Medical Office and Life Science Portfolios Should Produce Steady Growth for Healthpeak

Senior Analyst

Kevin Brown

The top healthcare real estate stands to benefit disproportionately from the Affordable Care Act. With an increased focus on higher-quality care being performed in lower-cost settings, the best owners and operators in the industry, which can provide better outcomes while driving greater efficiencies, should see demand funneled to them from the best healthcare systems. Additionally, the baby boomer generation is starting to enter its senior years, and the 80-plus population, an age range that spends more than 4 times on healthcare per capita than the national average, should almost double in size over the next 10 years. Long term, the best healthcare companies are well positioned to take advantage of these industry tailwinds.

Given the significant challenges that the coronavirus presented to the senior housing industry, Healthpeak made the strategic decision in 2020 to dispose of most of the company's senior housing assets in multiple transactions for around $4 billion in total proceeds. As a result, Healthpeak’s life science and medical office portfolios are now prominently featured in the company's portfolio as the proceeds from the senior housing sales are reinvested into these two sectors. Healthpeak has high-quality assets in top markets that attract credit-grade tenants in both segments, so we believe it makes sense to strategically focus the company on the segments where it has an advantage. Despite the possibility of further changes to the ACA, we think any changes will still result in a coordinated value- and outcome-based system that will provide Healthpeak’s current portfolio with strong tailwinds.

Business Strategy & Outlook

We don't believe Healthpeak has an economic moat. Senior housing has been one of Healthpeak’s largest segments, but we believe there are limited barriers to entry in this business, so it is too susceptible to supply growth that restricts excess economic returns. While Healthpeak is in sectors that use a triple-net lease structure that can have long contracts with annual rent increases, these contracts are often renegotiated if the underlying tenant operations are under pressure. Therefore, we don’t think the triple-net structure inherently confers a moat to those assets. Medical office and life science buildings have qualities that could support a moat for the highest-quality assets in both sectors, but the initial rents and rent increases from the high-quality properties compared with the initial capital investment produce returns that are well below Healthpeak’s weighted average cost of capital, leading us to conclude that they do not quantitatively support a moat. Healthpeak has historically shown an ability to drive higher internal operating income growth than peers in some sectors, but we see this as more of an attribute of the management team building relationships with top tenants than qualities inherent in the properties themselves.

Healthpeak’s triple-net leased portfolios (senior housing, hospital, post-acute/skilled nursing) have qualities that could lead to a narrow moat, but we think these qualities are undercut by recent events, leading us to think they have no moat. The portfolio’s triple-net leases are generally long term, with initial terms of 12-15 years or more, and often include extension options, place all responsibility for property operating expenses on the tenant, and include other tenant credit enhancements such as corporate guarantees or letters of credit. Furthermore, Healthpeak generally rents its properties under master leases, which group individual properties together under one lease. These master leases generally prevent tenants from dropping poorer-performing properties, as lease renewals are “all or none,” and promote strong partnerships between Healthpeak and its various operators, making triple-net business relatively sticky. However, many of Healthpeak’s triple-net leases grow only at inflationary levels, as they are frequently tied to the Consumer Price Index (though they often have floors of 2% and ceilings of 3%). Additionally, if the underlying properties can’t maintain the rent bumps throughout the lease term, the leases will eventually need to be broken and new, lower terms will be forced onto the landlord. 

