ABOUT THE EPISODE
I recently interviewed Healthcare Trust of America's (HTA) CFO, Robert Milligan. In this 21 minute interview we discussed a number of topics ranging from the state of healthcare, growth opportunities and dividend safety.
Enjoy the interview:
Hello, everyone. This is Brad Thomas with The Ground Up, and I'm back again with another CEO interview. Today, I'm joined with a CFO Robert Milligan. Robert is the, again, CFO of Healthcare Trust of America. That ticker symbol is (HTA). Robert, it's good to see you again today.
Hey. It's good to see you, Brad. Thanks for having me on again.
Well, we'll take the CFO any day of the week. So we like the numbers guys and, yeah, I know you've got all the numbers for us. So I guess, Robert, to start out, can you talk about the state of the MOB space today? Medical office building, of course, is what I'm referring to, and how the sector has maintained throughout the pandemic and where it sits today.
Yeah. No, I think the medical office sector has really performed quite well as it's gone throughout the pandemic. I think the early days, it's hard to believe that, first of all, it's been a year now since we really had the COVID pandemic start to take hold. As us in REIT land remember we have an annual Citi ... Citibank does a big REIT conference, and it was about this time that everybody started wondering, "Okay. Should we go? Should we not go? How is this going to impact the sector?," and really started to make plans.
And it's interesting to go back and remember March, April of last year, just how much uncertainty was out there. And I think medical office, we saw our healthcare systems, our physician tenants certainly be taken a little bit by surprise in March and April of last year as the pandemic first started taking hold.
But then what's really happened since then is that our tenants have really proved its resiliency and the medical office sector has really proven its resiliency. What medical office is really well known for, in the investment community at least, is producing very steady defensive cash flows and returns for investors. Healthcare is typically a very needs based demand. In all sorts of economic markets, you see patients continue to come in, doctors continue to be able to pay their bills, and thus very, very steady cashflow stream.
And the pandemic has really proven to be exactly the same thing. Despite a little bit of a blip in early March and April, come May, most of our healthcare systems and our physician provider tenants have bounced back. They started seeing all their patients again. And now, they're seeing almost business as usual as we got into the third and fourth quarter of last year.
What that looked like for medical office as a trend was very strong rent collections. I think when we look at HTA for all of 2020, we collected well over 99% of our rents. It shows that level of consistency and stability. We were able to continue to grow our earnings. We actually were able to grow earnings four percent last year, hit that midpoint of our guidance that we provided the street in February pre-pandemic.
And I think you look at where we're going to now in 2021, I think it's more of the same, steady, dependable growth with tenants that are emerging from the pandemic in, if not as good a position, even better position, because they've weathered the storm and have put themselves in a great place as they look to grow in 2021.
Great. Well, I want to reflect on a little bit of history here, I guess. Going back, I guess it was certainly before the pandemic and even maybe a year before then, if I recall. HTA had a pretty transformational acquisition of the Duke Realty medical office building portfolio. So you successfully integrated that very large portfolio. And again, that was a fairly low cap rate, as I recall, set the bar. But then we had the pandemic. So now that we've reset the bar, so to speak, how do you see, in terms of acquisitions, investment opportunities out there today, what type of pipeline is out there and where do you see cap rates?
Yeah. So going back to 2017, when we did our big Duke acquisition, for us, it was really transformative. There was an opportunity to really double up in a lot of the markets that we had to get really great economies of scale in leading markets throughout the country that are really benefiting from all the moves that are taking place from a population perspective during the pandemic, Dallas, Houston, Florida, all throughout there. So it was really an opportunity for HTA to gain some scale.
The pricing that we paid at the time, we did pay an aggressive price for it, 475, because we saw the opportunity to grow that, both by putting it on our operating platform, being able to generate synergies, as well as really some lease-up opportunity. So we bought that at 475. Within the first 18 months, we had got that up to the mid fives, approaching a six yield. So for us, I think that's how we looked at the investment, was going in, being able to get something that was going to go five and a half to six.
