Healthpeak Properties (DOC 2.51%) and Physicians Realty Trust (DOC) have agreed to an all-stock merger-of-equals transaction valuing the combined company at $21 billion. The deal will create a much larger-scale real estate investment trust (REIT) focused on the healthcare sector.
The accretive deal will enhance the combined company's income, portfolio, and growth prospects while preserving its balance sheet strength. That makes its high-yielding dividend (currently yielding 7.7%) even healthier.
A transformational transaction
Healthpeak Properties and Physicians Realty Trust are merging to create a leading healthcare REIT. The combined company will own over 750 properties with 52 million square feet of space dedicated to healthcare discovery and delivery. It will have 12 million square feet of lab space and 40 million square feet of outpatient medical space. The REITs have leased this space to high-quality healthcare systems, physician groups, and biopharma companies.
This portfolio puts the combined company in an even better position to capitalize on the high-growth markets of drug discovery and outpatient healthcare delivery. Furthermore, the merger will enhance the company's focus on high-growth market locations like Dallas, Houston, Nashville, Phoenix, and Denver. In commenting on the deal, Healthpeak CEO Scott Brinker stated in a press release: "This combination joins two leading platforms, bringing them to the next level to create a company uniquely focused on healthcare discovery and delivery, a large and attractive playing field with strong secular growth."
The merger will also enhance Healthpeak's portfolio. The REIT will increase its scale in over 30 markets where the two companies have overlapping footprints. That will enable it to broaden and deepen existing relationships. It will also provide new relationships, which could open the door to future growth opportunities. Meanwhile, the transaction will increase the company's diversification by reducing its tenant concentration.
Enhance its ability to pay dividends
Healthpeak expects that the merger will be immediately accretive to its adjusted funds from operations (FFO) per share. It anticipates capturing at least $40 million in cost savings during the first year and up to $60 million by the end of year two. That earnings improvement will lower the REIT's dividend payout ratio, which was a healthy 76% through the third quarter. Healthpeak Properties plans to maintain its existing dividend level of $0.30 per share each quarter ($1.20 annualized) following the merger. The company has paid that rate since resetting its payout during the pandemic.
Meanwhile, Healthpeak expects to maintain a strong balance sheet following the merger. It anticipates its leverage ratio will be in the low 5 times range after entering into a new five-year, $500 million term loan to enhance its liquidity. Even after assuming Physicians Realty Trust's existing debt, the new Healthpeak will primarily have low-cost, fixed-rate debt with no material maturities until 2025. That gives it lots of financial flexibility.
The REIT believes its fortress-like balance sheet following the merger will give it a competitive advantage in the current market environment. It positions the company to play offense. It has the financial flexibility to make additional acquisitions and invest in high-return development opportunities. Those investments would increase its income. That income growth would further enhance its ability to pay dividends. It could eventually enable Healthpeak to start growing its dividend.
Brinker commented on the deal's financial benefits, stating: "We expect the transaction to be immediately accretive to each company's shareholders, augment our strong balance sheet, and position the combined company for offense."
A healthier REIT
Healthpeak Properties and Physicians Realty Trust are joining forces in a mega-merger to create a $21 billion healthcare REIT. The deal will enhance the combined company's scale, increase its earnings, and diversify its portfolio while maintaining a strong balance sheet. These factors put its high-yielding dividend on a firmer foundation. Meanwhile, the deal positions it to go on offense in the current environment. Future investments will grow its income, which could enable the new Healthpeak to eventually increase its already attractive payout.
