Down 40% YTD, Can PEAK Stock Recoup Its Losses?

Healthpeak Properties stock (NYSE: PEAK) currently trades at $16 per share, around 58% below (130% upside) its level of $37 on August 5, 2021 (pre-inflation shock high), and seems undervalued. Healthpeak Properties saw its stock trading at around $26 at the end of June 2022, just before the Fed started increasing rates, and is trading 40% below that level now. In comparison, the S&P 500 gained about 17% during this period. The stock price has suffered over the recent quarters due to several reasons – slow growth in funds from operations (FFO), higher interest rates negatively hurting the bottom line, lower-than-expected FFO guidance, etc. 

Amid the current financial backdrop, PEAK stock has suffered a sharp decline of 50% from levels of $30 in early January 2021 to around $15 now, vs. an increase of about 20% for the S&P 500 over this roughly 3-year period. Notably, PEAK stock has underperformed the broader market in each of the last 3 years. Returns for the stock were 19% in 2021, -31% in 2022, and -38% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 15% in 2023 (YTD) – indicating that PEAK underperformed the S&P in 2021, 2022, and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Real Estate sector including PLD, AMT, and EQIX, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could PEAK face a similar situation as it did in 2021, 2022, and 2023 and underperform the S&P over the next 12 months – or will it see a recovery?

Returning to the pre-inflation shock level means that PEAK stock will have to gain around 140% from the current levels. While we do not expect that to materialize in the short term, the growth potential seems attractive in the mid to long term. This is because the company deals in the niche area of healthcare real estate, which is likely to grow due to the aging U.S. population. Further, interest expenses are likely to normalize with a correction in the interest rates over the coming years.

Our detailed analysis of Healthpeak Properties’ upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022 and compares these trends to the stock’s performance during the 2008 recession.

2022 Inflation Shock

Timeline of Inflation Shock So Far:

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt the supply
• April 2021: Inflation rates cross 4% and increase rapidly
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. S&P 500 index declines more than 20% from peak levels.
• October 2022 – July 2023: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses
• Since July 2023: Fed keeps interest rates unchanged to quell fears of a recession, although another rate hike remains in the cards.

In contrast, here’s how PEAK stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

PEAK and S&P 500 Performance During 2007-08 Crisis

Healthpeak Properties stock declined from nearly $31 in September 2007 (pre-crisis peak) to below $17 in March 2009 (as the markets bottomed out), implying PEAK stock lost almost 47% of its pre-crisis value. It recovered post the 2008 crisis to levels of around $28 in early 2010, rising 67% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

PEAK Fundamentals Over Recent Years

Healthpeak Properties revenues increased from $1.2 billion in 2019 to $1.6 billion in 2020 due to higher resident fees and services. Further, it improved to $1.9 billion in 2022, due to higher interest income and an increase in rental & related revenues. However, the growth rate suffered in 2022 driven by lower interest income. The firm posted a 9% rise in revenues to $2.1 billion.

On a similar note, earnings increased from $0.09 in 2019 to $0.93 in 2021, but slightly declined to $0.92 in 2022.

Does Healthpeak Properties Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

Healthpeak Properties’ debt increased from $6 billion in 2019 to $6.6 billion now, while its cash increased from $93.8 million to $160.5 million over the same period. Further, the company garnered $900.3 million in cash flows from operations in the last twelve months. Overall,  the company has a large debt obligation as compared to the cash cushion, which presents a near-term risk to the stock upside.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiments, we believe Healthpeak Properties (PEAK) stock has the potential for strong gains once fears of a potential recession are allayed. That said, the pressure on the company’s balance sheet remains a significant risk factor to the realization of these gains.

[1] Month-to-date and year-to-date as of 11/14/2023
[2] Cumulative total returns since the end of 2016

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