HEALTHCARE REALTY TRUST INCORPORATED
Fitch Ratings has affirmed the ratings of
The Rating Outlook is Stable. Fitch has also affirmed the unsecured debt at
The ratings and the Outlook reflect Fitch's expectation that HR's leverage will sustain between 6.0x-7.0x through the cycle, the durable cashflows generated by its medical office building (MOB) portfolio and its strong contingent liquidity as measured by UA/UD (unencumbered assets covering net unsecured debt) relative to peers. The ratings also reflect HR's improved scale and relative access to capital post its merger with
Key Rating Drivers
Durable, Predictable Cash Flows: A primary tenet of the ratings is the expectation that HR's portfolio will deliver durable and predictable operating cash flows. MOBs generally, and HR's assets specifically, benefit from secular demand drivers, long tenor-leases and a diversified tenant base with rents that are well-covered by underlying cash flows.
Strong tenant retention rates and cash releasing spreads further support the durability of HR's cash flows. These factors reduce the risk of meaningful credit-related declines in EBITDA during the life of the lease. Even though HR does not disclose tenant lease coverage ratios, Fitch views the generally higher rent coverage for all MOBs relative to other health care real estate property types as an indication of the lower relative lease default and lease renewal risk.
Conservative Financial Policy: The ratings reflect Fitch's expectation that leverage (net debt before preferred to recurring operating EBITDA after distributions to/from associates and minorities) will sustain between 6.0x-6.5x through the rating horizon. HR's leverage profile also benefits from the durability of long-tenor leased MOB cash flows. Fitch estimates HR's leverage at 3Q22 was 6.7x pro forma for recently announced dispositions.
Fitch positively views HR's acquisition discipline demonstrated in recent years and believes that its combination with HTA will support future acquisition and development volumes with the introduction of new markets and tenants. However, Fitch expects investment activity will be muted for the foreseeable future based on the issuer's comments on its 3Q22 earnings call.
On-Campus, Multi-Tenant Focus: HR's portfolio is primarily focused on on-campus (70% of total sq. ft. at 3Q22), multi-tenant MOBs (82%), which Fitch views more favorably than off-campus and single-tenant properties. Demand for non-hospital real estate is supported by secular shifts in the provision of care to non-hospital, outpatient settings. Fitch expects on-campus, multi-tenant MOBs will likely face lower lease renewal risk as they benefit from barriers to new supply.
Geographically Diversified Tenant Base: HR is geographically diversified with a presence in 71 U.S. markets across 35 states, with moderately high exposure to
Additionally, Fitch views the portfolio's proximity to hospitals and the system affiliation with some of the nation's largest and highest quality health and hospital systems as an indicator of the desirability of the real estate, as well as the high portfolio quality of HR's assets. HR has relationships with 57 of the top 100 health systems in the
Improved Fixed-Income Markets Presence: Fitch expects HR's relative access to capital to improve, given its larger size will result in larger and more frequent debt and equity issuances. HR has demonstrated access to relatively diversified capital sources through public bond and multiple common stock offerings, separate JVs with
Derivation Summary
HR's ratings reflect the issuer's high quality, geographically diversified portfolio of MOBs that generates durable cashflows. Its portfolio of health system affiliated on- and off-campus MOBs benefit from secular health care spending growth as well as from the shift of medical procedures to outpatient and community-based settings. Fitch expects HR will sustain leverage between 6.0x-7.0x through the cycle.
HR has improved scale and access to capital relative to its MOB peer,
Fitch rates HR higher than
Fitch rates HR lower than higher-rated peers
Fitch rates the IDRs of the parent REIT,
Fitch also rates the IDRs of the parent
Key Assumptions
Low-single-digit annual SSNOI growth, driven primarily by fixed contractual rent increases and positive cash releasing spreads;
No gross acquisitions through 2024 and
Annual disposition spend of
Annual development spend of
No equity issuance through 2024 with a modest
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Fitch's expectation of net debt to recurring operating EBITDA sustaining below 6.0x;
Demonstrated consistent access to unsecured debt capital and frequency of issuance on par with higher-rated REIT issuers.
Should Fitch come to expect that the issuer does not have comparable access relative to higher-rated peers, the leverage sensitivities may be tightened. Additionally, positive momentum on the ratings will also be governed by the issuer not meaningfully violating any of the negative rating sensitivities.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Fitch's expectation of net debt to recurring operating EBITDA sustaining above 7.0x;
Fitch's expectation of REIT fixed-charge coverage sustaining below 3.0x;
UA/UD sustaining below 2.0x, based on an 8.0% stressed capitalization rate;
Fitch's expectation of AFFO payout ratio sustaining at or above 100%;
A material and sustained increase in speculative development.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Adequate Liquidity: Fitch estimates HR's sources of liquidity (unrestricted cash, availability under the revolving credit facility, as well as retained cash flow from operations) are sufficient to cover its uses (debt maturities, committed development expenditures and maintenance capex) through 2024.
HR maintained approximately
Contingent Liquidity: Fitch estimates that HR's unencumbered assets would cover net unsecured debt (UA/UD) by 1.7x assuming an 8.0% stressed cap rate as of
The financeability of the underlying real estate is a core tenet of investment-grade REIT ratings. MOBs generally benefit from strong access to contingent liquidity sources, including a multitude of durable mortgage capital sources as well as more pro-cyclical bank mortgage and CMBS market.
Issuer Profile
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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