This article was coproduced with Wolf Report.
A few months ago, I wrote my first article on a REIT in an under favored sector, but with what I believe to be a solid upside. I'm talking about a REIT that today has over 7.1% well-covered yield, a market cap of almost $10B despite the drop, and comes with a BBB+ credit rating.
I'm talking about a REIT that despite estimating growth, even small growth, for the next few years, is being valued below 10x P/FFO. This is also despite the REIT not missing their estimates of more than 8.5% on a 2-year basis with a conservative margin of error.
I'm talking, if you follow my writing and might have guessed it already, about Healthpeak Properties (NYSE:PEAK).
Another healthcare REIT?
Well, I will always highlight quality and undervaluation where I find it, regardless of how much the sector is currently out of favor on the market. And to say healthcare has been out of favor - and healthcare REITs specifically - would be a bit of an understatement.
So I believe this business deserves an update and also deserves a fair bit of your attention.
Update on Healthpeak Properties and its upside.
PEAK certainly isn't the largest REIT in its sector. The company is a mixed REIT that owns a portfolio of the following property types:
- Life science properties (~50% of cash NOI)
- Outpatient Medical Care (~40% of cash NOI)
- CCRC, or Continuing Care Retirement Communities (~10% of cash NOI).
The yield, as I mentioned, is now up above 7%. This is above the 6% that I invested in when I initially wrote about the company back in July for the first time.
PEAK isn't normally one of the high-yielders in this sector - but the valuation has certainly pushed it that way, and continues to push it this way. This alone makes it attractive to me, provided of course there aren't fundamental reasons for this "move".
So, are there?
I would still say "No, there aren't".
There are obviously macro worries that are impacting things here, and that you can and should take seriously. But at the same time, we do know that the markets tend to overreact to both sides - and this downturn is where I believe the market has once again massively overreacted.
Yes, the company does have a fair bit of compositional exposure to California, which is probably one of the most out-of-favor geographies we can find today.
But at the same time, the company really has one of the better trends in the entire industry, with perhaps the exception of high-quality niche players like Alexandria (ARE). And just because we're in this environment, does not mean that the company's growth has stopped. It's just not growing as fast as it once was.
I wouldn't expect any company's occupancy to stay the same given the macro environment. This also goes for PEAK. But as you can see, most of the occupancy drops, even in outpatient medical, and especially on a combined basis, are only marginally down for this company.
Yet PEAK has seen double-digit declines in its share price. The company's portfolio is, as I see it, in no way overly exposed to risk. The worst risk is the rent from HCA Healthcare, which is a national player with over $83B worth of market share that makes up 12.2% of the company ABR. Aside from that, the only company that's even above 4% of ABR is Amgen (AMGN), and I wouldn't call that risky. Beyond that, it's all sub-1.6% ABR exposures in the top 20 tenants.
The company's 5.1x Net debt to Adjusted EBITDAre is one of the lowest in the industry, and no significant maturities worth mentioning (above $100M) are coming due until 2025E at the earliest - with most after 2028E and beyond. The company continues to have over $2.7B in liquidity available, and has a secured debt ratio of 2.0%, with a financial leverage below 35%.
Feel free to stop me here if anything of this sounds "risky".
Yes, PEAK's trading and valuation and FFO patterns do not do the company any favors. This is a REIT that has a few things to prove, especially because it has traded so schizophrenically for the past 20 years. We can illustrate this here.
What I want you to note is that despite these trading patterns, any time you could have bought the company below 10x P/FFO, that would have been an absolutely fantastic deal in terms of valuation and your returns.
It's way too early to say if PEAK has turned over some sort of new leaf and become a company we can own for the long term. I am not prepared to say this here.
What I am saying though, is that the company's results do not line up with the current valuation trends. I view the drawdown here as entirely macro-based. PEAK has not done anything "wrong", quite the opposite. The company has done its homework and is doing things correctly. It's continuing to execute leases, both existing and new ones, and has already executed more leases this year than in 2022.
