By Varun Vinay Iyengar, Rui Lee and Ardia Daniswara (King’s College London) ; Melvin Bergeret, Arthur Delfour, Axel Nkam and Victor Zheng (ESCP Business School)
Photo: Camilo Jimenez (Unsplash)
Overview of the deal
Acquirer: Healthpeak Properties
Target: Physicians Realty Trust
Total Transaction Size: $2.64Bn
Closed Date: H1 2024
Target Advisor: Bank of America Securities and KeyBanc Capital Markets (lead financial), BMO Capital Markets (additional financial). Baker McKenzie (legal)
Acquirer Advisor: Barclays and Morgan Stanley (lead financial), JP Morgan, Mizuho Securities, RBC Capital Markets and Wells Fargo (additional financial). Latham & Watkins (legal)
On October 30th 2023, real estate companies Healthpeak Properties (PEAK) and Physicians Realty Trust (DOC) announced their intentions to create a company that would lead the healthcare discovery and delivery market. With properties in high-growth markets, the combined company resulting from this merger would have a value of nearly $21Bn and will include a 52 million square foot portfolio; 40 million of which consists of outpatient medical properties that are within high-growth areas. Operating under the name of Healthpeak Properties, the combined company will trade with the ticker symbol “DOC'' on the New York Stock Exchange.
The boards of directors of both companies unanimously approved the transaction with high hopes that the synergies created in the merger will create a company that will generate strong returns. With run-rate synergies of at least $40m being expected in the first year, and projected to grow to $60m by the second year, the deal allows the combined company to leverage its connections within the healthcare system and utilise the full extent of their combined portfolios. With pre-existing relationships within the industry, Physicians Realty Trust also brings its own internal property management platform, allowing the two companies to have a competitive advantage in the market and ensuring that shareholders will immediately see the effects of the merger according to Scott Brinker (CEO and President of Healthpeak).
"This transaction brings together the complementary portfolios and capabilities of two premier real estate companies and we are confident this combination provides all shareholders an unmatched opportunity to benefit from growth and upside in our combined portfolio and platform.” - Governor Tommy Thompson, Chair (Physicians Realty Trust)
Company Details (Healthpeak Properties)
Healthpeak is a leading healthcare Real Estate Investment Trust REIT that invests in healthcare real estate, capitalising on the universal desire for improved health. The company focuses on lab and outpatient medical real estate where they have built a unique scale and deep relations. Healthpeak has a straightforward strategy of unwavering focus and deliberate actions to enable consistent execution on long term growth. Healthpeak as of November 2023 have over $20 billion of owned real estate.
Founded in 1985, headquartered in Denver Colorado
CEO: Scott M. Brinker
Number of employees:
Market Cap: $9.11bn (as of 25/11/2023)
EV: $15.91bn
LTM Revenue: $2.15bn
LTM EBITDA: $1.2bn
LTM EV/Revenue: 7.4x
LTM EV/EBITDA: 13.3x
Company Details (Physicians Realty Trust - DOC)
Physicians Realty Trust is a self-managed healthcare real estate company recently organised to acquire, selectively develop, own, and manage healthcare properties that are leased to physicians, hospitals, and healthcare delivery systems.
Founded in 2013, headquartered in Milwaukee, United States
CEO: John T. THOMAS
Number of employees: 101
Market Cap: $3.3bn (as of 31/12/2022)
EV: $5.1bn
LTM Revenue: $526.6 M
LTM EBITDA: $315 M
LTM EV/Revenue: 9.7x
LTM EV/EBITDA: 16.2x
Projections and Assumptions
Short-term consequences
The Healthpeak Properties Inc (PEAK) and Physician Realty Trust (DOC) merger triggered notable market volatility, initially causing a 2.7% decline on October 31. However, on November 3, positive sentiment led to a 10% increase to $17.21, the highest point since the merger news. Whereas DOC experienced a dip to $10.71 on November 1 but rebounded with a significant 10% upside to $11.81 on November 3.
Moreover, both companies have historically modest EPS, with PEAK averaging 0.92 and DOC at 0.32 over the last five years, aligning with REITs industry trends low EPS values due to high payout ratio and dividend yield. Other reasons may also include debt financing structure that has sensitivity to interest rates and extensive capex. The deal, however, might initially cause a dilution to their EPS, although the management is certain in the financial synergies of the merger that is projected to generate run-rate synergies of $40mn to $60mn based on their AFFO & FFO through compensation savings, redundancies, and increased net operating income from internalisation.
Furthermore, the merger brings forth a dynamic leadership team, with Scott Brinker to become the role of President and CEO, Peter Scott as CFO, and John Thomas as Vice Chair. The board will compose of eight Healthpeak and five Physicians Realty directors that promises near-term and future benefits, leveraging complementary portfolios. In addition, the merger enhances competitiveness in 13 markets with greater national presence, making the company an offence for acquisitions, development, and JV recapitalizations. The deal would also result in an integrated healthcare discovery platform, positioning the company as a market leader during this transformative healthcare sector in this post-Covid era.
Long-term Upsides
The merger between Healthpeak and Realty Physicians Realty Trust will create a powerful healthcare real estate platform of 52 million square feet of healthcare properties, located in major cities like Dallas, Houston, Nashville, Denver, etc.
This will help address some major issues in the healthcare real estate market, such as the increasing consumer demand for retail medical facilities (“MedTail”). In the post-Covid-19 world, many people are still used to quick and easy medical solutions like telehealth consultation services. Healthcare providers have accordingly adapted to these changing consumer needs, integrating marketplaces like shopping malls. With inflation back to lower levels, we can expect the combined entity to adapt to this trend and acquire facilities in areas like shopping centres.
Furthermore, the ageing of the Baby Boomer generation has created a strong demand for senior housing and rehabilitation. The National Investment Center for Seniors Housing & Care reports that occupancy rates of senior living facilities increased for 8 consecutive quarters, reaching 83.7% in the second quarter of 2023. Healthpeak already owns 15 Continuing Care Retirement Communities (CCRCs), and the combined entity is well-positioned to further expand and adapt to this changing demand trend by acquiring new senior healthcare facilities in the future.
Risks and Uncertainties
The transaction is not without its risks. This complex transaction highlights four key areas of concern that warrant careful consideration.
Antitrust and Regulatory Challenges - The foremost concern is the antitrust and regulatory scrutiny such a merger could attract. Combining two dominant players in healthcare real estate could potentially lead to a significant market share, raising red flags for regulators. The competition authorities could oppose this project by questioning respect for fair competition.
Cultural and Organisational Integration – Moreover, the merger faces the daunting task of blending two distinct corporate cultures and operational systems. This aspect of post-merger integration is often underestimated but can be a critical determinant of success. Aligning different organisational structures and management philosophies requires not only strategic foresight but also a nuanced understanding of the human element in corporate mergers.
Financial Risks and Debt Implications - Financially, mergers are double-edged swords. While they offer the promise of synergistic benefits and economies of scale, they also come with significant financial risks. The integration process often involves substantial costs and can lead to increased debt burdens. If the anticipated synergies do not materialise as expected, the financial repercussions could be severe, impacting not just the new entity but also its stakeholders.
Operational Disruptions - Lastly, there’s the risk of operational disruption. Mergers can often divert focus from the core business operations, leading to temporary inefficiencies and potential customer dissatisfaction. Maintaining operational continuity while navigating the complexities of a merger is a delicate balancing act, requiring meticulous planning and execution.