2023-07-06 08:15:58 ET
Summary
- Healthpeak Properties has underperformed the Real Estate Select Sector SPDR ETF this year, declining by 18% due to a delay in its pandemic recovery.
- Despite recent struggles, Healthpeak Properties is expected to recover in the coming years thanks to the aging U.S. population.
- PEAK stock is currently at a 14-year low, offering a nearly 10-year high dividend yield of 5.8%, which could reward patient investors when the business recovers.
Healthpeak Properties ( PEAK ) has dramatically underperformed the Real Estate Select Sector SPDR ETF ( XLRE ) this year, as it has declined 18% whereas the ETF has gained 3%. The underperformance of the REIT has resulted primarily from a postponement of its expected recovery from the pandemic. However, the market seems to have punished the stock to the extreme. Healthpeak Properties is trading at a 14-year low level, at a nearly 10-year low valuation level, and is offering a nearly 10-year high dividend yield of 5.8% . In addition, while the REIT has stumbled in recent years, it is likely to recover in the upcoming years thanks to the secular tailwinds facing its business. As a result, the stock is likely to highly reward patient investors.
Business overview
Healthpeak Properties is a fully integrated REIT with properties that serve the healthcare industry in the U.S. It is the first healthcare REIT that was included in the S&P 500 index and has become the largest healthcare REIT in the country, with more than 600 properties.
Healthpeak Properties has failed to grow its funds from operations [FFO] per unit over the last six years, primarily due to the great expansion of the company and its competitors in previous years, which rendered the healthcare industry oversupplied. Due to an excessive supply of healthcare properties, Healthpeak Properties has not initiated any new developments over the past 18 months and has not performed any material acquisitions for more than 24 months.
In addition, the company has sometimes been negatively affected by the nature of its business. Many drug candidates do not succeed and hence biotechnology companies cannot commit to rent a property for a whole decade. As a result, Healthpeak Properties has experienced many lease terminations and hence some of its properties have remained vacant for a considerable period.
The lackluster business momentum was evident in the latest earnings report of the REIT. In the first quarter, the company grew its same-property net operating income 5.5% over the prior year’s period, primarily thanks to material rent hikes and lower free rent in the life science and medical office divisions. However, its FFO per unit dipped 2%, from $0.43 to $0.42, due to a 28% increase in interest expense. Just like many other REITs, Healthpeak Properties has been severely hurt by the surge of interest rates to 15-year highs this year, as high interest rates have greatly increased the interest expense of the REIT. Moreover, in its latest presentation , management provided uninspiring guidance, expecting FFO per unit of $1.71-$1.77 this year. This guidance essentially implies flat performance over the prior year.
On the bright side, the supply and demand of healthcare properties in the markets of Healthpeak Properties have become much more balanced in recent years. In addition, the REIT benefits from some secular tailwinds. Thanks to the aging of baby boomers, the 65+ age group in the U.S. grew 39% between 2010 and 2020, the fastest pace since 1880-1890. According to another report , the 65+ age group is expected to grow from 55.7 million U.S. residents in 2020 to 80.8 million until 2040. As this age group has immense spending power, it will certainly spend a significant portion of its wealth on healthcare expenses. Healthcare spending comprises 18% of the U.S. economy. It is also important to note that Healthpeak Properties benefits from technological progress, which has greatly enhanced life expectancy.
Thanks to these secular tailwinds, the management of Healthpeak Properties expects its business to recover at some point in the upcoming years. Analysts seem to agree with management, as they expect the REIT to grow its FFO per unit by about 5% per year on average over the next five years, from $1.74 this year to $2.28 in 2028.
Dividend
Healthpeak Properties cut its dividend by 19% in 2021 due to the effect of the pandemic on its business. Even worse, it was the second dividend cut in the last decade, as the REIT had cut its dividend by 36% in 2016 due to onset of the aforementioned downturn in its business caused by an excessive supply of healthcare properties.
On the other hand, it is important to note that the stock is currently offering a nearly 10-year high dividend yield of 5.8%.
Moreover, the REIT has a FFO payout ratio of 69% , which is a nearly 10-year low level. Furthermore, the REIT has a leverage ratio (Net Debt to EBITDA) of 5.4 and no material debt maturities until 2025.
Source: Investor Presentation
It also has limited exposure to high interest rates from now on, as its floating rate debt is only 5% of total debt. Overall, the stock is offering a nearly 10-year high dividend yield of 5.8% with a wide margin of safety.
Valuation
Healthpeak Properties is currently trading at a nearly 10-year low price-to-FFO ratio of 12.0 , which is much lower than the 10-year average price-to-FFO ratio of 15.7 of the stock. The REIT is also trading at only 10.4 times its expected FFO in 2026. The cheap valuation of the stock has resulted primarily from the stagnation in its business. Whenever the REIT begins to recover from its current downturn, its valuation is likely to revert to its historical average level. This means that the stock will have approximate 30% upside potential (15.7/12.0 – 1) when its business begins to recover merely thanks to a normalization of its valuation level.
Risk
The primary risk factor is a potential postponement of the expected recovery of Healthpeak Properties. While there has been minimal development of new properties by competitors in most of the markets of Healthpeak Properties in the last two years, a pick-up in development activity could delay the expected recovery of the REIT. However, such a scenario is unlikely, as the competitors of the REIT, such as Ventas ( VTR ) and Medical Properties Trust (MPW), have stagnated in recent years as well. At some point in the upcoming years, healthcare REITs are likely to enjoy improved business momentum thanks to the fast pace of aging of the U.S. population.
Final thoughts
The stock of Healthpeak Properties has fallen out of favor in recent years, as the REIT has failed to grow its bottom line for 6 consecutive years whereas investors are given the opportunity to invest in numerous companies with high earnings growth. However, the market seems to have punished Healthpeak Properties to the extreme. Thanks to its depressed valuation and its attractive dividend, the REIT is likely to highly reward investors whenever its business begin to gain steam, though the stock is suitable only for patient investors, who can endure extended periods of stock price pressure.
For further details see:
Healthpeak Properties Is A Bargain Around Its 14-Year Lows