Physicians Realty to be Acquired by Healthpeak Realty in All-Stock Transaction

Healthpeak announced earlier this week it would acquire Physicians Realty (DOC) in a tax-free all-stock transaction valued at around $2.6 billion and expected to close in the first half of 2024. The combined company will retain the Healthpeak name but trade under the ticker symbol DOC.

Physicians Realty shareholders will receive 0.674 of newly-issued Healthpeak shares for each Physicians share owned, effectively at par with Physicians' stock price prior to the deal's announcement. As a result of the transaction, Physicians Realty shareholder's dividend income will be lower by around 12%.

Even so, if we were shareholders we would plan to maintain our position as the combined REIT should be positioned to start growing the dividend at a low-single-digit rate in the years ahead. And the combination provides exposure to the burgeoning life science industry which could provide more upside for the stock over the long run.

After the transaction closes, Healthpeak shareholders will own about 77% of the combined company, while Physicians shareholders will own the remaining 23%.

Healthpeak does not anticipate making any change to its $1.20 per share annual dividend, which represents a reasonable payout ratio of approximately 80% of the combined REIT's cash flow.

The combination of the two REITs is expected to be immediately accretive to earnings, with around a mid-single-digit percentage boost provided by $40 million in run-rate synergies achieved within the first year and $60 million in year two.

Healthpeak will also maintain its BBB+ credit rating, as S&P views the merger as a "modest credit positive" for the company thanks to the deal's leverage-neutral nature and the improved diversification from the combination.

The acquisition is a notable step forward for Healthpeak, which has been transforming its business in recent years to prioritize the burgeoning life sciences and outpatient medical office buildings (MOB) industries while shedding skilled nursing and senior housing assets, which have higher tenant credit risk.

Post-merger, the REIT will be reasonably balanced between healthcare delivery and research and discovery, with almost 50% of rent generated by MOBs and just over 40% from life science. Skilled nursing and senior housing will comprise less than 10%.
Source: Healthpeak Investor Presentation, November 2023
The firm's top ten tenants will account for around 20% of rent, seven of which have investment-grade credit ratings (~60% of total rent is tied to investment-grade caliber tenants). 

The REIT is also geographically diversified, with no metro area accounting for more than 10% of rent, except for San Fransisco (~22%).
Source: Healthpeak Investor Presentation, November 2023
Overall, the merger of Healthpeak and Physicians Realty creates a more diversified REIT that is focused and well-positioned to service the growing MOB and life science industries.

Operating at a larger scale with a solid balance sheet should make Healthpeak an even more attractive partner for health systems and research organizations looking to enter long-term relationships with stable operators.

Given the transaction is a net positive for the REIT, we are reaffirming Healthpeak Properties’ Borderline Safe Dividend Safety Score.

However, assuming the merger goes smoothly and Healthpeak begins to demonstrate the purported synergies we would consider upgrading the firm's score. 

In fact, as noted earlier, the healthcare REIT could even be in a position to start increasing the dividend annually at a low-single-digit rate over the next few years, mirroring earnings growth.

Either way, we'll continue to monitor Healthpeak and Physicians Realty, providing updates as needed.

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