Healthpeak President: Senior Housing Fundamentals Improving But ‘Not There Yet’

Healthpeak Properties (NYSE: PEAK) may have changed its name in the third quarter of 2019, but the revamping of its senior housing portfolio that began when it was known as HCP is still a work in progress — one that President and CIO Scott Brinker compared to surgery Wednesday during the company’s fourth quarter and full year of 2019 earnings call.

With the surgery complete, the senior housing portfolio is now in recovery.

“We blew apart virtually every asset that we owned either selling it, converting it to SHOP, restructuring leases, changing operators, acquisitions, redevelopment,” Brinker said. “Hardly an asset remained untouched.”

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Healthpeak announced revenues of $531.7 million in the fourth quarter, a nearly 17% increase over the previous year. The Irvine, California-based health care real estate investment trust also generated net income of $0.09 per share, NAREIT funds from operations (FFO) of $0.39 per share and blended total portfolio share purchase plan cash NOI growth of 3.6%.

The REIT also set its initial 2020 guidance: adjusted FFO per share ranging between $1.77 and $1.83 per share, and blended total portfolio same-store cash net operating income growth of 2.00%-3.00%.

Healthpeak also updated its same-store reporting practices.

“Healthpeak kicked off 4Q19 earnings season for the ‘Big 3’ health care REITs with results and initial 2020 guidance that were modestly ahead of expectations,” Raymond James analyst Jonathan Hughes wrote in a note to investors. “Total 4Q19 same-store NOI growth of +3.6% was led by strong performance within its seniors housing operating (SHOP) portfolio —  yes, the SHOP portfolio — as we are finally lapping favorable comps created by their formerly-brutally honest same-store definition.”

In terms of the big-picture outlook for senior housing going forward, Healthpeak executives painted a mixed picture — an extension of the cautious approach that they say has served them well given ongoing industry headwinds.

“The past couple years, we’ve been a bit more cautious than most about the state of the industry,” Brinker said. “From where we sit today, occupancy across the industry is generally flat. We don’t see [annual] rents growing at 3% at the industry-wide level — it’s more in the 1% to 2% range. We see that improving slightly in 2020, but we haven’t hit that inflection point. We either need to see flat occupancy and [increased] pricing power, or a dramatic increase in occupancy so that revenue growth can keep up with expense growth. We’re not there yet.”

Senior housing remains in transition

Healthpeak completed several senior housing transactions it announced in the third quarter of 2019. For the full year, it completed $1.4 billion in senior housing dispositions including:

  • Completing a $790 million joint venture in which it will sell a 46.5% stake in a 19-property Brookdale Senior Living (NYSE: BKD) portfolio to a sovereign wealth fund.
  • Disposing of the remaining 49% interest in its U.K. holdings for gross proceeds of $232 million to Omega Healthcare Investors (NYSE: OHI).
  • Executing an agreement with Capital Senior Living (NYSE: CSU) to convert the six properties in its master lease with the Dallas-based operator into a RIDEA structure and immediately market those properties for sale. The master lease is set to mature in April 2026.

The sale will end the relationship between Healthpeak and Capital and advances one of the REIT’s goals with its senior housing restructuring: to have 10% or less exposure to any one senior housing operator.

Proceeds from Healthpeak’s dispositions were recycled into $1.4 billion in acquisitions, highlighted by a $445 million deal for nine communities owned and operated by Discovery Senior Living, as well as purchasing three properties from Oakmont senior Living for $113 million.

Healthpeak and Oakmont also entered an agreement last December granting the REIT the option to acquire up to 24 of Oakmont’s senior housing development properties, when the Windsor, California-based owner-operator decides to sell them.

Additionally, Healthpeak released updates to its senior housing operating portfolio (SHOP) policies for 2020. The REIT did this so that it would be consistent and transparent with industry best practices.

First, properties undergoing operator transitions will be removed from same-store results to more closely conform with industry practice and prevent temporary distortions unrelated to property fundamentals. Healthpeak reserves the right to provide disclosure around future transition properties, if it materially impacts performance.

Second, consolidated and unconsolidated joint ventures will be included at the REIT’s pro rata share in order to most accurately include the interests in its same-store population.

Finally, Healthpeak will disclose management fees separately from operating expenses so investors can better understand the components of SHOP NOI.

The activity had a positive impact on Healthpeak’s senior housing cash NOI growth, which improved 1.5% year-over-year and 3.3% in the fourth quarter, respectively. If the new SHOP reporting policies were in effect for the full year of 2019, same-store NOI would have been minus-1% year-over-year and minus-2.7% in Q4, Capital One Analysts Dan Bernstein and Louis Benedict wrote in a note on the company’s earnings.

Healthpeak will gradually add transition properties to the same-store SHOP portfolio throughout 2020, as they stabilize, and the REIT expects to reap the rewards of its moves in 2021 and beyond, Brinker said.

But analysts expressed concern about the sheer number of Healthpeak’s SHOP portfolio that is in transition. Only 29 its SHOP properties are same-store, and more than half are in transition, notably 13 CCRCs formerly operated by Brookdale that are being taken over by Des Moines, Iowa-based LCS. This makes Healthpeak’s SHOP portfolio a difficult read on any industry trends, Bernstein told Senior Housing News.

The sentiment was echoed by Green Street Advisors Lukas Hartwich, in an earnings note.

“Healthpeak’s SHOP same-property pool is small (<5% of total NOI) and therefore volatile, especially considering substantial disruption from operator transitions,” he wrote.

As more properties are added to Healthpeak’s stabilized SHOP portfolio, analysts will begin to see sustained positive momentum over the next three to five years, even as excess supply in some markets and industry-wide struggles to curb expenses related to wage growth continue to put pressure on the bottom line. Brinker believes it has the right mix of operators, assets and markets to achieve that goal.

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