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

Well, good morning, everyone. I'm Josh Dennerlein, and I'm here with Tory Francis and Nicole Phang, who are with me on the health care REITS. We're extraordinarily pleased to have with us Healthpeak's CEO, Tom Herzog; President, CIO; Scott Brinker; CFO, Pete Scott; and Chief Development Officer and COO, Tom Klaritch. [Operator Instructions] Before we open it up to questions, I'll turn it over to Tom. Tom, over to you.

Okay. Thanks, Josh. And I think you introduced our senior executives, so I won't do that a second time. So let's just get started. So after 4 years of restructuring the company, we entered 2020 with a diversified private pay portfolio, strong development pipeline, fortress balance sheet, a strong liquidity position supported by one of the best platforms in the sector. Our focus has been on creating an attractive investment alternative of lower risk, diversified health care real estate with 3 subsectors that each follow their own unique cycle, and all in high barrier to entry markets and that will benefit from the aging baby boomer cohort. So with consideration to COVID, what is our current state of play? Our life science and MOB businesses have performed remarkably well, while senior housing was impacted heavily by COVID. Looking at each subsector, in life science, fundamentals remain healthy as demand for drug innovation is at the forefront. And our tenants are doing quite well. Our year-to-date leasing is ahead of expectations and rent collections are at 99% for the last 2 months. Funding continues to flow into the sector and 2020 already debt records for the most biopharma capital raise in any year, with year-to-date U.S. IPOs totaling over $10 billion and global VC funding of over $15 billion. In medical office, the sector continues to show consistent favorable results, especially now that the bans on procedures have been lifted across all of our markets. Rent collections were 99% in July, and August. Senior housing was hit hard by the first wave of COVID. But since mid-May, we have seen occupancy losses slow while COVID related expenses are coming back in line. But given the uncertainty of the path of COVID, we have retained our outlook framework in our supplemental to assist investors and analysts in the modeling of that business. Despite our optimism with the improved business climate, with the uncertainty of the timing and delivery of vaccines and treatments, we remain conservative in our capital deployment. And we are benefiting from the strengthened balance sheet that resulted from the issuance of long-dated bonds and repayment of all near-term maturities. As I mentioned on our Q2 earnings call, we have had inquiries from PE firms with interest in purchasing senior housing assets. We are working through this now. And if values are satisfactory, we would consider lightening up our SHOP and triple-net. But if not, we are perfectly good to play through and benefit over time from the inevitable recovery of the sector. Of note, we are not considering selling our CCRC portfolio as we deem it to be irreplaceable given the high barrier to entry average campus size of 50-plus acres of land at 400-plus units per property, the 8- to 10-year average length of stay, and professional management with an EV average tenure of 6 years versus 2 years per SHOP. And if we do sell portfolios of SHOP and triple-net, we have sizable opportunities in our life science and MOB businesses to redeploy part of that capital and could also repay additional debt to create dry powder. Our life science and MOB development and redevelopment pipelines offer yields that we believe will generate significant NAV value creation, and we have a number of material densification opportunities embedded in our life science, MOB and CCRC segments, not an area that we've talked a lot about in the past, but we will talk about more going forward. On a final note, our team is working very well in the remote environment, and we continue to improve our infrastructure and systems at a fast pace. So all in, despite the challenges posed by the virus, we are very well positioned to come out the other side an even stronger company. And Josh, with that, we will turn it over to your and the audience's questions.

Awesome. Thanks Tom. I appreciate that intro. Maybe to kind of kick things off, we have kind of a broad audience who aren't as familiar with the story. When you're talking to investors and I think they're asking you like why you should invest in PEAK today. Maybe, what are the top 3 reasons that investors should consider buying your stock today?

Well, it's always hard to narrow to the top 3 because I would say there are a number, but I will. So I would say that the first is our focus on life science, MOBs and CCRCs, which in our portfolio, we all have irreplaceable, high barrier to entry portfolios of real estate. If we look at life science, we have scale in all 3 of the big centers of innovation, San Francisco, San Diego and Boston. In medical office, our portfolio is 84% on-campus and 97% of it is affiliated in total with the nation's leading health care institutions, and we think that is very, very important to today's environment. And our CCRC portfolio serves senior housing in a form that provides an average 8- to 10-year length of stay. It's supported by nonrefundable entrance fees, which has much, much lower attrition. And our CCRC properties, as I said, are set on 50 acres of land each and are all relatively immune and new supply. In fact, in the last 10 years within a 10-mile radius, we have had absolute -- exactly 0 new entrants of supply into our immediate markets. Second reason is we have a highly accretive $1 billion development pipeline focused in life science and MOBs and a $1 billion shadow pipeline in addition to the densification opportunities that we talked about earlier. And finally, our balance sheet is in great shape with net debt-to-EBITDA in the mid-5s and ample liquidity of $2.65 billion, including nothing on our revolver and $150 million of just dry powder cash. So those will be the 3 reasons, Josh.

