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

Well, thank you, every one, for joining our next panel, focused on health care real estate. We hope you had a good day yesterday with a bunch of panels and today morning as well. As a reminder, I'm Vikram Malhotra, one of the Morgan Stanley REIT analysts. And obviously, there are concurrent panels going on. So we appreciate you joining in. Very excited today to have 2 experts in the health care space, both representing the public and the private -- both public and private investors. We have Tom Herzog, who is the CEO of Healthpeak, I'll introduce him in a bit; and Mike Gordon, who's senior -- Chief Operating Officer for Harrison Street. Before I get in, let me just quickly read some disclosures. So please note that this webcast is for Morgan Stanley clients and appropriate Morgan Stanley employees only. The webcast is not for members of the press. If you are a member of the press, please disconnect and reach out separately. For important disclosures, please see the Morgan Stanley research disclosure website. And if you have any questions, please reach out to your Morgan Stanley sales representative. With that, let me quickly introduce our panelists. So Tom has been the CEO and a member of the Board of Directors since 2017. From June to December 2016, he served as EVP and CFO, a role he formally held from April 2009 to May 2011. Before that, he was the CFO of UDR. For those of you who don't know that's an apartment REIT. And prior to joining UDR, he served in various CFO and CEO roles in the real estate industry and spent a decade at Deloitte & Touche. Mike is the -- as I mentioned, the Chief Operating Officer of Harrison Street. He leads Harrison Street's efforts to -- on the investment strategy as well as expansion into new sectors and strategies across North America. Prior to joining the firm, Mike worked with the transactions group of prudential real estate investors. So both, as you can see, have had a long career across the real estate space with a focus on health care. Thank you, both of you for joining and doing this. I know you're very busy, but hopefully, we can have a good discussion today.

Maybe just to start off very high level, assuming we're sort of coming out of COVID, and we can look forward to sort of bigger days, in a post-COVID world, can you sort of just high level rank the long-term fundamentals and the growth prospects for the broad categories, meaning senior housing, skilled, medical office, life science and hospitals. Maybe Tom, we'll start with you.

Sure. Yes. Thanks, Vikram. And thanks for having us. When I think about the post-COVID world, what this thing looks like on the other side of the pandemic, I really do think that all 5 categories of health care, real estate are important for the delivery system. I know that doesn't mean we don't have our preferences at Healthpeak because we did undergo a massive reblasting of our portfolio over about a 4-year period, where we shifted away from the government reimbursed type of health care real estate into the private pay categories of real estate, of life science, medical office and senior housing. So those are our preference. That doesn't mean there aren't any good plays to be made in the government reimbursed sections as well. But as I look at them individually, let's start with medical office. We like medical office for the consistency and the collectability of the rents. It's kind of slow and steady, but it does continue to take advantage of the increasing health care needs of the aging baby boomer population and the shift that continues to occur to outpatient services. When you think in terms of health care spend at 18% of GDP and rising, there will be -- the government just has to and the country has to see more efficient ways to provide health care and outpatient treatment is certainly one of those. So we do like MOBs for that reason. And in particular, on campus, which we'll come back to, I'm sure, later in the discussion. Life science has just fantastic right now, supply and demand fundamentals, particularly in the 3 hot beds of San Francisco, San Diego and Boston. And the fundraising has continued to be strong along with the societal mandate of driving scientific innovation, which has become more clear now than ever in the face of COVID. So we love that business. Senior housing, that's a more interesting discussion, as you can imagine. The demographics are fantastic. The baby boomer wave, we'll be hitting pretty hard beginning in the next couple of years. It is a need-based delivery product. It's not going anywhere, but it's going to be a bumpy ride for a couple of years. So there's -- there'll be some challenges for sure. But in the midst of this pandemic, it also highlights the fact that new supply is going to become less of an issue. And wage pressure will become less of an issue. So when I think about where there could be some significant upside, senior housing could be that, but maybe for a bumpy ride for a period of time. When I think about hospitals, that's still, by the way, 5% of our portfolio as we've been slowly winding that down over time. The reliance on government reimbursement is what steered us away from that. But obviously, it continues to be a critical part of the health care delivery system in the country and will remain, for sure, in some form, although maybe downsized as more and more of that -- the treatments move toward outpatient and MOBs. And then finally, skilled nursing, we are not an owner of stand-alone skilled nursing. Healthpeak, back when it was HCP, obviously, it was a huge owner of it. The government reimbursed portion, the stroke of the pen risk was something that we concluded we did not want as a part of our portfolio, not that it's not a good business for others because it sure produces a nice yield, but we want to be a more consistent dividend payer through the cycles and therefore, chose the 3 categories of real estate that are more pure real estate play spectrum.

