Healthpeak Nears $4B in Senior Housing Dispositions, Will Focus on ‘Irreplaceable’ CCRCs

Healthpeak Properties (NYSE: PEAK) expects to complete its plan to exit rental senior housing as early as the second quarter of 2020, which will allow it to focus on unlocking the potential value of its continuing care retirement communities (CCRC), and grow its medical office and life sciences segments.

Since the Denver-based health care real estate investment trust (REIT) announced plans to sell up to $4 billion in senior housing operating portfolio (SHOP) and triple-net senior housing assets last November, it recorded $2.5 billion in dispositions, is under contract to sell the balance, and at attractive pricing from a range of suitors, CEO Tom Herzog said during the company’s Q4 2020 earnings call with investors and analysts Wednesday.

“We’re now very far along to a full exit of rental senior housing, with some work left to do,” he said.

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Solid pricing

Herzog cited the speed with which Healthpeak is selling its SHOP and triple-net assets – six months from initial discussions to the present – as proof of the demand in the market for rental senior housing.

Healthpeak announced 12 closed transactions in the fourth quarter, led by the $510 million sale of 24 communities operated by Brookdale Senior Living (NYSE: BKD) to Omega Healthcare Investors (NYSE: OHI), which was announced last week, and a $350 million disposition of 10 communities to a joint venture of Aegis Senior Living and Blue Moon Capital Partners.

Additionally, the REIT closed two sales last December: A 12-property SHOP portfolio operated by Atria Senior Living for $312 million; and a 10 SHOP, 3 triple-net community deal with operators including Atria, Capital Senior Living, Sunrise Senior Living, Saber and LCB, for $152 million.

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The sales volume continued into the first quarter of 2021, highlighted by a $662 million disposition last month of 32 SHOP communities operated by Sunrise, a $230 million sale of a 16-property SHOP portfolio mainly located in Texas, with operators including Capital Senior Living, Atria and Life Care Services; and a $132 million sale of eight triple-net communities operated by Harbor Retirement Associates, to Welltower (NYSE: WELL).

The REIT’s remaining senior housing properties are poised to be sold to a diverse buyer pool totaling over 15 separate transactions when completed, Healthpeak President and Chief Investment Officer Scott Brinker said.

The buyers share two common traits. They are either repeat buyers with which the REIT is very familiar, which gives them confidence the communities are in good hands. Or they are new, well-capitalized buyers that are particularly motivated to get into the sector, including to puruse turnaround opportunities with a five- to seven-year internal rate of return (IRR).

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The pricing the REIT is receiving for its SHOP and triple-net assets remained consistent since it announced its disposition plan, in spite of meaningful degradation of cash flow on a sequential basis.

This stability may be thanks to the arrival of multiple effective vaccines that dovetailed with the most recent wave of Covid-19 cases, which appears to have instilled confidence in buyers, to Healthpeak’s benefit.

“The two have offset one another in the transaction market,” Brinker said. “We didn’t have any material changes in pricing.”

The REIT’s execution on its disposition strategy has been “impressive,” BMO Capital Markets Analyst Juan Sanabria observed in a note on the earnings results.

CCRC upside potential

Healthpeak’s reconstituted blended portfolio is now weighted toward medical office buildings and life sciences real estate. Combined, the two segments account for 87% of the REIT’s holdings.

CCRCs will account for 10% of Healthpeak’s total assets, but the REIT will not benefit from them until 2022, when 13 campuses operated by LCS will enter its full-year pool, CFO Pete Scott said.

These campuses, along with two CCRCs operated by Sunrise, are located in markets with attractive demographics and a lack of new product, and are situated on campuses which allow for significant expansion opportunities. Two-thirds of Healthpeak’s CCRCs are in Florida, a state with some of the best positive demographic trends for senior housing.

“That was one of the things that attracted us to the CCRC portfolio in the first place,” Brinker said.

With vaccinations gathering momentum, performance among the CCRC segment is improving. Although occupancy declined 100 basis points from September to November, it seemed to stabilize in December, and January occupancy was up 20 basis points, sequentially.

New resident contracts, meanwhile, increased nearly 100% in comparison to the low point in the second quarter of 2020. Although fees are still 30% below the prior year, they appear to be heading in a positive direction. Finally, all of Healthpeak’s CCRCs have completed first round vaccination clinics, and are open to limited in-person tours, move-ins and visitations.

“We’ve experienced headwinds in our CCRC portfolio, but we are encouraged by the successful rollout of the vaccine, which should be a catalyst for improving results in the near term,” Scott said.

Soft guidance

Proceeds from the senior housing dispositions will go toward expanding Healthpeak’s footprint in primary markets. The REIT also has land bank and densification opportunities valued at over $7 billion in new development value over the next decade.

Additionally, money from the sales will be earmarked for improving Healthpeak’s balance sheet. The REIT announced it would buy back $1.45 billion of bonds maturing in 2023 and 2024. Healthpeak closed on purchasing $782 million in January and expects to buy back the balance in February, Scott said.

Future proceeds from the remaining senior housing sales will be used to pay off an additional $400 million to $500 million in debt.

“The debt repayment allows us to put cash to work immediately,” he said. “[It] enhances our already strong credit profile by improving our weighted average tenor to approximately 7.5 years, and eliminating bond maturities until 2025.”

Healthpeak issued 2021 guidance during the earnings call: adjusted FFO ranging from $1.50 per share to $1.60 per share, blended same-store NOI, ranging from 1.5% to 3%.

The REIT reported funds from operations (FFO) of 41 cents per share in the fourth quarter of 2020, along with a blended same-store growth of 4.2%.
Healthpeak stock ended trading Tuesday up nearly 2.5%, closing at $30.64 per share.

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