And maybe to kind of touch on kind of what you said on the 2Q call and also just kind of what you had in your opening remarks about the potential to exit the SHOP in senior housing net lease assets. You spent a lot of time kind of reshaping the senior housing portfolio over the last couple of years to get into this kind of shape it was at this pre pandemic. Kind of what's driving your thinking on maybe a potential exit if the pricing is right? Do you think something has materially changed in that business model?

Yes. I think it's still viable real estate, and there will still be a need, especially for the need-based seniors, so I don't want to miss that fact. But I'll remind you that over the last 4 years, and I said this, but we've sold $5 billion of senior housing off the bottom of our portfolio. So we've had a view of lightening this up for a long time after we finish the spin of our SNF business in our mezzanine business, we did international business for that matter, we did seek to lighten up our senior housing. And we do have a desire to lighten it up some more so when we did receive those inquiries from PE buyers in the midst of COVID, and a PE buyer is going to value it different than we would as a REIT. We're acting off of different models, different incentive models. There's on a levered IRR basis for the 5- to 7-year hold, where they can live with the ups and downs. And ours were -- we seek more smooth growth in cash flows and dividends over time. And senior housing is invariably a bumpy road. It's our view that acuity has increased over time. So the business has changed. The barriers to new development have decreased. A lot of small players popping up, putting up new properties at $20 million to $25 million each, which then creates CapEx issues as well for the older properties and we also think that there's going to be more federal oversight as a result of the stimulus, which drifts us away from our private pay health care real estate strategic item that we have spoken to over and over again. So it really has changed some. I'm not saying it's not going to be a good business long-term because there will be a social need for it. I just don't know if it's as well set for a REIT in today's environment than it used to be. But I'll say again, we do feel strongly that if the pricing is not right, we're going to be happy to play through and all along, we've said that we intend for the majority of our growth to be in life science and medical office, which does, at this point, account for the majority of our NOI and asset value, and we do think that, that's an important part of our growth story, but also a way to differentiate ourselves from some of our peers, which I think is healthy in the investment world.

Great. And when we think about kind of a potential transaction on this side, is there -- are there PE buyers where they're big enough or have enough funds where they could kind of maybe take down the whole SHOP? Or should we kind of expect maybe like smaller transactions here and there to kind of move the needle?

Scott Brinker, you're working on this day-to-day, why don't you answer that question?

Yes. I think it's hard to comment with too many specifics. It's a portfolio that's far smaller than our peers in senior housing, and yet it's not insignificant. I mean, it's several billion dollars. And it's a range of product from Class A, virtually brand-new properties and along the East and West Coast to 20- to 30-year-old properties that are more secondary markets. Some of them need significant CapEx. Some of them are not creating a whole lot of NOI. So as a result, it's a diverse portfolio that will end up having a, we think, diverse group of buyers. But exactly how it plays out is to be determined.

And maybe when we think about -- if something does happen, and we see -- you do a sale, you're going to have proceeds, how do you think about allocating that capital on like the, I guess, on a growth basis, do you think we -- you put it to work in development? Do you think there's portfolio acquisitions you would do? And then maybe a mix between what you would look to invest in between life science and medical office?

Why don't I start, and then I'm going to ask Pete to pick the rest of it up in his role as CFO. As far as the mix, we do have some off-market opportunities in both life science and MOBs that will be very strategic for our portfolio. We were active prior to COVID. We had our growth machine geared up, and we do have some good transactions that we could complete, which would utilize a part of the proceeds, depending on how large the sales are and the amount of proceeds. Pete, why don't you take the rest and how you're thinking about it from a balance sheet perspective and otherwise?

Yes. Sure. It's a really good question, and it partially depends on how much the total proceeds end up being. We said this on this call and in all of our meetings. But we do intend for the majority of our future growth to be in life sciences and MOBs, which already accounts for the majority of our NOI and asset value. And ideally, we'd be able to match fund the proceeds immediately into new acquisitions, but that's certainly challenging to line everything up perfectly. We do have a large development pipeline. And over time, some of the proceeds will be invested into this pipeline, which has around $500 million to $600 million of cost remaining. And we do have the opportunity to repay some debt, too, which we may look to do initially and take our leverage below our run rate net debt-to-EBITDA levels, which tend to be in the mid- to high 5s. If you look at the bonds maturing in 2023 to 2025, they had coupons ranging from 3.4% to 4.25%. So actually, relative to today's rates, quite high. And we could easily delever and create dry powder for acquisitions over time. So we have a lot of different options in front of us. But we're certainly working, as Tom mentioned just now, on building out our acquisition pipeline, which would be a primary source of where these proceeds would go.

And maybe kind of thinking about the dividend and if you sell a good chunk of your senior housing and saying, maybe you can't really match fund it right away. The payout ratio is elevated at this point. Maybe, how do you think about the dividend policy kind of maybe pro forma for any sales or you're potentially considering?

