Healthcare Realty Trust Incorporated is a US$3.5b mid-cap, real estate investment trust (REIT) based in Nashville, United States. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how HR’s business operates and also how we should analyse its stock. Below, I’ll look at a few important metrics to keep in mind as part of your research on HR.
A common financial term REIT investors should know is Funds from Operations, or FFO for short, which is a REIT’s main source of income from its portfolio of property, such as rent. FFO is a cleaner and more representative figure of how much HR actually makes from its day-to-day operations, compared to net income, which can be affected by one-off activities or non-cash items such as depreciation. For HR, its FFO of US$180m makes up 68% of its gross profit, which means the majority of its earnings are high-quality and recurring.
HR’s financial stability can be gauged by seeing how much its FFO generated each year can cover its total amount of debt. The higher the coverage, the less risky HR is, broadly speaking, to have debt on its books. The metric I’ll be using, FFO-to-debt, also estimates the time it will take for the company to repay its debt with its FFO. With a ratio of 14%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take HR 7.14 years to pay off using just operating income, which is a long time, and risk increases with time. But realistically, companies have many levers to pull in order to pay back their debt, beyond operating income alone.
I also look at HR’s interest coverage ratio, which demonstrates how many times its earnings can cover its yearly interest expense. This is similar to the concept above, but looks at the upcoming obligations. The ratio is typically calculated using EBIT, but for a REIT stock, it’s better to use FFO divided by net interest. With an interest coverage ratio of 3.19x, it’s safe to say HR is generating an appropriate amount of cash from its borrowings.
In terms of valuing HR, FFO can also be used as a form of relative valuation. Instead of the P/E ratio, P/FFO is used instead, which is very common for REIT stocks. In HR’s case its P/FFO is 19.58x, compared to the long-term industry average of 16.5x, meaning that it is slightly overvalued.
As a REIT, Healthcare Realty Trust offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in HR, I highly recommend taking a look at other aspects of the stock to consider:
- Future Outlook: What are well-informed industry analysts predicting for HR’s future growth? Take a look at our free research report of analyst consensus for HR’s outlook.
- Valuation: What is HR worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether HR is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
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