Healthcare Realty Trust: Should You Buy This 4.3%-Yielding Health Care REIT?

Investors looking for a high-quality, recurring dividend income from a pure-play MOB REIT may want to take a closer look at Healthcare Realty Trust, Inc. (HR). The health care REIT invests aggressively into medical office buildings across the country, and is a long-term bet on rising health care costs in the U.S. economy. Healthcare Realty Trust has a conservative FFO payout ratio, but the dividend unfortunately is a “no growth” dividend. An investment in Healthcare Realty Trust yields 4.3 percent.

Healthcare Realty Trust – Business Overview

Healthcare Realty Trust is a pure-play medical office REIT that has seen strong growth in recent years thanks to its acquisition-centered growth strategy. At the end of the December quarter, the health care REIT’s portfolio comprised of 201 properties totaling 14.6 million square feet. Most of Healthcare Realty Trust’s MOB properties have more than one tenant and are located in major urban centers.

Source: Healthcare Realty Trust Investor Presentation

In real estate, it’s all about location, location, location. The majority of Healthcare Realty Trust’s properties are strategically located on health campuses (69 percent) and an additional 18 percent of the REIT’s properties are adjacent to health campuses. Only 5 percent of the properties are off campus.

Source: Healthcare Realty Trust

The REIT’s properties are concentrated in urban markets with attractive economic fundamentals such as high household income, above-average population growth and high demand for health care services.

Source: Healthcare Realty Trust

Acquisition-Centered Growth Strategy And Declining Cap Rates In The MOB Sector

Healthcare Realty Trust relies on acquisitions in order to catalyze FFO growth. The health care REIT spent $327.2 million on acquisitions last year.

Healthcare Realty Trust has regularly purchased new MOB assets in order to scale it portfolio over the years. In the last five years, Healthcare Realty Trust spent an average of ~$211.7 million each year on acquisitions.

Source: Healthcare Realty Trust

However, MOB assets have increased in (investment) popularity in the last several years, largely due to the overall trend of rising health care costs and changing patient preferences (shift from inpatient admissions toward outpatient services). The resulting demand for MOB assets has reduced cap rates in the sector to the 5-6 percent range. Lower cap rates equal lower investment yields for investors, obviously.

Source: Healthcare Realty Trust

The Dividend Is Safe

Healthcare Realty Trust is a pure-play MOB REIT at the safer end of the risk spectrum. The REIT has a conservative FFO payout ratio that has fluctuated in the 70-percent range.

Healthcare Realty Trust has maintained stable excess dividend coverage on a normalized funds from operations basis over time. The company currently pays shareholders a $0.30/share quarterly cash dividend which is equal to a 78.9 percent payout ratio based on Q4-2017 results.

Source: Achilles Research

The only negative here for me is that the REIT is not growing its dividend (even though it could afford to). On the other hand, I consider Healthcare Realty Trust’s dividend to have a very high degree of dividend safety.

Read also: “Physicians Realty Trust: Buy On The Drop”

Risk Factors Investors Need To Consider

Underearning its dividend is not a major risk factor for Healthcare Realty Trust at the moment, as far as I am concerned. I see bigger risks in an overheating market for medical office buildings and a further decrease of cap rates. Competition for MOB assets has driven up prices (and reduced yields), which can have a long-term negative effect on Healthcare Realty Trust if the REIT overpays for new assets.


The attractive growth outlook for MOB assets has made medical office REITs expensive. Valuations have come down back to earth a bit lately, but MOB REITs are far from being bargains, and investors still pay a significant premium to book value.

Here’s how Healthcare Realty Trust stacks up against Healthcare Trust of America, Inc. (HTA) and Physicians Realty Trust (DOC) in terms of price-to-book ratio.

ChartHR Price to Book Value data by YCharts

Your Takeaway

I like Healthcare Trust of America because the company is active in an attractive (yet slightly overheating) sub-sector of the health care market, medical office buildings. What I don’t like is that cap rates in the market are compressing (meaning prices are being bid up too much), and that the REIT is not growing its dividend. Healthcare Trust of America would be a good income vehicle, in my view, for a long-term minded investor with an average to below-average risk tolerance. Investors with an above-average risk tolerance seeking high recurring dividend income from a pure-play MOB REIT may want to consider Physicians Realty Trust.

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Disclosure: I am/we are long DOC.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.