Executives are still upbeat about life sciences despite big bet on medical
By Murray W. Wolf
One of Healthpeak’s most recent life sciences real estate (LSRE) projects is the $161 million, five-story, 148,500 square foot Nexus On Grand lab building in South San Francisco. The REIT has the Bay Area’s largest LSRE portfolio with more than 5.2 million square feet of lab space and about 1 million square feet of entitlements. (Rendering courtesy of Healthpeak)
A previously announced merger creating a healthcare and life sciences real estate investment trust (REIT) valued at nearly $21 billion has been completed.
Denver-based Healthpeak Properties Inc., which had a pre-merger enterprise value of about $16.32 billion, announced Friday (March 1) that it has closed on an all-stock “merger of equals” with Milwaukee-based Physicians Realty Trust, which was valued at about $4.63 billion.
The combined company, which now operates under the Healthpeak Properties name, began trading on the New York Stock Exchange this morning (March 4) under Physicians Realty Trust’s former ticker symbol, “DOC” rather than Healthpeak’s former symbol “PEAK.”
The merger with Physicians Realty Trust, a medical outpatient building (MOB) REIT with about 16 million square feet of space, creates a portfolio of about 52 million square feet of MOB and life sciences real estate (LSRE) assets. Physicians Realty Trust was a “pure play” medical REIT, so Healthpeak’s life sciences portfolio was unchanged by the merger.
Despite this renewed emphasis on MOBs and the recent challenges faced by the life sciences industry, Healthpeak assured investors of its continued faith in the prospects for the LSRE space.
In an updated investor presentation released Friday (March 1), the REIT noted that there are “positive long-term demand drivers for lab (space). With an aging population and accelerating scientific discovery and drug approvals,” along with growing global drug demand, estimated to increase from $1.88 trillion in 2023 to $2.74 trillion by 2031, it said, “we expect a long-term virtuous cycle that will support ongoing demand for our real estate.”
Currently, Healthpeak’s 146-property, roughly 12 million square foot LSRE portfolio includes significant holdings in the San Francisco Bay Area, Greater Boston and San Diego. Notable recent projects in those markets include Nexus on Grand in South San Francisco; 101 CambridgePark Drive in Cambridge, Mass.; and The Boardwalk in San Diego’s Torrey Pines area.
Why the sudden interest in MOBs?
If Healthpeak is still high on life sciences, then why the sudden interest in MOBs?
Well, for starters, the firm’s interest is far from sudden. Healthpeak has been investing in MOBs almost since the firm’s inception nearly four decades ago.
As of the end of 2023, even before the Physicians Realty Trust merger, it owned 297 MOBs totaling about 24.1 million square feet, accounting for about 36.6 percent of its portfolio income. (Lab space accounted for 50.5 percent, with other product types making up 12.9 percent.)
In its investor presentation, Healthpeak listed numerous strategic merger benefits, saying that the transaction will create a “best-in-class” platform, drive internal growth, grow earnings, reduce capital expenditures (CapEx), maintain a strong balance sheet, improve general and administrative (G&A) efficiency, and expand growth relationships.
With regard to reducing CapEx, Healthpeak noted that the legacy Physicians Realty Trust portfolio is comprised of newer assets with longer weight average lease terms (WALTs) and a higher percentage of investment-grade tenants, which should result in lower CapEx expenses than industry averages.
“Earnings and same-store are important metrics,” the presentation noted, “but cash flow drives IRR (internal rate of return).”
As for the last point, about expanding growth relationships, the presentation contended, “No company (is) better networked in the outpatient medical sector. Relationships create outsized internal and external growth opportunities.”
Healthpeak further expounded on its investment thesis for placing an even larger bet on MOBs.
“Outpatient medical demand drivers are stronger than ever,” the presentation asserted. “The structural trends of an aging population and the growth in healthcare spending support continued growth in lower-cost outpatient care settings, which should generate long-term demand for our real estate.”
As noted, Healthpeak is no stranger to MOBs and other medical buildings, as it already had a sizable portfolio of the asset class before the merger. But now with 575 MOBs totaling 40 million square feet, the firm says it has an “unmatched outpatient medical platform and portfolio.”
Indeed, by adding about 16 million square feet of medical outpatient space to its existing 24 million square feet, Healthpeak now boasts an MOB portfolio that rivals that of Healthcare Realty Trust Inc. (NYSE: HR), a Nashville, Tenn.-based REIT which owned 654 MOBs totaling about 35.8 million square feet as of the end of 2023.