The situation with HCR ManorCare, an operator of skilled nursing and post-acute care facilities, is a great example of how high rent bumps can become unmaintainable despite all of the protections put in place for the triple-net lease structure. Healthpeak acquired HCR ManorCare and its portfolio of high-quality skilled nursing assets in 2011. The lease was set at a 7.75% initial yield at a 1.5 times EBITDAR coverage ratio (above the industry standard of 1.4) and split the assets into four pools. The pools had a lease term of 13-17 years with a 10- to 17-year extension option and had contractual rent increases of 3.5% in the first five years and 3% thereafter. However, shortly after the lease commenced, the federal government began to make cuts to Medicare and Medicaid reimbursement increases, reducing revenue growth and reducing profits to an even greater degree due to the thin margins for the industry. Cash flow coverage dropped quarter after quarter, with facility-level EBITDAR coverage dropping below 1.0 times in 2012 and sinking lower each quarter thereafter, which weighed heavily on the stock. Even after renegotiating a $68 million rent reduction in 2015, the facility-level EBITDAR coverage remained below 1.0. In 2016, Healthpeak chose to spin off the assets into a skilled-nursing-focused real estate investment trust, Quality Care Properties, as management recognized that another massive rent cut was required and separating the assets from the parent company would unlock the value of the rest of Healthpeak’s portfolio value. Despite all of the protections and guarantees in place in the original triple-net lease term, the initial rent was set too high, given the cuts the federal government was making, and the rent increases were unmaintainable, given the declining revenue in the underlying assets. Therefore, we conclude that, despite the positive attributes, a triple-net lease structure does not create a moat if the underlying assets don’t support the rent payments.

Moats for medical office portfolios could hypothetically come from their proximity and connections to top health systems. Given the Affordable Care Act’s mandate, which encourages coordinated, value-based care between healthcare providers and a shift of patients to the types of lower-cost, consolidated settings that medical office buildings can provide, we believe there will be increasing demand for these types of assets from customers and healthcare partners. Premier medical office buildings are usually on campus or campus-adjacent to a hospital; with a hospital system that’s considered one of the top two or three in the region and one of the top 100 in the U.S.; and in a large metro area with strong population and income growth. Demand for these types of assets will remain strong as patients seek the best treatments from the top health systems, driving consistent patient volumes to their affiliated assets and thus increasing the rents that can be charged to doctors’ groups that want to service these patients. Additionally, the top health systems often seek to work with stable, long-term, well-capitalized partners, creating an opportunity for a landlord to build a long-term relationship with the health system that benefits both parties. Healthpeak has established itself as a desirable partner with some of the top hospitals, as 94% of its medical office building assets are affiliated with a health system. However, the average quality of Healthpeak’s assets is not high enough to generate an intrinsic moat, and the assets haven’t generated an internal growth rate high enough to exceed the company’s weighted average cost of capital. Thus, Healthpeak’s medical office portfolio doesn’t have an inherent moat, either from better locations or from extracting excess returns from the relationships it has built. 

A life science portfolio could establish a moat by having high-quality properties located next to major research campuses with diversified, investment-grade-rated tenants on long-term leases. Research and technology companies benefit from forming research and innovation clusters where top researchers can collaborate and, upon completion of one project, can immediately find new opportunities without having to relocate. The top research campuses in the U.S. are in Boston, San Francisco, San Diego, New York, Seattle, Maryland, and North Carolina. Class A properties in these markets attract high-quality, investment-grade tenants that can work on a number of research projects that don’t require the success of any single project for the tenant to remain financially solvent. Top tenants include academic and university research institutions, technology, biotech, and pharmaceutical companies, and venture capital firms focused on research and technology. Tenants often require custom-built laboratories and research office space for their specialized field of research, so there are significant switching costs to the tenant during the lease term, increasing the chance of tenant retention upon the lease’s maturity. Therefore, owning high-quality assets in these top locations allows for above-average rent increases to be passed on to tenants that should be able to absorb the higher costs, creating the possibility of a moat. Healthpeak has a strong presence in the top three markets (San Francisco, San Diego, and Boston) with a portfolio of about 30% of the total available square feet in the south San Francisco submarket. The company has an active development pipeline to further expand its presence in all three markets. Healthpeak has made relationships with several investment-grade partners in biotech (Amgen), technology (Google), and university research (Duke University). It has produced solid same-store NOI growth of about 4% over the last decade, which is above the average growth seen in the medical office building portfolios owned by the REITs but is slightly below the roughly 5% same-store NOI growth seen by life-science-focused Alexandria Real Estate Equities. While the life science portfolio is the strongest component of Healthpeak’s portfolio, the NOI generated by the life science portfolio isn’t high enough to generate an adjusted return on invested capital higher than the company’s WACC, given the company’s investment in the sector.

