Company Reports

First-quarter results for no-moat Healthpeak were slightly better than we anticipated, giving us confidence in our $30.50 fair value estimate. Same-store net operating income for the life science portfolio grew 2.7% in the first quarter, ahead of our estimate of 1.0% growth. For the medical office portfolio, same-store NOI grew 2.6%, which was in line with our estimate. While the continuing care retirement community segment only represents 9.3% of total company NOI, the segment saw 26.6% growth in the quarter, leading to total same-store NOI growth of 4.5% that was ahead of our estimate of 1.8% growth. Healthpeak reported adjusted funds from operations of $0.45 per share in the first quarter, four cents better than our $0.41 estimate.

We believe that there are several attractive opportunities across the US REIT sector for investors to consider. Following the recovery of many REIT sector fundamentals from the pandemic by mid-2021, we viewed the REIT sector as fairly valued through early 2022. However, the past two years have seen the rapid rise in interest rates and a slowing economy, which has led to major valuation declines across the sector. Our analysis of the REIT sector over the past 25 years suggests that the relative stock performance of REITs is negatively correlated with interest rate movements. The second and third quarters of 2023 saw large interest rate increases with the 10-year Treasury approaching 5%, which led to the sector underperforming. This occurred even as many REITs reported same-store net operating income, or NOI, growth at historical highs in 2022 due to high inflation. Higher interest rates, lower liquidity, tighter capital market conditions, and decelerating same-store NOI growth all led to a significant correction in the stock price for many REITs.

No-moat Healthpeak closed on the previously announced merger with Physicians Realty Trust and will now trade under the ticker DOC. The merger adds a 278-property portfolio of medical office buildings with 16 million square feet of space in a deal valued around $5 billion. We believe that the portfolio is complementary to Healthpeak's existing portfolio and makes the company the leading medical office REIT in the United States. We are in favor of the deal given that the additional scale adds diversification benefits and should increase the chance Healthpeak can achieve a higher credit rating and thus lower long-term debt costs. Management believes that the deal should see $40 million in cost savings in the first year and another $20 million as additional synergies between the companies are realized, though we have assumed a more conservative figure in our model as many of these synergies can be difficult to achieve. While the deal does not significantly change our funds from operations estimates for the company, we are pleased to see management execute a deal that has the potential to create long-term benefits.

The top healthcare real estate stands to benefit disproportionately from the Affordable Care Act. With an increased focus on higher-quality care being performed in lower-cost settings, the best owners and operators in the industry, which can provide better outcomes while driving greater efficiencies, should see demand funneled to them from the best healthcare systems. Additionally, the baby boomer generation is starting to enter its senior years, and the 80-plus population, an age range that spends more than 4 times on healthcare per capita than the national average, should almost double in size over the next 10 years. Long term, the best healthcare companies are well positioned to take advantage of these industry tailwinds.

Healthpeak reported third-quarter results that were relatively in line with our expectations, leading us to reaffirm our $32.50 fair value estimate for the no-moat company. Same-store net operating income for the life science portfolio increased 3.3% in the third quarter, slightly better than our estimate of 2.9% growth. Same-store net operating income for the medical office portfolio was up 3.4%, ahead of our estimate of a 2.1% increase. Meanwhile, the continuing care retirement community saw same-store NOI growth of 32.1% due to the recovery of the senior housing sector. As a result, the company reported total same-store NOI growth of 6.0% in the third quarter. Healthpeak reported adjusted funds from operations of $0.45 per share in the third quarter, which was in line with our estimate and was 2 cents better than the $0.43 figure the company reported in the third quarter of 2022.

The share prices of U.S. real estate investment trusts have fallen by approximately 30% from their 2021 highs because of higher interest rates and stress in some commercial real estate sectors. We think that the correction is overdone and the current valuations offer an attractive entry point for patient investors. Our core REIT coverage is trading at a discount of approximately 25% to our fair value estimate. We estimate that the average REIT within our U.S. coverage is currently trading at a dividend yield that is 126 basis points higher than the historical average. We see marked differences in valuation across different REIT sectors in the United States. For instance, the industrial sector is fairly valued, with stock valuations already accounting for future growth, but other sectors like offices, hotels, and malls are trading at attractive discounts.

