Healthpeak Properties, Inc. (DOC) Earnings Call Transcript & Summary

Okay, everyone. Welcome to the next session here with Healthpeak Properties. I'm Nick Yulico, I head up the U.S. REIT research team at Scotiabank. Joining us is Healthpeak Properties, one of the larger U.S. health care REITs. I guess to start off, what we'll do is we'll go through a little bit about the company, and then we will have some Q&A later and you can ask that through your Q&A panel on your screen, and then I'll field those questions and ask them for you. So with that, why don't I turn it over to CEO, Tom Herzog, for an introduction of the company.

Thanks, Nick. Good morning, everybody. With me today are Scott Brinker, our President and CIO; and Pete Scott, our CFO. Healthpeak owns a $20 billion-plus portfolio of high-quality, private-pay health care real estate balanced across the 3 segments of medical office, life science and senior housing, each benefiting from the powerful demographic of the aging baby boomers. As I think you're aware, our first quarter results came in strong, and our balance sheet and liquidity position remain in great shape. As of June 1, we had $2.8 billion of liquidity, which includes $300 million of cash and $2.5 billion available on our revolver. Our leverage is in the low to mid-5s. Our weighted average debt maturity of 6.7 years and no bonds maturing until August 2022 and the amount maturing is fairly small. The next maturity wouldn't be until November of 2023. And we recently received rating affirmations from both Moody's and Fitch. Based on our discussion today, we're really going to be focused more, though, on the balance of the year. With our first quarter results, we provided a 2020 earnings outlook in order to provide investors for the framework to model the impact of COVID-19, which depends, of course, heavily on the duration and penetration of this pandemic and related market disruption. Early this morning, we posted a new investor presentation and 8-K that included a 2 pager of our May preliminary results that are fairly extensive in their information. So let me touch on some of the key highlights, and I will reference a couple of the pages. So if you have that presentation in front of you, why don't you start on Page 11 of the deck, we'll start with life science and MOBs, which, by the way, represents 2/3 of our NOI and 75% of our total real estate value. In life science, year-to-date, our leasing continues to be ahead of expectations. We collected 97% of May rent payments, and the business is doing very well. In MOBs, elective surgery bans have now been lifted across every state. Year-to-date leasing continues to be ahead of expectations due primarily to renewal activity. We've had new leasing activity as well, but renewal activity has been even stronger, but frankly, is more profitable. We've received 96% of our May rent payments to date, which includes the 6% that was deferred under previously announced deferral program that we had put together with HCA. And then in hospitals, we received 96% of our May rent, which was the same as we experienced in April. Now let me take you to Page 12 of the deck. Senior housing, which represents 1/3 of our NOI and 25% of our real estate value, which really, when you look at, you have to look at it in 3 distinct buckets. The first bucket is SHOP. Our SHOP portfolio represents 14.5% of our NOI, and we saw some sequential improvement compared to April. Occupancy declined 190 basis points to 79.5%, with the decline slowing, though, as the month unfolded. Move-ins, move-outs, leads and tours all improved markedly. And 78% of the properties are now accepting new tenants. For CCRCs, 12.5% of our NOI -- let's look to IL/AL and memory care. We broke it down now into the IL/AL and memory care versus the SNFs, which, obviously, operate very differently. So the IL/AL/memory care, which is the vast majority of the profit on the properties, our occupancy declined only 110 basis points to 83.8%. CCRC attrition is much lower than SHOP due to the long 8- to 10-year average length of stay and average $200,000 nonrefundable entrance fee. Move-ins has increased with 67% of our properties now accepting new tenants. SNF occupancy increased 110 basis points to 59% from prior month, but still a huge year-over-year decline. The good news is we expect to see SNF occupancy recover as hospital elective procedures are starting to rapidly resume. In April, senior housing expenses increased only 5%, the low end of our 5% to 15% outlook range that we have set forth in our stock just a few weeks ago. For senior housing, triple net portfolio, which is 7% of NOI, received 97% of our May rent payments. We reached agreement with CSU to defer 25% of rent, which, in the full aggregate for the remaining of our lease term, is only $1.7 million. Because that lease matures at the end of October. And for HRA, they withdrew their rent relief request. So that's no longer outstanding. The last item, senior housing, new COVID cases at our communities are declining rapidly. We are down 75% from the peak, which hit in mid to late April. In summary, we're experiencing somewhat better performance across all of our businesses versus our prior outlook that we set forth in our Q1 supplement. But we do believe it's still too early to change our assumptions with so much volatility and uncertainty remaining from the pandemic in the industry and in the economy. Yet I will tell you that we do find the results to be encouraging. Before turning to Q&A, I wanted to take a moment and look ahead and tell you how we're thinking about a few things. We do believe that each of our business segments will remain vital post-COVID-19, so on the other side of the pandemic. Our on-campus specialist, MOB and our life science portfolios are both very durable. And in senior housing, again, one needs to separate the SHOP from the triple net from the CCRCs, and the SHOP does have significant near-term risk, and -- but less so for the AL and memory care, which, for us, represents 70% of our SHOP portfolio. And leasing activity is beginning to resume. Our triple net, as I said earlier, is in good shape. In our CCRCs with the longer average length of stay and entry fees have lower attrition and are also in good shape. Our balance sheet and liquidity, importantly, are bulletproof. We -- that puts us in a place where we will not be forcing to making noneconomic decisions, what is obviously crucial in the middle of the crisis. And we've been asked over and over, will we take advantage of the stress in the market? And the answer is probably. But we'll only do so when we can do it on a conservative basis. So I do think that those opportunities will come. We're not seeing enough to distress yet, but it could present itself in the future, and we'll do so, and we can do it safely. So Nick, with that, I'm going to turn it back over to you for Q&A.

