Healthcare Trust, Inc. (“HTI”) is an externally managed healthcare REIT with a portfolio of medical office buildings (“MOBs”) and senior housing operating properties (“SHOP”). The REIT has two outstanding public trading preferreds, the Healthcare Trust, Inc. 7.375% CUM RED REP PFD STK SER A (NASDAQ:HTIA) and the Healthcare Trust, Inc. 7.125% PFD SER B (NASDAQ:HTIBP). Both of these securities started trading in 2019 and 2021 respectively, but the common shares are yet to trade on a national exchange with the REIT’s quarterly SEC reporting obligation centered squarely on the two preferreds. Critically, non-public commons have raised the specter of risk on the preferreds, heightening a discount to liquidation value that currently sits at 38.8% for HTIA.

I have a policy of not buying preferreds in companies without a corresponding public trading commons, a situation that usually happens after take-private transactions that don’t trigger the standard change of control clause that would require the acquisitor to also buy the outstanding preferreds. The REIT has raised an IPO before, but this has yet to materialize. This is set to change. HTI has entered into a definitive agreement with AR Global, the parent of its external advisor, to transition to self-management by internalizing management functions. This is set to close on September 27, 2024. The REIT is also set to change its name to National Healthcare Properties.

Income, Cash Payment For Internalization, And Dispositions

HTI generated revenue of $88.8 million during its second quarter, up 3.15% over its year-ago comp. However, total expenses grew to $189 million from $84.99 million a year ago to drive an operating loss of $100.4 million. This was driven by $98.24 million in termination fees paid to related parties, AR Global, for the termination of its external advisory services. The fee will be payable within 30 days after the effective date of the termination. HTI will also have to pay AR Global a final $10.9 million asset management fee and a $3.9 million property management fee. Critically, in the event the closing payments exceed the REIT’s available cash, HTI will pay at least $60 million to AR Global and issue a promissory note equal to the difference between the unpaid balance.

The REIT held total cash, cash equivalents, and restricted cash of $81 million at the end of its second quarter. HTI also signaled it has further dispositions in its pipeline to fund the closing payments to AR Global. The REIT has year-to-date conducted the sale of 8 properties for a total consideration of $53.8 million with a pipeline of properties valued at $78.7 million yet to close. Does the huge outflow of cash from HTI’s balance sheet place the safety of the dividends at risk? Potentially. The combined quarterly payments to HTIA and HTIBP holders are exactly $6.9 million, $27.6 million per year. The REIT generated second-quarter adjusted funds from operations (“AFFO”) of $4.4 million, up a healthy 13.8% over its year-ago comp on improved managed expenses and property level performance. AFFO coverage at 64%, or a 157% payout ratio, means the preferred payments are not fully covered.

The Preferreds, Risks, And Fed Rate Cuts

HTIA currently swaps hands for $15.30 per share with a $1.84 per share annual coupon for a 12% yield on cost. This high yield on cost is secured by a portfolio of 160 MOBs and 45 SHOPs spread across 9 million square feet in 32 states. The risk here is that an outflow of cash due to internalization, combined with interest rates remaining elevated for longer after the 25 basis points cut at the September 18th FOMC meeting sets the preferreds up for underperformance. Value creation for HTI will be driven by the pending IPO of the common shares and the pace and intensity of rate cuts. The REIT is growing its AFFO year-over-year.

While near-term interest rate cuts won’t have an immediate impact on HTI’s quarterly interest expenses due to all its debt being at fixed interest rates, it will drive yield compression on both preferreds to provide an aggregated uplift to the securities on a successful name change and IPO. The REIT’s debt maturity schedule is also somewhat long-dated to temper risk with no debt maturing in 2024 and just $12.6 million in debt maturing through 2025 to be paid in January. Next is a $378.5 million loan maturing on December 2026. Holders of HTIA should be cognizant of the IPO not being certain even as market conditions for REITs improve on Fed rate cuts. I’ve taken a position in HTIA against these risks with the double-digit 12% yield on cost for 61 cents on the dollar more than enough to compensate for a REIT making moves to drive stronger future total returns for its shareholders.