Fair enough. Mike, sort of how would you -- I'm assuming you'd agree with a lot of it, but where would you differ?

Yes. Let me walk through, each of the sector is more high level, but not dissimilar from Tom and Healthpeak. Yes, Harrison Street is really primarily an investor on the healthcare side in private pay, senior housing, being IL/AL, memory care, on and off-campus, medical office, specialty subsectors, including behavioral health and patient rehab in addition to life science. So I'm happy to speak to broad long-term fundamentals. But when assessing growth prospects and bottom line performance, there's a number of variables that lead to a pretty wide range of outcomes, a quality strategy operator, health systems, the overall economy inflation being a major driver. As far as ranking the various segments, I'd say that life science would be the first. As I've shared with Tom in the past, I've got some major portfolio, I envy Tom. What Healthpeak has been referring to over the years is pretty impressive. But that's been a great story. There's a number of tailwinds, I'm sure we'll get into later in the discussion. We were talking NOI growth last week. And I peg NOI growth within that space at 5% plus, which is the byproduct of 2%, 3% lease bumps and 1% to 3% rate growth from leasing activity, whether it be renewals or new leases. There are extraordinarily high barriers to exit, given significant investment by the tenants and the FDA requirements make it really difficult to move out of your space. I'd say that next up would be senior housing, which is the largest allocation within health care in our broad portfolio. Well, 2020 has been and will most likely continue to be challenging, and we expect pretty positive trends going forward, primarily driven by basic supply and demand and a flushing out of new entrants and weak players, it's at peg mid-term NOI growth here at 4% plus. Next off is medical office, I would classify as 1/3. The sector has been a solid story. We see very positive trends in both on and off-campus medical office, specialty assets, certain postacute facilities. And where I'd peg midterm NOI growth somewhere around 2% plus. Next would be skilled nursing facilities. Frankly, even before entering the limelight during COVID, many SNFs were struggling to stay afloat and provide quality care. It's been -- it's really become evident that Medicare and Medicaid reimbursement has not been adequate. And thus, federal aid has just been pretty essential to operators' abilities to pay expenses and rent. And I peg midterm NOI growth a little bit more from an uneducated bend just because the fact that we don't live and breathe the sector, but somewhere around 2%. Having said that, there's a lot of nuances here that make this forecast pretty challenging, and namely the magnitude of lease restructures needed to provide adequate coverage, especially to the large publics. And then last, again, not dissimilar from Tom, I would classify general acute care hospitals as they've been particularly hard hit. There's many systems in hospitals that just won't recover. It will certainly be a story of haves and have-nots. And I'm not going to provide a forecast for NOI growth here in this segment. But I will say, as I mentioned earlier, that we're big believers in certain postacute hospital settings, such as IRFs.

That makes sense. And thanks for providing the high level cover -- the color. I know it's tough to forecast NOI growth. And so I'm going to assume, when you say midterm, it's kind of like a 3- to 5-year view, which kind of -- which I agree with it makes sense. Maybe just digging into senior housing, obviously, that's been a key focus and a debate amid COVID. What I'd like to kind of understand from each of your perspectives is: number one, we've seen second derivative improvement in May from April. I'm wondering if you have even any qualitative color you can talk about early June. And without -- I know you haven't published updates, but even qualitatively, are we similar to the inflection we've seen in May, is it a little better, a little worse? And how you see the so-called pent-up demand that people talk about playing out? Is it a 2020 second half event? Is it a -- it's more protected longer term? So how do you see the recovery shaping up at this point in time? Maybe we'll start, Tom, with you.

