Healthpeak Properties: A Quality Healthcare REIT That Should Get Back To Dividend Growth

Introduction

Healthcare REITs have held strong, more so than their retail peers over the past year. Those like CareTrust REIT (CTRE), Omega Healthcare Investors (OHI), and Sabra Health Care REIT (SBRA) are all in the green. But there is one REIT in the healthcare sector, Healthpeak Properties (NYSE:DOC) whose share price decline double-digits over the same period.

But with a recent merger on March 1st that is expected to produce synergies totaling $60 million over the next two years, this should not only increase their share price, but help the REIT get back to growing the dividend in the not too distant future. In this article, I discuss Healthpeak Properties latest earnings, dividend safety, and balance sheet, and explain why this REIT may be one to consider for dividend-focused investors.

Brief Overview

Healthpeak Properties is a company I haven’t covered here on Seeking Alpha before. The company is an S&P 500 REIT invested in the healthcare sector. The REIT operates in three segments: Lab, CCRC’s (Community Care Retirement Communities), and Outpatient Medical. The REIT recently closed on its merger with the former Physicians Realty Trust this past March.

This deal that is expected to generate merger-related synergies of $40 million this year and an additional $20 million in 2025. It is also expected to be accretive to AFFO by roughly $0.05 this year. DOC also has some strong tenants in its portfolio with healthcare behemoths like Pfizer (PFE), Bristol-Myers Squibb (BMY), and Johnson & Johnson (JNJ). All of them account for roughly 1% of annualized base rent so the REIT is also highly-diversified. They also have properties located in major, growing cities like Atlanta, Dallas, Phoenix, & Tampa.

Latest Earnings & Dividend Safety

For the record, the company has been paying a dividend for more than 3 decades so that speaks for something. And during its latest Q4 earnings back in early February, the company saw some nice growth. Same-store NOI growth was 4.8% while AFFO growth was 5.5%.

The lab segment saw 2.7% for the quarter and 3.7% for the entire year. Outpatient medical’s was 4.3% for the quarter and 3.4% for the year while CCRC’s saw the most at 15.6% for the full-year. Total portfolio same-store growth was 4.8% for the full-year, and occupancy levels were solid as well at 97% & 91% respectively. So, some nice growth and solid numbers overall.

FFO for the year was $1.73 while AFFO came in at $1.53. With an annualized dividend of $1.20, this gives the REIT a safe payout ratio of 78.4% and dividend yield over 6% currently. And using their 2024 FFO & AFFO guidance range of $1.73 – $1.79 and $1.50 – $1.56, the dividend will still be well-covered.

Keep in mind this is negatively impacted by the recent acquisition as the company assumed $1.9 billion of additional debt. But like other peers, I expect management to move the goal post to the right regarding guidance as they get more clarity on the economy and interest rates.

Although DOC cut the dividend during the pandemic and haven’t increased it since, I suspect this may change in the near future. Why? One because the merger is expected to be accretive to AFFO, expand growth relationships, and lower CAPEX. And two, because the REIT has some potential growth drivers and should benefit from the expected 75% increase in baby boomers needing nursing home care over these next few years.

Balance Sheet

Their balance sheet also remained strong at the end of the fiscal year with a net-debt-to EBITDA of 5.3x. Additionally, the company has no debt maturing until 2025 with most of this being unsecured and fixed-rate as well. Their liquidity was also strong with $3 billion with a BBB+ credit rating, giving them financial flexibility and putting them in a comfortable position to make acquisitions as the macro environment turns more favorable in the near future. For comparison purposes, DOC’s net debt-to EBITDA of 5.3x was lower than Sabra Health Care REIT’s (SBRA) 5.74x and Omega Healthcare Investors (OHI) 4.96x.

Valuation

Looking at Healthpeak’s 5-year chart investors may think the REIT is not a great investment. But with the now completed merger, I expect the company to get back to growing their dividend, which should positively impact the share price going forward. And when interest fall sometime in the near future, the entire sector will likely benefit, with many quality REITs offering investors some nice upside.

DOC’s current valuation is also attractive with a P/AFFO ratio of just 12.3x, below the sector median of 13.55x. Using their P/FFO ratio of roughly 11x, the REIT is even more attractive here. This is in comparison to peers CareTrust REIT’s (CTRE) 17.1x and Omega Health Investors 11.19x. So, currently DOC is a bargain and with anticipated merger synergies, I think the REIT will see some decent upside in the foreseeable future once interest rates are cut.

Risks

Although I think DOC is one of the better healthcare REITs out there, along with CareTrust REIT; the company still has to prove itself post-merger. If they can continue to perform well and see some FFO & AFFO growth as expected, then the share price should follow, especially if interest rates decline sometime in the near future. However, if the economy doesn’t manage to dodge a soft landing, and falls into a recession, then this could impact growth and their share price could continue to face downward pressures. This could also cause a drop in occupancy ratings for the company, which could also negatively impact their financials going forward.

Conclusion

With REITs out of favor at the moment, I think now is a great time to buy high quality REITs, like Healthpeak Properties at a discount. With merger-related synergies totaling $60 million expected over the next two years, a strong, investment-grade balance sheet with well-laddered debt maturities, DOC is well-positioned to take advantage of the expected favorable macro environment when interest rates do fall in the near future.

Moreover, if rates do remain higher for a longer period, Healthpeak is in a strong financial position with ample liquidity and no debt maturities to worry about this year. And although their share price is down over the past year, the merger should allow the company to increase the dividend in the near future, positively impacting their share price in the process. As a result of the recent merger with Physicians Realty Trust, attractive valuation, and the need for healthcare facilities due to aging baby boomers, I rate Healthpeak Properties a buy.