HEALTHPEAK PROPERTIES, INC.
Fitch Ratings has affirmed
In addition, PEAK's Short-Term IDR has been affirmed at 'F2'. The Rating Outlook is Stable.
The affirmation and Stable Outlook reflect PEAK's high-quality, private-pay focused, portfolio of life sciences properties, medical office buildings (MOBs), and Continuing Care Retirement Communities (CCRCs). Fitch expects long-term leverage to sustain between 5x and 6x, with PEAK using disposition proceeds and retained cash flow to help fund future acquisitions and developments in the life sciences and MOB segments. The affirmation and the Stable Outlook further reflect the issuer's consistent access to capital and strong contingent liquidity as measured by UA/UD relative to peers.
Key Rating Drivers
Durable, Predictable Cash Flows: Fitch expects PEAK's portfolio of life science (49% of NOI at 3Q21), medical office buildings (39%) and Continuing Care Retirement Communities (CCRCs; 8%) will deliver durable and predictable operating cash flows through the cycle. PEAK's life science properties and MOBs benefit from secular demand drivers, long-tenor leases, and diversified tenant bases with rents that are well-covered by underlying cash flows.
Stable occupancy rates, as well as strong tenant retention rates, and cash releasing spreads across life science properties and MOBs further support the durability of PEAK's cash flows. These factors reduce the risk of meaningful credit-related declines in EBITDA during the life of the lease.
PEAK'S portfolio level occupancy (92% at 3Q21) improved through the pandemic, as the issuer exited its senior housing triple net and SHOP (senior housing operating portfolio) assets, and increasingly focused on life science properties and MOBs. Occupancy rates within the Life Science (97% at 3Q21) and Medical Office (90% at 3Q21) segments have remained stable throughout the pandemic. Finally, PEAK's focus on private-pay healthcare real estate allows the issuer to increase rents at faster rates compared to issuers with properties more heavily reliant on government funding.
High Growth in Life Science Segment: NOI growth in the past decade for Life Science was well-above the average for all property sectors, which Fitch believes may be repeatable for the next five years. The Life Science sector has multi-decade demand drivers including an aging senior population, growing global drug demand, supportive regulatory environment and robust funding levels. Low (below 5%) vacancy rates in many markets should support mid-to-high single digit annual rent growth.
Moderate Market Concentration Risk: PEAK's Life Science portfolio is concentrated in three markets:
Positively, barriers to entry in the Life Science sector are high, given the importance of specificity for lab real estate and the clustering of real estate based on human talent, industry depth, and innovation hubs. As such, Fitch expects that a small number of life science ecosystems and core clusters including
On-Campus, Multi-Tenant Medical Office Focus: PEAK's MOB portfolio is primarily focused on on-campus, multi-tenant MOBs. Demand for non-hospital real estate is supported by secular shifts in the provision of care to non-hospital, outpatient settings. Fitch expects on-campus, multi-tenant MOBs will likely face lower lease renewal risk as they benefit from barriers to new supply. Fitch views the portfolio's proximity to hospitals and the system affiliation with high-quality health and hospital systems as an indicator of the desirability of the real estate, as well as the high portfolio quality of PEAK's MOB assets.
Fitch notes that PEAK's MOB portfolio has significant exposure to
Meaningful Leverage Headroom for Acquisitions and Developments: PEAK maintains adequate headroom for leverage to sustain below 6.0x, the level which Fitch views as consistent with its IDR. Fitch estimates leverage was 5.3x pro-forma including the
Fitch expects that PEAK will use its ample liquidity and disposition proceeds of non-core assets to fund acquisitions and development expenditures, primarily in the Life Science segment, over the rating horizon without changing its long-term leverage targets. PEAK's financial policy is leverage sustaining between 5.0x and 6.0x.
Derivation Summary
PEAK's ratings reflect Fitch's expectation that its high-quality private-pay focused portfolio of health care real estate will deliver durable EBITDA and free cash flow through the cycle. The ratings also reflect PEAK's conservative financial policies and above-average access to capital relative to both healthcare REITs specifically and the broader REIT universe.
Ventas (BBB+/Negative) and PEAK are the highest-rated health care REITs due to the generally comparable aforementioned factors. Ventas' Negative Outlook reflects Fitch's expectation for leverage to be above the 5x-6x range they have historically operated in due to the pandemic.
PEAK is rated higher than smaller and/or more narrowly focused peers such as
No Country Ceiling, parent/subsidiary linkage or operating environment aspects have an effect on the rating.
Key Assumptions
Mid-to-high single digit SSNOI growth in the Life Science segment and low-to-mid single digit SSNOI growth in the Medical Office segment through 2024;
Net acquisitions of
Net development spend of
Long run AFFO target payout ratio of 80%.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Fitch's expectation of leverage (net debt to recurring operating EBITDA after associates and minorities) sustaining below 5.0x;
Fitch's expectation of unencumbered asset coverage of unsecured debt (UA/UD) at a stressed capitalization rate of 8.0%, sustaining above 4.0x;
Demonstrated market-leading capital markets access across the broader REIT universe and comparable with 'A' category corporates;
Fitch's expectation of fixed-charge coverage (recurring operating EBITDA adjusted for straight line rents and maintenance capex relative to interest and preferred dividends) sustaining above 4.0x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Fitch's expectation of leverage sustaining above 6.0x;
Fitch's expectation of unencumbered asset coverage of unsecured debt (UA/UD) at a stressed capitalization rate of 8.0%, sustaining below 2.0x;
Fitch's expectation of fixed-charge coverage (recurring operating EBITDA adjusted for straight line rents and maintenance capex relative to interest and preferred dividends) sustaining below 3.0x.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Strong Liquidity Profile, No Near-Term Debt Maturities: Fitch estimates PEAK's sources of liquidity (unrestricted cash, availability under the revolving credit facilities, as well as retained cash flow from operations) cover its uses (debt maturities, committed development expenditures and maintenance capex) by 4.0x through 2023. The strength of PEAK's liquidity profile is driven by a well-staggered debt maturity profile with no meaningful debt maturities until 2025.
PEAK maintained full capacity on its
Fitch notes that PEAK had
Strong Contingent Liquidity: Fitch estimates that PEAK's unencumbered assets would cover net unsecured debt (UA/UD) by 2.3x assuming an 8% stressed cap rate as of
The financeability of the underlying real estate is a core tenet of investment-grade REIT ratings. Life science properties, MOBs, SNF and SH (across PEAK's CCRC segment) generally benefit from strong access to contingent liquidity sources, including a multitude of durable mortgage capital sources as well as more pro-cyclical bank mortgage and CMBS market.
Issuer Profile
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
RATING ACTIONS
Entity / Debt
Rating
Prior
LT IDR
BBB+
Affirmed
BBB+
ST IDR
F2
Affirmed
F2
senior unsecured
LT
BBB+
Affirmed
BBB+
senior unsecured
LT
BBB+
Affirmed
BBB+
senior unsecured
ST
F2
Affirmed
F2
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