HTA's Healthcare Tenants Face Short-term Challenges, Creating Some Uncertainty
Healthcare Trust of America (HTA) is the largest publicly-traded REIT focused on medical office buildings in the U.S. with more than 450 properties.
Healthcare systems, academic medical centers, and physician groups rent HTA's properties to provide healthcare services. No tenant accounts for more than 5% of total rent, and no state contains more than 20% of HTA's buildings.
Approximately 66% of HTA's portfolio is located on the campuses of, or adjacent to, nationally and regionally recognized healthcare systems. This helps create more demand from medical practices for the firm's properties.
Usually, this is a predictable business given the stable nature of healthcare services. But the coronavirus pandemic has put some of HTA's tenants under immense financial pressure.
The CDC in March recommended that non-essential procedures and appointments be rescheduled in order to keep hospital beds available for a potential surge in COVID-19 patients and to conserve protective equipment.
Hospitals make most of their money on elective procedures, so they have seen their largest revenue stream dry up, according to the Wall Street Journal.
For example, this morning HCA Healthcare (3.6% of HTA's rent) said it has seen a 70% drop in outpatient surgeries at its hospitals in April so far, according to Reuters.
HCA Healthcare suspended its dividend and share buybacks to preserve capital as it navigates this unprecedented period of financial strain and uncertainty.
Healthcare systems, academic medical centers, and physician groups rent HTA's properties to provide healthcare services. No tenant accounts for more than 5% of total rent, and no state contains more than 20% of HTA's buildings.
Approximately 66% of HTA's portfolio is located on the campuses of, or adjacent to, nationally and regionally recognized healthcare systems. This helps create more demand from medical practices for the firm's properties.
Usually, this is a predictable business given the stable nature of healthcare services. But the coronavirus pandemic has put some of HTA's tenants under immense financial pressure.
The CDC in March recommended that non-essential procedures and appointments be rescheduled in order to keep hospital beds available for a potential surge in COVID-19 patients and to conserve protective equipment.
Hospitals make most of their money on elective procedures, so they have seen their largest revenue stream dry up, according to the Wall Street Journal.
For example, this morning HCA Healthcare (3.6% of HTA's rent) said it has seen a 70% drop in outpatient surgeries at its hospitals in April so far, according to Reuters.
HCA Healthcare suspended its dividend and share buybacks to preserve capital as it navigates this unprecedented period of financial strain and uncertainty.
“The recovery period is really difficult to determine at this point. We don’t know what the full effects and the damage to the economy are going to be.”
– HCA Healthcare CFO William Rutherford
Meanwhile, Steward Health Care (1.8% of HTA's rent) recently told its hospital employees that it is experiencing a "seismic financial shock" and expects furloughs focused on non-clinical staff, per NPR.
Stay-at-home orders and social distancing have reduced demand at other healthcare facilities as well. In fact, two-thirds of physicians surveyed by MDLinx said their patient visits have dropped by 50% or more in their practices.
The good news is that the federal government's $2 trillion stimulus package passed last month included $100 billion earmarked for hospitals, and another $75 billion for healthcare facilities is being discussed as part of a new stimulus plan.
HCA Healthcare said it received $700 million of these funds, but it's unclear how much HTA's other tenants will benefit from these programs, and how effective the money will be in offsetting the cash flow disruptions they are experiencing.
Nearly 60% of HTA's annual rent is derived from credit-rated tenants, primarily health systems, so hopefully the REIT's tenant base was positioned well heading into the crisis.
A "significant" amount of HTA's remaining rent is also from physician groups and healthcare system tenants that management believes are credit-worthy but too small to benefit from paying to have a credit rating.
Regardless, with many healthcare systems and physician groups now struggling to earn a profit, the question is whether this pressure is enough to impact their ability to pay their full rent and renew their leases (9% expire in 2020 and 11% end in 2021).
Given the unprecedented financial pressure facing HTA's tenants, we are downgrading HTA's Dividend Safety Score from Safe to Borderline Safe.
The REIT's score could be upgraded quickly if its tenants remain strong enough to continue meeting their rent obligations and demand for elective procedures and physician appointments recovers in the months ahead, helping tenants climb out of this financial hole.
It's also worth noting that HTA remains in decent financial shape. The company has relatively low leverage, a BBB credit rating from Standard & Poor's, $1.2 billion of total liquidity, and no major debt maturities until 2023.
If needed, HTA could lean more on its balance sheet to temporarily cover its dividend (about $260 million annually) and spending needs (targeted over $500 million of acquisitions in 2020). However, the firm's dividend track record is relatively short since HTA only went public in 2012.
Management has talked about wanting to maintain a "very safe" dividend in the past, but this commitment could be tested if HTA's payout ratio drifts well above its targeted range of 80% to 90% due to tenant performance issues.
We will find out more about the state of HTA's tenants when the firm next reports earnings on May 5. Assuming there are no major surprises with rent collection or lease renewals, we expect HTA to continue its regular dividend.
HTA's long-term outlook arguably hasn't changed either. As new information becomes available, we will provide updates as needed.