What you see now through the pandemic is medical offices really proved its value. And with interest rates coming down, you've seen a lot more competition. You've seen a lot more investment yields going lower. So what we see now in the market is the yield for large portfolio of properties is it tends to be in the five to five and a half range. So you've seen it remained very competitive.
I think for HTA, we try to play in a couple other different areas of the acquisition market. Because we're so large, we can do smaller acquisitions in markets that we already know, tuck them in. Those tend to be a little bit higher yield. We're also able to buy assets and then put them on our own asset management platform, essentially do the property management ourselves, do certain facility services, and grow those yields by another 25, 50 basis points on top of that. So for us, we see the investment environment as a five and a half to six.
But it really has proven to be quite competitive. Investors, especially in the private side, really look in at the stability and the long-term growth dynamic for medical office. And I found it to be quite attractive.
Great. Let's talk about how you're able to grow and specifically your balance sheet, cost of capital. So can you weigh in on that in terms of your outlook for 2021?
Yeah. For us, we're definitely just focused on when we grow, it's got to be accretive. We don't want to be big just to be big. I think we want to be able to grow in a very targeted fashion so that the investors can get the returns.
One of the things we look at as an investment in HTA is that strong, steady, dependable cashflow should translate to earnings growth and dividend growth. And I'm happy to say that HTA is... Even during the pandemic, we were able to raise our dividend for the seventh year in a row. We've now averaged about two percent growth of the dividend over the last seven years. So we've been able to be very consistent in our cashflow and seeing it go down to shareholders.
As we look at the investment opportunity and the opportunities for growth, I think we see three or four areas that's really going to drive us forward. I think the first areas is we do see continued portfolio growth. So our same portfolio, same store growth, we do anticipate it continuing to move along at that two to three percent clip.
From an external investment perspective, we have both acquisition opportunities as well as development opportunities. And as you pointed out, it's really driven by the strength of our balance sheet and our cost of capital. When we look at our balance sheet and our ability to buy and invest, we did a couple things going into 2020 that's really set us up for long-term capital and the ability to invest that.
The first thing we did was we came into the year having raised almost 300 million dollars of equity on a forward basis, meaning that it's sitting out there with the banks, we can draw it down really at any time, as soon as we find the investments. And we raised it at very attractive prices. I think we raised it well north of 29, approaching $30 a share, taking some of that volatility of 2020 off the table.
We've also been very opportunistic as far as issue in our debt. In 2019, we were able to opportunistically issue debt in the mid threes. And then 2020, when the rates came down even further, we issued 800 million dollars of debt in September of this year at a coupon of two percent. So when we're looking at yields and accretiveness, we had raised 300 million dollars of equity at very attractive pricing pre-COVID. With the rates down, we raised ... we paid off 600 million dollars of debt and actually took 200 million dollars of incremental capital, because we thought the rates were favorable.
So we're coming into 2021 with 400 million dollars of long-term capital already at raised, at cost of capital in the mid fours. So we're able to put this to work at pricing that we see right now, and it's going to flow to the bottom line.
Yeah. Good. Yeah. In terms of the balance sheet, I guess you've got a triple B plus rating, right?
We're triple B flat, Baa2. Based on the pricing, we were able to get ... We get the feedback from our fixed income investors that they think we should be higher, given the stability of the portfolio, but we've got some work to do on those REIT [inaudible 00:09:43].
And also want to ask you, I know you're primarily ... well, exclusively US focused. But as a company, I know your name is Healthcare Trust of America, but have you considered going North America, potentially in Canada, like some of your peers in Ventas, or perhaps even into Europe like Medical Property Trust?
Well, we've certainly looked at it. I think as we look at the investible universe, our big focus is medical office. We think medical office and outpatient medical is really one of the key driving forces of healthcare over the next 20 years. So we like the sector and we're going to stay in the sector. I think that's the other question we typically get is do we want to go into senior housing, do we want to go into skilled nursing and other things like that, potentially life science. And I think we first say we like medical office first and foremost.
