Physicians Realty Trust

At this time, I would like to welcome everyone to the HealthPeak properties to report first quarter 2024 financial results and host conference call and webcast. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I'd now like to turn the call over to Andrew Johns, Senior Vice President, Investor Relations. Please go ahead.

Welcome to HealthPeak's first quarter 2024 financial results conference call. Today's conference call contains certain forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, our forward-looking statements are subject to risks and uncertainties that may cause actual results that differ materially from our expectations. A discussion of risk and risk factors is included in our press release in detail in our filings of the SEC. We do not undertake a duty to update any forward-looking statements. Certain non-GAAP financial measures will be discussed on this call. In an exhibit to the AKA we furnished to the SEC yesterday, we have reconciled all non-GAAP financial measures to most directly comparable GAAP measures in accordance with Reg G requirements. The exhibit is also available on our website at healthpeak.com. I'll now turn the call over to our President and Chief Executive Officer, Scott Brinker.

Okay. Thanks, Andrew. Good morning and welcome to HealthPeak's first quarter earnings call. Joining me today for prepared remarks is Pete Scott, our CFO, and the senior team is available for Q&A. We are extremely pleased with our first quarter results, and our momentum is positive on every key metric. We increased our 2024 earnings guidance by two pennies at the midpoint, driven by same-store results, outperformance on merger synergies, and increased stock buybacks. The merger has proven to be a meaningful, positive catalyst for the company, and the integration is exceeding our expectations. Many public company mergers are done through auctions, which delays the ability to integrate the two companies. Our transaction was completely different. Neither company would have proceeded with the merger without high confidence in our ability to put the teams and platforms together in a way that one plus one could equal three. That meant having extensive conversations on people, process, systems and capabilities before we agreed to proceed. Our integration planning was underway before we even announced the transaction. In the six months since that announcement, our combined team has done an exceptional job integrating every aspect of our business. The continuity and buy-in from JT and the senior team who joined HealthPeak has been critical to the integration, including key health system relationships. Property management internalization has been a huge success to date and is a good example of the merger augmenting our platform. Strategically, it was important to me that our own employees are interacting with our tenants every day. And financially, we're now capturing additional profit that flows through property-level analyze. To date, we've internalized 10 markets covering 17 million square feet. We chose to accelerate the rollout given our success to date, and we expect to internalize an additional 4 million square feet by year end. Significant upside remains to be captured. We're evaluating 10 plus million square feet for internalization in 2025 and 26, which in aggregate would allow us to internalize more than 70% of our total footprint. The positive feedback from the property managers on the ground and our tenants further validates the strategic decision to internalize. Let me take a minute on the value proposition in our stock today, which we think is compelling. The baseline is a strong balance sheet, a high-quality portfolio with 3% to 5% same-store growth, and a mid-6 dividend yield with a conservative payout ratio. Beyond that baseline, we've identified $80 million of NOI upside potential, none of which is included in our 2024 guidance from additional merger synergies and leasing up our active life science dev redef pipeline. We also see 30% upside by recapturing our discounted consensus NAV, which we expect to do through consistent earnings growth and smart capital allocation. Industry headlines notwithstanding, over the past two years, we grew FFO per share by 13%, and we expect to continue growing earnings moving forward. Moving to our outpatient business. The fundamentals have never been stronger. Patient volumes are increasing. Consumption is accelerating, and new development remains low. That's driving strong releasing spreads, retention, and NOI growth. In addition, progressive health systems have a strategic focus to grow their outpatient revenue. It's less expensive for payers, more convenient for consumers, and more profitable for the providers. We have the premier platform and relationships to capture this outpatient growth. whether on campus or off campus, and both locations are necessary to capture demand. We expect new supply to remain low given the cost of construction. Today, our triple net equivalent rents are in the low 20s, while most new developments are $35 to $40 per foot. Turning to our life science business, IPO and venture capital funding have improved recently, which is driving demand for space. Our leasing pipeline today is up 80% from last quarter, We're increasingly optimistic the pipeline will generate lease executions for the balance of 2024 and into 2025. Roughly 70% of our pipeline is existing tenants, many of which are deals that don't come to the broader market, again, providing us a big advantage versus the new entrants who can't tap into an existing portfolio of growing tenants. We're also seeing a massive reduction in new construction starts that should extend for multiple years. creating a far more favorable leasing environment for landlords. Let me close with capital allocation. The strategic merger with Physicians Realty closed on March 1 and is accretive to our earnings balance sheet and platform. Year to date, we've sold $363 million of fully stabilized assets at a 5.8% cap rate, plus $69 million of loan repayments. The most recent sale was an R&D flex office portfolio in Poway, east of San Diego that we sold to an affiliate of the tenant in an all-cash deal for $180 million, which was a 6% cap rate. We have additional asset sales in various stages of negotiation and execution, but given the environment, we'll provide details if and when they close. We took advantage of the disconnect in our stock price and repurchased $100 million of stock at an average price just above $17 per share, which represents an implied cap rate of 8%. The year-to-date asset sales are more than 200 basis points inside that level, delivering immediate value to shareholders. Our remaining authorization today is roughly $350 million and we'll continue to pursue buybacks as priority number one on capital allocation, obviously depending on their stock price and the arbitrage opportunity from asset sales. Priority two for capital is new outpatient medical development with key health system partners, provided there's strong pre-leasing and a positive spread to our asset sales. This capital recycling would be accretive to asset quality and stabilized earnings. We do have an attractive pipeline of such projects today in the $200-plus million range. Priority three is distressed opportunities in life science, which we are starting to see, especially development projects lacking capital and or leasing traction. These would be purely opportunistic and could be done on balance sheet or via joint ventures. Most of the distress won't be interesting to us, as we'll focus on our own core sub-markets where we can use our scale and relationships to drive out performance. I'll turn it to Pete for financial results and guidance.

