2023-07-06 08:05:00 ET
Summary
- Healthpeak Properties has seen a 23% drop in value over the past year, despite improving fundamentals and a strong portfolio in the healthcare sector.
- The company has a unique positioning in the Life Science sector, with a strong occupancy of 98% and robust global drug demand, setting it up for future growth.
- PEAK is well positioned to deliver strong shareholder returns in the long run, with a current undervalued price setting it up for potential capital appreciation.
Efficient market theorists believe that the current market price of any security represents the fair market value. That couldn't be further from reality, especially when it comes to those companies with real assets.
For example, you wouldn't believe that your house is worth 20% less today than it was a short 12 months ago, so why should a company with far greater resources and institutional quality assets fall in value by such a great amount?
It's wonderful that many believe in EMT, as that creates value opportunities for those who don't. To paraphrase Warren Buffett, playing against those who believe in efficient markets is like playing chess or bridge against someone who doesn't believe in thinking.
This brings me to Healthpeak Properties ( PEAK ), which as shown below, has dropped by 23% over the past 12 months, despite improving fundamentals. I last covered PEAK here in April, highlighting its portfolio strength and positive outlook. In this article, I provide an update on the business, valuation, and recommendation, so let's get started.
Why PEAK?
Healthpeak Properties is an S&P 500 ( SPY ) company and one of the big 3 diversified healthcare REITs, alongside Ventas ( VTR ) and Welltower ( WELL ). What sets PEAK apart from its 2 peers is its outsized exposure to the growing life sciences property segment, which comprise just over half (51%) of its portfolio NOI.
The senior housing segment, which has seen its fair share of pandemic-related headwinds since 2020 represents just 9% of PEAK's NOI, and outpatient medical (otherwise known as MOB), another growing healthcare segment, is PEAK's second largest asset class, representing 38% of NOI. Moreover, 81% of PEAK's outpatient medical segment is on-campus, making them a convenient and in-demand location for patients and healthcare providers, and 97% are affiliated with healthcare systems.
PEAK's heavy exposure to arguably healthcare's best-positioned segments has driven respectable growth for the company. This is reflected by same-store portfolio cash NOI growing by 5.5% YoY during the first quarter, with life science and MOB same store NOI growing by 6.3% and 3.7%, respectively. Notably, Life science is seeing strong tenant demand with 55% rent spread on renewal leases.
Looking ahead, PEAK has a fairly clear line of sight, as it has very few lease maturities this year, due to proactive early renewals. Its unique positioning in high exposure to Life Science also sets it up for growth down the line. This is supported by a very strong occupancy of 98% and robust global drug demand. As shown below, there were over 20K drugs under development in 2022, representing a 7% CAGR from 2016 levels, driven in large part to the growing adult senior population.
Risks to PEAK include the fact that not all tenants will survive and thrive, as that is just the nature of the competitive biotech industry, where the cost to develop a drug costs millions of dollars and not every drug will succeed. PEAK manages this risk through a 'cluster' strategy, with assets that are located together in biotech innovation centers, such as its Oyster Point location in South San Francisco, Boston, and San Diego.
This means that if one tenant fails, another tenant can be brought in to quickly replace it. Moreover, management is preparing for a slowdown in the sector in the near term, with no new development starts in the past 18 months and no expected acquisitions over the next 2 years.
Moreover, while higher interest rates pose a risk for all REITs, PEAK is one of the better positioned REITs compared to its two aforementioned peers with a low net debt to EBITDAre ratio of 5.4x, supporting its BBB+ credit rating. PEAK also has $2.9 billion of liquidity with no floating rate debt. As shown below, PEAK has well-staggered debt maturities to coincide with rent increases, and it has limited maturities between now and the end of next year.
Importantly, PEAK currently yields an attractive 5.8%, which is supported by a 69% payout ratio, based on full-year FFO per share guidance of $1.73 at the midpoint. Considering the respectable same-store NOI growth, PEAK could reasonably deliver mid-single digit FFO/share growth going forward, which is what analysts expect in the 2024-2025 timeframe. This, combined with the near 6% dividend yield could result outperformance over the market average 9-10% annual returns over the long run.
Lastly, I view PEAK to be undervalued at the current price of $20.77 with a forward P/FFO of 12.0. Considering the strong balance sheet, robust NOI growth, and positive forward outlook, I would expect for PEAK to trade in a P/FFO range of 13-16x, leading to the potential for double-digit returns over the next 12 to 18 months based on share price appreciation.
Investor Takeaway
In summary, Healthpeak Properties has a unique blend of attractive assets and a high dividend yield. With strong business fundamentals, liquidity position, balance sheet strength, and sensible capital allocation policies in place, I believe PEAK is well positioned to deliver strong shareholder returns over the long run. Lastly, it appears that PEAK is underappreciated by the market for its quality, setting the stock up for potential capital appreciation in the near term.
For further details see:
Healthpeak Properties: 6% Yield, Profit From Market Absurdity