Health Care Trust of America Is Good Medicine for Your Portfolio

NEW YORK ( TheStreet) -- Health care trends in the U.S. have created hot demand for medical-office space, and this bodes well for Healthcare Trust of America ( HTA).

Because of shifting consumer preferences and limited hospital space, more and more health care procedures that traditionally have been performed in hospitals -- such as surgery -- are now being done at outpatient facilities.

What's more demand for medical-office space is only likely to accelerate in coming years.

In a recent report, Randall Sakamoto, director of research at Rosen Consulting Group, wrote:
"The healthcare industry has been growing at a strong pace for decades. Looking forward, this trend is expected to accelerate as baby boomers reach retirement age and echo boomers begin to establish their own facilities. As demand for medical services increases, this will further increase the need for physicians, lab technicians, and other medical support staff, driving demand for the high-quality medical office buildings (or MOBs) that house them."

Healthcare Trust of America Is a Best-in-Class Health Care REIT

Last June, I recommended the shares in the nontraded REIT conversion of Healthcare Trust of America in an article for TheStreet.

At the time, HTA was unlocking around 229.5 million shares in an effort to create liquidity for about 25% of HTA investors. By utilizing a "Dutch auction" tender offer, HTA was entering the public markets and releasing 25% of its shares every six months. Essentially that means that HTA is controlling the demand for the shares while also attempting to lower the volatility within the initial $2.5 billion portfolio.

Now HTA is in the second round of unlocking shares, and the third round of shares (B-2 shares) hits the market in June. HTA plans to unlock all of its shares (the remaining 25%) in December.

Today HTA is trading at an all-time high of $12.85 a share with a market capitalization of around $2.8 billion. The Scottsdale, Ariz.-based REIT has been moving up rapidly, especially when compared with the other health care REITs that own MOBs.

HTA is a dominant player in the MOB space with about 90% of its portfolio leased out as MOB-occupied space. The other MOB peers include Healthcare REIT ( HR), Senior Housing Properties Trust ( SNH), Health Care REIT ( HCN), Ventas ( VTR), HCP ( HCP).

Clearly HTA has built a its dominating health care platform on strategic MOB assets:

As a REIT gets bigger and is added to an index, investors must increase their investment in these companies. Interestingly, many advisers are measured against these indices and view a company's inclusion as a signal to pay attention to them.

That's exactly what's happening now with HTA, and as more shares are unlocked (from its previous nonlisted REIT shareholder pool) investment appeal is increasing.

Since January, HTA is the best-performing MOB-focused REIT, with a total return of 31.41%. That's more than 25% higher than the peer group:

Perhaps driving the demand in HTA stock was the company's addition to several REIT indices, notably the MSCI US REIT Index and the Wilshire Real Estate Index.

Institutional shareholders also have taken note and increased their overall ownership stake in the company. HTA volume is averaging around one million shares a day, and that should continue as the company is expected to be added to several more indices.

HTA Stock Chart

Courtesy of SNL Financial

HTA is announcing first-quarter earnings on Tuesday night and, as mentioned above, the third wave of shares are being released in June.

The healthy portfolio fundamentals (91% occupancy and 40% investment grade-rated tenants) should produce consistent earnings growth and dividend safety. (HTA's rent coverage ratio is 9, and that provides a margin of safety that other, less-defensive health care sectors lack.)

In the MOB sector, physicians and health systems generate rent coverage closer to 9.0. That means that for every dollar of rent being paid, a physician or health system is making $9.00 of income with which to pay the rent.

That coverage is almost six times as great as the broader health care peer group -- definitely the margin of safety I look for in what I call "sleep well at night" (SWAN) investments.

HTA has an attractive dividend yield of 4.47%, and with the continued demand in high-quality health care real estate today, I expect continued outperformance in 2013. Shares should break $13.00 after earnings (this week) and possibly $15.00 by year-end.

MOB's are here to stay, and Healthcare Trust of America is one of my favorite SWAN REITs.

At the time of publication, Thomas had no positions in securities mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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