Healthcare REITs in 'atypical' merger deal trade at sharp discounts to NAV

Healthpeak Properties Inc. and Physicians Realty Trust traded at steep discounts to net asset value at the time they announced their planned all-stock merger.

On the date prior to the all-stock merger announcement, Healthpeak Properties traded at a 35.7% discount to its consensus net asset value (NAV) per-share estimate, and Physicians Realty traded at a discount of 28.9%, according to S&P Global Market Intelligence data. Meanwhile, the Dow Jones US Real Estate Health Care index traded at a premium of 11.6% and the Dow Jones Equity All REIT index traded at a discount of 17.5%.

The all-stock merger of equals would lead to a combined company with an expected enterprise value of about $21 billion. It was valued at $4.69 billion at announcement, according to Market Intelligence data.

Deal value

The transaction, which drew initial skepticism from investors, is not a sale but "just a combination based on relative value that made sense in and of itself," Healthpeak President and CEO Scott Brinker said on an M&A call.

Wedbush Securities analyst Richard Anderson called the deal "a unique marriage that doesn't follow the conventional playbook of REIT M&A." The "atypical" deal has nuances that investors will not fully come to terms with quickly, including the absence of a merger premium, Anderson wrote in a note.

Under the deal, Physicians Realty shareholders will receive 0.674 of a newly issued Healthpeak share for each Physicians Realty share. Based on Healthpeak's closing share price Oct. 27, the deal value per share was $11.07, the same as Physicians Realty's closing price the same date.

That being said, Healthpeak trades at a steeper discount to NAV than Physicians Realty. When substituting Healthpeak's NAV estimate as a potential value upside proxy, the per-share deal value comes out to $17.21, while Physicians Realty Trust's NAV estimate was $15.57.

Combined footprint

Together, the company will have a 52 million-square-foot portfolio with 40 million square feet of outpatient medical properties concentrated in high-growth markets such as Dallas; Houston; Phoenix; and Nashville, Tenn., according to the merger release.

The combined company will also have relationships with each of the 10 largest health systems in the US, most of the world's largest biopharmas and a mix of biotechs and regional health systems, Brinker said on the M&A call.

Following the completion of the merger, outpatient medical will represent about 50% of the combined company's net operating income. "We'll allocate capital based on opportunity and risk-adjusted returns. And we do expect the opportunity set to be significant, driven by four major buckets," Brinker said.

Those buckets consist of outpatient medical acquisitions from capital-constrained owners or health systems; new development with leading health systems; distressed acquisition opportunities in life science; and the activation of a 5 million-square-foot life science land bank when fundamentals are favorable, the executive said.

Physicians Realty President and CEO John Thomas lauded Healthpeak's lab portfolio, which includes large footprints and lab investment platforms in Cambridge, Mass.; South San Francisco; and San Diego "at an incredibly great valuation."

"I've toured Healthpeak's best-in-class lab in markets and share the vision for the development of existing land owned by Healthpeak in Cambridge and South San Francisco that should generate outsized growth for years to come, focused on lab and community development, but also outpatient medical access," Thomas said.