Healthpeak Properties’ (NYSE: PEAK) senior housing segment continues to struggle from the impact of Covid-19. But with a full quarter of operations during the outbreak under its belt, there are signs that the health care real estate investment trust (REIT) has entered the management phase of the pandemic.
Occupancy declines are slowing on a sequential basis, expenses are showing signs of easing, and Healthpeak’s operators are now resuming dining operations and visitations across half of its portfolio.
Moreover, Healthpeak’s senior housing woes were mitigated by strong growth in its life sciences and medical office building arms — a trend that emerged in the first quarter of 2020, as well as strong positions on liquidity and credit availability.
As the pandemic persists, the Irvine, California-based REIT’s primary focus is now on protecting its liquidity and credit rating, and shoring up the senior housing service line to capitalize on demand once the virus subsides, CEO Tom Herzog said Wednesday during the Irvine, California-based REIT’s Q2 2020 earnings call.
“Our liquidity and our credit rating we consider to be vital, in order to be a blue chip REIT in our sector. If we felt [Covid-19] was going to go on for a long time, then at some point it will put pressure on net debt to EBITDAR. We have to take that into account,” he said.
Healthpeak announced revenues of $312.4 million in the second quarter of 2020, a 3.6% increase over the previous year. The REIT also generated net income of $0.09 per share, NAREIT funds from operations (FFO) of $0.40 per share and blended total same-store portfolio cash net operating income (NOI) growth of minus 2.2%.
Medical office and life science accounts for 71% of Healthpeak’s total blended portfolio, and that is where the REIT plans on driving near-term future growth until the pandemic eases and senior housing can return to a semblance of normal. But Healthpeak’s leadership recognizes that when that happens, and what a new normal looks like, is out of their hands.
“There have been actions taken that have allowed the portfolio to get at least closer to a normal operating environment, but we’re not there yet. And I don’t think that’s going to happen in the next 30 days,” President and Chief Investment Officer Scott Brinker said. “It’s probably not a year away, either.”
Protecting liquidity
The wide disparity in performance between its major service lines has Healthpeak focused on protecting liquidity in the short-term. As of July 31, the REIT had $2.85 billion of liquidity including full availability on its $2.5 billion revolving credit facility and approximately $350 million of cash and cash equivalents.
In June, the REIT also completed a $600 million bond issuance to redeem $550 million in bonds at a blended interest rate of 3.7%. It used the net proceeds from the offering to fund the redemption of $300 million in outstanding 3.15% senior notes due in August 2022, as well as fund the purchase price for a previously announced cash tender offer for a portion of its 4.25% senior notes due in November 2023. This puts its next material debt maturity November 2023.
With no looming debt maturities on the books, Healthpeak issued a quarterly cash dividend to investors of $0.37. Future dividend payments will be reviewed on a quarterly basis, depending on the length and severity of the outbreak.
“We would revisit our leverage and our dividend as necessary to maintain the strength of the right hand side of our balance sheet,” Herzog said.
Moving forward, Healthpeak plans to capitalize on a rebounding capital markets landscape to sell non core assets and weight the portfolio balance toward life science and medical office. Brinker acknowledged that pricing has taken a hit during the pandemic, and will likely be affected for the next 12 months.
Patience with senior housing
With a full quarter operating during the pandemic under Healthpeak’s belt, the bifurcation between its senior housing performance, relative to its other assets was clear. Senior housing cash NOI growth plummeted 39% in the second quarter. Life science NOI increased 7.3% in the quarter, while medical office NOI grew 1.3% in the quarter.
But the initial disruption caused by the pandemic in April and May eased somewhat in June and July. In April, Healthpeak reported a 300 basis point drop in occupancy to 82.2%, a 73% decline in move-ins and a 22% increase in move-outs. For the quarter, occupancy in its senior housing operating portfolio declined 560 basis points, to 77.8% as of July 31, and 82.7% for the independent living, assisted living and memory care segments of its continuing care retirement communities (CCRC) portfolio.
Move-ins and move-outs improved on a sequential basis in June and July, with move-ins, in particular, improving by 50%. June was especially strong, with a 32% decrease in move-ins and a 1% drop in move-outs. Healthpeak has seen three straight months of improved move-out numbers, and 86% of its properties are now accepting move-ins.
July was a tale of two halves. Move-ins decreased by 62%, and move-outs dipped 19%, which Brinker attributed to surges in positive coronavirus cases in hot spots such as California, Florida and Texas. As cases in those states began to taper, however, those metrics improved in the second half of the month.
Healthpeak’s CCRC revenue losses were somewhat mitigated by $12.4 million from CARES Act relief, via Medicaid reimbursement billings for skilled nursing cohorts. Move-ins and move-outs in its CCRCs were stable among independent living, assisted living and memory care.
Healthpeak also announced that it collected 97% of rents from its senior housing triple-net tenants in the quarter. The REIT previously negotiated a rent deferral with Capital Senior Living (NYSE: CSU).
Overall, analysts indicated no surprises in Healthpeak’s Q2 performance, but noted that the uncertainty of Covid-19 will continue to cast a cloud over the REIT’s operations and performance.
“Trends will likely remain challenged over the next several months given the unpredictability of Covid-19, and we expect occupancy to drop 50-150 basis points per month through year-end,” RBC Capital Markets Analyst Michael Carroll wrote in an investor note. “Management noted occupancy declined 110 basis points in July, and expects occupancy could drop 50-250 basis points per month, down from its previous estimate of 200-400 basis points per month.”
Healthpeak stock ended trading Wednesday down slightly, to $27.18 per share.
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