The coronavirus pandemic was incredibly difficult for some areas of the healthcare sector while leaving others largely unscathed. That's an important backdrop to keep in mind when you look at Healthpeak Properties (NYSE: PEAK). Here's why and how you need to think about this giant healthcare landlord today.
Up until the fourth quarter of 2020, Healthpeak Properties would have fallen into the diversified healthcare real estate investment trust (REIT) category, ranking along with industry giants like Ventas and Welltower. But the final stanza of that pandemic-ravaged year was when Healthpeak basically completed its departure from the senior housing sector. The decision to exit this division was interesting, to say the least, because it profoundly changes the investment logic here.
Most importantly, Healthpeak is no longer a diversified healthcare REIT. If that's what you're looking for, you'll need to look elsewhere. At this point, Healthpeak is an office and life sciences landlord. The bad part of this is that, based on the timing of the senior housing dispositions, management got out this troubled healthcare niche at what appears to be the bottom.
Ventas and Welltower, among others, have started to see improving trends in their senior housing portfolios. That means Healthpeak got slammed during the pandemic-driven downturn and won't benefit from the recovery. It will also miss out on what is expected to be a demographically driven demand surge for senior housing assets over the next two decades as the baby boomer generation ages. The company made an ill-timed move out of nursing homes prior to this decision, which might be troubling to more conservative investors. However, that doesn't mean that Healthpeak isn't positioned well today.
The hot spot
Basically, all of the moves that Healthpeak has made over the past five years or so have left it focused on office and medical research assets. The mix is fairly close to 50/50, with a little more office exposure than health sciences. These two areas did very well for the REIT in 2020, with same-store rents up 2.1% on the office side and 6.2% in the life sciences arena. This is why Healthpeak made the shift -- office and life sciences properties are in high demand. And while they may not benefit as directly from aging baby boomers as senior housing will, they will still get a tailwind from this big-picture trend.
And there's ample opportunity here. For example, Healthpeak bought $425 million worth of medical office buildings in the second quarter alone. And in July it acquired another $205 million worth. The cash flow from these properties will start adding to the REIT's results right away.
However, Healthpeak is also buying land, specifically for life sciences investment. For example, it is in the process of acquiring a large parcel adjacent to an existing asset on which it will likely build a new medical research building. Thus, there is material internal growth potential here, as well. This isn't the only construction the REIT has going, either, with its other projects successfully signing up new tenants as they progress.
Which really speaks to the crux of the story for Healthpeak now. It is a growth-oriented healthcare REIT focused on the currently-hot office and life sciences spaces. That could easily be just what you are looking for given the headwinds that senior housing is facing thanks to the coronavirus pandemic.
Know what you own
The big makeover here has resulted in a dividend cut, but that's not shocking or unique in the healthcare REIT space, given the business backdrop today. That said, Healthpeak's last two dividend moves have been cuts (once when it got out of the nursing-home space in 2016 and again when it exited the senior housing sector in 2020). It looks like the REIT has positioned itself for growth, but it really needs to prove that by returning to dividend growth.
Meanwhile, the dividend yield is 3.2%, well above the S&P 500's tiny 1.3% yield but perhaps not high enough to justify an investment for more conservative types until that dividend starts rising again. That said, more aggressive investors willing to bet that the second makeover here has put the REIT on a solid path might want to take a closer look.