Healthpeak Properties

Healthpeak Properties reported adjusted funds from operations of $0.46 per share and same-store net operating income growth of 1.8% in the second quarter.

Why it matters: We were impressed with Healthpeak's second-quarter results, which beat our $0.44 AFFO estimate and exceeded our expectations that same-store NOI would decline 0.4% in the second quarter. While life science same-store occupancy was down 410 basis points year over over to 90.3%, occupancy improved sequentially for the second quarter in a row, demonstrating the segment's recovery through strong leasing. Same-store medical office NOI growth of 2.5% and same-store senior housing growth of 19.2% were both in line with our expectations. The company, however, beat our total estimate with life science NOI falling just 3.2%, which was better than our estimate of a 9.5% decrease as operating expenses only rose 0.8%.

The bottom line: We do not see anything from no-moat Healthpeak's second-quarter earnings that would cause a material change to our $26 per share fair value estimate. Our updated 2026 AFFO estimate of $1.76 is within management's updated guidance for the year, which was raised two cents to a new range of $1.73 to $1.77. We currently view the company's shares as undervalued, believing the market is focused on the life science near-term headwinds that are causing declining occupancy and re-leasing spreads even though we see the sector recovering longer term, producing consistent growth near 3%.

Coming up: Subsequent to quarter-end, Healthpeak sold a 49% interest in a portfolio of 86 medical office buildings with 5.6 million square feet to Brookfield Asset Management for $1.025 billion in proceeds. The deal values the portfolio at $2.1 billion and implies a cap rate of 5.9%. We think this is great pricing for Healthpeak as it is lower than the 6.25% cap rate we assume for the company's MOB portfolio, noting that even that would be hard to achieve in today's high interest rate environment.

We are increasing our fair value estimate to $27.50 per share from $26 per share after updating our model for second-quarter earnings and reducing our WACC assumption to 6.5% for the company. Our fair value estimate implies a 6.3% cap rate on our forward four-quarter net operating income forecast, a 16 times multiple on our forward four-quarter funds from operations estimate, and 4.4% dividend yield, based on a $1.22 annualized payout.

The rent, occupancy, and margin assumptions for each sector drive total company annual same-store NOI growth averaging 3.1% across our 10-year forecast. We expect continued acquisition and disposition activity as Healthpeak repositions its portfolio and improves the overall quality of its assets; we project an average of $200 million in acquisitions annually at an average cap rate of about 5.8% and $80 million of dispositions at 6.7% cap rates as the company looks to recycle lower-quality assets to partially fund the acquisition of higher-quality assets. We plan to incorporate potential significant deals as they are announced. Additionally, we expect Healthpeak to invest an average of $420 million annually in new development and redevelopment projects at a 7.0% average yield.

We estimate Healthpeak’s net asset value to be approximately $27.50 per share. We use NAV to assess the firm’s potential private market value, treating it as a portfolio of assets. To calculate the NAV, we use recent asset transactions to assign a cap rate to each segment of the portfolio, apply the cap rates to arrive at gross asset value for the company’s real estate, put a multiple on the company’s non-real estate assets, add the non-income-producing tangible assets, then net out the company’s liabilities (excluding corporate overhead considerations). We find NAV a useful data point for gauging the firm's underlying value, especially given the likelihood of realizing it through asset sales, recapitalization, or mergers and acquisitions.

We don't believe Healthpeak has an economic moat. Medical office and life science buildings have qualities that could support a moat for the highest-quality assets in both sectors, but the initial rents and rent increases from the high-quality properties compared with the initial capital investment produce returns that are well below Healthpeak’s weighted average cost of capital, leading us to conclude that they do not quantitatively support a moat. Healthpeak has historically shown an ability to drive higher internal operating income growth than peers in some sectors, but we see this as more of an attribute of the management team building relationships with top tenants than qualities inherent in the properties themselves.

