VTR - Healthcare Trust Preferred: Let's Give This 13.2% Yielder A Checkup

2023-12-15 14:04:09 ET

Summary

• Healthcare Trust, Inc. has a stronger balance sheet and a different business model than Medical Properties Trust, Inc.
• The Series A 7.375% Preferred stock has lost 34% of its value in 2023 and now yields 13.2%.
• Healthcare Trust has moderate balance sheet leverage, adequate balance sheet liquidity, and 1.6X preferred stock dividend coverage.

2023 was a terrible year for Medical Properties Trust, Inc. ( MPW ). MPW lost 53% of its value and slashed the common stock dividend as some hospitals struggled to pay their rent. Fortunately, I don't own MPW and won't be covering it in this article. This article is about a smaller medical real estate investment trust, or REIT, a peer that was unfairly tainted by the MPW disaster. Healthcare Trust, Inc. ( OTCPK:HLTC ) has a much stronger balance sheet and a very different business model than MPW. HLTC reported solid Q3 earnings with virtually 100% of their small medical office properties being current on the rent.

Despite healthy Q3 earnings, the Healthcare Trust, Inc. 7.375% CUM RED REP PFD STK SER A ( HTIA ) has lost 34% of its value in 2023 and now yields 13.2%. This article makes the bullish case for HTIA, with the top ten reasons that income investors should consider buying it. Some major risks are also discussed.

What is HTIA?

HTIA is a par $25 cumulative preferred issue with a 7.375% coupon. Dividends are paid quarterly, and HTIA now yields 13.2% at a recent price of $13.93. HTIA is a perpetual issue, which means that the company is not required to call it. The company has the option to call HTIA at par starting on 12/11/2024. See the prospectus for additional details. The average daily trading volume is typically around 15K shares. Use limit orders and patience when trading. There is currently $100 million par value of HTIA outstanding. HTIA holders will NOT receive a k-1.

Comparing HTIA to HTIBP

Healthcare Trust, Inc. 7.125% PFD SER B (HTIBP) is a very similar par $25 cumulative preferred issue with a 7.125% coupon. HTIBP is even less actively traded with an average daily trading volume of only about 8K shares. There is currently $91 million par value of HTIBP outstanding. See the prospectus for additional details. HTIA and HTIBP are equal in seniority. Compare yields to find the best value when trading.

1. Moderate balance sheet leverage

HLTC has very modest net debt/property assets of only 39.4% (see page #9 of the Q3 Investor Presentation ). They calculate balance sheet leverage based on net debt of $1,119 million / $2,840 of total assets. Note that the $2,840 of total assets includes $664 million of accumulated depreciation and amortization which has been added back.

However, as a preferred stock investor, it makes sense to also treat the $191 million of preferred stock as debt. That brings adjusted balance sheet leverage to (1,119 + 191) / 2,840 = 46.1%

How does the adjusted HLTC balance sheet leverage of 46.1% compared to other medical REIT sector peers? Using Seeking Alpha Healthcare REIT sector peer data:

REIT Name Debt / Total Assets

Medical Properties Trust 53%.

Omega Healthcare Investors, Inc. ( OHI ) 58%.

Ventas, Inc. ( VTR ) 57%.

LTC Properties, Inc. ( LTC ) 53%.

Global Medical REIT Inc. ( GMRE ) 50%.

2. Adequate balance sheet liquidity

Balance sheet liquidity is always an important consideration for high-yield preferred stock investors. As of 9/30/2023 , HLTC had unrestricted cash of $51 million as compared to $54 million on 12/31/2022. Balance sheet cash is adequate and appears to be stable.

In fact, the actual balance sheet liquidity is much higher than indicated by the balance sheet cash alone. There are also $700 million of unencumbered properties (see page #22 of the Q3 earnings report )

3. 1.6X preferred stock dividend coverage

Net operating income was $31.4 million for Q3 2023. For Q3 preferred stock dividends were $3.5 million and interest expense was $15.7 million (see page #18 of the investor presentation ). Therefore, coverage of the preferred stock dividend and interest was:

31.4 / (15.7 + 3.5) = 1.6X

4. 100% rent collection from medical office buildings

Medical office buildings are the key sector for HLTC. They accounted for 77.4% of Q3 net operating income. While many hospitals are struggling to pay their rent, the MOB sector is far healthier. Medical Office buildings are typically rented to profitable small medical offices. They don't face the problems with " uncompensated care costs " that many hospitals suffer from. As noted in the Q3 investor presentation (see page #4):

"Collected nearly 100% of the original Cash Rent due across the MOB portfolio in Q3'23."