Thanks, Scott. 2024 is off to a great start. For the first quarter, we reported FFOs adjusted of 45 cents per share, AFFO of 41 cents per share, and total portfolio same store growth of 4.5%. Let me briefly touch on segment performance. Starting with outpatient medical, we reported same store growth of 2.6%, driven by a positive 3.4% rent mark to market, and an 84% retention rate. Our strong leasing activity continues. During the quarter, we signed nearly 1.5 million square feet of leases, and we have a backlog of 2.5 million square feet in active discussions, including 700,000 square feet under LOI. Importantly, we expect outpatient medical same-store growth to increase as the year progresses due to accelerating internalization and an increase in occupancy from continued leasing. Turning to lab, we reported same store growth of 2.7%, driven by 3% plus contractual rent escalators and a 2.6% positive rent mark to market, partially offset by an anticipated tick down in occupancy. During the quarter, we signed approximately 150,000 square feet of leases, and we have a robust leasing pipeline nearly 2 million square feet. We have 455,000 square feet under LOI, positioning the second quarter to be one of our best lab leasing quarters in recent years. In addition, we also expect lab same-store growth to accelerate for the balance of the year as free rent from some large lease commencements burns off. Finishing with CCRCs, we reported same-store growth of positive 27%, driven by increased occupancy and rate growth. Occupancy in our CCRC portfolio ended the quarter at 85.2%, and we expect continued positive performance. Shifting to the balance sheet, we had a very active quarter. We successfully completed the assumption of $1.9 billion of debt with a weighted average interest rate of 4%. We closed on our newly originated five-year $750 million term loan, which we swapped to a fixed rate of 4.5% prior to the recent spike in interest rates. And as Scott mentioned, we opportunistically repurchased $100 million of stock. Subsequent quarter end, we fully repaid our commercial paper with proceeds from the Powai sale. Proform of this transaction, our net debt to EBITDA is 5.2 times, We have $3.1 billion of liquidity, no floating rate debt, an AFFO payout ratio of approximately 75%, and nearly $350 million of authorization left on our stock buyback program. Finishing now with guidance. We are increasing our FFO's adjusted guidance range by two pennies and tightening the range to $1.76 to $1.80. we are increasing our AFFO guidance range by two pennies and tightening the range to $1.53 to $1.57. Our increase in earnings guidance is driven by three items. First, we increased same store guidance by 25 basis points to 2.5% to 4%. Second, merger synergies continue to exceed expectations and are now forecast to be $45 million in 2024. Third, we have bought back $100 million worth of stock at an FFO yield in excess of 10%. One last note before Q&A, we published a revamped supplemental alongside our earnings release. You may have noticed that we streamlined the document and modified it to more closely align with how we viewed the business. We also added an NAV input page to assist with modeling, which we felt was important for our stakeholders. With that, operator, let's open the line for Q&A.

