Stock of Healthpeak properties: still too high (NYSE: PEAK)
These days, there are many different ways to play in the medical industry. For those who appreciate the medical space, an attractive opportunity is to buy REITs that lease their properties to various medical companies. This provides the advantage of traditional real estate investing while avoiding the risk that can often come with buying into some of the most volatile medical companies. Fortunately for investors, there are a number of players to consider. A fairly large prospect is a company called Healthpeak Properties (NYSE:PIC). In recent years, the management has done well to increase the company’s revenue at a good pace. Cash flow was a little more volatile, but generally robust. The most recent data provided by management shows a company that has reached a significant milestone in terms of revenue. And as a result, the company’s shares are trading at levels that should be considered quite high. Due to this high price, investors should be careful if they decide to bet on this prospect.
Recent performance more or less in line with expectations
I last wrote about Healthpeak Properties in an article published in June 2021. At that time, I called the company a decent game for patient investors. I applaud the company’s revenue growth over the past few years, but pointed out that its bottom line has not kept pace. This, combined with the high multiple the company was trading at, led me to ultimately rate the company as a neutral prospect. And since then, stocks have behaved more or less as I would have expected. While the S&P 500 generated a return for investors of 4.6% over the period covered, this particular outlook resulted in a loss for investors of around 1.6%.
This lackluster performance should not be viewed as a negative view of the company’s business model. In fact, the company’s overall business model looks attractive. Consider the company’s 2021 fiscal year results. That year, about 49% of its profits came from life science tenants, while 40% came from medical office tenants. An additional 9% of earnings came from real estate tenants in the Continuing Care Retirement Community, with the remaining 2% coming from miscellaneous properties the company owns. In total, the company has grown to have a fairly large footprint of 484 properties, and with a market capitalization of $18.25 billion, it’s certainly a sizeable player to contend with.
If the business model hasn’t been the issue, then maybe the financial performance is the issue. But that doesn’t seem to hold up well either. When I last wrote about the company, it only released financial results for the first quarter of its fiscal year 2021. Since then, the company has released three additional quarters of data. It takes us through the Financial year 2021. And in that year, the company generated revenue of just under $1.90 billion. This represents a 13.9% increase from the $1.66 billion generated a year earlier. This increase in sales is due to several factors. Chief among them was an increase in the average number of square feet occupied by the business. In the life sciences category, occupied square feet increased by 16.4% compared to fiscal 2020. For its medical practice portfolio, this growth is 4.1%. And for assets in the continuing care retirement community, growth was 4.9%. Part of this expansion appears to be tied to the company’s growth initiatives. Last quarter, for example, the company had just completed a $49 million project representing 172,000 square feet of medical office space at a facility in Tennessee. And to move forward, management has other plans. They are currently working on the first phase of a $393 million, 343,000 square foot life sciences development in San Francisco that is expected to see initial occupancy in the second half of 2023. Investors should therefore expect that the average square foot occupied in the company’s portfolio continues to climb.
On top of that, the company has seen improvements in the average annual rent per square foot. For life science properties, this year-over-year growth was 4.8%. For medical office buildings, it was 3.3%. On top of that, for its life science properties, the company saw a slight increase in occupancy from 96% in 2020 to 97% in 2021. However, it’s worth mentioning that its other two classes of assets saw occupancy rates drop, medical office buildings from 91% to 90% and retirement community assets in continuing care from 81% to 79%.
Ultimately for 2021, the company also performed well, but far from great. FFO, or funds from operations, was $610.89 million. That’s down from the $693.37 million generated a year earlier. Adjusted FFO, meanwhile, fell from $772.31 million to $734.03 million. Operating cash flow, however, actually improved from $758.43 million to $795.25 million. And EBITDA went from $769.10 million to $1.05 billion. For fiscal year 2022, using the company’s current share count, management expects a median FFO of approximately $933 million. The adjusted equivalent of this amount is expected to be approximately $922 million. Management did not provide any guidance for other profitability metrics. But if we assume the same kind of growth rate that we should see with adjusted FFO, operating cash flow should be around $998.9 million while EBITDA should be around $1.32 billion.
Using this data, we can effectively assess the business. On a price/FFO basis, its multiple stands at 29.9. The price to adjusted FFO multiple is 24.9, while the price to operating cash flow multiple is 22.9. Meanwhile, the EV/EBITDA multiple with the company is 23. If we assume the 2022 forecasts and estimates are correct, those multiples would be 19.6, 19.8, 18.3, and 18.3, respectively. . To put the company’s pricing into perspective, I decided to compare its 2021 estimates to the results of some other similar companies. On a price/operating cash flow basis, these companies ranged from a low of 9.3 to a high of 27.1. Of the five companies I reviewed, Healthpeak Properties was more expensive than all but one. I also looked at the business through the lens of the EV to EBITDA multiple, which gave a range of 12.3 to 31.4. And again, four out of five companies were cheaper than our prospect.
|Society||Price / Operating Cash||EV / EBITDA|
|Properties of Healthpeak||18.3||18.3|
|CareTrust REIT (CTRE)||12.2||16.6|
|Omega Healthcare Investors (OHI)||9.3||12.3|
|Pit Tower (PIT)||27.1||31.4|
|Healthcare Trust of America (HTA)||17.5||19.6|
|Medical Properties Trust (MPW)||17.9||17.3|
To take with
Based on the data provided, I will say that I think the long-term outlook for a company like Healthpeak Properties should be positive. If management can achieve the kind of growth it expects for fiscal 2022, stocks might start to look a little unattractive. But as they stand today, they just seem too high for a value-oriented investor like me to consider buying there.