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The healthcare real estate market has been one of the hardest hit in 2020. Between occupancy falling in senior housing and the temporary closure of several medical offices, many healthcare real estate investment trusts (REITs) have been put to the test. Two of the major players in this space are Welltower (NYSE: WELL) and Healthpeak Properties (NYSE: PEAK).
While it has been a rough year financially for both of these REITs, they've been making some major changes to their portfolios which could leave them coming out of the pandemic stronger than ever. We'll look closely at these recent moves to see which is the better buy between Welltower and Healthpeak Properties.
Both companies have been making some major changes to their portfolios over the past few months. In October, we talked about Welltower's sale of $1.3 billion worth of real estate, and it has since announced the sale of a 24-property medical office portfolio for roughly $550 million, in which Welltower will retain 20% economic interest and continue to manage the assets.
Meanwhile, Healthpeak Properties is in various stages of the disposition of roughly $4.5 billion worth of senior housing properties. The REIT is simultaneously investing in medical office and life science properties, and has further plans to expand several of their current campuses with funds from their senior housing dispositions.
So what does this mean for investors?
Welltower appears to be cleaning up their balance sheet by using the proceeds from these deals to strengthen their cash position and pay down or defease $855 million worth of debt. This puts their liquidity in great shape with $5.2 billion available between cash and lines of credit.
They also seem to be favoring their senior housing triple net properties over their senior housing operating properties. This was likely a smart move because occupancy on their senior housing operating portfolio has fallen 8.3% since February while their triple net portfolio is still collecting 98% of their rent. Not to mention the greater-than-expected increase in expenses in their senior housing operating properties due to the rise in COVID-19 cases. Overall, their recent transactions should prove to benefit investors in the long run.
Healthpeak's moves are a clear indication of their intention to put more focus on their life science and medical office properties. This is something they've been moving toward since 2016, when they announced their plan to spin off their ManorCare portfolio (which was later acquired by Welltower in 2018).
By redeploying capital from their senior housing dispositions, Healthpeak will be better positioned to capitalize on the expected growth in pharmaceutical manufacturing. According to JLL's (NYSE: JLL) 2020 Life Sciences Real Estate Outlook, brand-name pharmaceutical manufacturing is expected to see 16% growth through 2025.
While the REIT's surge in dispositions in 2020 is likely in part a reaction to the pandemic, it's important to remember that this isn't simply a knee-jerk reaction to stop the bleeding. The shift has been a long-term plan and should strengthen the company's portfolio overall.
It's possible that Healthpeak's dividend could be on the chopping block sometime in 2021. While the company has maintained its current quarterly dividend payout of $0.37 since it was cut in the fourth quarter of 2016, it's not sustainable for the near future.
Healthpeak's YTD dividend payout ratio for the first three quarters of 2020 was 113%. Unless there is a substantial increase to the company's FFO in the beginning of 2021, a dividend cut is a very likely possibility.
Welltower, on the other hand, made adjustments to its dividend early on in the pandemic, reducing the payout from $0.87 in February to $0.61 in May. This makes Welltower's current dividend much more sustainable.
Which is the better buy?
While Healthpeak's repositioning should benefit the company long term, I think it's too soon to buy with the high payout ratio hanging over their heads. I believe Welltower will see a faster and stronger comeback. The COVID-19 vaccine should help their occupancy rates and rent collections. Combining that with their improved balance sheet creates an excellent environment for their share price and dividends to increase to their pre-pandemic levels.
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