At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. Your first question comes from the line of Josh Denerling with Bank of America. Please go ahead.

Hey, everyone. Thanks for the time. I just wanted to follow up on your comment that 2Q should be one of the best quarters for lab leasing. I guess my first question on that is just how are rents trending on what you're signing versus maybe a few quarters ago? And then just what about TIs and concessions?

Yeah. Hey, Josh. I can start with that. I think rents and TIs, as we look across our portfolio, they've been pretty steady for the last... six months or so. As we look at market rents today, it's probably in that 5% to 10% premium when you compare it to our in-place rent across the portfolio, which is around $60 per square foot. On new lease deals, tenants are certainly seeking more turnkey space, which has increased the overall TI packages. But as I said, that's been much more steady the last six months or so. And I think from a lease term perspective, You know, on renewal deals, we're probably seeing more three to five year in term. And then on new leasing deals, we're seeing more seven to ten years there. And then obviously the last piece I'll just say fundamentally is, you know, lease deals just take a little bit longer, especially as you price out the GI packages. So if a lease deal took two to three months to get done a couple years ago, it's probably closer to six months. today, but we're certainly highly motivated to get our lab leasing pipeline, which has increased a lot over the last year or so, converted from a pipeline into a lease transaction.

Yeah, Josh, I just had our leasing costs have been really pretty modest. If you just look in the supplemental for renewal leases, our TI NLC has been 5% or less. of the rental rate. And even for new leases, it's in the 10% range. I mean, it's really pretty modest and very low free rent as well. So I think we've held in exceptionally well just given the quality of the portfolio and the sub-markets and the relationships.

Thanks, Wes. Appreciate that, Connor. And Scott, one follow-up for you. You mentioned you expect about 70% of the MLBs will eventually be internalized. how do you think about that 30% that you won't be able to internalize? Is that stuff you would eventually want to sell or maybe add scale on a market to get to a point where internalization makes sense?

Yeah, I wouldn't say it's assets we want to sell. It's more markets where we don't have significant scale. And then there are some markets where we have a big health system relationship where they prefer to use their own in-house property management firm. And Atlanta is a good example of that, that we still have that market. the fact the health system wants to use their own people, you know, we can live with that.

Oh, okay. I recognize that. Thanks.

Your next question comes from the line of Austin Worshman with KeyBank Capital Markets. Please go ahead.

Thanks. Good morning, everybody. Can you guys provide a breakdown of what's driving the increase to same-store cash and OI growth by segments?

We need to provide a breakdown, but I can tell you that all three segments are trending at or above the midpoint of the initial guidance. So we've got good traction across the board. Obviously, this particular quarter, CCRC was above. I expect that growth rate to normalize for the balance of the year. And then in lab and outpatient medical, I think all three quarters from here should be above what we reported in YQ, but there's volatility quarter to quarter.

Yeah, I mean, I guess just specific to the cash-themed sternal eye lab guidance, I think it was 1.5% to 3%. You know, Pete, you referenced there's acceleration through the balance of the year as free rent burns off, I think, related to the RevMed and Voyager deals you've highlighted. So, I guess, can you give us a sense of what the magnitude of upside is you know, there and then, you know, also just maybe what the risks are that's holding you back from going ahead and raising that at this point in the year.

Yeah, well, I would say that the, you know, 25 basis point raise that we did this quarter on the aggregate same score guidance certainly reflects the improved performance in lab. You know, on the lab side in particular, We've been pretty consistent in saying this, that at the beginning of the year, we will have a little bit of bad debt cushion incorporated into the guide that we put out. And as we look at where we are today and look at all the capital raising that's gotten done, we feel like we probably had too much of a cushion at the beginning of the year. So we've released a little bit of that. And then we are getting internalization benefit as well. You know, we're probably trending towards the higher end of that initial. Um, you know, 1 and a half to 3%, you know, guide number. You know, the biggest headwind and this is something that we've talked about is just the fact that. You know, we did have an occupancy decline as we look towards. You know, full year 2023 compared to where we expect that to be and. Full year 2024 we do think we'll see a. occupancy increases the year, progresses in our operating portfolio, but we're comparing that to the full year number last year.

