under common control with AR Global Investments, LLC.
The company's initial public offering was in 2013, and since then, it has steadily grown its footprint. By the end of 2020, the company owned 202 properties located in 32 states, demonstrating significant expansion in its first seven years of operation.
The company operates in two reportable business segments: OMFs and SHOPs. The OMF segment focuses on single- and multi-tenant outpatient medical facilities, where tenants are responsible for their pro-rata share of property operating expenses, in addition to base rent. The SHOP segment, on the other hand, invests in senior housing properties through the REIT Investment Diversification and Empowerment Act (RIDEA) structure, which allows the company to engage independent third-party operators to manage these facilities.
In recent years, the company has faced various challenges, including the impact of the COVID-19 pandemic on its senior housing operating properties. In 2021 and 2022, the company recorded significant impairment charges related to its portfolio, totaling over $60 million. Additionally, the company contended with rising inflation, labor shortages, and supply chain disruptions, which adversely impacted its results of operations.
A significant milestone in the company's history occurred on September 27, 2024, when it completed the internalization of its management functions. This process involved terminating its advisory agreement with the Advisor, with the Advisor's parent company contributing all necessary assets and employees to the company. This transition to self-management eliminated the need to pay various fees and expenses to the Advisor and its affiliates. Concurrent with this change, the company rebranded itself as National Healthcare Properties, Inc. and implemented a 1-for-4 reverse stock split.
Financials and Key Metrics
National Healthcare Properties' financial performance has been a mixed bag in recent years. The company's annual net income has fluctuated, with a loss of $72.3 million reported in 2023, compared to losses of $79.6 million and $85.4 million in 2022 and 2021, respectively. Annual revenue, however, has remained relatively stable, coming in at $345.9 million, $335.8 million, and $329.4 million for the same respective years.
The company's annual operating cash flow has also been inconsistent, with $21.6 million, $28.3 million, and $38.9 million generated in 2023, 2022, and 2021, respectively. Free cash flow, a crucial metric for REITs, has been negative in recent years, with a deficit of $0.8 million, $0.3 million, and $19.8 million in 2023, 2022, and 2021, respectively.
Key financial ratios paint a mixed picture for National Healthcare Properties. The company's debt ratio, a measure of leverage, stood at 0.59 as of the end of 2023, indicating a moderately leveraged balance sheet. However, the company's interest coverage ratio of -1.71 in 2023 suggests potential challenges in servicing its debt obligations.
In the most recent quarter (Q3 2024), National Healthcare Properties reported revenue of $88.94 million, representing a year-over-year increase of $3.25 million or 3.8% compared to Q3 2023. This growth was primarily driven by higher rent and occupancy in the SHOP segment, partially offset by lower revenue from disposed OMF properties. However, net income decreased by $24.58 million to a loss of $40.69 million, largely due to $8.83 million in impairment charges, $8.41 million in termination fees related to the internalization, and higher interest expense.
The company's liquidity position as of Q3 2024 showed a debt-to-equity ratio of 1.68, with $32.86 million in cash and cash equivalents. The company had $341.95 million outstanding under Fannie Mae Master Credit Facilities, bearing interest at a weighted average rate of 7.89%, and $21.71 million outstanding under an OMF Warehouse Facility, bearing interest at 8.20%. The current ratio and quick ratio both stood at 0.28, indicating potential short-term liquidity challenges.
Segment Performance
In the OMF segment, revenue from tenants increased by $2.39 million during the nine months ended September 30, 2024, compared to the same period in 2023. This increase was primarily driven by a $1.97 million increase in revenue from the Same Store Properties and a $2.97 million increase from the Acquired Properties, partially offset by a $1.37 million decrease from the Disposed Properties. The increase in Same Store Properties revenue was mainly due to higher expense reimbursements from increased property operating and maintenance expenses.
Property operating and maintenance expenses in the OMF segment increased by $2.31 million during the same period, primarily due to $2.89 million higher costs from the Same Store Properties, partially offset by a $0.77 million decrease from the Disposed Properties. The increase in Same Store Properties expenses was largely due to the impact of inflation on utility and maintenance costs, which are largely reimbursed by tenants.
In the SHOP segment, revenue from tenants increased by $4.53 million during the nine months ended September 30, 2024, compared to the same period in 2023. This was primarily driven by an $8.04 million increase in revenue from the Same Store Properties, partially offset by a $3.51 million decrease from the Disposed Properties. The increase in Same Store Properties revenue was mainly due to higher leasing rates and occupancy.