The top healthcare real estate stands to benefit disproportionately from the Affordable Care Act. With an increased focus on higher-quality care being performed in lower-cost settings, the best owners and operators in the industry, which can provide better outcomes while driving greater efficiencies, should see demand funneled to them from the best healthcare systems. Additionally, the baby boomer generation is starting to enter its senior years, and the 80-plus population, an age range that spends more than 4 times on healthcare per capita than the national average, should almost double in size over the next 10 years. Long term, the best healthcare companies are well positioned to take advantage of these industry tailwinds.

Second-quarter results for no-moat Healthpeak Properties were slightly better than we anticipated, giving us confidence in our $33.50 fair value estimate. Same-store net operating income for the life science segment grew 3.8%, slightly better than our 2.6% estimate. The medical office segment saw same-store NOI growth that was in line with our 2.5% estimate. The continuing care retirement community segment's same-store NOI growth was 19.3%, well ahead of our estimate of 6.4%. Combined same-store NOI for the company overall grew 4.8%, better than our estimate of 2.8%. As a result, Healthpeak reported 3.6% growth in adjusted funds from operations, to $0.45 per share, beating our estimate of $0.43 for the second quarter.

Healthpeak reported first-quarter results that were slightly better than we anticipated, leading us to reaffirm our $33.50 fair value estimate for the no-moat company. Same-store net operating income, or NOI, for the life science segment grew 6.3% in the first quarter, slightly better than our estimate of 5.6% growth. The medical office segment saw 3.7% same-store NOI growth, in line with our estimate. Finally, same-store NOI for the continuing care retirement community segment grew 9.5%, better than our estimate of 4.3% growth. Combined, total same-store NOI grew 5.5% in the first quarter, which beat our estimate of 4.4% total growth. Healthpeak reported adjusted funds from operations, or FFO, of $0.42 per share in the quarter, in line with our estimate for the company.

The top healthcare real estate stands to benefit disproportionately from the Affordable Care Act. With an increased focus on higher-quality care being performed in lower-cost settings, the best owners and operators in the industry, which can provide better outcomes while driving greater efficiencies, should see demand funneled to them from the best healthcare systems. Additionally, the baby boomer generation is starting to enter its senior years, and the 80-plus population, an age range that spends more than 4 times on healthcare per capita than the national average, should almost double in size over the next 10 years. Long term, the best healthcare companies are well positioned to take advantage of these industry tailwinds.

Fourth-quarter results for no-moat Healthpeak were relatively in line with our expectations, leading us to reaffirm our $35 fair value estimate. Same-store net operating income for the life science segment grew 5.7%, slightly better than our estimate of 5.2% growth, and the continuing care retirement community segment grew 15.0% while the medical office segment saw 5.4% same-store NOI growth in the fourth quarter, which was slightly below our estimate of 6.1% growth. Combined, total same-store NOI growth was 6.6% in the fourth quarter, which was in line with our 6.5% estimate. The solid internal growth led Healthpeak to report funds from operations of $0.44 per share for the fourth quarter, which was 3 cents better than the $0.41 figure reported in the fourth quarter of 2021.

The top healthcare real estate stands to benefit disproportionately from the Affordable Care Act. With an increased focus on higher-quality care being performed in lower-cost settings, the best owners and operators in the industry, which can provide better outcomes while driving greater efficiencies, should see demand funneled to them from the best healthcare systems. Additionally, the baby boomer generation is starting to enter its senior years, and the 80-plus population, an age range that spends more than 4 times on healthcare per capita than the national average, should almost double in size over the next 10 years. Long term, the best healthcare companies are well positioned to take advantage of these industry tailwinds.

Healthpeak Properties reported third-quarter results that were in line with our expectations. As a result, we are reaffirming our $36 fair value estimate for the no-moat company. Same-store cash net operating income growth was 5.4% for the life science segment, 4.9% for the medical office segment, and 4.1% for the continuing care retirement community segment. Combined, Healthpeak reported third-quarter same-store cash NOI growth of 5.1% that was slightly better than our estimate of 4.3% growth. The NOI growth across the company's operating segments led Healthpeak to report third-quarter adjusted funds from operations of $0.43 per share, in line with our estimate and 3 cents better than the $0.40 per-share figure the company reported in the third quarter of 2021.