Okay, that's helpful. And then I'm just curious, you know, certainly some of the VC funding and capital raising you highlighted have been, you know, positive presumably for some of the leasing discussions and pipeline. I'm just wondering if there's been any change in those discussions or the pace with which things are moving forward. on the leasing front and lab, just given some of the added economic uncertainty and volatility we've seen in the capital markets. And then just maybe even as you think forward from here, I know it's been sort of the last 30 days or so, but any impact you see that having on sort of the future pipeline and decision-making?

I mean, if you look, Austin, the capital raising has been at least year-to-date in 24 relative to year-to-date 2023. I mean, it's been up across every single category, especially on follow-on equity offerings, as well as private placements that we fit into that bucket well. Certainly, there could be some risk going forward with interest rates going up. I think it's a little less rate sensitive in the lab side of it than maybe cap rates in the world of real estate, and those private placements and follow-ons do take some time to come together. They're still happening. If you look across the last 30 days, the data will show you that even with the increase in rates, you're seeing capital flowing into biotech. The XBI is still holding up pretty well. Last night, there were some pretty good tech earnings as well, despite the interest rate environment. we still remain optimistic that that capital raising environment has a pretty decent runway in front of it.

I appreciate the thoughts. Thank you.

Your next question comes from the line of Juan Sanabria with BMO Capital Markets. Please go ahead.

Hi, good morning. Just hoping you could talk a little bit more about the disposition pipeline, how much is potentially for sale and what you could expect to transact on and how those proceeds would be split between debt reductions to stay leveraged neutral versus buybacks from here.

Hey, Juan. It's Scott here. We've done $350 million plus of pure asset sales year to date. The pipeline is at least that large, but it's a volatile environment, as Austin just pointed out. When we have clarity on transactions, we'll announce the details at that time, but it's certainly a big pipeline, more focused on outpatient medical, whereas the sales to date have been more life science or this R&D portfolio that we had in Poway. So yeah, it's an active pipeline. In terms of how the proceeds would be used, in large part it depends on the environment, in the stock price in particular. That's been the highest and best use of capital In recent months, just given where the stock was trading, if that continues to be the case, then that would be priority number one. If interest rates stay high or move higher, obviously we could always de-lever even beyond staying leverage neutral, which is just, we for sure will do that. We won't lever up the balance sheet to buy back stock. So those are kind of priority numbers, one A. And then in terms of playing offense, it would be primarily focused on outpatients. medical development. We are seeing some highly pre-leased core markets, core health systems, strong yields. And we feel like we should be recycling out of some older assets with a little bit more capex and risk in exchange for those brand new assets in the right markets, right systems.

And just as a quick follow-up on that question, you previously talked about $500 million to a billion of potential dispos. Is that still kind of a big placeholder in people's minds just to to think about that going forward for the balance of the year?

It's probably the right range. Yes.

And then just curious as a second question, just on AI, lots of discussions, not just in real estate, on what the transition is going to mean for everybody, but just curious when we think about the physical infrastructure, plant and lab, what the incremental use of power may mean for CapEx or just the buildings being able to handle it. Just curious on your early thoughts as this kind of progresses and evolves.

Hey Juan, it's Scott Bone. I think, you know, with AI, you know, you are seeing some, you know, maybe some automation labs within the labs, but you still have, you know, the bulk of those facilities still have chemistry and biology and, you know, your typical lab build outs. So we aren't seeing a, dramatic shift by any means in the build-outs for some of our tenants who are more AI-focused. Our buildings have a ton of power to them, have the infrastructure, have the capabilities to handle any of those needs.

Thank you very much.

Your next question comes from the line of Rich Anderson with Wedbush. Please go ahead.

Hey, thanks. Good morning, everyone. So, nice beat on the synergies. You know, typical, I guess, you know, most REITs, that's the low-hanging fruit of the story. But going forward is perhaps a little bit more difficult, which is the life science leasing that you've been talking about. I think $60 million of upside. Can you take a shot about, you know, what the timing of that is? It's not all next year. Could it be... as far out into 2027 or how long of a tail to the life science leasing do you think is possible here going forward?

