Physicians Realty Trust (DOC) investors woke up to some surprising news recently. The real estate investment trust (REIT) will merge with Healthpeak (DOC 2.51%) in an all-stock transaction.
At first glance, this looks like a much better deal for Healthpeak shareholders than Physicians Realty Trust shareholders. The deal could be completed in the first half of 2024, and when it does, each share of Physicians Realty Trust will convert into 0.674 newly minted Healthpeak shares.
The combined company will retain the Healthpeak name and trade under the symbol DOC. Physicians Realty Trust shareholders will own 23% of the combined company, and Healthpeak shareholders will own the rest.
What it means for investors
Healthpeak doesn't plan to change its quarterly dividend payout from its current level of $0.30 per share. This means Physicians Realty Trust shareholders will see a significant dividend reduction once the deal is completed.
Ahead of the merger, investors holding 1,000 shares of Physicians Realty Trust received $230 in dividend income each quarter. Following the merger, they'll receive just $202.20 from 674 shares of Healthpeak.
The payout reduction coming up for Physicians Realty Trust shareholders is a little disappointing, but new investors might find the stock attractive. At recent prices, shares of Physicians Realty Trust offer a 7.4% yield, or at least they will once the deal is completed.
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Building a stronger healthcare REIT
Physicians Realty Trust's current portfolio contains 278 healthcare properties spread across 32 states. Its portfolio consists mostly of outpatient facilities associated with a hospital or health system. Around 95% of its leasable square feet of space was leased at the end of September, with an average remaining lease term of 5.3 years.
Healthpeak finished September with 295 outpatient medical buildings in its portfolio, but this isn't its largest operating segment. The company also owns 146 labs leased to biopharmaceutical companies and diagnostics providers. This segment is responsible for 51.5% of net operating income.
In recent years, Healthpeak Properties disposed of its senior housing portfolio but retained 15 continuing care retirement buildings that currently contribute 9.5% of net operating income.
Both REITs have relatively diverse property portfolios, but the combined entity will be much more so. HCA Healthcare will be the new Healthpeak's largest tenant, at 9% of annualized base rent (ABR). At 4% of ABR, CommonSpirit Health will be the only other tenant responsible for more than 1% of ABR.
The combined entity is eligible for a new five-year $500 million term loan that could give it the firepower to enlarge its portfolio and perhaps raise its dividend payout in the years ahead. Physician Realty Trust's debt level is up around 6.0 times earnings before interest, taxes, depreciation, and amortization (EBITDA). With help from new financing, Healthpeak expects its leverage ratio to remain below 5.5 following the merger.
Why I'm not a buyer
Care providers operating outpatient buildings near hospitals generate relatively reliable cash flows, and so do pharmaceutical companies like Pfizer that rent Healthpeak's lab facilities. To date, I've avoided Healthpeak because many of its tenants are small-cap or privately held biopharma companies with unreliable cash flows, and those tenants will be responsible for 14% of the combined company's total ABR.
Healthpeak had to write off $9 million in rent from Sorrento Therapeutics this year after it sought bankruptcy protection -- and there could be more trouble ahead. In 2022, more than 119 biopharma companies announced layoffs, and Fierce Biotech has already recorded 156 strategic restructuring announcements this year.
The rapid withdrawal of investment in the biopharmaceutical space following the COVID-19 pandemic hasn't fully worked its way into Healthpeak's results yet. It's probably best to watch this merger from a safe distance until we see proof the combined healthcare REIT can outperform.