We use an adjusted ROIC calculation to determine if a company historically has shown or is forecast to have the characteristics of an economic moat. After adjusting the ROIC calculation to use maintenance capital expenditures instead of accounting depreciation, we calculate that over the past few years, Healthpeak has averaged an adjusted ROIC approximately 70 basis points below our 7.3% WACC. While the adjusted ROIC rises over our forecast horizon as the assets stabilize from recent transactions and developments, it does not exceed our WACC estimate. This affirms our view that Healthpeak’s portfolio should be assigned a no-moat rating.

None

Economic Moat

Healthpeak Properties

Healthpeak Properties, Inc. is a real estate investment trust, which invests primarily in real estate serving the healthcare industry in the United States. It acquires, develops, leases, sells, and manages healthcare real estate and provides mortgage and other financing to healthcare providers. It operates through the following business segments: Life Science, Medical Office and Continuing Care Retirement Community (CCRC). The Life Science segment contains laboratory and office space primarily for biotechnology, medical device and pharmaceutical companies, scientific research institutions, government agencies, and other organizations involved in the life science industry. The Medical Office segment includes pharmacies, hospital ancillary service space, and outpatient services such as diagnostic centers, rehabilitation clinics, and day-surgery operating rooms. The CCRC segment includes independent living, assisted living, and skilled nursing units to provide a continuum of care in an integrated campus. The company was founded in March 1985 and is headquartered in Denver, CO.

Earnings data Q2 2023

Revenue

Cost of revenue

Gross profit

Operating expenses

SG&A

Other

Operating income

EBITDA

Net income

Earnings per share

Total assets

Current assets

Cash & equivalents

Receivables

Inventory

Non-current assets

Net PPE

Intangibles

Total liabilities

Current liabilities

Short term debt

Income tax payable

Non-current liabilities

Long-term debt

Total equity

Stockholders equity

Minority interest

Total liabilities & equity

Total debt

Net debt

Book value per share

Cash from operations

Funds from operations

Change in working capital

Cash from investing

Capital expenditure

Purchase/sale of investments

Purchase/sale of business

Other sources

Cash from financing

Change in stock

Change in debt

Cash dividends paid

Cash from other sources

Net change in cash

Free cash flow

Healthpeak Properties, Inc. is a real estate investment trust, which engages in the acquisition, development, ownership, and management of healthcare real estate. It operates through the following business segments: Life Science, Medical Office and Continuing Care Retirement Community (CCRC). The Life Science segment contains laboratory and office space primarily for biotechnology, medical device and pharmaceutical companies, scientific research institutions, government agencies, and other organizations involved in the life science industry. The Medical Office segment includes medical office buildings and hospitals. The CCRC segment includes independent living, assisted living, and skilled nursing units to provide a continuum of care on a campus. The company was founded on March 21, 1985 and is headquartered in Denver, CO.

AbbVie

Citigroup

Caterpillar

CVS Health

Citizens & Northern

General Dynamics

Haleon PLC

Kinder Morgan

Norfolk Southern

Norwood Financial

Realty Income Corp

Premier Financial

Provident Financial Services

Procter & Gamble

Starbucks

AT&T

Texas Instruments

Verizon

WestRock

The author's May dividend income reached $883, a 20.25% increase compared to May 2022. Banks contributed 22.4% of the May dividend income, with a total of $198.05. The AT&T dividend cut in 2021 still impacts the author's dividend income, preventing them from crossing the $1,000 mark.

Bert's May 2023 Dividend Income Summary

Focus on enhancing its life-science real-estate assets and rising healthcare expenditure by senior citizens bode well for Healthpeak (PEAK). Competition from peers and high interest rates are woes.