Yeah. Hey, Rich. Well, as you mentioned on the synergies, I'll just start there. We do feel quite good about the trajectory that we're on, 45 million that we've been able to articulate we think we can hit this year. And we feel very confident in our ability to hit the 60 million. run rate as we head into the next year. Obviously, the trickier part that you mentioned is on the leasing pipeline and especially the three marquee campuses. What I can say is that within our pipeline, we are having discussions on all of those campuses. I'd say some of those discussions are much further along than others. Realistically, if we signed a lease today or in the second quarter, It really wouldn't commence given some of the work we have to do until. You know, the earliest, the beginning of 2025. so what I would say probably is an entire level. It's probably a 1 to 2 year. You know, period where we phase in and get to the full run rate there on the. And it's probably the best guidance I can give you as we signed leases. And we're pretty good at disclosing those. we can try and get a little bit more specific on that number. But it's probably a bit in 25, a bit more in 26, and hitting that full run rate number probably towards the end of 2026.

Hey, Rich, one other thing. I wouldn't characterize the synergies as low-hanging fruit. Most mergers actually don't achieve their projections. We've got a team of 300-plus people here that have been working on the clock to achieve those synergies. hats off to them for making it happen. It was anything but low-hanging fruit.

I don't mean to trivialize it. Let's call it middle-hanging fruit. Second question might be a tough one to answer, but I'm going to ask it anyway. When you think about the entirety of the transaction, including everything, including whatever the transaction fees were, if that's 3% of $5 billion, that's $150 million. When do you think the merger, the combination is truly kind of break even for the company when you take everything into consideration?

Yeah, I mean, if you're just referring to like a payback period, I mean, it's less than three years if you just take the synergies in comparison to the upfront cost. But obviously, company valuation is based on future cash flows, not just one year. And we feel with high confidence we're going to achieve those synergies, and it is permanent. The discounted value of those future cash flows is many multiples of the upfront transaction costs. So it's certainly a value creating transaction from that standpoint. And then most important for me, for our board, and the same for the Physicians Realty Board, is we created the best platform in the sector, and that has intangible benefits that will last forever. So hard to put a number on that, but we have that now.

All right. Sounds good. Thanks very much. Great quarter.

The next question comes from the line of Michael Griffin with Citi. Please go ahead.

Great. Thanks. I was wondering if you could give some more color on the Poway disposition. You mentioned it's a mix of industrial lab and office space. Is the cap rate indicative of where Lab might be trading today, or were there some specificities given the asset mix that might warrant a higher cap rate?

Yeah, it wasn't really a life science property in any event. It was kind of a mix of uses, R&D, there's some manufacturing, some office, kind of an industrial footprint. and build out in parts of it. It certainly wasn't traditional life science, nor was it in the traditional life science market. So I wouldn't view that as a read-through. I think it was a great price. That's why we sold it. So we were happy to recycle those proceeds into the balance of our portfolio. But yeah, I don't think that's indicative of life science cap rates.

And Brinker, where would you say kind of Class A lab space is trading these days on a cap rate basis?

Yeah, hard to say. Cap rates are always tough in life science, just given market rents versus in-place rents. What we did in San Diego, Torrey Pines, a couple months ago, rents were pretty close to market. So in that case, cap rate is more indicative of valuation. And that was in the low fives, but it was also a premier sub-market, brand new building, credit tenant. I mean, so if you're trying to you know, make your list of A plus. It was pretty much A plus across the board. So I'd say that's the low end of the continuum for life science.

Gotcha. That's helpful. And then maybe could you add some commentary around supply, particularly in South San Fran, where, you know, I think we've seen an elevated relative to the other core markets. And how might your competitive set compare to market supply overall?

Yeah, maybe I just touch on supply for a second, Chris, because it is a good question. I'm going to repeat a statement that we've been saying for a while and others have been saying as well, but not all new supply is built equally. And we do fully expect the incumbent landlords, which there's not a lot of them, out there in the core sub-markets to outperform. As we think just big picture, there were a lot of new entrants into the space over the last couple of years, not surprising, because it was such an incredible money-making sub-sector in real estate for such a long period of time. But I think a lot of these new entrants, and I think a lot of the very poorly capitalized landlords that we see now, they just fail to underwrite this incumbent risk. And we think a lot of them will struggle. But as we look at each one of our core sub-markets, when you look at the headline number that gets quoted by brokers, When we parse through the data, and we have included this in our investor presentation, the competitive supply, going back to the fact that I said not all supply is created equal, what we view as competitive, and I think we're probably still conservative in what we include in that bucket as well, it's a very manageable number.

