INVESTMENT THESIS
(NYSE: PEAK) has also signaled its willingness sell assets from the SHOP and NNN segments. The move would shift the portfolio mix of the company more heavily toward Life Science And Medical Office properties.
The beta on PEAK shares is 0.67.
Healthpeak recently reported third-quarter results that roughly matched analysts’ expectations. Adjusted diluted FFO came to $215 million or $0.40 per share.Revenue rose 11% to $598 million, driven by the January 2020 acquisition of Brookdale, which added the Continuing Care Retirement Community (CCRC) business to Healthpeak’s income statement.
Same-property cash net operating income increased 2.8% in 3Q to $172 million. The results reflected year-over-year, 3.3% in Medical Office segment, and 4.4% growth in the Senior Housing Triple-Net segment. These gains were partially offset by a same-store NOI decline of 15.8% in the Senior Housing Operating Portfolio (SHOP.)
Management has withdrawn its 2020 AFFO guidance. It previously expected AFFO of $1.77-$1.83 per share.
October 2020 was a busy month for the company on the acquisition front, as it acquired the Cambridge Discovery Park for $720 million. The property is a four-building, 607,000 square foot life science & research campus in Boston. The purchase price implied a stabilized cash rate and GAAP capitalization rate of 5.0% and 6.5%, respectively. Also during October, Healthpeak acquired 12 acres of land in San Francisco for $128 million. The company intends to use the land for new life science buildings. The final October transaction involved a 7-property medical office acquisition in three Midwestern states. The purchase price of $169 million implied a stabilized cash rate and GAAP capitalization rate of 5.0% and 6.5%, respectively.
On the disposition side, the company is targeting dispositions in the SHOP and NNN portfolio. From July 2020 through November 2020, the company sold 14 SHOP and NNN assets for approximately $100 million.
EARNINGS & GROWTH ANALYSIS
We are maintaining our 2020 AFFO per share estimate of $1.66, but are lowering our 2021 estimate to $1.72 from $1.75. We review the company’s 3Q20 performance by operating segment below.
— In the Senior Housing Triple-Net segment, same-store cash NOI came to $11.5 million, up 4.4% from 3Q19. The increase was primarily attributable to annual rent escalations.
— In the SHOP segment, same-store cash NOI came to $10.3 million, down 15.8% from 3Q19. The decrease was attributable to increased expenses and lower occupancy. Average occupancy dropped to 83.4% from 90.5% in the prior-year period.
— In the Life Science segment, same-property cash NOI came to $70.4 million, up 5.5% from 3Q19. The increase was attributable to rent escalations, partially offset by lower occupancy. Average occupancy fell to 96.4% from 97.1% a year earlier.
— In the Medical Office segment, same-property cash NOI came to $79.7 million, up 3.3% from 3Q19. The increase was attributable to rent increases and higher ad revenue, partially offset by a decrease in occupancy and lower parking income. Average occupancy slipped to 91.9% from 92.2% in 3Q19.
FINANCIAL STRENGTH & DIVIDEND
The company has a BBB+/stable rating from Fitch, a BBB+/stable rating from S&P, and a Baa1/negative rating from Moody’s.
MANAGEMENT & RISKS
Tom Herzog became CEO in 2017 and had been the CFO since 2016. He had also served as CFO at several REITs, including a prior CFO role at Healthpeak in 2009-2011.
Healthpeak faces the risk of payment defaults by tenants, which may occur due to poor management, an inability to retain clients, or legal action. The company may also be unable to renew existing tenants or find new tenants for expired leases.
Oversupply in senior housing is also a concern, as are labor challenges.
REITs have significant interest rate risk if acquisitions are funded with floating-rate debt, or if existing debt matures and credit conditions are tight. The high 4.8% yield may cause the stock to act more like a bond if interest rates rise.
VALUATION
On December 8 at midday, BUY-rated PEAK traded at $30.89, up $0.15.
Source: Argus