With the United States experiencing historically high inflation growth, many investors are wondering if real estate provides a natural hedge against inflation and if the REIT sector should therefore outperform the broader equity market. Many REITs in our coverage have reported rent and revenue growth at or near historic peaks over the past several quarters, with inflation being one of the largest reasons for the high growth. Given this and some historical evidence that REITs outperformed in the 1970s and early 1980s when inflation was similarly high, some investors are questioning why REITs have not outperformed in 2022.

Second-quarter results for Healthpeak were in line with our expectations, leading us to reaffirm our $36 fair value estimate for the no-moat company. The life science segment produced same-store net operating income growth of 4.3% in the quarter, better than our estimate of 3.1% growth. Similarly, medical office outperformed with 4.5% year-over-year growth that beat our 3.0% estimate. However, the company’s continuing care retirement community segment saw a 2.1% same-store NOI decline, which was worse than our estimate of 0.6% growth. Still, Healthpeak reported same-store NOI growth of 3.7% for the total company, slightly better than our 3.0% estimate. As a result, Healthpeak reported adjusted funds from operations of $0.44 per share in the second quarter that was in line with our expectations and 4 cents ahead of the $0.40 figure reported in the second quarter of 2021.

No-moat-rated Healthpeak reported first-quarter results that were slightly below our expectations, though we didn’t see anything in the quarter that would materially change our $36 per share fair value estimate.

The top healthcare real estate stands to benefit disproportionately from the Affordable Care Act. With an increased focus on higher-quality care being performed in lower-cost settings, the best owners and operators in the industry, which can provide better outcomes while driving greater efficiencies, should see demand funneled to them from the best healthcare systems. Additionally, the baby boomer generation is starting to enter its senior years, and the 80-plus population, an age range that spends more than 4 times on healthcare per capita than the national average, should almost double in size over the next 10 years. Long term, the best healthcare companies are well positioned to take advantage of these industry tailwinds.

Healthpeak's fourth-quarter results were relatively in line with our expectations, leading us to reaffirm our $36 fair value estimate for the no-moat company. The life science portfolio once again saw the highest same-store net operating income growth, reporting 5.4% growth in the fourth quarter, slightly below our estimate of 6.2%. Medical office also continued to do well with 3.6% growth, slightly ahead of our 3.1% estimate. However, the continuing care retirement community segment saw another decline in the fourth quarter, down either 9.6% if government grants received from the CARES Act are included in 2020 results or down 0.2% if those grants are excluded. However, since this segment accounts for only 11.8% of Healthpeak’s total NOI, total company NOI excluding the impact of the grants grew 4.0% in the fourth quarter, slightly ahead of our estimate of 3.7%. As a result, Healthpeak reported adjusted funds from operations of $0.41 per share for the fourth quarter, in line with our estimate.

Healthpeak reported third-quarter earnings that were slightly ahead of our expectations, leading us to reaffirm our $36 per share fair value estimate for the no-moat firm. Same-store net operating income growth was once again highest for the life science segment, which was up 6.8% year over year and outperformed our expectation of 5.0% growth. Same-store NOI for the medical office segment was up 2.9% in the third quarter, better than our estimate of 2.1%. The continuing care retirement community (CCRC) segment, though, saw another decline in the third quarter, down 9.0% when government grants received from the CARES Act are included in 2020 results and down 1.7% when those grants are excluded. Still, the CCRC portfolio represented only 10.7% of Healthpeak's total NOI in the third quarter. As such, total company same-store NOI grew 4.1% when the grants are excluded and 3.2% when the grants are included--both of which were slightly ahead of our 2.8% growth estimate. Even so, Healthpeak's adjusted reported FFO in the third quarter was in line with our $0.40 per share estimate, leaving us with relatively few material changes to our model from the quarter.

The top healthcare real estate stands to benefit disproportionately from the Affordable Care Act. With an increased focus on higher-quality care being performed in lower-cost settings, the best owners and operators in the industry, which can provide better outcomes while driving greater efficiencies, should see demand funneled to them from the best healthcare systems. Additionally, the baby boomer generation is starting to enter its senior years, and the 80-plus population, an age range that spends more than 4 times on healthcare per capita than the national average, should almost double in size over the next 10 years. Long term, the best healthcare companies are well positioned to take advantage of these industry tailwinds.