2023-04-22 08:05:00 ET
Summary
- Healthpeak Properties has seen material share price weakness over the past 12 months.
- Yet, its operating results point to underlying strength and it has a strong outlook.
- The value price combined with high yield and balance sheet strength makes PEAK a bargain opportunity at present.
It's simply not easy to find a stock that carries a BBB+ credit rating and yields near 6%, and yet that's where we find Healthpeak Properties (PEAK) at present. I last covered PEAK here in early December of last year, highlighting its NOI growth in all three property segments.
While it's only been six months, it feels much longer than that considering all the economic news that's happened since then. The stock has traded weakly since my last bullish take on it, and in this article, I highlight recent developments and discuss why PEAK is a bargain opportunity at present.
Why PEAK?
Healthpeak Properties is a diversified healthcare REIT, like peers Ventas ( VTR ) and Welltower ( WELL ) and is a member of the S&P 500 ( SPY ) index. Unlike healthcare peers like Omega Healthcare ( OHI ) and CareTrust REIT ( CTRE ) with public-pay properties in skilled nursing, PEAK is focused on private-pay healthcare asset classes including Life Sciences, Medical Office, and Senior Housing.
What sets PEAK apart from lesser quality REITs is its focus on trophy assets, especially in the Life Science and Medical Office side. This includes The Cove and Oyster Point, which is situated in the biotechnology hub of South San Francisco and includes 17 properties. It also includes Medical City in Dallas, Texas that's leased to premier healthcare operator HCA Healthcare ( HCA ) and Swedish Medical Center leased to Providence Health in Seattle, Washington.
Meanwhile, PEAK has seen material share price weakness over the past 12 months, with the stock falling by 40% YoY from $35 to $21.13 as of writing. One may think that the sky was falling for PEAK judging by the stock price performance alone, but that's clearly not the case.
That's because PEAK saw total same-store portfolio cash NOI growth of 6.6% YoY in the last reported quarter, led by a robust 15% NOI growth in the Senior Housing portfolio as this segment continues to recover from labor shortages. Moreover, PEAK saw 5% to 6% same-store NOI growth in its key Life Sciences and Medical Office portfolios, and an impressive 64% cash releasing spread on life science renewals. Both segments also carry very high 99% occupancy.
Looking ahead, PEAK's top and bottom line is set for growth this year, as it recently placed into service and completed redevelopment a couple of properties in Cambridge and South San Francisco (Oyster Point). Also encouraging, PEAK's $900 million life science development pipeline is garnering plenty of interest from tenants, as it is now 78% pre-leased.
Near-term risks include the dilutive effect of the $113 million sale of 2 R&D buildings in Durham for a 5% cap rate, as it remains to be seen how effectively the proceeds will be deployed. In addition, uncertainty in the equities market raise questions around the health of the Life Sciences industry.
However, it's worth noting that this segment saw VC fundraising of $25 billion last year, despite pressures around growth companies, and this is 50% higher than the amount of funds raised in 2019. Plus, as shown below, PEAK gets nearly half of its annual base rent for more established large cap and mid cap biotech companies.
Turning to the balance sheet, PEAK maintains a respectable BBB+ credit rating, with a net debt to EBITDAre ratio of 5.3x, sitting below the 6.0x level generally considered to be safe by ratings agencies for REITs. It also has no bond maturities until 2025, thereby mitigating the near term impact of higher interest rates, and has ample $2.5 billion in available liquidity.
Importantly for income investors, PEAK currently yields a respectable 5.7% and the dividend is well-covered by a 69% AFFO payout ratio. As shown below, PEAK currently yields at one of its highest levels over the past 5 years.
Lastly, I see value in PEAK at the current price of $21.13 with forward P/FFO of 12.1, sitting well under its normal P/FFO of 14.3. Analysts estimate 5% to 6% annual FFO per share growth over the next 2 years and have a consensus Buy rating with an average price target of $27.68 , which equates to a potential 37% total return over the next 12 months.
Investor Takeaway
In conclusion, Healthpeak Properties is a great REIT to consider at the current price. It continues to see respectable NOI growth in all three of its property segments all while maintaining a strong balance sheet with sizeable liquidity and no near-term debt maturities. Lastly, PEAK currently trades at a compelling valuation, offering patient investors a combination of high yield and capital appreciation potential.
For further details see:
Healthpeak Properties: Investment-Grade Rated Bargain