Yes. I really don't have any new updates since our last earnings call from several weeks ago. Maybe I'll give a little extra color. But what I said at that time was the most recent dividend we had announced was $0.01 above our second quarter AFFO. And that given the strength of our portfolio and balance sheet, we're comfortable if our dividend modestly exceeds our AFFO for some period of time. However, if the virus remains a protracted issue, we're going to have to continue to assess our dividend as conditions unfold. As necessary, we would take action to protect our credit ratings and liquidity, which are very important to us as a blue-chip REIT. But at the same time, if we do have sales that result in us having excess cash, we don't have to sit on dead cash, which obviously is very dilutive. We can pay down the debt that Pete spoke to and absorbed the entire additional amount in debt repayment. And then we can issue additional debt in the future as we identify the right strategic acquisitions to grow our way back up to our target net debt-to-EBITDA, which would probably be 5.5x. So we would still stay very, very comfortably in the BBB+ BAA1 range. And regardless of what happens with the sales we have to look to what happens in the senior housing sector, both for us and others as just an industry issue in great part as to how much does that lean on AFFO from our dividend coverage perspective, just based on the decline in occupancy. So we'll be underwriting that. We'll be underwriting the success of these sales and then if we are going to have a shortfall, how much for how long? And this will all come into the equation of the ultimate action that management will recommend that the Board will approve on our going-forward dividend. And then the other thing, of course, to take into consideration is that there are sales of senior housing, SHOP triple NAV, reinvested into life science and MOBs. At some point, there's some kind of a rating change remeasurement that takes place. And that factors in where you've got REITs in different segments of the sector that do really carry their leverage a little different, their dividend payout at a little different level. So we've got a lot of work to do over the next short period of time. We've already been doing a lot of work, but we'll have answers for that either in this upcoming call or shortly after that.

Great. Super helpful. I look forward to the next call. I got some audience questions. Maybe I'll switch to it at this point. The first one. Maybe could we just go through kind of what you're seeing as far as senior housing demand translating into new move-ins, how many of these potential kind of new tenants or maybe on the sidelines or have been on the sidelines? And are they feeling more comfortable moving into senior housing at this point? Are you seeing anything along those lines?

Scott?

Yes. I can take that, Josh. The pace of decline has improved significantly since the peak, and it was really mid-March through May, with April being the worst in our portfolio in terms of the census decline. At that point, only 45% of our properties were even accepting new move-ins. Today, we're up to 90%. And the pace of decline in occupancy has dropped dramatically. It was 90 basis points in August versus July. Move-outs are generally in line with historical averages. There was a period of time in April and May where they were a bit of both due to move-outs, unfortunately, due to death. Those rates have been more normalized recently. And the pace of moving activity, although still a bit below historical standards is accelerating, certainly off of the bottom in April. And it helps, one that 90% of the properties can even accept move in now. The rates of infection in most geographies has come down pretty dramatically, which obviously helps. And then inside of the properties, which is the lifestyle that residents and/or their families are making the decision to move in for, has improved. It's not back to normal. But in most properties, there's at least some level of group activities in group dining. A number of states are now allowing visitation, which is a huge deal. It happened in Florida this week, where visitation is now allowed. And we can even do in-person tours in many of our properties to at least some extent. So all of those things are helping. But what we did see throughout the pandemic, at least to date, is that the need-driven product experienced the most move-ins and probably no surprise, given that the lifestyle inside of the communities was far from normal. That the move-in activity that we did see tended to be on the higher acuity, oftentimes memory care component of the continuum of care, which is fine. There's certainly a need for that product. It does tend to come into lower margin in a much lower stay. So that's the idea looking forward. But assuming that the virus doesn't reaccelerate as we move into the winter seasons, we're reasonably optimistic that the trend in occupancy will continue to improve. But as far as when the bottom occurs, we've always thought about this as a framework going all the way back to April to give a range of our best estimate of the impact of COVID on senior housing because it's just so uncertain. So our most recent outlook that was really intended to cover the third quarter was that occupancy would be down roughly 150 basis points per month. We did quite a bit better than that in both July and August. So hopefully, that will continue into September.

And maybe while I have you, another question out there is, say we get a vaccine today and COVID was no longer a concern tomorrow. How long do you think it would take to get kind of senior housing NOIs in the SHOP segment back to kind of those pre-COVID NOI levels? And maybe tied into that question, is there a limit to how many move-ins like an operator or a property can really process any month? Just kind of thinking about once we get past this, how quickly we can, maybe, come back?

There is a limit. That tends to be more of an issue with new development properties just as they open and all the pre-leasing that they do, and they'll need to stagger the move-ins. I don't see there being so much pent-up demand that operators would be constrained with their inability to move in that many people, that would be a good problem to have, but I think it's unlikely, unfortunately. But as far as the time line to recover all the lost occupancies, there's a range of viewpoints on that topic. Our portfolio today in SHOP is in the mid- to high 70s as a percentage. And we started out in the mid- to high 80s. So we've lost quite a bit of occupancy in the time line to recapture that, I think it's quite speculative. We're pretty focused on what the next quarter looks like and not spending as much time thinking about, is it a 3-year process or a 5-year process? I think there's just so many uncertainties and puts and takes that it'd be nothing but speculation to try to predict that.

Appreciate that. And then one question, I guess, more of a clarification question. I think you mentioned -- it might have been Tom in the prepared remarks, you collected 99% of rent collected. Was that all cash? Or does that include deferred rents? Because some has reported differently?

It's all cash.