Healthcare REIT merger offers growth path despite chilly reception, analysts say

The planned merger between healthcare real estate investment trusts Healthpeak Properties Inc. and Physicians Realty Trust should offer growth opportunities over time, even as the deal drew initial skepticism from investors, analysts said.

The all-stock combination, which would result in a combined company with an expected enterprise value of about $21 billion, carried a transaction value of $4.69 billion at announcement, according to S&P Global Market Intelligence data.

Both companies' share prices fell on the first day of trading after the announcement — Healthpeak's by about 3.8% and Physicians Realty's by about 1.9%. Wedbush analyst Richard Anderson said in an Oct. 31 note that the initial reaction was "lukewarm to modestly negative."

Investors may need time to come to terms with the nuances of the deal, including the fact that the exchange ratio provided Physicians Realty shareholders with no premium to the company's market share price as of the announcement date, Anderson wrote. Moreover, the deal would be dilutive to Healthpeak without the impact of the expected run-rate synergies of $40 million by the end of year one and up to $60 million by the end of year two, the analyst said.

Still, Anderson wrote, the combined companies' pro forma balance sheet remains strong, while the combination with Physicians Realty should provide "a new $5 billion pillar of cash-flow stability" that could allow Healthpeak to go on the offensive in acquiring medical office buildings and life science properties.

Physicians Realty likely "sees the opportunity to attach itself to a much larger enterprise, at a time when it is out of favor, as meaningful upside for its shareholders," Anderson wrote. The analyst added that for Healthpeak, gaining scale with a path to accretion "only appeals to us if [the company] creates something positive from it."

In an Oct. 30 note, Morgan Stanley analysts Ronald Kamdem, Adam Kramer and Derrick Metzler wrote that the combined company would maintain relatively low leverage, in the range of 5x debt to EBITDA, excluding gains or losses on real estate sales or impairments.

"The key focus will be on upside beyond the operational synergies, like whether the larger company is better positioned to capitalize on an anticipated increase in distressed opportunities" in the second half of 2024, they wrote.

Robert W. Baird analysts Wesley Golladay, Mason Guell and Alec Feygin wrote in an Oct. 30 note that the merger will leverage the two companies' strengths: property management expertise for Physicians Realty and development and redevelopment abilities for Healthpeak.

The larger combined entity should have more avenues to create value in the near term, through corporate general and administrative expense synergies and internalizing property management at outpatient medical properties, they wrote.