From a geographic perspective, we have certainly looked at different geographies. I think every country has slightly different healthcare models that they have implemented, that have different impacts on the medical office sector and how that plays out. We've certainly looked at Canada quite a bit. They have a much more socialized medicine model. Medical office there looks and feels a little bit different because the private doctors essentially get to a certain point in the year and say, "Okay, I've seen all the private patients I can see. Now I'm done," which doesn't always play out well for rents and retention. But it's very steady.
And so I think the medical office in Canada tends to have private doctors, it's very steady, they're government compensated even from an insurance market perspective where you get much more of the healthcare systems that have that long-term bond type quality with their medical office buildings. So we've looked at it. I think if the right opportunity came up, we're open to expanding internationally.
But there's a lot of opportunity here in the US. When you look at the medical office market, it's still very fragmented. It's only 20% owned by institutional capital, the REITs, the large pension funds, large private equity players, things like that. So there's a lot of opportunity remaining here in the US. So I think this is going to continue to be our first and foremost focus.
Yeah. And speaking of investors, our investor subscriber base is fairly global. You have a number of ... quite a few European investors and Canadian investors who subscribe to our products, our REIT products. And I want to ask you, along those lines, I know when you started, the company started out as a really non-traded REIT. For those of you listening, that means they were publicly traded, but not publicly listed. But then I guess you can give me the exact date, because I always ... It's 2013 or something like that. I can't remember.
2012. So 2012, you didn't IPO. You actually converted or moved, not even spun, but you converted from a non- traded REIT to a publicly listed REIT. But that meant you had a fairly large retail base at the time. And it's interesting to see how over the years now, 2012, that means eight, almost nine years as a publicly traded company, you've really grown your institutional exposure, but also maintained that retail exposure. And of course, we'll talk about that. The next question, of course, is dividend. But can you talk a little bit about your investor base today? Because I know you still have a pretty balanced lineup of investors.
Yeah. And I think when we look at our investor base, obviously during the pandemic, I think the shareholders tend to change quite a bit, as investors are making sure that they're keeping up with all the various momentum trades that might be taking place. But our shareholder base has been fairly steady. I think it's got a very ... We're very well-represented by REIT dedicated investors. There was a report that came out yesterday or the day before that really highlighted the fact that HTA is one of the most overweight stocks owned by the REIT dedicated investors. So those that follow the sector, that follow real estate on a purposeful basis have bought into the story of what we're doing or the steady growth throughout the pandemic and the outlook has as we're going to continue to grow, we think, in 2021.
But you're right. I think we continue to be a great investment for retail shareholders. We continue to get calls in here. When we came public, we had 58,000 retail shareholders who had invested over two billion dollars in the company. And I think we continue to focus and make sure that we do remain very retail investor friendly. We like to get out and talk to them. I think we're a story that provides that steady, stable growth and really the dividend growth that most retail investors are looking for. I know my family looks for it. I know my parents look for it, my grandparents look for it, and they've really appreciated that steady, dependable dividend that we're aiming for.
And speaking of that, I get this question a lot. Maybe you could help me answer it, Robert, is when you think about inflation and now rising rates, what do you tell your investors today about HTA and how your company is able to deal with a rising rate environment? Obviously, you have leases that are locked in, but they also have escalations, your cost of capital. Can you touch on that and debunk that myth that rising rates is really going to be a bad thing?
Yeah. So I think you touched on a couple of things on that. First, looking at the balance sheet, we're very well managed from a debt maturity schedule. So we've locked in our debt for a long period of time. So we've got a very stable balance sheet as we look at that.
Going back to the actions we took this last year, in September we saw the opportunity to push out rates and in our maturity schedule, not just for the next two or three years, but we pushed out all of our bond maturities out to 2026. So we paid off anything coming due on a public bond maturity before '26 this last year. We paid a pre-payment penalty to do that, but we thought the benefit of having that pushed out and locked in for five, six years in a potentially rate moving environment was the smart thing to do. So we went ahead and did that.