5. Rents increased by 7.8% for MOB lease renewals

Q3 was a good quarter for the MOB sector. As Chief Executive Officer Michael Anderson commented (see page #1 of the conference call transcript ):

"We maintained our strong leasing momentum in the MOB portfolio with 17 new leases completed during the quarter, totaling over 40,000 square feet and nearly $1 million in straight-line rent. In addition to new leases, we completed 27 lease renewals in the quarter, bringing us to 62 for the year totaling over 355,500 square feet and at a positive Lease Renewal Rental Spread of 7.8% compared to the prior leases."

6. The senior housing sector is recovering

The senior housing sector was devastated by the pandemic and has been slowly recovering . The company's SHOP portfolio accounts for only 23% of NOI even though the properties comprised 44% of the total portfolio at cost. SHOP occupancy was only 74.1% in Q3 as compared to 90.1% occupancy for the MOB sector.

Fortunately, the slow SHOP sector recovery is continuing. As noted on page #2 of the investor presentation:

"SHOP portfolio revenue improved by 3.4% to $52 million in 03'23 from $50 million in 03'22 as a result of increased rental rates."

7. Near-term loan maturities are not a problem

HLTC successfully completed a major refinancing in Q2. The new $240 million loan is backed by 62 medical office buildings. The loan has a 10-year term and is interest-only at 6.345%.

8. Listing HLTC may be a catalyst for HTIA

The company made its first property acquisition in May 2013 as a non-traded REIT originally known as American Realty Capital Healthcare Trust II. The name was changed in 2015 when it first tried to list the common stock. HLTC has been trading as a pink sheet current information ( SEC filings are current) issue since September 2021. HLTC has a market capitalization of $448 million at a recent price of $4, but the stock is extremely thinly traded. HLTC only traded on 7 days during the last month. Management is very focused on moving HLTC off the pink sheets and making it more liquid. As CEO Michael Anderson noted at the start of the Q3 earnings conference call:

"Before we get into this quarter's results, I want to say that the leadership of HTI remains cognizant of how long most of you have been common shareholders of the Company and state that, while no definitive timing has been announced, a liquidity event for all common shareholders remains a key objective that everyone associated with the Company is working toward delivering."

I would expect that HLTC will move off the pink sheets and become more actively traded through a secondary stock offering. The exact timing is hard to predict, but management is clearly focused on this goal. A more actively traded common stock would also help to focus attention on the undervalued HTIA preferred stock.

9. PIK common stock dividends conserve cash

The company has been making payments in kind dividends on the HLTC stock. These PIK dividends are paid in additional shares of HLTC common stock. By conserving cash on the HLTC dividends, more cash is being retained to pay the HTIA and HTIBP preferred dividends in cash.

10. The company is still growing:

Continued growth is an important indicator of a company's health. HLTC has acquired 3 medical office buildings so far in 2023 and a 4th acquisition is expected to close in Q4. See page #6 of the Investor Presentation for details on their $48 million acquisition pipeline.

What are the major risks?

See page 14 - 46 of the annual report for a comprehensive discussion of risk factors. A few of the major risks are highlighted here. The preferred shares would benefit if the HLTC common stock moves off the pink sheets and becomes listed. The company plans to do this, but the timing is uncertain and dependent on market conditions. The SHOP and MOB sectors could be harmed by a new wave of Covid or other illnesses that disrupted normal operations. An independent operator that manages 20 of the company's SHOP facilities was terminated on 9/30/2023. It's possible that this management change could disrupt operations at some facilities in Q4.

Conclusion

At a recent price of $13.93, HTIA yields 13.2% and is trading at only 56 cents on the dollar. The preferred dividend has about 1.6X coverage and Q3 earnings showed modest improvements in both the MOB and SHOP sectors. HTIA is trading like a distressed issue, but Healthcare Trust, Inc. is still growing its portfolio and has $700 million of unencumbered properties.

For further details see: