2023-10-17 08:00:00 ET
Summary
- Healthcare REITs have outperformed most other REIT sectors and some of the major indexes this year.
- Healthpeak Properties has a diversified portfolio of medical office buildings, senior housing, and life science labs.
- The company offers a high, safe dividend approaching 7% and a sturdy balance sheet, and is selling at an attractive valuation.
Healthcare REITs have been one of only three REIT sectors that have made money this year (2.8%), outperforming the S&P 400 and 600 indexes (1.3% and (-1.4%), respectively), as well as the Dow Jones (1.5%), but badly trailing the Nasdaq 100 (38.9%) and the S&P 500 (13.4)%.
It's no secret that the U.S. population is aging, and this is providing a tailwind for all healthcare providers. In addition, Social Security cost of living adjustments have put a significant amount of additional income in the pockets of seniors. This has a salutary effect on senior housing, as Hoya Capital notes:
Senior Housing has emerged as a leader in recent quarters as the long-awaited post-pandemic occupancy recovery is finally taking hold as record-setting rent growth is being fueled by rising resident incomes from record-high Cost-of-Living-Adjustments.
The 8.75% increase in average monthly rent anticipated for 2023 is the highest since 1981.
Hoya Capital Income Builder
REITs dealing in medical lab space are facing a wave of oversupply that will likely persist through 2024, according to Hoya Capital's latest report on the Healthcare REIT sector .
MOB's however, have been beaten down by a mistaken conflation with Office REIT's, resulting in bargain pricing on REITs that hold a lot of MOBs.
Meet the company
Healthpeak Properties, Inc.
Founded in 1985, and headquartered in Denver, Healthpeak Properties ( PEAK ) owns a portfolio of
- senior housing,
- life science lab space, and
- MOB's (medical office buildings).
The company's senior housing components consist of 15 "irreplaceable and high barrier to entry" CCRC's (continuing care retirement communities). PEAK is also involved in 19 joint ventures, most of them senior living facilities, in partnership with Brookdale.
The company's lab space assets consist of 27 campuses, concentrated almost entirely in San Francisco, San Diego, and Boston. There are also 5 projects in development, and 3 being redeveloped.
Most of PEAK's 293 MOB's are on the campuses of major area hospitals, and tenants tend to be specialists who need to be near the hospital, resulting in a tenant retention rate of 80%. There is one new property being developed in Savannah, GA, and three more in redevelopment.
Healthpeak sits right in the market cap sweet spot , at $9.6 billion.
Geographical distribution of PEAK assets tilts toward coastal and Sunbelt regions, with a lot of emphasis on secondary markets outside the lab portfolio.
The lab spaces are the most lucrative, with San Francisco, Boston, and San Diego combining to account for half of PEAK's total portfolio income.
Hospitals and health systems rent 66% of PEAK square footage, and tenant diversity across areas of specialty show a tilt toward biotech and biopharma, which you would expect from the Lab portfolio, plus health systems and physicians groups, which combine to account for 42% of rental revenue.
The tenant roster is somewhat diversified, but not ideally, as the top tenant, HCA Healthcare, accounts for 12% of PEAK's ABR (annual base rent).
Growth metrics
Here are the 3-year growth figures for FFO (funds from operations), and TCFO (total cash from operations).
Metric | 2019 | 2020 | 2021 | 2022 | 3-year CAGR |
FFO (millions) | $780 | $693 | $605 | $895 | -- |
FFO Growth % | -- | (-11.2) | (-12.7) | 47.9 | 4.69% |
FFO per share | $1.76 | $1.64 | $1.61 | $1.74 | -- |
FFO per share growth % | -- | (-6.8) | (-1.8) | 8.1 | (-0.38)%% |
TCFO (millions) | $846 | $758 | $795 | $900 | -- |
TCFO Growth % | -- | (-10.4) | 4.9 | 13.2 | 2.08% |
Source: TD Ameritrade, Seeking Alpha Premium, Hoya Capital Income Builder, and author calculations
Like most REITs, PEAK took a hit during the pandemic, though not as heavy a blow as many others, and the decline in FFO per share was considerably smaller than the decline in total FFO, which indicates that management was taking care of shareholders with buybacks. All three metrics have fully recovered as of 2022.
Meanwhile, here is how the stock price has done over the past 3 twelve-month periods, compared to the REIT average, as represented by the Vanguard Real Estate ETF ( VNQ ).
Metric | 2020 | 2021 | 2022 | 2023 | 3-yr CAGR |
PEAK share price Oct. 13 | $27.87 | $33.99 | $22.73 | $17.39 | -- |
PEAK share price Gain % | -- | 22.0 | (-33.1) | (-23.5) | (-14.55)% |
VNQ share price Oct.13 | $81.98 | $105.18 | $78.08 | $75.49 | -- |
VNQ share price Gain % | -- | 28.4 | (-25.8) | (-3.3) | (-2.71)% |
Source: MarketWatch.com and author calculations
In 2021, which was a superb year for REITs, PEAK gained less than the VNQ, and in the past 2 years, which have been brutal for REITs, PEAK has lost more than the VNQ. Investors in the VNQ three years ago have seen an average annual loss of (-2.71)% on share price, but investors in PEAK have been hammered at (-14.55)%.
Balance sheet metrics
Here are the key balance sheet metrics.
Company | Liquidity Ratio | Debt Ratio | Debt/EBITDA | Bond Rating |
PEAK | 1.72 | 32% | 6.0 | BBB+ |
Source: Hoya Capital Income Builder, TD Ameritrade, and author calculations
Although its liabilities/assets ratio is a little weak, PEAK maintains a strong debt ratio and Debt/EBITDA, with an investment-grade balance sheet. The company is holding $104 million in cash, over against debts of $6.5 billion. The company has over $2 billion available on its revolver.
Maturities are favorable, with only negligible payments due this year and next. In 2026, approximately 20% of its current debt falls due, but no other year exceeds 12.5%
The weighted average maturity on PEAK's debt is 5.6 years, with a reasonable weighted average interest rate of 3.8%. Of the total indebtedness, 4.8% is held at variable rates, which is slightly higher than both the Healthcare REIT average of 4.1%, and the overall REIT average of 3.8%.
Dividend metrics
Healthpeak excels when it comes to paying dividends. Its yield of 6.90% is plump and juicy, compared to the healthcare sector and REITs as a whole.
Company | Div. Yield | 5-yr Div. Growth | Div. Score | Payout | Div. Safety |
PEAK | 6.90% | (-4.1)% | 6.09 | 70% | C- |
Source: Hoya Capital Income Builder, TD Ameritrade, Seeking Alpha Premium
Dividend Score projects the Yield three years from now, on shares bought today, assuming the Dividend Growth rate remains unchanged.
Although PEAK's dividend growth history over the last 5 years is typical of the medical sector as a whole, its Dividend Score of 6.09 is still outstanding, and the Dividend Safety grade of C- assigned by Seeking Alpha Premium is picture-perfect, paying out to investors as much as possible, without significant risk of a cut.
Valuation metrics
PEAK sells for an exceptionally low FFO multiple of 9.9, and is priced at a 33% discount to NAV. This is a classic value investor's setup.
Company | Div. Score | Price/FFO '23 | Premium to NAV |
PEAK | 6.09 | 9.9 | (-33.1)% |
Source: Hoya Capital Income Builder, TD Ameritrade, and author calculations
What could go wrong?
Healthpeak's leading tenant, HCA Healthcare, accounts for 12% of the company's revenue. If anything were to go wrong with HCA, PEAK's revenues would most likely suffer significantly.
PEAK is carrying 4.8% of its debt at variable rates, which exposes them to a mild risk of above-average interest expenses if the Fed continues to hike rates. If the Fed continues raising interest rates, the increase in PEAK's interest expense would be worse than the average REIT.
PEAK has significant exposure to lab space, which is expected to be in oversupply for at least the next 12 months, suppressing rent growth in that segment of the business.
Investor's bottom line
In my humble opinion, REITs are nearing a bottom, and if that is the case, most REITs are a Buy. Healthpeak Properties is not among the very best Buys, but is definitely among the good Buys, particularly for value investors. Its combination of high, safe dividend Yield and attractive price make it a good candidate, both for income and for near-term share price Gain. Its diversification within the healthcare industry give it stability across a variety of economic conditions.
Even though I am more a growth investor than a value investor, I am considering opening a position in PEAK. The only knock I have against it is that has consistently underperformed the VNQ on price over the last few years, and for this reason, I would keep the allocation modest.
Seeking Alpha Premium
Of the 20 Wall Street analysts covering PEAK, only one says Sell, while 10 say Buy or Strong Buy, and 9 say Hold. The average price target is $23.44, implying 34.8% upside.
TipRanks is Neutral on PEAK, while The Street and Ford Equity Research both recommend Selling. Zacks recommends a Hold.
As always, however, the opinion that matters most is yours. Because it's your money.
For further details see:
Healthpeak Properties: A Safe 6.9% Yield