With a new name and a streamlined portfolio that de-emphasizes seniors housing, Healthpeak Properties Inc. is attracting renewed interest from some real estate investment trust investors after years in the wilderness.
The healthcare property owner, formerly known as HCP Inc., changed its name in November after an overhaul that involved a portfolio spinoff and a series of high-level executive transitions and property transactions. Now, investor uncertainty about seniors housing and a misstep by one of Healthpeak's chief competitors have helped open a path forward for the revamped company.
Healthpeak is one of the three largest REITs, along with Welltower Inc. and Ventas Inc., that own healthcare properties such as senior living facilities, medical office buildings, hospitals and nursing homes. Market participants say equity investors that benchmark against real estate indexes typically have a favorite company among the so-called "big three," and may invest in one other, but generally don't own stakes in all three companies unless they are especially bullish on healthcare.
Investors say choosing between them involves judging their management teams and balance sheets, but also the way they allocate resources between the different healthcare property subsectors. Some property types, such as medical office, are typically viewed as conservative, slow-growing investments, while others, like seniors housing, offer greater risks and rewards, especially when property owners own a stake in the property operators that are their tenants.
Healthpeak's recent positive momentum coincides with a period of nervousness about the near-term outlook for seniors housing. After the overhaul, the company is aiming to own a portfolio with 35% to 40% seniors housing, 30% medical office and 30% life science properties. It has steadily reduced its exposure to a single tenant, Brookdale Senior Living Inc., to 6% of its net operating income, from 35% in 2016.
Since Jan. 1, 2018, the company's share price has risen 31.7%, compared to a 17.7% gain for the S&P 500, a 12.8% gain for the SNL U.S. REIT Equity index and an 18.0% gain for the SNL U.S. REIT Healthcare index.
Healthpeak's seniors housing operating portfolio, the subset of its overall seniors housing holdings most vulnerable to industry fluctuations, represents 16% of its total NOI, compared to 33% for Ventas and nearly 42% at Welltower.
"We have a substantially smaller portion of our portfolio that is senior housing than our two other big competitors have," CEO Tom Herzog said in an interview. "And that is intentional."
That choice helped Healthpeak escape the backlash that Ventas faced when reporting third-quarter earnings; Ventas said its seniors housing operating portfolio had been unexpectedly weak, and backed off its predictions of growth in 2020, irritating analysts and investors by reversing guidance it had issued just months earlier.
Welltower reported seniors housing operating results that were much stronger than either Ventas' or Healthpeak's, but some market participants call the company polarizing, in part because of unconventional strategies such as a major investment in skilled nursing properties once owned by HCP, and in part because of senior executives' sometimes combative tone.
Robert W. Baird analyst Drew Babin, who has an "outperform" rating on Healthpeak, said its medical office and life science business represent a "powerful earnings growth machine" while the company waits for its seniors housing portfolio performance to improve.
Winners and losers
The case for investing in seniors housing rests broadly on aging baby boomers, who should generate growing demand for assisted living and independent living facilities in the coming years.
Optimistic projections, though, have also led developers to build seniors housing units in large numbers, sometimes more aggressively than tenants could rent them. As a result, the rising demographic tide has failed to lift all boats in the industry equally, and some operators and landlords have faltered.
"There's an urgent social need for the product, and that's only going to get more significant over the next two decades," Healthpeak President Scott Brinker said in an interview. "So we feel really good about the demand side of the business. The challenge has been that supply has been growing even faster."
Unlike in many other real estate property sectors, in seniors housing "there's always been wide variation in performance among different companies and geographies," said Brinker, who previously was chief investment officer at Welltower.
That performance disparity means landlords that partner with stronger operators in good deal structures should be able to outperform their competitors in both good and bad economic times, Brinker added. Like executives at his former employer — which sued him when he switched companies — he touts Healthpeak's investments with trusted operators in high-growth, high-income markets.
"It's a very inefficient business, there will be winners and there will be losers, and if we hold the right portfolio, we have the right operators and we do a good job on our side, there's an awful lot of upside to be had," CEO Herzog said.
Brinker noted that net absorption across the seniors housing industry was strong in 2019, meaning tenants were taking up more space than developers were building. New construction starts in the segment have declined for six consecutive quarters, he added, leading Healthpeak executives to believe that demand could outpace deliveries over the next roughly 15 months.
Beyond the big three
For investors in the large healthcare REITs, the weeks since companies released third-quarter earnings have brought a series of questions. Among them: Will Ventas, unaccustomed to being out of analysts' good graces, regain its blue-chip status anytime soon? If so, could its current troubles present a discount-priced buying opportunity? Or is the sector undergoing a permanent re-ordering?
One buy-sider who follows the healthcare REITs wondered if the companies' reputation as a defensive investment, providing dependable cash flow in economic downturns, could need updating.
A decade ago, REITs typically rented seniors housing properties to operators under triple-net leases, which generated steady income for landlords with limited risk. Since then, REITs have embraced legislation that took effect in 2008, allowing them to hold ownership stakes in their properties' operators.
The shift opened up the possibility of higher returns in good economies and greater risks in weak periods. It has not been tested in a downturn, raising questions about whether the healthcare REITs are as defensively positioned as the conventional wisdom once held, the investor said.
Healthpeak's leaders, meanwhile, might prefer to live without the "big three" designation.
"We're trying to broaden our peer group," Brinker said. He contended that Healthpeak's portfolio, generating two-thirds of its income from medical office and life science properties, should be discussed alongside such pure-play REITs as Alexandria Real Estate Equities Inc., Healthcare Realty Trust Inc. and Healthcare Trust of America Inc.
Several market participants said Brinker's argument is a logical one for the company to advance, since the life science and medical office companies he named trade at higher earnings multiples than Healthpeak and its large-cap competitors. Still, they said comparing large-cap, diversified healthcare landlords against each other retains a certain logic.
Nonetheless, Herzog said, "I think the Street has come to recognize that all three of us are very different now, and that change has occurred drastically in the last three to five years."
"You have three massive, diversified healthcare REITs, and it's easy to refer to them as the big three, and then compare them with one another as if they were similar," he said. "When in fact, at this point, our strategies, and how we run our businesses, and what are goals are, are very, very different."