Great. That's it for me. Thanks for the time.

The next question comes from the line of Michael Carroll with RBC Capital Markets. Please go ahead.

Yeah, thanks. I wanted to touch on the life science LOIs that you kind of highlighted in the press release. I mean, how many of those are true expansionary spaces that could be earmarked to push up overall occupancy levels within the space?

Yeah. Well, maybe I'll just talk quickly about the overall leasing pipeline. Mike, I think that may be an easier way to answer your question, but our lab leasing pipeline today sits at around 2 million square feet, and all of those LOIs are included within that pipeline. Obviously, we have a pretty high degree of confidence those LOIs are going to turn into leases, but as we look at some of the parsing of that 2 million square feet, I'd say about you know, 70% of that is with existing, you know, tenants within the portfolio and then taking it, you know, even a step further, I'd say that probably 50% new lease deal, about a million square feet would be new lease deals within the portfolio and then the rest would be renewal. So a nice 50-50 split. And if you think about the amount of vacancy that we have within the portfolio across the marquee projects, whether it be Vantage or Gateway, as well as Portside and South San Francisco, a million square feet within our pipeline of new lease deals actually matches up quite well with what we have as vacancy for new lease deals.

And I guess related to that pipeline, how many tenants need to raise funds to kind of take down that space? Will any of those tenants decide to delay making decisions just given the increased volatility that we've seen in the capital markets over the past handful of weeks?

Yeah. I'd say very few need to raise capital, if any. We wouldn't be having active discussions. In fact, you don't really have a lot of active discussions for deals that are contingent upon capital raising. Those discussions tend to happen at least today after The capital has been raised, so I'd say that there's really no risk to that within the pipeline.

And will those tenants delay making decisions, or do you think that they could wait longer, just given what's happened in the capital markets and the geopolitical landscape over the past few weeks?

No, because as I said, I think all those tenants have effectively raised capital if they needed to raise capital, not all of them. These to raise capital, there's some mid cap and large cap. Names in there as well. So, I think the answer to that is no, they're not delaying decision. It does take a little bit longer to get these deals done today though. Specifically as you price out the various. You know, TI packages and build up.

Okay, and then just for me, I know. there has been issues over the past year where the company wants to take down space, but the boards of those companies have kind of vetoed it. I mean, do you know if the boards have approved just the leasing that's currently in the pipeline? And do you think that they could potentially veto some of those transactions or at least push them out?

I mean, the pipeline is 30 plus tenants. So we'll refrain from going down the but the quality of the discussions today is much higher than it has been in the last two years. So we can't give you certainty on any of this stuff. And certainly the geopolitical environment doesn't help at the margin, but I don't think it's a driving factor. The bottom line is the pipeline is massively bigger than it ever has been in the last two years, continues to grow, and the quality of the conversations is higher.

Okay, great. Thank you.

Your next question comes from the line of Wes Galladay with Baird. Please go ahead.

Hey, good morning, everyone. I just want to follow up on the new lease conversation. Looking at the 1 million square feet, are you seeing any change in demand for first-generation space, any sub-markets standing out in any kind of categories picking up activity?

Yeah, I mean, I think that part of that I'd like to focus on is the sub-markets. You know, we never... really exited or veered outside of the core sub-markets that we wanted to focus on. So in San Diego, it's Torrey Pines and Sorrento Mesa. In Boston, it's the Lexington Route 128 market in West Cambridge, and it's really South San Francisco. What we're actually seeing is gravitation towards tenants wanting to be in those core sub-markets, and I think some of those other sub-markets that were not fully proven, that perspective of development done in those, they're going to take a lot longer to lease up if they ever do lease up.

Okay. And then when you look at potential distressed opportunities, do you think you'll get any distressed pricing for those? Or is there still a lot of capital chasing those great submarkets? And how would you look to potentially, you know, get involved? Would it be a JV, MES lending? Can you elaborate on that?

It could be any of the above. It would be very opportunistic. But it would have to be in core submarkets. We really bring something unique to the table, which is our existing footprint, tenant relationships, broker relationships, et cetera. So we'll be very focused on particular submarkets, but we could be more open-minded on deal structure. But it would have to be opportunistic type pricing.

Okay, thanks for the time.

Yeah.

Your next question comes from the line of Jim Kammerk with Evercore. Please go ahead.

