Healthcare Trust of America, Inc. (HTA) is the largest dedicated owner and operator of medical office buildings in the U.S. As of September 30, 2021, HTA’s assets comprised approximately 25.80 million square feet of gross leasable area (GLA) and $7.70 billion worth investments in medical office buildings. The Scottsdale, Ariz.-based company has an ISS Governance QualityScore of 1, indicating low governance risk.

On February 18, HTA announced plans to merge with Healthcare Realty Trust Incorporated. Following the merger, HTA shareholders are set to receive a total implied value of $35.08 per share, including a special dividend of $4.82 per share. The newly merged company has a pro forma equity market cap of $11.60 billion and an EV of $17.60 billion.

However, shares of HTA declined 1.6% in price following the announcement of the merger. This is because HTA shareholders are slated to receive only the special dividend payout, because the business combination is structured as a reverse merger, with HTA buying Healthcare Realty Trust’s shares. Also, the stock has declined 9.7% in price year-to-date.

Here is what could shape HTA’s performance in the near term:

Mixed Financials

HTA’s revenues have increased 4.6% year-over-year to $195.70 million in its fiscal fourth quarter, ended Dec. 31, 2021. This can be attributed to a 3.6% rise in rental income and a 2211.1% improvement in interest and other operating income. The company’s quarterly dividend payout increased by $0.05 to $0.325 in the last quarter.

However, the company’s net income has declined 41.7% from the same period last year to $16.61 million due to a 10.4% rise in total expenses. Its FFO came in at $0.07, down 46.2% from the prior-year quarter. Furthermore, HTA’s net operating cash flow declined marginally year-over-year to $385.62 million.

Stable Growth

Analysts expect HTA’s revenues to rise 2.8% in its fiscal year 2022 first quarter (ending March), 5.2% in the second quarter (ending June 2022), and 5% in the current year. The consensus FFO estimates indicate a 3.2% year-over-year improvement in the current quarter, a 3.9% rise in the next quarter, and a 3.4% increase in fiscal 2022. In addition, the Street expects the company’s revenue and FFO to increase 6.9% and 3.7%, respectively, next year.

Stretched Valuation

In terms of forward P/AFFO, HTA is currently trading at 20.41x, which is 7.4% higher than the 19x industry average. Its 16.91 forward P/FFO multiple is slightly higher than the 2.30 industry average.

In addition, the stock’s trailing-12-month Price/Rental revenue and Price/Cash Flow ratios of 9.18 and 18.18, respectively, compare with the 8.62 and 17.27 industry averages. Furthermore, HTA’s 22.84 trailing-12-month EV/EBITDA multiple is 3.7% higher than the 22.04 industry average.

Consensus Rating and Price Target Indicate Potential Upside

Among the six Wall Street analysts that rated HTA, one rated it Buy while four rated it Hold. The 12-month median price target of $34.20 indicates an 11.7% potential upside from yesterday’s closing price of $30.61. The price targets range from a low of $30.00 to a high of $38.00.

POWR Ratings Reflect Uncertainty

HTA has an overall C rating, which translates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

HTA has a B grade for Growth but a D for Value and Quality. The company’s revenues have increased at a 3.3% CAGR over the past three years and at a 10.8% CAGR over the past five years, which is in sync with its Growth grade. However, the stock’s premium valuation justifies the Value grade. In addition, HTA’s 3.05% trailing-12-month ROE is 40.5% lower than the 5.12% industry average, and in sync with the Quality grade.

Among the 17 stocks in the D-rated REITs – Healthcare industry, HTA is ranked #13.

Beyond what I have stated above, view HTA ratings for Sentiment, Stability, and Momentum here.

Bottom Line

HTA’s recent merger is expected to significantly boost the company’s domestic market presence. However, with declining profit margins and operating cash flows, the fund outflow resulting from this merger could harm the company’s working capital fund availability in the near term. Furthermore, we think that as the broader market weakness continues, investors should wait until the REIT giant’s cash flows stabilize before investing in the stock.

How Does Healthcare Trust of America (HTA) Stack Up Against its Peers?

While HTA has a C rating in our proprietary rating system, one might want to consider looking at its industry peers, Universal Health Realty Income Trust (UHT) and NorthWest Healthcare Properties Real Estate Investment Trust (NWHUF), which have a B (Buy) rating.

HTA shares were trading at $30.57 per share on Friday morning, down $0.04 (-0.13%). Year-to-date, HTA has declined -7.55%, versus a -9.91% rise in the benchmark S&P 500 index during the same period.

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.

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