Healthcare Realty: The Recent Run-Up In Share Price Is Unjustified

Core Viewpoint - Healthcare Realty (HR) has shown strong operational metrics in Q1 2024, but the financial situation remains concerning due to high debt levels and unsustainable dividend coverage [3][4][15]. Financial Performance - Total multi-tenant NOI grew by 2.8%, exceeding the overall growth rate for 2023 by approximately 50 basis points [5]. - FFO per share reached $0.39, aligning with the upper end of the previously issued guidance for 2024 [6]. - The company reported a net loss attributable to common stockholders of$310.8 million in Q1 2024, translating to a loss per diluted share of $0.82 [12]. Dividend and Cash Flow - The quarterly dividend exceeds the FAD generation, necessitating HR to utilize its equity or asset base to fund the existing dividend [6][11]. - FAD for Q1 2024 was$104.5 million, while quarterly dividends and OP distributions amounted to $119.5 million, indicating a shortfall [12]. Debt and Liquidity - Net debt to EBITDA stands at 6.4x, which is considered high [6]. - HR has entered a strategic joint venture with KKR, allowing access to$300 million in fresh liquidity, with plans to capture an additional $300 million in the next 90 days [8][15]. - Upcoming debt maturities in 2025 and 2026 total approximately$1.9 billion, posing refinancing risks [14]. Asset Management and Share Buybacks - HR has monetized several medical office buildings (MOBs) at a cap rate of 6.5%, which reflects the quality of its portfolio [15][16]. - The company has initiated a $500 million share repurchase program, with$42 million already spent to buy back 3 million shares at an average price of just over $14 per share [9][16]. - The strategy of using proceeds from asset sales for share buybacks raises concerns about the sustainability of dividend coverage and future cash flows [10][16].