With its exit from rental senior housing near completion, Healthpeak Properties (NYSE: PEAK) is turning its attention to driving growth and value through its three primary real estate segments: life sciences, medical office buildings, and continuing care retirement communities (CCRCs).
Healthpeak’s CCRCs reported improved operations, expense controls and occupancy gains in the first quarter of 2021, and occupancy improved significantly in April, President and Chief Investment Officer Scott Brinker said during the company’s Q1 2021 earnings call with investors and analysts Wednesday.
The Denver-based real estate investment trust (REIT) reported $143.3 million in net income in the first quarter of 2021, compared to $280 million for the same period last year.
It also updated its 2021 guidance. Funds from operations (FFO) was increased to a range between $1.53 per share and $1.61 per share at the midpoint of 2021. Same-store NOI growth, meanwhile, was revised to a range from 1.75% to 3.25%.
Senior housing exit near completion
Most of the net income decline is attributed to Healthpeak’s exit from the rental senior housing market.
The REIT announced $1 billion in senior housing sales in the quarter, including a $564 million disposition of a 12-property portfolio operated by Oakmont Senior Living, and a $334 million sale of a 10-property portfolio operated by Discovery Senior Living. Healthpeak previously completed $2.5 billion in dispositions in the fourth quarter of 2020.
This is part of a planned sale of its senior housing operating portfolio (SHOP) and triple-net senior housing assets, which would generate proceeds of up to $4 billion. Healthpeak has $400 million in properties remaining — all of them under contract to buyers with money at risk, CEO Tom Herzog said on Wednesday’s call. The timetable for completing these deals will depend on licensure and debt assumptions.
Healthpeak successfully executed its disposition strategy, receiving favorable pricing despite Covid-19 headwinds, BMO Capital Markets Analysts John Kim and Juan Sanabria wrote in a note to investors.
Leadership briefly entertained retaining ownership of some properties before staying the course with the disposition plan, Herzog said. Modifying pricing and adding complexity to any deals was deemed not worth the potential upside.
“We recognized that if we’re going to have an exit, [we want] to have a clean exit, so that we can move forward with our business plan in the three core businesses and grow those, manage the balance sheet, and change the rhetoric on the company and [our] growth trajectory,” he said.
Healthpeak is already putting the proceeds from these sales to work. During the first quarter, the company repaid $1.45 billion in bonds expected to mature in 2023 and 2024, and on Tuesday announced it would purchase up to $550 million in bonds set to mature in 2025. This will allow the REIT to minimize dilution from sitting on dry powder and further improve its balance sheet: Weighted average debt maturity improved to 6.5 years, President and CFO Pete Scott said.
Other proceeds will be used to fund Healthpeak’s life science and medical office development and acquisition pipelines.
The company continues to evaluate the status of its sovereign wealth partner, and is working together to fund a mutually beneficial solution to its shared senior housing investment.
“We’re happy to hold that long term if, if that’s what makes the most sense, but also happy to do something different,” Herzog said.
CCRCs poised for growth
Although trends are promising, Healthpeak is taking a conservative approach to CCRC growth in 2021.
The trends are especially encouraging among the 13 campuses operated by Des Moines, Iowa-based Life Care Services, which entered Healthpeak’s same-store blended portfolio in the second quarter of 2021. First quarter leads exceeded 2019 levels. Tours increased by 70%, driven in part by digital marketing initiatives. Entry fee sales improved 80% from their nadir during the pandemic’s early months in the second quarter of 2020.
With an effective vaccine rollout and a strong housing market, Brinker believes this performance will continue to gain momentum throughout the year.
“As the LCS properties enter the pool, quarterly same-store results will become more representative [of our portfolio],” he said.
Expected cash NOI from the LCS portfolio increased 10% from previous guidance, wrote Jordan Sadler, equity research analyst with KeyBanc Capital Markets, in a note to investors.
Healthpeak sees potential for growth in the segment through campus expansions and targeted acquisitions. Its CCRCs are located in high barrier to entry markets with little to no competition. Moreover, M&A trends in the CCRC space have favored affiliations and campus expansions in recent years.
Healthpeak’s CCRC portfolio consists of 15 properties situated on more than 700 acres. The company identified at least 100 acres on five campuses ripe for expansion, and completed initial planning and underwriting to determine courses of action, Brinker said.
This will not be immediate; although he indicated that some projects could get underway within the next two years, the majority of expansion will likely occur within the next decade. Options include adding independent living cottages, a high-rise, and filling in gaps in the service offerings to provide a full continuum of care.
“[We have] eight to ten campuses that are good campuses over time,” he said.
Healthpeak also sees opportunity to build scale in its CCRC cohort via acquisitions, but any opportunity must meet the qualifications of the properties driving its current strategy. Acquisitions and expansions are preferable to building new CCRCs. It can take as long as 10 years for a new CCRC to achieve stabilization, Herzog said.
He believes there are providers in the market that may be capital constrained and seeking financial partners that can help achieve accretive value.
“It creates a great deal for us,” he said.
Healthpeak stock ended trading Wednesday down nearly 3%, closing at $33.09 per share.
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