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Will Seniors Housing Woes Mar Healthpeak (PEAK) Q2 Earnings?

Healthpeak Properties, Inc. PEAK is scheduled to report second-quarter 2020 earnings on Aug 4, after market close. While the company’s results are expected to reflect year-over-year revenue growth, its funds from operations (FFO) per share are anticipated to display a decline.

In the last reported quarter, this health real estate investment trust (REIT) reported first-quarter 2020 FFO as adjusted of 45 cents per share, surpassing the Zacks Consensus Estimate of 44 cents. Results were supported by the decent performance of its life science and medical office segments.

Over the preceding four quarters, the company beat the Zacks Consensus Estimate on three occasions and met in the other, the average beat being 1.73%. The graph below depicts this surprise history:

Healthpeak Properties, Inc. Price and EPS Surprise

 

Healthpeak Properties, Inc. Price and EPS Surprise

Healthpeak Properties, Inc. price-eps-surprise | Healthpeak Properties, Inc. Quote

Let’s see how things have shaped up prior to the second-quarter earnings release.

Factors at Play

Second-quarter 2020 is the first quarter where the full impact of the coronavirus pandemic and related lockdown-driven damage on earnings will be visible. As for the seniors housing industry, it continued to grapple with the virus spread, as indicated by occupancy and rental rate erosions. In fact, seniors housing occupancy for the second quarter declined 280 basis points sequentially to 84.9%, as indicated by data by the National Investment Center for Seniors Housing & Care (NIC).

Moreover, annual absorption turned negative to -0.5% during the quarter, as compared with 3% in first-quarter 2020. The decline in occupancy and absorption is expected to have led to a deceleration in rent growth. In fact, annual rent growth for the quarter was 84.9%, relative to 87.7% observed in the March-end quarter.

Healthpeak’s three senior housing businesses — senior housing triple-net, senior housing operating portfolio (SHOP), continuing care retirement community (CCRC), which account for 34% of net operating income (NOI) — are not immune to these industry trends and are expected to have been adversely impacted by the COVID-19 pandemic.

The company is expected to have faced a decline in move-ins, in-person tours and the higher move-outs, impacting occupancy rates at the senior housing portfolio. In fact, for the duration of the pandemic, Healthpeak estimated 2-4% of occupancy attrition per month in SHOP asset and 50-100 bps per month drop in CCRC occupancy. This will hinder the company’s senior-housing segment’s NOI.

Moreover, Healthpeak expects operating expenses to flare up 5-15% during the pandemic. This is expected to have impacted bottom-line growth in the second quarter.

Healthpeak also faced rent collection issues during the second quarter from seniors housing operators and medical office tenants. As of May 31, 2020, $2.6 million of medical office rents and 3% of triple-net were deferred by the company. 

Nonetheless, life science and medical office segments indicate around 60% of Healthpeak’s NOI and witnessed strong fundamental improvement, driven by reopening and resuming operations in the overall market.

In fact, amid the increasing need for effective diagnostics, therapies and vaccines to combat the coronavirus pandemic, the company’s life-science properties have become indispensable. Hence, Healthpeak is anticipated to have continued its business operations across such properties during the second quarter. Also, this is expected to have driven solid leasing activity and high rent collections during the April-June quarter.

The company received 97% and 95% of May rent payments across its life science and MOB businesses. Additionally, at its medical office segment, occupancy improved 10 basis points (bps) in May. These are expected to have benefitted life-science and medical office NOI.

Moreover, strong rent collections at these resilient segments are anticipated to have supported revenue growth during the quarter. In fact, total revenues for the second quarter are pegged at $687.7 million, suggesting year-over-year growth of approximately 40%.

However, prior to the second-quarter earnings release, there is a lack of any solid catalyst for becoming optimistic about the company’s prospects. In fact, the Zacks Consensus Estimate for the second-quarter FFO per share remained unchanged at 41 cents over the past month. It also suggests a 6.8% year-over-year decline.

Here is what our quantitative model predicts:

Our proven model does not conclusively predict a positive surprise in terms of FFO per share for Healthpeak Properties this season. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of a FFO beat. But that’s not the case here. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Healthpeak currently has a Zacks Rank #3 and an Earnings ESP of -4.21%.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Stocks That Warrant a Look

Here are a few stocks in the REIT sector that you may want to consider, as our model shows that these have the right combination of elements to report a positive surprise this quarter:

Digital Realty Trust DLR, slated to release second-quarter earnings on Jul 30, has an Earnings ESP of +2.70% and a Zacks Rank of 3 at present.

Healthcare Trust of America, Inc. HTA, set to report quarterly numbers on Aug 6, currently has an Earnings ESP of +0.96% and a Zacks Rank of 3.

National Storage Affiliates Trust NSA, set to report quarterly numbers on Aug 6, currently has an Earnings ESP of +0.44% and a Zacks Rank of 3.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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