Analyst Stays Neutral on Healthcare Realty Trust

NASHVILLE, TN—Despite an increase in revenue and leasing on track with expectations at its healthcare properties, J.J.B. Hilliard, W.L. Lyons, LLC (Hilliard Lyons) remains neutral on Healthcare Realty Trust's shares.

John M. Roberts, senior vice president, director of research and real estate investment trusts (REITs) analyst with Hilliard Lyons, says that the Nashville-based REIT is “finally beginning to show earnings growth in line with the peer group. However, valuation remains above the peer group. As a result, we cannot recommend purchase of HR shares. We are retaining our Neutral rating on the shares due to the potential for accelerating cash flow growth in the future, and the potential for consolidation in the industry. We note that the shares' premium valuation would likely merit an Underperform rating on these medium quality shares, in our view were it not for these attributes.”

In its recently released first quarter earnings report for the period ended March 31, Healthcare Realty reported normalized funds from operations (FFO) totaled $0.35 per diluted common share. FFO grew $5.7 million, or 20.3% year-over-year, to $33.5 million. Over the same time period, normalized FFO per share increased 9.4%, the company stated.

Healthcare Realty Trust owns, manages, finances and develops income-producing real estate properties associated primarily with the delivery of outpatient healthcare services throughout the United States. The company had investments of approximately $3.2 billion in 201 real estate properties and mortgages as of March 31, 2014. The REIT's 198 owned real estate properties are located in 28 states and total approximately 14 million square feet. The company also provides property management services to approximately 10.3 million square feet nationwide.

Roberts noted that in a conference call with Healthcare Realty Inc., management estimates as much as $60 million in dispositions during 2014, while retaining the emphasis on higher return development assets. The anticipated dispositions could be offset by as much as $150 million in acquisitions. Hilliard Lyons is keeping with its estimate that Healthcare Realty Trust will post an FFO of $1.45 a share in 2014.

Healthcare Realty Trust has seen a consistent increase in its stock price so far this year. At the close of trading on April 30, its shares were valued at $25.15 a share, the mid-range of its 52-week range of $20.85-$30.59 a share, according to Hilliard Lyons. Commenting on the stock value, Roberts states, “At this point we would marketweight the healthcare REIT group as a whole. While the stocks are at a premium to the markets, we believe their conservative nature and yield orientation could continue to support the share prices.”

Some of the other highlights of Healthcare Realty Trust's first quarter earnings report included:

• Its 12 development conversion properties generated NOI of $3.1 million and would have generated $3.6 million had all occupants been in place and paying rent for the entire quarter. Occupancy and leasing at the 12 properties increased to 66% and 81%, respectively.

• Leases totaling 441,000 square feet were signed or renewed during the first quarter, on track with expectations, with tenant retention increasing to 82%.

• Same store NOI grew by 0.5% year-over-year. Multi-tenant operating expenses, notably utilities and snow removal, were adversely affected by harsh winter conditions.

• Occupancy at the same store properties remained stable at 91%.

• A dividend of $0.30 per common share was declared for the first quarter of 2014, which is 83.3% of normalized FAD.

• For the three months ended March 31, 2014, year-over-year revenues grew by $11.6 million to $91.9 million. The company reported net income attributable to common stockholders for the quarter of $3.9 million.