Good morning. Thank you. You're just building a little further, if possible, on the lab leasing demand. It sounds like your pipeline's larger. These tenants have funding. Is that translating to any ability for landlords like yourself to kind of hold the economics in terms of TI packages and whatnot? Because if I recall, that was kind of being pushed more and more towards landlords in terms of $150, maybe to $250 and plus. Any comments there? And if you are still being required to pay those, are you able to get an economic return on that and effectively bake it into the rent? Thanks.

Yeah, our releasing spread in the first quarter was around 3%. Now it could vary quarter to quarter, but as we look at our current pipeline, the renewal spreads will be above that level in the aggregate, some higher, some lower, but on average certainly above the 3% across the portfolio, we still feel like we're in the 5% to 10% range. And at least in recent quarters, the leasing and TI that we're putting into the buildings to drive those rents is very modest, around 5% of rent on renewal leasing and around 10% on new leasing. So those are pretty modest leasing costs across commercial real estate.

Right. I'm sorry I wasn't clear, but I meant like on a brand new space, weren't landlords being required to put in

know 250 bucks type of allowance and stuff to make the deal happen or am i mistaken yeah so for for new development that that's true i was speaking more to renewal and releasing spreads but for new development certainly there's an expectation of turnkey or closer to it which we've been talking about for the last year or so that we're actually having more success in the current environment on our second generation space that's turnkey in nature but at a much more modest investment, but lower rent, lower OpEx, and no TI from the tenant. So that's certainly a big part of our leasing pipeline, but we are getting some interest in our development projects as well.

All right.

Thank you.

Yeah.

The next question comes from the line of Mike Mueller with JPMorgan. Please go ahead.

Yeah. Hi. Thanks. Curious, how do you see tenant retention shaping up for the balance of the year? And where do you think the 96% operating portfolio occupancy could end the year?

Yeah. Hey, Mike. It's Keith. You know, tenant retention, the headline number was a little bit lower. I'm assuming you're talking just about labs. Just because we actually had a sub-tenant that went direct, and we don't include that in the retention statistics. It was NGM that went direct on one of the Amgen buildings, and they had been a sub-tenant in that building for years. But the way we report it, we don't include that as the tenant was retained within the building. We report that as a new lease. Therefore, if you did include it as tenant retention, you'd be right around 60%. And I would say that that's probably a pretty good number. Lab's always going to be a little bit below what we achieve in outpatient medical, which I think this quarter, a number out there were 84%, which was pretty darn high. So I think the tenant retention number is a little bit misleading and you gotta dig into it.

And then occupancy, too.

Yeah, and then on occupancy, on the 96%, our view is that that should pick up a little bit. In fact, I know there was a sequential decline From the fourth quarter, the first quarter, that was actually proactive termination. We did at the towers building in. South San Francisco, and we've actually already released that space. It just hasn't commenced yet. So we don't include that in the occupancy number until the lease commences. So. Just if you factor that in alone, we'd expect occupancy to pick up a little bit as the year progresses.

Got it.

Okay. Thank you. Your next question comes from the line of Michael Stroyek with Green Street. Please go ahead.

Thanks, and good morning. Could you just provide some color on the outpatient medical sequential occupancy decline during the quarter, and just whether that largely came from legacy doc or legacy peak portfolios?

Yeah, really, you typically see, this is Tom Clarich, but you see a decline From Q4 to Q1 pretty regularly, because a lot of doctors hold over. Over the holiday period, and then when things settle down after the 1st of the year, they move out. So that's that's pretty typical. I wouldn't point to. Legacy peak or legacy doc as a cause for that.

Got it, so I guess nothing really stands out in terms of like, kind of credit asset quality or anything else. Just just normal.

Just normal rhythm during the year.

Got it. Okay. And then maybe following up on the Poway disposition discussion, can you just help us understand how much of your portfolio is similar to these assets in terms of it not necessarily being traditional life science properties?

That was really it. I mean, we have like the land bank and conversions in West Cambridge. where we'll eventually tear buildings down and build by science. But in terms of the stabilized asset, that's it.

Okay. That's helpful. Thank you.

The next question comes from the line of Vikram Malhotra with Mizuho. Please go ahead.

