Healthcare real estate is not only one of the most resilient types of commercial real estate but also a major growth market. With existing healthcare properties located in the United States totaling more than $1 trillion, the rapidly aging population and incredible advances in life sciences should keep the market growing for decades to come.
And only about 15% of all healthcare properties are owned by real estate investment trusts (REIT), so we're still in the early stages of growth for this REIT subsector.
Healthpeak Properties (NYSE: PEAK) is one of the largest players in the healthcare real estate industry. It also delivers one of the most interesting ways to invest, thanks to its three-pronged approach. In this article, we'll take a closer look at Healthpeak's portfolio, investment strategy, recent developments, and performance for investors over the years.
Healthpeak Properties company profile
Healthpeak Properties has been around since the mid-1980s and, until 2019, was known by its previous name, HCP Inc. As we mentioned, Healthpeak is a REIT that focuses on healthcare real estate.
Healthpeak is one of the largest owners of healthcare real estate in the U.S., with a market capitalization of approximately $18 billion (June 2021). Three types of properties comprise 97% of its portfolio: life science (47%), medical office buildings (MOBs; 39%), and continuing care retirement communities (CCRCs; 11%).
Life science, in particular, is a hot commercial real estate market right now, as medical innovation is occurring at an exciting pace. Healthpeak is a leader in the three big life science markets -- San Francisco, San Diego, and Boston -- and continues to invest heavily in acquisitions and development to grow this part of the portfolio.
Healthpeak is also the largest owner of MOBs located on major health campuses in the United States. Medical offices are perhaps the most recession-resistant type of commercial real estate out there, and the market should grow steadily over the coming decades as the massive baby boomer generation progresses toward retirement age.
Finally, CCRCs are a type of senior housing, but one that isn't heavily owned by healthcare REITs. If you aren't familiar, a CCRC is a community where residents have a house or apartment on the property, access to healthcare services, and Step Up housing options as they age. CCRCs are capital-intensive because of their scale, and few REITs own a portfolio of them.
Healthpeak Properties news
By far, the biggest news item involving Healthpeak Properties in the past few years is the company's massive portfolio repositioning, which has just been completed after five years in the making. As we go on, you'll see that Healthpeak has underperformed in the overall stock market in recent years, and this effort (which sacrificed short-term returns in favor of long-term sustainability and value creation) is the main reason for it.
In a nutshell, Healthpeak found itself in a bit of a jam in the mid-2010s as the skilled nursing industry and some of its key operators were in bad financial shape. Not only that, Healthpeak had leverage that was a bit too high for comfort and was far too reliant on this struggling property type. So, Healthpeak decided to give its portfolio, balance sheet, and investment strategy a complete overhaul.
On the portfolio side, Healthpeak decided to focus on just three high-potential areas of healthcare real estate -- life science, medical offices, and CCRCs -- which made up less than 40% of the portfolio in 2016. As a result, the company sold or spun off $18 billion in properties and spent heavily on acquisitions in its focus markets, and the three core areas now make up 97% of the portfolio.
Healthpeak's balance sheet also looks quite a bit stronger than it did back then. Its debt-to-EBITDA ratio has declined significantly, and it has far fewer debts with near-term maturities. Thus, the company's credit ratings have been upgraded by all three major rating agencies.
Finally, Healthpeak decided to pivot more of its attention to a development-focused approach. To be sure, the company still acquires properties when it finds attractive opportunities. However, developing commercial real estate from the ground up can be an excellent value-creation tool, especially in high-demand markets such as life science.
The company's development spending rate is now more than triple what it was five years ago. In addition, Healthpeak has a land bank and identified densification opportunities totaling more than $7 billion, which should keep the company growing for more than a decade into the future.
Healthpeak Properties stock price
As mentioned, Healthpeak (under different names) has been around since the mid-1980s (1985 to be exact), and its track record of performance has been a mixed one.
From its inception through mid-2013, the company had an excellent performance history, delivering a stellar 9,850% total return over roughly 28 years, which translates to annualized returns of nearly 18% -- an excellent return for any type of company to sustain over nearly three decades.
However, the company's performance severely lagged in the market from mid-2013 through today. The short explanation is that the skilled nursing assets in the portfolio (which have since been disposed of) encountered financial trouble and weighed on Healthpeak's earnings. Further, the poor performance and multiyear repositioning discussed in the previous section led to several years of subpar performance.
With that in mind, here's how Healthpeak has done for its investors over certain lengths of time. As you can see, long-term real estate investors have done quite well, but the same cannot be said for those who bought around the time the company's repositioning started.