HCP Starts New Chapter as Healthpeak, Expects Continued Senior Housing Pressure

After three years of effort to reposition its leadership, investment strategy and portfolio, the time finally came for real estate investment trust HCP to take on a whole new identity. The company will be known as Healthpeak (NYSE: PEAK) going forward.

“Today marks the beginning of a new chapter in our history,” CEO Tom Herzog said Tuesday on the company’s third quarter 2019 earnings call.

The numbers supported Healthpeak’s name change, according to analysts.

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“Andre Agassi once famously said ‘image is everything’ but more importantly he, like the re-branded Healthpeak … backed it up with substance,” BMO Capital Markets Analyst John Kim wrote in a note on the company’s Q3 earnings. “[Healthpeak’s] 3Q19 included an earnings beat and FY guidance raise, despite SS NOI deceleration in its main segments.”

Healthpeak announced revenues of $537.97 million, an 18% increase over the previous year. The REIT also generated a net loss of $0.09 per share, NAREIT funds from operations (FFO) of $0.37 per share, FFO as adjusted of $0.44 per share and blended total portfolio share purchase plan cash NOI growth of 2.4%.

Senior housing performance lags

The REIT’s reinvention has included moves to transition away from triple-net leases toward RIDEA in its senior housing portfolio, which accounts for 26.2% of the total asset mix.

Senior housing cash NOI growth declined 1.3% year over year in Q3, and Healthpeak’s senior housing operating portfolio — which makes up only 15% of its total senior housing mix — recorded a 6% dropoff.

Despite the sluggish results, Healthpeak CFO Pete Scott noted that the senior housing segment is performing within expectations, given how quickly the company has restructured the service line. Senior housing cash NOI growth year to date is only down 0.5% and the small size of the SHOP portfolio meant that the decline equated to just over $1 million in revenue.

Still, Healthpeak’s senior housing performance will fuel speculation about whether the industry is poised for a rebound, particularly after a poor third-quarter earnings report related to senior housing from Chicago-based REIT Ventas (NYSE: VTR).

“Healthpeak’s SHOP portfolio continues to underperform due to disruption from operator transitions. However, 3Q19’s results did not show a material change from previous quarters,” Green Street Advisors Analyst Lukas Hartwich wrote.

Healthpeak’s leadership team preferred to accentuate the positives and stressed that its senior housing restructuring will prove fruitful in the long term. The REIT announced a slew of transactions on Wednesday, including the exit from its remaining holdings in the United Kingdom, and the early termination of nine leases with Dallas-based Capital Senior Living (NYSE: CSU).

In addition, Healthpeak sold a 46.5% interest in a 19-property senior housing operating portfolio managed by Brookdale Senior Living (NYSE: BKD) to a sovereign wealth fund. The decision to partner with the sovereign wealth fund on the Brookdale assets is strategic in nature, said Scott Brinker, who has just stepped into the president role at Healthpeak.

The sovereign wealth fund will provide patient capital which will be important as the Brookdale assets are likely to be challenged in the near term due to their location, and the fund can be a potential strategic partner for a range of future opportunities. 

Healthpeak also is acquiring Brookdale’s 51% stake in a portfolio of 13 CCRCs that have been jointly owned. The REIT sees long-term potential in the CCRC as they are located in markets with significant barriers to entry, have seen no new CCRC supply within a 10-mile radius for over a decade, the average age of entry is 80 years of age and the average length of stay is eight to ten years.

And with over 600 acres across the portfolio, Healthpeak has ample opportunities for expansion and redevelopment, Brinker said.

And these latest transactions come after an already busy year. Healthpeak’s senior housing acquisitions have totaled over $1.4 billion to date in 2019.

“There was an avalanche in positive activity in senior housing,” Brinker said.

Healthpeak would not place an estimate on a SHOP turnaround, but Scott noted that half of the portfolio’s assets are properties in Denver and Houston, two markets with a flood of new inventory coming online. Excluding these assets, same-store performance would have been flat year-over-year, Scott said.

Heading into the fourth quarter, Healthpeak expects some offsets and rollover impact from late transactions. The company will also look to dispose of underperforming assets that do not fit its investment strategy, be it in senior housing or other areas that it invests in, such as medical office.

“Just assume we’ll sell $300 million in tired assets every year and recycle that into our strategy,” Herzog said.

Healthpeak currently sits on $570 million of forward equity, and expects proceeds from dispositions to add another $450 million to its coffers. These proceeds will be recycled into its development pipeline, redevelopments and capital expenditures, Scott said.

Healthpeak’s SHOP occupancy improved 40 basis points in Q3 over the previous quarter, to 87.7%. But it came at the expense of rate concessions, Capital One Analysts Daniel Bernstein and Louis Benedict wrote.

“While we are pleased to see the strong occupancy gains q/q, we generally prefer rate growth at the expense of occupancy,” they wrote. “HCP’s earnings, along with Ventas and 3Q NICMAP Data Services statistics, confirm increasing rate pressure in 3Q19.”

Overall, Herzog anticipates near-term pressures but longer term upside in the senior housing operating portfolio.

“We believe we’ve got an operating environment that is going to be choppy in 2020, but we expect to see steady improvement going forward,” he said. “And we have worked really hard to remake the SHOP platform to favorably position it for our portfolio.”

Healthpeak stock ended trading Thursday up nearly 2%, to $37.62 per share. Its stock ticker will change to PEAK beginning at the start of trading on November 5.

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