Shares of diversified healthcare real estate investment trust (REIT) Healthpeak Properties (NYSE:PEAK) are down 30% so far in 2020. When the market bounced back from its March lows, Healthpeak didn't really go along for the ride. Yes, it rose off of its lows -- but the S&P 500 Index is only down about 8% for the year.

Clearly something bad is going on at this REIT, which is true. But that doesn't mean investors should avoid it. Here's a deeper look at Healthpeak Properties, and why investors might actually want to buy despite the painful share price decline.

A terrible situation

There's no way to sugarcoat the problem that Healthpeak faces right now. The real estate investment trust owns facilities in which senior citizens live. That means that its properties are purpose-built to bring the elderly together into group settings, and a large number of these people move into senior housing because they needed extra assistance for some reason, often because of pre-existing medical conditions. This is the exact demographic that is most at risk from COVID-19, and they're living in a setting that facilitates the coronavirus' spread.

A young woman in a medical coat comforting an older woman sitting down

Image source: Getty Images

It's not surprising that investors would be a little leery of Healthpeak today. This is a very big issue, and could materially alter the way in which senior housing facilities operate over the long term. However, there's a reason why senior housing exists. As the baby boom demographic cohort continues to age, demand for these facilities is likely to continue to grow. Purpose-built facilities are a good option when living with family or at one's own home becomes more difficult. 

In fact, during Healthpeak's first-quarter 2020 earnings conference call, CEO Tom Herzog noted that "...as we come out the other side of this crisis, we believe there will be pent-up demand that will increase move-ins beyond the historical -- average historical levels." The REIT's direct peers echoed those sentiments, with the CEO of industry bellwether Welltower (NYSE:WELL) recounting a conversation with an operator in the hard-hit Northeast who said that, once COVID-19-related restrictions were softened, occupancy at that operator's properties could rise as much as 300 basis points. 

So senior housing is a problem today, but the basic need for the services these facilities provide is likely to mean they survive. As long as Healthpeak and its peers can muddle through the COVID-19-related headwinds, they are still likely to have viable businesses. 

The rest of the puzzle

That brings up the REIT's dividend, which, despite the troubles in senior housing, is being maintained at its current level of $0.37 per share per quarter. CEO Herzog notes that he's "comfortable" with the level of the dividend, even though the funds from operations (or FFO, which is like earnings for an industrial company) payout ratio may go above 100% temporarily. You don't let the payout ratio rise above 100% unless you are pretty confident about the long-term viability of your business. That is the crux of Healthpeak's story today. 

Why is the CEO so confident? Healthpeak doesn't own just senior housing assets, like peers Welltower and Ventas (NYSE:VTR) -- it is a diversified healthcare REIT. Senior housing is just one piece of the portfolio. In fact, it only makes up about a third of the company's operating income. The rest is largely medical office buildings and medical research facilities. Those two segments are holding up relatively well right now, with net operating income increasing 2% and 3.1%, respectively, in the first quarter. Moreover, of the roughly third of the business that's tied to senior housing, only 15% of the entire pie is related to the REIT's senior housing operating portfolio (or SHOP in industry lingo). 

 

SHOP % Net Operating Income

Total Senior Housing % Net Operating Income

Healthpeak

15%

34%

Welltower

45%

65%

Ventas

30%

73%

Data source: Healthpeak, Welltower, and Ventas quarterly reports and presentations 

The SHOP segment is an important issue to monitor because Healthpeak both owns and operates those assets (though technically it hires third parties to do the day-to-day work). These are different from assets leased to others on long-term contracts, in that the performance of the properties flows through to Healthpeak. In good times that means higher earnings, but in bad times it means the REIT has to share in the downside. Compared to peers Welltower and Ventas, Healthpeak has less senior housing exposure and less SHOP exposure. In other words, for investors that are looking for a diversified healthcare REIT, Healthpeak looks particularly well situated today. 

Worth a deep dive

With a yield of 6% and a well-balanced portfolio of healthcare assets, Healthpeak appears to be one of the best-positioned of the large diversified healthcare REITs. With the shares still well off early-year highs, more aggressive income investors might want to take a closer look. There are clearly still risks out there related to COVID-19, but it looks like Healthpeak is prepared to handle them.