Okay. Great. Maybe we can just start out with life science, medical office, which is the bulk of the portfolio now. You could talk a little bit about tenant demand in those 2 sectors right now and whether you've seen any change since pre-COVID?

Scott, would you like to take those?

Yes. Maybe I'll start with life science, then I'll cover MOB the best I can without Tom Klaritch. Yes, in life science, we've signed almost 500,000 square feet of leases year-to-date and another 300,000 square feet under signed letter of intent. We've had continued activity in both April and May with nearly 100,000 square feet of leases signed in both of those months. A lot of those have been renewals. The balance of the activity this year has been a significant amount of new leasing activity, especially in our new developments, we continue to have success. So despite the slowdown in April, in particular, in-person tours, we're well on our way through executions and letters of intent towards meeting our full year leasing expectations in that segment. And it's not coming at the expense of shorter terms or lower rental rates. So the supply-demand fundamentals continue to be very strong really in all 3 of our core markets. We've had success. So it's not just 1 submarket, but it's across Boston, San Diego and San Francisco. And then in medical office, it's actually been a similar story. We are ahead of leasing expectations for the year. In particular, we've had strong success on renewal activity in the portfolio. And then a surprising number of new leases signed as well. And the demand for that segment has continued to be strong. We even had fewer tenants than we expected that took us up on the rent deferral requests, so they continue to pay rent. We're in the 95% to 97% range for rent paid out of both of the 2 office segments in both April and May with continued leasing momentum mix. So relative to most real estate sectors, a very positive story out of the 2 office segments.

And in terms of medical office, how much of the portfolio is up and running right now? And if we think about the issue of elective surgery as being delayed in many cases across states, how does that impact the medical office portfolio?

Yes. We're up to nearly 100% of our buildings that are now -- well, they've all been open throughout. But in terms of our tenants being in active practice, we're back up to nearly 100%. There's a handful of dentists, et cetera, that are still not yet working, but we're nearly 100%. Their level of activity continues to ramp up. There was obviously a pretty dramatic decline in April. Most of our tenant base is specialist physicians who are doing, for the most part, elective procedures, and there was a pretty big slowdown in April. There's been a significant now ramp back up in May, but we're still at only about 60% of historical activity in that business, but obviously, moving in the right direction as more and more economies reopen.

And as we think about the life science segment and contrast it with traditional office, is there any -- are there any changes that need to be made to tenant footprints? I mean, clearly, life science is something you can't -- research is something that you can't do from home, so that's a very good thing. But is there any other types of densification issues that are in life science where tenants maybe need to adjust space, which is obviously a big topic in traditional office. I imagine less so in life science.

Scott, I can take that one. I'll give you a break. A couple of thoughts on life science. One of the questions that's come up repeatedly is with office properties, are they easily convertible into life science properties? And the answer is no. With the infrastructure in the way that the properties are designed and built, that's not an easy conversion. So there's not a huge stress from that. And as far as the -- whether the footprint can change in some way, and whether there's going to be a challenge to that space as a result of the -- perhaps the work-from-home movement that could take place, that may be offset in a life science property due to the de-densification that is underway. When you think about life science property, you're probably talking, on average, 50-50 as far as actual lab space versus office space, but you've got scientists that work in the labs during the day and then choose to and desire to office in that same property so they can do their work in the lab and then they can go up and they can occupy their office for the remainder of the work. And from that, there has been a willingness to pay higher rents on lab space so that the scientists can actually do that. So that doesn't seem that, that's going to change. The de-densification probably -- certainly is not a big deal in the lab space itself. That stuff is not going to move back home or into people's garages and whatnot. And the de-densification probably offsets the work-from-home element relative to the fact that those scientists want to do their office work and their lab work inside of the same property. So that probably doesn't change it a great deal. The other thing we're seeing, Nick, is there has been an ongoing flow of venture capital funding going into the space, and a good number of IPOs that have taken place with the biotech tenants or biotech companies. And therefore, that creates a lot of demand for the properties that we hold, which are primarily biotech based. So we feel very good about that business in all those respects.