Sure. We're not going to comment on June just yet, Vikram. The information is still coming in. The month is too early. And we like to scrub it down a little bit before I provide remarks publicly, as you can imagine. April, obviously, that had been a tough month, and we had seen dramatic declines in move-ins, move-outs, tours, dramatic downward assessment, I guess, of move-outs and a downward assessment of move-ins and tours and -- in the month of April. And then we saw some recovery that occurred. I would actually reference you to an 8-K that we put out pre-Nareit. Well, I think it was on Wednesday morning, where we actually provide the statistics for each of the different categories of senior housing that we have. So that would give you the specifics. But certainly, it was a surprise to the upside for us that the move-in, move-out data and the attrition of occupancy improved during the month of May fairly dramatically. And we had more assets that were open for admission than we had at the end of April as well. So certainly, it had been -- there had been a reopening that had occurred. From a pent-up demand perspective, I would put it this way, within AL and memory care, it is very much of a need-based product. Those seniors continue to have needs that can't be met at home. Society just as in United States is not set up to take care of those needs, especially when you have dual income households where people then need to get back to work or find that they really can't take care of those responsibilities at home in the first place. So we were seeing, even with our portfolio, which, as you know, is smaller than some of the others on the SHOP side, pent-up demand of 200 or so requests to move in. And for us, that represents greater than 1% occupancy across our SHOP portfolio. That continues today. So as we have allowed new move-ins to occur, they have been replaced by additional seniors that have made requests. And that's not based on live tours that have occurred because we've not allowed our operators, and we've got 20, 25 of them, have not allowed live tours in the communities. That's been through video tours, has resulted in that much demand. Not so much on the IL side, which is obviously more lifestyle-based, but also social needs that need to be cared for has resulted in some people still putting themselves on the list but much, much more directed towards the AL and the memory care.

That makes sense. Mike, are you seeing sort of similar -- have you seen similar improvements in May and any early indications or thoughts around June that you can provide?

Yes. Well, I can be a little bit more of a cowboy than Tom relative to sharing forecast. I'm just -- I'm not going to do it. But anecdotally, we own 130 communities in 29 states across the U.S. scattered amongst 23 best-in-class operating partners. I will share with you that about 4.5% of our residents have tested positive for COVID. And unfortunately, 1.5% of our residents have passed, albeit virtually all these residents had comorbidity. Across our portfolio, we've experienced about 2.5% attrition per month since early March. The vast majority of move-outs have been because of death. There are a number of reasons to move out of a community and the 2 others kind of change of pace, whether it be moving back in with your family, moving to a new geography, moving to another property has virtually been halted. In addition to moving into higher acuity facilities like SNFs has also gone down dramatically. And unfortunately, movements have also halted or been materially reduced. So there has been a profound 2.5% attrition rate over the course of the past couple of months. Having said that, sharing a statistic that we're pretty excited about, we currently have a nearly 500-person wait list. And to the extent that we are able to convert the lion's share of these deposits, that will reverse more than a month of attrition. To share a bit more data, 85 of our communities have experienced 0 to 1 COVID death. About 15 of our communities, all of which are located in federally declared to long-term investors, while other segments that we're recovering today are more or less income producing, steady and predictable performers over cycles. Senior housing really either benefits from or takes it on the chin relative to supply and demand, and it plays a huge role in performance. If you focus on the fact that the primary users of senior housing are in the 80-plus age cohort, and broadly, statistically, it's expected that there's going to be a 50% increase in 80-plus age group over the course of the next decade. And the population of those that are 85-plus expected to nearly double during the next 20 years. There is obviously a compelling force of demand that should continue to really benefit the space. We can get into supply to the extent that you're interested in going there. But when you look at an increasing and exponentially increasing pool of demand against the backdrop of supply that, frankly, we see growth is slowing down dramatically. Pre-COVID, post-COVID, there's a lot of very interesting tailwinds here that should benefit the space.

That makes sense. I agree with a lot of what both of you said. We just can see how the so-called pent-up demand plays out. [Operator Instructions] I'm going to weave in a few questions that we've got into our discussion. Before we turn to medical office, as you both referenced, it's a key part of your portfolio, is in a focus area, just very high level quickly. From each of your perspectives, what's your view on the chances of government providing aid to the seniors housing industry just like they have for the skilled nursing, whether it's grants or increased loans, Mike, do you want -- I'll start with you.

Yes. I've had a number -- and by the way, it'd be a remiss if I didn't apologize for the fact that our conference room lighting system just went out. We decided to open the office yesterday, and it's pretty thin over here. So I apologize for that. But it's interesting. We've had a number of conversations across operating partners, frankly, with our law firm and other consultants just discussing this this very point. We actually had an interesting conversation over the weekend about it. With support comes regulation. I'm not sure what the support is going to look like, I'm not sure what the regulation is going to look like. But to the extent that operators ask for and receive support from the government, I'd be surprised that in the case the government doesn't ask to enhance regulation over the space. So it's very early on in kind of the discovery of what that's going to look like. But frankly, it's coming. We're starting to see large operators receive reach out from the government asking a variety of questions, not dissimilar from the questions that they ask from an operating perspective of skilled nursing providers. And it kind of -- it's incumbent upon the industry and collective associations and frankly, our lobbying friends to help to kind of moderate that regulation to the extent possible. But again, early on, but I do think that something is coming.

