Healthcare Realty Trust Inc (HR) stock intrinsic value fair value estimate & owner earnings analysis

Healthcare Realty owns about 500 medical outpatient buildings: doctors' offices, outpatient surgery centers and imaging centers, mostly near hospitals. They are concentrated in fast-growing U.S. metro areas, with Dallas, Seattle, Houston, Charlotte, Phoenix, Denver, Raleigh, Atlanta and Nashville the largest. Today's company was formed by the July 2022 merger of the original Healthcare Realty with Healthcare Trust of America. Earlier years describe two separate companies, so we measure earning power only from 2023, the first full year of the combined business. EARNING POWER. We start with cash from operations and remove the timing swings in working capital. We then subtract stock compensation and the spending needed to keep existing buildings leased: fit-outs for replacement tenants, leasing commissions and building repairs. On that basis the company earned $1.07 per share in 2023, $0.94 in 2024 and $1.08 in 2025. We use the median, $1.07, as our starting point. 2024 was low because of restructuring-related stock compensation and heavier leasing costs. The large accounting losses (a net loss of $246 million in 2025, and a $251 million goodwill write-off in 2024) come mostly from depreciation and write-downs. They are not cash costs, so they are excluded. We treated new development, redevelopment and first-time fit-outs of space that had never been leased as growth investment, not upkeep. Revenue has fallen because the company deliberately sold about $2.3 billion of buildings in 2024 and 2025 (the 2025 sales were at a 6.7% yield), not because the business shrank. A rule that labels all spending as upkeep when revenue falls would count new construction as maintenance. The first half of 2026 ran at roughly $1.15 per share annualized, which confirms that the starting point held up after the sales. Owner earnings grew 14% in 2025, largely a rebound from a weak 2024. Our base case assumes about 4% growth in 2026, below that trailing rate. WHAT DRIVES VALUE. Rents rise under the leases themselves. Contractual increases average 2.9% a year, and leases signed in mid-2026 carry 3.0%. Rents on renewals rose 2.7% in 2025 and 4.8% in the second quarter of 2026, and 77% to 88% of tenants renew. Most leases pass operating costs through to tenants. However, 38% are gross or partly gross leases, so the company absorbs some expense inflation. The largest headwind is cheap debt that must be refinanced. The company's $3.45 billion of senior notes carry an average coupon of about 2.9%. They mature in 2027 (3.75%), 2028 (3.63%), 2030 (3.10% and 2.40%) and 2031 (2.05% and 2.00%). In addition, $700 million of 3.00% exchangeable notes due 2032 were issued in 2026 to repay notes that came due in August 2026. Refinancing all of this at about 5.25% would add roughly $86 million of interest a year by 2032, about $0.25 per share or nearly a quarter of today's earning power. That is why our values are well below a simple multiple of current cash flow. There are also 23 redevelopment projects totaling $291 million, with $169 million still to be spent at the end of 2025. We charge that remaining cost against the cases and credit the rent they should produce. BASE CASE ($18.72 per share). Rents on existing space grow about 2.5% a year after cost inflation, debt is refinanced at about 5.25%, and the redevelopment projects lease up at typical yields. Per-share earning power dips while the redevelopment is funded, then settles around $1.20-$1.30 through 2036. After 2036 we hold it flat for 30 more years. The support for that is the buildings themselves: long-lived real estate on about $1.06 billion of land, with upkeep already deducted from earnings, and a decades-long record of re-leasing medical space. We assign no value beyond 40 years. BEAR CASE ($12.51). Rent growth slows to about 1.5% as hospital-system and physician tenants come under strain. Prospect Medical's 2025 bankruptcy is an example: it leased about 81,000 square feet, and the acquirer of its business took only about 65,000. Debt is refinanced at 6%. About $35 million a year of what is now classed as growth spending turns out to be needed just to hold occupancy in older buildings. Earnings then run flat for 20 years after 2036 and stop. Debt of about 5.6 times cash earnings before interest makes this downside real. BULL CASE ($24.44). Renewal rent increases near recent levels lift growth to about 3.25%. Refinancing costs about 4.75%; the 2026 exchangeable notes priced at 3.00%. Redevelopment returns are above plan. After 2036, earnings grow 2% a year in line with lease escalators, for 30 years. OTHER NOTES. The original Healthcare Realty's 2020 operating cash flow included a one-time $244 million from selling properties held under sales-type leases. We excluded it. The 2032 exchangeable notes could issue new shares if the stock rises well above the exchange price; that dilution is not modeled. The company does not break out every category of redevelopment and first-generation fit-out spending by year, so the split between upkeep and growth rests on its own classification, which we tested in the bear case. MARGIN-OF-SAFETY PRICE. The margin-of-safety price is $13.00, about 30% below the base case and close to the bear case. This is a steady rent-collecting business, but meaningful borrowing and a known wave of refinancing at higher rates justify a larger margin of safety than an unlevered landlord would need. The valuation would be wrong if hospital-system tenants fail widely, if refinancing rates settle well above 6%, or if redevelopment spending proves to be permanent upkeep rather than growth.