Healthpeak Properties is a diversified real estate investment trust (REIT) that owns and develops healthcare real estate for Life Science, Senior Housing and Medical Office tenants.

They are an innovative company at the forefront of providing premium real estate to the dynamic healthcare industry. They started their listed existence as Health Care Property Investors in 1985 with an IPO on the NYSE, growing into a leading healthcare REIT, and earning their way into the S&P 500 index in 2008.

Healthpeak currently has over $20 billion of owned real estate and are well-positioned to create consistent long-term growth opportunities for investors.

We will investigate;

  • The business units and their fundamental attributes
  • How they interact with the environment
  • How they add value for shareholders

Business Units

  1. Medical Office
  2. Continuing care retirement communities
  3. Life sciences

1. Medical Office

HealthPeak owns and develops efficient buildings for a wide variety of outpatient healthcare services. The vast majority of their properties are located on the campuses of the #1 or #2 hospitals in their local markets, so their tenants are well positioned to deliver convenient care. The properties attract physician specialists who need to be in close proximity to the hospital, which results in stable occupancy and consistent growth.

2. Continuing Care Retirement Communities

HealthPeak invests in irreplaceable and high barrier to entry Continuing Care Retirement Communities (CCRC). CCRCs offer residents a continuum of care within a single campus designed to support a vibrant community with a wide range of amenities. They partner with operators who focus on quality care while sharing our goal of maintaining efficient and innovative communities.

3. Life Science

Healthpeak invests in and develops state-of-the-art life science campuses in three core growth markets of San Francisco, Boston and San Diego. They provide their tenants with flexibility to meet their specific needs, ensuring there is room to research, invent, expand – and discover the next important breakthrough.

Medical office fundamentals

Unique On-Campus Portfolio – 84% of the portfolio is on-campus, 6% adjacent-to-campus, 7% off-campus affiliated with a health system. Aggregate 97% on campus and affiliated.

Superior Performance – On-campus properties have outperformed off-campus properties.

  • Renewal Rate: 80% on-campus vs 74% off-campus affiliated, 66% off-campus unaffiliated
  • Mark-to-Market on Renewals: On-campus renewal rates had a mark-to-market approximately 500 bps above off-campus affiliated and unaffiliated properties.
  • Annual NOI Growth: On-campus NOI growth has been 160 bps above off-campus affiliated and 310 bps above off-campus unaffiliated.

 

Diverse Portfolio with Growth Markets Focus – 281 properties with 23M sqft across 33 states. Top markets are low-tax, high-growth like Nashville, Denver, Phoenix, Houston, and Dallas.

Leading Hospital Partners – Consistent strategy to partner with the #1 or #2 hospitals in the market. Partner hospitals’ 2019 average revenue was $404M, 68% above the national average.

Specialty Physician Focus – 82% specialty care, which insulates the portfolio from new competition from urgent care centers and telehealth.

Development Upside – Largest private sector developer of medical office.

Extensive Experience – Two decades of experience and expertise operating the MOB portfolio, dating back to MedCap, one of the pioneers in large scale MOB portfolios.

Life Science Industry Fundamentals

Growing Demand and Scientific Innovation – The aging population is driving demand for life changing therapies and cures. Accelerating scientific innovation by the biotechs is treating more and more previously untreatable diseases.

Favorable Drug Approval Trends – The FDA approved 53 drugs in 2020, double the 10-year average. The FDA has reduced the average drug review time by 50% since 1990.

Supportive Regulatory Environment – The Affordable Care Act grants new biologics 12 years of market exclusivity. 13 biologics applications were approved last year, a 100% increase from 2010.

Sustainability –  Biologics are more difficult to replicate than small molecule drugs, better insulating biologics from generic competition.

Record High Industry Funding – Driven by the foregoing, life science equity funding exceeded $100bn in 2020, doubling the previous 5-year average. Healthcare venture capital funds raised an additional $17bn in 2020, much of which will be invested into biotechs in the future.