Long history in life sciences
Health Care Property Investors Inc., the predecessor to Healthpeak, was founded in 1985 with two acute care hospitals and 22 skilled nursing facilities (SNFs).
In June 2007, after more than two decades of steady growth in the MOB and senior living sectors, Health Care Property Investors made its entrée into life sciences with the $2.9 billion acquisition of Slough Estates USA, a LSRE firm owned by SEGRO plc, a London-based REIT. The acquisition added 83 life sciences properties totaling 5.2 million square feet to the REIT’s portfolio, including the corporate campuses for Genentech Inc. (now part of F. Hoffmann-La Roche AG) and Amgen Inc. (Nasdaq: AMGN) in South San Francisco, as well as a 500,000 square foot development pipeline.
In September 2007, Health Care Property Investors changed its name to HCP Inc. to reflect its more diversified business model.
During the next decade or so, the senior housing business – particularly skilled nursing facilities (SNFs) – faced growing financial pressures due to increased regulatory scrutiny and changes in reimbursement policies, declining occupancy rates due to changing consumer preferences, and staffing challenges. Amid increasingly thin margins, many SNF operators had difficulty living up to their lease obligations.
In about 2016, in light of the seemingly grim prospects for senior housing, HCP began the process of repositioning assets, shedding its portfolio of SNFs and most other senior housing properties. By 2020, the REIT had almost completely exited the struggling senior housing sector to focus on life sciences and medical properties.
Today, Healthpeak’s only remaining senior housing assets are 15 continuing care retirement communities (CCRCs) totaling 7,097 units.
Along the way, the REIT also went through another rebranding, further distancing itself from the SNF headaches of the past, becoming Healthpeak Properties in October 2019.
Then-CEO Tom Herzog explained the move, saying “The name change represents the culmination of efforts to reposition our strategy, team, portfolio and balance sheet. Over the last few years, we have successfully transitioned to a vastly improved and more focused portfolio that we expect to produce high-quality cash flows, consistent earnings and strong dividend growth through the cycles.”
More merger details
Under the terms of the Healthpeak merger agreement, each common share of Physicians Realty Trust stock will be converted into 0.674 shares of newly issued Healthpeak common shares. Healthpeak President and CEO Scott Brinker and Chief Financial Officer (CFO) Peter Scott will retain those roles with the newly merged firm.
John T. Thomas, who was president and CEO of Milwaukee-based Physicians Realty Trust since its launch as a public company in 2013, will serve as vice chair of the board of directors and have “an active role in strategy, relationships and business development.” The Healthpeak Board of Directors also expanded to 13 directors from eight with the addition of five new directors who previously served on the Physicians Realty Trust board of trustees. In addition to Mr. Thomas, they include Ava Lias-Booker, Pamela Kessler, former Wisconsin Governor Tommy Thompson and Richard Weiss.
“We are pleased to announce the completion of our merger with Physicians Realty Trust,” Mr. Brinker said in a news release. “We believe this transaction augments our earnings, balance sheet, and platform. Our integration efforts are progressing ahead of schedule with property management internalized in four markets to date, with an additional five markets scheduled by the end of the second quarter (Q2). We expect to generate merger-related synergies of $40 million during 2024 with potential for $20 million or more of additional synergies by year-end 2025.”
In conjunction with the merger closing, Healthpeak also entered into a new $750 million, five-year unsecured term loan. Proceeds from the term loan were used toward the repayment of $210 million of Physicians Realty Trust private placement notes and will be used for general corporate purposes, including transaction costs and repayment of borrowings under Healthpeak’s commercial paper program. Healthpeak has entered into swap agreements to fix the interest rate of the new term loan at about 4.5 percent for the full five-year term.
Barclays and Morgan Stanley & Co. LLC served as lead financial advisors, J.P. Morgan Securities LLC, Mizuho Securities USA LLC, RBC Capital Markets and Wells Fargo served as additional financial advisors, and Latham & Watkins LLP acted as legal advisor to Healthpeak. BofA Securities and KeyBanc Capital Markets Inc. acted as lead financial advisors, BMO Capital Markets Corp. served as financial advisor, and Baker McKenzie acted as legal advisor to Physicians Realty Trust.
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