HEALTHPEAK PROPERTIES, INC.
Fitch Ratings has affirmed and withdrawn
In addition, Fitch has affirmed and withdrawn Healthpeak OP's Short-Term IDR at 'F2'. The Rating Outlook prior to the withdrawal was Stable.
The prior ratings reflected PEAK's high-quality, private-pay focused, portfolio of life sciences properties, medical office buildings (MOBs), and Continuing Care Retirement Communities (CCRCs), the issuer's strong liquidity profile, consistent access to capital and strong contingent liquidity as measured by UA/UD relative to peers.
Fitch Ratings has chosen to withdraw the ratings of
Key Rating Drivers
The following reflect the Key Rating Drivers prior to the withdrawal.
Limited Leverage Headroom: Fitch expected PEAK to maintain leverage (net debt before to recurring operating EBITDA after distributions to/from associates and minorities) around 6x through the rating horizon. Fitch-calculated leverage and PEAK-calculated leverage at FYE 2022 was 5.9x and 5.5x, respectively. The differences between Fitch's and PEAK's leverage metrics can be attributed to methodology differences, mainly due to differing treatment of joint ventures and the netting of cash. PEAK's long-term leverage target is maintaining leverage around 5.5x PEAK-calculated leverage.
Fitch believed that the issuer would maintain Fitch-calculated leverage around 6x through the rating horizon using a combination of EBITDA growth, asset sales, moderated investment activity, and equity issuances. If execution risk for these transactions rose, such that leverage sustains above Fitch's negative sensitivities without any offsetting steps by the issuer, Fitch may have revised the ratings and/or Outlook.
Durable, Predictable Rental Cash Flows: Fitch expected PEAK's portfolio of life science (49% of NOI at 4Q22), medical office buildings (MOBs; 38%) and Continuing Care Retirement Communities (CCRCs; 10%) would 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. Additionally, 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. Fitch notes that near-term lab real estate demand and rent growth may be affected by soft fundraising and valuations, however, low vacancy rates in many markets should support mid-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. Finally, PEAK's MOB portfolio has significant exposure to
Derivation Summary
PEAK's ratings reflected 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 reflected 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 were the highest-rated health care REITs due to the generally comparable aforementioned factors.
Fitch rates medical office buildings peer
PEAK was rated higher than smaller and/or more narrowly focused healthcare REITs such as
Fitch rated the IDRs of the parent REIT,
Key Assumptions
Prior to the withdrawal, Fitch's Key Assumptions were as follows:
Mid-single digit SSNOI growth in the Life Science segment and low-to-mid single digit SSNOI growth in the Medical Office segment through 2025;
Gross acquisitions of
Development spend of
Dispositions of
No additional equity issuances through 2025.
RATING SENSITIVITIES
Rating sensitivities prior to withdrawal were:
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Fitch's expectation of leverage (net debt before preferred shares to recurring operating EBITDA after distributions to/from 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 (net debt before preferred shares to recurring operating EBITDA after distributions to/from associates and minorities) 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 estimated 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) through 2024. 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
Average Contingent Liquidity: Fitch estimates that PEAK's unencumbered assets would cover net unsecured debt (UA/UD) by 2.0x 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.
Following the withdrawal of ratings for
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