Business Overview and History
National Healthcare Properties (HTIA), formerly known as Healthcare Trust, Inc., is a real estate investment trust (REIT) that has been navigating the dynamic healthcare real estate landscape for over a decade. The company's diversified portfolio of outpatient medical facilities (OMFs) and senior housing operating properties (SHOPs) has positioned it as a key player in the growing healthcare REIT sector.
Established in 2013, National Healthcare Properties has evolved significantly over the years. Initially focused on acquiring and managing a diverse portfolio of healthcare-related real estate assets, the company has since expanded its footprint, owning 198 properties across 32 states as of September 30, 2024. The portfolio is comprised of 153 OMFs and 45 SHOPs, totaling 8.55 million rentable square feet.
In its early years, National Healthcare Properties experienced rapid growth, adding 202 properties to its portfolio by the end of 2018. However, this expansion came with challenges, including difficulties in integrating new properties and managing the rapid growth. The COVID-19 pandemic in 2020 further strained the company's SHOP assets, leading to declining occupancy rates due to lockdowns and health precautions.
To address these challenges, National Healthcare Properties made significant changes to its leadership and management structure. In 2017, the company entered into an advisory agreement with Healthcare Trust Advisors, LLC to manage its day-to-day operations. This arrangement continued until September 2024, when the company completed a transformative Internalization process, bringing its advisory and property management functions in-house. This strategic move allowed National Healthcare Properties to streamline its operations and better align its interests with those of its shareholders.
The Internalization was accompanied by a reverse stock split, which adjusted the company's share structure to enhance its flexibility and market positioning. Additionally, the company changed its name from Healthcare Trust, Inc. to National Healthcare Properties, Inc. to better reflect its focus on healthcare-related real estate.
Financial Performance and Metrics
As of the latest reported quarter (Q3 2024), National Healthcare Properties reported total 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 occupancy and rental rates in the SHOP segment, partially offset by lower revenue in the OMF segment due to property dispositions. However, the company reported a net loss of $40.69 million for the quarter, which was a decrease of $24.58 million compared to the same period in the previous year. This decline in net income was primarily attributed to higher impairment charges, termination fees to related parties, and acquisition/transaction costs related to the Internalization process.
For the first nine months of 2024, the company's total revenue amounted to $266.06 million, with a net loss of $173.24 million. Operating cash flow for this period was $86.30 million, while free cash flow was negative $3.74 million. These financial results reflect the ongoing challenges faced by the healthcare REIT sector, including rising interest rates, inflationary pressures, and the lingering effects of the COVID-19 pandemic.
Looking at the most recent fiscal year (2023), National Healthcare Properties reported revenue of $345.93 million, a net loss of $72.38 million, operating cash flow of $21.62 million, and free cash flow of negative $0.77 million.
Despite the recent headwinds, National Healthcare Properties has maintained a relatively strong balance sheet. As of September 30, 2024, the company's debt-to-equity ratio stood at 1.68, with a debt-to-total-capitalization ratio of 46.1%. The company's liquidity position remains adequate, with $32.86 million in cash and cash equivalents on hand. The current ratio and quick ratio both stand at 1.13, indicating the company's ability to meet its short-term obligations.
Operational Highlights and Segment Performance
National Healthcare Properties operates in two key business segments: Outpatient Medical Facilities (OMF) and Senior Housing Operating Properties (SHOP).
In the OMF segment, the company has seen fluctuating performance. During the three months ended September 30, 2024, revenue from tenants in the OMF segment decreased by $0.6 million compared to the prior year period. This decrease was primarily due to a $1.3 million reduction from disposed properties, partially offset by a $1.4 million increase from same-store properties. Property operating and maintenance expenses in the OMF segment increased by $1.3 million, driven by higher costs in the same-store properties, which were largely reimbursed by tenants.
The SHOP segment has experienced more substantial growth. During the three months ended September 30, 2024, revenue from tenants in the SHOP segment increased by $2.6 million compared to the prior year period. This increase was primarily due to a $3.5 million rise from same-store properties, partially offset by a $0.9 million decrease from disposed properties. Property operating and maintenance expenses in the SHOP segment increased by $0.8 million, mostly from the same-store properties.
Over the first nine months of 2024, the OMF segment saw a 2.4% increase in revenue from tenants, driven by higher occupancy and increased expense reimbursements. However, this was partially offset by a 2.3% increase in property operating and maintenance expenses, primarily due to the impact of inflation on utility and maintenance costs.
The SHOP segment experienced more substantial challenges during the same period, with a 4.5% increase in revenue from tenants offset by a 2.5% rise in property operating and maintenance expenses. The increase in SHOP expenses was primarily attributable to higher wages, including overtime, training, and bonus payments to employees of the company's third-party operators, as well as increased management fees and insurance costs.
Navigating Industry Challenges
The healthcare REIT sector, including National Healthcare Properties, has faced a number of significant challenges in recent years. The COVID-19 pandemic disrupted operations, leading to occupancy declines and increased operating expenses. Additionally, the company has had to contend with rising interest rates, which have impacted the cost of its debt financing.
To address these challenges, National Healthcare Properties has taken a multi-faceted approach. The Internalization process has allowed the company to streamline its operations and better control costs. This strategic move resulted in one-time termination fees of $106.65 million paid to Healthcare Trust Advisors, LLC. Additionally, the company has been actively managing its portfolio, strategically disposing of underperforming assets and redeploying capital into more promising opportunities.
The company's debt profile includes a Fannie Mae Master Credit Facility with $342.00 million outstanding, carrying a variable rate of SOFR + 2.41% and 2.46%, maturing in November 2026. National Healthcare Properties also maintains an OMF Warehouse Facility with $21.71 million outstanding, at a variable rate of SOFR + 3.00%, maturing in December 2026.
Looking Ahead
Despite the near-term headwinds, National Healthcare Properties remains optimistic about the long-term prospects of the healthcare REIT sector. The aging population and growing demand for healthcare services are expected to drive continued growth in the industry. Additionally, the company's diversified portfolio and focus on essential healthcare assets provide a degree of stability and resilience.
As National Healthcare Properties navigates the evolving landscape, the company's ability to adapt and innovate will be key to its continued success. The company operates primarily in the United States, and while it does not provide a detailed geographic breakdown of its operations, its presence across 32 states offers a degree of geographic diversification.
Investors will be closely monitoring the company's progress in executing its strategic initiatives, managing its expenses, and positioning itself for growth in the years to come. The company's performance will likely be influenced by broader trends in the senior housing and outpatient medical facility sectors, such as occupancy rates, rental rates, and construction activity.
Conclusion
National Healthcare Properties has demonstrated its ability to adapt and evolve in the face of significant industry challenges. With a diversified portfolio, a strengthened balance sheet, and a renewed focus on operational efficiency following the Internalization process, the company is well-positioned to capitalize on the long-term growth opportunities within the healthcare REIT sector.
The company's recent financial performance, while showing some improvements in revenue, also highlights the ongoing challenges in the industry. The net losses reported in recent periods underscore the need for continued focus on cost management and strategic portfolio optimization.
As National Healthcare Properties continues to navigate the dynamic landscape, investors will be closely watching its progress and ability to deliver sustainable value for its shareholders. The company's success will depend on its ability to leverage its newly internalized management structure, capitalize on favorable demographic trends, and effectively manage its property portfolio in an evolving healthcare real estate market.