Renewal and existing customer rates are high here - and like with ARE, labs are attractive assets that are not as easily replaceable as other "boxes".
Unlike some of the other Healthcare REITs that are seeing more difficult trends, PEAK is still transacting and renewing at a good rate, and at significantly above 5-year average mark-to-market renewal rates.
Places like the Medical City Dallas Campus give me some security that the company is moving the needle in the right direction.
And more campuses are coming as well - and you already know from my last article, that PEAK is actively divesting non-core unattractive assets here, lowering its exposure to seniors and similar trends.
Let's update the valuation thesis and see why the upside is so good here.
PEAK valuation - It's at peak attractiveness
PEAK has not been this appealing as an investment in a very long time. Even if you were to stick to an extremely conservative 10x P/FFO on a forward basis here, your forward potential annualized RoR would come all the way up to nearly 15% per year - and that's with less than 4% annual growth.
You could, in fact, even forecast the company at less than 8x P/FFO, and you would still not be in the negative RoR thanks to a very compelling yield. The case can be made that investing here carries very little downside, short of a fundamental collapse in the REIT that I view as extremely unlikely.
After all, PEAK is BBB+ - and that only begins to speak to its fundamentals.
At any sort of normalization, this company turns into a significant market-beater. If you forecast it at 12-15x P/FFO, your upside over time quickly climbs above 20%. At a 15x P/FFO (and before you consider this unlikely, we had this last year), you get a 30%+ annualized RoR, or almost 90% RoR in 2-3 years.
Even if the company for some reason was to crater, it could go to 8-10x P/FFO normalized without you losing money based on this 2025E forecast. At higher levels of premiumization, say 15-16x P/FFO, that return range goes up significantly here.
The company has obviously dropped quite a bit since I last wrote about it. But so have most REITs, regardless of quality. Even A-rated REITs are down. I view this as a blessing for value-conscious investors, and for that reason, I'm putting more and more money to work here.
I believe the current market environment completely underestimates everything having to do with office and life sciences. Because of that, I picked out the "best" of these companies - and now this includes healthcare as well.
At BBB+ and with a well-covered yield and a solid management team, I believe this company is definitely part of that positive potential. I've been showcasing for you other undervalued stalwarts, such as Boston Properties (BXP), Highwoods (HIW), Kilroy (KRC), and above all for comparison here, Alexandria (ARE).
All of the ones mentioned above are companies I am actually invested in, and in the case of ARE, for instance, I'm not just invested, but more than 2% of my portfolio is ARE.
I went back and forth with regard to my price target for PEAK here but I ultimately decided that the $27/share PT marks a very good long-term implied level for where I believe the company should trade, even with the current trends.
You could impact this further if you like - but I invest with an eye for the very long term, and this makes the company a good "BUY" here.
- Healthpeak is one of the better healthcare REITs out there. Its portfolio is sound, its fundamentals are safe, the yield is extremely well-covered, and the company has attractive future prospects based on both stability and slight growth of its prospects. The next few years will be tough for REITs in the space, but I believe that PEAK will be one of the REITs that survives and thrives.
- Based on this, I consider this company an attractive "BUY" at a good price, where we can see a conservative double-digit upside. Ever since selling off its senior portfolio, the company's earnings capacity has been declining from 2015 levels - but it's stabilizing, and I see a potential for growth in the next few years.
- I give the company a conservative P/FFO of at least 13.5, implying a long-term PT of $27/share, and an upside of at least 15% here.
- PEAK is a "BUY" and a good one.
Here are my criteria and how the company fulfills them (italicized).
- This company is overall qualitative.
- This company is fundamentally safe/conservative & well-run.
- This company pays a well-covered dividend.
- This company is currently cheap.
- This company has a realistic upside based on earnings growth or multiple expansion/reversion.
This means that the company fulfills every single one of my criteria, making it relatively straightforward why I view it as a "BUY" here.
I'll be interviewing the CEO, Scott Brinker, this week (after earnings) for members.
Note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: Written and distributed only to assist in research while providing a forum for second-level thinking.
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