Here's Why You Should Retain Healthpeak (PEAK) Stock for Now

Enbridge

Healthpeak Properties, BCE, and Enbridge are all dividend stocks that yield more than 5% annually. These stocks not only offer diversification, they ensure you collect a dividend payment every month of the year.

Want to Collect $200 in Dividends Every Month? Invest $39,700 in These 3 Stocks.

DENVER , May 1, 2023 /PRNewswire/ -- Healthpeak Properties, Inc. ("Healthpeak") (NYSE: PEAK) announced today that its operating company, Healthpeak OP, LLC (the "operating company"), has priced a public offering of $350 million aggregate principal amount of additional 5.250% senior unsecured notes due 2032 (the "notes"). The notes will be senior unsecured obligations of the operating company and will be fully and unconditionally guaranteed by Healthpeak.

Healthpeak Prices Add-On Offering of $350 Million of 5.250% Senior Unsecured Notes due 2032

Healthpeak Properties, Inc. (NYSE:PEAK ) Q1 2023 Results Conference Call April 28, 2023 11:00 AM ET Company Participants Andrew Johns - Senior Vice President, Investor Relations Scott Brinker - President and Chief Executive Officer Peter Scott - Chief Financial Officer Scott Bohn - Chief Development Officer Tom Klaritch - Chief Operating Officer Conference Call Participants Michael Carrol - RBC Capital Markets Nick Yulico - Scotiabank Vikram Malhotra - Mizuho Michael Griffin - Citi Steve Valiquette - Barclays Connor Siversky - Wells Fargo Securities Ronald Kamdem - Morgan Stanley Tayo Okusanya - Credit Suisse John Pawlowski - Green Street Mike Mueller - JPMorgan Josh Dennerlein - BOA Operator Good morning, and welcome to the Healthpeak Properties, Inc. First Quarter Conference Call. All participants will be in a listen-only mode.

Healthpeak Properties, Inc. (PEAK) Q1 2023 Earnings Call Transcript

Healthpeak's (PEAK) Q1 performance reflects year-over-year growth in revenues. Same-store portfolio cash (adjusted) net operating income improves year over year.

Healthpeak's (PEAK) Q1 FFO Meets Estimates, Revenues Beat

Healthpeak (PEAK) came out with quarterly funds from operations (FFO) of $0.42 per share, in line with the Zacks Consensus Estimate. This compares to FFO of $0.43 per share a year ago.

