Healthpeak Properties Stock: Steady Dividend, Poor Price Growth

Healthpeak Properties, Inc. (NYSE:PEAK) is a large-cap healthcare real estate investment trust (REIT) with a market capitalization of $19.16 billion. This REIT’s portfolio primarily consists of properties involved in the business of Continuing Care Retirement Communities (CCRC), Medical Business Office (MBO) & Life Science campuses. 97 percent of this United States-based REIT is held by institutions, whereas only 0.27 percent is held by insiders. The four bigger asset management firms – Vanguard Group Inc., Cohen & Steers Inc., BlackRock Inc., and State Street Corporation – hold more than 46 percent of public equity shares of this healthcare REIT.

Healthpeak Properties, Inc. is one of four major (large-cap) US healthcare REITs. Other three are Welltower Inc. (WELL), Medical Properties Trust, Inc. (MPW), and Ventas, Inc. (VTR). PEAK has recorded a price growth of 7.23 percent in the past 5 years. And over the past 10 years, the growth was negative 7.73 percent. So, the price performance was extremely poor over the medium and long term. 5 out of the last 10 years, the company has generated a double-digit negative price growth. As a result of that, PEAK’s total returns also were negative in those 5 years.

Healthpeak Properties, Inc.’s price growth over the short term has been considerably better, around 5 percent on an average. PEAK’s price grew by 4.56 percent and 16.9 percent over the past one year and 3 years respectively. PEAK has been able to grow during the covid-19 pandemic, despite the healthcare REITs being hit hard by lower occupancy and realization.

All companies engaged in the business of providing care to seniors, retirement communities, and specialized nursing have struggled. Fortunately, less than 12 percent of PEAK’s net operating income (NOI) is from this segment. Landlords in MBOs and life science campuses, however, have benefitted, which is reflected in the financials and return of MPW, one of the world’s largest owners of hospitals.

PEAK also generates considerable NOI from the MBO segment. PEAK’s medical offices attract physician specialists who need to be in close proximity to the hospital. This results in stable occupancy and consistent growth for Healthpeak Properties, Inc. In addition, PEAK’s state-of-the-art life science campuses in three core growth markets of San Francisco, Boston, and San Diego have attracted strong rentals.

The P/E multiple of PEAK is 158.5, which looks absurd. However, P/E doesn’t fit as a valuation criterion for the real estate business. Rather, price to book, and price to cash flow are good metrics to judge REITs. Price to book of 2.89 and price to cash flow of 23.64 are a bit higher compared to the industry averages. EV/EBIDTA (26) and Price/FFO (20) are also some of the highest among its peers. All these multiples indicate an overvaluation of Healthpeak Properties, Inc.

However, Healthpeak Properties, Inc. had been a steady and strong dividend payer for the past 32 years. This healthcare REIT is paying quarterly dividends with an annual average yield 4 percent and 6.5 percent. During the past 10 years, its annual average yield was 5.2 percent. Though the company slashed its quarterly dividends by 36 percent in the fourth quarter of 2016 and kept it static at that level since then, it had little impact on the yield due to its price remaining quite low.

The stock has witnessed positive price growth during the past 3 years. In my opinion, the company will have much better price growth as it slowly moves away from the CCRC segment and concentrates more on MBO and life science campuses. However, this has to be backed by significant investments in these sectors. As all other major healthcare REITs shift their focus towards these more lucrative segments, there might be a series of acquisitions in the near future. In such a case, Healthpeak Properties, Inc. has to face tough competition from WELL, MPW, and VTR.

Here, I believe MPW has an edge over the other three large-cap healthcare REITs, due to its strong cash balance and even stronger free cash flow. MPW has a huge cash balance of $460 million, as compared to $200 million of PEAK, and $190 million of Ventas. WELL has a cash balance of $300 million, but it will not face difficulty raising capital to pursue acquisition of smaller companies, just because of its sheer size. WELL has a market capitalization of $44 billion, as compared to $19 billion of PEAK, and $24 billion of VTR.

I see the stock having upside potential in the long run, due to its focus towards the MBO and life science campuses. Moreover, some regulatory constraints on construction of healthcare facilities are expected to benefit big landlords like PEAK. If the current level of oversupply of healthcare properties gets reversed, Healthpeak Properties, Inc. surely will be in a better position with higher occupancy as well as higher rentals.

However, to reach that stage, the stock might have to go through major ups and downs. Expecting a smooth bullish ride for PEAK will not be a wise idea. This may be a good stock for investors with above-average risk appetite who are betting it to pay out a steady dividend irrespective of lack of price growth. Since Healthpeak Properties, Inc. has been able to pay dividends even during its worst years, expecting a steady dividend in case the company generates good earnings will not be a bad idea.

But generating sufficient earnings again is surrounded by a lot of uncertainties. Healthpeak Properties, Inc. is not in the best position to grow inorganically. The medium- and long-term historical price growth is disappointing. The price multiples indicate a possible overvaluation. The short-term technical indicator doesn’t make me bullish either. All the long-term simple moving averages (SMA) are placed above the short-term moving averages. There is an astonishing wide gap between 200 days SMA and 100 days SMA. Staying away from this stock thus will not be a bad idea.

But again, holding PEAK’s stock for a longer term also makes sense as the expected dividends are good enough and has a fair chance of generating significant price growth. If I am holding PEAK, I’ll hedge it with long-term calls and put options. Wide range of call and put options are available for October 21 (6 months forward) within a strike price between $27 and $45. In order to safeguard my investments, I would prefer to spend another $1.6 to buy an October 20 put option at a strike price of $33, so that I don’t have to incur a loss beyond 10 percent from the level of current market price of Healthpeak Properties, Inc.