So I think the balance sheet takes away a lot of that risk. We planned for that, we pushed out the maturities, and we've locked things in by and large. On the revenue side, and I think when we look at our leases, a lot of people think of healthcare and they think, "Oh, these are very long 10, 15 year leases, not very many bumps and escalations," and that's not really true. I think when we look at HTA's portfolio, our typical leases average between five and seven years, which gives us the opportunity to roll over 10 to 15% of our leases to market on an annual basis. It's not too much, but it's also not too little so that we are able to mark things to market.
And then we do have annual rent escalators. Our typical rent escalator in our leases is about two and a half percent. So we do get that annual revenue bump through most of our leases. And again, once we get to the end of the lease term, we've got properties that are in great locations, mostly multi-tenanted buildings. And as we've been rolling those leases over, we've been able to push rates. In 2020, we actually leased about 17% of our space. And we did that at renewal rates that were up close to five percent.
So medical office has the ability to move rates. I think you see our ability to move with inflation. If inflation goes up, we'll be able to mark our portfolio to market over the next five to seven years on a steady, progressive type pace.
I guess this is a targeted question for the CFO, but are you positioned for M&A from a balance sheet ... another transformational deal like Duke? Could you take on with that skill advantage another large deal?
Well, we do think we're in a great position. Unique within the medical office spaces is really our vertically integrated platform. One of the reasons we did the Duke acquisition at the time was to give us that scale, that we could really invest in our infrastructure. I think we're unique in that we property manage over 95% of our properties. We do mostly of our own leasing. We have facility building engineers that we employ in each of our markets. We have construction people. We have development people, too, in each of the markets.
So I think that's one of the things that the Duke transaction really allowed us to do was create the scale and capabilities that's very hard to match within the medical office space. So I think from that perspective, we're in a great shape for anything else that might come up.
That said, I think we're the largest medical office player. I think when you compare us to the other two pure play medical office REITs, our portfolio is about 50 to 60% larger than both of those. So we already are of a size and scale that we can continue to grow and continue to have very strong diversification from a tenant base, from a market base, things like that. So we don't need to do anything. So I think if something did come up, we're in a great place to do it. But we also have the luxury of being patient and disciplined and making sure anything that we do is really for the benefit of shareholders for the long term.
Great. Last question, and I promise I'll talk about the dividend. And this question, Robert, is really directed to the board. So hopefully, you'll get copies of this video for all the board members. But I know you've done a great job with dividend growth, and if Scott Peters were on this call here, I would say the same. You guys have done a great job with growing that dividend. So the one box that's not checked, at least from a retail investors perspective, and I'm sure you know exactly what I'm talking about.
... the monthly dividend.
... is that monthly dividend.
There you go.
So again, I think that's ... Look at it. There's, I think, LTC in the healthcare spaces, I think the only one, all of the REITs in Canada. The argument I would make to the board is it's just as easy to pay monthly as it is quarterly. You get your rent checks coming in every month. So you guys would be perfect for a monthly dividend, especially in this environment. We do have a buy rating on HTA, because we think the valuation certainly fits our box.
So anyway, I know you're paying a quarterly dividend. I'm not going to ... I know that's not your sole decision, but that is a message we would like to communicate to the management team and the board, that I think a monthly dividend would be nice to see with all the other great things that HTA has been doing. So I just wanted to pass that along to you.
Well, Brad, you're certainly consistent. And I think you definitely have ... you're looking out for the retail investor. And I think we are, too, and that's why we want to make sure that our dividends is very well covered and we take it seriously as far as growing the dividend long term.
We do pay it quarterly. I think that's what fits the box for us right now. It does give us certain advantages as far as working capital and some other things like that. But I think we take the dividend seriously. It's why we've grown it each of the last seven years. And it's why we're really focused on anything we do, drawing that earnings to the bottom line so we can continue to focus on that. So-
Great. Well, I want to thank you for your time today, Robert, and all the transparency. You always yell ... You and Scott are always really good at getting on these calls and appreciate that, because this is great for our followers to know about HTA and what you're doing. So look forward to catching up with you again. I guess after the first quarter results, we'll be tracking you back down.
That sounds good.