Healthcare Realty Trust (HR) is a REIT which owns, manages, finances, and develops properties related to healthcare services, such as medical office buildings and other outpatient-related medical facilities across the US, explains Ben Reynolds, editor of Top 10 REITs.

Healthcare Realty was founded in 1992, and has grown from a portfolio of 21 healthcare facilities to now being invested in over 700 properties in the U.S. The Trust’s portfolio primarily consists of multi-tenant, on-campus medical office buildings that provide stable occupancy, high tenant retention, and reliable growth.

In July 2022, Healthcare Realty completed its strategic combination with Healthcare Trust of America; the combined company boasts improved market scale, increased diversification, and a stronger, more flexible balance sheet.

Safety & Dividend Risk Analysis

At the end of the third quarter, the trust had $57 million in cash and cash equivalents and the run-rate net debt to adjusted EBITDA ratio was 6.3x, which is high. The trust’s payout ratio has remained fairly stable over the last five years, whereas the payout was under threat before.

Today the dividend appears to be well covered by normalized FFO. The trust’s dividend has been rebased to $0.31 quarterly due to the massive merger with HTA, this following some small increases after it had remained unchanged for an entire decade prior. Healthcare Realty was negatively affected by the Great Recession. It slashed its dividend multiple times from a high of $2.64 in 2006 to $1.20 by 2020.

Growth, Value & Expected Total Return Analysis

Acquisitions will be the main growth driver for Healthcare Realty. Additionally, the joint venture with TIAA allows for the trust to continue investing larger amounts of capital by diversifying its funding sources. Also, the trust predicts that average in-place rent increases, and future annual contractual increases for leases will further bolster FFO growth. We anticipate this will lead to 3.0% growth in the intermediate term.

Healthcare Realty trades at 11.6 times AFFO estimates for 2022, which is below our estimate of fair value at 18.0 times AFFO. This implies a 9.5% annualized tailwind to total returns. Combined with the 3.0% expected growth rate and 6.3% starting dividend yield, we expect total annual returns of 16.5% over the next five years.

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