Healthcare Realty to Combine Business with HTA; Shares Fall 11%

Healthcare Realty Trust Incorporated (NYSE: HR) has agreed to combine its businesses with Scottsdale, AZ-based Healthcare Trust of America, Inc. (HTA). The total enterprise value of this strategic business combination is $17.6 billion.

The business combination has received a go-ahead from the board of directors of both companies. Approvals from their respective shareholders are still pending. Upon fulfillment of customary closing conditions, the transaction is expected to conclude in the third quarter of 2022.

Headquartered in Nashville, TN, Healthcare Realty is a real estate investment trust (REIT) with assets mainly in the healthcare services market. Shares of this company lost 11.1% to close at $26.08 on Monday.

Rationale Behind the Transaction

Healthcare Trust of America is one of the largest owners of medical office buildings and providers of infrastructure in the U.S. healthcare market. In 2021, HTA leased 2.8 million square feet of gross leasable area (GLA) and made investments of $306 million in medical office buildings.

The business combination is forecast to create a giant REIT dealing in medical office buildings. Pro forma market capitalization of the resultant company, Healthcare Realty Trust Incorporated, will be $11.6 billion. Its market trading symbol will be ‘HR’, while its headquarter will be in Nashville.

Of the total shareholding of the combined company, 39% will be with Healthcare Realty shareholders and 61% with HTA shareholders.

The resultant company will own 727 properties, totaling 44 million square feet. Its President and CEO will be Todd Meredith, while the Executive Vice-President and Chief Financial Officer will be Kris Douglas.

Financial Aspects

As part of the agreement, a special cash dividend of $4.82 will be paid for each share of HTA. Also, each share of Healthcare Realty will be exchanged for one share of HTA.

Overall, the transaction’s implied value will be $35.08 per share for HTA shareholders, suggesting an 18.2% premium over HTA’s closing price on February 24.

Run rate cost synergies (annual) of $33-$36 million are forecast in a year of the closing of the transaction. Benefits to per-share results are expected together with a better liquidity position.

Management’s Take

Todd Meredith, the President and CEO of Healthcare Realty, said, “We are pleased to announce this strategic transaction, which unites two highly complementary medical office portfolios and represents a rare opportunity to create a sector-leading REIT in terms of both size and quality. We believe all shareholders will benefit from the Company’s expanded national footprint from HR’s Seattle portfolio to HTA’s Boston portfolio.”

Stock Rating

Lately, Connor Siversky, an analyst at Berenberg Bank, maintained a Buy rating and the price target of $35 (34.2% upside potential) on Healthcare Realty.

Meanwhile, BMO Capital analyst Juan C. Sanabria reiterated a Hold rating on the stock with a price target of $34 (30.37% upside potential).

Healthcare Realty has a Moderate Buy consensus rating based on 2 Buys and 2 Holds. This rating points towards Wall Street’s cautiously optimistic view of Healthcare Realty. The average Healthcare Realty price target of $34.25 suggests 31.33% upside potential from current levels. Over the past year, shares of Healthcare Realty have lost 7.7%.

Risk Analysis

Per TipRanks Risk Factors tool, Healthcare Realty stock is at risk mainly from three factors: Finance & Corporate, Legal & Regulatory, and Production. While Finance & Corporate contributes 17 risks to the total 39 risks identified for the stock, Legal & Regulatory and Production account for eight risks each.

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