Good morning, Peg. Thanks for taking the question. Maybe just first one, you've talked a lot about the life sciences leaving pipeline, but I'm wondering if you can update us or just provide color on the watch list, you know, given the capital raising, I'm assuming it's lower, but any numbers, any magnitude, or perhaps in other ways, like what's baked into the guide for the watch list?

Yeah. Hey, Beck, it's Pete here. I think you've done a very nice job actually in your research talking about this and What's happening is actually following suit with what you're saying. The strong capital raising is certainly causing us to have a much lower tenant monitoring list. Our monitoring list would be a tenant that's got less than 12 months of cash runway. And if you just want to put percentages on that, I'd say that list today is 50% of the size of what it was a year ago. It continues to trend in the right direction. So it's down considerably. And the other thing I would just mention, we've said this before, even in the best of lab markets, you're always going to have a couple of tenants. We've got 200 tenants. You're always going to have a couple of tenants that you're paying close attention to because it really comes down to the science and the success of the science and not necessarily always about, you know, the capital markets and ability to raise capital.

Okay, that's helpful. Just second, I'm wondering, you know, the HCA sort of programmatic deal you had in terms of MOBs has been pretty fruitful. I'm wondering with the combined company now with physicians, is there a likelihood of a similar deal with another system or is it just given the capital environment, even hospital systems are just waiting on developments?

Hey, Victor. Mr. JT. You know, we have a lot of historical relationships across the portfolio. So it's not, you know, we have kind of, I hate to call it systematic, but routine kind of steady pipeline with a number of health systems, you know, in multiple states. So all highly pre-leased, all, you know, kind of outpatient services that are higher margin and that they need to, you know, kind of expand into, you know, kind of new markets for providing access to care in this market. So it's pretty systematic across the board and just has to be at the right price and kind of the right markets first to proceed, but pretty steady flow of kind of off-market relationship business.

And then just one more, if I may, just a clarification. I think on the medical office rent spread, there was a 500,000 plus square foot deal that I think you noted was not in there or it would impact rents later on. Can you just elaborate upon that like when will that hit the rent spread metrics and what was that?

Yeah, that lease, the master lease with a system in Houston and it covers basically three campuses. I do want to point out that we did do that lease internally so we saved about three and a half million dollars of lease commissions on that deal and we also had no TI contribution and we eliminated our capital liability for 10 years so It was a great deal. Two of the campuses did have an increase. There's one of the campuses had a decrease, so it will have an impact on mark to market in July of 25. I think it was six to eight percent decline, but to me that's a great deal if you get absolutely no capital for ten years on 600,000 square feet. Thank you.

Your next question comes from the line of Teo Akusanya with Deutsche Bank. Please go ahead.

Yes, good morning. Congrats on a solid quarter and a solid improving outlook. I wanted to get some clarification on the MOBs and the synergies. When you do do the next round of internalizations, the targeted internalizations, Is that additional synergies beyond the 45 that's been identified? Like, is that going to be additional 20 million bucket that you kind of talked about? And could you also talk to us a little bit about just revenue synergies and how that hits also into maybe the 20 million additional revenue target you've talked, additional synergy target you've talked about?

Yeah, it's additional and it's actual, you know, net cash revenue that comes in. So we're really ahead of schedule on, you know, kind of internalizing markets across the portfolio. And there's more to come. So, you know, I think we assumed it kind of a couple of year plan to internalize most of the markets that we where we had scale and where it made sense. But it's it's it's it's net cash continuously, you know, year after year after year, net cash to the to the bottom line.

Yeah. And then on Revenue synergies, we've been pretty clear that that $60 million run rate does not include revenue synergies, so that could be some upside, whether that's through better lease executions, better retention, better lease rates, so on and so forth. That would be upside. I think it's a little challenging to our articulator to go through what we think that is, but we certainly think that there are revenue synergies out there for us to get.

Gotcha. So the 60 mil run rate is just from more GMA type operating expense type synergies that gets you from the 40 to the 60 and then revenues or anything on top.

Yeah, that's the right way to characterize that.

Perfect. That's very helpful. Thank you.

I will now turn the call back over to Scott Brinker for closing remarks. Please go ahead.

Yeah, thanks for joining us, everyone. Good momentum here. Happy to talk about it today and look forward to seeing you in the coming weeks and months. Take care.

Ladies and gentlemen, that concludes today's call. Thank you all for joining and you may now disconnect.