Property operating and maintenance expenses in the SHOP segment increased by $2.47 million during the same period, largely attributable to a $6.14 million increase from the Same Store Properties, partially offset by a $3.67 million decrease from the Disposed Properties. The increase in Same Store Properties expenses was primarily due to higher labor costs, including overtime, training, and bonus wages paid to employees of the third-party operators, as well as increased management fees and insurance expenses.
Navigating the Challenges in the Senior Housing Sector
The senior housing industry has faced significant headwinds in recent years, and National Healthcare Properties has not been immune to these challenges. The COVID-19 pandemic, for instance, had a profound impact on the company's SHOP segment, as occupancy rates and operating margins were severely disrupted.
To address these challenges, National Healthcare Properties has undertaken a strategic transformation, including the internalization of its management functions in September 2024. This move, which involved the termination of the company's advisory agreement with its former external manager, is expected to generate cost savings and improved operational efficiency.
Additionally, the company has been actively managing its portfolio, disposing of underperforming assets and focusing on properties with stronger growth prospects. In 2023 and 2024, National Healthcare Properties sold 15 properties, generating $82.6 million in gross proceeds, which were used to fund a portion of the costs associated with the internalization.
Risks and Opportunities
Despite the company's strategic efforts, National Healthcare Properties continues to face a number of risks. The senior housing industry remains highly competitive, with ongoing challenges related to labor shortages, supply chain disruptions, and rising inflation. These factors can put pressure on the company's operating margins and ability to maintain occupancy levels.
Moreover, the company's heavy reliance on the senior housing sector, particularly the SHOP segment, exposes it to concentration risk. Any further disruptions or downturns in this industry could have a significant impact on National Healthcare Properties' financial performance.
On the other hand, the company's diversified portfolio of OMFs and SHOPs, as well as its focus on strategic dispositions and internalization, present opportunities for growth and improved operational efficiency. The company's RIDEA structure, which allows it to participate in the upside of its SHOP assets, could also be a source of potential upside if the senior housing market rebounds.
Industry Trends and Outlook
The healthcare real estate sector has seen moderate growth in recent years, with a compound annual growth rate (CAGR) of approximately 4-6% for publicly traded healthcare REITs. However, the sector has faced headwinds from rising interest rates, labor shortages, and inflationary pressures, which have impacted National Healthcare Properties' profitability and liquidity.
The company's portfolio currently consists of 198 healthcare properties, including 153 outpatient medical facilities (OMFs) and 45 senior housing operating properties (SHOPs). This diversification strategy may help mitigate some of the risks associated with market fluctuations in specific healthcare subsectors.
Conclusion
National Healthcare Properties, Inc. (HTIBP) is a REIT that has navigated a challenging landscape in the healthcare real estate industry, particularly within the senior housing sector. While the company's financial performance has been mixed in recent years, its strategic transformation, including the internalization of management and active portfolio management, could position it for improved operational efficiency and growth opportunities.
The company's recent financial results show some positive trends, such as increased revenue in both the OMF and SHOP segments, driven by higher occupancy rates and leasing rates. However, these gains have been partially offset by increased operating expenses, particularly in the SHOP segment, due to inflationary pressures and higher labor costs.
The internalization of management functions, completed in September 2024, represents a significant shift in the company's operational structure. While this transition resulted in substantial one-time costs, it is expected to lead to long-term cost savings and improved alignment of interests between management and shareholders.
National Healthcare Properties' ability to navigate the ongoing challenges in the healthcare real estate sector, including labor shortages, supply chain disruptions, and inflationary pressures, will be crucial to its future success. The company's focus on portfolio optimization, coupled with its diversified asset base, may provide some resilience in the face of these industry-wide headwinds.
Investors should closely monitor the company's progress in addressing these challenges and its ability to capitalize on the potential upside in the healthcare real estate sector. Key metrics to watch include occupancy rates, operating margins, and the company's success in passing through increased costs to tenants, particularly in the SHOP segment. Additionally, the company's ability to manage its debt obligations and improve its liquidity position will be critical factors in its long-term financial health.
As National Healthcare Properties continues to adapt to the evolving healthcare real estate landscape, its strategic initiatives and operational improvements may position it to benefit from the long-term demographic trends supporting demand for healthcare services and senior housing. However, investors should remain mindful of the ongoing risks and challenges facing the company and the broader healthcare REIT sector.