Moats for medical office portfolios could hypothetically come from their proximity and connections to top health systems. Given the Affordable Care Act’s mandate, which encourages coordinated, value-based care between healthcare providers and a shift of patients to the types of lower-cost, consolidated settings that medical office buildings can provide, we believe there will be increasing demand for these types of assets from customers and healthcare partners. Premier medical office buildings are usually on campus or campus-adjacent to a hospital; with a hospital system that’s considered one of the top two or three in the region and one of the top 100 in the US; and in a large metro area with strong population and income growth. Demand for these types of assets will remain strong as patients seek the best treatments from the top health systems, driving consistent patient volumes to their affiliated assets and thus increasing the rents that can be charged to doctors’ groups that want to service these patients. Additionally, the top health systems often seek to work with stable, long-term, well-capitalized partners, creating an opportunity for a landlord to build a long-term relationship with the health system that benefits both parties. Healthpeak has established itself as a desirable partner with some of the top hospitals, as 94% of its medical office building assets are affiliated with a health system. However, the average quality of Healthpeak’s assets is not high enough to generate an intrinsic moat, and the assets haven’t generated an internal growth rate high enough to exceed the company’s weighted average cost of capital. Thus, Healthpeak’s medical office portfolio doesn’t have an inherent moat, either from better locations or from extracting excess returns from the relationships it has built.

A life science portfolio could establish a moat by having high-quality properties located next to major research campuses with diversified, investment-grade-rated tenants on long-term leases. Research and technology companies benefit from forming research and innovation clusters where top researchers can collaborate and, upon completion of one project, can immediately find new opportunities without having to relocate. The top research campuses in the US are in Boston, San Francisco, San Diego, New York, Seattle, Maryland, and North Carolina. Class A properties in these markets attract high-quality, investment-grade tenants that can work on a number of research projects that don’t require the success of any single project for the tenant to remain financially solvent. Top tenants include academic and university research institutions, technology, biotech, and pharmaceutical companies, and venture capital firms focused on research and technology. Tenants often require custom-built laboratories and research office space for their specialized field of research, so there are significant switching costs to the tenant during the lease term, increasing the chance of tenant retention upon the lease’s maturity. Therefore, owning high-quality assets in these top locations allows for above-average rent increases to be passed on to tenants that should be able to absorb the higher costs, creating the possibility of a moat. Healthpeak has a strong presence in the top three markets (San Francisco, San Diego, and Boston) with a portfolio of about 30% of the total available square feet in the south San Francisco submarket. The company has an active development pipeline to further expand its presence in all three markets. Healthpeak has made relationships with several investment-grade partners in biotech (Amgen), technology (Google), and university research (Duke University). It has produced solid same-store NOI growth of about 4% over the last decade, which is above the average growth seen in the medical office building portfolios owned by the REITs but is slightly below the roughly 5% same-store NOI growth seen by life-science-focused Alexandria Real Estate Equities. While the life science portfolio is the strongest component of Healthpeak’s portfolio, the NOI generated by the life science portfolio isn’t high enough to generate an adjusted return on invested capital higher than the company’s WACC, given the company’s investment in the sector.

We use an adjusted ROIC calculation to determine if a company historically has shown or is forecast to have the characteristics of an economic moat. After adjusting the ROIC calculation to use maintenance capital expenditures instead of accounting depreciation, we calculate that over the past few years, Healthpeak has averaged an adjusted ROIC approximately 60 basis points below our 6.5% WACC. While the adjusted ROIC rises over our forecast horizon as the assets stabilize from recent transactions and developments, it does not exceed our WACC estimate. This affirms our view that Healthpeak’s portfolio should be assigned a no-moat rating.

Healthpeak enjoys industry tailwinds, including an aging population and regulatory changes that expand the pool of participants in the healthcare system.

Healthpeak’s diverse strategy allows it to consider a range of opportunities across property types and business models as a means for growth.

Healthpeak’s development projects across its life science portfolio should be completed at development yields above the company's weighted average cost of capital and could drive strong internal growth over the next decade as those projects stabilize.

Healthpeak's new management team doesn't have the same operational experience or relationships as its peers, which could make it difficult to achieve the same internal growth.

The life science business is entering a mature growth phase with same-store NOI growth in the low single digits, so the company may have difficulty replicating the growth it experienced in the sector over the past decade.

Healthpeak faces significant reinvest risk as it redeploys capital from the sale of senior housing assets into medical office and life science assets.