We are sharing an attractive income-generating options trade that exists because of current market conditions. Healthpeak Properties (PEAK) is a healthcare REIT (formerly known as HCP) that is wisely and proactively taking steps to reduce its exposure to troubled senior housing through its new joint venture and focus on private pay. The shares sold off in the last month due to the uncertainty of the new joint venture announcement (as well as the Fed’s interest rate messaging change), which has created a very attractive opportunity in this 4.3% dividend yield healthcare REIT. We believe this is an attractive high-income trade to place today, and potentially over the next few days, as long as the share price doesn’t move too dramatically before then.
The Trade:
Selling Put Options on Healthpeak (PEAK) with a strike price of $32.50 (6.0% out of the money), and expiration date of December 20, 2019, and for a premium of $0.20 (this comes out to greater than 8% of extra income on an annualized basis, ($0.20/$32.50 x (25 out of 365 days)). This trade not only generates attractive income for us now, but it gives us the possibility of owning shares of Healthpeak at an even lower price if the shares fall even further than they already recently have, and they get put to us (and we’d be happy to own Healthpeak, especially if it falls to a purchase price of $32.50 per share).
Note: If you want higher upfront income consider selling the January $32.50 puts instead.
Your Opportunity:
We believe this is an attractive trade to place today and potentially over the next few days as long as the price of Healthpeak doesn't move dramatically before then, and as long as you’re able to generate annualized premium (income for selling, divided by strike price, annualized) of approximately 7-9%, or greater.
Our Thesis:
Our thesis is basically that Healthpeak is wisely and proactively taking steps to reduce its exposure to troubled senior housing through its new joint venture and focus on private pay. The shares sold off due to the uncertainty of the new joint venture announcement (as well as the Fed’s interest rate messaging change), which we view as a buying opportunity considering the strategy and portfolio assets. Healthpeak was a dividend aristocrat until it reduced its dividend in 2016 due to huge industry-wide healthcare reimbursement challenges, which we believe the company is now turning the corner and the portfolio is attractively valued.
We previously wrote up a full report on Healthpeak (formerly HCP) in May which described the challenges the company has faced in recent years, as well as the actions management was taking to turn the corner. To summarize very broadly, HCP (now Healthpeak) was negatively impacted by the enormous industry pressure on healthcare reimbursement rates, and was force to reduce it’s dividend, but has recently been turning the corner and positioning itself for steady long-term dividends and growth.
You can access that full report here:
More recently, here is what investor need to know…
Name Change:
According to Healthpeak’s November 1st earnings call:
“Today, we are excited to announce that we are changing our name to Healthpeak Properties effective immediately… Why Healthpeak? Word Health, of course, communicates the sector in which we invest and operate. PEAK and also our position as one of the country's premier REITs plus list the concepts of focus, stability and high-quality.”
Continuing to Reduce Exposure to Troubled Senior Housing…
Per the company’s investor supplement:
“In October 2019, Healthpeak entered into a definitive agreement with a sovereign wealth fund (the "JV Partner") to form a new $790 million 53.5% (Healthpeak) / 46.5% (JV Partner) joint venture (the "Senior Housing Joint Venture"). The transaction is expected to close by year end. Healthpeak will contribute 19 senior housing operating properties managed by Brookdale to the Senior Housing Joint Venture… The Senior Housing Joint Venture, combined with the previously announced Brookdale CCRC and triple-net transactions, is expected to reduce Healthpeak’s Brookdale concentration to 6% on a pro forma basis.”
Also, important to note, not only is Healthpeak reducing its exposure to troubled Brookdale, but it’s also focused on private pay, which helps avoid the cause of many of the challenged in the first place (i.e. enormous government/regulator pressure on reimbursement rates). This next chart (from the supplement) provides prospective.
We believe the uncertainty with this “yet-to-close” deal, combined with the Fed’s redirected interest rate posture (more on this in a moment) contributed to the recent sell off. In fact, we believe the options trade discussed in this report is attractive because of the PEAK volatility created by the joint venture announcement and interest rates. Specifically, when volatility goes up, the premium income available for selling put options also usually goes up. And it is the recent sell-off in PEAK that makes the premium income on this trade increasingly attractive.
Interest Rate Impacts on REITs:
REITs rely on borrowing to fund growth since they’re generally required to pay out most of their income as dividends. And changing interest rate expectations absolutely have an impact on REIT prices. For perspective, here is a look at the recent price change of a REIT index versus the 10-year treasury rate, and you can see the general inverse relationship in recent years (as rats go down, REITs go up). For more color, we’ve also included the performance of the S&P 500 (SPY) over the same time period.
For a little more perspective, here is a look at the recent performance of a slew of popular REITs, many of which have also sold off as the overall market (S&P 500) has climbed (the names highlighted in yellow are a few of the names we follow).
A few more things to note…
Increased FFO Guidance:
Healthpeak recently increased its Funds From Operations (“FFO”) guidance by a penny.
Credit Rating Upgrade:
Healthpeak recently received credit rating upgrade from Fitch Ratings to BBB+ with a stable outlook
Street Analysts:
For what it’s worth, the 20 street analysts covering the stock (as reported by Factset) are increasingly bullish on the shares of this big dividend REIT.
Important Trade Considerations:
Two important considerations when selling put options are dividends and earnings announcements because they can both impact the price and thereby impact your trade. In this particular case, both are largely a non-issue. First, Healthpeak isn’t expected to go ex-dividend until the beginning of February—after this options contract has already expired. And with regards to earnings, Healthpeak isn’t expected to announce earnings again until February (also after this options contract expires). Had either of these events happened prior to this option trade’s expiration, we’d have to take a closer look at the potential impacts on the trade.
Conclusion:
Healthpeak is an attractive long-term REIT investment thanks to its restructured business, its healthy dividend (4.3% yield), and its ongoing growth opportunities. However, it is facing uncertainty and fear-driven selling pressure in the short-term. High premium income is available for placing this trade, especially for a durable dividend REIT. If the shares get put to us--we're happy to hold them for the long-term. If the put options are not executed, then we're happy to simply keep the high premium income we generated for selling the puts.