Is Healthpeak Making a Major Mistake?

In the healthcare real estate investment trust (REIT) space, there have historically been three main diversified players, including Healthpeak Properties (NYSE: PEAK). It looks like this is changing, thanks to a decision by Healthpeak to reshape its portfolio. Is this good or bad for investors?

A little history

In 2016, Healthpeak effectively cut its dividend. The reason was that it spun off nursing home operations that had been struggling, with the expectation that the combined dividend of the two companies would equal the pre-spinoff payment. The spinoff didn’t maintain its dividend, so it was really a de facto cut for Healthpeak investors.

After that move, however, Healthpeak made a strategic decision to balance its portfolio across medical office, medical research, and senior housing assets. The breakdown was roughly a third of the portfolio in each segment, which seemed fairly well-balanced. And it put the REIT in a great position relative to its other diversified peers in 2020, which had more exposure to senior housing during the coronavirus pandemic.

But, given the pandemic, it looks like Healthpeak management is shaking things up once more.

Diversified no more

When Healthpeak reported its fourth-quarter results, it offered up two sets of property performance numbers. One showed full-year 2020 same-store net operating income growth of 1%, and the other showed 3.8% growth. The big difference was that one included the REIT’s senior housing operations, and the other excluded them. Why this breakdown? Healthpeak has basically decided to cull out the struggling senior housing business and focus only on medical office and medical research assets.

On the surface, that looks like a great move, given that the roughly third of the portfolio once dedicated to senior housing dragged down same-store growth from 3.8% to 1%. These properties are definitely facing headwinds today thanks to the coronavirus pandemic, which impacts older people more severely and spreads easily in group settings. Senior housing is purpose-built to bring older people together in groups. However, at this point, Healthpeak is no longer a diversified REIT. It’s a medical office REIT, and that changes things for investors.

Right now, this looks like a great call, with medical office and research properties performing well and demand for new buildings still material. The company delivered two research facilities and a medical office building in the fourth quarter and plans to deliver additional research assets in 2021 and 2022, so there’s still growth to come. That sets the REIT up for strong performance and doesn’t include any future investments in these sectors, which are likely.

However, investors looking to Healthpeak as a way to gain broad exposure to the healthcare property sector will be disappointed by this decision. While senior housing is struggling today, the demographic trends in the U.S. have not changed. Older cohorts are growing in size, and they will need increased medical attention, which is likely to include a shift into senior housing for many people.

The senior housing industry is under a great deal of stress, for sure, but with vaccines starting to be rolled out in larger numbers, it’s likely to stabilize. And once the world learns to deal with the coronavirus, a recovery is probably coming, given that senior housing is at least partially a need-based product.

In other words, Healthpeak could be dumping out of the sector just as it’s getting ready to start showing improvement. It may be a slow process and take longer than the senior housing sector would like, but the demographic trends here are large and still coming. For investors looking to invest in a diversified healthcare REIT at this point, Ventas (NYSE: VTR) and Welltower (NYSE: WELL) are now the more applicable options.

It’s notable that Ventas recently explained to investors it has seen strong lead generation despite the late-2020 spike in COVID-19 cases. Leads are an early indication of demand. Welltower, while more cautious, noted during its earnings call that the vaccine rollouts should help to stabilize properties and that there’s likely to be a short lag from there before property-level performance starts to see improvements. Management specifically noted that it isn’t calling a turn yet, but it’s starting to see some positive shifts in select areas. These green shoots could be the indication that the worst is behind the industry.

Now what?

Thanks to Healthpeak’s business overhaul, the REIT cut its dividend by roughly 20%. That’s not terrible, nor is it out of line with Ventas or Welltower, both of which cut their dividends last year. That said, Healthpeak investors have a decision to make at this point: Do they want to own a medical research and office REIT, or a diversified healthcare REIT that also owns senior housing? And if your choice is to stick with Healthpeak, which is fine, you probably need to start comparing it to a different peer group.

However, before making a final decision here, consider the demographic need for senior housing and the fact that momentum on the vaccine front is starting to grow. When the world learns how to deal with the coronavirus, senior housing could quickly come back into favor. Dropping the sector now could mean losing out on a potential recovery — one that early hints suggest is getting closer.