One of the preeminent U.S. real estate investment trusts with a focus on medical office buildings is Healthpeak Properties (NYSE:DOC).
Healthpeak Properties, in its present form, emerged from the company’s merger with Physician Realty Trust, which was completed in 1Q24. Healthpeak Properties is poised to grow its funds from operations in the long-term as the senior population is growing and the U.S. spends more money on the healthcare sector. The trust’s stock is still fairly attractively valued, with an AFFO multiple of 13.0x, and I think has a chance to grow.
Taking into account the long-term drivers of growth in the healthcare industry, I think that Healthpeak Properties is a compelling investment for passive income investors.
My Rating History
I covered Physician Realty Trust and had a stock classification of Buy before the trust’s merger with Healthpeak Properties, primarily because the trust grew its dividend consistently and had a low dividend pay-out ratio.
The merger with Healthpeak Properties presents passive income investors with the opportunity to invest in a larger MOB-focused real estate investment trust with considerable merger synergies and prospects for adjusted funds from operations growth.
Merger Close, Synergy Upside, Industry Growth Drivers
The merger between Physicians Realty Trust and Healthpeak Properties was completed on March 1, 2024, and the trust’s stock has enjoyed an about 15% price increase since. The trust’s portfolio now is comprised of 748 properties, which include mainly medical office buildings and laboratories. Outpatient medical office buildings made up the majority of the real estate investment trust’s portfolio in 1Q24, as they accounted for 589 properties and 40 million square feet.
Healthpeak Properties is now a $14.0 billion healthcare real estate investment trust with outpatient medical properties and labs located across the country. The biggest market is the Bay Area in San Francisco, which produced 25% of the trust’s annualized base rent in the first quarter.
In its original merger outlook, Healthpeak Properties anticipated $60 million in merger-related cash NOI synergies, which the real estate investment trust now upped by another $20 million. These synergies, totaling $80 million, are poised to boost the trust’s adjusted funds from operations.
Though Healthpeak Properties is not growing its dividend, it is paying a steady $0.30 per share per quarter, I like to think that investors could, in the long-term, see some decent dividend growth from this healthcare trust, particularly if the real estate investment trust can reap its estimated synergy estimates.
Passive income investors, I think, will find the outpatient medical office market interesting for its compelling long-term growth characteristics. The medical office market is primarily driven by seniors, which tend to spend the most money on healthcare services, both on an inpatient and outpatient basis.
With people enjoying longer lives thanks to better medicines, more effective treatment options and safer workplaces, rising healthcare per-capita spending and a growing senior population create a catalyst for long-term funds from operations growth in the MOB industry.
Healthpeak Properties has been able to grow its funds from operations (as adjusted) at double digits (11%) between 2021 and 2023, as demand for outpatient services is growing and more medical procedures can now be done in an outpatient environment. Healthpeak Properties’ FFO as adjusted totaled $277.5 million in 1Q24, up 20% YoY, while its per share FFO rose 7% YoY.
With the dividend being well-covered by funds from operations as adjusted, I think the trust is a compelling investment for passive income investors moving forward.
FFO Guidance, Pay-Out Ratio And Multiple
Healthpeak Properties foresees funds from operations as adjusted of $1.73-1.79 per share in 2024 compared to $1.78 per share in FFO in 2023. The trust pays a $0.30 per share per quarter dividend which, at the middle of DOC’s guidance for 2024, reflects an estimated dividend pay-out ratio of 68% which would theoretically leave room for the healthcare trust to grow its pay-out.
Taking into account that the merger with Physicians Realty Trust just closed and DOC is focused on realizing merger benefits, a dividend hike might not be in the cards any time soon.
Based on a present stock price of $19.73, DOC is selling for an FFO multiple of 11.2x. Healthcare Realty Trust Inc. (HR), a leading MOB-focused real estate investment trust, is selling for 11.1x funds from operations. Both trusts services the outpatient market and are growing their real estate portfolios as well as funds from operations.
Healthcare Realty Trust, however, is only having half the size of Healthpeak Properties and does not have merger-related effects (synergy potential, increased portfolio diversification) working in its favor.
Why The Investment Thesis May Not Work Out
There is no guarantee that Healthpeak Properties can capture its projected merger-related synergies. The trust, however, has solid estimated dividend coverage based on its outlook for 2024 adjusted funds from operations which means even with synergies, Healthpeak Properties should be able to sustain its 6.1% yield.
Taking into account that the trust’s growth catalysts are of a long-term nature, I think that the risk/reward relationship here is positive.
My Conclusion
The merger between Healthpeak Properties and Physicians Realty Trust was completed in the first quarter, and now the real estate investment trust can look forward to capturing merger synergies and growing its adjusted funds from operations.
According to Healthpeak Properties’ outlook for 2024 AFFO, the trust should be on track to pay out somewhere around 68% of its funds from operations as adjusted and the trust retains some upside here related to the identification of further merger-related synergies.
In my view, Healthpeak Properties is a compelling investment for passive income investors because of the secular nature of its growth drivers in the senior-focused MOB market.
A growing senior population as well as higher healthcare expenditures point to long-term FFO upside for outpatient medical office landlords, and Healthpeak Properties is at the forefront of this market. Buy.
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