And in terms of turning back to the senior housing portfolio, I know you did give a bunch of stats today in terms of communities that are open, that continues to increase, leads coming back, tours coming back. Can you just explain at this point what is keeping a community closed? And at what point you think you get closer to 100% of communities in senior housing, again, allowing move-ins?

Yes. Tom, maybe I'll take that, and you can add some color or if you have a different view. But Nick, a year -- a month ago, only 45% of our senior housing properties were open for move-ins. Today, that's at 78%. So a significant increase. And the primary criteria today were being closed to new move-ins is that there was an exposure to COVID within the last 14 days, whether it was a resident or a staff member. So we think that 78% will continue to increase. I don't know that it goes to 100% anytime soon. There is still COVID activity throughout the country, roughly 20,000 cases per day. So until that declines very significantly, I think we'll always have at least some properties that have some level of exposure over the previous 14 days. But we're obviously heading in the right direction in a pretty material way over the past 30 days.

And we did get some questions sent in. And just a reminder to everyone, if you want to send in a question, please go ahead, I can read them for you. So this one is on how are rental rates trending for your senior housing operating business? How have you changed your strategy on renewals and concessions?

Yes. I'll take that, and the team may have some additions. We're not expecting that REVPOR is going to come under significant pressure, at least not in the near term. Prospective residents are not making their choice based on $200 a month right now. They either need the product or they don't. So it's not a point in the cycle where discounting is going to drive a lot of occupancy. And certainly for existing residents who generally are paying increased rates either on the anniversary date of their move-in or on January 1, they're not incentivized to leave. If anything, right now, they would be more incentivized an effort to stay in the community. And we continue to have reasonable pricing power on those renewals. We're not considering early renewals at this point. And then looking forward, ultimately, it is a supply and demand business. And occupancy is lower today across the industry than it was 2 months ago, and that will probably be the case a month from now as well. And there may be certain properties and operators that decide to compete on rate. At least within our own portfolio, we've only had 1 operator suggest that they might consider that approach at specific properties. The balance has indicated that they're more likely to hold rates at least through 2020. But there may be some pressure in certain markets, Nick, if occupancy falls enough, especially on new development, if it's not leasing up. But so far, we've been more focused on occupancy and the cost of labor as being the primary drivers for senior housing and not so much a big change in rate.

Okay. And we've got another question here about the sustainability -- a question on your perspective on the sustainability of your dividend. So obviously, other companies have cut the dividend. In your sector, you have not. Maybe you could tell us a little bit about the thinking on whether you think the current dividend is sustainable?

Well, we think it's absolutely sustainable and safe. It's a conversation that we had early on in the crisis is, first of all, what are the big drivers as we see it as it pertains to how we are approaching the crisis and then also how do we think about our dividend. One is we looked at what is the essential nature of our real estate coming out the other side of this pandemic. How good do we feel about it? And we looked at biotech and felt that, that was going to be a very, very strong business throughout and on the other side of the pandemic. We looked at our MOB portfolio and concluded, we've long had a view that on-campus and strongly anchored MOB properties was the play that we wanted to make. And for a long period of time, was because of urgent care centers, retail clinics, we thought post the threat, certainly telemedicine, post a more recent and even potentially a larger threat. So we feel really good that only 4% of our properties in MOB are off-campus and not anchored. Therefore, 96% are either on-campus and anchored, 84% of those are on-campus. When we look at senior housing, despite the fact that the difficulties that have been encountered, the societal changes are here. In other words, families are not -- households are not set up to take care of memory care seniors at home anymore or when daily living needs, such as baby and bathroom medications, et cetera, are required to have 2-worker households. So we do believe that senior housing will have a recovery quicker in AL probably than IL. But we think that all 3 categories of our private pay portfolio are going to be vital on the other side of this pandemic. That was item number one. Item number two is liquidity and balance sheet, and like I said earlier, were bulletproof. And item number three was will we take advantage of distress, and because we do have a balance sheet to do that. We can do it right now if we want to -- we don't think the distress is near deep enough to make that interesting for us, but it could become deep enough. And at that time, we will look at it. But we'll do it conservatively, protecting our balance sheet first. And then that brings us all the way background then to how do we think about dividend. From a dividend perspective, we feel that with our portfolio, with our liquidity, with our balance sheet, we have very few near-term maturities that our dividend is safe, and we're at 91% coverage in Q1. If it goes upside down a little bit over some coming quarters for some short-term period of time, take the present value of that deficit, bring it back into today's dollars, set that off against your NAV, and what does that amount to? Maybe it's -- who knows, $0.15, $0.20, $0.30 a share. It doesn't amount to anything. Talked to many, many investors, as I would have frequent phone calls with investors during the last quarter or so as to how we're thinking about different things. And invariably, investors said, "We would vastly prefer you to maintain your dividend. You guys are in great shape. There is no risk. Do not touch your dividend." That's the feedback we've received to date, and that's how we, as a management team and a Board, feel. At the same time, as we go through this crisis and depending on the length and severity of it, we'll continue to revisit it, but we feel very good about it right now.

