The coronavirus pandemic has been brutal for real estate investment trusts (REITs) that own senior housing assets. That includes Healthpeak Properties (NYSE: PEAK). But it's important to look beyond this one subsector when you examine healthcare landlords. Here's why, despite some problems, you might still want to buy Healthpeak Properties.
The ugly stuff
There's no point ignoring the negatives, diversified healthcare REIT Healthpeak Properties is dealing with material issues in its senior housing segment. To put some numbers on just how bad it is, the REIT's same-store net operating income (NOI) growth in senior housing was down 5.8% year over year through the first nine months of 2020. Worse, it was lower by 6.3% year over year in the third quarter, showing that things have been getting worse, not better.
The problems are fairly straightforward. Older people are more at risk from the coronavirus and the novel illness spreads more easily in group settings. Senior housing is purpose-built to bring older people together in large groups. Move outs (which includes deaths) are up throughout the sector, move-ins are down, and costs are elevated because of increased cleaning efforts, among other things. There's no easy answer and vaccines are still months, more likely quarters, away from changing the direction of the pandemic.
But the senior housing issue, while very real, has to be put into perspective. Healthpeak only generates around a quarter of its NOI from senior housing. And just 8.6% of NOI comes from its senior housing operating portfolio (called SHOP in the industry), which are properties it owns and operates (it hires third parties for the day-to-day stuff). That's the riskiest category of senior housing because property level performance flows through to the REIT's top and bottom lines. This is relatively modest exposure compared to its closest peers.
All the rest
So from a big-picture perspective, Healthpeak is facing problems in about 25% of its business. The other 75% is, for the most part, doing much better. About 5.5% of NOI falls into "hospitals and other," which doesn't appear to be doing too badly. Year over year in the third quarter the REIT's "other" segment was roughly flat. However, the other two, more material, segments in the portfolio are doing quite well.
Roughly 31% of NOI comes from medical office buildings and nearly 38% from medical research properties. Both of these divisions have been pretty hot, relatively speaking. Medical Office witnessed 2.3% year-over-year NOI growth through the first three quarters of 2020. In the third quarter, NOI growth was up 3.3%, suggesting that this division actually strengthened as the year progressed. Medical research grew NOI 5.7% through the first nine months of 2020, with a 5.5% increase in the third quarter. Although the third quarter was a touch slower, it was still a very strong number and consistent with the rest of the year.
This brings up the key point here. You know that diversification is good for your portfolio; well, it's also good for a REIT's portfolio. Through the first nine months of 2020, despite the headwinds Healthpeak faced in senior housing, its NOI grew 2.7%. In the third quarter, NOI growth was 2.8%. In other words, Healthpeak is doing pretty well given the pandemic background. And when the world starts to move past the coronavirus, the senior housing segment will likely stage a rebound since the aging baby boomer generation hasn't stopped cresting into retirement and won't for a long time to come.
Risk versus reward
Healthpeak isn't a risk-free investment, but then no stock is. If you are looking at the out-of-favor healthcare REIT sector, Healthpeak provides a good balance between the struggling senior housing segment and areas of the industry that are still growing (office and research). In other words, it allows investors to hedge their bets, in a way, by providing some exposure to an area that could see a rebound without requiring a full commitment to the niche. That's probably worth buying for long-term investors looking to take advantage of the pullback in the healthcare REIT space -- and you can collect a generous 4.9% yield while you wait for better days.