That makes sense. Tom, anything different you've heard or view?

We also have been following it closely and have Board seats on ASHA and Argentum within our organization. So we are tracking it. The -- we've heard -- let's put it this way, there have been conversations by ASHA and Argentum with the correct government officials, making the case and seeking to capture support which, in my mind, only makes sense. There are many, many moves that senior housing operators and communities are taking to keep people safe. That includes the various protocols, the PPE, the testing, the limitation on move-ins, and that is very costly for everybody. And so it's hard to understand why at some point, there wouldn't be some relief on that front because that's hard to sustain for the long term. We have heard positive, at least optimistic views that there will be some relief. At the same time, we've heard that, that is a little sketchy right now. So we'll have to wait and see. And I'm with Mike, regulation is -- it can be concerning if it's overly heavy-handed. But at the same time, we feel that if there's some regulation, at least we know where the guideposts are on what the operators are and are not supposed to do. And with that, maybe there comes some form of immunity. If everybody's trying to do the right thing, there's not gross negligence or willful misconduct, which would be a good thing for the industry. So mixed feelings on all these different topics, but certainly, some kind of relief would seem to make sense to me.

Yes. Yes. Hopefully, I'm -- knock wood, I'm hoping there is some aid because certainly, there are a lot of operators that need that. I'm glad to hear that residents in both your communities are -- you're seeing better trends in terms of COVID. Let's just -- moving on to medical office, we have about 5 more minutes. Medical office, as you both mentioned, sort of provides more stability, steady grower, I want to touch upon 2 aspects here. One, your views today about this debate between on and off-campus. I've heard anecdotally from a bunch of your peers, off-campus seems to be performing better and hospitals seem to be more open to it. So how do you view on and off-campus? And do you anticipate shifting your investment strategy more towards one over the other? And then related to that, there was a comment around hospitals having financial challenges. Hospitals have been very reticent if part with their real estate historically. Do you see that changing going forward as it relates to their medical office holdings? Maybe Tom, we'll start with you.

Sure. As to hospitals having financial challenges in investing or hanging on to their medical office real estate, that seems very possible that we could see more of that and more opportunity on the site of Harrison Street or at Healthpeak, we're a capital providers for that type of real estate. So actually, I'm hopeful that, that is an outcome, and maybe there can be a win-win for us and the hospital organizations as they need capital. From Healthpeak's perspective, I have heard coming out of Nareit here, what everybody is talking about that there is some reluctance at least or viewpoints from some of the MOB holders that there's some reluctance of some patients to go on to hospital campuses. It's our view that, that is short term, that the longer-term consideration is that you've got urgent care centers, you've got telemedicine, you got retail clinics that do provide a real threat to off-campus, nonanchored MOB properties. And especially when the work-from-home situation could create more open office space, whether or not that occurs, but it seems like it could. We have long been of the view that the on campus and anchored MOB properties has been our strategy because that's where the specialists reside. And the specialists are not going to be displaced by urgent care centers and telemedicine for the obvious reasons. So we continue to like that business much, much better. We'll forego this 75 to 100 basis point differential that can occur in pricing in the off-campus. But I also understand there will be some others that have the opposite view, but we'll stick closer to the on campus and the anchored properties that help you.

Makes sense. Mike, what's your view?

Yes. In the spirit of diversification, we invest both on and off-campus. Frankly, we do see the trend of moving services off-campus is absolutely here to stay. Now frankly, it's surprising that it's taken this along. And the primary driver is our cost, consumer preference and the ability for health systems to really open up new potential submarkets in kind of the battle to gain market share and play defense, it's kind of a necessary evil. And frankly, a pretty interesting strategy. With outpatient revenue outpacing inpatient for most nonhigh-acute procedures, this trend will -- it will continue to as it's lower cost with better outcomes, and it's, frankly, a better patient experience. Demand for outpatient care has outpaced inpatient services, I think, since 2015. What I read recently is an older patient population that requires more frequent care has really recognized the advantage of shorter duration, lower price point, outpatient visits. There's going to be a massive increase in the 65-plus population during the next 10, 20 years as we've discussed, and they're choosing outpatient services. 65-plus goes to the doctor 2.5x more than those under 45. And again, when considering a low-cost environment and the potential to gain market share in a pretty competitive landscape, it seems like a no-brainer for health systems. So we're not actively -- as Tom was alluding to, investing off-campus with one-off GP practices. It's got to be anchored by a dominant health system, a strong private physician practice. But again, frankly, I really don't see much of a need for most elective procedures to occur in hospital settings. There's a risk of infection from other acute care procedures in the hospital, off-campus is more convenient for doctors and patients. Doctors want better lifestyle, which means easy access to parking, building entrances, 1 to 3 stories to cut elevator rides. And frankly, I think COVID will probably reinforce this desire. So again, we're certainly not afraid to be heavily investing in off-campus settings.