Continuing Care Retirement Communities Fundamentals

Unique Property Type – Continuing Care Retirement Communities (CCRCs) allow seniors to age in place by offering a full continuum of care in very large communities. Residents are invested since they pay a non-refundable entrance fee and are assured care for life.

Irreplaceable Real Estate – Healthpeak’s CCRCs on average sit on ~50 acres of land in infill locations.

Densification Potential – 100+ acres of undeveloped land on our existing campuses allows for expansion with no incremental land cost. Total spend over time of $500mn or more.

High Barriers-to-Entry – No new supply within 10 miles of our CCRCs in the past 10 years.

Strong Markets – Portfolio is concentrated in major retirement markets with projected population growth above the national average.

Broad Appeal – The average gross entrance fee is $200,000, 75% of the local median home value; accordingly, the communities appeal to a wide market of potential residents.

High Non-Refundable EF – On average, 75% of the entrance fees are non-refundable, creating a steady income stream.

Best-in-Class Management – LCS is the largest operator in this unique product type, with 5 decades of experience.

How has the REIT changed?

Over the past five years Healthpeak have taken deliberate actions to reposition their portfolio, focusing on ownership of non-commoditized real estate where they have scale and expertise, creating a competitive advantage. They have have sold $18bn of non-core assets and recycled the proceeds into strategic acquisitions in three irreplaceable businesses, invested heavily in a value-creating development platform and repaid debt to create a strong balance sheet. The company now consists of 97% Life Science / Medical Office / CCRC portfolio, a $1.3bn active development pipeline and $7bn+ of land bank & embedded densification opportunities that will help fuel growth for 10+ years. This transformation has created a differentiated REIT that is positioned to generate consistent and stable earnings and dividend growth.

Environmental credentials:

Green House Gas Emissions Reduction – 35% GHG emissions reduction since 2011. As of the end of 2020, 111,746 CO2e metric tonnes in GHG emission reduction since 2011 baseline. That’s the equivalent of removing 23,551 cars from the road!

Energy Consumption Reduction – 16% energy consumption reduction since 2011. As of the end of 2020, 132,105 megawatt hours in energy usage savings since our 2011 baseline. That’s enough energy to power over 86 medical office buildings for one year.

Water Consumption Reduction – 8.3% water consumption reduction since 2011. 109 million gallons of water saved in 2020 since our 2011 baseline. That’s the equivalent of 827 million water bottles.

Landfill Waste Disposal Reduction – 7.1% landfill waste disposal reduction since 2011. As of the end of 2020, 871 metric tonnes in landfill waste reduction since our 2011 baseline.
That’s the weight of 320 elephants.

LEED-Certified Properties – 4.9 Million Square Feet of LEED-Certified Properties. LEED certifications are awarded to high performing green buildings.

ENERGY STAR Certifications – 233 ENERGY STAR Certifications (cumulative). ENERGY STAR certified buildings meet strict energy performance standards.

Dow Jones Sustainability Index

  • Named to the DJSI North America Index for 8 consecutive years.
  • Named to the DJSI World Index 3 times.
  • Named to the DJSI Global 1200 ESG Index for the first time in 2019.

Development opportunities

Healthpeak has a diverse group of development opportunities across the US. As can be seen below, these opportunities are across their three main business units and specifically target key geographic regions with demographic tailwinds. They have balance sheet capacity to fund these developments and we believe they will generate excellent returns. This will help drive superior earnings growth. Of this $7bn+ landbank, Healthpeak have identified a near term $1.3bn development pipeline that is expected 7% yield. Given the cost of debt funding is so low, this again points to superior future earnings growth.

Conclusion

Healthpeak have deliberately targeted three asset classes that have favourable demographic attributes. Management has transformed the business over the last five years by selling off non-core assets and curating a large development pipeline. They are an environmentally conscious company that has a sustainable competitive advantage that we think can be harnessed to deliver above average outcomes going forward for shareholders.

 

 

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