Healthpeak Properties’ (NYSE: PEAK) announced in February that its senior housing portfolio was in “recovery” after two years of restructuring assets and operators.
Then the coronavirus pandemic swept across the U.S., and Healthpeak CEO Tom Herzog did not mince words about its effect on the Irvine, California-based health care real estate trust.
“Of all of our [segments], senior housing … has been the most impacted by COVID-19,” he said during a Wednesday earnings call.
Healthpeak announced revenues of $280 million in the first quarter of 2020, a nearly 22% increase over the previous year. The REIT also generated net income of $0.54 per share, NAREIT funds from operations (FFO) of $0.34 per share and blended total same-store portfolio cash net operating income (NOI) growth of 2%.
However, the Q1 financial results largely did not account for the effects of Covid-19, which took hold in the United States in mid-March. The pandemic has driven down senior housing occupancy while increasing expenses, as operators have stocked up equipment and supplies, spent more on labor, and incurred other unusual costs. Healthpeak estimates that Covid-19 will increase expenses in the range of 5% to 15%. Meanwhile about half of the senior housing communities in the REIT’s portfolio are not currently accepting new move-ins.
The downturn in Healthpeak’s senior housing performance was offset by gains in its medical office and life science segments, which saw strong NOI growth and appear poised to deliver healthy, but slower, growth in the months ahead. Of its total portfolio mix, 34% of its assets are senior housing; 31% are in life sciences; 29% are medical office building and 6% are hospitals.
“Our diversification of portfolio has been very helpful. We’re looking at it that way to ensure that we stay completely healthy through this crisis,” Herzog said.
Additionally, Healthpeak reported a strong balance sheet, with around $3 billion in available liquidity and a weighted debt maturity of 6.7 years. Analysts touted Healthpeak’s balanced portfolio as the main reason the REIT overperformed in the first quarter, but warned that margins may be compressed if shelter-in-place orders persist.
“[Healthpeak’s] report offered incremental insight into the challenges posed by COVID-19 on senior housing portfolios, but offered a glimpse of the potential resilience of medical office, life science, and hospital assets,” KeyBanc Capital Markets Analyst Jordan Sadler wrote in a note to investors.
Senior housing performance plummets
Overall, same-store performance across Healthpeak’s senior housing portfolio declined by only 0.1% in the first quarter of 2019. Given the uncertainty the pandemic has cast across the industry, the REIT withdrew its 2020 guidance for the segment in March.
April numbers reported by Healthpeak highlighted how much the virus has impacted the space. Its senior housing operating portfolio (SHOP), accounting for 14% of total NOI, saw a 300 basis point drop in occupancy last month to 82.2%, as well as a 73% decline in move-ins and a 22% increase in move-outs. As of Wednesday morning, Healthpeak had 54 properties managed by 13 different operators with confirmed resident COVID-19 cases, and 31 of those affected properties had experienced resident deaths.
Continuing care retirement communities (CCRCs), which account for 10% of total NOI, reported a 65 basis point drop in occupancy to 82.4%, along with an 89% drop in new move-ins. Triple net lease tenants, meanwhile, paid rents in full in the first quarter, and 97% of those paid April rents. Healthpeak is negotiating rent deferral requests with Capital Senior Living (NYSE: CSU) and Harbor Retirement Associates.
Sales and marketing leads have taken a hit as shelter-in-place orders continue. Healthpeak reported that leads in its SHOP segment decreased 50%, year-over-year, and 52% in its CCRCs. Marketing teams have switched to virtual tours across the segment, Healthpeak President and Chief Investment Officer Scott Brinker said.
“About 50% to 55% of our senior housing properties today are not accepting move-ins,” he said.
In lieu of guidance, Healthpeak designed a framework last month to better determine the ongoing impact of the virus on senior housing operations. With the initial hit behind it, the REIT expects move-ins to be negatively disrupted by 2% per month in its SHOP assets, and 0.5% in CCRCs. Move-outs, meanwhile, are projected to increase between 3% and 5% per month for SHOP, and 0.75% to 1.25% for CCRCs.
First steps to recovery
The leadership team sees some rays of light as the crisis lingers. The majority of move-outs in SHOP properties were involuntary and related to positive Covid-19 tests. And skilled nursing accounted for the bulk of the new move-in declines in the CCRC portfolio, which was hit because elective procedures have been postponed in response to the pandemic.
Moreover, Healthpeak expects a reversal of these short-term trends as more states prepare to relax shelter-in-place restrictions and re-open. Between 80% and 85% of Healthpeak’s operators are in states where phase one re-openings began late last month or will happen in May. This will impact medical office buildings first, with the return of elective surgical procedures.
Senior housing will likely be part of later phases, and Brinker expects the free fall to level out when that happens.
“At least the first step towards business as usual has begun,” he said.
As restrictions are eased, Healthpeak believes that its operators are poised to capitalize on pent-up demand caused by the outbreak, particularly in needs-based acuities such as assisted living and memory care, which account for 70% of its SHOP unit mix.
“What we have heard from numerous operators is [adult children realize caring for parents is] much harder than they had expected. Some of these adult children worry about getting sick themselves and realize that there’s no way that their parents are able to care for themselves. There certainly is a backlog … waiting to get into these communities, subject to screening and quarantine,” Herzog said.
Healthpeak stock ended trading Wednesday down over 4%, to $24.03 per share.