And let me add, Mike, if I could?

Makes sense. Sorry, go ahead.

We actually agree with you that the anchored off-campus setting is a very good alternative, and there is more and more of this is -- that is going to be moving to outpatient so we also like that product. The on campus where the doctors still make the rounds in the hospital and have the medical office property that might be right adjacent or possibly even attached to the hospital still has merit. So we actually like both of those 2 products. So we're probably not too different apart on how we're thinking about it.

That makes sense.

Yes. Totally agree.

Just want to quickly address -- I know we have just maybe a minute left, but quickly address the question that came and one that I was planning to ask. You both raised life science is a pretty good area to be in today, longer term, the growth prospects look really compelling. But given how tight some of the markets are both -- on both sides of the coast in Boston and in San Francisco, do you anticipate new pockets emerging around the country? Are there areas that you might be exploring or thinking about where you could see more life science supply and demand crop up? Mike, maybe we'll start with you.

Absolutely. Appreciate it. So yes, we certainly do. When considering funding sources for life-changing pharmaceuticals, what's interesting is I recently read statistic that only about 5% of known diseases worldwide have some sort of treatment. So NIH funding is not going anywhere. Roughly $40 billion from the NIH, roughly the same amount coming from health-related charitable giving. And interestingly, only about 40% of that funding is to institutions within the cluster markets, including Boston, San Fran, San Diego, RTP, New York. So there's kind of a jump all for the other 60%. And a lot of the large institutional investors are really focused on those clusters or the emerging clusters like D.C., Maryland, Virginia, Philly, Seattle, Austin, but something that a bunch of the current listeners might know about us is that we're large investors in university housing, and we're currently investing about 120 college towns across the country. And we've really witnessed the collaborative nature of research in these settings, and universities have been commercializing their IP for years. And that's really beginning to accelerate. The profit associated with university innovation has become mission-critical to their endowments. And many of these innovative drugs are being discovered in conjunction with pharma. So we're seeing research districts being thoughtfully developed at institutions across the U.S. in college towns that are major beneficiaries of NIH and charitable funding, such as St. Louis and Pittsburgh, Ann Arbor, New Haven, Portland, to name a few. And these are markets that already have a compelling amenity infrastructure, highly -- have high livability and are areas that are attractive to an educated and concentrated workforce in the sciences industry. Now importantly, you've been seeing a lot of big pharma place flags and thus needing space in these university towns is -- investment into university incubated biotech is really been increasing quite dramatically. It's almost like M&A is the new R&D, which I know it sounds like it's been talked about for years, but we see a real opportunity. And we're starting to make a pretty big splash in kind of the cross section of education and health care and helping to build lab buildings in these types of markets.

That makes sense. And so Tom, just to wrap with you, you've pretty sizable holdings now on both ends of the coast. Any one or 2 markets that you're thinking about from a life science perspective that you may look to enter?

Vikram, no. And I actually like Mike's and Harrison Street's play on the universities. We're not in that, but I think that's a nice play. We've chosen to stay close to the 3 hot beds of San Diego, San Francisco and Boston. We -- our offering is primarily to biotechs, and biotechs oftentimes start out with a $40 million funding and 30,000 square feet of space, and then they grow with us. So for us, it's very important to have clusters of assets with campuses that they can grow with us. And we've got a nice pipeline of development that can continue to meet that need. There is very, very low vacancy, and we continue to receive a lot of demand. So we'll continue to try to anchor our position in those 3 markets for now. So we feel good about that.

Great. Great. Well, this was really helpful and exciting. And hopefully, as I said, the trends keep improving in each of your portfolios from a COVID perspective. The next time we do this, either the group or individually, I'm hoping it's in person. So thank you again very much, and thank you, everyone, for listening in. Just a quick plug, the next panel will be at a different link. So please look for that, and it will not be on this. But thank you, again, both of you for doing this. Have a good rest of the week.

Thanks, Vikram and Tom. Great spending time.

Thank you, guys, and thanks, everybody. Bye-bye.

Thank you.