There are three large healthcare real estate investment trusts (REITs): Welltower (WELL 0.36%), Ventas (VTR 1.48%), and Healthpeak (DOC 2.51%). The first two have yields of 3.1% and 3.8%, respectively. Healthpeak's yield is 5.8%. What's going on here? And more important, can Healthpeak support that elevated yield?
Shifting the portfolio
Historically speaking, Welltower, Ventas, and Healthpeak are considered diversified healthcare REITs. That's still true of Welltower and Ventas, which both have exposure to a broad range of healthcare property types, including senior housing. A few years ago Healthpeak chose to get out of senior housing, instead focusing largely on medical office and medical research assets. It still gets lumped in with the other two more diversified REITs, but it isn't exactly the same anymore.
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The company's shift away from senior housing came at roughly the same time that the coronavirus pandemic was wreaking havoc on those properties. The illness was particularly hard on older adults. Healthpeak cut its dividend because it exited senior housing, while Welltower and Ventas cut their dividends because of the impact of the pandemic on senior housing. The pandemic headwind has lingered for Welltower and Ventas, but Healthpeak has been executing fairly well overall, with its focus on medical office and medical research assets.
WELL Dividend Per Share (Quarterly) data by YCharts
These two property types are set to benefit from the increased spending that is happening to support an aging population. For example, more outpatient care is taking place in offices to avoid the expense of hospital stays. And more research is being done to improve overall medical care. And yet investors appear to be downbeat on Healthpeak relative to Welltower and Ventas when you examine their yields.
Ample support
The first thing to recognize is that the dividend cuts at Welltower and Ventas were much larger than the cut at Healthpeak. So the starting points are a bit different when it comes to assessing yield. Next is the fact that Welltower's core medical office and medical research businesses have remained fairly strong throughout the pandemic, with same-store operating income increasing in the low- to mid-single digits in 2020, 2021, and 2022. That strength continued into the first quarter of 2023. That's a far cry from the massive same-store operating declines that Ventas and Welltower experienced in their senior housing businesses.
Senior housing is starting to recover, leading to huge same-store rent increases for Ventas and Welltower. But that's basically an issue of rebounding from a position of weakness, not consistent performance as was offered by Healthpeak. Investors may be punishing Healthpeak at this point because it doesn't have the same recovery potential. So the material yield difference here isn't really a simple issue.
That said, Healthpeak's adjusted funds from operations (FFO) payout ratio was a fairly healthy 80% or so in the first quarter. Given that the REIT isn't dealing with the same issues around senior housing, that's a completely reasonable figure. Add in the ongoing same-store operating income growth and there's even more reason to be happy with the payout ratio.
Indeed, there's no particular reason to think that the business will suddenly hit a weak patch that puts stress on the REIT's ability to pay its dividend. In fact, with an 80% payout ratio there's actually plenty of room for adversity before a dividend cut would be needed.
A different animal
Healthpeak isn't the same as Ventas and Welltower anymore, and investors should think about it differently than they have in the past. With ongoing strong performance in its medical office and medical research properties, the REIT's dividend looks like it is on solid ground. No, it won't benefit from an upturn in senior housing, but it also didn't suffer through the pain that niche lived through. Investors looking at the healthcare REIT space should feel confident in Healthpeak's ability to pay its dividend, but also need to recognize that it is a changed company.