Okay. Thanks, Tom. We got another question here about senior housing, about the industry. How do you see the industry supply-demand dynamics (oversupply) changing due to COVID? So I guess it's a question about supply. Is that to support pipeline change because of COVID?

Scott?

Yes, I can -- we start with that one, Nick. For the last 2 years, there's been a steady decline in the number of new starts in senior housing, which, over an 18- to 24-month period, then leads to lower new deliveries. So I think logically, there's going to be a continued deceleration in new starts, certainly for the next -- the previous 2 months. And the next couple of months looking forward, I would expect almost no new activities. So if you look out 2 to 3 years from now, that will be an incremental positive from a supply-demand standpoint from the answer we would have given 3 months ago. So that's a good thing. We also look at the cost of labor. And although for the near term, it's going to be higher than it would have been. If you look forward, the unemployment rate is going to be materially higher. That should lead to a bigger pool of workers so -- at least over time. So there are some reasons to be more optimistic today than even 3 months ago about the intermediate to long term for that business. And yet, it is going to be incrementally more challenged in the interim.

And another question here about the transaction market. Maybe you can go through, for the different asset classes, what you're seeing in terms of asset sales happening. Our understanding is that medical office, in particular, has stayed very liquid throughout this, and pricing hasn't been impacted as much. But maybe you could talk about what you're seeing in the transaction market for medical office, life science and senior housing post-COVID.

Scott, do you want to take that?

Yes, yes. And Tom, jump in, for sure, if you like. But Nick, in the 2 office segments, we've seen, if anything, increased interest in that -- in those segments. So we're not expecting any decline or any increase in cap rates. If anything, they might decline given the sustainability of the cash flows. And in the case of life science, I think incrementally, positive news, both on capital raising as well as support in Washington and from the FDA that, if anything, would give investors even more reason for optimism about that business. In senior housing, of course, we were planning to sell a couple hundred million of assets. It was really the final wave of our noncore asset sales, which totaled almost $5 billion over the past 4 years. And a month ago with earnings, we reduced our earnings or our disposition guidance, in part, because we thought that the senior housing sales would be slowed down. We still expect to complete them. But there was very little activity for the 6 to 8 weeks in April and most of May. And then in the last couple of weeks, it really has started to pick up pretty significantly in terms of interest. Things that were put on pause are now moving forward again. And portfolios that we were actively marketing, we're starting to get a lot of interest. So reason for optimism that senior housing, the demand for that sector from investors, is certainly not going away. And Nick, I think we got about 1 minute left.

Okay. Great. So with that, maybe I'll just -- guys, if you want to just wrap up with some closing comments that you think is important for investors to be aware of right now?

Yes, I would say the one guy that didn't end up speaking on this call is Pete just -- I think that's attributable to the fact that he's got the forecasting so dialed in, had a great outlook and framework in the way that he's laid this thing out to The Street is left -- provide a lot of information with a lot of questions because it was so well done with the disclosure. The balance sheet and liquidity is in very, very tight shape. And that's testament to the work Pete's been doing for the last year, tightening up our debt maturities and they're linking then them out and lowering the rates. And that liquidity has been a big, big deal for us where we do not -- we are not in a position to have any worry about noneconomic decisions so we can run our business, we can make the right decisions, and then decide if we're going to see some opportunity on the other side of this, which we think we will. All 3 businesses are doing -- well, let me reword that. 2 businesses are doing really well. One of them is in the middle of, obviously, a crisis, but I think you will see the other side of the crisis in good shape. And so as we go forward, we do think we have a fair amount of upside. If you take the sum of the parts of the company, which I think investors are probably doing that math, analysts are doing that math, I think you'll find that the value proposition looks quite good right now. So we feel good about where things are going.

Okay. Great. Well, with that, Tom, I think that's a wrap. We'll end there. Thanks, everyone, for joining.