Healthpeak (PEAK) Q1 FFO Meet Estimates

DENVER , April 27, 2023 /PRNewswire/ -- Healthpeak Properties, Inc. (NYSE: PEAK) today announced results for the first quarter ended March 31, 2023.  FIRST QUARTER 2023 FINANCIAL PERFORMANCE AND RECENT HIGHLIGHTS –  Net income of $0.22 per share, Nareit FFO of $0.42 per share, FFO as Adjusted of $0.42 per share, AFFO of $0.38 per share, and blended Total Same-Store Portfolio Cash (Adjusted) NOI growth of 5.5%  Life Science and MOB Same-Store Portfolio Cash (Adjusted) NOI growth of 6.3% and 3.7%, respectively –  First quarter life science new and renewal lease executions totaled 311,000 square feet, with +55% cash releasing spreads on renewals –  Placed-in-service the remaining 19,000 square feet at 101 CambridgePark Drive –  Balance Sheet:  In January 2023, issued $400 million of 5.25% fixed rate 10-year senior unsecured notes Net debt to Adjusted EBITDAre was 5.4x as of March 31, 2023 –  On February 10, 2023, Healthpeak implemented a holding company reorganization to an Umbrella Partnership Real Estate Investment Trust (UPREIT) –  Board of Directors:   Kathy Sandstrom appointed Chair of the Board of Directors Jim Connor appointed as an independent director –  Healthpeak's Board of Directors declared today a quarterly common stock cash dividend of $0.30 per share to be paid on May 19, 2023, to stockholders of record as of the close of business on May 8, 2023   –  Recent ESG accomplishments include: Earned the 2023 ENERGY STAR® Partner of the Year Award from the U.S. Environmental Protection Agency and the U.S. Department of Energy, marking Healthpeak's third time receiving the award Ranked in the top 10% of companies by ISS for each of our environmental, social, and governance quality scores Named a Women's Forum of New York Corporate Champion for the fifth time FIRST QUARTER COMPARISON   Three Months Ended March 31, 2023 Three Months Ended March 31, 2022 (in thousands, except per share amounts) Amount Per Share Amount Per Share Net income, diluted $  117,698 $       0.22 $    69,637 $       0.13 Nareit FFO, diluted 230,443 0.42 245,783 0.45 FFO as Adjusted, diluted 231,881 0.42 237,186 0.43 AFFO, diluted 209,299 0.38 203,682 0.37 Nareit FFO, FFO as Adjusted, AFFO, Same-Store Cash (Adjusted) NOI, and Net Debt to Adjusted EBITDAre are supplemental non-GAAP financial measures that we believe are useful in evaluating the operating performance and financial position of real estate investment trusts (see the "Funds From Operations" and "Adjusted Funds From Operations" sections of this release for additional information).

Healthpeak Properties Reports First Quarter 2023 Results and Declares Quarterly Cash Dividend on Common Stock

DENVER , April 27, 2023 /PRNewswire/ -- Healthpeak Properties, Inc. (NYSE: PEAK) announced today that Kathy Sandstrom was appointed as independent Chair of the Board of Directors. Ms. Sandstrom succeeds Brian Cartwright, who will continue to serve on the Board as an independent director.

Healthpeak Properties Board Appoints Kathy Sandstrom as Chair

Healthpeak Properties: Investment-Grade Rated Bargain.

Healthpeak Properties: Investment-Grade Rated Bargain

Robust demand for Healthpeak's (PEAK) life-science assets and rising healthcare spending by senior citizens are likely to have aided its Q1 earnings. However, rising interest rates might have ailed.

Healthpeak (PEAK) to Post Q1 Earnings: What's in the Offing?

Office Properties Income Trust

W. P. Carey

Healthpeak Properties pays a very healthy dividend yielding 5.6%. W. P. Carey has dual drivers to continue increasing its 5.9%-yielding dividend.

2 Ultra-High-Yield REIT Stocks to Buy Hand Over Fist and 1 To Avoid

Barclays

FactSet Research Systems

The majority of analysts have a buy rating on these REITs. They offer dividends yielding more than 4.5% that analysts believe will grow over the next few years.

4 Dividend Stocks Yielding 4.5%-Plus That Are Great Buys, According to Wall Street

Citizens Financial Group

Comerica

Fifth Third Bancorp

Hasbro

Iron Mountain

Organon & Co

Philip Morris

Vici Properties

During a period of high interest rates, it might be more difficult to impress investors with dividend stocks. But the stocks can have an important advantage over the long term.

10 dividend stocks yielding at least 4.5% that are rated ‘buy' by most analysts

Franklin Resources

Boston Properties

Dow Inc

Federal Realty Investment Trust

KeyCorp

Kraft Heinz

Altria

NRG Energy

Newell Brands

ONEOK

Prudential Financial

Ventas

If you invest in dividend stocks, you are probably looking for long-term growth to go with the income. Otherwise you might be content to hold one-month U.S. Treasury bills, which yield 4.5% or park your money in an online savings account for a yield close to 4%.

14 dividend stocks yielding 4% or more that are expected to increase payouts in 2023 and 2024

DENVER , March 23, 2023 /PRNewswire/ -- Healthpeak Properties, Inc. (NYSE: PEAK) is scheduled to report first quarter financial results after the close of trading on the New York Stock Exchange on Thursday, April 27, 2023. Healthpeak will host a conference call and webcast on Friday, April 28, 2023, at 9:00 a.m.

