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Healthcare Realty (HR) to Buy Medical Buildings in Atlanta

Zacks

Healthcare Realty Trust Incorporated HR announced that it will acquire an array of 15 Atlanta-based medical office buildings as per its prior agreement. The properties, totaling 1.3 million square feet in area, will be purchased for $612.5 million. Majority of these properties are located in hospital campuses, hinting at the high growth potential.

The high quality properties are anticipated to enhance the Healthcare Realty’s portfolio and boast its top line accelerate its rent growth. The portfolio has an average age of 9.7 years and is 96.25% occupied indicating high demand. Over 90% of the properties are leased to hospital-centric specialties, comprising obstetrics/gynecology, oncology, cardiology and orthopedics which occupy 13%, 12%, 11% and 9%, respectively.

Out of the total properties, 59.8% are leased by three leading health systems of Atlanta – WellStar Health System (“WellStar”), Piedmont Healthcare (“Piedmont”) and Gwinnett Medical Center (“Gwinnett”). Moreover, 53% of the portfolio will be up for renewal in five years when the lease expires.

The acquisition is likely to take place in numerous closings throughout the third and fourth quarters of 2017. Hence, this buyout is anticipated to add value to the 2018 FFO and net asset figures by contributing $29.9 million to net operating income. In addition, the acquisition is estimated to produce a cash yield of 4.9%.

To pursue this large scale acquisition, the company will raise funds through a public offering of 7.25 million shares for $30.90 per share. The underwriters will get a 30-day option to purchase up to an additional 1,087,500 shares. The offering will generate approximately $215.1 million funds for the company. This amount comes after recognizing underwriting expenses and commissions, and before accounting for the underwriters' option, if exercised.

Along with funding the above mentioned acquisition, Healthcare plans to spend the proceeds to repay its unsecured credit facility maturing in 2020 and for general corporate purposes, which may include trimming the company’s debt obligations and investing in development of healthcare facilities.

Though this stock offering will result in dilution of earnings, prudent investments in strategic assets are likely to help the company fortify its position in the healthcare service space.

Moreover, the stock has climbed 4.8% year to date, outperforming the 2.8% growth of the industry it belongs to.


Currently, the stock carries a Zacks Rank #3 (Hold).

Stocks to Consider

Investors can, however, consider better-ranked stocks in the REIT space like Condor Hospitality Trust, Inc. CDOR, DCT Industrial Trust Inc DCT and Four Corners Property Trust, Inc. FCPT. All three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Condor Hospitality Trust and DCT Industrial Trust have long-term growth rates of 15% and 4%, respectively.

For Four Corners Property Trust, the Zacks Consensus Estimate for full-year 2017 funds from operations (FFO) per share is expected to be up nearly 13.4% year over year to $1.38.

Note: All EPS numbers presented in this write up represent funds from operations (“FFO”) per share. FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

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