The global pandemic has been terrible for healthcare-focused real estate investment trusts (REITs) that own senior housing assets. These headwinds have engulfed the largest and most diversified names, like Healthpeak Properties (NYSE: PEAK). But this particular healthcare REIT has been working for several years to change its stripes -- something that's set it up particularly well to survive this difficult time and thrive long term. Here's what you need to know.
A terrible time
It would be hard to understate the impact the fast-spreading coronavirus has had on the world. It's been particularly bad for older adults, a group that faces elevated risks from COVID-19. This is why healthcare REITs that own senior housing assets are struggling today. There are more move outs (usually a euphemism for residents dying), fewer move ins, and costs are elevated because of higher employee compensation and heightened cleaning regimes.
To put some numbers on this, Healthpeak's senior housing segment saw net operating income decline by 5.8% through the first nine months of 2020. Things were even worse in the third quarter, which witnessed a 6.3% year-over-year decline. With a resurgence of COVID-19 cases, this situation won't get better anytime soon.
But Healthpeak isn't alone. Similarly large peers Ventas (NYSE: VTR) and Welltower (NYSE: WELL) are also struggling on the senior housing side of things.
A setback setup
That said, there's a big difference between Healthpeak and its closest competitors that dates back a few years. In late 2016, Healthpeak, then known as HCP, completed the spinoff of its nursing home division as a stand-alone company, a move similar to the one made by Ventas. The problem was timing. Ventas jettisoned its nursing business before the sector started to face material headwinds, and Healthpeak did so after the storm had struck with full force. It was a major misstep that effectively resulted in a 95% dividend cut for Healthpeak investors.
Chastened by the event, Healthpeak decided it needed to rethink its business model. It was focused heavily on senior housing, like its peers. But it chose at that time to shift gears toward areas, like medical office buildings and research facilities, with more growth potential.
At this point, senior housing makes up roughly 26% of its net operating income (NOI). The rest comes from hospitals (5% of NOI), medical office (31%), and medical research (38%). In other words roughly 70% of its NOI is unrelated to senior housing at a time when senior housing is facing huge headwinds.
That puts Healthpeak in a very strong position relative to Ventas and Welltower. Ventas gets roughly two-thirds of its NOI from senior housing and Welltower nearly 70%, if you include nursing homes in the mix. The differences here have placed more-diversified Healthpeak at the head of the pack.
In the third quarter, Healthpeak's company-wide NOI grew by 2.8%, thanks to its still-expanding office and research portfolios. Through the first nine months of the year, NOI expanded 2.7% despite COVID-19 related headwinds. Ventas' NOI fell 4.3% in the third quarter and was off by a painful 10.4% through the first three quarters of 2020, with its senior housing business leading the way down. Welltower's performance followed the same trend, with third-quarter NOI off by a worrying 12%.
When you step back and look at this trio of industry giants, it shouldn't be surprising to see that Healthpeak shares have outperformed during the pandemic as investors reward it for its more diversified portfolio. Even though positive vaccine news has investors rethinking the headwinds healthcare REITs face, Healthpeak and its 4.9% yield is probably still the best-positioned option here. Indeed, the benefit of a vaccine is still months if not quarters away. In the end, the lessons from the REIT's nursing home misstep helped to set Healthpeak up for long-term success.