Healthpeak Properties to Report First Quarter Financial Results and Host Conference Call/Webcast

Lexington Realty

National Storage Affiliates Trust

“Final four” is an eye-popping term, and will signal maximum excitement for fans of the NCAA Men's Division 1 Basketball Tournament, when we see which teams win games among the “elite eight” on March 26.

March Madness for REITs? Here's a ‘final four' for investors seeking dividend income.

DENVER , March 14, 2023 /PRNewswire/ -- Healthpeak Properties, Inc. (NYSE: PEAK) announced today the appointment of James B. "Jim" Connor as an independent director to its Board of Directors, effective immediately.

Healthpeak Properties Appoints Jim Connor to its Board of Directors

Healthpeak (PEAK) reported earnings 30 days ago. What's next for the stock?

Why Is Healthpeak (PEAK) Down 12% Since Last Earnings Report?

Healthpeak's (PEAK) focus on enhancing its life-science real-estate assets, capital-recycling moves and a solid balance sheet bodes well. Stiff competition from peers and rising interest rates are woes.

Is it Wise to Hold on to Healthpeak (PEAK) Stock for Now?

DENVER , March 2, 2023 /PRNewswire/ -- Healthpeak Properties, Inc. (NYSE: PEAK) announced today that Scott Brinker, its President and Chief Executive Officer, is scheduled to present at the Citi 2023 Global Property CEO Conference. The presentation is scheduled for 9:55 a.m.

Healthpeak Properties to Present at the Citi 2023 Global Property CEO Conference

After some questionable moves in recent years, should investors move on?

Is It Time To Sell This Healthcare Stock?

DENVER , Feb. 10, 2023 /PRNewswire/ -- Healthpeak Properties, Inc. (NYSE: PEAK) (the "Company") today announced the completion of its holding company reorganization (the "Reorganization"), which restructured the Company as an Umbrella Partnership Real Estate Investment Trust, or UPREIT. The Reorganization provides additional flexibility for the Company to efficiently acquire properties in a tax-deferred manner and aligns the Company's corporate structure with other publicly traded U.S. real estate investment trusts.

Healthpeak Announces Closing of Holding Company Reorganization

Healthpeak Properties is an owner and operator of healthcare properties across the U.S. and is a REIT and S&P 500 component. Similar to other healthcare-related REITs, PEAK has and is likely to continue benefitting from favorable long-term demand drivers, such as an aging senior population.

Healthpeak Properties: A Solid End To 2022 And A Positive Future Outlook

Healthpeak Properties, Inc. (NYSE:PEAK ) Q4 2022 Results Conference Call February 8, 2023 11:00 AM ET Company Participants Andrew Johns - Senior Vice President, IR Scott Brinker - CEO, President & Director Scott Bohn - Chief Development Officer & Co-Head, Life Science Peter Scott - CFO Thomas Klaritch - COO Conference Call Participants Nicholas Yulico - Scotiabank Austin Wurschmidt - KeyBanc Capital Markets Juan Sanabria - BMO Capital Markets Steve Sakwa - Evercore ISI Vikram Malhotra - Mizuho Richard Anderson - SMBC Ronald Kamden - Morgan Stanley Michael Griffin - Citi Joshua Dennerlein - Bank of America Merrill Lynch Steven Valiquette - Barclays Bank Omotayo Okusanya - Credit Suisse John Pawlowski - Green Street Advisors Daniel Hogan - Baird & Co. Operator Good morning, and welcome to the Healthpeak Properties, Inc. Fourth Quarter Conference Call. All participants will be in listen-only mode [Operator Instructions].

Healthpeak Properties, Inc. (PEAK) Q4 2022 Earnings Call Transcript

News for Healthpeak Properties Stock (PEAK)