Not too long ago Healthpeak Properties (NYSE:PEAK) was the laggard in its diversified real estate investment trust (REIT) peer group. Today it looks better positioned than its closest peers. Here's what happened, and why, if you are looking for a diversified REIT today, you might want to look at Healthpeak.
Waiting too long to change
Way back in 2016, Healthpeak was known as HCP. Like diversified healthcare real estate investment trust peers Ventas (NYSE:VTR) and Welltower (NYSE:HCN) (formerly known as Health Care REIT), it owns a collection of assets spanning across the healthcare space, specifically in the senior housing, office, and medical research facilities niches. However, in 2016 it had material exposure to the nursing home space. That sector was facing headwinds, with many operators struggling to make a profit because of changes in government reimbursement rates.
Welltower had less exposure to the niche. Ventas spun off its nursing homes before things got really bad. Healthpeak stuck around a little too long -- by the time it spun off its nursing home properties it was doing so from a position of weakness. The REIT was effectively forced to cut its dividend and retrench. That was a very notable misstep, but it set in motion a material portfolio overhaul. That makeover set the company up to better weather the impact of COVID-19, with Healthpeak's management team choosing to take a much more balanced approach to its portfolio than its closest peers.
Dealing with today's troubles
The big issue for healthcare REITs today is that the coronavirus spreads easily in group settings, and seniors are more at risk than others. That means senior housing is basically at the center of the storm. Operators are facing increased costs, fewer new move ins, and an increased rate of move outs (in the industry, that's usually a euphemism for resident deaths, though today some families are choosing to bring loved ones home). It's very ugly. Both Ventas and Welltower have cut their dividends at this point. So far, Healthpeak hasn't needed to cut its payment.
The difference is in their portfolios. Ventas gets around 70% of its rents from senior housing, and roughly 27% from medical research facilities and medical offices (the rest comes from other assets, including nursing homes and loans). Welltower gets around 70% of its net operating income from senior housing, with the rest coming from a mix of outpatient medical facilities and hospital systems. Healthpeak's portfolio is about 30% in medical office space, 30% in medical research, and the rest in a variety of senior housing assets.
Medical office and medical research are two higher-growth areas of the healthcare space that have managed to weather the hit from COVID-19 fairly well -- and much better than senior housing. So the nursing home misstep at Healthpeak basically led the REIT to rethink its portfolio and set it up to be in a better position than its closest peers in the current environment. To be fair, that wasn't the goal at the time. Management was simply rebalancing the portfolio so it was tilted more toward growth. That it happened to be a benefit during a global pandemic was just a coincidence.
Coincidence for not, however, Healthpeak is likely the best-positioned diversified healthcare REIT investors can buy today. That's not lost on investors, with the stock down "only" around 22% so far in 2020, compared to over-37% drops for both Ventas and Welltower. Still, with a generous 5.6% yield, investors looking for a diversified healthcare REIT while the sector is out of favor on Wall Street would do well to understand what it is that sets Healthpeak apart today.
Could be the best option
COVID-19 is impacting Healthpeak just like it's impacting the REIT's closest peers. However, with materially less exposure to senior housing, the REIT is simply in a better position to weather the hit. If you are looking at diversified healthcare landlords as a way to play the long-term demographic trends (an aging population) that remain in place despite the global pandemic, Healthpeak might just be the best-positioned option available today, even though it's not down as much as peers, because of its well-balanced portfolio.